e10ksb
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(Mark One)
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For the fiscal year ended December 31, 2005
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
Commission file number: 000-26073
Immediatek, Inc.
(Name of small business issuer in its charter)
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| Nevada
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86-0881193 |
(State or other jurisdiction
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(I.R.S. Employer |
| of incorporation or organization)
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Identification No.) |
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| 10488 Brockwood Road, Dallas, Texas
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75238 |
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(Address of principal executive offices)
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(Zip Code) |
Issuer’s telephone number: (972)852-2876
Securities registered under Section 12(b) of the Exchange Act:
Title of each class: None
Name of each exchange on which registered: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes o No þ
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act) Yes o No þ
State issuer’s revenues for its most recent fiscal year. $140,912.
The aggregate market value of the common stock of the registrant held by non-affiliates of the
registrant, computed by reference to the average bid and asked price of such common stock on May 1,
2006, was $1,516,775.
As of December 31, 2005, the issuer had 38,769,655 shares of common stock outstanding. As of
May 1, 2006, the issuer had 32,394,655 shares of common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes o No þ
PART I
Forlward-Looking Statements
This annual report on Form 10-KSB includes “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), which can be identified by the
use of forward-looking terminology such as “may,” “can,” “believe,” “expect,” “intend,” “plan,”
“seek,” “anticipate,” “estimate,” “will,” or “continue,” or the negative thereof or other
variations thereon or comparable terminology. All statements other than statements of historical
fact included in this annual report on Form 10-KSB are forward-looking statements, including,
without limitation, the statements under “Item 1. Description of Business” and “Item 6.
Management’s Discussion and Analysis or Plan of Operation” and located elsewhere herein regarding
the financial position and liquidity of the Company (defined below). Although the Company believes
that the expectations reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Important factors with respect to any
such forward-looking statements, including certain risks and uncertainties that could cause actual
results to differ materially from the Company’s expectations (“Cautionary Statements”), are
disclosed in this annual report on Form 10-KSB, including, without limitation, in conjunction with
the forward-looking statements and under the caption “Risk Factors.” In addition, important
factors that could cause actual results to differ materially from those in the forward-looking
statements included herein include, but are not limited to, inability to continue as a going
concern, limited working capital, limited access to capital, changes from anticipated levels of
sales, future national or regional economic and competitive conditions, changes in relationships
with customers, difficulties in developing and marketing new products, marketing existing products,
customer acceptance of existing and new products, validity of patents, technological change,
dependence on key personnel, dependence on third party manufacturers, vendors, contractors, product
liability, casualty to or other disruption of the production facilities, delays and disruptions in
the shipment of the Company’s products, and the ability of the Company to meet its stated business
goals. All subsequent written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the Cautionary
Statements.
This annual report on Form 10-KSB contains registered trademarks and servicemarks owned or
licensed by companies other than us, including, but not limited to, iPod®.
ITEM 1. DESCRIPTION OF BUSINESS.
Unless the context otherwise indicates, the words “we,” “our,” “ours,” “us” and the “Company”
refer to Immediatek, Inc., or Immediatek, and its subsidiaries, including DiscLive, Inc., or
DiscLive, collectively.
General
Immediatek, through its operating subsidiary, DiscLive, records live content, such as concerts
and conferences, and makes the recorded content available for sale to attendees within fifteen
minutes after the conclusion of the live event. The recorded content is also made available for
sale on our website, www.disclive.com.
DiscLive has recorded live events for Billy Idol, Jefferson Starship, the Pixies, The Fixx,
George Clinton (DVD), Vertical Horizon to name a few. During 2005, we recorded 51 live events and
sold, or delivered under contract, approximately 10,000 recordings of those events.
Our principal executive offices are located at 10488 Brockwood Road, Dallas, Texas 75238,
telephone number (972) 852-2876, and our website address is www.immediatek.com.
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Recent Developments
Going Concern and Liquidity Problems
Our auditors have included an explanatory paragraph in their audit opinion with respect to our
consolidated financial statements at December 31, 2005. The paragraph states that our recurring
losses from operations and resulting continued dependence on access to external financing raise
substantial doubts about our ability to continue as a going concern. Furthermore, the factors
leading to, and the existence of, the explanatory paragraph may adversely affect our relationships
with customers and suppliers and have an adverse effect on our ability to obtain financing.
We currently do not have sufficient working capital to sustain our operations. We have been
unable to generate sufficient revenues to sustain our operations. We will have to obtain funds to
meet our cash requirements through business alliances, such as strategic or financial transactions
with third parties, the sale of securities or other financing arrangements, or we may be required
to curtail our operations, seek a merger partner, or seek protection under federal bankruptcy laws.
Any of the foregoing may be on terms that are unfavorable to us or disadvantageous to existing
stockholders. In addition, no assurance may be given that the Company will be successful in
raising additional funds or entering into business alliances.
The Company has recently entered into a stock purchase transaction that will, if closed, bring
significant working capital to the Company. The Company obtained the written consent of
stockholders holding 16,556,712 shares, representing 51.1% of our issued and outstanding shares of
common stock (the “Common Stock”) on March 3, 2006, the record date for obtaining consents
authorizing the transaction. There can be no assurance that we will be successful in closing the
transaction. A detailed discussion of the transaction appears below.
Pending Stock Purchase Transaction with Radical Holdings LP and Resulting Change of Control
On January 24, 2006, a Securities Purchase Agreement was executed between us and Radical
Holdings LP, or Radical. The Securities Purchase Agreement was subsequently amended by the First
Amendment to Securities Purchase Agreement, which was executed by the parties on March 3, 2006. In
accordance with the terms, and subject to the conditions, of the Securities Purchase Agreement, as
amended, Radical is purchasing 4,392,286 shares of Series A Convertible Preferred Stock for an
aggregate purchase price of $3.0 million, or $0.68 per share of Series A Convertible Preferred
Stock. The Series A Convertible Preferred Stock is, at the option of the holders of the Series A
Convertible Preferred Stock, convertible into that aggregate number of full shares of common stock
representing 95% of the total common stock outstanding after giving effect to the conversion. Upon
the purchase of the Series A Convertible Preferred Stock of the Company by Radical pursuant to the
Securities Purchase Agreement, as amended, a change in control of the Company will occur, as
Radical will beneficially own 95% of the outstanding securities of the Company entitled to vote on
matters required or permitted to be submitted to the stockholders of the Company.
As a condition to closing the Stock Purchase Agreement we will be amending our Articles of
Incorporation as follows:
1. An amendment to effectuate a one hundred (100) for one (1) reverse stock split. This
reverse stock split will not change the capital structure of the Company;
2. An amendment to remove preemptive rights of stockholders; and
3. An amendment that authorizes the board of directors to designate the series and to
determine the attributes and preferences of each issue of preferred stock.
The Securities Purchase Agreement, as amended, and the amendments to our Articles of
Incorporation were previously approved and recommended for stockholder approval by the unanimous
written consent of the Board of Directors on March 3, 2006. A written consent approving the
Securities Purchase Agreement, as amended, and the amendments to our Articles of Incorporation was
executed by stockholders representing 51.1% of our issued and outstanding common stock on March 3,
2006, as well.
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Purpose of Stock Purchase Transaction
The Company has certain business prospects primarily through its subsidiary, DiscLive, which
is an enterprise primarily engaged in the business of recording live performances by music artists.
Music artists’ contract with DiscLive to record live events and DiscLive produces compact discs of
the concert to sell to concert goers as they leave the concert or on the internet after the
concert. During the coming fiscal year, DiscLive plans to expand its services to a number of
musical artists and, thereby, increase live recordings and CD sales. However, the Company does not
presently have sufficient capital to pay its current obligations or implement its business plan. By
consummating the Securities Purchase Agreement with Radical, the Company will receive $3,000,000 in
equity capital from the purchase by Radical of 4,392,286 shares of the Company’s authorized
preferred stock.
In the initial discussions of a potential transaction, Radical and the Company, on an
arms-length basis, negotiated a $3.0 million total purchase price for 95% of the Company. The
parties explored various structures to accomplish this, including a tender offer and reverse
merger. Prior to the execution of the Securities Purchase Agreement, the Company had severely
limited its operations due to the lack of adequate operating funds and it had no other firm offers
to provide those necessary funds. In order to provide the Company with funds to continue its
operations, which was determined to be of paramount importance, Radical and the Company structured
the transaction as a stock purchase transaction, whereby Radical would purchase the Series A
Convertible Preferred Stock of the Company. The per share purchase price was determined by
dividing the total purchase price by a number of shares of Series A Convertible Preferred Stock
that are convertible into shares of common stock representing 95% of the Company after giving
effect to their conversion. Therefore, the per share purchase price bears no relationship to the
market price of the common stock or market capitalization of the Company.
The high and low sales price for the Company’s common stock on the date the Securities
Purchase Agreement was executed was $0.03 per share, resulting in a market capitalization of the
Company of $954,241. If the transaction was a sale of all of the interests or assets of the
Company to Radical, the aggregate purchase price being paid by Radical would represent a value more
than three times the market capitalization of the Company on the date the Securities Purchase
Agreement was executed. The Series A Convertible Preferred Stock is convertible into that aggregate
number of full shares of the Company representing 95% of the total voting power of all outstanding
shares of capital stock, which represents 19 times the 492,002 shares of common stock estimated to
be outstanding on a fully-diluted basis after giving effect to the 100-for-1 reverse stock split.
Our Board of Directors, in its best business judgment, believed that, given the precarious
financial condition of the Company, the fact that the total purchase price was the highest Radical
was willing offer, that the Company had no other firm offers for financing and that the total
purchase price is more than three time the market capitalization of the Company on the date the
Securities Purchase Agreement was executed, the purchase price is fair and reasonable.
Although this transaction will create significant working capital for the Company and enable
the Company to satisfy its outstanding accounts payable, liabilities and obligations, there are
still risks associated with this transaction. There is no guaranty that this transaction will be
consummated or, if consummated, that the resulting infusion of capital will permit the Company’s
business plan and expansion to be successful.
Background
Immediatek was formerly named ModernGroove Entertainment, Inc. On November 23, 2002,
ModernGroove Entertainment, Inc., a Nevada corporation and an OTCBB-listed company, entered into a
merger agreement with Immediatek, Inc., a private company duly incorporated in accordance with the
laws of the State of Texas. Immediatek, a privately owned company, was founded in 2001 by Zach
Bair, our Chief Executive Officer. On December 9, 2002, ModernGroove Entertainment, Inc. changed
its name to Immediatek, Inc.
On February 27, 2003, Immediatek acquired the key assets of LCD Interactive, Inc., a private
corporation (“LCD”) that had developed breakthrough CD burning software which would form the basis
of ITEK’s business model going forward. Prior to the acquisition, ITEK had formed a strategic
alliance with LCD d/b/a TwoBigToes, to exclusively market and develop the CD burning software.
Acquisition of LCD’s assets, including the CD burning
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software and LCD’s flagship website, www.TwoBigToes.com, was accomplished through a stock
transaction whereby the shareholders of LCD, were issued 6,980,000 restricted shares in Immediatek.
DiscLive
In April 2004, we acquired all the issued and outstanding shares of DiscLive, Inc., a Delaware
corporation. The acquisition of DiscLive was accomplished through a stock for stock transaction
whereby the stockholders of DiscLive acquired 1,666,667 shares of our common stock and we acquired
all the issued and outstanding shares of DiscLive. DiscLive is now a wholly owned subsidiary of
Immediatek.
DiscLive is an enterprise primarily engaged in the business of recording live performances by
music artists who contract with DiscLive to produce compact discs of the concert to sell to concert
goers as they leave the concert. This is accomplished through on site mobile manufacturing
facilities, which are capable of producing up to approximately 800 CD’s within 15 minutes of the
concert’s ending. The CD’s are also sold through our web site to potential customers who did not
attend the concert. The CD’s can also be manufactured using our NetBurn Secure™ Technology.
Copy Control Technology – NetBurn Secure™
Immediatek has licensed the MediaMax CD-3 technology from SunnComm Technologies and has
embedded SunnComm’s technology into NetBurn™. The resultant product is called NetBurn Secure™.
NetBurn allows an end user to download and burn music using the Internet or a music CD burning
kiosk to burn digital media directly to a burnable CD without infringing the legal copyrights of
the publishers and artists. The Company believes that NetBurn has completed its development stage
and is now a proven technology. NetBurn Secure, Immediatek’s latest variant of the software,
creates copy controlled burned CDs, so that once the CD is burned it is copy controlled and can
thereby limit how many copies, if any at all, are permitted to be made from the burned CD.
Risk Factors
Our failure to close the transaction evidenced by the Securities Purchase Agreement will have
a material adverse effect upon our business and financial condition. Management is making every
attempt to close the transaction whereby we will sell our Series A Convertible Preferred Stock for
an aggregate purchase price of $3.0 million to Radical. There can be no assurance, however, that
we can complete this transaction. If we don’t complete this transaction, we will not have the
funds necessary to continue our operations and will have to look elsewhere to obtain those funds
and such funds may not be available.
Our Articles of Incorporation provide stockholders with preemptive rights, and we have issued
shares of our common stock that trigger those rights without giving notice to those stockholders.
Our stockholders currently possess preemptive rights with respect to shares of our common stock
that we issue for cash. In the past, we have issued shares of our common stock for cash without
giving notice to those stockholders. At some point, stockholders who possess these rights may
exercise these rights, which would require us to issue additional shares of our common stock. We
are able to determine the exercise price of the preemptive rights; however, at this time, we are
unable to determine with certainty which of our stockholders possess preemptive rights with respect
to prior issuances. As a result, we cannot determine the number of shares that may be purchased
upon the exercise of existing preemptive rights. Any exercise of preemptive rights will likely be
dilutive to those stockholders who do not possess those rights.
We
have determined that our fiscal year 2003 and 2004 audited financials and our quarterly
reports for all three quarters of 2003, 2004 and 2005 need to be restated and stockholders should
not rely on our prior financial statements. On March 3, 2006, the Board of Directors of
Immediatek, Inc., or the Company, concluded that the Company will be required to restate its
previously issued financial statements for the years ended December 31, 2003 and 2004 appearing in
the Company’s Forms 10-KSB for the years ended December 31, 2003 and 2004, and the interim
financial statements contained in Forms 10-QSB for the quarters ending in those years. In addition,
the Board of Directors of the Company concluded that the Company will be required to restate is
previously issued
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interim financial statements for the quarters ended March 31, June 30 and September 30 for the
year ended December 31, 2005 appearing the Forms 10-QSB for those periods.
The conclusions of our Board of Directors were based upon the following:
Year Ending December 31, 2003:
Upon an analysis of the value of services and the current market value of our common stock at
the time of issue, we determined, pursuant to FAS 123, the greater of the two to be the fair market
value to be the fair market value of the underlying shares and, therefore, expensed all
compensatory issuances during the quarter ended March 31, 2003, at the fair market value of the
underlying shares. Subsequent to this determination, additional consideration was given to a
revaluation based upon an appraisal prepared by an independent third-party. As a result, there is a
material adjustment to the original expense reported on the Company Form 10-QSB for the period
ended March 31, 2003. This restatement is estimated to reduce the overall net loss for the year
ended December 31, 2003, by approximately $2.1 million, and the impact on the loss per share is
estimated to a decrease of $0.12 per share, or $(0.05) per share restated compared to $(0.17) per
share originally reported.
Years Ending December 31, 2004 and 2005:
It has come to the attention of the Company through an independent due diligence process that
previous grants of options and warrants by the Company has not been properly disclosed during the
year ended December 31, 2004 and the quarter ended June 30, 2005.
In light of these restatements, our prior financial statements for the periods described above
should no longer be relied upon.
Based upon discoveries made by us, we have decided to restate our financial statements for the
years ending December 31, 2003 and 2004 and for the interim periods of 2005. As a result, we may
be subject to inquiry or investigation by governmental authorities, including the Securities and
Exchange Commission. In the event that we are subject to an inquiry or investigation, we will
fully cooperate with that inquiry or investigation. An inquiry or investigation could result in
substantial costs and divert management attention and resources from our business, which could
adversely affect our business and financial condition.
Further, in the past, private securities class action litigation has been brought against
companies after certain events, including restatement of financial results. Due to the restatement
of our financial results, we may become subject to litigation. This litigation could result in
substantial costs and divert management attention and resources from our business, which could
adversely affect our business and financial condition.
