10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO 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 PURSUANT TO SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number 0-27412
WATCHIT MEDIA, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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94-3173918 |
(State of incorporation)
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(I.R.S. Employer Identification No.) |
3485 W. Harmon Avenue, Las Vegas, Nevada 89103
(Address of principal executive offices)
(702) 740-1700
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by checkmark whether the registrant is large accelerated filer, an accelerated filer
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicated by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of
the Act) Yes o No þ
At
February 6, 2007, there were 42,714,844 shares of Common Stock outstanding.
WATCHIT MEDIA, INC.
INDEX
2
Item 1. Financial Statements
WATCHIT MEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
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June 30, |
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December 31, |
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2006 |
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2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
11 |
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Refundable income taxes |
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13 |
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Accounts receivable, net of allowance for doubtful accounts
of $54 and $54, and $325 and $368 pledged as collateral
security, respectively |
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327 |
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340 |
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Prepaid expenses and other current assets |
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92 |
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Total current assets |
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327 |
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456 |
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Property and equipment, net |
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144 |
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177 |
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Goodwill |
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2,728 |
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2,728 |
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Other intangibles, net |
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537 |
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607 |
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Other assets |
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182 |
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Total assets |
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$ |
3,736 |
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$ |
4,150 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Bank Overdraft |
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$ |
41 |
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$ |
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Secured borrowings |
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325 |
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287 |
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Accounts payable |
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1,354 |
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801 |
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Accrued compensation and related payroll liabilities |
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253 |
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269 |
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Restructuring liabilities |
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594 |
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595 |
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Other accrued liabilities |
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464 |
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243 |
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Debt |
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264 |
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Total current liabilities |
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3,295 |
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2,195 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred Stock, $0.01 par value; 500,000 shares
authorized, no shares issued or outstanding |
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Common Stock, $0.01 par value; 100,000,000 shares
authorized, 33,668,896 and 28,868,229 shares issued,
respectively |
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337 |
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289 |
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Additional paid-in capital |
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83,079 |
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82,785 |
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Accumulated deficit |
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(82,862 |
) |
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(81,006 |
) |
Treasury stock |
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(113 |
) |
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(113 |
) |
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Total stockholders equity |
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441 |
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1,955 |
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Total liabilities and stockholders equity |
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$ |
3,736 |
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$ |
4,150 |
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See accompanying notes to the condensed consolidated financial statements.
3
WATCHIT MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
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Three Months Ended June 30, |
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Six Months Ended 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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Revenues |
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658 |
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609 |
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$ |
1,241 |
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$ |
864 |
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Cost of revenues |
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308 |
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232 |
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619 |
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345 |
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Gross profit |
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350 |
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377 |
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622 |
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519 |
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Selling, general and administrative expenses |
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1,164 |
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740 |
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2,428 |
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1,244 |
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Operating loss |
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(814 |
) |
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(363 |
) |
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(1,806 |
) |
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(725 |
) |
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Other income (expense): |
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Interest expense |
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(35 |
) |
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(11 |
) |
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(49 |
) |
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(20 |
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Interest income |
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1 |
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Other |
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26 |
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26 |
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Total other income (expense) |
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(35 |
) |
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15 |
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(49 |
) |
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7 |
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Loss from continuing operations before income
tax benefit (expense) |
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(849 |
) |
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(348 |
) |
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(1,855 |
) |
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(718 |
) |
Income tax benefit (expense) |
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67 |
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Loss from continuing operations |
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(849 |
) |
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(348 |
) |
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|
(1,855 |
) |
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(651 |
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Loss from discontinued operations, net of income
tax benefit of $- and $- |
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(279 |
) |
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(951 |
) |
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Net loss |
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(849 |
) |
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(627 |
) |
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$ |
(1,855 |
) |
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$ |
(1,602 |
) |
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Earnings per share: |
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Basic and diluted |
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Loss from continuing operations |
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(0.03 |
) |
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|
(0.01 |
) |
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$ |
(0.06 |
) |
|
$ |
(0.02 |
) |
Loss from discontinued operations |
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|
(.000 |
) |
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(0.01 |
) |
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(0.04 |
) |
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Net loss |
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(0.03 |
) |
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(0.02 |
) |
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$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
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Basic and diluted weighted average number of
shares outstanding |
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29,825,666 |
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28,011,739 |
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29,825,666 |
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26,692,079 |
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See accompanying notes to condensed consolidated financial statements.
4
WATCHIT MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six Months Ended June 30, |
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2006 |
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2005 |
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Revised See |
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Note 1 |
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Cash flows from operating activities: |
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Net Loss |
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$ |
(1,855 |
) |
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$ |
(651 |
) |
Adjustments to reconcile net loss to net cash used in
operating activities: |
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Depreciation and amortization of property and equipment |
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33 |
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51 |
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Common stock issued for services |
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Amortization of identifiable intangible assets |
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70 |
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70 |
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Restricted shares issued in connection with director
compensation |
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39 |
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Provision for doubtful accounts |
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|
8 |
|
Changes in current assets and liabilities: |
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Accounts receivable |
|
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13 |
|
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(72 |
) |
Prepaid expenses and other current assets |
|
|
92 |
|
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(3 |
) |
Bank overdraft |
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41 |
|
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Accounts payable and accrued liabilities |
|
|
756 |
|
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|
690 |
|
Income taxes, net |
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|
13 |
|
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|
(63 |
) |
Other assets |
|
|
182 |
|
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|
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Net cash used in operating activities |
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(655 |
) |
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|
69 |
|
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(47 |
) |
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Net cash used in investing activities |
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(47 |
) |
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Cash flows from financing activities: |
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Additional (repayment) of secured borrowings |
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38 |
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329 |
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Proceeds from debt |
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264 |
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Cost of issuing of Common Stock and warrants |
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(57 |
) |
Proceeds from issuance of Common Stock and warrants |
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|
342 |
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420 |
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Net cash provided by financing activities |
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|
644 |
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692 |
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Cash flows from discontinued operations: |
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Cash used in discontinued operations |
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(1,042 |
) |
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Net decrease in cash and cash equivalents |
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(11 |
) |
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(328 |
) |
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Cash and cash equivalents at beginning of period |
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11 |
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526 |
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Cash and cash equivalents at end of period |
|
$ |
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$ |
198 |
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|
See accompanying notes to condensed consolidated financial statements.
