United States
Securities and Exchange Commission
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: September 30, 2003
Commission file number: 33-42498
SUN NETWORK GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 65-024624
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1440 Coral Ridge Dr., Suite 140
Coral Springs, Florida 33071
(Address of principal executive offices)
(Zip code)
(954) 360-4080
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of November 14, 2003: 28,448,487 shares of common stock, $.001
par value per share.
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets
September 30, 2003 (Unaudited) and December 31, 2002 ............................. 3
Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended September 30, 2003 and 2002 .................. 4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2003 and 2002 ............................ 5
Notes to Consolidated Financial Statements (Unaudited) ....................................... 6-11
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12-15
Item 3 - Control and Procedures .............................................................. 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ................................................................... 16
Item 2 - Changes in Securities and Use of Proceeds ........................................... 16
Item 4 - Submission of Matters to a Vote of Security Holders ................................. 16
Item 6 - Exhibits and Reports on Form 8-K .................................................... 16
Signatures ................................................................................... 17
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
----------- -----------
(Unaudited)
Assets
Current assets:
Cash $ 1,373 $ 81,751
Due from joint venture partner, net -- 50,000
Deferred debt issuance cost, net -- 10,000
Prepaids 54,000 20,910
----------- -----------
Total current assets 55,373 162,661
----------- -----------
Other assets:
Radio programs, net -- 10,192
----------- -----------
Total other assets -- 10,192
----------- -----------
Total assets $ 55,373 $ 172,853
=========== ===========
Liabilities and Stockholders' Deficit
Current liabilities:
Convertible debentures, net of discount $ 500,000 $ 487,226
Accounts payable 47,358 16,961
Accrued interest 87,534 28,053
Accrued penalty 458,383 31,233
Accrued compensation, related party 155,750 58,750
Due to officer 13,541 3,242
----------- -----------
Total current liabilities 1,262,566 625,465
----------- -----------
Minority interest 38,127 43,224
----------- -----------
Stockholders' deficit:
Common stock ($0.001 par value; 500,000,000 authorized shares; 28,448,487 and
22,448,487 shares issued and outstanding
at September 30, 2003 and December 31, 2002, respectively) 28,448 22,448
Common stock issuable (5,000,000 shares at December 31, 2002) -- 5,000
Additional paid-in capital 1,325,541 1,290,041
Accumulated deficit (2,599,309) (1,813,325)
----------- -----------
Total stockholders' deficit (1,245,320) (495,836)
----------- -----------
Total liabilities and stockholders' deficit $ 55,373 $ 172,853
=========== ===========
See accompanying notes to consolidated financial statements.
3
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES $ 6,769 $ 1,100 $ 39,998 $ 1,100
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Compensation 37,500 37,500 115,986 118,516
Amortization 2,794 1,027 10,192 1,027
Bad debt 1,663 -- 4,936 --
Consulting 2,629 68,799 15,758 187,899
Debenture penalty 167,408 -- 427,150 986
Debt issuance cost amortization -- -- 10,000 5,000
Impairment loss -- -- 20,910 --
Professional fees 7,344 13,495 56,853 27,119
Other selling, general and administrative 20,775 62,093 80,487 87,768
------------ ------------ ------------ ------------
Total Operating Expenses 240,113 182,914 742,272 428,315
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (233,344) (181,814) (702,274) (427,215)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Settlement expense -- -- (36,500) --
Interest expense (30,327) (252,598) (72,255) (493,168)
Recovery of bad debt 2,946 -- 15,012 --
Interest income 1,663 1,380 4,936 1,380
------------ ------------ ------------ ------------
Total Other Expenses (25,718) (251,218) (88,807) (491,788)
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST (259,062) (433,032) (791,081) (919,003)
MINORITY INTEREST IN SUBSIDIARY LOSS 1,397 -- 5,097 --
------------ ------------ ------------ ------------
NET LOSS $ (257,665) $ (433,032) $ (785,984) $ (919,003)
============ ============ ============ ============
EARNING (LOSS) PER SHARE:
Net Loss Per Common Share - Basic and Diluted $ (0.01) $ (0.02) $ (0.03) $ (0.04)
============ ============ ============ ============
Weighted Common Shares Outstanding - Basic
and Diluted 28,448,487 21,344,139 28,316,619 22,024,055
============ ============ ============ ============
See accompanying note to consolidated financial statements.
