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 January 31, 2006.
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
for the transition period from ________ to _________.
Commission file number 000-28761
JAG MEDIA HOLDINGS, INC.
(Exact name of small business issuer as specified in its Charter)
Nevada 88-0380546
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6865 SW 18th Street
Suite B-13
Boca Raton, Florida 33433
(Address of Principal Executive Offices)
(866) 300-7410
(Issuer's Telephone Number, Including Area Code)
-----------
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 __
-
Indicated by check mark whether registrant is a shell company (as defined by
Rule 12b-2 of the Securities Exchange Act of 1934)
Yes __ No X
-
As of March 15, 2006, the Registrant had 41,229,426 shares of Common Stock,
381,906 shares of Series 2 Class B Common Stock and 21,500 shares of Series 3
Class B Common Stock issued and outstanding.
JAG MEDIA HOLDINGS, INC.
INDEX
PART I FINANCIAL INFORMATION
PAGE
----
ITEM 1: FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet F-1
January 31, 2006 (Unaudited)
Condensed Consolidated Statements of Operations F-2
Six and Three Months Ended January 31, 2006 and 2005 (Unaudited)
Condensed Consolidated Statement of Changes in Stockholders' Deficiency F-3
Six Months Ended January 31, 2006 (Unaudited)
Condensed Consolidated Statements of Cash Flows F-4
Six Months Ended January 31, 2006 and 2005
Notes to Condensed Consolidated Financial Statements F-5/11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS 12/17
ITEM 3: CONTROLS AND PROCEDURES 17
PART II OTHER INFORMATION
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 VOTE OF SECURITY HOLDERS 18
ITEM 5: OTHER INFORMATION 18
ITEM 6: EXHIBITS 18
* * *
JAG Media Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
January 31, 2006
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 68,745
Accounts receivable, net of allowance for doubtful accounts of $7,500 25,280
Other current assets 59,252
----------------
Total current assets 153,277
Equipment, net of accumulated depreciation of $106,301 60,856
Other assets 22,551
----------------
Total $ 236,684
================
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable and accrued expenses $ 888,884
Deferred revenues 29,929
Loan payable, net of unamortized debt discount of $45,098 1,954,902
----------------
Total liabilities 2,873,715
----------------
Mandatorily redeemable Class B common stock; par value $.00001 per share:
400,000 shares designated as Series 2; 372,848 shares issued and
outstanding 4
40,000 shares designated as Series 3; 21,500 shares issued and
outstanding -
----------------
4
----------------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock; par value $.00001 per share;
50,000,000 shares authorized, none issued
Common stock; par value $.00001 per share;
250,000,000 shares authorized; 41,241,551 shares
issue and outstanding 413
Additional paid-in capital 43,798,222
Unearned compensation (69,996)
Accumulated deficit (46,365,674)
----------------
Total stockholders' deficiency (2,637,035)
----------------
Total $ 236,684
================
See Notes to Condensed Consolidated Financial Statements.
F-1
Jag Media Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Six and Three Months Ended January 31, 2006 and 2005
(Unaudited)
Six Months Three Months
Ended January 31, Ended January 31,
------------------------------- -------------------------------
2006 2005 2006 2005
------------------------------- -------------------------------
Revenues $ 85,098 $ 117,688 $ 45,075 $ 45,461
------------------------------- -------------------------------
Operating expenses:
Cost of revenues 44,070 79,873 18,197 41,430
Selling expenses 24,220 16,247 14,351 14,096
General and administrative expenses 1,202,799 851,589 676,632 602,164
------------------------------- -------------------------------
Totals 1,271,089 947,709 709,180 657,690
------------------------------- -------------------------------
Loss from operations (1,185,991) (830,021) (664,105) (612,229)
Other income (expense):
Writeoff of goodwill - (50,392) - (50,392)
Interest income 2,716 981 1,014 290
Interest expense (148,739) - (74,370)
------------------------------- -------------------------------
Net loss $(1,332,014) $(879,432) $(737,461) $(662,331)
=============================== ===============================
Basic net loss per share $ (0.03) $ (0.02) $ (0.02) $ (0.01)
=============================== ===============================
Basic weighted average common shares outstanding 44,018,553 44,319,470 43,289,308 44,403,641
=============================== ===============================
See Notes to Condensed Consolidated Financial Statements.
