UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0000-24477
STRATUS MEDIA GROUP, INC.
(Exact name of Registrant as specified in its charter)
Nevada #86-0776876
(State of Incorporation) (I.R.S. Employer
Identification No.)
3 East De La Guerra Street, Santa Barbara, CA 93001
(Address of principal executive offices)
(805) 884-9977
(Issuer's telephone number)
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 |X| No |_|
Indiate by check mark whether the registrant has submitted electronically and
posted on its website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period registrant was required to submit and post
such files). Yeso|_|ooNoo |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company: in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer |_| Accelerated Filer |_|
Non-Accelerated Filer (Do not check if Smaller Reporting Company |X|
smaller reporting company)|_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of August 14, 2009: 57,754,130.
- --------------------------------------------------------------------------------
STRATUS MEDIA GROUP, INC.
FORM 10-Q
JUNE 30, 2009
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Qualitative and Quantitative Disclosures About Market Risk 22
Item 4T. Controls and Procedures 23
Part II - Other Information
Item 1. Legal Proceedings 23
Item IA. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 24
Item 6. Exhibits 24
Signatures 25
Certifications 26
2
PART I -- FINANCIAL INFORMATION ITEM I -- FINANCIAL STATEMENTS
STRATUS MEDIA GROUP, INC.
BALANCE SHEETS
June 30, December 31,
2009 2008
----------------- -----------------
(Unaudited)
ASSETS
Current assets
Cash $ 200,211 $ 800
Restricted cash 112,832 162,855
Receivables 10,165 10,165
Deposits and prepaid expenses 110,393 35,861
Inventory 9,482 9,482
----------------- -----------------
Total current assets 443,083 219,163
Property and equipment, net 1,690 2,469
Intangible assets, net 4,044,650 4,067,355
Goodwill 1,073,345 1,073,345
----------------- -----------------
Total assets $ 5,562,768 $ 5,362,332
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 612,970 $ 633,605
Deferred salary 120,000 -
Accrued interest 247,979 193,421
Accrued expenses - legal judgment 65,316 65,316
Other accrued expenses and other liabilities 912,310 815,942
Loans payable to shareholders 740,954 767,488
Current portion of notes payable - related parties 465,000 465,000
Notes payable 267,017 319,517
Event acquisition liabilities 913,760 913,760
Redemption fund reserve 112,832 124,293
----------------- -----------------
Total current liabilities 4,458,138 4,298,342
----------------- -----------------
Non-current liabilities
Non-current portion of notes payable - related parties 625,000 625,000
----------------- -----------------
Total liabilities 5,083,138 4,923,342
----------------- -----------------
Commitments and contingencies
Shareholders' equity
Preferred stock, $0.01 par value: 5,000,000 shares authorized - -
0 and 0 shares issued and outstanding
Common stock, $0.001 par value: 200,000,000 shares authorized 57,723 57,132
57,276,464 and 57,130,879 shares issued and
outstanding, respectively
Additional paid-in capital 16,192,520 15,154,541
Stock subscription receivable (58,500) (100,000)
Accumulated deficit (15,712,113) (14,672,683)
----------------- -----------------
Total shareholders' equity 479,630 438,990
----------------- -----------------
Total liabilities and shareholders' equity $ 5,562,768 $ 5,362,332
================= =================
See accompanying notes to financial statements.
3
STRATUS MEDIA GROUP, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- -------------------------------------
2009 2008 2009 2008
----------------- ----------------- ----------------- ----------------
Net revenues
Event revenues $ - $ - $ - $ 33,606
Stratus revenues - 1,050 - 6,583
----------------- ----------------- ----------------- ----------------
Total revenues - 1,050 - 40,189
----------------- ----------------- ----------------- ----------------
Cost of revenues
Event cost of sales - - - 25,162
Stratus cost of sales - - - -
----------------- ----------------- ----------------- ----------------
Total cost of sales - - - 25,162
----------------- ----------------- ----------------- ----------------
Gross profit - 1,050 - 15,027
----------------- ----------------- ----------------- ----------------
Operating expenses
General and administrative 353,031 161,841 561,094 305,586
Fair value charge for stock sales
and value of warrants issued 226,136 - 337,570 -
Legal and professional services 60,953 58,040 110,654 175,000
Depreciation and amortization 11,743 14,507 23,486 29,014
----------------- ----------------- ----------------- ----------------
Total operating expenses 651,863 234,388 1,032,804 509,600
----------------- ----------------- ----------------- ----------------
Loss from operations (651,863) (233,338) (1,032,804) (494,573)
----------------- ----------------- ----------------- ----------------
Other (income)/expenses
Other (income)/expense (49,417) 6,466 (49,417) (367,587)
Interest expense 28,582 46,398 56,042 93,143
----------------- ----------------- ----------------- ----------------
Total other (income)/expenses (20,835) 52,864 6,625 (274,444)
----------------- ----------------- ----------------- ----------------
Net loss $ (631,028) $ (286,202) $ (1,039,429) $ (220,129)
================= ================= ================= ================
Basic and diluted earnings
per share $ (0.01) $ (0.01) $ (0.02) $ (0.00)
----------------- ----------------- ----------------- ----------------
Basic and diluted weighted-
average common shares 57,776,458 55,005,576 57,514,546 52,667,460
----------------- ----------------- ----------------- ----------------
See accompanying notes to financial statements.
4
STRATUS MEDIA GROUP, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
------------------------------------
2009 2008
----------------- -----------------
Cash flows from operating activities:
Net income/(loss) $ (1,039,429) $ (220,129)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 23,486 29,014
Expense for value of stock issued in excess of value received
and for Warrants issued with sales of Common Stock 337,570 -
Increase / (decrease) in:
Receivables - (10,100)
Deposits and prepaid expenses (74,532) (20,541)
Accounts payable (20,636) 2,385
Deferred salary 120,000 120,000
Accrued interest 54,557 91,768
Accrued expenses - legal judgment - (365,579)
Other accrued expenses and other liabilities 96,367 74,040
Deferred revenue - (6,584)
Redemption fund reserve (11,461) -
----------------- -----------------
Net cash used in operating activities (514,078) (305,726)
----------------- -----------------
Cash flows from investing activities: - -
Cash flows from financing activities:
Transfer from restricted cash to operating cash 50,023 -
Payments on line of credit - (68,041)
Payments on loans payable to shareholders (26,534) (15,132)
Payments on notes payable (52,500) -
Proceeds from issuance of common stock for cash 742,500 405,000
----------------- -----------------
Net cash provided by financing activities 713,489 321,827
----------------- -----------------
Net change in cash and cash equivalents 199,411 16,101
Cash and cash equivalents, beginning of period 800 196
----------------- -----------------
Cash and cash equivalents, end of period $ 200,211 $ 16,297
================= =================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ - $ -
================= =================
Cash paid during the period for income taxes $ - $ -
================= =================
See accompanying notes to financial statements.
5
STRATUS MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009
(UNAUDITED)
1. Business
Business
On March 14, 2008, pursuant to an Agreement and Plan of Merger dated as
of August 20, 2007 by and among the Company, Feris Merger Sub, Inc., Patty
Linson, on one hand, and Pro Sports & Entertainment, Inc. ("PSEI"), on the other
hand, the Company issued 49,500,000 shares of its common stock in exchange for
all of the issued and outstanding shares of PSEI, resulting in PSEI becoming a
wholly-owned subsidiary of the Company and the surviving entity for accounting
purposes ("Reverse Merger"). In July 2008, the Company's corporate name was
changed to Stratus Media Group, Inc.