Our failure to properly report payroll taxes has created a material liability, including
resulting penalties and interest. We have discovered that we have not properly reported payroll
taxes for the last three fiscal years. We have filed amended returns with the Internal Revenue
Service to rectify this situation and intend to cooperate with the Internal Revenue Service in that
regard. No assurance can be given, however, that this matter can be timely resolved or without
further increases in liability. As of December 31, 2005, we estimate that our payroll tax
liability, including penalties and interest, is approximately $383,000, which we have recorded on
our balance sheet for the year ended December 31, 2005.
Further, as a result of our failure to report these amounts correctly, we may become the
subject of an audit by the Internal Revenue Service. An audit could result in substantial costs,
including further liability, and divert management attention and resources from our business, which
could adversely affect our business and financial condition.
Our failure to properly pay sales taxes in states where are products are sold has created a
material liability. We have discovered that we have not properly reported sales taxes in certain
states where we sold our products during fiscal years 2004 and 2005. We are endeavoring to satisfy
these obligations to the extent we deem
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appropriate and file appropriate returns. No assurances can be given, however, that we will
be able to timely resolve this matter or without further increases in liability. As of December
31, 2005, we estimate that our sales tax liability, including penalties and interest, is
approximately $61,000, which we have recorded on our balance sheet for the year ended December 31,
2005.
Further, as a result of our attempts to satisfy these amounts, we may become the subject of an
audit by certain states. An audit could result in substantial costs, including further liability,
and divert management attention and resources from our business, which could adversely affect our
business and financial condition.
Our limited operating history makes our potential difficult to assess. The Company has a
limited operating history. Stockholders and prospective stockholders should be aware of the
difficulties encountered by such new enterprises, as the Company faces all of the risks inherent in
any new business. These risks include, but are not limited to, competition, the absence of an
operating history, the need for additional working capital, and the possible inability to adapt to
various economic changes inherent in a market economy. The likelihood of success of the Company
must be considered in light of these problems, expenses that are frequently incurred in the
operation of a new business and the competitive environment in which the Company will operate.
Our business is not completely unique and although we believe there are significant portions
of that business which are proprietary to the Company, the potential for additional competitors is
high. The degree of competition, general economic conditions, and regulation also can affect the
commercial viability of the Company’s business. None of these factors can be predicted with any
certainty. Therefore, there is a substantial risk that some or all of the Company’s projects will
not be commercially successful, resulting in loss and anticipated profits not being realized.
We are dependent upon our proprietary technology and its marketability as state of the art.
The technology we use may become obsolete or limit our ability to compete effectively within the
music and multi-media applicable industries. These industries are characterized by rapidly
changing technology, evolving industry standards and frequent new product introductions. The
introduction of products embodying new technologies or the emergence of industry standards can
render existing products obsolete and unmarketable. Our success will depend on our ability to
enhance our existing products. Our success will also depend on our ability to develop and
introduce, on a timely and cost-effective basis, new products that keep pace with technological
developments and emerging industry standards and that address increasingly sophisticated customer
requirements.
Our business would be adversely affected if we were to incur difficulties or delays in
developing new products or enhancements or if those products or enhancements did not gain market
acceptance. Specifically:
(a) we may not be successful in identifying, developing and marketing product
enhancements or new products that respond to technological change or evolving industry
standards;
(b) we may experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products; and
(c) our new products and enhanced products may not adequately meet the requirements of
the marketplace and achieve market acceptance or may not keep pace with advances made by our
competitors.
We currently have several U.S. patents pending, and there can be no assurance that our patent
applications will be granted. Further, there can be no assurance that our technologies will be
accepted in the marketplace. In addition, different technologies owned by others could arise that
would be superior or more marketable than ours. See – “Patents, Trademarks, Licenses, Franchises,
Concessions, Royalty Agreements, Or Labor Contracts.”
Our marketing success depends upon our pricing and product innovation. In general, the
markets in which the Company competes are characterized by ease of use, price, quality, as well as
developed distribution channels and contractor and customer relationships. The Company may not
always be able to respond to lower prices being offered or to new product innovations to be
competitive as this industry changes. In addition, these market
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characteristics are heightened by the emerging nature of the Internet and the evident trend of
companies from many industries offering products over the Internet.
We have been subject to fluctuations in our operating results and this will likely continue.
The Company’s economic success cannot be predicted with certainty. Accordingly, the Company’s
revenue and any earnings may fluctuate significantly from period to period, and the results of any
one period may not be indicative of results for any future periods. As with revenues, because of
the significant increase in the sales of the Company, the projected expenses may not be the same as
the actual expenses incurred.
We are uncertain about market acceptance. The sale and use of the Company’s existing products
depends not only on the price and quality of these products but also on the general music industry.
Whether or not the Company’s existing products, technological superiority, quality and pricing
warrant the demand necessary to achieve widespread customer acceptance is uncertain. Lack of
customer acceptance of the Company’s products will have an adverse effect on the Company.
Although the Company has registered a patent to protect its products, there is no assurance
that agreements with employees, consultants and others will prevent the disclosure of confidential
information, or that the Company will have adequate remedies available to it if information is
disclosed, or that the Company’s trade secrets will not otherwise be disclosed or independently
developed by competitors.
There is a substantial cost of building brand awareness which may not guarantee success. The
Company’s initiatives regarding significantly increasing sales will require the Company to build
significant brand awareness, sufficient to attract customers to buy its product. This will entail
an investment in marketing and advertising programs, which will not guarantee that sufficient
customers will buy the Company’s product, which in turn could have a material adverse effect on the
Company.
Our company represents an extremely high degree of business risk. The Company is a fairly new
enterprise which is in the process of marketing certain unique products to the music industry and
to music fans themselves. The Company may encounter unusual or unexpected problems which it may or
may not be successful in resolving. Failure to resolve any such problems could cause the Company
to spend significant capital to resolve such problems or cause the Company’s revenues to decrease
substantially. Either one or both these events could case the Company to cease operations
resulting in investors in the Company loosing all or a portion of their investment.
Government regulation may affect our business. Laws and regulations may be passed in respect
to the online music industry which could adversely affect the growth of this market, which could in
turn decrease the demand for the Company’s products or could otherwise have a material adverse
effect on its business, financial condition and operating results.
We are dependent on single business and we lack diversification in our business products. The
Company is engaged solely in the business of the marketing of its DiscLive services and has no
current plans to enter into any other business opportunities. As a result, the financial success of
the Company is completely dependent upon the Company’s ability to successfully market its DiscLive
services to potential customers, the success of its business strategy and the continued
existence/viability of said products. Management does not believe that its business can be readily
adapted to other businesses without significant cost and expense and there can be no assurance that
the Company would be successful in locating or operating any alternative business or that it will
have sufficient financial resources to implement any significant change in its business.
We will encounter substantial risks associated with acquisitions. If appropriate
opportunities present themselves, the Company may acquire businesses, technologies, services or
product(s) that the Company believes are strategic and would help it to expand its operations
and/or future customer base. Future acquisitions could result in potentially dilutive issuances of
equity securities, the incurrence of debt, contingent liabilities and/or amortization expenses
related to goodwill and other intangible assets, which could materially adversely affect the
Company’s business, results of operations and financial condition. Any future acquisitions of
other businesses, technologies, services or product(s) might require the Company to obtain
additional equity or debt financing, which might not be available on terms favorable to the
Company, or at all, and such financing, if available, might be dilutive.
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We also expect to experience increased competition from new entrants into the market. We may
be unable to compete with large music companies, including the music divisions of large
international firms. This increased competition may result in pricing pressures, loss of market
share or loss of clients, any of which could have an adverse effect on our business, financial
condition, operating results and cash flows.
Our common stock may be subject to penny stock rules and regulations. Federal rules and
regulations under the Exchange Act regulate the trading of so-called penny stocks, which generally
refers to low-priced (below $5.00), speculative securities of very small companies traded on the
OTC Bulletin Board or in the Pink Sheets. Trading, if any, in shares of common stock may be
subject to the full range of penny stock rules. Before a broker/dealer can sell a penny stock,
these rules require the broker/dealer to first approve the investor for the transaction and obtain
from the investor a written agreement regarding the transaction. The broker/dealer must also
furnish the investor with a document describing the risks of investing in penny stocks. The
broker/dealer must also tell the investor the current market quotation, if any, for the penny stock
and the compensation the broker/dealer will receive for the trade. Finally, the broker/dealer must
send monthly account statements showing the market value of each penny stock held in the investor’s
account. If these rules are not followed by the broker/dealer, the investor may have no obligation
to purchase the shares. Accordingly, these rules and regulations may make it more expensive and
difficult for broker/dealers to sell shares of our common stock, and purchasers of our common stock
may experience difficulty in selling such shares in secondary trading markets.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty
Agreements, Or Labor Contracts.
The Company regards substantial elements of its future and underlying infrastructure and
technology as proprietary and attempts to protect them by relying on trademark, service mark,
copyright and trade secret laws and restrictions on disclosure and transferring title and other
methods. The Company plans to enter into confidentiality agreements with its future employees and
any future consultants. Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use the Company’s proprietary information without authorization or to develop
similar technology independently. The Company has several patents regarding its technology and has
applied for several patents regarding its software technology. Legal standards relating to the
validity, enforceability and scope of protection of certain proprietary rights in the software
business may be uncertain, and no assurance can be given as to the future viability or value of any
of the Company’s proprietary rights. This can be no assurance that the steps taken by the Company
will prevent misappropriation or infringement of its proprietary information, which could have a
material adverse effect on the Company’s business, results of operations and financial condition.
Effect Of Existing Or Probable Government
Regulations
Currently there is no absolute standard of government regulation that would affect
Immediatek’s business; however, the issues raised by copyrights, royalties, and the controversies
that have amassed around the exchange of MP3 files may result in such regulations and must be
addressed by any company seriously considering the future of the industry. Beyond this issue of
copyrights and royalties to artists/distributors, some government legislation has been proposed
that imposes liability for or prohibits the transmission over the Internet of certain types of
information. The imposition upon the Company and other online providers of potential liability for
information carried on or disseminated through their services could require the Company to
implement measures to reduce its exposure to such liability, which may require the Company to
expend substantial resources and/or to discontinue certain service offerings. The inability to
ascertain the effect of government regulation on a prospective business activity presents a risk to
the Company.
8
Impact On Environmental Laws
The Company is not aware of any federal, state or local environmental laws that would effect
its operations.
Employees
The Company currently has four full time employees and one part-time employee.
The Company’s performance is substantially dependent on the performance of its executive
officers, Zach Bair and Paul Marin. The Company does not carry key person life insurance on any of
its personnel. The loss of the services of its executive officers could have a material adverse
effect on the business, results of operations and financial condition of the Company. The
Company’s future success also depends on its eventual ability to attract and retain highly
qualified technical and managerial personnel.
There can be no assurance that in the future the Company will be able to attract and retain
additional highly qualified technical and managerial personnel. The inability to attract and retain
the technical and managerial personnel necessary to support the growth of the Company’s business,
due to, among other things, a large increase in the wages demanded by such personnel, could have a
material adverse effect upon the Company’s business, results of operations and financial condition.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company’s corporate headquarters are located at 10488 Brockwood Road, Dallas, Texas 75238.
We sublease approximately 4800 square feet of office space at a rent of $2,000 per month. Our
lease expires in February 2007. There is significant office space at competitive prices available
to us in the same geographical location as its current office.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings ongoing at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted for stockholder approval in fiscal year 2005.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
As of May 1, 2006, we had approximately 286 record holders of our common stock, and a
total of 32,394,655 shares of our common stock were outstanding. Our common stock is currently
being quoted on the OTC Bulletin Board under the symbol “ITEKE.” A limited market exists for the
trading of the Company’s common stock. The table below sets forth the high and low bid prices of
our common stock for each quarter shown, as provided by the Nasdaq Trading and Market Services
Research Unit. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
| |
|
|
|
|
|
|
|
|
| Fiscal 2004 |
|
HIGH |
|
LOW |
Quarter Ended March 31, 2004 |
|
|
0.06 |
|
|
|
0.04 |
|
Quarter Ended June 30, 2004 |
|
|
0.05 |
|
|
|
0.01 |
|
Quarter Ended September 30, 2004 |
|
|
0.09 |
|
|
|
0.01 |
|
Quarter Ended December 31, 2004 |
|
|
0.09 |
|
|
|
0.01 |
|
| |
|
|
|
|
|
|
|
|
| Fiscal 2005 |
|
HIGH |
|
LOW |
Quarter Ended March 31, 2005 |
|
|
0.25 |
|
|
|
0.12 |
|
Quarter Ended June 30, 2005 |
|
|
0.15 |
|
|
|
0.07 |
|
Quarter Ended September 30, 2005 |
|
|
0.05 |
|
|
|
0.01 |
|
Quarter Ended December 31, 2005 |
|
|
0.10 |
|
|
|
0.01 |
|
Holders
The approximate number of holders of record of common stock as of May 1, 2006 was 286.
Dividends
Holders of common stock are entitled to receive such dividends as the board of directors may
from time to time declare out of funds legally available for the payment of dividends. No
dividends have been paid on our common stock, and we do not anticipate paying any dividends on our
common stock in the foreseeable future.
Unregistered Sale of Equity Securities
On February 28, 2005, the Company entered into an “Asset Purchase Agreement” with Moving
Records, LLC, (“MR”) a private company established and operated in the State of Minnesota.
Pursuant to the agreement, the Company acquired equipment valued at $288,998, intellectual property
valued at $125,000 and agreed to assume a total of $138,606 in debt from MR under separate
promissory note and $13,973 in accounts payable, in exchange for 2,500,000 shares of the Company’s
$0.001 par value common stock. The fair value of the Company’s common stock on the date of the
agreement was $450,000.
On March 4, 2005, the Company issued 64,000 shares of its $0.001 par value common stock for
consulting services valued at $7,680.
9
On July 6, 2005, the Company issued 50,000 shares of its $0.001 par value common stock for
consulting services valued at $2,500, the fair market value of the underlying shares.
On September 15, 2005 and September 23, 2005, the Company issued 5,775,000 shares and 600,000
shares, respectively of its $0.001 par value common stock to key employees of the Company valued at
$115,500 and $12,000, respectively.
On May 6, 2005, the Company entered into a consulting agreement with an individual. The
Company granted 650,000 stock options to vest over a period of thirty-six months as consideration
for the services performed. The options expire on May 6, 2008.
The foregoing issuances of securities were issued by the Company in reliance upon an exemption
from registration set forth in Section 4(2) of the Securities Act of 1933, as transactions not
constituting a public offering of securities.
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Overview
Unless the context otherwise indicates, the words “we,” “our,” “ours,” “us” and the
“Company” refer to Immediatek, Inc., or ITEK, and its subsidiaries, including DiscLive, Inc., or
DiscLive, collectively.
The following Management’s Discussion and Analysis, or MD&A, is intended to aid the reader in
understanding us, our operations and our present business environment. MD&A is provided as a
supplement to, and should be read in conjunction with, our consolidated financial statements and
the notes accompanying those financial statements, which are included in this Annual Report on Form
10-KSB. MD&A includes the following sections:
| |
• |
|
Our Business – a general description of our business; our objectives, our areas of
focus; and the challenges and risks of our business. |
| |
| |
• |
|
Critical Accounting Policies and Estimates – a discussion of accounting policies that
require critical judgments and estimates. |
| |
| |
• |
|
Operations Review – an analysis of our consolidated results of operations for the two
years presented in our consolidated financial statements. |
| |
| |
• |
|
Liquidity, Capital Resources and Financial Position – an analysis of our cash flows and
debt and contractual obligations; and an overview of our financial position. |
Our Business
General
ITEK, through its operating subsidiary, DiscLive, records live content, such as concerts and
conferences, and makes the recorded content available for sale to attendees within fifteen minutes
after the conclusion of the live event. The recorded content is also made available for sale on
our website, www.disclive.com. The content is delivered primarily via CD or DVD. Additionally, in
November 2005, we made recorded content available for download via iPod® at The Hollywood
Reporter/Billboard Film & TV Music Conference. We anticipate making this method of delivery
available at many of the events we record going forward.
DiscLive has recorded live events for Billy Idol, Jefferson Starship, the Pixies, The Fixx,
George Clinton (DVD) and Vertical Horizon to name a few. During 2005, we recorded 51 live events
and sold, or delivered under contract, approximately 10,000 recordings of those events.
10
History of Operating Losses
We incurred a net loss of $1.9 million and $3.9 million and used cash in operations of $0.4
million and $1.4 million for the years ended December 31, 2005 and 2004, respectively. In
addition, we are highly leveraged. At December 31, 2005, our current liabilities exceeded current
assets by $2.2 million and our stockholders’ deficit was $2.0 million. Our existence and
operations are dependent upon our ability to obtain the necessary capital, primarily through the
issuance of additional equity. See “Recent Developments and Change in Control” below.
