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: SEPTEMBER 30, 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)
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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
As of November 15, 2005 the Issuer had 71,589,454 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 ......18
ITEM 3: CONTROLS AND PROCEDURES ........................................28
PART II: OTHER INFORMATION
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.....28
ITEM 6: EXHIBITS........................................................29
SIGNATURES ..............................................................30
CERTIFICATIONS ..........................................................31
2
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL INFORMATION
IMEDIA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2005 2004
-------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 2,946,322 $ 358,969
Accounts receivable 907,899 46,444
Work in process 258,019 -
Prepaid expense 8,683 555
-------------- -------------
Total current assets 4,120,923 405,968
-------------- -------------
Property and equipment, net 100,016 78,211
Investment in available for sale securities - 1,066,461
-------------- -------------
Total assets $ 4,220,939 $ 1,550,640
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 668,412 $ 757,633
Deferred revenue 48,340 -
Due to affiliate 8,709 13,602
Notes payable 16,561 1,080,022
-------------- -------------
Total current liabilities 742,022 1,851,257
-------------- -------------
SERIES A - MANDATORY REDEEMABLE CONVERTIBLE
PREFERRED STOCK, net of discount of $2,567,110 472,890 -
-------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred Stock - authorized 20,000,000 shares:
Series A - Convertible Preferred stock subject
to mandatory redemption, to 7,600,000 shares
of common stock, $0.001 par value, 6% dividend,
authorized 7,200 shares; 3,040 shares issued
and outstanding as of September 30, 2005, none
outstanding as of December 31, 2004 - -
Series B - Convertible Preferred stock, net of
offering costs of $1,098,468 convertible into
12,300,000 shares of common stock, $0.001 par
value, 6% dividend through August 22, 2009, 9%
dividend for the year ended August 22, 2010 and
14% thereafter, authorized 6,000 shares; 4,920
shares issued and outstanding as of September 30,
2005, none outstanding as of December 31, 2004 3,821,532 -
Common stock-500,000,000 shares authorized,
$.001 par value, 71,589,454 issued and
outstanding as of September 30, 2005;
65,567,908 issued and outstanding as of
December 31, 2004 71,590 65,568
Subscription receivable - (530,000)
Common stock committed, 710,000 shares as
of December 31, 2004 - 674,900
Preferred compensation (558,379) (149,246)
Capital in excess of par value 21,578,281 9,320,428
Accumulated deficit (21,906,997) (8,551,816)
Accumulated other comprehensive loss - (1,130,451)
-------------- -------------
Total stockholders' equity (deficiency) 3,006,027 (300,617)
-------------- -------------
Total liabilities and stockholders'
equity (deficiency) $ 4,220,939 $ 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 and Nine Months Ended September 30, 2005 and 2004 (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2005 2004 2005 2004
------------- ------------- -------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<s> <c> <c> <c> <c>
Net sales $ 970,165 $ 756,794 $ 3,117,516 $ 1,681,969
Cost of sales 811,622 668,000 2,526,854 1,439,109
------------- ------------- -------------- -------------
Gross profit 158,543 88,794 590,662 242,860
------------- ------------- -------------- -------------
Costs and expenses:
Selling 781,187 296,515 1,521,407 695,934
General and administrative 1,133,495 700,456 5,135,825 2,228,366
Operating expenses -
related parties 155,000 121,500 447,500 364,500
------------- ------------- -------------- -------------
Total expenses 2,069,682 1,118,471 7,104,732 3,288,800
------------- ------------- -------------- -------------
Loss from operations (1,911,139) (1,029,677) (6,514,070) (3,045,940)
------------- ------------- -------------- -------------
Other expense:
Interest expense, net 618,963 235,767 1,261,534 330,811
Loss on sale of investments 9,582 - 573,975 -
Impairment loss on
investment in available
for sale securities - - 1,156,270 -
------------- ------------- -------------- -------------
Total other expense 628,545 235,767 2,991,779 330,811
------------- ------------- -------------- -------------
Loss before provision
for income taxes (2,539,684) (1,265,444) (9,505,849) (3,376,751)
Provision for income taxes - - 3,200 2,400
------------- ------------- -------------- -------------
Net loss (2,539,684) (1,265,444) (9,509,049) (3,379,151)
Beneficial conversion feature
on the Series B convertible
preferred stock (3,821,532) - (3,821,532) -
Preferred stock dividends (24,600) - (24,600) -
------------- ------------- -------------- -------------
Net loss applicable to
common shareholders $ (6,385,816) $ (1,265,444) $ (13,355,181) $ (3,379,151)
============= ============= ============== =============
NET LOSS PER COMMON SHARE
APPLICABLE TO COMMON SHAREHOLDERS,
Basic and Diluted:
Net loss applicable to
common stockholders $ (0.09) $ (0.02) $ (0.19) $ (0.06)
============= ============= ============== =============
WEIGHTED AVERAGE COMMON
OUTSTANDING SHARES
Basic and diluted 71,411,546 61,154,390 69,815,924 60,357,274
============= ============= ============== =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
IMEDIA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIT AND OTHER COMPREHENSIVE INCOME (LOSS)
As of September 30, 2005 (unaudited)
Accumulated
Preferred Deferred Capital in Other
Common Stock Stock Subscription Committed Compen- excess of Comprehen. Accumulated
Shares Amount Shares Amount Receivable Shares Amount sation par value Losses Deficit Total
---------- ------- ----- ---------- --------- -------- --------- --------- ----------- ------------ ----------- -----------
<s> <c> <c> <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)
Cancella-
tion of
subscrip-
tion
receivable - - - - 530,000 (580,000) (580,000) - 50,000 - - -
Issuance
of common
stock upon
exercise
of
warrants 2,874,119 2,874 - - - - - - 1,132,087 - - 1,134,961
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 - - - - - - - 1,186,046 - - - 1,186,046
Permanent
impairment
on investment
in available
for sale
securities - - - - - - - - - 1,130,451 - 1,130,451
Issuance of
additional
warrants to
investors - - - - - - - - 439,819 - - 439,819
Issuance of
warrants
with
preferred
stock
offering - - - - - - - - 2,781,000 - - 2,781,000
Issuance of
replacement
warrants - - - - - - - - 329,105 - - 329,105
Issuance of
warrants for
legal
services - - - - - - - - 83,584 - - 83,584
Issuance of
warrants for
debt extension - - - - - - - - 340,478 - - 340,478
Issuance of
preferred
shares - - 4,920 4,920,000 - - - - - - - 4,920,000
Beneficial
conversion
feature on
preferred
shares - - - - - - - - 3,821,532 - (3,821,532) -
Warrants
issued for
offering
costs for
Series B
Preferred
Stock - - - (412,845) - - - - 412,845 - - -
Cash offering
costs for
Series B
Preferred
Stock - - - (685,623) - - - - - - - (685,623)
Issuance of
preferred
stock
dividends - - - - - - - - - - (24,600) (24,600)
Issuance of
common stock
for legal
services 62,500 63 - - - - - - 37,438 - - 37,501
Shares
issued for
settlement 43,253 43 - - - - - - (43) - - -
Issuance
of common
stock for
commissions 6,097 6 - - - - - - 2,494 - - 2,500
Issuance of
warrants for
services - - - - - - - - 62,632 - - 62,632
Preferred
stock
dividend
- - common
shares
issued 130,577 131 - - - - - - 65,158 - - 65,289
Net Loss - - - - - - - - - - (9,509,049) (9,509,049)
---------- ------- ----- ---------- ---------- ------- --------- --------- ----------- ------------ ----------- -----------
Balance
September
30, 2005 71,589,454 $71,590 4,920 $3,821,532 - - - $(558,379)$21,578,281 $ - $(21,906,997)$3,006,027
========== ======= ===== ========== ========== ======= ========= ========= =========== ============ =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
IMEDIA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2005 and 2004 (unaudited)
2005 2004
-------------- -------------
(unaudited) (unaudited)
Cash Flow from operating activities:
Net loss $ (9,509,049) $ (3,379,151)
Adjustments to reconcile net loss to net cash
used in net operating activities:
Interest on fixed conversion feature - 311,358
Depreciation and amortization 33,043 33,504
Loss on sales of investments 573,975 -
Impairment loss on investment in available
for sale securities 1,156,270 -
Non-cash stock and warrant compensation charge 3,043,837 469,073
Non-cash warrant interest charge 340,478 -
Non-cash interest payment 65,289 -
Amortization of common stock for interest
on notes to related parties 94,900 -
Amortization of debt discount for preferred stock 472,889 -
Amortization of note discount 62,937 -
Increase in accounts and advances receivable (861,452) (346,330)
Increase in work in process (258,019) -
Increase in deferred compensation - (2,373)
Decrease in prepaid expenses (8,128) (34,886)
Decrease in leases payable (2,138) -
Decrease in inventory - 36,505
Increase (decrease) in accounts payable
and accrued expenses (100,044) 422,466
Increase in deferred revenue 48,340 -
-------------- -------------
Net cash flows used in operating activities (4,846,872) (2,489,834)
-------------- -------------
Cash flows from investing activities:
Purchase of equipment (54,848) (53,954)
Due from affiliates and associated companies, net (4,893) (40,805)
Proceeds from sale of investment in available
for sale securities 466,668 -
-------------- -------------
Net cash flows provided by (used in)
investing activities 406,927 (94,759)
-------------- -------------
Cash flow from financing activities:
Increase in committed stock - 50,000
Payments on notes payable - related parties (130,000) (14,254)
Proceeds on notes payable - related parties 16,561 1,391
Payments on notes payable (1,000,000) (250,000)
Proceeds from notes payable - 1,380,000
Proceeds for collection of common stock
subscription receivable - 370,000
Proceeds from issuance of common stock 1,149,960 1,228,000
Preferred stock dividend (24,600) -
Net proceeds from issuance of Series A
Preferred Stock 2,781,000 -
Net proceeds from issuance of Series B
Preferred Stock 4,234,377 -
Offering costs paid on issuance of stock - (184,790)
-------------- -------------
Net cash flows provided by financing activities 7,027,298 2,580,347
-------------- -------------
Net increase (decrease) in cash 2,587,353 (4,246)
Cash, at beginning of period 358,969 813,189
-------------- -------------
Cash, at end of period $ 2,946,322 $ 808,943
============== =============
Supplemental disclosures of cash flow information
Income taxes paid $ 3,200 $ 2,400
Interest paid $ 67,571 $ -
Non Cash Transaction:
Dividend payable and accrued interest added to
balance of mandatory convertible redeemable
stock $ 15,200 $ -
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
IMEDIA INTERNATIONAL INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
1. ORGANIZATION
General
Hollywood Previews, Inc. ("HPI"), iMedia International's wholly-owned
subsidiary, was originally incorporated in California on July 25, 2002 under
the name DTV Studios. 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, IPC had no material operations at the
time of the merger. Because the Acquisition resulted in a change of control,
with the shareholders of HPI becoming the primary shareholders of IPC, the
Acquisition 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.
