UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to_______________
Commission file number: 000-50159
IMEDIA INTERNATIONAL, INC.
____________________________________________________________________
(Name of small business issuer in its charter)
DELAWARE 56-2428786
________________________________ __________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
1721 21st STREET, SANTA MONICA, CA 90404
__________________________________________________
(Address of principal executive offices)
(310) 453-4499
_______________________________________________________________
Issuer's Telephone Number
_______________________________________________________________
(Former address, if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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 [ ]
As of August 6, 2004 the Registrant had 60,983,583 shares of common stock
outstanding.
Transitional small business disclosure format: Yes [ ] No [X]
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS...............................................3
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.........13
ITEM 3: CONTROLS AND PROCEDURES...........................................28
PART II: OTHER INFORMATION
ITEM 1: LEGAL.............................................................28
ITEM 2: CHANGES IN SECURITIES.............................................29
ITEM 3: DEFAULTS UPON SENIOR SECURITIES...................................29
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............29
ITEM 5: OTHER INFORMATION.................................................30
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K .................................32
SIGNATURES................................................................ 33
CERTIFICATIONS.............................................................34
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
IMEDIA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
==============================================================================
JUNE 30, DEC. 31,
2004 2003
------------- -------------
ASSETS (unaudited)
CURRENT ASSETS
Cash $ 278,477 $ 813,189
Accounts receivable 444,585 -
Prepaid expense - 3,397
Inventory - 71,056
------------- -------------
Total current assets 723,062 813,189
PROPERTY AND EQUIPMENT, NET 72,487 51,833
------------- -------------
Total Assets $ 795,549 $ 1,076,139
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 261,560 $ 159,171
Due to Affiliate 92,356 285,472
Notes payable 231,992 12,863
------------- -------------
Total current liabilities 585,908 457,506
------------- -------------
SHAREHOLDERS' EQUITY
Preferred stock, $0.001 par value, authorized
20,000,000 shares; none outstanding - -
Common stock, $0.001 par value, authorized
500,000,000 shares; 60,983,583 issued and
outstanding 60,983 59,183
Subscriptions receivable (530,000) (680,000)
Common stock committed, 530,000, shares 580,000 691,520
Deferred compensation (47,317) -
Capital in excess of par value 5,896,982 4,185,230
Accumulated deficit (5,751,007) (3,637,300)
------------- -------------
Total shareholders' equity 209,641 618,633
------------- -------------
Total liabilities and equity $ 795,549 $ 1,076,139
============= =============
The accompanying notes are an integral part of these financial statements.
3
IMEDIA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended JUNE 30, 2004 and 2003.
(unaudited)
=============================================================================
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------------- --------------- ------------- -------------
Net sales $ 899,675 $ 37,500 $ 925,175 $ 37,500
Cost of sales 766,409 32,411 771,109 32,411
------------- --------------- ------------- -------------
Gross Income 133,266 5,089 154,066 5,089
Operating expenses 1,158,317 567,879 1,927,329 567,879
Operating expenses
- related Parties 121,500 850,179 243,000 850,179
------------- --------------- ------------- -------------
Loss from operations (1,146,551) (1,412,963) (2,016,263) (1,412,963)
Interest expense 95,044 511 95,044 511
------------- --------------- ------------- -------------
Loss before provision
for income taxes (1,241,595) (1,413,474) (2,111,307) (1,413,474)
Provision for income taxes - 800 2,400 800
------------- --------------- ------------- -------------
Net Loss $ (1,241,595) $ (1,414,274) $ (2,113,707) $ (1,414,274)
============= =============== ============= =============
NET LOSS PER COMMON SHARE
Basic and diluted $ (0.02) $ (0.03) $ (0.04) $ (0.03)
============= =============== ============= =============
WEIGHTED AVERAGE COMMON
OUTSTANDING SHARES
Basic and diluted 60,488,428 50,300,373 59,953,397 50,300,373
============= =============== ============= =============
The accompanying notes are an integral part of these financial statements.
4
IMEDIA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended JUNE 30, 2004 and 2003.
(unaudited)
====================================================================================
JUNE 30, JUNE 30,
2004 2003
------------- -------------
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,113,707) $ (1,414,274)
Adjustments to reconcile net loss to net
cash used in operating activities
Interest on fixed conversion feature 90,044 -
Depreciation 20,739 8,697
Reserve for collection of receivable
due from affiliate - 850,173
Non-cash stock compensation 13,000 -
Increase in accounts receivable (444,585) 37,500
Increase in other assets - (7,500)
Increase in deferred compensation (47,317) -
Decrease in prepaid expenses 3,397 -
Decrease in inventory 71,055 -
Increase in accounts payable 102,389 13,654
Increase in committed stock 50,000 -
------------- -------------
Net cash used in operating activities (1,987,215) (586,750)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (41,393) -
Due from Affiliates & Associated Companies (net) (56,451) (535,173)
------------- -------------
Net cash used in investing activities (97,844) (535,173)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable - related parties (14,254) (175,000)
Proceeds from notes payable - related parties 1,391 7,500
Proceeds from notes payable 250,000 -
Proceeds from collections of common stock
subscriptions 370,000 -
Proceeds from issuance of common stock 1,058,000 1,570,000
Offering Costs paid on issuance of common stock (114,790) 29,249
------------- -------------
Net cash provided by financing activities 1,550,347 1,373,251
------------- -------------
Net Change in Cash (534,712) 251,328
Cash, beginning of Period 813,189 -
------------- -------------
Cash, end of Period $ 278,477 $ 251,328
============= =============
Supplemental disclosures of cash flow information
Income taxes paid $ 2,400 $ 800
============= =============
The accompanying notes are an integral part of these financial statements.
5
IMEDIA INTERNATIONAL INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
=============================================================================
1. ORGANIZATION
Pursuant to an Agreement and Plan of Merger dated as of August 18, 2003 (the
"Merger Agreement"), a wholly-owned subsidiary of the Company's corporate
predecessor, Irvine Pacific Corporation ("IPC") merged with and into Hollywood
Previews, Inc. ("HPI"), on August 29, 2003, resulting in HPI becoming a
wholly-owned subsidiary of IPC (the "Acquisition").
As consideration for the Acquisition, the shareholders of HPI were issued
55,179,581 shares of IPC common stock which, immediately following the
Acquisition, represented 96.18% of the issued and outstanding common stock of
IPC (after giving effect to the conversion of all of IPC's outstanding notes
immediately prior to the Acquisition). Although HPI became a wholly-owned
subsidiary following the Acquisition, because the transaction resulted in a
change of control, the transaction was recorded as a "reverse merger" whereby
HPI is considered to be the accounting acquirer of the Company. Immediately
prior to the Acquisition IPC had only nominal assets and liabilities and no
current business operations.
Effective November 25, 2003, IPC completed a statutory merger effected for the
purpose of changing its state of incorporation from Colorado to Delaware by
merging into a newly formed Delaware corporation, iMedia International, Inc.
(the "Company"). This change in IPC's state of incorporation and corporate
name was approved by the holders of a majority of IPC's outstanding shares of
common stock at a special meeting of shareholders on November 21, 2003.
As a result of the reincorporation merger, each outstanding share of IPC's
common stock was automatically converted into one share of Company common
stock. Each stock certificate representing issued and outstanding shares of
IPC's common stock continues to represent the same number of shares of common
stock of the Company. The Company continues to operate the business of IPC,
and the reincorporation did not result in any change in IPC's former business,
assets or liabilities, did not cause the Company's headquarters to be moved,
or result in any relocation of management or other employees.
At the time of the Acquisition HPI held an exclusive license from iPublishing,
Inc. ("iPublishing"), an affiliate of the Company, to use iPublishing's
intellectual property (the "License"). iPublishing's three shareholders, David
MacEachern, Scott Kapp and Franklin Unruh (each of whom own approximately 33%
of the outstanding securities of iPublishing), are each officers and directors
of the Company. Pursuant to the License, iPublishing receives annual annual
royalties of 5% of Gross Margin generated by disks produced by the Company
using iPublishing technology. Because the License is exclusive, iPublishing
may not license or assign any of its intellectual property to any other party
and may not compete with the Company. It is the Company's intention to
permanently acquire all of iPublishing's intellectual property at some point
in the future when operations and revenue have stabilized. In connection with
the exclusive license, HPI purchased all of iPublishing's property and
equipment, which iPublishing had previously purchased from one of its
shareholders and officers. The purchase transaction has been accounted for at
the carry-over basis of the assets at which they were obtained by the
shareholder/officer of iPublishing. HPI has since transferred the exclusive
6
license to its parent, the Company. The intellectual property covered by the
License consists of various proprietary procedures, codes, technologies,
copyrights, trademarks and brands, along with the proprietary suite of
mastering software used to create our CD-ROM and DVD-ROM products.