PSEI, a California corporation, was organized on November 23, 1998 and
specializes in sports and entertainment events that it owns, operates, manages,
markets and sells in national markets. In addition, PSEI acquired the business
of Stratus Rewards, LLC ("Stratus") in August 2005. Stratus is a credit card
rewards program that uses the Visa card platform and offers a unique luxury
rewards redemption program, including private jet travel, premium travel
opportunities, exclusive events and luxury merchandise. The sponsoring bank that
conducted the "back end" banking requirements of the Stratus program stopped
sending PSEI statements in October 2007 and provided notice in March 2008 that
it was discontinuing the program. While several cardmembers are continuing to
use their cards with the former sponsor bank, the Company has not recorded these
new revenues since October 2007, and the Company is investigating legal redress
against this bank. The Company is actively seeking a new sponsoring bank for the
back end banking requirements of the program, but there can be no assurances
that it will be able to do so.
Management's Plan of Operations
The Company has suffered losses from operations and currently lacks
liquidity to meet its current obligations. The Company had a net loss in 2008 of
$2,093,267 and a net loss for the three and six months ended June 30, 2009 of
$631,028 and $1,039,429, respectively. As of June 30, 2009, the Company had
negative working capital of $4,015,055 and cumulative losses of $15,712,113.
Unless additional financing is obtained, the Company may not be able to continue
as a going concern. In the six months ended June 30, 2009, the Company raised
$742,500 in cash through the issuance of common stock. The Company is actively
seeking additional capital. However, due to the current economic environment and
the Company's current financial condition, we cannot assure current and future
stockholders there will be adequate capital available when needed and on
acceptable terms.
The financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the settlement of liabilities
in the normal course of business. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result if the
Company becomes unable to continue as a going concern.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The financial statements are unaudited and have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information, pursuant to the rules and regulations
of the Securities and Exchange Commission. Notes to the financial statements
which would substantially duplicate the disclosures contained in the financial
statements for the most recent fiscal year 2008 for the Company have been
omitted. The results of operations for the three and six months ended June 30,
2009 and 2008 are not necessarily indicative of the results to be expected for
the full year. These statements should be read in conjunction with the financial
statements and related notes which are part of the Company's Report on Form
10-K, as amended, that included audited results for the years ended December 31,
2008 and 2007.
Stock Split
On March 14, 2008, the Board of Directors of the Company approved a
3.582 for 1.000 forward stock split of the PSEI's common stock. The effective
date of the stock split was March 14, 2008 and was concurrent with the Reverse
Merger. All share and per share information have been adjusted to give effect to
the stock split for all periods presented, including all references throughout
the financial statements and accompanying notes.
6
Deferred Salary
Our President has an employment contract that stipulates an annual
salary of $240,000 per year. He has not received cash payments for salary since
prior to 2006 and $60,000 is accrued each quarter.
Accrued Expense - Legal Judgment
An accrual of $65,316 was established in 2007 to reserve for a judgment
against the Company.
Other (Income)/Expense
This account contains non-operating expenses that have included in the
past, but may not limited to in the future, writeoffs of accounts payable,
accounting expense adjustments related to the Stratus Visa program, and
increases/decreases in legal accruals.
Net Loss per Share
We compute net loss per share in accordance with SFAS No. 128, Earnings
Per Share. Basic per share data is computed by dividing loss available to common
stockholders by the weighted average number of shares outstanding during the
period. Diluted per share data is computed by dividing loss available to common
stockholders by the weighted average shares outstanding during the period
increased to include, if dilutive, the number of additional common share
equivalents that would have been outstanding if potential common shares had been
issued using the treasury stock method. Diluted per share data would also
include the potential common share equivalents relating to convertible
securities by application of the if-converted method.
The effect of common stock equivalents (which include outstanding
warrants and stock options) are not included for the three and six months ended
June 30, 2009, as they are antidilutive to loss per share. Losses per share for
the three and six months ended June 30, 2009 do not include the potential impact
of options to purchase 5,709,852 shares of the Company's common stock, warrants
to purchase 50,942 shares, or of warrants to purchase $36,250 of the Company's
common stock, with the number of shares issuable under this warrant to be
determined by the Company's first financing round following its reverse merger
in March 14, 2008.
Intangible Assets
Company has purchased several events that have been recorded on the
Company's balance sheet as intangible assets with a value equal to the
consideration paid for such assets, which generally includes licensing rights,
naming rights, merchandising rights and the right to hold such event in
particular geographic locations. There was no goodwill assigned to any of these
events and the value of the consideration paid for each event is considered to
be the value for each related intangible asset. Each event has separate accounts
for tracking revenues and expenses per event and a separate account to track the
asset valuation.
A portion of the consideration used to purchase the Stratus Rewards
Visa card program was allocated to specific assets, as disclosed in the
footnotes to the financial statements, with the difference between the specific
assets and the total consideration paid for the program being allocated to
goodwill. We apply the provisions of Statement of Financial Accounting Standards
(SFAS) No. 142 Goodwill and Other Intangible Assets, which requires allocating
goodwill to each reporting unit and testing for impairment.
The Company reviews the value of intangible assets and related goodwill
as part of its annual reporting process, which generally occurs in February or
March of each calendar year. In between valuations, the Company is prepared to
conduct additional tests if circumstances warrant such testing. For example, if
the Company was unable to secure the services of any sponsoring banks, the
Company would then undergo a thorough valuation of the intangible assets related
to its Stratus Rewards program.
To review the value of intangible assets and related goodwill, the
Company compares discounted cash flow forecasts with the stated value of the
assets on the balance sheet.
The events are forecasted based on historical results for those events,
adjusted over time for the assumed synergies expected from discounts from
purchases of goods and services from a number of events rather than from each
event on its own, and for synergies resulting from the expected ability to
provide sponsors with benefits from sponsoring multiple events with a single
point of contact.
These forecasts are discounted at a range of discount rates determined
by taking the risk-free interest rate at the time of valuation, plus a premium
for equity risk, plus a premium related to small companies in general, plus a
7
risk premium for factors specific to the Company and the operating segment that
range from 9.5% for events to 55% for the Stratus Rewards Visa card. The total
discount rates ranged from 27% for events, to 69% for athlete management to 79%
for the Stratus Rewards program. Terminal values are determined by taking cash
flows in year five of the forecast, then applying an annual growth of 2.0% to
2.4% for twenty years and discounting that stream of cash flows by the discount
rate used for that section of the business.
If the Company determines that the discount factor for cash flows
should be substantially increased, or the event will not be able to begin
operations when planned, it is possible that the values for the intangible
assets currently on the balance sheet could be substantially reduced or
eliminated, which could result in a maximum charge to operations of the current
carrying value of the intangible assets of $5,117,995.
Recent Accounting Pronouncements
In April 2009, the FASB issued FSP No. FAS 157-4, "Determining Fair
Values When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly." This
FSP provides guidance on (1) estimating the fair value of an asset or liability
when the volume and level of activity for the asset or liability have
significantly declined and (2) identifying transactions that are not orderly.
The FSP also amends certain disclosure provisions of SFAS No. 157 to require,
among other things, disclosures in interim periods of the inputs and valuation
techniques used to measure fair value. This pronouncement is effective
prospectively beginning April 1, 2009. The Company is currently evaluating the
impact of this standard, but does not expect it to have a material impact on
the Company's consolidated results of operations or financial condition.
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2,
"Recognition and Presentation of Other-Than-Temporary Impairments" (FSP 115-2).
