UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2004
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______________________ to ________________
Commission File Number 0-25659
-------
ROO GROUP, INC.
---------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 11-3447894
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
62 WHITE STREET, SUITE 3A, NEW YORK, NY 10013
---------------------------------------------
(Address of principal executive offices)
(646) 352- 0260
---------------
(Issuer's telephone number, including area code)
VIRILITEC INDUSTRIES, INC.
--------------------------
(Former Name)
All Correspondence to:
Arthur S. Marcus, Esq.
Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP
101 E. 52 Street, 9th Floor
New York, New York 10022
(212) 752-9700
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 [ ]
The number of shares outstanding of each of the issuer's classes of common
stock, as of August 9, 2004 was 179,851,804.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
ROO GROUP, INC.
TABLE OF CONTENTS
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Controls and Procedures 16
PART II
OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 2 Changes in Securities and Small Business
Issuer Purchases of Equity Securities 17
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 and Reports on Form 8-K 19
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ROO GROUP, INC. AND SUBSIDIARIES
[A Development Stage Company]
CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 2004
[Unaudited]
ASSETS
Current Assets
Cash and cash equivalents $ 156,335
Accounts receivable 860,057
Other Debtors and Prepayments 105,030
----------------
Total current assets 1,121,422
Non Current Assets
Fixed Assets 327,384
Content 144,733
Deferred Tax Assets 17,104
Intangible Asset 622,969
Goodwill 1,990,413
----------------
Total non current assets 3,102,603
----------------
Total assets 4,224,025
================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities
Accounts payable 560,667
Capital Leases 43,150
Accrued Expenses 247,747
Stockholder loans payable 513,241
Related Party Loans 163,212
Income Tax Payable 63,444
Deferred Payment Reality Shares 144,456
Provision Employee Benefits 43,893
Other current liabilities 215,695
----------------
Total current liabilities 1,995,505
----------------
Non Current Liabilities
Capital Leases 113,357
Minority Interest 5,162
----------------
118,519
----------------
Stockholder's Equity (Deficit)
Common Stock, $.0001 par value: authorized 500,000,000 shares;
issued and outstanding 179,851,804 17,985
Paid-in capital 4,379,265
(Deficit) accumulated during development stage (2,263,141)
Accumulated other comprehensive (loss) (24,108)
----------------
Total stockholder's equity (deficit) 2,110,001
----------------
Total liabilities and stockholder's equity
(deficit) $ 4,224,025
================
The accompanying notes are an integral part of these consolidated financial
statements.
1
ROO GROUP, INC. AND SUBSIDIARIES
[A Development Stage Company]
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
[Unaudited]
Cumulative
period from
March 30,2001
Three months Three months Six months Six months (date of
ended ended ended ended inception)
June 30, 2004 June 30 2003 June 30, 2004 June 30, 2003 to June 30,2004
--------------------------------------------------------------------------------------------
Revenue $1,140,972 $124,932 $1,149,474 $127,840 $1,299,253
--------------------------------------------------------------------------------------------
Expenses:
Operating Expenses 789,754 789,754 789,754
Research and Development 83,371 59,934 146,001 101,902 513,726
Sales and Marketing 115,558 31,623 168,061 60,367 435,658
General and Administration 501,477 12,100 591,160 39,421 1,167,849
--------------------------------------------------------------------------------------------
Total Expenses 1,490,160 103,657 1,694,976 201,690 2,906,987
--------------------------------------------------------------------------------------------
Income(Loss) from Operations (349,188) 21,275 (545,502) (73,850) (1,607,734)
Non Cash Cost of Capital (433,747) (433,747)
Cost of Capital (72,530) (72,530) (72,530)
Interest Income 729 774 803
Interest Expense - Related Party (13,088) (16,211) (25,525) (31,009) (129,596)
Interest Expense - Other (24,546) (29,498) (15,866)
--------------------------------------------------------------------------------------------
(Loss) before Income Taxes (458,623) 5,064 (1,106,028) (104,859) (2,258,670)
Income Taxes 3,094 3,094 3,094
Income (Loss) before minority
Interest (461,717) 5,064 (1,109,122) (104,859) (2,261,764)
Minority Interest 1,377 1,377 1,377
--------------------------------------------------------------------------------------------
Net Income (Loss) $(463,094) $5,064 $(1,110,499) $(104,859) $(2,263,141)
============================================================================================
Net Income (loss) per common Share $ -- $ -- $(0.01) $ -- $(0.02)
============================================================================================
Basic and Diluted $ -- $ -- $(0.01) $ -- $(0.02)
============================================================================================
Average common shares outstanding 173,178,796 148,000,000 165,569,265 148,000,000
============================================================================================
Comprehensive Income:
Net Income (Loss) $(463,094) $5,064 $(1,110,499) $(104,859) $(2,263,141)
Foreign Currency Translation (11,063) (756) (11,170) (2,176) (24,108)
--------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $(474,157) $4,308 $(1,121,669) $(107,035) $(2,287,249)
============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
2
ROO GROUP, INC. AND SUBSIDIARIES
[A Development Stage Company]
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
[Unaudited]
(Deficit) Accumulated
Other Accumulated Other Total