As a result of the Acquisition, the Company became a publisher of interactive,
digital, and multimedia publications on CD-ROM. The Company distributes
Hollywood Previews(TM) Entertainment iMagazine(TM) , an interactive digital
magazine (also called an iMagazine) on CD-ROM that features movie previews,
video games, and television previews, plus interviews with stars, behind the
scenes videos, music soundtracks and music videos, Hollywood fashion and
style, and other entertainment news. Hollywood Previews(TM) Entertainment
iMagazine(TM) s used primarily to showcase the Company's proprietary digital
publishing system capabilities. The Company also markets and produces a
variety of special edition digital publications and custom promotional discs
for various corporate clients. The Company's publications are distributed
either through major Sunday newspapers, inserted in magazines and periodicals
at movie theater box offices, handed-out or mailed directly to consumers.
The majority of our revenues to date have been generated from the sale of
custom publications and special edition discs. We continue to pursue the
procurement of paid advertising sponsorships, licensing, content placements,
and e-commerce fees from Hollywood Previews(TM) Entertainment iMagazine(TM).
We also intend to begin sales efforts of our proprietary Usage Report that
monitors the navigation and use of Hollywood Previews(TM) Entertainment
iMagazine(TM) by its audience.
The Company is a holding company doing business through various operating
subsidiaries. We formed iMedia US, LLC, a California limited liability
company on December 24, 2003 to serve as our primary operating unit.
7
Combined Financial Statements - Footnote
The pro-forma impact of HPI, the predecessor company, on the consolidated
results of operations of the Company, for the three months and six months
ended June 30, 2003 would be as follows:
For the three months ended June 30, 2003
Affiliated Combining Combined
As Reported Group Entries Basis
----------- ---------- ----------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Results of operations
Revenue $ 37,500 $ 64,620 $ - $ 102,120
Expenses 1,450,463 245,430 850,173 845,720
----------- ---------- ----------- ------------
(Loss)income from
operations (1,412,963) (180,810) 850,173 (745,600)
Other expense (511) (56,014) - (56,525)
(Loss) income before
provision for
income taxes (1,413,474) (236,824) 850,173 (800,125)
Provision for
income taxes 800 1,600 - 2,400
----------- ---------- ----------- ------------
Net(loss) income $1,414,274 $(238,424) $ 850,173 $ (802,525)
=========== ========== =========== ============
For the six months ended June 30, 2003
Affiliated Combining Combined
As Reported Group Entries Basis
----------- ---------- ----------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Results of operations
Revenue $ 37,500 $ 286,125 $ - $ 323,625
Expenses 1,450,463 736,930 850,173 1,337,270
----------- ---------- ----------- ------------
(Loss)income from
operations (1,412,963) (450,855) 850,173 (1,013,645)
Other expense (511) (61,979) - (62,490)
----------- ---------- ----------- ------------
(Loss) income before
provision for
income taxes (1,413,474) (512,834) 850,173 (1,076,135)
Provision for
income taxes 800 1,600 - 2,400
----------- ---------- ----------- ------------
Net(loss) income $1,414,274 $(514,434) $ 850,173 $(1,078,535)
=========== ========== =========== ============
The accompanying notes are an integral part of these financial statements.
8
2. GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company to date has not had
significant operations and is highly dependent on equity and debt financing.
These factors raise substantial doubt about our ability to continue as a going
concern.
Additional financing will be required in order for the Company to continue
operations. Management believes it will be able to obtain such financing from
new investors by the sale of equity or convertible debt through various
private placements. However, the Company can provide no assurance that it
will be able to obtain such financing, or that the terms of any such financing
will be favorable to the Company.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The consolidated financial information as of June 30, 2004 and for the six and
three months ended June 30, 2004 is has not been audited and reflects all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of the financial position, operating
results, and cash flows for such periods. The consolidated results of
operations for the six and three months ended June 30, 2004 are not
necessarily indicative of the results that may be expected for any future
period. These financial statements should be read in conjunction with our
financial statements in the Company's Form 10-KSB for the year ended December
31, 2003.
Basis of Presentation
The consolidated financial statements of iMedia International, Inc. include
the accounts of the Company and its wholly owned subsidiaries iMedia US, LLC
and HPI. All inter-company accounts and transactions have been eliminated in
consolidation.
Dissolution of Subsidiaries
The Company's majority owned subsidiaries Las Vegas Previews, LLC and
iPolitix, LLC had no operations for the six months ended June 30, 2004, and
these entities have subsequently been dissolved.
Revenue Recognition
Revenue is generated mainly through the sale and licensing of interactive,
digital and multimedia publications and is recognized when the product,
usually either a CD-ROM or DVD, is shipped to the customer or is distributed
to the public, provided that the following conditions of sale as established
by the Securities and Exchange Commission's Staff Accounting Bulleting ("SAB")
No. 104, are satisfied:
. Persuasive evidence of an arrangement exists,
9
. Delivery has occurred or services have been rendered,
. The seller's price to the buyer is fixed or determinable, and
. Collectibility is reasonably assured.
Revenue from advertising contracts and agreements is deferred until the
services and/or products are completed and delivered.
Earnings (Loss) per Common Share
We have adopted the Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share", which established standards for computing and
presenting earnings per share (EPS). The statement simplifies the standards
for computing EPS, replaces the presentation of primary EPS with a
presentation of basic EPS and requires a dual presentation of basic and
diluted EPS on the face of the income statement. Basic EPS are based upon the
weighted average number of common shares outstanding during the period.
Diluted EPS are based upon the weighted average number of common shares if all
dilutive potential common shares had been outstanding.
The following potential common shares have been excluded from the computation
of dilutive net income (loss) per share for all periods presented because the
effect would have been anti-dilutive:
For the Six For the Three
Months Ended Months Ended
June 30, June 30,
2004 2003 2004 2003
---------- ----------- ---------- ----------
Warrants or options issued for
- Offering costs 44,150 - 44,150 -
- Services rendered 415,191 - 60,866 -
- Convertible Note payable 300,000 - 300,000 -
Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Concentrations and Uncertainties
We do not believe that in the near future our earnings from sales to customers
will be over concentrated to any one or to only a few customers. The Company's
business plan calls for sales to a wide variety of customers and in a wide
variety of interests. The Company's receivables outstanding at June 30, 2004
have subsequently been paid.
10
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2004 consisted of the following:
Equipment 222,257
Less accumulated depreciation 149,770
-----------
Total $ 72,487
===========
5. LINES OF CREDIT
In March 2004, we cancelled a line of credit with a financial institution in
the amount of $30,000. The Company presently has no additional open lines of
credit.
6. CONVERTIBLE NOTE PAYABLE
On April 22, 2004 we closed on a short-term convertible note payable to
Augustine Fund, LLP. We borrowed the amount of $250,000 payable in 90-days.
The Note bore interest of 8% APR, compounded monthly. As an incentive to make
the loan, Augustine Fund was issued a 3-year warrant to purchase up to 50,000
shares at $1.00 per share and a second one-year warrant to purchase up to
250,000 additional common shares at the same price. Pursuant to the terms of
the Note, the Company had the right to repay the note at any time subject to a
10-day option to convert the Note into 250,000 shares of our Common Stock.
The Company also had the right to extend the note for one additional 90-day
period in its discretion. However, if the Company elected to extend the note
(a) the conversion price of the Note would have been discounted 50% in favor
of Augustine so that upon conversion, Augustine would receive 500,000 common
shares and (b) Augustine would receive a third three-year "penalty warrant" to
purchase 325,000 shares of common stock at $1.00 per share.
