SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
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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: 000-50900
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RIDDLE RECORDS, INC.
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(Exact name of registrant as specified in its charter)
Nevada
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(State of other jurisdiction of incorporation or organization)
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88-0507969
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(I.R.S. Employer Identification No.)
9595 Wilshire Boulevard, Suite 700, Beverly Hills, California 90212
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(Address of principal executive office)
(310) 273-2407
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(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |_| No |X|
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the issuer as of December 31, 2004 cannot be determined
because the issuer's common equity does not have an active trading market. There
were 20,771,250 and 12,000,000 of outstanding shares of the issuer's Class A and
Class B Common Stock, respectively, as of May 12, 2005.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION........................................ 2
ITEM 1. FINANCIAL STATEMENTS......................................... 2
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2005
(UNAUDITED)AND JUNE 30, 2004................................. 2
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 2005 (UNAUDITED) AND 2004 (UNAUDITED)........ 3
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED MARCH 31, 2005 (UNAUDITED) AND 2004 (UNAUDITED)
AND FOR THE PERIOD FROM INCEPTION (AUGUST 8, 2001) TO
MARCH 31, 2005 (UNAUDITED)................................... 4
CONSOLIDATED STATEMENT OF CASH FLOW FOR THE NINE MONTHS
ENDED MARCH 31, 2005 (UNAUDITED) AND 2004 (UNAUDITED)
AND FOR THE PERIOD FROM INCEPTION (AUGUST 8, 2001) TO
MARCH 31, 2005 (UNAUDITED)................................... 5
NOTES TO UNAUDITED FINANCIAL STATEMENTS...................... 6
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................ 9
ITEM 3. CONTROLS AND PROCEDURES...................................... 18
PART II. OTHER INFORMATION............................................ 18
ITEM 1. LEGAL PROCEEDINGS............................................ 18
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.. 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.............................. 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 18
ITEM 5. OTHER INFORMATION............................................ 19
ITEM 6. EXHIBITS..................................................... 19
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
June 30, March 31,
2004 2005
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(Unaudited)
CURRENT ASSETS:
Cash $ 4,518 $ 3,430
Prepaid loan fees 3,667 667
Film costs 18,825 49,084
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Total current assets 27,010 53,181
EQUIPMENT, net of accumulated depreciation of $960 and $1,320 2,642 2,101
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$ 29,652 $ 55,282
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 34,079 $ 60,436
Accrued expenses due to stockholder 1,442 --
Accrued interest payable -- 5,037
Amounts due to related parties 1,300 15,132
Notes payable 40,000 120,000
Note payable to stockholder 13,700 --
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Total current liabilities 90,521 200,605
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock: 10,000,000 shares authorized,
-0- issued and outstanding -- --
Class A Common Stock: 80,000,000 shares
authorized, $.001 par value, 20,771,250 shares
issued and outstanding 20,771 20,771
Class B Common Stock: 20,000,000 shares
authorized, $.001 par value, 12,000,000 shares
issued and outstanding 250 250
Additional Paid-in Capital 27,612 33,031
Deficit accumulated during the development stage (109,502) (199,375)
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Total stockholders' equity (deficit) (60,869) (145,323)
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$ 29,652 $ 55,282
========= =========
See accompanying notes to financial statements.
2
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31
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2005 2004
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EXPENSES:
General and administrative $ 13,096 $ 39,287
Depreciation and amortization 180 180
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Total expenses 13,276 39,467
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OTHER (EXPENSE):
Loan fees 1,000 --
Interest expense 2,650 --
Interest expense, related party 220 46
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Total other expenses
3,870 46
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(LOSS) BEFORE INCOME TAXES (17,146) (39,513)
Provision for income taxes 3,044 844
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NET (LOSS) $ (20,190) $ (40,357)
=========== ===========
(Loss) per common share-basic and diluted $ * $ *
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Weighted average number of shares outstanding 32,771,250 32,754,028
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* Less than $0.01 per share
See accompanying notes to financial statements.
3
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
Inception
Nine Months Ended (August 8, 2001)
March 31 to
------------------------- March 31
2005 2004 2005
----------- ----------- -----------
EXPENSES:
General and administrative $ 77,533 $ 88,169 $ 184,038
Depreciation and amortization 540 540 1,500
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Total expenses 78,073 88,709 185,538
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OTHER (EXPENSE):
Loan fees 3,000 -- 3,333
Interest expense 4,763 34 5,395
Interest expense, related party 993 139 1,221
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Total other expenses
8,756 173 9,949
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(LOSS) BEFORE INCOME TAXES (86,829) (88,882) (195,487)
Provision for income taxes 3,044 844 3,888
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NET (LOSS) $ (89,873) $ (89,726) $ (199,375)
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(Loss) per common share-basic and diluted $ * $ *
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Weighted average number of shares outstanding 32,771,250 30,284,692
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* Less than $0.01 per share
See accompanying notes to financial statements.