The reports of our independent registered public accounting firm on our financial statements
for the years ended December 31, 2005 and 2004, include an emphasis paragraph, in addition to their
audit opinion, stating that our recurring losses from operations and working capital deficiency
raise substantial doubt about our ability to continue as a going concern. The financial statements
do not include any adjustments to reflect the possible effects on recoverability and classification
of assets or the amounts and classification of liabilities that may result from our inability to
continue as a going concern.
We have funded our operations during fiscal year 2005 for the most part by incurring
indebtedness. During the fiscal year ended December 31, 2005, we raised $688,449 in short-term
debt to cover operations and repay indebtedness.
Recent Developments and Change in Control
On January 24, 2006, we entered into a Securities Purchase Agreement, or Purchase Agreement,
with Radical Holdings LP, or Radical, which was subsequently amended on March 3, 2006. Upon the
satisfaction of conditions precedent contained in the Purchase Agreement, Radical will purchase
4,392,286 shares of Series A Convertible Preferred Stock for an aggregate purchase price of $3.0
million, or $0.68 per share of Series A Convertible Preferred Stock. The Series A Convertible
Preferred Stock is convertible, at the option of, and at any time by, Radical, into that number of
full shares of our common stock representing 95% of our outstanding common stock after giving
effect to the conversion. Upon the purchase of the Series A Convertible Preferred Stock of the
Company by Radical pursuant to the Purchase Agreement, as amended, a change in control of the
Company will occur, as Radical will beneficially own 95% of the outstanding securities of the
Company entitled to vote on matters required or permitted to be submitted to the stockholders of
the Company.
Our Objectives
Our objective is to utilize our current assets – brand name, unique concept, trade secrets,
intellectual property and people – to increase live recordings and sales of those recordings. Our
vision to achieve that objective includes:
| |
• |
|
Increase in Recordings: Market and expand our services to a number of live
events in order to increase the sales of our product. If the transaction evidenced
by the Purchase Agreement is consummated, management will be able to devote its
time to this endeavor instead of securing capital to continue operations. |
| |
| |
• |
|
Profit: Maximizing our profit on live events by controlling costs and utilizing
our assets efficiently. |
Areas of Focus
Closing the Transaction Evidenced by the Purchase Agreement. Our primary focus at this time
is to close the transaction evidenced by the Purchase Agreement because that will provide us with
vital operating funds required to continue operations and repay our outstanding liabilities. There
are conditions that must be satisfied by us prior the closing of that transaction, including, among
others, amending our articles of incorporation, and our management has been diligently working to
satisfy those conditions.
Revitalizing the Company. We are focused on revitalizing the Company using the proceeds from
the sale of the Series A Convertible Preferred Stock. In anticipation of receipt of those funds,
we have hired three new employees, one in sales, one in accounting and one for customer assistance
and general matters. With these new employees, we believe that we will have the necessary people
to support and manage our operations. Further, utilizing the proceeds from the sale of the Series
A Convertible Preferred Stock to repay all of our outstanding
11
liabilities, which is required by the Purchase Agreement, we believe that we will have better
relationships with vendors and more creditability with customers.
Realizing on Our Business Plan and Potential. Upon receipt of the proceeds from the sale of
the Series A Convertible Preferred Stock, our management will be able to direct substantially all
of its attention to implementing the business plan and operations rather than attempts to secure
additional funding to continue operations. We further believe that our existing employees,
together with our new employees, will allow us to better market our products, expend more time
analyzing and procuring contracts to record live events and better manage costs and assets in
performing under those contracts.
Challenges and Risks
Operating in this industry provides unique opportunities; however, challenges and risks
accompany those opportunities. Our management has identified the following material challenges and
risks that will require substantive attention from our management.
Closing the Transaction Evidenced by the Purchase Agreement. Management is making every
attempt to close the transaction whereby we will sell our Series A Convertible Preferred Stock for
an aggregate purchase price of $3.0 million to Radical. There can be no assurance, however, that
we can complete this transaction. If we don’t complete this transaction, we will not have the
funds necessary to continue our operations and will have to look elsewhere to obtain those funds
and such funds may not be available.
Utilizing the new funds, if obtained, in a manner that is accretive. If we do not manage our
assets aggressively and apply the additional capital, if received, judicially, we may not generate
sufficient cash from our operating activities to fund our operations going forward, which would
require us to seek additional funding in the future.
Obtaining Contracts to Record Live Content that are Profitable. While obtaining contracts to
record live events creates challenges in itself, our ability to obtain contracts to record live
events that generate sufficient sales of our products is even more challenging. Prior to entering
into recording contracts, we perform an analysis of the costs to be incurred and the amount of our
product that we estimate will be sold. These analyses contain many assumptions, many of which are
beyond our control. If our analysis of a number of recording contracts proves to be incorrect, we
will not generate sufficient cash from our operating activities to sustain operations and,
therefore, will require additional funding to continue our business.
Competing with a Substantial Competitor. Our major competitor, Instant Live, which is a
division of Live Nation, formerly a part of Clear Channel Entertainment, Inc., has substantial more
resources than us, both financially and in the industry. According to Live Nation, for the year
ended December 31, 2005, it promoted, produced or hosted over 29,500 events, including music
concerts, theatrical performances, specialized motor sports and other events, with total attendance
nearing 60 million, and as of December 31, 2005, it owned or operated 119 venues, consisting of 77
domestic and 42 international venues, which include 37 amphitheaters, 61 theaters, 15 clubs, four
arenas and two festival sites. As a result of Live Nation’s ownership of the venues and production
of the events, we believe that Instant Live has a substantial competitive position to us in
obtaining live event recording contracts.
Maintaining a Quality Product. The “live disc” space is a new business. In early 2004 the
speed of CD duplicators increased to a point to improve scalability. The Company has transitioned
to multi-track recording, to provide a better audio product.
Additionally, see “Risk Factors” in Part I of this Annual Report on Form 10-KSB concerning
risks and uncertainties facing us.
Challenges and risks, including those described above, if not properly addressed or managed,
may have a material adverse effect on our business. Our management, however, is endeavoring to
properly manage and address these challenges and risks.
12
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted
accounting principles in the United States, which requires management to make estimates, judgments
and assumptions that the amounts reported in the consolidated financial statements and in the notes
accompanying the financial statements. We believe that the most critical accounting policies and
estimates relate to the following:
| |
• |
|
Recoverability of Non-Current Assets; The Company has certain non-current
assets, including goodwill and tangible fixed assets. Management considers the life
of goodwill on an annual basis and is assessed for recoverability if events occur
that provide indications of impairment. An assessment of recoverability involves
comparing the carrying value of the asset with its recoverable amount, typically
its value in use. If the value in use of a non-current asset were determined to be
less than its carrying value, an impairment would be charged to the Income
Statement. |
| |
| |
• |
|
Revenue Recognition; The Company recognizes revenues, net of sales tax and
including shipping and handling charges billed to customers, upon shipment of goods
to customers. |
While our estimates and assumptions are based on our knowledge of current events and actions
we may undertake in the future, actual results may ultimately differ from those estimates and
assumptions. For a discussion of our significant accounting policies, see Note 2 of Notes to
Consolidated Financial Statements commencing on page F-7.
Recent Accounting Standards and Pronouncements
Refer to Note 2 of the Consolidated Financial Statements appearing on page F-7 for a
discussion of recent accounting standards and pronouncements.
Operations Review
The Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
Revenues. For the year ended December 31, 2005, revenue was $140,912, compared to $1,098,680
for the year ended December 31, 2004, or a decrease of $957,768. The decrease in revenue was due
to the conclusion of the contract to record the Pixies, which was our largest live content
recording contract to date.
We expect revenues for the year ended December 31, 2006, to increase from the year ended
December 31, 2005, as we ramp up our operations, which were limited in fiscal 2005 due to the lack
of necessary operating funds.
Cost of Sales. For the year ended December 31, 2005, cost of sales was $153,228, compared to
$919,295 for the year ended December 31, 2004, or a decrease of $766,067. The decrease in cost of
sales is attributable to decrease in products sold, in fiscal 2005 compared to fiscal 2004.
Further, as a result of the decrease in sales in year 2005, our profit margins decreased due the
decrease in the volume of products sold.
Consulting Fees. For the year ended December 31, 2005, consulting service expenses were
$206,514 as compared to $1,251,244 for the year ended December 31, 2004. This decrease in
consulting service expense was attributable to limited working capital as a result in a downturn in
revenue and a decrease in the amount of stock based compensation.
During the year ended December 31, 2006, we expect to have minimal or no consulting expense as
we have terminated all of our consultants. We may be required to retain a consultant to review and
implement internal controls required by the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley. The
Securities and Exchange Commission, however, is considering relief under this requirement for small
business issuers, but has not published its conclusions as of yet. As a result, we are unable to
determine what costs will be required to be incurred in order to meet these requirements.
13
Depreciation Expense. Depreciation expense decreased $12,436 from the prior year ended
December 31, 2004. This decrease in depreciation expense resulted in declines in capital
expenditures for the current year. We anticipate depreciation expense will decrease in year 2006
due to the write-off of $939,454 of our assets based upon evaluation that the value of these assets
will not be recovered.
General and Administrative Expense. For the year ended December 31, 2005, general and
administrative expenses were $323,465, as compared to $1,768,327 for the year ended December 31,
2004. This decrease is attributable to a decrease in business activity for the current year and
limited working capital in 2005.
We anticipate general and administrative expense will increase in year 2006 due the new office
space we leased in 2006 at a rate of $2,000 per month, the increase in the number of total
employees from two to five and costs of new procedures and policies, which are being implemented to
assist us in operating more efficiently and may be required by Sarbanes-Oxley.
Professional Fees. Professional fees were $153,309 for the year ended December 31, 2005, as
compared to $284,183 for the year ended December 31, 2004. This decrease resulted from a decrease
in business activity for the current year and limited working capital in 2005.
We anticipate that professional fees for year 2006 will increase. These increases will be
attributable to the transaction with Radical, increases in audit fees resulting from implementation
of the Sarbanes-Oxley requirement for the audit of our internal controls, and other professional
fees incurred as we ramp up our operations. We anticipate that these increases will be partially
offset by decreases in accounting and book-keeping fees, as we have hired an employee to perform
this function.
Sales and Marketing Expenses. For the year ended December 31, 2005, sales and marketing
expenses were $5,960, as compared to $89,943 for the year ended December 31, 2004. This decrease
is attributable to the lack of funds to operate our business during year 2005. We expect that
these expenses will increase slightly during year 2006 as we ramp our business operations.
Research and Development. No research and development expense was incurred in the year ended
December 31, 2005, as compared to $50,605 in the year ended December 31, 2004. This decrease is
due to our focus on operations of the live CD business through the existing infrastructure without
no new research and development for the current year We do not expect to incur any research and
development expense in year 2006.
Salaries and Wages. Salaries and wages for the year ended December 31, 2005, were $144,440,
as compared to $465,611 for the year ended December 31, 2004. This decrease is attributable to the
resignation of several employees during the second half of 2004. We expect to incur additional
salary and wage expense during year 2006 as we ramp up our operations and perform under more
contracts to record live content.
Salary and wage expenses will increase by approximately $220,000 during year 2006 due the
employment agreements that entered into by and between DiscLive and Zach Bair and Paul Marin, which
is a condition under the Purchase Agreement, and the addition of three new employees. Other than
the foregoing, we do not expect any further increases in salary and wage expense during year 2006.
Other Income (Expense). Other Expense of $75,784 for the year ended December 31, 2005,
consisted primarily of interest expense of $83,418, which was offset by $7,634 of forgiveness of
debt.
Income Taxes. There was no federal income tax expense for the years ended December 31, 2005
and 2004 due a net loss in each period.
14
Liquidity and Capital Resources and Financial Position
Our cash and cash equivalents were at a deficit of $2,951 at December 31, 2005, as compared to
$21,550 at December 31, 2004. The decrease in cash and cash equivalents is due to the fact that
cash provided by operating and financing activities was not sufficient to support cash used in
operating and investing activities. Due to the shortfall in cash generated from operating
activities, we had to borrow $688,449 and limit our operations in 2005.
As a result of our inability to generate sufficient cash from operating activities at this
time to sustain our operations, additional financing is required. In that regard, we entered into
the Purchase Agreement with Radical, which will provide us with $3.0 million of funds upon the sale
of the Series A Convertible Preferred Stock in accordance with, and subject to, the terms of the
Purchase Agreement. The proceeds are required to be used to pay all outstanding liabilities,
including, among others, accounts payable and indebtedness. After satisfying all of our
liabilities, we estimate that we will have $750,000 of operating funds, which we anticipate will
sustain our operations for fiscal year 2006. At the end of fiscal year 2006, we will be required
to obtain additional funds if we do not generate sufficient cash from operating activities to fund
our future operating activities. No assurance can be given, however, that the sale of the Series A
Convertible Preferred Stock will occur or that we will be able to obtain any funds when and if
needed.
Operating Activities. Cash used in operating activities was $360,104 and $1,417,558 for the
fiscal year ended December 31, 2005 2004, respectively. The decrease resulted primarily from a
decrease in shares issued for consulting services.
Investing Activities. Cash used in investing activities was $13,646 for the year ended
December 31, 2005 and $10,877 for the year ended December 31, 2004. Purchases of fixed assets
decreased by $17,893 but were offset by cash received from an acquisition in the amount of $20,662
in 2004.
Financing Activities. Cash from financing activities was $352,200 for the year ended December
31, 2005 and $1,331,423 for the year ended December 31, 2004. The decrease resulted primarily from
the private placement we conducted in 2004, which was offset by $688,449 of borrowings by us in
2005.
Indebtedness
We have no long-term debt, but have significant short-term debt. As a result, we are highly
leveraged. At December 31, 2005, our current liabilities exceeded our current assets by $2.2
million and our stockholders’ deficit was $ 2.0 million. The following table is a summary of our
short-term debt as of December 31, 2005.
| |
|
|
|
|
| |
|
Balance at |
|
| Short-Term Debt |
|
December 31, 2005 (1) |
|
Secured Convertible Promissory Notes, dated November 29, 2004,
bearing interest at 10% per annum |
|
$ |
580,249 |
(2) |
Secured Promissory Note, dated April 8, 2005, bearing interest at 10%
per annum |
|
$ |
425,000 |
(3) |
Promissory Note in favor of Chief Executive Officer, bearing no
interest |
|
$ |
43,000 |
|
Secured Promissory Note in favor of Community Bank, bearing interest
at 7% per annum |
|
$ |
18,606 |
(4) |
Promissory Note, dated Feb. 28th, 2005, bearing interest
at 7% per annum |
|
$ |
100,000 |
|
Promissory Note, dated Sept. 9th, 2004, bearing no interest |
|
$ |
5,000 |
|
|
|
|
|
Total Short-Term Debt |
|
$ |
1,171,855 |
|
|
|
|
|
|
|
|
| (1) |
|
Except as otherwise described in the following footnotes, we are required to use the proceeds
from the sale of the Series A Convertible Preferred Stock to repay all amounts outstanding
under this short-term indebtedness |
15
|
|
|
| |
|
after giving effect to the conversion of indebtedness to our common stock as described in the
following footnotes. |
| |
| (2) |
|
The holders of these notes have agreed to convert $525,500 aggregate principal amount into
shares of our common stock at $12.50 per share (post-100-for-1 reverse stock split)
immediately prior to sale of the Series A Convertible Preferred Stock and to waive all accrued
but unpaid interest on those notes at conversion. |
| |
| (3) |
|
The holder of this note has agreed to waive the payment of all accrued but unpaid interest on
this note upon payment in full of the outstanding principal amount of the note. |
| |
| (4) |
|
This note was repaid in full in March 2006 with the proceeds from a loan to us made to us by
Radical. |
Accounts Payable
At December 31, 2005, we had $488,512 of accounts payable outstanding, 91% of which had ages
over 90 days. See “Liquidity” below. The proceeds from the sale of the Series A Convertible
Preferred Stock under the Purchase Agreement are required to be utilized to satisfy all of our
accounts payable.