F-2
Jag Media Holdings, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders' Deficiency
Six Months Ended January 31, 2006
(Unaudited)
Common Stock
--------------------------- Additional
Number of Paid-in Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
------ ------ ------- ------------ ------- -----
Balance, August 1, 2005 44,747,799 $ 448 $ 43,742,187 $ (40,447) $(45,033,660) $ (1,331,472)
Effect of issuance of
options in exchange for
services 56,000 (56,000) --
Effect of return and
retirement of shares (3,506,248) (35) 35 --
Amortization of
unearned compensation 26,451 26,451
Net loss (1,332,014) (1,332,014)
------------ ------------ ------------ ------------ ------------ ------------
Balance, January 31, 2006 41,241,551 $ 413 $ 43,798,222 $ (69,996) $(46,365,674) $ (2,637,035)
============ ============ ============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
F-3
Jag Media Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six Months Ended January 31, 2006 and 2005
(Unaudited)
2006 2005
---------------- ---------------
Operating activities:
Net loss $(1,332,014) $(879,432)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 11,160 8,329
Amortization of unearned compensation 26,451 26,877
Amortization of debt discount 27,753 -
Amortization of other assets 13,875
Writeoff of goodwill - 50,392
Effects of issuance of common stock in exchange for services - 2,500
Changes in operating assets and liabilities:
Accounts receivable (10,770) (9,340)
Other current assets 8,018 24,305
Accounts payable and accrued expenses 675,364 466,510
Deferred revenues 698 3,025
---------------- ---------------
Net cash used in operating activities (579,465) (306,834)
---------------- ---------------
Investing activities:
Equipment purchases (12,655) (3,016)
Cash paid for business acquisition - (19,212)
---------------- ---------------
Net cash used in investing activities (12,655) (22,228)
---------------- ---------------
Net decrease in cash and cash equivalents (592,120) (329,062)
Cash and cash equivalents, beginning of period 660,865 386,283
---------------- ---------------
Cash and cash equivalents, end of period $ 68,745 $ 57,221
================ ===============
See Notes to Condensed Consolidated Financial Statements.
F-4
JAG Media Holdings, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of presentation:
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial position of JAG Media
Holdings, Inc. ("JAG Media") and its subsidiaries as of January 31, 2006, their
results of operations for the six and three months ended January 31, 2006 and
2005, and cash flows for the six months ended January 31, 2006 and 2005 and
their changes in stockholders' deficiency for the six months ended January 31,
2006. JAG Media and its subsidiaries are referred to together herein as the
"Company." Pursuant to rules and regulations of the Securities and Exchange
Commission (the "SEC"), certain information and disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted from
these consolidated financial statements unless significant changes have taken
place since the end of the most recent fiscal year. Accordingly, these condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements, notes to consolidated financial statements
and the other information in the audited consolidated financial statements of
the Company as of July 31, 2005 and for the years ended July 31, 2005 and 2004
(the "Audited Financial Statements") included in the Company's Annual Report on
Form 10-KSB (the "10-KSB") for the year ended July 31, 2005 that was previously
filed with the SEC.
The results of the Company's operations for the six months ended January 31,
2006 are not necessarily indicative of the results of operations to be expected
for the full year ending July 31, 2006.
As further explained in Note 1 to the Audited Financial Statements, the Company
gathers and compiles financial and investment information from contacts at
financial institutions, experienced journalists, money managers, analysts and
other Wall Street professionals and generates revenues by releasing such
information to subscribers on a timely basis through facsimile transmissions and
a web site. As a result of an acquisition on November 24, 2004 (see Note 9 to
the Audited Financial Statements), the Company is also in the business of
developing software focused on streaming video solutions.
The accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. However, as shown in
the accompanying condensed consolidated financial statements, the Company only
generated revenues of approximately $85,000 and it incurred net losses of
approximately $1,332,000 and cash flow deficiencies from operating activities of
approximately $579,000 for the six months ended January 31, 2006. In addition,
as of January 31, 2006, the Company only had cash and cash equivalents available
of approximately $69,000 and a working capital deficiency of approximately
$2,720,000. These matters raise substantial doubt about the Company's ability to
continue as a going concern.
Management believes that, in the absence of a substantial increase in
subscription revenues, it is probable that the Company will continue to incur
losses and negative cash flows from operating activities through at least
January 31, 2007 and that the Company will need to obtain additional equity or
debt financing to sustain its operations until it can market its services,
expand its customer base and achieve profitability.
As further explained in Note 4 herein, the Company entered into an agreement
with an investment partnership pursuant to which it has, in effect, "put"
options whereby, subject to certain conditions, it is able to require the
investment partnership to purchase shares of its common stock from time to time
at
F-5
JAG Media Holdings, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of presentation (continued):
prices based on the market value of its shares. The maximum aggregate purchase
price under this equity line is $10,000,000. This equity line was renewed in
July 2004 and expires in August 2006. As of January 31, 2006 and March 15, 2006,
the Company had received gross proceeds of $4,035,000 from the exercise of "put"
options. Although the timing and amount of the required purchases under the
agreement are at the Company's discretion, the purchases are subject to certain
conditions as also explained in Note 4 herein and the ability of the investment
partnership to fund the purchases. Also as explained in Note 4 herein, on
January 25, 2005, the Company entered into a Promissory Note agreement with the
investment partnership pursuant to which the Company agreed to borrow $2,000,000
from the investment partnership. The $2,000,000 loan was funded on February 2,
2005. Pursuant to the Promissory Note, the Company deposited 35 put notices
under the above agreement for puts in the amount of $60,000 each and one in the
amount of $181,017 into escrow. All such put notices have been returned to the
Company and the Company is negotiating with Cornell Capital to restructure the
Promissory Note.