4
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Inception
(August 8, 2001)
Nine Months Ended to
March 31, March 31,
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2005 2004 2005
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CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net loss $ (89,873) $ (89,726) $(199,375)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation
540 540 1,500
Class A Common Stock issued for services
-- 400 400
Changes in assets and liabilities:
Decrease in prepaid loan fees
3,000 -- (667)
Increase in accounts payable
26,357 42,582 60,436
Increase in accrued interest payable
5,815 138 7,257
Increase (Decrease) in amounts due to related parties 13,832 1,000 13,134
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Net cash (used in) operating activities (40,329) (45,066) (117,315)
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CASH FLOWS (TO) INVESTING ACTIVITIES:
Investment in film costs (30,259) -- (49,084)
Purchase of equipment -- -- (3,602)
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Net cash (used in) investing activities
(30,259) -- (52,686)
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CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Proceeds from the sale of common shares -- 50,128 57,625
Payment of offering costs -- (3,214) (7,394)
Proceeds from note payable 80,000 -- 120,000
Repayment of note payable to stockholder (40,500) -- (40,500)
Proceeds from note payable to stockholder 30,000 -- 43,700
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Net cash provided by financing activities 69,500 46,914 173,431
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NET INCREASE (DECREASE) IN CASH (1,088) 1,848 3,430
CASH AT BEGINNING OF PERIOD
4,518 581 --
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$ 3,430 $ 2,429 3,430
========= ========= =========
See accompanying notes to financial statements.
5
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND NATURE OF BUSINESS
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The accompanying unaudited financial
statements reflect all adjustments that, in the opinion of management, are
considered necessary for a fair presentation of the financial position, results
of operations, and cash flows for the periods presented. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The accompanying
unaudited financial statements should be read in conjunction with the audited
financial statements of Riddle Records, Inc. included in the Form 10-KSB for the
fiscal year ended June 30, 2004.
Organization and Business
Riddle Records, Inc. (the "Company") (a development stage company) was
incorporated on August 8, 2001 under the laws of the State of Nevada to engage
in business as an independent record label that was established to capitalize on
the growth of the music industry and that of the "hip-hop" and "rap" genres in
particular. The fiscal year end is June 30. The Company is considered to be in
the development stage as defined in Statement of Financial Accounting Standards
No. 7, Accounting and Reporting by Development Stage Enterprises.
Going Concern and Plan of Operation
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company is in the
development stage and has not earned any revenues from operations to date.
The Company is currently devoting its efforts to raising investment capital. The
Company's ability to continue as a going concern is dependent upon its ability
to develop additional sources of capital, and ultimately, achieve profitable
operations. The accompanying financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
The Company entered into an agreement with NT Media Corp. of California ("NT"),
a related party entity in which a director of the Company is also a director,
dated July 9, 2004, wherein it agreed to pay an amount equal to all of NT's out
of pocket costs associated with the project presently entitled "Rap Battle" in
exchange for all of NT's rights in and to the project. The Company believes that
it will be able to exploit the results and proceeds of the Project in the
distribution of the "direct to DVD". The Company believes that it is too soon to
project total sales related to the Project. (See Note 3.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Earnings (Loss) per Share
The Company computes earnings per common share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"). The
Statement requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic loss per
share is computed by dividing loss available to common shareholders by the
weighted average number of common shares outstanding. The computation of diluted
loss per share is similar to the basic loss per share computation except the
denominator is increased to include the number of additional shares that would
have been outstanding if the dilutive potential common shares had been issued.
In addition, the numerator is adjusted for any changes in income or loss that
would result from the assumed conversions of those potential shares. As of March
31, 2005, the Company has no dilutive securities and therefore no such
presentation is made.
6
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Stock-Based Compensation
The Company accounts for stock based compensation in accordance with Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). This standard requires the Company to adopt the "fair
value" method with respect to stock-based compensation of consultants and other
non-employees and allows for use of the intrinsic value method for stock-based
compensation of employees under Accounting Principles Board Opinion No. 25. To
date the Company has not issued any equity instruments under its employee
compensation plans.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company entered into an agreement with NT on July 9, 2004, wherein it agreed
to pay an amount equal to all of NT's out of pocket costs associated with the
project presently entitled "Rap Battle" in exchange for all of NT's rights in
and to the project. The payment for the rights mentioned herein will be due not
later than December 31, 2005. The Company has recorded $12,717 of related film
costs.
On October 29, 2004, the Company entered into a bridge loan promissory note
agreement with JRT Holdings, Inc., an entity owned by the Company's President
and Chief Executive Officer and his brother, in the amount of $10,000, interest
at 9% per annum, due December 31, 2004.
On November 16, 2004, the Company entered into a bridge loan promissory note
agreement with JRT Holdings, Inc., an entity owned by the Company's President
and Chief Executive Officer and his brother, in the amount of $10,000, interest
at 9% per annum, due December 31, 2004.
On December 31, 2004, the Company entered into a promissory note agreement with
JRT Holdings, Inc., an entity owned by the Company's President and Chief
Executive Officer and his brother, in the amount of $21,000. This amount
represents the $20,000 loaned to the Company from JRT Holdings, Inc. during
October and November 2004 plus accrued interest of $263 and an additional $738
for extending the due date to June 30, 2005.
