[As adopted in Release No. 34-32231, April 28, 1993, 58 F.R. 26509]
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2002
---------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from------------to------------
Commission file number 0-18834
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Klever Marketing, Inc.
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(Exact name of small business issuer as
specified in its charter)
Delaware 36-3688583
--------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
350 West 300 South, Suite 201, Salt Lake City, Utah 84101
(Address of principal executive offices)
(801) 322-1221
-------------------------------------------
Issuer's telephone number
(Former name, former address and former fiscal year, if changed since
last report.)
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 registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practical date: September 30, 2002 12,370,578
Transitional Small Business Disclosure Format (check one).
Yes ; No X
---- -----
PART I
Item 1. Financial Statements
INDEPENDENT ACCOUNTANT'S REPORT
Klever Marketing, Inc.
We have reviewed the accompanying balance sheets of Klever Marketing,
Inc. as of September 30, 2002 and December 31, 2001, and the related statements
of operations for the three and nine months ended September 30, 2002 and 2001,
and cash flows for the nine months ended September 30, 2002 and 2001. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statement taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
Respectfully submitted
/S/ ROBISON, HILL & CO.
Certified Public Accountants
Salt Lake City, Utah
November 11, 2002
3
KLEVER MARKETING, INC.
BALANCE SHEETS
September 30, December 31,
------------------ -----------------
ASSETS 2002 2001
------ ------------------ -----------------
Current Assets
Cash $ 1,603 $ -
Prepaid Expenses 20,706 226,272
Related Party Receivables - 7,964
------------------ -----------------
Total Current Assets 22,309 234,236
------------------ -----------------
Fixed Assets
Office Equipment 148,067 155,876
Phase 2 Equipment 57,750 66,690
Less Accumulated Depreciation (115,826) (105,145)
------------------ -----------------
Net Fixed Assets 89,991 117,421
------------------ -----------------
Other Assets
Patents 2,321,775 2,303,380
Less Accumulated Amortization (1,858,226) (1,694,599)
------------------ -----------------
Net Other Assets 463,549 608,781
------------------ -----------------
Total Assets $ 575,849 $ 960,438
================== =================
4
KLEVER MARKETING, INC.
BALANCE SHEETS
(Continued)
September 30, December 31,
------------------- ------------------
2002 2001
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable, Trade $ 411,178 $ 420,945
Liability for Overdrawn Cash - 3,903
Accrued Liabilities 611,267 346,011
Related Party Payables 2,498,883 2,331,482
Short-term Notes Payable 2,859 4,828
------------------- ------------------
Total Current Liabilities 3,524,187 3,107,169
Non-Current Liabilities
Lease Obligation Payable 4,060 6,246
------------------- ------------------
Total Liabilities 3,528,247 3,113,415
------------------- ------------------
Stockholders' Equity
Preferred stock (Par Value $.01),
2,000,000 shares authorized. 168,434 shares issued
and outstanding September 30, 2002 and December 31, 2001 1,684 1,684
Common Stock (Par Value $.01),
20,000,000 shares authorized. 12,370,578 shares issued
and outstanding at September 30, 2002 and 12,674,807
shares issued and outstanding December 31, 2001 123,706 126,748
Common Stock to be issued, 435,584 shares at
September 30, 2002 and December 31, 2001 4,356 4,356
Treasury Stock, 1,000 shares at September 30, 2002 and
December 31, 2001 (1,000) (1,000)
Paid in Capital in Excess of Par Value 12,078,917 12,276,665
Retained Deficit (15,160,061) (14,561,430)
------------------- ------------------
Total Stockholders' Equity (2,952,398) (2,152,977)
------------------- ------------------
Total Liabilities and Stockholders' Equity $ 575,849 $ 960,438
=================== ==================
See accompanying notes and accountants' report.
5
KLEVER MARKETING, INC.
STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------------- --------------------------------------
2002 2001 2002 2001
------------------ --------------- ------------------ ------------------
Revenue $ - $ - $ - $ -
------------------ --------------- ------------------ ------------------
Expenses
Sales and Marketing - 130 - 33,197
General and Administrative 111,032 381,326 380,245 1,310,744
Research and Development - 53,456 - 359,046
------------------ --------------- ------------------ ------------------
Total Expenses 111,032 434,912 380,245 1,702,987
------------------ --------------- ------------------ ------------------
Other Income (Expense)
Interest Income - 651 - 4,504
Interest Expense (73,129) (58,665) (214,388) (137,437)
Other Income (Expense) - - (3,998) -
------------------ --------------- ------------------ ------------------
Total Other Income (Expense) (73,129) (58,014) (218,386) (132,933)
------------------ --------------- ------------------ ------------------
Loss Before Taxes (184,161) (492,926) (598,631) (1,835,920)
Income Taxes - - - -
------------------ --------------- ------------------ ------------------
Net Loss After Taxes $ (184,161) $ (492,926) $ (598,631) $ (1,835,920)
================== =============== ================== ==================
Weighted Average Shares
Outstanding 12,535,920 12,100,249 12,628,003 12,098,700
================== =============== ================== ==================
Loss per Common Share $ (0.01) $ (0.04) $ (0.05) $ (0.15)
================== =============== ================== ==================
See accompanying notes and accountants' report.
