SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
/x/ | AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended January 31, 2001
| / / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-23491
GLOBALMEDIA.COM
(Exact name of registrant as specified in its charter)
| Nevada (State or other jurisdiction of incorporation or organization) | 91-1842480 (I.R.S. Employer Identification No.) |
400 Robson Street, Vancouver, British Columbia, Canada V6B 2B4
(Address of Principal Executive Offices; Zip Code)
Registrant's telephone number, including area code:(604) 688-9994
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
Applicable only to issuers involved in bankruptcy proceedings 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 court. Yes / / No / /
Applicable only to corporate issuers:
State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:As of March 12, 2001, there were 49,401,106 shares outstanding of the Company's common stock.
ITEM 1. FINANCIAL STATEMENTS
GLOBALMEDIA.COM
CONSOLIDATED BALANCE SHEETS
(in U.S. dollars)
| | January 31 2001 (Unaudited) $ | July 31 2000 (Audited) $ | |||||
|---|---|---|---|---|---|---|---|
| ASSETS | |||||||
| Current Assets | |||||||
| Cash and cash equivalents | 33,654 | 1,686,560 | |||||
| Short-term investments | 152,982 | 174,099 | |||||
| Trade and other receivables, net of allowance for doubtful accounts of $84,452 (July 31, 2000—$89,832) | 178,517 | 247,526 | |||||
| Prepaid expenses (Note 3) | 663,816 | 2,783,533 | |||||
| Assets held for sale (Note 13) | 2,250,000 | — | |||||
| 3,278,969 | 4,891,718 | ||||||
| Capital Assets (Notes 4 and 13) | 1,167,941 | 6,234,637 | |||||
| Intangible Assets (Notes 9, 10, 11 and 13) | — | 8,343,000 | |||||
| 4,446,910 | 17,469,355 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |||||||
| Current Liabilities | |||||||
| Accounts payable and accrued liabilities | 2,312,921 | 1,047,157 | |||||
| Due to SurferNETWORK.com (Note 13) | 500,000 | — | |||||
| Due to stockholders | 9,068 | 65,960 | |||||
| Current portion of obligations under capital lease | 56,732 | 67,620 | |||||
| Note payable | — | 1,000,000 | |||||
| Deferred revenue | — | 38,333 | |||||
| 2,878,721 | 2,219,070 | ||||||
| Obligations Under Capital Lease | — | 21,860 | |||||
| Total Liabilities | 2,878,721 | 2,240,930 | |||||
| Commitments and Contingencies (Note 12) | |||||||
| Convertible Preferred Shares Series B (July 31, 2000—5,000 issued and outstanding) (Note 7) | — | 4,365,900 | |||||
| Stockholders' Equity (Deficit) | |||||||
| Convertible preferred shares, 100,000,000 authorized Series A—3,340 (July 31, 2000—3,975) issued and outstanding (Note 7) | 3,076,857 | 3,661,746 | |||||
| Convertible preferred shares, 100,000,000 authorized Series B—4,200 issued and outstanding (Note 7) | 3,327,729 | — | |||||
| Common stock, par value $0.001 each, 200,000,000 authorized 40,851,116 (July 1, 2000—25,292,105) issued and outstanding | 32,854 | 17,295 | |||||
| 6,437,440 | 3,679,041 | ||||||
| Additional paid-in capital | 42,677,159 | 30,746,032 | |||||
| Deferred compensation (Note 8) | — | (1,963,750 | ) | ||||
| Accumulated deficit | (47,546,410 | ) | (21,598,798 | ) | |||
| 1,568,189 | 10,862,525 | ||||||
| 4,446,910 | 17,469,355 | ||||||
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GLOBALMEDIA.COM
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(Unaudited)
(in U.S. dollars except share data)
| | For 3 months Ended January 31 | For 6 months Ended January 31 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 $ | 2000 $ | 2001 $ | 2000 $ | ||||||
| REVENUE | 208,171 | 58,635 | 493,806 | 72,280 | ||||||
| OPERATING EXPENSES | ||||||||||
| Write-down of intangible assets (Note 11 and 13) | 4,360,420 | — | 4,360,420 | — | ||||||
| Amortization of intangible assets (Notes 9 and 10) | 3,983,600 | — | 7,967,200 | — | ||||||
| General and administrative (Notes 3 and 8) | 2,760,079 | 1,078,518 | 5,805,869 | 1,876,365 | ||||||
| Write-down of capital assets (Note 13) | 2,064,499 | — | 2,064,499 | — | ||||||
| Direct costs | 1,037,346 | 57,923 | 1,986,663 | 130,713 | ||||||
| Sales and marketing (Note 3) | 913,064 | 1,114,037 | 2,545,627 | 1,661,171 | ||||||
| Amortization of capital assets (Note 4) | 548,584 | 256,267 | 1,091,310 | 347,851 | ||||||
| Stockholder communications | 153,959 | 59,395 | 284,577 | 126,595 | ||||||
| 15,821,551 | 2,566,140 | 26,106,165 | 4,142,695 | |||||||
| LOSS FROM OPERATIONS BEFORE OTHER ITEMS | (15,613,380 | ) | (2,507,505 | ) | (25,612,359 | ) | (4,070,415 | ) | ||
| OTHER ITEMS | ||||||||||
| Interest | 407 | (10,164 | ) | 10,100 | 2,109 | |||||
| Foreign exchange | (30,649 | ) | 9,279 | (38,777 | ) | 4,644 | ||||
| LOSS AND COMPREHENSIVE LOSS | (15,643,622 | ) | (2,508,390 | ) | (25,641,036 | ) | (4,063,662 | ) | ||
| BASIC AND DILUTED LOSS PER COMMON SHARE | (0.44 | ) | (0.11 | ) | (0.87 | ) | (0.19 | ) | ||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED IN THE COMPUTATION OF LOSS PER SHARE | 35,520,909 | 22,104,264 | 29,442,239 | 21,772,984 | ||||||
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GLOBALMEDIA.COM
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in U.S. dollars)
| | Mandatorily Redeemable Preferred Stock | | | | | | | | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Preferred Stock | Common Stock | | | | ||||||||||||||
| | Deferred Compensation | Additional Paid in Capital | Accumulated Deficit | ||||||||||||||||
| | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||
| Balance, July 31, 1999 | 8,500 | 7,089,775 | — | — | 20,656,331 | 12,658 | — | 2,617,109 | (2,893,070 | ) | |||||||||
| Registration of Series A preferred shares | (8,500 | ) | (7,089,775 | ) | 8,500 | 7,089,775 | — | — | — | — | — | ||||||||
| Stock options exercised | — | — | — | — | 1,469,581 | 1,470 | — | 5,807,636 | — | ||||||||||
| Accrued preferred share premium | — | 53,900 | — | 342,575 | — | — | — | — | (396,475 | ) | |||||||||
| Conversion of preferred shares Series A (Note 6) | — | — | (4,325 | ) | (3,770,604 | ) | 1,092,056 | 1,092 | — | 3,769,512 | — | ||||||||
| Conversion of amounts due to stockholder and affiliated company | — | — | — | — | 32,535 | 33 | — | 203,312 | — | ||||||||||
| Issue of restricted shares (Note 5) | — | — | — | — | 343,983 | 344 | — | 2,029,661 | — | ||||||||||
| Issue of preferred shares (Note 7) | 5,000 | 4,312,000 | — | — | — | — | — | — | — | ||||||||||
| Deemed dividend on beneficial conversion feature (Note 6) | — | — | — | — | — | — | — | 3,400,000 | (3,400,000 | ) | |||||||||
| Warrants issued on financing | — | — | — | — | — | — | — | 493,000 | — | ||||||||||
| Deferred compensation (Note 8) | — | — | — | — | — | — | (3,927,500 | ) | 3,927,500 | — | |||||||||
| Issue of common shares (Note 9) | — | — | — | — | 1,697,619 | 1,698 | — | 8,498,302 | — | ||||||||||
| Loss for the year | — | — | — | — | — | — | 1,963,750 | — | (14,909,253 | ) | |||||||||
| Balance, July 31, 2000 | 5,000 | 4,365,900 | 4,175 | 3,661,746 | 25,292,105 | 17,295 | (1,963,750 | ) | 30,746,032 | (21,598,798 | ) | ||||||||
| Registration of Series B Preferred shares (Note 7) | �� | (5,000 | ) | (4,365,900 | ) | 5,000 | 4,365,900 | — | — | — | — | — | |||||||
| Stock options exercised | — | — | — | — | 23,100 | 23 | — | 11,527 | — | ||||||||||
| Accrued preferred share premium | — | — | — | 306,576 | — | — | — | — | (306,576 | ) | |||||||||