Contractual Obligations and Commercial Commitments
The following table highlights, as of December 31, 2005, our contractual obligations and
commitments by type and period:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Payments due by Period |
| Contractual Obligations |
|
Total |
|
Less than 1 Year |
|
1-3 Years |
Short-Term Debt (1) |
|
$ |
1,171,855 |
|
|
$ |
1,171,855 |
|
|
|
— |
|
Guaranty (2) |
|
|
580,249 |
|
|
|
580,249 |
|
|
|
— |
|
|
|
|
| (1) |
|
This short-term indebtedness is required to be paid with the proceeds from the sale of the
Series A Convertible Preferred Stock pursuant to the Purchase Agreement.
|
| |
| (2) |
|
This is a guaranty by DiscLive of the obligations under those certain notes, dated November 29,
2004. |
Liquidity
We will require approximately $750,000 of funds to operate our business at the desired level
during year 2006. We presently do not generate sufficient cash from operations to fund our
operating activities and, until recently, limited operations to that which we deemed to be
critical.
Radical may, from time to time, in its sole discretion, prior to the closing of the purchase
and sale of the Series A Convertible Preferred Stock, loan funds to us to pay outstanding
liabilities, accounts payable or other obligations and to provide necessary funds to operate our
business. Any funds loaned to us are required:
(i) to be applied in strict accordance with the uses approved by Radical;
(ii) if the closing of the purchase and sale of the Series A Convertible Preferred Stock
occurs, to be fully credited towards the aggregate purchase price of the Series A Convertible
Preferred Stock; and
(iii) if the Purchase Agreement is terminated for any reason whatsoever, to be repaid in full
to Radical, without interest and without deduction thereon, within thirty (30) days following the
date of the termination of the Purchase Agreement.
In the event that any funds loaned to us are not repaid pursuant to item (iii) immediately above,
we will make in favor of Radical a non-interest bearing note in the aggregate amount loaned by
Radical to us and grant Radical a security interest in all of our assets to secure the repayment of
all the amounts due and payable under such note or notes. The note or notes shall have a term of
ninety (90) days, and the note or notes and security agreement shall be in a form reasonably
satisfactory to Radical. As of March 31, 2006, Radical has loaned us an aggregate of $287,000.
We are relying on the consummation of the sale of the Series A Convertible Preferred Stock to
provide us with the necessary funds to operate our business for year 2006. In the event that the
sale does not occur, we will be
16
required to seek alternative financing. Our ability to obtain financing outside of the sale of the
Series A Convertible Preferred Stock depends on many factors, many of which are out of our control,
such as the state of the capital markets, the market price for our common stock, and the prospects
for our business. The necessary additional financing may not be available to us or may be
available on adverse terms. Consequently, failure to consummate the sale of the Series A
Convertible Preferred Stock or obtain alternative financing would have a material adverse effect on
our business, results of operations and financial condition. If the financing we require to
sustain our operations is unavailable or insufficient, we may be unable to continue as a going
concern.
ITEM 7. FINANCIAL STATEMENTS.
CONTENTS
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F-3 |
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F-7 -17 |
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17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 8A. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), we
carried out an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2005. This evaluation was carried out under the
supervision and with the participation of our Chief Executive Officer. Based upon that evaluation,
our Chief Executive and Financial Officer concluded that our disclosure controls and procedures
have not been effective in timely alerting management to material information relating to us
required to be included in our periodic SEC filings.
On March 3, 2006 management and our Board of Directors concluded that we will be required to
restate its previously issued financial statements for the years ended December 31, 2003 and 2004
appearing in our Forms 10-KSB for the years ended December 31, 2003 and 2004, and the interim
financial statements contained in Forms 10-QSB for the quarters ending in those years. In addition,
our Board of Directors concluded that we will be required to restate our previously issued interim
financial statements for the quarters ended March 31, June 30 and September 30 for the year ended
December 31, 2005 appearing the Forms 10-QSB for those periods.
The conclusions of our Board of Directors were based upon the following:
Year Ending December 31, 2003:
Upon an analysis of the value of services and the current market value of our common stock at
the time of issue, we determined, pursuant to FAS 123, the greater of the two to be the fair market
value to be the fair market value of the underlying shares and, therefore, expensed all
compensatory issuances during the quarter ended March 31, 2003, at the fair market value of the
underlying shares. Subsequent to this determination, additional consideration was given to a
revaluation based upon an appraisal prepared by an independent third-party. As a result, there is a
material adjustment to the original expense reported on the Company Form 10-QSB for the period
ended March 31, 2003. This restatement is estimated to reduce the overall net loss for the year
ended December 31, 2003, by approximately $2.1 million, and the impact on the loss per share is
estimated to a decrease of $0.12 per share, or $(0.05) per share restated compared to $(0.17) per
share originally reported.
Years Ending December 31, 2004 and 2005:
It has come to the attention of the Company through an independent due diligence process that
previous grants of options and warrants by the Company has not been properly disclosed during the
year ended December 31, 2004 and the quarter ended June 30, 2005.
We believe that we have implemented a better system of controls and review process by our
management and accountants to avoid similar problems in the future. This is being accomplished by a
periodic review of our day to day financial entries by our accountant so that they may alert
management to any improper entries or issues that need to be resolved in accordance with proper
generally accepted accounting principals (GAAP) accounting.
Disclosure controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer, to allow timely decisions regarding required
disclosure.
18
Item 8B. Other Information
Preemptive Rights
As part of our preparation for the Radical stock purchase, we have requested that our
stockholders waive their preemptive rights which were granted them previously by a provision in our
Articles of Incorporation. As of May 1, 2006, thirty four (34) of our stockholders holding
approximately 80.2% of our common shares have executed the requested waiver including our Chief
Executive Officer, Zach Bair and our Chief Operations Officer, Paul Marin. Provided, however, the
waivers entered into by Messrs. Bair and Marin are subject to no other stockholders exercising
their respective preemptive rights, and in the event that any stockholder exercises a preemptive
right Messrs. Bair and Marin have an affirmative obligation to exercise the respective preemptive
rights to the extent necessary to maintain their respective percentage ownership interest in the
Company. Attached to this report are copies of the various form waiver agreements.
Note Conversion Agreement, Waiver and Release
On or about January 9, 2006, four of our creditors, representing $1,004,249 of our
indebtedness, have entered into Note Conversion Agreement, Waiver and Release agreements with us,
which were subsequently amended on March 15, 2006. Pursuant to this agreement, these note holders
have agreed to convert $525,000 aggregate principal amount evidenced by those notes into shares of
our common stock at a conversion price of $0.125 per share (or $12.50 per share post-reverse
split). Additionally, pursuant to these agreements, these note holders have agreed to waive any
and all accrued but unpaid interest on these notes.
A form of the Note Conversion Agreement is attached as an exhibit to this report.
See “Certain Relationships and Related Transactions” for a description of certain other information
applicable to this item.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A)OF THE EXCHANGE ACT.
The members of the Board of Directors of the Company serve until the next annual meeting of
stockholders. The officers serve at the pleasure of the Board of Directors. Information as to
the directors and executive officers of the Company is as follows:
MANAGEMENT
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| Name |
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Age |
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Position |
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Year First Elected/Appointed |
Zach Bair |
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43 |
|
Chairman, Director and CEO |
|
2002 |
Paul Marin |
|
36 |
|
COO and Director |
|
2003 |
Zach Bair, Chairman and CEO – Bair has been a professional consultant in the IT
industry since 1986, and in recent years gained local recognition for founding Richardson, Texas
based software company PowerUp Networks. He is an expert in business process engineering through
the use of technology and coined the term “Efficient Solutions Provider,” or “ESP.” Bair started
PowerUp Networks in 2000. Before and during his tenure at Sabre, Inc., Bair conceived and authored
what is now the flagship product of PowerUp Networks, “Rapid Network Deployment,” or RND. In terms
of an agreement between Bair and Sabre, Sabre continues to use the product internally as “WARPED,”
and Bair has the rights to develop the product for the broader marketplace. Bair funded this
venture with a seed round of financing of $600,000 and then brought on Alan Shannon, formerly of
Read-Rite Corporation, EDS and TI, as CEO, and Peter Donovan, formerly of Nortel, as Chief
Marketing Officer. Kevin Clark was then enlisted as VP for
19
Development. In less than three months, the core PowerUp management team, led by Bair and
Shannon, raised over $12 million in a Series B funding round.
Bair is a U.S. Air Force veteran, and attended Louisiana State University in Shreveport, LA,
and then Stephen F. Austin State University in Nacogdoches, majoring in English. Bair has provided
consulting services to Fortune 500 companies such as Marathon Oil, Arco Oil & Gas, MD Anderson
Cancer Center, Nortel, Sprint, EDS, and Sabre. Bair has been an entrepreneur since his college
years and his other ventures include the popular aviation-related website
http://www.pilot-jobs.com, and its sister website http://www.texascomputerjobs.com. Bair also has
over 20 years of experience in the music industry, as an artist, producer, and band
manager/promoter. He has been featured in Entrepreneur Magazine with his band No Control
(http://www.no-control.com), and has written, produced and recorded three independent CD releases
with No Control since the band was formed in 1990. Bair and his band have made appearances on Fox
television’s Good Day Dallas, as well as numerous live radio appearances on top-rated stations such
as Dallas’ Eagle 97.1.
Paul Marin, COO & Director - In 1999, Mr. Marin founded and developed LCD Interactive,
Inc., a software company specializing in CD burning technology. Mr. Marin raised private equity
capital, filed patents, established corporate policies, negotiated stock purchase agreements,
recruited the Board of Directors and secured over 300 license agreements from record labels from
over 20 countries around the world. Prior to Mr. Marin’s founding of LCD Interactive, he advised on
structuring mergers and acquisitions in both Mexico and Brazil. Paul has over 12 years experience
in international finance with specific expertise in mergers and acquisitions, corporate finance,
valuation, financial modeling, tax structuring and operations research analysis. He has conducted
numerous M&A activities in Latin America including foreign ownership research, financial modeling,
preparation of offering documents and deal structure. Mr. Marin has successfully closed over $1
billion in transactions of senior notes while with Citicorp. Mr. Marin also has considerable
experience in cross border transactions involving foreign direct investment and international joint
ventures. His expertise in communicating with foreign top-level executives of international
corporations has provided him a firsthand knowledge of foreign customs and cultures from around the
globe.
Mr. Marin holds an MBA in International Management from the University of Texas at Dallas. He
also holds a BBA with a double major in Finance and Accounting from the University of North Texas.
Mr. Marin is fluent in Spanish.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
directors and executive officers, and persons who beneficially own more than ten percent (10%) of a
registered class of the Company’s equity securities, to file reports of beneficial ownership and
changes in beneficial ownership of the Company’s securities with the Securities and Exchange
Commission (“SEC”) on Form 3 (Initial Statement of Beneficial Ownership), Form 4 (Statement of
Changes of Beneficial Ownership of Securities) and Form 5 (Annual Statement of Beneficial Ownership
of Securities). Directors, executive officers and beneficial owners of more than ten percent (10%)
of the Company’s common stock are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms that they file. Based solely on a review of the copies of such forms
furnished to the Company, or written representations that no reports were required, the Company
believes that all directors, executive officers and beneficial owners have not complied with the
Section 16(a) filing requirements applicable to them. We are endeavoring to rectify this
shortcoming and believe we will complete compliance within the next thirty to sixty days.
As of the date of this report we have not established an audit committee. We anticipate
establishing an audit committee and filing with the commission an appropriate audit committee
charter upon successful completion of the stock purchase transaction with Radical and the
concurrent change of control.
We have not adopted a code of ethics for our officers and directors as of the date of this
report. We anticipate drafting and filing with the commission a code of ethics upon successful
completion of the stock purchase transaction with Radical and the concurrent change of control.
20
ITEM 10. EXECUTIVE COMPENSATION.
The following table summarizes the compensation earned by Immediatek’s Chief Executive Officer
and other most highly compensated executive officers (whose annualized compensation exceeded
$100,000) (collectively called the “named executive officers”), for services rendered in all
capacities to Immediatek during the fiscal years ended December 31, 2005, 2004 and 2003.
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Securities |
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Underlying |
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Compensation |
| Name and Principal Positions |
|
Year |
|
Salary |
|
Bonus |
|
Options (#) |
|
Other $ |
Zach Bair, |
|
|
2005 |
|
|
$ |
76,656 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
President and Chief Executive Officer |
|
|
2004 |
|
|
$ |
175,310 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
2003 |
|
|
$ |
104,786 |
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Paul Marin, |
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2005 |
|
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$ |
53,557 |
|
|
|
— |
|
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— |
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— |
|
Chief Operating Officer |
|
|
2004 |
|
|
$ |
126,924 |
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|
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— |
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— |
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— |
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2003 |
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$ |
48,325 |
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Compensation of Directors
There were no arrangements pursuant to which any director of the Company was compensated for
the calendar year ended December 31, 2005 for any service provided as a director.
Employment Agreements
On March 7, 2006, DiscLive entered in employment agreements with Messrs. Bair and Marin that
are effective as of March 1, 2006. These employment agreements are a condition to the closing of
the purchase and sale of the Series A Convertible Preferred Stock under the Securities Purchase
Agreement, as amended.
In accordance with these employment agreements, Messrs. Bair and Marin will continue to be
employed as Chief Executive Officer and Chief Operating Officer, respectively, of DiscLive for a
term of three years. Pursuant to these employment agreements, the annual salaries for Messrs. Bair
and Marin for the first year are $102,000 and $94,800, respectively, and increase at a rate of five
percent each year. These employment agreements also provide that Messrs. Bair and Marin are
eligible to participate in benefit plans made available by the Company.
Under their respective employment agreements, if the executive is terminated for a reason
other than cause, then the executive is entitled to receive the lesser of (i) the aggregate of the
sums payable to the executive for the remaining term of the employment agreement in the amounts and
at the times called for by the employment agreement and (ii) a sum equal to the executive’s then
current annual compensation payable in accordance with the regular payroll practices of the Company
over a period of one year following the date of termination of the employment agreement; provided,
however, in each case subject to the offset under certain circumstances.
21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the beneficial ownership of our
outstanding common stock as of May 1, 2006, by each person known by Immediatek to own beneficially
more than 5% of the outstanding common stock, by each of our directors and officers and by all of
our directors and officers as a group. Unless otherwise indicated below, all persons listed below
have sole voting and investment power with respect to their shares of common stock.
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|
Number of Shares |
|
|
|
|
| Name/Address |
|
Position |
|
of Common Stock |
|
|
% Ownership(1) |
|
Zach Bair |
|
Chief Executive |
|
|
|
|
|
|
|
|
10488 Brockwood Road |
|
Officer/President/Director |
|
|
|
|
|
|
|
|
Dallas, TX 75238 |
|
|
|
|
11,195,265 |
|
|
|
34.6 |
% |
Paul Marin |
|
Chief Operating |
|
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|
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|
|
|
|
10488 Brockwood Road |
|
Officer/Vice |
|
|
|
|
|
|
|
|
Dallas, TX 75238 |
|
President/Director |
|
|
5,361,447 |
|
|
|
16.6 |
% |
Gary Blum
3104 Oak Lane
Dallas, Texas 75226 |
|
|
|
|
1,693,060 |
(2) |
|
|
5.2 |
% |
Jess Morgan & Co.
5750 Wilshire
Blvd., Suite 590
Los Angeles,
California 90036 |
|
|
|
|
5,003,836 |
(3) |
|
|
14.1 |
% |
Directors and
Executive Officers
as a group |
|
|
|
|
16,556,712 |
(4) |
|
|
51.1 |
% |
|
|
|
| (1) |
|
Based upon 32,394,655 shares of common stock outstanding on May 1, 2006. The shares of common
stock issuable under instruments to purchase common stock that are currently exercisable
within 60 days of May 1, 2006, are treated as if outstanding for purposes of computing the
percentage ownership of the person holding these instruments, but are not treated as
outstanding for purposes of computing the percentage ownership of any other person. |
| |
| (2) |
|
Does not include 2,404,000 shares of common stock issuable to Mr. Blum pursuant to an
agreement with the Company to convert $300,500 aggregate indebtedness owed by the Company to
Mr. Blum into common stock of the Company. |
| |
| (3) |
|
Includes 3,002,302 shares of common stock acquirable pursuant to the exercise of a warrant at
$0.20 per share which expires March 22, 2007. Excludes shares of common stock issuable to Jess
Morgan under that certain Agreement, Settlement and Release, dated January 22, 2006, by and
between the Company and Jess Morgan, as amended. In accordance with the Agreement, Settlement
and Release, as amended, Jess Morgan will be issued 94,157 shares of common stock
(post-reverse split), or such other amount as is necessary to result in Jess Morgan owning 25%
of the total outstanding common stock after giving effect to the reverse split and immediately
prior to the closing of the purchase and sale of the Series A Convertible Preferred Stock. |
| |
| (4) |
|
Represents two persons, Messrs. Bair and Marin. |
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| |
|
Unless otherwise stated, the address for all listed individuals is:10488 Brockwood Road,
Dallas, Texas, 75238. |
Non-voting Securities and Principal Holders Thereof
The Company has not issued any preferred shares or other non-voting securities.
