e10qsbza
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
(Mark One)
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
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o |
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from to
Commission file number: 000-26073
IMMEDIATEK,
INC.
(Exact name of small business issuer as specified in its charter)
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Nevada
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86-0881193 |
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(State or other jurisdiction of incorporation or
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(IRS Employer Identification No.) |
organization) |
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10488 Brockwood Road
Dallas, Texas 75238
(Address of principal executive offices)
(972) 852-2876
(Issuers telephone number)
(Former name, former address and former fiscal year, if changed since last report)
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 þ No 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
As of June 30, 2006 and November 17, 2006, the issuer had 474,807 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes o No þ
IMMEDIATEK, INC.
TABLE OF CONTENTS
i
EXPLANATORY NOTE
This Quarterly Report on Form 10-QSB/A (Amendment No. 1) for the quarterly period ended June 30,
2006, amends and supersedes the Quarterly Report on Form 10-QSB for the quarterly period ended June
30, 2006, filed by Immediatek, Inc. on August 14, 2006. This Quarterly Report on Form 10-QSB/A
(Amendment No. 1) is being filed to, among other items, correct the commitment date used to measure
the fair market value of a certain note entered into on April 7, 2006 and converted on June 7, 2006
(See Notes to Condensed Consolidated Financial Statements Note 9 Notes Payable) and to
correct the calculation of the historical cost of the minority interest as a result of push down
accounting (See Notes to Condensed Consolidated Financial Statements Note 4 New Basis of
Accounting). This Quarterly Report on Form 10-QSB/A (Amendment No. 1) continues to speak as of
the date of the original filing of the Quarterly Report on Form 10-QSB and Immediatek, Inc. has not
updated the disclosure in this Quarterly Report on Form 10-QSB/A (Amendment No. 1) to speak as of
any later date.
1
INTRODUCTION
Unless the context otherwise indicates, all references in this Quarterly Report on Form
10-QSB/A (Amendment No. 1) to the Company, Immediatek, we, us, our or ours or similar
words are to Immediatek, Inc. and its direct, wholly-owned subsidiary, DiscLive, Inc. Accordingly,
there are no separate financial statements for DiscLive, Inc.
Change in Control
On June 8, 2006, Immediatek issued and sold, and Radical Holdings LP purchased, 4,392,286
shares of Series A Convertible Preferred Stock of Immediatek for an aggregate purchase price of
$3.0 million, or $0.68 per share of Series A Convertible Preferred Stock, pursuant to the
Securities Purchase Agreement, as amended, or the Purchase Agreement, by and among Immediatek,
Radical Holdings LP, or Radical, and the other parties thereto. The Series A Convertible Preferred
Stock is, at the option of the holders of the Series A Convertible Preferred Stock, convertible at
any time into that aggregate number of full shares of Immediatek common stock representing 95% of
the total common stock outstanding after giving effect to the conversion.
A holder of a share of the Series A Convertible Preferred Stock is entitled to vote on all
matters required or permitted to be voted upon by the stockholders of Immediatek. Each holder of a
share of the Series A Convertible Preferred Stock is entitled to the number of votes equal to the
largest number of full shares of Immediatek common stock into which all shares of the Series A
Convertible Preferred Stock held by that holder could be converted. As a result and as of June 8,
2006, a change in control of Immediatek occurred because Radical beneficially owns 95% of the
outstanding securities entitled to vote on matters required or permitted to be submitted to the
stockholders of Immediatek.
Additionally, for so long as any shares of the Series A Convertible Preferred Stock originally
issued under the Purchase Agreement remain outstanding, the holders of a majority-in-interest of
the shares of the Series A Convertible Preferred Stock originally issued under the Purchase
Agreement then outstanding have the right to designate all the persons to serve as directors on the
board of directors of Immediatek and its subsidiaries.
Reverse Stock Split
At the close of business on June 6, 2006, the Company effected a 100-for-1 reverse stock split
of its then outstanding common stock. After giving effect to the reverse stock split, each
stockholder of record immediately prior to the reverse stock split holds one one-hundredth of the
shares they held before the reverse stock split. All fractional shares were rounded up to the next
whole number. Accordingly, all references in this Quarterly Report on Form 10-QSB/A (Amendment No.
1) to numbers of shares of Company common stock, including those relating to prior periods, have
been adjusted to reflect the reverse stock split.
New Basis of Accounting
As a result of the change in control of Immediatek by virtue of the purchase of the Series A
Convertible Preferred Stock by Radical, we have pushed down our basis to a proportionate amount
of our underlying assets and liabilities acquired based on the estimated fair market values of the
assets and liabilities. The primary changes to the balance sheet reflect:
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adjustments to our fixed assets to reflect a step-up in basis of those assets; |
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the recording of a value for our trade names, trade marks and covenants not to compete; |
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adjustments to historical goodwill to reflect goodwill arising from the push down
accounting adjustments; |
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the recording of a value for assets held for sale; |
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the recording of a value for our deferred tax asset and liability; and |
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a decrease in additional paid-in capital from these adjustments. |
2
The primary changes to the statements of operations are:
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an increase in net operating loss due to a higher level of depreciation from the
increase in the depreciable basis of fixed assets; and |
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an increase in net operating loss due to a higher level of amortization related to
the increase in the amortizable basis of intangible assets. |
The increases in net loss due to higher levels of depreciation and amortization from the increase
in the depreciable and amortizable basis of fixed assets and intangible assets, as applicable, were
offset in cash used in operations by corresponding non-cash adjustments.
Due to the impact of the changes resulting from the push down accounting adjustments
described above, the statements of operations and the statements of cash flow presentations
separate our 2006 results and cash flows into two periods: (1) the period ending on June 7, 2006,
which was the day prior to the consummation of the sale of the Series A Convertible Preferred
Stock, and (2) the period beginning on June 8, 2006 utilizing the new basis of accounting. The
results and cash flows are further separated by a heavy black line to indicate the effective date
of the new basis of accounting.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB/A (Amendment No. 1) and the materials incorporated by
reference into this Quarterly Report on Form 10-QSB/A (Amendment No. 1) include forward-looking
statements intended to qualify for the safe harbor from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking statements generally can be
identified as such because the context of the statement includes words such as we believe,
expect, anticipate, will, should or other words of similar import. Similarly, statements
in this Quarterly Report on Form 10-QSB/A (Amendment No. 1) that describe our objectives, plans or
goals also are forward-looking statements. These statements include those made on matters such as
our financial condition, litigation, accounting matters, our business, our efforts to grow our
business and increase efficiencies, our efforts to use our resources judicially, our efforts to
implement new financial software, our liquidity and sources of funding and our capital
expenditures. All forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those in the forward-looking statements. The
forward-looking statements included in this Quarterly Report on Form 10-QSB/A (Amendment No. 1)
continue to speak as of the date of the original filing of the Quarterly Report on Form 10-QSB.
Certain factors that could cause actual results to differ include, among others:
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our inability to continue as a going concern; |
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our history of losses, which are likely to continue; |
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our utilization of funds received in a manner that is accretive; |
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our ability to generate sufficient funds from operating activities to fund our operations; |
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our ability to obtain a sufficient number of contracts to record live content; |
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changes in anticipated levels of sales of our products; |
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competition, including competition from a substantial competitor that possesses
greater resources, both financially and in the industry, than we do; |
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dependence on third party manufacturers and contractors; |
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changes in technology that may make our products less attractive or obsolete; |
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the development of new products or innovations by our competitors; |
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difficulties in developing and marketing new products; and |
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changes in conditions affecting the economy generally. |
For a discussion of these and other risks and uncertainties that could cause actual results to
differ materially from those contained in our forward-looking statements, please refer to Risk
Factors in our Annual Report on Form 10-KSB for the year ended December 31, 2005.
3
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements
Immediatek, Inc.
Condensed Consolidated Balance Sheet
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June 30, 2006 |
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(restated) |
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(unaudited) |
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Assets |
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Current assets: |
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Cash |
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$ |
1,802,290 |
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Accounts receivable |
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4,145 |
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Prepaid expenses and other current assets |
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10,000 |
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Total current assets |
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1,816,435 |
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Fixed assets, net |
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127,600 |
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Assets held for sale |
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30,810 |
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Intangible assets, net |
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42,220 |
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Goodwill |
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1,765,493 |
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Deferred tax asset, net |
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64,464 |
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Total Assets |
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$ |
3,847,022 |
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Liabilities and Stockholders Deficit |
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Current liabilities: |
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Accounts payable |
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$ |
415,685 |
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Accrued liabilities |
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328,709 |
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Accrued interest |
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10,925 |
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Convertible notes payable |
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100,000 |
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Total current liabilities |
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855,319 |
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Deferred tax liability |
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64,464 |
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Total Liabilities |
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$ |
919,783 |
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Series A Convertible Preferred Stock (conditionally redeemable)
4,392,286 authorized, issued and outstanding; $0.001 par value
redemption/liquidation value $0.68 |
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$ |
3,000,000 |
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Stockholders Deficit: |
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Common stock, $0.001 par value, 500,000,000 shares
authorized, 474,807 shares issued and outstanding |
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475 |
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Additional paid-in capital (deficit) |
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(94,614 |
) |
Retained
earnings |
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21,378 |
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Total Stockholders Deficit |
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(72,761 |
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Total Liabilities, Preferred Stock and Stockholders Deficit |
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$ |
3,847,022 |
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See accompanying notes to unaudited condensed consolidated financial statements.
4
Immediatek, Inc.
Condensed Consolidated Statements of Operations
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For the Three Months Ended |
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For the Six Months Ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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(restated) |
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(restated) |
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(restated) |
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(restated) |
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(unaudited) |
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(unaudited) |
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(unaudited) |
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(unaudited) |
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(see Note 4) |
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(see Note 4) |
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Successor |
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Predecessor |
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Successor |
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Predecessor |
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June 8 - June 30 |
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April 1 - June 7 |
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Predecessor |
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June 8 - June 30 |
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January 1 - June 7 |
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Predecessor |
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Revenues |
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$ |
19,740 |
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$ |
2,425 |
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$ |
56,000 |
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$ |
19,740 |
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$ |
19,451 |
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$ |
76,795 |
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Cost of sales |
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7,472 |
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24,645 |
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30,196 |
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7,472 |
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43,584 |
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52,606 |
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Gross Margin |
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12,268 |
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(22,220 |
) |
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25,804 |
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12,268 |
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(24,133 |
) |
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24,189 |
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Expenses: |
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General and administrative expenses |
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5,459 |
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17,656 |
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19,297 |
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5,459 |
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34,903 |
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139,939 |
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Consulting services |
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18,210 |
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Professional fees |
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20,259 |
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208,133 |
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31,504 |
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20,259 |
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328,347 |
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69,420 |
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Salaries and benefits |
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31,524 |
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59,726 |
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68,817 |
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31,524 |
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89,130 |
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143,235 |
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Non-cash stock compensation |
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16,197 |
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3,410 |
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52,001 |
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Non-cash consulting expense |
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37,680 |
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Depreciation and amortization |
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2,867 |
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1,418 |
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78,673 |
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2,867 |
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2,755 |
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117,715 |
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(Gain) loss on extinguishment of debt |
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(69,219 |
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43,056 |
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(69,219 |
) |
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43,056 |
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46,000 |
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Gain on settlement of accounts payable |
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(91,894 |
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(140,525 |
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Total expenses |
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(9,110 |
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238,095 |
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214,488 |
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(9,110 |
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361,076 |
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624,200 |
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Net operating income (loss) |
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$ |
21,378 |
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$ |
(260,315 |
) |
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$ |
(188,684 |
) |
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$ |
21,378 |
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$ |
(385,209 |
) |
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$ |
(600,011 |
) |
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Other expense: |
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Interest expense, net |
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(35,244 |
) |
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(43,614 |
) |
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(73,276 |
) |
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(78,414 |
) |
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Net income (loss) |
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$ |
21,378 |
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$ |
(295,559 |
) |
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$ |
(232,298 |
) |
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$ |
21,378 |
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$ |
(458,485 |
) |
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$ |
(678,425 |
) |
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Deemed dividend related to beneficial
conversion feature on Series A convertible
preferred stock |
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(3,000,000 |
) |
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(3,000,000 |
) |
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Net loss attributable to common stockholders |
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$ |
(2,978,622 |
) |
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$ |
(295,559 |
) |
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$ |
(232,298 |
) |
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$ |
(2,978,622 |
) |
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$ |
(458,485 |
) |
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$ |
(678,425 |
) |
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Weighted average number of common shares
outstanding basic and fully diluted |
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466,435 |
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466,435 |
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309,373 |
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394,877 |
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394,877 |
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309,373 |
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Basic and diluted loss per common share
attributable
to common stockholders |
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$ |
(6.39 |
) |
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$ |
(0.63 |
) |
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$ |
(0.75 |
) |
|
$ |
(7.54 |
) |
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$ |
(1.16 |
) |
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$ |
(2.19 |
) |
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See accompanying notes to unaudited condensed consolidated financial statements.
5
Immediatek, Inc.
Condensed Consolidated Statements of Cash Flow
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For the Three Months Ended |
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For the Six Months Ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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(restated) |
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(restated) |
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(restated) |
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(restated) |
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(unaudited) |
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(unaudited) |
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(unaudited) |
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(unaudited) |
|
|
|
|
|
|
|
(see Note 4) |
|
|
|
|
|
|
(see Note 4) |
|
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
|
June 8 - June 30 |
|
|
April 1 - June 7 |
|
|
Predecessor |
|
|
June 8 - June 30 |
|
|
January 1 - June 7 |
|
|
Predecessor |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
21,378 |
|
|
$ |
(295,559 |
) |
|
$ |
(232,298 |
) |
|
$ |
21,378 |
|
|
$ |
(458,485 |
) |
|
$ |
(678,425 |
) |
Depreciation and amortization |
|
|
2,867 |
|
|
|
1,418 |
|
|
|
78,673 |
|
|
|
2,867 |
|
|
|
2,755 |
|
|
|
117,715 |
|
Non-cash interest expense |
|
|
|
|
|
|
7,436 |
|
|
|
17,949 |
|
|
|
|
|
|
|
12,353 |
|
|
|
29,563 |
|
Non-cash consulting fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,680 |
|
Non-cash stock compensation |
|
|
|
|
|
|
|
|
|
|
16,197 |
|
|
|
|
|
|
|
3,410 |
|
|
|
52,001 |
|
(Gain) loss on extinguishment of debt |
|
|
(69,219 |
) |
|
|
43,056 |
|
|
|
|
|
|
|
(69,219 |
) |
|
|
43,056 |
|
|
|
46,000 |
|
Adjustments to reconcile net income (loss) to net
cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(145 |
) |
|
|
|
|
|
|
|
|
|
|
(145 |
) |
|
|
(4,000 |
) |
|
|
73,281 |
|
Prepaid expenses and other current assets |
|
|
24,900 |
|
|
|
81,265 |
|
|
|
(14,202 |
) |
|
|
24,900 |
|
|
|
(26,000 |
) |
|
|
(345 |
) |
Accounts payable |
|
|
(134,060 |
) |
|
|
(5,034 |
) |
|
|
(1,677 |
) |
|
|
(134,060 |
) |
|
|
61,233 |
|
|
|
(888 |
) |
Accrued liabilities |
|
|
(196,635 |
) |
|
|
37,188 |
|
|
|
37,819 |
|
|
|
(196,635 |
) |
|
|
17,267 |
|
|
|
57,096 |
|
Accrued interest |
|
|
|
|
|
|
16,969 |
|
|
|
23,167 |
|
|
|
|
|
|
|
47,895 |
|
|
|
23,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(350,914 |
) |
|
|
(113,261 |
) |
|
|
(74,372 |
) |
|
|
(350,914 |
) |
|
|
(300,516 |
) |
|
|
(243,285 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets |
|
|
|
|
|
|
(907 |
) |
|
|
|
|
|
|
|
|
|
|
(2,476 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(907 |
) |
|
|
|
|
|
|
|
|
|
|
(2,476 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash deficit |
|
|
|
|
|
|
|
|
|
|
2,435 |
|
|
|
|
|
|
|
2,951 |
|
|
|
2,435 |
|
Payments on notes payable |
|
|
(528,149 |
) |
|
|
|
|
|
|
(6,200 |
) |
|
|
(528,149 |
) |
|
|
(18,606 |
) |
|
|
(236,200 |
) |
Proceeds from notes payable |
|
|
|
|
|
|
60,000 |
|
|
|
27,500 |
|
|
|
|
|
|
|
347,000 |
|
|
|
455,500 |
|
Proceeds from issuance of Series A convertible
preferred stock |
|
|
2,653,000 |
|
|
|
|
|
|
|
|
|
|
|
2,653,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,124,851 |
|
|
|
60,000 |
|
|
|
23,735 |
|
|
|
2,124,851 |
|
|
|
331,345 |
|
|
|
221,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
1,773,937 |
|
|
|
(54,168 |
) |
|
|
(50,637 |
) |
|
|
1,773,937 |
|
|
|
28,353 |
|
|
|
(21,550 |
) |
Cash beginning |
|
|
28,353 |
|
|
|
82,521 |
|
|
|
50,637 |
|
|
|
28,353 |
|
|
|
|
|
|
|
21,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash ending |
|
$ |
1,802,290 |
|
|
$ |
28,353 |
|
|
$ |
|
|
|
$ |
1,802,290 |
|
|
$ |
28,353 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Income taxes paid |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares issued for consulting services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,640 |
|
Value of shares issued for consulting services |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
37,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares issued for settlement of contingencies |
|
|
|
|
|
|
108,662 |
|
|
|
|
|
|
|
|
|
|
|
108,662 |
|
|
|
|
|
Value of shares issued for settlement of contingencies |
|
$ |
|
|
|
$ |
1,521,268 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,521,268 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares issued for conversion of notes payable |
|
|
|
|
|
|
42,040 |
|
|
|
|
|
|
|
|
|
|
|
42,040 |
|
|
|
7,000 |
|
Value of shares issued for conversion of notes payable |
|
$ |
|
|
|
$ |
636,598 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
636,598 |
|
|
$ |
126,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares issued for acquisition of assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,000 |
|
Value of shares issued for acquisition of assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
286,400 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
6
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
NOTE 1 RESTATEMENT OF PRIOR YEARS CONSOLIDATED FINANCIAL STATEMENTS
In connection with the preparation of our audit of fiscal 2005 and a due diligence process
conducted by an investor, we determined that there were errors in accounting treatment and reported
amounts in our previously filed consolidated financial statements for the years ended December 31,
2005, 2004 and 2003. As a result, we restated our consolidated financial statements for those
years in amendments to our Annual Reports on Forms 10-KSB for the years ended December 31, 2005 and
2004, which were filed on July 18, 2006 and July 20, 2006, respectively, with the Securities and
Exchange Commission.