5
WATCHIT MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
(Unaudited)
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Six Months Ended |
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June 30, |
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2006 |
|
2005 |
Supplemental disclosures of cash flow information: |
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Interest paid |
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$ |
49 |
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$ |
20 |
|
Income taxes refunded |
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$ |
13 |
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$ |
6 |
|
Significant non-cash financing and investing activities: |
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Deferred acquisition costs |
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$ |
|
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$ |
238 |
|
Issuance of Common Stock in debt transaction |
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$ |
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$ |
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|
See accompanying notes to condensed consolidated financial statements.
6
WATCHIT MEDIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note 1 Summary of Significant Accounting Policies and Practices
Description of Business
On December 8, 2005, Watchit Media, Inc. (WMDA.PK) changed the Companys ticker symbol to WMDA from
CGZT. The change in the Companys ticker symbol reflects its change in identity from Cotelligent,
Inc to Watchit Media, Inc. The Company is in the process of transitioning all aspects of its former
brand, name and identity to Watchit Media, Inc.
Watchit Media, Inc. (Watchit Media or the Company), a Delaware corporation, provides
narrowcasting services which include digital technologies and production services for video
content, distribution, scripting and playback on digital display channels.
In 2004, the Company was organized into two reportable segments, IT services and narrowcasting
(which became effective with the acquisition of OnSite Media, Inc. on March 2, 2004). Prior to
December 31, 2004, the Company entered into a plan to divest its IT services segment. The
divestiture was completed on July 15, 2005. Accordingly, the accompanying consolidated financial
statements and related footnotes have been prepared to present as discontinued operations the
Companys IT services segment for all periods presented.
These financial statements include the accounts of Watchit Media, Inc. and its subsidiaries. The
results of OnSite Media, Inc. have been included in the Companys results from its acquisition
date.
Liquidity
The Company has had operating losses and negative operating cash flows for the past several fiscal
periods. This has been due to declining demand for IT services and solutions and investments the
Company has made in its new narrowcasting business. As a result, the Company is exposed to certain
risks which include the availability of financing, the retention of and dependence on key
individuals, the effects of intense competition, the ability to develop and successfully market new
product and service offerings, and the ability to streamline operations and increase revenues.
While the Company is now focused on executing a growth strategy in the narrowcasting market, there
can be no assurance the Company will be profitable in the future.
During the past and in 2006, management has taken action in response to the continued softness in
IT services in order to preserve cash, including but not limited to significant reductions in
headcount, outsourcing certain administrative functions, changing benefit plan insurance carriers,
relocating the headquarters resulting in lower lease obligations, acquiring a business in an
industry with more near term growth prospects than IT services, securing a line of credit agreement
against its accounts receivable and announcing the plan to divesting its IT services segment. On
February 1, 2005, the Company entered into a Stock and Warrant Purchase Agreement with certain
accredited investors pursuant to which the Company sold Common Stock and warrants resulting in a
cash infusion to the Company. In addition, on April 1, 2005 the Company signed a definitive
agreement with FastTrack, LLC, an affiliate of Beverly Hills, California private equity firm
Skyview Capital, LLC for the sale of its remaining IT services business.
On February 20, 2006, the Company issued a 15% Convertible Promissory Note (the Note) to James
Lavelle, its Chairman and CEO, in exchange for a $65 infusion by Mr. Lavelle to the Company. The
Note is due and payable on demand. The Note has a conversion price of $.07 per share, for each
Common share issued upon conversion of the Note. In addition upon conversion Mr. Lavelle will
receive two warrants for each common share issued. Each warrant, represents the right to purchase
two additional unregistered
shares.
7
of Common Stock at a price of $.15 per share. The warrant shall be immediately exercisable upon
issuance and shall expire three years from the date of issuance.
On March 2, 2006, the Company obtained $100 from a private investor, who is a related party (the
Companys Public Relations Manager), in a first round of short term financing (the Bridge) in the
form of a short term note bearing an interest rate of 1.5% per annum, plus 500,000 shares of the
Companys unregistered common shares. The Bridge is due and payable in September 2006. The Company
valued the Common Stock using the market price of the Companys Common Stock on March 2, 2006,
which resulted in an estimated fair value of $53. This amount has been recorded as prepaid interest
and is being amortized to interest expense.
On March 16, 2005, the Company obtained $200 from a private equity fund, who is not a related
party, in a first round of a private placement of the Companys unregistered stock. 3,333,334
shares of the Companys unregistered common shares and warrants were issued for this transaction.
The same investor has committed to invest another $100 in the next round of funding scheduled to
occur in the second quarter of 2006.
Management has carefully forecasted its results of operations and financial position through
March 31, 2007, and has determined that the remaining cash on hand, together with cash available
from the line of credit (see discussion in subsequent events, regarding notice from CAPCO) and
proceeds from the sales of Common Stock to accredited investors, and proceeds from the sale of the
IT services segment, will provide adequate cash to fund its anticipated working capital needs. In
the event circumstances arise that are not factored into the forecast, management will take further
action to streamline operations and to continue looking for financing alternatives.
Stock-Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, (SFAS 123(R)) which requires the measurement and
recognition of compensation expense for all share-based payment awards made to employees and
directors including employee stock options based on estimated fair values. SFAS 123(R) supersedes
the Companys previous accounting under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25) for periods beginning in fiscal 2006.
The Company adopted SFAS 123(R) using the modified prospective transition method, which requires
the application of the accounting standard as of January 1, 2006, the first day of the Companys
fiscal year 2006. The Companys Consolidated Financial Statements as of and for the six months
ended June 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective
transition method, the Companys Consolidated Financial Statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation
expense recognized under SFAS 123(R) for the three months ended March 31, 2006 and six months ended
June 30, 2006 was $36 and -0- which consisted of stock-based compensation expense related to
employee stock options. There was no stock-based compensation expense related to employee stock
options and employee stock purchases recognized during the three months ended March 31, 2006 and
six months ended June 30, 2006.
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods in the Companys
Consolidated Statement of Operations. Prior to the adoption of SFAS 123(R), the Company accounted
for stock-based awards to employees and directors using the intrinsic value method in accordance
with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123). Under the intrinsic value method, no stock-based
compensation expense had been recognized in the Companys Consolidated Statement of Operations,
because the exercise price of the Companys stock options granted to employees and directors
equaled the fair market value of the underlying stock at the date of grant.