Additional During Comprehensive Stockholders'
Common Stock Paid-in Development Income Equity
Stock Par Value Capital Stage (Loss) (Deficit)
-------------------------------------------------------------------------------------------
Recapitalization as a result of 148,000,000 $14,800 $394,308 $ -- $ -- $409,108
merger (1)
Net loss for period from
March 30, 2001 (date of inception)
to December 31, 2001 -- -- -- (184,209) -- (184,209)
-------------------------------------------------------------------------------------------
Balance - December 31, 2001 148,000,000 14,800 394,308 (184,209) -- 224,899
Net Loss for year ended
December 31, 2002 -- -- -- (389,620) -- (389,620)
Foreign currency translation
adjustment -- -- -- -- (982) (982)
-------------------------------------------------------------------------------------------
Balance - December 2002 148,000,000 14,800 394,308 (573,829) (982) (165,703)
Equity of shell in merger
transaction 9,669,130 967 (967) -- -- --
Net (Loss) for the year
ended December 31, 2003 -- -- -- (578,813) -- (578,813)
Foreign currency translation
adjustment -- -- -- -- (11,956) (11,956)
-------------------------------------------------------------------------------------------
Balance December 31, 2003 157,669,130 15,767 393,341 (1,152,642) (12,938) (756,472)
Stock issued to Gersten, Savage
Kaplowitz, Wolf & Marcus, LLP
February 18, 2004 148,200 15 14,805 -- -- 14,820
Grant stock options for services 347,232 347,232
Stock issued in private placement
March 3, 2004 954,547 95 141,420 -- -- 141,515
Net (Loss) for quarter ended
March 31,2004 (647,405) (647,405)
Foreign currency translation
adjustment (107) (107)
-------------------------------------------------------------------------------------------
Balance March 31, 2004 158,771,877 15,877 896,798 (1,800,047) (13,045) (900,417)
Stock issued for Marketing Services
April 19,2004 5,000,000 500 449,500 450,000
Shares issued for purchase of
80% of Reality Group Pty Ltd 8,360,000 836 2,507,164 2,508,000
April 30, 2004
Stock issued in private placements 4,720,833 472 414,528 415,000
April, 2004 including 325,000
shares issued as non cash placement
fees
Stock issued in private placements
in May 2004, including 75,000 shares
issued as non cash placement fees 974,996 97 134,903 135,000
Stock issued to Gersten, Savage
Kaplowitz, Wolf & Marcus LLP
May 26, 2004. 37,765 4 7,549 7,553
Stock issued for purchase of
Undercover Media Pty Ltd
Business June 1, 2004 1,000,000 100 149,900 150,000
Stock issued in private placements
in June 2004 986,333 99 130,201 130,300
Deferred marketing expenses (311,278) (311,278)
Net (Loss) for quarter ended
June 30, 2004 (463,094) (463,094)
Foreign currency translation
adjustment (11,063) (11,063)
-------------------------------------------------------------------------------------------
179,851,804 $17,985 $4,379,265 $(2,263,141) $(24,108) $2,110,001
The accompanying notes are an integral part of these consolidated financial
statements.
3
ROO GROUP, INC. AND SUBSIDIARIES
[A Development Stage Company]
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Unaudited]
-------------------------------------------------
Cumulative
period
May 2001 (date
Six months Six months of
ended ended inception) to
June 30, 2004 June 30, 2003 June 30, 2004
-------------------------------------------------
Operating activities:
Net Income/(Loss) $(1,110,499) $(104,859) $(2,263,141)
-------------------------------------------------
Adjustments to reconcile net (loss) to net cash provided
(used) by operating activities:
Depreciation 20,688 1,902 28,267
Amortization of intangible asset 27,085 27,085
Non cash cost of capital 433,747 433,747
Non cash legal expenses 7,553 7,553
Non cash marketing expenses 138,722 138,722
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (81,273) (1,371) (86,249)
Other assets 7,088 7,088
Increase (decrease) in:
Accounts payable (172,980) 8,755 1,178
Accrued Expenses 125,762 125,762
Income Tax payable (970) (970)
Accrued Employee Benefits (302) (302)
Other liabilities 170,342 17,828 223,515
-------------------------------------------------
Total adjustments 675,462 27,114 905,396
-------------------------------------------------
-------------------------------------------------
Net cash provided (used) by operating activities (435,037) (77,745) (1,357,745)
-------------------------------------------------
Investing activities:
Purchase of equipment (19,205) (1,842) (42,960)
Net cash received in acquisition 30,374 30,374
-------------------------------------------------
Net cash provided (used) by investing activities 11,169 (1,842) (12,586)
-------------------------------------------------
Financing activities:
Capital contribution 750,120 1,159,228
Bank Overdraft (42,596) (42,598)
(Decrease) in related party loans (68,021) (68,021)
Increase in stockholder loan 87,981 234,526 1,183,947
(Decrease) in stockholder loan (88,641) (156,260) (670,443)
Note payable (62,500)
(Decrease) in capital leases (5,085) (5,085)
-------------------------------------------------
Net cash provided by financing activities 571,258 78,266 1,557,028
-------------------------------------------------
Effect of exchange rate changes on cash (17,426) (1,234) (30,362)
-------------------------------------------------
Net increase in cash and cash equivalents 129,964 (2,555) 156,335.00
Cash and cash equivalents at beginning of periods 26,371 11,427 --
-------------------------------------------------
Cash and cash equivalents at end of periods $156,335 $8,872 $156,335.00
=================================================
For the six months ended June 30, 2004 and 2003, the Company paid $0 for taxes
and $55,023 for interest and $0 for taxes and $31,009 for interest,
respectively.
The accompanying notes are an integral part of these consolidated financial
statements
4
NOTES TO CONSODLIATED FINANCIAL STATEMENTS [UNAUDITED]
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of ROO Group, Inc.