IPC was originally incorporated in Colorado on June 10, 1987 under the name of
Weston Hotel Corp. The Company had no material operations from shortly after
its inception until its Acquisition of HPI, as described above. Shortly after
the acquisition, effective November 25, 2003, IPC completed a statutory
merger effected for the purpose of changing its state of incorporation from
Colorado to Delaware by merging into a newly formed Delaware corporation,
iMedia International, Inc. (the "Company"). This change in IPC's state of
incorporation and corporate name was approved by the holders of a majority of
IPC's outstanding shares of common stock at a special meeting of shareholders
on November 21, 2003.
As a result of the reincorporation merger, each outstanding share of IPC's
common stock was automatically converted into one share of Company common
stock. Each stock certificate representing issued and outstanding shares of
IPC's common stock continues to represent the same number of shares of common
stock of the Company. The Company continues to operate the business of IPC,
and the reincorporation did not result in any change in IPC's former business,
assets or liabilities, did not cause the Company's headquarters to be moved,
or result in any relocation of management or other employees.
At the time of the Acquisition HPI held an exclusive license from iPublishing,
Inc. ("iPublishing"), an affiliate of the Company, to use iPublishing's
intellectual property (the "License"). iPublishing's three shareholders, David
MacEachern, Scott Kapp and Franklin Unruh (each of whom own approximately 33%
of the outstanding securities of iPublishing), are each officers and directors
of the Company. Pursuant to the License, iPublishing receives annual 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 the Company's revenues to date have been generated from the
sale of custom publications and special edition discs. The Company continues
to pursue the procurement of paid advertising sponsorships, licensing, content
placements, and e-commerce fees from Hollywood Previews(TM) Entertainment
iMagazine(TM) and intends to begin sales efforts of its proprietary data and
usage report technology 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. iMedia US, LLC, a California limited liability company was
formed on December 24, 2003 to serve as the Company's primary operating unit
for developing custom publications and special edition discs.
7
2. GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company experienced net
losses from operations for the nine months ended September 30, 2005 of
$9,509,049, negative cash flows from operations of $4,846,872 and has an
accumulated deficit of $21,906,997 as of September 30, 2005. These factors
raise substantial doubt about its ability to continue as a going concern.
During the nine months ended September 30, 2005 the Company has raised
$7,015,377, net of costs, through the sale to several accredited investors
pursuant to which the Company agreed to sell 3,040 of its shares of Series
A-6% Mandatory Redeemable Convertible Preferred Stock and 4,920 shares of its
Series B-6% Convertible Preferred Stock along with warrants to purchase its
common stock (see Note 11). The Company has also raised $1,149,960 through the
sale of common stock and the conversion of warrants to common stock. The
Company believes that the funds received are adequate to execute its business
plan, the objective of which is to become cash flow positive through the
generation of net income.
The financial statements do not include any adjustments relating to the
recoverability and classification of assets or liabilities that might be
necessary should the Company be unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The consolidated financial information as of September 30, 2005 and for the
three and nine months ended September 30, 2005 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 and nine months ended September 30, 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 and nine months ended
September 30, 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 iMedia International, Inc. as of
September 30, 2005, include the accounts of the Company and its wholly-owned
subsidiaries Hollywood Previews, Inc. (a California corporation), iMedia US,
LLC (a California limited liability company) and iMedia Nevada, LLC (a Nevada
limited liability company). All significant inter-company accounts and
transactions have been eliminated in consolidation.
Stock Based Compensation
The Company currently accounts for all stock option grants and warrants to
both employees and non employees in accordance with Statement of Financial
Accounting Standards ("SFAS") 123 "Accounting for Stock Based Compensation."
Accordingly, the Company recognizes compensation expense based on the fair
market value of the warrant or option issued.
In December 2002, the Financial Accounting Standards Board ("the FASB") issued
Statement SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure - an amendment of FASB Statement No. 123. SFAS No. 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
Revenue Recognition
The Company's major source of revenue is from the creation and duplication of
interactive multi-media CD-ROMs from content provided by customers. Revenue is
allocated to the creation of the CD-ROMs, and to the duplication of such
CD-ROMs, based upon the contract terms and relative fair value of such
services to the total contractual revenue. Revenue from the creation of the
multi-media interactive CD-ROMs is recognized when completed and upon client
acceptance. Revenue from duplication is recognized as the units are delivered.
In accordance with Emerging Issues Task Form ("EITF") Issue 00-21, the Company
believes that the multiple deliverables under our customer contracts that
relate to the creation of a CD-ROM and duplication of a CD-ROM are two
distinct separate units of accounting. Each unit of accounting has a value to
the customer on a stand-alone basis. The Company can determine the fair value
for the creation of a master and the duplication and delivery of the CD-ROM.
The Company's contracts have no right of return once they have been approved
by the customer.
In accordance with EITF Issue 99-19 in the fiscal year 2004, the Company
recorded sales net of outside advertising agency fees. For the three and nine
months ended September 30, 2004 advertising agency fees used to offset sales
were $49,632 and $91,985, respectively. In fiscal 2005 the Company did not
incur any outside advertising agency fees.
8
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 September
30, 2005 (unaudited) and December 31, 2004 no valuation allowance has been
recorded against the accounts receivable.
Work in Progress
The Company capitalizes direct material and labor into work in process on
projects that have yet to be completed. Total work in process as of September
30, 2005 is $258,019. There was no work in progress as of December 31, 2004.
Earnings (Loss) per Common Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
requires presentation of basic earnings per share and diluted earnings per
share. 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 and nine months ended September 30, 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 and nine months ended September 30, 2005 and 2004.
For the three and nine months ended September 30, 2005, potentially dilutive
securities totaled 21,028,750 and 54,090,355, respectively. For the three and
nine months ended September 30, 2004, potentially dilutive securities totaled
1,697,725 and 2,457,066, respectively.
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. As of September 30, 2005 total cash in excess of
federally insured amounts by the Company is $2,974,014.
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 a small business issuer, and therefore is
required to adopt SFAS 123R as of the first interim or annual reporting period
of the first fiscal year that begins on or after December 15, 2005. 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.
In March 2005, the Securities and Exchange Commission Office of the Chief
Accountant and its Division of Corporate Finance released Financial Accounting
Bulletin No. 107, "Share-Based Payment" (SAB 107). SAB 107 provides
interpretive guidance related to the interaction between Statement of
Financial Accounting Standards No. 123R "Shared Based Payment" (SFAS 123R)
and certain SEC rules and regulations. SAB 107 provides the staff's views
regarding the valuation of shared-based payment arrangements for public
companies and stresses the importance of including appropriate disclosures
within SEC filings, particularly during the transition to SFAS 123R.
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 September 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.
9
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS 154"). SFAS 154 replaces APB Opinion No. 20, "Accounting Changes" ("APB
20") and FASB Statement No. 3, "Reporting Accounting Changes in Interim
Financial Statements," and changes the requirements for the accounting for and
reporting of a change in accounting principle. APB 20 previously required that
most voluntary changes in accounting principle be recognized by including in
net income of the period of the change the cumulative effect of changing to
the new accounting principle. SFAS 154 requires retrospective application to
prior periods' financial statements for voluntary changes in accounting
principle. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The impact of
SFAS 154 will depend on the accounting change, if any, in a future period.
4. MAJOR CUSTOMERS AND SUPPLIERS
During the three and nine months ended September 30, 2005, three and four
major customers accounted for 94% and 92% of total net sales, respectively,
whereas for the three and nine months ended September 30, 2004, two major
customers accounted for 93% and 75% of total net sales, respectively. During
the three and nine months ended September 30, 2005, two vendors accounted for
95% of total purchases, respectively. Whereas for the three and nine months
ended September 30, 2004, five vendors accounted for 97% and 80% of total
purchases, respectively.
We are 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 the Company.
5. 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).
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 iMedia 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 iMedia
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 iMedia shares falls below
$0.95, all the escrowed Langley shares will be lost. If, however, the trading
price of iMedia shares is more than $0.95 but less than $1.90, only a
proportionate amount of the escrowed shares will be lost. During the three
months ended March 31, 2005, the Company's share price was below $.95. The
Company determined that its entire investment in the escrow shares became
permanently impaired. In accordance with SFAS No. 115, the write down of
these shares was reflected as a permanent impairment and the previously
reflected unrealized loss of $1,130,451 included in accumulated other
comprehensive loss as of December 31, 2004 was recorded in the statement of
operations, and during 2005, the Company reflected a further impairment loss
of $25,819 on the non escrowed shares.
During the nine months ended September 30, 2005, the Company sold 1,883,260
shares of its non-escrow shares, respectively for gross proceeds totaling
$257,407 and $466,668, respectively. In connection with the sale of these
shares the Company recorded a loss for the three and nine months ended
September 30, 2005 of $9,582 and $573,975, respectively, in the statement of
operations in other expense.
As of September 30, 2005 all Langley non escrowed shares had been sold.
6. COMMITMENTS AND CONTINGENCIES
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 iPublishing, 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 iPublishing, 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, in April 2005
increased to $50,000 per month and in September 2005 to $55,000 per month. The
Company may terminate the agreement upon 30-days written notice. Total
compensation paid for the three and nine months ended September 30, 2005 and
2004 is $155,000 and $447,500, respectively, and $121,500 and $364,500,
respectively.
The Company entered into consulting and independent contractor agreements on
July 15, 2003 with companies owned by its shareholders, Investment Advisory
Group, Inc. and Media Solutions Network, LLC. Each agreement specifies monthly
payments of $13,500 each 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 and nine months ended September 30,
2005 and 2004 is $81,000 and $242,000, respectively, and $81,000 and $364,500,
respectively.
10
On September 20, 2005 the Company entered into a two year employment agreement
with an individual to be the president of its newspaper syndication division.
The Company will pay this individual a salary of $200,000 per year including
the opportunity to earn warrants or options to acquire up to 2,000,000 shares.
500,000 warrants or options will vest after each successive six months of
service.
Service Agreement
On August 5, 2005 the Company entered into an agreement through December 31,
2010 with a newspaper content provider to be an exclusive representative for
the Company in marketing the Company's discs including "Hollywood Previews" to
newspapers and to newspaper websites throughout the world. For these services
the Company is obligated to pay a per unit fee for iMedia discs of no less
than $12,000 per month against a per unit fee. The Company is in the process
of renegotiating this contract however, until the contract is renegotiated the
terms remain in place. For the nine months ended September 30, 2005 the
Company has paid $24,000 on this contract.
7. 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 bore 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 had 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 had 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.
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 notes to Lenders are considered to be interest expense. Such
difference was 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 allocated 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 was 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 Lenders agreed to extend the loan to April 30, 2005 under
similar terms, except that, under the terms of the amendment, the price that
Lenders may have exercised 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 and was fully amortized
and recognized as interest expense during the nine months ended September 30,
2005.
In the second quarter of 2005, the Company was granted an additional repayment
extension. The Company issued the Lender 555,556 additional warrants in
connection with this extension. These warrants were valued at $340,478 and are
reflected as interest expense during the nine months ended September 30, 2005.
In the second quarter of 2005 these notes were repaid in their entirety.
8. 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 and each was evidenced by a promissory note (each, a
"Related Party Note"). Each Related Party 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 (see Note 11). On
December 31, 2004 the Related Party Notes were amended and the loans were
extended until April 30, 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 (see
Note 10). At December 31, 2004 the committed stock was valued at $94,900.
