SECURITIES AND EXCHANGE COMMISSION
| (Mark One) |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | |
| | | For the quarterly period ended September 30, 2009 |
| | | |
o | | 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 0-50762
DEBUT BROADCASTING CORPORATION, INC.
(Exact name of registrant as specified in its charter)
| Nevada | | 88-0417389 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1025 16th Ave South, Suite 102, Nashville, TN | | 37212 |
| (Address of principal executive offices) | | (Zip Code) |
(Registrant’s telephone number, including area code)
(Former name, former address, and formal fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller Reporting Company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of November 13, 2009, there were 19,866,866 shares of common stock issued and outstanding.
| | | Page |
| PART I - FINANCIAL INFORMATION |
| |
| Item 1. | Financial Statements | 3 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 |
| Item 4T. | Controls and Procedures | 20 |
| | | |
| PART II - OTHER INFORMATION |
| |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 22 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 23 |
| Item 6. | Exhibits | 24 |
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A (the “Amendment”) amends the quarterly report of Debut Broadcasting Corporation, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2009 as filed with the Securities and Exchange Commission on November 13, 2009 (the “Original Filing”). This Amendment i() revises the disclosure of controls and procedures, and (ii) adds certain information to paragraph 4 of Exhibits 31.1 and 31.2.
In addition, as required by Rule 12b-15 under the Exchange Act, new certifications by the Company’s principal executive officer and principal financial officer are filed as exhibits to this Amendment. This Amendment does not reflect events occurring after the date of the Original Filing or modify or update any disclosures that may have been affected by subsequent events. Except as described above, all other information included in the Original Filing remains unchanged.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
| Our unaudited financial statements included in this Form 10-Q are as follows: |
| |
| F-1 | Condensed Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008 (audited) |
| | |
| F-2 | Condensed Consolidated Statements of Operations and Accumulated Deficit for the three months and nine months ended September 30, 2009 and 2008 (unaudited) |
| | |
| F-3 | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 (unaudited |
These unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended September 30, 2009 are not necessarily indicative of the results that can be expected for the full year. Balance sheet information as of December 31, 2008 was derived from the Company’s audited financial statements for the year ended December 31, 2008.
DEBUT BROADCASTING CORPORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | September 30 2009 (Unaudited) | | | December 31 2008 | |
| ASSETS | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents | | $ | 35,040 | | | $ | 59,143 | |
| Accounts receivable, net | | | 1,065,298 | | | | 1,096,316 | |
| Stock warrant receivable | | | — | | | | 85 | |
| Prepaid expenses | | | 21,624 | | | | 47,644 | |
| Unexercized stock warrants | | | 454,657 | | | | 454,658 | |
| Total current assets | | | 1,576,621 | | | | 1,657,846 | |
| | | | | | | | | |
| Property and equipment, net | | | 632,525 | | | | 749,415 | |
| Deposits | | | 15,651 | | | | 3,928 | |
| Goodwill | | | 459,280 | | | | 459,280 | |
| FCC licenses | | | 1,509,500 | | | | 1,509,500 | |
| Non-Compete Agreement, net | | | — | | | | 23,333 | |
| Other intangible assets, net | | | 1,989,431 | | | | 1,996,041 | |
| | | | | | | | | |
| Total assets | | $ | 4,198,577 | | | $ | 4,403,302 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable | | $ | 761,971 | | | $ | 530,792 | |
| Accrued expenses and taxes | | | 336,548 | | | | 449,881 | |
| Notes payable to shareholders | | | 750,000 | | | | 750,000 | |
| Lines of credit | | | 731,860 | | | | 774,212 | |
| Current portion of long-term debt | | | 56,659 | | | | 108,443 | |
| Unrecognized stock warrant loss | | | 485,523 | | | | 485,523 | |
| Total current liabilities | | | 3,122,561 | | | | 3,098,851 | |
| | | | | | | | | |
| Long term liabilities | | | | | | | | |
| Leases payable | | | 2,4445 | | | | 5,381 | |
| Long-term debt | | | 1,309,501 | | | | 1,336,194 | |
| Total long term liabilities | | | 1,311,946 | | | | 1,341,575 | |
| | | | | | | | | |
| Total liabilities | | | 4,434,507 | | | | 4,440,426 | |
| | | | | | | | | |
| Stockholders' deficit | | | | | | | | |
| Common stock - $.003 par value, 100,000,000 shares authorized | | | 30,383 | | | | 30,601 | |
| Additional paid in capital | | | 3,166,839 | | | | 3,166,621 | |
| Accumulated deficit | | | (3,433,153 | ) | | | (3,234,346 | ) |
| Total stockholders' deficit | | | (235,931 | ) | | | (37,124 | ) |
| Total liabilities and stockholders' deficit | | $ | 4,198,577 | | | $ | 4,403,302 | |
DEBUT BROADCASTING CORPORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | |
| Net Revenue | | $ | 592,931 | | | $ | 741,074 | | | $ | 1,584,197 | | | $ | 1,918,857 | |
| | | | | | | | | | | | | | | | | |
| Operating Expenses | | | | | | | | | | | | | | | | |
| Advertising | | | 3,052 | | | | 21,751 | | | | 12,722 | | | | 174,491 | |
| Operating Expense | | | 601,581 | | | | 711,739 | | | | 1,763,193 | | | | 2,088,904 | |
| Depreciation Expense | | | 46,835 | | | | 28,889 | | | | 134,109 | | | | 94,757 | |
| (Gain) on Settlement of Debt | | | (340,539 | ) | | | — | | | | (340,539 | ) | | | — | |
| Merger and Acquisition Related Expenses | | | - | | | | 10,405 | | | | - | | | | 11,300 | |
| | | | | | | | | | | | | | | | | |
| Total Operating Expenses | | | 310,928 | | | | 772,784 | | | | 1,592,818 | | | | 2,369,452 | |
| | | | | | | | | | | | | | | | | |
| Operating Income (Loss) | | | 214,873 | | | | (31,711 | ) | | | (8,621 | ) | | | (450,596 | ) |
| | | | | | | | | | | | | | | | | |
| Other Income and Expense | | | | | | | | | | | | | | | | |
| Interest Income | | | (5,126 | ) | | | (7,143 | ) | | | (9,836 | ) | | | (9,542 | ) |
| Interest Expense | | | 53,499 | | | | 46,200 | | | | 206,410 | | | | 153,795 | |
| Income Tax | | | — | | | | — | | | | 960 | | | | | |
| Total Other (Income) and Expense | | | 48,363 | | | | 39,057 | | | | 197,533 | | | | 144,253 | |
| | | | | | | | | | | | | | | | | |
| Net Income (Loss) | | $ | 166,510 | | | $ | (70,767 | ) | | $ | (206,154 | ) | | $ | (594,848 | ) |
| | | | | | | | | | | | | | | | | |
| Accumulated Deficit at the Beginning of the Period | | $ | (3,599,663 | ) | | $ | (2,945,025 | ) | | $ | (3,226,998 | ) | | $ | (2,545,315 | ) |
| | | | | | | | | | | | | | | | | |
| Accumulated Deficit at the End of the Period | | $ | (3,433,153 | ) | | $ | (3,015,792 | ) | | $ | (3,433,153 | ) | | $ | (3,015,792 | ) |
| Loss per common share | | | | | | | | | | | | | | | | |
Basic | | | (0.008 | ) | | | (0.008 | ) | | | (0.01 | ) | | | (0.03 | ) |
| Weighted average number of shares outstanding, basic | | | 19,866,907 | | | | 19,794,360 | | | | 19,866,907 | | | | 19,794,360 | |
The accompanying notes are an integral part of these financial statements.