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-QSB and Item
310(b) of Regulation S-B. Accordingly, they do not include all information and
footnotes required by general accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary in order to make the interim financial
statements not misleading have been included. Results for the three and six
months ended June 30, 2004 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2004. These interim consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto of the Company and management's
discussion and analysis of financial condition and results of operations
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 2003.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ROO Group, Inc.,
its wholly owned subsidiary ROO Media Corporation and its 80% subsidiary Reality
Group Pty. Ltd. ("Reality"). Included in the consolidation with ROO Media are
ROO Media's wholly owned subsidiary ROO Media (Australia) Pty Ltd. and ROO Media
(Australia) Pty Ltd.'s wholly owned subsidiary Undercover Media Pty Ltd.
("Undercover"), its 76%-owned subsidiary ROO Media Europe Pty Ltd, and its
94%-owned subsidiary ROO Broadcasting Limited. The acquisition of Reality closed
on April 30, 2004 and Reality's activities for the period from May 1, 2004 to
June 30, 2004 have been included in the consolidated statements. The asset
acquisition of Undercover was completed on June 1, 2004 and the activities of
Undercover for the period from June 1, 2004 to June 30, 2004 have been included
in the consolidated statements. All material intercompany accounts and
transactions have been eliminated.
(B) Management estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Certain amounts included in the financial statements are
estimated based on currently available information and management's judgment as
to the outcome of future conditions and circumstances. Changes in the status of
certain facts or circumstances could result in material changes to the estimates
used in the preparation of financial statements and actual results could differ
from the estimates and assumptions. Every effort is made to ensure the integrity
of such estimates.
(C) Foreign Currency Translation
Assets and liabilities of ROO Group's foreign subsidiaries are translated at
current exchange rates and related revenues and expenses are translated at
average exchange rates in affect during the period. Resulting translation
adjustments are recorded as a component of accumulated comprehensive income
(loss) in stockholders' equity.
5
(D) Revenue Recognition
Revenues are derived principally from professional services, digital media
management and advertising. Revenue is recognized when service has been
provided.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provide guidance for disclosures related to revenue
recognition policies. Management believes that ROO Group's revenue recognition
practices are in conformity with the guidelines of SAB 101.
(E) Earnings (Loss) Per Share Calculation:
Net loss per share is based on the weighted average number of shares outstanding
reflecting the shares issued in the merger as outstanding for all periods
presented.
Earnings (Loss) per common share are calculated under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which establishes standards for computing and presenting earnings per
share. SFAS No. 128 requires ROO Group to report both basic earnings (loss) per
share, which is based on the weighted average number of common shares
outstanding during the period, and diluted earnings (loss) per share, which is
based on the weighted average number of common shares outstanding plus all
potential dilutive common shares outstanding. Options and warrants are not
considered in calculating diluted earnings (loss) per share since considering
such items would have an anti-dilutive effect.
(F) Stock Options and Similar Equity Instruments
The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation," for stock options and similar equity instruments
(collectively "Options") issued to employees and directors, however, the Company
will continue to apply the intrinsic value based method of accounting for
options issued to employees prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" rather than the fair
value based method of accounting prescribed by SFAS No. 123. SFAS No.123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods and services from non-employees. Those transactions must be
accounted for based on the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of options. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
(G) Non Cash Cost of Capital
During the six month periods ended June 30, 2004 and 2003, non cash cost of
capital included options issued for capital raising services which were valued
using the Black-Scholes method totaling $347,232 and $-0-, respectively.
6
NOTE 3 ACQUISITIONS
(i) On April 30, 2004 the Company completed the acquisition of 80% of the
outstanding ordinary shares (the "Shares") of The Reality Group Pty Ltd.
("Reality"). Reality is a provider of integrated communication solutions,
including direct marketing, internet advertising and sales promotion.
The consideration for the Shares was the issuance of an aggregate of eight
million three hundred and sixty thousand (8,360,000) shares of common stock, par
value $.0001 per share, of ROO Group, Inc. to the Reality shareholders, pro rata
based on the Reality shareholders' ownership interest in Reality. As additional
consideration for the Shares, ROO Group, Inc. agreed to pay an aggregate of
US$144,456 ($200,000 Australian Dollars) to the Reality shareholders on or
before September 30, 2004, to be divided proportionally to each Reality
shareholder based on the Reality shareholder's current ownership percentage in
Reality. The shares were valued at time of issue at $0.30 per share as this was
the price that the Company guaranteed the closing market price of the Company's
common stock would be one year from the date of the closing of the Reality
acquisition and, together with the deferred cash payment, placed a value on the
Reality acquisition of $2,652,456. Unless the trading price of the Company's
common stock is at least $0.30 per share for a period of twelve months
commencing one year from the closing of the Reality acquisition, the Company
will be required to pay the difference between the closing share price per share
and $0.30 per share (a) in cash, (b) by returning a number of shares in Reality
to the original Reality shareholders on a pro rata basis based upon an agreed
valuation of the Reality ordinary shares or (c) with the agreement of the
Reality shareholders, by issuing additional common shares of ROO Group, Inc.
proportionately to the Reality shareholders.
The operations of Reality during the period from May 1, 2004 to June 30, 2004
have been included in the consolidated statements.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition (April 30, 2004).
