SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2009
OR
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION FROM _______ TO ________.
COMMISSION FILE NUMBER 333-139991
GEN2MEDIA CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Nevada | 26-1358844 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
7658 Municipal Dr., Orlando, FL | 32819 | |
(Address of principal executive offices) | (Zip code) |
Issuer's telephone number: (321) 293-3360
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 x No ¨
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of February 10, 2010, there were 64,042,428 outstanding shares of the Registrant's Common Stock, $.001 par value.
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GEN2MEDIA CORPORATION
DECEMBER 31, 2009 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION | Page | |||
Item 1. Financial Statements | 3 | |||
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition | 14 | |||
Item 4T. Controls and Procedures | 16 | |||
PART II - OTHER INFORMATION | ||||
Item 1. Legal Proceedings | 18 | |||
Item 1A. Risk Factors | 18 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 18 | |||
Item 3. Defaults Upon Senior Securities | 18 | |||
Item 4. Submission of Matters to a Vote of Security Holders | 18 | |||
Item 5. Other Information | 18 | |||
Item 6. Exhibits | 18 | |||
SIGNATURES | 19 |
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GEN2MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2009 (Unaudited) | June 30, 2009 | |||||||
Assets | ||||||||
Current: | ||||||||
Cash and cash equivalents | $ | 3,795 | $ | 401 | ||||
Accounts Receivable | 152,960 | 58,576 | ||||||
Other Current Assets | 7,315 | 8,007 | ||||||
Deferred financing costs – current portion | 61,878 | 61,878 | ||||||
Total Current Assets | 225,948 | 128,862 | ||||||
Furniture and Equipment: | ||||||||
Computer equipment | 86,930 | 84,432 | ||||||
Office furniture and fixtures | 34,500 | 26,610 | ||||||
121,430 | 111,042 | |||||||
Less Accumulated depreciation | (46,830 | ) | (36,372 | ) | ||||
Net Furniture and Equipment | 74,600 | 74,670 | ||||||
Intangibles, Net: | ||||||||
Customer list | 39,936 | 54,250 | ||||||
Website platform | 67,718 | 135,434 | ||||||
Patent Pending | 8,754 | 8,754 | ||||||
Intangible Assets, net of accumulated amortization | 116,408 | 198,438 | ||||||
Other Assets – Deposits | 16,202 | 16,202 | ||||||
Deferred financing costs, non-current portion | 27,722 | 27,582 | ||||||
Total Assets | $ | 460,880 | $ | 445,754 | ||||
Liabilities and Stockholders' Deficit | ||||||||
Current Liabilities: | �� | |||||||
Accounts Payable | $ | 323,842 | $ | 406,127 | ||||
Accrued Salaries | 114,935 | 234,613 | ||||||
Deferred revenue | 1,720 | 28,600 | ||||||
Convertible Secured Promissory Notes | 259,986 | 257,521 | ||||||
Promissory Notes and Notes payable-current portion | 362,506 | 294,845 | ||||||
Total Current Liabilities | 1,062,989 | 1,221,706 | ||||||
Convertible Secured Promissory Notes – noncurrent portion | 300,000 | - | ||||||
Promissory Notes – non-current portion | 482,000 | 109,678 | ||||||
Total Liabilities | 1,844,989 | 1,331,384 | ||||||
Stockholders' (Deficit) Equity: | ||||||||
Common stock, $.001 par value; 100,000,000 shares authorized; | ||||||||
63,792,428 and 58,175,191 issued and outstanding at December 31 and June 30, 2009, respectively | 63,792 | 58,175 | ||||||
Additional paid in capital | 5,654,501 | 4,395,036 | ||||||
Accumulated Deficit | (7,370,573 | ) | (5,627,971 | ) | ||||
Total Stockholders’ Deficit of Gen2Media Corporation | (1,652,280 | ) | (1,174,760 | ) | ||||
Noncontrolling Interest | 268,171 | 289,130 | ||||||
Total Stockholders’ Deficit | (1,384,109 | ) | (885,630 | ) | ||||
Total Liabilities and Stockholders’ Deficit | $ | 460,880 | $ | 445,754 | ||||
See accompanying notes to consolidated financial statements.