DEBUT BROADCASTING CORPORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | Nine Months Ended September 30, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Operating Activities: | | | | | | |
| Net Loss | | | (206,154 | ) | | | (594,858 | ) |
| Adjustments to reconcile net loss to net cash provided by/used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 157,443 | | | | 94,759 | |
| Changes in operating assets and liabilities, net effects of acquisitions | | | | | | | | |
| (Increase) decrease in accounts receivable | | | 39,400 | | | | (687,929 | ) |
| (Increase) decrease in other current assets | | | 1,000 | | | | (8,325 | ) |
| Increase (decrease) in accounts payable | | | 231,180 | | | | 159,186 | |
| Increase (decrease) in accrued expenses and taxes | | | (165,117 | ) | | | 396,596 | |
| | | | | | | | | |
| Net cash provided by (used in) operating activities | | | 57,752 | | | | (640,573 | ) |
| | | | | | | | | |
| Investing Activities: | | | | | | | | |
| Purchases of property and equipment | | | (9,872 | ) | | | (280,094 | ) |
| Acquisition of WBBV FM | | | - | | | | (980,022 | ) |
| Net cash used in investing activities | | | (9,872 | ) | | | (1,260,116 | ) |
| | | | | | | | | |
| Financing Activities: | | | | | | | | |
| Proceeds from issuance of stock warrants | | | - | | | | 30,865 | |
| Proceeds from bank credit facility | | | 350,000 | | | | 1,241,304 | |
| Proceeds from stockholder notes | | | - | | | | 750,000 | |
| Repayment of long-term debt | | | (421,981 | ) | | | (59,563 | ) |
| Proceeds from issuance of common stock | | | - | | | | - | |
| | | | | | | | | |
| Net cash provided by financing activities | | | (71,981 | ) | | | 1,962,606 | |
| | | | | | | | | |
| Net (decrease) increase in cash and cash equivalents | | | (24,103 | ) | | | 61,918 | |
| | | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 59,143 | | | | 8,643 | |
| | | | | | | | | |
| Cash and cash equivalents at end of period | | | 35,040 | | | | 70,561 | |
The accompanying notes are an integral part of these financial statements.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
Note 1 - Organization
Debut Broadcasting Corporation, Inc. (the “Company”) is located in Nashville, Tennessee and conducts business from its principal executive office at 1025 16th Avenue South, Suite 102, Nashville, Tennessee 37212. The Company relocated to the current office location on January 31, 2009. The Company produces and distributes syndicated radio programs to radio stations across the United States and Canada. In addition, the Company owns and operates eight radio stations in Mississippi.
The Company maintains radio syndication in Nashville and produces and distributes 14 radio programs, which are broadcast over approximately 1,400 radio station affiliates. These radio programs have an estimated 40 million U.S. listeners per week. In addition to its syndication services, the Company owns and operates a multi-media studio with audio, video and on-line content production capabilities. This facility is located on Music Row in Nashville, Tennessee. The Company also provides marketing, consulting and media buying (advertising) for its radio broadcast station customers in the United States.
Note 2 - Basis of Presentation and Interim Results
The condensed consolidated financial statements include the accounts of the Company, and its subsidiaries. The interim financial statements of the Company have been prepared without audit.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. We believe that the disclosures are adequate to make the financial information presented not misleading. These condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2008. All adjustments were of a normal recurring nature unless otherwise disclosed. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year.
We use the allowance method for determining the collectability of our accounts receivable. The allowance method recognizes bad debt expense following a review of the individual accounts outstanding in light of the surrounding facts. Accounts receivable are reported at their outstanding unpaid principal balances reduced by an allowance for doubtful accounts based on historical bad debts, factors related to specific customers’ ability to pay and economic trends. We write off accounts receivable against the allowance when a balance is determined to be uncollectible. Accounts receivable on the consolidated balance sheet is stated net of our allowance for doubtful accounts.
Revenue and Cost Recognition
The Company recognizes its advertising and programming revenues for syndicated programming when the Company’s radio shows air on its contracted radio station affiliates. Generally, the Company is paid by a national advertising agency, which sells the commercial time provided by the affiliate.
As the Company earns its revenue from the national advertising agency, it also recognizes any amounts due to the individual shows, which are based on the audience level generated by the specific program. Expenses are accrued at the time the shows are run.
Consulting projects are generally negotiated at a fixed price per project; however, if the Company utilizes its advertising capacity as part of the consulting project, it will charge the consulting client in the same manner as the affiliated stations described more fully above. Consulting fee income is recognized as time is incurred under the terms of the contract.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
Note 2 - Basis of Presentation and Interim Results (continued)
The Company recognizes its advertising and programming revenues for its owned and operated radio broadcast stations when the advertising airs. Generally, the Company is paid by the local advertiser for advertising coordinated and contracted through a local employee sales representative or sales manager.
Advertising
The Company expenses advertising costs as they are incurred. Total advertising costs of $3,052 and $21,751 are included in the financial statements for the three months ended September 30, 2009 and September 30, 2008, respectively. Total advertising costs of $12,722 and $174,491 are including in the financial statements for the nine months ended September 30, 2009 and September 30, 2008, respectively.
Financing
We will require additional capital to execute on our plan to grow through the acquisition of radio stations and radio station clusters. We do not presently have sufficient capital to make additional acquisitions. We intend to raise additional capital over the next twelve months through additional equity offerings.
Although we are and will be unable to predict the precise terms of any financing until the time that such financing is actually obtained, it is likely that any such financing will fit within the following parameters:
• None of the indebtedness to which the Properties would be subject will be recourse to the shareholders, although some or all of the indebtedness may be recourse to us. However, each obligation will be secured by a first lien and/or second lien security interest in the financed Property. It is probable that all of our Properties will be subject to substantial security interests.
• We expect any indebtedness will be first repaid with the operating revenues of the Properties. Operating revenues will first be applied to the payment of interest, principal amortization (if any), and principal on primary indebtedness. Next, operating revenues will be applied to interest on and principal of any subordinate financing.
• Each of these financing arrangements may be subject to acceleration in the event of default, including non-payment, insolvency, or the sale of a Property. Upon an acceleration, if we are unable to effect an immediate refinancing, we may lose one or more of our Properties by foreclosure.
While financing may initially be available only on a radio station by radio station basis, we may eventually seek to refinance all of our Properties in one non-recourse loan which will, in all likelihood, be secured by all of our Properties.