During the nine months ended September 30, 2005 the deferred interest of
$94,900 had been amortized to interest expense.
On May 26, 2005 the Company paid $130,000 to satisfy its "Payable to related
parties".
11
9. PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of preferred stock. The
following types of preferred stock has been issued:
Series A - Mandatory Redeemable Convertible Preferred Stock
The following is a brief descriptive summary of the principal terms, rights
and obligations of the Company's Series A-6% Convertible Preferred Stock ("
the Series A - Preferred Stock"):
Dividends. Holders of the Series A - Preferred Stock shall be entitled to
receive cumulative dividends of 6% per annum, based on the stated value of
$1,000 per share of Preferred Stock, payable quarterly on March 1, June 1,
September 1 and December 1, with the first payment due on June 1, 2005. The
Company has the right to elect to pay the 6% preferred dividend in common
stock in lieu of cash. In the event Company elects to pay the preferred
dividend in common stock, dividends are calculated by dividing the quarterly
dividend by the sum of the discounted Value Weighted Average Pricing ("VWAP")
for the 20 trading days preceding day the preferred dividend is paid. If the
underlying shares have been registered for trading with the Securities and
Exchange Commission (the "SEC"), then the discount rate of the VWAP is 10%.
If the shares have not been registered for trading with the SEC, then the
discount rate of the VWAP is 30%. If for some reason the dividend is not paid
within three trading days of the dividend payment date, interest accrues at
the rate of 18% annually
Voting Rights. Except as otherwise required by law, a holder of shares Series
A - Preferred Stock does not have the right to vote on matters that come
before the Company's stockholders. However, the Company may not authorize or
create any class of stock ranking senior to, or otherwise pari passu with,
Preferred Stock with respect to dividends, redemption or distribution of
assets upon a liquidation.
Liquidation Preference. In the event of a dissolution or winding up of the
Company, each holder of the Series A - Preferred Stock is entitled to a
liquidation preference of $1,000 per share of Series A - Preferred Stock held
plus any declared but unpaid dividends on such share, prior to any payment to
the holders of the Company's common stock or any other stock of Company
ranking junior to the Series A - Preferred Stock with regard to any
distribution of assets upon liquidation, dissolution or winding up of the
Company.
Conversion. Shares of the Series-A Preferred Stock may, at the option of the
holder, be converted at any time or from time to time into shares of common
stock at the initial conversion price of $0.40 per share, subject to
adjustment; provided, that a holder of Series A - Preferred Stock may at any
given time convert only up to that number of shares of Series A - Preferred
Stock so that, upon conversion, the aggregate beneficial ownership of common
stock of such holder and all persons affiliated with such holders does not
exceed 4.99% of the then outstanding common stock. The number of shares into
which one share of Stock shall be convertible shall be determined by dividing
$1,000 by the then existing conversion price.
The conversion price may be reduced if the Company sells common stock or other
securities convertible into or exercisable for common stock at a per share
price, exercise price or conversion price lower than the conversion price then
in effect (other than in connection with an acquisition of the securities,
assets or business of another company, joint ventures and employee stock
options).
Redemption. The Registrant is to redeem all of the then outstanding shares of
Series A - Preferred Stock on May 23, 2007. If the shares underlying the
Series A - Preferred Stock are registered and the Company 's stock price
trades above $1.25 for a period of thirty consecutive days with average daily
volume for 20 consecutive days of 100,000 shares per day the Company may force
the holders of the Series A- Preferred Stock to convert into Common Stock.
On May 23, 2005, the Company's Board of Directors authorized the issuance of
7,200 shares of Series A - Preferred Stock. On the same date, 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 shares of Series A - Preferred Stock for an
aggregate of $3,040,000. The Series A - Preferred Stock has a mandatory
redeemable feature at the end of two years from its issuance date. The
Preferred Stock is therefore classified as a long term liability on the
balance sheet due to the redemption feature. Net proceeds received by the
Company after closing costs of $259,000, was $2,781,000. The $259,000 of
closing costs has been reflected as debt discount.
The Series A - Preferred Stock contains certain conversion features and
16,217,950 warrants at varying terms and exercise prices were issued in
conjunction with the Preferred Stock pursuant to the Purchaser's respective
purchase agreements. Based upon the existence of these features, the Company
determined that a debt discount was required to be recorded as of the date of
issuance to account for the value of the warrants and the value of the
beneficial conversion feature. The total value of the warrants associated with
this Preferred Stock offering was valued at $9,979,966 based upon the Black
Scholes pricing model using assumptions discussed in Note 11 and the
beneficial conversion feature was valued at $3,415,730. As the value of the
warrants and the beneficial conversion feature exceeded the total offering
proceeds, the amount allocated to the warrants and the beneficial conversion
feature was limited to the amount of the Series A - Preferred Stock. Therefore
the Company recorded a debt discount of $2,781,000 relating to the issuance of
the warrants.
The debt discount has been recorded as a valuation allowance against the
Series A - Preferred Stock and is being amortized to interest expense over the
redemption feature of 24 months. For the three and nine months ended September
30, 2005 amortization of the debt discount recorded to interest expense is
$380,001 and $472,890, respectively. The Company expensed Series A Preferred
Stock dividends of $84,584 during the nine months ended September 30, 2005
through the issuance of 130,577 shares of common stock, cash of $4,095 and
accrued interest of $15,200. This amount was recorded to interest expense.
Recorded in the Series A - Preferred Stock dividend is a penalty of $201 for
late payments of the June 1, 2005 dividends.
12
The Company elected to withhold the filing of its registration statement for
its Series - A Preferred Stock and warrants until it could close on its Series
- - B Preferred Stock offering. Therefore, the Company did not file its
registration statement until September 29, 2005. In accordance with the
Series A - Preferred Stock agreement liquidated damages were assessed at the
rate of 2% per month as the registration was not filed by July 7, 2005. As
such, the Company was 84 days late in filing its registration statement. The
Company has accrued $170,240 associated with these liquidated damages and has
recorded this amount in interest expense for the nine months ended September
30, 2005 (See Note 10).
Series B - Convertible Preferred Stock
The following is a brief descriptive summary of the principal terms, rights
and obligations of the Company's Series B Convertible Preferred Stock ("The
Series B - Preferred Stock") issued on August 22, 2005 ("Original Issue
Date"):
Dividends. Holders of the Series B - Preferred Stock shall be entitled to
receive cumulative dividends based on the stated value of $1,000 per share of
Series B - Preferred Stock at the rate of 6% per annum until August 22, 2009,
9% per annum from August 22, 2009 until August 22, 2010 and 14% from the
August 22, 2010 until the Series B- Preferred Stock is no longer outstanding.
Dividends will be payable quarterly on March 1, June 1, September 1 and
December 1, with the first payment due on December 1. Pursuant to the terms of
the Series B-Preferred Stock Certificate of Designation, if the Company does
not have in effect a policy of directors and officers liability insurance by
February 20, 2006, or if the Corporation shall not have appointed a new Chief
Financial Officer ("CFO") prior to November 18, 2005, then dividends accrue
and are payable at a rate of 9% per annum in lieu of 6% per annum during the
occurrence and during the continuance of either of the foregoing events. The
Company has plans to hire a new CFO in the near future and intends to request
a waiver from the holders of its Series B- Preferred Stock with respect to any
penalties resulting from the appointment of the CFO after the deadline of
November 18, 2005. The Company has the right to elect to pay the 6% preferred
dividend in common stock in lieu of cash. In the event Company elects to pay
the preferred dividend in common stock, dividends are calculated by dividing
the quarterly dividend by the sum of the discounted Value Weighted Average
Pricing ("VWAP") for the 20 trading days preceding day the preferred dividend
is paid. If the underlying shares have been registered for trading with the
SEC, then the discount rate of the VWAP is 10%. If the shares have not been
registered for trading with the SEC, then the discount rate of the VWAP is
30%. If for some reason the dividend is not paid within three trading days of
the dividend payment date, then interest accrues at the rate of 18% annually.
Voting Rights. Except as otherwise required by law, a holder of shares of
Series B - Preferred Stock does not have the right to vote on matters that
come before the Company's stockholders. However, the Company may not authorize
or create any class of stock ranking senior to, or otherwise pari passu with,
the Series B - Preferred Stock with respect to dividends, redemption or
distribution of assets upon a liquidation.
Liquidation Preference. In the event of a dissolution or winding up of the
Registrant, each holder of the Series B- Preferred Stock is entitled to a
liquidation preference of $1,000 per share of Series B - Preferred Stock held
plus any declared but unpaid dividends on such share, after distribution or
payment to the holders of the Company's Series B - Preferred Stock and prior
to any payment to the holders of the Company's common stock or any other stock
of the Company ranking junior to the Series B - Preferred Stock with regard to
any distribution of assets upon liquidation, dissolution or winding up of the
Company.
Conversion. Shares of Series B - Preferred Stock may, at the option of the
holder, be converted at any time or from time to time into shares of common
stock at the initial conversion price of $0.40 per share, subject to
adjustment; provided, that a holder of Series B - Preferred Stock may at any
given time convert only up to that number of shares of Series B - Preferred
Stock so that, upon conversion, the aggregate beneficial ownership of the
common stock of such holder and all persons affiliated with such holders does
not exceed 4.99% of the then outstanding common stock. The number of shares
into which one share of Series B Stock shall be convertible shall be
determined by dividing $1,000 by the then existing conversion price.
The conversion price may be reduced if the Company sells common stock or other
securities convertible into or exercisable for common stock at a per share
price, exercise price or conversion price lower than the conversion price then
in effect (other than in connection with an acquisition of the securities,
assets or business of another company, joint ventures and employee stock
options).
Forced Conversion. If the shares underlying the Series B - Preferred Stock are
registered and the Company's stock price trades above $1.25 for a period of
thirty consecutive days with average daily volume for 20 consecutive days of
100,000 shares per day the Company may force the holders of Series B
Convertible Preferred Stock to convert into Common Stock.
On August 22, 2005, the Company entered into a Purchase Agreement with 36
accredited investors (the "Purchasers") pursuant to which the Company agreed
to sell, and the Purchasers agreed to purchase, $4,920,000 in shares of Series
B - Convertible Preferred Stock and warrants to purchase up to 14,760,000
shares of common stock. The Warrants are exercisable for five years at $0.60
per share.
13
The Series B Convertible Preferred Stock contains certain conversion features
and 14,760,000 warrants that were issued in conjunction with the Preferred
Stock pursuant to the Purchaser's respective purchase agreements. In addition
1,211,250 warrants, valued at $412,845 were issued and $685,623 of cash was
paid as commissions for the placement of the Series B Convertible Preferred
Stock. Based upon the existence of these conversion features and warrants
issued, the Company determined that a preferred stock beneficial conversion
feature was required to be recorded as of the date of issuance to account for
the value of the warrants and the value of the effect of the beneficial
conversion feature. The total value of the warrants attached to this Preferred
Stock offering was valued at $5,981,400 based upon the Black Scholes pricing
model using assumptions discussed in Note 11. The beneficial conversion
feature was valued at $3,821,532. Since the warrant value is greater then the
proceeds of the preferred stock offering after cash expenses and warrants for
commissions, the beneficial conversion feature is limited to the net value of
the preferred stock of $3,821,532. In accordance with EITF Issue 98-5 since
the holders of the Series B Convertible Preferred Stock may convert at anytime
the preferred stock beneficial conversion feature of $3,821,532 has been
amortized in full against retained earnings as of September 30, 2005.