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GEN2MEDIA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Quarter Ended | Quarter Ended | 6 Months Ended | 6 Months Ended | |||||||||||||
12/31/09 | 12/31/08 | 12/31/09 | 12/31/08 | |||||||||||||
REVENUES | $ | 246,973 | $ | 383,738 | $ | 630,763 | $ | 897,873 | ||||||||
Cost of Sales | (43,237 | ) | (283,071 | ) | (184,247 | ) | (384,182 | ) | ||||||||
Operating Margin | 203,736 | 100,667 | 446,516 | 513,691 | ||||||||||||
Operating Expenses | ||||||||||||||||
Selling, General and Administrative | 487,209 | 500,742 | 996,020 | 897,198 | ||||||||||||
Depreciation and Amortization | 47,403 | 45,788 | 92,489 | 89,209 | ||||||||||||
Stock based compensation | 237,262 | 377 | 675,716 | 482,606 | ||||||||||||
Total expenses | 771,874 | 546,907 | 1,764,225 | 1,469,013 | ||||||||||||
Loss from Operations | (568,138 | ) | (446,240 | ) | (1,317,709 | ) | (955,322 | ) | ||||||||
Interest expense | (224,694 | ) | (16,649 | ) | (445,852 | ) | (26,275 | ) | ||||||||
NET LOSS | (792,832 | ) | (462,889 | ) | (1,763,561 | ) | (981,597 | ) | ||||||||
Net Loss attributable to Noncontrolling Interest | 1,856 | 8,135 | 20,959 | 11,701 | ||||||||||||
NET LOSS TO COMMON SHAREHOLDERS OF GEN2MEDIA CORPORATION | $ | (790,976 | ) | $ | (454,754 | ) | $ | (1,742,602 | ) | $ | (969,896 | ) | ||||
BASIC AND DILUTED NET LOSS PER COMMON SHARE | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.02 | ) | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING | 61,334,881 | 55,182,451 | 59,614,117 | 49,142,501 |
See accompanying notes to consolidated financial statements.
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GEN2MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT/EQUITY
(UNAUDITED)
Class A | Additional | |||||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Noncontrolling | |||||||||||||||||||||
Shares | Amount | Capital | Deficit | Interest | Total | |||||||||||||||||||
Balance at June 30, 2009 | 58,175,191 | $ | 58,175 | $ | 4,395,036 | $ | (5,627,971 | ) | $ | 289,130 | $ | (885,630 | ) | |||||||||||
Stock based compensation cost for Employees | 2,168,861 | 2,169 | 757,698 | - | - | 759,867 | ||||||||||||||||||
Common stock issued for professional services | 419,338 | 419 | 212,899 | - | - | 213,318 | ||||||||||||||||||
Warrants issued for services | - | - | 142,754 | - | - | 142,754 | ||||||||||||||||||
Net loss attributable to noncontrolling interest | - | - | - | - | (20,959 | ) | (20,959 | ) | ||||||||||||||||
Common stock issued for Options exercised | 3,029,038 | 3,029 | 146,114 | - | - | 149,143 | ||||||||||||||||||
Net loss | - | - | - | (1,742,602 | ) | - | (1,742,602 | ) | ||||||||||||||||
Balance at September 30, 2009 | 63,792,428 | $ | 63,792 | $ | 5,654,501 | $ | (7,370,573 | ) | $ | 268,171 | $ | (1,384,109 | ) |
See accompanying notes to consolidated financial statements.
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GEN2MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
6 Months Ended | 6 Months Ended | |||||||
12/31/09 | 12/31/08 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss | $ | (1,742,602 | ) | $ | (969,896 | ) | ||
Adjustments to reconcile net loss to net cash used | ||||||||
by operating activities: | ||||||||
Depreciation | 10,459 | 9,094 | ||||||
Amortization | 82,030 | 80,116 | ||||||
Amortization of deferred financing costs | 62,779 | - | ||||||
Accretion of interest expense | 302,465 | 7,110 | ||||||
Accretion of Accrued Salaries | 13,728 | - | ||||||
Common stock and warrants issued for services to | ||||||||
Nonemployees | 325,153 | - | ||||||
Stock-based compensation | 675,716 | 482,606 | ||||||
Noncontrolling interest in loss of subsidiary | (20,959 | ) | (11,701 | ) | ||||
Net changes in: | ||||||||
Due to related parties | - | 6,631 | ||||||
Other current assets | 692 | (5,928) | ||||||
Deposits | - | (13,652 | ) | |||||
Accrued Salaries | 6,939 | 40,464 | ||||||
Accounts receivable | (94,384) | (64,710 | ) | |||||
Accounts payable and accrued expenses | (67,285) | 107,653 | ||||||
Deferred revenue | (26,880) | - | ||||||
Net Cash Used By Operating Activities | (472,149 | ) | (332,213 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Purchase of furniture and equipment | (10,389 | ) | (28,107 | ) | ||||
Net Cash Used By Investing Activities | (10,389 | ) | (28,107 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from common stock issuance | 92,949 | 211,500 | ||||||
Proceeds from issuance of promissory notes and convertible secured promissory notes | 470,000 | 195,000 | ||||||
Incurrence of deferred financing costs | (47,000 | ) | - | |||||
Repayments of notes payable | (30,017 | ) | (7,051) | |||||
Net Cash Provided By Financing Activities | 485,932 | 399,449 | ||||||
Net Increase in Cash and Cash Equivalents | 3,394 | 39,129 | ||||||
Cash and Cash Equivalents, Beginning | 401 | 3,079 | ||||||
Cash and Cash Equivalents, Ending | $ | 3,795 | $ | 42,208 | ||||
Supplemental cash flow information: | ||||||||
Non-cash Operating activities | ||||||||
Issuance of common stock in exchange for forgiveness of accounts payable | 15,000 | - | ||||||
Issuance of common stock in exchange for forgiveness of accrued payroll | 140,345 | - | ||||||
Non-cash financing activities: | ||||||||
Deferred financing costs incurred | 15,919 | - | ||||||
Non-cash investing and financing activities: | ||||||||
Debt assumed in connection with purchase accounting related to Media Evolutions | - | 88,836 | ||||||
Intangible assets acquired in connection with the purchase accounting related to Media Evolutions | - | 79,870 | ||||||
Issuance of common stock in exchange for forgiveness of employee and related party indebtedness. | 140,345 | 337,401 | ||||||
Other disclosures: | ||||||||
Interest Paid | 58,721 | 3,403 |
See accompanying notes to consolidated financial statements.
