UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ________ to __________
Commission File Number: 333-119632
RELATIONSERVE MEDIA, INC.
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(Exact name of small business issuer as specified in charter)
NEVADA 43-2053462
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6700 North Andrews Avenue, 2nd Floor
Fort Lauderdale, Florida 33309
------------------------------
(Address of principal executive offices)(Zip Code)
(954) 202-6000
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(Issuer's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 12, 2005, there were
19,771,015 shares of the issuer's common stock outstanding.
RELATIONSERVE MEDIA, INC.
FORM 10-QSB
QUARTERLY PERIOD ENDED JUNE 30, 2005
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet (Unaudited)
As of June 30, 2005..............................................3
Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended June 30, 2005 and 2004 .......4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2005 and 2004.................5
Notes to Consolidated Financial Statements............................6-19
Item 2 - Management's Discussion and Analysis or Plan of
Operation..................................................19-24
Item 3 - Controls and Procedures......................................24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................25
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds..25
Item 3 - Defaults Upon Senior Securities..............................25
Item 4 - Submission of Matters to a Vote of Security Holders..........25
Item 5 - Other Information............................................25
Item 6 - Exhibits.....................................................26-27
Signatures............................................................28
-2-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
BALANCE SHEET
June 30, 2005
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 2,907,801
Accounts receivable, less allowance for doubtful accounts of $1,682,619 2,970,199
Prepaid expenses and other assets 84,283
------------
Total current assets 5,962,283
------------
Property and equipment, net 737,745
Intangibles, net 1,250,304
Other assets 28,966
------------
Total Assets $ 7,979,298
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 319,305
Accrued expenses 416,179
Accrued commissions 598,335
Income taxes payable 644,055
Deferred rent 180,630
Customer deposits 105,161
------------
Total current liabilities 2,263,665
LONG-TERM NOTE PAYABLE 700,000
Total liabilities 2,963,665
------------
SHAREHOLDERS' EQUITY:
Preferred stock ($.001 Par value; 10,000,000 shares authorized;
No shares issued and outstanding) -
Common stock ($.001 Par value; 90,000,000 shares authorized;
18,641,015 shares issued and outstanding) 18,641
Common stock issuable (1,130,000 shares) 1,130
Paid-in capital 7,088,156
Accumulated deficit (43,693)
Less: Deferred compensation (2,048,601)
Total shareholders' equity 5,015,633
------------
Total liabilties and shareholders' equity $ 7,979,298
============
See accompanying notes to unaudited consolidated financial statements.
-3-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-----------------------------------------------------------
2005 2004 2005 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ --------------------------- ------------
Revenues, net $ 3,986,353 $ 2,530,907 $ 6,678,023 $ 3,842,193
Cost of revenues 377,701 364,742 733,252 844,931
------------ ------------ ------------ ------------
Gross Profit 3,608,652 2,166,165 5,944,771 2,997,262
------------ ------------ ------------ ------------
Selling Expenses:
Salaries and commissions 835,940 730,232 1,545,486 1,221,303
Advertising and trade shows 166,425 124,997 302,278 221,172
------------ ------------ ------------ ------------
1,002,365 855,229 1,847,764 1,442,475
------------ ------------ ------------ ------------
General and Administrative Expenses:
Bad debt 276,801 -- 577,202 --
Salaries 214,334 183,068 344,323 335,431
Depreciation and amortization 188,256 103,225 348,547 195,789
Professional fees 233,910 73,411 256,353 106,942
Stock-based consulting expense 127,632 -- 127,632 --
Stock-based compensation expense 4,167 -- 4,167 --
Other general and administrative 419,582 237,337 737,452 425,081
------------ ------------ ------------ ------------
1,464,682 597,041 2,395,676 1,063,243
------------ ------------ ------------ ------------
Income from Operations 1,141,605 713,895 1,701,331 491,544
Other Expense:
Interest expense (6,449) -- (6,449) --
------------ ------------ ------------ ------------
Income before provision for income taxes 1,135,156 713,895 1,694,882 491,544
Provision for income taxes (431,359) -- (644,055) --
------------ ------------ ------------ ------------
Net income $ 703,797 $ 713,895 $ 1,050,827 $ 491,544
============ ============ ============ ============
Net income per common share:
Net income per common share - basic $ 0.05 $ 0.06 $ 0.08 $ 0.04
============ ============ ============ ============
Net income per common share - diluted $ 0.04 $ 0.06 $ 0.06 $ 0.04
============ ============ ============ ============
Weighted average common shares outstanding - basic 13,469,852 12,001,000 12,739,483 12,001,000
============ ============ ============ ============
Weighted average common shares outstanding - diluted 17,934,012 12,001,000 17,036,254 12,001,000
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
-4-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
--------------------------
2005 2004
----------- -----------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net income $ 1,050,827 $ 491,544
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 348,547 195,789
Stock-based compensation and consulting 131,799 --
Changes in assets and liabilities:
Accounts receivable (2,347,138) (1,179,137)
Due from principal member 140,312 (5,654)
Prepaid expenses and other current assets (17,749) 57,691
Other assets -- 28,966
Accounts payable (18,492) (108,048)
Accrued expenses 209,547 10,971
Accrued commissions 342,065 201,739
Income taxes payable 644,055
Deferred rent (12,235) 172,238
Customer deposits (199,052) 286,528
----------- -----------
Net cash provided by operating activities 272,486 152,627
----------- -----------
Cash Flows From Investing Activities:
Cash used in acquisition (150,000) --
Purchase of property and equipment (50,480) (116,997)
Purchase of intangible assets (708,767) (525,695)
----------- -----------
Net cash used in investing activities (909,247) (642,692)
----------- -----------
Cash Flows From Financing Activities:
Net proceeds from sales of common stock 3,459,807 --
Proceeds from exercise of warrants 137,500
Contributions from members -- 1,030,001
Draws by members (207,124) --
Payments on notes payable -- (674,499)
----------- -----------
Net cash provided by financing activities 3,390,183 355,502
----------- -----------
Net increase (decrease) in cash 2,753,422 (134,563)
Cash - Beginning of period 154,379 213,943
----------- -----------
Cash - End of period $ 2,907,801 $ 79,380
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 810 $ --
=========== ===========
Cash payments for income taxes $ -- $ --
=========== ===========
Non-cash investing and financing activities:
=========== ===========
Note payable assumed in connection with acquisition $ 700,000 $ --
=========== ===========
Common stock issued for future services $ 2,180,000 $ --
=========== ===========
Distribution of software to member (pre-acquisition) $ 200,000 $ --
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
-5-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, the financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included and
such adjustments are of a normal recurring nature. These consolidated financial
statements should be read in conjunction with the financial statements for the
year ended December 31, 2004 and notes thereto of Omni Point Marketing LLC and
other pertinent information contained in the Current Report on Form 8-K of
Relationserve Media, Inc. (the "Company") as filed with the Securities and
Exchange Commission (the "Commission") on June 16, 2005. The results of
operations for the six months ended June 30, 2005 are not necessarily indicative
of the results for the full fiscal year ending December 31, 2005.
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("US GAAP"). The
consolidated financial statements of the Company include the Company and its
subsidiaries. All material intercompany balances and transactions have been
eliminated.