8
The table below reflects net income and diluted net income per share pro forma information for
the six months ended June 30, 2006 as follows:
|
|
|
|
|
|
|
Six Months |
|
|
|
Ended |
|
|
|
June 30 |
|
|
|
2006 |
|
Net loss, as reported |
|
$ |
(1,855 |
) |
Deduct: Stock-based compensation expense determined
under fair value based method for awards net of
related tax expense, if applicable |
|
|
|
|
|
|
|
|
Net Loss pro forma |
|
$ |
(1,855 |
) |
|
|
|
|
|
|
|
|
|
Basic and diluted: |
|
|
|
|
Net loss per share, as reported |
|
$ |
(0.06 |
) |
Effect of stock-based compensation per SFAS 123 |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.06 |
) |
|
|
|
|
The Company calculated the value of each option on the grant date using the Black-Scholes option
pricing model as prescribed in SFAS No. 123 using the following assumptions:
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, 2006 |
Dividend Yield |
|
|
0 |
% |
Volatility |
|
|
157 |
% |
Risk-free interest rate |
|
|
3.96 |
% |
Expected term |
|
1.25 years |
|
Basis of Presentation
We have prepared the accompanying condensed consolidated financial statements pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to these rules and
regulations. These condensed consolidated financial statements should be read in conjunction with
our audited financial statements and footnotes related thereto for the year ended December 31,
2005, included in our annual report on Form 10-K filed with the Securities and Exchange Commission
on April 17, 2006. The unedited condensed consolidated financial statements include, in our
opinion, all adjustments (consisting only of normal recurring adjustments) necessary to present
fairly our financial position as of June 30, 2006. The results of operations for such interim
periods are not necessarily indicative of the results to be achieved for the full year.
Revised Cash Flow
In 2005, the Company has not reported operating, investing, and financing portions of the cash flow
attributed to its discontinued operations as a single amount.
9
Note 2 Changes in Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
Paid in |
|
|
|
|
|
|
Treasury Stock |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Net Loss |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
Balance at December 31, 2005 |
|
|
28,868,229 |
|
|
$ |
289 |
|
|
$ |
82,785 |
|
|
$ |
(81,006 |
) |
|
|
144,600 |
|
|
$ |
(113 |
) |
|
$ |
1,955 |
|
Issuance of Common Stock in connection with private placement |
|
|
3,333,334 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
Issuance of Warrants in connection with private placement |
|
|
|
|
|
|
|
|
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167 |
|
Cost of registering and issuing securities in connection with private placement |
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
Issuance of Common Stock in connection with purchase of a business |
|
|
197,333 |
|
|
|
2 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Cost of registering and issuing securities in connection with purchase of a
business |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
Issuance of Common Stock for services |
|
|
770,000 |
|
|
|
8 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63 |
|
Stock-based compensation expense related to employee stock options |
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
Issuance of Common Stock in connection with issuing debt |
|
|
500,000 |
|
|
|
5 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(991 |
) |
|
|
|
|
|
|
|
|
|
|
(991 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 |
|
|
33,668,896 |
|
|
$ |
337 |
|
|
|
83,079 |
|
|
$ |
(81,997 |
) |
|
|
144,600 |
|
|
$ |
(113 |
) |
|
$ |
1,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Note 3 Acquisition
Watchit Media acquired OnSite Media, Inc, a Nevada corporation, on March 2, 2004. In the
acquisition, OnSite was merged with and into Watchit Media USA, Inc. a wholly owned subsidiary of
Watchit Media, or Watchit. OnSite was a ten year old Company that developed enabling digital
technologies and production services aimed at providing complete solutions for video content
creation, distribution, scripting and playback for companies with digital display channels and
networks. OnSite historically provided this software and service offerings to the hospitality and
gambling industries. This is called narrowcasting.
Narrowcasting technology presents dynamic, compelling motion media that influences the actions of
captive audiences. Promotional messages for hotel in-room channels, presenting commercial messages
to casino entertainment facilities and outdoor signage had been the primary business of OnSite. In
addition, OnSite developed a unique Internet media creation software application which we believe
will give the newly formed Watchit a competitive advantage. Watchit Media intends to leverage its
marketing expertise, resources and infrastructure to enhance Watchits current services, launch new
proprietary television programs, add greater value to current client relationships, add clients in
the hospitality market, and expand to new markets.
The Company believes the convergence of Internet, wireless and video media will soon become a major
part of the technology landscape. The Company believes Watchit Medias infrastructure, experience
in developing wireless and Internet business applications and its system integration expertise are
an excellent fit with the rapidly evolving narrowcasting market.
The aggregate consideration paid for the acquisition was $3,307 (10,679,608 shares of the Companys
Common Stock issued at fair value of $1,815 and based on the average closing price of the Companys
Common Stock for a few days prior to and after the signing of the definitive agreement and related
public announcement to purchase the business on November 25, 2003, warrants to purchase 5,339,803
shares of the Companys Common Stock value using the Black-Scholes with the following assumptions:
(1) risk-free interest rate of 1.95%, (2) a dividend yield of 0%, (3) volatility factor of the
expected market price of the Companys Common Stock of 175%, and (4) a weighted average expected
life of 2 years, that resulted in a valuation of $676, cash consideration of $505 and transaction
costs of $501). Transaction costs of $501 include $195 paid for registration of securities in
connection with the acquisition which were netted against the issuance of the shares. Liabilities
assumed were approximately $247, and tangible assets acquired were
approximately $96. The Company recognized total intangible assets of $3,458 resulting from the
acquisition.
The Company has obtained an independent valuation for the aggregate consideration paid for the
acquisition as follows.
|
|
|
|
|
Total liabilities assumed |
|
$ |
(247 |
) |
Total tangible assets acquired |
|
|
96 |
|
Identifiable intangible assets: |
|
|
|
|
Software |
|
|
73 |
|
Customer contracts |
|
|
98 |
|
Archived content video library |
|
|
695 |
|
Goodwill |
|
|
2,592 |
|
|
|
|
|
Total aggregate consideration paid |
|
$ |
3,307 |
|
|
|
|
|
Immediately following the close of the transaction, with the issuance of 10,679,608 shares of
Watchit Media Common Stock, the former OnSite stockholders owned 43% of the total shares of Watchit
Media Common Stock then outstanding.