As a result of the restatement, we are designing internal procedures and controls for purposes
of the preparation and certification of our consolidated financial statements going forward. In
this process, we identified certain errors in accounting determinations and judgments, which have
been reflected in the restated consolidated financial statements.
Summary of Restatements by Category
The restated consolidated financial statements include adjustments related primarily to the
following:
Common Stock Issued to Officers for Intellectual Property. During the first quarter of 2003,
the Company issued 181,004 shares of its $0.001 par value common stock to its officers in exchange
for intellectual property. Pursuant to Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, 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
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 restated its 2003 financial statements with the filing of
the 2005 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. It was
subsequently determined that it was inappropriate to revalue this transaction. As a result, the
restated accounting treatment has been rescinded and the amounts have been adjusted to the original
accounting treatment based on fair market value of the underlying shares that were exchanged in the
transaction.
Warrants and Options. During the year ended December 31, 2004, the Company issued warrants
and options to purchase up to 49,756 shares of Company 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 recorded the expense in its restated 2004
annual financial statements filed with the 2005 financial statements. Upon further review of the
transactions, it was noted that the restated adjustments did not properly account for options and
warrants issued to third-party consultants on the appropriate measurement date. Furthermore,
certain of the warrants were issued in connection with a private placement memorandum and the sale
of common stock. As such, the fair market value of the warrants issued with common stock should
have been ascribed a value and recorded to additional paid-in capital accordingly. The amount
originally recorded as the restatement, $1,272,522, has been reversed in the restated financial
statements. See further discussions regarding the restated accounting treatment for options and
warrants in separate paragraphs below.
7
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
Payroll Tax. The Company restated its 2003 and 2004 financial statements to reflect
additional payroll tax liabilities resulting from reclassification of compensatory disbursements.
Historically, the Company has taken 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 expense and addition to accrued
liabilities totaled $12,833 and $52,926 for the years ended December 31, 2004 and 2003,
respectively.
Sales Tax. During 2006, 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 expense of $22,990 in 2005 and a reduction in the previously
recorded expense for 2004 of $9,172.
Mechanicals and Royalties. During 2006, the Company determined that mechanicals and royalties
had not properly been accrued for the related revenue transactions. As a result of this review,
additional cost of sales expense and accrued liabilities were recorded in the amount of $20,550 and
$13,731 for 2004 and 2005, respectively.
Assets Acquired from Moving Records, LLC. The Company erroneously recorded goodwill related
to the assets acquired from Moving Records, LLC during 2005. Goodwill is not appropriate in an
asset acquisition. As such, the amount was reclassified to Intellectual Property with a one year
amortizable life based on the relative fair market value of the assets acquired. Amortization
expense was recorded in the amount of $198,150 in the 2005 restated financial statements. There
was, however, no impact on Accumulated Deficit for 2005 due to the fact that all the Moving
Records, LLC assets were considered to be impaired at December 31, 2005. Thus, the impairment
charge of the goodwill originally recorded offsets the amortization expense that should have been
recorded during the year.
Loss on Forgiveness of Debt related to certain assets purchased. On February 28, 2005, the
Company issued 7,000 shares of common stock in exchange for the extinguishment of $80,000 of debt
related to certain assets acquired from Moving Records, LLC. The fair market value of the shares
was $126,000. A loss on extinguishment of debt in the amount of $46,000 was recorded in the
restated 2005 financial statements.
Common Stock Issued on Behalf of the Company for Consulting Services. During 2003, an
employee stockholder of the Company transferred personally owned common stock of the Company to
third party consultants. The transfer was assumed to be on behalf of the Company and was recorded
as a deemed contribution and consulting expense in the restated financial statements. The
resulting charge to accumulated deficit was $54,766, which represents the fair market value of the
shares.
Common Stock Issued on Behalf of the Company for Conversion of Note Payable. During 2003, an
employee stockholder of the Company transferred personally owned common stock of the Company to a
noteholder. The transfer was assumed to be on behalf of the Company and occurred in close
proximity to the conversion of the debt by the noteholder to common stock. The transfer was
recorded as a deemed contribution to the Company and as a further inducement for the conversion of
debt. The fair market value of $15,900 was recorded in the restated financial statements as a loss
on extinguishment of debt related to the transfer.
Common Stock Issued on Behalf of the Company for Issuance of Note Payable. During 2004, an
employee stockholder of the Company transferred personally owned common stock of the Company to a
noteholder. The transfer was assumed to be on behalf of the Company and occurred in close
proximity to the receipt of cash in exchange for a note payable. The transfer was recorded as a
deemed contribution to the Company and as a cost of the note payable at the fair market value of
the shares. Accordingly, $60,000 was recorded in the restated financial statements as debt issue
costs related to the transfer and was amortized over
the term of the note payable of eleven months. The amortization of the debt issue costs was
charged to interest expense as $5,231 in 2004 and $54,769 in 2005.
8
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
Common Stock Issued on Behalf of the Company for Employee Compensation. During 2004, an
employee stockholder of the Company transferred personally owned common stock of the Company to an
employee. The transfer was assumed to be on behalf of the Company and was recorded as a deemed
contribution and non-cash compensation expense in the restated financial statements. The resulting
charge to accumulated deficit was $30,000 and was based on the fair market value of the shares.
Warrants to Purchase Common Stock Issued on Behalf of the Company for Consulting Services.
During 2004, two employee stockholders of the Company issued warrants to purchase personally owned
shares of common stock of the Company directly from the stockholders to third party consultants.
The issuance of the personal warrants was assumed to be on behalf of the Company and was recorded
as a deemed contribution and consulting expense in the restated financial statements. The
resulting charge of $48,860 to accumulated deficit was based on the fair market value of the shares
determined using the Black-Scholes option pricing model.
Conversion of Notes Payable to Common Stock with Warrants. During 2003, the Company issued
8,959 shares of common stock for the extinguishment of $107,500 in outstanding notes payable. In
addition to the common stock, warrants to purchase 4,480 shares of common stock were issued to the
noteholders. The extinguishment of the debt should have been recorded based on the underlying fair
market value of the common stock issued. The difference between the fair market value of the
shares and the carrying amount of the notes payable should have been recorded as a loss on
extinguishment of debt. Additionally, the warrants should have been ascribed a value based on the
relative fair market value of the warrants to the common stock issued. The fair market value of
the common stock issued was determined to be $537,500. Thus, a loss on the extinguishment of debt
in the amount of $430,000 was recorded in the 2003 restated financial statements. The ascribed
value of the warrants was determined to be $177,375 and was recorded to additional paid-in capital.
Conversion of Notes Payable to Common Stock Upon Exercise of Warrants. During 2004, the
Company issued 634 shares of common stock upon the exercise of warrants to effect the
extinguishment of $9,500 in outstanding notes payable. The extinguishment of the debt should have
been recorded based on the underlying fair market value of the common stock issued. The difference
between the fair market value of the shares and the carrying amount of the notes payable should
have been recorded as a loss on extinguishment of debt. The fair market value of the common stock
issued was determined to be $19,633. Thus, a loss on the extinguishment of debt in the amount of
$10,133 was recorded in the 2004 restated financial statements.
Legal Fees Related to Capital Transactions. The Company had erroneously recorded legal
expenses related to capital transactions as an expense in the financial statements. These amounts
should have been recorded as a reduction of the proceeds received. As a result of the correction
of the errors, $9,265, $25,815 and $64,045 was recorded as a reduction of legal expenses and a
corresponding reduction of the capital proceeds in the 2003, 2004 and 2005 restated financial
statements, respectively.
Common Stock Issued with Warrants. During 2004, the Company issued warrants to purchase 1,667
shares of common stock in connection with common stock issued in exchange for cash. The warrants
should have been ascribed a value of the proceeds based on the relative fair market value of the
warrants to the common stock issued. The ascribed value of the warrants was determined to be
$28,474 and was recorded to additional paid-in capital in the 2004 restated financial statements.
Warrants to Purchase Common Stock Issued for Consulting Services. During 2004, the Company
issued warrants to purchase 13,057 shares of common stock to third party consultants. The fair
market value of the warrants was determined using the Black-Scholes option pricing model. As a
result of the issuance of the warrants, $394,849 was recorded in the 2004 restated financial
statements.
Common Stock Issued with Warrants in a Private Placement. During 2003 and 2004, the Company
issued warrants to purchase 2,500 and 27,524 shares of common stock, respectively, in connection
with common stock issued in a private placement. The warrants should have been ascribed a value of
the proceeds based on the relative fair market value of the
warrants to the common stock issued.
The ascribed value of the
9
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
warrants for 2003 and 2004 was determined to be $30,000 and $326,690,
respectively, and was recorded to additional paid-in capital in the restated financial statements.
Consulting Services Related to Capital Transactions. The Company had erroneously recorded
consulting expenses related to successful capital transactions as an expense in the financial
statements. These amounts should have been recorded as a reduction of the proceeds received. As a
result of the correction of the errors, $23,655 was recorded as a reduction of consulting expense
and a corresponding reduction of the capital proceeds in the 2004 restated financial statements.
Common Stock Issued for Consulting Services. During 2003, 2004 and 2005, the Company issued
10,300, 15,942 and 2,640 shares of common stock, respectively, to third party consultants. The
fair market value of the shares should have been determined based on the measurement date in
accordance with SFAS 123, Accounting for Stock-Based Compensation, for shares issued to third
party consultants. The Company erroneously determined the fair market value on the date of grant.
The correction of the error resulted in $20,000 in additional non-cash consulting expense in the
2003 restated financial statements, a reduction of non-cash consulting expense of $31,299 in 2004
and additional consulting expense of $37,416 in 2005.
Common Stock Issued to Employees. During 2003, 2004 and 2005, the Company issued 1,000, 6,250
and 500 shares of common stock, respectively, to employees. The fair market value of the shares
should have been determined based on the date of the Board of Directors approval in accordance
with SFAS 123, Accounting for Stock-Based Compensation, as the date that all necessary
authorizations were obtained. The Company erroneously determined the fair market value on the date
of grant. The correction of the error resulted in $11,000 in additional non-cash compensation
expense in the 2003 restated financial statements and a reduction of non-cash compensation expense
of $200,850 and $135,180 in 2004 and 2005, respectively.
Common Stock Options Granted to Employees. During 2004 and 2005, the Company granted options
to purchase shares of common stock to employees. The fair market value of the shares should have
been determined using the Black-Scholes option pricing model and amortized over the vesting period
of the options. The correction of the error resulted in $101,445 and $40,856 in additional
non-cash compensation expense in the 2004 and 2005 restated financial statements, respectively.
Imputed Interest on Non-Interest Bearing Notes Payable. During 2004 and 2005, the Company
issued non-interest bearing notes payable to stockholders in exchange for cash. Interest should
have been imputed on these notes and amortized to interest expense over the term of the notes
payable. Interest for these notes was recorded at 10% per annum in the restated 2004 and 2005
financial statements, resulting in additional non-cash interest expense of $3,352 and $5,844,
respectively.
The foregoing adjustments did not affect our previously reported cash and cash equivalent
balances in prior periods. The following tables present the effect of the restatement adjustments
by financial statement line item for the Consolidated Balance Sheets, Consolidated Statements of
Operations and Consolidated Statements of Cash Flow.