4
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months
Ended September 30,
----------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss $(785,984) $(919,003)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization expense 10,192 1,027
Bad debt expense 4,936 --
Impairment loss 20,910 --
Amortization of deferred debt issuance costs 10,000 5,000
Amortization of debt discounts to interest expense 12,774 5,044
Stock based consulting expense 36,500 106,700
Interest expense -- 475,795
Allocation of loss to minority interest (5,097) --
(Increase) decrease in:
Accounts receivable -- (1,100)
Interest receivable (4,936) (1,380)
Prepaids (54,000) 24,425
Increase (decrease) in:
Accounts payable 30,397 1,290
Accrued expenses 59,481 13,315
Accrued penalties 427,150 --
Accrued compensation, related party 97,000 92,500
--------- ---------
Net cash used in operating activities (140,677) (196,387)
--------- ---------
Cash flows from investing activities:
Loan disbursement -- (56,000)
Convertible note disbursement -- (10,000)
--------- ---------
Net cash used in investing activities -- (66,000)
--------- ---------
Cash flows from financing activities:
Equity proceeds from stockholders -- 82,390
Proceeds from convertible debt -- 500,000
Deferred debt issuance costs -- (20,000)
Proceed from loan from joint venture partner 50,000 --
Proceeds from (payments on) loans from officer 10,299 (26,021)
--------- ---------
Net cash provided by financing activities 60,299 536,369
--------- ---------
Net (decrease) increase in cash (80,378) 273,982
Cash at beginning of period 81,751 5,321
--------- ---------
Cash at end of period $ 1,373 $ 279,303
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ -- $ --
========= =========
Income Taxes $ -- $ --
========= =========
See accompanying notes to consolidated financial statements.
5
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). The accompanying consolidated
financial statements for the interim periods are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the consolidated
financial position and consolidated operating results for the periods presented.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements of Sun Network Group, Inc. for the year ended
December 31, 2002, 2001 and 2000 and notes thereto contained in the Report on
Form 10-K for the year ended December 31, 2002 as filed with the SEC . The
results of operations for the nine months ended September 30, 2003 are not
necessarily indicative of the results for the full fiscal year ending December
31, 2003.
Sun Network Group, Inc. was incorporated under the laws of Florida on May 9,
1990 and was inactive for several years.
On September 5, 2002, the Company formed a general partnership with one other
partner. The partnership, Radio X Network ("Radio X"), was formed to
independently create, produce, distribute, and syndicate radio programs. The
Company offers radio programs to radio stations in exchange for advertising time
on those stations, which the Company then sells to advertisers. This is known in
the media industry as "barter syndication." In return for providing the radio
stations with programming content, the Company receives advertising minutes,
which the Company then sells to advertisers. The amount of advertising minutes
received is based on several factors, including the type and length of the
programming and the audience size of the radio station affiliate. In some
instances, the Company may also receive a monthly license fee in addition to or
in lieu of the commercial inventory and may derive revenues from sponsorship and
merchandising. Sun Network Group, Inc. acts as a holding company for Radio X and
RadioTV Network, Inc. RadioTV Network Inc. is developing a business to produce
and broadcast television versions of top rated radio programs.
Principles of Consolidation
The consolidated financial statements include the accounts of Sun Network Group,
Inc., its wholly owned subsidiary, RadioTV Network, Inc., and its controlled
subsidiary Radio X. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Revenue Recognition
The Company accounts for revenues from its Radio TV Network, Inc operations in
accordance with the AICPA Accounting Standards Executive Committee Statement of
Position No. 00-2, "Accounting by Producers or Distributors of Films" ("SOP
00-2").
The Company produced in the past and may again in the future, episodic
television series and generates revenues from the sale of broadcast licenses.
The terms of the licensing arrangement may vary significantly from contract to
contract and may include fixed fees, variable fees with or without nonrefundable
minimum guarantees, or barter arrangements.
6
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Revenue Recognition (Continued)
The Company recognizes monetary revenues when evidence of a sale or licensing
arrangement exists, the license period has begun, delivery of the film to the
licensee has occurred or the film is available for immediate and unconditional
delivery, the arrangement fee is fixed or determinable, and collection of the
arrangement fee is reasonably assured. The Company recognizes only the net
revenue due to the Company pursuant to the formulas or amounts stipulated in the
customer contracts.