This FSP modifies the requirements for recognizing other-than-temporarily
impaired debt securities and changes the existing impairment model for such
securities. The FSP also requires additional disclosures for both annual and
interim periods with respect to both debt and equity securities. Under the FSP,
impairment of debt securities will be considered other-than-temporary if an
entity (1) intends to sell the security, (2) more likely than not will be
required to sell the security before recovering its cost, or (3) does not expect
to recover the security's entire amortized cost basis (even if the entity does
not intend to sell). The FSP further indicates that, depending on which of the
above factor(s) causes the impairment to be considered other-than-temporary, (1)
the entire shortfall of the security's fair value versus its amortized cost
basis or (2) only the credit loss portion would be recognized in earnings while
the remaining shortfall (if any) would be recorded in other comprehensive
income. FSP 115-2 requires entities to initially apply the provisions of the
standard to previously other-than-temporarily impaired debt securities existing
as of the date of initial adoption by making a cumulative-effect adjustment to
the opening balance of retained earnings in the period of adoption. The
cumulative-effect adjustment potentially reclassifies the noncredit portion of a
previously other-than-temporarily impaired debt security held as of the date of
initial adoption from retained earnings to accumulated other comprehensive
income. This pronouncement is effective April 1, 2009. The Company does not
believe this standard will have a material impact on the Company's consolidated
results of operations or financial condition.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, "Interim
Disclosures about Fair Value of Financial Instruments." This FSP essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the FSP requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. These additional disclosures will be required
beginning with the quarter ending June 30, 2009. The Company is currently
evaluating the requirements of these additional disclosures, but does not
expect this standard will have a material impact on the Company's consolidated
results of operations or financial condition.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS
165") [ASC 855-10-05], which provides guidance to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. SFAS
165 also requires entities to disclose the date through which subsequent events
were evaluated as well as the rationale for why that date was selected. SFAS 165
is effective for interim and annual periods ending after June 15, 2009, and
accordingly, the Company adopted this pronouncement during the second quarter of
2009. SFAS 165 requires that public entities evaluate subsequent events through
the date that the financial statements are issued. The Company has evaluated
subsequent events in accordance with SFAS 165 through the time of filing these
financial statements with the SEC on August 14, 2009.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets -- an amendment of FASB Statement No. 140 ("SFAS 166") [ASC
860], which requires entities to provide more information regarding sales of
securitized financial assets and similar transactions, particularly if the
entity has continuing exposure to the risks related to transferred financial
assets. SFAS 166 eliminates the concept of a "qualifying special-purpose
entity," changes the requirements for derecognizing financial assets and
requires additional disclosures. SFAS 166 is effective for fiscal years
beginning after November 15, 2009. The Company has not completed its assessment
of the impact SFAS 166, but does not expect this standard will have a material
impact on the Company's consolidated results of operations or financial
condition.
8
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB
Interpretation No. 46(R) ("SFAS 167") [ASC 810-10], which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS 167
clarifies that the determination of whether a company is required to consolidate
an entity is based on, among other things, an entity's purpose and design and a
company's ability to direct the activities of the entity that most significantly
impact the entity's economic performance. SFAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. SFAS 167 also requires additional disclosures about a company's
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. SFAS 167 is effective for fiscal years
beginning after November 15, 2009. The Company has not completed its assessment
of the impact SFAS 167 will have on its financial condition, results of
operations or cash flows.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting
Standards Codification(TM) and the Hierarchy of Generally Accepted Accounting
Principles a Replacement of FASB Statement No. 162 ("SFAS 168"). This Standard
establishes the FASB Accounting Standards Codification(TM) (the "Codification")
as the source of authoritative accounting principles recognized by the FASB to
be applied by nongovernmental entities in the preparation of financial
statements in conformity with US GAAP. The Codification does not change current
US GAAP, but is intended to simplify user access to all authoritative US GAAP by
providing all the authoritative literature related to a particular topic in one
place. The Codification is effective for interim and annual periods ending after
September 15, 2009, and as of the effective date, all existing accounting
standard documents will be superseded. The Codification is effective in the
third quarter of 2009, and accordingly, the Quarterly Report on Form 10-Q for
the quarter ending September 30, 2009 and all subsequent public filings will
reference the Codification as the sole source of authoritative literature.
3. Litigation
In connection with a settlement agreement in May 2005, a judgment was
entered in the Superior Court of the County of Los Angeles against the Company
in favor of the previous owners of the "Core Tour" event of $482,126 plus
interest. The dispute arose out of the Company's asset purchase of the "Core
Tour" event from the plaintiffs. As of December 31, 2005, the Company recorded
the $482,126 judgment. On July 31, 2008, Stratus Management and Core Tour agreed
to a settlement whereby Stratus will retain all rights of the Core Tour events
in exchange for payment of $482,126 in cash by December 31, 2008 and 74,000
shares of Common Stock as payment of interest. On December 31, 2008, the Company
issued 102,840 shares of our common stock to the owners of the Core Tour as
payment for accrued interest on the judgment as of that date. These shares were
valued at the $163,516 based on the closing stock price of our common stock as
of that date, and accrued interest on the books of $172,993 was reversed, with
the difference going to other income. The Company is in negotiations regarding
payment of the $482,126.
In March 2008, a court case was overturned and dismissed for which a
$365,579 reserve had been established on the balance sheet. This reserve was
reversed, with the offset going to other income.
On August 18, 2008, two judgments totaling $70,805 were entered against
Stratus related to wage claims for two former employees. This amount was taken
as an expense in the three months ended September 30, 2008.
In or around October 2008, the Company was made aware by a third party
that HollyRod Foundation ("HollyRod"), a California non-profit corporation,
filed a lawsuit in the Superior Court of California, County of Los Angeles,
seeking $100,000 of sponsorship fees related to the Stratus Reward's sponsorship
of a function held by HollyRod in Phoenix Arizona in January 2008 related to the
Super Bowl. In February 2009, Hollyrod filed a motion for summary judgment with
the court. The Company believes the case presented by HollyRod is without merit
and that HollyRod breached the agreement by failing to perform on nearly all
required actions required of HollyRod in the sponsorship agreement. The Company
notified HollyRod that the Company has not been properly served and, upon being
properly served, the Company intends to vigorously defend this action and
believes it will prevail, but there can be no assurance that it will do so. The
Company has not taken a charge in the three months ended June 30, 2009 for this
action.
4. Acquisition of Stratus Rewards
In August 2005, PSEI acquired the business of Stratus Rewards, a credit
card rewards program.
The total consideration for this acquisition was $3,000,000, with PSEI
entering into a note of $1,000,000 and issuing 666,667 common shares valued at
$2,000,000. The note is payable in eight quarterly equal payments over a 24
month period, with the first payment due upon completion of the first
post-public merger funding of a minimum amount of $3,000,000.
The results of operations of the business acquired have been included
in the Company's Statements of Operations from the date of acquisition.
Depreciation and amortization related to the acquisition were calculated based
9
on the estimated fair market values and estimated useful lives for property and
equipment and an independent valuation for certain identifiable intangible
assets was acquired.
The sponsoring bank that conducted the "back end" banking requirements
of the Stratus program stopped sending PSEI statements in October 2007 and
provided notice in March 2008 that it was discontinuing the program. While
several cardmembers are continuing to use their cards with the former sponsor
bank the Company has not recorded these new revenues since October 2007, and the
Company is investigating legal redress against this bank. The Company is
actively seeking a new sponsoring bank for the back end banking requirements of
the program, but there can be no assurances that it will be able to do so.
5. Property and Equipment
Property and equipment consisted of the following as of the dates
indicated:
June 30, 2009 December 31, 2008
--------------- --------------------
(unaudited)
Computers and peripherals $ 52,873 $ 52,873
Office machines 11,058 11,058
Furniture and fixtures 56,468 56,468
--------------- --------------------
120,399 120,399
Less: accumulated depreciation (118,709) (117,930)
--------------- --------------------
$ 1,690 $ 2,469
=============== --------------------
For the three months ended June 30, 2009 and 2008, depreciation expense
was $390 and $3,154, respectively, and for the six months ended June 30, 2009
and 2008, depreciation expense was $780 and $6,309, respectively.