Management believes that the Company will be able to generate sufficient
revenues from its remaining facsimile transmission and web site operations and
obtain sufficient financing from its agreement with the investment partnership
prior to its expiration in August 2006 or through other financing agreements to
enable it to continue as a going concern through at least January 31, 2007.
However, if the Company cannot generate sufficient revenues and/or obtain
sufficient additional financing, if necessary, by that date, the Company may be
forced thereafter to restructure its operations, file for bankruptcy or entirely
cease its operations.
The accompanying condensed consolidated financial statements do not include any
adjustments related to the recoverability and classification of assets or the
amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Note 2 - Net earnings (loss) per share:
The Company presents "basic" earnings (loss) per share and, if applicable,
"diluted" earnings per share pursuant to the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share". Basic earnings
(loss) per share is calculated by dividing net income or loss by the weighted
average number of common shares during each period. The calculation of diluted
earnings per share is similar to that of basic earnings per share, except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if all potentially dilutive common shares, such
as those issuable upon the exercise of outstanding stock options and warrants,
were issued during the period and the treasury stock method had been applied to
the proceeds from their exercise.
As of January 31, 2006, there were options outstanding for the purchase of a
total of 1,460,000 shares of common stock (see Note 4 herein). However, diluted
per share amounts have not been presented in the accompanying condensed
consolidated statements of operations because the Company had a net loss in the
six and three months ended January 31, 2006 and 2005 and the assumed effects of
the exercise of the Company's stock options and warrants that were outstanding
during all or part of those periods would have been anti-dilutive.
F-6
JAG Media Holdings, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements
(Unaudited)
Note 3 - Income taxes:
As of January 31, 2006, the Company had Federal net operating loss carryforwards
of approximately $30,142,000 available to reduce future Federal taxable income
which will expire from 2019 through 2026.
As of January 31, 2006, the Company's deferred tax assets consisted of the
effects of temporary differences attributable to the following:
Deferred revenues, net $ 10,000
Unearned compensation 57,000
Net operating loss carryforwards 11,629,000
----------
11,696,000
Less valuation allowance (11,696,000)
------------
Total $ -
=============
Due to the uncertainties related to, among other things, the extent and timing
of its future taxable income, the Company offset its net deferred tax assets by
an equivalent valuation allowance as of January 31, 2006.
The Company had also offset the potential benefits from its net deferred tax
assets by an equivalent valuation allowance during the year ended July 31, 2005.
As a result of the decrease in the valuation allowance of $147,000 attributable
to the expiration and cancellation of options and warrants that had not been
exercised during the six months ended January 31, 2006 and the increase in the
valuation allowance of $223,000 during the three months ended January 31, 2006,
and the increases in the valuation allowance of $307,000 and $239,000 during the
six and three months ended January 31, 2005, respectively, there are no credits
for income taxes reflected in the accompanying condensed consolidated statements
of operations to offset pre-tax losses.
Note 4 - Issuances of common stock and stock options:
Equity and debt financing agreements with Cornell Capital Partners, L.P.:
As further explained in Note 4 to the Audited Financial Statements, on April 9,
2002, the Company entered into an equity line purchase agreement (the " Equity
Line Agreement") with Cornell Capital Partners L.P. ("Cornell Capital") pursuant
to which the Company has, in effect, put options whereby, subject to certain
conditions, it can require Cornell Capital to purchase shares of its common
stock from time to time at an aggregate purchase price of $10,000,000. The
Equity Line Agreement became available on August 28, 2002 and was extended in
July 2004 for an additional 24 months through August 2006 unless it is
terminated earlier at the discretion of the Company. The purchase price will be
95% of the lowest closing bid price of the Company's common stock over a
specified number of trading days commencing on specified dates. Cornell Capital
shall be entitled to a cash fee equal to 5% of the gross proceeds received by
the Company from Cornell Capital in connection with each put. As of January 31,
2006, $4,035,000 of the Company's Equity Line with Cornell Capital had been
utilized.
F-7
JAG Media Holdings, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Issuances of common stock and stock options (continued):
The timing and amount of the required purchases shall be at the Company's
discretion subject to certain conditions including (i) a maximum purchase price
to be paid by Cornell Capital for each put of $500,000; (ii) at least five
trading days must elapse before the Company can deliver a new put notice to
Cornell Capital; (iii) the registration statement covering the shares issuable
to Cornell Capital pursuant to the equity line must remain effective at all
times and (iv) on any given closing date, there shall be at least one bid for
the common stock on the Nasdaq OTC Bulletin Board. In addition, the obligation
of Cornell Capital to complete its purchases under the Equity Line Agreement is
not secured or guaranteed and, accordingly, if Cornell Capital does not have
available funds at the time it is required to make a purchase, the Company may
not be able to force it to do so.