6
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Gen2Media Corporation (“Gen2” or the “Company”) and its consolidated subsidiaries, E360, LLC (E360) and Media Evolutions (MEV) is a full service digital media company. Gen2 engages audiences on digital platforms through provision of media content either directly or through collaboration with channel partners. Through a combination of original and acquired programming and other entertainment content, Gen2 is focused on providing content that appeals to key demographics attractive to advertisers and distributors on radio, printed news, cable television, satellite, mobile and digital media platforms, and consumer products. Gen2 supports its ability to create original programming through its professional production studio and its proprietary digital playback system. Gen2’s production capabilities include in-house production of content, creation and support of video imagery for top line names in the entertainment business, and support of video production for traditional media. Gen2 also provides its software under licensing arrangements whereby Gen2 receives a monthly subscription fee for use of its software.
Basis of Presentation
Unaudited Interim Financial Statements
The accompanying unaudited consolidated quarterly financial statements have been prepared on a basis consistent with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and pursuant to the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results expected for the full year or any future period. These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2009, as filed with the SEC on September 28, 2009 (the “2009 Annual Report”).
Use of Estimates
Preparing financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates presented and the reported amounts of revenues and expenses during the reporting periods presented. Significant estimates inherent in the preparation of the accompanying consolidated financial statements include estimates of revenues and related receivables expected to be collected, valuations of intangible assets and stock-based compensation. Estimates are based on past experience and other considerations reasonable under the circumstances. Actual results may differ from these estimates.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts and transactions of Gen2 and its subsidiary E360 as well as MEV. Gen2 has a 95% interest in E360, which was acquired by Gen2 in a stock exchange. MEV is controlled by Gen2 pursuant to a management agreement between the two companies effective July 14, 2008. The consolidation of MEV was treated as a purchase in the quarter ended September 30, 2008. All significant intercompany accounts and transactions are eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior year balances to conform to the current year presentation.
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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is generated from advertising on Gen2Media’s network of websites, which includes fees and revenue sharing associated with the use of our digital media player by our channel partners, the development of micro sites for clients, production and distribution of original content, and services rendered in connection with the production of video content. Revenue is recognized when services are rendered in accordance with the terms of the agreement provided that the collection of the associated receivable is reasonably assured and there are no remaining significant obligations.
Website Platform
Website platform includes capitalized costs incurred during the application and infrastructure development stage in accordance with EITF 00-02. Development of the website was completed in July 2007 and has been placed in service. Website platform has an estimated useful life of 3 years and is being amortized over 36 months on a straight-time basis.
Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairment charges were incurred during the period ended September 30, 2009 and 2008.
Minority Interest
Minority interest represents the portion of E360 not owned by Gen2.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) requires companies to measure the cost of employee service received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.
Income Taxes
The Company follows the provisions of the Interpretations No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has not recognized a liability as a result of the implementation of FIN 48. A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there is no unrecognized benefit as of the date of adoption. The Company has not recognized interest expense or penalties as a result of the implementation of FIN 48. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax expense as the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Deferred income taxes are recognized for the tax consequences of temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities in accordance with SFAS No. 109, "Accounting for Income Taxes." Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to realized. Income tax expense is the tax payable or refundable for the period plus or minus change during the period in deferred tax assets and liabilities.
8
Earnings per Common share
Basic earnings per common share excludes potentially dilutive securities and is computed by dividing net earnings(loss) by the weighted average number of common shares outstanding during the period. Fully diluted earnings per share are not displayed as the impact of including those shares would be anti-dilutive. For the quarters and six months ended December 31, 2009 and 2008, the Company had 6,936,048 and 9,135,427, and 8,300,001 and 8,036,001 potentially dilutive common shares, respectively, which were not included in the calculation of diluted loss per share.
