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: MARCH 31, 2005
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 18, 2005 the Issuer had 72,375,677 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.......15
ITEM 3: CONTROLS AND PROCEDURES.........................................24
PART II: OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES...........................................25
ITEM 6: EXHIBITS........................................................25
SIGNATURES...............................................................26
CERTIFICATIONS...........................................................27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
IMEDIA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 30,055 $ 358,969
Accounts receivable 240,302 46,444
Advances receivable 42,841 -
Prepaid expense 555 555
------------- -------------
Total current assets 313,753 405,968
Property and equipment, net 63,721 78,211
Investment in available for sale securities 338,523 1,066,461
------------- -------------
Total assets $ 715,997 $ 1,550,640
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 798,932 $ 757,633
Customer deposit 83,920 -
Due to affiliate 40,000 13,602
Notes payable 1,126,522 1,080,022
------------- -------------
Total current liabilities 2,049,374 1,851,257
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, $0.001 par value, authorized
20,000,000 shares; none outstanding - -
Common stock, 500,000,000 shares authorized,
$0.001 par value; 69,572,427 issued and
outstanding as of March 31, 2005 and
65,567,913 issued and outstanding as of
December 31, 2004 69,573 65,568
Subscription receivable - (530,000)
Common stock committed - 710,000 shares as
of December 31, 2004 - 674,900
Deferred compensation (1,578,457) (149,246)
Capital in excess of par value 12,940,660 9,320,428
Accumulated deficit (12,765,153) (8,551,816)
Accumulated other comprehensive loss - (1,130,451)
------------- -------------
Total stockholders' deficit (1,333,377) (300,617)
------------- -------------
Total liabilities and stockholders' deficit $ 715,997 $ 1,550,640
============= =============
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
3
IMEDIA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2005 and 2004 (unaudited)
2005 2004
------------- -------------
(unaudited) (unaudited)
Net sales $ 446,464 $ 25,500
Cost of sales 267,954 4,700
------------- -------------
Gross profit 178,510 20,800
------------- -------------
Operating expenses 2,459,494 769,012
Operating expenses - related parties 142,500 121,500
------------- -------------
Total expenses 2,601,994 890,512
------------- -------------
Loss from operations (2,423,484) (869,712)
------------- -------------
Other expense:
Interest expense 132,546 -
Loss on sale of investments 143,477 -
Unrealized loss on investment in available
for sale securities 1,513,030 -
------------- -------------
Total other expense 1,789,053 -
------------- -------------
Net loss before provision for income taxes (4,212,537) (869,712)
Provision for income taxes 800 2,400
------------- -------------
Net loss $ (4,213,337) $ (872,112)
============= =============
NET LOSS PER COMMON SHARE BASIC AND DILUTED
Basic and diluted $ (0.06) $ (0.01)
============= =============
WEIGHTED AVERAGE COMMON OUTSTANDING SHARES
Basic and diluted 67,027,824 59,416,997
============= =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
IMEDIA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS DEFICIT AND OTHER COMPREHENSIVE INCOME (LOSS)
For the three months ended March 31, 2005 (unaudited)
Accumulated
Deferred Capitalin Other
Common Stock Subscription Committed Compen- excess of Comprehensive Accumulated
Shares Amount Receivable Shares Amount sation par value Losses Deficit Total
---------- -------- ----------- ------- ---------- ------------- ----------- ------------ ------------- ------------
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Balance
December
31, 2004 65,567,908 $ 65,568 $ (530,000) 710,000 $ 674,900 $ (149,246) $ 9,320,428 $(1,130,451) $ (8,551,816) $ (300,617)
Cancellation
of
subscription
receivable - - 530,000 (580,000) (580,000) - 50,000 - - -
Issuance
of common
stock for
warrants 1,099,519 1,100 - - - - 430,689 - - 431,789
Issuance
of common
stock for
cash 30,000 30 - - - - 14,970 - - 15,000
Issuance
of common
stock for
services 2,745,000 2,745 - - - (929,200) 1,924,005 - - 997,550
Issuance
of common
stock for
interest
payable to
related
parties 130,000 130 - (130,000) (94,900) - 94,770 - - -
Issuance
of warrants
for services - - - - - (665,979) 665,979 - - -
Amortization
of deferred
compensation - - - - - 165,968 - - - 165,968
Unrealized
loss on
investment - - - - - - - (382,579) - (382,579)
Permanent
impairment on
investment in
available
for sale
securities - - - - - - - 1,513,030 - 1,513,030
Issuance of
additional
warrants to
investors - - - - - - 439,819 - - 439,819
Net loss - - - - - - - - (4,213,337) (4,213,337)
---------- -------- ----------- ------- ---------- ------------- ----------- ------------ ------------- ------------
Balance
March 31,
2005 69,572,427 $ 69,573 $ - - $ - $ (1,578,457) $12,940,660 $ - $(12,765,153) $(1,333,377)
========== ======== =========== ======= ========== ============= =========== ============ ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
5
IMEDIA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2005 and 2004 (unaudited)
2005 2004
------------- -------------
(unaudited) (unaudited)
<s> <c> <c>
Cash Flow from operating activities:
Net loss $ (4,213,337) $ (872,112)
Adjustments to reconcile net loss to net cash
used in net operating activities:
Depreciation and amortization 15,323 9,639
Loss on sales of investments 143,477 -
Unrealized loss on investment in available for sale securities 1,513,030 -
Non-cash stock and warrant compensation charge 1,603,337 13,000
Amortization of note discount 47,203 -
Increase in accounts and advances receivable (236,699) (8,000)
Decrease in prepaid expenses - 3,397
Decrease in leases payable (703) -
Increase (decrease) in accounts payable and accrued expenses 41,299 (35,962)
Increase in customer deposits 83,920 -
------------- -------------
Net cash flows used in operating activities (1,003,150) (890,038)
------------- -------------
Cash flows from investing activities:
Purchase of equipment (833) (13,123)
Sale of investment in available for sale securities 201,882 (32,272)
------------- -------------
Net cash flows provided by (used in) investing activities 201,049 (45,395)
------------- -------------
Cash flow from financing activities:
Payments on notes payable - related parties - (7,500)
Proceeds from notes payable - related parties 26,398 1,391
Proceeds for collection of common stock subscription receivable - 370,000
Proceeds from issuance of common stock 446,789 25,001
------------- -------------
Net cash flows provided by financing activities 473,187 388,892
------------- -------------
Net decrease in cash (328,914) (546,541)
Cash, at beginning of period 358,969 813,189
------------- -------------
Cash, at end of period $ 30,055 $ 266,648
============= =============
Supplemental disclosures of cash flow information
Income taxes paid $ 800 $ 2,400
============= =============
Interest paid $ 25,394 $ -
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
IMEDIA INTERNATIONAL INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
1. ORGANIZATION
General
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, media 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 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 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 markets and
produces a variety of special edition digital publications and custom
promotional discs for various corporate clients. The Company also 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. The Company's publications are distributed in
a variety of methods including insertions in major metropolitan newspapers,
insertions in major magazines and periodicals, hand-outs using targeted street
teams, at movie theater box offices, in back-end fulfillment and packaging, or
via direct mail 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 data and 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 media US, LLC, a California limited liability company
on December 24, 2003 to serve as our primary operating unit.