During the six months ended January 31, 2006, no put options were exercised. As
of January 31, 2006, the Company had the ability to require Cornell Capital to
purchase shares of its common stock pursuant to the Equity Line Agreement at an
aggregate purchase price of $5,965,000 through August 28, 2006. The $5,965,000
of availability will be reduced to the extent the Promissory Note and interest
thereunder is repaid out of the net proceeds received by the Company upon
delivery of put notices under the Equity Line Agreement.
On January 25, 2005, the Company entered into a Promissory Note Agreement with
Cornell Capital for a loan of $2,000,000. The $2,000,000 loan from Cornell
Capital was funded on February 2, 2005 net of a debt discount of $100,000
attributable to a fee paid to Cornell Capital deducted at the time of funding
which is being amortized over the life of the loan. The unamortized debt
discount as of January 31, 2006 is $45,098. The face amount of the Promissory
Note and interest on the amount from time to time outstanding at a rate of 12%
per year will be payable either (i) out of the net proceeds to be received by
the Company upon delivery of put notices under the Equity Line Agreement or (ii)
in full by the Company within 663 calendar days of January 25, 2005 regardless
of the availability of proceeds under the Equity Line Agreement, unless an
extension is mutually agreed to by the parties in writing.
Pursuant to the Promissory Note, the Company agreed to deposit in escrow 35 put
notices under the Equity Line Agreement for puts in an amount of $60,000 each
and one request for a put under the Equity Line Agreement in an amount of
$181,017. Under the terms of the Promissory Note as amended on August 5, 2005,
the put notices were to have been held in escrow and released every 14 days
commencing November 4, 2005. The Company has also agreed to reserve out of its
authorized but unissued shares of common stock 3,500,000 shares of the Company's
common stock (the "Reserved Shares") to be delivered to Cornell Capital under
the Equity Line Agreement upon use of such put notices.
The Company has the option to repay the amounts due under the Promissory Note
provided that each repayment is an amount not less than $25,000. If the
Promissory Note is not paid in full when due, the
F-8
JAG Media Holdings, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Issuances of common stock and stock options (continued):
outstanding principal owed thereunder will be due and payable in full together
with interest at a rate of 14% per year or the highest interest rate permitted
by applicable law, if lower. Upon an event of default (as defined in the
Promissory Note), the entire principal balance and accrued interest of the
Promissory Note, and all other obligations of the Company under the Promissory
Note, would become immediately due and payable without any action on the part of
Cornell Capital.
All such put notices have been returned to the Company and the Company is
negotiating with Cornell Capital to restructure the Promissory Note.
Options issued for services:
As explained in Note 5 to the Audited Financial Statements, the Company has
issued, from time to time, stock options for the purchase of common stock to
employees as compensation and to nonemployees, including investment analysts and
commentators that have entered into agreements to provide the Company with
financial information that is released to subscribers, as consideration for
consulting, professional and other services. As explained in Note 2 to the
Audited Financial Statements, the Company recognizes the cost of such issuances
based on the fair value of the equity instruments issued over the periods in
which the related services are rendered in accordance with the provisions of
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123").
As of August 1, 2005, the Company had 2,510,000 shares of common stock that were
subject to outstanding options and warrants issued to employees and nonemployees
as compensation for services. During the six months ended January 31, 2006, the
Company granted to employees options to purchase 250,000 shares of common stock
and granted to consultants options to purchase 200,000 shares of common stock.
These options had exercise prices ranging from $.02 to $1.00 per share and will
expire at various dates from August 2011 through September 2015. During the six
months ended January 31, 2006, options to purchase 1,500,000 shares were
canceled and no options were exercised. As a result, options to purchase
1,460,000 shares of common stock at prices ranging from $.02 to $1.00 per share
were outstanding as of January 31, 2006.
The cost of the options of $56,000, determined based on their aggregate
estimated fair values at the respective dates of issuance using the
Black-Scholes option pricing model, assuming a risk free interest rate of 6.5%
annually, no dividend payments, annual volatility ranging from 2.71 to 2.79, an
exercise price of $0.02 and stock prices when issued of $0.12 to $0.13, was
initially charged directly to expense or to unearned compensation and
subsequently amortized to expense.
During the Company's fiscal quarter ended January 31, 2006, the Company received
the following from a stockholder: (i) instructions for the cancellation of an
outstanding option to acquire 1,000,000 shares of the Company's common stock;
(ii) stock certificates and a stock power transferring back to the Company
3,506,248 shares of common stock; and (iii) a stock power to transfer back to
the Company 7,981 shares of Series B common stock, all of which shares were
cancelled by the Company resulting in an increase in additional paid-in capital
and a decrease in the par value of common stock of $35. The Company paid no
consideration for the return of such shares or cancellation of the option.
F-9
JAG Media Holdings, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements
(Unaudited)
Note 5 - Legal proceedings:
The Company is a party to various claims and lawsuits incidental to its
business. In the opinion of management, it is probable that the resolution of
such contingencies will not materially affect the consolidated financial
position or results of operations of the Company in subsequent years.