Financial Instruments
In July 2008, the Company adopted SFAS No. 157 "Fair Value Measurements" ("SFAS No. 157") to value its financial assets and liabilities. The adoption of SFAS No. 157 did not have a significant impact on the Company's results of operations, financial positions or cash flows. SFAS No. 157 defines fair value, establishes a framework for measurings fair value as the exchange price that would be paid by an external party for an asset or liability (exit price). SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when fair value is calculated. Three levels of inputs may be used to measure fair value:
▪ | Level 1 - Active market provides quoted prices for identical assets or liabilities; | |
▪ | Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable with market data; and | |
▪ | Level 3 - Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumption that market participants would use in pricing. |
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2009. The Company uses the market approach to measure fair value for its Level 1 financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial statements which include cash, trade receivables, borrowings, related party notes payable, accounts payable and accrued liabilities are valued using Level 1 inputs and are immediately available without market risk to principal. Fair values were assumed to approximate carrying values for these financial instruments since they are short term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The Company does not have other financial assets that would be characterized as Level 2 or Level 3 assets.
SFAS No. 157 is effective for non-financial assets and liabilities for the Company's fiscal year beginning July 1, 2009. The Company is currently assessing the impact of this pronouncement as it relates to non-financial assets and liabilities.
NOTE 3. RECENT ACCOUNTING STANDARDS
On June 12, 2009 the FASB issued two statements that amended the guidance for off-balance-sheet accounting of financial instruments: SFAS No. 166, Accounting for Transfers of Financial Assets, and SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 166 revises SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and will require entities to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk to the assets, the FASB said. The statement eliminates the concept of a qualifying special-purpose entity, changes the requirements for the derecognizing of financial assets, and calls upon sellers of the assets to make additional disclosures about them.
SFAS No. 167 amends FASB Interpretation (FIN) No. 46(R), Consolidation of Variable Interest Entities, by altering how a company determines when an entity that is insufficiently capitalized or not controlled through voting should be consolidated, the FASB said. A company has to determine whether it should provide consolidated reporting of an entity based upon the entity's purpose and design and the parent company's ability to direct the entity's actions. SFAS Nos. 166 and 167 will be effective at the start of the first fiscal year beginning after November 15, 2009. We do not expect SFAS Nos. 166 or 167 to have a material impact on the Company’s financial position and results of operations.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“SFAS No. 168”). SFAS No. 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles and establishes the FASB Accounting Standards Codification™ (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for interim and annual reporting periods ending after September 15, 2009. Therefore, beginning with the Company’s quarter ending September 30, 2009, all references made by it to GAAP in its financial statements will use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, does not have a material impact on the Company’s financial position and results of operations.
9
In May 2009, the FASB issued SFAS 165, Subsequent Events. SFAS 165 should not result in significant changes in the subsequent events that an entity reports. Rather, SFAS 165 introduces the concept of financial statements being available to be issued. Financial statements are considered available to be issued when they are complete in a form and format that complies with generally accepted accounting principles (GAAP) and all approvals necessary for issuance have been obtained. We do not expect the adoption of SFAS 165 to have a material impact on our financial position, results of operations, or financial disclosure.
The recent accounting standards disclosed should be read in conjunction with the disclosures made in the Company's Annual Report on form 10-K for the fiscal year ended June 30, 2009.
NOTE 4. ACQUISITION
On July 14, 2008, Gen2 entered in a management agreement with MEV. MEV provides production services to some of the largest names in the entertainment business. The terms of the agreement require Gen2 to manage all the business and financial operations of MEV. In exchange for these services Gen2 shall receive all revenues, profits and cash flows generated by MEV and shall pay all bills and obligations of MEV. Based on these terms, Gen 2 has control of MEV and therefore this transaction was treated as a purchase in the quarter ended September 30, 2008.
The acquisition has been accounted for in accordance with SFAS No. 141 "Business Combinations" and accordingly, the consolidated statements of operations include the results of MEV since the date of acquisition, July 14, 2008. The excess of the purchase price over the fair value of acquired assets and liabilities assumed is allocated to an intangible asset related to MEV's customer lists.
The statement of operations includes revenues and earnings incurred after the date of acquisition, July 14, 2008. On an unaudited proforma basis, had the acquisition occurred on July 1, 2008, the results for the periods presented would have been identical to those presented in the Consolidated Financial Statements, as there were no transactions during the period from July 1, 2008 to the date of acquisition, July 14, 2008.
There was no cash consideration paid for this acquisition. The purchase price of $79,870 was determined by taking the difference between MEV's assets of $8,966 and its debt of $88,836 as of the date of the acquisition.