As required by the Series B Convertible Preferred stock dividend the Company
has accrued $24,600 of dividends in common stock during the nine months ended
September 30, 2005.
10. COMMON STOCK TRANSACTIONS
Common Stock and Warrants Registered
On September 28, 2005 the Company filed an registration statement on Form SB-2
with the Securities and Exchange Commission ("SEC") to register for resale by
certain selling shareholders 54,525,488 common shares, including common shares
underlying warrants, common shares underlying Series A - Preferred Stock and
Series B - Preferred Stock and common shares underlying warrants issued in
connection with Series A and Series B - Preferred Stock held by such selling
shareholder. As of November 17, 2005 this registration statement has not been
declared effective.
Common Stock Issued
A total of 130,000 shares of common stock were issued to related parties in
connection with the cancellation of $94,900 of accrued interest on the Related
Party Notes recorded as "Payables to Related Parties" (See Note 8).
An individual investor purchased 30,000 shares of common stock during the nine
months ended September 30, 2005 for $15,000.
See Note 11 for common stock issued for cash of $1,134,960 from the exercise
of 2,874,119 warrants.
On August 25, 2005 the Company issued to an investment banking group 43,253
common shares to settle a dispute over outstanding investment banking
over-ride commissions.
On September 1, 2005, the Company issued 130,577 shares of common stock for
$65,289 in order to satisfy the Series A - Preferred Stock dividend.
On September 23, 2005, the Company issued 62,500 shares of common stock at a
per share price of $.60 for legal services rendered.
In September 2005 the Company issued 6,097 shares of common stock for
commissions.
In accordance with the Series A - Preferred stock purchase agreement a
Registration Statement on Form SB-2 was required to be filed with the SEC by
July 7, 2005. If the SB-2 was not filed by July 7, 2005 liquidated damages in
the amount of 2% per month is to be paid to the Series A - Preferred Stock
holders by the Company. The total value of the liquidated damages was
$170,240. During the three months ended September 30, 2005 the Company paid
the $170,240 fine with a combination of $50,400 in cash, and 476,873 shares of
common stock. As of September 30, 2005 these shares have yet to be issued.
Common Stock Subscriptions
During the nine months ended September 30, 2005 the Company canceled a stock
subscription receivable of $580,000 for 580,000 shares.
Warrants exercised for Common Stock converted to Common Stock
In March 2005, the Company offered holders of certain one-year warrants to
purchase common stock the opportunity to exercise such warrants at discounted
price of $.40 per share. 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. During the three months and nine months ended September 30,
2005 certain warrant holders took advantage of this opportunity and exercised
warrants for 1,774,600 and 2,874,119 shares of common stock, respectively.
Total proceeds from these warrant conversions for the nine months ended
September 30, 2005 is $1,134,960, respectively. For the three months ended
September 30, 2005 there were no proceeds from the exercise of these warrants.
14
Common Stock issued for Services
During the nine months ended September 30, 2005 the Company issued a total of
2,745,000 restricted shares for services as follows:
2,510,000 restricted shares were issued to various consultants for services to
be provided over various periods, such services were valued at $1,633,000 of
which $179,838 and $1,453,163 is recognized as consulting expense in general
and administrative expense for the three and nine months ended September 30,
2005, respectively, and $179,837 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 in general and administrative
expense during the nine months ended September 30, 2005.
11. WARRANTS
Compensation Warrants
During the nine months ended September 30, 2005 the Company issued a total of
1,082,500 warrants to purchase common stock as consideration for services
provided, as follows:
In January, 2005, the Company issued five year warrants to purchase 350,000
shares of its common stock to a consultant for advisory services for a two
year term at an exercise price of $.40 per share. 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. As of September 30, 2005, $201,735 of deferred
compensation associated with these warrants is on the balance sheet of the
Company. For the three and nine months ended September 30, 2005 the Company
amortized deferred compensation of $39,046 and $110,630, respectively to
compensation expense.
In March, 2005, the Company issued three year warrants to purchase 500,000
shares of its common stock to a consultant for marketing services for a one
year term 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. As of September 30, 2005,
$176,807 of deferred compensation associated with these warrants is on the
balance sheet of the Company. For the three months and nine months ended
September 30, 2005 Company amortized deferred compensation of $88,404 and
$176,808 to compensation expense.
In April 2005, the Company issued warrants to purchase 100,000 shares of
common stock for legal services in the second quarter of 2005. Total value of
this warrant is $83,584 and is recorded in general and administrative expense
as compensation on the statement of operations for the nine months ended
September 30, 2005. The warrant has a strike price of $.40 per share and a
term of three years. The warrant value was calculated using the Black-Scholes
method using the following assumptions of 117% volatility, $.1.01 share price,
risk free interest rate of 3.65% and zero dividend yield.
On August 15, 2005, the Company issued warrants to purchase 132,500 shares of
common stock for consulting services in the third quarter of 2005. Total value
of this warrant is $62,634 and is recorded in general and administrative
expense as compensation on the statement of operations for the three and nine
months ended September 30, 2005. The warrant has a strike price of $.40 per
share and a term of four years. The warrant value was calculated using the
Black-Scholes method using the following assumptions of 107% volatility, $.60
share price, risk free interest rate of 3.50% and zero dividend yield.
Prior Investors Warrants
In February 2005, the Company 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. The Company issued these
warrants due to the illiquidity experienced by these investors while it 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 using the Black -
Scholes method and is recorded as an expense in the statement of operations
for the nine months ended September 30, 2005.
Replacement Warrants
In March 2005, the Company offered holders of certain one-year warrants the
opportunity to exercise these warrants at a discounted price of $.40 per
share, 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. For the nine months ended
September 30, 2005 certain warrant holders took advantage of this opportunity
and exercised warrants for 2,874,119 shares of common stock for total proceeds
to the Company of $1,134,960. As a condition to the agreement, for each
warrant exercised, the Company issued a replacement warrant as of September
30, 2005. In all, the Company issued to these holders of one year warrants
1,437,060 replacement warrants with an exercise price of $1.25 to these
holders and 1,437,059 replacement warrants with an exercise price of $1.00.
These replacement warrants will expire on September 30, 2006. The total value
of the 1,437,059 warrants with a strike price of $1 per share is $181,056,
calculated using the Black-Scholes method using the following assumptions of
124% volatility, $.46 share price, risk free interest rate of 3.50% and zero
dividend yields. The total value of the 1,437,060 warrants with a strike price
of $1.25 is $148,049, using the Black-Scholes method using the following
assumptions of 124% volatility, $.46 share price, risk free interest rate of
3.50% and zero dividend yields. Total value of all warrants issued for this
transaction is $329,105 and is accounted for as compensation in general and
administrative expense in the accompanying financial statements. There were no
commissions paid in conjunction with these warrants.
15
Sales of Preferred Stock and Accompanying Warrants
Series A Mandatory Redeemable/Convertible Preferred Stock
- ----------------------------------------------------------
In connection with the Company's sale of its Series A - Preferred Stock the
Company issued the following warrants:
Warrants to purchase up to 7,600,000 shares at a strike price of $.60 per
share with a term of 5 years expiring on May 23, 2010. Total value of these
warrants is $5,866,967. The warrant value was calculated using the
Black-Scholes method using the following assumptions of 120% volatility,
expected life of 5 years, $.89 share price, risk free interest rate of
3.83% and zero dividend yields.
Warrants to purchase up to 6,000,000 shares ("Green Shoe Warrants"). The
Green Shoe Warrants have a two year term and expire on May 23, 2007. Of the
6,000,000 warrants, 3,000,000 warrants are at a strike price of $.40. Total
value of these 3,000,000 warrants is $1,989,665. The warrant value was
calculated using the Black-Scholes method using the following assumptions
of 114% volatility, expected life of 2 years $.89 share price, risk free
interest rate of 3.65% and zero dividend yields. The remaining 3,000,000
have a strike price of $.60 per share. Total value of these remaining
warrants is $1,846,058. The warrant value was calculated using the
Black-Scholes method using the following assumptions of 120% volatility,
$.89 share price, risk free interest rate of 3.65% and zero dividend
yields.
In addition, the Company paid certain offering commissions to a total of
eight investment banking firms and individuals in connection with the
issuance of its Series A - Preferred Stock through the issuance of warrants
to purchase up to 2,717,950 shares of its common stock. The warrants were
issued at strike prices ranging from $1.00 per share to $.40 per share and
terms ranging from 5 years to 1 year. The value of these warrants is
$440,835. The warrant value was calculated using the Black-Scholes method
using the following assumptions of 125% volatility, using an average life
of 1 to 5 years, $.47 share price, risk free interest rate ranging from of
3.50% to 3.65% and a zero dividend yield. The warrant values were offset
against the value of the Series A - Preferred Stock and the value of this
Series A - Preferred Stock is being accreted to the redemption value over
the term of the mandatory redemption period on the interest method.
Series B - Preferred Stock
- --------------------------
In connection with the Company's sale of its Series B - Preferred Stock the
Company issued the following warrants:
Warrants to purchase up to 14,760,000 shares at a strike price of $.60 per
share with a term of 5 years expiring on August 22, 2010. Total value of
these warrants is $5,981,400. The warrant value was calculated using the
Black-Scholes method using the following assumptions of 108%
volatility, expected life of 5 years, $.52 share price, risk free interest
rate of 3.83% and zero dividend yields.
In addition, the Company paid certain offering commissions to two
investment banking firms in connection with the issuance of its Series B -
Preferred Stock through the issuance of warrants to purchase up to
1,211,250 shares of its common stock. The warrants were issued at strike
prices of $.40 per share expiring on August 22, 2009. The value of these
warrants is $412,845. The warrant value was calculated using the
Black-Scholes method using the following assumptions of 108% volatility,
expected life of 4 years, $.45 share price, risk free interest rate ranging
of 3.83% and a zero dividend yield.
Holders of warrants issued in the Series A - Preferred Stock and Series B -
Preferred Stock financings may only exercise warrants with a "cashless
exercise" provision if, after one year from the date of issuance of the
warrants (May 24th, 2006 and August 28th, 2006 for Series A - Preferred Stock
and Series B - Preferred Stock holders, respectively), there is no effective
registration statement or no current prospectus available for resale by the
Holder of the shares underlying such warrants.
12. RELATED PARTY TRANSACTIONS
The Company entered into consulting and independent contractor agreements on
July 15, 2003 with companies owned by its 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 and nine months ended September 30, 2005
and 2004 is $81,000 and $242,000, and $81,000 and $364,500, respectively.
See Note 8 "Payables to Related Parties".