Bay Point Investment Partners, LLC has threatened to commence litigation against
the Company, certain of its officers and directors and others. The Bay Point
claim relates to its purchase of shares of the Company's stock in private
placements on December 10, 2002 and June 19, 2003. Bay Point alleges, among
other things, various disclosure failings as well as the Company's failure to
register the shares it purchased in the June 19, 2003 private placement by the
date provided in the placement agreement and to use the proceeds as Bay Point
claims they were intended to be used. The outcome of the matter is not
determinable at this time.
Note 6 - Employment agreements:
On November 3, 2005, the Company renewed and extended the amended and restated
employment agreements between the Company and its two senior executives, each
dated August 31, 2001, retroactively effective to August 31, 2004. Under the
revision, the Company became obligated to make cash payments of $150,000 to each
of the two senior executives annually during the three year period ending August
31, 2007. As a result, the Company's obligations for cash payments under the two
employment agreements during periods subsequent to January 31, 2006 totaled
approximately $150,000, $300,000 and $25,000 in the years ending July 31, 2006,
2007 and 2008, respectively. The exercise price of various options which may be
granted under the terms of the original amended and restated employment
agreements was increased from 25% of a defined market value to 100% of a defined
fair market value.
Note 7 - Proposed acquisition:
On December 27, 2005, the Company entered into an agreement and plan of merger
(the "Merger Agreement") with, among others, Cryptometrics, Inc., a Delaware
corporation ("Cryptometrics"), pursuant to which Cryptometrics would merge with
a newly created subsidiary of the Company. In consideration of the merger, the
stockholders of Cryptometrics would acquire shares of common stock of the
Company, which shares would, upon issuance, represent approximately 88% of the
outstanding Company common stock, in exchange for all of the issued and
outstanding capital stock of Cryptometrics. The shares of common stock to be
received by the stockholders of Cryptometrics are to be registered under the
U.S. Securities Act of 1933, as amended, which the Company has done. If
consummated, the proposed transaction would be accounted for as a reverse
acquisition in which Cryptometrics would be the acquirer for accounting
purposes.
At the closing of the proposed transaction, the Company's current directors
would resign as directors of the Company and would also resign as officers and
executives of the Company. The Company's board of directors would be replaced
with designees of Cryptometrics, at least a majority of whom would be
independent and who, in whole or in part, would also constitute the audit
committee of the Company's board of directors.
F-10
JAG Media Holdings, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements
(Unaudited)
Note 7 - Proposed acquisition (continued):
Until the Company and Cryptometrics agree otherwise, the Merger Agreement,
notwithstanding approval by the Cryptometrics' stockholders may be cancelled
with or without any reason at any time by either of them with no liability.
In addition, the proposed transaction is subject to various conditions being
satisfied prior to closing, including, among others, (i) the approval of the
stockholders of the Company of various amendments to its Articles of
Incorporation, (ii) the listing of the Company's Common Stock on the Nasdaq
Capital Market, (iii) the parties agreeing on disclosure schedules and
completing a due diligence review satisfactory to them in all respects and (iv)
the Company and Cryptometrics obtaining all appropriate and necessary corporate
and stockholder approvals for the transaction.
There is no assurance that the Company or Cryptometrics will not cancel the
Merger Agreement, that the conditions of the proposed transaction will be
fulfilled and that the proposed transaction between the Company and
Cryptometrics will be consummated.
F-11
Item 2. Management's Discussion and Analysis.
Critical Accounting Policies and Estimates
Our 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 principles generally accepted in the United States
of America. The preparation of these consolidated 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 accounts receivable, equipment, stock-based compensation,
income taxes and contingencies. 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.
The accounting policies and estimates used as of July 31, 2005, as outlined in
our previously filed Form 10-KSB, have been applied consistently for the six
months ended January 31, 2006.
Six months ended January 31, 2006 as compared to six months ended January 31,
2005.
Six Months
Ended January 31,
-------------------------------
2006 2005 $ Change
-------------- --------------- --------------
Revenues $ 85,098 $ 117,688 $ (32,590)
-------------- --------------- --------------
Operating expenses:
Cost of revenues 44,070 79,873 (35,803)
Selling expenses 24,220 16,247 7,973
General and administrative expenses 1,202,799 851,589 351,210
-------------- --------------- --------------
Totals 1,271,089 947,709 323,380
-------------- --------------- --------------
Loss from operations (1,185,991) (830,021) (355,970)
Other income (expense) :
Write-off of goodwill - (50,392) 50,392
Interest income 2,716 981 1,735
Interest expense (148,739) - (148,739)
-------------- --------------- --------------
Net loss $ (1,332,014) $ (879,432) $ (452,582)
============== =============== ==============
12
Revenues:
Revenues primarily consist of subscription revenues from annual, semi-annual,
quarterly and monthly subscriptions relating to our product "JAGNotes." JAGNotes
is a daily consolidated investment report that summarizes newly issued research,
analyst opinions, upgrades, downgrades, and analyst coverage changes from
various investment banks and brokerage houses. The decrease in subscription
revenues during the six months ended January 31, 2006 as compared to the six
months ended January 31, 2005 was due primarily to the lack of advertising and
increased competition. While our revenues do include revenues from other
sources, these other revenues are not material to our business.