On January 27, 2005, the Company entered into an amendment to the bridge note
dated December 31, 2004 with JRT Holdings. In consideration of JRT Holdings
agreeing to reduce the amount owed them by the Company from $21,000 to $19,000,
the due date was changed to January 27, 2005. This amount was paid in full by
the Company on January 27, 2005. In connection with this transaction, the $2,000
of forgiven debt was credited to additional paid in capital.
On December 10, 2004, the Company entered into a bridge promissory note
agreement with the Company's President and Chief Executive Officer, in the
amount of $10,000, interest at 9% per annum, due December 31, 2004.
On December 31, 2004, the Company entered into a bridge promissory note
agreement with the Company's President and Chief Executive Officer, in the
amount of $12,000, interest at 9% per annum, due June 30, 2005. This amount
represents the $10,000 loaned to the Company on December 10, 2004 plus accrued
interest of $800 and an additional $1,200 for extending the due date to June 30,
2005. In connection with this transaction, the officer agreed to forgive $1,700
of previous debt. The amount forgiven was credited to additional paid in
capital.
On January 27, 2005, the Company entered into an amendment to the bridge note
dated December 31, 2004 with an officer of the Company. In consideration of the
officer agreeing to reduce the amount owed them by the Company from $12,000 to
$10,500, the due date was changed to January 27, 2005. This amount was paid in
full by the Company on January 27, 2005. In connection with this transaction,
the $1,500 of forgiven debt was credited to additional paid in capital.
7
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 4 - NOTES PAYABLE
On December 23, 2004, the Company entered into a promissory note agreement with
an unrelated party, in the amount of $50,000, interest at 9% per annum, due June
30, 2005.
On January 24, 2005, the Company entered into a promissory note agreement with
an unrelated party, in the amount of $30,000, interest at 9% per annum, due June
30, 2005.
8
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion should be read in conjunction with our financial
statements and notes thereto appearing elsewhere in this quarterly report on
Form 10-QSB.
This quarterly report may contain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, including statements
with regard to descriptions of our plans or objectives for future operations,
products or services, and forecasts of our revenues, earnings or other measures
of economic performance. Forward-looking statements can be identified by the
fact that they do not relate strictly to historical or current facts. They often
include the words "believe," "expect," "anticipate," "intend," "plan,"
"estimate," or words of similar meaning, or future or conditional verbs such as
"will," "would," "should," "could," or "may."
Forward-looking statements, by their nature, are subject to risks and
uncertainties. A number of factors - many of which are beyond our control -
could cause actual conditions, events or results to differ significantly from
those described in the forward-looking statements and reported results should
not be considered an indication of our future performance. Some of these risk
factors include, among others, our ability to successfully obtain additional
financing to continue future operations, our ability to continue as a going
concern, our limited experience in the market as an independent record label,
our ability to attract new artists to our label and maintain agreements with
them, our dependence on our artists' commercial success in order to sign
additional new artists, the successful promotion of our artists and the
commercial success of our music offerings in order to generate revenue,
competition among record labels within the music industry, the limited
experience of our management team and our ability to attract and retain key
personnel, our ability to develop brand identity as a record label, potential
liability to third parties for music and other content that we produce and
distribute, enforcement of our intellectual property rights, control of our
company by our majority stockholders, and the unpredictability of our operating
results and other factors could cause the price of our Class A common stock to
fluctuate significantly in the future assuming the successful development of a
trading market for those securities. These risk factors are not exhaustive, and
additional factors that could have an adverse effect on our business and
financial performance are set forth under "Risk Factors" and elsewhere in this
quarterly report.
Forward-looking statements speak only as of the date they are made. We do not
undertake to update forward-looking statements to reflect circumstances or
events that occur after the date forward-looking statements are made.
OVERVIEW
We were incorporated in Nevada in August 2001 and recently established our
company as an independent record label to capitalize on the growth of the music
industry and that of the "hip-hop" and rap genres in particular. By identifying
and representing new, high-potential artists in these categories, our primary
objective will be to successfully introduce these artists to large audiences and
create a loyal following from fans. As a record label, Riddle Records expects to
be directly involved in every stage of developing the music of our artists. The
four key responsibilities of Riddle Records will include the production,
manufacturing, distribution and promotion of our artists' music.
We have a limited operating history, no client base and no revenue to date. Our
specific plan of operations for the next 12 months is based primarily on the
development of our business, including our brand name within the music industry,
and the signing of our initial artists. During the next 12 months, we plan to
focus on acquiring two artists as clients and developing our brand name within
the music industry. We anticipate expenditures of approximately $225,000 over
the next 12 months to maintain our business. Of this amount, approximately
$75,000 will be spent on general and administrative costs (which includes legal
and other professional costs), and $125,000 on artist development, which
includes entertainment, travel, costs to promote those artists that we engage as
clients and $25,000 for consultant and advisory fees. We expect that these
amounts will be sufficient to cover all of our anticipated costs including
general and administrative expenses for the next 12 months, and we do not
anticipate any other material operational costs for the next 12 months. Given
the current lack of revenues, the lack of proceeds from this offering and the
lack of a client base, we will be required to rely primarily on the sale of
additional equity and debt securities to fund our operations. If we raise less
than $225,000, we expect to scale back our planned operations and cut back our
general and administrative and artist development costs in equal proportions. To
the extent we are unable to raise sufficient financing, we will not have
sufficient cash to continue operations. See "Risk Factors - Risks Related to Our
Financial Results."