In connection with acquisitions, dispositions and financing, we will incur appropriate accounting and legal fees.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
Note 2 - Basis of Presentation and Interim Results (continued)
Governmental Regulation of Radio Broadcasting
The following is a brief summary of certain provisions of the Communications Act, the Telecom Act, and related FCC rules and policies (collectively, the "Communications Laws"). This description does not purport to be comprehensive, and reference should be made to the Communications Laws, public notices, and decisions issued by the FCC for further information concerning the nature and extent of federal regulation of radio broadcast stations. Failure to observe the provisions of the Communications Laws can result in the imposition of various sanctions, including monetary forfeitures and the grant of a "short-term" (less than the maximum term) license renewal. For particularly egregious violations, the FCC may deny a station's license renewal application, revoke a station's license, or deny applications in which an applicant seeks to acquire additional broadcast properties.
License Grant and Renewal. Radio broadcast licenses are granted and renewed for maximum terms of eight years. Licenses are renewed by filing an application with the FCC. Petitions to deny license renewal applications may be filed by interested parties, including members of the public.
Service Areas. The area served by AM stations is determined by a combination of frequency, transmitter power, antenna orientation, and soil conductivity. To determine the effective service area of an AM station, the station’s power, operating frequency, antenna patterns and its day/night operating modes are required. The area served by an FM station is determined by a combination of transmitter power and antenna height, with stations divided into classes according to these technical parameters.
Class C FM stations operate with the equivalent of 100 kilowatts of effective radiated power (“ERP”) at an antenna height of up to 1,968 feet above average terrain. They are the most powerful FM stations, providing service to a large area, typically covering one or more counties within a state. Class B FM stations operate with the equivalent of 50 kilowatts ERP at an antenna height of up to 492 feet above average terrain. Class B FM stations typically serve large metropolitan areas as well as their associated suburbs. Class A FM stations operate with the equivalent of 6 kilowatts ERP at an antenna height of up to 328 feet above average terrain, and generally serve smaller cities and towns or suburbs of larger cities.
The minimum and maximum facilities requirements for an FM station are determined by its class. FM class designations depend upon the geographic zone in which the transmitter of the FM station is located. In general, commercial FM stations are classified as follows, in order of increasing power and antenna height: Class A, B1, C3, B, C2, C1, C0, and C.
The following table sets forth the market, call letters, FCC license classification, antenna elevation above average terrain (for FM stations only), power and frequency of all of our owned and operated stations as of September 30, 2009
Market | | Stations | | City of License | | Frequency | | Expiration Date of License | | FCC Class | | Height Above Average Terrain (in feet) | | Power (in Watts) |
| G Mississippi | | WNLA FM | | Indianola, MS | | | 105.5 | | June 1, 2012 | | A | | | 190 | | 4400 |
| | | WBAQ FM | | Greenville, MS | | | 97.9 | | June 1, 2012 | | C2 | | | 502 | | 48000 |
| | | WIQQ FM | | Leland, MS | | | 102.3 | | June 1, 2012 | | A | | | 446 | | 1650 |
| | | WNLA AM | | Indianola, MS | | | 1380 | | June 1, 2012 | | D | | | AM | | 500 |
| | | WNIX AM | | Greenville, MS | | | 1330 | | June 1, 2012 | | B | | | AM | | 1000 |
| | | WBBV FM | | Vicksburg, MS | | | 101.1 | | June 1, 2012 | | C3 | | | 394 | | 13000 |
| | | KLSM FM | | Tallulah, LA | | | 104.9 | | June 1, 2012 | | A | | | 299 | | 3000 |
| | | WQBC AM | | Vicksburg, MS | | | 1420 | | June1, 2012 | | B | | | AM | | 1000 |
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
Note 2 - Basis of Presentation and Interim Results (continued)
Compliance with Environmental Laws
We have not incurred and do not anticipate incurring any expenses associated with environmental laws.
Note 3 - Initial Adoption of FIN 48
We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”), on May 17, 2007. This interpretation increases the relevancy and comparability of financial reporting by clarifying the way companies account for uncertainty in income taxes. FIN 48 prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring such tax positions for financial statement purposes. The interpretation also requires expanded disclosure with respect to the uncertainty in income taxes.
Note 4 - Loss Per Share
We present basic loss per share on the face of the condensed consolidated balance sheets. As provided by SFAS No. 128, Earnings Per Share, basic loss per share is calculated as income available to common stockholders divided by the weighted average number of shares outstanding during the period.
On January 2, 2008, the Company awarded options to purchase 342,055 shares of its common stock to employees and valued contractors. These options were awarded at a strike price of $0.86 per share and vest ratably over five years. The options will be accounted for utilizing the Black-Scholes method of valuation.
On January 21, 2008, the Company issued to Remington Partners, Inc. a warrant to purchase 62,500 shares of Company common stock at an exercise price of $1.00 per share, with an expiration date three years after the date of issuance.
On February 26, 2008, the Company issued to Remington Partners, Inc. a warrant to purchase 125,000 shares of Company common stock at an exercise price of $1.00 per share, with an expiration date three years after the date of issuance.
On March 16, 2008, the Company issued to Holladay Broadcasting of Louisiana, LLC a warrant to purchase 200,000 shares of Company common stock at an exercise price of $1.00 per share, with an expiration date 10 years after the date of issuance.
On June 18, 2008 the Company issued to Wolcott Squared a warrant to purchase 18,408 shares of our common stock at an exercise price of $0.3925 per share, with an expiration date of December 17, 2017. The consideration received for this warrant was services rendered in December of 2007 valued at $7,225.
On June 18, 2008, the Company issued to Wolcott Squared a warrant to purchase 22,279 shares of our common stock at an exercise price of $0.51 per share with an expiration date of January 31, 2018. The consideration received for this warrant was services rendered in January of 2008 valued at $11,362.
On June 18, 2008, the Company issued to Wolcott Squared a warrant to purchase 5,686 shares of our common stock at an exercise price of $0.51 per share with an expiration date of February 29, 2018. The consideration received for this warrant was services rendered in February of 2008 valued at $2,899.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
Note 4 - Loss Per Share (continued)
On June 30, 2008, the Company issued to Politis Communications a warrant to purchase 10,254 shares of our common stock at an exercise price of $0.01 per share, with an expiration date of June 29, 2018. The consideration received for this warrant was services rendered by Politis Communications.
On September 22, 2008, the Company issued to Stephen Ross, a third party, a warrant to purchase 18,000 shares of Company common stock at an exercise price of $0.50 per share, with an expiration date of January 31, 2011. The consideration we received for this warrant was legal services rendered by Stephen Ross, Esq,
On September 22, 2008, the Company issued to Stephen Ross, a third party, a warrant to purchase 27,000 shares of Company common stock at an exercise price of $0.50 per share, with an expiration date of September 30, 2011. The consideration we received for this warrant was legal services rendered by Stephen Ross, Esq,
On September 30, 2008, the Company issued to Politis Communications a warrant to purchase 5,495 shares of Company common stock at an exercise price of $0.01 per share, with an expiration date of September 29, 2018. The consideration received for this warrant was public relations services rendered by Politis Communications.