NOTE 5. RELATED PARTY TRANSACTIONS
During 2008, the Company issued notes payable to three of its shareholders, to fund operations. $75,513 was outstanding under these notes payable as of June 30, 2008. This loan required interest only payments, bore interest at 12%, was secured by all the assets of the Company, and personally guaranteed by the three officers of the Company. During August 2008 these notes were satisfied through issuances of shares for $50,000 of the obligation and exercising of options for $25,000 for an aggregate of 1,000,000 shares.
As of June 30, 2008, there was an additional $411,972 in non-interest bearing amounts due to related companies and certain of its officers that related to working capital needs. During August 2008, 2,411,170 shares were issued in satisfaction of $241,117 of this obligation.
During July, 2008, the company entered into an agreement with MEV to provide management services. In exchange for management of the business and financial operations, Gen2 has the right to all revenue and profit and is obligated to pay all financial obligations of MEV. MEV was owned and operated by certain directors and officers of Gen2.
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NOTE 6. INDEBTEDNESS
Convertible Secured Promissory Notes
During the year ended June 30, 2009, the Company issued debt instruments in the form of promissory notes (the “Notes”). The Notes carry interest at 12% and are due and payable in full at the earlier of either minimum equity financing of $1 million or one year. Interest can be received monthly or accrued and paid at maturity at the option of the holder. The Notes are secured by all assets of the Company.
The holders of the Notes have the option, but not the obligation, to convert the outstanding principal into common stock at any time under any of the following terms: A conversion price of $.25 per share; a conversion price of 30% less than price per share obtained in the next round of financing completed by the Company; a conversion price of 30% less than the price per share paid in the event of a sale of the company, or $0.13 per share in the event the Company does not raise a minimum of $1 million in additional financing.
The notes contain warrants to purchase shares valued at 20% of the face value of the note assuming a stock value of $0.25 per share and an exercise price of $0.001 per share. If the value of common stock at the time of conversion is less than $0.25, the payee shall receive additional warrants to bring the total value of warrants issued under this program to be equal to 20% of the face value of the Note. The Notes also included a beneficial conversion feature as the obligations can convert into equity for an exercise price less than the share price at the time of issuance at the option of the holder. Based on these features, the proceeds from debt were split between the value of the warrants and the debt. Further, the debt obligation must have value assigned to the beneficial conversion feature. These valuations cause the proceeds from these notes to be allocated to additional paid capital with $248,953 assigned to the value of the warrants and the remaining $351,047 assigned to the beneficial conversion feature. The face value of the debt will be accreted to interest expense over the 1-year term of the debt. During the quarter and six months ended December 31, 2009, $151,233 and $302,465, respectively, was accreted to interest.
Subsequent to December 31, 2009, the holders of these notes have agreed to extend the terms of maturity. The Company has provided additional consideration to the Note holders for extending the maturity dates. The additional consideration provided was either an increase in the interest rate being paid to 13% or additional shares of common stock of 200 shares for every $1,000 invested. The terms of the extensions extended the maturity dates to various dates between August 1, 2010 and June 30, 2011.
Promissory Notes
During the year ended June 30, 2009 and the six months ended December 31, 2009, the Company issued debt instruments in the form of promissory notes with a face value of $801,500 (the “ Promissory Notes”) and bear interest at 12%. These Promissory Notes were issued in two traunches. Traunch I has a face value of $231,500 and was originally due and payable one year from issuance. Traunch I was issued during the fourth quarter of the year ended June 30, 2009, and was originally due during the quarter ending June 30, 2010. Traunch II has a face value of $570,000 and was originally due and payable on December 31, 2010. Interest is paid monthly. Subsequent to December 31, 2009, $477,000 of these Notes’ maturity dates were extended in exchange for additional interest increasing the rate of interest paid to 13%. The maturity dates were extended through March 31 or June 30, 2011.
Notes Payable
In connection with the management agreement entered into with MEV, Gen2 became obligated for the repayment of certain notes payable currently outstanding. These notes originally consisted of a term loan and a line of credit. The notes are secured by a personal guarantee from Richard Brock, Ian McDaniel and Mark Argenti. The term loan originated on September 20, 2005 with a face value of $100,000 and requires monthly payments of principal and interest over a five year period maturing on September 20, 2010 and bears interest at 6.75%. On June 30, 2009, MEV agreed to convert the outstanding balance on the line of credit to a term loan and repay it over a 15 month period maturing on September 20, 2010 with an interest rate of 6.5%. There was $43,006 outstanding at December 31, 2009 on these Notes.
Schedule of Maturities
Due within 1 year | Due years 2-5 | Unrecognized interest expense | Balance | |||||||||||||
Convertible Notes | $ | 295,000 | $ | 305,000 | $ | (40,014 | ) | $ | 559,986 | |||||||
Promissory Notes | 324,500 | 477,000 | 801,500 | |||||||||||||
Notes Payable | 43,006 | - | - | 43,006 | ||||||||||||
Total | $ | 662,506 | $ | 782,000 | $ | (40,014 | ) | $ | 1,404,492 |
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NOTE 7. CAPITAL STOCK
The Company’s authorized capital stock consists of 100,000,000 shares of Class A common with a par value of $0.001. 63,792,428 shares were outstanding as of December 31, 2009.