9
We expect that our promotional efforts on behalf of our clients will primarily
consist of the creation of recordings of their projects and talent typically on
compact disc or online, the distribution of these recordings to the appropriate
parties in the music industry, the introduction of our clients to related
industry decision-makers, and the making of personal presentations on behalf of
our clients to prospective interested parties.
During the next 12 months, we intend to focus our efforts on two aspects of the
business. The first is creating an awareness within the music industry of our
business. While none of our existing directors or officers has prior business
experience with a record label company, these persons have arranged informal
advisory arrangements with a number of industry professionals who have agreed to
afford our company access to their existing relationships in the music and
entertainment industry. In addition, two artist and repertoire (A&R) advisors
are providing us with introductions to their contacts within the music and
entertainment industry as well as scouting and identifying for us new,
high-potential artists performing at showcases, clubs and other small venues.
These A&R advisors are providing their services with the understanding that if
we sign any artists that they introduce to us, they will receive compensation at
a negotiated royalty rate on future sales of those artists' products. We have
and intend to continue to market our business by generally making those in the
music and entertainment industry aware of the services we will provide. Our
marketing efforts undertaken to date include generating interest in our record
label by word-of-mouth and distributing business cards and other promotional
materials and at concerts and other music events, as well as, networking with
other professionals at courses, seminars and other music and entertainment
industry gatherings. Our goal is to build a database of industry participants
through these advisory relationships and to thereafter build upon that database
through referrals from existing contacts.
After our initial marketing campaign, we anticipate that further marketing of
our company will be conducted almost exclusively through word-of-mouth, as well
as the successful distribution of our project "Rap Battle." During our first
year of operations, we intend to start identifying clients that show promise but
require our services to move forward, and clients that we determine are likely
to generate recurring revenues. We intend to derive these initial clients from
that pool of industry referrals and relationships referenced above. Following
that, we anticipate using these initial clients to generate sufficient revenue
to maintain our operating expenses.
The other focus is completing the production and commencing the distribution of
our first project, presently entitled, "Rap Battle." We entered into an
agreement dated July 9, 2004 with NT Media Corp. of California ("NT"), a related
party entity in which one of our directors is also a director, wherein we agreed
to pay an amount equal to all of NT's out of pocket costs associated with a
project presently entitled "Rap Battle" in exchange for all of NT's rights in
and to the project. The payment for the rights mentioned herein will be due not
later than December 31, 2005. We have recorded $12,717 of related film costs. We
believe that we will be able to exploit the results and proceeds of this project
in the distribution of the "direct to DVD". We are currently negotiating with a
third party distributor to distribute "Rap Battle" through its distribution
channels.
RESULTS OF OPERATIONS
We are a development stage company. We have not generated any revenue since
inception through March 31, 2005.
Operating expenses from inception through March 31, 2005 is comprised of general
and administrative fees of $184,038, and depreciation expenses of $1,500.
We had a net loss for the period from inception through March 31, 2005 of
$199,375.
LIQUIDITY AND CAPITAL RESOURCES
We are not engaged in a capital-intensive business. Our costs are primarily
incurred by the business development costs, travel and entertainment related to
our business operations, and business overhead normal to an independent record
label business. We have generated a net amount of $50,231 as of March 31, 2005
through the private sales of restricted Class A common stock to 28 accredited
investors. As of March 31, 2005, we have outstanding loans from unrelated
parties in the amount of $120,000. During June 2004, our company received
10
$40,000 under a bridge note payable agreement, due June 5, 2005, with interest
at a rate of 10%. On December 23, 2004, our company received $50,000 under a
promissory note agreement with an unrelated party, with interest at 9%, due June
30, 2005. On January 24, 2005, our company received $30,000 under a promissory
note agreement with an unrelated party, with interest at 9%, due June 30, 2005.
