UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 000-28515
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IN STORE MEDIA SYSTEMS, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 84-1249735
------------------------------ --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
15423 East Batavia Drive, Aurora, Colorado 80011
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(Address of principal executive offices and Zip Code)
(303) 364-6550
-----------------------------
(Registrant's telephone number)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's classes of common stock, par
value $.001 per share, as of May 15, 2002 is 72,045,595 shares.
IN STORE MEDIA SYSTEMS, INC.
INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheet - December 31, 2001 and March 31, 2002 (unaudited) 2 and 3
Statement of Operations - For the Three Months Ended March 31,
2001 and 2002 and for the period from December 30, 1992
(inception) through March 31, 2002 (unaudited) 4
Statement of Stockholders' Equity (Deficit)- For the Three Months
Ended March 31, 2002 (unaudited) 5
Statement of Cash Flows - For the Three Months Ended March 31,
2001 and 2002 and for the period from December 30, 1992
(inception) through March 31, 2002 (unaudited) 6
Notes to Unaudited Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
PART II. OTHER INFORMATION 15
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1
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 2001 and March 31, 2002
(Unaudited)
ASSETS
------
2001 2002
---- ----
Current assets:
Cash and cash equivalents $ 21,457 $ 26,056
Accounts receivable 3,224 2,157
Inventory 5,525 5,525
Other current assets 60,283 39,343
--------- ---------
Total current assets 90,489 73,081
Property and equipment, at cost:
Office furniture and equipment 243,024 244,366
Leasehold improvements 55,228 55,228
--------- ---------
298,252 299,594
Less accumulated depreciation and amortization (133,898) (142,898)
--------- ---------
Net property and equipment 164,354 156,696
Other assets:
Debt issuance costs, net of accumulated amortization 356,667 324,167
Patent costs, net of accumulated amortization of
$31,436 (2001) and $33,500 (2002) 98,186 97,367
--------- ---------
Net other assets 454,853 421,534
--------- ---------
$ 709,696 $ 651,311
========= =========
See accompanying notes
2
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 2001 and March 31, 2002
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
2001 2002
---- ----
Current liabilities:
Accounts payable $ 823,869 $ 885,123
Interest payable 243,993 232,552
Accrued expenses 98,698 104,494
Notes payable (Notes 2 and 8) 487,500 437,500
Notes payable-related party (Note 2) -- 70,000
Short-term notes payable 33,996 17,199
------------ ------------
Total current liabilities 1,688,056 1,746,868
Stockholders' equity (deficit) (Notes 2, 4, 5, 6, 7 and 8):
Preferred stock, no par value; 50,000,000 shares
authorized, 2 shares issued and outstanding
liquidation preference $510,000 500,000 500,000
Common stock, $.001 par value; 150,000,000 shares
authorized, 80,378,240 (2001) and 80,813,594
(2002) shares issued 80,378 80,813
Additional paid-in capital 19,740,240 19,900,066
Stock subscriptions received 350,000 745,000
Treasury stock, at cost; 9,374,742 shares (563,750) (563,750)
Deficit accumulated during the development stage (21,085,228) (21,757,686)
------------ ------------
Total stockholders' equity (deficit) (978,360) (1,095,557)
------------ ------------
$ 709,696 $ 651,311
============ ============
See accompanying notes
3
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2001 and 2002
and for the Period from December 30, 1992 (inception) through March 31, 2002
(Unaudited)
Cumulative
amounts from
2001 2002 inception
------------ ------------ ------------
Revenues:
Coupon handling fees and other $ 336 $ 1,158 $ 19,664
Costs and expenses:
Research and development 53,000 -- 3,318,423
General and administrative 728,675 662,480 10,289,660
Depreciation and amortization 10,729 11,064 347,905
------------ ------------ ------------
Total costs and expenses 792,404 673,544 13,955,988
------------ ------------ ------------
Operating loss (792,068) (672,386) (13,936,324)
Other income (expense):
Interest income 2,252 20 105,872
Litigation settlement -- -- (156,250)
Restructuring costs -- -- (222,632)
Debt conversion costs (Note 2) (500,548) (16,195) (1,324,537)
Interest expense (1,903,956) 36,103 (5,393,157)
------------ ------------ ------------
Total other income (expense) (2,402,252) 19,928 (6,990,704)
------------ ------------ ------------
Net loss (Note 3) (3,194,320) (652,458) (20,927,028)
Preferred stock dividends 26,056 20,000 76,056
------------ ------------ ------------
Net loss applicable to common
stockholders $ (3,220,376) $ (672,458) $(21,003,084)
============ ============ ============
Basic and diluted net loss per common
share $ (.05) $ (.01) $ (.43)
============ ============ ============
Weighted average common shares