The Company recognizes revenues from barter arrangements in accordance with the
Accounting Principles Board Opinion No. 29 "Accounting for Non-Monetary
Exchanges," ("APB 29") as interpreted by EITF No. 93-11 "Accounting for Barter
Transactions Involving Barter Credits." In general, APB 29 and it related
interpretation require barter revenue to be recorded at the fair market value of
what is received or what is surrendered, whichever is more clearly evident.
The Company recognizes revenues from the sale of radio program advertising in
its Radio X Network operations when the fee is determinable and after the
commercial advertisements are broadcast. Any amounts received from customers for
radio advertisements that have not been broadcast during the period are recorded
as deferred revenues until such time as the advertisement is broadcast.
The Company recognizes radio program license fee revenues when evidence of a
licensing arrangement exists, the license period has begun, delivery of the
program to the licensee has occurred or is available for immediate and
unconditional delivery, the arrangement fee is fixed or determinable, and
collection of the arrangement fee is reasonably assured.
NOTE 2 - CONVERTIBLE DEBENTURES AND WARRANTS AND DEFAULT
On June 27, 2002, the Company entered into a Securities Purchase Agreement to
Issue and sell 12% convertible debentures, in the aggregate amount of $750,000,
convertible into shares of common stock, of the Company. The Company is
permitted to use the proceeds to make one or more loans for a legitimate
business purpose, which such loans, in the aggregate, may not exceed $100,000.
As of June 27, 2002, $250,000 in convertible debentures were issued to various
parties. The holders of this debt have the right to convert all or any amount of
this debenture into fully paid and non-assessable shares of common stock at the
conversion price with the limitation that any debenture holder may not convert
any amount of the debentures if after conversion that debenture holder would
beneficially hold more than 4.9% of the total outstanding common stock of the
Company. However, any debenture holder may waive this limitation provision with
61 days written notice to the Company. The conversion price generally is the
lesser of (a) 50% of the market value of the common stock as defined in the
debenture or (b) $0.15. Interest is payable either quarterly or at the
conversion date at the option of the holder. These convertible debentures
matured on June 27, 2003, and are secured by substantially all present and
future assets of the Company. (see default discussion below)
7
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2003
(UNAUDITED)
NOTE 2 - CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
In 2002, the Company paid $20,000 of legal fees related to the debenture
issuances and recorded these fees as a deferred debt issuance cost asset to be
amortized over the one-year term of the debentures. Amortization of the deferred
debt issuance cost included in general and administrative was $10,000 for the
nine months ended September 30, 2003.
In connection with the convertible debentures issued, warrants to purchase
250,000 common shares were issued to the holders at an exercise price per share
of $0.15. The warrants are exercisable immediately and through the third
anniversary of the date of issuance. These warrants were treated as a discount
on the convertible debenture and in 2002 were valued at $9,430 under SFAS No.
123 using the Black-Scholes option-pricing model.
On August 8, 2002, an additional $250,000 of convertible debentures and warrants
to purchase 250,000 common shares were purchased from the Company for $250,000
with the terms similar to that described above and matured on August 8, 2003
(see default discussion below). The warrants were treated as a discount on these
convertible debentures and in 2002 were valued at $14,775 computed using the
Black-Scholes option-pricing model. The discount on the convertible debentures
is amortized to interest expense over the term of the debentures starting on
July 1, 2002. Amortization included in interest expense for the nine months
ended September 30, 2003 was $12,774.
If the registration statement relating to the debentures is not declared
effective with in 90 days of June 27, 2002 or loses quotation in the NASD OTCBB
the Company is obligated to pay a fee to the debenture holders equal to 2% per
month on the principal balance outstanding. As of September 30, 2003, the
registration statement was not effective and accordingly, the Company has
recorded $89,753 in penalty fee expenses for the nine months ended September 30,
2003 resulting in a total accrued penalty related to this penalty of $120,986 at
September 30, 2003.
Under the debenture, the Company incurs a liquidated damages penalty for not
having enough authorized shares to allow for the issuance of all dilutive
securities based on a formula as stipulated in the Debenture agreement. The
penalty rate is computed as 3% of the outstanding debenture balance per month
which computes to $15,000 per month. The accrued penalty through September 30,
2003 amounted to $161,137. Although the Company authorized the increase of its
authorized shares to 200,000,000 in May 2003, this increase was not sufficient
to satisfy the required authorized shares pursuant to the Debenture Agreement
and therefore the penalty has been accrued through September 30, 2003. In
October 2003, the authorized shares were increased to 500,000,000.