| Conversion of preferred shares Series A (Note 6) | — | — | (835 | ) | (761,612 | ) | 2,371,587 | 2,372 | — | 759,240 | — | ||||||||
| Conversion of preferred shares Series B (Note 7) | — | — | (800 | ) | (1,168,024 | ) | 3,081,895 | 3,082 | — | 1,164,942 | — | ||||||||
| Issue of restricted shares (Note 5) | — | — | — | — | 5,714,286 | 5,714 | — | 2,494,286 | — | ||||||||||
| Issue of common shares and Warrants (Note 10) | — | — | — | — | 2,082,429 | 2,082 | — | 6,085,918 | — | ||||||||||
| Issue of common shares (Note 5) | 2,285,714 | 2,286 | — | 997,714 | |||||||||||||||
| Deemed compensation (Note 8) | 417,500 | ||||||||||||||||||
| Loss for the period | — | — | — | — | — | — | 1,963,750 | — | (25,641,036 | ) | |||||||||
| Balance, January 31, 2001 | — | — | 7,540 | 6,404,586 | 40,851,116 | 32,854 | — | 42,677,159 | (47,546,410 | ) | |||||||||
4
GLOBALMEDIA.COM
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in U.S. dollars)
| | For 6 Months Ended January 31 | ||||||
|---|---|---|---|---|---|---|---|
| | 2001 $ | 2000 $ | |||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
| Loss for the period | (25,641,036 | ) | (4,063,662 | ) | |||
| Items not requiring an outlay of cash | |||||||
| Amortization of intangible assets (Notes 9 and 10) | 7,967,200 | — | |||||
| Write-down of intangible assets (Note 11) | 4,360,420 | — | |||||
| Write-down of capital assets (Note 13) | 2,064,499 | — | |||||
| Deferred compensation (Note 8) | 1,963,750 | — | |||||
| Amortization of capital assets | 1,091,310 | 347,851 | |||||
| Deemed compensation (Note 8) | 417,500 | — | |||||
| (7,776,357 | ) | (3,715,811 | ) | ||||
| Changes in non-cash operating working capital | |||||||
| Trade and other receivables | 69,009 | (97,864 | ) | ||||
| Short-term investments | 21,117 | — | |||||
| Prepaid expenses | 2,119,716 | (2,624 | ) | ||||
| Deferred revenue | (38,333 | ) | — | ||||
| Accounts payable and accrued liabilities | 1,265,766 | 27,265 | |||||
| (4,339,082 | ) | (3,789,034 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
| Broadcast network capital expenditures | — | (2,970,337 | ) | ||||
| Purchase of capital assets | (314,472 | ) | (728,014 | ) | |||
| (314,472 | ) | (3,698,351 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
| Advances from (to) shareholders | (56,892 | ) | (16,466 | ) | |||
| Advances from (to) affiliated companies | — | (14,467 | ) | ||||
| Note payable | (1,000,000 | ) | — | ||||
| Due to SurferNETWORK.com (Note 13) | 500,000 | — | |||||
| Lease payable | (32,748 | ) | 152,587 | ||||
| Issue of restricted shares (Note 6) | 3,500,000 | 1,999,995 | |||||
| Stock options exercised | 11,550 | 2,194,320 | |||||
| 2,921,910 | 4,315,969 | ||||||
| Effect of exchange rate changes on cash | 78,738 | 65,176 | |||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (1,652,906 | ) | (3,106,240 | ) | |||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 1,686,560 | 5,649,073 | |||||
| CASH AND CASH EQUIVALENTS, END OF QUARTER | 33,654 | 2,542,833 | |||||
| Supplemental cash flow disclosure | |||||||
| Interest—paid | 2,323 | 6,728 | |||||
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The following notes are to be read in conjunction with the notes to our audited financial statements contained in our Annual Report on Form 10-KSB/A, filed with the Securities and Exchange Commission on December 14, 2000.
1. NATURE OF BUSINESS AND GOING CONCERN
GlobalMedia.com (formerly Global Media Corp.) (the "Company") was incorporated on April 8, 1997 in the State of Nevada and is headquartered in Vancouver, British Columbia, Canada. During the third quarter of fiscal 1999, the Company adopted an internet-focused business plan. Through the second quarter of fiscal 2001 it had been engaged primarily in the development of a broadcast network over the Internet, including streaming services, integrated e-commerce solutions, a customized media player and simulated live internet-only radio stations.
On December 29, 2000, the Company announced a major restructuring of its business from an Internet radio broadcaster with a revenue model based primarily upon advertising income, to an Internet video, custom website and wireless Internet consultant for the sports and entertainment industries, with a revenue model based primarily upon receipt of per project consulting fees.
On February 2, 2001 the Company entered into an asset sale agreement with SurferNETWORK.com, under which it sold its radio contracts, web sites, and other tangible and intangible assets used in the Company's online media and streaming solutions business. Subsequent to the sale of its radio contracts and related assets, the Company has been in the process of downsizing its operations and seeking investment capital to continue its consulting services business.
The accompanying financial statements have been prepared on a going concern basis which contemplates that the Company will continue its operations and will be able to realize its assets and discharge its liabilities in the normal course of operations. Several conditions and events cast substantial doubt about the Company's ability to continue as a going concern. The Company has a limited operating history in an industry that is characterized by rapid technological change. The Company reported a $15,643,622 net loss for the second quarter of fiscal 2001, a $25,641,036 net loss for the six months ended January 31, 2001, and net losses of $14,909,253 and $2,231,074 during the years ended July 31, 2000 and 1999, respectively, and will require additional financing in order to continue its business operations.
The Company raised $1,500,000 in additional equity financing during the quarter and $500,000 from asset dispositions subsequent to the end of the period (see Note 13). However, management currently anticipates that it only has sufficient funds to meet working capital and capital expenditure needs through March 31 2001. These factors, among others, indicate that the Company may be unable to continue as a going concern for a reasonable period of time.
The Company's future capital requirements will depend on numerous factors including, but not limited to, its ability to develop its restructured business model, repay existing liabilities, and regain and maintain compliance with Nasdaq listing and marketplace rules so that the Company will not be delisted from Nasdaq. Management is actively pursuing additional financing and has had discussions with various third parties, although no firm commitments have been obtained.
The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. If the Company were unable to continue as a going concern, then substantial adjustments would be necessary to the carrying values of its assets, the reported amounts of its liabilities, the reported revenues and expenses and the balance sheet classifications used.
6
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States and are presented in U.S. dollars.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and all its subsidiaries. The principal operating subsidiary is Globalmedia.com (Canada) Limited.
Intangible assets and amortization
Intangible assets are recorded at the lower of cost and net realizable value. Amortization is provided over the estimated useful lives of the contracts and has been calculated using the straight-line method.