outstanding 62,400,000 71,000,000 49,200,000
============ ============ ============
See accompanying notes
4
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Three Months Ended March 31, 2002
(Unaudited)
Preferred stock Common stock
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balance, December 31, 2001 2 $ 500,000 80,378,240 $ 80,378
Sale of common stock for cash ($.42 per share)
(Note 4) -- -- 285,354 285
Preferred stock dividends -- -- -- --
Intrinsic value of stock options granted to
officers of the Company (Note 6) -- -- -- --
Value of stock options granted to
consultants (Note 6) -- -- -- --
Conversion of notes payable into common
stock (Note 2) -- -- 150,000 150
Extension of exercise period of warrants issued
in connection with debt offering (Note 2) -- -- -- --
Stock subscription received for the purchase
of 953,965 shares ocommon stock (Notes 4 and 5) -- -- -- --
Net loss for the three months ended
March 31, 2002 -- -- -- --
------------ ------------ ------------ ------------
Balance, March 31, 2002 2 $ 500,000 80,813,594 $ 80,813
============ ============ ============ ============
Deficit
accumulated
Additional during the
paid-in Stock Treasury development
capital subscriptions stock stage Total
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 $ 19,740,240 $ 350,000 $ (563,750) $(21,085,228) $ (978,360)
Sale of common stock for cash ($.42 per share)
(Note 4) 120,915 -- -- -- 121,200
Preferred stock dividends -- -- -- (20,000) (20,000)
Intrinsic value of stock options granted to
officers of the Company (Note 6) 12,600 -- -- -- 12,600
Value of stock options granted to
consultants (Note 6) 18,745 -- -- -- 18,745
Conversion of notes payable into common
stock (Note 2) 93,850 -- -- -- 94,000
Extension of exercise period of warrants issued
in connection with debt offering (Note 2) (86,284) -- -- -- (86,284)
Stock subscription received for the purchase
of 953,965 shares ocommon stock (Notes 4 and 5) -- 395,000 -- -- 395,000
Net loss for the three months ended
March 31, 2002 -- -- -- (652,458) (652,458)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2002 $ 19,900,066 $ 745,000 $ (563,750) $(21,757,686) $ (1,095,557)
============ ============ ============ ============ ============
See accompanying notes
5
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2001 and 2002
and for the Period from December 30, 1992 (inception) through March 31, 2002
(Unaudited)
Cumulative
amounts
from
2001 2002 inception
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (3,194,320) $ (652,458) $(20,927,028)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 10,729 11,064 347,905
Restructuring charges -- -- 222,632
Common stock issued for services, patents and
payables 2,612,563 (38,744) 4,260,761
Amortization of debt issuance costs -- 32,500 1,762,403
Reduction in note receivable - related party
charged to research and development -- -- 244,311
Changes in assets and liabilities:
Accounts receivable and notes receivable -- 1,067 (66,017)
Inventory 400 -- (109,905)
Other assets 12,616 20,940 (39,343)
Accounts payable 154,316 61,254 885,123
Interest payable 21,105 16,364 907,835
Other (16,665) 5,796 104,494
------------ ------------ ------------
Total adjustments 2,795,064 110,241 8,520,199
------------ ------------ ------------
Net cash used in operations (399,256) (542,217) (12,406,829)
Cash flows from investing activities:
Purchase of property and equipment (54,815) (1,342) (382,780)
Proceeds from sale of property and equipment -- -- 125,000
Advances - related party (775) -- (244,311)
Patent costs (187) (1,245) (130,865)
Lease deposits -- -- (27,880)
Debt issuance costs -- -- (10,000)
------------ ------------ ------------
Net cash used in investing activities (55,777) (2,587) (670,836)
Cash flows from financing activities:
Proceeds from sale of common stock 1,000,000 516,200 8,664,444
Purchase of treasury stock -- -- (520,000)
Proceeds from sale of preferred stock -- -- 750,000
Preferred stock dividends (26,056) (20,000) (80,658)
Proceeds from (repayments of) stockholder loans (251,000) 70,000 70,000
Repayments of capital leases -- -- (14,087)
Proceeds from notes payable -- -- 5,220,767
Repayments of notes payable (334,705) (16,797) (986,745)
------------ ------------ ------------
Net cash provided by financing activities 388,239 549,403 13,103,721
------------ ------------ ------------
Net increase (decrease) in cash (66,794) 4,599 26,056
Cash and cash equivalents at beginning of period 191,039 21,457 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 124,245 $ 26,056 $ 26,056
============ ============ ============
See accompanying notes
6
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 2002
1. Basis of presentation
---------------------
The accompanying unaudited financial statements have been prepared by the
Company. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the financial position as of
March 31, 2002, and the results of operations and cash flows for the
periods ended March 31, 2001 and 2002.