As of March 31, 2005, we had $3,430 in available cash. We will need to raise
additional funds in order to satisfy our future liquidity requirements,
including working capital to fund the cash requirements of our company as well
as expand our business during the next six months and capital expenditures that
relate to the organization of our company. It is unlikely that we will be able
to generate sufficient cash flows from operations to meet any cash requirements
during the next six months or to meet our anticipated needs for working capital
and capital expenditures thereafter. Depending on the number of artists that we
sign as clients within the next 12 months, we anticipate being required to raise
between $200,000 and $1,000,000 in order to satisfy future liquidity
requirements. We will have to meet these liquidity requirements through public
or private equity offerings or debt financings. We may be unable to obtain any
required additional financing on terms favorable to us, if at all. If adequate
funds are not available on acceptable terms, we will be unable to fund our
expansion, successfully promote our brand, sign and develop any artists and
promote and produce any signed artists, respond to competitive pressures or take
advantage of acquisition opportunities, any of which would have a material
adverse effect on our business. If we raise additional funds through the
issuance of equity securities, our stockholders may experience dilution of their
ownership interest, and the newly-issued securities may have rights superior to
those of our Class A common stock. If we raise additional funds by issuing debt,
we may be subject to limitations on our operations, including limitations on the
payment of dividends. There can be no assurances that we will be able to secure
additional financing, or obtain favorable terms on such financing if it is
available. Continued negative cash flows create substantial doubt about our
ability to fully implement our operating plan and we may have to reduce the
scope of our planned operations, which may jeopardize our ability to continue
our business. If cash and cash equivalents, together with any cash generated
from operations, are insufficient to satisfy our liquidity requirements, we will
not have sufficient resources to continue operations.
RISK FACTORS
In addition to the other information in this quarterly report on Form 10-QSB,
the following factors should be considered in evaluating us and our business.
RISKS RELATED TO OUR FINANCIAL RESULTS
If we are unable to successfully obtain additional financing we will not have
sufficient cash to continue operations.
- --------------------------------------------------------------------------------
As of March 31, 2005, we had $3,430 in available cash. We will need to raise
additional funds in order to satisfy our future liquidity requirements,
including working capital to fund the cash requirements of our company as well
as expand our business during the next six months and capital expenditures that
relate to the organization of our company. It is unlikely that we will be able
to generate sufficient cash flows from operations to meet any unexpected cash
requirements during the next six months or to meet our anticipated needs for
working capital and capital expenditures thereafter. It is likely that we will
seek to meet these liquidity requirements through public or private equity
offerings or debt financings. Current market conditions present uncertainty as
to our ability to secure additional financing. There can be no assurances that
we will be able to secure additional financing, or obtain favorable terms on
such financing if it is available, or as to our ability to achieve positive cash
flow from operations. Continued negative cash flows create substantial doubt
about our ability to implement our operating plan and we may have to reduce the
scope of our planned operations. If cash and cash equivalents, together with
cash generated from operations, if any, are insufficient to satisfy our
liquidity requirements, we will not have sufficient resources to continue
operations.
11
We have experienced operating losses since our inception and our independent
auditors report expresses substantial doubt concerning our ability to continue
operations as a going concern.
- --------------------------------------------------------------------------------
We have earned no revenue since our inception and have incurred a net loss of
$199,375 from inception through March 31, 2005. We expect to continue to incur
substantial losses and may not generate significant revenue, if any, for the
immediate future. Our independent auditors report, dated August 30, 2004,
includes an explanatory paragraph expressing substantial doubt as to our ability
to continue as a going concern due to the fact that we are in the development
stage and have not commenced operations. Our ability to continue as a going
concern prior to the generation of significant revenue is dependent upon
obtaining additional financing for our planned operations. If we fail to
generate enough working capital, either from future equity or debt sales or
revenue from operations, our ability to expand and complete our business plan
will be materially affected, and you may lose all or substantially all of your
investment.
It is difficult to evaluate our business and prospects because we have a limited
operating history.
- --------------------------------------------------------------------------------
Although we were incorporated in August 2001, we are a development stage company
and have had no significant operations to date. Because we have a limited
operating history, it is difficult to accurately predict whether and when we
will generate any revenue or to evaluate our future prospects and an investment
in our Class A common stock. Our prospects are uncertain and must be considered
in light of the risks, expenses and difficulties frequently encountered by
independent record labels in the early stages of development.
Our operating results may prove unpredictable, and, if a market for our Class A
common stock develops, our Class A common stock price may decrease or fluctuate
significantly.
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Our operating results are likely to fluctuate significantly in the future due to
a variety of factors, many of which are outside of our control. If a market for
our Class A common stock develops and our operating results fluctuate negatively
in any future quarter, the trading price of our Class A common stock may fall
significantly. Factors that may cause our operating results to fluctuate
significantly include the following:
o our ability to generate enough working capital from future equity
sales;
o our ability to recruit and retain new artists;
o the level of commercial acceptance by the public of the music
o offerings of our artists;
o the long-term commercial success of our artists and their songs with
the public;
o the timing and success of our promotions of our artists;
o fluctuations in the levels of consumer purchasing activity relating to
the purchase of recorded music;
o the level of commercial success achieved by new music and new music
products introduced by us or by our competitors;
o our ability to enter into joint venture distribution and promotion
agreements, which reduce our risk in investing in new unproven
artists;
o fluctuations in the demand for recorded music sales and products
associated with music and other entertainment events;
12
o extensive competition in the music industry, including direct
competition for talent from major recording labels, substantially all
of which have significantly greater capital resources and
infrastructure than we have;
o the general threat to the music industry posed by the dissemination of
free music over the internet;
o the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations and infrastructure;
and
o general economic conditions and economic conditions specific to the
music industry.