10
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
Consolidated Balance Sheets as of December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
|
Previously |
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
As Restated |
|
|
Restated |
|
|
Adjustments |
|
|
As Restated |
|
|
Restated |
|
|
Adjustments |
|
|
As Restated |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
21,550 |
|
|
$ |
|
|
|
$ |
21,550 |
|
|
$ |
118,562 |
|
|
$ |
|
|
|
$ |
118,562 |
|
Accounts receivable |
|
|
4,000 |
|
|
|
|
|
|
|
4,000 |
|
|
|
73,281 |
|
|
|
|
|
|
|
73,281 |
|
|
|
1,647 |
|
|
|
|
|
|
|
1,647 |
|
Prepaid expenses and other current assets |
|
|
3,668 |
|
|
|
|
|
|
|
3,668 |
|
|
|
20,678 |
|
|
|
70,249 |
|
|
|
90,927 |
|
|
|
5,760 |
|
|
|
|
|
|
|
5,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
7,668 |
|
|
|
|
|
|
|
7,668 |
|
|
|
115,509 |
|
|
|
70,249 |
|
|
|
185,758 |
|
|
|
125,969 |
|
|
|
|
|
|
|
125,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net |
|
|
18,599 |
|
|
|
|
|
|
|
18,599 |
|
|
|
294,404 |
|
|
|
(19,202 |
) |
|
|
275,202 |
|
|
|
6,576 |
|
|
|
|
|
|
|
6,576 |
|
Intellectual property |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,601 |
|
|
|
65,601 |
|
Goodwill |
|
|
162,071 |
|
|
|
|
|
|
|
162,071 |
|
|
|
324,142 |
|
|
|
|
|
|
|
324,142 |
|
|
|
65,601 |
|
|
|
(65,601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
188,338 |
|
|
$ |
|
|
|
$ |
188,338 |
|
|
$ |
734,055 |
|
|
$ |
51,047 |
|
|
$ |
785,102 |
|
|
$ |
198,146 |
|
|
$ |
|
|
|
$ |
198,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash deficit |
|
$ |
2,951 |
|
|
$ |
|
|
|
$ |
2,951 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Accounts payable |
|
|
488,512 |
|
|
|
|
|
|
|
488,512 |
|
|
|
346,868 |
|
|
|
|
|
|
|
346,868 |
|
|
|
67,706 |
|
|
|
43,221 |
|
|
|
110,927 |
|
Accrued liablities |
|
|
480,991 |
|
|
|
27,084 |
|
|
|
508,075 |
|
|
|
442,381 |
|
|
|
(110,312 |
) |
|
|
332,069 |
|
|
|
60,907 |
|
|
|
|
|
|
|
60,907 |
|
Accrued interest |
|
|
85,397 |
|
|
|
5,220 |
|
|
|
90,617 |
|
|
|
|
|
|
|
12,793 |
|
|
|
12,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable |
|
|
123,606 |
|
|
|
|
|
|
|
123,606 |
|
|
|
3,000 |
|
|
|
|
|
|
|
3,000 |
|
|
|
|
|
|
|
9,500 |
|
|
|
9,500 |
|
Notes payable related party |
|
|
43,000 |
|
|
|
|
|
|
|
43,000 |
|
|
|
43,000 |
|
|
|
|
|
|
|
43,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable |
|
|
1,005,249 |
|
|
|
|
|
|
|
1,005,249 |
|
|
|
640,000 |
|
|
|
|
|
|
|
640,000 |
|
|
|
9,500 |
|
|
|
(9,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
$ |
2,229,706 |
|
|
$ |
32,304 |
|
|
$ |
2,262,010 |
|
|
$ |
1,475,249 |
|
|
$ |
(97,519 |
) |
|
$ |
1,377,730 |
|
|
$ |
138,113 |
|
|
$ |
43,221 |
|
|
$ |
181,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Deficit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 500,000,000
shares authorized, 324,105, 297,965
and 229,737 shares issued and
outstanding in 2005, 2004 and 2003,
respectively |
|
$ |
388 |
|
|
$ |
(64 |
) |
|
$ |
324 |
|
|
$ |
298 |
|
|
$ |
|
|
|
$ |
298 |
|
|
$ |
230 |
|
|
$ |
|
|
|
$ |
230 |
|
Additional paid-in capital |
|
|
5,153,844 |
|
|
|
1,859,361 |
|
|
|
7,013,205 |
|
|
|
4,533,421 |
|
|
|
2,017,786 |
|
|
|
6,551,207 |
|
|
|
1,429,355 |
|
|
|
2,737,752 |
|
|
|
4,167,107 |
|
Accumulated Deficit |
|
|
(7,195,600 |
) |
|
|
(1,891,601 |
) |
|
|
(9,087,201 |
) |
|
|
(5,274,913 |
) |
|
|
(1,869,220 |
) |
|
|
(7,144,133 |
) |
|
|
(1,369,552 |
) |
|
|
(2,780,973 |
) |
|
|
(4,150,525 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Deficit |
|
|
(2,041,368 |
) |
|
|
(32,304 |
) |
|
|
(2,073,672 |
) |
|
|
(741,194 |
) |
|
|
148,566 |
|
|
|
(592,628 |
) |
|
|
60,033 |
|
|
|
(43,221 |
) |
|
|
16,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Deficit |
|
$ |
188,338 |
|
|
$ |
|
|
|
$ |
188,338 |
|
|
$ |
734,055 |
|
|
$ |
51,047 |
|
|
$ |
785,102 |
|
|
$ |
198,146 |
|
|
$ |
|
|
|
$ |
198,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
|
|
|
|
|
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
As Restated |
|
|
Restated |
|
|
Adjustments |
|
|
As Restated |
|
|
Restated |
|
|
Adjustments |
|
|
As Restated |
|
Revenues |
|
$ |
140,912 |
|
|
$ |
|
|
|
$ |
140,912 |
|
|
$ |
1,098,680 |
|
|
$ |
73,281 |
|
|
$ |
1,171,961 |
|
|
$ |
133,485 |
|
|
$ |
1 |
|
|
$ |
133,486 |
|
Cost of sales |
|
|
153,228 |
|
|
|
13,732 |
|
|
|
166,960 |
|
|
|
919,295 |
|
|
|
(81,166 |
) |
|
|
838,129 |
|
|
|
48,156 |
|
|
|
|
|
|
|
48,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
|
(12,316 |
) |
|
|
(13,732 |
) |
|
|
(26,048 |
) |
|
|
179,385 |
|
|
|
154,447 |
|
|
|
333,832 |
|
|
|
85,329 |
|
|
|
1 |
|
|
|
85,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
329,425 |
|
|
|
114 |
|
|
|
329,539 |
|
|
|
335,684 |
|
|
|
870,459 |
|
|
|
1,206,143 |
|
|
|
340,676 |
|
|
|
(109,192 |
) |
|
|
231,484 |
|
Consulting fees |
|
|
36,001 |
|
|
|
(9,154 |
) |
|
|
26,847 |
|
|
|
1,190,224 |
|
|
|
(1,055,130 |
) |
|
|
135,094 |
|
|
|
|
|
|
|
54,766 |
|
|
|
54,766 |
|
Professional fees |
|
|
153,309 |
|
|
|
(64,045 |
) |
|
|
89,264 |
|
|
|
284,183 |
|
|
|
93,901 |
|
|
|
378,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative salaries |
|
|
144,440 |
|
|
|
40,145 |
|
|
|
184,585 |
|
|
|
465,611 |
|
|
|
(34,375 |
) |
|
|
431,236 |
|
|
|
161,775 |
|
|
|
23,855 |
|
|
|
185,630 |
|
Non-cash stock compensation |
|
|
32,833 |
|
|
|
12,663 |
|
|
|
45,496 |
|
|
|
61,020 |
|
|
|
145,425 |
|
|
|
206,445 |
|
|
|
38,000 |
|
|
|
2,345,645 |
|
|
|
2,383,645 |
|
Non-cash consulting expense |
|
|
137,680 |
|
|
|
(69,309 |
) |
|
|
68,371 |
|
|
|
1,573,191 |
|
|
|
(806,335 |
) |
|
|
766,856 |
|
|
|
390,400 |
|
|
|
20,000 |
|
|
|
410,400 |
|
Depreciation and amortization |
|
|
59,445 |
|
|
|
198,150 |
|
|
|
257,595 |
|
|
|
71,881 |
|
|
|
(24,269 |
) |
|
|
47,612 |
|
|
|
439 |
|
|
|
|
|
|
|
439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost and expenses |
|
|
893,133 |
|
|
|
108,564 |
|
|
|
1,001,697 |
|
|
|
3,981,794 |
|
|
|
(810,324 |
) |
|
|
3,171,470 |
|
|
|
931,290 |
|
|
|
2,335,074 |
|
|
|
3,266,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss |
|
|
(905,449 |
) |
|
|
(122,296 |
) |
|
|
(1,027,745 |
) |
|
|
(3,802,409 |
) |
|
|
964,771 |
|
|
|
(2,837,638 |
) |
|
|
(845,961 |
) |
|
|
(2,335,073 |
) |
|
|
(3,181,034 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on extinguishment of
debt |
|
|
7,634 |
|
|
|
(53,634 |
) |
|
|
(46,000 |
) |
|
|
|
|
|
|
(50,043 |
) |
|
|
(50,043 |
) |
|
|
|
|
|
|
(445,900 |
) |
|
|
(445,900 |
) |
Loss on impairment of assets |
|
|
(939,454 |
) |
|
|
237,951 |
|
|
|
(701,503 |
) |
|
|
(68,700 |
) |
|
|
|
|
|
|
(68,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income, net |
|
|
(83,418 |
) |
|
|
(84,402 |
) |
|
|
(167,820 |
) |
|
|
(34,252 |
) |
|
|
(2,975 |
) |
|
|
(37,227 |
) |
|
|
437 |
|
|
|
|
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,920,687 |
) |
|
$ |
(22,381 |
) |
|
$ |
(1,943,068 |
) |
|
$ |
(3,905,361 |
) |
|
$ |
911,753 |
|
|
$ |
(2,993,608 |
) |
|
$ |
(845,524 |
) |
|
$ |
(2,780,973 |
) |
|
$ |
(3,626,497 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding basic and
fully diluted |
|
|
328,544 |
|
|
|
(94,619 |
) |
|
|
233,925 |
|
|
|
254,168 |
|
|
|
(41,898 |
) |
|
|
212,270 |
|
|
|
177,736 |
|
|
|
(6,057 |
) |
|
|
171,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and fully diluted |
|
$ |
(5.85 |
) |
|
$ |
(2.46 |
) |
|
$ |
(8.31 |
) |
|
$ |
(15.37 |
) |
|
$ |
1.27 |
|
|
$ |
(14.10 |
) |
|
$ |
(4.76 |
) |
|
$ |
(16.36 |
) |
|
$ |
(21.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
Basic and diluted shares changed as a result of the rescission and return of shares
issued in September 2005. See Note 7 Stockholders Equity for a more detailed discussion. As
a result, only 324,105 shares of Company common stock were outstanding at December 31, 2005.
Outstanding options and warrants to purchase Company common stock were not included in the
computation of diluted loss per share, as the effect of including the options and warrants in the
calculation would be anti-dilutive.
Consolidated Statements of Cash Flow for the years ended December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
As Restated |
|
|
Restated |
|
|
Adjustments |
|
|
As Restated |
|
|
Restated |
|
|
Adjustments |
|
|
As Restated |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,920,687 |
) |
|
$ |
(22,381 |
) |
|
$ |
(1,943,068 |
) |
|
$ |
(3,905,361 |
) |
|
$ |
911,753 |
|
|
$ |
(2,993,608 |
) |
|
$ |
(845,524 |
) |
|
$ |
(2,780,973 |
) |
|
$ |
(3,626,497 |
) |
Depreciation and amortization |
|
|
59,445 |
|
|
|
198,150 |
|
|
|
257,595 |
|
|
|
71,881 |
|
|
|
(24,269 |
) |
|
|
47,612 |
|
|
|
439 |
|
|
|
|
|
|
|
439 |
|
Non-cash interest expense |
|
|
|
|
|
|
37,902 |
|
|
|
37,902 |
|
|
|
|
|
|
|
32,191 |
|
|
|
32,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash consulting fees |
|
|
137,680 |
|
|
|
(69,309 |
) |
|
|
68,371 |
|
|
|
1,573,191 |
|
|
|
(806,335 |
) |
|
|
766,856 |
|
|
|
390,400 |
|
|
|
20,000 |
|
|
|
410,400 |
|
Non-cash stock compensation |
|
|
32,833 |
|
|
|
12,663 |
|
|
|
45,496 |
|
|
|
61,020 |
|
|
|
145,425 |
|
|
|
206,445 |
|
|
|
38,000 |
|
|
|
2,345,645 |
|
|
|
2,383,645 |
|
(Gain) Loss on extinguishment of debt |
|
|
(7,634 |
) |
|
|
53,634 |
|
|
|
46,000 |
|
|
|
|
|
|
|
50,043 |
|
|
|
50,043 |
|
|
|
|
|
|
|
445,900 |
|
|
|
445,900 |
|
Impairment loss on assets |
|
|
939,454 |
|
|
|
(237,951 |
) |
|
|
701,503 |
|
|
|
68,700 |
|
|
|
|
|
|
|
68,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net
cash used by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
69,281 |
|
|
|
|
|
|
|
69,281 |
|
|
|
(73,281 |
) |
|
|
1,647 |
|
|
|
(71,634 |
) |
|
|
(1,205 |
) |
|
|
|
|
|
|
(1,205 |
) |
Other assets |
|
|
40,124 |
|
|
|
(7,633 |
) |
|
|
32,491 |
|
|
|
665 |
|
|
|
(51,724 |
) |
|
|
(51,059 |
) |
|
|
(7,605 |
) |
|
|
|
|
|
|
(7,605 |
) |
Accounts payable |
|
|
165,393 |
|
|
|
(23,749 |
) |
|
|
141,644 |
|
|
|
324,279 |
|
|
|
(88,338 |
) |
|
|
235,941 |
|
|
|
60,198 |
|
|
|
|
|
|
|
60,198 |
|
Accrued liabilities |
|
|
38,610 |
|
|
|
137,396 |
|
|
|
176,006 |
|
|
|
461,348 |
|
|
|
(190,186 |
) |
|
|
271,162 |
|
|
|
132,643 |
|
|
|
(30,572 |
) |
|
|
102,071 |
|
Accrued interest |
|
|
85,397 |
|
|
|
(7,573 |
) |
|
|
77,824 |
|
|
|
|
|
|
|
12,793 |
|
|
|
12,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by operating activities |
|
|
(360,104 |
) |
|
|
71,149 |
|
|
|
(288,955 |
) |
|
|
(1,417,558 |
) |
|
|
(7,000 |
) |
|
|
(1,424,558 |
) |
|
|
(232,654 |
) |
|
|
|
|
|
|
(232,654 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets |
|
|
(13,646 |
) |
|
|
|
|
|
|
(13,646 |
) |
|
|
(31,539 |
) |
|
|
9,470 |
|
|
|
(22,069 |
) |
|
|
(3,129 |
) |
|
|
|
|
|
|
(3,129 |
) |
Cash received in acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,662 |
|
|
|
|
|
|
|
20,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(13,646 |
) |
|
|
|
|
|
|
(13,646 |
) |
|
|
(10,877 |
) |
|
|
9,470 |
|
|
|
(1,407 |
) |
|
|
(3,129 |
) |
|
|
|
|
|
|
(3,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash deficit |
|
|
2,951 |
|
|
|
|
|
|
|
2,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on notes payable |
|
|
(339,200 |
) |
|
|
90,600 |
|
|
|
(248,600 |
) |
|
|
(54,000 |
) |
|
|
(41,000 |
) |
|
|
(95,000 |
) |
|
|
(7,500 |
) |
|
|
|
|
|
|
(7,500 |
) |
Proceeds from notes payable |
|
|
688,449 |
|
|
|
(97,704 |
) |
|
|
590,745 |
|
|
|
528,000 |
|
|
|
53,000 |
|
|
|
581,000 |
|
|
|
147,000 |
|
|
|
|
|
|
|
147,000 |
|
Proceeds from issuance of common stock, net of fees |
|
|
|
|
|
|
(64,045 |
) |
|
|
(64,045 |
) |
|
|
857,423 |
|
|
|
(14,470 |
) |
|
|
842,953 |
|
|
|
210,000 |
|
|
|
|
|
|
|
210,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
352,200 |
|
|
|
(71,149 |
) |
|
|
281,051 |
|
|
|
1,331,423 |
|
|
|
(2,470 |
) |
|
|
1,328,953 |
|
|
|
349,500 |
|
|
|
|
|
|
|
349,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
|
(21,550 |
) |
|
|
|
|
|
|
(21,550 |
) |
|
|
(97,012 |
) |
|
|
|
|
|
|
(97,012 |
) |
|
|
113,717 |
|
|
|
|
|
|
|
113,717 |
|
Cash beginning |
|
|
21,550 |
|
|
|
|
|
|
|
21,550 |
|
|
|
118,562 |
|
|
|
|
|
|
|
118,562 |
|
|
|
4,845 |
|
|
|
|
|
|
|
4,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash ending |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
21,550 |
|
|
$ |
|
|
|
$ |
21,550 |
|
|
$ |
118,562 |
|
|
$ |
|
|
|
$ |
118,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,698 |
|
|
$ |
2,698 |
|
Income taxes paid |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares issued for consulting services |
|
|
64,890 |
|
|
|
(62,250 |
) |
|
|
2,640 |
|
|
|
22,192 |
|
|
|
(6,250 |
) |
|
|
15,942 |
|
|
|
10,300 |
|
|
|
|
|
|
|
10,300 |
|
Value of shares issued for consulting services |
|
$ |
137,680 |
|
|
$ |
(100,000 |
) |
|
$ |
37,680 |
|
|
$ |
385,996 |
|
|
$ |
(62,849 |
) |
|
$ |
323,147 |
|
|
$ |
390,400 |
|
|
$ |
20,000 |
|
|
$ |
410,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares issued for employee services |
|
|
|
|
|
|
500 |
|
|
|
500 |
|
|
|
|
|
|
|
6,250 |
|
|
|
6,250 |
|
|
|
181,014 |
|
|
|
990 |
|
|
|
182,004 |
|
Value of shares issued for employee services |
|
$ |
|
|
|
$ |
2,500 |
|
|
$ |
2,500 |
|
|
$ |
|
|
|
$ |
75,000 |
|
|
$ |
75,000 |
|
|
$ |
38,000 |
|
|
$ |
2,345,951 |
|
|
$ |
2,383,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares issued for conversion of notes payable |
|
|
|
|
|
|
7,000 |
|
|
|
7,000 |
|
|
|
634 |
|
|
|
|
|
|
|
634 |
|
|
|
9,559 |
|
|
|
(600 |
) |
|
|
8,959 |
|
Value of shares issued for conversion of notes payable |
|
$ |
|
|
|
$ |
126,000 |
|
|
$ |
126,000 |
|
|
$ |
9,500 |
|
|
$ |
10,133 |
|
|
$ |
19,633 |
|
|
$ |
137,500 |
|
|
$ |
400,000 |
|
|
$ |
537,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares issued for acquisitions |
|
|
|
|
|
|
16,000 |
|
|
|
16,000 |
|
|
|
16,667 |
|
|
|
|
|
|
|
16,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of shares issued for acquisitions |
|
$ |
|
|
|
$ |
288,000 |
|
|
$ |
288,000 |
|
|
$ |
600,000 |
|
|
$ |
(124,196 |
) |
|
$ |
475,804 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares issued for assets |
|
|
25,000 |
|
|
|
(25,000 |
) |
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
100 |
|
|
|
2,084 |
|
|
|
(750 |
) |
|
|
1,334 |
|
Value of shares issued for assets |
|
$ |
450,000 |
|
|
$ |
(450,000 |
) |
|
$ |
|
|
|
$ |
3,000 |
|
|
$ |
|
|
|
$ |
3,000 |
|
|
$ |
48,500 |
|
|
$ |
|
|
|
$ |
48,500 |
|
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
Push Down Accounting: See Note 4 New Basis of Accounting.