On December 31, 2008, the Company issued to Stephen Ross, a third party, a warrant to purchase 27,000 shares of Company common stock at an exercise price of $0.50 per share, with an expiration date of December 31, 2011. The consideration we received for this warrant was legal services rendered by Stephen Ross, Esq.
On December 31, 2008, the Company issued to Politis Communications a warrant to purchase 5,495 shares of Company common stock at an exercise price of $0.01 per share, with an expiration date December 31, 2018. The consideration received for this warrant was public relations services rendered by Politis Communications.
On April 1, 2009, the Company issued to Stephen Ross, a third party, a warrant to purchase 27,000 shares of Company common stock at an exercise price of $0.50 per share, with an expiration date of April 1, 2012. The consideration we received for this warrant was legal services rendered by Stephen Ross, Esq.
On June 30, 2009, the Company issued to Stephen Ross, a third party, a warrant to purchase 27,000 shares of Company common stock at an exercise price of $0.50 per share, with an expiration date of June 30, 2012. The consideration we received for this warrant was legal services rendered by Stephen Ross, Esq.
The Company revalues all warrants quarterly utilizing the Black-Scholes method.
All of these warrants were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), as set forth in Section 4(2) under the Securities Act and Rule 506 of Regulation D promulgated thereunder relating to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.
On December 5, 2008, Politis Communications exercised a warrant to purchase 8,500 shares of Company common stock at $0.01 per share. The shares were authorized by Politis Communications as compensatory gifts to a number of employees of Politis Communications. No underwriters were involved in this warrant exercise. The underlying shares are restricted and carry piggy-back registration rights.
On December 5, 2008, The Company issued a stock certificate to Mohammed Rahman for 22,026 shares of our common stock at $0.07 per share. We issued the shares of common stock to Mohammed Rahman in exchange for services rendered. No underwriters were involved in this sale of securities. Outside of the existing vendor client relationship the investor has no prior relationship to the company. The underlying shares are restricted and carry piggy-back registration rights.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
Note 4 - Loss Per Share (continued)
On December 3, 2008, The Company issued a stock certificate to Sariah Hopkins for 42,000 shares of our common stock at $0.07 per share. We issued the shares of common stock to Sariah Hopkins as a compensatory bonus for services rendered in the role of Chief Financial Officer. The underlying shares are restricted and carry piggy-back registration rights.
Note 5 - Property and equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment are computed using the straight-line method based upon estimated lives of assets ranging between three to thirty years. Property and equipment are summarized as follows:
| | | | | | | | | |
| | | | $ | 49,500 | | | $ | 49,500 | |
Buildings and building improvements | | | | | 138,780 | | | | 136,460 | |
Towers and studio equipment | | | | | 395.835 | | | | 372,714 | |
Furniture, fixtures and equipment | | | | | 282,304 | | | | 270,972 | |
| | | | | 169,032 | | | | 194,938 | |
| | | | | | | | | | | |
| | | | | (403,006 | ) | | | (276,169 | ) |
Property and equipment, net | | | | $ | 632,525 | | | $ | 749,415 | |
Of the $632,525 in Net Property and Equipment as of September 30, 2009, $35,000 was added through the acquisition of the radio broadcast station WBBV FM during the third quarter of 2008 including equipment purchases to support the acquired stations. In April of 2009, the Company disposed of a 2007 Chevrolet HHR and a 2007 Nissan XTerra through sales to third parties for $12,000 and $13,300 respectively.
Note 6 - Lines of Credit
On May 3, 2002 and amended on April 26, 2004, the Company entered into an unsecured promissory note establishing a revolving line of credit with the Bank of America for $75,000. On September 21, 2009, the note was converted to a new five year term loan, eliminating the balance of the line of credit. The balance of the line of credit at September 30, 2009 and 2008 was $0.00 and $75,000 respectively.
The Company signed a promissory note and established a revolving line of credit on February 27, 2004 for $200,000 with Regions Bank to refinance existing debt. The note matured on September 30, 2009, and requires monthly interest payments accruing at an initial rate of 7.58% and a current rate of 4.41438% at September 30, 2009. The rate is subject to monthly changes based on an independent index plus 2.25%. As a result of the present economic downturn in the banking and radio industries, the note was transferred to the special assets division of Regions Bank. The company has reached an amicable settlement agreement on the note with Regions Bank, and anticipates paying the settlement agreement in full on or before November 16, 2009.
The note is secured by personal guarantee of certain officers of the Company and all inventory, chattel paper, accounts, equipment and general intangibles existing or purchased after the signing of the related agreement. The principal balance of the note at September 30, 2009 and 2008 was $164,823 and $199,297, respectively.
The Company signed a promissory note and established a revolving line of credit on September 21, 2009 for $1,500,000 with River Falls Financial Services, LLC to refinance existing debt and fund future acquisitions. The note matures on July 31, 2010, and requires monthly interest payments accruing at a rate of 12% per annum. The balance of the note on September 30, 2009 and 2008 was $350,000 and $0.00 respectively.
Note 7 - Notes Payable to Stockholders
Debut Broadcasting Stockholder Notes
On January 21, 2008 the Company issued to Remington Partners, Inc. warrants to purchase 62,500 shares of Company common stock in exchange for a loan in the amount of $250,000 with a $2,000 loan origination fee and interest of 18% per annum due monthly. The promissory note plus any accrued interest was payable on July 31, 2009. The company is actively negotiating an amicable settlement with Remington Partners, Inc.
On February 26, 2008 the Company issued to Remington Partners, Inc. warrants to purchase 125,000 shares of Company common stock in exchange for a loan in the amount of $500,000, with a $2,000 loan origination fee and interest of 18% per annum due monthly. The promissory note plus any accrued interest was payable on July 31, 2009. The company is actively negotiating an amicable settlement with Remington Partners, Inc.
Total interest expense associated with the stockholder loans for the three months ended September 30, 2009 and 2008 was $34,397 and $33,334 respectively. Accrued interest due to stockholders was $0 and $0 as of September 30, 2009 and 2008, respectively.
Note 8 - Loans Payable
On August 15, 2006, the Company signed a promissory note with Regions Bank for $300,000 with an initial interest rate of 7.58% and a current rate of 2.59438% as of September 30, 2009. The loan is secured by all inventory, chattel paper, accounts, equipment and general intangibles of the Company. The loan matures on August 30, 2011 and is payable in monthly installments of $6,058, including variable interest at 2.25% points per annum over the London Interbank Offered Rate for the applicable index period. The company has reached an amicable settlement agreement on the note with Regions Bank, and anticipates paying the settlement agreement in full on or before November 16, 2009.
Total interest expense on the Regions Bank loan for the three months ended September 30, 2009 and 2008 was $861.91 and $2,363, respectively. Total interest expense for the nine months ended September 30, 2009 and 2008 was $3,014 and $8,487, respectively. The balance of the loan at September 30, 2009 was $146,749, of which $35,565 was classified as current portion of long-term debt. The balance of the loan at September 30, 2008 was $190,790, of which $11,733 was classified as current portion of long-term debt.