ORGANIZATION
Prior to June 13, 2005, Relationserve Media, Inc. had been an exploration stage
company engaged in the business of mineral exploration incorporated in Nevada as
Chubasco Resources, Inc. ("Chubasco"). On June 10, 2005, Chubasco's Board of
Directors authorized the merger (the "Merger") of its newly formed wholly-owned
subsidiary, Reland Acquisition, Inc. ("Reland"), a Delaware corporation, with
Relationserve, Inc., a Delaware corporation ("Relationserve") and entered into
an Agreement of Merger and Plan of Reorganization (the "Merger Agreement"). On
June 13, 2005, a Certificate of Merger was filed with the Secretary of State of
the State of Delaware in order to complete the Merger, and on June 15, 2005,
Chubasco changed its name to Relationserve Media, Inc.
In connection with the Merger, the Company acquired all of the issued and
outstanding capital stock of Relationserve in exchange for 13,326,000 shares
(the "Merger Stock") of the Company's common stock, par value $0.001 per share
(the "Common Stock"), and certain holders agreed to cancel 6,800,000 outstanding
shares of the Company's Common Stock following the Merger. Under the terms of
the Merger Agreement, each share of Relationserve common stock outstanding prior
to the Merger (13,326,000) and each Relationserve warrant (6,562,500) were
converted into one share of the Company's common stock and a warrant to purchase
one share of the Company's common stock, respectively, following the Merger. As
a result, Relationserve's former stockholders became the Company's majority
stockholders and Relationserve became the Company's wholly-owned subsidiary with
Chubasco's former shareholders retaining 3,216,500 shares of common stock.
Additionally, at the effective time of the merger, the Company assumed a
$700,000 promissory note due in May 2007 issued by Relationserve in connection
with an acquisition, as described below.
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RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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(CONTINUED)
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ORGANIZATION (CONTINUED)
Prior to the merger, on May 16, 2005, Relationserve, through its wholly-owned
Delaware subsidiary Relationserve Access, Inc. ("Access"), purchased the assets
and assumed certain liabilities of Omni Point Marketing, LLC, a Florida limited
liability company ("Omni Point"), and through its wholly-owned Delaware
subsidiary, Friendsand, Inc. ("Friendsand") acquired all of the assets and
liabilities of Friendsand LLC, a Delaware, a limited liability company
("Affiliated Company"). Omni Point and Affiliated Company were acquired for a
combination of cash payments, a two-year promissory note in the principal amount
of $700,000, and 8,000,000 newly-issued common shares of Relationserve. The
acquisition of Omni Point and Affiliated Company by Relationserve was accounted
for as a reverse merger because on a post-merger basis, the former Omni Point
and Affiliated Company members held a majority of the outstanding common stock
of Relationserve on a voting and fully-diluted basis. As a result, Omni Point
and Affiliated Company were deemed to be the acquirer for accounting purposes.
In addition, the acquisition of Relationserve by the Company was accounted for
as a reverse merger because on a post-merger basis, the former Relationserve
shareholders hold a majority of the outstanding common stock of the Company on a
voting and fully diluted basis. As a result, Relationserve was deemed to be the
acquirer for accounting purposes. Accordingly, the consolidated financial
statements presented, beginning with the period ending June 30, 2005, are those
of Relationserve and Omni Point and Affiliated Company for all periods prior to
the acquisition, and the financial statements of the consolidated companies from
the acquisition date forward. The historical shareholders' deficit of
Relationserve prior to the acquisition has been retroactively restated (a
recapitalization) for the equivalent number of shares received in the
acquisition after giving effect to any differences in the par value of the
Company and Relationserve's common stock, with an offset to additional paid-in
capital. The restated consolidated retained earnings of the accounting acquirer
(Relationserve and Omni Point and Affiliated Company) are carried forward after
the acquisition.
Through its wholly-owned subsidiary, Access, the Company specializes in
marketing third party offers for products and services via email. The Company
offers advertisers integrated online and offline marketing programs including
permission-based email advertising, email database append services, online
surveys, ad serving networks and internet compiled direct mail lists.
Additionally, through its wholly-owned subsidiary, Friendsand, the Company hosts
an internet social networking community.
The Company currently intends to continue to pursue acquisitions of similar
businesses, including businesses that offer online and offline marketing
programs such as permission based email advertising, email database append
services, online surveys, and Internet compiled direct mail lists, and Internet
social networking communities.
USE OF ESTIMATES
The preparation of financial statements in conformity with US GAAP principles
requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from
those estimates. Significant estimates in 2005 and 2004 include the allowance
for doubtful accounts, stock-based compensation, and the useful life of property
and equipment and intangible assets.
-7-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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(CONTINUED)
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ACCOUNTS RECEIVABLE
Accounts receivable are reported at net realizable value. The Company has
established an allowance for doubtful accounts based upon factors pertaining to
the credit risk of specific customers, historical trends, and other information.
Delinquent accounts are written-off when it is determined that the amounts are
uncollectible. At June 30, 2005, the allowance for doubtful accounts was
$1,682,619.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. The cost of repairs and maintenance
is expensed as incurred; major replacements and improvements are capitalized.
When assets are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are included in
income in the year of disposition. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", the Company examines the possibility of decreases in the
value of fixed assets when events or changes in circumstances reflect the fact
that their recorded value may not be recoverable. Depreciation is computed by
the straight-line method over the following estimated useful lives:
YEARS
-----
Leasehold improvements 5-6
Computer equipment 5
Furniture, fixtures and office equipment 5-7
Software 3
INTANGIBLE ASSETS
Intangible assets consist of databases of email addresses acquired during normal
operations and costs associated with the development of the Company's various
websites. Costs to develop new email databases, which primarily represent direct
external costs, are capitalized and are amortized straight-line over the
expected lives of the databases. The Company reviews the carrying value of
intangibles and other long-lived assets for impairment at least annually or
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of long-lived assets is measured
by comparison of its carrying amount to the undiscounted cash flows that the
asset or asset group is expected to generate. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the property, if any, exceeds its fair market value.
These costs are being amortized using the straight-line method over the
following estimated useful lives:
YEARS
Email database 3
Web properties 3-5
-8-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------
(CONTINUED)
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INCOME PER COMMON SHARE
Basic income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
income per share is computed by dividing net income by the weighted average
number of shares of common stock, common stock equivalents and potentially
dilutive securities outstanding during each period.
INCOME TAXES
Income taxes are accounted for under the asset and liability method of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes ("SFAS
109"). Under SFAS 109 deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Prior to May 16, 2005, the Company had made an election to have its income or
loss taxed directly to its members as a partnership for income tax purposes.