E-commerce infrastructure
E-commerce infrastructure costs incurred subsequent to establishing technological feasibility were capitalized. Capitalized costs are amortized using the straight-line method over two and one half years. Capitalization ceased and amortization commenced on the date that the software was ready for use.
The recoverability of the e-commerce infrastructure is dependent upon realization of sufficient undiscounted future revenues from this product. At January 31, 2001, the remaining net book value of the e-commerce infrastructure costs were written down to zero (see Note 13).
Broadcast network
Broadcast network development costs incurred subsequent to establishing technological feasibility were capitalized. Capital costs are amortized using the straight-line method over two years. Capitalization ceased and amortization commenced on the date that the network was ready for use.
The recoverability of the network development costs is dependent upon realization of sufficient undiscounted future revenues from this product. At January 31, 2001, the remaining net book value of the broadcast network development costs were written down to zero (see Note 13).
Revenue recognition
The Company's revenues consist primarily of advertising, bandwidth surcharges, streaming surcharges, set-up fees and revenue from e-commerce transactions.
Advertising revenue
Advertising revenue is derived from the sale of advertising on the Company's web sites. Advertising revenue is recognized in the period the advertisement is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Company obligations include guarantees of a minimum number of impressions, or times that an advertisement is viewed by users of the Company's web sites. Amounts received or billed for which impressions have not yet been delivered are reflected as deferred revenue in the accompanying consolidated balance sheets.
Revenue from e-commerce transactions
Revenue from e-commerce transactions is derived from the sale of CDs, videos and books and is recognized once the product has been shipped and payment is assured.
7
Bandwidth surcharges, streaming surcharges and set-up fees
Set-up fees are primarily related to implementation services most often performed on a time and material basis under separate agreements for the development of a web site. Revenue from set-up fees is recognized once the work is completed. Revenues from bandwidth and streaming surcharges are recognized as the respective services are performed.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company's management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to the financial statements. Actual results may differ from those estimates.
Earnings per share
The Company has adopted SFAS No. 128, "Earnings per Share". This statement requires the presentation of basic and diluted net income or loss per share. Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of common and dilutive equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and warrants. Common equivalent shares, comprising the incremental common shares issuable upon the exercise of stock options and warrants, have not been included as such shares are anti-dilutive for all periods presented.
Accounting for long-lived assets
Long-lived assets are comprised principally of equipment, fixtures, network costs and intangible assets. The Company periodically evaluates whether events and circumstances have occurred that indicate that the Company should revise the remaining estimated useful lives of these assets or that the Company will not recover the remaining balances of these assets. When factors indicate that the Company should perform an evaluation for possible impairment, the Company uses an estimate of the future cash flows from operations of the related asset as a measure of future recoverability of these assets. At January 31, 2001, the Company has written down the remaining net book value of e-commerce infrastructure costs, broadcast network development costs, and intangible assets to zero (see Notes 11 and 13).
3. PREPAID EXPENSES
During the second quarter of fiscal 2000, the Company entered into an agreement with RealNetworks where RealNetworks will provide the Company with advertising through its RealPlayer and banner ads on its web sites, and technical services over various terms. As at January 31, 2001, prepaid advertising expenses amounted to $663,816 (sales and marketing), which are being recognized over the term of the agreement. During the quarter, $709,526 was expensed to sales and marketing and $216,667 in products support was expensed to general and administrative expenses.
8
4. CAPITAL ASSETS
| | Cost $ | Accumulated Amortization $ | Net Book Value $ | |||
|---|---|---|---|---|---|---|
| January 31, 2001 | ||||||
| Communications infrastructure | 89,647 | 89,414 | 233 | |||
| Computer hardware | 1,093,334 | 335,596 | 757,737 | |||
| Leased computer hardware | 132,576 | 36,790 | 95,786 | |||
| Leasehold improvements | 108,101 | 27,230 | 80,871 | |||
| Office furniture and equipment | 176,679 | 37,520 | 139,159 | |||
| Software | 152,590 | 58,436 | 94,155 | |||
| 1,752,927 | 584,986 | 1,167,941 | ||||
| July 31, 2000 | ||||||
| Broadcast network | 3,674,896 | 1,001,875 | 2,673,021 | |||
| Communications infrastructure | 90,057 | 74,812 | 15,245 | |||
| Computer hardware | 1,179,055 | 264,600 | 914,455 | |||
| Leased computer hardware | 132,576 | 19,886 | 112,690 | |||
| Leasehold improvements | 72,055 | 11,015 | 61,040 | |||
| Office furniture and equipment | 139,660 | 24,345 | 115,315 | |||
| Software | 140,831 | 43,212 | 97,619 | |||
| E-commerce infrastructure | 527,100 | 281,848 | 245,252 | |||
| 5,956,230 | 1,721,593 | 4,234,637 | ||||
At January 31, 2001 the Company has written down broadcast network development costs and e-commerce infrastructure costs to zero. This results in a $2,058,058 write-down of broadcast network development costs and a $6,441 write-down of e-commerce infrastructure costs, for a total write-down of $2,064,499 (see Note 13).
5. SHARE CAPITAL
Stock option plans
As of January 31, 2001 the Company has stock options outstanding under two plans: 3,458,570 options pertaining to the 1999 Stock Option Plan ("1999 Plan"), and 2,208,040 options pertaining to the 2000 Stock Option Plan ("2000 Plan"). All plans are administered by the Board of Directors, who have sole discretion and authority to determine awards including the conditions of exercise.
The 1999 Plan, which became effective on March 24, 1999, provides for the issuance of a total of 4,000,000 options within a period of ten years from the effective date. Of the 3,638,025 options granted in total, 2,071,910 options vested immediately and 1,566,115 vested on a quarterly basis over one year. As at January 31, 2001, 2,533,269 options are fully vested. During the second quarter of fiscal 2001, no additional grants were made, none of the outstanding options were exercised and 594,540 options were cancelled. The options expire five years from the date of grant.
The 2000 Plan became effective on April 28, 2000 and provided for the issuance of 4,000,000 options within a period of five years from the effective date. During the quarter, 939,605 options at an exercise price of $0.438, 500,000 options at an exercise price of $0.406 and 8,000 options at an exercise price of $0.156 were granted. Of the 2,208,040 options granted in total, 650,000 options vested immediately and one third of the remaining 1,558,040 outstanding options vest after the first year. The remaining two thirds of the 1,558,040 options will vest quarterly over two years, starting in the second
9
year. During the second quarter of fiscal 2001, 1,447,605 additional grants were made, none of the options offered were exercised during the quarter and 672,170 were cancelled.
Activity in the stock option plans for the current period and 2000 fiscal year was as follows:
| | January 31, 2001 | July 31, 2000 | ||||||
|---|---|---|---|---|---|---|---|---|
| | Options # | Weighted Average Exercise Price $ | Options # | Weighted Average Exercise Price $ | ||||
| Outstanding, beginning of period | 5,070,865 | 5.03 | 3,257,00 | 3.81 | ||||
| Granted (cancelled) | (231,720 | ) | 1.94 | 2,191,390 | 7.01 | |||
| Expired | (75,000 | ) | 0.50 | — | — | |||
| Exercised | (23,100 | ) | 0.50 | (377,525 | ) | 3.50 | ||
| Outstanding, end of period | 4,741,045 | 3.42 | 5,070,865 | 5.03 | ||||
| Options exercisable at the end of period | 3,615,734 | 4.17 | 3,433,507 | 4.51 | ||||
The Company also had a 1998 Stock Option Plan, which became effective on August 21, 1998, and provided for the issuance of 1,000,000 options within a period of ten years from the effective date. All 1,000,000 options were granted during the 1999 fiscal year at an exercise price of $0.50 per share, of which 980,000 were granted to employees and 20,000 were granted to outside contractors. All options vested on grant. During the first quarter of fiscal 2001, 23,100 options were exercised and the remaining 75,000 options expired.