On May 3, 2002 and amended on April 26, 2004, the Company entered into an unsecured promissory note establishing a revolving line of credit with the Bank of America for $75,000. On September 21, 2009, the note was converted to a new five year term loan, which will mature on September 30, 2014. The note requires monthly principle and interest payments and the interest rate is based on the bank’s prime rate, which was 7.5% at September 30, 2009. The note is secured by personal guarantee of certain officers of the Company.
Total interest expense on the Bank of America loan for the three months ended September 30, 2009 and 2008 was $ and $0.00 respectively. Total interest expense for the nine months ended September 30 2009 and 2008 was $184.22 and $0.00 respectively. The balance of the loan at September 30, 2009 was $75,000 of which $0.00 was classified as current portion of long-term debt.
Citadel Communications Loan
On August 28, 2002, the Company signed an unsecured promissory note with Citadel Communications for $430,415. The loan has no maturity date and accrues interest at a rate of 12%. The note was amended in April, 2003 requiring interest only payments indefinitely. The company negotiated a settlement of $24,322 to be paid to Citadel Communications in one lump sum, which was accepted on September 21, 2009 by Citadel Communications. Total interest expense on the Citadel Communications loan for each of the three months ended September 30, 2009 and 2008 was $10,428. The balance of the loan at September 30, 2009 and 2008 was $0.00 and $347,491.
The Company signed a promissory note and established a revolving line of credit on August 22, 2008 for $500,000 with SunTrust Bank to facilitate the acquisition of WBBV. The note matured on August 22, 2009 and requires monthly interest payment accruing at an initial rate of 6.0% and a current rate of 4.25% at September 30, 2009. The rate is subject to monthly changes based on an independent index plus 1.00%. The company is in the process of converting the line of credit into a ten year term loan.
The note is secured by personal guarantee of certain officers of the Company and all inventory, chattel paper, accounts, equipment and general intangibles existing or purchased by the wholly-owned subsidiary entity, Debut Broadcasting Mississippi, after the signing of the related agreement. Total interest expense on the SunTrust Bank loan for the three months ended September 30, 2009 and 2008 was $5,508 and $825 respectively. Total interest expense on the SunTrust Bank loan for the nine months ended September 30, 2009 and 2008 was $20,175 and $825 respectively. The balance of the loan at September 30, 2009 and 2008 was $496,142 and $0.00 respectively.
On August 28, 2007, the Company signed a direct purchase money loan and security agreement with DaimlerChrysler for the purchase of two vehicles for $50,068 with an effective interest rate of 7.3%. The corresponding promissory note is to be paid over a five-year period with a monthly payment of $1,011. In April of 2009, these two vehicles were disposed of through sales to third parties for $12,000 and $13,300 respectively. The direct purchase money loan was paid in full and the security interest DaimlerChrysler held in the vehicles was released.
On September 25, 2007, the Company signed a retail installment sale contract with GMAC for the purchase of two vehicles for $47,498 with an effective interest rate of 5.0%. The corresponding promissory note is to be paid over a three-year period with a monthly payment of $1,424. The purchased vehicles are used in conjunction with the radio broadcast operations.
On May 1, 2008, the Company signed a retail installment sale contract with Daimler Chrysler Financial Services for the purchase of a vehicle for $23,137 with an effective interest rate of 7.49%. The corresponding promissory note is to be paid over a five-year period with a monthly payment of $463. The purchased vehicle is used in conjunction with the radio broadcast operations.
On May 15, 2008, the Company signed a retail installment sale contract with Daimler Chrysler Financial Services for the purchase of a vehicle for $19,303 with an effective interest rate of 11.25%. The corresponding promissory note is to be paid over a five-year period with a monthly payment of $367. The purchased vehicle is used in conjunction with the radio broadcast operations.
DEBUT BROADCASTING CORPORATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On May 30, 2008, the Company signed a retail installment sale contract with GMAC for the purchase of a vehicle for $25,256 with an effective interest rate of 9.5%. The corresponding promissory note is to be paid over a five-year period with a monthly payment of $530. The purchased vehicle is used in conjunction with the radio broadcast operations.
Total interest expense on the vehicle loans for the quarter ended September 30, 2009 and 2008 was $1,571 and $2286, respectively. Total interest expense on the vehicle loans for the nine months ended September 30, 2009 and 2008 was $6,278 and $3,107, respectively. The principal balance of the vehicle loans as of September 30, 2009 and 2008 was $70,068 and $132,232, respectively. At September 30, 2009, $8,179 was classified as the current portion of the loans.
On December 5, 2007, the Company entered into a capital lease arrangement with National City Media Finance to acquire studio equipment for $15,009 with a fixed interest rate of 7.5%. The lease term is for three years with monthly payments of $464, with a $1 buyout option at the end of the lease term.
Total interest expense on studio equipment for the quarters ended September 30, 2009 and 2008 was $188 and $175, respectively. Total interest expense on studio equipment for the nine months ended September 30, 2009 and 2008 was $357 and $710, respectively. The principal balance of the capital lease as of September 30, 2009 and 2008 was $2,445 and $6,237, respectively. At September 30, 2009, $2,445 was classified as the current portion of the lease.
Note 9 - Stockholders’ Equity
In connection with the reverse merger on May 17, 2007, all shares of common stock of Debut Broadcasting (as hereinafter defined) outstanding prior to the merger were exchanged for 10,000,000 shares of Company common stock (See Note 10. Business Combinations).
In addition, in connection with the reverse merger, the Company completed a private placement of 6,000,000 shares of Company common stock at $0.50 per share. The transaction was recorded net of financing costs of $23,502.
Finally, in connection with the reverse merger, the Company converted notes payable to stockholders in the amount of $215,158 into 430,316 shares of Company common stock at $0.50 per share.
The pre-merger stockholders of the Company maintained 364,044 shares of Company common stock.
On May 21, 2007, $100,000 of convertible debentures issued on May 15, 2007 were converted into 3,000,000 shares of Company common stock.
Note 10 - Business Combinations
On August 27, 2008, the Company acquired a radio broadcast stations from Holladay Broadcasting of Louisiana, LLC identified as WBBV FM 101.3 MHz in Vicksburg, Mississippi, including all of the facilities, equipment, licenses and intellectual property necessary to operate this station, in exchange for $180,022.
The purchase price was allocated as follows:
| | | |
| | | | |
| | $ | 57,522 | |
| | | 0.00 | |
| | | 25,000 | |
| | | 10,000 | |
| | | 472,500 | |
| | | 35,000 | |
| | | 380,000 | |
| | | (800,000 | ) |
| | $ | 180,022 | |
Holladay Broadcasting Company
On March 16, 2008, the Company entered into a Local Marketing Agreement for a radio broadcast station identified as KLSM FM 105.5 MHz in Tallulah, Louisiana with Holladay Broadcasting Company, including all of the facilities, equipment, licenses and intellectual property necessary to operate these stations. The Company maintains the station including all revenues and expenses. Holladay Broadcasting Company has retained ownership of all assets and liabilities of the station as of March 16, 2008.