7
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 experienced net
losses from operations for the three months ended March 31, 2005 of
$4,213,337, and negative cash flows from operations of $1,003,150 and has a
working capital deficiency of $1,735,621 and a stockholder's deficiency of
$1,333,377 as of March 31, 2005. These factors raise substantial doubt about
its ability to continue as a going concern.
Additional financing will be required in order for the Company to continue in
existence. Management believes it will be able to obtain such financing from
new investors through sales of equity through a private placement memorandum.
Subsequent to March 31, 2005 the Company entered into a purchase agreement
with several accredited investors pursuant to which the Company agreed to sell
$3,040,000 shares of Series A 6% convertible preferred stock along with
warrants (see note 11). 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The consolidated financial information as of March 31, 2005 and for the three
months ended March 31, 2004 is unaudited and reflects all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position, operating
results, and cash flows for such periods. The consolidated results of
operations for the three months ended March 31, 2005 are not necessarily
indicative of the results that may be expected for any future period. These
financial statements and accompanying footnotes should be read in conjunction
with the Company's financial statements in the Company's Form 10-KSB for the
year ended December 31, 2004.
The Company's results of operations for the three months ended March 31, 2005
are not necessarily indicative of the results of operations to be expected for
the full fiscal year ending December 31, 2005.
Basis of Presentation
The consolidated financial statements of media International, Inc. as of March
31, 2005, include the accounts of the Company and its wholly-owned
subsidiaries Hollywood Previews, Inc., and Imedia US, LLC. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company's major source of revenue is from the creation and duplication of
interactive multi-media CD's from content provided by customers. Revenue is
allocated to the creation of the CD, and to the duplication of such CD's,
based upon the relative fair value of such services to the total contractual
revenue. Revenue from the creation of the multi-media interactive CD is
recognized when completed and upon client acceptance. Revenue from duplication
is recognized as the units are shipped.
Accounts Receivable
The Company sells its products throughout North America. The Company evaluates
its accounts receivable on a regular basis for collectibility and provides for
an allowance for potential credit losses as deemed necessary. As of March
31, 2005 (unaudited) and December 31, 2004 no valuation allowance has been
recorded against the accounts receivable.
Earnings (Loss) per Common Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
requires presentation of basic earnings per share ("Basic EPS") and diluted
earnings per share ("Diluted EPS"). Basic earnings (loss) per share is
computed by dividing earnings (loss) available to common stockholders by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share gives effect to all dilutive potential common
shares outstanding during the period. These potentially dilutive securities
were not included in the calculation of loss per share for the three months
ended March 31, 2005 and 2004 because the Company incurred a loss during such
periods and thus their effect would have been anti-dilutive. Accordingly,
basic and diluted loss per share is the same for the three months ended March
31, 2005 and 2004. At March 31, 2005 and 2004, potentially dilutive securities
consisted of outstanding common stock purchase warrants options to acquire an
aggregate of 7,516,670 shares and 754,469 shares,respectively.
8
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of three to five years. Maintenance and minor replacements are
charged to expense as incurred. Gains and losses on disposals are included in
the results of operations.
Property and equipment at March 31, 2005 (unaudited) and December 31, 2004
consisted of the following:
2005 2004
------------- --------------
Equipment $ 256,186 $ 255,352
Less: Accumulated Depreciation (192,465) (177,141)
------------- --------------
$ 63,721 $ 78,211
============= ==============
Cash
The Company places its cash in banks in excess of amounts insured by federal
agencies. The Company does not believe that as a result of this concentration
it is subject to any unusual financial risk beyond the normal risk associated
with commercial banking relationships. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash.
Impairment of Long-Lived Assets
The Company reviews its assets for impairment in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Estimated losses are included in the statements of operations as
a component of cost of sales.
Fair Value of Financial Instruments
The Company's financial instruments include cash, accounts receivable accounts
payable and accrued expenses. The book values of all financial instruments are
representative of their fair values.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts
at each year-end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
Estimates
The preparation of financial statements 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.
Recent accounting pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), "Share Based Payment" ("SFAS 123R"), a revision
to SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123R
supercedes Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and amends SFAS No. 95, "Statement of Cash Flows". SFAS
123R requires that the Company measure the cost of employee services received
in exchange for equity awards based on the grant date fair value of the
awards. The cost will be recognized as compensation expense over the vesting
period of the awards. The Company is required to adopt SFAS 123R no later than
the beginning of the first quarter of 2006. Under this method, the Company
will begin recognizing compensation cost for equity-based compensation for all
new or modified grants after the date of adoption. In addition, the Company
will recognize the unvested portion of the grant date fair value of awards
issued prior to adoption based on the fair values previously calculated for
disclosure purposes over the remaining vesting period of the outstanding
options and warrants. The Company is currently evaluating the potential effect
that the adoption of SFAS 123R will have on the Company's financial statement
presentation and disclosures.
9
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment to APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends
Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary
Transactions", to require that exchanges of nonmonetary assets be measured and
accounted for at fair value, rather than at carryover basis, of the assets
exchanged. Nonmonetary exchanges that lack commercial substance are exempt
from this requirement. SFAS 153 is effective for nonmonetary exchanges entered
into in fiscal periods beginning after June 15, 2005. The Company does not
routinely enter into nonmonetary exchanges. Accordingly, the Company does not
expect that the adoption of SFAS 153 will have a significant effect on the
Company's financial statement presentation or disclosures.