Current assets $ 961,780
Property, Plant and Equipment 326,532
Deferred Tax assets 13,108
Intangible Asset - Customer List 650,054
Goodwill 1,990,413
----------
Total assets acquired 3,941,887
==========
Current liabilities 1,160,326
Non current liabilities 123,943
Minority interest 5,162
----------
Total liabilities assumed 1,289,431
==========
Net assets acquired $2,652,456
==========
(ii) On June 1, 2004 the Company completed the acquisition of the business and
business assets of Undercover Media Pty Ltd. ("Undercover"). Included in the
purchase is the WWW.UNDERCOVER.COM.AU website, which currently serves
approximately 500,000 visitors per month with 55% from the USA, 18% from Europe,
7% from Asia and 20% from other countries around the world. The Undercover
website, through its relationship with HMV, exemplifies the link between music
content and the sale of music; the user
7
reads the article or interview and can then click through and purchase the
artist's CD from HMV's web site.
The consideration for the business was one million (1,000,000) shares of common
stock, par value $.0001 per share, of ROO Group, Inc. In determining a fair
value for the cost of the acquisition of Undercover, the Company considered the
effects of price fluctuations in the common stock during the period prior to
negotiations through the period subsequent to the closing of the acquisition,
quantities traded, issue costs and the like. The Company considers the fair
value for the stock issued to be $0.15 per share.
The estimated fair value of the assets acquired was $150,000 for music, audio,
video and photographic content acquired. There were no liabilities assumed in
the acquisition.
The operations of the business of Undercover for the period from June 1, 2004 to
June 30, 2004 have been included in the consolidated statements.
Selected unaudited pro forma combined results of operations for the three months
and six months ended June 30, 2004, assuming the Reality and Undercover
acquisitions occurred on January 1, 2004 using actual unaudited figures from
each entity prior to acquisition, are presented as follows:
Three months ended Six months ended
June 30,2004 June 30, 2004
---------------------------------------
Total revenues $1,556,574 $2,604,940
Net (Loss) ($466,902) ($1,055,257)
Net (loss) per common and
common equivalent share $ -- ($.01)
NOTE 4 - LEASES
The Company is a party to a number of noncancelable lease agreements primarily
involving office premises and computer equipment. Computer equipment leases are
generally for 3-year periods and the lease of office premises is for a 4-year
period ending April 2006. The office premises lease has a renewal option for an
additional 3-year term.
The following is a schedule of future minimum payments under capital leases and
operating leases and obligations under capital leases (present value of future
minimum rentals) as of June 30, 2004.
Periods January to December
unless stated otherwise Capital Operating Total
---------------------------------------------------------------------------------------------
July to December 2004 $ 20,814 $ 77,093 $ 97,907
2005 51,110 148,387 199,497
2006 43,833 52,687 96,520
2007 29,223 8,617 37,840
2008 29,485 3,290 32,775
2009 -- -- --
2010 and thereafter -- -- --
---------------------------------------------------------------------------------------------
Total minimum lease payments 174,465 $ 290,074 $ 464,539
==============================
Less amount representing interest 17,958
------------
Total obligations under capital leases $156,507
============
Rent expense amounted to $26,980 and $3,835 for the three months ended June 30,
2004 and 2003, respectively, and $29,271 and $3,835 for the six months ended
June 30, 2004 and 2003, respectively.
8
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2004 consists of the following:
Plant and Motor
Equipment Vehicles
Plant and Capital Motor Capital Computer Other
Equipment Lease Vehicles Lease Software Equipment Total
-------------------------------------------------------------------------------------------------
Cost $188,762 $26,028 $6,733 $190,409 $59,068 $115,996 $586,996
Accumulated
Depreciation (79,808) (18,564) (3,257) (62,921) (34,268) (60,794) (259,612)
-------------------------------------------------------------------------------------------------
Net $108,954 $7,464 $3,476 $127,488 $24,800 $55,202 $327,384
=================================================================================================
Estimated useful life 20 years 4 years 6-8 years 6-8 years 4 years 4-8 years
Depreciation expense (including amortization of capital lease assets) amounts to
$18,501 and $983 for the three months ended June 30, 2004 and 2003,
respectively, and $20,688 and $1,902 for the six months ended June 30, 2004 and
2003, respectively.
NOTE 6 - INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
Three months Six months Six months
ended ended Three months ended ended
June 30,2004 June 30,2004 June 30,2003 June 30,2003
---------------------------------------------------------------------
Current
Federal tax expense $5,589 $5,589 $ -- $ --
Non-current
Federal tax expense 2,495 2,495 -- --
------------------------------------------------------ --------------
$3,094 $3,094 $ -- $ --
=====================================================================
The reconciliation of reported income tax expense to the amount of income tax
expense that would result from applying domestic federal tax rates to pretax
income is as follows:
Statutory federal income tax $903 $903 $ -- $ --
Other (non allowable deductions) 2,191 2,191 -- --
------------------------------------------------------ --------------
$3,094 $3,094 $ -- $ --
=====================================================================
The components of deferred tax assets and liabilities were as follows:
Deferred tax assets:
Provision accounts $13,168 $13,168 $ -- $ --
Depreciation (261) (261) -- --
Other liabilities 4,107 4,107 -- --
------------------------------------------------------ --------------
$17,014 $17,014 $ -- $ --
=====================================================================
9
NOTE 7 - GOODWILL AND INTANGIBLE ASSETS
Goodwill of $1,990,413 represents the excess of acquisition costs over the fair
value of net assets of the Reality acquisition. The Company's policy is to
regularly review goodwill to determine if it has been permanently impaired by
adverse conditions which might affect Reality.