Licensing Agreement
iPublishing licensed to the Company the exclusive rights to use its
intellectual property. The Company is obliged to pay iPublishing 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 and nine months ended
September 30, 2005 the Company paid royalties of $7,927 and $29,717,
respectively to iPublishing. For the three and nine months ended September 30,
2004 the Company paid $4,338 and $13,038, respectively. 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.
16
Executive Compensation paid to Affiliate
For the three and nine months ended September 30, 2005 the Company, in lieu of
salary to three executive officers, paid an affiliated Company iPublishing,
$155,000 and $447,500, respectively. These payments are recorded as management
compensation expense in the accompanying statement of operations for the three
and nine months ended September 30, 2005. For the three and nine months ended
September 30, 2004 the Company, in lieu of salaries to three executive
officers paid $121,500 and $364,500, respectively.
13. LITIGATION
The Company may from time to time become involved in various legal cases
arising in the ordinary course of business. Based upon current information,
management, after consultation with legal counsel, believes the ultimate
disposition thereof will have no material effect upon either the Company's
results of operations or its financial condition.
In July 2005, the Company received an arbitration demand arising from a
contractual dispute raised by a former financial advisor of the Company. The
amount in dispute is approximately $60,000, plus legal fees, which the former
advisor believes is owed to it pursuant to services conducted on behalf of the
Company under its engagement agreement. The Company settled with this advisor
for 43,252 shares of common stock which has been reflected in the statement of
operations in general and administrative expenses for the nine months ended
September 30, 2005.
14. SALES BACKLOG
In addition to the reported sales from the Company for the three months and
nine months ended September 30, 2005 of $970,165 and $3,117,516, respectively,
the Company has executed sales contracts of approximately $3.2 million. The
Company anticipates recognizing the revenue on its executed sales contracts in
final quarter of 2005.
15. SUBSEQUENT EVENT
On November 8, 2005 the Company received a comment letter from the SEC with
respect to its Registration on Form SB-2 filed on September 28, 2005. As
part of that comment letter the SEC required, among other things, further
clarification on the accounting for the Company's Series A - Preferred Stock
and the accounting for previous investments in other entities. The results of
the SEC comment process with respect to the SB-2 may require the Company to
amend its prior filed financial statements and this 10-QSB. The Company is in
the process of evaluating the SEC's comments and responding to the SEC's
questions.
17
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.
FORWARD LOOKING STATEMENTS
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
Hollywood Previews, Inc. ("HPI"), iMedia International's wholly-owned
subsidiary, was originally incorporated in California on July 25, 2002 under
the name DTV Studios. 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, IPC had no material operations at the
time of the merger. Because the Acquisition resulted in a change of control,
with the shareholders of HPI becoming the primary shareholders of IPC, the
Acquisition 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.
IPC was originally incorporated in Colorado on June 10, 1987 under the name of
Weston Hotel Corp. The Company had no material operations from shortly after
its inception until its Acquisition of HPI, as described above. Shortly after
the acquisition, effective November 25, 2003, IPC completed a statutory merger
effected for the purpose of changing its state of incorporation from Colorado
to Delaware by merging into a newly formed Delaware corporation, iMedia
International, Inc. (the "Company"). This change in IPC's state of
incorporation and corporate name was approved by the holders of a majority of
IPC's outstanding shares of common stock at a special meeting of shareholders
on November 21, 2003.
As a result of the reincorporation merger, each outstanding share of IPC's
common stock was automatically converted into one share of Company common
stock. Each stock certificate representing issued and outstanding shares of
IPC's common stock continues to represent the same number of shares of common
stock of the Company. The Company continues to operate the business of IPC,
and the reincorporation did not result in any change in IPC's former business,
assets or liabilities, did not cause the Company's headquarters to be moved,
or result in any relocation of management or other employees.
18
At the time of the Acquisition HPI held an exclusive license (the "License")
from iPublishing, Inc. ("iPublishing"), an affiliate of the Company, to use
iPublishing's intellectual property (the "iPublishing Technology").
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. The sole
consideration for the License was a royalty arrangement pursuant to which
iPublishing receives 5% of Gross Margin annually, generated by disks produced
by the Company using the 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 acquiring ownership of the iPublishing
Technology at some point in the future when operations and revenue have
stabilized. In connection with the License, HPI purchased all of iPublishing's
personal 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, valued at $71,196, at
which they were obtained by the shareholder/officer of iPublishing. HPI has
since transferred the License to its parent, the Company. The iPublishing
Technology 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.
Under the terms of the License, the Company is obligated to use its best
efforts to commercially exploit the License and the iPublishing Technology to
create a royalty-stream that will allow iPublishing and its preferred
shareholder, Franklin Unruh, to service and retire certain debt obligations
encumbered as a result of his acquisition of the iPublishing Technology. The
iPublishing Technology was obtained by Mr. Unruh through a UCC 9504 "Transfer
in Lieu of Foreclosure" resulting from a default on certain indebtedness to
Mr. Unruh by Mod Studios Inc, a Delaware corporation. At the time of the
transfer, Mod Studios Inc. was owned by Messers. Unruh, MacEachern and Kapp.
On April 3, 2003, Mod Studios, Inc. transferred to Mr. Unruh all of its
physical assets (including a variety of computers, servers, office equipment,
supplies and furnishings previously used by MOD Studios in the operation of
its business) having a book value of $71,196 (unaudited) and the iPublishing
Technology with a book value of $0 (unaudited). The transfer was due to MOD
Studios' non-payment of certain notes payable to Mr. Unruh. The notes payable
totaled $393,331 (unaudited) at the time of the transfer. On April 4, 2003,
Mr. Unruh then sold the iPublishing Technology to iPublishing in exchange for
an equity interest in iPublishing, and sold the physical assets to iPublishing
in exchange for a note from the Company in the principal amount of $71,196.
The Company and iPublishing are currently negotiating of the acquisition of
the ownership rights in the iPublishing Technology, and are in the process of
determining the fair market value thereof.
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 the Company's 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 with respect to our
proprietary data and usage report technology which has the ability to monitor
the navigation of users on our Hollywood Previews(TM) Entertainment
iMagazine(TM), and our other custom disc products.
The Company is a holding company doing business through various operating
subsidiaries which include Hollywood Previews, Inc. (A California
Corporation), iMedia US, LLC (A California Limited Liability Company) and
iMedia Nevada, LLC (A Nevada Limited Liability Company). We formed iMedia US,
LLC, a California limited liability company as a wholly owned subsidiary on
December 24, 2003 to serve as our primary operating unit for developing custom
publications and special edition discs.
Strategic Distribution Partners
Our strategic distribution partners for Hollywood Previews(TM) Entertainment
iMagazine(TM) and our custom discs currently include the Los Angeles Times, a
large metropolitan newspaper, Amazon.com, an online retailer, and Universal
Press Syndicate, a syndicate of content to the newspaper industry. We
anticipate that in the future a majority of our new distribution sources will
be as a result of sales representation by Universal Press Syndicate to their
affiliated group of newspaper clients. Through Universal Press Syndicate, we
are currently negotiating additional distribution agreements with several
major metropolitan newspapers, but have not yet formalized or completed these
negotiations.
We are currently underwriting the costs involved in the distribution of
Hollywood Previews(TM) Entertainment iMagazine(TM) with the Los Angeles Times
and Amazon.com. We incurred costs of $283,043 and $366,326 for the three and
nine month periods ending September 30, 2005 respectively. We anticipate that
we will continue to subsidize costs, with our current cash resources, related
to the above distribution until such time as advertising revenues exceed
production and distribution costs. We do not anticipate substantial
underwriting or subsidizing of revenue shortfalls as we expand to new
distribution markets or launch new proprietary brand publications. We are
planning on having each new distribution partner cover any revenue shortfall
that may occur during our expansion, or delay the launch of any new market or
publication until profitability can be assured.
19
While the Company expects that it will continue to secure new distribution
partnerships with other metropolitan U.S. newspapers, the newspaper industry
in general is currently in a state of flux as these companies look for new
ways to increase advertising revenues, and stop the recent and substantive
trend in circulation loss. Although the Company believes that these trends
will benefit the Company in the long term, current disruptions within the
industry could prove to have the affect of delaying the Company's ability to
integrate their business plan with these newspapers as strategic distribution
partners.
Custom Discs
A major portion of our efforts and resources are spent on the development of
special edition and custom interactive publications for a variety of
industries and corporate clientele. We are continually improving and
advancing our custom disc products in order to integrate developing
technologies. These technologies and services can be incorporated into the
Company's existing products and then offered to clients on a custom basis.
Each of these new technologies and services constitute opportunities for new
or additional revenue streams. As technology advances allow, we will continue
to incorporate and integrate other forms of digital media into our products
and services that will allow us to expand our revenue streams without changing
our underlying products, services or business models.
We anticipate that the custom disc market will continue to constitute a
significant part of our future revenues. We have identified and have developed
new products specifically targeted to new custom disc industries and sectors,
including entertainment, sports, travel, information, medical, wireless,
automotive and direct marketing. These new products include various digital
communication services such as voicecasting, e-mail campaigns, data management
and call center support. We intend to use a portion of our capital on an
ongoing basis to develop these new target markets.
PLAN OF OPERATION
For the remainder of the current fiscal year we intend to focus on the
following primary objectives:
. Continued development and publication of Hollywood Previews(TM)
Entertainment Magazine.
. Establishing strategic distribution partners in various information
dissemination industries.
. Identification and development of specialty and custom disc customers,
industry sectors and content.
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 publications by their audiences.
The consolidated financial statements of iMedia International Inc., as of
September 30, 2005 include the accounts of the Company and its wholly owned
subsidiaries Hollywood Previews, Inc. (a California corporation), iMedia US,
LLC (a California limited liability company) and iMedia Nevada, LLC (a Nevada
limited liability company).
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.
When publishing our proprietary publications like Hollywood Previews, we are
required to subsidize any shortfalls that occur when we make a distribution
for which there is insufficient revenue to offset costs. As with any
traditional magazine publisher, we must evidence our ability to meet our
distribution schedule prior to being able to securing advertising commitments
or sponsorships. We are currently underwriting the shortfalls involved in the
distribution of Hollywood Previews with the Los Angeles Times and Amazon.com
where advertising revenues fall short of production and distribution costs.
We incurred costs of $283,043 and $366,326 to cover such shortfalls for the
three and nine month periods ending September 30, 2005 respectively. We
anticipate that we will continue to subsidize costs related to the above
distributions, with our existing cash resources, until such time as
advertising revenues exceed production and distribution costs, however the
amount of these revenue shortfalls should begin to decline as new advertisers
and sponsors are secured.
The following discussion is based on a comparison of the Company's operations
for the nine months ended September 30, 2005 to the nine months ended
September 30, 2004:
Sales
Net sales increased $1,435,547 or 85% for the nine months ended September 30,
2005 to $3,117,516 from $1,681,969 for the nine months ended September 30,
2004.