Basis of presentation and management's plans:
The Company's financial statements have been presented on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company is in the
development stage and has been primarily involved in research and
development activities. This has resulted in significant losses
($20,927,028 since inception) and a stockholders' deficit at March 31, 2002
of $1,095,557. The Company's continued existence is dependent on its
ability to obtain the additional funding necessary to continue the
marketing of the electronic coupon clearing and distribution systems. In
December 2001, the Company received subscriptions for 405,093 shares of the
Company's common stock for cash proceeds totaling $175,000 from each of two
directors of the Company. In January 2002, the Company raised $150,000 of
additional equity from In Store Capital, LLC ("ISC") (see Note 5).
In February 2002, the board of directors of the Company authorized the
offering of up to $700,000 of 2002 Units to accredited investors (see Note
4). As of March 31, 2002, the Company had sold 892,097 of its 2002 Units
generating total proceeds of $366,200.
The financial statements do not include any adjustment relating to the
recoverability and classification of recorded asset amounts or the amount
and classification of liabilities or other adjustments that might be
necessary should the Company be unable to continue as a going concern in
its present form.
In March 2001, the Company launched the initial pilot program of its
proprietary electronic coupon clearing system. In connection with this
pilot program, the Company has commenced the generation of operating
revenue. For the quarter ended March 31, 2001, the Company generated
operating revenue of $336. This pilot program was completed in January
2002. For the quarter ended March 31, 2002, the Company generated operating
revenue of $1,158.
2. Notes payable
-------------
In connection with the notes payable issued in 1996, 1997 and 1998, the
Company issued warrants to purchase the Company stock exercisable for a
three-year period. A majority of these warrants were classified as "A",
7
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 2002
2. Notes payable (continued)
-------------------------
"B", and "C" warrants. The balance of the warrants did not have a specific
classification. As these warrants have neared their initial expiration
dates, the Company has extended these warrants first for 120 days and then
for successive 90 day periods. In March 2001, the Company issued a letter
to all holders of the A, B, and C warrants, whose notes were previously
converted to the Company's common stock, informing them that the Company
would no longer be extending the warrants beyond their current extension
dates. All related A, B, and C warrants that were not exercised during
2001, expired on December 31, 2001. The exercise period for the remaining
warrants was extended to June 30, 2002.
For accounting purposes, the Company is treating these extensions as stock
appreciation rights and has recorded interest expense of $1,831,892 in the
quarter ended March 31, 2001 related to the warrants, which have been
extended. During the quarter ended March 31, 2002, the price of the
Company's stock decreased. As a result, the value assigned to the warrant
extensions was decreased by $86,284 for the three months ended March 31,
2002.
In March 2002, the Company offered its noteholders the option of extending
their notes through October 31, 2002 or electing to convert their notes and
accrued interest into shares of the Company's restricted common stock.
Under the extension feature, each noteholder has the option of extending
their note and accrued interest to October 31, 2002. In consideration for
extending their note, each noteholder would receive options to purchase
shares of the Company's restricted common stock exercisable at $1.00 per
share for each dollar owed the noteholder as of March 1, 2002 including all
accrued interest. Under the conversion feature, each noteholder has the
option of converting their note and accrued interest into shares of the
Company's restricted common stock at $.45 per share. In consideration for
converting their note, each noteholder would receive options to purchase
shares of the Company's restricted common stock (one option for each share
of common stock) at prices ranging from $.50 - $.75 per share. All options
expire on December 31, 2002. As of March 31, 2002, notes totaling $50,000
have been extended and notes totaling $77,805, including accrued interest
of $27,805 have been converted into 150,000 shares of the Company's common
stock. The Company has recorded an expense of $16,195 as debt conversion
costs in recognition of the beneficial conversion terms offered.