6
KLEVER MARKETING, INC.
STATEMENT OF CASH FLOWS
For the Nine Months
Ended September 30,
--------------------------------------
2002 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (598,631) $ (1,835,920)
Adjustments used to reconcile net loss to net cash
provided by (used in) operating activities:
Stock returned for services not rendered (200,790) -
Stock issued for commissions - 15,000
(Increase) decrease in:
inventory - -
accounts receivable - 8,118
related party receivables - (2,486)
prepaid expense & other assets 205,566 9,194
Increase (decrease) in:
accounts payable (9,767) 148,140
accrued liabilities 261,353 108,724
lease obligation (4,155) (4,783)
related party payables (6,345) 74,442
Depreciation and Amortization 178,019 182,797
------------------ ------------------
Net cash used in operating activities (174,750) (1,296,774)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment - (73,970)
Disposal of equipment 13,038 -
Acquisition of patents (18,395) (46,102)
------------------ ------------------
Net cash used by investing activities (5,357) (120,072)
------------------ ------------------
7
KLEVER MARKETING, INC.
STATEMENT OF CASH FLOWS
(Continued)
For the Nine Months
Ended September 30,
--------------------------------------
2002 2001
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital stock $ - $ 483,892
Proceeds from shareholder loans 181,710 1,240,000
Conversion of note payable to preferred stock - (290,000)
------------------ ------------------
Net Cash Provided by Financing Activities 181,710 1,433,892
------------------ ------------------
Net Increase (Decrease) in
Cash and Cash Equivalents 1,603 17,046
Cash and Cash Equivalents at
Beginning of the Period - 2,870
------------------ ------------------
Cash and Cash Equivalents at
End of the Period $ 1,603 $ 19,916
================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH
-------------------------------
FLOW INFORMATION:
Interest $ - $ -
Income Taxes $ - $ -
See accompanying notes and accountants' report.
8
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN
This summary of accounting policies for Klever Marketing, Inc. is
presented to assist in understanding the Company's financial statements. The
accounting policies conform to generally accepted accounting principles and have
been consistently applied in the preparation of the financial statements.
The unaudited financial statements as of September 30, 2002 and for the
nine months then ended reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to fairly state the
financial position and results of operations for the nine months. Operating
results for interim periods are not necessarily indicative of the results which
can be expected for full years.
The accompanying financial statements have been prepared on the basis
of accounting principles applicable to a "going concern", which assume that the
Company will continue in operation for at least one year and will be able to
realize its assets and discharge its liabilities in the normal course of
operations.
Several conditions and events cast doubt about the Company's ability to
continue as a "going concern". The Company has incurred net losses of
approximately $599,000 for the nine months ended September 30, 2002 and net
losses of approximately $1,800,000 for the nine months ended September 30, 2001,
has a liquidity problem, and requires additional financing in order to finance
its business activities on an ongoing basis. The Company is actively pursuing
alternative financing and has had discussions with various third parties,
although no firm commitments have been obtained.
The Company's future capital requirements will depend on numerous
factors including, but not limited to, continued progress in developing its
products, and market penetration.
These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern". While
management believes that the actions already taken or planned, will mitigate the
adverse conditions and events which raise doubt about the validity of the "going
concern" assumption used in preparing these financial statements, there can be
no assurance that these actions will be successful.
If the Company were unable to continue as a "going concern", then
substantial adjustments would be necessary to the carrying values of assets, the
reported amounts of its liabilities, the reported revenues and expenses, and the
balance sheet classifications used.
9
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(continued)
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN (continued)
-----------------------------------------------------------
Organization and Basis of Presentation
The Company was organized under the laws of the State of Delaware in
December 1989. The Company was in the Development stage from 1989 to 1991. The
Company was an operating company from 1992 to December 8, 1993 when it filed
petitions for relief under Chapter 11 bankruptcy. The Company was inactive until
July 5, 1996 when the Company merged with Klever Kart, Inc. in a reverse merger
and changed its name to Klever Marketing, Inc. The company was in the
development stage until June 30, 1998.
Nature of Business
The Company was formed for the purpose of creating a vehicle to obtain
capital, to file and acquire patents, to seek out, investigate, develop,
manufacture and market electronic in-store advertising, directory and coupon
services which have potential for profit. The Company is currently in the
process of the commercialization of the patented process it has acquired.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
This summary of accounting policies for Klever Marketing, Inc. is
presented to assist in understanding the Company's financial statements. The
accounting policies conform to generally accepted accounting principles and have
been consistently applied in the preparation of the financial statements.
Cash Equivalents
For the purpose of reporting cash flows, the Company considers all
highly liquid debt instruments purchased with maturity of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
10
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
Reclassifications
Certain reclassifications have been made in the 2001 financial
statements to conform with the 2002 presentation.