In accordance with generally accepted accounting principles, the difference
between the conversion price and the Company's stock price on the date of
issuance of the Note to Augustine is considered to be interest expense. It
will be recognized in the statement of operations during the period from the
date of issuance of the note to the time at which the note matures. In the
event the debt is settled prior to the maturity date, an expense will be
recognized based on the difference between the carrying amount and the amount
of the payment. During the quarter ended June 30, 2004, the Company recorded
$54,026 as a debt discount and recognized $45,022 in interest expense related
to the accretion of the debt discount.
The warrants issued to Augustine entitle Augustine to purchase 300,000 shares
of the Company's common stock at $1.00 per share, and it expires in a range of
one to three years from the date of issuance. The Company allocates the
proceeds received from debt or convertible debt with detachable warrants using
the relative fair value of the individual elements at the time of issuance.
In the event the debt is settled prior to the maturity date, an expense will
be recognized based on the difference between the carrying amount and the
amount of the payment. The amount allocated to the warrants as a debt
discount was calculated at $54,026 and will be recognized as interest expense
over the period until the notes mature or are converted. During the quarter
ended June 30, 2004, the Company recognized $45,022 in interest expense
related to the accretion of the debt discount.
11
Subsequent to June 30, 2004, the Company exercised its option to repay the
Note and Augustine elected not to convert. The principal amount of the Note,
plus $5,000 in interest was paid by the Company on July 20, 2004 and no
penalty warrants were issued. The remaining interest related to the difference
between the Company's stock price and the conversion price and the warrants
was recognized on that date.
7. COMMITMENTS - RENT
We lease office facilities on a month-to-month basis. Rent expense amounted
to $19,500 for the six months ended June 30, 2004 and $19,500 for the six
months ended June 30, 2003.
8. SHAREHOLDERS' EQUITY
Common Stock Subscriptions
During the six months ended June 30, 2004 we received subscriptions of
$1,058,000 for the purchase of 1,058,000 shares of common stock from
accredited investors through a private placement dated March 18, 2004.
In addition, $370,000 was received from prior subscriptions receivable.
Common Stock issued to Subscribers of a Previous Private Placement
We issued an additional 408,993 shares to investors who participated in a
previous private placement dated September 2, 2003. The shares were issued to
compensate for the difference between the amount paid by these prior
subscribers and the amounts paid by subscribers of a subsequent private
placement dated March 18, 2004, who purchased shares at a price-per-share
lower than that of the previous offering.
Common Stock issued for Services
During the six months ended June 30, 2004, we issued a total of 25,000
restricted shares for services rendered.
Issued securities include:
.. 15,000 shares issued to a consultant - 12,000 shares for services rendered
and expensed during 2003 and 3,000 shares for services rendered during the
three month period ended March 31, 2004, valued at $15,000.
.. 10,000 restricted shares issued to another consultant for services
rendered during the three month period ended March 31, 2004, valued at
$10,000.
12
9. WARRANTS AND OPTIONS
During the six months ended June 30, 2004, the Company:
.. issued options to purchase 415,191 shares of the Company's common stock to
third parties for consulting services. The Company issued these options
at exercise prices between $0.10 - $1.75 per share, with terms expiring in
two to three years. The options had a calculated value of $267,771 of
which $47,317 will be recognized in a future period and is currently
recorded as a deferred compensation equity account.
10. EXECUTIVE COMPENSATION PAID TO AN AFFILIATE
In lieu of salary to three executive officers for the six-month period ended
June 30, 2004, we paid iPublishing, Inc. the amount of $243,000 and recorded
these payments as management compensation expense.
11. RELATED PARTY TRANSACTIONS
Notes Payable
A $7,500 Unsecured Note payable at December 31, 2003, payable to an officer,
due on demand, was repaid on March 18, 2004. The on-demand note carried no
interest.
Loans Made by Related Parties
On July 20, 2004, we closed on three short-term loans totaling $130,000.
These loans were made to the Company by parties related to the Company and/or
its officers or directors. The Company issued a promissory note to each
lender. Each note had identical terms and conditions, although the note
amounts varied. The notes have a term of 90-days and bear interest at 8%
annually. In addition, a total of 130,000 two-year warrants, convertible to
common stock at the price of $0.50 per share were issued to the lenders as an
incentive to make the loans.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
Certain statements contained in this Quarterly Report on Form 10-QSB, and
other written and oral statements made by us from time to time are not based
strictly on historical facts but are considered "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Words such
as "anticipate," "believe," "could," "estimate," "expect," "forecast,"
"intend," "may," "plan," "possible," "project," "should," or "will," or
similar words or expressions, are intended to identify forward looking
statements. This forward-looking information involves important risks and
uncertainties that could materially alter results in the future from those
13
expressed in any forward-looking statements made by, or on behalf of, the
Company. Such forward-looking statements are predictions by their nature.
Actual events or results may differ materially and there are a variety of
factors that could cause results to differ materially, including those factors
described below. It is not possible to foresee or identify all factors
affecting our forward-looking statements and any list of such factors cannot
be exhaustive. We are under no duty to update any forward-looking statements.
OVERVIEW
Pursuant to an Agreement and Plan of Merger dated as of August 18, 2003 (the
"Merger Agreement"), a wholly-owned subsidiary of the Company's corporate
predecessor, Irvine Pacific Corporation ("IPC") merged with and into Hollywood
Previews, Inc. ("HPI"), on August 29, 2003, resulting in HPI becoming a
wholly-owned subsidiary of IPC (the "Acquisition").
As consideration for the Acquisition, the shareholders of HPI were issued
55,179,581 shares of IPC common stock which, immediately following the
Acquisition, represented 96.18% of the issued and outstanding common stock of
IPC (after giving effect to the conversion of all of IPC's outstanding notes
immediately prior to the Acquisition). Because the Acquisition resulted in a
change of control of IPC, the Acquisition was accounted for as a
recapitalization of HPI, pursuant to which the accounting basis of HPI
continued unchanged subsequent to the Acquisition date. Accordingly, the
pre-Acquisition financial statements of HPI became the historical financial
statements of IPC. Immediately prior to the Acquisition IPC had only nominal
assets and liabilities and no current business operations.
Effective November 25, 2003, IPC completed a statutory merger effected for the
purpose of changing its state of incorporation from Colorado to Delaware by
merging into a newly formed Delaware corporation, iMedia International, Inc.
(the "Company"). This change in IPC's state of incorporation and corporate
name was approved by the holders of a majority of IPC's outstanding shares of
common stock at a special meeting of shareholders on November 21, 2003.
As a result of the reincorporation merger, each outstanding share of IPC's
common stock was automatically converted into one share of Company common
stock. Each stock certificate representing issued and outstanding shares of
IPC's common stock continues to represent the same number of shares of common
stock of the Company. The Company continues to operate the business of IPC,
and the reincorporation did not result in any change in IPC's former business,
assets or liabilities, did not cause the Company's headquarters to be moved,
or result in any relocation of management or other employees.
HPI holds an exclusive license from I-Publishing, Inc. ("I-Publishing"), an
affiliate of the Company, to use I-Publishing's intellectual property (the
"License"). I-Publishing's three shareholders, David MacEachern, Scott Kapp
and Franklin Unruh (each of whom own approximately 33% of the outstanding
securities of I-Publishing), are each officers and directors of the Company.
Pursuant to the License, I-Publishing receives annual royalties of 5% of Gross
Margin generated by discs produced by the Company using I-Publishing
technology. Because the License is exclusive, I-Publishing may not license or
assign any of its intellectual property to any other party and may not compete
with the Company. It is the Company's intention to permanently acquire all of
I-Publishing's intellectual property at some point in the future when
operations and revenue have stabilized.
14
BUSINESS
As a result of the Acquisition, we became a publisher of interactive, digital,
multi-media publications on CD-ROM. The Company distributes Hollywood
Previews(TM) Entertainment iMagazine(TM), an interactive digital magazine
(also called an iMagazine) on CD-ROM that features movie previews, video
games, and television previews, plus interviews with stars, behind the scenes
videos, music soundtracks and music videos, Hollywood fashion and style, and
other entertainment news. Hollywood Previews(TM) Entertainment iMagazine(TM)
is used primarily to showcase the Company's proprietary digital publishing
system capabilities. In addition, the Company markets and produces a variety
of special edition digital publications and custom promotional discs for
various corporate clients. Our publications are distributed either through
major Sunday newspapers, inserted in magazines and periodicals at movie
theater box offices, or handed-out or mailed directly to consumers.