Going Concern: These financial statements have been prepared on a going concern basis, which
contemplates the realization of the assets of the Company and the satisfaction of its liabilities
and commitments in the normal course of business. Management of the Company believes that, as a
result of $3,000,000 in funding received on June 8, 2006 (see Notes 3 and 5), the Company has
adequate resources to fund its operations until the conclusion of fiscal 2007 based on its current
business plan. There can be no assurances, however, that there will not be delays or other
unforeseen events that prevent the Company from achieving its current business plan.
12
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
See Note 5 for a discussion of the Companys ability to continue as a going concern and its
plans for addressing those issues. The inability to obtain additional financing in the future, if
and when needed, could have a material adverse effect on the Company.
Description of Business: Immediatek, through its wholly-owned, operating subsidiary, DiscLive,
Inc., records live content, such as concerts and conferences, and makes the recorded content
available for delivery to attendees within fifteen minutes after the conclusion of the live event.
The recorded content is made available for pre-sale and sale at the venue and on DiscLives
website, www.disclive.com. The content is delivered primarily via compact disc.
Basis of Presentation: The accompanying condensed consolidated financial statements of the Company
have been prepared in conformity with accounting principles generally accepted in the United
States. Certain information and footnote disclosures normally included in financials statements
prepared in accordance with generally accepted accounting principles, however, have been condensed
or omitted pursuant to the rules and regulations promulgated by the Securities and Exchange
Commission. The condensed consolidated financial statements include the accounts of all
wholly-owned subsidiaries of the Company, including DiscLive, Inc, which primarily conducts all of
the Companys operating activity. All significant intercompany accounts and transactions have been
eliminated in the condensed consolidated financial statements.
The Companys condensed consolidated balance sheet as of June 30, 2006 (restated) and
condensed consolidated statements of operations and condensed consolidated statements of cash flow
for:
|
(i) |
|
the period from April 1, 2006 to June 7, 2006 (restated); |
|
|
(ii) |
|
the period from June 8, 2006 to June 30, 2006; |
|
|
(iii) |
|
the period from January 1, 2006 to June 7, 2006 (restated); and |
|
|
(iv) |
|
the three and six months ended June 30, 2005 (restated), |
are unaudited. Certain accounts have been reclassified to conform to the current periods
presentation. In the opinion of management, these financial statements have been prepared on the
same basis as the audited consolidated financial statements and include all adjustments necessary
for the fair presentation of the Companys financial position, results of operations and cash
flows. These adjustments were of a normal recurring nature, except as discussed above in Note 1
Restatement of Prior Years Consolidated Financial Statements. The results of operations for the
periods presented in this Quarterly Report on Form 10-QSB/A (Amendment No. 1) are not necessarily
indicative of the results that may be expected for the entire year. Additional information is
contained in the Companys Annual Report on Form 10-KSB/A (Amendment No. 1) for the fiscal year
ended December 31, 2005, which was filed with the Securities and Exchange Commission, or SEC, on
July 18, 2006, and which should be read in conjunction with this Quarterly Report on Form 10-QSB/A
(Amendment No. 1).
Management Estimates and Significant Risks and Uncertainties: The preparation of the condensed
consolidated financial statements, in conformity with accounting principles generally accepted in
the United States of America, requires management of the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets
and liabilities, at the dates of the financial statements and the reported amounts of revenues and
expenses during such reporting periods. Actual results could differ from these estimates.
The Company is subject to a number of risks and can be affected by a variety of factors. For
example, management of the Company believes that the following factors, as well as others, could
have a significant negative effect on the Companys future financial position, results of
operations or cash flows:
|
|
|
our inability to continue as a going concern; |
|
|
|
|
our history of losses, which are likely to continue; |
|
|
|
|
our utilization of funds received in a manner that is accretive; |
|
|
|
|
our ability to generate sufficient funds from operating activities to fund our operations; |
13
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
|
|
|
our ability to obtain a sufficient number of contracts to record live content; |
|
|
|
|
changes in anticipated levels of sales of our products; |
|
|
|
|
competition, including competition from a substantial competitor that possesses
greater resources, both financially and in the industry, than we do; |
|
|
|
|
dependence on third party manufacturers and contractors; |
|
|
|
|
changes in technology that may make our products less attractive or obsolete; |
|
|
|
|
the development of new products or innovations by our competitors; |
|
|
|
|
difficulties in developing and marketing new products; and |
|
|
|
|
changes in conditions affecting the economy generally. |
Business Segments: The Company has determined that it currently operates in one segment, the
production and sale of live recordings of events. The Company follows Statement of Financial
Accounting Standards No. 130, Disclosures About Segments of an Enterprise and Related
Information. The Company will evaluate additional segment disclosure requirements as it expands
its operations.
Cash: Cash consists principally of amounts held in demand deposit accounts and amounts invested in
financial instruments with initial maturities of three months or less at the time of purchase. The
Company places its temporary cash investments with quality financial institutions. At times, these
investments may be in excess of the Federal Deposit Insurance Corporation insurance limit. The
Company does not believe that it is exposed to any significant credit risk on cash. There were no
cash equivalents at June 30, 2006.
Fair Value of Financial Instruments: The fair value of financial instruments is determined by
reference to various market data and other valuation techniques, as appropriate. Unless otherwise
disclosed, the fair values of financial instruments approximate their recorded value due primarily
to their short-term nature.
The estimated fair value of financial instruments has been determined by the Company based on
available market information and appropriate valuation methodologies. Considerable judgment is
required, however, in interpreting market data to develop the fair value estimates. The estimates,
therefore, may not be indicative of the amount the Company might realize in a current market
exchange.
Fixed Assets: At June 30, 2006, fixed assets are stated at their estimated fair market value based
upon a valuation performed by an independent third-party, less depreciation and additions (valued
at cost) from June 8, 2006 to June 30, 2006. This valuation was obtained in connection with the
push down accounting performed as a result of the change in control of the Company. See Note 4
New Basis of Accounting below for a more detailed discussion. The following table summarizes the
fixed assets of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Remaining |
|
|
Accumulated |
|
|
Net Book Value at |
|
|
|
Cost |
|
|
Useful Lives |
|
|
Depreciation |
|
|
June 30, 2006 |
|
Transportation equipment |
|
$ |
30,810 |
|
|
Held for Sale |
|
$ |
|
|
|
$ |
30,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment |
|
|
17,316 |
|
|
1.5 years |
|
|
528 |
|
|
|
16,788 |
|
Recording equipment |
|
|
102,648 |
|
|
5 years |
|
|
1,365 |
|
|
|
101,283 |
|
Office furniture and equipment |
|
|
9,722 |
|
|
3 years |
|
|
193 |
|
|
|
9,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed assets |
|
$ |
129,686 |
|
|
|
|
|
|
$ |
2,086 |
|
|
$ |
127,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repair 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.
Intangible Assets: At June 30, 2006, intangible assets are stated at their estimated fair market
value based upon a valuation performed by an independent third-party, less amortization from June
8, 2006 to June 30, 2006. This valuation was obtained in connection with the push down
accounting performed as a result of the
14
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
change in control of the Company. See Note 4 New Basis
of Accounting below for a more detailed discussion. The following table summarizes the intangible
assets of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Market Value |
|
|
Estimated Remaining |
|
|
|
|
|
|
Net at |
|
|
|
at June 8, 2006 |
|
|
Useful Lives |
|
|
Amortization |
|
|
June 30, 2006 |
|
Trade name and trademarks |
|
$ |
29,100 |
|
|
5 years |
|
$ |
355 |
|
|
$ |
28,745 |
|
Covenants not-to-compete |
|
|
13,900 |
|
|
2 years |
|
|
425 |
|
|
|
13,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
43,000 |
|
|
|
|
|
|
$ |
780 |
|
|
$ |
42,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These assets will be amortized over their respective remaining useful lives described
above, and the amounts will be evaluated each reporting period for impairment in accordance with
SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Revenue Recognition: DiscLive primarily delivers products sold by it through shipment to the
customer. Revenue is recognized upon shipment of the product to the customer. A smaller
percentage of revenues are recognized at the point of sale at the event being recorded. Certain
customers purchase and accept hand delivery of the product on-site at the event. Pursuant to
Emerging Issues Task Force Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs,
(EITF 0010), the Company includes 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.
Revenues and costs of sales are as follows for the periods presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
For the Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
(restated) |
|
(restated) |
|
|
|
|
|
|
(restated) |
|
(restated) |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
|
|
|
|
|
|
(see Note 4) |
|
|
|
|
|
|
(see Note 4) |
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
|
June 8 - June 30 |
|
|
April 1 - June 7 |
|
Predecessor |
|
June 8 - June 30 |
|
|
January 1 - June 7 |
|
Predecessor |
Revenues |
|
$ |
19,740 |
|
|
|
$ |
2,425 |
|
|
$ |
56,000 |
|
|
$ |
19,740 |
|
|
|
$ |
19,451 |
|
|
$ |
76,795 |
|
Cost of sales |
|
$ |
7,472 |
|
|
|
$ |
24,645 |
|
|
$ |
30,196 |
|
|
$ |
7,472 |
|
|
|
$ |
43,584 |
|
|
$ |
52,606 |
|
Goodwill: Due to the application of push down accounting, goodwill of the predecessor has
been eliminated and goodwill of the successor is the difference between the aggregate purchase
price of the Series A Convertible Preferred Stock issued and sold by the Company and the fair
market value of the assets and liabilities of the Company at the date of the issuance and sale of
the Series A Convertible Preferred Stock. See Note 4 New Basis of Accounting. Annually in the
fourth quarter of each year, or more frequently if indicators of potential impairment exist, the
Company performs a review to determine if the carrying value of the recorded goodwill is impaired.
The first step of this process is to identify potential goodwill impairment by comparing fair value
of the single reporting unit to its carrying value. The Company estimates fair value using
discounted cash flows. If the carrying value is less than fair value, the Company would complete
step two in the impairment review process, which measures the amount of goodwill impairment.
Management tests the reasonableness of the inputs and outcomes of the discounted cash flow
analysis. The entire goodwill balance is assigned to the Companys sole reporting unit.
The push down accounting treatment was reviewed as it relates to the five percent minority interest
retained by the common stockholders. It was determined that the five percent minority interest
should be carried at historical cost value. As such, our push down accounting treatment in the
Radical transaction changed
Additional paid-in capital (deficit) and Goodwill, which were adjusted by $1,031,010, respectively.
These adjustments are recorded in this Quarterly Report on Form 10-QSB/A (Amendment No. 1).
15
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
Stock-Based Compensation: For all periods presented, the Company has used the fair value based
method of accounting for stock-based compensation, as defined in SFAS 123, Accounting for
Stock-Based Compensation. Under this method, stock-based compensation expense is determined on
the measurement date based on the estimated fair value of the award. Stock-based compensation
includes stock options and awards granted to both employees and consultants.
Net Loss Per Share: Net loss attributable to common stockholders was used in the calculation of
both basic and diluted loss per share. The weighted average number of shares of common stock
outstanding also was the same for calculating both basic and diluted loss per share. Options to
purchase 1,625 shares of common stock and warrants to purchase 37,425 shares of common stock
outstanding at June 30, 2006, and options to purchase 11,000 shares of common stock and warrants to
purchase 39,059 shares of common stock outstanding at June 30, 2005, were not included in the
computation of diluted loss per share, as the effect of including the options and warrants in the
calculation would be anti-dilutive.
Comprehensive Loss: For all periods presented, comprehensive loss is equal to net loss.
Income Taxes: The Company follows SFAS 109, Accounting for Income Taxes, 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 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.
NOTE 3 CHANGE IN CONTROL AND SERIES A CONVERTIBLE PREFERRED STOCK
Change in Control. In accordance with the Securities Purchase Agreement, as amended, by and among
the Company, Radical Holdings LP and the other parties thereto, the Company issued and sold, and
Radical Holdings LP purchased, 4,392,286 shares of the Series A Convertible Preferred Stock for an
aggregate purchase price of $3,000,000, or $0.68 per share of Series A Convertible Preferred Stock,
on June 8, 2006. The Series A Convertible Preferred Stock is, at the option of the holders of the
Series A Convertible Preferred Stock, convertible at any time into that aggregate number of full
shares of Company common stock representing 95% of the total common stock outstanding after giving
effect to the conversion.
A holder of a share of Series A Convertible Preferred Stock is entitled to vote on all matters
required or permitted to be voted upon by the stockholders of the Company. Each holder of a share
of Series A Convertible Preferred Stock is entitled to the number of votes equal to the largest
number of full shares of Company common stock into which all shares of Series A Convertible
Preferred Stock held by that holder could be converted. As a result and as of June 8, 2006,
Radical Holdings LP beneficially owns 95% of the outstanding securities entitled to vote on matters
required or permitted to be submitted to the stockholders of the Company. Accordingly, a change in
control of the Company occurred on June 8, 2006.
16
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
Series A Convertible Preferred Stock. The following is a summary of the material terms of the
Series A Convertible Preferred Stock issued to Radical and established pursuant to the Certificate
of Designation, Rights and Preferences filed by the Company with the Secretary of State of Nevada
on June 5, 2006:
Dividends. The holders of the Series A Convertible Preferred Stock are not entitled to any
preferential dividends. Holders of the Series A Convertible Preferred Stock, however, are entitled
to participate on an as-converted basis in any cash dividends declared and paid on shares of
Company common stock.
Liquidation. Upon the liquidation, dissolution or winding up of the Company, an acquisition
of the Company that results in the sale of more than 50% of the outstanding voting power of the
Company, or the sale or exclusive license of all or substantially all of the assets of the Company,
the holders of the Series A Convertible Preferred Stock are entitled to receive, out of the legally
available funds and assets of the Company, before any payment is made to any shares of Company
common stock or other junior stock, an amount per share equal to the greater of:
|
|
|
$0.683015632 per share of Series A Convertible Preferred Stock; and |
|
|
|
|
The amount that the holder of that share of Series A Convertible Preferred
Stock would have received had the holder converted that share into shares of
Company common stock immediately prior to the liquidation event. |
If the legally available funds and assets of the Company are insufficient to pay the holders of
shares of the Series A Convertible Preferred Stock the full amount to which they are entitled, the
holders of the shares of Series A Convertible Preferred Stock and the holders of capital stock of
the Company that are on a parity with the Series A Convertible Preferred Stock will share ratably
in any distribution of the remaining legally available funds and assets of the Company.
Ranking. The Series A Convertible Preferred Stock shall, with respect to rights on
liquidation, winding up, corporate reorganization and dissolution, rank senior to the shares of
Company common stock and other junior stock.