Marketable Securities
The Company accounts for investments under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Investment securities are
classified into one of three categories: held-to-maturity, available-for-sale,
or trading. Securities are considered held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity. These
securities are recorded as either short-term investments or long-term
marketable securities on the balance sheet depending upon their original
contractual maturity dates. Held-to-maturity securities are stated at
amortized cost, including adjustments for amortization of premiums and
accretion of discounts. Securities are considered trading when bought
principally for the purpose of selling in the near term. Trading securities
are recorded as short-term investments and are carried at market value.
Unrealized holding gains and losses on trading securities are included in
operating income. Securities not classified as held-to-maturity or as trading
are considered available-for-sale. Available-for-sale securities are recorded
as either short-term investments or long-term marketable securities and are
carried at market value with unrealized gains and losses included in other
comprehensive income in stockholders' equity.
Comprehensive Income (Loss):
SFAS No. 130, "Reporting Comprehensive Income," established new rules for the
reporting and display of comprehensive income and its components. SFAS No. 130
requires unrealized gains or losses on the Company's available-for-sale
securities, foreign currency translation adjustments and minimum pension
liability adjustments to be reported as a separate component (comprehensive
income/loss) of stockholders' equity.
3. 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. It is anticipated that over the succeeding quarters, our
customer base will become more broadly diversified as we begin marketing
efforts directed at sports, travel and the life science industries.
During the three months ended March 31, 2005 3 major customers accounted for
98% of total net sales whereas for the three months ended March 31, 2004 two
customers constituted 100% of total net sales. For the three months ended
March 31, 2005, one major vendor accounted for 99.76% of purchases. During
the three months ended March 31, 2004 the Company's sales and cost of sales
were not material to its operations and therefore the concentration
percentages are not shown.
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.
The Company does not believe that in the near future its 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. Similarly, the Company's purchases will not be
over concentrated to any one or only a few vendors.
4. INVESTMENT IN AVAILABLE FOR SALE SECURITIES
On September 30, 2004, the Company closed on a Stock Purchase Agreement with
Langley Park Investments LLP, a London-based institutional investment trust.
Langley Park purchased 4,000,000 of the Company's common shares at the price
of $1.90 per share. In lieu of cash, Langley issued 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 became free-trading
on the London Stock Exchange (LSE) on October 8, 2004 and opened at British
Pound Sterling 0.31 per share. On September 30, 2004, the Company recorded the
corresponding value of these shares as an asset on its financial statements in
the amount of $2,312,539. The asset value was calculated by multiplying the
number of the Langley Shares by the first opening trade as reported on the
LSE, multiplied by the U.S. dollar to British Pound Sterling exchange rate on
September 30, 2004 (4,185,022 X British Pound Sterling 0.31 X $1.7825 =
$2,312,539).
10
The Company paid a non-cash commission to an investment banker consisting of
209,251 Langley Park shares valued at $115,627 (209,251 x British Pound
Sterling 0.31 X $1.7825), and an additional 200,000 shares of our common stock
booked at fair market value, and valued at $146,000 (200,000 X $0.73) for this
transaction. The net fair market asset value of the Langley Park investment as
of March 31, 2005 is $308,192.
The Langley Park shares are registered as a Unit Investment Trust on the LSE.
The trading symbol for the shares is LSE:LPI. The shares are quoted in British
Pound Sterling. The investment trust consists of a portfolio of common stock
of 23 U.S. publicly-traded microcap companies. Langley Park must hold, and
cannot sell, short or hedge against its portfolio for a period of two years.
One-half of the free-trading Langley Park shares paid to media and the 22
other portfolio companies is being held in an escrow account as downside
protection for the trust in the case that any of the portfolio companies
should lose market value. At the end of the two-year restriction period, the
escrowed shares will be returned to the Company if the trading price of media
shares at that time exceeds $1.90, otherwise a portion or all of the escrowed
shares will be returned to the trust to adjust for a market loss. If, at the
end of the two-year period, the trading price of media shares falls below
$0.95, all the escrowed Langley shares will be lost. If, however, the trading
price of media shares is more than $0.95 but less than $1.90, only a
proportionate amount of the escrowed shares will be lost. As of March 31,
2005 the Company's share price was $1.00 and subsequent to March 31, 2005, the
Company's share price was below $.95. During the first quarter of 2005 the
Company determined that its investment in these available for sale securities
has been permanently impaired. As such, the Company has provided for a full
write down of the escrowed shares and wrote down the escrow shares to a value
of zero. In accordance with SFAS No. 115 the write down of these shares is
recorded as an unrealized loss on available for sale securities in the
statement of operations for the three months ended March 31, 2005. As such,
the Company has reclassified all other previously reported other comprehensive
losses losses arising from its Langley Park Investment as unrealized losses as
of and during the three months ended March 31, 2005. For the three months
ended March 31, 2005 the total unrealized loss on the investment in available
for sale securities is $1,513,030.
During the three months ended March 31, 2005 the Company sold 625,000 Langley
shares for $201,882. In connection with this sale the Company recorded a loss
on the sale of these shares of $143,477 in the statement of operations in
other expense.
5. COMMITMENTS AND CONTINGENCIES
Office Lease
The Company leases its office facilities on a month-to-month basis. Rent
expense amounted to $14,185 for the three months ended March 31, 2005 and
$9,750 for the three months ended March 31, 2004.
Employment and consulting agreements
The Company entered into employment agreements with Mr. MacEachern, Mr. Kapp
and Mr. Unruh on August 1, 2003. Each officer is compensated $18,000 annually
in addition to compensation received through I-Publishing, Inc as described
below. The agreements may be terminated by the Company or employee upon
14-days written notice.
The Company entered into a consulting and independent contractor agreement
with I-Publishing, Inc. on July 15, 2003. The agreement specifies monthly
payments totaling $40,500 for the combined executive management services of
the Company's Chief Executive Officer, President and Chief Financial Officer.
In October 2004, this amount was increased to $47,500 per month. The Company
may terminate the agreement upon 30-days written notice. Total compensation
paid for the three months ended March 31, 2005 and 2004 is $142,500 and
$81,000, respectively.