Cost of revenues:
Cost of revenues includes the cost to transmit the product over the telephone
and fax lines, on-line service charges for our web site, costs in connection
with the development and maintenance of the web site, and payments to
commentators and employees for their reports that are posted on our web site.
During the six months ended January 31, 2006, consulting fees were approximately
$32,000 as compared to approximately $63,000 for the six months ended January
31, 2005. Such fees included non-cash charges associated with the amortization
of unearned compensation arising from the issuance of shares of approximately
$5,400 and $24,000 for the six months ended January 31, 2006 and 2005,
respectively. The decrease in consulting fees is a result of the expiration of
consulting contracts associated with commentators for our JagNotes website.
Selling and general and administrative expenses:
Selling and general and administrative expenses consist primarily of advertising
and other promotional expenses, compensation and benefits for the officers,
other compensation, occupancy costs, professional fees and other office
expenses. The increase in general and administrative expenses is attributable to
legal and accounting costs associated with a proposed acquisition.
Interest expense:
The increase results from borrowings under our Promissory Note payable to
Cornell Capital.
13
Three Months
Ended January 31,
-------------------------------
2006 2005 $ Change
-------------- --------------- --------------
Revenues $ 45,075 $ 45,461 $ (386)
-------------- --------------- --------------
Operating expenses:
Cost of revenues 18,197 41,430 (23,233)
Selling expenses 14,351 14,096 255
General and administrative expenses 676,632 602,164 74,468
-------------- --------------- --------------
Totals 709,180 657,690 51,490
-------------- --------------- --------------
Loss from operations (664,105) (612,229) (51,876)
Other income (expense) :
Writeoff of goodwill - (50,392) 50,392
Interest income 1,014 290 724
Interest expense (74,370) - (74,370)
-------------- --------------- --------------
Net loss ($737,461) ($662,331) ($75,130)
============== =============== ==============
Revenues:
Revenues were unchanged for the three months ended January 31, 2006 compared to
the three months ended January 31, 2005.
Cost of revenues:
During the three months ended January 31, 2006, consulting fees were
approximately $14,300 as compared to approximately $32,000 for the three months
ended January 31, 2005. Such fees included non-cash charges associated with the
amortization of unearned compensation arising from the issuance of options and
warrants of approximately $3,250 and $10,000 for the three months ended January
31, 2006 and 2005, respectively. The decrease in consulting fees is a result of
the expiration of consulting contracts associated with commentators for our
JagNotes website.
Selling and general and administrative expenses:
Selling and general and administrative expenses consist primarily of advertising
and other promotional expenses, compensation and benefits for the officers,
other compensation, occupancy costs, professional fees and other office
expenses. The increase in general and administrative expenses is attributable to
legal and accounting costs associated with the proposed acquisition.
Interest expense:
The increase results from borrowings under our Promissory Note payable to
Cornell Capital.
14
Liquidity and Capital Resources:
We only generated revenues of approximately $85,000 and we incurred net losses
of approximately $1,332,000 and cash flow deficiencies from operating activities
of approximately $579,000 for the six months ended January 31, 2006. In
addition at January 31, 2006, we had cash and cash equivalents of approximately
$69,000 and a working capital deficiency of approximately $2,720,000. These
matters raise substantial doubt about our ability to continue as a going
concern.
We believe that, in the absence of a substantial increase in subscription
revenues, it is probable that the we will continue to incur losses and negative
cash flows from operating activities through at least January 31, 2007 and that
we will need to obtain additional equity or debt financing to sustain our
operations until we can market our services, expand our customer base and
achieve profitability.
As further explained below, we entered into an agreement with an investment
partnership pursuant to which it has, in effect, "put" options whereby, subject
to certain conditions, we are able to require the investment partnership to
purchase shares of our common stock from time to time at prices based on the
market value of its shares. The maximum aggregate purchase price under this
equity line is $10,000,000. The equity line was renewed in July 2004 and expires
in August 2006. As of January 31, 2006 and March 15, 2006, we had received gross
proceeds of $4,035,000, from the exercise of "put" options. Although the timing
and amount of the required purchases under the agreement are at our discretion,
the purchases are subject to certain conditions and the ability of the
investment partnership to fund the purchases.
We believe that we will be able to generate sufficient revenues from our
remaining facsimile transmission and web site operations and obtain sufficient
financing from our agreement with the investment partnership or through other
financing agreements to enable us to continue as a going concern through at
least January 31, 2007. However, if we cannot generate sufficient revenues
and/or obtain sufficient additional financing, if necessary, by that date, we
may be forced thereafter to restructure our operations, file for bankruptcy or
entirely cease our operations.