Loss per Share
The reconciliations of the numerators and denominators of the basic
earnings per share computations are as follows:
Per-Share
Loss Shares Amount
For the three months ended September 30, 2002
---------------------------------------------
Basic Loss per Share
Loss available to common shareholders $ (184,161) 12,535,920 $ (0.01)
================= ================== ==================
For the three months ended September 30, 2001
---------------------------------------------
Basic Loss per Share
Loss available to common shareholders $ (492,926) 12,100,249 $ (0.04)
================= ================== ==================
For the nine months ended September 30, 2002
--------------------------------------------
Basic Loss per Share
Loss available to common shareholders $ (598,631) 12,628,003 $ (0.05)
================= ================== ==================
For the nine months ended September 30, 2001
--------------------------------------------
Basic Loss per Share
Loss available to common shareholders $ (1,835,920) 12,098,700 $ (0.15)
================= ================== ==================
Basic earnings per common share were computed by dividing net loss by
the weighted average number of shares of common stock outstanding during the
year. Diluted loss per common share for the three and nine months ended
September 30, 2002 and 2001 are not presented as it would be anti-dilutive.
11
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
Concentration of Credit Risk
The Company has no significant off-balance-sheet concentrations of
credit risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements.
Fixed Assets
Fixed assets are stated at cost. Depreciation and amortization are
computed using the straight- line method over the estimated economic useful
lives of the related assets as follows:
Computer equipment 3 years
Office furniture and fixtures 5-10 years
Upon sale or other disposition of property and equipment, the cost and
related accumulated depreciation or amortization are removed from the accounts
and any gain or loss is included in the determination of income or loss.
Expenditures for maintenance and repairs are charged to expense as
incurred. Major overhauls and betterments are capitalized and depreciated over
their estimated economic useful lives.
Intangibles
Intangibles associated with certain technology agreements are amortized
over 10 -14 years.
Other Current Assets
During 2000, the Company purchased supplies of batteries and parts
related to research and development of the Klever-Kart System. These supplies
are carried at fair market value on the balance sheet. Due to technological
changes, these supplies have become obsolete. The parts supplies were sold in
January 2001. The batteries were written-off and expensed during 2001.
NOTE 3 - INCOME TAXES
The Company has accumulated tax losses estimated at $15,000,000
expiring in years 2007 through 2022. Current tax laws limit the amount of loss
available to be offset against future taxable income when a substantial change
in ownership occurs. The amount of net operating loss carryforward available to
offset future taxable income may be limited if there is a substantial change in
ownership.
12
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(continued)
NOTE 4 - LEASE COMMITMENT
The Company currently leases approximately 1,620 square feet of office
space from Four Cabo's Enterprises, Ltd. on a month to month basis. The lease
payments are approximately $2,025 per month.
The Company has also entered into lease agreements for the rental of
computer equipment. These leases expire between September 2003 and May 2004. The
total monthly lease payments due on the above leases is approximately $210.
During 2000, the Company entered into a financing agreement for the
purchase of a laser printer. The payments on this agreement are $312 per month
for a term of 36 months.
The minimum future lease payments under these leases for the next five
years are:
Year Ended December 31,
-------------------------------------------
2002 $ 8,289
2003 5,774
2004 890
2005 -
2006 -
--------------
Total minimum future lease payments $ 14,953
==============
NOTE 5 - RESEARCH AND DEVELOPMENT
Research and development of the Klever-Kart System began with the sole
purpose of reducing thefts of shopping carts. A voice-activated alarm system was
envisioned. As time and technology progressed, the present embodiment of the
Klever-Kart System evolved into a "product specific" point-of-purchase
advertising system consisting of an easily readable electronic display that
attaches to any shopping cart, a shelf mounted message sending unit that
automatically sends featured products' ad-message to the display and a host
computer using proprietary software.
During the three months ended September 30, 2002 and 2001, the Company
expended $0 and $53,456, respectively for research and development of the
technology involved with its patents.
NOTE 6- RELATED PARTY TRANSACTIONS
During 1998 various shareholders loaned the Company $347,100. The notes
are payable within one year plus interest at 10% and 12% per annum. During 1999
and 2000, principle payments of $155,850 and $62,500 were paid toward these
loans.
13
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(continued)
NOTE 6- RELATED PARTY TRANSACTIONS (continued)
During the year ended December 31, 2000, a shareholder loaned the
Company $1,100,000. This loan is secured by the Company's inventory, accounts
receivable, equipment, patents and any proceeds related to these assets. This
note is payable within one year plus interest at 10% per annum.
During the year ended December 31, 2001, shareholders loaned the
Company $1,017,323. These loans are secured by the Company's inventory, accounts
receivable, equipment, patents and any proceeds related to these assets. These
notes are payable within one year plus interest at 10% per annum. During the six
months ended September 30, 2002, shareholders loaned the Company $181,710. The
total balance of notes payable due as of September 30, 2002 is $2,420,003.
During the year ended December 31, 2001, the Company accrued additional
related party liabilities. These liabilities resulted from an agreement with a
shareholder and interest due on accrued compensation. The total amount of these
liabilities at September 30, 2002 is $78,880.