The Company entered into consulting and independent contractor agreements on
July 15, 2003 with companies owned by shareholders, Investment Advisory Group,
Inc. and Media Solutions Network, LLC. Each agreement specifies monthly
payments of $13,500 for management services for a total of $27,000 per month.
The Company may terminate the agreements upon 30-days written notice. Total
management fees paid for the three months ended March 31, 2005 and 2004 is
$81,000 and $53,000, respectively.
6. CONVERTIBLE NOTES PAYABLE
On September 1, 2004 the Company closed on two short-term convertible notes
payable to MicroCapital Fund, LP and MicroCapital Fund LTD (separately and
collectively "Lenders"). The Company borrowed the aggregate amount of
$1,000,000 payable to Lenders in 120 days. The Notes bears simple interest of
15%. As an incentive to make the loan, Lenders were issued 5-year warrants to
purchase up to the aggregate of 1,111,000 shares of common stock at $0.90 per
share. Pursuant to the terms of the Notes, the Company has the right to repay
the notes at maturity, or Lenders may exercise an option to convert any
portion of the notes into common shares at the price of $0.60 per share up to
a maximum of 1,666,666 common shares. The Company has the right to force a
conversion at the price of $0.20 per share, or 5,000,000 shares subject to the
Company meeting certain required disclosure conditions.
11
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 Lenders are 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. During the year
ended December 31, 2004, the Company recorded $464,140 as a debt discount and
recognized the entire $464,140 as interest expense related to the accretion of
the debt discount.
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. The amount allocated to the warrants as a debt
discount was calculated at $247,473 and will be recognized as interest expense
over the period until the notes mature or are converted. During the year ended
December 31, 2004, the Company recognized the entire $247,473 as interest
expense related to the accretion of the debt discount.
On December 30, 2004 MicroCap agreed to extend the loan until April 30th, 2005
under similar terms, except that, under the terms of the amendment, the price
that Lenders may exercise an option to convert any portion of the notes into
common shares is $0.60 per share up to a maximum of 1,666,666 common shares
and the Company's right to force conversion at price is lowered to $0.16 per
share, or 6,250,000 shares. Due to the amendment, the additional amount
allocated to the warrants as debt discount is $62,937 of which $37,500 is
recognized as interest expense as of March 31, 2005.
The Company expects to repay the notes upon maturity, unless the Lenders
exercise their option to convert into common shares. The Company does not
expect to exercise its option to force a conversion to common stock under the
terms of the amendment.
7. PAYABLES TO RELATED PARTIES
On July 20, 2004, the Company closed 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 had a term of 90 days and bore interest at 8% per
annum. 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. On December 31, 2004 the agreements were amended
and the loans were extended until April 30th, 2005. In exchange for waiving
the interest payments on the original notes, the 130,000 two year warrants
were cancelled and the Company authorized the issuance of 130,000 common
shares in January 2005. At December 31, 2004 the committed stock was valued at
$94,900. Deferred interest was calculated at $94,900, of which $79,083 was
recognized in the period ending March 31, 2005 and $15,817 was recorded as
deferred compensation as of March 31, 2005. As of March 31, 2005 and December
31, 2004, the related party notes of $130,000 were recorded in notes payable.
8. COMMON STOCK TRANSACTION
Common Stock Issued
A total of 130,000 shares of common stock were issued to related parties in
connection with the cancellation of interest of $94,900 on "Payables to
Related Parties" (See Note 7).
An individual purchased 30,000 shares during the three months ended March 31,
2005 for $15,000.
Common Stock Subscriptions
During the three months ended March 31, 2005 the Company canceled a stock
subscription receivable of $580,000 for 580,000 shares.
Warrants exercised for Common Stock
During the three months ended March 31, 2005 the Company issued 1,099,519
shares of its common stock from warrants converted to common stock for cash of
$431,789.
Common Stock issued for Services
During the three months ended March 31, 2005 the Company issued a total of
2,745,000 restricted shares as follows:
2,510,000 restricted shares were issued to consultants for services,
valued at $1,633,000 of which $703,800 was recognized as consulting
expense for the three months ended March 31, 2005 and $929,200 is recorded
as deferred compensation on the balance sheet.
235,000 restricted shares were issued to staff as incentive bonuses,
valued at $293,750 and is recorded as compensation expense during the
three months ended March 31, 2005.
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9. WARRANTS
During the three months ended March 31, 2005 the Company issued a total of
850,000 warrants to purchase common stock, as follows:
350,000 five year warrants issued to a consultant for advisory services at
an exercise price of $.40. The common stock price at issue was $1.10.
Total value of these warrants is $312,364. The warrant value was
calculated using the Black-Scholes method using the following assumptions
of 78% volatility, $1.10 share price, risk free interest rate of 3.68% and
zero dividend yields. For the three months ended March 31, 2005 the
Company recorded $279,826 of deferred compensation associated with these
warrants, of which $32,538 was amortized during the period.
500,000 three year warrants issued to a consultant for marketing services
at an exercise price of $1.00 effective March 29, 2005. The common stock
price at issue was $1.03. Total value of these warrants is $353,614. The
warrant value was calculated using the Black-Scholes method using the
following assumptions of 111% volatility, $1.03 share price, risk free
interest rate of 3.76% and zero dividend yields. For the three months
ended March 31, 2005 the Company recognized $353,614 of deferred
compensation associated with these warrants.
During the period ending Match 31, 2005, we issued a total of 5,969,234
out-of-the-money warrants to purchase additional shares of common stock to
approximately 40 investors to the Company's prior private placements. We
issued these warrants due to the illiquidity experienced by these investors
while the Company was experiencing delays in obtaining its OTC-BB listing.
2,984,617 warrants are exercisable at the price of $1.00 per share, and
2,984,617 of these warrants are exercisable at the price of $1.25 per share.
Each warrant issued was for a one-year term and will expire on February 2,
2006. At the date the warrants were issued, the market price of the Company's
common stock was $.80 per share. The value of the warrants was calculated at
$439,819 and is recorded as compensation expense in the statement of
operations for the three months ended March 31, 2005.