The Company is a reporting public company. The Company filed a form 15c2-11 with FINRA and requested permission to trade on the OTC Bulletin Board. The Company’s stock began trading on October 3, 2008.
NOTE 8. STOCK BASED COMPENSATION
In November, 2009, the Board of Directors of the Company approved the Gen2Media Corporation 2009 Non-Qualified Stock Option Plan. The Plan permits the issuance of Stock Options to employees, officers and independent contractors of Gen2Media with flexibility provided to the vesting period and exercise period at the discretion of the board. Vesting periods range from fully vested at the time of the award to 3 year vesting periods. Exercise periods range from 5 years to infinite lives. In addition to Options issued under the Plan, the Company has issued Stock Options and warrants outside of the Plan to its Officers and certain professional service providers. Vesting and Exercise periods are similar for both types of Options and warrants issued.
During the quarter and six months ended December 31, 2009, the Company issued options and warrants for 2,046,325 and 4,096,325 shares, respectively of common stock, principally in connection with the recruitment and retention of directors, officers, and employees. Additionally, during the quarter and six months ended December 31, 2008, the Company issued options and warrants for 0 and 4,300,000 shares, respectively of common stock, principally in connection with the recruitment of directors and officers. During the six months ended, December 31, 2008 the Company accelerated the vesting of options for 5,000,000 shares previously issued to certain advisors. These options fully vested during the period in exchange for an agreement to exercise said options.
Based on these activities compensation cost of $237,262 and $675,716 was recognized in the quarter and six months ended December 31, 2009, respectively, and $377 and $482,606 was recognized in the quarter and six months ended December 31, 2008, respectively. Additionally, Common Stock and Warrants issued to nonemployees for services generated cost of $167,173 and $340,153 in the quarter and six months ended December 31, 2009, respectively and $0 in the same periods of the prior year. Unrecognized compensation cost related to unvested stock options and warrants at December 31, 2009 was $434,688 and are expected to be recognized over a weighted average period of 30 months.
Number of Shares Outstanding Under Options and Warrants | Weighted Average Exercise Price | |||||||
Outstanding, June 30, 2009 | 6,279,039 | $ | 0.14 | |||||
Granted | 4,096,325 | 0.30 | ||||||
Exercised | (3,029,038) | 0.05 | ||||||
Forfeited or expired | (410,278) | 0.58 | ||||||
Outstanding, December 31, 2009 | 6,936,048 | $ | 0.24 | |||||
Exercisable, December 31, 2009 | 2,974,167 | $ | 0.17 |
A summary of the Company’s non-vested stock options is as follows:
Number of shares | Weighted-Average Grant-Date Fair Value | |||||||
Non-vested balance, June 30, 2009 | 568,603 | $ | 0.56 | |||||
Granted | 4,096,325 | 0.16 | ||||||
Vested | (1,280,482 | ) | 0.21 | |||||
Forfeited/Expired | (410,279 | ) | 0.57 | |||||
Non-vested balance, December 31, 2009 | 2,974,167 | $ | 0.17 |
The total intrinsic value of options exercised during the six months ended December 31, 2009 and 2008 and was $315,020 and $0, respectively. The aggregate intrinsic value of the outstanding options at December 31, 2009 was $0 as fair value was less than the exercise price on options outstanding.
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NOTE 9. GOING CONCERN
The company became operational during the year ended June 30, 2009. Through December 31, 2009, the Company has accumulated losses of $7,370,573. The Company expects to generate revenues from corporate clients and partners in the way of advertising revenue, through the delivery of the client’s content, platform and technology via the internet as well as for its production services and software as a service. The Company will either receive a fee for those services, or will share in the revenue generated from the clients and partners through use of its technology.
The Company faces all the risks common to companies in their early stages of operations including under capitalization and uncertainty of funding sources, high initial expenditure levels, uncertain revenue streams, and difficulties in managing growth. In view of these conditions, the ability of the Company to continue as a going concern is in substantial doubt and dependent upon achieving a profitable level of operations and on the ability of the Company to obtain necessary financing to fund ongoing operations. The Company’s financial statements do not reflect any adjustments that might result from the outcome of this uncertainty. The future of the Company hereafter will depend in large part on the Company’s ability to monetize its investment in its technology and services, and successfully raise capital from external sources to pay for planned expenditures. The Company continues to seek other sources of financing in order to support existing operations and expand the range and scope of its business. However, there are no assurances that any such financing can be obtained on acceptable terms, if at all.