20
The increase in sales for the nine months September 30, 2005 versus the same
time period in September 30, 2004 is primarily due to an increase in our
customer base as a result of the implementation of our marketing plan. Our
customer base increased from approximately 13 customers through the nine
months ended 2004 to approximately 36 customers in the comparable period in
2005. Our sales consisted mainly of custom digital solutions that augmented
our various customers marketing and advertising programs. As of September 30,
2005 we have a sales backlog of approximately $3.2 million, which we expect to
recognize mainly in the fourth quarter of 2005. In 2004 our sales backlog was
comparatively insignificant. In the nine months period ended September 30,
2005 our customer base consisted of several diverse industries operating
domestically and abroad in a variety of industries. These industries include
television, broadcast, casinos and gaming, travel, entertainment, automotive
and financial services. As noted above, we believe that, in the future, sales
will not continue to be concentrated on any one or a few clients or
industries. We continue to have repeat business with many of our original
customers. These repeat orders tend to become progressively larger as our
products are tested by our clients and have historically expanded from local
to regional and national programs. As new clients proceed through this sales
and re-order cycle, we anticipate that future gross sales will continue to be
allocated over an increasingly large customer base. Further, we expect to
continue targeting new customers in the entertainment, automotive, advertising
and wireless device industries.
Cost of sales and gross profit
Cost of sales increased $1,087,745 or 76% for the nine months ended September
30, 2005 to $2,526,854 from $1,439,109 for the nine months ended September 30,
2004. Gross profit as a percentage of sales for the nine months ended
September 30, 2005 versus the nine months ended September 30, 2004 is 19% and
14.4%, respectively.
The increase in cost of goods sold in absolute dollars for the nine months
ended September 30, 2005 versus the same time period in 2004 is due to
increased sales. The increase in our gross profit as a percentage of sales
during the nine-month period ended September 30, 2005 versus the same time
period in 2004 is primarily due to our aggressive attempt to capture market
share in 2004 by pricing our projects below our anticipated margin rate.
During the nine months ended September 30, 2005 we continued our strategy of
pricing our projects below our anticipated margin rate in order to capture
market share. During the nine months ended September 30, 2005, however, we
have engaged in increasingly more projects with higher margin rates, more
typical of our anticipated margins, and anticipate that such trend will
continue. For the nine months ended September 30, 2005, we had approximately
$30,000 of costs in excess of revenues related to four specific customer
projects. The Company anticipates that as these programs develop, the
Company will be able to reduce the amount of subsidies required for
distribution, and the reduction in these subsidies will have the impact of
increasing our overall gross profit margin. The Company does foresee the need
to continue a long-term policy of cost variation in order to achieve
significant market penetration and brand recognition. For the nine months
ended September 30, 2005 we used five vendors for 80% of our purchases. The
replication of optical discs and printing of packaging materials which we
outsource is a commodity industry and therefore there are many sources for
these services and our vendors can be easily replaced, if necessary.
Operating Expenses:
Selling
Selling expenses increased $825,472 or 119% for the nine months ended
September 30, 2005 to $1,521,407 from $695,934 for the nine months ended
September 30, 2004. The increase in selling expense is attributable to the
following:
. An increase in payments to outside sales representatives to promote our
products resulting from an increase from three sales representatives in
2004 to seven sales representatives in 2005. Additional travel, meals
and entertainment and telephone expenses associated with these
additional sales representatives also increased selling expenses. The
total increase attributed to this increase in sales representatives and
related expenses over the same time period in 2004 is approximately
$420,000.
. In conjunction with our strategy of testing various forms of
distribution and promoting brand recognition, we have continued our
sales strategy of distributing our proprietary brands including
Hollywood Previews iMagazine through various newspapers, periodicals
and on-line retailers. We have supplied these products to these
distributors at no cost, and are dependent upon advertising revenues as
the only revenue source. The total increase in this sales promotion
for the nine months ended September 30, 2005 from the same time period
in 2004 is approximately $404,000. We intend to continue this
promotional strategy for the foreseeable future, but expect that
advertising revenues will increase thereby reducing or eliminating
these promotional subsidies.
General and Administrative
General and Administrative expenses increased $2,907,459 or 130% for the nine
months ended September 30, 2005 to $5,135,825 from $2,228,366 for the nine
months ended September 30, 2004. The increase in general administrative
expense for the nine months ended September 30, 2005 versus the same time
period in 2004 is primarily attributable to the following:
Non Cash Transactions: During the nine month period ending September 30,
2005, we booked as general and administrative expenses approximately
$2,685,000 in various non-cash transactions as opposed to approximately
$40,000 for the same period in 2004. The majority of these expenses were
related to non-recurring costs associated with the issuance of various
warrants to prior investors and investment banking consultants for promotion
of ongoing financing activities. We feel that the unusual and one-time nature
of these non-cash expenses should not be relied upon to establish the actual
month-to-month costs of our general and administrative operations. For this
reason, we are including the following breakdown of non-cash transactions as
follows:
. In February 2005, we issued 5,969,234 warrants ("Prior Investment
Warrants") valued at approximately $439,000 to investors who had
experienced illiquidity due to our delay in obtaining our listing on
the Over-the-Counter Bulletin Board. We did not have this expense
during the same time period in 2004.
21
. In June 2005, we issued 2,874,119 warrants ("Replacement Warrants") to
provide certain warrant holders the opportunity to obtain shares at a
discount to the stock market price at the time. The Replacement
Warrants were issued as a condition to the election of holders of
certain one-year warrants to exercise such warrants at a discount
price of $.40 per share in March 2004. We valued the Replacement
Warrants at approximately $329,000. We did not have this
expense during the same time period in 2004.
. We issued 2,510,000 shares of common stock for services to various
consultants to promote us and on going financing activities. This
common stock was not issued for any direct offering costs. The total
value of the common shares issued is approximately $1,450,000. For the
same time period in 2004 this cost was approximately $40,000.
. We issued an aggregate of 235,000 shares of our common stock, valued
at $293,750, to our employees as an incentive bonus. In addition, in
January 2005, we issued 350,000 warrants to a consultant for advisory
services. These warrants were valued at $110,630. Finally, in August
2005, we issued warrants to purchase 132,500 shares in exchange for
consulting services. These warrants were valued at $62,634. The total
value of these warrants and common stock is approximately $467,000. We
did not have equivalent expenses during the same time period in 2004.
Cash Transactions: We increased our general and administrative staff during
the nine months ended September 30, 2005 by 3 full time equivalent staff from
11 to 14. The increase in staff was necessary to support our operations.
This increase in staff accounts for approximately $86,000 in costs as compared
to the comparable period in 2004. Further, our accounting and auditing fees
increased by approximately $108,000 as compared to the 2004 period. The
increase in these fees is attributable to the additional accounting support
necessary for filing our Registration Statement on Form SB-2 in August 2005,
and the hiring of outside accounting professionals to provide technical
consulting on accounting and SEC issues.
As our business increases, it is anticipated that our cash operating expenses
will increase in absolute dollars, but should decrease as a percentage of
sales. We will continue to issues non-cash compensation to our advisors and
consultants as necessary. However we do not anticipate issuing the same
volume of warrants or common stock in the near future.
Operating Expenses - related parties
Operating expenses - related parties increased $83,000 or 23% for the nine
months ended September 30, 2005 to $447,500 from $364,500 for the nine months
ended September 30, 2004. Operating expense - related parties consists of
payments to iPublishing for management services. iPublishing is owned by the
three principal shareholders, directors and officers of the Company, Messrs
MacEachern, Kapp and Unruh. These related party expenses are for executive
management services provide to the Company by iPublishing, specifically the
position of President, Chief Executive Officer and Chief Financial Officer.
We have contracted with iPublishing so as to allow members of management to
benefit from certain tax loss-carry forwards and other flow-though income
provisions that may be legally available to them through their respective
entity or personal service corporations. Management believes the increase in
overall executive compensation is commensurate with an increase in the
Officers' responsibilities.
Other Expense
Interest Expense, net
Interest expense, net increased $930,723 or 281% for the nine months ended
September 30, 2005 to $1,261,534 from $330,811 for the nine months ended
September 30, 2004. Interest expense for the nine months ended September 30,
2005 consisted primarily of the following:
. September 2004 short term convertible debt of $403,415, which includes
$340,478 of interest related to warrants issued in connection with a
final debt extension prior to its repayment;
. The amortization of the Company's Series A-6% Mandatory
Convertible/Redeemable Preferred Stock (the "Series A - Preferred
Stock") debt discount of $472,890 and accrued preferred stock dividends
of $84,584 recorded as interest (See "Liquidity and Capital Resources
Below"); and
. Interest on payable to related parties of $94,900 for common stock
issued in lieu of interest expense.
. We elected to defer the filing of our registration statement for our
Series A - Preferred Stock and warrants until after the completion of
our Series - B Preferred Stock offering. Therefore, we did not file our
registration statement until September 29, 2005. In accordance with the
Series A - Preferred Stock agreement liquidated damages would be
assessed at the rate of 2% per month if the registration was not filed
by July 7, 2005. As such, the Company was 84 days late in filing its
registration statement. The Company has accrued $170,240 associated
with these liquidated damages and has recorded it as interest expense
for the nine months ended September 30, 2005.
22
Interest expense for the nine months ended September 30, 2004 consisted
primarily of the amortization of the beneficial conversion feature of a
different note payable.
During the second quarter of 2005, we paid off the September 2004 bridge loan.
We do not anticipate any material interest expense through 2005 except for the
amortization of the debt discount on the Preferred Stock.
Loss on sale of investments
The loss on sale of investments for the nine months ended September 30, 2005
of $573,975 reflects the sale of 1,883,260 shares, of the Company's available
for sale investment in Langley Park. For the nine months ended September 30,
2004 the Company did not have any investment transactions.
Impairment loss on investment in available for sale securities
During the nine months ended September 30, 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. The loss of $1,156,270 for the nine
months ended September 30, 2005 represents the impairment loss on this
investment from the inception of the acquisition of the Langley Shares.
Provision for Income Taxes
For the nine months ended September 30, 2005 and 2004 the provision for income
taxes represents the minimum state taxes due.
Net Loss
Net loss increased $6,129,898 or 181% for the nine months ended September 30,
2005 to $9,509,049 from $3,379,151 for the nine months ended September 30,
2004. The substantial increase in net loss is attributable partially to the
overall increase in operations, but more specifically to unusual and one-time
non-cash general and administrative expenses, additional legal and accounting
costs relating to the filing of our Registration Statement on Form SB-2 filed
in August 2005, non-cash interest expenses and the loss or impairment on
investment of for sale securities as detailed above.
Beneficial Conversion Feature
During the nine months ended September 30, 2005 we issued 4,920 shares of
Series B Convertible Preferred Stock (the "Series B - Preferred Stock") for
total proceeds of $4,920,000. The Series B - Preferred Stock contains certain
conversion provisions and were issued in conjunction with 14,760,000 warrants
to purchase our common stock pursuant to the Purchaser's respective purchase
agreements. In addition 1,211,250 warrants, valued at $412,845, were issued
and $685,623 of cash was paid as commissions for the placement of the Series B
- - Preferred Stock. Based upon the existence of these conversion features and
warrants issued, we determined that a preferred stock beneficial conversion
feature was required to be recorded as of the date of issuance to account for
the value of the warrants and the value of the effect of the beneficial
conversion feature. The total value of the warrants attached to this Preferred
Stock offering was valued at $5,981,400 based upon the Black Scholes pricing
model. The beneficial conversion feature was valued at $3,821,532. Since the
warrant value is greater then the proceeds of the preferred stock offering
after cash expenses and warrants for commissions, the beneficial conversion
feature is limited to the net value of the preferred stock of $3,821,532. In
accordance with EITF Issue 98-5 since the holders of the Series B - Preferred
Stock may convert at anytime the beneficial conversion feature of $3,821,532
has been amortized in full against retained earnings and shown as a separate
component of the statement of operations as of September 30, 2005.