11
The results of the acquired business were included in the Companys results of operations from its
acquisition date, March 2, 2004.
California Visitors Network
Pursuant to an Asset Purchase Agreement dated September 15, 2005, between the Company and
California Visitors Network, the aggregate consideration paid to California Visitors Network was
$126 (202,667 shares of the Companys Common Stock issued at fair value of $30, based on the
average closing price of the Companys Common Stock on a few days prior to and after the signing of
the Asset Purchase Agreement and cash considerations of $66 and future cash payments payable of
$30). Liabilities assumed were $10.
The Company has accounted for the aggregate consideration paid for the acquisition as follows:
|
|
|
|
|
Liabilities assumed |
|
$ |
(10 |
) |
Goodwill |
|
|
136 |
|
|
|
|
|
Total aggregate consideration paid |
|
$ |
126 |
|
|
|
|
|
The changes in carrying amounts of goodwill and other intangibles for the six months ended June 30,
2006 were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
Goodwill |
|
|
Intangibles |
|
Balance at December 31, 2005 |
|
$ |
2,728 |
|
|
$ |
607 |
|
Amortization expense |
|
|
|
|
|
|
(70 |
) |
|
|
|
|
|
|
|
Balance at June 30, 2006 |
|
$ |
2,728 |
|
|
$ |
537 |
|
|
|
|
|
|
|
|
The Company has ascribed useful lives to the identifiable intangible assets that range from 2 to 20
years. In the six months ended June 30, 2006 and 2005 the Company recorded amortization on the
identifiable intangible assets of $35 and $35, respectively.
Note 4 Restructuring Programs
In September 2001, as part of the Companys efforts to streamline its operations commensurate with
its revenue base, the Company identified opportunities to reduce its cost structure. Accordingly,
the Company adopted an exit plan which resulted in a restructuring charge of $2,436 during the year ended
December 31, 2001. The September 2001 plan included provisions for severance of approximately 145
management and operating staff ($1,034) as well as closure costs associated with a plan to
consolidate or dispose of certain locations ($1,402). The September 2001 plan did not meet the
requirements in order to accrue employee severance costs as of a commitment date, and these
severance costs that did not provide a future benefit were charged to operations when due and
payable.
12
The following summarizes the activity and balances for these restructuring programs for the six
months ended June 30, 2006.
|
|
|
|
|
|
|
September 2001 |
|
|
|
Facilities |
|
|
|
Closure |
|
Balance at December 31, 2005 |
|
$ |
595 |
|
Spending, net of sublease receipts on facilities |
|
|
(1 |
) |
|
|
|
|
Balance at June 30, 2006 |
|
$ |
594 |
|
|
|
|
|
Note 5 Discontinued Operations
Prior to December 31, 2004, the Company entered into a plan to divest its IT services segment. The
following financial data reflects the summary of operating results for the three months ended March
31, 2005. The sale of the IT services segment was completed on July 15, 2005
Summary of Operating Loss from Discontinued Operations:
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2005 |
|
Revenues |
|
$ |
937 |
|
Cost of revenues |
|
|
514 |
|
|
|
|
|
Gross profit |
|
|
423 |
|
Selling, general and administrative expenses |
|
|
1,095 |
|
|
|
|
|
Operating loss |
|
|
(672 |
) |
Total other expense |
|
|
|
|
|
|
|
|
Loss before income tax expense |
|
|
(672 |
) |
Income tax expense |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(672 |
) |
|
|
|
|
13
Note 6 Weighted Average Number of Shares Outstanding
There were no reconciling items between the numerator and denominator used to compute basic and
diluted loss per share for the periods presented in the condensed consolidated statements of
operations. The Company had outstanding stock options, and warrants of 17,416,088 and 10,310,805 at
March 31, 2006 and 2005 respectively, that were not included in EPS for those relevant periods
because the Company reported a loss from continuing operations resulting in an antidilutive effect.
Note 7 Stock Based Compensation
Long-term Incentive Plan
The Company maintains the 1998 Long-Term Incentive Plan (the 1998 Plan) and the 2000 Long-Term
Incentive Plan (the 2000 Plan). The 1998 Plan was adopted as a replacement to the Companys 1995
Long-Term Incentive Plan (the 1995 Plan). No further awards may be granted under the 1995 Plan,
although awards granted prior to the adoption of the 1998 Plan remain outstanding under the 1995
Plan in accordance with their terms. The 2000 Plan is similar to the 1998 Plan, except that (i) awards
under the 2000 Plan are to be made primarily to employees who are not officers or directors, (ii)
the 2000 Plan does not contain a limit as to the number of shares that may be subject to
outstanding awards granted either individually or in the aggregate (whereas the 1998 Plan contains
750,000 per individual annual limit, and aggregate limit of 18% of total outstanding shares), and
(iii) incentive stock options (ISOs) cannot be granted under the 2000 Plan. Of the non-qualified
options granted to date, a majority is generally exercisable beginning one year from the date of
the grant in cumulative yearly amounts of 25% to 33% of the shares under option and all expire ten
years from the date of the grant. Under the provisions of the plans, stock-based awards are granted
at terms and prices determined by the Compensation Committee of the Board of Directors as defined
in each plan, except for grants of 10,000 stock options or less, which are administered by the
Chief Executive Officer of the Company.
A summary of option transactions is described in the table below. All options granted in the
periods below are non-qualified and were granted with exercise prices no less than the fair market
value of the underlying stock on the date of the grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of Shares |
|
|
Exercise Price |
|
Outstanding at December 31, 2005 |
|
|
5,419,810 |
|
|
$ |
0.19 |
|
Granted |
|
|
1,575,000 |
|
|
$ |
0.07 |
|
Cancelled |
|
|
(1,214,936 |
) |
|
$ |
0.24 |
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
5,379,874 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
The total compensation cost not yet recognized as of March 31, 2006 related to non-vested options
was $107,874 which will be recognized over 3 years.
14
Note 8 Segment Information
Prior to March 2, 2004, Watchit Media was organized into one reportable segment, IT services.