On February 1, 2000 an accrued liability in the amount of $306,666.64
was converted to common shares by exercise of options for the purchase of
579,585 shares at $.86 per share and a note receivable in the amount of
$191,776.46. The note is payable in thirty-six equal installments with interest
at the rate of eight percent. The note is collateralized by 100,000 shares of
the Company's common shares. As of July 31, 2001, the total balance on the note
receivable was $98,375. On July 31, 2001, the Company forgave the remaining
amount owed on the receivable in exchange for 100,000 shares of common stock
that were returned to the Company.
NOTE 7- STOCK OPTIONS
The shareholders approved, by a majority vote, the adoption of the 1998
Stock Incentive Plan (the "Plan"). Under the Plan, 3,500,000 shares of common
stock are reserved for issuance upon the exercise of options which may be
granted from time-to-time to officers, directors and certain employees and
consultants of the Company or its subsidiaries. The Plan permits the award of
both qualified and non-qualified incentive stock options. Under the Plan, an
additional 500,000 shares of common stock are reserved for issuance in the form
of restricted stock grants. As of December 31, 1998, no options had been granted
under the Plan. Compensation expense charged to operations in 2001 and 2000 is
$0 and $297,686. The following is a summary of transactions:
14
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(continued)
NOTE 7- STOCK OPTIONS (continued)
Shares Under Option
--------------------------------------
September 30, December 31,
--------------------------------------
2002 2001
------------------ ------------------
Outstanding, beginning of year 2,124,392 2,685,049
Granted during the year 1,664,406 2,299,367
Canceled during the year (120,000) (2,860,024)
Exercised during the year - -
------------------ ------------------
Outstanding, end of year (at prices
ranging from $.01 to $3.00 per share) 3,668,798 2,124,392
================== ==================
Eligible, end of year for exercise currently (at prices
ranging from $.01 to $3.00 per share) 3,168,798 1,458,500
================== ==================
NOTE 8 - PREFERRED STOCK
On February 7, 2000 the Board of Directors authorized and established
"Class A Voting Preferred Stock" ("Class A Shares") as a class of its $.01 par
value, 2,000,000 shares authorized, preferred stock. Class A Shares consisted of
1,000,000, 125,000 shares thereof were designated as Series 1 shares. On May 20,
2002, the Board of Directors amended the number of authorized shares of Class A
voting preferred stock to 55,000 shares.
Class A Shares are convertible into Common Stock at an initial
conversion price of $2.60 (subject to adjustment).
Holders of Class A Shares shall be entitled to receive when and as
declared by the Board of Directors of the Company out of any funds at the time
legally available therefor dividends at the rate of $2.20 per share per annum,
payable semi-annually on the first day of January and July of each year. Such
dividends shall accrue on each such share from the date of its original issuance
and shall accrue from day to day, whether or not earned or declared. Such
dividend shall be cumulative and may be paid in cash or in kind through the
distribution of .0425 Class A Shares, Series 1, for each outstanding Class A
Share, on each dividend payment date. In addition, each holder of Class A Shares
shall be entitled to receive, when and as declared, a dividend equal to each
dividend declared and paid on the shares of Common Stock, on a share for share
basis. If there is a split or dividend on the Common Stock, then the Class A
Share dividends shall be adjusted as if a similar split or dividend had occurred
with respect to the Class A Shares.
15
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(continued)
NOTE 8 - PREFERRED STOCK (continued)
Class A Shareholders shall be entitled to one vote for each share of
Common Stock into which such Class A Shares could then be converted, and shall
have voting rights and powers equal to that of a holder of Common Stock. The
Holders of Class A Shares shall vote with the holders of Common Stock and not as
a separate class.
Class A Shares carry a liquidation preference of $26 per share plus any
accrued but unpaid dividends on such shares, if any, and adjusted for
combinations, splits, dividends or distributions of shares of stock with respect
to such shares.
The Class A Shares shall be redeemable by the Company, in whole or in
part, at the option of the Board of Directors of the Company, at any time and
from time to time on or after July 1, 2002. The redemption price shall be $26
per share together with accrued but unpaid dividends on such shares, if any.
On September 24, 2000 the Board of Directors authorized and established
"Class B Voting Preferred Stock" ("Class B Shares") as a class of its $.01 par
value, 2,000,000 shares authorized, preferred stock. Class B Shares consisted of
250,000, 125,000 shares thereof were designated as Series 1 shares. On May 20,
2002, the Board of Directors amended the number of authorized shares of Class B
voting preferred stock to 42,000 shares.
Class B Shares are convertible into Common Stock at an initial
conversion price of $1.70 (subject to adjustment).