Accordingly, the pro rata income or loss will be included in the tax return of
the members. As a result, no income taxes have been recognized in the
accompanying financial statements for the 2004 period. Had income taxes been
determined based on a effective tax rate of 38% consistent with the method of
SFAS 109, the Company's net income and income per share would have been changed
to the pro forma amounts indicated below for the three and six months ended June
30, 2004, respectively:
Three Months Six Months
ended June 30, ended June 30,
2004 2004
------------- ---------------
Net income as reported $ 713,895 $ 491,544
Less: income taxes at an effective
tax rate of 38% (271,280) (186,787)
------------- ---------------
Pro forma net income $ 442,615 $ 304,757
============= ===============
Basic income per share:
As reported $ .06 $ .04
============= ===============
Pro forma $ .04 $ .03
============= ===============
Diluted income per share:
As reported $ .06 $ .04
============= ===============
Pro forma $ .04 $ .03
============= ===============
-9-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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(CONTINUED)
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REVENUE RECOGNITION
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectibility is reasonably assured. The
following policies reflect specific criteria for the various revenues streams of
the Company:
EMAIL APPEND SERVICES: The Company's email append solution allows a
marketer to augment their existing customer database with the Company's
permission-based email data. When a match is confirmed, the customer's
email address is added to the client's file. Revenue is recognized upon
completion of the email append service and the delivery of the updated
customer database is delivered to the client.
ELECTRONIC CHANGE OF ADDRESS: The Company's electronic change of address
service enables clients to update their email databases. Revenue is
recognized upon delivery of the updated customer database.
LEAD GENERATION: The Company offers lead generation programs to assist a
variety of businesses with customer acquisition. The Company pre-screens
the leads through its online surveys to meet its clients' exact criteria.
Revenue is recognized upon delivery of a lead database to the client.
DIRECT MAIL AND POSTAL LIST ADVERTISEMENT: The Company compiles an
exclusive Internet responders' postal mailing list. This list is sourced
from online registration and individuals who have responded to the
Company's online campaigns. These consumers are responsive to offers and
purchase products and services through online and offline channels.
Revenue is recognized upon delivery of the respective list to the client.
ONLINE MARKET RESEARCH: The Company has developed a consumer survey and
offers a variety of targeted leads generated from its ongoing survey
responses. The Company also offers marketers the opportunity to add
specific questions to the survey. The Company then sells the response
information to the marketer on a cost per response basis. If a marketer or
a market research company needs a full survey completed, the Company will
broadcast its client's survey to a designated responder list on a cost per
thousand basis. Revenue is recognized upon delivery of the respective
survey to the designated responder.
STOCK-BASED COMPENSATION
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts are amortized over the respective vesting periods of the
option grant. The Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
-10-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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(CONTINUED)
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STOCK-BASED COMPENSATION (CONTINUED)
The exercise prices of all options granted by the Company equal the market price
at the dates of grant. No compensation expense has been recognized. Had
compensation cost for the stock option plan been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS 123,
"Accounting for Stock Based Compensation", the Company's net income and income
per share would have been changed to the pro forma amounts indicated below for
the six months ended June 30, 2005 and 2004:
SIX MONTHS ENDED JUNE 30,
--------------------------------
2005 2004
-------------- -------------
Net income as reported $ 1,050,827 $ 491,544
Less: total stock-based employee
compensation expense determined under
fair value based method, net of related tax
effect (1,239,112) --
-------------- -----------
Pro forma net income (loss) $ (188,285) $ 491,544
============== ===========
Basic income per share:
As reported $ .08 $ .04
============== ===========
Pro forma $ (.01) $ .04
============== ===========
Diluted income per share:
As reported $ .06 $ .04
============== ===========
Pro forma $ (.01) $ .04
============== ===========
The option grants are estimated as of the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants as of June
30, 2005: expected volatility of 50%; risk free interest rate of 3.53%; expected
life of 10 years and annual dividend rate of 0%. The above pro forma disclosures
may not be representative of the effects on reported net earnings for future
years as options vest over several years and the Company may continue to grant
options to employees.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts, which, at times, exceed
federally insured limits. At June 30, 2005, the Company had approximately
$2,858,000 in United States bank deposits, which exceed federally insured
limits. The Company has not experienced any losses in such accounts through June
30, 2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant-date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective for the first fiscal year beginning after December 15,
2005. The Company is in the process of evaluating the impact of this
pronouncement on its financial statements.
-11-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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(CONTINUED)
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RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Non-monetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." The EITF reached a consensus about the
criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss and how that criteria should be applied to investments
accounted for under SFAS No. 115, "Accounting in Certain Investments in Debt and
Equity Securities." EITF 03-01 also included accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Additionally, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards Board (FASB)
delayed the accounting provisions of EITF 03-01; however the disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company believes that the adoption of this standard will have no material impact
on its financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT
----------------------
At June 30, 2005, property and equipment consist of the following:
Computer equipment $ 513,261
Office equipment 119,206
Furniture and fixtures 223,602
Leasehold improvements 121,686
Software 66,544
-----------
1,044,299
Less accumulated depreciation (306,554)
-----------
$ 737,745
==========
Depreciation expense was $91,741 and $127,518 for the six months ended June 30,
2005 and 2004, respectively.
-12-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 3 - INTANGIBLE ASSETS
-----------------
At June 30, 2005, intangible assets consisted of the following:
Email database $ 1,722,079
Web properties 155,274
-----------
1,877,353
Less accumulated amortization (627,049)
-----------
$ 1,250,304
===========
Amortization expense was $256,807 and $68,271 for the six months ended June 30,
2005 and 2004, respectively.
NOTE 4 - NOTE PAYABLE
------------
On May 13, 2005, in connection with the acquisition of Friendsand LLC, the
Company's subsidiary, Relationserve, entered into a promissory note with the
former member of Friendsand LLC for $700,000. The note bears interest at 6% per
annum and shall be computed on the basis of a 365-day year. The entire principal
balance plus all accrued interest is due on May 13, 2007. However, the maturity
date of this note shall be accelerated (i) as to 50% of the original principal
amount ($350,000) and accrued interest on such amount to the date on which the
Company closes on a private placement or public offering of its securities with
aggregate gross proceeds of not less than $5,000,000; and (ii) as to the
remaining 50% of the original principal ($350,000) and accrued interest on such
amount to the date on which the Company closes on a private placement or public
offering of its securities with aggregate gross proceeds of not less than
$10,000,000. In July 2005, the Company repaid $350,000 on this note.
At June 30, 2005 the scheduled maturities of loan payable is as follows:
2007 $ 700,000
=============
NOTE 5 - SHAREHOLDERS' EQUITY
--------------------
COMMON STOCK
On April 1, 2005, in connection with the formation of Relationserve, founders of
Relationserve received 4,001,000 shares of Relationserve common stock and
6,000,000 warrants in connection with their efforts and for providing bridge
loan advances and negotiating the Company's initial acquisitions. The exercise
price of the warrants issued to bridge loan holders is $0.25 per share. These
shares were issued pursuant to an exemption from registration pursuant to
Section 4(2) of the Securities Act and are restricted shares as defined in the
Securities Act. For the six months ended June 30, 2005, in connection with the
issuance of these shares, the Company recorded stock-based compensation expense
of $400. Under the terms of the Merger Agreement dated June 10, 2005 (see note
1), these shares (4,001,000) and each warrant (6,000,000) were converted into
one share of the Company's common stock and a warrant to purchase one share of
the Company's common stock, respectively, following the Merger.