6. Goodwill and intangible assets
The following sets forth the intangible assets of the Company as of the
dates indicated:
June 30, December 31,
2009 2008
---- ----
(unaudited)
Intangible Assets
Events
- - Long Beach Marathon $ 300,000 $ 300,000
- - Concours on Rodeo 600,000 600,000
- - Santa Barbara Concours d'Elegance 243,000 243,000
- - Core Tour/Action Sports Tour 1,067,069 1,067,069
- - Freedom Bowl 344,232 344,232
- - Maui Music Festival 725,805 725,805
- - Athlete Management 15,000 15,000
------------ --------------
Total - Events 3,295,106 3,295,106
------------ --------------
Stratus Rewards
- - Purchased Licensed Technology, net of accumulated
amortization of $135,556 and $92,293 210,544 227,849
- - Membership List, net of accumulated amortization of $42,300
and $28,800 65,700 71,100
- - Corporate Partner List 23,300 23,300
- - Corporate Membership 450,000 450,000
------------ --------------
Total - Stratus Rewards 760,897 772,249
------------ -------------
Total Intangible Assets $ 4,044,650 $ 4,067,355
============ ==============
The Company purchased several events that have been recorded on the
Company's balance sheet as intangible assets equal to the consideration paid for
such assets, which generally includes licensing rights, naming rights,
merchandising rights and the right to hold such event in particular geographic
locations. There was no goodwill assigned to any of these events and the value
of the consideration paid for each event is considered to be the value for each
related intangible asset. Each event has separate accounts for tracking revenues
and expenses and a separate account to track the asset valuation.
10
A portion of the consideration used to purchase the Stratus Rewards
Visa card program was allocated to specific assets, as disclosed in the
footnotes to the financial statements, with the difference between the specific
assets and the total consideration paid for the program being allocated to
goodwill. We apply the provisions of Statement of Financial Accounting Standards
(SFAS) No. 142 Goodwill and Other Intangible Assets, which requires allocating
goodwill to each reporting unit and testing for impairment.
The Company reviews the value of intangible assets and related goodwill
as part of its annual reporting process, which generally occurs in February or
March of each calendar year. In between valuations, the Company is prepared to
conduct additional tests if circumstances warrant such testing.
The purchased licensed technology and membership list are being
amortized over their estimated useful life of 10 years. For the three months
ended June 30, 2009 and 2008, amortization expense was $11,352 and $11,352,
respectively, and for the six months ended June 30, 2009 and 2008, amortization
expense was $22,704 and $22,704, respectively.
7. Other accrued expenses and other liabilities
Other accrued liabilities consisted of the following as of the dates
indicated:
June 30, December 31,
2009 2008
----------------------------
(unaudited)
Professional fees $ 133,908 $ 128,908
Travel expenses 187,403 147,509
Consultants fees 219,940 217,199
Payroll tax liabilities 274,689 270,047
Other 96,370 52,279
----------------------------
Total accrued liabilities $ 912,310 $ 815,942
============================
8. Loans payable to shareholders
The Loans Payable to Shareholders represents a loan from the Company's
President and amounted to the following as of the dates indicated:
June 30, December 31,
2009 2008
----------------- ---------------
(unaudited)
Loans payable to shareholders, due on demand, with
an interest rate of 9.5% $ 740,954 $ 767,488
================= ===============
This loan is unsecured, has no priority or subordination features, does
not bear any restrictive covenants and contains no acceleration provisions.
Interest expense on loans to shareholders for the three months ended June 30,
2009 and 2008 was $17,382 and $23,563, respectively, and for the six months
ended June 30, 2009 and 2008 was $34,889 and $47,493, respectively.
9. Notes payable to related parties
Notes Payable to Related Parties consisted of the following as of the dates indicated :
June 30, December 31,
2009 2008
-------------------- -------------------
(unaudited)
- - Note payable to shareholder (unsecured), dated
January 14, 2005, with maturity of May 14, 2005.
The principal amount and accrued interest were payable
on May 14, 2005, plus interest at 10%. This note is
currently in default. $ 70,000 $ 70,000
11
- - Note payable to shareholder (unsecured), dated
February 1, 2005, with maturity of June 1, 2005.
The principal amount and accrued interest were payable
on June 1, 2005, plus interest at 10%. This note is
currently in default. 10,000 10,000
- - Note payable to shareholder (unsecured), dated
February 5, 2005, with maturity of June 5, 2005.
The principal amount and accrued interest were payable
on June 5, 2005, plus interest at 10%. This note is
currently in default. 10,000 10,000
- - Note payable to shareholder (unsecured) related to
purchase of Stratus. The note is payable in eight
quarterly equal payments over a 24 month period, with
the first payment due upon completion of the first
post-public merger funding, with such funding to be at
a minimum amount of $3,000,000. 1,000,000 1,000,000
-------------------- -------------------
Total 1,090,000 1,090,000
Less: current portion 465,000 465,000
-------------------- -------------------
Long-term portion $ 625,000 $ 625,000
==================== ===================
These notes are unsecured, have no priority or subordination features,
do not bear any restrictive covenants and contain no acceleration provisions.
Interest expense on loans to shareholders for the three months ended June 30,
2009 and 2008 was $2,250 and $2,250, respectively, and for the six months ended
June 30, 2009 and 2008 was $4,500 and $4,500, respectively.
10. Notes payable
Notes Payable consisted of the following as of the dates indicated:
June 30, December 31,
2009 2008
------------ --------------
(unaudited)
- - Note payable to non-shareholder (unsecured),
date January 19, 2005 with maturity date of
May 19, 2005. The principal amount and accrued
interest were payable June 1, 2005, plus interest
at 10%. This note is currently in default. $ 125,000 $ 125,000
- - Note payable to a shareholder (unsecured)
$100,000 made in August 2008 and $84,517
made after November 2008. Payable on demand
and bears interest at 10%. 132,017 184,517
- - Note payable to non-shareholder
(unsecured). Payable on demand and
does not bear interest 10,000 10,000
------------ --------------
Total $ 267,017 $ 319,517
============ ==============
These notes are unsecured, have no priority or subordination features,
do not bear any restrictive covenants and contain no acceleration provisions.
Interest expense on notes payable for the three months ended June 30, 2009 and
2008 was $7,231 and $7,825, respectively, and for the six months ended June 30,
2009 and 2008 was $15,169 and $15,650, respectively.
11. Event acquisition liabilities
12
The following sets forth the liabilities, in relation to the
acquisition of events (refer to Note 6), assumed by the Company as of the dates
indicated:
June 30, December 31,
2009 2008
----------- ---------------
(unaudited)
- - Concours on Rodeo $ 430,043 $ 430,043
- - Core Tour/Action Sports Tour 483,717 483,717
----------- ---------------
$ 913,760 $ 913,760
=========== ===============
12. Redemption fund reserve
The redemption fund reserve records the liabilities related to the
Company's obligations to pay for the redemption of rewards from the Stratus
credit card rewards program.
13. Related party transaction
From prior to fiscal 2006 through June of 2009, the Company rented
office space owned by the Chairman, President and Chief Executive Officer of the
Company. The total rent expense accrued by the Company in the three months ended
June 30, 2009 and 2008 was $12,000 and $12,000, respectively, and for the six
months ended June 30, 2009 and 2008 was $24,000 and $24,000, respectively. The
Company believes such rents were at or below prevailing market rates and
terminated the rental of this space at the end of June 2009.