22
Change in Control
Upon the purchase of the Series A Convertible Preferred Stock of the Company by Radical, a
change in control of the Company will occur because Radical will beneficially own 95% of the
securities of the Company entitled to vote on matters required or permitted to be submitted to the
stockholders of the Company. Pursuant to the Securities Purchase Agreement, the Company will issue
and sell, and Radical will purchase, 4,392,286 shares of Series A Convertible Preferred Stock of
the Company for an aggregate purchase price of $3.0 million, or $0.68 per share of Series A
Convertible Preferred Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Zach Bair
Zach Bair, a director and our Chief Executive Officer, made a loan of $43,000 aggregate
principal amount to the Company in 2004. This loan does not bear interest and has no maturity
date. The Company has committed to repay this note with the proceeds for the sale of its Series A
Convertible Preferred Stock.
Additionally, pursuant to the Securities Purchase Agreement, Mr. Bair agreed that:
(i) he shall, and he shall cause his affiliates and related persons to, cooperate fully with
the Company and Radical to consummate the purchase and sale of the Series A Convertible Preferred
Stock;
(ii) he shall execute a release in favor of the Company and its subsidiaries;
(iii) he shall not transfer any of his shares of Company common stock or grant any proxies or
enter into any voting trust or other agreement or understanding with respect to the voting of his
shares of Company common stock; and
(iv) at any meeting of the stockholders or pursuant to any action taken by written consent, he
will vote in favor of, or consent to, the adoption of the Securities Purchase Agreement and the
approval of the transactions contemplated thereby and vote against, or not consent to, any action
that is intended, or could be reasonably be expected, to impede, frustrate, interfere with, impair,
delay, adversely affect or prevent the consummation of the transactions contemplated by the
Securities Purchase Agreement.
Further, pursuant to an agreement with Mr. Bair, he has waived any and all preemptive rights
that he may possess subject to no other stockholders of the Company exercising any preemptive
rights. In the event that any other stockholder exercises a preemptive right, Mr. Bair is required
to exercise his preemptive rights to the extent necessary to maintain his percentage ownership
interest in the Company.
Paul Marin
Paul Marin, a director and our Chief Operating Officer, pursuant to the Securities Purchase
Agreement, agreed that:
(i) he shall, and he shall cause his affiliates and related persons to, cooperate fully with
the Company and Radical to consummate the purchase and sale of the Series A Convertible Preferred
Stock;
(ii) he shall execute a release in favor of the Company and its subsidiaries;
(iii) he shall not transfer any of his shares of Company common stock or grant any proxies or
enter into any voting trust or other agreement or understanding with respect to the voting of his
shares of Company common stock; and
(iv) at any meeting of the stockholders or pursuant to any action taken by written consent, he
will vote in favor of, or consent to, the adoption of the Securities Purchase Agreement and the
approval of the transactions contemplated thereby and vote against, or not consent to, any action
that is intended, or could be reasonably be
23
expected, to impede, frustrate, interfere with, impair, delay, adversely affect or prevent the
consummation of the transactions contemplated by the Securities Purchase Agreement.
Further, pursuant to an agreement with Mr. Marin, he has waived any and all preemptive rights
that he may possess subject to no other stockholders of the Company exercising any preemptive
rights. In the event that any other stockholder exercises a preemptive right, Mr. Marin is
required to exercise his preemptive rights to the extent necessary to maintain his percentage
ownership interest in the Company.
Jess Morgan & Company
On January 23, 2006, the Company and Jess Morgan & Company, or JSM, entered into the
Agreement, Settlement and Release, or the JSM Release, which was subsequently amended on March 15,
2006. In accordance with the JSM Release, as amended, the Company will amend the warrant
previously issued to JSM to remove provisions contained in the warrant that granted the Company
rights to call the warrant upon certain events. Additionally, under the JSM Release, as amended,
the Company will, after the consummation of the 100-for-one reverse stock split and prior to the
closing of the purchase and sale of the Series A Convertible Preferred Stock, issue to JSM a total
of 94,157 shares of Company common stock, or such other amount necessary to result in JSM holding
25% of the outstanding Company common stock after giving effect to the reverse stock split and
immediately prior to the closing of the purchase and sale of the Series A Convertible Preferred
Stock. In consideration for the above waiver and issuance, JSM has agreed, upon receipt of those
shares and subject to the closing of the purchase and sale of the Series A Convertible Preferred
Stock, to terminate all agreements, other than the warrant, between it and the Company, including,
without limitation, the Proposal of Terms and a letter agreement regarding operation guidelines,
and forever waive and release any and all rights, claims and other matters that JSM may have. In
the event that the closing of the purchase and sale of the Series A Convertible Preferred Stock
does not occur on or prior to May 15, 2006, the JSM Release will terminate.
Gary Blum
On November 29, 2004, Gary Blum, a stockholder of the Company, made a loan to the Company of
$160,000 aggregate principal amount. On October 28, 2005, Mr. Blum made another loan to the
Company of $140,500 aggregate principal amount. Each of these loans were evidenced by a Secured
Convertible Promissory Note. Additionally, from time to time, Mr. Blum has advanced an aggregate
of $36,129 to the Company and its subsidiaries. Effective January 31, 2006, the amounts owed to
Mr. Blum under these notes and advances were consolidated into one note, which is convertible into
Company common stock at a conversion price of $0.125 per share. Pursuant to the consolidated note,
Mr. Blum is required to convert $300,500 aggregate principal amount into Company common stock in
accordance with the terms of the consolidated note immediately prior to the sale of the Series A
Convertible Preferred Stock. The consolidate note bears interest at 10% per annum and matures on
June 30, 2006. Mr. Blum, however, pursuant to a Waiver and Release, effective as of February 1,
2006, agreed to waive any and all accrued but unpaid interest on the notes and consolidated notes.
The original notes were, and the consolidated note continues to be, guaranteed by DiscLive
pursuant to that certain Unlimited Guaranty, dated as of November 29, 2004. Additionally, the
obligations under the original notes were, and the consolidated notes continue to be, secured by
the all of the assets of DiscLive pursuant to that certain Collateral Assignment and Security
Agreement, dated as of November 29, 2006.
Osias Blum
On November 29, 2005, Osias Blum, a stockholder of the Company, made a loan to the Company of
$175,000 aggregate principal amount. This loan was evidenced by a Secured Convertible Promissory
Note that bears interest at 10% per annum. This note is guaranteed by DiscLive pursuant to that
certain Unlimited Guaranty, dated as of November 29, 2004. Additionally, the obligations under
this note are secured by the all of the assets of DiscLive pursuant to that certain Collateral
Assignment and Security Agreement, dated as of November 29, 2006.
On April 8, 2005, Osias Blum made another loan to the Company of $425,000 aggregate principal
amount, which is evidenced by a Secured Promissory Note. This note bears interest at a rate of 10%
per annum. The obligations under this note are secured by all our tangible and intangible assets,
other than those assets previously
24
pledged on prior debt transactions to other secured parties, pursuant to that certain
Collateral Assignment and General Security Agreement, dated as of April 8, 2005.
On January 9, 2006, Osias Blum and the Company entered into a Note Conversion Agreement,
Waiver and Release, which was subsequently amended on March 15, 2006. Pursuant to this agreement,
as amended, Osias Blum agreed to convert $150,000 of the indebtedness owed to him under these note
into Company common stock at a conversion price of $0.125 per share (pre-split). Additionally,
pursuant to this agreement, Osias Blum agreed to waive any and all accrued but unpaid interest
under these notes.
ITEM 13. EXHIBITS.
The following exhibits are provided pursuant to provisions of Item 601 of Regulation S-B:
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| Exhibit |
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| Number |
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Description of Exhibit |
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3.1 |
* |
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Articles of Incorporation of the Registrant, dated as of
August 3, 1998 and filed with the Secretary of State of the |
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State of Nevada on August 6, 1998. |
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3.2 |
* |
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Bylaws of the Registrant. |
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4.1 |
* |
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Form of common stock certificate of the Registrant. |
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4.2 |
|
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Warrant to Purchase Common Stock of the Registrant, dated
as of March 22, 2004, issued by the Registrant to Jess S.
Morgan & Co. (filed as Exhibit 10.2 to the Registrant’s
Registration Statement on Form SB-2 (File No. 333-115989)
and incorporated herein by reference). |
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4.3 |
* |
|
Warrant to Purchase Common Stock of the Registrant, dated
as of April 23, 2004, issued by the Registrant to Phil
McMorrow. |
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|
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4.4 |
* |
|
Warrant to Purchase Common Stock of the Registrant, dated
as of June 22, 2004, issued by the Registrant to Broad
Street Ventures, LLC. |
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4.5 |
* |
|
Warrant to Purchase Common Stock of the Registrant, dated
as of June 22, 2004, issued by the Registrant to Doman
Technology Capital, Inc. |
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4.6 |
* |
|
Warrant to Purchase Common Stock of the Registrant, dated
as of December 9, 2004, issued by the Registrant to Doman
Technology Capital, Inc. |
| |
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10.1 |
|
|
Acquisition Agreement, dated as of April 9, 2004, by and
between the Registrant and DiscLive, Inc. (filed as Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed
on April 20, 2004 and incorporated herein by reference). |
| |
|
|
|
|
| |
10.2.1 |
* |
|
Form of Secured Convertible Promissory Notes, dated as of
November 29, 2004, issued by the Registrant in favor of
each of Gary Blum, Osias Blum, Barnett Family Partnership
II and Doman Technology Capital, Inc. |
| |
| |
10.2.2 |
* |
|
Unlimited Guaranty, dated as of November 29, 2004, by and
among DiscLive, Inc., a wholly-owned subsidiary of the
Registrant, Gary Blum, Jeffrey Doman and Osias Blum. |
25
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibit |
| |
|
|
|
|
| |
10.2.3 |
* |
|
Collateral Assignment and Security Agreement, dated as of
November 29, 2004, by and between DiscLive, Inc., a
wholly-owned subsidiary of the Registrant, and Osias Blum |
| |
|
|
|
|
| |
10.3.1 |
|
|
Secured Promissory Note, dated as of April 8, 2005, made by
the Registrant in favor of Osias Blum in the aggregate
principal amount of $425,000 (filed as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on April 14,
2005 and incorporated herein by reference). |
| |
|
|
|
|
| |
10.3.2 |
|
|
Collateral Assignment and General Security Agreement, dated
as of April 8, 2005, by and between Osias Blum and the
Registrant (filed as Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K filed on April 14, 2005 and
incorporated herein by reference). |
| |
|
|
|
|
| |
10.4.1 |
* |
|
Asset Purchase Agreement, dated as of February 28, 2005, by
and between the Registrant and Moving Records, LLC. |
| |
|
|
|
|
| |
10.4.2 |
* |
|
First Amendment to Asset Purchase Agreement, executed as of
February 28, 2006, but effective as of February 28, 2005,
by and between the Registrant and Moving Records, LLC. |
| |
|
|
|
|
| |
10.5 |
* |
|
Non-Qualified Stock Option Agreement, made as of January
31, 2006, but effective as of May 6, 2005, by and between
the Registrant and Charles Humphreyson. |
| |
|
|
|
|
| |
10.6.1 |
|
|
Securities Purchase Agreement, dated as of January 24,
2006, by and among the Registrant, Radical Holdings LP and
the other parties thereto (filed as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on January
27, 2006 and incorporated herein by reference). |
| |
|
|
|
|
| |
10.6.2 |
|
|
First Amendment to Securities Purchase Agreement, dated as
of March 3, 2006, by and among the Registrant, Radical
Holdings LP and the other parties thereto (filed as Exhibit
10.2 to the Registrant’s Current Report on Form 8-K filed
on March 9, 2006 and incorporated herein by reference). |
| |
|
|
|
|
| |
10.7 |
|
|
Employment Agreement, executed as of March 7, 2006, but
effective as of March 1, 2006, by and between Zach Bair and
DiscLive, Inc., a wholly-owned subsidiary of the Registrant
(filed as Exhibit 10.3 to the Registrant’s Current Report
on Form 8-K filed on March 9, 2006 and incorporated herein
by reference). |
| |
|
|
|
|
| |
10.8 |
|
|
Employment Agreement, executed as of March 7, 2006, but
effective as of March 1, 2006, by and between Paul Marin
and DiscLive, Inc., a wholly-owned subsidiary of the
Registrant (filed as Exhibit 10.4 to the Registrant’s
Current Report on Form 8-K filed on March 9, 2006 and
incorporated herein by reference). |
| |
|
|
|
|
| |
10.9.1 |
* |
|
Agreement, Settlement and Release, dated as of January 23,
2006, by and between the Registrant and Jess Morgan &
Company. |
| |
|
|
|
|
| |
10.9.2 |
* |
|
First Amendment to Agreement, Settlement and Release, dated
as of March 15, 2006, by and between the Registrant and
Jess Morgan & Company. |
| |
|
|
|
|
| |
10.10.1 |
* |
|
Agreement, Settlement and Release, dated as of January 23,
2006, by and between the Registrant and Phil McMorrow. |
| |
|
|
|
|
| |
10.10.2 |
* |
|
First Amendment to Agreement, Settlement and Release, dated
as of March 15, 2006, by and between the Registrant and
Phil McMorrow. |
26
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibit |
| |
|
|
|
|
| |
10.11.1 |
* |
|
Form of Note Conversion Agreement, Release and Waiver, each
dated as of January 9, 2006, by and between the Registrant
and each of Barnett Family Partnership II, Broad Street
Ventures, LLC, Doman Technology Capital, Inc., Steven
Lenzen and Osias Blum. |
| |
|
|
|
|
| |
10.11.2 |
* |
|
Form of First Amendment to Note Conversion Agreement,
Release and Waiver, each dated as of March 15, 2006, by and
between the Registrant and each of the Barnett Family
Partnership II, Broad Street Ventures, LLC, Doman
Technology Capital, Inc. and Osias Blum. |
| |
|
|
|
|
| |
10.12 |
* |
|
Amended and Restated Consolidated Secured Convertible
Promissory Note, dated as of January 31, 2006, made by the
Registrant in favor of Gary Blum in the aggregate principal
amount of $330,629. |
| |
|
|
|
|
| |
10.13 |
* |
|
Waiver and Release, dated as of February 1, 2006, by and
between the Registrant and Gary Blum. |
| |
|
|
|
|
| |
10.14 |
* |
|
Form of Agreement of Waiver by and between the Registrant
and stockholders of the Registrant. |
| |
|
|
|
|
| |
10.15 |
* |
|
Agreement of Waiver, dated as of May 1, 2006, but effective
as of January 24, 2006, by and between the Registrant and
Zach Bair. |
| |
|
|
|
|
| |
10.16 |
* |
|
Agreement of Waiver, dated as of May 1, 2006, but effective
as of January 24, 2006, by and between the Registrant and
Paul Marin. |
| |
|
|
|
|
| |
21.1 |
* |
|
Subsidiaries of the Registrant. |
| |
|
|
|
|
| |
31.1 |
* |
|
Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act. |
| |
|
|
|
|
| |
32.1 |
* |
|
Certification Required by 18 U.S.C. Section 1350 (as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002). |
ITEM 14. Principal Accountant Fees and Services
During 2005 and 2004, we paid the following fees, including out of pocket expense reimbursements,
to Beckstead and Watts, LLP. :
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
2005 |
Audit Fees |
|
$ |
36,370.75 |
|
|
$ |
31,500.00 |
|
Immediatek paid no other fees or compensation to Beckstead and Watts, LLP. Immediatek, Inc.’s
management approves the engagement of an accountant to render all audit and non-audit services
prior to the engagement of the accountant based upon a proposal by the accountant of estimated fees
and scope of the engagement. Immediatek, Inc.’s management has received the written disclosure and
the letter from Beckstead and Watts, LLP required by Independence Standards Board Standard No. 1,
as currently in effect, and has discussed with Beckstead and Watts, LLP their independence.