-13-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 5 - SHAREHOLDERS' EQUITY (CONTINUED)
--------------------------------
COMMON STOCK (CONTINUED)
On April 20, 2005, the Company commenced a private offering of up to $1,000,000
in Units, each Unit consisted of 50,000 shares of Company's Common stock with
warrants to purchase 25,000 shares of the Company's Common Stock exercisable at
$2.00 per share (the "Offering"). The private placement was originally to be for
a maximum amount of $1,000,000, but was subsequently increased to a maximum of
$1,625,000. In May and June 2005, the Company sold 1,625,000 shares of and
granted 812,500 warrants to purchase 812,500 shares of common stock at an
exercise price of $2.00 per share for net proceeds of $1,495,027.
On May 24, 2005, the Company entered into an independent consulting agreement
with Summit Financial Partners, LLC (Summit"). Under the terms of the agreement,
Summit is to provide investor relations and similar services for a period of 12
months in exchange for issuance of 1,050,000 shares of Common Stock. In
connection with this agreement, the Company issued 200,000 shares of common
stock with the remaining 850,000 shares being issued by various shareholders of
the Company. In connection with this consulting agreement, the Company valued
all 1,050,000 common shares under the consulting agreement at $1.00 per shares
based on the recent selling price of the shares under a private placement.
Accordingly, the Company recorded deferred compensation of $1,050,000, which
will be amortized into consulting expense over the term of the contract. For the
six months ended June 30, 2005, the Company amortized $109,375 into stock-based
consulting expense.
On June 13, 2005, the Company entered into an independent consulting agreement
with two individuals (the "Consultants"). Under the terms of the agreement, the
Consultants will provide investor relations and similar services for a period of
21 months in exchange for issuance of 750,000 shares of Common Stock. In
connection with this consulting agreement, the Company valued the 750,000 common
shares under the consulting agreement at $1.00 per shares based on the recent
selling price of the shares. Accordingly, the Company recorded deferred
compensation of $750,000, which will be amortized into consulting expense over
the term of the contract. For the six months ended June 30, 2005, the Company
amortized $17,857 into stock-based consulting expense. As of June 30, 2005, the
shares had not been issued and are including in common stock issuable on the
accompanying balance sheet.
On June 17, 2005, the effective date of an employment agreement with the
Company's Chief Executive Officer, the Company agreed to issue 300,000 shares of
common stock. The Company valued the 300,000 common shares issued under the
employment agreement at $1.00 per shares based on the recent selling price of
the shares under a private placement. Accordingly, the Company recorded deferred
compensation of $300,000, which will be amortized into stock-based compensation
expense over the employment contract term of 36 months. For the six months ended
June 30, 2005, the Company amortized $4,167 into stock-based compensation
expense. As of June 30, 2005, the shares had not been issued and are included in
common stock issuable on the accompanying balance sheet.
On June 27, 2005, the Company issued 550,000 shares of common stock in
connection with the exercise of 550,000 common stock warrants for net proceeds
of $137,500.
On June 27, 2005, the effective date of an employment agreement with the
Company's Chief Operating Officer, the Company agreed to issue 80,000 shares of
common stock. The Company valued the 80,000 common shares issued under the
employment agreement at $1.00 per share based on the recent selling price of the
shares. Accordingly, the Company recorded deferred compensation of $80,000,
which will be amortized into stock-based compensation expense over the
employment contract term of 36 months. As of June 30, 2005, the shares had not
been issued and are included in common stock issuable on the accompanying
balance sheet.
-14-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 5 - SHAREHOLDERS' EQUITY (CONTINUED)
-------------------------------
COMMON STOCK (CONTINUED)
Pursuant to a Confidential Memorandum dated June 22, 2005 (the "PPM"), the
Company offered in a private placement (the "Offering") to accredited investors
up to $4,000,000 in Units for a purchase price of $100,000 per Unit. Each Unit
consists of 50,000 shares of the Company's common stock, par value $0.001 per
share (the "Common Stock") and a three-year warrant to purchase 25,000 shares of
Common Stock at $3.50 per share. On June 30, 2005, the Company sold 20 Units to
accredited investors for net proceeds of $1,767,218 and issued an aggregate of
1,048,515 shares of common stock and granted 524,257 warrants to purchase
524,257 shares of common stock at $3.50 per share.
STOCK OPTIONS
On June 16, 2005, pursuant to the Company's 2005 Non-Employee Directors Plan
(the "Directors Plan"), the Company granted an option to purchase 1,000,000
shares of common stock to a non-employee director. The option is exercisable six
months after the approval of the Directors' Plan by stockholders and expires on
June 16, 2015. The option is exercisable at $1.00 per share, which was the fair
market value of the common stock at the grant date based on the recent selling
price. Accordingly, under APB 25, no compensation expense was recognized.
The Company's Directors Plan was adopted on August 9, 2005, by its stockholders.
The Directors Plan provides for the grant of non-qualified stock options to
non-employee directors of the Company and its subsidiaries. 2,000,000 shares of
common stock have been reserved for issuance under the Directors Plan, provided
that awards to the Chairman of the Board are limited to 1,000,000 shares during
the life of the Plan. The Directors Plan provides that each non-employee
director who is newly-elected or appointed Chairman of the Board shall receive
an option to purchase 1,000,000 shares of common stock exercisable on the
six-month anniversary of the approval of the Directors Plan by the stockholders,
each newly elected or appointed non-employee director (other than the Chairman)
shall be granted an option to purchase 50,000 shares of common stock,
exercisable as to 50% of such shares on the date which is one year from the date
of grant and 50% on the date which is two years from the date of grant. In
addition, each non-employee director shall be granted an option to purchase
50,000 shares of common stock on the second anniversary of such director's
initial election or appointment, exercisable as to 50% on the date which is one
year from the date of grant and 50% on the date which is two years from the date
of grant. All such options shall be exercisable at the fair market value on the
date of grant.
On June 21, 2005, the Company's sole director adopted the 2005 Incentive Stock
Plan (the "Plan"). The purpose of the Plan is to encourage stock ownership by
the Company's officers, directors, key employees and consultants, and to give
such persons a greater personal interest in the success of the business and an
added incentive to continue to advance and contribute to the Company and to
attract new directors, officers, consultants, advisors and employees whose
services are considered valuable. The Plan provides for the grant of options and
the issuance of restricted shares for an aggregate of 3,300,000 shares of common
stock that have been reserved under the Plan. Both incentive and nonqualified
stock options may be granted under the Plan and the Plan terminates on June 21,
2015. As of June 30, 2005, 380,000 shares and options to purchase 2,019,000
shares have been granted under the Plan.
-15-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 5 - SHAREHOLDER' EQUITY (CONTINUED)
------------------------------
STOCK OPTIONS (CONTINUED)
The exercise price of options granted pursuant to this plan is determined by a
committee but may not be less than 100% of the fair market value on the day of
grant and the option term may not exceed 10 years. For holders of 10% or more of
the combined voting power of all classes of the Company's stock, options may not
be granted at less than 110% of the fair value of the common stock at the date
of grant and the option term may not exceed 5 years. The exercise prices of all
options granted by the Company through June 30, 2005 equal or exceeded the
market price at the dates of grant. No compensation expense has been recognized.