During the period ending March 31, 2005, we offered holders of certain
one-year warrants the opportunity to exercise these warrants at $.40 per
shares, which was at a discount to the warrant exercise price. At the time of
the offer, the market price of the Company's common stock was approximately
$.50 per share, and there was little trading volume. Approximately 15 warrant
holders took advantage of this opportunity and exercised warrants for
1,099,519 common shares. In exchange the Company received $431,788. As a
condition to the agreement, for each warrant exercised, the Company committed
to issue, but has no yet issued a replacement warrant with the same term,
expiration and strike price of those of the original warrant. In all, the
Company has committed to issue 549,758 warrants with an exercise price of
$1.00 and 549,761 with an exercise price of $1.25 to these investors. These
replacement warrants will expire on February 2, 2006.
10. RELATED PARTY TRANSACTIONS
The Company entered into consulting and independent contractor agreements on
July 15, 2003 with companies owned by shareholders, Investment Advisory Group,
Inc. and Media Solutions Network, LLC. Each agreement specifies monthly
payments of $13,500 for management services for a total of $27,000 per month.
The Company may terminate the agreements upon 30-days written notice. Total
management fees paid for the three months ended March 31, 2005 and 2004 is
$81,000 and $53,000, respectively.
See Note 7 "Payables to Related Parties"
Licensing Agreement
I-Publishing licensed to the Company the exclusive rights to use its
intellectual property. The Company is obliged to pay I-Publishing a royalty of
5% of the gross margin, defined as gross revenues less cost of goods,
associated with revenue earned that uses or relies upon the Licensor's
intellectual property in any form. For the three months ended March 31, 2005
the Company paid royalties of $8,925 to I-Publishing. The Company did not pay
any royalties during the three months ended March 31, 2004. Licensor may not
sell, provide or otherwise assign a similar license to any other company, nor
become a competitor for as long a period of time as the Company remains in
operation. There are no minimum performance stipulations in the License
Agreement. The license term is for 99 years beginning April, 2003.
Executive Compensation paid to Affiliate
For the three months ended March 31, 2005 the Company, in lieu of salary to
three executive officers, paid an affiliated Company I - Publishing, $142,500.
These payments are recorded as management compensation expense in the
accompanying statement of operations for the three months ended March 31,
2005.
13
11. SUBSEQUENT EVENTS
As of May 17, 2005, the Company had received $703,173 for the exercise of
warrants into 1,806,250 shares of unregistered common stock through a private
placement.
On May 23, 2005, the Company entered into a Purchase Agreement with several
accredited investors (the "Purchasers") pursuant to which the Company agreed
to sell, and the Purchasers agreed to purchase, $3,040,000 in shares of Series
A 6% Convertible Preferred Stock (the "Preferred Stock"), warrants (the "Long
Term Warrants") to purchase up to 7,600,000 shares of common stock and, solely
to another investor a Short Term Warrant. The Long Term Warrants are
exercisable for five years at $0.60 per share. Each share of Preferred Stock
may be converted into shares of common stock at a price of $0.40 per share.
The Short Term Warrant entitles the Purchaser to purchase up to $1,200,000 in
Preferred Stock and a warrant based on the same terms and conditions as the
Long Term Warrants, but exercisable until the earlier of one after date a
registration statement including the common shares underlying the Warrant
issued to the Purchaser is declared effective or two years after the date of
issuance.
On May 26, 2005 the Company paid $130,000 to satisfy its "Payable to related
parties".
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY STATEMENTS
You should read the following discussion and analysis in conjunction with the
Financial Statements and related Notes thereto included elsewhere in this
report and the audited financial statements and Management Discussion and
Analysis contained in our Annual Report on Form 10-KSB for the year ended
December 31, 2004. The information in this Report is not a complete
description of our business or the risks associated with an investment in our
common stock. We urge you to carefully review and consider the various
disclosures made by us in this Report and in our other reports filed with the
SEC.
The section entitled "Risk Factors" set forth in this Report and in our other
SEC filings discuss some of the important risk factors that may affect our
business, results of operations and financial condition. You should carefully
consider those risks, in addition to the other information in this Report and
in our other filings with the SEC, before deciding to invest in our Company or
to maintain or increase your investment.
FORWARD LOOKING STATEMENTS
Forward looking statements in this Form 10-QSB are made pursuant to the safe
harbor provisions of the Securities Litigation Reform Act of 1995. Such
forward looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as the date hereof.
This report, including the sections entitled "Cautionary Statements and Risk
Factors," "Management's Discussion and Analysis or Plan of Operation" and
"Description of Business," contains "forward-looking statements" that include
information relating to future events, future financial performance,
strategies, expectations, competitive environment, regulation and availability
of resources. These forward-looking statements include, without limitation,
statements regarding: proposed new services; our expectations concerning
litigation, regulatory developments or other matters; statements concerning
projections, predictions, expectations, estimates or forecasts for our
business, financial and operating results and future economic performance;
statements of management's goals and objectives; and other similar expressions
concerning matters that are not historical facts. Words such as "may," "will,"
"should," "could," "would," "predicts," "potential," "continue," "expects,"
"anticipates," "future," "intends," "plans," "believes" and "estimates," and
similar expressions, as well as statements in future tense, identify
forward-looking statements.
Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of
the times at, or by which, that performance or those results will be achieved.
Forward-looking statements are based on information available at the time they
are made and/or management's good faith belief as of that time with respect to
future events, and are subject to risks and uncertainties that could cause
actual performance or results to differ materially from those expressed in or
suggested by the forward-looking statements.
Forward-looking statements speak only as of the date they are made. You should
not put undue reliance on any forward-looking statements. We assume no
obligation to update forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting forward-looking
information, except to the extent required by applicable securities laws. If
we do update one or more forward-looking statements, no inference should be
drawn that we will make additional updates with respect to those or other
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). 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, media 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.
15
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 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 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 markets and
produces a variety of special edition digital publications and custom
promotional discs for various corporate clients. We also distribute 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. The Company's publications are distributed in a variety
of methods including insertions in major metropolitan newspapers, insertions
in major magazines and periodicals, hand-outs using targeted street teams, at
movie theater box offices, in back-end fulfillment and packaging, or via
direct mail 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 data and 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 media US, LLC, a California limited liability company
on December 24, 2003 to serve as our primary operating unit.