On August 15, 2008, the Company entered into a Local Marketing Agreement for a radio broadcast station identified as WQBC AM 1420 Khz in Vicksburg, Mississippi with Grace Media Company, including all of the facilities, equipment, licenses and intellectual property necessary to operate these stations. The Company maintains the station including all revenues and expenses. Grace Media Company has retained ownership of all assets and liabilities of the station as of August 22, 2008. We attribute $39,340 of the net loss incurred during the nine months ended September 30, 2009 to the operation of WQBC AM. In response to the evaluation of losses incurred through the operation of WQBC AM, the company advised Grace Media Company of its decision to exercise a 90 day cancellation clause in the Local Marketing Agreement. WQBC AM was taken off the air at 11:59pm on May 31, 2009. Operations will revert to Grace Media Company on September 1, 2009.
Note 11 – Subsequent Events
The Company has analyzed its operations subsequent to September 30, 2009 through November 13, 2009 and has determined that it does not have any material subsequent events to disclose in these financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements contained in this report may not be based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements may be identified by reference to a future-period(s) or by the use of forward-looking terminology, such as “anticipate,” “believe,” “estimate,” “expect,” “foresee,” “may,” “might,” “will,” “intend,” “could,” “would,” or “plan” or future or conditional verb tenses, and variations or negatives of such terms.
These forward-looking statements include, without limitation, the basis of presentation of our financial statements, charges to consulting clients, the impact of recent accounting pronouncements, the impact of radio station acquisitions, radio advertising growth, pending acquisitions, the future use of Black-Scholes method of valuation, market trends, our need for additional capital, our ability to raise capital through debt and equity financing, the terms of any financing the we may obtain, the incurrence of accounting and legal fees in connection with acquisitions and the effectiveness of our disclosure controls and procedures.
We caution you not to place undue reliance on the forward-looking statements contained in this report, in that actual results could differ materially from those indicated in such forward-looking statements as a result of a variety of factors. These factors include, but are not limited to, our ability to provide and market competitive service and products, our ability to diversify revenue, our ability to attract, train and retain qualified personnel, our ability to operate and integrate new technology, changes in consumer preference, changes in our operating or expansion strategy, changes in economic conditions, fluctuation in prevailing interest rates, our ability to identify and effectively integrate potential acquisitions, FCC and government approval of potential acquisition, our inability to renew one or more of our broadcast licenses, our ability to manage growth and effectively serve an expanding customer and market base, geographic concentrations of our assets and susceptibility to economic downturns in that area, availability of and costs associated with maintaining and/or obtaining adequate and timely sources of capital and liquidity, our ability to compete with other companies that produce and distribute syndicated radio programs and/or own radio stations, shifts in populations and other demographics, changes in governmental regulations, laws and regulations as the affect companies that produce and distribute syndicated radio programs and/or own radio stations, industry conditions, the popularity of radio as a broadcasting and advertising medium, cancellation, disruption or postponements of advertising schedules in response to national or world events, possible adverse ruling, judgments, settlements, and other outcomes of pending or threatened litigation, other factors generally understood to affect the financial condition or results of companies that produce and distribute syndicated radio programs and/or own radio stations and other factors detailed from time to time in our press releases and filings with the Securities and Exchange Commission. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this report.
A Radio Advertising Bureau report issued in January of 2009 indicated that local advertisers, the largest advertisers which are served in small markets, decreased their overall advertising by 10% in 2008. Analysts are projecting that overall revenue will continue to be lower year over year in 2009 with a return to 2008 levels in 2010. We have been affected by this decline with a decrease in sales from advertisers in key groups of casino and automotive. Management believes that the small markets will recover with more speed than the broader national markets, but that has not left the small markets immune to recession. Non-broadcast radio revenue (“non-spot revenue”) remained steady during the second quarter of 2009. Our small market focus allows us to capitalize on the growth in local markets and non-spot revenue as we participate as active members in the communities in which we operate. For the nine months ended September 30, 2009, combined net revenue from radio, multi-media, media purchasing and syndication decreased 10.1% compared to the same period in 2008.
Our management team remains focused on our strategy of pursuing growth through acquisition. However, acquisitions are closely evaluated to ensure that they will generate stockholder value and our management is committed to completing only those acquisitions that it believes will increase our share price.
Results of Operations
For the Three Months Ended September 30, 2009 and 2008
We generated $525,802 in net revenue for the quarter ended September 30, 2009, a decrease of $215,272 or 29.04%, compared to $741,074 for the quarter ended September 30, 2008. Approximately $354,000 of this decrease relates to the syndication business. Revenue increased in the Mississippi radio station markets, offsetting the overall loss for the quarter ended September 30, 2009 compared to the quarter ended September 30, 2008.
Advertising expense was $3,052 for the quarter ended September 30, 2009, a decrease of 18,699 or 85.9%, compared to $21,751 for the quarter ended September 30, 2008. This decrease is partially attributable to the expiration of a public relations contract that we entered into with Politis Communications. Additionally contributing to the decrease were the expiration of contracts that we entered into with Agoracom for investor relations services, as well as discontinued public relations contracts with Dutton Associates and Rubicon Capital Partners.
Operating expense was $601,581 for the quarter ended September 30, 2009, a decrease of $170.148 or 22.04%, compared to $771,729 for the quarter ended September 30, 2008. Of the total decrease in operating expenses, approximately $340,539 related to a gain on settlement of debt with Citadel Broadcasting. Approximately $170,000 relates to company wide staffing and salary reductions implemented in the first quarter of 2009, and a decrease in legal and regulatory spending.
On August 22, 2002, the company signed an unsecured promissory note with Citadel Broadcasting to alleviate pass through bad debt due to the temporary collapse of the national advertising market in late 2001. Over the life of the agreement, the company made principle and interest payments to Citadel Broadcasting totaling $350,467. During the three months ended September 30, 2009 the company settled the agreement, resulting in a one time gain on settlement of $340,539.
Depreciation and amortization expense was $52,668 for the quarter ended September 30, 2009, an increase of $23,779, or 82%, compared to $28,889 for the quarter ended September 30, 2008. The primary reason for the increase relates to the assets acquired as part of the WBBV FM acquisition.
Interest expense was $53,499 for the quarter ended September 30, 2009, an increase of $7,299 or 13.6% compared to $46,200 for the quarter ended September 30, 2008. The primary source of the interest expenditures were interest payments associated with the two term loans from Remington Partners, Inc, the Regions Bank loans, and the SunTrust Bank loan.
As a result of the foregoing revenue and expenses, our overall net income or (loss) for the three-month period ending September 30, 2009 and September 30, 2008 was $166,510 and ($70,767), respectively.
For the Nine Months Ended September 30, 2009 and 2008
We generated $1,056,916 in net revenue for the nine months ended September 30, 2009, a decrease of $861,939, or 44.9%, compared to $1,918,857 for the nine months ended September 30, 2008. Approximately $1,009,889 of this decrease relates to the syndication business. Revenue increased in the Mississippi radio station markets, offsetting the overall loss for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008
Advertising expense was $12,722 for the nine months ended September 30, 2009 a decrease of $161,769 or 92.7% compared to $174,491 for the nine months ended September 30, 2008. This decrease is partially attributable to the expiration of a public relations contract that we entered into with Politis Communications. Additionally contributing to the decrease were the expiration of contracts that we entered into with Agoracom for investor relations services, as well as discontinued public relations contracts with Dutton Associates and Rubicon Capital Partners.