In February 2002, the Company borrowed $70,000 from an officer/director of
the Company bearing interest at 8% per annum, convertible into shares of
the Company's common stock at a price of $.432 per share. This note matured
on March 16, 2002 and was subsequently extended to May 15, 2002.
3. Income taxes
------------
No provision for income taxes is required at March 31, 2002, because, in
management's estimation the Company will not recognize any taxable income
through December 31, 2002.
8
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 2002
4. Private placement
-----------------
In February 2002, the board of directors of the Company authorized the
offering of up to $700,000 of 2002 Units to accredited investors of the
Company. Each "2002 Unit" is comprised of (i) one share of the Company's
common stock at a price equal to 90% of the average closing price over the
five trading days immediately preceding the purchase of the Unit, (ii) an
option to purchase an additional share of the Company's common stock at an
exercise price of $.50 per share for a period of five months following the
date of the purchase of the Unit, and (iii) a pro-rata royalty payment
equal to a maximum of one half of one cent ($.005) per redeemed coupon
under the Budget Saver(TM) program payable until such time as the initial
investment has been fully realized by the investor. As of March 31, 2002,
the Company has sold 892,097 of its 2002 Units generating total proceeds of
$366,200.
5. Sale of common stock
--------------------
In January 2002, the Company raised $150,000 of additional equity from ISC
enabling the Company to continue the marketing of its Budget Saver(TM)
program. Under the term of the agreement, ISC subscribed for 347,222 shares
of the Company's common stock. Additionally, ISC shall receive a royalty
equal to one half of one cent ($.005) for each coupon processed by the
Company through the Budget Saver(TM) program. This royalty payment shall
continue until that time when ISC shall have received royalty payments
totaling $300,000.
6. Stock options
-------------
In February 2002 and in conjunction with the hiring of Michael T. Mozer as
the Company's Chairman, President, and Chief Executive Officer effective
January 1, 2002, the Company's board of directors approved the issuance of
options to Mr. Mozer to purchase 200,000 shares of the Company's common
stock exercisable at $.42 per share. These options were granted pursuant to
the Company's 2000 Omnibus Equity Incentive Plan.
During the quarter ended March 31, 2002, the Company issued options to a
consultant to purchase 75,000 shares of the Company's common stock
exercisable at prices ranging from $.36 to $.41 per share.
For the quarter ended March 31, 2002, the Company recognized compensation
expense of $12,600 and $18,745 for the options issued to Mr. Mozer and the
consultant, respectively. Compensation expense resulted from the difference
between the exercise price and the market price of the Company's common
stock at the time the options were granted to Mr. Mozer and based on the
Black-Scholes model for the options issued to the consultant.
9
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 2002
7. Registration of company equity incentive plan
---------------------------------------------
In February 2002, the Company completed a Registration Statement on Form
S-8 with the Securities and Exchange Commission registering options to
purchase 8,866,875 shares of the Company's common stock that were
authorized to be issued under the Company's 2000 Omnibus Equity Incentive
Plan. As of March 31, 2002, the Company had granted options to purchase a
total of 3,066,875 shares of the Company's common stock to various
employees and directors of the Company. As of March 31, 2002, none of these
stock options had been exercised.
8. Subsequent events
-----------------
In April 2002, noteholders elected to extend their notes totaling $25,000
to October 31, 2002.
In April 2002 and in conjunction with the Company's $700,000 private
placement of 2002 Units, the Company sold 432,531 of its 2002 Units
generating total proceeds of $181,650.
10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
These discussions may contain forward-looking statements. A forward-looking
statement may contain words or phrases such as "will continue to be," "will be,"
"continue to," "expect to," "anticipates that," "to be," or "can impact."
Management cautions that forward-looking statements are subject to risks and
uncertainties that could cause the Company's actual results to differ materially
from those projected in forward-looking statements.
OVERVIEW
- --------
The Company has identified the accounting policies described below as critical
to its business operations and the understanding of the Company's results of
operations. The impact and any associated risks related to these policies on the
Company's business operations is discussed throughout this section where such
policies affect the Company's reported and expected financial results. The
preparation of this Quarterly Report requires the Company to make estimates and
assumptions that affect the reported amount of assets and liabilities of the
Company, revenues and expenses of the Company during the reporting period and
contingent assets and liabilities as of the date of the Company's financial
statements. There can be no assurance that the actual results will not differ
from those estimates.