During June 2005, the Company granted options to purchase an aggregate of
2,019,000 shares of common stock to employees of the Company. The options are
exercisable at $3.85 per share, which exceeds the fair market value of the
common stock at the grant date. Accordingly, under APB 25, no compensation
expense was recognized. The options vest as to 25% of such shares on the date
six months following the date of grant and 25% on each of the first, second and
third anniversaries of the date of grant and expire on June 21, 2015 or earlier
due to employment termination.
A summary of the status of the Company's outstanding stock options as of June
30, 2005 and changes during the period ending on that date is as follows:
Weighted
Average
Exercise
Shares Price
------------ ------------
Outstanding at December 31, 2004 - $ 0.00
Granted 3,019,000 2.98
Exercised - (0.00)
Forfeited - (0.00)
------------ ------------
Outstanding at June 30, 2005 3,019,000 $ 2.98
============ ============
Options exercisable at end of period - $ -
============ ============
Weighted-average fair value of options
granted during the period $ 2.98
The following information applies to options outstanding at June 30, 2005:
Options Outstanding Options Exercisable
---------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life (Years) Price Shares Price
------------------------ ----------- ------------ ----------- ---------- ----------
$1.00 1,000,000 10.00 $ 1.00 - -
$3.85 2,019,000 10.00 $ 3.85 - -
-16-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 5 - SHAREHOLDER' EQUITY (CONTINUED)
COMMON STOCK WARRANTS
In April 2004, in connection with certain bridge loans, the Company granted
6,000,000 warrants to purchase 6,000,000 shares of common stock at $.25 per
shares. The warrants expire on April 1, 2015. Through June 30, 2005, 550,000 of
these warrants have been exercised.
In May 2005, in connection with a private placement, the Company granted 562,500
warrants to purchase 562,500 shares of common stock at $2.00 per share. The
warrants expire on May 16, 2008.
In June 2005, in connection with a private placement, the Company granted
250,000 warrants to purchase 250,000 shares of common stock at $2.00 per share.
The warrants expire on June 13, 2008.
On June 30, 2005, in connection with a private placement, the Company granted
524,257 warrants to purchase 524,257 shares of common stock at $3.50 per share.
The warrants expire on June 30, 2008.
A summary of the status of the Company's outstanding stock warrants granted as
of June 30, 2005 and changes during the period is as follows:
Weighted
Average
Exercise
Shares Price
-------------- ------------
Outstanding at December 31, 2004 - $ -
Granted 7,336,757 0.66
Exercised (550,000) (0.25)
Forfeited - -
-------------- ------------
Outstanding at June 30, 2005 6,786,757 $ 0.70
============== ============
Warrants exercisable at end of period 6,786,757 $ 0.70
============== ============
Weighted-average fair value of warrants
granted during the period $ 0.66
The following information applies to all warrants outstanding at June 30, 2005:
Warrants Outstanding Warrants Exercisable
---------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life (Years) Price Shares Price
------------------------ ----------- ------------ ----------- ------------ ----------
$0.25 5,450,000 9.75 $ 0.25 5,450,000 0.25
$2.00 812,500 2.85 $ 2.00 812,500 2.00
$3.50 524,257 3.00 $ 3.50 500,000 3.50
-17-
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 6 - COMMITMENTS AND CONTINGENCIES
-----------------------------
Employment Agreements
Effective June 17, 2005, the Company entered into an employment agreement with
its Chief Executive Officer for a 36-month period ending June 16, 2008, which
automatically renews for successive 24-month terms unless earlier terminated by
the Company or the employee. In addition to an annual salary of $200,000, the
agreement entitled the officer to receive an option to purchase 100,000 shares
of common stock of the Company at fair market value. This option was issued
under the Company's 2005 Incentive Stock Plan (see Note 5). Subject to the terms
of the 2005 Incentive Stock Plan, the option vests as to 25% of such shares on
the date six months following the date of grant and 25% on each of the first,
second and third anniversaries of the date of grant and expire on the ten-year
anniversary of grant or earlier due to employment termination. The agreement
also provides for an annual bonus at the discretion of the Board of Directors.
Effective June 17, 2005, the Company entered into an employment agreement with
its President for a 36-month period ending June 16, 2008, which automatically
renews for successive 24-month terms unless earlier terminated by the Company or
the employee. The Agreement provides for an initial base salary of $100,000 per
year, which shall be increased by at least $25,000, as the Board of Directors
may determine, on each anniversary of the effective date. In addition, the
agreement entitled the officer to receive an option to purchase 100,000 shares
of common stock of the Company at fair market value. This option was issued
under the Company's 2005 Incentive Stock Plan (see Note 5). Subject to the terms
of the 2005 Incentive Stock Plan, this option vests as to 25% of such shares on
the date six months following the date of grant and 25% on each of the first,
second and third anniversaries of the date of grant and expire on ten-year
anniversary of grant or earlier due to employment termination. The agreement
also provides an annual bonus at the discretion of the Board of Directors.
Effective June 27, 2005, the Company entered into an employment agreement with
its Chief Operating Officer for a 36-month period ending June 27, 2008, which
automatically renews for successive 24-month terms unless earlier terminated by
the Company or the employee. In addition to an annual salary of $180,000, the
agreement entitled the officer to receive an option to purchase 100,000 shares
of common stock of the Company at fair market value. These options were issued
under the Company's 2005 Incentive Stock Plan (see Note 5). This option vests as
to 25% of such shares on the date six months following the date of grant and 25%
on each of the first, second and third anniversaries of the date of grant and
expire on ten-year anniversary of grant or earlier due to employment
termination. The agreement also provide for an annual bonus at the discretion of
the Board of Directors.
NOTE 7 - SUBSEQUENT EVENT
----------------
On August 9, 2005, the Company entered into an asset purchase agreement (the
"Agreement") with theglobe.com, inc. ("Globe") and its wholly-owned subsidiary
SendTec, Inc. ("SendTec") for the purchase by the Company of all of the business
and substantially all of the assets of SendTec ("Asset Purchase"). Under the
terms of the Agreement, the Company will pay $37,500,000, subject to certain
adjustments and assume certain of the Seller's liabilities. In addition, the
Company will reserve approximately $15,000,000 of restricted common stock of the
Company for issuance upon the occurrence of certain future events. The closing
of the Asset Purchase is subject to several conditions including, approval by
Globe's stockholders, distribution of an information statement to Globe
stockholders, and entry into a redemption agreement by Globe and certain of
SendTec's management and employees for redemption of shares, options and
warrants. The Company has deposited in escrow $1,000,000 in connection with the
execution of the Agreement, subject to forfeiture in certain circumstances, as
described in the Agreement. The closing is also subject to certain ancillary
agreements, including agreements with certain current members of management of
SendTec to assume management positions with the Company. The Company intends to
finance the acquisition through issuance of new convertible debt or equity
securities, the final terms of which have not been determined. The Agreement
requires that the acquisition financing be held in escrow within 30 days of
execution of the Agreement.
Following the closing, it is contemplated that nearly all of SendTec's employees
will become employees of the Company.