NOTE 10. INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes resulting from temporary differences. Such temporary differences result from differences in the carrying value of assets and liabilities for tax and financial reporting purposes. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The components of deferred tax assets are as follows:
12/31/09 | 6/30/09 | |||||||
Accumulated Net loss | $ | 7,370,573 | $ | 5,577,222 | ||||
Valuation allowance | (7,370,573 | ) | (5,577,222 | ) | ||||
Net deferred tax assets | $ | - | $ | - |
NOTE 11. SUBSEQUENT EVENTS
Subsequent to December 31, 2009, the Company extended the terms of certain indebtedness. The terms of the indebtedness called for repayment of or conversion to Common Stock under various maturity dates as stated in Note 6. Indebtedness. The Company has offered additional consideration to the holders of its debt to extend the terms of scheduled maturities. See further discussion in Note 6. Indebtedness for additional explanation regarding the revised terms.
Subsequent to December 31, 2009, the Company prepared a private placement memorandum (PPM) and entered into a subscription agreement (SA) for its Common Stock with certain accredited investors. The PPM and SA calls for up to $500,000 of stock to be sold at $0.20 per share with warrants issued to purchase an equivalent number of shares of Common Stock for $0.30 per share. The Company provided two investors with a right to exclusively subscribe to the entire $500,000 for the commitment to fund a minimum of $50,000 per month for the first five months of 2010. Through February 12, 2010, $50,000 of this obligation was funded.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Gen2 is a full service provider of a proprietary digital media network and related online digital strategies for leading media and entertainment companies. Gen2 engages audiences on digital platforms through provision of media content either directly or through collaboration with channel partners. Through a combination of original and acquired programming and other entertainment content, Gen2 is focused on providing content that appeals to key demographics attractive to advertisers and distributors or radio, printed news, cable television, satellite, mobile and digital media platforms, and consumer products.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. References in this section to "Gen2Media Corporation," “Gen2Media,” the "Company," "we," "us," and "our" refer to Gen2Media Corporation and our direct and indirect subsidiaries on a consolidated basis unless the context indicates otherwise.
This quarterly report contains forward looking statements relating to our Company's future economic performance, plans and objectives of management for future operations, projections of revenue mix and other financial items that are based on the beliefs of, as well as assumptions made by and information currently known to, our management. The words "expects," "intends," "believes," "anticipates," "may," "could," "should" and similar expressions and variations thereof are intended to identify forward-looking statements. The cautionary statements set forth in this section are intended to emphasize that actual results may differ materially from those contained in any forward looking statement.
The following discussion and analysis should be read in conjunction with the consolidated financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
Overview
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2009 COMPARED TO THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2008.
Revenue
Revenue decreased $136,765 to $246,973 and $267,110 to $630,763 in the quarter and six months ended December 31, 2009, respectively, as compared to 2008. While revenue in aggregate declined, the mix of revenue saw a demonstrable shift toward ongoing recurring revenue generated by the Company’s ad supported network of websites from one time custom engagements experienced in the prior year. Additionally, the Company began earning revenue in its software as a service business unit in the quarter ended December 31, 2009.
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Cost of Sales
During the quarter the Company incurred cost of sales in conjunction with the direct provision of services to our clients. These expenses consist of bandwidth to serve advertising on the Gen2 Network of websites, and professional support and production personnel as well as equipment to facilitate the provision of our production services. Cost of sales decreased by $239,834 to $43,237 and by $199,935 to $184,247 in the quarter and six months ended December 31, 2009, repectively as compared to 2008. The decrease was due to the movement of a greater percentage of revenue towards Gen2’s advertising network and software as a service as those business units generally have a lower cost of producing revenue than production services.
Operating Margin
The operating margin generated during the quarter ended December 31, 2009 increased by $103,069 to $203,736 while the operating margin for the six months ended December 31, 2009 decreased by $67,175 to $446,516 in comparison to the prior year. The operating margin percentage increased for both the quarter and six months, increasing to 82.5% from 26.2% in the quarter and to 70.8% from 57.2% for the six months. The increase in the operating margin percentages was driven by an increase in advertising revenue which produces a stronger operating margin than that generated in the production business unit. The established infrastructure and technology in place at the company allows the provision of our products and services to the marketplace at a low cost ratio for each new client engagement or advertising campaign allowing for a strong margin.
Selling General and Administrative
Selling General and Administrative costs generally consist of salaries, professional fees, office expenses and other administrative costs. These costs decreased by $13,533 to $487,209 for the quarter and increased by $98,822 to $996,020 for the six months ended December 31, 2009. The decrease in the current year relates to the decreased expenses for executive and employee compensation as Company personnel have taken increased incentive compensation in the form of equity, accounting for a decrease of approximately $140,000. Additionally, costs for professional services decreased by $83,000. These decreases were partially offset by an increase in noncash charges for professional services related to investor relations expenses of $165,000. The growth in year to date expenses is for improved infrastructure in personnel including additional officers and supporting staff that did not exist in the first quarter of the fiscal year ended June 30, 2009.