Conversion. The shares of Series A Convertible Preferred Stock are convertible into that
aggregate number of full shares of Company common stock representing 95% of the total voting power
of all outstanding shares of capital stock of the Company, including outstanding Company common
stock, after giving effect to the conversion. Accordingly, in the event the Company should issue
additional capital stock before conversion of the Series A Convertible Preferred Stock, the
conversion price per share is subject to downward adjustments in order to cause the holders of the
Series A Convertible Preferred Stock, collectively, to own 95% of the outstanding shares of Company
common stock upon conversion of all Series A Convertible Preferred Stock. The conversion price of
a share of Series A Convertible Preferred Stock into shares of Company common stock also is subject
to adjustment, from time to time, for, among other reasons, stock splits, combinations, dividends
and distributions.
The Series A Convertible Preferred Stock is convertible at any time into Company common stock.
An intrinsic value exists for a beneficial conversion feature if the market value of the Company
common stock that can be acquired by conversion of the Series A Convertible Preferred Stock is
greater than the carrying value of those shares before issue costs.
The Company issued 4,392,286 shares of Series A Convertible Preferred Stock at a per share
price of $0.68 to Radical Holdings LP for cash proceeds of $3,000,000. The beneficial conversion
feature represents the difference between the fair market value of Company common stock and the
conversion price on the date of issuance of the Series A Convertible Preferred Stock, multiplied by
the number of shares of common stock that would be received upon conversion. The Company recorded
a deemed dividend due to the beneficial conversion price of $3,000,000, which represents the lesser
of the proceeds or the beneficial conversion feature of $123,321,622.
17
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
Voting. The holders of the shares of Series A Convertible Preferred Stock are entitled to
vote on all matters required or permitted to be voted upon by the stockholders of the Company.
Each holder of a share of Series A Convertible Preferred Stock is entitled to the number of votes
equal to the largest number of full shares of Company common stock into which all shares of Series
A Convertible Preferred Stock held by that holder could be converted. Except as required by law on
matters requiring class voting, the holders of the Series A Convertible Preferred Stock and Company
common stock will vote together as a single class.
Protective Provisions. Unless the directors designated by the holders of the shares of the
Series A Convertible Preferred Stock originally issued under the Securities Purchase Agreement
control the board of directors of the Company with respect to all actions, for so long as any
shares of the Series A Convertible Preferred Stock originally issued under the Securities Purchase
Agreement remain outstanding, except where the vote or written consent of the holders of a greater
number of shares of the Company is required by law or by the Companys articles of incorporation,
and in addition to any other vote required by law or by the Companys articles of incorporation,
the Company cannot, and the Company shall cause its subsidiaries not to, as applicable, without the
prior vote or written consent of the holders of at least 75% of the shares of the Series A
Convertible Preferred Stock originally issued under the Securities Purchase Agreement then
outstanding:
(a) amend the articles or bylaws in any manner that would alter or change any of the rights,
preferences, privileges or restrictions of the Series A Convertible Preferred Stock or the shares
issuable upon conversion of the Series A Convertible Preferred Stock;
(b) reclassify any outstanding securities into securities having rights, preferences or
privileges senior to, or on a parity with, the Series A Convertible Preferred Stock;
(c) authorize or issue any additional shares of capital stock (other than to holders of the
Series A Convertible Preferred Stock);
(d) merge or consolidate with or into any corporation or other person;
(e) sell all or substantially all their respective assets in a single transaction or series of
related transactions;
(f) license all or substantially all of their respective intellectual property in a single
transaction or series of related transactions;
(g) liquidate or dissolve;
(h) alter any rights of the holders of the Series A Convertible Preferred Stock or change the
size of the Board of Directors;
(i) declare or pay any dividends (other than dividends payable to the Company or its
subsidiaries) on or declare or make any other distribution, directly or indirectly, on account of
any shares of Company common stock now or hereafter outstanding;
(j) repurchase any outstanding shares of capital stock;
(k) approve or modify by 10% or more the aggregate amount of any annual or other operating or
capital budget, or approve or modify by 50% or more any single line item of any such operating or
capital budget;
(l) increase the salary of any officer or employee or pay any bonus to any officer, director
or employee not contemplated in a budget or bonus plan approved by directors designated by the
holders of the shares of the Series A Convertible Preferred Stock originally issued under the
Purchase Agreement then outstanding;
(m) retain, terminate or enter into any salary or employment negotiations or employment
agreement with any employee or any future employee;
18
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
(n) incur indebtedness (other than trade payables) or enter into contracts or leases that
require payments in excess of $5,000 in the aggregate;
(o) make or incur any single capital expenditure;
(p) award stock options, stock appreciation rights or similar employee benefits or determine
vesting schedules, exercise prices or similar features;
(q) make any material change in the nature of its business or enter into any new line of
business, joint venture or similar arrangement;
(r) pledge its assets or guarantee the obligations of any other individual or entity;
(s) recommend approval of any new equity incentive plan;
(t) form or acquire any subsidiary, joint venture or similar business entity; or
(u) directly or indirectly enter into, or permit to exist, any material transaction with any
affiliate of the Company, any director or officer or any affiliate of a director or officer, or
transfer, pay, loan or otherwise obligate the Company to give cash, services, assets or other items
of value to affiliates, officers or directors or any affiliate of a officer or director or commit
to do any of the preceding after the date hereof, except for employee compensation or for
reimbursement of ordinary business expenses.
Board of Directors. For so long as any shares of the Series A Convertible Preferred Stock
originally issued under the Securities Purchase Agreement remain outstanding, the holders of a
majority-in-interest of the shares of the Series A Convertible Preferred Stock originally issued
under the Securities Purchase Agreement then outstanding have the right to designate all the
persons to serve as directors on the Board of Directors of the Company and its subsidiaries. If
the holders of the shares of the Series A Convertible Preferred Stock originally issued under the
Securities Purchase Agreement then outstanding choose not to designate any directors, the holders
of a majority-in-interest of the shares of the Series A Convertible Preferred Stock originally
issued under the Securities Purchase Agreement then outstanding may appoint a designee to serve as
an observer at all meetings of the Companys or its subsidiaries Board of Directors and committees
thereof.
Investors Rights Agreement. In connection with, and as a condition to, the purchase and sale
of the Series A Convertible Preferred Stock, the Company, Radical, Zach Bair and Paul Marin entered
into an Investors Rights Agreement. The Investors Rights Agreement grants Radical certain
demand, piggy-back and shelf registration rights and sets forth the procedures pursuant to which
those rights may be exercised and effected. The Investors Rights Agreement also grants Radical
rights of first refusal to purchase any or all of the securities of the Company that Messrs. Bair
or Marin propose to sell or otherwise transfer on the same terms and conditions as the proposed
sale or transfer by them. In addition, the Investors Rights Agreement provides that Messrs. Bair
and Marin are prohibited from selling or otherwise transferring any securities of the Company owned
by them for a period of three years. After three years, they can sell or otherwise transfer only
half of the securities owned by them. If, however, Messrs. Bair or Marin is terminated for a
reason other than cause, upon his termination he can sell a total of 10% of the securities owned by
him in any given month. Further, in the Investors Rights Agreement, the Company covenanted with
Radical to certain matters, including, the protective provisions described above.
Classification. Since the redemption right with respect to the Series A Convertible Preferred
Stock is conditional, the Series A Convertible Preferred Stock is not a liability under SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity, but should be classified as equity. Based on the guidance in EITF D-98, Classification
and Measurement of Redeemable Securities, however, the Series A Convertible Preferred Stock is
classified outside of permanent stockholders equity. Except in the case of an ordinary
liquidation event that involves the redemption and liquidation of all equity
securities, EITF D-98 provides that if a security is subject to any event that could trigger a
redemption and that event is not solely within the control of the Company, regardless of its
probability, then the preferred stock is to be classified outside of permanent equity. Radical
controls over 50% of the voting securities of the Company since the Series A Convertible Preferred
Stock held by Radical can vote on all matters in which the common
19
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
stockholders are required or permitted to vote. Therefore, Radical would be able to control a vote
to redeem the Series A Convertible Preferred Stock if such a measure were brought to a vote of
stockholders and, thus, the Series A Convertible Preferred Stock could be redeemable at the option
of the holder and any redemption event would be outside the control of the issuer.
NOTE 4 NEW BASIS OF ACCOUNTING
As a result of the change in control of the Company by virtue of the purchase of the Series A
Convertible Preferred Stock by Radical, the Company has pushed down its basis to a proportionate
amount of its underlying assets and liabilities acquired based on the estimated fair market values
of the assets and liabilities. The primary changes to the balance sheet reflect:
|
|
|
adjustments to the Companys fixed assets to reflect a step-up in basis of those
assets; |
|
|
|
|
the recording of a value for the Companys trade names, trade marks and covenants
not to compete; |
|
|
|
|
adjustments to historical goodwill to reflect goodwill arising from the push down
accounting adjustments; |
|
|
|
|
the recording of a value for assets held for sale; |
|
|
|
|
the recording of a value for the Companys deferred tax asset and liability; and |
|
|
|
|
a decrease in additional paid-in capital from these adjustments. |
The primary changes to the statements of operations are:
|
|
|
an increase in net operating loss due to a higher level of depreciation from the
increase in the depreciable basis of fixed assets; and |
|
|
|
|
an increase in net operating loss due to a higher level of amortization related to
the increase in the amortizable basis of intangible assets. |
The increases in net loss due to higher levels of depreciation and amortization from the increase
in the depreciable and amortizable basis of fixed assets and intangible assets, as applicable, were
offset in cash used in operations by corresponding non-cash adjustments.
Due to the impact of the changes resulting from the push down accounting adjustments
described above, the statements of operations and the statements of cash flow presentations
separate our 2006 results and cash flows into two periods: (1) the period ending on June 7, 2006,
which was the day prior to the consummation of the sale of the Series A Convertible Preferred
Stock, and (2) the period beginning on June 8, 2006 utilizing the new basis of accounting. The
results and cash flows are further separated by a heavy black line to indicate the effective date
of the new basis of accounting.
The push down accounting treatment was reviewed as it relates to the five percent minority
interest retained by the common stockholders. It was determined that the five percent minority
interest should be carried at historical cost value. As such, our push down accounting treatment
in the Radical transaction changed Additional paid in capital (deficit) and Goodwill, which were
adjusted by $1,031,010, respectively. These adjustments are recorded in this Quarterly Report on
Form 10-QSB/A (Amendment No. 1).
NOTE 5 GOING CONCERN
As shown in the accompanying financial statements, as of June 30, 2006, the Company has
retained earnings of $21,378. The retained earnings balance represents 23 days of activity,
including a gain on
extinguishment of debt of $69,219, and is not indicative of expected future results. Prior to
the new basis of accounting, the Company had an accumulated deficit of $9,545,686. Accordingly,
this raises substantial doubt about the Companys ability to continue as a going concern.
20
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
Prior to the issuance and sale of the Series A Convertible Preferred Stock, the Company had
been attempting to raise adequate capital to be able to continue its operations and implement its
business plan, and management had to devote a significant amount of time to raising capital rather
than to operations. Due to the lack of adequate funds in the second half of 2005 and the first
five months of 2006, management of the Company took certain steps to reduce cash expenditures while
pursuing additional financing. In January 2006, the Company entered into the Securities Purchase
Agreement with Radical Holdings LP. This transaction was consummated on June 8, 2006, and provided
the Company with an aggregate of $2,653,000 in funds, which is net of $347,000 of funds previously
loaned to the Company by Radical and credited towards the purchase price of the Series A
Convertible Preferred Stock. In accordance with the Securities Purchase Agreement, the proceeds
from the issuance and sale of the Series A Convertible Preferred Stock were, and are being,
utilized to pay all outstanding liabilities, including, among others, accounts payable and
indebtedness. After satisfying all of the Companys liabilities, management of the Company
estimates that it will have $900,000 of operating funds, which management anticipates will sustain
the Companys operations until the conclusion of fiscal 2007. At the end of fiscal 2007, the
Company will be required to obtain additional funds if it does not generate sufficient cash from
operating activities to fund its future operations.
In that regard, the Company is undertaking various plans and measures, which it believes will
increase funds generated from operating activity. No assurances, however, can be given that those
plans and measures will be successful in increasing funds generated from operating activity.
The accompanying financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of
business. These financial statements do not include any adjustments to the recoverability and
classification of recorded asset amounts or the amount and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
NOTE 6 ASSET ACQUISITION
On February 28, 2005, the Company entered into an Asset Purchase Agreement with Moving
Records, LLC, a private Minnesota corporation (MR). Pursuant to the Asset Purchase Agreement,
the Company acquired assets and assumed certain liabilities in exchange for 16,000 shares of
Company common stock. A summary of the fair market value of assets acquired and the liabilities
assumed recorded in the financial statements is as follows:
|
|
|
|
|
Equipment |
|
$ |
288,998 |
|
Intellectual property |
|
|
237,781 |
|
Accounts payable |
|
|
(13,973 |
) |
Note payable due to bank |
|
|
(24,806 |
) |
Note payable commercial vehicle |
|
|
(80,000 |
) |
Note payable sellers |
|
|
(120,000 |
) |
|
|
|
|
Net fair market value |
|
$ |
288,000 |
|
|
|
|
|
In connection with the Asset Purchase Agreement, the Company issued 7,000 shares of its common
stock in exchange for the extinguishment of the note payable for the commercial vehicle in the
amount of $80,000. The fair market value of the common stock was $126,000. The difference between
the fair market value of the common stock in exchange for the note payable was $46,000 and was
recorded as a loss on extinguishment of debt in the financial statements.
21
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
NOTE 7 STOCKHOLDERS EQUITY
The Company is authorized to issue 500,000,000 shares of common stock, $0.001 par value per
share, and 5,000,000 shares of preferred stock, $0.001 par value per share. Of the preferred
stock, 4,392,286 shares have been designated as Series A Convertible Preferred Stock. All shares
of common stock issued prior to June 6, 2006, are subject to preemptive rights, which entitle the
holder of that common stock to purchase additional shares of common stock with respect to issuances
of common stock, or any security convertible into shares of common stock, prior to June 6, 2006 in
certain circumstances.
At the close of business on June 6, 2006, the Company effected a 100-for-1 reverse stock split
of its then outstanding common stock. After giving effect to the reverse stock split, each
stockholder of record immediately prior to the reverse stock split holds one one-hundredth of the
shares they held before the reverse stock split. All fractional shares were rounded up to the next
whole number. As a result, all references in this Quarterly Report on Form 10-QSB/A (Amendment No.
1) to numbers of shares of Company common stock, including those relating to prior periods, have
been adjusted to reflect the reverse stock split.
During 2005, the Company issued 2,640 shares of its common stock for consulting services. The
fair market value of those shares was determined to be $37,680 as of the measurement dates and was
charged to consulting expense accordingly.
During 2005, the Company issued 500 shares of its common stock to employees for services
rendered. The fair market value of the underlying shares was determined to be $2,500 on the
respective grant dates, as no further services were required by the employees.
On February 28, 2005, the Company issued 16,000 shares of its common stock in exchange for
certain assets acquired and the liabilities assumed from Moving Records, LLC. Additionally, in
connection with the asset purchase, the Company issued 7,000 shares of its common stock in exchange
for the extinguishment of the note payable for the commercial vehicle in the amount of $80,000.
See the discussion of the Moving Records, LLC transaction in Note 6 above.
On September 15, 2005, the Company issued 30,000, 22,750 and 5,000 shares of Company common
stock to Zach Bair, Paul Marin and Gary Blum, respectively. On March 2, 2006, Zach Bair, Paul
Marin and Gary Blum agreed with the Company to rescind these shares effective as of the date of
issue. The certificates evidencing these shares were returned to the transfer agent and cancelled
in March 2006.
On September 23, 2005, the Company issued 6,000 shares of its common stock to Paul Marin
valued at $12,000. Effective September 2005, Mr. Marin returned these shares of Company common
stock to the transfer agent because they were issued to him in error.
On June 7, 2006, pursuant to agreements with holders of instruments evidencing Company
indebtedness, the Company issued an aggregate of 42,040 shares of Company common stock upon
conversion of $525,500 aggregate principal amount of that indebtedness. The fair market value of
the common stock was determined to be $636,640 on the respective commitment dates, which resulted
in a loss on extinguishment of debt of $43,056.