-18-
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
2005 contains "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended. Generally, the words "believes",
"anticipates," "may," "will," "should," "expect," "intend," "estimate,"
"continue," and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements which include,
but are not limited to, statements concerning the Company's expectations
regarding its working capital requirements, financing requirements, business
prospects, and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends, and similar expressions concerning
matters that are not historical facts. Such statements are subject to certain
risks and uncertainties, including the matters set forth in this Quarterly
Report or other reports or documents the Company files with the Securities and
Exchange Commission from time to time, which could cause actual results or
outcomes to differ materially from those projected. Undue reliance should not be
placed on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to update these forward-looking
statements. In addition, the forward-looking statements in this Quarterly Report
on Form 10-QSB involve known and unknown risks, uncertainties and other factors
that could cause the actual results, performance or achievements of the Company
to differ materially from those expressed in or implied by the forward-looking
statements contained herein.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
OVERVIEW
We specialize in marketing third party offers for products and
services via email. We offer advertisers integrated online and offline marketing
programs including permission based email advertising, email database append
services, online surveys, ad serving networks and internet compiled direct mail
lists. Additionally, through our wholly-owned subsidiary, Friendsand, Inc., we
host an internet social networking community.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004
Net revenues for six months ended June 30, 2005 were $6,678,023 as
compared to net revenues of $3,842,193 for six months ended June 30, 2004, an
increase of $2,835,830 or approximately 74%. This increase reflects of our
increased marketing efforts and broadening of our customer base. We currently
employ 27 sales representatives who market and sell our products. This increase
reflects the growth in our online lead generation product revenues from
approximately $160,000 for the six months ended June 30, 2004 to approximately
$2.1 million for the six months ended June 30, 2005 and growth in our append and
data services products from approximately $1.7 million for the six months ended
June 30, 2004 to $2.4 million for the six months ended June 30, 2005.
Costs of revenues for six months ended June 30, 2005 were $733,252
as compared to net cost of revenues of $844,931 for six months ended June 30,
2004, a decrease of $111,679 or approximately 13%. Costs of revenues include
salaries and contract labor costs for our technology department, costs
associated with our internet broadcast bandwidth, and non-capitalized costs
associated with maintaining our databases and outsourcing data information from
outside vendors. For the six months ended June 30, 2005, technology salaries and
contract labor amounted to $269,649 as compared to $383,796 for the six months
ended June 30,2004, a decrease of $114,147 or 30%. This decrease reflects a
decrease in the number of technology employees from 12 employees to 7. For the
six months ended June 30, 2005, broadcast bandwidth expenses amounted to $91,215
as compared to $241,295 for the six months ended June 30, 2004, a decrease of
$150,080 or 62%. This decrease was attributable to the outsourcing of email
broadcasting to third party vendor which reduced the Company's internal
bandwidth requirements. For the six months ended June 30, 2005, we incurred
costs associated with the acquisition of data for our database of $372,388 as
compared to $219,840 for the six months ended June 30,2004, an increase of
$152,548 or 69%. The increase primarily attributable to the our outsourcing to
third party vendors of our email broadcast function.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)
Our cost of revenues were approximately 11% of net revenues for the
six months ended June 30, 2005 as compared to approximately 22 % for the
comparable six month period in fiscal 2004. This increase in our gross profit
margin was primarily attributable to increased revenues with a corresponding
decrease in costs as discussed above.
Total selling expenses for the six months ended June 30, 2005 were
$1,847,764, an increase of $405,289, or approximately 28%, from total selling
expenses for the six months ended June 30, 2004 of $1,442,475. This increase is
primarily attributable to:
o For the six months ended June 30, 2005, selling salaries and
commissions amounted to $1,545,486 as compared to $1,221,303 for
the six months ended June 30, 2004, an increase of $324,183, or
approximately 26.5%. The increase is primarily due to the
payment of commission on increased revenues offset by a
reduction in sales personnel from 47 employees to 27.
o For the six months ended June 30, 2005, advertising and trade
show expense amounted to $302,278 as compared to $221,172 for
the six months ended June 30, 2004, an increase of $81,106, or
approximately 36.7%. We continued to increase our marketing
efforts to increase our revenues.
Total general and administrative expenses for the six months ended
June 30, 2005 were $2,395,676, an increase of $1,332,433, or approximately 125%,
from total general and administrative expenses for the six months ended June 30,
2004 of $1,063,243. This increase is primarily attributable to:
o For the six months ended June 30, 2005, bad debt expense
amounted to $577,202 as compared to $0 for the six months ended
June 30, 2004, an increase of $577,202 or approximately 100%. We
have established an allowance for doubtful accounts based upon
factors pertaining to the credit risk of specific customers,
historical trends, and other information. Delinquent accounts
are written-off when it is determined that the amounts are
uncollectible. At June 30, 2005, the allowance for doubtful
accounts was $1,682,619. In the 2004 period, based on an
analysis of accounts receivable, no additional allowance was
recorded for the period.
o For the six months ended June 30, 2005, salaries expense
amounted to $344,323 as compared to $335,431 for the six months
ended June 30, 2004, an increase of $8,892 or approximately 3%.
The increase was attributable to hiring of our chief executive
officer and chief operating officer in June 2005. We expect our
salaries expense to increase in subsequent quarters due to these
new employees and new employees.
o For the six months ended June 30, 2005, depreciation and
amortization expense amounted to $348,547 as compared to
$195,789 for the six months ended June 30, 2004, an increase of
$152,758 or approximately 78%. For the six months ended June 30,
2005 and 2004, depreciation expense relating to our property and
equipment amounted to $91,741 and $127,518, respectively. For
the six months ended June 30, 2005 and 2004, amortization
expense relating to the continued acquisition of data for our
databases amounted to $256,806 and $68,271, respectively.
o For the six months ended June 30, 2005, professional fees
amounted to $256,353 as compared to $106,942 for the six months
ended June 30, 2004, an increase of $149,411 or approximately
140%. The increase was primarily attributable to an increase in
legal and accounting fees associated with our acquisitions and
SEC filings as well as the audit of our financials statements.
o For the six months ended June 30, 2005, stock-based compensation
and consulting expense amounted to $131,799 as compared to $0
for the six months ended June 30, 2004, an increase of $131,799
or 100%. The increase is a result of stock issuances to
employees, officers and consultants during the six months ended
June 30, 2005. There were no comparable issuances in the six
months ended June 30, 2004. Additionally, at June 30, 2005, we
have deferred compensation of $2,048,601 which will be amortized
into expense during fiscal 2005, 2005 and 2007.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)
o For the six months ended June 30, 2005, other general and
administrative expense amounted to $737,452 as compared to
$425,081 for the six months ended June 30, 2004, an increase of
$312,371 or 73%. The increase is summarized as follows:
2005 2004
----------- -------------
Rent $ 159,954 $ 117,812
Consulting fees 71,214 -
Payroll taxes 82,692 -
Insurance 81,699 67,140
Other 341,893 240,129
----------- -------------
Total $ 737,452 $ 425,081
=========== =============
The increase in rent expense was attributable to payments during the
six months ended June 30, 2005 for common area maintenance and
utilities that were not reflected as rent expense in the prior
period.
In 2005, we paid consulting fees amounting to $20,000 to a related
party (shareholder) for business management services rendered and to
other consultants for services related to our acquisition.
In 2005, we paid consulting fees amounting to $20,000 to related
parties (shareholders) for business management services rendered.