Strategic Distribution Partners
We are continuing to forge relationships with major publishers of newspapers
and magazines for strategic distribution. We are working closely with these
publishers to develop a series of interactive, digital enhancements that will
serve as digital supplements to their publications.
In conjunction with a major metropolitan newspaper, we intend to underwrite
the costs for several unique new publications so as to guarantee publication
and distribution over the next twelve months. By undertaking to subsidize any
revenue we ensure continuity of our publishing calendar with the newspaper and
our potential sponsors.
For each strategic distribution publishing partner, we plan to implement a
revenue sharing program that will allow us to participate in the combined
sponsorship revenues.
Custom Discs
A major portion of our efforts and resources are spent in the development of
special edition and custom interactive publications for a variety of
industries and corporate clientele.
We foresee that the custom disc market will constitute a major part of our
future revenues. We have identified and have developed new products
specifically targeted to these new markets, industries and sectors. We intend
to use a portion of our capital on an ongoing basis to develop these targeted
markets.
We will continue to open up new segments of industry and commerce and new
lines of distribution. Topics and sectors include entertainment, sports,
travel, information, medical, and direct marketing.
16
PLAN OF OPERATION
For the current fiscal year we intend to focus on the following primary
objectives:
. Continued development and publication of Hollywood Previews(TM)
Entertainment Magazine.
. Establish a strategic distribution partner or partners in various
information dissemination industries.
. Identification and development of specialty and custom disc
customers, industry sectors and content.
. Raise capital through debt issues and new private equity offerings.
RESULTS OF OPERATIONS
Revenues are generated from the sale of paid advertising sponsorships,
licensing, content placements, and e-commerce fees, plus the sale to
advertisers and content providers of the Company's proprietary Usage Report
that monitors the use of the disk by its audience.
The consolidated financial statements of media International Inc., as of March
31, 2005 include the accounts of the Company and its wholly owned subsidiaries
HPI, and media US LLC.
On a combined basis, the Company has 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 ended March 31, 2005 to the three months ended March 31,
2004:
Sales
Net sales increased $420,964 or 1,651% for the three months ended March 31,
2005 to $446,464 from $25,500 for the three months ended March 31, 2004.
The three month period ended March 31, 2005 versus the same time period in
2004 is not comparable. For the three months ended March 31, 2004 we, for the
most part, had not begun to execute our sales plan as such our sales were
immaterial and consisted of design and royalty fees. For the three months
ended March 31, 2005 our sales consisted of custom productions to augment our
various customers marketing and advertising programs.
Cost of sales and gross profit
Cost of sales increased to $263,254 or 5,601% for the three months ended March
31, 2005 to $267,954 from $4,700 for the three months ended March 31, 2004.
Gross profit increased $157,710 or 7,582% for the three months ended March 31,
2005 to $178,510 from $20,800 for the three months ended March 31, 2004.
Gross profit as a percentage of sales for the three months ended March 31,
2005 is 40% versus 81% for the three months ended March 31, 2004.
As noted above, revenues for the three months ended March 31, 2005 originated
primarily from design fees and royalties which have little associated cost of
sales. Cost of sales for the three months ended March 31, 2005 included a
combination of design and manufacturing costs, thus there is little parity in
comparisons between the two periods. During 2005, it is anticipated that sales
and cost of sales shall constitute a variety of design, manufacturing,
replication and advertising, and that the cost of sales will average 20% to
40% of gross revenues. We may also be required to vary the profitability of
each project so as to establish market share. The Company foresees the need to
continue its policy of cost variation in order to achieve significant market
penetration and brand recognition.
Operating Expenses
Operating expenses increased $1,690,482 or 220% for the three months ended
March 31, 2005 to $2,459,494 from $769,012 for the three months ended March
31, 2004.
The increase in expenses is due primarily to continued development of our
products, growth initiatives, expenses associated with expanded sales efforts,
as well as substantial legal and accounting costs associated with completing
our reverse-merger and maintaining our fully-reporting status. We have
dramatically increased our sales and marketing efforts resulting in additional
operating expenses. For the three months ended March 31, 2005 approximately
$1,555,000 or 63% of operating expenses were associated with compensation and
services paid through the issuance of warrants as opposed to cash. As our
business increases, it is anticipated that operating expenses will increase in
absolute dollars, but should decrease as a percentage of sales.
17
Operating Expenses - related parties
Operating expenses - related parties increased $21,000 or 17% for the three
months ended March 31, 2005 to $142,500 from $121,500 for the three months
ended March 31, 2004.
In lieu of certain officer salaries we paid a company owned by our officers
and shareholders.
Other Expense
Interest Expense
Interest expense was $132,546 for the three months ended March 31, 2005,
compared to zero for the three months ended June 30, 2004. Interest expense
for the three months ended March 31, 2005 resulted in connection with bridge
loans obtained by us for support of our operations. For the three months
ended March 31, 2005 we paid Micro-Cap $37,500 in interest expense associated
with their bridge financing. It is our intention to pay off this bridge loan
during the second quarter of 2005. Therefore, we do not anticipate interest
expense on this note subsequent to the second quarter of 2005. For the three
months ended March 31, 2004 we did not have any significant debt on our
balance sheet and therefore no interest expense for the three months ended
March 31, 2004.
Loss on sale of investments
The loss on sale of investment for the three months ended March 31, 2005 of
$143,477 reflects the sale of 625,000 shares of the Company's available for
sale investment in Langley Park. For the three months ended March 31, 2004
the Company did not have any investment transactions.
Unrealized loss on investment in available for sale securities
During the three months ended March 31, 2005 we determined that the value of
our investment in available for sale securities ("Langley Shares") has been
permanently impaired. In accordance with SFAS 115 we have recorded the
permanent impairment of this investment as an unrealized loss. The unrealized
loss of $1,513,030 for the three months ended March 31, 2005 represents the
unrealized loss on this investment from the inception of the acquisition of
the Langley Shares.
Provision for Income Taxes
For the three months ended March 31, 2005 and 2004 the provision for income
taxes represents the minimum state taxes due.
Net Profit or Loss
Net loss for the three months ended March 31, 2005 increased to ($4,213,337)
compared to ($872,112) for an increased loss of ($3,341,225) or 383% to the
comparable period of the prior year.