On June 7, 2006, pursuant to an Agreement, Settlement and Release with each of Jess Morgan &
Company, or Jess Morgan, and Phil McMorrow, the Company issued 98,783 and 9,879 shares of Company
common stock to Jess Morgan and Mr. McMorrow, respectively. Jess Morgan and Phil McMorrow agreed,
upon receipt of those shares, to terminate all agreements, other than the warrant, between them and
the Company, including and 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 Jess Morgan or Phil
McMorrow may have. The shares were valued using the fair market value of Company common stock
on the date of issuance and was recorded as Additional Paid in Capital.
22
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
On June 8, 2006, the Company issued and sold 4,392,286 shares of Series A Convertible
Preferred Stock to Radical Holdings LP for an aggregate cash purchase price of $3,000,000. See
Note 3 Change in Control and Series A Convertible Preferred Stock above.
NOTE 8 WARRANTS AND OPTIONS
Warrants to Purchase Common Stock:
The following table summarizes the information with respect to warrants for the six months
ended June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
Number of |
|
|
|
|
|
Number of |
|
|
|
|
|
|
Shares |
|
|
Weighted |
|
|
Shares |
|
|
Weighted |
|
|
|
Underlying |
|
|
Average |
|
|
Underlying |
|
|
Average |
|
|
|
Warrants |
|
|
Exercise Price |
|
|
Warrants |
|
|
Exercise Price |
|
Balance, beginning of year |
|
|
38,759 |
|
|
$ |
23.51 |
|
|
|
45,559 |
|
|
$ |
34.37 |
|
|
Warrants granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants expired |
|
|
1,334 |
|
|
|
30.00 |
|
|
|
6,500 |
|
|
|
100.00 |
|
Warrants exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30 |
|
|
37,425 |
|
|
$ |
23.28 |
|
|
|
39,059 |
|
|
$ |
23.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30 |
|
|
37,425 |
|
|
$ |
23.28 |
|
|
|
39,059 |
|
|
$ |
23.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Underlying |
|
|
Shares Underlying Warrants Outstanding |
|
Warrants Exercisable |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
Average |
|
Weighted |
|
Shares |
|
Weighted |
|
|
|
|
|
|
Underlying |
|
Remaining |
|
Average |
|
Underlying |
|
Average |
|
|
Range of |
|
Warrants |
|
Contractual |
|
Exercise |
|
Warrants |
|
Exercise |
Date |
|
Exercise Prices |
|
Outstanding |
|
Life |
|
Price |
|
Exercisable |
|
Price |
June 30, 2005 |
|
$ |
15.00 - 75.00 |
|
|
|
39,059 |
|
|
1.8 years |
|
$ |
23.45 |
|
|
|
39,059 |
|
|
$ |
23.45 |
|
June 30, 2006 |
|
$ |
20.00-75.00 |
|
|
|
37,425 |
|
|
0.8 years |
|
$ |
23.28 |
|
|
|
37,425 |
|
|
$ |
23.28 |
|
Options to Purchase Common Stock:
On February 14, 2006, the Company terminated its consulting relationship with a consultant to
whom it granted an option to purchase 6,500 shares of Company common stock. Pursuant to the
agreement evidencing the option, shares vested in 36 equal monthly installments at the end of each
calendar month, commencing in May 2005, so long as the consulting arrangement was in effect. As a
result of the termination of this consulting arrangement and in accordance with the option
agreement, the shares acquirable pursuant to this option ceased to vest after nine monthly
installments, which resulted in 1,625 vested shares under this option. The term of this option for
vested shares expires on May 5, 2008.
23
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
The following table summarizes the information with respect to stock options for the six
months ended June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
Number of |
|
|
|
|
|
Number of |
|
|
|
|
|
|
Shares |
|
|
Weighted |
|
|
Shares |
|
|
Weighted |
|
|
|
Underlying |
|
|
Average |
|
|
Underlying |
|
|
Average |
|
|
|
Options |
|
|
Exercise Price |
|
|
Options |
|
|
Exercise Price |
|
Balance, beginning of year |
|
|
11,000 |
|
|
$ |
35.45 |
|
|
|
4,500 |
|
|
$ |
65.00 |
|
|
Options granted |
|
|
|
|
|
|
|
|
|
|
6,500 |
|
|
|
15.00 |
|
Options expired |
|
|
9,375 |
|
|
|
39.00 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30 |
|
|
1,625 |
|
|
$ |
15.00 |
|
|
|
11,000 |
|
|
$ |
35.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30 |
|
|
1,625 |
|
|
$ |
15.00 |
|
|
|
4,861 |
|
|
$ |
61.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Underlying |
|
|
Shares Underlying Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
Average |
|
Weighted |
|
Shares |
|
Weighted |
|
|
|
|
|
|
Underlying |
|
Remaining |
|
Average |
|
Underlying |
|
Average |
|
|
Range of |
|
Options |
|
Contractual |
|
Exercise |
|
Options |
|
Exercise |
Date |
|
Exercise Prices |
|
Outstanding |
|
Life |
|
Price |
|
Exercisable |
|
Price |
June 30, 2005 |
|
$ |
15.00 - 65.00 |
|
|
|
11,000 |
|
|
2.0 years |
|
$ |
35.45 |
|
|
|
4,861 |
|
|
$ |
61.29 |
|
June 30, 2006 |
|
$ |
15.00 |
|
|
|
1,625 |
|
|
1.9 years |
|
$ |
15.00 |
|
|
|
1,625 |
|
|
$ |
15.00 |
|
NOTE 9 NOTES PAYABLE
Pursuant to the Securities Purchase Agreement, Radical Holdings LP loaned funds to the Company
to pay outstanding liabilities, accounts payable or other obligations and to provide necessary
funds to operate the Companys business prior to the consummation of the sale of the Series A
Convertible Preferred Stock. These funds loaned to the Company were required to be applied in
strict accordance with the uses approved by Radical Holdings LP and be fully credited towards the
aggregate purchase price of the Series A Convertible Preferred Stock. As of June 7, 2006, Radical
Holdings LP had loaned the Company an aggregate of $347,000, which was applied to the purchase
price of the Series A Convertible Preferred Stock.
Effective January 31, 2006, the Company made an Amended and Restated Consolidated Secured
Convertible Promissory Note in the aggregate principal amount of $330,749 in favor of a noteholder.
This note revised the conversion terms of the Secured Convertible Promissory Notes previously made
by the Company in favor of the noteholder and consolidated all of the Secured Convertible
Promissory Notes previously made by the Company in favor of the noteholder and advances to the
Company previously made by the noteholder. The commitment date was determined to be the date the
Amended and Restated Consolidated Secured Convertible Promissory Note was executed, or April 7,
2006. The fair market value of the revised conversion option on the commitment date was $16.00 per
share. The conversion was measured as of the commitment date, but not recorded until the
conversion contingency was satisfied.
24
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
On June 7, 2006, the Company issued 42,040 shares of its common stock upon the conversion of
$525,500 of aggregate principle amount of outstanding indebtedness at a conversion price of $12.50
per share as follows:
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
Principal |
|
Description |
|
Outstanding |
|
|
Converted |
|
Amended & Restated Consolidated Secured Convertibe Promissory Note,
bearing interest at 10% per annum, due on June 30, 2006 |
|
$ |
330,749 |
|
|
$ |
300,500 |
|
Secured Convertible Promissory Notes, bearing interest at 10% per annum
due April 1, 2006 |
|
|
175,000 |
|
|
|
150,000 |
|
Secured Convertible Promissory Notes, bearing interest at 10% per annum
due April 1, 2006 |
|
|
25,000 |
|
|
|
25,000 |
|
Secured Convertible Promissory Notes, bearing interest at 10% per annum
due April 1, 2006 |
|
|
50,000 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
$ |
580,749 |
|
|
$ |
525,500 |
|
|
|
|
|
|
|
|
These noteholders waived all accrued and unpaid interest on this outstanding principal
indebtedness. The fair market value of Company common stock on the date of conversion of the
Secured Convertible Promissory Notes was $14 per share. As a result of the conversion, $43,056 was
recorded as a loss on conversion of debt in the financial statements. The loss was calculated as
the difference between the fair market value, as determined on the respective commitment dates, of
the common stock and the principal and interest converted in the transaction. The remaining
principal balance on these notes of $55,249 was paid during June 2006 subsequent to the closing of
the Securities Purchase Agreement with Radical Holdings LP.
In addition to the remaining principal balance on the convertible notes payable, the Company
paid $472,900 on various notes payable outstanding during June 2006 subsequent to the closing of
the Securities Purchase Agreement with Radical Holdings LP. These noteholders waived all accrued
and unpaid interest on the notes, which resulted in a gain on extinguishment of debt in the amount
of $69,219.
At June 30, 2006, $100,000 of principal remains outstanding on a promissory note bearing
interest at 7% per annum that was due April 1, 2006. The noteholder has agreed to waive all
accrued and unpaid interest on this note.
NOTE 10 ACCOUNTS PAYABLE
As of June 30, 2006, the Company had outstanding accounts payable in the amount of $415,685,
of which $322,730, or 78%, had been outstanding over 90 days. The carrying value of accounts
payable approximates fair value due to the short-term nature of the obligations.
The Company has negotiated reductions and settled with certain accounts payable vendors. The
settlements resulted in a reduction of accounts payable of $140,525 for the predecessor period
ended June 7, 2006. This amount was primarily related to legal and consulting expenses incurred in
prior years. The settlements were recorded in the financial statements upon acceptance of payment
in full by the vendors.
NOTE 11 INCOME TAXES
While the Company had generated substantial tax loss carryforwards in prior years, the ability
to use these loss carryforwards has been substantially affected as a result of an ownership change
(as defined in the Internal Revenue Code of 1986, as amended) that occurred in connection with the
issuance and sale of the
Series A Convertible Preferred Stock. The Company believes that the use of loss carryforwards
generated prior to the issuance and sale of the Series A Convertible Preferred Stock will be
limited to approximately $133,500
25
IMMEDIATEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(Unaudited)
per year for the next 20 years. The Company, however, has recorded a valuation allowance due to
the uncertainty of the utilization of the net operating loss carryforward in future periods.
The following table presents the components of the deferred tax asset and liability at June
30, 2006:
|
|
|
|
|
Deferred Tax Asset: |
|
|
|
|
Net operating loss |
|
$ |
2,670,000 |
|
Valuation allowance |
|
|
(2,605,536 |
) |
|
|
|
|
Deferred tax asset, net |
|
$ |
64,464 |
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liability: |
|
|
|
|
Depreciation |
|
$ |
49,844 |
|
Amortization |
|
|
14,620 |
|
|
|
|
|
|
|
$ |
64,464 |
|
|
|
|
|
NOTE 12 RELATED PARTY TRANSACTIONS
License Agreement: On June 22, 2006, the Company entered into a License Agreement with Radical
Incubation Management LLC, which is an affiliate of Radical Holdings LP. The License Agreement
permits Radical Incubation Management LLC to use, as long as it or its affiliates own a ten percent
or greater interest in the Company, the marks, names and logos of the Company to promote the
Company. Radical Incubation Management LLC and its affiliates are not entitled to receive any
compensation for their efforts and are not required to pay the Company for the use of those
materials.
NOTE 13 SUBSEQUENT EVENTS
Restatements of Fiscal Years Ending December 31, 2005, 2004 and 2003
The Company filed amendments to its annual reports for the years ended December 31, 2005 and
2004 on July 18, 2006 and July 20, 2006, respectively, to restate its previously issued
consolidated financial statements for fiscal years ended December 31, 2005, 2004 and 2003, because
of accounting errors in reporting financing and other transactions. Further information on the
restatements and the corresponding adjustments can be found in Note 1 Restatement of Prior
Years Consolidated Financial Statements above and in those filings with the Securities and
Exchange Commission.
The Company has not amended, and does not intend to amend, its previously filed Quarterly
Reports on Form 10-QSB for the quarterly periods in years 2005, 2004 and 2003; however, the
Company has shown, and will continue to show, restated comparative financial statements for the
quarterly periods in fiscal 2005 in the Quarterly Reports on Forms 10-QSB that it files during
fiscal year 2006. For this reason, the consolidated financial statements and related financial
information for the affected periods contained in such previously filed Quarterly Reports on 10-QSB
should no longer be relied upon.
26
Item 2. Managements 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 Immediatek, and its subsidiaries, including DiscLive, Inc., or
DiscLive, collectively.
The following Managements 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 condensed consolidated financial
statements and the notes accompanying those financial statements, which are included in this
Quarterly Report on Form 10-QSB/A (Amendment No. 1). Additionally, MD&A should be read in
conjunction with our Annual Report on Form 10-KSB/A (Amendment No. 1) for the year ended December
31, 2005. MD&A includes the following sections:
|
|
|
Recent Developments a description of important events that have recently occurred. |
|
|
|
|
Our Business a general description of our business; our objective, 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
periods presented in our condensed consolidated financial statements included in this
Quarterly Report on Form 10-QSB/A (Amendment No. 1). |
|
|
|
|
Liquidity, Capital Resources and Financial Position an analysis of our cash flows and
debt and contractual obligations; and an overview of our financial position. |
Recent Developments
Sale of Preferred Stock 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. On June 8,
2006, pursuant to the Purchase Agreement, we issued and sold, and Radical purchased, 4,392,286
shares of the Series A Convertible Preferred Stock for an aggregate purchase price of $3,000,000,
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 at any time into that aggregate number of full shares of
our common stock representing 95% of the total common stock outstanding after giving effect to the
conversion. A holder of a share of Series A Convertible Preferred Stock is entitled to vote on all
matters required or permitted to be voted upon by our stockholders. Each holder of a share of
Series A Convertible Preferred Stock is entitled to the number of votes equal to the largest number
of full shares of our common stock into which all shares of Series A Convertible Preferred Stock
held by that holder could be converted. As a result and as of June 8, 2006, Radical beneficially
owns 95% of the outstanding securities entitled to vote on matters required or permitted to be
submitted to our stockholders. Accordingly, a change in control of us occurred on June 8, 2006.
Additionally, for so long as any shares of the Series A Convertible Preferred Stock originally
issued under the Purchase Agreement remain outstanding, the holders of a majority-in-interest of
the shares of the Series A Convertible Preferred Stock originally issued under the Purchase
Agreement then outstanding have the right to designate all the persons to serve as directors on the
board of directors of the Company and its subsidiaries. If the holders of the shares of Series A
Convertible Preferred Stock originally issued under the Purchase Agreement then outstanding choose
not to designate any directors, the holders of a majority-in-interest of the shares of Series A
Convertible Preferred Stock originally issued under the Purchase Agreement then outstanding may
appoint a designee to serve as an observer at all meetings of the Companys or its subsidiaries
board of directors and committees thereof.
27
New Basis of Accounting
As a result of the change in control of us by virtue of the purchase of the Series A
Convertible Preferred Stock by Radical, we have pushed down our basis to a proportionate amount
of our underlying assets and liabilities acquired based on the estimated fair market values of the
assets and liabilities. The primary changes to the balance sheet reflect:
|
|
|
adjustments to our fixed assets to reflect a step-up in basis of those assets; |
|
|
|
|
the recording of a value for our trade names, trade marks and covenants not to compete; |
|
|
|
|
adjustments to historical goodwill to reflect goodwill arising from the push down
accounting adjustments; |
|
|
|
|
the recording of a value for assets held for sale; |
|
|
|
|
the recording of a value for our deferred tax asset and liability; and |
|
|
|
|
a decrease in additional paid-in capital from these adjustments. |
The primary changes to the statements of operations are:
|
|
|
an increase in net operating loss due to a higher level of depreciation from the
increase in the depreciable basis of fixed assets; and |
|
|
|
|
an increase in net operating loss due to a higher level of amortization related to
the increase in the amortizable basis of intangible assets. |
The increases in net loss due to higher levels of depreciation and amortization from the increases
in the depreciable and amortizable basis of fixed assets and intangible assets, as applicable, were
offset in cash used in operations by corresponding non-cash adjustments.