A significant intellectual property, and a key component to our business is
the Company's proprietary iReporting, real-time measurement and reporting
software. iReporting allows the company to track user navigation and usage.
This allows the company to generate real-time reports that accurately
determines how many people actually viewed each disk, how long they spent
viewing certain ads or commercials and what was the most or least popular
content. Using this system, we can also generate a substantial amount of data
on viewer's habits, likes, dislikes and begin building powerful demographic
and psychographic profiles.
The majority of revenues to date have been generated from the sale of custom
publications and special edition discs. We continue to pursue the procurement
of paid advertising sponsorships, licensing, content placements, and
e-commerce fees for Hollywood Previews(TM) Entertainment iMagazine(TM). We
also intend to begin sales efforts of our proprietary "Usage Reports"
generated with our iReporting technology.
Custom Discs
A major portion of our time and resources has been spent developing special
edition and custom interactive publications for a variety of industries and
corporate clientele. The majority of revenues to date have been generated
from the sale of such custom publications and special edition discs.
We believe that the custom disc market will constitute a major part of our
future revenues. We intend to continue to develop custom discs for a variety
of industries, including discs addressing topics such as sports, travel,
reference and medical information. We also intend to expand distribution of
our custom discs by expanding our lines of distribution, including utilizing
direct mail, catalogues and third-party fulfillment companies.
Hollywood Previews(TM) Entertainment iMagazine(TM).
We continue to publish Hollywood Previews(TM) Entertainment iMagazine(TM) and
use this publication to showcase our proprietary digital publishing system.
During the six months ended June 30, 2004, we produced a limited edition
Academy Awards commemorative Hollywood Previews(TM) Entertainment
iMagazine(TM) that was distributed primarily in the Los Angeles, CA market and
targeted to entertainment industry insiders. A majority of the content of our
Hollywood Previews(TM) Entertainment iMagazine(TM), including theatrical movie
trailers and other material such as press releases, behind-the-scenes footage,
video
15
clips, celebrity interviews and other promotional media, is provided to us
directly by film studios and other sources.
We have not yet been able to achieve profitability in the publication of this
product, but we continue to pursue the procurement of paid advertising
sponsorships, licensing, content placements and e-commerce fees for the
product. We will continue to publish Hollywood Previews(TM) Entertainment
iMagazine(TM) as a showcase for our technology and capabilities, but may elect
to reduce future distribution of issues when there are revenue shortfalls.
Strategic Distribution Partners
We are continuing to forge relationships with major publishers of newspapers
and magazines for strategic distribution of proprietary and custom discs. We
are working closely with these publishers to develop a series of interactive,
digital enhancements that will serve as digital supplements to their
publications.
Revenue Sharing with Partnering Publishers
For certain strategic publishing partners, we have implemented a revenue
sharing program that will allow us to participate in a portion of the combined
sponsorship revenues. We continue to form relationships with these publishers
for the development of new disc programs to be integrated into their
publications. Some of these relationships involve revenue sharing programs
that could provide the Company with additional profit and revenues. However,
in order to implement these programs, we may be required to subsidize a
portion of the costs involved in producing discs for these programs. This is
due to anticipated revenue shortfalls that will occur until such time as these
newspapers and publishers can fully-integrate the sale of our digital media
products with their existing print advertisers and sponsors.
Major Customers and Suppliers
We continue to expand and diversify our customer and marketing base so as to
reduce the risk associated with sales concentration on any one or group of
clients or markets. Our largest customer (a major television network),
accounted for 66% of our total revenue for this quarterly period. It is
anticipated that over the succeeding quarters, our customer base will become
more broadly diversified.
We continue to be dependent upon third party suppliers for the manufacturing
of our goods and products. Presently we outsource our disc manufacturing and
printing to a variety of vendors in strategic geographic areas. Printing and
disc manufacturing is a commodity industry, and should it be necessary, these
suppliers can be easily replaced without detrimentally affecting to the
Company.
ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principals generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
16
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to customer programs, bad debts, income taxes, and
contingencies and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
consolidated financial statements.
Allowance for Doubtful Accounts - We maintain allowances for doubtful accounts
for estimated losses from the inability of our customers to make required
payments. If the condition of our customers were to deteriorate, resulting in
the impairment of their ability to make payments, additional allowances may be
required.
Revenue Recognition - Revenue is generated mainly through the sale and
licensing of interactive, digital, multi-media publishing and is recognized
when the product, usually either a CD-ROM or DVD, is shipped to the customer
or distributed to the public, provided that the other conditions of sale as
established by the Securities and Exchange Commission's Staff Accounting
Bulleting ("SAB") No. 104, are satisfied:
. Persuasive evidence of an arrangement exists.
. Delivery has occurred or services have been rendered.
. The seller's price to the buyer is fixed or determinable.
. Collectibility is reasonably assured.
Revenue from advertising contracts and agreements is deferred until the
services and/or products are completed and delivered.
Valuation Allowance - We record a valuation allowance to reduce our deferred
tax assets to the amount that is more likely than not to be realized. While
we have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the
event we were to determine that we would be able to realize our deferred tax
assets in the future in excess of our net recorded amount, an adjustment to
the deferred tax asset would increase income in the period such determination
was made.
RESULTS OF OPERATIONS
Revenues are being generated from a combination of sales of paid advertising
sponsorships, licensing, content placements, design, production and
distribution of custom discs and e-commerce fees, plus the sale to advertisers
and content providers of the Company's proprietary Usage Report utilizing the
Company's iReporting technology.
The consolidated financial statements of iMedia International Inc., as of June
30, 2004 include the accounts of the Company and its wholly owned subsidiaries
HPI, and iMedia US LLC.
17
On a combined basis, the Company and its predecessor companies have incurred
operating losses since inception due to the expenses involved with production,
fundraising, and for general and administrative expenses. Significant
expenditures at the corporate level continue. These outlays include
production and distribution costs, fundraising costs, marketing costs, growth
initiatives, legal, accounting and other professional fees.
The following discussion is based on a comparison of the Company's operations
for the three months and six months ended June 30, 2004 to its predecessor
companies' financial statements for the three and six months ended June 30,
2004.
Sales
Net sales for the three months ended June 30, 2004 were $899,675 compared with
$102,120 for the three months ended June 30, 2003.
The increase in sales is indicative of the acceleration in the Company's
ability to procure new business and the shift in our sales emphasis towards
special edition and custom disc production, which have a longer sales cycles.
We have focused much of our sales and marketing activities towards forming
strategic partnerships with publishers of newspapers and magazines the results
of which will be felt within the next six months.
Cost of Sales
Cost of sales increased to $766,409 from $204,486 for the three months ended
June, 2004 and 2003, respectively. Gross profit contribution was $133,266 (or
15%) and $5,089 (or 14%) for the three months ended June 30, 2004 and 2003,
respectively, an increase of 25 times.
Revenues for the quarterly period ending June 30, 2004 originated primarily
from the design, production and distribution of custom discs and royalties.
Cost of sales from the comparative period included a combination of design and
manufacturing costs, thus there is little parity in comparisons between the
two periods.
Operating Expenses
Operating expenses increased to $1,158,317 (113%) for the three months ended
June 30, 2004, from $641,234 for the same period in the prior year.
The increase in expenses is due to continued development of our products,
growth initiatives, expenses associated with expanded sales efforts, as well
as substantial legal and accounting costs associated with the maintenance of
our fully-reporting status.
Interest expense, relating to convertible debt interest, increased to $95,044
for the three months ended June 30, 2004. Bank interest of $511 was incurred
for the same period in the prior year.
Net Profit or Loss
Net loss for the three months ended June 30, 2004 increased to ($1,241,595)
compared to ($802,525) for the prior year's comparable period. This represents
a decreased loss of ($439,070) or (54%).
The increase in net loss is primarily attributable to the expanded operations,
the substantial legal and accounting costs related to our fully-reporting
status, and our increased sales and marketing efforts.
The following discussion is based on a comparison of the Company's operations
for the six months ended June, 2004 to the Company's financial statements for
the six months ended June 30, 2003, and include results from its predecessor
Company's operations:
18
Sales
Net sales for the six months ended June 30, 2004 were $925,175 compared with
$323,625 for the six months ended June 30, 2003.