On June 28, 2003 (the "Default Date") the Company defaulted on its maturity date
payment on $250,000 of debentures. Additionally, on August 8, 2003 (the "Default
Date") the Company defaulted on its maturity date payment on $250,000 of
debentures. A default penalty is computed under the terms of the debenture as
$176,260 and has been charged to default note of 15% from the default dates
operations on the Default Date and included in accrued penalty at September 30,
2003.
In addition, interest is accruing at the default rate of 15% from the default
dates. The convertible debenture liability is as follows at September 30, 2003:
Convertible debenture $500,000
Less: unamortized discount on debenture --
--------
Convertible debenture, net $500,000
========
Accrued interest at September 30, 2003 was $87,534
8
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2003
(UNAUDITED)
NOTE 3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several new
accounting pronouncements:
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of this pronouncement did not have a material effect on the
earnings or financial position of the Company.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires that if an entity
has a controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN 46 requires
that its provisions are effective immediately for all arrangements entered into
after January 31, 2003. The Company does not have any variable interest entities
created after January 31, 2003. For those arrangements entered into prior to
January 31, 2003, the FIN 46 provisions are required to be adopted at the
beginning of the first interim or annual period beginning after June 15, 2003.
The Company has not identified any variable interest entities to date and will
continue to evaluate whether it has variable interest entities that will have a
significant impact on its consolidated balance sheet and results of operations.
In January 2003, the EITF finalized a consensus on Issue No. 02-16, "Accounting
by a Customer (Including a Reseller) for Cash Consideration Received from a
Vendor." The Task Force concluded that cash consideration in excess of specific
identifiable costs, including sales incentives, allowances, discounts, coupons,
rebates and price reductions, when meeting certain criteria, constitute a
reduction in vendor price, and should therefore be reflected as a reduction in
cost of sales when the related merchandise is sold. The EITF concluded that this
literature should be applied to new arrangements, including modifications of
existing arrangements, entered into after December 31, 2002. We adopted EITF
02-16 as of January 1, 2003. The adoption of EITF 02-16 had an immaterial impact
on our consolidated financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective for the first interim period beginning
after June 15, 2003, with certain exceptions. The adoption of SFAS No. 150 did
not have a significant impact on our consolidated financial position or results
of operations.
9
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2003
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' DEFICIT
Common Stock
In January 2003, 5,000,000 shares previously issuable were issued.
On February 4, 2003, the Company settled a lawsuit by issuing 1,000,000 common
shares and $6,500 in cash. The shares were valued at the quoted trading price of
$0.03 per share on the settlement date resulting in a total settlement expense
of $36,500.
NOTE 5 - IMPAIRMENT LOSS
The Company received certain capital stock of a private German company in
exchange for a prepaid expense of $20,910 that was recorded at December 31,
2002. As the valuation of the capital stock received could not be supported
based on valuation or other objective data, the Company has elected the
conservatively impair this asset for accounting purposes. Accordingly, the
Company recorded an impairment loss of $20,910 for the nine months ended
September 30, 2003.
NOTE 6 - COMMITMENTS
On February 21, 2003 the Company executed a Production and Studio Facility
Agreement (the "Agreement") whereby the Company will pay a vendor to construct a
production facility and provide certain initial stipulated production services
relating to a television program for which the Company has exclusive rights.
Production was to commence no later than October 1, 2003. As of the date of this
report, the Company has not commenced production.
The total consideration to be paid by the Company is $162,000. The Company paid
$54,000 upon execution of the agreement and became committed to pay the next
$54,000 on August 1, 2003. Another $54,000 will be due when the studio
construction is completed. As of the date of this report, the $54,000 due on
August 1, 2003 has not been paid. As contingent consideration, the Company will
pay 5% of all "net receipts" as defined in the Agreement
The Company may terminate the agreement after July 1, 2003 and received as a
refund any unused portion of the consideration advanced plus $10,000.