Due to the impact of the changes resulting from the push down accounting adjustments
described above, the statements of operations and the statements of cash flow presentations
separate our 2006 results and cash flows into two periods: (1) the period ending on June 7, 2006,
which was the day prior to the consummation of the sale of the Series A Convertible Preferred
Stock, and (2) the period beginning on June 8, 2006 utilizing the new basis of accounting. The
results and cash flows are further separated by a heavy black line to indicate the effective date
of the new basis of accounting.
Resignation and Appointment of Officers and Directors
Effective July 12, 2006, Zach Bair resigned from all positions held with us. Specifically,
those positions he resigned from are:
|
|
|
Director of Immediatek and DiscLive; |
|
|
|
|
Chief Executive Officer and President of Immediatek; and |
|
|
|
|
Chief Executive Officer and President of DiscLive. |
On July 12, 2006, the boards of directors of Immediatek and DiscLive appointed Darin Divinia
to fill the vacancy created by the resignations of Mr. Bair from the respective boards of
directors. Mr. Divinia will serve for the unexpired terms. For so long as any shares of the
Series A Convertible Preferred Stock originally issued under the Purchase Agreement remain
outstanding, the holders of a majority-in-interest of the shares of Series A Convertible Preferred
Stock originally issued under the Purchase Agreement then outstanding have the right to designate
all the persons to serve as directors on the board of directors of Immediatek and its subsidiaries.
In connection with that right, Radical, as the sole stockholder of the Series A Convertible
Preferred Stock, nominated Mr. Divinia to be appointed, and the Immediatek and DiscLive boards of
directors appointed Mr. Divinia, to the respective board of directors. Mr. Divinia is currently
employed by Radical Incubation LP, an affiliate of Radical Holdings LP.
28
Additionally, on July 12, 2006, the boards of directors of Immediatek and DiscLive appointed
Travis Hill as Chief Executive Officer of Immediatek and DiscLive. Mr. Hill previously served as
Vice President Artist Relations of DiscLive. Further, on July 12, 2006, the boards of directors
of Immediatek and DiscLive appointed Paul Marin as President and Secretary. Mr. Marin currently
serves, and will continue to serve, as a director of Immediatek and DiscLive. Prior to being
appointed as President and Secretary of Immediatek and DiscLive, Mr. Marin served as Vice
President, Chief Operating Officer and Secretary of Immediatek since 2003 and DiscLive since 2004.
Our Business
General
Immediatek, through its wholly-owned, operating subsidiary, DiscLive, records live content,
such as concerts and conferences, and makes the recorded content available for delivery to
attendees within fifteen minutes after the conclusion of the live event. The recorded content is
made available for pre-sale and sale at the venue and on our website, www.disclive.com. The
content is delivered primarily via compact disc.
DiscLive has recorded live events for Billy Idol, Jefferson Starship, the Pixies, The Fixx,
George Clinton (DVD) and Vertical Horizon, among others. During the three and six months ended
June 30, 2006, we recorded two live events, one of which was a music festival, and ten live
events, respectively, and sold, or delivered under contract, approximately 860 and 1,760 recordings
of those events and prior events during the three and six months ended June 30, 2006, respectively.
History of Operating Losses
The following table presents our net income and losses and cash used in
operating activities for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
For the Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
|
(restated) |
|
(restated) |
|
|
|
|
|
(restated) |
|
(restated) |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
|
|
|
|
|
(see Note 4) |
|
|
|
|
|
(see Note 4) |
|
|
Successor |
|
Predecessor |
|
|
|
|
|
Successor |
|
Predecessor |
|
|
|
|
June 8 - June 30 |
|
April 1 - June 7 |
|
Predecessor |
|
June 8 - June 30 |
|
January 1 - June 7 |
|
Predecessor |
Net income (loss) |
|
$ |
21,378 |
|
|
$ |
(295,559 |
) |
|
$ |
(232,298 |
) |
|
$ |
21,378 |
|
|
$ |
(458,485 |
) |
|
$ |
(678,425 |
) |
Net cash used in operating activities |
|
$ |
(350,914 |
) |
|
$ |
(113,261 |
) |
|
$ |
(74,372 |
) |
|
$ |
(350,914 |
) |
|
$ |
(300,516 |
) |
|
$ |
(243,285 |
) |
Our net income during the period from June 8, 2006 to June 30, 2006, however, is
attributable to the gain on the extinguishment of debt of $69,219 and not the result of net income
from operations. Our existence and operations are dependent upon our ability to generate
sufficient funds from operations to fund operation activities.
The reports of our independent registered public accounting firm on our financial statements
for the years ended December 31, 2005 (restated) and 2004 (restated), included 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 funded our operations during the three and six months ended June 30, 2006 primarily through
borrowings from Radical Holdings LP. During the three and six months ended June 30, 2006, we
borrowed $60,000 and $347,000 aggregate principal amount, respectively, to cover operations and
repay indebtedness. These borrowings were credited in full towards the aggregate purchase price of
the Series A Convertible Preferred Stock. See Liquidity and Capital Resources and Financial
Position below.
29
Our Objectives
Our objective is to utilize our assets brand name, unique concept 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
different live events, including those other than concerts, in order to increase
the sales of our product. |
|
|
|
|
Profit: Maximizing our profit on live events by controlling costs and
utilizing our assets efficiently. We are refining our strategy on the deployment
of assets to record live events in order to make most efficient use of those
assets, while reducing costs. Additionally, we believe by expanding our services
outside of concert recordings that we can more effectively maximize profit by
reducing sales risk. |
Areas of Focus
Revitalizing the Company. We are focused on revitalizing the Company using the proceeds from
the sale of the Series A Convertible Preferred Stock. We believe that we 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 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. Our management is now able to direct
substantially all of its attention to implementing the business plan and to operations rather than
attempts to secure additional funding to continue operations with the consummation of the
transaction evidenced by the Purchase Agreement. We further believe that our existing employees,
together with our new employees, will be able 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.
Utilizing the New Funds in a Manner that is Accretive. If we do not manage our assets
aggressively and apply the additional capital 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. We are also implementing and
exploring various measures to minimize our sales risk.
Competing with a Substantial Competitor. Our major competitor, InstantLive, LLC, which is a
subsidiary of Live Nation, Inc., formerly a part of Clear Channel Communications Inc., has
substantially 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
30
Nations ownership of the venues and production of the events, we believe that InstantLive has a
substantial competitive position to us in obtaining live event recording contracts.
Maintaining a Quality Product. Our product is relatively new and continues to evolve. In
early 2004, the speed of compact disc duplicators increased to a point where our product could be
produced efficiently. As technology improves and better quality recordings are necessary, we will
be required to improve our products to maintain a market for our products and compete with our
competitors. In that regard, we have already transitioned to multi-track recording, which provides
a more quality product.
Additionally, see Risk Factors in Part I of our Annual Report on Form 10-KSB for the year
ended December 31, 2005 concerning other 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.
Critical Accounting Policies and Estimates
Our condensed 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 with respect to the amounts reported in the condensed consolidated
financial statements and in the notes accompanying those financial statements. Certain information
and footnote disclosures normally included in financial statements prepared in accordance with
generally accepted accounting principles, however, have been condensed or omitted pursuant to the
rules and regulations promulgated by the Securities and Exchange Commission. 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.
Management considers the useful life of the assets on an annual basis and assesses
whether or not there is an 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. |
|
|
|
|
Goodwill. Management evaluates goodwill for impairment on an annual basis or more
frequently if events occur that provide indications of impairment. If indicators of
potential impairment exist, we perform a review to determine if the carrying value of
the recorded goodwill is impaired. The first step of this process is to identify
potential goodwill impairment by comparing the fair value of the single reporting unit
to its carrying value. We estimate fair value using discounted cash flows. If the
carrying value is less than the fair value, we would complete step two in the
impairment review process, which measures the amount of goodwill impairment. We test
the reasonableness of the inputs and outcomes of the discounted cash flow analysis. |
|
|
|
|
Convertible Securities. From time to time, we issue convertible securities with
beneficial conversion features. We account for these convertible securities in
accordance with Emerging Issues Task Force Issue 98-5, Accounting for Convertible
Securities with a Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios (EITF 98-5) and EITF 00-27, Application of Issue No. 98-5 to Certain
Convertible Instruments. |
|
|
|
|
New Basis of Accounting. As a result of a 95% change in control of the Company, we
have applied push down accounting, which requires that the proportionate basis of
the assets acquired and liabilities assumed be pushed down to the Company based upon
their estimated fair market values. We make estimates and judgments in determining
the fair value of the acquired assets and liabilities. We base our determination on
independent appraisal reports, as well as our internal judgments based on the existing
facts and circumstances. If we were to use different judgments or assumptions, the
amounts assigned to the individual assets or liabilities could be materially
different. |
31
|
|
|
Revenue Recognition. DiscLive primarily delivers products sold by it through
shipment to the customer. Revenue is recognized upon shipment of the product to the
customer. A smaller percentage of revenues are recognized at the point of sale at the
event being recorded. Certain customers purchase and accept hand delivery of the
product on-site at the event. Pursuant to Emerging Issues Task Force Issue No. 00-10,
Accounting for Shipping and Handling Fees and Costs, (EITF 0010), the Company
includes 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. |
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
Condensed Consolidated Financial Statements commencing on page 12.
Operations Review
As a result of the push down accounting adjustments described in Note 4 New Basis of
Accounting, above, the activity for the period June 8, 2006 through June 30, 2006, or the
post-push down period, is reported under the new basis of accounting, while the activity for the
period January 1, 2006 through June 7, 2006, or the pre-push down period, is reported on the
historical basis of accounting, which was used in 2005. For the post-push down period, the primary
changes to the income statement reflect an increase in net operating loss due to a higher level of
depreciation from the increase in the depreciable basis of fixed assets and an increase in net
operating loss due to a higher level of amortization related to the increase in the amortizable
basis of intangible assets.
Three Months Ended June 30, 2006 (restated) Compared to Three Months Ended June 30, 2005
(restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(restated) |
|
|
(restated) |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
|
|
|
|
|
|
(see Note 4) |
|
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
|
June 8 - June 30 |
|
|
April 1 - June 7 |
|
|
Predecessor |
|
Revenues |
|
$ |
19,740 |
|
|
$ |
2,425 |
|
|
$ |
56,000 |
|
Cost of sales |
|
|
7,472 |
|
|
|
24,645 |
|
|
|
30,196 |
|
|
|
|
|
Gross Profit |
|
|
12,268 |
|
|
|
(22,220 |
) |
|
|
25,804 |
|
Gross Profit Margin |
|
|
62 |
% |
|
|
(916 |
)% |
|
|
46 |
% |
General and administrative expenses |
|
|
5,459 |
|
|
|
17,656 |
|
|
|
19,297 |
|
Consulting services |
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees |
|
|
20,259 |
|
|
|
208,133 |
|
|
|
31,504 |
|
Salaries and benefits |
|
|
31,524 |
|
|
|
59,726 |
|
|
|
68,817 |
|
Non-cash stock compensation |
|
|
|
|
|
|
|
|
|
|
16,197 |
|
Non-cash consulting expense |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,867 |
|
|
|
1,418 |
|
|
|
78,673 |
|
(Gain) loss on extinguishment of debt |
|
|
(69,219 |
) |
|
|
43,056 |
|
|
|
|
|
Gain on settlement of accounts payable |
|
|
|
|
|
|
(91,894 |
) |
|
|
|
|
|
|
|
|
Net operating income (loss) |
|
$ |
21,378 |
|
|
$ |
(260,315 |
) |
|
$ |
(188,684 |
) |
Interest expense, net |
|
|
|
|
|
|
(35,244 |
) |
|
|
(43,614 |
) |
|
|
|
|
Net income (loss) |
|
$ |
21,378 |
|
|
$ |
(295,559 |
) |
|
$ |
(232,298 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend related to beneficial
conversion feature on Series A convertible
preferred stock |
|
|
(3,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
$ |
(2,978,622 |
) |
|
$ |
(295,559 |
) |
|
$ |
(232,298 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
attributable to common stockholders |
|
$ |
(6.39 |
) |
|
$ |
(0.63 |
) |
|
$ |
(0.75 |
) |
|
|
|
|
|
|
|
|
|
|
32
Revenues. Revenues for the post-push down period primarily relate to sales of compact
discs of a music festival recorded in June 2006. For the pre-push down period during the three
months ended June 30, 2006, revenues consisted of sales of compact discs related to live events
recorded in prior periods, as there were no recordings made of live events during that period that
were revenue generating. For the three months ended June 30, 2005, revenues related primarily to
the sale of recordings made of three live events during that period, one of which was a music
festival.
We expect revenues in the second half of 2006 to be higher than the first half of 2006, as we
are ramping up our operations, which were limited in the second half of fiscal 2005 and the first
five months of fiscal 2006 due to the lack of necessary operating funds. The Company currently has
two live events under contract for the third quarter of 2006 and is actively pursuing six live
events for the remainder of the year.
Cost of Sales. The decrease in costs of sales for the post-push down period compared to the
pre-push down period in the three months ended June 30, 2006 is attributable to the costs incurred
in recording a non-revenue event in April 2006, as well as repair and transport costs for moving
our commercial vehicle to the our corporate offices. Additionally, the costs in the post-push down
period are lower than expected due to the music festival recorded in June 2006 being located near
our offices. Thus, no travel costs were incurred to record this live event. The increase in costs
of sales for the three months ended June 30, 2006 compared to the three months ended June 30, 2005
is related to costs of our commercial vehicle.
We expect costs of sales to increase if our revenues increase; however, we continue to
evaluate and implement plans to reduce the costs associated with our products, which we anticipate
will offset a portion of any increase in cost of sales.
General and Administrative Expense. The increase in general and administrative expense for
the three months ended June 30, 2006, as compared to the three months ended June 30, 2005, is
attributable to improvements made to our website during 2006.
We anticipate that general and administrative expense will increase over the next six months
as costs associated with the implementation of new procedures and policies, which will assist us in
operating more efficiently and may be required by the Sarbanes-Oxley Act of 2002, or Sarbanes
Oxley.
Consulting Services. During the remainder of the 2006 fiscal year, consulting services
expense will increase, as we have retained individuals and companies to repair our information
systems and equipment, and potentially design and implement new information systems.
Professional Fees. The increase in professional fees is attributable to the fees incurred in
connection with the restatement of our financial statements for the years ended December 31, 2005,
2004 and 2003, together with the legal fees for the consummation of the Series A Convertible
Preferred Stock transaction.
We anticipate that professional fees for the remainder of year 2006 will decrease due to the
completion of the restatement of our financial statements for the years ended December 31, 2005,
2004 and 2003 and the consummation of the Series A Convertible Preferred Stock transaction . The
decrease will, however, be offset by anticipated increases in audit fees, 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.
Salaries and Benefits. Salaries and benefits increased as the result of the employment
contracts entered into with our officers in March 2006, the addition of new employees and the
retention of benefit plans. Salaries and benefits will be approximately $135,000 for the remainder
of 2006, which has been reduced from prior reported amounts due the resignation of Zach Bair from
all positions with the Company.
Depreciation and Amortization. This decrease is attributable to the impairment of fixed
assets and intangible assets recognized at December 31, 2005, which was offset by the step-up in
basis resulting from the application of push down accounting. See Recent DevelopmentsNew Basis
of Accounting above.
33
(Gain) Loss on Extinguishment of Debt. For the post-push down period, the gain relates solely
to the forgiveness of interest payable on notes payable that were settled in cash during the
post-push down period. For the pre-push down period during the three months ended June 30, 2006,
the loss relates to the conversion of certain notes payable into Company common stock upon
consummation of the Radical transaction.
Gain on Settlement of Accounts Payable. This amount results from the discounts that we
negotiated and settled during the period on certain outstanding accounts payable. We are
continuing to negotiate with vendors on past due amounts. Favorable settlements, however, may not
be obtained in future periods. The amount recorded in accounts payable represents the current
amounts outstanding per invoices received from vendors.
Interest Expense. Interest expense decreased as a result of the conversion of notes payable
on June 7, 2006 and the subsequent repayment of notes payable during June 2006.
Income Taxes. There was no Federal income tax expense recorded for the three months ended
June 30, 2005 and the pre-push down period during the three months ended June 30, 2006, due to a
net loss in each period. There was no Federal income tax expense recorded for the post-push down
period due to the utilization of the net operating loss carryforward.