The increase in sales is indicative of the acceleration in the Company's
ability to procure new business and the shift in our sales emphasis towards
special edition and custom disc production which have a longer sales cycles.
We have focused much of our sales and marketing activities towards forming
strategic partnerships with publishers of newspapers and magazines the results
of which will be felt within the next six months.
Cost of Sales
Cost of sales increased to $771,109 from $209,186 for the six months ended
June, 2004 and 2003, respectively. Gross profit contribution was $154,066 (or
17%) and $114,439 (or 35%) for the six months ended June 30, 2004 and 2003,
respectively, a decrease of 18%.
Revenues during the quarterly period ending June 30, 2004 originated primarily
from the design, production and distribution of custom discs and royalties.
Cost of sales from the comparative period included a combination of design and
manufacturing costs, thus there is little parity in comparisons between the
two periods. In the future, it is anticipated that sales and cost of sales
shall constitute a variety of design, manufacturing, replication and
advertising costs, and that the gross margins will average between 20% to 40%
of gross revenues with a potential to increase those margins when shared
advertising revenue models, reporting models and back-end bundling models
mature. We may, however, be required to vary the profitability of each
project to establish and maintain market share. We foresee the need to
continue our policy of cost variation in order to achieve significant market
penetration and brand recognition.
Operating Expenses
Operating expenses increased to $2,170,329 (153%) for the six months ended
June 30, 2004, from $1,401,649 for the same period in the prior year.
The increase in expenses is due to continued development of our products,
growth initiatives, expenses associated with expanded sales efforts, as well
as substantial legal and accounting costs associated with the maintenance of
our fully-reporting status. We have dramatically increased our sales and
marketing efforts resulting in additional operating expenses. As our business
increases, it is anticipated that operating expenses will increase in absolute
dollars, but should decrease as a percentage of sales.
Interest expense, relating to convertible debt interest, increased to $95,044
for the six months ended June 30, 2004. Bank interest of $511 was incurred for
the same period in the prior year.
Net Profit or Loss
Net loss for the six months ended June 30, 2004 increased to ($2,113,707)
compared to ($1,078,535) for the prior year's comparable period. This
represents an increased loss of ($699,433) or (49%).
19
The increase in net loss is primarily attributable to the expanded operations,
the substantial legal and accounting costs related to our fully-reporting
status, and our increased sales and marketing efforts.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the six months ended June 30, 2004
was ($1,987,215), resulting in a net operating loss.
Net cash used in investing activities in the six months ended June 30, 2004
was ($97,844) reflecting the purchase of equipment ($41,393) and a reduction
in the amount due from affiliates and associated companies of ($56,451).
Net cash provided by financing activities for the six months ended June 30,
2004, totaled $1,550,347. The Company received proceeds from the issuance of
common stock of $1,058,000 and the collection of common stock receivables of
$370,000.
The Company's ability to make payments to fund planned capital expenditures
and operations will depend on its ability to generate sufficient cash in the
future as well as to raise additional capital. The Company has historically
raised funds to support its operating expenses and capital requirements
through sales of equity securities or through other credit arrangements. In
order to satisfy our immediate cash flow and liquidity requirements, we will
need to raise additional funds. To the extent additional sales of equity or
debt securities are insufficient to satisfy the Company's liquidity
requirements, or are not available on terms acceptable to the Company, we will
have limited cash flow and may have to reduce or dramatically curtail
operations, including the development of new products, distribution of current
publications and other services, or cease operations entirely. Any future
funding may take the form of debt or equity or a combination of both.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company to date has not had
significant operations and is highly dependent on equity and debt financing.
The Company has limited cash reserves. We incurred net operating losses of
($2,113,707) for the six months ended June 30, 2004.
Internal and External Sources of Liquidity
We believe that over the next 12 months we will experience a steady growth in
revenues and a steady growth towards profitability. However in the near term,
we will require new capital to finance continued operations. To address issues
of liquidity and to create an adequate capital pool, the Company has engaged
in or is preparing to engage in the following transactions:
On April 22, 2004 we closed on a short-term convertible note payable to
Augustine Fund, LLP. We borrowed the amount of $250,000 payable in 90-days.
The Note bore interest of 8% APR, compounded monthly. As an incentive to make
the loan, Augustine Fund was issued a 3-year warrant to purchase up to 50,000
shares at $1.00 per share and a second one-year warrant to purchase up to
250,000 additional common shares at the same price. Pursuant to the terms of
the Note, the Company had the right to repay the note at any time subject to a
10-day option to convert the Note into 250,000 shares of our Common
20
Stock. The Company also had the right to extend the note for one additional
90-day period in its discretion. However, if the Company elected to extend
the note (a) the conversion price of the Note would have been discounted 50%
in favor of Augustine so that upon conversion, Augustine would receive 500,000
common shares and (b) Augustine would have received a third three-year
"penalty warrant" to purchase 325,000 shares of common stock at $1.00 per
share. The loan has since been repaid.
On May 14, 2004, we commenced a private offering of up to 8,333,334 shares of
common stock of the Company for a total offering of up to $10,000,000. Since
that date, we have retained, on a non-exclusive basis, three NASD registered
broker-dealers to act as placement agents for this offering. The offering is
currently being presented primarily to institutions, private equity funds and
other professional accredited investors. To date, we have received $530,000
in commitments to this offering for 530,000 common shares. These are as yet
unpaid. This offering was set to close on August 8, 2004, but the Company has
elected to continue the offering by extending it on a month-by-month basis
until such time as the Company has secured sufficient capital to fund its
operations and plan of growth.
On July 14, 2004, we entered into a contingent Share Purchase Agreement with
Langley Park, LLP, a London-based institutional investment fund. Both the
Company and Langley Park have signed the Share Purchase Agreement, however the
transaction has not yet closed. Langley has agreed to purchase in a private
placement, four million of the Company's common shares at the price of $1.90
per share. In lieu of cash, Langley will issue to the Company 4,185,022 of
its common shares at British Pound Sterling 1.00 per share (British Pound
Sterling 1.00 = US $1.81 on August 5, 2004). These shares will become
free-trading on the London Stock Exchange (LSE) upon approval of Langley's
pending registration statement (U.K. listing application). Langley has applied
to the United Kingdom Listing Authority for registration as a unit investment
trust and subsequent listing on the London Stock Exchange. The fund has not
yet obtained this approval. At the request of Langley, the Company agreed
issue its 4,000,000 shares into an escrow account until such time as Langley
obtains its registration and listing on the LSE, or until September 30, 2004
whichever shall first occur. Provided Langley is successful in obtaining its
listing by this date, the transaction will close, and the Company will be
provided with immediate, although initially limited liquidity from the Langley
free-trading shares. We anticipate that we will use the Langley shares either
to collateralize and drawn-down on a bank line of credit, and/or begin
progressive liquidation of the shares through the LSE in the secondary market.
On July 20, 2004, we closed on three short-term loans totaling $130,000.
These loans were made to the Company by parties related to the Company and/or
its officers or directors. The Company issued a promissory note to each
lender. Each note had identical terms and conditions, although the note
amounts varied. The notes are for a period of 90-days and bear interest at
the rate of 8% annually. In addition, a total of 130,000 two-year warrants,
convertible to common stock at the price of $0.50 per share were issued to the
lenders in conjunction with these loans.
Recent Sales of Unregistered Securities
On March 18, 2004, we offered up to $1,000,000 of our common stock at an
offering price of $1.00 per share in a private placement. The stock was sold
directly by the Company, and through a non-exclusive placement agent,
Salomon-Grey Financial Corporation. The shares were offered only to persons
who are "accredited investors" as defined in Rule 501 of Regulation "D"
promulgated under the Securities Act of 1933, as amended, or who are
21
non-United States persons as defined in Regulation S under the Securities Act.
We closed the offering on May 10, 2004. As at June 30, 2004 the Company had
sold 1,221,657 shares, in that offering, directly, and had received gross
proceeds of $1,058,000. Selling commissions paid were $114,790.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements contained in this Quarterly Report on Form 10-QSB, and
other written and oral statements made by us from time to time are not based
strictly on historical facts but are considered "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Words such as "anticipate,"
"believe," "could," "estimate," "expect," "forecast," "intend," "may," "plan,"
"possible," "project," "should," or "will," or similar words or expressions,
are intended to identify forward looking statements. This forward-looking
information involves important risks and uncertainties that could materially
alter results in the future from those expressed in any forward-looking
statements made by, or on behalf of, the Company. Such forward-looking
statements are predictions by their nature. Actual events or results may
differ materially and there are a variety of factors that could cause results
to differ materially, including those factors described below. It is not
possible to foresee or identify all factors affecting our forward-looking
statements and any list of such factors cannot be exhaustive. We are under no
duty to update any forward-looking statements.