At June 30, 2004 intangible assets include the following:
Customer Lists $ 650,054
Less Amortization (27,085)
-----------
$ 622,969
===========
The customer lists are being amortized over a 4-year period on a straight line
basis. We estimate that the aggregate annual amortization expense for each of
the next 4 years will be $162,510.
NOTE 8 - STOCK ISSUANCES
During the three months ended June 30, 2004, the Company issued shares of its
common stock in a private placement conducted by the Company. The Company relied
upon the exemption from registration provided by Section 4(2) of the Securities
Act. The Company determined that the fair value, based on market conditions, was
cash received for the common stock.
During April 2004 the Company issued 4,720,833 shares of common stock,
including 325,000 shares issued as compensation for non cash placement fees
netted against proceeds of shares. The stock issued for cash was issued at three
price levels that were determined based on changing market conditions - 333,333
shares were issued at $0.075 per share, 812,500 shares were issued at $0.08 per
share and 3,250,000 shares were issued at $0.10 per share.
During May 2004 the Company issued 974,996 shares of common stock,
including 75,000 shares issued as compensation for non cash placement fees
netted against proceeds of shares. The stock issued for cash was issued at $0.15
per share.
10
During June 2004 the Company issued 986,333 shares of common stock. The
stock issued for cash was issued at two price levels that were determined based
on changing market conditions - 353,000 shares were issued at $0.10 per share
and 633,333 shares were issued at $0.15 per share.
During the three months ended June 30, 2004, the Company also issued shares of
its common stock as consideration for its strategic acquisitions of Reality
Group Pty Ltd. and Undercover Media Pty. Ltd. See Note 3 - Acquisitions.
In addition, during the three months ended June 30, 2004, the Company issued
shares of its common stock as consideration for services provided to the
Company.
In April 2004, the Company authorized the issuance of 5,000,000 shares
of its common stock to an entity for marketing services provided or to be
provided until December 31, 2004.
In May 2004, the Company authorized the issuance of 37,765 shares of
its common stock to Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, its
corporate and securities counsel, as payment for outstanding legal fees.
COST OF CAPITAL
During the six months ended June 30, 2004, a company associated with a
director of a subsidiary of the Company received a cash payment equivalent to
10% of the cash received from the issuances of common stock from private
placements during the period.
NOTE 9 - STOCK OPTION PLAN
On April 1, 2004 the Board of Directors of ROO Group, Inc. adopted ROO Group,
Inc.'s 2004 Stock Option Plan (the "Plan"). Pursuant to the Plan, which expires
on April 1, 2014, incentive stock options or non-qualified options to purchase
an aggregate of 50,000,000 shares of common stock may be issued. Of that amount,
options to acquire 13,450,000 shares of common stock have been issued to
officers, directors, employees and consultants of ROO Group at prices ranging
from $0.115 to $0.16 per share. The balance of options to acquire 36,550,000
shares issuable under the Plan have not been issued or committed for issuance.
The Plan is administered by the Board of Directors of ROO Group (the "Board") or
by a committee to which administration of the Plan, or of part of the Plan, may
be delegated by the Board (in either case, the "Administrator"). Options granted
under the Plan are not generally transferable by the optionee except by will,
the laws of descent and distribution or pursuant to a qualified domestic
relations order, and are exercisable during the lifetime of the optionee only by
such optionee. Options granted under the Plan vest in such increments as is
determined by the Administrator. To the extent that options are vested, they
must be exercised within a maximum of three months of the end of optionee's
status as an employee, director or consultant, or within a maximum of 12 months
after such optionee's termination by death or disability, but in no event later
than the expiration of the option term. The exercise price of all stock options
granted under the Plan shall be determined by the Administrator. With respect to
any participant who owns stock possessing more than 10% of the voting power of
all classes of ROO Group's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market value
on the grant date.
If the compensation cost for the stock-based employee compensation plans had
been determined based on fair values of awards on the grant date, estimated
using the Black-Scholes option pricing model, which would be consistent with the
method described in SFAS No. 123, the Company's reported net (loss) and (loss)
per share would have been reduced to the pro forma amounts shown below:
11
Six months
Six months ended ended
June 30, 2004 June 30, 2003
--------------------- ----------------
Net (Loss) as reported (1,110,499) (104,859)
Deduct: Amount by which stock-based employee
compensation as determined under fair value
based method for all awards exceeds the
compensation as determined under the intrinsic
value method (1,026,876) --
Pro Forma Net (Loss) (2,137,375) (104,859)
Basic and Diluted (Loss) Per Share as Reported (0.01) --
Pro Forma Basic and Diluted (Loss) Per Share (0.01) --
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transaction and Disclosure - An
Amendment of SFAS No. 123." This Statement provides alternative accounting for
stock-based employee compensation and requires prominent disclosures in both
annual and interim financial statements about the method used in reporting
results. The Company has elected not to adopt the recognition and measurement
provisions of SFAS No. 123 and continues to account for its stock-based employee
compensation plans under APB Opinion No. 25 and related interpretations and,
therefore, the transaction provisions will not have an impact on the Company's
financial position or results of operations. The required expanded interim
disclosures are provided above.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
-----------------------------------------------------------------------
Set forth below is a discussion of the financial condition and results of
operations for the three months and six months ended June 31, 2004 and 2003. The
following discussion should be read in conjunction with the information set
forth in the consolidated financial statements and the related notes thereto
appearing elsewhere in this quarterly report.
Certain statements contained herein may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Because such statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements as a result of certain factors, including, but not limited to, risks
associated with the integration of businesses following an acquisition,
competitors with broader product lines and greater resources, emergence into new
markets, the termination of any of our significant contracts, our inability to
maintain working capital requirements to fund future operations, or our
inability to attract and retain highly qualified management, technical and sales
personnel.