In 2005, we incurred payroll taxes related to our salaries. In 2004,
we leased our employees from a third party. The increase in
insurance is primarily related to an increase in health insurance
costs due the increase in the number of employees.
The increase in other general and administrative expense was
attributable to an overall increase in operations.
We reported income from operations of $1,701,331 for the six months
ended June 30, 2005 as compared to income from operations of
$491,544 for the six months ended June 30, 2004.
Interest expense for the six months ended June 30, 2005 was $6,449
as compared to $0 for the six months ended June 30, 2004, an
increase of $6,449 or 100%. This was primarily attributable to the
assumption of debt in connection with our acquisitions.
For the six months ended June 30, 2005, we recorded a provision for
income taxes of $644,055 as compared to $0 for the six months ended June 30,
2004. In 2004, the Company had made an election to have its income or loss taxed
directly to its members as a partnership for income tax purposes. Accordingly,
the pro rata income or loss will be included in the tax return of the members.
As a result, no income taxes have been recognized in the accompanying financial
statements for the 2004 period.
We reported net income of $1,050,827 for the six months ended June
30, 2005 as compared to net income of $491,544 for the six months ended June 30,
2004. This translated into the following net income per common share:
Three Months Ended Six Months Ended
2005 2004 2005 2004
---------- ----------- ----------- ------------
Net income per common share - basic $ 0.05 $ 0.06 $ 0.08 $ 0.04
=========== =========== =========== ===========
Net income per common share - diluted $ 0.04 $ 0.06 $ 0.06 $ 0.04
=========== =========== =========== ===========
Weighted average common shares outstanding - basic 13,469,852 12,001,000 12,739,483 12,001,000
=========== =========== =========== ===========
Weighted average common shares outstanding- diluted 17,934,012 12,001,000 17,036,254 12,001,000
=========== =========== =========== ===========
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
On April 20, 2005, we commenced a private offering of up to
$1,000,000 Units, each Unit consisted of 50,000 shares of our common stock with
warrants to purchase 25,000 shares of our common stock exercisable at $2.00 per
share. The private placement was originally to be for a maximum amount of
$1,000,000, but was subsequently increased to a maximum of $1,625,000. In May
and June 2005, we sold 1,625,000 shares of and granted 812,500 warrants to
purchase 812,500 shares of common stock at an exercise price of $2.00 per share
for net proceeds of $1,495,027.
Pursuant to a Confidential Memorandum dated June 22, 2005, (the
"PPM"), we offered in a private placement to accredited investors up to
$4,000,000 of Units for a purchase price of $100,000 per Unit. Each Unit
consists of 50,000 shares of the Company's common stock, par value $0.001 per
share (the "Common Stock") and a three-year warrant to purchase 25,000 shares of
Common Stock at $3.50 per share. As of June 30, 2005, we sold units to
accredited investors for net proceeds of $1,964,780 issuing 1,048,515 shares of
common stock and granting 524,257 warrants to purchase 524,257 shares of common
stock at $3.50 per share.
Net cash flows provided by operating activities for the six months
ended June 30, 2005 were $272,486 as compared to $152,627 for the six months
ended June 30, 2004. For the six months ended June 30, 2005, net cash provided
by operating activities was attributable to our net income of $1,050,827
(adjusted for add-back non-cash items such as depreciation and amortization of
$348,547 and stock-based compensation and consulting of $131,799), offset by an
increase in accounts receivable of $2,347,138 and customer deposits of $199,052.
We reported net cash flows used in investing activities of $909,247 for
the six months ended June 30, 2005 as compared to net cash used in investing
activities of $642,692 for the six months ended June 30, 2004, an increase of
$266,555. This increase is attributable to the use of cash of $150,000 in
connection with our acquisitions and an increase in acquisitions of capitalized
data costs.
Net cash flows provided by financing activities was $3,390,183 for the
six months ended June 30, 2005 as compared to net cash provided by financing
activities of $355,502 for the six months ended June 30, 2004. For the six
months ended June 30, 2005, we received net proceeds from the sale of common
stock of $3,459,807 and net proceeds from the exercise of warrants of $137,500
offset by net draws by members (pre-acquisition) of $207,124. For the six months
ended June 30, 2004, we received proceeds from contributions by members of
$1,030,001 offset by the repayment of notes payable of $674,499.
We reported a net increase in cash for the six months ended June 30,
2005 of $2,753,422 as compared to a net decrease in cash of $134,563 for the six
months ended June 30, 2004. At June 30, 2005 we had cash on hand of $2,907,801.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United States.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. These estimates and assumptions are affected by management's
applications of accounting policies. Our critical accounting policies include
revenue recognition, the useful life of our intangible assets, and accounting
for stock based compensation.
Revenue Recognition - We follow the guidance of the Securities and
Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In
general, we record revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to
the customer is fixed or determinable, and collectibility is reasonably assured.
The following policies reflect specific criteria for the various revenues
streams of the Company:
EMAIL APPEND SERVICES: The Company's email append solution allows
marketers to augment their existing customer database with the Company's
permission-based email data. When a match is confirmed, the customer's
email address is added to the client's file. Revenue is recognized upon
completion of the email append service and the delivery of the updated
customer database is delivered to the client.
ELECTRONIC CHANGE OF ADDRESS: The Company's electronic change of address
service enables clients to update their email databases. Revenue is
recognized upon delivery of the updated customer database is delivered to
the client.
LEAD GENERATION: The Company offers lead generation programs to assist a
variety of businesses with customer acquisition. The Company pre-screens
the leads through its online surveys to meet its clients' exact criteria.
Revenue is recognized upon delivery of a lead database to the client.
DIRECT MAIL AND POSTAL LIST ADVERTISEMENT: The Company compiles an
exclusive Internet responders' postal mailing list. This list is sourced
from online registration and individuals who have responded to the
Company's online campaigns. These consumers are responsive to offers and
purchase products and services through online and offline channels.
Revenue is recognized upon delivery of the respective list to the client.
ONLINE MARKET RESEARCH: The Company has developed a consumer survey. The
Company offers a variety of targeted leads generated from its ongoing
survey responses. The Company also offers marketers the opportunity to add
specific questions to the survey. The Company then sells the response
information to the marketer on a cost per response basis. If a marketer or
a market research company needs a full survey completed, the Company will
broadcast its client's survey to a designated responder list on a cost per
thousand basis. Revenue is recognized upon delivery of the respective
survey is delivered to the designated responder.
Intangible assets consist of a database of email addresses acquired during
normal operations and costs associated with the development of our various
websites. Costs to develop new email databases, which primarily represent direct
external costs, are capitalized and are amortized straight-line over the
expected lives of the databases. We review the carrying value of intangibles and
other long-lived assets for impairment at least annually or whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of long-lived assets is measured by comparison of
its carrying amount to the undiscounted cash flows that the asset or asset group
is expected to generate. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the property, if any, exceeds its fair market value.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES (CONTINUED)
Accounting for Stock Based Compensation - We account for stock based
compensation utilizing Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which encourages, but
does not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. We have chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the estimated fair market value of our stock
at the date of the grant over the amount an employee must pay to acquire the
stock. We have adopted the "disclosure only" alternative described in SFAS 123
and SFAS 148 (See Recent Accounting Pronouncements), which require pro forma
disclosures of net income and earnings per share as if the fair value method of
accounting had been applied. Because of this election, we continue to account
for our employee stock-based compensation plans under Accounting Principles
Board (APB) Opinion No. 25 and the related interpretations. We are required to
comply with SFAS No. 123 (revised 2004) starting on the first day of our fiscal
year 2006 . We are currently evaluating the effect that the adoption of SFAS No.