Holders of Class B Shares shall be entitled to receive when and as
declared by the Board of Directors of the Corporation out of any funds at the
time legally available therefore dividends at the rate of the Original Issue
Price divided by 11.8181818 per share per annum, payable semi-annually on the
first day of January and July of each year. Such dividends shall accrue on each
such share from the date of its original issuance and shall accrue from day to
day, whether or not earned or declared. Such dividends shall be cumulative and
may be paid in cash or in kind through the distribution of .0425 Class B Shares,
of the same Series for which the dividend is accrued, for each outstanding Class
B Share, on each dividend payment date; provided, that if such dividends in
respect of any period shall not have been paid or declared and set apart for
payment for all outstanding Class B Shares by each payment date, then until all
unpaid dividends thereon shall be paid or set apart for payment to the holders
of such shares, the Corporation may not pay, declare or set apart any dividend
or other distribution on its shares of Common Stock or other shares junior to
the Class B Shares, nor may any other distributions, redemptions or other
payments be made with respect to the shares of Common Stock or other junior
shares. In addition to the foregoing, each
16
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(continued)
NOTE 8 - PREFERRED STOCK (continued)
holder of a Class B Share shall be entitled to receive, when and as declared, a
dividend equal to each dividend declared and paid on the shares of Common Stock,
on a share for share basis, so the holders of the Class B Shares shall be
entitled to participate equally on a share for share basis with the holders of
the shares of Common Stock. If there is a share split or dividend on the Common
Stock, then the Class B Share dividends shall be adjusted as if a similar split
or dividend had occurred with respect to the Class B Shares.
Class B Shareholders shall be entitled to one vote for each share of
Common Stock into which such Class B Shares could then be converted and shall
have voting rights and powers equal
to the voting rights and powers of a holder of shares of Common Stock. The
holders of Class B Shares shall vote with the holders of shares of Common Stock
and not as a separate class.
Class B Shares shall carry a liquidation preference of $17 per share
plus any accrued but unpaid dividends on such shares, if any, and adjusted for
combinations, splits, dividends or distributions of shares of stock with respect
to such shares.
The Class B Shares shall be redeemable by the Company, in whole or in
part, at the option of the Board of Directors of the Company, at any time and
from time to time on or after March 24, 2004 for Series 1, and such date as
determined by the Board of Directors for each additional Series. The redemption
price shall be $17.00 per share together with accrued but unpaid dividends on
such shares, if any.
On January 2, 2001 the Board of Directors authorized and established
"Class C Voting Preferred Stock" ("Class C Shares") as a class of its $.01 par
value, 2,000,000 shares authorized, preferred stock. Class C Shares consisted of
500,000, 125,000 shares thereof were designated as Series 1 shares and 125,000
shares thereof were designated as Series 2 shares. On May 20, 2002, the Board of
Directors amended the number of authorized shares of Class C voting preferred
stock to 150,000 shares.
Class C Shares are convertible into Common Stock at an initial
conversion price of $.66 (subject to adjustment).
Holders of Class C Shares shall be entitled to receive when and as
declared by the Board of Directors of the Corporation out of any funds at the
time legally available therefore dividends at the rate of the Original Issue
Price divided by 11.8181818 per share per annum, payable semi-annually on the
first day of January and July of each year. Such dividends shall accrue on each
such share
17
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(continued)
NOTE 8 - PREFERRED STOCK (continued)
from the date of its original issuance and shall accrue from day to day, whether
or not earned or declared. Such dividends shall be cumulative and may be paid in
cash or in kind through the distribution of .0425 Class C Shares, of the same
Series for which the dividend is accrued, for each outstanding Class C Share, on
each dividend payment date; provided, that if such dividends in respect of any
period shall not have been paid or declared and set apart for payment for all
outstanding Class C Shares by each payment date, then until all unpaid dividends
thereon shall be paid or set apart for payment to the holders of such shares,
the Corporation may not pay, declare or set apart any dividend or other
distribution on its shares of Common Stock or other shares junior to the Class C
Shares, nor may any other distributions, redemptions or other payments be made
with respect to the shares of Common Stock or other junior shares. In addition
to the foregoing, each holder of a Class C Share shall be entitled to receive,
when and as declared, a dividend equal to each dividend declared and paid on the
shares of Common Stock, on a share for share basis, so the holders of the Class
C Shares shall be entitled to participate equally on a share for share basis
with the holders of the shares of Common Stock. If there is a share split or
dividend on the Common Stock, then the Class C Share dividends shall be adjusted
as if a similar split or dividend had occurred with
respect to the Class C Shares.
Class C Shareholders shall be entitled to one vote for each share of
Common Stock into which such Class C Shares could then be converted and shall
have voting rights and powers equal to the voting rights and powers of a holder
of shares of Common Stock. The holders of Class C Shares shall vote with the
holders of shares of Common Stock and not as a separate class.
Class C Shares shall carry a liquidation preference of $6.60 per share
plus any accrued but unpaid dividends on such shares, if any, and adjusted for
combinations, splits, dividends or distributions of shares of stock with respect
to such shares.
The Class C Shares shall be redeemable by the Company, in whole or in
part, at the option of the Board of Directors of the Company, at any time and
from time to time on or after July 2, 2004 for Series 1, and such date as
determined by the Board of Directors for each additional Series. The redemption
price shall be $6.60 per share together with accrued but unpaid dividends on
such shares, if any.
On May 20, 2002, the Board of Directors authorized and established
"Class D Voting Preferred Stock" ("Class D Shares") as a class of its $.01 par
value, 2,000,000 shares authorized, preferred stock. Class D Shares consist of
500,000 shares thereof are designated as "Class D Voting Preferred Stock" (the
"Class D Shares").
18
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(continued)
NOTE 8 - PREFERRED STOCK (continued)
Class D Shares are convertible into Common Stock at an initial
conversion price of $1.05 (subject to adjustment).