Management believes that its multi-disciplinary approach, combined with
industry and geographic diversification, will help insulate the Company from
unforeseen economic, political and/or regulatory pressures that may arise on a
regional basis. The Company has embarked on this course of diversification
and has made inroads in the newspaper, magazine and direct response
industries. However, there is no guarantee against recessions, regional
slow-downs or negative economic conditions that may exist now, or may occur in
the future, in some or many of the Company's key geographic regions. Negative
economic conditions could directly impact the Company's ability to distribute
its products, obtain financing for new productions, future acquisitions, or
continue to grow consistent with Management's expectations.
. We have a limited operating history and may incur losses we seek to grow.
Our various operating units have been recently incorporated and have limited
operations. In addition, we may incur future losses from: the development of
new products; the acquisition of licenses and rights to other business,
products and services; research and development activities; limited marketing
activities; and the general and administrative expenses associated with the
above activities. The extent of losses and the time required to reach
profitability are uncertain. There can be no assurance that the we will be
able to sustain profitability on an ongoing basis. Furthermore, as digital
media and digital publishing are continually developing technologies, the
level of profitability, or lack thereof, cannot be accurately predicted.
Our consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. We have a history of operating
losses that are likely to continue in the future. Our auditors have included
an explanatory paragraph in their Independent Auditor's Report included in our
audited financial statements for the year ended December 31, 2003 and for the
period from July 22, 2002 (inception) to December 31, 2002 to the effect that
our significant losses from operations and our dependence on equity
22
and debt financing raise substantial doubt about our ability to continue as a
going concern.
. We currently do not have sufficient revenues to support our business
activities and, if operating losses continue, we may not be able to secure
additional financing to operate our business.
We require substantial working capital to fund our business. Because we
currently do not have sufficient revenues to support our business activities,
and if operating losses continue, we may be required to raise additional
capital to fund our operations and finance our research and development
activities. Funding, whether from a public or private offering of debt or
equity, a bank loan or a collaborative agreement, may not be available when
needed or on favorable terms. Any equity financing could result in dilution
to the existing stockholders. Debt financing will result in interest expense,
and if convertible into equity, could also dilute then-existing stockholders.
We may also be subject to various restrictive covenants which could
significantly limit our operating and financial flexibility and may limit our
ability to respond to changes in our business or competitive environment. If
we are unable to obtain necessary financing in the amounts and on terms deemed
acceptable, we may have to limit, delay, scale back or eliminate our research
and development activities or future operations. Any of the foregoing may
adversely affect our business.
. We may not be successful in establishing necessary strategic alliances.
We are seeking to build alliances with leading national sponsors, media and
publishing companies, distributors, financial organizations and technology
companies, and plans to continue its strategy of developing key alliances in
order to expand its reach into the national and international marketplace.
However, there can be no assurance that the Company will be successful in
obtaining ongoing strategic alliances or that the we will be able to find
further suitable business relationships as it develops strategies and new
products. Any failure to continue or expand such relationships could have a
material adverse effect on our business, results of operations or financial
condition.
Major risks associated with strategic alliances and partnerships are (1) the
lack of control we may have over these operations, and (2) the possibility
that in the future, our strategic alliances will not develop or will market
products in competition with ours, and/or discontinue their alliances with the
Company or form alliances with the our competitors.
. Competition and technological uncertainty exists in the market.
We operate in a rapidly evolving field. Competition from other domestic and
foreign companies, media, entertainment, and other institutions in the areas
of product development, product and technology acquisition, manufacturing and
marketing is intense. Competitors may succeed in obtaining content for their
products more rapidly or less expensively than we can. Competitors may have
already developed, or be in the process of developing technologies that are,
or may be, the basis for competitive products to the Company's current or
planned lines of products. Some of these products may have an entirely
different approach or means of accomplishing the same end results as products
currently developed, or contemplated for development, by the Company. One or
more of our competitors may achieve patent protection that could have a
material adverse effect on the Company. Although we do not currently have any
specific plans to do so, we may have to prosecute or may be required to defend
patent or trademark infringement litigation or patent interference
23
proceedings with holders of competitive patents or trademarks. We may incur
substantial costs in defending or prosecuting such proceedings. In addition,
such proceedings may impact our competitive position and there can be no
assurance that we will be successful in any patent or trademark litigation.
Our ability to respond quickly to consumer needs or advances in digital
publishing technologies, without compromising product quality, will be crucial
to our success. We are continually engaged in product development and
improvement programs to establish and improve our competitive position. We
cannot, however, guarantee that we will be successful in enhancing existing
products or developing new products or technologies that will timely achieve
or receive market acceptance.
. Development of alternative forms of digital media and products may
negatively affect our ability to compete in the market.
Our competitive position may be adversely affected by competitive product
development or the acceptance and/or integration by the public or sponsors of
new or other forms of digital media, formats or devices not anticipated or
supported by the Company.
Many of our competitors have substantially greater financial, technical and
human resources than we do. There can be no assurance that our competitors
will not succeed in developing technologies and products that are more
effective or affordable than those being developed by the Company or that
would render our technology and products less competitive or obsolete.
If we are unable to develop and market new products and technologies, we may
experience a decrease in demand for our products or our products could become
obsolete.
. We face technology risks.
Our products are subject to the risks of failure inherent in the development
and testing of products based on innovative or developing technologies. These
risks include the possibilities that Company technology or any or all of the
Company's products may be found to be ineffective, or to have substantial
limitations, or otherwise fail.
. There is no guarantee that the motion picture studios will continue to
provide the Company with content and movie trailers at no cost.
Presently, we are being provided copyrighted theatrical movie trailers and
other copyrighted public dissemination's such as press releases,
behind-the-scenes footage, video clips, celebrity interviews and other
promotional media directly from film studios and other sources at no cost.
This same promotional media is also made available to other companies,
broadcasters and production facilities for their use and incorporation into
various other broadcast mediums and products. Traditionally, this media has
been provided free of charge in the form of industry "Press Kits" and made
available for re-broadcast or re-distribution by third parties without license
or fees. We will continue to rely upon the availability of this free media
and content as the key component for the Hollywood Previews Entertainment
Magazine. Although it is not anticipated, should in the future this content
become unavailable, or should at any time studios begin charging a license or
other royalties for the use or re-broadcast of its copyrighted materials, the
Company's ability to continue producing the Hollywood Previews Entertainment
Magazine could be jeopardized, and the production and distribution of this
24
product could prove non-viable. This would have an immediate and materially
adverse effect upon the Company's revenue projections, and subsequently affect
Company viability.
. Our future depends, in part, on our Key Personnel, Consultants and
Principal Management's continued participation.
Our ability to successfully develop its products, manage growth and maintain
its competitive position will depend, in a large part, on its ability to
attract and retain highly qualified management. The Company is dependent upon
its Chief Executive Officer, President, Chief Financial Officer, and other key
members of its management and consulting team. Competition for such personnel
is significant, and there can be no assurance that the Company will be able to
continue to attract and retain such personnel. Our consultants may be
affiliated or employed by others and some may have consulting or other
advisory arrangements with other entities that may conflict or compete with
their obligations to the Company. We addresse such potential conflicts by
requiring that its consultants, collaborators and sponsored researchers
execute confidentiality agreements upon commencement of relationships with the
Company, by closely monitoring the work of such persons and by requiring
material transfer and patent assignment agreements wherever possible and
appropriate.
. The Company's controlling shareholders are also Executive Officers and
Directors of the Company.
The Company's officers, directors, founders, employees and principal
shareholders currently own a controlling position of the Company's outstanding
stock. Management will be able to elect a majority of the Company's Board of
Directors and will have the ability to control the Company and direct its
business and affairs. This concentration of ownership could have the effect
of delaying or preventing a change in control of the Company. In addition,
this significant concentration of share ownership may adversely affect the
trading price for the Company's common stock because investors often perceive
disadvantages in owning stock in companies with controlling shareholders.