Operating expense was $1,763,193 for the nine months ended September 30, 2009, a decrease of $325,711 or 15.59%, compared to $2,088,904 for the nine months ended September 30, 2008. Of the total decrease in operating expenses, approximately $83,000 related to company wide staffing and salary reductions implemented in the first quarter of 2009. Additional reasons for the decrease in operating expenses relate to a decrease in legal and regulatory spending of approximately $149,800, and a decrease and travel and entertainment expenditures of approximately $44,500.
On August 22, 2002, the company signed an unsecured promissory note with Citadel Broadcasting to alleviate pass through bad debt due to the temporary collapse of the national advertising market in late 2001. Over the life of the agreement, the company made principle and interest payments to Citadel Broadcasting totaling $350,467. During the nine months ended September 30, 2009 the company settled the agreement, resulting in a one time gain on settlement of $340,539.
Depreciation and amortization expense was $157,442 for the nine months ended September 30, 2009, an increase of $21,406 or 32.5% compared to $65,868 for the nine months ended September 30, 2008. The primary reason for the increase relates to the assets acquired as part of the WBBV FM acquisition.
Interest expense was $152,911 for the nine months ended September 30, 2009, an increase of $58,154 or 38% compared to $94,757 for the nine months ended September 30, 2008. The primary source of the increase was interest payments associated with the two term loans from Remington Partners, Inc. An additional increase in interest expense was attributable to the vehicles which have been financed for the radio station operations.
As a result of the foregoing revenue and expenses, our overall net loss for the nine month period ending September 30, 2009 and September 30, 2008 was $206,154 and $594,848, respectively.
Financial Condition
Accounts receivable, net of allowance for doubtful accounts was $1,056,916 at September 30, 2009, a decrease of $36,400 or 3.3% compared to $1,096,316 at December 31, 2008. The drop in sales revenue from the syndication business is largely attributable to the decrease in the accounts receivable balance.
Unexercised Stock warrants was $447,836 at September 30, 2009, a decrease of $6,822 compared to $454,658 at December 31, 2008. In accordance with FAS 133, we record an associated asset and liability for the issuance of warrants, which is adjusted quarterly using the Black-Scholes method of derivative valuation.
In the second quarter of 2009, we disposed of a Dodge Magnum and a Nissan Xterra through sales to third parties for $12,000 and $13,300 respectively. As a result of these disposals and accumulated depreciation on our existing assets, our property and equipment, net of depreciation, fell to $632,525 compared to $749,416 at December 31, 2008.
Accounts payable at September 30, 2009 was $761,971, an increase of $231,179 or 30.3% compared to $530,792 at December 31, 2008. We decreased our accounts payable balance in the third quarter as compared to the quarter ended June 30, 2009, utilizing funds from the Riverfalls loan. However, the increase in accounts payable is attributable to a slower collections cycle and increases in bad debt among automotive advertisers nationally and locally, limiting our ability to maintain a normal payables cycle.
Accrued expenses and taxes at September 30, 2009 were $336,548, a decrease of $113,333 from December 31, 2008. This decrease is attributable to payments of accrued audit and legal fees, as well as accrued contracts for radio programming that have been fully satisfied.
In January and February of 2008, we exercised two loans with Remington Partners, Inc. for a total of $750,000 in notes payable to stockholders. As a result, our notes payable to stockholders were $750,000 at September 30, 2009 and December 31, 2008.
Liquidity and Capital Resources
As of September 30, 2009, our current assets in the amount of $1,576,619, consisted of $35,040 in cash and cash equivalents, $1,056,916 in accounts receivable, $85 in stock warrants receivable, $21,624 in prepaid expenses and $454,657 in unexercised stock warrants. As of September 30, 2009, our current liabilities in the amount of $3,122,561, consisted of $761,971 in accounts payable, $336,548 in accrued expenses and taxes, $750,000 in notes payable to stockholders, $731,860 in lines of credit and $56,659 in current portion of long term debt, and $485,523 in unexercised stock warrant loss. This combination of assets and liabilities resulted in a working capital deficit in the amount of $1,540,941.
In the third quarter of 2009 we signed an agreement with Riverfalls Capital Partners that we anticipate will meet our funding needs to acquire additional radio stations while subsequently correcting our arrearages on accounts payable.
Recent Events
During the fourth quarter of 2007, we signed letters of intent to purchase seven additional radio stations in two markets. Two of these stations, WBBV FM, and KLSM FM were placed under a local marketing agreement on March 16, 2008. We signed an asset purchase agreement and filed for FCC License transfer for WBBV during the first quarter of 2008. We received approval from the FCC to proceed with the acquisition during the second quarter of 2008. We finalized the acquisition of WBBV during the third quarter of 2008. We anticipate placing additional stations under local marketing agreements and filing asset purchase agreements during the fourth quarter of 2009 and first quarter of 2010.
These markets complement the geography of our existing radio stations and will create a super-regional cluster™ resulting in an anticipated reduction in operating costs of up to 17% incrementally. We anticipate signing asset purchase agreements, and filing for FCC license transfers for the 6 additional stations during the fourth quarter of 2009 and first quarter of 2010. These acquisitions will represent overall growth in radio operations of 140% year over year.
Off Balance Sheet Arrangements
As of September 30, 2009, there were no off balance sheet arrangements.
Critical Accounting Policies
Revenue and Cost Recognition
We recognize advertising and programming revenues when our radio programs air with our contracted radio station affiliates. Generally, we are paid by a national advertising agency, which sells the commercial time provided by the affiliate.
We earn revenue from the national advertising agency, we also recognize any amounts attributable to the individual radio programs, which are based on the audience level generated by the specific program. Expenses are accrued at the time the radio programs are run.
Consulting projects are generally negotiated at a fixed price per project; however, if we utilize our advertising capacity as part of the consulting project, we will charge the consulting client in the same manner as the affiliated stations described more fully above. Consulting fee income is recognized as time is incurred under the terms of the contract.
Advertising
We expense advertising costs as they are incurred.
New Accounting Pronouncements
We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), on May 17, 2007. This interpretation increases the relevancy and comparability of financial reporting by clarifying the way companies account for uncertainty in income taxes. FIN 48 prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring such tax positions for financial statement purposes. The interpretation also requires expanded disclosure with respect to the uncertainty in income taxes.
As required by Rule 13a-15 of the Securities Exchange Act of 1934, our principal executive officer and principal financial officer evaluated our company's disclosure controls and procedures (as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of the end of the period covered by this report, these disclosure controls and procedures were not effective to ensure that the information required to be disclosed by our company in reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities Exchange Commission and to ensure that such information is accumulated and communicated to our company's management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. The conclusion that our disclosure controls and procedures were not effective was due to the presence of the following material weaknesses in internal control over financial reporting which are indicative of many small companies with small staff: inadequate segregation of duties and effective risk assessment. Management anticipates that such disclosure controls and procedures will not be effective until the material weaknesses are remediated.