We operate as a digital media company in the business of providing products and
solutions to a global base of clients enabling the broadcast of topical video
content from their Internet websites. We specialize in providing the technology
and content required for video to be played on computers via the Internet as
well as emerging broadcasting platforms such as set top boxes and wireless
devices (i.e., mobile phones and PDAs). Our core activities include the
aggregation of video content, media management, online advertising, hosting, and
content delivery.
RESULTS OF OPERATIONS
On April 30, 2004, we purchased 80% of the issued and outstanding ordinary
shares (the "Shares") of Reality Group Pty Ltd. ("Reality") from the
shareholders of Reality. Reality's financial results for the period from May 1,
2004 to June 30, 2004 have been included in the consolidated statements.
On June 1, 2004 we, through our wholly owned subsidiary ROO Media Corporation,
completed the acquisition of the business and business assets of Undercover
Media Pty Ltd. ("Undercover"). Undercover's financial results for the period
from June 1, 2004 to June 30, 2004 have been included in the consolidated
statements.
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE AND SIX
MONTHS ENDED JUNE 30 2003.
NET REVENUES
Total net revenues increased by $1,016,040 from $124,932 for the three months
ended June 30, 2003 to $1,140,972 for the three months ended June30, 2004, an
increase of 813%. Total net revenues increased by $1,021,634 from $127,840 for
the six months ended June 30, 2003 to $1,149,474 for the six months ended June
30, 2004, an increase of 799%. The increase over both periods reflect the
inclusion of the Reality revenues from the date of acquisition.
OPERATING EXPENSES
OPERATIONS. Operating expenses have been included for the first time in the
period ended June 30, 2004. The operating expenses for the three and six months
ended June 30, 2004 were $789,754 and $789,754, respectively. The primary reason
for the inclusion of operating expenses as a separate category stems from the
13
inclusion of the Reality operations since the date of acquisition. These
expenses are primarily the costs directly associated with the generation of
revenues. It also reflects the change from development of products to selling
these products in our other operating areas.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
salaries and related personnel costs, consulting fees associated with product
development, and costs of technology acquired from third parties to incorporate
into products currently under development. Research and development expenses
were $83,371 for the three months ended June 30, 2004, an increase of 39.1% from
$59,934 for the three months ended June 30, 2003. For the six months ended June
30, 2004, research and development expenses were $146,001, an increase of 43.3%
from $101,902 for the six months ended June 30, 2003. The increase in expenses
was due primarily to the increase in activities to bring our products to market.
SALES AND MARKETING. Sales and marketing expenses consist primarily of expenses
for advertising sales and marketing consultants, expenditures for advertising,
and promotional activities and expenses to bring our products to market. These
expenses increased by $83,935 from $31,623 for the three months ended June 30,
2003 to $115,558 for the three months ended June 30, 2004, an increase of
265.4%. In the six months ended June 30, 2004 these expenses were $168,061, an
increase of 178.4% from $60,367 in the six months ended June 30, 2003. This
increase was due primarily to the inclusion of the Reality revenues from the
date of acquisition.
We believe that additional sales and marketing personnel and programs are
required to remain competitive. Therefore, we expect that our sales and
marketing expenses will continue to increase in absolute dollars for the
foreseeable future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of expenses for management, finance and administrative personnel,
legal, accounting, and consulting fees, and facilities costs. These expenses
increased by $489,377 from $12,100 for the three months ended June 30, 2003 to
$501,477 for the three months ended June 30, 2004, an increase of 4,044%. The
general and administrative expenses increased from $39,421 in the six months
ended June 30, 2003 to $591,160 in the six months ended June 30, 2004, an
increase of $551,739 or 1,400%. This increase was due primarily to providing
administrative support to the increased activity of operations and the inclusion
of the Reality general and administrative expenses since acquisition in the
consolidated statements.
INTEREST INCOME. Interest income totaled $729 in the three months ended June 30,
2004 and $774 in the six months ended June 30, 2004. Other than in the foregoing
periods, we did receive interest income.
INTEREST EXPENSE, RELATED PARTY
Interest expense, related party, includes interest charges on our indebtedness
to Robert Petty, our Chief Executive Officer. The expense decreased by $3,123,
from $16,211 for the three months ended June 30, 2003 to $13,088 for the three
months ended June 30, 2004, a decrease of 19.3%. In the six months ended June
30, 2004, this expense decreased to $25,525 from $31,009 for the six months
ended June 30, 2003, a decrease of $5,484 or 17.7%. This decrease was due to a
reduction in the amount of the debt outstanding.
NET LOSS FROM OPERATIONS
Net loss from operations was $(349,188) for the three months ended June 30,
2004, compared to a net income of $21,275 for the three months ended June 30,
2003. Net loss from operations for the six months ended June 30, 2004 was
$545,502, compared to a net loss of $73,850 for the six months ended June 30,
2003, an increase of 639%. The net loss is due to the increase in activities to
develop products for future revenue generation and the increase in
administrative expenses to support these activities.
14
LIQUIDITY AND CAPITAL RESOURCES
From ROO Media Corporation's inception through June 30, 2004, we have financed
our activities through funding from a loan facility from Robert Petty, our Chief
Executive Officer, and through private placements.
Net cash used in operating activities was $435,037 for the six months ended June
30, 2004, compared to $77,745 for the six months ended June 30, 2003, an
increase of 460%. The increase in net cash used in operating activities is
primarily the result of our net operating losses.