Restricted shares
Standard Radio Inc. Investments
On December 7, 1999, Standard Radio Inc. ("Standard") invested $2,000,000 into the Company and received 338,983 shares of restricted common stock of the Company with piggy-back registration rights. Standard also committed to cause all radio stations owned by it at the time or during the three years following, to become network associates in the GlobalMedia.com E-Commerce Network and GlobalMedia.com Broadcast Network. In connection with the agreement, on December 7, 1999, the Company acted to increase the number of authorized directors by one and appointed Standard's Chief Executive Officer to the Company's Board of Directors. Upon accepting his position on the Board, this person received 125,000 options under the 1999 Plan at an exercise price equal to the closing price of the common stock on the OTC Bulletin Board on the date of the grant. The options vest over a three-year period on a quarterly basis from the date of grant and will expire five years from the grant date.
Furthermore, effective December 7, 1999 the Company and each of the six general managers of the Standard radio stations, Standard's national program director and the general manager of Standard's syndication division entered into consulting agreements. In consideration of services to be performed under these agreements, the Company granted each individual options to acquire up to 20,000 shares under the 1999 Plan at an exercise price equal to the closing price of the common stock on the OTC Bulletin Board on the date of the grant. The options vest over a one-year period from the date of grant depending on certain performance criteria being met, and will expire five years from the grant date. During fiscal 2000 and the six months ended January 31, 2001, the performance criteria was not met and, therefore, none of the options granted under the consulting agreements vested during the period.
On September 7, 2000, the Company sold to Standard Radio Inc. 1,388,888 shares of common stock for $1.80 per share and warrants to purchase up to 277,778 shares of common stock, for an
10
aggregate purchase price of approximately $2,500,000. The warrants had a per share exercise price of $2.25, which is 125% of the per share offering price. If the Company raised a minimum of $7,500,000 on or before December 31, 2000, Standard had agreed to invest an additional $2,500,000 in common equity. However, if subsequent financing was made at a per share price that is less than the price of the Standard investment, the Company would be required to promptly issue to Standard additional shares based on a specified anti-dilution formula and adjust the exercise price of the warrants issued to Standard (see Standard Radio/Jeff Mandelbaum Investment not below). As part of the transaction, the Company agreed to waive all of Standard's fees and expenses under the Company's existing co-marketing agreement with Standard's current radio stations for three years, or so long as Standard continues to hold 2% or more of the Company's issued and outstanding shares.
Standard Radio/Jeff Mandelbaum Investment
On November 14, 2000, the Company has entered into definitive share purchase agreements for $1 million in new investments from Standard Radio Inc., Gary Slaight, David Coriat and Lama Jama Investments LLC (Jeffrey Mandelbaum's investment entity) (the "Investors"). These agreements call for the Company to issue 2,285,714 common shares to the Investors. In connection with and the closing of this new investment, effective as of November 15, 2000, the following other agreements were entered into:
The Company initially agreed to grant fully vested options to purchase 228,572 shares of common stock to L. James Porter, in exchange for which Mr. Porter agreed (a) to exercise that option by November 17, 2000 for an aggregate exercise price of $100,000.25, and (b) that one-half of the shares issued would be held in escrow for 90 days after the closing date. This part of the financing transaction was subsequently waived by the Company and the Investors. As a result, these options were not granted to Mr. Porter, and he did not make the corresponding investment.
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6. SERIES A CONVERTIBLE PREFERRED STOCK
On May 6, 1999, the Company entered into a Securities Purchase Agreement and ancillary agreements with RGC pursuant to which the Company issued, for cash, a 5% convertible debenture to RGC in the aggregate principal amount of $8,500,000. On July 19, 1999, the debenture was converted into 8,500 shares of Series A convertible preferred stock with a stated value of $1,000 per share. The Series A convertible preferred shares are convertible from time to time at RGC's option into shares of common stock of the Company as follows: the stated value of each share of Series A convertible preferred stock, together with a premium thereon accruing at a per annum rate of 5%, is convertible at the lesser of a fixed conversion price or a variable conversion price based on the market price of the common shares at the time of conversion. The conversion price of the Series A convertible preferred stock is the lesser of:
During the quarter, 635 Series A convertible preferred shares and the accrued premium on those shares were converted to 2,001,019 common shares, leaving 3,340 Series A convertible preferred shares outstanding at January 31, 2001. Of the 635 preferred shares converted during the quarter, 250 were converted under the terms of the Rose Glen Modification Agreement (see Note 13).
Upon conversion of Series A convertible preferred shares by RGC, RGC has an investment option to acquire, at an exercise price equal to the conversion price then in effect, the same number of shares of common stock as the number of shares of common stock into which the Series A convertible preferred shares are being converted. During the period, RGC did not exercise investment options. To the extent any Series A convertible preferred shares are not converted prior to May 6, 2002, any previously unconverted shares are converted automatically into common shares under the same conversion terms described above.
In connection with this transaction, the Company issued to RGC warrants to purchase 680,000 common stock of the Company at an exercise price of $8.3475. The warrants have a five-year term. In addition, the Company agreed to provide the financing agents warrants to purchase 62,769 common shares at an exercise price of $8.125, which expire in five years.
The proceeds from RGC were allocated to the underlying instruments in accordance with their fair values at the date of issuance such that $7,500,000 was allocated to the Series A convertible preferred shares and the related investment options and $1,000,000 was allocated to the warrants and included in additional paid in capital. The unamortized finance costs are presented as a reduction of the carrying value of the Series A convertible preferred shares.
Under the terms of the securities purchase agreement with RGC, the conversion terms were adjusted to 80% of their original value when the Company was not listed on the Nasdaq Stock Market by November 6, 1999. In accordance with EITF 98-5, the Company recorded a deemed dividend and additional paid in capital of $3,400,000 at November 6, 1999 to account for the realization of the contingent benefit.
7. SERIES B AND SERIES C CONVERTIBLE PREFERRED SHARES
The Company entered into a Securities Purchase Agreement and ancillary agreements with RGC on April 28, 2000 whereby the Company issued, for cash, 5,000 shares of Series B convertible preferred stock with a stated value of $1,000 per share. The Series B convertible preferred shares are convertible from time to time at RGC's option into shares of common stock of the Company as follows: the stated
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value of each share of Series B convertible preferred stock together with a premium thereon accruing at a per annum rate of 5% is convertible at the lesser of:
During the quarter, 800 Series B convertible preferred shares and the accrued premium on those shares were converted to 3,081,895 common shares, leaving 4,200 Series B convertible preferred shares outstanding at January 31, 2001. All of the 800 preferred shares converted during the quarter were converted under the terms of the Rose Glen Modification Agreement (see Note 13).
Upon conversion of Series B convertible preferred shares by RGC, RGC has an investment option to acquire, at an exercise price equal to the conversion price then in effect, the same number of shares of common stock as the number of shares of common stock into which the Series B convertible preferred shares are being converted. To the extent any Series B convertible preferred shares are not converted prior to April 28, 2003, any previously unconverted portion is automatically converted into common shares under the same conversion terms described above.
In connection with this transaction, the Company issued to RGC warrants to purchase 388,500 common shares at an exercise price of $7.0785. These warrants have a five-year exercise term.
The proceeds from RGC were allocated to the underlying instruments in accordance with their fair values at the date of issuance such that $4,507,000 was allocated to the Series B convertible preferred shares and the related investment options, and $493,000 was allocated to the warrants and included in additional paid in capital. The unamortized finance costs are presented as a reduction of the carrying value of the Series B preferred shares.