. The Company does not have any product or multimedia insurance coverage.
We do not presently have liability insurance to protect us from the costs of
claims for damages due to the use or distribution of our publications. We
intend on securing such insurance in the future. This insurance may be
limited in certain circumstances and limited in amount. Recent premium
increases and coverage limitations may make this insurance uneconomic.
However, even if the Company obtains such insurance, one or more liability
claims could exceed policy limits. If we continue to have no coverage or our
insurance does not provide sufficient coverage, product liability claims could
result in material losses in excess of our reserves.
. Quarterly operating results may vary.
Our quarterly operating results are subject to substantial fluctuations and
any failure to meet financial expectations for any fiscal quarter may
disappoint securities analysts and investors and could cause our stock price
to decline.
Our quarterly operating results may vary significantly due to a combination of
factors, many of which are beyond our control. These factors include:
25
. Changes in demand for our products;
. Our ability to meet the demand for our products;
. Existing and increased competition;
. Our ability to compete against significantly larger and better funded
competitors;
. The number, timing, pricing and significance of new products and
product introductions and enhancements by us and our competitors;
. Our ability to develop, introduce and market new and enhanced versions
of our products on a timely basis;
. Changes in pricing policies by us and our competitors;
. The timing of significant orders and shipments;
. Litigation with respect to liability, trademark or copyright claims or
product recalls and any insurance covering such claims or recalls; and
. General economic factors.
As a result, we believe that period-to-period comparisons of our results of
operations are not necessarily meaningful and you should not rely upon these
comparisons as indications of future performance. These factors may cause our
operating results to be below market analysts' expectations in some future
quarters, which could cause the market price of our stock to decline.
. General Economic Slowdowns may have a material effect on sales.
If changes in the economy and consumer spending reduce consumer demand for our
products, our sales and profitability will suffer.
. We are highly dependant upon outside consultants.
If our consultants or collaborative partners do not perform, we may be unable
to develop and bring to market new products as anticipated.
We may in the future enter into consulting collaborative arrangements with
third parties to develop products. These arrangements may not produce
successful products. If we fail to establish these arrangements, the number
of products from which we could receive future revenues will be limited.
Our dependence on consulting or collaborative arrangements with third parties
subjects us to a number of risks. These arrangements may not be on terms
favorable to us. We cannot absolutely control the amount and timing of
resources our consultants or collaborative partners may devote to our
products, and these third parties may choose to pursue alternative products.
These third parties also may not perform their obligations as expected.
Business combinations, significant changes in their business strategy, or
their access to financial resources may adversely affect a consultant's or
partner's willingness or ability to complete its obligations under the
arrangement. Moreover, we could become involved in disputes with our
consultants or partners, which could lead to delays or termination of the
arrangements and time-consuming and expensive litigation or arbitration.
. Our intellectual properties rights may be challenged or infringed.
Should our intellectual property rights not adequately protect our products or
technologies, others could compete against us more directly, which would hurt
our sales and profitability.
26
Our success depends in part on our ability to obtain patents or rights to
patents, copyrights, protect trade secrets, operate without infringing upon
the proprietary rights of others, and prevent others from infringing on our
patents, copyrights, trademarks and other intellectual property rights. We
will be able to protect our intellectual property from unauthorized use by
third parties only to the extent that it is covered by valid and enforceable
patents, copyrights, trademarks and licenses. Patent and/or copyright
protection generally involves complex legal and factual questions and,
therefore, enforceability of such rights cannot be predicted with certainty.
Patents and copyrights may be challenged, invalidated or circumvented. Thus,
any patents and/or copyrights that we own or license from others may not
provide adequate protection against competitors. In addition, any pending and
future patent applications may fail to result in patents being issued. Also,
those patents that are issued may not provide us with adequate proprietary
protection or competitive advantages against competitors with similar
technologies. Moreover, the laws of certain foreign countries do not protect
our intellectual property rights to the same extent as do the laws of the
United States.
In addition to patents, copyrights and trademarks, we rely on trade secrets
and proprietary know-how. We seek protection of these rights, in part,
through confidentiality and proprietary information agreements. These
agreements may not provide meaningful protection or adequate remedies for
violation of our rights in the event of unauthorized use or disclosure of
confidential and proprietary information. Failure to protect our proprietary
rights could seriously impair our competitive position.
If third parties claim we are infringing their intellectual property rights,
we could suffer significant litigation or licensing expenses or be prevented
from marketing our products.
Our commercial success depends significantly on our ability to operate without
infringing the patents and other proprietary rights of others. However,
regardless of our intent, our technologies may infringe the patents and
copyrights, or violate other proprietary rights of third parties. In the event
of such infringement or violation, we may face litigation and may be prevented
from pursuing product development or commercialization.
. Future Acquisitions may prove unprofitable.
If we make any acquisitions, we will incur a variety of costs and may never
realize the anticipated benefits.
We intend to attempt to acquire businesses, technologies or products that we
believe are a strategic fit with our business. If we undertake any transaction
of this sort, the process of integrating a business, technology or product may
result in operating difficulties and expenditures and may absorb significant
management attention that would otherwise be available for ongoing development
of our business. Moreover, we may never realize the anticipated benefits of
any acquisition. Future acquisitions could result in potentially dilutive
issuances of equity securities, the incurrence of debt, contingent liabilities
and/or impairment related to goodwill and other intangibles, and the
incurrence of large, immediate write-offs.
. Future sales of our common stock may depress our stock price.
The market price of our common stock could decline as a result of sales of our
common stock in the public market, or the perception that these sales could
27
occur. In addition, these factors could make it more difficult for us to raise
funds through future offerings of common stock.
ITEM 3. CONTROLS AND PROCEDURES
(a) The Company's management, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this quarterly report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, to the best of their knowledge, as of the end of the period
covered by this quarterly report, the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in
this quarterly report has been made known to them in a timely fashion. There
were no changes in the Company's internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are likely materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
NONE
ITEM 2: CHANGES IN SECURITIES
During the six months ended June 30, 2004, we sold an aggregate of 1,058,000
shares of common stock. The shares were sold pursuant to an exemption
provided by Section 4(2) of the Securities Act of 1933, as amended, and Rule
506 Regulation D promulgated thereunder. Commissions of $114,790 were paid in
connection with the sale of those shares. The Company issued 25,000 common
shares for services rendered. We issued an additional 408,993 shares to
investors who participated in a previous private placement dated September 2,
2003. The shares were issued to adjust the difference paid by these prior
subscribers from that of subscribers of the subsequent private placement dated
March 18, 2004, who eventually purchased shares at a price-per-share lower
than that of the previous offering. As at June 30, 2004 the Company held
signed subscriptions for a further 530,000 shares ($530,000) that remain
unpaid that were sold pursuant to a private placement offering dated May 15,
2004.
On April 22, 2004 we closed on a short-term convertible note payable to
Augustine Fund, LLP. As an incentive to make the loan, Augustine Fund was
issued a 3-year warrant to purchase up to 50,000 shares at $1.00 per share and
a second one-year warrant to purchase up to 250,000 additional common shares
at the same price. Pursuant to the terms of the Note, the Company had the
right to repay the note at any time subject to a 10-day option to convert the
Note into 250,000 shares of our Common Stock. The Company also had the right
to extend the note for one additional 90-day period in its discretion.
However, if the Company elected to extend the note (a) the conversion price of
the Note would have been discounted 50% in favor of Augustine so that upon
conversion, Augustine would receive 500,000 common shares and (b) Augustine
would have received a third three-year "penalty warrant" to purchase 325,000
shares of common stock at $1.00 per share. The loan has since been repaid,
28
without penalty or conversion of the Note. The Company believes that the
issuance of its securities to Augustine Fund, LLP in this transaction was
exempt from registration pursuant to Sections 4(2) and 4(6) of the Securities
Act and Rule 506 of Regulation D because Augustine Fund, LLP is an "accredited
investor" as that term is defined in Regulation D.