Our cash and cash equivalent position of approximately $69,000 as of January 31,
2006 results from the advance we received under our Promissory Note dated
January 25, 2005 with Cornell Capital Partners, L.P. ("Cornell Capital").
On April 9, 2002, we entered into an equity line purchase agreement (the "Equity
Line Agreement") with Cornell Capital pursuant to which we have, in effect, put
options whereby, subject to certain conditions, we can require Cornell Capital
to purchase shares of our common stock from time to time at an aggregate
purchase price of $10,000,000. The Equity Line Agreement became available to us
on August 28, 2002, and was extended in July 2004 for an additional 24 months
through August 2006 unless it is terminated earlier by us in our sole
discretion. The purchase price will be 95% of the lowest closing bid price of
our common stock over a specified number of trading days commencing on specified
dates. Cornell Capital shall be entitled to a cash fee equal to 5% of the gross
proceeds received by the Company from Cornell Capital in connection with each
put. As of January 31, 2006, $4,035,000 of the existing Equity Line with Cornell
Capital had been utilized.
The timing and amount of the required purchases shall be at our discretion
subject to certain conditions including (i) a maximum purchase price to be paid
by Cornell Capital for each put of $500,000; (ii) at least five trading days
must elapse before we can deliver a new put notice to Cornell Capital; (iii) the
registration statement covering the shares issuable to Cornell Capital pursuant
to the equity line must remain effective at all times and (iv) on any given
closing date, there shall be at least one bid for the common stock on the Nasdaq
OTC Bulletin Board. In addition, the obligation of Cornell Capital to complete
its purchases under the Equity Line Agreement is not secured or guaranteed and,
accordingly, if Cornell Capital does not have available funds at the time it is
required to make a purchase, we may not be able to force it to do so. We have
issued 10,000 shares of our common stock to a placement agent as of the
effective date as consideration for their services in connection with the Equity
Line Agreement.
15
During the six months ended January 31, 2006, no put options were exercised. As
of January 31, 2006, we had the ability to require Cornell Capital to purchase
shares of our common stock pursuant to the Equity Line Agreement at an aggregate
purchase price of $5,965,000 through August 28, 2006. The $5,965,000 of
availability will be reduced to the extent the Promissory Note and interest
thereunder is repaid out of the net proceeds received by the Company upon
delivery of put notices under the Equity Line Agreement.
On January 25, 2005, we entered into a Promissory Note with Cornell Capital. The
Promissory Note was funded on February 2, 2005. The face amount of the
Promissory Note and interest on the amount from time to time outstanding at a
rate of 12% per year will be payable either (i) out of the net proceeds to be
received by us upon delivery of put notices under the Equity Line Agreement or
(ii) in full by us within 663 calendar days of January 25, 2005 regardless of
the availability of proceeds under the Equity Line Agreement, unless an
extension is mutually agreed to by the parties in writing.
Pursuant to the Promissory Note, we agreed to deposit in escrow 35 put notices
under the Equity Line for puts in an amount of $60,000 each and one request for
a put under the Equity Line in an amount of $181,017. Under the terms of the
Promissory Note as amended on August 5, 2005, the put notices were to have been
held in escrow and released every fourteen (14) days commencing November 4,
2005. We have also agreed to reserve out of our authorized but unissued shares
of common stock 3,500,000 shares of the Company's common stock (the "Reserved
Shares") to be delivered to Cornell under the Equity Line Agreement upon use of
such put notices.
We have the option to repay the amounts due under the Promissory Note provided
that each repayment is in an amount not less than $25,000. If the Promissory
Note is not paid in full when due, the outstanding principal owed thereunder
will be due and payable in full together with interest at a rate of 14% per year
or the highest permitted by applicable law, if lower. Upon an event of default
(as defined in the Promissory Note), the entire principal balance and accrued
interest of the Promissory Note, and all of our other obligations under the
Promissory Note, would become immediately due and payable without any action on
the part of Cornell.
Cornell Capital has returned to us all the put notices we delivered to it under
the terms of the Promissory Note and we are negotiating with Cornell Capital to
restructure the Promissory Note.
During the six months ended January 31, 2006, we used cash of approximately
$579,000 in our operations primarily to fund our net loss.
On November 24, 2004, we entered into a Business Sale Agreement (the "Sale
Agreement") with TComm Limited, a company organized in the United Kingdom
("Seller") and Pixaya (UK) Limited (formerly known as TComm (UK) Limited), a
company organized in the United Kingdom and a wholly-owned subsidiary of the
Company. We entered into the transaction to access the seller's development
stage software, which we believed offered a new platform for delivery of our
services as well as being valuable in its own right. Effective October 3, 2005,
TComm (UK) Limited formally changed its name to Pixaya (UK) Limited. We continue
to fund the development of Pixaya's software.