At July 31, 2000, the Series B convertible preferred shares were required to be classified as mezzanine equity as there was a potential mandatory redemption event relating to the Company's obligation to register for public resale the common stock issuable upon conversion of such shares and upon exercise of the related investment options and warrants. On September 3, 2000, the Company's Form S-3 registration statement registering the underlying shares was declared effective by the SEC. As a result, the Series B convertible preferred shares from this date onwards have been classified in stockholders' equity.
8. DEEMED COMPENSATION
On February 1, 2000, an agreement was entered into to transfer stock from a principal stockholder to an executive of the Company for nominal consideration. The shares are subject to a lock-up period of one year from the date of the transaction, during which time they will be held in escrow. The shares are also subject to the right of repurchase if the Company terminates the executive for cause or the executive resigns during the lock-up period. Deemed compensation expense of $3,927,500 has been calculated on the transaction and is being recognized over the one-year term. During the second quarter of fiscal 2001, $981,875 was expensed in general and administrative expenses.
On November 14, 2000 in conjunction with the Standard Radio/Jeff Mandelbaum investment agreement (see Note 5), a principal stockholder transferred stock to an executive of the Company and board members for nominal consideration. Deemed compensation expense of $417,500 has been calculated on the transactions and was recorded at the time of transfer.
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9. PURCHASE OF CONTRACTS FROM ONRADIO.COM
On June 7, 2000, the Company entered into a transaction with OnRadio.com ("OnRadio") to acquire certain contracts relating to the provision of certain web-related services to 212 radio station customers of OnRadio. Of these, 144 station contracts relate to basic services such as web site hosting, content provision and ad placement. The contracts with the remaining 68 stations relate to streaming media services. The contracts have remaining lives ranging from 12 to 18 months.
The Company agreed to pay OnRadio $500,000 cash and issue them 1,697,619 shares of common stock for total consideration of $9,000,000. The Company incurred an additional $270,000 in transaction costs. In connection with this transaction, the Company entered into certain other agreements with OnRadio, including agreements relating to transitional services, licensing of certain OnRadio software, and the lease of certain computer equipment.
The Company also agreed to pay OnRadio additional stock consideration of up to $3,000,000 (at $5.00 per share) in the event that the Company concludes customer contracts with certain identified sales prospects of OnRadio, which OnRadio agreed to transition over to the Company. The criteria for issuing the additional stock consideration was not met.
| | $ | ||
|---|---|---|---|
| Contracts Purchased | |||
| Cash outlay | 500,000 | ||
| Shares issued | 8,500,000 | ||
| Transaction costs | 270,000 | ||
| Total Intangible Assets Purchased | 9,270,000 | ||
10. PURCHASE OF CONTRACTS FROM MAGNITUDE NETWORKS, INC.
On August 3, 2000, the Company entered into an asset purchase agreement with Magnitude Network, Inc. ("Magnitude") under which the Company (a) acquired customer contracts and computer hardware used in the online media and streaming solutions business of Magnitude, and (b) assumed certain of Magnitude's ongoing liabilities related the acquired contracts. The Company also licensed certain software and other intellectual property rights from Magnitude. In addition, Magnitude's parent corporation signed a non-solicitation agreement under which it agreed to refrain from soliciting customers the Company acquired in connection with the transaction, or our employees. The contracts acquired from Magnitude have remaining terms ranging from 5 to 48 months.
Magnitude paid the Company $238,715 in cash to cover the transition costs and the Company issued Magnitude 2,082,429 shares of common stock for total consideration of $6,000,000, and a stock purchase warrant to acquire 2,000,000 shares of common stock at an exercise price of $3.60. The warrants have an eighteen month exercise term and expire on February 3, 2002. Of the shares issued, 416,485 are being held in escrow for twelve months to satisfy certain indemnity claims that may arise
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against Magnitude. The Company also granted Magnitude registration rights with regard to these shares.
| | $ | ||
|---|---|---|---|
| Contracts Purchased | |||
| Shares issued | 6,000,000 | ||
| Warrants issued | 88,000 | ||
| Total Purchase Price | 6,088,000 | ||
| Computer Hardware | 75,000 | ||
| Intangible Assets | 6,013,000 | ||
| 6,088,000 | |||
11. INTANGIBLE ASSETS
| January 31, 2001 | $ | |||
|---|---|---|---|---|
| Cost | ||||
| Contracts acquired from OnRadio | 9,270,000 | |||
| Contracts acquired from Magnitude | 6,013,000 | |||
| 15,283,000 | ||||
| Accumulated Amortization | (8,894,200 | ) | ||
| Write-down (see Note 13) | (4,360,420 | ) | ||
| Assets held for Sale (Note 13) | 2,028,380 | |||
| July 31, 2000 | $ | |||
|---|---|---|---|---|
| Cost | ||||
| Contracts acquired from OnRadio | 9,270,000 | |||
| Accumulated Amortization | (927,000 | ) | ||
| 8,343,000 | ||||
12. COMMITMENTS AND CONTINGENCIES
The Company has entered into operating leases in respect of office premises in both Vancouver and Nanaimo. Minimum payments under these lease commitments over the next five years are represented in the table below.
| Year Ended July 31 | Nanaimo Office $ | Vancouver Office $ | ||
|---|---|---|---|---|
| 2001 | 22,868 | 47,250 | ||
| 2002 | 45,736 | 111,000 | ||
| 2003 | — | 119,833 | ||
| 2004 | — | 129,667 | ||
| 2005 | — | 10,875 | ||
| 68,604 | 418,625 | |||
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13. SUBSEQUENT EVENTS
In connection with the Standard/Mandelbaum financing, Rose Glen Capital Management, L.P. and RGC General Partner Corp. on behalf of RGC International Investors, LDC ("Rose Glen") have agreed in principle to certain concessions in regard to Rose Glen's existing preferred share position in the Company, which will be effective upon execution of a Modification Agreement between the Company and Rose Glen, as follows:
On February 2, 2001, the Company entered into an asset sale agreement with SurferNETWORK.com, under which it sold customer contracts, web sites, and other tangible and intangible assets used in the Company's online media and streaming solutions business for $1 million in cash and 1 million shares of SurferNETWORK.com for total consideration of $2.25 million. In addition, the Company signed a non-solicitation agreement under which it agreed to refrain from soliciting customers it sold in connection with the transaction.
As a result of this sale, as of January 31, 2001, intangible assets of $2,028,380 and computer hardware of $221,620 were reclassified to assets held for sale. Remaining unamortized intangible assets were written down by $4,360,420 to zero. With the disposition of assets used in the Company's online media and streaming solutions business, as of January 31, 2001 remaining unamortized e-commerce infrastructure costs were written down by $6,441 to zero and remaining unamortized broadcast network development costs were written down by $2,058,058 to zero.
On January 8, 2001 the Company signed $500,000 note payable to SurferNETWORK.com, which was subsequently repaid with interest from the proceeds of the sale agreement. The note payable had an interest rate of 10% per annum and was secured by all assets of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE: The following discussion contains or may contain forward-looking statements based on current expectations, estimates and projections about the Company's industry, management's beliefs and certain assumptions made by management. All statements, trends, analyses and other information contained herein relative to trends in net sales, gross margin, anticipated expense levels, liquidity and capital resources, as well as other statements, including, but not limited to, words such as "anticipate," "believe," "plan," "estimate," "expect," "seek" and "intend," and other similar expressions, constitute forward-looking statements. These forward-looking statements involve risks and uncertainties, and actual results may differ materially from those anticipated or expressed in such statements. Except as required by law, the Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. Readers, however, should carefully review the factors set forth in other reports or documents that the Company files from time to time with the Securities and Exchange Commission (the "SEC").