We expect that we will experience seasonality in our business, reflecting
traditional retail seasonality patterns affecting sales of recorded music. Sales
in the traditional retail music industry are significantly higher in the fourth
calendar quarter of each year than in the preceding three quarters. However, to
date, our limited operating history makes it difficult to ascertain the effects
of seasonality on our business.
RISKS RELATED TO OUR BUSINESS
We are a development stage independent record label with no experience in the
market, and failure to successfully compensate for this inexperience may
adversely impact our ability to successfully generate revenue.
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We operate as independent record label with no substantial tangible assets in a
highly competitive industry. Our management has no significant experience in
managing an independent record label. We have little operating history, no
client base and no revenue to date. This makes it difficult to evaluate our
future performance and prospects. Our prospectus must be considered in light of
the risks, expenses, delays and difficulties frequently encountered in
establishing a new business in an emerging and evolving industry characterized
by intense competition, including:
o our business model and strategy are still evolving and are continually
being reviewed and revised;
o we may not be able to raise the capital required to develop our
initial client base and reputation;
o we may not be able to successfully implement our business model and
strategy; and
o our management has not worked together for very long.
We cannot be sure that we will be successful in meeting these challenges and
addressing these risks and uncertainties. If we are unable to do so, our
business will not be successful and the value of your investment in our company
will decline.
If we are initially unable to attract new artists to our label, we will not
succeed in our business plan, and even if we are initially able to attract new
artists, we will be dependent on their success with us to sign additional new
artists.
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We have not signed any artists and may not be successful in signing any artists.
In order to attract and sign our initial artists, we will need to overcome the
fact that we are a start-up independent record label with no experience in the
industry. Artists may be unwilling to be associated with our company because of
our lack of expertise and lack of brand name. Even if we do attract initial
artists, in order for us to sign additional new artists, any principal artists
that we initially sign must remain with us, become popular with our customers
and thereafter sustain their popularity. In order to retain initial artists that
we have signed, we will need to raise sufficient funds to meet our anticipated
needs for working capital and capital expenditures, and we will need to overcome
increased competition from other labels. Our business would be adversely
affected by:
o our inability to recruit new artists with commercial promise and to
enter into production and promotional agreements with them;
o the loss of popularity of any artists that we may sign;
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o our inability to maintain relationships with and retain any artists
that we may initially sign;
o non-renewals of current agreements with any artists that we may sign;
and
o poor performance or negative publicity of any artists that we may
sign.
If we are not successful in promoting any artists that we may sign and in
retaining those artists that we successfully promote, we will be unable to
generate steady and ongoing revenues.
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We expect that any future revenues will be primarily derived from a specified
percentage of the income generated by any artists that we may sign so, to
operate successfully, we must attract and retain highly qualified artists as
clients. We face intense competition for qualified personnel in the
entertainment industries, and any clients that we may sign will face intense
competition in achieving success and steady income generation in these
industries. If we are unable to successfully promote our clients, we will not
generate revenues. Furthermore, upon the expiration of an artist's recording
agreement with us, if we are unable to re-sign and retain the artist, we would
not necessarily earn any revenues from recordings, tours or other commercial
properties that we have not produced during the term of our relationship with
the artist.
If our music offerings are not commercially successful, we will be unable to
successfully generate revenue.
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We expect a significant amount of our revenue to come from the production and
distribution of records, as well as the use of our artists' music in feature
films and television programs. The success of these music offerings depends
primarily upon their acceptance by the public, which is difficult to predict.
The commercial success of a record, feature film or television program depends
on consumer taste, the quality and acceptance of competing offerings released
into the marketplace at or near the same time, the availability of alternative
forms of entertainment and leisure time activities, general economic conditions
and other tangible and intangible factors, all of which can change quickly.
Because we expect the popularity of our music offerings to be a significant
factor driving the growth of our company, if we fail to produce records with
broad consumer appeal, we will be unable to successfully generate revenue.
The music industry is extremely competitive and we may not be able to compete
successfully against other record labels, both large and small, for both artists
and the public's attention.
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The market for the promotion and distribution of music is extremely competitive
and rapidly changing. We currently and in the future face competitive pressures
from numerous actual and potential competitors. Many of our current and
potential competitors in the recorded music business have more substantial
competitive advantages than we have, including:
o longer operating histories;
o significantly greater financial, technical and marketing resources;
o greater brand name recognition;
o better distribution channels;
o larger client bases of artists; and
o more popular content or artists.
14
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in the public's musical tastes and devote greater
resources to identify, develop and promote artists, and distribute and sell
their music offerings than we can. Furthermore, historically, when recording
artists have achieved substantial commercial success they have sought to
renegotiate the terms of their recording agreements, or we may lose these
artists to those competitors of ours who offer recording agreements with more
favorable terms.
Our success depends in large part on our current key personnel and our ability
to attract and retain additional key personnel, which we may or may not be able
to do.