14. Shareholders' Equity
Common Stock
On March 14, 2008, pursuant to an Agreement and Plan of Merger dated as
of August 20, 2007 (the "Merger Agreement") by and among the Company, Feris
Merger Sub, Inc. and Patty Linson, on the one hand, and Pro Sports &
Entertainment, Inc. ("PSEI"), on the other hand, the Company issued 49,500,000
shares of its common stock in exchange for all of the issued and outstanding
shares of the PSEI, resulting in a "reverse merger" in which PSEI became a
wholly owned subsidiary of Feris and is the surviving entity for accounting
purposes.
During the three months ended June 30, 2009 and 2008 the Company raised
$610,500 and $25,000, respectively, through the issuance of 564,949 and 29,850
shares of common stock, respectively. During the six months ended June 30, 2009
and 2008 the Company raised $742,500 and $405,000, respectively, through the
issuance of 710,529 and 483,578 shares of common stock, respectively.
Stock Options
There was no stock option expense for the three and six months ended
June 30, 2009 and 2008. A summary of the options outstanding as of June 30, 2009
is:
Options Outstanding Options Exercisable
-------------------------------------- ------------------------
Weighted
Weighted Average
Average Weighted Exercise
Remaining Average Price of
Range of Options Life in Exercise Options Options
Exercise Prices Outstanding Years Price Exercisable Exercisable
--------------- ------------- ----------- ------------ ----------- ------------
As of June 30, 2009 $ 1.79-$10.75 5,709,852 2.8 $ 2.40 5,709,852 $ 2.40
Warrants
During 2005, the Company granted warrants with rights to purchase
$36,250 of its common stock. These warrants have terms of five years and the
exercise prices for these warrants will be the share prices applicable in the
next Company Financing after March 2008. The warrants expire in 2010 and the
exercise prices for these warrants and the number of shares for such warrants
are to be determined by the share price used in such financing. The Company
valued these warrants, using the Black-Scholes option pricing model, at December
13
31, 2008 and 2007, at $0 and $0, respectively, and included this liability in
other accrued expenses and other liabilities. There were no warrants granted in
2006, 2007 and 2008.
Since this Company Financing event has not occurred, the number of
shares and the purchase price related to these warrants could not be determined
as of December 31, 2007 or 2008. The Company analyzed these warrants in
accordance with EITF pronouncement No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock". The Company determined that the warrants should be classified as a
liability based on the fact that the number of shares attributable to these
warrants is indeterminate.
These warrants were granted as financing costs related to notes payable
agreements with two shareholders and one non-shareholder. The warrants are
accounted for as financing costs which were capitalized and amortized over the
five-year life of the debt. There was no related amortization expense for the
three months and six months ended June 30, 2009 and 2008.
Since the number of shares and the purchase price related to these
warrants can't be determined, which in turn prevents a determination of the
Black Scholes value of these warrants as of June 30, 2009 and 2008 and
consequent determination of the charge to the income statement, if any, for the
periods ending on those dates.
During the six months ended June 30, 2009, the Company issued warrants
to purchase a total of 50,942 shares of common stock in connection with the sale
of common stock. There are no repricing or antidilution features for these
warrants. These warrants have a strike price of $2.00 per share and a life of
five years:
Warrants Outstanding Warrants Exercisable
-------------------------------------- ------------------------
Weighted
Weighted Average
Average Weighted Exercise
Remaining Average Price of
Warrants Life in Exercise Warrants Options
Exercise Price Outstanding Years Price Exercisable Exercisable
--------------- ------------- ----------- ------------ ----------- ------------
As of June 30, 2009 $2.00 50,942 4.8 $2.00 50,942 $2.00
An expense of $48,102 was taken for these warrants during the six
months ended June 30, 2009, based on Black-Scholes valuations using the
following assumptions:
Range of estimated fair value of underlying common stock $1.48 - $1.58
Remaining life (in years) 5.0
Range of risk-free interest rate 1.81% - 2.15%
Expected volatility 88.00%
Dividend yield -
15. Segments
Each event and the Stratus Reward program is considered an operating
segment pursuant to SFAS 131 since each is budgeted separately and results of
each event and the Stratus program are tracked separately to provide the chief
operating decision maker information to assess and manage each event and the
Stratus Program.
The characteristics of the Stratus Reward program are different than
the events, so that operating segment is considered a reporting segment. The
events share similar economic characteristics and are aggregated into a
reporting segment pursuant to paragraph 17 of SFAS 131. All of the events
provide entertainment and the logistics and production processes and methods for
each event are similar: sponsorship sales, ticket and concession sales,
security, stages, public address systems and the like. While the demographic
characteristics of the audience can vary by event, all events cater to consumer
entertainment.
A summary of results by segments are as follows:
14
As of and Six Months ended June 30, 2009 As of and Six Months ended June 30, 2008
-------------------------------------------------------- --------------------------------------------------------
Stratus Stratus
Credit Card Events Other Total Credit Card Events Other Total
-------------------------------------------------------- --------------------------------------------------------
Revenues $ - $ - $ - $ - $ 6,583 $ 33,606 $ 40,189
Cost of sales - - - - - 25,162 - 25,162
------------- ------------- ---------------------------- --------------------------------------------------------
Gross margin - - - - 6,583 8,444 - 15,027
Deprec. & Amort 23,486 - 23,486 29,014 - 29,014
------------- ------------- ---------------------------- --------------------------------------------------------
Segment profit (23,486) - - (23,486) (22,431) 8,444 - (13,987)
Operating expenses - - 1,009,318 1,009,318 - - 480,586 480,586
Oth. (Inc.)/Exp. - - 6,625 6,625 - - (274,444) (274,444)
------------- ------------- ---------------------------- --------------------------------------------------------
Net income $ (23,486) $ - $ (1,015,943) $ (1,039,429) $ (22,431) $ 8,444 $ (206,142) $ (220,129)
============= ============= ============================ ========================================================
Assets $ 1,948,764 $ 3,268,588 $ 345,416 $ 5,562,768 $ 3,031,154 $ 3,620,821 $ 68,861 $ 6,720,836
Liabilities $ 1,112,832 $ 913,760 $ 3,056,546 $ 5,083,138 $ 1,124,293 $ 1,153,760 $ 5,200,555 $ 7,478,608
16. Commitments and contingencies
Office space rental
Rent expense for the three months ended June 30, 2009 and 2008 was
$50,883 and $37,500, respectively. Rent expense for the six months ended June
30, 2009 and 2008 was $97,033 and $49,500, respectively.
Effective April 1, 2008, the Company entered into a lease for office
space in West Hollywood, California with a security deposit of $34,200 at a
monthly rate of $8,500 from April 1, 2008 to October 31, 2008, and a monthly
rent of $11,400 per month from November 1, 2008 until the end of the lease at
June 30, 2010. The Company vacated this space in July 2009 and is negotiating a
settlement of the lease with the landlord.
On May 1, 2009, the Company entered into a lease agreement for
approximately 1,800 square feet of office space in Santa Barbara, California for
use as its executive offices. The lease expires on January 1, 2011 with a
three-year renewal term available at an initial rent plus common area charges of
approximately $4,400 with rent increasing in August 2009 to $5,200 per month.
Contractual obligations
Set forth below is information concerning our known contractual
obligations as of June 30, 2009 that are fixed and determinable.
Total 2009 2010 2011 2012 2013 After 2013
-------------- -------------- ------------ ------------ ------------ ------------ ------------
Debt obligations* $ 1,000,000 $ 375,000 $ 500,000 $ 125,000 $ - $ - $ -
Other debt obligations 1,370,426 1,370,426 - - - - -
Event acquisition liabilities 913,760 913,760 - - - - -
Legal judgment 65,316 65,316 - - - - -
Rent obligations 186,000 123,600 62,400 - - - -
-------------- -------------- ------------ ------------ ------------ ------------ ------------
Total $ 3,535,502 $ 2,848,102 $ 562,400 $ 125,000 $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------
* Debt incurred in connection with acquisition of Stratus. Repayment is
triggered by first funding of at least $3,000,000. For purposes of this
schedule such funding is assumed to occur during 2009.