123 (revised 2004) will have on our consolidated operating results and financial
condition. No stock-based compensation cost is currently reflected in net income
for employee and director option grants as all options granted under the 2005
Incentive Stock Plan and the Non-Employee Directors Stock Plan had an exercise
price equal to the market value of the underlying common stock on the date of
grant.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Statement No. 123R,
"Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R").
FAS No. 123R requires companies to recognize in the statement of operations the
grant- date fair value of stock options and other equity-based compensation
issued to employees. FAS No. 123R is effective beginning in the Company's second
quarter of fiscal 2006. We are in process of evaluating the impact this
pronouncement may have on our financial statements.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges
of Non-monetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. We believe that the adoption of this
standard will have no material impact on our financial statements.
ITEM 3. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer
(collectively, the "Certifying Officers") are responsible for establishing and
maintaining disclosure controls and procedures for us. Based upon such officers'
evaluation of these controls and procedures as of a date as of the end of the
period covered by this Quarterly Report, and subject to the limitations noted
hereinafter, the Certifying Officers have concluded that our disclosure controls
and procedures are effective to ensure that information required to be disclosed
by us in this Quarterly Report is accumulated and communicated to management,
including our Certifying Officers as appropriate, to allow timely decisions
regarding required disclosure.
The Certifying Officers have also indicated that there were no
significant changes in our internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
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Our management, including each of the Certifying Officers, does not
expect that our disclosure controls or our internal controls will prevent all
error and fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. In addition, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a 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. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people or by
management override of the control. The design of any systems of controls also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of these inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 27, 2005, we issued 550,000 shares of common stock in
connection with the exercise of 550,000 common stock warrants for net
proceeds of $137,500.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER EVENTS
None
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ITEM 6. EXHIBITS
Exhibit No. Description
- ----------- -----------
2.1 Agreement of Merger and Plan of Reorganization among Chubasco
Resources Corp., Reland Acquisition, Inc. and Relationserve, Inc.
dated June 10, 2005 (incorporated herein by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K filed with the
Commission on June 16, 2005).
2.2 Certificate of Merger of Reland Acquisition, Inc. with and into
Relationserve, Inc. dated June 10, 2005 (incorporated herein by
reference to Exhibit 2.2 to the Company's Current Report on Form
8-K filed with the Commission on June 16, 2005)
3.1 Certificate of Amendment to Articles of Incorporation of Chubasco
Resources Corp. dated June 15, 2005 (incorporated herein by
reference to Exhibit 3.1 to the Company's Current Report on Form
8-K filed with the Commission on June 16, 2005)
3.2 Amended and Restated By-Laws of RelationServe Media, Inc.
(incorporated herein by reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K filed with the Commission on August 4,
2005)
4.1 Promissory Note by Relationserve, Inc. in favor of Stacy McCall
dated May 13, 2005 (incorporated herein by reference to Exhibit
2.7 to the Company's Current Report on Form 8-K filed with the
Commission on June 16, 2005)
4.2 Form of Warrant to purchase Common Stock of Relationserve, Inc.
(incorporated herein by reference to Exhibit 2.8 to the Company's
Current Report on Form 8-K filed with the Commission on June 16,
2005)
4.3 Form of Subscription Agreement (incorporated herein by reference
to Exhibit 4.1 to the Company's Current Report on Form 8-K filed
with the Commission on June 30, 2005)
10.1 Asset Purchase Agreement by and among Relationserve Access, Inc.,
Omni Point Marketing, LLC, Cobalt Holdings, LLC and McCall and
Estes Advertising, Inc. dated May 12, 2005 (incorporated herein
by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K filed with the Commission on June 16, 2005)
10.2 Agreement and Plan of Merger between Friends Acquisition, Inc.
and Friendsand LLC dated May 13, 2005 (incorporated herein by
reference to Exhibit 2.2 to the Company's Current Report on Form
8-K filed with the Commission on June 16, 2005)
10.3 Note Purchase Agreement by and between Relationserve, Inc., JH
Associates, Inc. and GRQ Consultants, Inc. dated April 1, 2005
(incorporated herein by reference to Exhibit 2.3 to the Company's
Current Report on Form 8-K filed with the Commission on June 16,
2005)
10.4 Independent Consulting Agreement by and between Relationserve,
Inc. and Summit Financial Partners, LLC. dated May 24, 2005
(incorporated herein by reference to Exhibit 2.4 to the Company's
Current Report on Form 8-K filed with the Commission on June 16,
2005)
10.5 Agreement between RelationServe Media, Inc. and Warren Musser,
dated June 23, 2005 (incorporated herein by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K filed with the
Commission on June 27, 2005)
10.6 Agreement between RelationServe Media, Inc. and Mandee Heller
Adler, dated June 24, 2005 (incorporated herein by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K filed
with the Commission on June 27, 2005)
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10.7 Form of Registration Rights Agreement*
10.8 RelationServe Media, Inc. 2005 Incentive Stock Plan (incorporated
herein by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed with the Commission on July 18, 2005)
10.9 Employment Agreement between RelationServe Media, Inc. and Mandee
Heller Adler, dated July 13, 2005 (incorporated herein by
reference to Exhibit 10.2 to the Company's Current Report on Form
8-K filed with the Commission on July 18, 2005)
10.10 Employment Agreement between RelationServe Media, Inc. and
Danielle Karp, dated July 13, 2005 (incorporated herein by
reference to Exhibit 10.3 to the Company's Current Report on Form
8-K filed with the Commission on July 18, 2005)
10.11 Employment Agreement between RelationServe Media, Inc. and Ohad
Jehassi, dated July 13, 2005 (incorporated herein by reference to
Exhibit 10.4 to the Company's Current Report on Form 8-K filed
with the Commission on July 18, 2005)
10.12 Consulting Agreement between RelationServe, Inc. and Stronghurst,
LLC, dated June 13, 2005 (incorporated herein by reference to
Exhibit 10.5 to the Company's Current Report on Form 8-K filed
with the Commission on July 18, 2005)
10.13 2005 Non-Employee Directors Plan (incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on Form
8-K filed with the Commission on August 12, 2005)
10.14 Form of Option Certificate *
10.15 Form of Restricted Stock Agreement *
31.1 Section 302 Certification of the Principal Executive Officer *
31.2 Section 302 Certification of the Principal Financial Officer *
32.1 Section 906 Certification of Principal Executive Officer *
32.2 Section 906 Certification of Principal Financial and Accounting
Officer *
* Filed herewith
-27-
SIGNATURES
In Accorance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Relationserve Media, Inc.
By: /s/ Mandee Heller Adler
---------------------------
August 15, 2005 Mandee Heller Adler
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Adam Wasserman
---------------------------
August 15, 2005 Adam Wasserman
Principal Financial and
Accounting Officer
-28-