Holders of Class D Shares shall be entitled to receive when and as
declared by the Board of Directors of the Corporation out of any funds at the
time legally available therefore dividends at the rate of the Original Issue
Price divided by 11.8181818 per share per annum, payable semi-annually on the
first day of January and July of each year. Such dividends shall accrue on each
such share from the date of its original issuance and shall accrue from day to
day, whether or not earned or declared. Such dividends shall be cumulative and
may be paid in cash or in kind through the distribution of .0425 Class D Shares
for each outstanding Class D Share, on each dividend payment date; provided,
that if such dividends in respect of any period shall not have been paid or
declared and set apart for payment for all outstanding Class D Shares by each
payment date, then until all unpaid dividends thereon shall be paid or set apart
for payment to the holders of such shares, the Corporation may not pay, declare
or set apart any dividend or other distribution on its shares of Common Stock or
other shares junior to the Class D Shares, nor may any other distributions,
redemptions or other payments be made with respect to the shares of Common Stock
or other junior shares. In addition to the foregoing, each holder of a Class D
Share shall be entitled to receive, when and as declared, a dividend equal to
each dividend declared and paid on the shares of Common Stock, on a share for
share basis, so the holders of the Class D Shares shall be entitled to
participate equally on a share for share basis with the holders of the shares of
Common Stock. If there is a share split or dividend on the Common Stock, then
the Class D Share dividends shall be adjusted as if a similar split or dividend
had occurred with respect to the Class D Shares.
Class D Shareholders shall be entitled to one vote for each share of
Common Stock into which such Class D Shares could then be converted and shall
have voting rights and powers equal to the voting rights and powers of a holder
of shares of Common Stock. The holders of Class D Shares shall vote with the
holders of shares of Common Stock and not as a separate class.
Class D Shares shall carry a liquidation preference of $10.50 per share
plus any accrued but unpaid dividends on such shares, if any, and adjusted for
combinations, splits, dividends or distributions of shares of stock with respect
to such shares.
The Class D Shares shall be redeemable by the Company, in whole or in
part, at the option of the Board of Directors of the Company, at any time and
from time to time on or after May 14, 2007. The redemption price shall be $10.50
per share together with accrued but unpaid dividends on such shares, if any.
19
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(continued)
NOTE 9 - CONTINGENCIES
On September 18, 2001, a Complaint was filed in Superior Court of the
State of California, County of San Francisco, by eiKart, L.L.C. ("eiKart")
against the Company. The Complaint arises out of a written agreement between the
Company and eiKart dated May 11, 2001. Pursuant to the agreement, eiKart was to
pursue certain financing sources for the Company. The Complaint also alleges
that eiKart was requested by and performed for the Company certain additional
financing consulting services. The Complaint also claims that the Company
defrauded eiKart by stating that it was seeking interim financing when in
reality, the Company was not seeking financing, but trying to "go private" and
that the Company defrauded eiKart by not executing an amendment to the written
agreement. eiKart seeks payment in the form of stock options and cash as
required pursuant to said written agreement as if all benchmarks were satisfied,
payment for the fair value of financing services rendered (alleged to be in
excess of $300,000) and recovery of damages suffered as a result of the
fraudulent misrepresentations in the amount to be proven at trial. The Company
disputes all claims as invalid and intends to vigorously defend this action.
Management believes that the Company will prevail in this matter, therefore no
provision has been made in the financial statements related to this claim.
NOTE 10 - STOCK TRANSACTIONS
During August 2001, the Company issued 507,048 shares of common stock
as a prepayment for services to be rendered over the next twelve months. This
resulted in a prepaid asset of $195,213 and expenses of $139,438. Approximately
40% of the agreement was completed. On August 15, 2002, the Company received a
refund of 304,229 shares of stock for services that were never rendered. These
shares have been canceled and are no longer outstanding.
Item 2. Management's Discussion and Analysis or Plan of Operation.
General - This discussion should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's annual report on Form 10-KSB for the year ended December 31, 2001.
Plan of Operations - The Company's goal is to become the leading supplier of
in-store promotions and advertising technology for grocery and other
mass-merchandise retailers. To accomplish this goal, the Company intends to
expand its product offerings to include: (i) electronic couponing (2003) to
eliminate the need for and reduce the costs related to paper coupons (including
fraud, mis- redemption and mal-redemption); (ii) the establishment of targeted
Internet-type content to enhance customer loyalty; (iii) capturing
Point-of-Selection data in the aggregate for providing data warehousing and
mining services to various interested parties; (iv) certain other in-store
services.
20
Additionally, the Company intends to expand the Klever-Kart System's application
to other retailers including superstores, discount stores, toy stores and
warehouse stores. Following is a description of the Company's growth strategy,
which is dependent upon the Company securing additional financing:
System Development and Product Movement Test.
The product movement test was completed during third quarter 1997. The test took
place in a Smith's Food and Drug store located in Salt Lake City, Utah.
Information Resources, Inc., an independent company, audited the results of the
test which concluded an average 46.8% incremental product movement.