Employment Agreement
The Company has an Employment Agreement ("Agreement"), dated January 1,
2007, with its President and Chief Executive Officer, which requires the Company
to offer a non-qualified stock option to purchase 10% of the fully diluted
shares of the Company's capital stock issued and outstanding on January 1, 2007,
the effective date of the Agreement. The stock option has a term of five years
at an exercise price of $1.79 per share for 4,862,894 shares and vested
immediately on the date of the agreement. This stock option is subject to a
customary anti-dilution provision with respect to any stock splits, mergers,
reorganizations and other such events. The length of this Agreement is five
years from the effective date unless the employment is terminated for another
cause. During the duration of this Agreement, the Chief Executive Officer is
entitled to an annual salary of $240,000 and a bonus of $250,000 in the event a
Valuing Event causes the Company to be valued in excess of $100,000,000 and an
additional bonus of $500,000 in the event a Valuing Event causes the Company to
be valued in excess of $500,000,000. For the six months ended June 30, 2009 and
the year ended December 31, 2008, no bonuses have been paid by the Company in
relation to this Agreement.
15
17. Subsequent Events
Subsequent to June 30, 2009, the Company sold 32,121 shares of its
common stock for $53,000 and issued warrants to purchase 2,409 shares of its
common stock for $2.00. These warrants have a five-year life and do not have
repricing or antidilution features.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Certain Factors That May Affect Future Results" below and elsewhere in, or
incorporated by reference into, this report.
In some cases, you can identify forward-looking statements by terms
such as "may," "intend," "might," "will," "should," "could," "would," "expect,"
"believe," "anticipate," "estimate," "predict," "potential," or the negative of
these terms, and similar expressions are intended to identify forward-looking
statements. When used in the following discussion, the words "believes,"
"anticipates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The forward-looking
statements in this report are based upon management's current expectations and
belief, which management believes is reasonable. These statements represent our
estimates and assumptions only as of the date of this Quarterly Report on Form
10-Q, and we undertake no obligation to publicly release the result of any
revisions to these forward-looking statements, which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
The following discussion relates to the operations of Stratus and
should be read in conjunction with the Notes to Financial Statements.
Description of Business
Overview
On March 14, 2008, pursuant to an Agreement and Plan of Merger dated as
of August 20, 2007 by and among the Company, Feris Merger Sub, Inc. and Patty
Linson, on one hand, and Pro Sports & Entertainment, Inc. ("PSEI"), on the other
hand, the Company issued 49,500,000 shares of its common stock in exchange for
all of the issued and outstanding shares of the PSEI, resulting in PSEI becoming
a wholly-owned subsidiary of the Company and is the surviving entity for
accounting purposes ("Reverse Merger"). In July 2008, the Company's corporate
name was changed to Stratus Media Group, Inc.. The Company is based in Santa
Barbara, California and remains a Nevada corporation.
PSEI, a California corporation, was organized in November 1998 and
specializes in sports and entertainment events that it owns, and intends to
operate, manage, market and sell in national markets. In addition, PSEI acquired
the business of Stratus Rewards, LLC ("Stratus Rewards") in August 2005. Stratus
Rewards is a credit card rewards marketing program that uses the Visa card
platform that offers a unique luxury rewards redemption program, including
private jet travel, premium travel opportunities, exclusive events and luxury
merchandise.
The business plan of the Company is to own, operate and market live
entertainment events and derive its revenue primarily from
ticket/admission/membership sales, corporate sponsorship, television, print,
radio, on-line and broadcast rights fees, merchandising, and hospitality
activities. With additional funding, the objective of management is to build a
profitable business by implementing an aggressive acquisition growth plan to
acquire quality companies, build corporate infrastructure, and increase organic
growth. The plan is to leverage operational efficiencies across an expanded
portfolio of events to reduce costs and increase revenues. The Company intends
to promote the Stratus Rewards card and its events together, obtaining maximum
cross marketing benefit among card members, corporate sponsors and Stratus
events.
The Company is using a "roll up" strategy, targeting sports and live
entertainment events and companies that are independently owned and operated or
being divested by larger companies with the plan to aggregate them into one
large leading live entertainment company. The strategy is to purchase these
events for approximately four to six times Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA") of the events, with the expectation
that the combined EBITDA of the Company from these events will receive a higher
valuation multiple in the public markets.
17
Assuming the availability of capital, the Company is targeting
acquisitions of event properties. The goal is to aggressively build-up a
critical mass of events, venues and companies that allow for numerous
cross-event synergies. Specifically:
o On the expense side, to share sales, financial and operations
resources across multiple events, creating economies of scale,
increasing the Company's purchasing power, eliminating
duplicative costs, and bringing standardized operating and
financial procedures to all events, thus increasing the
margins of all events.
o On the revenue side, to present advertisers and corporate
sponsors an exciting and diverse menu of demographics and
programming that allows sponsors "one stop shopping" rather
than having to deal with each event on its own, and in so
doing, convert these sponsors into "strategic partners."
With these core operational synergies, and subject to available
capital, the Company intends to (1) reestablish its existing portfolio of
events, (2) implement its acquisition strategy of additional live sports and
entertainment events and companies, (3) create entirely new event properties on
the forefront of the "experience economy" and thus tap into people's lifestyle
passions, and (4) cross-promote the Stratus Rewards Visa card with these events
to enhance the results of the card and event businesses.
The business plan of Stratus is to provide integrated event management,
television programming, marketing, talent representation and consulting services
in the sports and other live entertainment industries. Stratus's event
management, television programming and marketing services may involve:
o managing sporting events, such as college bowl games, golf
tournaments and auto racing team and events;
o managing live entertainment events, such as music festivals, car
shows and fashion shows;
o producing television programs, principally sports entertainment and
live entertainment programs; and o marketing athletes, models and
entertainers and organizations.
Description of our Revenues, Costs and Expenses
Revenues
Our revenues represent event revenues from ticket sales, sponsorships,
concessions and merchandise, which are recorded when the event occurs, and
Stratus revenues from membership fees, fees on purchases and interest income
earned on the redemption trust. Membership fees are amortized over the twelve
month period and fees from purchases and interest income are recorded when they
occur.
Gross Profit
Our gross profit represents revenues less the cost of sales. Our event
cost of sales consists of the costs renting the venue, structures at the venue,
concessions, and temporary personnel hired for the event. Cost of sales for the
Stratus program are nominal.
Operating Expenses
Our selling, general and administrative expenses include personnel,
rent, travel, office and other costs for selling and promoting events and
running the administrative functions of the Company. Legal and professional
services are paid to outside attorneys, auditors and consultants are broken out
separately given the size of these expenses relative to selling, general and
administrative expenses. Operating expenses also include the non-cash expenses
for the value of common stock issued above the value of consideration received
and the Black-Sholes costs of options and warrants.
Interest Expense
Our interest expense results from accruing interest on a court
judgment, loans payable to shareholders, current portion of notes
payable-related parties and notes payable.
Critical Accounting Policies
The following discussion relates to the operations of the Company and
should be read in conjunction with the Notes to Financial Statements.
18
Stock Split
On March 14, 2008, the Board of Directors of the Company approved a
3.582 for 1.000 forward stock split of the Company's common stock. The effective
date of the stock split was March 14, 2008 and was concurrent with the Reverse
Merger. All share and per share information have been adjusted to give effect to
the stock split for all periods presented, including all references throughout
the financial statements and accompanying notes.