We plan to take steps to enhance and improve the design of our internal controls over financial reporting. During the period covered by this quarterly report on Form 10-Q, we have not been able to remediate the material weaknesses identified above. The company has appointed additional qualified personnel to address inadequate segregation of duties and ineffective risk management. At the present time the company does not have the financial resources to appoint additional staff, but does plan to add additional financial staff as soon as practicable.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2009 the company added two additional members to the financial reporting team. The company has identified these additions in connection with the evaluation required by paragraph (d) of ss.240.13a -15 or ss.240.15d-15 of the Exchange Act and believes that these additions will improve the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company, and increase the company’s ability to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company.
PART II - OTHER INFORMATION
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 17, 2007, we completed a private placement of 6,430,316 shares of our common stock at $0.50 per share. 430,316 shares were sold to existing shareholders in exchange for conversion of their notes to the Predecessor Company. The remaining 6,000,000 shares were sold to a number of investors with no prior relationship to the company. No underwriters were involved in this sale of securities. We issued the shares of common stock to the investors in exchange for a combination of cash and debt reduction. The transaction was recorded net of financing costs of $23,503. We used the net proceeds from the private offering for the acquisition of Shamrock Broadcasting and River Broadcasting Group.
On June 18, 2008, we issued to Wolcott Squared a warrant to purchase 18,408 shares of our common stock at an exercise price of $0.3925 per share, with an expiration date of December 17, 2017. The consideration received for this warrant was services rendered in December of 2007 valued at $7,225.
On June 18, 2008, we issued to Wolcott Squared a warrant to purchase 22,279 shares of our common stock at an exercise price of $0.51 per share with an expiration date of January 31, 2018. The consideration received for this warrant was services rendered in January of 2008 valued at $11,362.
On June 18, 2008, we issued to Wolcott Squared a warrant to purchase 5,686 shares of our common stock at an exercise price of $0.51 per share with an expiration date of February 29, 2018. The consideration received for this warrant was services rendered in February of 2008 valued at $2,899.
On June 30, 2008, we issued to Politis Communications a warrant to purchase 10,254 shares of our common stock at an exercise price of $0.01 per share, with an expiration date of June 29, 2018. The consideration received for this warrant was services rendered by Politis Communications.
On September 22, 2008, we issued to Stephen Ross, a third party, a warrant to purchase 18,000 shares of Company common stock at an exercise price of $0.50 per share, with an expiration date of January 31, 2011. The consideration we received for this warrant was legal services rendered by Stephen Ross, Esq,
On September 22, 2008, we issued to Stephen Ross, a third party, a warrant to purchase 27,000 shares of Company common stock at an exercise price of $0.50 per share, with an expiration date of September 30, 2011. The consideration we received for this warrant was legal services rendered by Stephen Ross, Esq,
On September 30, 2008, we issued to Politis Communications a warrant to purchase 5,495 shares of Company common stock at an exercise price of $0.01 per share, with an expiration date of September 29, 2018. The consideration received for this warrant was public relations services rendered by Politis Communications.
On December 31, 2008, we issued to Stephen Ross, a third party, a warrant to purchase 27,000 shares of Company common stock at an exercise price of $0.50 per share, with an expiration date of December 31, 2011. The consideration we received for this warrant was legal services rendered by Stephen Ross, Esq,
On December 31, 2008, we issued to Politis Communications a warrant to purchase 5,495 shares of Company common stock at an exercise price of $0.01 per share, with an expiration date December 31, 2018. The consideration received for this warrant was public relations services rendered by Politis Communications.
On April 1, 2009, we issued to Stephen Ross, a third party, a warrant to purchase 27,000 shares of Company common stock at an exercise price of $0.50 per share, with an expiration date of March 31, 2012.The consideration we received for this warrant was legal services rendered by Stephen Ross, Esq,
On September 30, 2009, we issued to Stephen Ross, a third party, a warrant to purchase 27,000 shares of Company common stock at an exercise price of $0.50 per share, with an expiration date of June 29, 2012.The consideration we received for this warrant was legal services rendered by Stephen Ross, Esq,
We revalue warrants quarterly utilizing the Black-Scholes method.
All of these warrants were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), as set forth in Section 4(2) under the Securities Act and Rule 506 of Regulation D promulgated thereunder relating to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.
On December 5, 2008, Politis Communications exercised a warrant to purchase 8,500 shares of our common stock at $0.01 per share. The shares were authorized by Politis Communications as compensatory gifts to a number of employees of Politis Communications. No underwriters were involved in this warrant exercise. The underlying shares are restricted and carry piggy-back registration rights.
On December 5, 2008, we issued a stock certificate to Mohammed Rahman for 22,026 shares of our common stock at $0.07 per share. We issued the shares of common stock to Mohammed Rahman in exchange for services rendered. No underwriters were involved in this sale of securities. Outside of the existing vendor client relationship the investor has no prior relationship to the company. The underlying shares are restricted and carry piggy-back registration rights.
On December 3, 2008, we issued a stock certificate to Sariah Hopkins for 42,000 shares of our common stock at $0.07 per share. We issued the shares of common stock to Sariah Hopkins as a compensatory bonus for services rendered in the role of Chief Financial Officer. The underlying shares are restricted and carry piggy-back registration rights.
We issued the above-described shares of our common stock in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended, as set forth in Section 4(2) under the Securities Act and Rule 506 of Regulation D promulgated thereunder relating to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required. The purchasers represented to us that they were accredited investors as defined in Rule 501(a) of the Securities Act and that the securities issued pursuant thereto were being acquired for investment purposes. The sales of these securities were made without general solicitation or advertising.
On July 29, 2009 we held our annual meeting of stockholders. Matters brought before stockholders for approval were the ratification of Maddox Unger Silberstein, PLLC as our registered auditor, the election of our board of directors, and the amendment of the Company’s Amended and Restated Certificate of Incorporation to provide for authorization of 50,000,000 shares of preferred stock, par value $0.003 per share. Of 19,866,866 shares outstanding, 11,842,841 were present at the meeting. Tabulation of votes was provides by CPA Associates, PLLC.
The results of the vote were:
| | · | Ratification of Maddox Unger Silberstein, PLLC, as registered auditor: |
| | · | Election of Ron Heineman as a director: |
| | · | Election of Steven Ludwig as a director: |
| | · | Election of Robert Marquitz as a director: |
| | · | Election of Alan Hirsch as a director: |
| | · | Election of Harry Lyles as a director: |
| | · | Authorization of 50,000,000 shares of common stock, par value $.0003: |
Item 6. Exhibits
Exhibit Number | | Description of Exhibit |
| 31.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly cause this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | DEBUT BROADCASTING CORPORATION, INC. |
| | |
| January 13, 2010 | /s/ Sariah Hopkins |
| | Sariah Hopkins |
| | Chief Financial Officer |