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Our success depends to some extent on the skills, experience and reputation of
our president, Jacques Tizabi and our director, Ali Moussavi, and the contacts
that they each have with a number of music and entertainment industry
professionals. Additionally, we hope to attract additional key personnel who can
contribute to our success in various ways. The loss or unavailability of either
Messrs. Tizabi or Moussavi for an extended period of time, and/or our inability
to attract additional key personnel could have a material adverse effect on our
ability to conduct our business. We do not have any employment agreements with
any of our officers, directors or employees.
The members of our management team have limited experience in leadership roles
in the music industry or in a public company and may be unable to successfully
lead us to profitability.
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We cannot assure you that our management team will be able to successfully lead
an independent record label. Our officers have limited significant experience in
this industry. We have not signed any artists and may not be successful in
signing any. The failure of our management team to adequately handle these
challenges would have a material adverse effect on our ability to conduct our
business.
Unless our artists develop a strong brand identity, our business may not grow
and our financial results may suffer.
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We believe that historical growth and brand recognition are important factors
not only in persuading artists to choose us as their record label, but also in
our ability to effectively utilize the dominant marketing resources in the music
industry (radio, public relations, trade publications, etc.). We believe that
our ability to promote and strengthen our brand will be critical to attracting
artists and achieving widespread acceptance of their music. However, brand
promotion activities may not yield revenues, and even if they do, any such
revenues may not offset the expenses we incur in building our brand.
We may be liable to third parties for music and other content that is on the
compact discs we will produce and distribute.
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We may be liable to third parties for the content on the compact discs that we
expect to distribute:
o if the music, text, graphics, or other content on our compact discs
violates their copyright, trademark, or other intellectual property
rights;
o if our artists violate their contractual obligations to others by
providing content on our compact discs; or
o if anything on our compact discs is deemed obscene, indecent or
defamatory.
We will attempt to minimize these types of liability by requiring
representations and warranties relating to our artists' ownership of and rights
to distribute and submit their music and by taking related measures to review
content on our compact discs. However, alleged liability could harm our business
by damaging our reputation, requiring us to incur legal costs in defense,
exposing us to awards of damages and costs and diverting management's attention
away from our business.
15
If we have difficulty enforcing our intellectual property right our future
profitability may suffer.
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The decreasing cost of electronic equipment and related technology has made it
easier to create unauthorized versions of audio and audiovisual products such as
compact discs, videotapes and DVDs. A substantial portion of our revenue is
expected to come from the sale of audio and audiovisual products potentially
subject to unauthorized copying. Similarly, advances in Internet technology have
increasingly made it possible for computer users to share audio and audiovisual
information without the permission of the copyright owners and without paying
royalties to holders of applicable intellectual property or other rights. While
we do not currently hold any intellectual property rights, intellectual property
rights to information that are expected to represent a substantial portion of
our market value may be subject to widespread, uncompensated dissemination on
the Internet. If we fail to obtain appropriate relief through the judicial
process or the complete enforcement of judicial decisions issued in our favor,
or if we fail to develop effective means of protecting our intellectual property
or entertainment-related products and services, our future profitability may
suffer.
RISKS RELATED TO OUR CAPITAL STRUCTURE
The control by our majority stockholders, and their disparate voting rights, may
make certain transactions impossible without the approval of these majority
stockholders.
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We are controlled by Jacques Tizabi and Ali Moussavi, who beneficially own 57.8%
of our Class A common stock and 100% of our outstanding Class B common stock (or
approximately 73.2% of our outstanding capital stock). The holders of Class A
common stock and Class B common stock have identical rights except that holders
of Class A common stock are entitled to one vote per share while holders of
Class B common stock are entitled to ten votes per share on all matters
submitted to a vote of the stockholders. As a result, Messrs. Tizabi and
Moussavi hold approximately 93.8% of the aggregate number of votes eligible to
be cast by our stockholders. Therefore, Messrs. Tizabi and Moussavi will be able
to control substantially all matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combination transactions, and will also have control over our
management and affairs. As a result of such control, certain transactions may
not be possible without the approval of Messrs. Tizabi and Moussavi, including
proxy contests, tender offers, open market purchase programs or other
transactions that could give our stockholders the opportunity to realize a
premium over the then-prevailing market prices for their shares of Class A
common stock. The differential in the voting rights could adversely affect the
value of the Class A common stock to the extent that investors or any potential
future purchaser of our company view the superior voting rights of the Class B
common stock to have value.
Some provisions of our certificate of incorporation and bylaws may deter
takeover attempts, which may limit the opportunity of our stockholders to sell
their shares at a favorable price.
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Some of the provisions of our certificate of incorporation and bylaws could make
it more difficult for a third party to acquire us, even if doing so might be
beneficial to our stockholders by providing them with the opportunity to sell
their shares possibly at a premium over the then market price.
For example, our certificate of incorporation, as amended, authorizes the board
of directors to issue up to 10,000,000 shares of preferred stock. The preferred
stock may be issued in one or more series, the terms of which may be determined
at the time of issuance by our board of directors without further action by the
stockholders. These terms may include voting rights including the right to vote
as a series on particular matters, preferences as to dividends and liquidation,
conversion rights, redemption rights and sinking fund provisions. No shares of
preferred stock are outstanding or will be outstanding upon the closing of this
offering and we have no present plans for the issuance of any preferred stock.