Stock based Compensation
Stock based compensation increased by $236,885 to $237,262 and $193,110 to $675,716 for the three and six months ended December 31, 2009, respectively. The increase for the quarter ended December 31, 2009 is due to the adoption of the Gen2Media Corporation 2009 Nonqualified Stock Option Plan as well as the provision of equity incentives for the officers of the Company. The increase for the six months ended December 31, 2009 was not as significant, as the expense associated with stock based compensation in the prior year first quarter also included previously outstanding options that fully vested during that quarter in exchange for the agreement to exercise said options.
Interest expense
Interest expense increased by $208,045 to $224,694 and $419,577 to $445,852 for the three and six months ended December 31, 2009, respectively. The increase is due to the additional indebtedness incurred by the Company over the past year. The most significant portion of interest expense is noncash and relates to the recognition of interest expense associated with the Secured Convertible Promissory Notes which amounted to $151,233 and $302,465 during the three and six months ended December 31, 2009.
Net Loss
The net loss increased by $336,224 to $790,978 and $772,706 to $1,742,602 for the three and six months ended December 31, 2009, respectively. The increased loss in the quarter was primarily due to increased noncash charges. The improvement in Operating Margin and Selling General and Administrative Costs was offset by Stock Based Compensation and interest charges.
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Liquidity and Capital Resources
The Company had net working capital of $(837,041) at December 31, 2009, an improvement of $255,803 compared to June 30, 2009. The Company issued debt, net of deferred financing costs of $423,000 and received proceeds from the exercise of stock options to fund working capital needs in the six months ended December 31, 2009.
The Company has incurred losses since its inception. The Company’s auditor has emphasized uncertainty regarding our ability to continue as a going concern in his audit report for the year ended June 30, 2009. As shown in the accompanying financial statements, the Company realized net losses from operations of $1,742,602 for the six months ended December 31, 2009 resulting in an accumulated deficit of $7,370,573 as of December 31, 2009.
Other components of the Company’s working capital and changes therein are discussed as follows:
Cash and Cash Equivalents. For the six month period ended December 31, 2009, cash and cash equivalents increased to $3,795 from $401 at June 30, 2009. The increase in cash equivalents is primarily attributable the operating activities use of cash of $472,149 funded by the financing activities of $485,932.
Cash Flows from Operating Activities. Net cash used by operating activities was $472,149 for the six months ended December 31, 2009, a decline of $139,936 over the first six months of the prior year. The change in cash flows from operating activities is primarily attributable to the increase in accounts receivable and reduction of accounts payable and accrued expenses.
Cash Flows from Financing Activities. Net cash provided by financing activities was $485,932 for the six months ended December 31, 2009. This cash was generated from the issuance of additional indebtedness in the form of notes payable and cash collected from the exercise of stock options.
Noncash transactions. During the six months, the Company issued Common Stock and Warrants valued at $325,153 in exchange for professional services and issued Common Stock and Stock Options to officers and employees valued at $675,716. The Company also incurred noncash interest expense of $302,465 related to its Secured Convertible Promissory Notes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A.
ITEM 4T. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of June 30, 2009. Disclosure controls and procedures are those controls and procedures designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act filings is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms, and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2009, our disclosure controls and procedures were ineffective due to the lack of segregation of duties and the lack of audit committee oversight. Upon the acquisition of adequate capital the Company intends to remediate the deficiencies through the deployment of additional personnel and implementation of an audit committee.
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Management’s Quarterly Report on Internal Control Over Financial Reporting
Management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a – 15(f). Management conducted an assessment as of December 31, 2009 of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, management concluded that our internal control over financial reporting was ineffective as of December 31, 2009.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements should they occur. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the control procedure may deteriorate.
This Quarterly Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Quarterly Report. As required by SEC Rule 13a-15(b), our company carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer, of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, management concluded that our disclosure controls and procedures were ineffective at the resonable assurance level.
Changes in Internal Control Over Financial Reporting
None.
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PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
ITEM 1A. RISK FACTORS
None.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
There were no material changes to the procedures by which security holders may recommend nominees to the registrant’s board of directors.
ITEM 6 - EXHIBITS
Exhibit Number | Description | |
31.1 | Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. | |
31.2 | Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. | |
32.1 | Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code. | |
32.2 | Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GEN2MEDIA CORPORATION | |||
DATE: February 16, 2010 | By: | /s/ Mark Argenti | |
Mark Argenti | |||
Chief Executive Officer (principal executive officer) |
By: | /s/ Thomas Moreland | ||
Thomas Moreland | |||
Chief Financial Officer and Treasurer (Principal financial and accounting officer) |
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