27
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
| |
|
|
|
|
|
|
| |
|
Immediatek, Inc.¸
a Nevada corporation |
|
|
|
|
|
|
|
|
|
Date: May 10, 2006
|
|
By:
|
|
/s/ ZACH BAIR
|
|
|
|
|
|
|
|
|
|
|
|
Name:
|
|
Zach Bair |
|
|
|
|
Title:
|
|
Chief Executive Officer |
|
|
In accordance with the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
| |
|
|
|
|
| Signature |
|
Capacity |
|
Date |
| |
|
|
|
|
| /s/ ZACH BAIR
Zach Bair |
|
Chairman, Director, President and Chief
Executive Officer (principal executive,
financial and accounting officer)
|
|
May 10, 2006 |
| |
|
|
|
|
| /s/ PAUL MARIN
Paul Marin |
|
Director, Chief Operating Officer and
Vice President
|
|
May 10, 2006 |
28
Beckstead and Watts, LLP
Certified Public Accountants
2425 W Horizon Ridge Parkway
Henderson, NV 89052
702.257.1984 (tel)
702.362.0540 (fax)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of Immediatek, Inc. (the
“Company”), as of December 31, 2005 and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Immediatek, Inc. as of December 31, 2005 and the
results of its operations and cash flows for the year then ended, in conformity with U.S. generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming the Company will
continue as a going concern. As discussed in Note 5 to the consolidated financial statements, the
Company has had limited operations and have not commenced planned principal operations. This
raises substantial doubt about its ability to continue as a going concern. Management’s plans in
regard to these matters are also described in Note 5. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ BECKSTEAD AND WATTS, LLP
May 10, 2006
F-1
Beckstead and Watts, LLP
Certified Public Accountants
2425 W Horizon Ridge Parkway
Henderson, NV 89052
702.257.1984 (tel)
702.362.0540 (fax)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying restated consolidated statements of operations, stockholders’
equity, and cash flows of Immediatek, Inc. (the “Company”) for the year ended December 31, 2004.
These restated consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these restated consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the restated consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the restated consolidated financial statements referred to above present fairly, in
all material respects, the results of its operations and cash flows for the year ended December 31,
2004 of Immediatek, Inc., in conformity with U.S. generally accepted accounting principles.
The accompanying restated consolidated financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 5 to the restated consolidated financial
statements, the Company has had limited operations and have not commenced planned principal
operations. This raises substantial doubt about its ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 5. The restated
consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
As discussed in Note 2 to the restated consolidated financial statements, the Company’s 2004 net
loss previously reported as $2,149,425 should have been $3,905,363. This discovery was made
subsequent to the issuance of the consolidated financial statements. The restated consolidated
financial statements have been restated to reflect this correction.
/s/ BECKSTEAD AND WATTS, LLP
March 30, 2005, except for Note 2, as to which the date is May 9, 2006
F-2
Immediatek, Inc.
Consolidated Balance Sheet
(Audited)
| |
|
|
|
|
| |
|
December 31, |
|
| |
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
Cash |
|
$ |
— |
|
Accounts receivable |
|
|
4,000 |
|
Prepaid expenses |
|
|
3,668 |
|
|
|
|
|
Total current assets |
|
|
7,668 |
|
|
|
|
|
|
|
|
|
|
Fixed assets, net |
|
|
18,599 |
|
|
|
|
|
|
Other assets: |
|
|
|
|
Goodwill |
|
|
162,071 |
|
|
|
|
|
Total other assets |
|
|
162,071 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
188,338 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ (Deficit) |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
Cash deficit |
|
$ |
2,951 |
|
Accounts payable |
|
|
488,512 |
|
Accrued liabilities |
|
|
37,180 |
|
Accrued payroll liabilities |
|
|
382,864 |
|
Accrued interest |
|
|
85,397 |
|
Sales tax liability |
|
|
60,947 |
|
Note payable |
|
|
123,606 |
|
Note payable — related party |
|
|
43,000 |
|
Convertible notes payable |
|
|
75,000 |
|
Convertible notes payable — related party |
|
|
930,249 |
|
|
|
|
|
Total current liabilities |
|
|
2,229,706 |
|
|
|
|
|
|
|
|
|
|
Stockholders’ (deficit): |
|
|
|
|
Common stock, $0.001 par value, 500,000,000 shares
authorized, 38,769,655 shares issued and outstanding |
|
|
38,769 |
|
Additional paid-in capital |
|
|
5,169,839 |
|
Unamortized warrants and options |
|
|
(54,376 |
) |
Accumulated (deficit) |
|
|
(7,195,600 |
) |
|
|
|
|
|
|
|
(2,041,368 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
188,338 |
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-3
Immediatek, Inc.
Consolidated Statements of Operations
(Audited)
| |
|
|
|
|
|
|
|
|
| |
|
For the years ended |
|
| |
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
| |
|
|
|
|
|
(RESTATED) |
|
Revenue |
|
$ |
140,912 |
|
|
$ |
1,098,680 |
|
Cost of sales |
|
|
153,228 |
|
|
|
919,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
(12,316 |
) |
|
|
179,385 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
— |
|
|
|
50,605 |
|
Depreciation expense |
|
|
59,445 |
|
|
|
71,881 |
|
General and administrative expense |
|
|
323,465 |
|
|
|
1,768,327 |
|
Consulting fees |
|
|
206,514 |
|
|
|
1,251,244 |
|
Professional fees |
|
|
153,309 |
|
|
|
284,183 |
|
Sales and marketing |
|
|
5,960 |
|
|
|
89,943 |
|
Salaries and wages |
|
|
144,440 |
|
|
|
465,611 |
|
Impairment loss on operating assets |
|
|
939,454 |
|
|
|
68,700 |
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
1,832,587 |
|
|
|
4,050,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating (loss) |
|
|
(1,844,903 |
) |
|
|
(3,871,109 |
) |
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Forgiveness of debt |
|
|
7,634 |
|
|
|
— |
|
Interest income |
|
|
— |
|
|
|
159 |
|
Interest (expense) |
|
|
(83,418 |
) |
|
|
(34,411 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
$ |
(1,920,687 |
) |
|
$ |
(3,905,361 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding — basic and fully diluted |
|
|
32,854,341 |
|
|
|
25,416,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share — basic and fully diluted |
|
$ |
(0.05 |
) |
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-4
Immediatek, Inc.
Consolidated Statements of Changes in Stockholders’ (Deficit)
(Audited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Total |
|
| |
|
Common Stock |
|
|
Paid-in |
|
|
Unamortized |
|
|
Accumulated |
|
|
Stockholders’ |
|
| |
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Warrants/Options |
|
|
(Deficit) |
|
|
(Deficit) |
|
Balance, December 31, 2003 (RESTATED) |
|
|
22,958,218 |
|
|
$ |
22,958 |
|
|
$ |
1,406,627 |
|
|
$ |
— |
|
|
$ |
(1,369,552 |
) |
|
$ |
60,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to acquire DiscLive, Inc. |
|
|
1,666,667 |
|
|
|
1,667 |
|
|
|
598,333 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for conversion of debt |
|
|
63,333 |
|
|
|
63 |
|
|
|
9,437 |
|
|
|
|
|
|
|
|
|
|
|
9,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for assets |
|
|
10,000 |
|
|
|
10 |
|
|
|
2,990 |
|
|
|
|
|
|
|
|
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for consulting services |
|
|
200,153 |
|
|
|
200 |
|
|
|
59,846 |
|
|
|
|
|
|
|
|
|
|
|
60,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for consulting services |
|
|
50,000 |
|
|
|
50 |
|
|
|
14,950 |
|
|
|
|
|
|
|
|
|
|
|
15,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for cash |
|
|
10,417 |
|
|
|
10 |
|
|
|
1,553 |
|
|
|
|
|
|
|
|
|
|
|
1,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for cash |
|
|
1,668,201 |
|
|
|
1,668 |
|
|
|
498,792 |
|
|
|
|
|
|
|
|
|
|
|
500,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for cash |
|
|
167,000 |
|
|
|
167 |
|
|
|
49,933 |
|
|
|
|
|
|
|
|
|
|
|
50,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for cash |
|
|
1,017,666 |
|
|
|
1,018 |
|
|
|
304,282 |
|
|
|
|
|
|
|
|
|
|
|
305,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for consulting services |
|
|
130,000 |
|
|
|
130 |
|
|
|
34,970 |
|
|
|
|
|
|
|
|
|
|
|
35,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for consulting services |
|
|
1,839,000 |
|
|
|
1,839 |
|
|
|
274,011 |
|
|
|
|
|
|
|
|
|
|
|
275,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued for services |
|
|
— |
|
|
|
— |
|
|
|
1,221,494 |
|
|
|
(34,299 |
) |
|
|
|
|
|
|
1,187,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options issued for services |
|
|
— |
|
|
|
— |
|
|
|
61,020 |
|
|
|
|
|
|
|
|
|
|
|
61,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) for the year ended December 31, 2004 |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
(3,905,361 |
) |
|
|
(3,905,361 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 (RESTATED) |
|
|
29,780,655 |
|
|
|
29,780 |
|
|
|
4,538,238 |
|
|
|
(34,299 |
) |
|
|
(5,274,913 |
) |
|
|
(741,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for asset acquisition |
|
|
2,500,000 |
|
|
|
2,500 |
|
|
|
447,500 |
|
|
|
|
|
|
|
|
|
|
|
450,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for consulting services |
|
|
6,489,000 |
|
|
|
6,489 |
|
|
|
131,191 |
|
|
|
|
|
|
|
|
|
|
|
137,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options issued for services |
|
|
— |
|
|
|
— |
|
|
|
52,910 |
|
|
|
(39,680 |
) |
|
|
|
|
|
|
13,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period amortization of warrants and options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,603 |
|
|
|
|
|
|
|
19,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) for the year ended December 31, 2005 |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
(1,920,687 |
) |
|
|
(1,920,687 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
|
38,769,655 |
|
|
$ |
38,769 |
|
|
$ |
5,169,839 |
|
|
$ |
(54,376 |
) |
|
$ |
(7,195,600 |
) |
|
$ |
(2,041,368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-5
Immediatek, Inc.
Consolidated Statements Of Cash Flow
(Audited)
| |
|
|
|
|
|
|
|
|
| |
|
For the years ended |
|
| |
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
| |
|
|
|
|
|
(RESTATED) |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net (loss) |
|
$ |
(1,920,687 |
) |
|
$ |
(3,905,361 |
) |
Depreciation expense |
|
|
59,445 |
|
|
|
71,881 |
|
Impairment loss on assets |
|
|
939,454 |
|
|
|
68,700 |
|
Shares issued for consulting services |
|
|
170,513 |
|
|
|
1,634,211 |
|
Adjustments to reconcile net (loss) to
net cash (used) by operating activities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
69,281 |
|
|
|
(73,281 |
) |
Prepaid expenses |
|
|
18,730 |
|
|
|
665 |
|
Other assets |
|
|
13,760 |
|
|
|
— |
|
Accounts payable |
|
|
159,900 |
|
|
|
324,279 |
|
Accrued liabilities |
|
|
129,500 |
|
|
|
461,348 |
|
|
|
|
|
|
|
|
Net cash (used) by operating activities |
|
|
(360,104 |
) |
|
|
(1,417,558 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchase of fixed assets |
|
|
(13,646 |
) |
|
|
(31,539 |
) |
Cash received in acquisition |
|
|
— |
|
|
|
20,662 |
|
|
|
|
|
|
|
|
Net cash (used) by investing activities |
|
|
(13,646 |
) |
|
|
(10,877 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Cash deficit |
|
|
2,951 |
|
|
|
— |
|
Proceeds from convertible note payable — related party |
|
|
686,449 |
|
|
|
528,000 |
|
Payments on convertible note payable — related party |
|
|
(139,200 |
) |
|
|
(54,000 |
) |
Proceeds from note payable |
|
|
2,000 |
|
|
|
— |
|
Payments on note payable |
|
|
(200,000 |
) |
|
|
— |
|
Proceeds from sale of common stock |
|
|
— |
|
|
|
857,423 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
352,200 |
|
|
|
1,331,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) in cash |
|
|
(21,550 |
) |
|
|
(97,012 |
) |
Cash — beginning |
|
|
21,550 |
|
|
|
118,562 |
|
|
|
|
|
|
|
|
Cash — ending |
|
$ |
— |
|
|
$ |
21,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares issued for consulting and services |
|
|
6,489,000 |
|
|
|
2,219,153 |
|
|
|
|
|
|
|
|
Value of shares issued for consulting services |
|
$ |
137,680 |
|
|
$ |
385,996 |
|
|
|
|
|
|
|
|
Number of shares issued to convert debt to equity |
|
|
— |
|
|
|
63,333 |
|
|
|
|
|
|
|
|
Value of shares issued for debt conversion |
|
$ |
— |
|
|
$ |
9,500 |
|
|
|
|
|
|
|
|
Number of shares issued to acquire DiscLive, Inc. |
|
|
— |
|
|
|
1,666,667 |
|
|
|
|
|
|
|
|
Value of shares issued to acquire DiscLive, Inc. |
|
$ |
— |
|
|
$ |
600,000 |
|
|
|
|
|
|
|
|
Number of shares issued for assets |
|
|
2,500,000 |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
Value of shares issued for assets |
|
$ |
450,000 |
|
|
$ |
3,000 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-6
Immediatek, Inc.
Notes to Consolidated Financial Statements
Note 1 – History and organization of the company
The Company was originally organized August 6, 1998, under the laws of the State of Nevada, as
Barrington Laboratories, Inc. On December 18, 2000, the Company amended its Articles of
Incorporation to rename the Company, ModernGroove Entertainment, Inc. ModernGroove Entertainment,
Inc. then operated as a developer of software for the home television-based entertainment industry.
On April 12, 2002, the Canadian Imperial Bank of Commerce, Vancouver, British Columbia filed
against ModernGroove Entertainment, Inc., the Canadian subsidiary, a petition with the Supreme
Court of British Columbia to be adjudged bankrupt, under Canadian Bankruptcy Code, British
Columbia, Bankruptcy Division, Department of Consumer and Corporate Affairs, designated with the
Vancouver Registry as Case No. 225054VA02. The Canadian corporation has ceased operations in
Canada.
On September 18, 2002, the Company combined by “reverse-merger” with Immediatek, Inc., a State of
Texas corporation. On November 5, 2002, the Company amended its Articles of Incorporation to
rename the Company, Immediatek, Inc.
Immediatek, Inc. (Texas corp) was organized March 1, 2002 (Date of Inception) under the laws of the
State of Texas, as Immediatek, Inc. and upon completion of the reverse merger the Texas corporation
was dissolved.
Note 2 – Accounting policies and procedures
Correction of errors in comparative financial statements
Prior to the issuance of the Company’s 2005 audited financial statements, the Company’s management
determined the need to restate prior period financial statements to correct errors discovered
during the 2005 year-end close and reporting process. The errors included improper recording and
disclosure of warrants and options issued in the periods ended December 31, 2004 and 2003, change
in valuation of share-based payments to related parties, previously unrecorded liabilities and
certain balance sheet, income statement and cash flow statement misclassifications. These errors
are described in more detail below.
| |
1) |
|
During the first quarter of 2003, the Company issued 18,100,397 shares of its $0.001
par value common stock to its officers in exchange for intellectual property. Pursuant to
SFAS 142, assets acquired independently are to be recorded at their current fair values. At
the time of the transaction, there was not a readily available fair value to the
intellectual property acquired and, therefore, value was assessed using the actual hard
costs attributable to the asset based on documentation provided by the officers. The fair
value of the shares given as consideration for the intellectual property exceeded the asset
value by $2,335,081 which was recorded as compensation. Upon subsequent review of the
transaction, the Company determined that an independent valuation of the consideration paid
was appropriate given the magnitude of the excess value received. Pursuant to the
aforementioned valuation, prepared by an independent third party, the Company will restate
its 2003 financial statements, reflecting a decrease in compensation expense in the amount
of $2,226,479 in order to reflect the new value attributable to the consideration paid. |
| |
| |
2) |
|
During the year ended December 31, 2004, the Company issued warrants and options to
purchase up to 4,325,582 shares of the Company’s par value common stock to various
individuals in exchange for consulting services provided to the Company. As of December
31, 2005 and 2004, no expense had been recorded. The warrants and options were subsequently
valued at $1,272,522 using the Black-Scholes option pricing model. The Company has recorded
the expense and will disclose accordingly in its restated 2004 interim and annual financial
statements. |
| |
| |
3) |
|
The Company has also restated its 2003 and 2004 financial statements to reflect
additional payroll tax liabilities resulting from reclassification of compensatory
disbursements. Historically, the Company has taken |
F-7
| |
|
|
the position whereby all compensation paid to individuals was non-employee compensation.