Overview
GlobalMedia.com was incorporated on April 8, 1997 in the State of Nevada and is headquartered in Vancouver, British Columbia, Canada. During the third quarter of fiscal 1999, we adopted an internet-focused business plan. Through the second quarter of fiscal 2001 we were engaged primarily in the development of a broadcast network over the Internet, including streaming services, integrated e-commerce solutions, a customized media player and simulated live internet-only radio stations. In the quarter ended January 31, 2001, we implemented, on a selective basis, significant enhancements to the GlobalMedia.com Player including a "now playing" feature for live broadcast associates that allowed users to view details and purchasing information about content currently streaming through our media player. We also continued to develop programs during the quarter to realize larger scale design and implementation fees as part of our consulting services.
On December 29, 2000, we announced a major restructuring of our business from an Internet radio broadcaster with a revenue model based primarily upon advertising income, to an Internet video, custom website and wireless Internet consultant for the sports and entertainment industries, with a revenue model based primarily upon receipt of per project consulting fees. We have a number of significant clients in this emerging market, including, the National Football League, 4Kids Entertainment, WorldHockeyNetwork, AccuWeather and ClassicMovies.com. We also intend to focus on the development of our next generation technology which is targeted for the rapidly growing video broadband and wireless market.
In furtherance of our restructured business plan, on February 2, 2001, we sold all of our customer radio contracts, web sites, and other tangible and intangible assets used in our online radio streaming solutions business to SurferNETWORK.com. We also licensed certain software and other intellectual property rights to SurferNETWORK.com. In addition, we signed a non-solicitation agreement under which we agreed to refrain from soliciting customers we sold in connection with the transaction. However, we retained ownership of the intellectual property surrounding our award-winning streaming media broadcast solution as well as the GlobalMedia.com Player, a streaming media player built for us by RealNetworks, Inc. and further developed by us, the centerpiece of our broadcast network solution.
Our financial situation and business restructuring has resulted in major cutbacks of our staff and overhead expenses in an effort to streamline operations. Although we have ceased both sales and development operations until additional funding can be located, we have retained key personnel for management of existing video clients. We are actively seeking funding and strategic combinations in order to fund existing operations while attempting to implement our restructured business model, repay existing liabilities, and regain and maintain compliance with Nasdaq listing and marketplace rules so
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that we will not be delisted from Nasdaq. Management is engaged in ongoing discussions with various third parties, although no firm commitments have been obtained.
However, several conditions and events cast substantial doubt about our ability to continue as a going concern. We have a limited operating history in an industry that is characterized by rapid technological change. We reported a $15,643,622 net loss for the second quarter of fiscal 2001, and net losses of $14,909,253 and $2,231,074 during the years ended July 31, 2000 and 1999, respectively, and will require additional financing in order to continue business operations. We raised $1,500,000 in additional financing during the quarter and $500,000 from asset dispositions subsequent to the end of the period (see Note 13 to Financial Statements). However, management currently anticipates that we only have sufficient funds to meet working capital and capital expenditure needs through March 31, 2001. These factors, among others, indicate that we may be unable to continue as a going concern past that date.
Results of Continuing Operations
Quarter ended January 31, 2001 compared to quarter ended January 31, 2000
Sales. We had sales of $208,171 from our operations in the second quarter of fiscal 2001, compared to $58,635 in the second quarter of fiscal 2000. Our sales for the second quarter of fiscal 2001 decreased 27% over total sales of $285,635 in first quarter of fiscal 2001.
Operating Expenses. Our operating expenses increased to $15,821,551 in the second quarter of fiscal 2001, from $2,566,140 in the second quarter of fiscal 2000. This increase resulted from significant amortization charges related to the disposition of capital and intangible assets, and growth in our operations which is reflected in increases in all our operating expenses as follows:
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Net Loss from Continuing Operations. We experienced a $15,613,380 net loss from continuing operations for the second quarter of fiscal 2001, up from our $2,507,505 net loss from continuing operations for the second quarter of fiscal 2000, due primarily to the increases in operating expenses described above.
Interest. We realized net interest income of $407 in the second quarter of fiscal 2001, up from net interest expense of $10,164 in the second quarter of fiscal 2000.
Loss and Comprehensive Loss. We experienced a $15,643,622 loss and comprehensive loss for the second quarter of fiscal 2001, up from our $2,508,390 loss and comprehensive loss for the second quarter of fiscal 2000.
Six months ended January 31, 2001 compared to six months ended January 31, 2000
Sales. We had sales of $493,806 from our operations in the six months ended January 31, 2001, compared to $72,280 in the six months ended January 31, 2000.
Operating Expenses. Our operating expenses increased to $26,106,165 in the six months ended January 31, 2001, from $4,142,695 in the six months ended January 31, 2000. This increase resulted from significant amortization charges related to the disposition of capital and intangible assets, and growth in our operations which is reflected in increases in all our operating expenses as follows:
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costs incurred under marketing-related agreements with RealNetworks and increased costs associated with attending industry related conferences, marketing of our Network Associate program, and development of our sales force.
Net Loss from Continuing Operations. We experienced a $25,612,359 net loss from continuing operations for the six months ended January 31, 2001, up from our $4,070,415 net loss from continuing operations for the six months ended January 31, 2000, due primarily to the increases in operating expenses described above.
Interest. We realized net interest income of $10,100 in the six months ended January 31, 2001, up from net interest income of $2,109 in the six months ended January 31, 2000.
Loss and Comprehensive Loss. We experienced a $25,641,036 loss and comprehensive loss for the six months ended January 31, 2001, up from our $4,063,662 loss and comprehensive loss for the six months ended January 31, 2000.
Liquidity and Capital Resources
Quarter ended January 31, 2001 compared to quarter ended January 31, 2000
Working Capital. At January 31, 2001, we had positive working capital of $400,248 and a working capital ratio of 1.14. This represents a decrease from our January 31, 2000 working capital of $2,397,438 and working capital ratio of 4.94.
Financing Activities. We financed our operations and capital expenditures in second quarter of fiscal 2001 primarily from a $500,000 advance on the purchase price paid by SurferNETWORK.com (see "—Loans"), and from the issuance of common shares and warrants in the following private transaction (see Note 5 to our Consolidated Financial Statements):
Standard Radio/Mandelbaum Investment. On November 14, 2000, we entered into definitive share purchase agreements for an aggregate of $1 million in new investments from Standard Radio Inc., Gary Slaight and David Coriat (officers of Standard), and Lama Jama Investments LLC (Jeffrey Mandelbaum's investment entity) (the "Investors"). Under these agreements, we issued 2,285,714 common shares to the Investors. In connection with the closing of this investment, which was effective as of November 15, 2000, the following other agreements were entered into:
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The Company initially agreed to grant fully vested options to purchase 228,572 shares of common stock to L. James Porter, in exchange for which Mr. Porter agreed (a) to exercise that option by November 17, 2000 for an aggregate exercise price of $100,000.25, and (b) that one-half of the shares issued would be held in escrow for 90 days after the closing date. This part of the financing transaction was subsequently waived by the Company and the Investors. As a result, these options were not granted to Mr. Porter, and he did not make the corresponding investment.
Loans. In January 2001, we received a $500,000 bridge loan under a note payable to SurferNETWORK.com, which was due at the earlier of closing the SurferNETWORK.com asset sale agreement or February 15, 2001, with interest at the rate of 10%. See "—Recent Events" and Note 13 to our Consolidated Financial Statements. The note payable to SurferNETWORK.com was subsequently repaid on February 2, 2001 from the cash portion of the SurferNETWORK.com purchase price. At January 31, 2001 no other loans were outstanding excluding capital lease commitments. Also at January 31, 2001, we had lines of credit from two suppliers, which are secured by $150,000 in term deposits. One of these lines of credit will expire on May 12, 2001 and the other will expire on June 14, 2001.