16
Proposed Acquisition:
On December 27, 2005, we entered into an agreement and plan of merger (the
"Merger Agreement") with, among others, Cryptometrics, Inc., a Delaware
corporation ("Cryptometrics"), pursuant to which Cryptometrics would merge with
a newly created subsidiary of the Company. In consideration of the merger, the
stockholders of Cryptometrics would acquire shares of common stock of the
Company, which shares would, upon issuance, represent approximately 88% of the
outstanding Company common stock, in exchange for all of the issued and
outstanding capital stock of Cryptometrics. The shares of common stock to be
received by the stockholders of Cryptometrics are to be registered under the
U.S. Securities Act of 1933, as amended, which we have done. If consummated, the
proposed transaction would be accounted for as a reverse acquisition in which
Cryptometrics would be the acquirer for accounting purposes.
At the closing of the proposed transaction, our current directors would resign
as directors of the Company and would also resign as officers and executives of
the Company. Our board of directors would be replaced with designees of
Cryptometrics, at least a majority of whom would be independent and who, in
whole or in part, would also constitute the audit committee of the Company's
board of directors.
Until the Company and Cryptometrics agree otherwise, the Merger Agreement,
notwithstanding approval by the Cryptometrics stockholders, may be cancelled
with or without any reason at any time by either of them with no liability.
In addition, the proposed transaction is subject to various conditions being
satisfied prior to closing, including, among others, (i) the approval of the
shareholders of the Company of various amendments to its Articles of
Incorporation, (ii) the listing of the Company's Common Stock on the Nasdaq
Capital Market, (iii) the parties agreeing on disclosure schedules and
completing a due diligence review satisfactory to them in all respects and (iv)
the Company and Cryptometrics obtaining all appropriate and necessary corporate
and stockholder approvals for the transaction.
There is no assurance that the Company or Cryptometrics will not cancel the
Merger Agreement, that the conditions of the proposed transaction will be
fulfilled and that the proposed transaction between the Company and
Cryptometrics will be consummated.
On November 3, 2005, we renewed and extended the amended and restated employment
agreements between the Company and its two senior executives, each dated August
31, 2001, retroactively effective to August 31, 2004. Under the revision, we
became obligated to make cash payments of $150,000 to each of the two senior
executives annually during the three year period ending August 31, 2007. As a
result, the Company's obligations for cash payments under the two employment
agreements during periods subsequent to January 31, 2006 totaled approximately
$150,000, $300,000, and $25,000 in the years ending July 31, 2006, 2007 and 2008
respectively. The exercise price of various options which may be granted under
the terms of the original amended and restated employment agreements was
increased from 25% of a defined market value to 100% of a defined fair market
value.
Item 3. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures:
As of the end of the fiscal quarter ended January 31, 2006, our Chief Executive
Officer and Chief Financial Officer carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures that we have in place with respect to the accumulation and
communication of information to management and the recording, processing and
summarizing thereof. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
are effective in alerting them in a timely manner to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in our periodic SEC filings.
17
(b) Change in Internal Control over Financial Reporting:
There have been no changes in internal control over financial reporting that
occurred during the most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Bay Point Investment Partners, LLC has threatened to commence litigation against
the Company, certain of its officers and directors and others. The Bay Point
claim relates to its purchase of shares of the Company's stock in private
placements on December 10, 2002 and June 19, 2003. Bay Point alleges, among
other things, various disclosure failings as well as the Company's failure to
register the shares it purchased in the June 19, 2003 private placement by the
date provided in the placement agreement and to use the proceeds as Bay Point
claims they were intended to be used. Bay Point has made various requests but
has most recently sought a payment while continuing to hold all of its shares in
the Company. The outcome of the matter is not determinable at this time.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the fiscal quarter ended January 31, 2006, no put options were exercised
under our Equity Line Purchase Agreement, dated as of April 9, 2002. As of
January 31, 2006, we had the ability to require Cornell Capital to purchase
shares of our common stock pursuant to the Equity Line at an aggregate purchase
price of $5,965,000 through August 28, 2006.
During the fiscal quarter ended January 31, 2006, there were no sales of
unregistered securities by the Company.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
31.1 Section 302 Certification of Chief Executive Officer.
18
31.2 Section 302 Certification of Chief Financial Officer.
32.1 Section 906 Certification of Chief Executive Officer and Chief
Financial Officer.
19
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.
JAG MEDIA HOLDINGS, INC.
Date: March 22, 2006 By: /s/ Thomas J. Mazzarisi
------------------------------------
Name: Thomas J. Mazzarisi
Title: Chairman of the Board and Chief
Executive Officer
Date: March 22, 2006 By: /s/ Stephen J. Schoepfer
------------------------------------
Name: Stephen J. Schoepfer
Title: President, Chief Financial Officer,
Chief Operating Officer and Secretary
EXHIBIT INDEX
31.1 Section 302 Certification of Chief Executive Officer.
31.2 Section 302 Certification of Chief Financial Officer.
32.1 Section 906 Certification of Chief Executive Officer and Chief
Financial Officer.