On May 14, 2004, we began circulating a private offering memorandum for the
sale of up to 8,333,334 shares of common stock of the Company for a total
offering of up to $10,000,000. Since that date, we have retained, on a
non-exclusive basis, three NASD registered broker-dealers to act as placement
agents for this offering. The offering is currently being distributed
primarily to institutions, private equity funds and other professional
accredited investors. To date, we have received $530,000 in commitments to
this offering for 530,000 common shares. These are as yet unpaid. This
offering was set to close on August 8, 2004, but the Company has elected to
continue the offering by extending it on a month-by-month basis until such
time as the Company has secured sufficient capital to fund its operations and
plan of growth. The Company believes that the issuance of its securities to
any purchasers under the private offering memorandum will be exempt from
registration pursuant to Sections 4(2) and 4(6) of the Securities Act and Rule
506 of Regulation D since the shares will be offered only to persons who are
"accredited investors" as defined in Rule 501 of Regulation D.
On July 14, 2004, we entered into a contingent Share Purchase Agreement with
Langley Park, LLP, a London-based institutional investment fund. Both the
Company and Langley Park have signed the Share Purchase Agreement, however the
transaction has not yet closed. Langley has agreed to purchase in a private
placement, four million of the Company's common shares at the price of $1.90
per share. In lieu of cash, Langley will issue to the Company 4,185,022 of
its common shares at British Pound Sterling 1.00 per share (British Pound
Sterling 1.00 = US $1.81 on August 5, 2004). These shares will become
free-trading on the London Stock Exchange (LSE) upon approval of the Langley's
pending registration statement (U.K. listing application). Langley has applied
to the United Kingdom Listing Authority for registration as a unit investment
trust and subsequent listing on the London Stock Exchange. The fund has not
yet obtained this approval. Langley has requested the Company to issue its
4,000,000 shares into an escrow account until such time as Langley obtains its
registration and listing on the LSE, or until September 30, 2004 whichever
shall first occur. Provided Langley is successful in obtaining its listing by
this date, the transaction will close, and the Company will be provided with
immediate, although initially limited liquidity from the Langley free-trading
shares. We anticipate that we will use the Langley shares either to
collateralize and drawn-down on a bank line of credit, and/or begin
progressive liquidation of the shares through the LSE in the secondary market.
The Company believes that the issuance of its securities to Langley Park, LLP
in this transaction will be exempt from registration pursuant to Sections 4(2)
and 4(6) of the Securities Act and Rule 506 of Regulation D, since Langley
Park, LLP is an "accredited investor" as that term is defined in Regulation D.
ITEM 3: DEFAULTS ON SENIOR SECURITIES
NONE
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
NONE
29
ITEM 5: OTHER INFORMATION
Reincorporation
Effective November 25, 2003, the Company, formerly known as Irvine Pacific
Corporation ("IPC") completed a statutory merger effected for the purpose of
changing its state of incorporation from Colorado to Delaware by merging into
a newly formed Delaware corporation, iMedia International, Inc. ("iMedia").
This change in the IPC's state of incorporation was approved by the holders of
a majority of the IPC's outstanding shares of common stock at the Company's
special meeting of shareholders on November 21, 2003.
As a result of the merger, each outstanding share of the IPC's common stock,
was automatically converted into one share of iMedia. Each stock certificate
representing issued and outstanding shares of the IPC's common stock continues
to represent the same number of shares of common stock of iMedia.
iMedia continues to operate the business of IPC. The reincorporation did not
result in any change in IPC's business, assets or liabilities, did not cause
IPC's headquarters to be moved, or result in any relocation of management or
other employees.
Description of Capital Stock
iMedia is authorized to issue up to 500,000,000 shares of common stock, $0.001
par value per share, and 20,000,000 shares of preferred stock, $0.001 par
value per share.
iMedia's Common Stock
iMedia's common stock is traded on the Pink Sheets under the symbol IMNL.
Each holder of iMedia's common stock is entitled to one vote per share
registered in his or her name on iMedia's books on all matters submitted to a
vote of iMedia's stockholders.
The holders of outstanding shares of common stock of iMedia are entitled to
receive dividends, when and if declared by the board of directors, out of the
assets of iMedia which by law are available therefor, payable in cash, in
property or in shares of capital stock. Each stockholder is entitled to one
vote for each share of common stock held of record by that holder on the books
of iMedia for the election of directors and on all matters submitted to a vote
of stockholders of the corporation. Holders of iMedia 's common stock have no
preemptive rights and no right to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the common stock. In the event of liquidation, dissolution or winding up of
the affairs of iMedia, after payment of claims of creditors and the
satisfaction of any liquidation preference granted to the holders of any
outstanding shares of preferred stock, holders of iMedia common stock will be
entitled to receive all of the remaining assets of iMedia of whatever kind
available for distribution to stockholders ratably in proportion to the number
of shares of iMedia common stock held by them. The rights, preferences and
privileges of the holders of iMedia common stock are subject to and may be
adversely affected by the rights of the holders of shares of any series of
preferred stock, which the board of directors may designate in the future.
30
iMedia may issue preferred stock at such time or times and for such
consideration as the board of directors may determine. Each series shall be so
designated as to distinguish the shares thereof from the shares of all other
series. The board of directors is expressly authorized, subject to the
limitations prescribed by law and the provisions of iMedia 's Certificate of
Incorporation, to provide for the issuance of all or any shares of preferred
stock, in one or more series, each with such designations, preferences, voting
powers (or no voting powers), relative, participating, optional or other
special rights and privileges and such qualifications, limitations or
restrictions thereof as shall be determined by the board of directors.
iMedia Preferred Stock
iMedia has no outstanding shares of preferred stock. iMedia's board of
directors, however, is authorized at any time and from time to time to create
and provide for the issuance of shares of preferred stock in one or more
series and to fix, from time to time, the relative rights, preferences,
privileges and restrictions granted to or imposed upon any unissued series of
preferred stock. The authority of iMedia 's board of directors with respect to
each series of preferred stock includes the determination of the number of
shares of any series and the designation to distinguish the shares of such
series from the shares of all other series. The board of directors effects a
designation of each series of preferred stock by filing with the Delaware
Secretary of State a certificate of designation defining the rights and
preferences of such series.
Certain Provisions in iMedia 's Certificate of Incorporation and Bylaws
iMedia's certificate of incorporation and bylaws may encourage persons
considering unsolicited tender offers or other unilateral takeover proposals
to negotiate with iMedia's board of directors rather than pursue
non-negotiated takeover attempts. iMedia's certificate of incorporation
authorizes blank check preferred stock. iMedia's board of directors can set
the voting, redemption, conversion and other rights relating to the preferred
stock and can issue the stock in either a private or public transaction. The
issuance of any preferred stock may have the effect of delaying or preventing
a change in control of iMedia without further stockholder action and may
adversely affect the rights and powers, including voting rights of the holders
of iMedia 's common stock, rights to receive dividends and rights to payments
upon liquidation. In certain circumstances, the issuance of preferred stock
could depress the market price of iMedia's common stock.
Securities Registered Under the Securities Exchange Act of 1934
IPC's common stock was registered under Section 12(g) of the Securities
Exchange Act of 1934. iMedia's common stock is deemed registered under the
Securities Exchange Act of 1934 by operation of paragraph (a) of Rule 12g-3 of
the Securities Exchange Act of 1934.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit
Number Description
- ------- ------------
10.1 Form of Subscription Agreement purchased under Regulation D Private
Placement closed May 14, 2004
31
10.2 Form of Subscription Agreement purchased under Regulation D Private
Placement dated May 15, 2004
10.3 Form of Subscription Agreement purchased under Regulation S Private
Placement dated May 15, 2004
10.4 Term Loan Agreement Dated April 22, 2004 between the Company and
Augustine Fund, L.P.
10.5 Stock Purchase Agreement Dated July 14, 2004 between the Company and
Langely Park Investments, PLC
31.1 Certification of Chief Executive Officer required by Rule 13a-14(a)
or Rule 15d-14(a)
31.2 Certification of Chief Financial Officer required by Rule 13a-14(a)
or Rule 15d-14(a)
32.1 Certification of Chief Executive Officer and Chief Financial Officer
required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
(B) Reports on Form 8-K
NONE
32
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: August 23, 2004
IMEDIA INTERNATIONAL INC.
By: /s/ David MacEachern
-----------------------
David MacEachern,
Chief Executive Officer
By: /s/ Franklin Unruh
-----------------------
Franklin Unruh,
Chief Financial Officer
33