Capital Expenditures and Commitments. Our capital expenditures decreased to $57,091 in second quarter fiscal 2001, from $1,151,082 in second quarter fiscal 2000, primarily due to reduced requirements for additional computer hardware, software and operating equipment purchases and the limited capitalization of development costs subsequent to achieving usable products. As of January 31, 2001, we had no material commitments outstanding for purchases of additional capital assets.
Going Concern Qualification. We currently anticipate that our available funds will be sufficient to meet our anticipated needs for working capital, capital expenditures and business expansion only through March 31, 2001. We will therefore need to raise additional capital to meet our current obligations and operating needs by that time. There is no assurance that additional financing will be available on terms favorable to us or at all. As a result, the report of our auditors for our fiscal 2000 financial statements is qualified on the basis that there is substantial doubt about our ability to continue as a going concern.
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Recent Events
Rose Glen Modification Agreement in Principal. In connection with the Standard/Mandelbaum financing, we and Rose Glen Capital Management, L.P. and RGC General Partner Corp. on behalf of RGC International Investors, LDC ("RGC") agreed in principal to certain concessions in regard to RGC's existing preferred share position in the Company, to be effective upon execution of a Modification Agreement between us and Rose Glen, as follows:
Although the documentation for this transaction has not yet been signed, all conversions processed by RGC since the closing of the Standard/Mandelbaum offering have been done at the modified conversion price described above.
Disposition of Radio Assets. On February 2, 2001, we entered into an asset sale agreement with SurferNETWORK.com, under which we sold customer contracts, web sites, and other tangible and intangible assets used in our online radio streaming solutions business. In addition, we signed a non-solicitation agreement under which we agreed to refrain from soliciting customers whose contracts we sold in the transaction.
On January 8, 2001, we issued a $500,000 bridge note payable to SurferNETWORK.com, which had an interest rate of 10% per annum and was secured by all our assets.
At closing SurferNETWORK.com paid us $1,000,000 in cash ($500,000 of which was used to repay the bridge note), and issued us 1,000,000 shares of common stock (valued at $1.25 per share based on SurferNETWORK.com's most recent private placement), for total consideration of $2,250,000. As a result of this sale, intangible assets of $2,028,380 and computer hardware of $221,620 were reclassified to assets held for sale as of January 31, 2001. Remaining unamortized intangible assets were written down by $4,360,420 to zero. With the disposition of assets used in our online radio streaming solutions business, as of January 31, 2001 remaining unamortized e-commerce infrastructure costs were written down by $6,441 to zero and remaining unamortized broadcast network development costs were written down by $2,058,058 to zero. See Note 13 to our Consolidated Financial Statements.
Future Capital Requirements
We currently anticipate that our available funds will be sufficient to meet our anticipated needs for working capital, capital expenditures and business expansion only through March 31, 2001. If we obtain additional financing and are able to continue as a going concern, we expect to incur net losses and negative cash flow for the foreseeable future as we implement our restructured business plan. We are in discussions with a number of potential strategic investors to obtain additional financing to fund our operating and capital expenditure needs. However, there can be no assurance that additional financing will be available on terms favorable to us or at all.
If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution and such securities may have rights, preferences and privileges senior to those of our common stock.
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Seasonality
We expect our operating results to fluctuate significantly from period to period. Both seasonal fluctuations in Internet usage and traditional retail seasonality may affect our business. Internet usage generally declines during the summer. Sales in the traditional retail book and music industries usually increase significantly in the fourth calendar quarter of each year and are correspondingly lower in other quarters. If similar seasonal patterns emerge under our restructured business plan, our revenues may vary significantly from period to period.
Foreign Currency Translation
We have translated our monetary assets and liabilities, which are denominated in a foreign currency into U.S. dollars at the period-end exchange rates. We have translated our income and expense items at the average exchange rates prevailing during the fiscal period. Exchange gains and losses arising on translation are reflected in net income for the period.
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Item 1.Legal Proceedings
From time to time, we may be subject to legal proceedings and claims, which may have a material adverse effect on our business. We are not aware of any current legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, prospects, financial condition or results of operations, other than a suit filed by Activate.net Corporation, on February 12, 2001 in the Washington Superior Court (Case No. 01-2-04079-1SEA). In that complaint, Activate is claiming slightly over $500,000 in damages for an alleged breach of contract, and treble damages and attorneys' fees for an alleged violation of the Unfair Business Practices Act. Settlement negotiations are currently underway with Activate.
While not expected to have a material adverse effect on us, on October 23, 2000, Monte Wall Burris, our former Vice President of Corporate Affairs, filed a lawsuit against us and our president, Jeffrey Mandelbaum, with the Supreme Court of British Columbia (S.C.B.C. Action No. S005654). In his complaint, Mr. Burris seeks unspecified compensatory and punitive damages for wrongful dismissal allegedly resulting from our termination of his employment on October 2, 2000, and for alleged intentional interference with his employment contract. We believe that Mr. Burris' allegations and claims are wholly without merit and intend to vigorously defend against this lawsuit.
Item 2.Changes in Securities and Use of Proceeds
On November 14, 2000, we sold to Standard Radio Inc., Gary Slaight, David Coriat and Lama Jama Investments LLC, 2,285,714 shares of common stock for $0.4375 per share for an aggregate purchase price of approximately $1,000,000. As additional consideration for that investment, we also issued an additional 4,235,398 shares to Standard Radio to effect a repricing of the shares sold to Standard Radio under its September 2000 Private Placement Subscription Agreement to $0.4375 per share. No broker commission or finders fees were paid in connection with this transaction.
Item 3.Defaults upon Senior Securities
None.
Item 4.Submission of Matters to a Vote of Security Holders
None.
Item 5.Other Information
Executive Officers.
Jeff Mandelbaum. As additional consideration for the investment discussed in Item 2, the Company, Mr. Mandelbaum and Mr. Metcalfe amended Mr. Mandelbaum's Executive Agreement to accelerate Mr. Metcalfe's sale of an additional 500,000 shares of Common Stock held by Mr. Metcalfe to Mr. Mandelbaum, at $0.02 per share. That sale also closed November 14, 2000. Mr. Mandelbaum elected not to renew his Executive Agreement for the optional second term and resigned his employment as of February 1, 2001.
James L. Porter. Mr. Porter resigned as our Chief Financial Officer in November 2000.
Barr Potter. Effective as of November 15, 2000, we entered into a one-year Executive Agreement with Barr Potter, one of our outside board members, to hold the positions of President and Chief Operating Officer, in order to permit Mr. Mandelbaum to turn his entire attention to seeking funding
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and strategic partners. That agreement provided for a base salary of $200,000 per annum, a signing bonus of $40,000 that Mr. Potter used to purchase Company common stock, and a bonus of no less than $100,000 per year to be paid upon achievement of goals and milestones as determined by the Board of Directors. Mr. Potter was also granted a five-year option to acquire up to 500,000 shares of the Company's common stock exercisable at $.40625 per share under the 2000 Plan. The stock options were 40% vested on signing with the balance vesting in equal installments at the end of each full quarter of continuous service during the first year of the agreement term. The vesting of unvested options would accelerate upon termination, unless it was for cause, or voluntarily by Mr. Potter without 90 days notice. Mr. Potter would have 90 days to exercise any vested options after voluntary or involuntary termination for any reason. In addition, as part of his joining the Company, Mr. Potter acquired 100,000 shares of common stock from Michael Metcalfe for nominal consideration. These shares were subject to a lock-up period of one year from their purchase date, and a right of repurchase if the Company terminates Mr. Potter for cause or he if terminated his employment voluntarily during the one year lock-up period without the required notice.