Cost Reduction & Enhancement.
In January 1998, the Company commenced development of the Phase II functional
specification that encompassed cost reductions and system enhancements.
Improvements on the Klever-Kart(R) system included: a significantly smaller and
more sleek design in the appearance and size of the display unit; smaller
trigger units with improved sensitivity, more durable plastics, and improved
sound fidelity. Upon completion of the Phase II functional specification, the
Company began phase II engineering design and development. In September 1999,
the Company began parts procurement and other manufacturing processes.
In early third quarter 2000, the Company installed stores for testing of the
Phase II system. In November 2000, the Company commenced engineering design and
development of Phase III. Phase III focused on improved consumer ergonomics,
enhanced user interface, modular design, improved graphics, and longer battery
life. The Company intends to complete this phase and proceed with a roll out
into stores.
Future Business Development
1. Technological Innovation and Expanded Product Offerings
The Company is in the process of developing various product enhancements for its
retail grocer and consumer goods manufacturer clients and expects to offer these
enhancements commencing in 2003. These product enhancements include electronic
coupons and the Klever-Kard* enhancement to existing frequent shopping programs
("Klever-Kard Program").
Electronic Couponing
The Company expects to complete the development and testing of the electronic
coupon feature of the Klever-Kart System in 2003. The Company expects the
electronic coupon feature to be well received by the consumer goods companies,
retailers and consumers because it (i) reduces handling costs for both the
retailer and consumer goods manufacturer; (ii) virtually eliminates mis-
redemption, mal-redemption and fraud associated with paper coupons; and (iii)
makes coupon use convenient for the consumer. In addition, this feature is
expected to permit the consumer goods
21
manufacturer or retailer to electronically alter the face value of coupon to
rapidly customize it for competitive situations, seasonal trends or to alter its
value or expiration based upon predetermined redemption rates.
Industry sources indicate the number of coupons redeemed annually in the U.S. is
approximately 5.3 billion with coupon fraud accounting for more than $300
million in losses to the consumer goods companies. The Company believes the
electronic coupon feature of the Klever-Kart System will be superior to
competitor product offerings due to the virtual elimination of mis-redemption,
mal- redemption and fraud associated with paper coupons.
Klever-Kard Program
The Company expects to introduce the Klever-Kard Program in 2003. The
Klever-Kard Program is a frequent shopper program enhancement that is expected
to permit consumer goods companies and retailers to target specific promotional
campaigns to individual consumers based upon demographics and personal buying
history. Further development of the Klever-Kard Program is expected to include
targeted Internet tie-ins, direct mail, rebates, download of shopping
lists/recipes, product sampling and electronic contest entry. Information from
individual consumer card usage is expected to produce individual customer
profiles and track specific marketing and purchasing trends. Using this
precedent in conjunction with the Klever-Kart System, the Company expects to
sell customer shopping behavior information to consumer research companies,
consumer goods companies and retailers.
2. Expand Retailer Base
The Company expects to expand the Klever-Kart System's orientation to other
store formats including superstores, discount stores, toy stores, do-it-yourself
(DIY) stores and warehouse stores. The Company plans to install the Klever-Kart
System in a pilot store at two or more key retailers across the U.S. The Company
believes that the existing Klever-Kart System can be easily adapted to meet the
requirements of retailers operating in a variety of environments.
Liquidity and Capital Resources - The Company requires working capital
principally to fund its current research and development and operating expenses
for which the Company has relied on short-term borrowings and the issuance of
restricted common stock. There are no formal commitments from banks or other
lending sources for lines of credit or similar short-term borrowings, but the
Company has been able to borrow limited additional working capital that has been
required. From time to time in the past, required short-term borrowings have
been obtained from a principal shareholder or other related entities.
Cash flows. Operating activities used cash of $60,000 and $298,000 for the three
months ended September 30, 2002 and 2001, respectively.
Investing activities used cash of $4,000 and $93,000 for the three months ended
September 30, 2002 and 2001. Investing activities primarily represent purchases
of patents relating to the electronic in- store advertising, directory and
coupon devices, and purchases of office equipment.
22
Financing activities provided cash of $64,000 and $403,000 for the three months
ended September 30, 2002 and 2001, respectively. Financing activities primarily
represent sales of the Company's common and preferred stock, and loans from
shareholders.
The Company will be required to supplement its available cash and other liquid
assets with proceeds from borrowing, the sale of additional securities, or other
sources. There can be no assurance that any such required additional funding
will be available or, if available, that it can be obtained on terms favorable
to the Company.
Item 3. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on an evaluation conducted within 90 days prior to the filing
date of this Quarterly Report on Form 10- QSB, that the Company's disclosure
controls and procedures have functioned effectively so as to provide those
officers the information necessary to evaluate whether:
(i) this Quarterly Report on Form 10-QSB contains any untrue statement
of a material fact or omits 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 Quarterly Report on Form 10-QSB, and
(ii) the financial statements, and other financial information included
in this Quarterly Report on Form 10-QSB, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this Quarterly
Report on Form 10-QSB.