Net Loss per Share
We compute net loss per share in accordance with SFAS No. 128, Earnings
Per Share. Basic per share data is computed by dividing loss available to common
stockholders by the weighted average number of shares outstanding during the
period. Diluted per share data is computed by dividing loss available to common
stockholders by the weighted average shares outstanding during the period
increased to include, if dilutive, the number of additional common share
equivalents that would have been outstanding if potential common shares had been
issued using the treasury stock method. Diluted per share data would also
include the potential common share equivalents relating to convertible
securities by application of the if-converted method.
The effect of common stock equivalents (which include outstanding
warrants and stock options) are not included for the three and six months ended
June 30, 2009, as they are antidilutive to loss per share. Losses per share for
the three and six months ended June 30, 2009 do not include the potential impact
of options to purchase 5,709,852 shares of the Company's common stock, warrants
to purchase 50,942 shares, or of warrants to purchase $36,250 of the Company's
common stock, with the number of shares issuable under this warrant to be
determined by the Company's first financing round following its reverse merger
in March 14, 2008.
Intangible Assets
Company has purchased several events that were recorded on the
Company's balance sheet as intangible assets equal to the consideration paid for
such assets, which generally includes licensing rights, naming rights,
merchandising rights and the right to hold such event in particular geographic
locations. There was no goodwill assigned to any of these events and the value
of the consideration paid for each event is considered to be the value for each
related intangible asset. Each event has separate accounts for tracking revenues
and expenses per event and a separate account to track the asset valuation.
A portion of the consideration used to purchase the Stratus Rewards
Visa card program was allocated to specific assets, as disclosed in the
footnotes to the financial statements, with the difference between the specific
assets and the total consideration paid for the program being allocated to
goodwill. We apply the provisions of Statement of Financial Accounting Standards
(SFAS) No. 142 Goodwill and Other Intangible Assets, which requires allocating
goodwill to each reporting unit and testing for impairment.
The Company reviews the value of intangible assets and related goodwill
as part of its annual reporting process, which generally occurs in February or
March of each calendar year. In between valuations, the Company is prepared to
conduct additional tests if circumstances warrant such testing. For example, if
the Company was unable to secure the services of any sponsoring banks, the
Company would then undergo a thorough valuation of the intangible assets related
to its Stratus Rewards program.
To review the value of intangible assets and related goodwill, the
Company compares discounted cash flow forecasts with the stated value of the
assets on the balance sheet.
The events are forecasted based on historical results for those events,
adjusted over time for the assumed synergies expected from discounts from
purchases of goods and services from a number of events rather than from each
event on its own, and for synergies resulting from the expected ability to
provide sponsors with benefits from sponsoring multiple events with a single
point of contact.
These forecasts are discounted at a range of discount rates determined
by taking the risk-free interest rate at the time of valuation, plus a premium
for equity risk, plus a premium related to small companies in general, plus a
risk premium for factors specific to the Company and the operating segment that
range from 9.5% for events to 55% for the Stratus Rewards Visa card. The total
discount rates ranged from 27% for events, to 69% for athlete management to 79%
for the Stratus Rewards program. Terminal values are determined by taking cash
flows in year five of the forecast, then applying an annual growth of 2.0% to
2.4% for twenty years and discounting that stream of cash flows by the discount
rate used for that section of the business.
19
If the Company determines that the discount factor for cash flows
should be substantially increased, or the event will not be able to begin
operations when planned, it is possible that the values for the intangible
assets currently on the balance sheet could be substantially reduced or
eliminated, which could result in a maximum charge to operations equal to the
current carrying value of the intangible assets of $5,117,995.
In addition to the intangible assets on the balance sheet, the Company
has acquired the rights or assumed ownership of a number of other events as
well. Based on a valuation dated December 11, 2006 by an independent valuation
consultant, the value of all these event properties was $45,700,000 at December
31, 2005 (unaudited).
Results of Operations for the Three Months Ended June 30, 2009
Revenues
Revenues for the three months ended June 30, 2009 ("Current Period")
were $0, which was a decrease of $1,050, or 100%, from the $1,050 realized for
the three months ended June 30, 2008 ("Prior Period"). There were no event
revenues in the Current Period or the Prior Period. Stratus card revenues were
$0 in the Current Period, a decrease of $1,050, or 100%, from $1,050 in the
Prior Period. The sponsoring bank that conducted the "back end" banking
requirements of the Stratus program stopped sending the Company statements in
October 2007 and provided notice in March 2008 that it was discontinuing the
program. While several cardmembers are continuing to use their cards with the
former sponsor bank the Company has not recorded these new revenues since
October 2007, and the Company is investigating legal redress against this bank.
The Company is actively seeking a new sponsoring bank for the back end banking
requirements of the program, but there can be no assurances that it will be able
to do so.
Gross Profit
There were no cost of revenues in either the Current Period or the
Prior Period, so the gross profit in the Current Period was $0 and the gross
profit in the Prior Period was $1,050
Operating Expenses
Overall operating expenses for the Current Period were $651,863, an
increase of $417,475, or 178%, from $234,388 in the Prior Period. General and
administrative expenses of $353,031 increased by $191,190, or 118%, from
$161,841 in the Prior Period. This increase was generally related to higher
levels of business development activity in the Current Period and specifically
related to consulting fees of $116,023 in the Current Period for international
and domestic business development consultants, versus $31,045 in the Prior
Period, travel and entertainment costs of $63,810 in the Current Period versus
$19,230 in the Prior Period, and rent expense of $50,833 in the Current Period
versus $31,045 in the Prior Period. In addition, the Company incurred a total of
$226,136 in non-cash charges in the Current Period versus $0 in the Prior
Period, with $172,037 for charges taken to reflect the value of common stock
sold over the value received, and $54,098 in Black Scholes expense for Warrants
in the Current Period versus $0 in the Prior Period. Legal and professional
services remained relatively consistent with $$60,953 in the Current Period
versus $58,040 in the Prior Period. Depreciation and amortization remained
relatively constant with $11,743 in the Current Period, compared with $14,507 in
the Prior Period.
Other Income/Expense
Other income and expense decreased by $55,883 or 864%, from a net gain
of $49,417 in the Current Period from a net loss of $6,466 in the Prior Period.
The Current Period included a $11,461 gain from reducing the Redemption Fund
Reserve from $124,293 in the Prior Period to $112,832 in the Current Period to
match the Restricted Cash Balance of $112,832 in the Current Period, and a net
gain of $37,956 for settling amounts owed to a vendor below the face value of
the amounts owed.
Interest Expense
Interest expense was $28,582 in the Current Period, a decrease of
$17,816, or 38%, from $46,398 in the Prior Period, primarily related to the use
of common stock to reduce interest-bearing debt to stockholders and the
elimination of interest on the Core Tour settlement, both of which occurred on
December 31, 2008.
Results of Operations for the Six Months Ended June 30, 2009
Revenues
20
Revenues for the six months ended June 30, 2009 ("Current Period") were
$0, which was a decrease of $40,189, or 100%, from the $40,189 of revenues
realized for the six months ended June 30, 2008 ("Prior Period"). There were no
event revenues in the Current Period, compared with $33,606 in the Prior Period
from a Superbowl-related event held in the Prior Period that did not occur in
the Current Period. Stratus card revenues were $0 in the Current Period, a
decrease of $6,583, or 100%, from $6,583 in the Prior Period. The sponsoring
bank that conducted the "back end" banking requirements of the Stratus program
when PSEI acquired Stratus stopped sending the Company statements in October
2007 and provided notice in March 2008 that it was discontinuing the program.