Upon review of the Internal Revenue Code and information located in IRS publication 15-A,
the Company determined that it was appropriate to reclassify all such payments as employee
compensation reportable on form W-2 and accrue for all unpaid tax and related penalties and
interest associated with the reclassification. The resulting liabilities totaled $300,317
for the years ended December 31, 2004 and 2003. |
| |
| |
4) |
|
During the year-end close, the Company evaluated all state reporting requirements with
respect to its revenue and corresponding sales tax requirements. Deficiencies were
identified during this process resulting in additional liabilities totaling $54,241 for the
years ended December 31, 2004 and 2003. |
As a result of the errors described above, adjustments have been made in 2004 as a prior period
correction to retained earnings. All of the amounts included in this report reflect the effects of
these restated financial statements. The following table provides a reconciliation of originally
reported amounts to restated amounts.
| |
|
|
|
|
| |
|
December 31, 2004 |
|
Net (loss) as previously reported |
|
$ |
(2,149,425 |
) |
Error correction in valuation
|
|
|
|
|
Warrant and option valuation |
|
|
(1,248,215 |
) |
Previously unrecorded liabilities |
|
|
(507,721 |
) |
Certain stock-based compensation |
|
|
-0- |
|
|
|
|
|
Net (loss) as restated |
|
$ |
(3,905,361 |
) |
|
|
|
|
|
|
|
|
|
Accumulated (deficit) at beginning of period |
|
$ |
(1,369,552 |
) |
| |
Net (loss) as restated |
|
|
(3,905,361 |
) |
|
|
|
|
Accumulated (deficit) at end of period, as restated |
|
$ |
(5,274,913 |
) |
|
|
|
|
Cash and cash equivalents
Cash and cash equivalents include all cash balances in non-interest bearing accounts and
money-market accounts. The Company places its temporary cash investments with quality financial
institutions. At times such investments may be in excess of Federal Deposit Insurance Corporation
(FDIC) insurance limit. The Company does not believe it is exposed to any significant credit risk
on cash and cash equivalents. For the purpose of the statements of cash flows, all highly liquid
investments with an original maturity of three months or less are considered to be cash
equivalents. There are no cash equivalents as of December 31, 2005 and 2004.
Investments
Investments in companies over which the Company exercises significant influence are accounted for
by the equity method whereby the Company includes its proportionate share of earnings and losses
of such companies in earnings. Other long-term investments are recorded at cost and are written
down to their estimated recoverable amount if there is evidence of a decline in value, which is
other than temporary.
Fixed assets
Fixed assets are stated at the lower of cost or estimated net recoverable amount. The cost of
property, plant and equipment is depreciated using the straight-line method based on the lesser of
the estimated useful lives of the assets or the lease term based on the following life expectancy:
| |
|
|
|
|
Computer equipment |
|
5 years |
Software |
|
3 years |
Office furniture and fixtures |
|
7 years |
F-8
Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and
replacements, which extend the useful life of an asset, are capitalized and depreciated over the
remaining estimated useful life of the asset. When assets are retired or sold, the costs and
related accumulated depreciation and amortization are eliminated and any resulting gain or loss is
reflected in operations.
Revenue recognition
The Company recognizes revenue from its sales based on the gross sale amount pursuant to the
indicators outlined in EITF 99-19 such as; the Company is the primary obligator in the sale
arrangement, establishes all pricing levels, and has sole discretion with respect to supplier
selection. All costs based upon each sale are expensed as costs of sales as revenue is recognized.
Pursuant to EITF-00-10, the Company will include all shipping and handling fees charged to its
customers in gross revenue. All actual costs incurred by the Company for shipping and handling are
immaterial in nature and are included as direct costs of revenue. The Company will recognize a
revenue transaction as being complete upon delivery of product and so record the revenue. The
Company bases this recognition policy on the authoritative literature located in FAS-48, par 6.
Revenue from proprietary software sales and the related license fees that do not require further
commitment from the Company are recognized upon shipment in accordance with Statement of Position
97-2 “Software Revenue Recognition”. The Company includes all PCS fees as part of the initial
sales price of the software. The Company sells its custom CD products in both a retail environment
and orders from its web site. All revenue generated from both types of sales is recognized upon
delivery to the customer. In 2004, the Company has added a feature to its website whereby its
on-line customers have the ability to download pre-recorded music in the form of an MP3 file for
use on various computer equipment. All sales generated via the download option are recognized upon
each physical download. The download system is designed to require credit card processing and
acceptance prior to allowing any download capabilities. At the point the credit card authorization
has processed, the Company recognizes the revenue generated from that sale. Revenue from custom
software development, which is generally billed separately from the Company’s proprietary
software, is recognized based on its percentage of completion. Revenue recognized under
percentage of completion contracts are generally based upon specific milestones achieved as
specified in customer contracts.
The cost of services, consisting of staff payroll, outside services, equipment rental,
communication costs and supplies, is expensed as incurred.
Gross revenue for the year ended December 31, 2005 was $140,912 and cost of sales was $153,228.
Gross revenue for the year ended December 31, 2004 was $1,098,680 and direct costs were $919,295.
Advertising costs
The Company expenses all costs of advertising as incurred. There were $1,705 and $-0- in
advertising costs included in general and administrative expenses as of December 31, 2005 and
2004, respectively.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Fair value of financial instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent
information available to management as of December 31, 2005. The respective carrying value of
certain on-balance-sheet financial instruments approximated their fair values. These financial
instruments include the following; cash, accounts receivable, accounts payable, accrued
liabilities and notes payable. Fair values were assumed to approximate carrying values for each
of the aforementioned instruments because they are short term in nature and their carrying amounts
approximate fair values or they are payable on demand.
F-9
Goodwill
The Company evaluates the recoverability of goodwill whenever events or changes in circumstances
indicate that an intangible asset’s carrying amount may not be recoverable. Such circumstances
could include, but are not limited to: (1) a significant decrease in the market value of an asset,
(2) a significant adverse change in the extent or manner in which an asset is used, or (3) an
accumulation of costs significantly in excess of the amount originally expected for the
acquisition of an asset. The Company measures the carrying amount of the asset against the
estimated undiscounted future cash flows associated with it. Should the sum of the expected future
cash flows be less than the carrying value, the Company would recognize an impairment loss. At
December 31, 2005, the Company reviewed the carrying value of goodwill and recognized an
impairment loss in the amount of $350,652 and $0 as of December 31, 2005 and 2004, respectively.
Impairment of long-lived assets
The Company reviews its long-lived assets periodically to determine potential impairment by
comparing the carrying value of the long-lived assets with the estimated future cash flows
expected to result from the use of the assets, including cash flows from disposition. Should the
sum of the expected future cash flows be less than the carrying value, the Company would recognize
an impairment loss. An impairment loss would be measured by comparing the amount by which the
carrying value exceeds the fair value of the long-lived assets. The Company recognized impairment
losses in the amount of $588,802 and $68,700 as of December 31, 2005 and 2004, respectively.
Loss per share
SFAS No. 128, Earnings Per Share. This standard requires dual presentation of basic and diluted
earnings per share on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the diluted loss per
share computation.
Potentially issuable shares of common stock pursuant to outstanding stock options and warrants are
excluded from the diluted computation, as their effect would be anti-dilutive.
Dividends
The Company has not yet adopted any policy regarding payment of dividends. No dividends have been
paid or declared since inception.
Segment reporting
The Company follows Statement of Financial Accounting Standards No. 130, “Disclosures About
Segments of an Enterprise and Related Information.” The Company operates as a single segment and
will evaluate additional segment disclosure requirements as it expands its operations.
Consolidation policy
The accompanying Consolidated Financial Statements include the accounts of the Company and its
majority-owned subsidiary partnerships and corporations, after elimination of all material
inter-company accounts, transactions, and profits. Investments in unconsolidated subsidiaries
representing ownership of at least 20% but less than 50%, are accounted for under the equity
method. Non-marketable investments in which the Company has less than 20% ownership and in which
it does not have the ability to exercise significant influence over the investee are initially
recorded at cost and periodically reviewed for impairment.
Income taxes
The Company follows Statement of Financial Accounting Standard No. 109, “Accounting for Income
Taxes” (“SFAS No. 109”) for recording the provision for income taxes. Deferred tax assets and
liabilities are computed based upon the difference between the financial statement and income tax
basis of assets and liabilities using the enacted marginal tax rate applicable when the related
asset or liability is expected to be realized or settled. Deferred income tax expenses or
benefits are based on the changes in the asset or liability each period. If available evidence
suggests that it is more likely than not that some portion or all of the deferred tax assets will
not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount
that is more likely than not to be realized. Future changes in such valuation allowance are
included in the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income and expense items
reported for financial accounting and tax purposes in different periods. Deferred taxes are
classified as current or non-current, depending on the classification of assets and liabilities to
which they relate. Deferred taxes arising from temporary
F-10
differences that are not related to an asset or liability are classified as current or non-current
depending on the periods in which the temporary differences are expected to reverse.
Reclassifications
Certain reclassifications have been made to prior periods to conform to current presentation.
Recent pronouncements
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense, freight, handing costs, and
spoilage. This statement requires that those items be recognized as current period charges
regardless of whether they meet the criterion of “so abnormal” which was the criterion specified
in ARB No. 43. In addition, this Statement requires that allocation of fixed production overheads
to the cost of production be based on normal capacity of the production facilities. This
pronouncement is effective for the Company beginning October 1, 2005. The Company does not believe
adopting this new standard will have a significant impact to its financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004). Share-Based Payment, which is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement of Cash
Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS
No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative. The new standard will be effective for the
Company in the first interim or annual reporting period beginning after December 15, 2005.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement
of APB Opinion 20 and FASB Statement No. 3. This statement defines retrospective application as
the application of a different accounting principle to prior accounting periods as if that
principle had always been used or as the adjustment of previously issued financial statements to
reflect a change in the reporting entity. This Statement also redefines restatement as the
revising of previously issued financial statements to reflect the correction of an error. The new
standard will be effective for the Company in the first interim or annual reporting period
beginning after December 15, 2005.
Year end
The Company has adopted December 31 as its fiscal year end.
Note 3 – Material business combination
On April 9, 2004, the Company completed the purchase of DiscLive, Inc. a privately held company
that secures contracts with various music artists to record live concert performances, by acquiring
all of the outstanding capital stock for a total purchase price of $600,000. DiscLive, Inc.’s
results of operations have been included in the consolidated financial statements since the date of
acquisition
The aggregate purchase price consisted of 1,666,667 shares of the Company’s common stock valued at
$600,000. The value of the 1,666,667 common shares issued was determined based on the average
market price of the Company’s common shares at the time of acquisition. The company allocated
$324,142 of the acquisition price to goodwill and the balance of $275,858 to assets and
liabilities.
F-11
The following (unaudited) pro forma consolidated results of operations have been prepared as if the
acquisition of DiscLive, Inc. had occurred at January 1, 2004:
| |
|
|
|
|
| |
|
Year Ended |
|
| |
|
December 31, 2004 |
|
Revenue, net |
|
$ |
379,588 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
General and administrative |
|
|
2,488,649 |
|
General and administrative — related party |
|
|
37,263 |
|
Depreciation expense |
|
|
47,612 |
|
Compensation – related party |
|
|
0 |
|
|
|
|
|
Total expenses: |
|
|
2,573,524 |
|
|
|
|
|
|
Other income: |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
Net (loss): |
|
|
(2,193,960 |
) |
|
|
|
|
|
|
|
|
|
Net income per share–basic and fully diluted |
|
|
(.08 |
) |
|
|
|
|
The pro forma information is presented for informational purposes only and is not necessarily
indicative of the results of operations that actually would have been achieved had the acquisition
been consummated as of that time, nor is it intended to be a projection of future results.
Note 4 – Asset acquisition
On February 28, 2005, the Company entered into an “Asset Purchase Agreement” with Moving Records,
LLC, (“MR”) a private company established and operated in the State of Minnesota. Pursuant to the
agreement, the Company acquired equipment valued at $288,998, intellectual property valued at
$125,000 and agreed to assume a total of $138,606 in debt from MR under separate promissory note
and $13,973 in accounts payable, in exchange for 2,500,000 shares of the Company’s $0.001 par value
common stock. The fair value of the Company’s common stock on the date of the agreement was
$450,000. The difference between the value of the stock issued and the fair market value of the
assets acquired is $188,581, which the Company recorded as goodwill.
Note 5 — Going concern
As shown in the accompanying financial statements, the Company has accumulated net losses from
operations totaling $7,195,600 as of December 31, 2005, the Company’s current liabilities exceeded
its current assets by $2,222,038 and its total liabilities exceeded its total assets by $2,041,368.
These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s financial statements are prepared using the generally accepted accounting principles
applicable to a going concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. However, the Company has generated limited revenue
from its planned principal operations. In order to obtain the necessary capital, the Company has
historically raised funds via private offerings. The Company is dependent upon its ability to
secure additional equity and/or debt financing and there are no assurances that the Company will be
successful, and without sufficient financing it would be unlikely for the Company to continue as a
going concern. The accompanying financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
F-12
Note 6 – Fixed assets
Fixed assets consist of the following:
| |
|
|
|
|
| |
|
December 31, |
|
| |
|
2005 |
|
Computer and office equipment |
|
$ |
26,224 |
|
Recording equipment |
|
|
-0- |
|
Software |
|
|
-0- |
|
|
|
|
|
|
|
|
26,224 |
|
Less accumulated depreciation |
|
|
(7,625 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,599 |
|
|
|
|
|
Depreciation expense totaled $59,445 and $71,881 for the years ended December 31, 2005 and 2004,
respectively.
Note 7 – Income taxes
For the year ended December 31, 2005, the Company incurred net operating losses and, accordingly,
no provision for income taxes has been recorded. In addition, no benefit for income taxes has been
recorded due to the uncertainty of the realization of any tax assets. At December 31, 2005, the
Company had approximately $5,228,805 of federal and state net operating losses. The net operating
loss carryforwards, if not utilized will begin to expire in 2017.
The components of the Company’s deferred tax asset are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2005 |
|
|
2004 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
5,228,805 |
|
|
$ |
3,640,702 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
5,228,805 |
|
|
|
3,640,702 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Net deferred tax assets before valuation allowance |
|
|
5,228,805 |
|
|
|
3,604,702 |
|
Less: Valuation allowance |
|
|
(5,228,805 |
) |
|
|
(3,604,702 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
-0- |
|
|
$ |
-0- |
|
|
|
|
|
|
|
|
For financial reporting purposes, the Company has incurred a loss since inception to December 31,
2005. Based on the available objective evidence, including the Company’s history of losses,
management believes it is more likely than not that the net deferred tax assets will not be fully
realizable. Accordingly, the Company provided for a full valuation allowance against its net
deferred tax assets at December 31, 2005.
A reconciliation between the amount of income tax benefit determined by applying the applicable
U.S. and State statutory income tax rate to pre-tax loss is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2005 |
|
|
2004 |
|
Federal and state statutory rate |
|
$ |
(1,777,794 |
) |
|
$ |
(1,225,599 |
) |
Change in valuation allowance
on deferred tax assets |
|
|
1,777,794 |
|
|
|
1,225,599 |
|
|
|
|
|
|
|
|
|
|
$ |
-0- |
|
|
$ |
-0- |
|
|
|
|
|
|
|
|
F-13
Note 8 – Notes payable and convertible debt
| |
|
|
|
|
| |
|
Dec. 31, 2005 |
|
Secured Convertible Promissory Notes, bearing interest at 10% per annum, due on April 1, 2006 (1) |
|
$ |
330,249 |
|
|
|
|
|
|
Secured Convertible Promissory Note, bearing interest at 10% per annum, due on April 1, 2006 (2) |
|
|
600,000 |
|
|
|
|
|
|
Secured Convertible Promissory Note, bearing interest at 10% per annum, due on April 1, 2006 (3) |
|
|
25,000 |
|
|
|
|
|
|
Secured Convertible Promissory Note, bearing interest at 10% per annum, due on April 1, 2006 (3) |
|
|
50,000 |
|
|
|
|
|
|
Unsecured note from a related party bearing no interest and due on demand |
|
|
43,000 |
|
|
|
|
|
|
Secured Promissory Note in favor of Community Bank, bearing interest at 7% per annum |
|
|
18,606 |
|
|
|
|
|
|
Promissory Note, bearing interest at 7% per annum, due on April 1, 2006 |
|
|
100,000 |
|
|
|
|
|
|
Promissory Note, bearing no interest, due on April 1, 2006 |
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
Total Short-term debt |
|
$ |
1,171,855 |
|
|
|
|
|
|
|
|
| (1) |
|
Pursuant to a Note Conversion Agreement, Waiver and Release, as amended, with these
note-holders, the note-holders have agreed to convert $300,500 aggregate principal amount of the
notes into Company common stock at a conversion price of $0.125 per share of common stock and waive
any and all accrued but unpaid interest. The Note Conversion Agreement, Waiver and Release, as
amended, however, is subject to termination in the event the transaction between Radical Holdings
LP and the Company is not consummated (See Note 12 – Subsequent Events). |
| |
| (2) |
|
Pursuant to a Note Conversion Agreement, Waiver and Release, as amended, with these
note-holders, the note-holders have agreed to convert $150,000 aggregate principal amount of the
notes into Company common stock at a conversion price of $0.125 per share of common stock and waive
any and all accrued but unpaid interest. The Note Conversion Agreement, Waiver and Release, as
amended, however, is subject to termination in the event the transaction between Radical Holdings
LP and the Company is not consummated (See Note 12 – Subsequent Events). |
| |
| (3) |
|
Pursuant to the Note Conversion Agreement, Waiver and Release, as amended, with this
note-holder, the note-holder has agreed to convert all aggregate principal amount of this note into
Company common stock at a conversion price of $0.125 per share of common stock and waive any and
all accrued but unpaid interest. The Note Conversion Agreement, Waiver and Release, as amended,
however, is subject to termination in the event the transaction between Radical Holdings LP and the
Company is not consummated (See Note 12 – Subsequent Events). |
Interest expense totaled $63,065 and $16,500 for the years ended December 31, 2005 and 2004,
respectively.