Effective with the acquisition of OnSite Media, Inc. on March 2, 2004, the Company became organized
into the following two reportable segments, to align internal management with current service
offerings:
IT services . IT software and consulting services to businesses with complex IT operations in
addition to maintenance, support and hosting on software products it has licensed.
Narrowcasting. Creative media development, private venue video programming, installation and
integration of Internet protocol (IP) digital technology presenting video content, distribution,
scripting and playback via Broadband to private video networks.
Prior to December 31, 2004, the Company committed to a plan to discontinue its IT services segment.
Accordingly, these accompanying consolidated financial statements have been prepared on a
discontinued operations basis effectively reporting the Narrowcasting segment as continuing
operations (see accompanying condensed consolidated statements of operations), and the IT services
segment as discontinued operations (see Note 5).
Note 9 Subsequent Events
Issuances of Common Stock
On April 14, 2006, the Company obtained $20,000 from an accredited investor, who is not a related
party, as part of the private placement of the Companys unregistered stock. 333,333 shares of the
Companys unregistered common shares were issued for this transaction.
On April 28, 2006, the Company obtained $500,000 from two accredited investors, who are not a
related party, as part of the private placement of the Companys unregistered stock. 5,555,555
shares of the Companys unregistered common shares and 2,777,778 warrants were issued for this
transaction.
On May 16, 2006, the Company obtained $125,000 from two accredited investors, who are not a related
party, as part of the private placement of the Companys unregistered stock. 1,250,000 shares of
the Companys unregistered common shares and 625,000 warrants were issued for this transaction.
On May 5, 2006, the Company filed form SB-2 with the Securities and Exchange Commission registering
all shares and warrants that were to be issued for all funding that was received prior to May 5,
2006. On May 12, 2006, the SEC informed the Company that the SEC does not plan on reviewing the
form SB-2 and the Company may proceed with requesting effectiveness. The Company plans to do so
promptly.
Other
On August 1, 2006, the Company entered into an Agreement with Access Commercial Credit for the
purpose of factoring our accounts receivable. By factoring our accounts receivable we are able to
have access to 80% of the cash underlying the accounts receivable upon presentation of our invoices
to our clients. Under the Agreement Access Commercial Credit is paid 2.5% of the face amount of
each invoice factored and 2.0% of each invoice factored for each 15 day period beyond the initial 60
day period. The Agreement is for a term of two years and may be renewed by the parties for an
additional year at the end of the initial term. The Company has the right on 90 days notice to
terminate the Agreement. Upon termination the Company is obligated to pay a termination fee equal
to the highest monthly fees paid during the 90 days preceding the termination date.
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Except for statements of historical fact contained herein, any statements contained in this report
may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For
example, words such as may, will, should, estimates, predicts, potential, continue,
strategy, believes, anticipates, plans, expects, intends and similar expressions are
intended to identify forward-looking statements. All such forward-looking statements are based upon
current expectations that involve risks and uncertainties. The Companys actual results and the
timing of certain events may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause or contribute to such a discrepancy include, but are not
limited to, those discussed under Risk Factors in The Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2005 and other filings made with the Securities and Exchange
Commission. The following discussion is qualified in its entirety by, and should be read in
conjunction with, the more detailed information set forth in our financial statements and the notes
thereto included elsewhere in this filing. All forward-looking statements included in this report
are based upon information available to The Company as of the date thereof, and The Company assumes
no obligation to update any of such forward-looking statements.
The Company was formed in February 1993 to acquire, own and operate IT services businesses. The
Company was a non-operating entity until 1996 when it first began to acquire businesses. The
Company historically operated on an April 1 to March 31, fiscal year. In July 2000, the Company
changed its fiscal year to December 31, resulting in a nine-month transition period from April 1,
2000 through December 31, 2000. In 2004, the Company was organized into two reportable segments, IT
services and narrowcasting (which became effective with the acquisition of OnSite Media, Inc. on
March 2, 2004). The results of OnSite Media, Inc. have been included in the Companys results from
its acquisition date. Prior to December 31, 2004, the Company entered into a plan to divest its IT
services segment. Accordingly, the financial information on the Quarterly Report has been restated
to present as discontinued operations the Companys IT services segment for all periods presented.
On a continuing operations basis, Watchit Media provides narrowcasting services which includes
Internet protocol (IP) technologies and production services for video content, distribution,
scripting and playback on digital display video channels and networks, as well as maintenance,
support and contract services on software and hardware products it licenses. The Company provides
these services primarily to gaming and hospitality businesses. Narrowcasting, maintenance and
support services are provided under term contracts of which most are one year or longer. These
contracts are renewable at the discretion of our clients.
The Company recognizes revenue for the subscription of maintenance, support and contract services
on software and hardware products it licenses to its narrowcasting clients as the Company performs
the services. Revenues earned for software license sales and service contracts are recorded based
on the provisions of AICPA SOP 97-2, Software Revenue Recognition , as amended, which shares the
basic criteria described above. For each element in a software arrangement (e.g. license,
maintenance, and services), the amount of revenue recognized is based upon vendor specific
objective evidence of fair value using the residual method. Revenue for production services for
video content, distribution, scripting and playback on digital display video channels and networks
on either a time and materials basis, when services are provided or where pursuant to fixed-fee
contract, the revenue is generally recognized as services are rendered on the
percentage-of-completion method of accounting based on hours incurred to total estimated labor
hours to complete. Revenues include reimbursable expenses charged to and collected from clients.
The Companys principal costs are professional compensation directly related to the performance of
services and related expenses. Gross profits (revenues after professional compensation and related
expenses) are primarily a function of the number of gaming and hospitality properties that
subscribe to the narrowcasting services as well as the number of channels for different
narrowcasting services each property elects to subscribe to and the level of video production
service purchased by the client. Gross profits can be adversely impacted if clients do not renew
contracts, if the Company is not effective in managing its service activities, or if fixed-fee engagements
for production services are not properly priced.
16
Operating income can be adversely impacted by increased administrative staff compensation and
expenses related to streamlining or expanding the Companys business, which may be incurred before
revenues or economies of scale are generated from such investment.