The Company has relied upon the issuance of shares of its common stock, options
to purchase its common stock and warrants to purchase its common stock to fund
much of the Company's operations. The following describes the methods used to
record various stock related transactions.
Stock issued for services is valued at the market price of the Company's stock
at the date of grant.
Compensation related to the issuance of stock options to employees and directors
is recorded at the intrinsic value of the options, which is the market price of
the Company's common stock less the exercise price of the option at the grant
date. Compensation related to the issuance of options to consultants for the
purchase of the Company's common stock is recorded at the market price of the
Company's common stock at the measurement date. The measurement date is
generally the date the options are fully vested.
Warrants issued to warrant holders with respect to convertible notes and
warrants issued in 1996, 1997 and 1998 were initially valued and recorded as
debt issuance costs which were subsequently amortized to interest expense over
the initial term of the convertible notes. When the warrants expired, the
Company recorded the initial 120-day extension of the warrants at the fair value
of the warrants using the Black-Scholes option-pricing model. As the warrants
were extended for additional 30-day periods, the Company treated the warrants as
stock appreciation rights and adjusted the value of the warrants quarterly based
on the increase or decrease in the market price of the Company's stock. Upon
conversion of these convertible notes into shares of the Company's common stock,
the Company valued any additional shares of its common stock issued and recorded
any decrease in the warrant exercise price, compared to the original terms of
the conversion option, as debt conversion costs.
The Company is a development stage company engaged in the development of its
system for distributing and electronically clearing coupons, certain components
of which are patented. The Company generated revenues from operations during the
quarter ended March 31, 2002 totaling $1,158 as compared to $336 for the quarter
ended March 31, 2001. Additionally, the Company has incurred losses of
$20,927,028 since inception through March 31, 2002.
At March 31, 2002, the Company had a stockholders' deficit of $1,095,557, which
reflects $20,662,129 of paid in capital (net of amount attributable to treasury
stock) less accumulated deficit of $21,757,686. The accumulated deficit amount
11
is primarily the result of the amount of interest expense incurred in connection
with short-term convertible notes and debentures by the Company and its
predecessor in private transactions in 1996 through 2001, research and
development, general and administrative expenses and the valuation of stock
options and warrants incurred since inception. At March 31, 2002, the Company
had a working capital deficit of $1,673,787.
In January 2002, the Company raised $150,000 of equity from ISC enabling the
Company to continue the marketing of its electronic coupon distribution program.
In February 2002, the board of directors authorized the offering of up to
$700,000 of 2002 Units to accredited investors to continue the marketing of the
electronic coupon distribution program. As of March 31, 2002, the Company had
sold 892,097 of its 2002 Units generating total gross proceeds of $366,200. The
Company is unable to provide any assurance that it will be able to raise the
additional funds necessary to finance anticipated costs associated with the
commencement of the electronic coupon distribution program and otherwise to
implement its business plan and strategy, as presently contemplated.
The Company is seeking to eliminate all remaining debt obligations through the
conversion or buyout of notes payable. In March 2002, the Company provided these
noteholders with the option of extending their notes through October 31, 2002 or
electing to convert their notes and accrued interest into shares of the
Company's common stock. As of March 31, 2002, notes totaling $50,000 were
extended and notes totaling $77,805, including accrued interest of $27,805, have
been converted into 150,000 shares of the Company's common stock. As of March
31, 2002, notes totaling $592,372 (including accrued interest of $204,872)
remain outstanding and in default. Through March 31, 2002 the Company remained
burdened with debt obligations and a continuing lack of working capital. The
raising of additional equity in the first quarter of 2002 relieved some of the
burden relating to the debt obligations and provided the necessary funding to
continue the marketing of the Company's electronic coupon distribution program.
If the Company is unsuccessful in eliminating all remaining debt obligations
either through conversion or buyout, the Company may require the securing of
additional working capital to continue its program and operations as planned.
Otherwise, the Company may be forced to curtail or discontinue its operations.
FINANCIAL CONDITION
- -------------------
The Company had $651,311 in total assets and $1,746,868 in total liabilities at
March 31, 2002, as compared to $709,696 and $1,688,056 at December 31, 2001,
respectively. Accounts payable and accrued expenses at December 31, 2001 were
$922,567 as compared to $989,617 at March 31, 2002. The Company had a working
capital deficit of $1,673,787 at March 31, 2002, as compared to a working
capital deficit of $1,597,567 at December 31, 2001. This difference primarily is
attributed to an increase in accounts payable of $61,254.