The increase in net loss is primarily attributable to the expanded operations,
the substantial legal and accounting costs related to our reverse merger and
fully-reporting status, our increased sales and marketing efforts and the
unrealized loss created from the impairment in our investment in the Langley
Shares.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the three months ended March 31,
2005 was $1,003,150. The net cash used from operations is a result of the net
loss of approximately $4,213,337 offset by approximately $1,555,000 of non
cash stock and warrant compensation charges and $1,513,000 of unrealized
losses on the investment in available for sale securities. Non cash
compensation charges resulted from warrants issued for consulting services and
bonuses. The unrealized loss on the investment in available for sale
securities is the result of us making the determination that the shares were
permanently impaired as determined in SFAS 115. Net cash used in operating
activities for the three months ended March 31, 2004 of $890,038 is primarily
attributable to the net loss from for the three months ended March 31, 2004 of
approximately $872,000.
Net cash provided by investing activities for the three months ended March 31,
2005 was $201,049. Net cash provided by investing activities for the three
months ended March 31, 2005 is primarily attributable to the sale of
securities held for investments (i.e. Langley Park shares). For the three
months ended March 31, 2004 net cash used in investing activities of $45,395
was a result of the purchase of equipment for approximately $13,000 and the
reduction in the amount from Affiliates and associated companies payable of
approximately $32,000.
18
Net cash provided by financing activities for the three months ended March 31,
2005, totaled $473,187. We received net proceeds from the issuance of common
stock for approximately $446,000. In addition, we received proceeds form
notes payable to related parties of approximately $26,000. Net cash provided
by financing activities for the three months ended March 31, 2004 totaled
$388,892. We received net proceeds from the issuance of common stock totaling
approximately $395,000. These proceeds were offset primarily by payments on
notes payable to related party of approximately $6,100.
We have generated losses since inception and have negative working capital as
of March 31, 2005. For the year ended December 31, 2005 the independent
registered public accounting firm, in their opinion, has expressed substantial
doubt about the Company's ability to continue as a 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.
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 the shortfall in revenues and the
growth. To address the issue of liquidity and create an adequate capital pool
we are doing or are prepared to do the following actions:
. Subsequent to March 31, 2005 warrant holders converted 1,803,250
warrants to common stock creating $703,173 in proceeds.
. Completed a private placement of preferred stock for $3,040,000.
. Continue to raise funds through equity placements of preferred stock
of which our target is $5,000,000.
Recent Sales of Unregistered Securities
A total of 130,000 shares of common stock were issued to related parties in
connection with the cancellation of interest on "Payables to Related Parties".
An individual purchased 30,000 shares during the three months ended March 31,
2005 for $15,000.
During the three months ended March 31, 2005 we issued a total of 1,099,519
shares of our common stock from warrants converted to common stock for
$431,789.
During the three months ended March 31, 2005 we issued a total of 2,745,000
restricted shares as follows:
2,510,000 restricted shares were issued to consultants for services,
valued at $1,633,000.
235,000 restricted shares were issued to staff as incentive bonuses,
valued at $293,750.
OFF BALANCE SHEET ARRANGEMENTS
As of March 31, 2005 we did not have any off Balance Sheet arrangements.
CRITICAL 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,
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. 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.
19
Revenue Recognition
Our major source of revenue is from the creation and duplication of
interactive multi-media CD's from content provided by our customers. Revenue
is allocated to the creation of the CD, and to the duplication of such CD's,
based upon the relative fair value of such services to the total contractual
revenue. Revenue from the creation of the multi-media interactive CD is
recognized when completed and upon client acceptance. Revenue from duplication
is recognized as the units are shipped.
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.
Asset Impairment
We assess the fair value and recoverability of our long-lived assets whenever
events and circumstances indicate the carrying value of an asset may not be
recoverable from estimated future cash flows expected to result from its use
and eventual disposition. In doing so, we make assumptions and estimates
regarding future cash flows and other factors to make our determination. The
fair value of our long-lived assets is dependent upon the forecasted
performance of our business, changes in the various industries, and the
overall economic environment. When we determine that the carrying value of our
long-lived assets may not be recoverable, we measure any impairment based upon
the excess of the carrying value that exceeds the estimated fair value of the
assets. As a result of our reviews, we have determined there is no impairment
loss to be recognized at March 31, 2005.
Marketable Securities
The Company accounts for investments under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Investment securities are
classified into one of three categories: held-to-maturity, available-for-sale,
or trading. Securities are considered held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity. These
securities are recorded as either short-term investments or long-term
marketable securities on the balance sheet depending upon their original
contractual maturity dates. Held-to-maturity securities are stated at
amortized cost, including adjustments for amortization of premiums and
accretion of discounts. Securities are considered trading when bought
principally for the purpose of selling in the near term. Trading securities
are recorded as short-term investments and are carried at market value.
Unrealized holding gains and losses on trading securities are included in
operating income. Securities not classified as held-to-maturity or as trading
are considered available-for-sale. Available-for-sale securities are recorded
as either short-term investments or long-term marketable securities and are
carried at market value with unrealized gains and losses included in other
comprehensive income in stockholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS
There has been no material change to our disclosure of recent accounting
pronouncements provided in Management's Discussion and Analysis contained in
our Annual Report on Form 10-KSB for the year ended December 31, 2004.
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 the
industry and geographic diversification will help insulate the Company from
unforeseen economic, political and/or regulatory pressures that may arise on a
regional basis. 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.
20
The Company has a limited operating history and may incur losses as it
seeks to grow.
The Company's various operating units have been recently incorporated and have
limited operations. In addition, the Company 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 Company 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.
The Company's 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, 2004 to the effect that our significant losses from operations
and our dependence on equity and debt financing raise substantial doubt about
our ability to continue as a going concern.
The Company may not be successful in establishing necessary strategic
alliances.
The Company is 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 Company 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 the Company's business,
results of operations or financial condition.
Major risks associated with strategic alliances and partnerships are (1) the
lack of control Company may have over these operations, and (2) the
possibility that in the future, the Company's strategic alliances will not
develop or market products in competition with the Company, and/or discontinue
their alliances with the Company or form alliances with the Company's
competitors.
Some of the Company's agreements have not been finalized and terms may
differ.
Many of the agreements, negotiations and other business activities of the
Company are still in discussion stage and have not yet been consummated.