OVERVIEW OF 2006 AND 2005
In the years leading up to 2004, we strategically shifted from providing general IT services and
solutions to a targeted approach to offering mobile workforce management and Web services. We
changed our go-to-market strategy to better focus our resources and leverage our experience and
solid client base in these areas. Our decision to do this was reinforced at the time by market
research, financial research and our own research and analysis indicating that mobile workforce
management and Web services were the next emerging growth markets. Our solutions utilized broadly
accepted as well as cutting edge technologies. We spent considerable time on the development of
these core competencies after divesting the majority of our IT staffing business in 2000. In
addition, the Company carefully assessed and exited a number of solutions and service offerings
that were not core to the principal service offerings outlined above.
While executing this strategy we believed we were focused on offering services that would help us
increase revenue in the near term. From 2001 through the third quarter of 2003 the Company
continued to invest heavily in a large scale sales, marketing and business development organization
working to capture new business. In September 2002, the Company hired a marketing executive to
develop and implement a more formalized and systematic marketing program for the Company because of
the difficulty we were having in selling new business to new clients. Marketing programs
re-designed and put in place by early 2003 offered promising results when measured against prior
year sales opportunity pipeline and business backlog. By the second quarter of 2003, the Company
gained more confidence in its marketing program and saw an unprecedented number of prospect and
client proposals. Nevertheless, throughout 2003 we continued to be disappointed by prospects and
clients either delaying decisions to initiate projects or pursuing lower cost off-shore technical
resource to executing their projects. In spite of the Companys investments in its selling
organization, we were not successful in signing new business with companies we had not done
business with before. We did, however, continue to sign new contracts with existing clients.
In August of 2003, it became clear to us that a number of opportunities that only a few months
before looked promising were not going to close. The Company performed an in-depth review of each
opportunity and concluded that businesses were reticent to use discretionary expenditures to invest
in mobile workforce and Web service technologies (or other new projects) given the fact that their
current IT environments operated satisfactorily. In addition, fearful of continuing poor economic
conditions and market pressures, we observed that many of the prospects that decided to pursue
projects did so with larger, better capitalized firms than Watchit Media.
It became evident that the outlook for spending in IT services would continue to be uncertain
without any clear indication of when a turnaround could be expected. Accordingly, in August 2003,
the Company terminated the majority of its senior executive staff along with most of the sales and
business development organization. At the same time we aggressively engaged our existing clients
and committed ourselves to supporting their project requirements. In some cases we have been
successful in securing longer term commitments. By scaling back expenses and focusing intensely on
generating business from our long term clients we began to stabilize our revenue trend allowing us
to move forward in our attempt to restore profitability and positive cash flow.
Throughout the remainder of 2003, the Company continued to reduce headcount and looked closely at
expense activity to scale back and streamline operating costs in line with revenue. The
Philadelphia-based operation that supports Watchit Medias sales force automation application
FastTrack has achieved stable revenue over the past several years and our clients continue to give
us high marks for performance and client service. In addition, the core team responsible for our
custom software development activities is helping us to take advantage of recurring projects with
existing clients. By keeping only the top sales account executives and account managers, we have
lowered our selling cost and improved our client relationships and retention.
17
In April 2003, our Chief Executive Officer, James Lavelle, sent a letter to our stockholders
indicating the Companys intention to engage in merger and acquisition activities in order to help
improve Watchit Medias prospects for the future and increase our scale. As a matter of course
since we started our Company in 1996 and successfully executed an aggressive merger and acquisition
strategy through early 1999, we believed this strategy would help us improve our prospects. We
researched and analyzed a variety of vertical markets that could provide new growth opportunities
for us through merger or acquisition. In mid-2003 Watchit Media signed a letter of intent to
acquire a field force automation firm. After 90 days of due diligence, we decided not to consummate
the transaction.
In September 2003, Watchit Media engaged in a dialog with a Las Vegas based narrowcasting Company,
OnSite Media, Inc. The combination of Watchit Medias deep history in Internet, media and wireless
technologies and OnSites strength in driving video content to high growth venues in the gaming and
hospitality industries looked promising. Watchit Media entered into a definitive agreement to
acquire OnSite Media, Inc. on November 24, 2003, and closed the acquisition transaction on March 2,
2004. By integrating OnSites business with Watchit Medias infrastructure, and by utilizing our
public Company know how to position us for the future, we have set about executing a strategy that
we believe will allow us to play an important role in the convergence of Internet, video and mobile
technology. This is a growing; fast paced market in which we believe the ability to integrate these
technologies will help us to differentiate us from many other companies.
Upon completion of the acquisition, OnSite Media was renamed Watchit Media, Inc., and is now a
wholly-owned subsidiary of Watchit Media, Inc. The newly acquired business was immediately
integrated into the Watchit Media infrastructure from March through October 2004. Our Board of
Directors carefully followed and evaluated the financial and operating performance of our Companys
two business segments. While the IT services and solutions business continued to struggle, Watchit
Media performed well and experienced significant revenue growth, together with stabile to
increasing gross margin performance. In addition, Watchits near and longer term business
opportunities appeared to indicate the strong possibility of future revenue growth.
In November 2004, we announced our plan to divest our entire IT services and solutions
business and change our name to Watchit Media, Inc. allowing us to focus all of our attention on
narrowcasting. On July 13, 2005, the Companys stockholders approved the sale of the IT services
business located at Broomall, Pennsylvania, the remaining component of our discontinued operations,
pursuant to an Asset Purchase Agreement, dated as of April 1, 2005, as amended on June 27, 2005
(the Asset Purchase Agreement) entered into between the Company and certain of its subsidiaries
and FastTech Integrated Solutions, LLC, an affiliate of Beverly Hills, California-based private
equity firm Skyview Capital, LLC. The transaction was completed on July 15, 2005. Pursuant to the
Asset Purchase Agreement, aggregate consideration for the business included: cash at closing of
$2,300, subject to closing date adjustments, and an earn-out of up to $1,450 if certain future
revenue targets are attained over the three years following completion of the sale.
Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
Revenues
Revenues increased $49 or 8%, to $658 in the three months ended June 30, 2006, from $609 in the
three months ended June 30, 2005. The increase in revenues resulted from stabilizing monthly
recurring contract fee based revenue and having a quarterly uplift in 2006 with larger platform
installations with premier casinos clients.
Our narrowcasting clients retain us to manage a part of their television system
infrastructure, produce video content pertinent to their brand, marketing communications and hotel
property amenities, and present this content on their Private Video
Networks. We have annual renewable
contracts with our clients for managing the computer hardware that interfaces with their
television systems and, in some cases, their
18
information system infrastructure. Watchit Media charges a base monthly subscription fee for
these services.