Six
Months Ended June 30, 2006 (restated) Compared to Six Months Ended June 30, 2005
(restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(restated) |
|
|
(restated) |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
|
|
|
|
|
|
(see Note 4) |
|
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
|
June 8 - June 30 |
|
|
January 1 - June 7 |
|
|
Predecessor |
|
Revenues |
|
$ |
19,740 |
|
|
$ |
19,451 |
|
|
$ |
76,795 |
|
Cost of sales |
|
|
7,472 |
|
|
|
43,584 |
|
|
|
52,606 |
|
|
|
|
|
Gross Profit |
|
|
12,268 |
|
|
|
(24,133 |
) |
|
|
24,189 |
|
Gross Profit Margin |
|
|
62 |
% |
|
|
(124 |
)% |
|
|
31 |
% |
General and administrative expenses |
|
|
5,459 |
|
|
|
34,903 |
|
|
|
139,939 |
|
Consulting services |
|
|
|
|
|
|
|
|
|
|
18,210 |
|
Professional fees |
|
|
20,259 |
|
|
|
328,347 |
|
|
|
69,420 |
|
Salaries and benefits |
|
|
31,524 |
|
|
|
89,130 |
|
|
|
143,235 |
|
Non-cash stock compensation |
|
|
|
|
|
|
3,410 |
|
|
|
52,001 |
|
Non-cash consulting expense |
|
|
|
|
|
|
|
|
|
|
37,680 |
|
Depreciation and amortization |
|
|
2,867 |
|
|
|
2,755 |
|
|
|
117,715 |
|
(Gain) loss on extinguishment of debt |
|
|
(69,219 |
) |
|
|
43,056 |
|
|
|
46,000 |
|
Gain on settlement of accounts payable |
|
|
|
|
|
|
(140,525 |
) |
|
|
|
|
|
|
|
|
Net operating loss |
|
$ |
21,378 |
|
|
$ |
(385,209 |
) |
|
$ |
(600,011 |
) |
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
(73,276 |
) |
|
|
(78,414 |
) |
|
|
|
|
Net income (loss) |
|
$ |
21,378 |
|
|
$ |
(458,485 |
) |
|
$ |
(678,425 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend related to beneficial
conversion feature on Series A convertible
preferred stock |
|
|
(3,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
$ |
(2,978,622 |
) |
|
$ |
(458,485 |
) |
|
$ |
(678,425 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
attributable to common stockholders |
|
$ |
(7.54 |
) |
|
$ |
(1.16 |
) |
|
$ |
(2.19 |
) |
|
|
|
|
|
|
|
|
|
|
Revenues. The decrease in revenues is attributable to fewer sales of the recordings made,
as we recorded the same number of live events during the six months ended June 30, 2006 and 2005.
34
We expect revenues in the second half of 2006 to be higher than the first half of 2006, as we
are ramping up our operations, which were limited in the second half of fiscal 2005 and the first
five months of fiscal 2006 due to the lack of necessary operating funds. The Company currently has
two live events under contract for the third quarter of 2006 and is actively pursuing six live
events for the remainder of the year.
Cost of Sales. Costs of sales remained relatively consistent with the prior year primarily
due to the recording of approximately the same number of live events in each period.
We expect costs of sales to increase if our revenues increase; however, we continue to
evaluate and implement plans to reduce the costs associated with our products, which we anticipate
will offset a portion of any increase in cost of sales.
General and Administrative Expense. The decrease in general and administrative expense for
the six months ended June 30, 2006, as compared to the six months ended June 30, 2005, is
attributable to the reduction of rent for office space, a decrease in travel and other measures we
undertook to reduce operations due to a lack of sufficient operating funds.
We anticipate that general and administrative expense will increase over the next six months
for costs associated with the implementation of new procedures and policies, which will assist us
in operating more efficiently and may be required by Sarbanes Oxley.
Consulting Services. The decrease in consulting services expense is the result of the
termination of all our prior consultants. During the remainder of the 2006 fiscal year, consulting
services expense will increase, as we have retained individuals and companies to repair our
information systems and equipment, and potentially design and implement new information systems.
Professional Fees. The increase in professional fees is attributable to fees incurred in
connection with the restatement of our financial statements for the years ended December 31, 2005,
2004 and 2003, together with the legal fees for the consummation of the Series A Convertible
Preferred Stock transaction.
We anticipate that professional fees for the remainder of year 2006 will decrease due to the
completion of the restatement of our financial statements for the years ended December 31, 2005,
2004 and 2003 and the consummation of the Series A Convertible Preferred Stock transaction . The
decrease will, however, be offset by anticipated increases in audit fees, 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.
Salaries and Benefits. Salaries and benefits decreased due to the lack of operating funds in
the first quarter of 2006 and the reduction of personnel, as compared to the prior year. Salaries
and benefits will be approximately $135,000 for the remainder of 2006, which has been reduced from
prior reported amounts due the resignation of Zach Bair from all positions with the Company.
Depreciation and Amortization. This decrease is attributable to the impairment of fixed
assets and intangible assets recognized at December 31, 2005, which was offset by the step-up in
basis resulting from the application of push down accounting. See Recent DevelopmentsNew Basis
of Accounting above.
(Gain) Loss on Extinguishment of Debt. For the post-push down period, the gain relates solely
to the forgiveness of interest payable on notes payable that were settled in cash during the
post-push down period. For the pre-push down period during the six months ended June 30, 2006, the
loss relates to the conversion of certain notes payable into Company common stock upon consummation
of the Radical transaction.
Gain on Settlement of Accounts Payable. This amount results from the discounts that we
negotiated and settled during the period on certain outstanding accounts payable. We are
continuing to negotiate with vendors on past due amounts. Favorable settlements, however, may not
be obtained in future periods. The amount recorded in accounts payable represents the current
amounts outstanding per invoices received from vendors.
35
Interest Expense. Interest expense increased as a result of a higher amount of notes payable
outstanding during 2006 than in 2005.
Income Taxes. There was no Federal income tax expense recorded for the six months ended June
30, 2005 and the pre-push down period during the six months ended June 30, 2006, due to a net loss
in each period. There was no Federal income tax expense recorded for the post-push down period due
to the utilization of the net operating loss carryforward.
Liquidity and Capital Resources and Financial Position
Prior to the issuance and sale of the Series A Convertible Preferred Stock, we had been
attempting to raise adequate capital to be able to continue our operations and implement our
business plan, and management had to devote a significant amount of time to raising capital rather
than to operations. Due the lack of adequate funds in the second half of 2005 and the first five
months of 2006, our management took certain steps to reduce cash expenditures while pursuing
additional financing. In January 2006, the Company entered into the Securities Purchase Agreement
with Radical. This transaction was consummated on June 8, 2006, and provided us with an aggregate
of $2,653,000 in funds, which is net of $347,000 funds previously loaned to us by Radical and
credited towards the purchase price of the Series A Convertible Preferred Stock. In accordance
with the Securities Purchase Agreement, the proceeds from the issuance and sale of the Series A
Convertible Preferred Stock were, and are being, utilized to pay all outstanding liabilities,
including, among others, accounts payable and indebtedness. After satisfying all of our
liabilities, our management estimates that we will have $900,000 of operating funds, which
management anticipates will sustain our operations until the conclusion of fiscal 2007. At the end
of fiscal 2007, we will be required to obtain additional funds if we do not generate sufficient
cash from operating activities to fund our future operating activities. In that regard, we
undertaking various plans and measures, which we believe will increase funds generated from
operating activity. No assurances, however, can be given that those plans and measures will be
successful in increasing funds generated from operating activity.
As a result of the push down accounting adjustments described in Note 4New Basis of
Accounting above, the activity for the period June 8, 2006 through June 30, 2006, or the
post-push down period, is reported under the new basis of accounting, while the activity for the
period January 1, 2006 through June 7, 2006, or the pre-push down period, is reported on the
historical basis of accounting, which was used in 2005.
Operating Activities. Cash used in operations was $350,914 and $113,261 for the post-push
down and pre-push down periods, respectively, in the three months ended June 30, 2006. Cash used
in operations was $74,372 for the three months ended June 30, 2005. The increase in cash used in
operations is primarily attributable to the payment of accounts payable and accrued liabilities.
Payment of these amounts was deferred during 2005 due to the lack of funds.
Cash used in operations was $350,914 and $300,516 for the post-push down and pre-push down
periods, respectively, in the six months ended June 30, 2006, as compared to $243,285 of cash used
in operations for the six months ended June 30, 2005. The additional cash used in operations is
attributable to the payment of a large portion of outstanding accounts payable and accrued
liabilities. Payment of these amounts was deferred in 2005 due to the lack of funds.
Investing Activities. There were no investing activities during the post-push down period.
Cash used in investing activities was $907 for the pre-push down period during the three months
ended June 30, 2006. There were no investing activities for the three months ended June 30, 2005.
The cash used in investing activities during 2006 consisted of purchases of fixed assets.
Cash used in investing activities was $2,476 for the pre-push down period during the six
months ended June 30, 2006. There were no investing activities for the six months ended June 30,
2005. The cash used in investing activities during 2006 consisted of purchases of fixed assets.
Financing Activities. Cash from financing activities was $2,124,851 for the post-push down
period and $60,000 for the pre-push down period in the three months ended June 30, 2006. Cash from
financing
36
activities was $23,735 for the three months ended June 30, 2005. The increase from 2005
is attributable to the issuance and sale of the Series A Convertible Preferred Stock to Radical
that resulted in proceeds of $2,653,000. This increase was offset by the repayment of $528,149 of
notes payable in the post-push down period.
Cash from financing activities was $2,124,851 for the post-push down period and $331,345 for
the pre-push down period in the six months ended June 30, 2006. Cash from financing activities was
$221,735 for the six months ended June 30, 2005. The increase from 2005 is attributable to the
issuance and sale of the Series A Convertible Preferred Stock to Radical that resulted in proceeds
of $2,653,000. This increase was offset by the repayment of $528,149 of notes payable in the
post-push down period.
Indebtedness
At June 30, 2006, notes payable consisted of a promissory note for $100,000 that was due on
April 1, 2006 and bears interest at seven percent per year. This noteholder has agreed to waive
all accrued and unpaid interest. The Company expects to pay this promissory note in full prior to
September 30, 2006 and is making every attempt to pay it in full prior to that date.
Accounts Payable
As of June 30, 2006, the Company had outstanding accounts payable in the amount of $415,685,
of which $322,730, or 78%, had been outstanding over 90 days. The decrease in accounts payable is
attributable to the utilization of the proceeds from the issuance and sale of the Series A
Convertible Preferred Stock under the Securities Purchase Agreement to satisfy those accounts
payable, as well as the favorable settlement of amounts due for a reduction of accounts payable in
the amount of $140,525. We are continuing to negotiate with vendors on past due amounts.
Favorable settlements, however, may not be obtained in future periods. The amount recorded in
accounts payable represents the current amounts outstanding per invoices received from vendors.
Contractual Obligations and Commercial Commitments
The following table highlights, as of June 30, 2006, 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) |
|
$ |
100,000 |
|
|
$ |
100,000 |
|
|
|
|
|
Lease |
|
|
16,000 |
|
|
|
16,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
$ |
116,000 |
|
|
$ |
116,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This noteholder has agreed to waive any and all accrued but unpaid interest on this note. |
Liquidity
We will utilize approximately $250,000 of funds to operate our business at the desired level
during the remainder of 2006. We presently do not generate sufficient cash from operations to fund
our operating activities and, until the issuance and sale of the Series A Convertible Preferred
Stock, limited operations to that which we deemed to be critical.
We believe that the funds received from the consummation of the issuance and sale of the
Series A Convertible Preferred Stock on June 8, 2006, will provide us with the necessary funds to
operate our business until the conclusion of fiscal 2007. At the end of fiscal 2007, we will be
required to obtain additional funds if we doe not generate sufficient cash from operating
activities to fund our future operating activities. In that regard, we undertaking various plans
and measures, which we believe will increase funds generated from
operating activity. No assurances, however, can be given that those plans and measures will be
successful in increasing funds generated from operating activity.
37
Item 3. Controls and Procedures
Our chief executive officer and president are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under
the Securities Exchange Act of 1934) for the Company. Accordingly, our chief executive officer and
president designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under their supervision, to ensure that material information relating to
the Company, including our consolidated subsidiaries, is made known to our chief executive officer
and president by others within those entities. We regularly evaluate the effectiveness of
disclosure controls and procedures and report our conclusions about the effectiveness of the
disclosure controls quarterly on our Forms 10-QSB and annually on our Forms 10-KSB. Based upon the
evaluation for the period ended June 30, 2006, for the reasons described below, our chief executive
officer and president concluded that our disclosure controls and procedures were not effective, as
of the end of the period covered by this Report (June 30, 2006), in ensuring that material
information relating to the Company required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms and that such information is accumulated and
communicated to management, including the chief executive officer and the president, as
appropriate, to allow timely decisions regarding required disclosure. Notwithstanding the material
weaknesses described below, the Companys management has concluded that the condensed consolidated
financial statements included in this Quarterly Report on Form 10-QSB/A (Amendment No. 1) fairly
state, in all material respects, the Companys financial condition, results of operations and cash
flows for the periods presented in conformity with generally accepted accounting principles.
Based on the definition of material weakness in the Public Company Accounting Oversight
Boards Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in
Conjunction With an Audit of Financial Statements, restatement of financial statements in prior
filings with the SEC is a strong indicator of the existence of a material weakness in the design
or operation of internal control over financial reporting. The Company has concluded that it did
not maintain effective controls. The Company determined that because effective controls were not
in place, the recognition of certain items was inconsistent with its accounting policies and that a
material weakness existed in the Companys internal control over financial reporting, and disclosed
this to the Board of Directors and to the independent registered public accountants. In addition,
the Company has determined that a material weakness exists in the Companys internal controls over
financial reporting related to the limited number of accounting personnel in the Company. The
Company disclosed this to its Board of Directors and to its independent registered public
accountants.
Plan for Remediation of Material Weaknesses
The Company is in the process of designing and instituting new policies that substantially
improve these controls. Also, the Company has retained qualified personnel and consultants for its
accounting and reporting functions.
Changes in Internal Controls
Changes in our internal controls are currently being designed and will be implemented on an
ongoing basis as designed.
Limitations on the Effectiveness of Controls
Our management, including our chief executive officer and president, does not expect that our
disclosure controls and internal controls will prevent all error and all fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Due to the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision making can be faulty, and that
breakdowns can occur because of simple
38
error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the control.
The design of any system of controls is also based in part upon certain assumptions about the
likelihood of future events occurring. There can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time, a control may become
inadequate because of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Due to the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
PART II OTHER INFORMATION
Item 6. Exhibits
The following exhibits are filed in accordance with the provisions of Item 601 of Regulation
S-B.
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
10.18*
|
|
Employment, Confidential Information and Invention Assignment
Agreement, dated as of April 3, 2006, by and between DiscLive,
Inc. and Travis Hill. |
|
|
|
14.1*
|
|
Immediatek, Inc. Code of Business Conduct and Ethics. |
|
|
|
31.1**
|
|
Certification of Principal Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act. |
|
|
|
31.2**
|
|
Certification of Principal 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). |
|
|
|
* |
|
Previously filed. |
|
** |
|
Filed herewith. |
39
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
Date: November 21, 2006 |
IMMEDIATEK, INC.
a Nevada corporation
|
|
|
By: |
/s/ TRAVIS HILL
|
|
|
Name: |
Travis Hill |
|
|
Title: |
Chief Executive Officer
(On behalf of the Registrant and as Principal
Executive Officer) |
|
|
S-1
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
10.18*
|
|
Employment, Confidential Information and Invention Assignment
Agreement, dated as of April 3, 2006, by and between DiscLive,
Inc. and Travis Hill. |
|
|
|
14.1*
|
|
Immediatek, Inc. Code of Business Conduct and Ethics. |
|
|
|
31.1**
|
|
Certification of Principal Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act. |
|
|
|
31.2**
|
|
Certification of Principal 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). |
|
|
|
* |
|
Previously filed. |
|
** |
|
Filed herewith. |
Exhibit Index