Net cash used in investing activities was $1,842 for the six months ended June
30, 2003, compared to net cash used in investing activities for the six months
ended June 30, 2004 of $19,205. The increase in net cash used in investing
activities is primarily the result of a purchase of fixed assets.
Net cash provided by investing activities in the six months ended June 30, 2004,
was $30,374 compared to net cash provided by investing activities for the six
months ended June 30, 2003 of $0. The increase in net cash provided by investing
activities arose from the net cash received in the Reality acquisition.
Net cash provided by financing activities was $571,258 for the six months ended
June 30, 2004 compared to $78,266 for the six months ended June 30, 2003. The
increase in net cash provided by financing activities was primarily due to the
proceeds from private placements.
As of June30, 2004, we had a working capital deficiency of approximately
$874,083. Our cash balance as of June 30, 2004 of $156,335 is, in management's
opinion, not sufficient to ensure our continued operation and the payment of
debts until our business is profitable and generating sufficient cash flow to
meet our liquidity requirements, of which there can be no assurance. We do not
expect additions to property and equipment to be material in the near future.
We conduct our operations in primary functional currencies: the United States
dollar, the British pound, the Euro and the Australian dollar. Historically,
neither fluctuations in foreign exchange rates nor changes in foreign economic
conditions have had a significant impact on our financial condition or results
of operations. We currently do not hedge any of our foreign currency exposures
and are therefore subject to the risk of exchange rate fluctuations. We invoice
our international customers primarily in U.S. dollars, except in Europe, the
United Kingdom and Australia, where we invoice our customers primarily in euros,
pounds and Australian dollars, respectively. We are exposed to foreign exchange
rate fluctuations as the financial results of foreign subsidiaries are
translated into U.S. dollars in consolidation and as our foreign currency
consumer receipts are converted into U.S. dollars. Our exposure to foreign
exchange rate fluctuations also arises from payables and receivables to and from
our foreign subsidiaries, vendors and customers. Foreign exchange rate
fluctuations did not have a material impact on our financial results in the
three months ended June 30, 2004 and 2003.
We anticipate that our liquidity needs over the next 12 months will require
additional financings. If cash generated from operations is insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities or obtain a credit facility. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. The incurrence of indebtedness would result in increased fixed
obligations and could result in operating covenants that would restrict our
operations. We cannot assure you that financing will be available in amounts or
on terms acceptable to us, if at all.
15
GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that we will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. We
have incurred net operating losses of approximately $545,502 for the six months
ended June 30, 2004, compared to $73,850 for the six months ended June 30, 2003.
Additionally, as of June 30, 2004, we had a net working capital deficiency of
approximately $874,083 and negative cash flows from operating activities of
approximately $435,037. Since ROO Media's inception, we have incurred losses,
had an accumulated deficit, and have experienced negative cash flows from
operations. The expansion and development of our business may require additional
capital. This condition raises substantial doubt about our ability to continue
as a going concern. Our management expects cash flows from operating activities
to improve in the fourth quarter of fiscal 2004, primarily as a result of an
increase in sales, and plans to raise capital through various methods to achieve
their business plans, although there can be no assurance thereof. The
accompanying consolidated financial statements do not include any adjustments
that might be necessary should we be unable to continue as a going concern. If
we fail to generate positive cash flows or obtain additional capital when
required, we may have to modify, delay or abandon some or all of our business
and expansion plans.
OFF-BALANCE SHEET ARRANGEMENTS
None.
Item 3. CONTROLS AND PROCEDURES
-----------------------
With the participation of management, our Chief Executive Officer and Chief
Financial Officer evaluated our disclosure controls and procedures within the 90
days preceding the filing date of this quarterly report. Based upon this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in ensuring that
material information required to be disclosed is included in the reports that we
file with the Securities and Exchange Commission.
There were no significant changes in our internal control over financial
reporting to the knowledge of our management, or in other factors that have
materially affected or are reasonably likely to materially affect these internal
controls over financial reporting subsequent to the evaluation date.
16
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
Not applicable.
Item 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
-------------------------------------------------------------------
SALES THROUGH PRIVATE PLACEMENTS
- --------------------------------
During the three months ended June 30, 2004, we issued shares of our common
stock, par value $.0001 per share, to investors in a private placement conducted
by us. In issuing such securities, we relied upon the exemption from
registration provided by Section 4(2) of the Securities Act.
During April 2004 we issued 4,720,833 shares of common stock, including
325,000 shares issued as compensation for non cash placement fees netted against
proceeds of shares. The stock issued for cash was issued at three price levels
that were determined based on changing market conditions - 333,333 shares were
issued at $0.075 per share, 812,500 shares were issued at $0.08 per share and
3,250,000 shares were issued at $0.10 per share.
During May 2004 we issued 974,996 shares of common stock, including
75,000 shares issued as compensation for non cash placement fees netted against
proceeds of shares. The stock issued for cash was issued at $0.15 per share.
During June 2004 we issued 986,333 shares of common stock. The stock
issued for cash was issued at two price levels that were determined based on
changing market conditions - 353,000 shares were issued at $0.10 per share and
633,333 shares were issued at $0.15 per share.
SALES THROUGH ACQUISITIONS
- --------------------------
During the three months ended June 30, 2004, we issued shares of our common
stock as consideration for strategic acquisitions. In issuing these securities,
we relied upon the exemption from registration provided by Section 4(2) of the
Securities Act.
On April 30, 2004 we completed the acquisition of 80% of the
outstanding ordinary shares (the "Shares") of The Reality Group Pty Ltd.