In addition, our clients pay us on a time and materials basis for the production of video content.
In the gaming and hospitality industry, our clients tend to require frequent changes to the content
we produce for them. Video content pertaining to their entertainment, casino games, cross
promotions, and activities are among the dynamic video content we produce.
Gross Profit
Gross profit decreased $27 or 7%, to $350 in the three months ended June 30, 2006, from $377 in the
three months ended June 30, 2005. Effective with the acquisition of OnSite Media, Inc, March 2,
2004, the Company commenced reporting revenues under its narrowcasting segment. The decrease in
gross profit resulted from higher revenues offset by a higher mix of hardware platform
installations which have slightly lower margins than the monthly service contracts.
As a percentage of revenues, the gross margin decreased to 44% in the three months ended June 30,
2006, from 56% in the three months ended June 30, 2005. The decrease in gross margin was the result
of the new revenue product mix which contained a higher percentage of hardware installations passed
through to clients with a nominal mark-up which have lower margins than service and labor margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $424 or 57%, to $1,164 in the three months
ended June 30, 2006, from $740 in the three months ended June 30, 2005. Effective with the
acquisition of OnSite Media, Inc, March 2, 2004, the Company commenced reporting revenues under its
narrowcasting segment. The increase in selling, general and administrative expenses was the result
of a different mix of staff, marketing programs and development of new proprietary video
programming not yet introduced to clients. In addition, corporate selling, general and
administrative expense was allocated between the narrowcasting and IT services segment. Upon
completion of the divestiture of the remaining component of the IT services segment on July 15,
2005, corporate selling, general and administrative expenses were allocated solely to the
narrowcasting segment.
Other Income (Expense)
Other income (expense) consists of interest income and interest expense.
Interest expense was $35 for the three months ended June 30, 2006 compared to $11 for the three
months ended June 30, 2005. The increase in net interest expense was the result of lower cash
balances on hand coupled with interest expense on secured borrowings.
Loss from Discontinued Operations
Discontinued operations comprised operations associated with the IT services segment. Loss from
discontinued operations was $672 for the three months ended June 30, 2005 compared to $0 for the
three months ended June 30, 2006. The sales of the IT services and solutions business transaction
was completed on July 15, 2005.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company has financed its operations principally through its own cash
resources.
Cash (used in) and provided by operating activities was ($655) and $69 for the three months ended
June 30, 2006 and June 30, 2005, respectively. In the three months ended June 30, 2006, the primary
sources of cash
provided by operating activities were $515 increase in accounts payable, $63 of
Common Stock issued for
services and $60 of depreciation and amortization, offset by $991 net loss and $149 increase in
accounts payable. In the three months ended June 30, 2005 the primary sources of cash provided
19
by operating activities were $756 increase in accounts payable, $92 decrease in prepaid expenses
and other current assets and $61 in depreciation and amortization, offset by $1,855 net loss.
Cash used by investing activities was $0 for the three months ended June 30, 2006, compared to cash
used by investing activities of $47 for the three months ended June 30, 2005. In the three months
ended June 30, 2006, $0 was used to acquire property and equipment. In the three months ended June
30, 2005 $38 was used to acquire property and equipment.
Cash provided by financing activities was $644 in the three months ended June 30, 2006 compared to
$692 provided from financing activities in the three months ended June 30, 2005. In the three
months ended June 30, 2006, $342 was provided from the issuance of Common Stock and warrants, $38
from specified borrowings, and $264 from issuance of debt, offset by $0 of cost incurred in
connection with the issuance of Common Stock and warrants. In the three months ended June 30, 2005,
$420 was used for costs incurred in connection with the issuance of stock and warrants $329
specified borrowings, and $57 cost incurred in connection with the issuance of Common Stock and
warrants.
Management has carefully forecasted its results of operations and financial position through June
30, 2007, and has determined that the cash accessible through our factoring arrangement along with
proceeds from the sales of Common Stock to accredited investors, will provide adequate cash to fund
its anticipated working capital needs. In the event circumstances arise that are not contemplated
in the forecast, management will take further action to streamline operations and to continue
looking for financing alternatives.
The following table reflects our contractual cash obligations as of June 30, 2006, excluding
interest, due over the indicated periods.
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Payments Due by Period |
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Less than |
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1 to 3 |
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4 to 5 |
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After 5 |
Contractual Cash Obligations: |
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Total |
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1 Year |
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Years |
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Years |
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Years |
Operating leases, net of
sublet arrangements |
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$ |
858 |
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$ |
769 |
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$ |
89 |
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$ |
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$ |
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CRITICAL ACCOUNTING ESTIMATES
Allowance for Doubtful Accounts
The Company provides an allowance for potentially uncollectible accounts receivable under the
provisions of SFAS No. 5, Accounting for Contingencies, in the ordinary course of business. The
allowance is derived as the result of periodic reviews of aged and known problem accounts during
each quarter. In addition, the Company reserves for unknown issues in its receivables at the
balance sheet date using a formula consistent from quarter to quarter. Management believes that its
approach is appropriate to reserve for potentially uncollectible receivables. If management had
taken another approach to developing its reserve, the allowance for doubtful accounts may have been
different than that reported.
20
Revenue Recognition
The Company recognizes revenue for time and materials contracts when there is evidence of an
agreement, a fixed or determinable fee, its ability to collect is reasonably assured, and delivery
has occurred. Revenues exclude reimbursable expenses charged to and collected from clients.
Revenues pursuant to fixed-fee contracts are generally recognized as services are rendered on the
percentage-of-completion method of accounting based on hours incurred to total estimated labor
hours to complete. Revenues earned for software license sales and service contracts are recorded
based on the provisions of AICPA SOP 97-2, Software Revenue Recognition, as amended, which
shares the basic criteria described above, except its ability to collect is probable rather than
reasonably assured.
Accounting for Income Taxes
The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes. This
pronouncement requires using an asset and liability approach to recognize deferred tax assets and
liabilities for the tax consequences of temporary differences by applying enacted statutory tax
rates to differences between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The Company has not given benefit to any deferred tax assets or net
operating losses in the previous three fiscal years due to uncertainty of realizing these assets in
future periods. In addition, the financial statements have provided for certain tax positions taken
by the Company in certain tax periods where the statute of limitations still applies.