Note 9 – Stockholders’ equity
The Company is authorized to issue 500,000,000 shares of its $0.001 par value common stock. All
shares of common stock are subject to preemptive rights entitling each stockholder to subscribe for
additional shares of common stock upon any additional issuance of common stock or any security
convertible into shares of common stock.
On April 9, 2004, the Company acquired all the outstanding shares of DiscLive, Inc., a Delaware
corporation, in exchange for 1,666,667 shares of the Company’s $0.001 par value common stock valued
at $600,000, the fair value of the underlying shares.
On May 20, 2004, the Company issued 63,333 shares of its $0.001 par value common stock to a certain
note holder who elected to convert their convertible notes totaling $9,500 into Company equity.
F-14
On May 20, 2004, the Company issued 10,000 shares of its $0.001 par value common stock to a company
to acquire equipment valued at $3,000.
On May 20, 2004, the Company issued 200,153 shares of its $0.001 par value common stock to an
individual for consulting services valued at $60,046, the fair market value of the underlying
shares.
On May 20, 2004, the Company issued 50,000 shares of its $0.001 par value common stock to an
individual for consulting services valued at $15,000, the fair market value of the underlying
shares.
On May 20, 2004, the Company issued 10,417 shares of its $0.001 par value common stock to an
individual upon the exercise of a warrant. The aggregate cash exercise price was $1,563.
On May 20, 2004, the Company issued 1,668,201 shares of its $0.001 par value common stock for cash
in the amount of $500,460.
On May 20, 2004, the Company issued 167,000 shares of its $0.001 par value common stock for cash in
the amount of $50,100.
On May 20, 2004, the Company issued 1,017,666 shares of its $0.001 par value common stock for cash
totaling $305,300 pursuant to outstanding subscription agreements.
On June 25, 2004, the Company issued 130,000 shares of its $0.001 par value common stock for
consulting services valued at $35,100, the fair market value of the underlying shares.
On November 30, 2004, the Company issued 1,839,000 shares of its $0.001 par value common stock for
consulting services valued at $275,850, the fair market value of the underlying shares.
On February 28, 2005, the Company issued 2,500,000 shares of its $0.001 par value common stock
pursuant to an “Asset Acquisition Agreement”. The fair market value of the underlying shares is
$450,000.
On March 4, 2005, the Company issued 64,000 shares of its $0.001 par value common stock for
consulting services valued at $7,680.
On July 6, 2005, the Company issued 50,000 shares of its $0.001 par value common stock for
consulting services valued at $2,500, the fair market value of the underlying shares.
On September 15, 2005 and September 23, 2005, the Company issued 5,775,000 shares and 600,000
shares, respectively of its $0.001 par value common stock to key employees of the Company valued at
$115,500 and $12,000, respectively.
As of December 31, 2005, there have been no other issuances of common stock.
Note 10 – Warrants and options
Warrants
For the year ended December 31, 2003, the Company issued 447,916 warrants to purchase common stock
on a one-for-one basis at an exercise price of $0.15 per share of common stock. The fair value of
the warrants has been estimated using the Black-Scholes option pricing model. The weighted average
fair value of these warrants was $0.15. As of December 31, 2004, the Company recorded a consulting
expense in the amount of $45,016. The following assumptions were used in computing the fair value
of these warrants: weighted average risk-free interest rate of 4.50%, zero dividend yield, average
volatility of the Company’s common stock of 355% and an expected life of the warrants of one year.
On April 30, 2004, 437,499 warrants expired.
On May 20, 2004, the Company issued 10,417 shares of its $0.001 par value common stock for the
exercise of warrants. The warrants were exercisable at $0.15 per share and the Company received
proceeds totaling $1,563.
F-15
On March 20, 2004, the Company issued warrants to purchase up to 200,000 shares of its $.001 par
value common stock to Pangloss International, Inc. in connection with financial consulting
activities. The warrants are exercisable at an average exercise price of $1.00 per share. The fair
value of the warrants has been estimated using the Black-Scholes option pricing model. The weighted
average fair value of these warrants was $0.05. As of December 31, 2004, the Company recorded a
consulting expense in the amount of $9,993. The following assumptions were used in computing the
fair value of these warrants: weighted average risk-free interest rate of 3.50%, zero dividend
yield, average volatility of the Company’s common stock of 79% and an expected life of the warrants
of one year. The warrants expired on March 20, 2005.
On March 22, 2004, the Company issued warrants to purchase up to 3,002,302 shares of its $.001 par
value common stock to Jess Morgan & Co., Inc. in connection with financial consulting activities.
The warrants are exercisable at an average exercise price of $0.20 per share. The fair value of the
warrants has been estimated using the Black-Scholes option pricing model. The weighted average fair
value of these warrants was $0.34. As of December 31, 2004, the Company recorded a consulting
expense in the amount of $1,018,381. The following assumptions were used in computing the fair
value of these warrants: weighted average risk-free interest rate of 3.50%, zero dividend yield,
average volatility of the Company’s common stock of 79% and an expected life of the warrants of
three years. The warrants will expire on March 22, 2007.
On March 22, 2004, the Company issued warrants to purchase up to 300,000 shares of its $.001 par
value common stock to an individual in connection with financial consulting activities. The
warrants are exercisable at an average price of $0.20 per share. The fair value of the warrants has
been estimated using the Black-Scholes option pricing model. The weighted average fair value of
these warrants was $0.34. As of December 31, 2004, the Company recorded a consulting expense in the
amount of $101,760. The following assumptions were used in computing the fair value of these
warrants: weighted average risk-free interest rate of 3.50%, zero dividend yield, average
volatility of the Company’s common stock of 79% and an expected life of the warrants of three
years. The warrants will expire on March 22, 2007.
On June 22, 2004, the Company issued warrants to purchase up to 350,000 shares of its $.001 par
value common stock to Broad Street Ventures in connection with a consulting agreement. 175,000
warrants are exercisable at a price of $0.30 per share and 175,000 are exercisable at $0.75 per
share. The fair value of the warrants has been estimated using the Black-Scholes option pricing
model. The weighted average fair value of these warrants was $0.12 and $0.11, respectively. As of
December 31, 2004, the Company recorded a consulting expense in the amount of $4,901 and
unamortized costs totaling $34,299. The following assumptions were used in computing the fair value
of these warrants: weighted average risk-free interest rate of 3.75%, zero dividend yield, average
volatility of the Company’s common stock of 164% and an expected life of the warrants of three
years. The warrants will expire on September 9, 2007.
On June 22, 2004, the Company issued warrants to purchase up to 133,333 shares of its $.001 par
value common stock to individuals in connection with financial consulting services. The warrants
are exercisable at a price of $0.30 per share. The fair value of the warrants has been estimated
using the Black-Scholes option pricing model. The weighted average fair value of these warrants was
$0.247. As of December 31, 2004, the Company recorded a consulting expense in the amount of
$32,933. The following assumptions were used in computing the fair value of these warrants:
weighted average risk-free interest rate of 3.75%, zero dividend yield, average volatility of the
Company’s common stock of 101% and an expected life of the warrants of three years. The warrants
will expire on February 19, 2006.
On June 22, 2004 and December 9, 2004, the Company issued warrants to purchase up to 89,947 shares
of its $.001 par value common stock to Doman Technology Capital, Inc. in connection with consulting
services. The warrants are exercisable at a price of $0.30 per share. The fair value of the
warrants has been estimated using the Black-Scholes option pricing model. The weighted average fair
value of these warrants was $0.23. As of December 31, 2004, the Company recorded a consulting
expense in the amount of $19,227. The following assumptions were used in computing the fair value
of these warrants: weighted average risk-free interest rate of 3.75%, zero dividend yield, average
volatility of the Company’s common stock of 190.50% and an expected life of the warrants of two
years. The warrants will expire on February 19, 2007.
F-16
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
| |
|
Number |
|
|
Exercise |
|
| |
|
Of Warrants |
|
|
Price |
|
Balance, January 1, 2004 |
|
|
447,916 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
Warrants granted |
|
|
4,075,582 |
|
|
|
0.33 |
|
Warrants expired |
|
|
(437,499 |
) |
|
|
0.15 |
|
Warrants exercised |
|
|
(10,417 |
) |
|
|
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
|
4,075,582 |
|
|
|
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2004 |
|
|
4,075,582 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2005 |
|
|
4,075,582 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
Warrants granted |
|
|
-0- |
|
|
|
-0- |
|
Warrants exercised |
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
|
4,075,582 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
The following is a summary of information about the warrants outstanding at December 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Underlying |
| Shares Underlying Warrants Outstanding |
|
Warrants Exercisable |
| |
|
|
|
Shares |
|
Average |
|
Weighted |
|
Shares |
|
Weighted |
| |
|
|
|
Underlying |
|
Remaining |
|
Average |
|
Underlying |
|
Average |
| Range of |
|
Warrants |
|
Contractual |
|
Exercise |
|
Warrants |
|
Exercise |
| Exercise Prices |
|
Outstanding |
|
Life |
|
Price |
|
Exercisable |
|
Price |
| $ |
0.20-0.75 |
|
|
|
4,075,582 |
|
|
2 years |
|
$ |
0.33 |
|
|
|
4,075,582 |
|
|
$ |
0.33 |
|
Options
On April 14, 2004, the Company entered into an employment agreement with an individual as a result
of its DiscLive acquisition. As additional consideration for services, the Company granted stock
options to purchase up to 450,000 shares of its $0.001 par value common stock at an exercise price
of $0.65 per share. The value of the options on the grant date using the Black-Scholes Model is
$61,020, which has been recorded as compensation expense on the Statement of Operations as of
December 31, 2004. As of December 31, 2005, the employment contract had been terminated and the
Company entered into a subsequent agreement whereby it would re-purchase all of the options for
cash consideration in the amount of $4,500, which remained unpaid at December 31, 2005. The
following assumptions were used in computing the fair value of these options: weighted average
risk-free interest rate of 3.75%, zero dividend yield, average volatility of the Company’s common
stock of 85% and an expected life of the options of two years. The options expired on April 14,
2006.
On May 6, 2005, the Company entered into a consulting agreement with an individual. The Company
granted 650,000 stock options to vest over a period of thirty-six months as consideration for the
services performed. The value of the options on the grant date using the Black-Scholes Model is
$52,910. The Company has recorded compensation expense in the amount of $13,230 representing the
amortizable portion of the compensation as of December 31, 2005. The remaining balance of $39,680
has been recorded on the balance sheet as unamortized options. The following assumptions were used
in computing the fair value of these options: weighted average risk-free interest rate of 4.50%,
zero dividend yield, average volatility of the Company’s common stock of 161% and an expected life
of the options of three years. The options expire on May 6, 2008.
F-17
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
| |
|
Number |
|
|
Exercise |
|
| |
|
Of Shares |
|
|
Price |
|
Balance, January 1, 2004 |
|
|
-0- |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
450,000- |
|
|
$ |
0.65 |
|
Options exercised |
|
|
(-0- |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
|
450,000 |
|
|
|
0.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2004 |
|
|
450,000 |
|
|
$ |
0.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2005 |
|
|
450,000 |
|
|
$ |
0.65 |
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
650,000 |
|
|
|
0.15 |
|
Options exercised |
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
|
1,100,000 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
The following is a summary of information about the options outstanding at December 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Underlying |
|
| Shares Underlying Options Outstanding |
|
|
Options Exercisable |
|
| |
|
|
|
Shares |
|
|
Average |
|
|
Weighted |
|
|
Shares |
|
|
Weighted |
|
| |
|
|
|
Underlying |
|
|
Remaining |
|
|
Average |
|
|
Underlying |
|
|
Average |
|
| Range of |
|
|
Options |
|
|
Contractual |
|
|
Exercise |
|
|
Options |
|
|
Exercise |
|
| Exercise Prices |
|
|
Outstanding |
|
|
Life |
|
|
Price |
|
|
Exercisable |
|
|
Price |
|
| $ |
0.15-0.65 |
|
|
|
1,100,000 |
|
|
2 years |
|
$ |
0.35 |
|
|
|
1,100,000 |
|
|
$ |
0.35 |
|
Note 11 – Related party transactions
Shareholder loans
During the year ended December 31, 2005, the Company received $686,449 in cash advances for
operating expenses from shareholders of the Company (see Note 8 above).
During the year ended December 31, 2004, the Company received a loan of $43,000 aggregate principal
amount from its Chief Executive Officer. This note does not bear interest and has no maturity
date.
Note 12 – Subsequent events
On January 24, 2006, the Company entered into a “Securities Purchase Agreement” with Radical
Holdings LP, a Texas limited partnership (“Radical”), which was subsequently amended on March 3,
2006. Pursuant to the Securities Purchase Agreement, as amended, the Company will adopt and file a
Certificate of Designation, Rights and Preferences, establishing the Series “A” Convertible
Preferred Stock, par value $0.001 per share to issue and sell to Radical. Subject to the terms of
the Securities Purchase Agreement, as amended, Radical will purchase 4,392,286 shares of the Series
A Preferred Stock for cash totaling $3,000,000, or $0.68 per share of Series A Convertible
Preferred Stock. The shares of Series A Convertible Preferred Stock are convertible, at any time at
the option of the
F-18
holders of the Series A Convertible Preferred Stock, into that aggregate number of full shares of
Company common stock representing 95% of the total Company common stock outstanding after giving
effect to the conversion.
As required by the Securities Purchase Agreement, the Company’s Board of Directors and shareholders
will adopt and file amended and restated Articles of Incorporation authorizing its Board of
Directors to fix and determine the voting powers, designations, preferences, limitations,
restrictions and relative rights of the preferred stock of the Company, to delete the article
providing for preemptive rights for holders of the Common Stock of the Company, to delete the
provision that specifies that the principal place of business of the Company shall be in Clark
County, Nevada and to effectuate a 100-for-1 reverse stock split of the outstanding common stock.
We will require approximately $750,000 of funds to operate our business at the desired level during
year 2006. We presently do not generate sufficient cash from operations to fund our operating
activities and, until recently, limited operations to that which we deemed to be critical.
Radical may, from time to time, in its sole discretion, prior to the closing of the purchase and
sale of the Series A Convertible Preferred Stock, loan funds to us to pay outstanding liabilities,
accounts payable or other obligations and to provide necessary funds to operate our business. Any
funds loaned to us are required:
(i) to be applied in strict accordance with the uses approved by Radical;
(ii) if the closing of the purchase and sale of the Series A Convertible Preferred Stock
occurs, to be fully credited towards the aggregate purchase price of the Series A Convertible
Preferred Stock; and
(iii) if the Purchase Agreement is terminated for any reason whatsoever, to be repaid in full
to Radical, without interest and without deduction thereon, within thirty (30) days following the
date of the termination of the Purchase Agreement.
In the event that any funds loaned to us are not repaid pursuant to item (iii) immediately above,
we will make in favor of Radical a non-interest bearing note in the aggregate amount loaned by
Radical to us and grant Radical a security interest in all of our assets to secure the repayment of
all the amounts due and payable under such note or notes. The note or notes shall have a term of
ninety (90) days, and the note or notes and security agreement shall be in a form reasonably
satisfactory to Radical. As of March 31, 2006, Radical has loaned us an aggregate of $287,000.
F-19