RESULTS OF OPERATIONS
- ---------------------
The Company's operational costs historically have increased or decreased
primarily due to the expansion or contraction of the Company's ongoing research
and development efforts. The Company has incurred operating expenses of
$13,955,988 from inception through March 31, 2002. These expenses include
$3,318,423 in research and development expenses and $10,289,660 in general and
administrative expenses. Subject to the availability of additional funds, the
Company expects its operational expenses and costs to increase as it expands its
marketing and promotional efforts to commence the introduction of its systems,
products, and services.
12
QUARTER ENDED MARCH 31, 2002, COMPARED TO QUARTER ENDED MARCH 31, 2001
For the quarter ended March 31, 2002, the Company sustained net operating losses
of $652,458, as compared to net losses of $3,194,320 for the quarter ended March
31, 2001. The decrease in operating losses primarily was due to a decrease in
debt conversion costs associated with the conversion of notes payable in 2001
and a decrease in interest expense, which resulted from the expiration of the A,
B, and C warrants in December 2001 and the valuation of stock warrants and
options at March 31, 2002 as compared to the valuation at December 31, 2001. For
the quarter ended March 31, 2002, the Company recognized a decrease in the
valuation of these options and warrants totaling $86,284.
The Company's operating expenses for the quarter ended March 31, 2002 decreased
by approximately 15% to $673,544, as compared to operating expenses of $792,404,
for the same period last year. The decrease in operating expenses in 2002 was
due to decreases in research and development and general and administrative
expenses. Research and development costs decreased by 100% to $0 for the quarter
ended March 31, 2002, as compared to research and development costs of $53,000
for the same period last year. This decrease was due to the completion of all
prototype development work that was necessary in order to enable the Company to
launch its pilot program in March 2001. General and administrative expenses
decreased by $66,195 or 9% to $662,480 for the 2002 fiscal quarter as compared
to general and administrative expenses of $728,675 for the same period last
year. The decrease in general and administrative expenses primarily was due to
decreases of $129,217 in management consulting fees related to the Company's
project management requirements, $120,939 in wages and benefits and offset by
increases in legal and professional fees, travel, and LGS royalty fees of
$194,433 incurred in conjunction with the marketing of the Company's electronic
coupon distribution program.
The Company's net non-operating income (including non-operating interest income
and interest expense) increased to $19,928 for the quarter ended March 31, 2002
as compared to net non-operating expenses of $2,402,252 for the quarter ended
March 31, 2001. The increase was primarily due to decreases in debt conversion
costs and interest expense. Debt conversion costs for the quarter ended March
31, 2002 decreased by 97% to $16,195 as compared to the same period last year.
This was due to decreases in the number of notes and accrued interest converted
to common stock. Interest expense for the quarter ended March 31, 2002 decreased
by $1,940,059. Interest expense represented 181% of the net non-operating income
for the quarter. This was due primarily to a decrease in the valuation of the
warrants issued in connection with the Company's debt offerings as a result of
the expiration of the A, B, and C warrants in December 2001.
LIQUIDITY AND CAPITAL RESOURCES
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Since inception, the Company's principal requirements for capital have been to
finance the cost of research and development of its coupon selection, dispensing
and clearing systems and related technologies, and to pay for expenses
associated with securing patent protection, formulating its business strategy
and developing strategic relationships with third parties, such as Unisys
Corporation, retailers and product manufacturers. The Company has historically
financed its operations through loans and investments by directors and officers,
and the sale of equity and debt securities in private transactions in reliance
upon exemptions from the registration and qualification requirements under
federal and state securities laws.
At March 31, 2002, the Company had $1,746,868 in current liabilities, of which
$670,052 (including $232,552 of interest accrued thereon) was in the form of
convertible, short-term debentures issued by the Company and its predecessor in
private transactions during the 1998, 1997 and 1996 fiscal years. At March 31,
13
2002, the Company was in default of its obligations under the notes issued to
investors by the Company and its predecessor in the amount of $387,500 (plus
accrued interest of $204,872). A portion of the notes was converted into shares
of the Company's common stock during the 1998, 1999, 2000, and 2001 fiscal
years. In March 2002, the Company offered its noteholders the option of
extending their notes through October 31, 2002 or electing to convert their
notes and accrued interest into shares of the Company's restricted common stock.