("Reality"). The consideration for the Shares was the issuance of an aggregate
of eight million three hundred and sixty thousand (8,360,000) shares of our
common stock, par value $.0001 per share, to the Reality shareholders pro rata
based on the Reality shareholders' ownership interest in Reality. The shares
were valued at time of issue at $0.30 per share as this was the price that we
guaranteed the closing market price of our common stock would be one year from
the date of the closing of the Reality acquisition.
On June 1, 2004 we completed the acquisition of the business and
business assets of Undercover Media Pty Ltd. ("Undercover"). The consideration
for the business was one million (1,000,000) shares of our common stock, par
value $.0001 per share. In determining a fair value for the cost of the
acquisition of Undercover, we considered the effects of price fluctuations in
the common stock during the period prior to negotiations through the period
subsequent to the closing of the acquisition, quantities traded, issue costs and
the like. We consider the fair value for the stock issued to be $0.15 per share.
17
SALES IN CONSIDERATION FOR THE PERFORMANCE OF SERVICES
- ------------------------------------------------------
During the three months ended June 30, 2004, we issued shares of our common
stock as consideration for services provided to us. In issuing such securities,
we relied upon the exemption from registration provided by Section 4(2) of the
Securities Act based on the fact that the transaction involved only one party,
and thus was not a public offering.
In April 2004 we authorized the issuance of 5,000,000 shares of our
common stock to Vertex Capital Corporation for marketing services provided or to
be provided until December 31, 2004.
In May 2004 we authorized the issuance of 37,765 shares of our common
stock to Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, our corporate and
securities counsel, as payment for outstanding legal fees.
ISSUANCES OF STOCK OPTIONS
- --------------------------
In April 2004, we issued an aggregate of 9.7 million incentive stock
options to four individuals, comprised of our Chief Executive Officer, Chief
Financial Officer and two employees. Of the 9.7 million options, we issued 6
million to our Chief Executive Officer Robert Petty. Such options vest on May 8,
2004, expire on May 8, 2006 and are exercisable at $.1265 per share. Three
million of the 9.7 million options were issued to our Chief Financial Officer
Robin Smyth. Such options vest on May 8, 2004, expire on May 8, 2006 and are
exercisable at $.1265 per share. The remaining 700,00 options were issued to two
employees. These options vest pursuant to the respective stock option
agreements, expire on April 8, 2006 and are exercisable at $0.115 per share. In
addition, we issued 3 million nonqualified stock options to a director of one of
our subsidiaries. Such options vest pursuant to the respective stock option
agreements, expire on April 8, 2006 and are exercisable at $0.115 per share.
In June 2004, we issued an aggregate of 750,000 incentive stock
options to 5 individuals, each of whom are employees. These options vest
pursuant to the respective stock option agreements, expire on June 29, 2006 and
are exercisable at $0.16 per share.
Item 3. DEFAULT UPON SENIOR SECURITIES
------------------------------
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
Item 5. OTHER INFORMATION
-----------------
Not applicable
18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
2.1 Stock Purchase Agreement, dated as of March 11, 2004, by and among ROO
Group, Inc., a corporation formed under the laws of the State of
Delaware, and the shareholders of Reality Group Pty Ltd., a company
formed under the laws of Australia (3)
2.2 Asset Purchase Agreement, dated as of May 26, 2004, by and among ROO
Group, Inc., a corporation formed under the laws of the State of
Delaware, Undercover Holdings Pty Ltd., a Victorian Australian
corporation, and Undercover Media Pty Ltd, a Victorian Australian
corporation (4)
3.1 Certificate of Incorporation (2)
3.2 Bylaws (2)
10.1 Employment Agreement between ROO Group, Inc. and Robert Petty, CEO of
ROO Group, Inc. (1)
10.2 Employment Agreement between ROO Group, Inc. and Robin Smyth, CFO of
ROO Group, Inc. (1)
10.3 Option Agreement between ROO Group, Inc. and Robert Petty, CEO of ROO
Group, Inc. (1)
10.4 Option Agreement between ROO Group, Inc. and Robin Smyth, CFO of ROO
Group, Inc. (1)
31.1 Rule 13a-14(a)/15d-14(a) Certification.(1)
32.1 Section 1350 Certifications (1) +
- -------------
(1) Filed herewith.
(2) Incorporated by reference from the Form 10-SB filed with the Securities and
Exchange Commission on March 29, 1999.
(3) Incorporated by reference from the Form 8-K filed with the Securities and
Exchange Commission on May 17, 2004.
(4) Incorporated by reference from the Form 8-K filed with the Securities and
Exchange Commission on June 16, 2004.
+ The Exhibit attached to this Form 10-QSB shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange
Act") or otherwise subject to liability under that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933,
as amended, or the Exchange Act, except as expressly set forth by specific
reference in such filing.
(b) Reports on Form 8-K
Form 8-K/A filed with the Commission on July 14, 2004 containing
consolidated financials statements in Item 7 for the Reality Group Pty Ltd.
acquisition
Form 8-K filed with the Commission on June 16, 2004 containing in Item
2 the Undercover Media Pty Ltd. acquisition
Form 8-K filed with the Commission on May 17, 2004 containing in Item 2
the Reality Group Pty Ltd. acquisition
19
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.
ROO GROUP, INC.
--------------------------------------
(Registrant)
Date: August 16, 2004 /s/ Robert Petty
--------------------------------------
Name: Robert Petty
Title: Chief Executive Officer
20