There have been no significant changes in the Company's internal controls or in
other factors since the date of the Chief Executive Officer's and Chief
Financial Officer's evaluation that could significantly affect these internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On September 18, 2001, a Complaint was filed in Superior Court of the State of
California, County of San Francisco, by eiKart, L.L.C. ("eiKart") against the
Company. The Complaint arises out of a written agreement between the Company and
eiKart dated May 11, 2001. Pursuant to the agreement, eiKart was to pursue
certain financing sources for the Company. The Complaint also alleges that
eiKart was requested by and performed for the Company certain additional
financing consulting services. The Complaint also claims that the Company
defrauded eiKart by stating that it was seeking interim financing when in
reality, the Company was not seeking financing, but trying to "go private" and
that the Company defrauded eiKart by not executing an amendment to the written
agreement. eiKart seeks payment in the form of stock options and cash as
required pursuant to said written agreement as if all benchmarks were satisfied,
payment for the fair value of financing
23
services rendered (alleged to be in excess of $300,000) and recovery of damages
suffered as a result of the fraudulent misrepresentations in the amount to be
proven at trial. The Company disputes all claims as invalid and intends to
vigorously defend this action. Management believes that the Company will prevail
in this matter, therefore no provision has been made in the financial statements
related to this claim.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit
Number Title of Document
3.01 Restated Certificate of Incorporation of Klever Marketing, Inc. a
Delaware corporation (1)
3.02 Certificate of Designation of Rights, Privileges and Preferences:
Rights of A Class Voting Preferred Stock, Series 1, of Klever
Marketing, Inc., dated February 7, 2000 (2)
3.03 Bylaws, as amended (2)
4.01 Amended Certificate of Designation of Rights, Privileges and
Preferences: Rights of A Class of Voting Preferred Stock, Series 1, of
Klever Marketing, Inc., Dated February 7, 2000 (3)
4.02 Certificate of Designation of Rights, Privileges and Preferences of
Class B Voting Preferred Stock, of Klever Marketing, Inc., dated
September 24, 2000 (3)
4.03 Certificate of Designation of Rights, Privileges and Preferences of
Class C Voting Preferred Stock, of Klever Marketing, Inc., dated
January 2, 2001 (3)
24
4.04 Certificate of Designation of Rights, Privileges and Preferences of
Class D Voting Preferred Stock, of Klever Marketing, Inc., dated June
14, 2002 (5)
4.05 Amendment to the Certificates of Designation of Rights, Privileges and
Preferences of Class A, B, and C Voting Preferred Stock, of Klever
Marketing, Inc., dated June 12, 2002 (5)
10.01 Separation Agreement between Paul G. Begum and the Registrant Dated
January 8, 2001 (2)
10.02 Stock Incentive Plan, effective June 1, 1998 (2)
10.03 Amended and Restated Promissory Note (Secured) of the Registrant
payable to Presidio Investments, LLC, dated June 27, 2000, with
Financing Statement and Exhibit "A" (2)
10.04 Intercreditor Agreement between Seabury Investors III, Limited
Partnership, The Olson Foundation, Presidio Investments, LLC, and the
Registrant dated August 27, 2001 (4)
(1) Incorporated herein by reference from Registrant's Form 10KSB,
dated June 20, 1997.
(2) Incorporated herein by reference from Registrant's Form 10KSB,
dated March 29, 2001.
(3) Incorporated herein by reference from Registrant's Form 10QSB,
dated May 15, 2001.
(4) Incorporated herein by reference from Registrant's Form 10KSB,
dated May 15, 2002.
(5) Incorporated herein by reference from Registrant's Form 10QSB,
dated August 19, 2002.
On August 19, 2002, the Company filed a Form 8-K under Item 7,
Financial Statements and Exhibits, and Item 9, Regulation FD Disclosure. The 8-K
included the Certifications of the Company's CEO and CFO for the quarter ended
June 30, 2002, in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Klever Marketing, Inc.
-----------------------
(Registrant)
DATE: November 19, 2002
------------------------------------
25
By: /s/ Richard J. Trout
-------------------------------
Richard J. Trout
President & Director
By: /s/ D. Paul Smith
---------------------------------
D. Paul Smith
C.F.O.
I, Richard J. Trout, certify that:
1. I have reviewed this quarterly report on form 10-QSB of Klever
Marketing, Inc.
2. Based on my knowledge, this quarterly 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
quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
exchange act rules 13a-14 and 15d-14) for the registrant and have:
A) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
B) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "evaluation
date"); and
C) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the evaluation date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
26
A) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
B) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Richard J. Trout
Richard J. Trout
President and Director
(Principal Executive Officer)
I, D. Paul Smith, certify that:
1. I have reviewed this quarterly report on form 10-QSB of Klever
Marketing, Inc.
2. Based on my knowledge, this quarterly 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
quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
exchange act rules 13a-14 and 15d-14) for the registrant and have:
A) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
B) evaluated the effectiveness of the registrant's disclosure
controls and procedures as
27
of a date within 90 days prior to the filing date of this
quarterly report (the "evaluation date"); and
C) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the evaluation date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
A) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
B) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ D. Paul Smith
D. Paul Smith
C.F.O.
(Principal Financial Officer)
28