While several cardmembers are continuing to use their cards with the former
sponsor bank the Company has not recorded these new revenues since October 2007,
and the Company is investigating legal redress against this bank. The Company is
actively seeking a new sponsoring bank for the back end banking requirements of
the program, but there can be no assurances that it will be able to do so.
Gross Profit
There was no cost of revenues in the Current Period and $25,162 in the
Prior Period, primarily related to appearance fees for the Superbowl-related
event, so the gross profit in the Current Period was $0 and the gross profit in
the Prior Period was $15,027.
Operating Expenses
Overall operating expenses for the Current Period were $1,032,804, an
increase of $523,204, or 103%, from $509,600 in the Prior Period. General and
administrative expenses of $561,094 increased by $255,508, or 84%, from $305,586
in the Prior Period. This increase was generally related to higher levels of
business development activity in the Current Period and specifically related to
consulting fees of $167,623 in the Current Period, primarily for international
and domestic business development consultants, versus $55,625 in the Prior
Period, travel and entertainment costs of $95,990 in the Current Period versus
$43,970 in the Prior Period, and rent expense of $97,033 in the Current Period
versus $49,500 in the Prior Period, primarily related to the addition of the
West Hollywood office in the Current period. In addition, the Company incurred a
total of $337,570 in non-cash charges in the Current Period versus $0 in the
Prior Period, with $274,294 for charges taken to reflect the value of common
stock sold over the value received, and $63,274 in Black Scholes expense for
Warrants in the Current Period versus $0 in the Prior Period. Legal and
professional services declined from $175,000 in the Prior Period to $110,654 in
the Current Period, primarily related to legal and audit work performed in
connection with the Company's reverse merger on March 14, 2008. Depreciation and
amortization declined from $29,014 in the Prior Period to $23,486, primarily
related to a number of assets reaching the end of their depreciable lives and no
longer incurring depreciation expense.
Other Income/Expense
Other income and expense decreased by $318,170, or 87%, from a net gain
of $367,587 in the Prior Period to a net gain of $49,417 in the Current Period,
primarily related to a $365,579 gain in the Prior Period from reversing an
accrual for legal judgment when the related court case was dismissed.
Interest Expense
Interest expense was $56,042 in the Current Period, a decrease of
$37,101, or 40%, from $93,143 in the Prior Period, primarily related to the use
of common stock to reduce interest-bearing debt to stockholders and the
elimination of interest on the Core Tour settlement, both of which occurred on
December 31, 2008.
Liquidity and Capital Resources
The report of our independent registered public accounting firm on the
financial statements for the years ended December 31, 2008 and 2007 contains an
explanatory paragraph expressing substantial doubt about our ability to continue
as a going concern as a result of recurring losses, a working capital
deficiency, and negative cash flows. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that would be necessary
if we are unable to continue as a going concern.
During the three months ended June 30, 2009 and 2008 the Company raised
$610,500 and $25,000, respectively, through the issuance of 564,949 and 29,850
shares of common stock, respectively. During the six months ended June 30, 2009
and 2008 the Company raised $742,500 and $405,000, respectively, through the
issuance of 710,529 and 483,578 shares of common stock, respectively.
The Company is actively pursuing equity capital and is targeting an
initial raise of $2 million to $5 million or more. The proceeds raised will be
used for operational expenses, settling existing liabilities, acquisitions and
21
selling expenses. Due to our history of operating losses and the current credit
constraints in the capital markets, we cannot assure you that such financing
will be available to us on favorable terms, or at all. If we cannot obtain such
financing, we will be forced to curtail our operations or may not be able to
continue as a going concern, and we may become unable to satisfy our obligations
to our creditors. In such an event we will need to enter into discussions with
our creditors to settle, or otherwise seek relief from, our obligations.
At June 30, 2009, our principal sources of liquidity consist of
advances of funds from officers, increases in accounts payable and accrued
expenses, and the issuance of equity securities. In addition to funding
operations, our principal short-term and long-term liquidity needs have been,
and are expected to be, the settling of obligations to our creditors, capital
expenditures, the funding of operating losses until we achieve profitability,
and general corporate purposes. In addition, commensurate with our level of
sales, we require working capital for purchases of inventories and sales and
marketing costs to increase the promotion and distribution of our products. At
June 30, 2009, our cash and cash equivalents were $200,211, and we had negative
working capital of $4,015,055. At June 30, 2009, we had $2,086,971 in debt
obligations (comprised of a $729,954 loan from shareholder, $1,090,000 of notes
payable to related parties and $267,017 in notes payable), all of which is due
upon demand, and $215,000 is in default for non-payment.
Cash Flows
The following table sets forth our cash flows as of the dates
indicated:
Six Months Ended June 30,
--------------------------------
2009 2008
------------------- ------------
(unaudited) (unaudited)
Operating activities $ (514,078) $ (305,726)
Investing activities - -
Financing activities 713,489 321,827
------------------- ------------
Total change $ 199,411 $ 16,101
=================== ============
Operating Activities
Operating cash flows for the six months ended June 30, 2009 reflects
the net loss of $1,039.429, offset by changes in working capital of $164,295,
depreciation and amortization of $23,486, non-cash expenses of $337,570 for the
excess of fair value of common stock sales over the consideration received and
Black-Scholes cost of warrant issuance.
Operating cash flows for the six months ended June 30, 2008 reflects
our net loss of $220,129, offset by changes in working capital of $56,583 and
non-cash items (depreciation and amortization) of $29,014. The change in working
capital is primarily related to reversing a $365,579 reserve for a legal action
that was dismissed, offset by increases in deferred salary, accrued interest and
other accrued expenses.
Investing Activities
Capital constraints resulted in no cash used in investing activities
during either period.
Financing Activities
During the six months ended June 30, 2009, we received cash proceeds of
$742,500 from sales of common stock and $50,023 from a payment to us from the
former sponsoring bank for the Stratus Visa Card program. Of these amounts, we
used $37,534 to partially repay loans from shareholders and $52,500 to partially
repay notes payable, for net cash proceeds of $702,489. During the three months
ended June 30, 2009 we received $100,000 and used a net of $3,124 to repay debt
obligations, for net proceeds of $96,876.
During the six months ended June 30, 2008, we received cash proceeds of
$405,000 from the sale of stock and used $15,132 to partially repay loans from
shareholders. In May of 2008, we used $68,041 to extinguish a line of credit
with Wells Fargo. Net cash from financing activities was $321,827.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
22
Not applicable
ITEM 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" means controls and other
procedures of the Company that are designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported,
within the time periods specified in the Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Act is accumulated and
communicated to the Company's management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and Acting Chief Financial Officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this report (the
"Evaluation Date"), has concluded that as of the Evaluation Date, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed in the reports that we file and submit under the Exchange Act (i) is
recorded, processed, summarized and reported as and when required and (ii) is
accumulated and communicated to our management, including our Chief Executive
Officer and Acting Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure, with the following one exception.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting
that occurred during the quarter ended June 30, 2009 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
Not applicable.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 2009 the Company raised $610,500
through the issuance of 564,949 shares of common stock. No commissions were paid
on these sales.
All securities were issued pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Section 4(2) and Regulation D, given that these sales were made to accredited
investors under a written subscription agreement in which such investors
acknowledged that the shares were being purchased for investment purposes and
that the certificates evidencing such stock ownership would contain a
restrictive legend.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
23
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibit No. Exhibit Description
31.1 Certification by the Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification by the acting Chief Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of
1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification by the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the acting Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
24
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.
STRATUS MEDIA GROUP, INC.
By: /s/ Paul Feller
---------------
Paul Feller
Principal Executive Officer
By: /s/John Moynahan
----------------
John Moynahan
Acting Principal Financial Officer
Date: August 14, 2009
25