The following discussion is based on a comparison of the Company's operations
for the three months ended September 30, 2005 to the three months ended
September 30, 2004:
Sales
Net sales increased $213,371 or 28% for the three months ended September 30,
2005 to $970,165 from $756,794 for the three months ended September 30, 2004.
The increase in sales for the three months ended September 30, 2005 versus the
same time period in September 30, 2004 is primarily due to an increase in our
customer base as a result of the implementation of our marketing plan. Our
customer base increased from approximately 13 customers through the nine
months ended 2004 to approximately 36 customers in the comparable period in
2005. Our sales consisted mainly of custom digital solutions that augmented
our various customers' marketing and advertising programs. As of September 30,
2005 we have a sales backlog of approximately $3.2 million, which we expect to
recognize in the fourth quarter of 2005. In 2004 our sales backlog was
comparatively insignificant.
Cost of sales and gross profit
Cost of sales increased $143,622 or 22% for the three months ended September
30, 2005 to $811,622 from $668,000 for the three months ended September 30,
2004. Gross profit as a percentage of sales for the three months ended
September 30, 2005 versus the three months ended September 30, 2004 is 16% and
12%, respectively.
23
The increase in cost of goods sold in absolute dollars for the three months
ended September 30, 2005 versus the same time period in 2004 is due to
increased sales. Our gross profit as a percentage of sales has historically
been low as a result of our policy of varying the profitability of each
project so as to establish market share. We anticipate that our margins will
increase as our customer base grows and we emerge from our growth stage. In
the third quarter of 2004 we were focused on establishing this market share
and as such we took on those projects with profit margins below our
anticipated target margins. In the third quarter of 2005 we continued to take
on these types of projects, however we have been able to add projects with
margins closer to our target margin. For the three months ended September 30,
2005 we used five vendors for 97% of our purchases.
Operating Expenses
Selling
Selling expenses increased $484,672 or 163% for the three months ended
September 30, 2005 to $781,187 from $296,515 for the three months ended
September 30, 2004. The increase in selling expense is attributable to the
following:
. An increase in payments to outside sales representatives to promote our
products resulting from an increase from three sales representatives in
2004 to seven sales representatives in 2005. Additional travel, meals
and entertainment and telephone expenses associated with these additional
sales representatives also increased selling expenses. The total increase
attributed to this increase in sales representatives and related expenses
over the nine-months ended September 30, 2004 is approximately $161,000.
. In conjunction with our strategy of testing various forms of distribution
and promoting brand recognition, we have continued our sales strategy of
distributing our proprietary brands, including Hollywood Previews
iMagazine through various newspapers, periodicals and on-line retailers.
We have supplied these products to these distributors at no cost, and are
dependent upon advertising revenues as the only revenue source. The
total increase in this sales promotion for the three months ended
September 30, 2005 from the same time period in 2004 is approximately
$322,000. We intend to continue this promotional strategy for the
foreseeable future, but expect that advertising revenues will
increase thereby reducing or eliminating these promotional subsidies.
We anticipate that selling expenses will continue to constitute a major
portion of our operating expenses, and will continue to increase in future
quarters. However, we also expect that although selling cost will increase in
net dollars, they will decrease as a percentage of sales.
General and Administrative
General and Administrative expenses increased $433,039 or 62% for the three
months ended September 30, 2005 to $1,133,495 from $700,456 for the three
months ended September 30, 2004. The increase in general administrative
expense for the three months ended September 30, 2005 versus the same time
period in 2004 is primarily attributable to the following:
Non Cash Transactions:
During the three month period ending September 30, 2005, we booked as general
and administrative expenses approximately $281,000 in various non-cash
transactions as opposed to an immaterial amount for the same period in 2004.
The majority of these expenses were related to non-recurring costs associated
with the issuance of various warrants to investment banking consultants for
promotion of ongoing financing activities. We feel that the unusual and
one-time nature of these non-cash expenses should not be relied upon to
establish the actual month-to-month costs of our general and administrative
operations. For this reason, we are including the following breakdown of
non-cash transactions as follows:
. We issued 2,510,000 shares of common stock for services to various
consultants to promote us and on going financing activities. This
common stock was not issued for any direct offering costs. We
recognized approximately $179,000 in expense related to these common
shares in the third quarter. For the same time period in 2004 this cost
was immaterial.
. In addition, in January 2005, we issued 350,000 warrants to a consultant
for advisory services. We recognized approximately $39,000 in expense
related to these warrants in the third quarter. Finally, in August
2005, we issued warrants to purchase 132,500 shares for consulting
services. These warrants were valued at $62,634. Total value of these
warrants issued is approximately $102,000. We did not have equivalent
expenses during the same time period in 2004.
Cash Transactions:
In addition, we increased our general and administrative staff from the
nine months ended September 30, 2004 to the nine months ended September 30,
2005 by 3 full time equivalent staff from 11 to 14. The increase in staff was
necessary to support our operations. This increase in staff accounts for
approximately $104,000 in additional cost. Further, our accounting and
auditing fees increased by approximately $59,000. The increase in these fees
is attributable to the additional accounting support necessary for filing our
Registration Statement on Form SB-2 in August 2005, and the hiring of
accounting professionals to provide technical consulting on accounting and
disclosure issues.
24
Operating Expenses - related parties
Operating expenses - related parties increased $33,500 or 28% for the three
months ended September 30, 2005 to $155,000 from $121,500 for the three months
ended September 30, 2004. Operating expense - related parties consists of
payment for management services to iPublishing. iPublishing is owned by the
three principal shareholders, directors and officers of the Company, Messrs
MacEachern, Kapp and Unruh. These related party expenses are for executive
management services of the Company, specifically for the position of
President, Chief Executive Officer and Chief Financial Officer. We have
contracted with iPublishing so as to allow members of management to benefit
from certain tax loss-carry forwards and other flow-though income provisions
that may be legally available to them through their respective entity or
personal service corporations. Management believes the increase in overall
executive compensation is commensurate with an increase in the Officers'
responsibilities.
Interest Expense, net
Interest expense, net increased $383,196 or 163% for the three months ended
September 30, 2005 to $618,963 from $235,767 for the three months ended
September 30, 2004. Interest expense for the three months ended September 30,
2005 consisted primarily of the following:
. The amortization of the Series A - Preferred Stock debt discount of
$380,001 and accrued preferred stock dividends of approximately $69,384
recorded as interest.
. We did not file our registration statement for the underlying common
shares for our Series - A Preferred Stock and warrants until September
29, 2005. In accordance with the Series A - Preferred Stock agreement
a penalty is assessed at the rate of 2% per month if the registration
was not filed by July 7, 2005. As such, the Company was 84 days late
in filing its registration statement. The Company has accrued $170,240
associated with this penalty and has recorded it as interest expense
for the three months ended September 30, 2005.
Interest expense for the three months ended September 30, 2004 consisted
primarily of the amortization of the beneficial conversion feature of a
different note payable.
Loss on sale of investments
The loss on sale of investments for the three months ended September 30, 2005
of $9,582 reflects the sale of 1,233,260 shares, of the Company's available
for sale investment in Langley Park. For the three months ended September 30,
2004 the Company did not have any investment transactions.
Provision for Income Taxes
For the three months ended September 30, 2005 we paid no taxes.
Net Loss
Net loss increased $1,274,240 or 101% for the three months ended September 30,
2005 to $2,539,684 from $1,265,444 for the three months ended September 30,
2004. The substantial increase in net loss is attributable partially to the
overall increase in operations, but more specifically to unusual and one-time
non-cash general and administrative expenses, additional legal and accounting
costs relating to the filing of our SB-2 registration statement and non-cash
interest expenses as detailed above.
Beneficial Conversion Feature
During the three months ended September 30, 2005 we issued 4,920 shares of
Series B - Preferred Stock for proceeds of $4,920,000. The Series B -
Preferred Stock contains certain conversion features and 14,760,000 warrants
that were issued in conjunction with the Preferred Stock pursuant to the
Purchaser's respective purchase agreements. In addition 1,211,250 warrants,
valued at $412,845, were issued and $685,623 of cash was paid as commissions
for the placement of the Series B - Preferred Stock. Based upon the
existence of these conversion features and warrants issued, we determined that
a preferred stock beneficial conversion feature was required to be recorded as
of the date of issuance to account for the value of the warrants and the value
of the effect of the beneficial conversion feature. The total value of the
warrants attached to this Preferred Stock offering was valued at $5,981,400
based upon the Black Scholes pricing model. The beneficial conversion feature
was valued at $3,821,532. Since the warrant value is greater then the proceeds
of the preferred stock offering after cash expenses and warrants for
commissions, the beneficial conversion feature is limited to the net value of
the preferred stock of $3,821,532. Since the holders of the Series B -
Preferred Stock may convert at anytime the preferred stock beneficial
conversion feature of $3,821,532 has been amortized in full against retained
earnings and shown as a separate component of the statement of operations as
of September 30, 2005.
25
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine months ended September 30,
2005 was $4,846,872. The net cash used in operations is a result of a net loss
of approximately $9,489,000 offset by approximately $4,060,000 of non-cash
common stock and warrant compensation and interest charges and approximately
$1,730,000 of unrealized and realized losses on the investment in Langley
Shares. In addition, we used approximately $1,181,000 for working capital
purposes. Non-cash compensation charges resulted from warrants issued for
consulting services, bonuses and interest. The unrealized loss on the
investment in Langley Shares is the result of our determination that the
shares were permanently impaired as determined in SFAS 115. Net cash used in
operating activities for the nine months ended September 30, 2004 of
$2,439,834 is primarily attributable to the net loss for the nine months ended
September 30, 2004 of approximately $3,379,000 offset by warrants issued for
services of approximately $468,000, non cash interest of $311,000 and
approximately $125,000 for working capital purposes.
Net cash provided by investing activities for the nine months ended September
30, 2005 was $406,927. Net cash provided by investing activities for the nine
months ended September 30, 2005 is primarily attributable to the sale of
securities held for investments (i.e., the Langley Shares) for approximately
$467,000 offset by the purchase of equipment for $55,000 and payments from
affiliates of approximately $5,000. For the nine months ended September 30,
2004 net cash used in investing activities of $94,759 was a result of the
purchase of equipment for approximately $54,000 and the reduction in the
amount from Affiliates and associated companies payable of approximately
$40,000.