Depending upon circumstances both inside and outside of the Company's control,
some or all of these agreements may never be consummated, or, if consummated,
the terms and conditions may change materially from those currently projected
or assumed by Company.
Competition and technological uncertainty exists in the market.
The Company operates 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 the Company.
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.
The Company's 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.
The Company's 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 the Company's competitors have substantially greater financial,
technical and human resources than the Company. There can be no assurance that
the Company's 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 the Company's 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.
21
The Company faces technology risks.
The Company's 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. One or more of the Company's
competitors may achieve patent protection that could have a material adverse
effect on the Company. Although the Company does not currently have any
specific plans to do so, it may prosecute or may be required to defend patent
or trademark infringement litigation or patent interference proceedings with
holders of competitive patents or trademarks. The Company may incur
substantial costs in defending or prosecuting such proceedings. In addition,
such proceedings may impact the Company's competitive position and there can
be no assurance that the Company will be successful in any patent or trademark
litigation.
There is no guarantee that the motion picture studios will continue to
provide the Company with content and movie trailers at no cost.
Presently, the Company is 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. The Company will continue to rely upon the availability of this free
media and content as the key component for the Hollywood Previews(TM)
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(TM) Entertainment Magazine could be jeopardized, and the production
and distribution of this core Company 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.
The Company's future depends, in part, on its Key Personnel, Consultants
and Principal Management's continued participation.
The Company's 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. The Company's
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. The Company
addresses 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.
Loss of relationships with key suppliers may harm the Company.
Whenever possible, the Company will acquire businesses, products or product
lines which do not rely on a single supplier for raw materials or finished
goods, but there can be no assurance that some products or product lines will
be able to utilize materials or parts except those available through a single
supplier.
Control by Management.
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.
Lack of Product or Multi-Media 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. The
Company intends 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.
22
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:
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.
The Company is 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.
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.
23
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.
Our international business exposes us to a number of risks.
A significant part of our current sales are and a significant part of our
projected future sales will be derived from international operations. In
addition, we anticipate having material international operations, including, a
variety of jointly-owned subsidiary operations. Accordingly, we will be
exposed to risks associated with international operations, including risks
associated with re-valuation of the local currencies of countries where we
sell our products or conduct business, which may result in our products
becoming more expensive in local currency terms, thus reducing demand or in
increased costs to us. Our operations and financial results also may be
significantly affected by other international factors, including:
.. Foreign government regulation
.. Political or economic instability in our target markets
.. Trade restrictions
.. Changes in tax laws and tariffs
.. Inadequate protection of intellectual property rights in some countries
.. Managing foreign distributors, manufacturers and staffing
.. Managing foreign branch offices
If these risks actually materialize, our sales to international customers, as
well as those domestic customers that use products manufactured abroad, may
decrease.
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
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
Our management evaluated, with the participation of our Chief Executive and
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-QSB.
Based on this evaluation, our Chief Executive and Financial Officer has
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act)) are inadequate to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms. We are developing a plan to ensure that all
information will be recorded, processed, summarized and reported on a timely
basis. This plan is dependent, in part, upon reallocation of responsibilities
among various personnel, possibly hiring additional personnel and consultants
and additional funding. It should also be noted that the design of any system
of controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless
of how remote.
24
PART II - OTHER INFORMATION
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In January 2005, we issued 130,000 shares of our common stock to an individual
for total proceeds of $94,900 in connection with the cancellation of interest.
The purchaser represented to us that the purchaser was an "accredited
investor" within the meaning of Rule 501 of Regulation D under the Securities
Act of 1933, and that such investor was receiving the common stock for
investment and not in connection with a distribution thereof. The issuance
of the common stock was exempt from the registration and prospectus delivery
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act and Rule 506 thereunder as a transaction not involving any public
offering."
In March 2005, we sold 30,000 shares of our common stock to an individual for
total proceeds of $15,000. The purchaser represented to us that the purchaser
was an "accredited investor" within the meaning of Rule 501 of Regulation D
under the Securities Act of 1933, and that such investor was receiving the
common stock for investment and not in connection with a distribution
thereof. The issuance and sale of the common stock was exempt from the
registration and prospectus delivery requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act and Rule 506 thereunder as a
transaction not involving any public offering."
In the first quarter of 2005, we issued 2,510,000 shares of our common stock
to outside consultants of the Company for a value of $1,576,752. The
recipient represented to us that the recipient was an "accredited investor"
within the meaning of Rule 501 of Regulation D under the Securities Act of
1933, and that such investor was receiving the common stock for investment
and not in connection with a distribution thereof. The issuance of the
common stock was exempt from the registration and prospectus delivery
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act and Rule 506 thereunder as a transaction not involving any public
offering."
In the first quarter of 2005, we issued 235,000 shares of our common stock to
an our employees as incentive bonuses for a value of $293,750. The recipients
represented to us that the recipient was an "accredited investor" within the
meaning of Rule 501 of Regulation D under the Securities Act of 1933, and that
such investor was receiving the common stock for investment and not in
connection with a distribution thereof. The issuance and sale of the common
stock was exempt from the registration and prospectus delivery requirements of
the Securities Act pursuant to Section 4(2) of the Securities Act and Rule 506
thereunder as a transaction not involving any public offering."
In the first quarter of 2005, we issued 1,099,519 shares of our common stock
to convert warrants with a value of $431,739. The purchaser represented to us
that the purchaser was an "accredited investor" within the meaning of Rule 501
of Regulation D under the Securities Act of 1933, and that such investor was
receiving the common stock for investment and not in connection with a
distribution thereof. The issuance and sale of the common stock was exempt
from the registration and prospectus delivery requirements of the Securities
Act pursuant to Section 4(2) of the Securities Act and Rule 506 thereunder as
a transaction not involving any public offering."
ITEM 6: EXHIBITS
(A) The following exhibits are filed as part of this report.
Exhibit
Number Description
- ---------- -----------
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 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
25
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: June 7, 2005
IMEDIA INTERNATIONAL INC.
By: /s/ David MacEachern
-----------------------------------------
David MacEachern, Chief Executive Officer
By: /s/ Franklin Unruh
-----------------------------------------
Franklin Unruh, Chief Financial Officer
26