The issuance of any preferred stock, however, could diminish the rights of
holders of our Class A common stock, and therefore could reduce the value of our
common stock. In addition, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with, or sell
assets to, a third party. The ability of our board of directors to issue
preferred stock could make it more difficult, delay, discourage, prevent or make
it more costly to acquire or effect a change in control, thereby preserving the
current stockholders' control.
In addition, Messrs. Tizabi's and Moussavi's substantial beneficial ownership
position, together with the authorization of preferred stock, the disparate
voting rights between the Class A and Class B common stock, and the lack of
cumulative voting in our certificate of incorporation and bylaws, may have the
effect of delaying, deferring or preventing a change in control of our company,
may discourage bids for our Class A common stock at a premium over the market
price of the Class A common stock and may adversely affect the market price of
our Class A common stock.
16
RISKS RELATED TO OUR CLASS A COMMON STOCK
Our Class A common stock has never been traded, and assuming a trading market
develops in the future, prices for our Class A common stock may decline and
investors may have difficulty selling their securities.
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There is no public market for our Class A common stock and we cannot assure you
that a market will develop or that any stockholder will be able to liquidate his
investment without considerable delay, if at all. We cannot assure you that any
brokerage firm will act as a market maker of our securities. A trading market
may not develop in the future, and if one does develop, it may not be sustained.
If an active trading market does develop, the market price of our Class A common
stock is likely to be highly volatile due to, among other things, the nature of
our business and because we are a new public company with a limited operating
history. The market price of our Class A common stock may also fluctuate
significantly in response to the following factors, most of which are beyond our
control:
o variations in our quarterly operating results;
o changes in securities analysts estimates of our financial performance;
o changes in general economic conditions and in the music retailing
industry;
o changes in market valuations of similar companies;
o announcements by us or our competitors of significant new contracts
with artists, acquisitions, strategic partnerships or joint ventures,
or capital commitments;
o loss of a major artist, partner or joint venture participant or the
failure to effectively exploit the catalogs of our musicians; and
o the addition or loss of key managerial and creative personnel.
The equity markets have, on occasion, experienced significant price and volume
fluctuations that have affected the market prices for many companies' securities
and that have often been unrelated to the operating performance of these
companies. Any such fluctuations may adversely affect the market price of our
Class A common stock, regardless of our actual operating performance. As a
result, stockholders may be unable to sell their shares, or may be forced to
sell them at a loss.
There are a substantial number of shares eligible for future sale which could
adversely affect the price of our Class A common stock.
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The sales of substantial amounts of our Class A common stock in the public
market or the prospect of such sales could materially and adversely affect the
market price of our Class A common stock. Jacques Tizabi and Ali Moussavi, who
each beneficially own 6,000,000 shares of our Class A common stock and 6,000,000
shares of our Class B common stock, have received certain registration rights to
sell shares of Class A common stock held by them and issuable upon conversion of
their shares of Class B common stock in the public market. We also intend to
register the shares of our Class A common stock reserved for issuance pursuant
to our Stock Option Plan.
17
We do not intend to pay dividends to our stockholders, so you will not receive
any return on your investment in our company prior to selling your interest in
Riddle Records.
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We have never paid any dividends to our stockholders. We currently intend to
retain any future earnings for funding growth and, therefore, do not expect to
pay any dividends in the foreseeable future. If we determine that we will pay
dividends to the holders of our Class A common stock, we cannot assure that such
dividends will be paid on a timely basis. As a result, you will not receive any
return on your investment prior to selling your shares in our company.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" refers to the controls and
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files the Securities Exchange
Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported
within required time periods. As of the end of the period covered by this
quarterly report on Form 10-QSB (the "Evaluation Date"), we carried out an
evaluation under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer of the effectiveness of our
disclosure controls and procedures. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of the
Evaluation Date, such controls and procedures were effective in ensuring that
required information will be disclosed on a timely basis in our periodic reports
filed under the Exchange Act.
(b) Changes in internal control over financial reporting
Based on the evaluation of our management as required by paragraph (d) of Rule
13a-15 of 15d-15 of the Exchange Act, we believe that there were no changes in
our internal control over financial reporting that occurred during our last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
We are not a party to any material legal proceedings with respect to us or any
of our properties.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS
(a) Exhibits
Exhibit
Number Description
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31.1 Certification of Chief Executive Officer pursuant to
Item 601(b)(31) of Regulation S-B, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Item
601(b)(31) of Regulation S-B, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
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* This exhibit shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of that
section, nor shall it be deemed incorporated by reference in any filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made
before or after the date hereof and irrespective of any general incorporation
language in any filings.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RIDDLE RECORDS, INC.
/s/ Jacques Tizabi
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Jacques Tizabi
Chief Executive Officer
Date: May 20, 2005