Stock-Based Compensation
On January 1, 2006 our accounting policy related to stock option accounting changed upon our
adoption of Statement of Financial Accounting Standards (SFAS) no. 123 (R), Share Based Payment.
SFAS 123 (R) requires us to expense the fair value of employee stock options and other forms of
share-based compensation. Under the fair value recognition provisions of SFAS 123 (R), share-based
compensation cost is estimated at the grant date based on the value of the award and is recognized
as expense ratably over the requisite service period of the award. Determining the appropriate fair
value model and calculating the fair value of share-based awards requires judgment, including
estimating stock price volatility, the risk-free interest rate, forfeiture rates and the expected
life of the equity instrument. Expected volatility utilized in the model is based on the historical
volatility of the Companys stock price and other factors. The risk-free interest rate is derived
from the U.S. Treasury yield in effect at the time of the grant. The model incorporates forfeiture
assumptions based on an analysis of historical data. The expected life of the 2006 grants is
derived from historical and other factors. In accordance with the SFAS No. 123 (R), we recorded $36
of share-based compensation in the three-month period ended March 31, 2006. Before 2006, we
accounted for share-based compensation to employees in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and
followed the disclosure requirements of SFAS No. 123 (R), Accounting for Sock-Based Compensation.
Thus before the first quarter of 2006, we did not record any significant compensation cost related
to share-based awards. Periods before our first quarter of 2006 were not restated to reflect the
fair value method of expensing stock options. The impact of expensing stock awards on our earnings,
is and will continue to be, not significant and is further described in Note 1 to the notes to the
unaudited consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Companys policy is to invest its cash in a manner that provides the Company with the
appropriate level of liquidity to enable the Company to meet its current obligations, primarily
accounts payable, capital expenditures and payroll.
The Company has invested its existing cash in highly liquid money market accounts and does not use
derivative financial instruments, derivative commodity instruments or other market risk sensitive
instruments, positions or transactions. Accordingly, the Company believes that it is not subject to
any
material risks arising from changes in interest rates, foreign currency exchange rates, commodity
prices, equity prices or other market changes that affect market risk sensitive instruments.
21
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of the Companys disclosure controls
and procedures as of the end of the period covered by this report was carried out by the Company
under the supervision and with the participation of the Companys management, including the Chief
Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Companys disclosure controls and
procedures as of the end of the period covered by this report, were designed and were functioning
effectively to provide reasonable assurance that the information required to be disclosed by the
Company in reports filed under the Securities and Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms. A controls
system, no matter how well designed and operated, cannot provide absolute assurance that the
objectives of the controls systems are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a Company have been
detected.
Change in Internal Control over Financial Reporting
No change in the Companys internal control over financial reporting occurred during the Companys
most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, a party to litigation arising in the normal course of our business.
In June 2005, Advance at Branchburg, LLC (Advance) filed a lawsuit against us in the Superior
Court of New Jersey, Law Division, Somerset County. The lawsuit arises out of a commercial lease
agreement between Advance as landlord and the Company as tenant. Specifically, Advance alleges that
we breached the lease agreement by failing to make base and additional rent payments for the months
of March 2005 to the present. Advance seeks payment of all amounts allegedly due under the lease,
including base rent, late charges, interest and attorneys fees and costs. Advance also seeks loss
of bargain damages, consisting of all rent due through the end of the lease term, reduced to
present value using an interest rate of 6% per annum. The lawsuit does not specify the specific
amount of damages sought. At December 31, 2005, we have accrued $595 related to the lease
obligation, which is classified as part of restructuring liabilities. The accrual covers
obligations for base and additional rent and late charges, offset by estimated potential rent from
the sublet of the facility. In addition, we maintain a $180 security deposit with Advance in
connection with the lease, classified as part of other long term assets.
During 2005 a claim was filed against us stating that we breached an employment contract by
terminating an employee without cause. The claimants demand is for $170 plus attorneys fees and
costs. We believe that the claim is without merit, however if the claimant were to prevail the
exposure could range from $0 to as much as $250 with attorney fees. We carry insurance to cover the
cost of these types of claims but as of the date of this report, we are unsure of the amount that
would be covered by insurance, if any.
22
Item 1A Risk Factors
For information regarding factors that could affect the Companys results of operation, financial
condition and liquidity, see the risk factors discussion provided under Risk Factors in Item 1A
of the Companys Annual Report on Form 10-K for the year ended December 31, 2005. See also,
Forward-Looking Statements included in this Quarterly Report of Form 10-Q.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
On February 20, 2006, the Company issued a 15% Convertible Promissory Note (the Note) to
James Lavelle, its Chairman and CEO, in exchange for a $65 infusion by Mr. Lavelle to the
Company. The Note has a conversion price of $.07 per share, for each Common share issued upon
conversion of the Note. In addition to the conversion shares, Mr. Lavelle received warrants.
One warrant will be issued for each common share converted. Each warrant represents the right
to purchase two additional unregistered shares of Common Stock at a price of $.15 per share.
The warrant shall be immediately exercisable upon issuance and shall expire three years from
the date of issuance.
On March 2, 2006, the Company obtained $100 from a private investor, who is a related party
(the Companys Public Relations Manager), in a first round of short term financing (the
Bridge) in the form of a short term note bearing an interest rate of 1.5% per annum, plus
500,000 shares of the Companys unregistered common shares.
On March 16, 2005, the Company obtained $200 from a private equity fund, who is not a related
party, in a first round of a private placement of the Companys unregistered stock. 3,333,334
shares of the companys unregistered common shares and warrants were issued for this
transaction. The same investor has committed to invest another $100 in the next round of
funding scheduled to occur in the second quarter of 2006.
All proceeds received in connection with the above transactions are applied to working
capital.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Not applicable
Item 6. Exhibits
(a) Exhibits
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31.1 |
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Rule 13a-14(a) Certification of Chief Executive Officer / Chief Financial Officer
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32.1 |
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Certification pursuant to 18 U.S.C. as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer / Chief Financial Officer. |
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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WATCHIT MEDIA, INC.
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Date: February 6, 2007 |
/s/ James R. Lavelle
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James R. Lavelle |
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Chief Executive Officer |
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