Under the extension feature, each noteholder has the option of extending their
note and accrued interest to October 31, 2002. In consideration for extending
their note, each noteholder would receive options to purchase shares of the
Company's restricted common stock exercisable at $1.00 per share for each dollar
owed the noteholder as of March 1, 2002 including all accrued interest. Under
the conversion feature, each noteholder has the option of converting their note
and accrued interest into shares of the Company's restricted common stock at
$.45 per share. In consideration for converting their note, each noteholder
would receive options to purchase shares of the Company's restricted common
stock (one option for each share of common stock) at prices ranging from $.50 to
$.75 per share. All options expire on December 31, 2002. As of March 31, 2002,
notes totaling $50,000 have been extended and notes totaling $77,805, including
accrued interest of $27,805 have been converted into 150,000 shares of the
Company's common stock. At March 31, 2002, notes in the aggregate principal
amount of $387,500 remained outstanding, as compared to notes in the aggregate
principal amount of $487,500 that were outstanding on December 31, 2001. The
remaining portion of the Company's current liabilities is primarily comprised of
short-term note obligations totaling $87,199 and continuing payment obligations
of $490,688 (at March 31, 2002 and December 31, 2001) to Unisys Corporation. The
Company relies on the availability of additional capital to satisfy all such
obligations.
The Company will require additional capital to continue and complete development
of its systems, to market its products and services and to implement its
business strategies.
The Company has limited access to additional sources of equity and debt
financing and it can provide no assurance that additional funds will be
available at all, or if available, on commercially acceptable terms or in a
timely manner to enable the Company to continue its operations as expected.
Since the end of fiscal year 2001 through March 31, 2002, the Company's cash
position has increased. At March 31, 2002, the Company had available cash of
$26,056, as compared to available cash of $21,457 at December 31, 2001.
In January 2002, the Company raised an additional $150,000 of equity from ISC,
enabling the Company to continue the marketing of its electronic coupon
distribution program. In February 2002, the board of directors authorized the
offering of up to $700,000 of 2002 Units to accredited investors. As of March
31, 2002, the Company had sold 892,097 of its 2002 Units generating total gross
proceeds of $366,200. The Company requires additional capital to finance its
operating costs through the sale of equity and/or debt securities. Additionally
if the Company is successful in securing long-term contracts with a minimum
number of customers, then the Company would be in a much stronger position to
secure addition capital if the need should arise. Failure to secure these
contracts would require the Company to acquire additional capital in the form of
either debt or equity. If the Company were unable to secure this additional
capital, if needed, it would most likely impair the ability of the Company to
meet its obligations in the near or medium term and to continue operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
- -------------------------------------------------------------------
The Company does not own financial instruments that are subject to market risk.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2002, the Company raised an additional $150,000 of equity from ISC
in exchange for the issuance of 347,222 shares of the Company's restricted
common stock, enabling the Company to continue the marketing of its electronic
coupon distribution program. This sale was made pursuant to an exemption from
registration under Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.
In February 2002, the board of directors authorized the offering of up to
$700,000 of 2002 Units to accredited investors. As of March 31, 2002, the
Company had generated total gross proceeds of $366,200 in exchange for the
issuance of 892,097 shares of the Company's restricted common stock. This sale
was made pursuant to an exemption under Section 4(6) of the Securities Act and
Regulation D promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of May 15, 2001, the Company was in default on its notes payable issued to
investors in 1996, 1997, and 1998 in the form of convertible short-term
debentures totaling $592,372 (including accrued interest of $204,872). These
debentures, which originally matured between 1997 and 1999, are in default
because of the Company's inability to repay these obligations as a result of the
Company's insufficient working capital.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In February 2002, the Company completed an Registration Statement on Form S-8
with the Securities and Exchange Commission registering options to purchase
8,866,875 shares of the Company's common stock, par value $.001 per share, that
were authorized to be issued by the Company under the Company's 2000 Omnibus
Equity Incentive Plan. As of March 31, 2002, options to purchase 3,066,875
shares of the Company's common stock had been granted to various employees and
directors of the Company. Additionally, as of March 31, 2002, no such options
were exercised.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K.
None.
15
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.
Date: May 15, 2002 IN STORE MEDIA SYSTEMS, INC.
(Registrant)
By: /s/ Michael T. Mozer
--------------------------------
Michael T. Mozer,
President and Chief
Executive Officer
By: /s/ Robert L. Cohen
-------------------------------
Robert L. Cohen
Vice President and
Chief Financial Officer
16