Net cash provided by financing activities for the nine months ended September
30, 2005 totaled $7,027,298. We received net proceeds from the issuance of
common and preferred stock, net of costs, of approximately $8,140,000. These
proceeds were offset by the payment of notes and notes payable to related
parties with the preferred stock offering proceeds of approximately
$1,130,000. Net cash provided by financing activities for the nine months
ended September 30, 2004 totaled $2,530,347. We received net proceeds from the
issuance of common stock and stock subscription receivable totaling
approximately $1,413,000 and net proceeds from notes payable of $1,130,000.
These proceeds were offset primarily by payments on notes payable to a related
party of approximately $14,000.
We have generated losses since inception and have an accumulated deficit as of
September 30, 2005 of $9,489,462. For the year ended December 31, 2004 the
independent registered public accounting firm, in their opinion, has expressed
substantial doubt about the our 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.
During the nine months ended September 30, 2005 the Company raised
approximately $8,140,000 in investment funds through the issuance of Series A
and B - Preferred Stock and the exercise of warrants for common stock. As of
September 30, 2005 our cash balance is $2,946,322 and we have receivables in
the amount of $907,899. On a cash pro-forma and run-rate basis, and
considering subsequent revenue events not herein described, our present
operations do not result in a significant monthly negative cash flow. With
the current cash positions and accounts receivable, the Company believes that
it has adequate cash or cash equivalents to fund operations for the next 12
months.
Recent Sales of Unregistered Securities
In September 2005 the Company issued 6,097 shares of its common stock as sales
commissions.
On September 23, 2005, the Company issued 62,500 shares of common stock at a
per share price of $.60 for legal services rendered.
On September 1, 2005, the Company issued 130,577 shares of common stock for
$65,289 in order to satisfy the Series A - Preferred Stock dividend.
On August 25, 2005 the Company issued to an investment banking group 43,253
common shares to settle a dispute over outstanding investment banking
over-ride commissions.
On August 22, 2005, the Company entered into a Purchase Agreement with 36
accredited investors (the "Purchasers") pursuant to which the Company agreed
to sell, and the Purchasers agreed to purchase, $4,920,000 in shares of Series
B - Preferred Stock and warrants to purchase up to 14,760,000 shares of
Company common stock. The warrants are exercisable for five years at $0.60 per
share.
Also in August 2005 the Company paid certain offering commissions to two
investment banking firms in connection with the issuance of the Series B -
Preferred Stock through the issuance of warrants to purchase up to 1,211,250
shares of its common stock. The warrants were issued at a strike price of $.40
per share, and expire on August 22, 2009.
On August 15, 2005, the Company issued warrants to purchase 132,500 shares of
common stock for consulting services, specifically 43,750 warrants for
investor relations services and 88,750 warrants for sales consulting. The
total value of this warrant is $62,634 and is recorded in operating expense as
compensation on the statement of operations for the three and nine months
ended September 30, 2005. The warrant has a strike price of $.40 per share and
a term of four years. The warrant value was calculated using the Black-Scholes
method using the following assumptions of 107% volatility, $.60 share price,
risk free interest rate of 3.50% and zero dividend yield.
Off-Balance Sheet Arrangements
At September 30, 2005 and September 30, 2004, we did not have any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance, variable interest or special
purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such
relationships.
26
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. If the condition of our customers were to
deteriorate, resulting in the impairment of their ability to make payments,
allowances against our accounts receivable may be required.
Revenue Recognition
Our major source of revenue is from the creation and duplication of
interactive multi-media CD-ROMs from content provided by our customers.
Revenue is allocated to the creation of the CD-ROM, and to the duplication of
such CD-ROMs, based upon the contract terms and relative fair value of such
services to the total contractual revenue. Revenue from the creation of the
multi-media interactive CD-ROM 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.
We follow the guidance of Staff Accounting Bulletin 104 and EITF Issue 00-21
when applicable. Revenue from the creation and duplication of interactive
CD-ROMs is normally dictated by contract terms. The estimate that management
must apply is the determination of when the creation service of the CD-ROM is
finalized. Normally the creation of the CD-ROM is finalized when the customer
provides written acceptance of a master copy. Our estimation of completion
dates may change based on the customers schedule. As noted above we record
revenue for duplication of CD-ROMs when they are delivered. At times our
customers take delivery at the point of replication, other times we are
responsible for the physical distribution of the completed product to the
end-user consumer. It is not unusual for us to have completed an entire
project, have replicated CD-ROMSs and packaging duplicated and ready to be
shipped; however our customer may request that we delay shipping or
distribution to a future time thus preventing us from recognizing revenue on a
scheduled basis.
Stock Based Compensation and Warrants Issued
Historically we have used warrants and common stock as compensation for
services. We have valued our warrants in accordance with the Black-Scholes
method, which estimates fair market value for our warrants. Since the Company
has experienced significant volatility in its stock price the warrant values
have fluctuated significantly and sometimes can be as valuable as the
underlying common stock. Although the Black-Scholes methodology is generally
accepted to determine fair value the resulting warrant value may appear
inconsistent with the underlying fair market value of the common stock which
can result as a significant non cash expense to us. The Company intends to
limit the future issuance of warrants and common stock as compensation.
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 a small business issuer, and therefore is
required to adopt SFAS 123R as of the first interim or annual reporting period
of the first fiscal year that begins on or after December 15, 2005. 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.
In March 2005, the Securities and Exchange Commission Office of the Chief
Accountant and its Division of Corporate Finance released Financial Accounting
Bulletin No. 107, "Share-Based Payment" (SAB 107). SAB 107 provides
interpretive guidance related to the interaction between Statement of
Financial Accounting Standards No. 123R "Shared Based Payment" (SFAS 123R)
and certain SEC rules and regulations. SAB 107 provides the staff's views
regarding the valuation of shared-based payment arrangements for public
companies and stresses the importance of including appropriate disclosures
within SEC filings, particularly during the transition to SFAS 123R.
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 September 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.
27
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS 154"). SFAS 154 replaces APB Opinion No. 20, "Accounting Changes" ("APB
20") and FASB Statement No. 3, "Reporting Accounting Changes in Interim
Financial Statements," and changes the requirements for the accounting for and
reporting of a change in accounting principle. APB 20 previously required that
most voluntary changes in accounting principle be recognized by including in
net income of the period of the change the cumulative effect of changing to
the new accounting principle. SFAS 154 requires retrospective application to
prior periods' financial statements for voluntary changes in accounting
principle. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The impact of
SFAS 154 will depend on the accounting change, if any, in a future period.
ITEM 3. CONTROLS AND PROCEDURES
(a) The Company's management, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this quarterly report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that 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 not effective. Early in 2005 the Company's independent
auditors made management aware of possible deficiencies in its disclosure
controls and procedures that alone, and in the aggregate, constituted a
"material weakness," which is defined under standards established by the
Public Company Accounting Oversight Board as a deficiency that could result in
more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. Such
deficiencies included a general lack of adequate procedures for recording,
processing and summarizing financial information on a timely basis. The
Company's management determined that the deficiencies in its systems were
primarily due to a lack of expertise with respect to public company reporting
standards by the executive officers. The Company developed and has begun to
implement a plan to ensure that its financial information will be recorded,
processed, summarized and reported on a timely basis, and is presently
reallocating responsibilities among various personnel and recruiting qualified
personnel and consultants, including an experienced public company Chief
Financial Officer, to remediate the material weaknesses. We anticipate the
engagement of such Chief Financial Officer prior to the end of our fiscal
year. As of September 30, 2005, management believes that the material
weaknesses disclosed herein still exist.
(b) There were no changes in our internal control over financial reporting or
in other factors identified in connection with the evaluation required by
paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the
three months ended September 30, 2005 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In September 2005 the Company issued 6,097 shares of its common stock as sales
commissions. The issuance of the common stock was exempt from the registration
and prospectus delivery requirements of the Securities Act pursuant to Section
4(2) thereof.
On September 23, 2005, the Company issued 62,500 shares of common stock at a
per share price of $.60 for legal services rendered. Each investor represented
to us that such investor 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.
On September 1, 2005, the Company issued 130,577 shares of common stock for
$65,289 in order to satisfy the Series A - Preferred Stock dividend. Each
investor represented to us that such investor 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.
On August 25, 2005 the Company issued to an investment banking group 43,252
shares of common stock to settle a dispute over outstanding investment banking
over-ride commissions. The investor represented to us that it was an
"accredited investor" within the meaning of Rule 501 of Regulation D under the
Securities Act of 1933, and that it 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.
On August 22, 2005, the Company entered into a Purchase Agreement with 36
accredited investors pursuant to which the Company agreed to sell, and the
purchasers agreed to purchase, $4,920,000 in shares of Series B - Preferred
Stock and warrants to purchase up to 14,760,000 shares of common stock. The
Warrants are exercisable for five years at $0.60 per share. Each purchaser
represented to us that such 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 Preferred Stock and warrants for investment
and not in connection with a distribution thereof. The issuance of the
Preferred Stock and warrants 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.
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Also in August 2005 the Company paid certain offering commissions to two
investment banking firms in connection with the issuance of the Series B -
Preferred Stock through the issuance of warrants to purchase up to 1,211,250
shares of its common stock. The warrants were issued at strike prices of $.40
per share expiring on August 22, 2009. The investment banking firms
represented to us each was an "accredited investor" within the meaning of Rule
501 of Regulation D under the Securities Act of 1933, and that such investment
banking firm was receiving the warrants for investment and not in connection
with a distribution thereof. The issuance of the warrants 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."
On August 15, 2005, the Company issued warrants to purchase 132,500 shares of
common stock for consulting services in the third quarter of 2005. Total value
of this warrant is $62,634 and is recorded in operating expense as
compensation on the statement of operations for the three and nine months
ended September 30, 2005. The warrant has a strike price of $.40 per share and
a term of four years. The warrant value was calculated using the Black-Scholes
method using the following assumptions of 107% volatility, $.60 share price,
risk free interest rate of 3.50% and zero dividend yield. The investors
represented to us that each 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 warrants for investment and not in connection with
a distribution thereof. The issuance of the warrants 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
3.1 Certificate of Incorporation of iMedia International Inc.,
dated October 28, 2003(1)
3.2 Certificate of Designation of Series A - 6% Convertible Preferred Stock
of iMedia International, Inc.
3.3 Certificate of Designation of Series B - 6% Convertible Preferred
Stock (2)
3.4 Bylaws of iMedia International, Inc. (1)
10.1 Form of Purchase Agreement, dated as of August 22, 2005, between iMedia
International, Inc., and the Purchasers of Series B 6% Convertible
Preferred Stock
10.2 Registration Rights Agreement, dated as of August 22, 2005, between
iMedia International, Inc., and the Purchasers of Series B 6%
Convertible Preferred Stock
10.3 Form of Warrant issued to holders of Series B 6% Convertible Preferred
Stock
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
(1) Previously filed as an exhibit to our registration statement on Form
10-SB filed with the commission on January 27, 2003 incorporated herein
by this reference
(2) Previously filed as an exhibit to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on August 23, 2005, and
incorporated herein by this reference.
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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: November 18, 2005
IMEDIA INTERNATIONAL INC.
By: /s/ David MacEachern
-----------------------------------------
David MacEachern, Chief Executive Officer
By: /s/ Franklin Unruh
----------------------------------------
Franklin Unruh, Chief Financial Officer
30