The agreement also provided that if there was a "change of control", Mr. Potter would be entitled to voluntarily terminate upon only two-weeks notice in which case he would be entitled to receive (a) his salary for the longer of expiration of the term or 90 days, (b) the $100,000 bonus, (c) all unvested options would fully vest, (d) all vested options would be exercisable for five years, and (e) the restricted stock would cease being subject to the lock-up. "Change of control" included the Company's insolvency. Since the sale of the Company's radio assets unfortunately did not generate sufficient cash to remedy the Company's insolvency, Mr. Potter terminated his employment under this provision, which the Company requested be effective as of February 1, 2000.
We entered into a non-exclusive consulting agreement with Mr. Potter on February 1, 2001, under which Mr. Potter is engaged to locate a strategic investor or purchaser and negotiate the transaction. If such a transaction closes, Mr. Potter would be entitled to 5% of the consideration paid in stock and 5% of the consideration paid in cash.
Board of Directors
In connection with our restructuring plan, directors Mandelbaum, Potter, Slaight and Coriat resigned from the Board effective as of February 1, 2001. In a press release issued on February 9, 2001, the Company announced the appointment of a new board of directors comprised of Michael Metcalfe, the Company's president and founder, Winston Barta, the Company's vice president of Business Development and a former board member, and three independent board members: (1) Patrick Smyth, CEO of Wiremix Media Inc., a division of Nextlevel.com Inc., (2) Canon Bryan, Director of Analytics and Corporate development for LASIK Vision Corporation, a Canadian Ventures Exchange-listing company, and (3) Dr. Herbert Becker, CEO of Entervision Inc. However, due to a mutual misunderstanding the announcement of Dr. Becker joining the board was erroneous and Dr. Becker has never been a member of our Board of Directors. Our Board of Directors currently consists of Messrs. Metcalfe, Barta, Smyth, and Bryan.
Nasdaq Delisting Hearing
We received letters from Nasdaq staff on November 22, 2000, December 1, 2000, March 2, 2001, and March 13, 2001 indicating delisting action unless we were able to demonstrate compliance with Nasdaq's bid price, public float and shareholder approval requirements. On February 16, 2001, we requested a written hearing before a Nasdaq Listing Qualifications Panel in order to present our plan to regain and maintain long-term compliance with all applicable Nasdaq maintenance criteria and marketplace rules. Under Nasdaq's rules, the filing of the hearing request stayed the pending delisting determination until an order was issued by the hearing panel. All the foregoing issues are scheduled to
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be determined by the Nasdaq Listing Qualifications Panel at a written hearing scheduled for March 30, 2001.
We have filed a written submission for that hearing specifying how we hope to regain and maintain long-term compliance with all applicable Nasdaq maintenance criteria and marketplace rules. In that written submission, we requested 90 days from the hearing date to give us time to attempt to complete the steps necessary to achieve such compliance. Although we are actively pursuing measures to bring us back into compliance with all Nasdaq rules, there can be no assurance that our efforts will be successful or that the Panel will grant our request for continued listing, or grant us 90 days from the hearing date to regain compliance with all Nasdaq rules.
Item 6.Exhibits and Reports on Form 8-K
The following documents are filed as exhibits to this Quarterly Report: (1)
| Exhibit Number | Description | |
|---|---|---|
| 10.1 | Stock Purchase Agreement, dated as of November 13, 2000, between GlobalMedia.com, Standard Radio Inc., Gary Slaight, David Coriat, Lama Jama Investments, LLC and Jeffrey Mandelbaum | |
10.2 | Registration Rights Agreement, dated as of November 14, 2000, between GlobalMedia.com, Standard Radio Inc., Gary Slaight, David Coriat, Lama Jama Investments, LLC and Jeffrey Mandelbaum | |
10.3 | Amendment to Private Placement Subscription Agreement, dated as of November 14, 2000, between GlobalMedia.com and Standard Radio, Inc. | |
10.4 | Amended Common Stock Purchase Warrant issued on November 14, 2000 from GlobalMedia.com to Standard Radio, Inc. | |
10.5 | Share Purchase Agreement, dated as of November 14, 2000, between Standard Radio, Inc., Gary Slaight, David Coriat, and Michael Metcalfe | |
10.6 | Stock Option Agreement under 2000 Stock Option Plan, dated as of November 14, 2000, between GloablMedia.com and Jeffrey Mandelbaum | |
10.7 | Amendment No. 1 to Executive Agreement, dated as of November 14, 2000, between GlobalMedia.com and Jeff Mandelbaum | |
10.8 | Executive Agreement, dated as of November 15, 2000, between GlobalMedia.com and Barr B. Potter | |
10.9 | Asset Purchase Agreement, dated as of February 2, 2001, between GlobalMedia.com [Canada] Limited, GlobalMedia.com, and SurferNETWORK.com, Inc. | |
10.10 | Escrow Agreement, dated as of February 2, 2001, between GlobalMedia.com, SurferNETWORK.com, Inc., and U.S. Bank Trust National Association | |
99.1 | Press Release dated March 19, 2001 | |
99.2 | Press Release dated March 9, 2001 | |
99.3 | Press Release dated March 1, 2001 | |
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99.4 | Press Release dated February 2, 2001 | |
99.5 | Press Release dated October 5, 2000 |
GlobalMedia.com filed the following reports on Form 8-K during the second quarter of fiscal 2001:
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Pursuant to the requirements of the Exchange Act, the registrant has caused this report on Form 10-QSB to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: March 20, 2001 | ||
/s/ MICHAEL METCALFE Michael Metcalfe Chairman and Chief Executive Officer (principal executive officer and acting principal financial officer) |
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The following documents are filed as exhibits to this Quarterly Report: (1)
| Exhibit Number | Description | |
|---|---|---|
| 10.1 | Stock Purchase Agreement, dated as of November 13, 2000, between GlobalMedia.com, Standard Radio Inc., Gary Slaight, David Coriat, Lama Jama Investments, LLC and Jeffrey Mandelbaum | |
10.2 | Registration Rights Agreement, dated as of November 14, 2000, between GlobalMedia.com, Standard Radio Inc., Gary Slaight, David Coriat, Lama Jama Investments, LLC and Jeffrey Mandelbaum | |
10.3 | Amendment to Private Placement Subscription Agreement, dated as of November 14, 2000, between GlobalMedia.com and Standard Radio, Inc. | |
10.4 | Amended Common Stock Purchase Warrant issued on November 14, 2000 from GlobalMedia.com to Standard Radio, Inc. | |
10.5 | Share Purchase Agreement, dated as of November 14, 2000, between Standard Radio, Inc., Gary Slaight, David Coriat, and Michael Metcalfe | |
10.6 | Stock Option Agreement under 2000 Stock Option Plan, dated as of November 14, 2000, between GloablMedia.com and Jeffrey Mandelbaum | |
10.7 | Amendment No. 1 to Executive Agreement, dated as of November 14, 2000, between GlobalMedia.com and Jeff Mandelbaum | |
10.8 | Executive Agreement, dated as of November 15, 2000, between GlobalMedia.com and Barr B. Potter | |
10.9 | Asset Purchase Agreement, dated as of February 2, 2001, between GlobalMedia.com [Canada] Limited, GlobalMedia.com, and SurferNETWORK.com, Inc. | |
10.10 | Escrow Agreement, dated as of February 2, 2001, between GlobalMedia.com, SurferNETWORK.com, Inc., and U.S. Bank Trust National Association | |
99.1 | Press Release dated March 19, 2001 | |
99.2 | Press Release dated March 9, 2001 | |
99.3 | Press Release dated March 1, 2001 | |
99.4 | Press Release dated February 2, 2001 | |
99.5 | Press Release dated October 5, 2000 |
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