NOTE 7 - REPORTABLE SEGMENTS
As of September 30, 2003 and 2002, the Company had two reportable segments:
Network TV and Network Radio. The Company's reportable segments have been
determined in accordance with the Company's internal management structure. The
following table sets forth the Company's financial results by operating
segments:
10
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2003
(UNAUDITED)
NOTE 7 - REPORTABLE SEGMENTS - continued
September 30, 2003 Network TV Network Radio Total
------------------ ---------- ------------- -----
Assets $ 55,373 $ -- $ 55,373
--------- --------- ---------
Revenues $ 30,000 9,998 $ 39,998
Amortization -- (10,192) (10,192)
Other operating expenses (707,070) (25,010) (732,080)
Interest income 4,936 -- 4,936
Interest expense (72,255) -- (72,255)
Settlement expense (36,500) -- (36,500)
Recovery of bad debt -- 15,012 15,012
Minority interest in subsidiary losses -- 5,097 5,097
--------- --------- ---------
Segment loss $(780,889) $ (6,492) $(785,984)
========= ========= =========
September 30, 2002 Network TV Network Radio Total
------------------ ---------- ------------- -----
Assets $ 273,058 $ 149,473 $ 422,531
--------- --------- ---------
Revenues $ -- 1,100 $ 1,100
Amortization -- (1,027) (1,027)
Other operating expenses (426,688) (600) (427,288)
Interest income 1,380 -- 1,380
Interest expense (493,168) -- (493,168)
--------- --------- ---------
Segment loss $(918,476) $ (527) $(919,003)
========= ========= =========
NOTE 8 - GOING CONCERN
As reflected in the accompanying consolidated financial statements, the Company
had an accumulated deficit of $2,599,309 and a working capital deficit of
$1,207,193 at September 30, 2003, and cash used in operations in for the nine
months ended September 30, 2003 of $140,677. In addition, revenues were nominal.
In 2002, the Company received $500,000 in funding and a commitment for an
additional $250,000. In November 2003, the Company received $167,400, net of
$82,600 of fees. In addition, management has implemented revenue producing
programs in its new subsidiary, Radio X Network, which have started to generate
minimal revenues.
Management expects operations to generate negative cash flow at least through
December 2003 and the Company does not have existing capital resources or credit
lines available that are sufficient to fund operations and capital requirements
as presently planned over the next twelve months. The Company's ability to raise
capital to fund operations is further constrained because they have already
pledged substantially all of their assets and have restrictions on the issuance
of the common stock. The Company expects to generate substantially all revenues
in the future from sales of Radio X Network programs. However, the Company's
limited financial resources have prevented the Company from aggressively
advertising its product to achieve consumer recognition. The ability of the
Company to continue as a going concern is dependent on the Company's ability to
further implement its business plan and generate revenues. The consolidated
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern. Management believes that
the actions presently being taken to further implement its business plan and
generate additional revenues provide the opportunity for the Company to continue
as a going concern.
NOTE 9 - SUBSEQUENT EVENTS
In October 2003, the Company changed the number of authorized common shares to
500,000,000.
In November 2003 the Company issued $250,000 of convertible debentures and
warrants to purchase 250,000 common shares and received $167,400 net of $82,600
of fees.
The warrants were valued at $3,500 resulting in a debt discount to be amortized
over the debt term of one year.
The Company paid $25,000 of debt issuance cost legal fees (included in the
$82,600 above) which is recorded as an asset to be amortized over the debt term.
The Company also recognized a $246,500 interest expense relating to the
beneficial conversion feature of the debentures.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company acquired all of the assets of RadioTV Network, Inc ("RTV") on July
16, 2001 in a transaction treated as a recapitalization of RTV. RTV has been
developing and operating, for the past few years, a new television network that
produced and distributed TV adaptations of top rated radio programs and also
produces and distributes radio programs through a partnership with an
established radio network.
On June 27, 2002 the Company entered into agreement with four (4) institutional
investors to provide the Company $750,000 in capital through a Secured
Convertible Debenture Offering ("Debenture"). The Company has filed and
withdrawn a SB-2 Registration Statement and, subsequently, a SB-2/A amended
Registration Statement and a new SB-2 Registration Statement in connection with
the Debenture. In November 2003, the SB-2 was declared effective by the SEC.
On June 28, 2002 the Company entered into an Option Agreement and Plan of Merger
("Agreement") to acquire all of the assets of Live Media Enterprises, Inc
("Live"), a west coast based independent producer of consumer lifestyle events.
On September 3, 2002 the Company elected to terminate the Agreement with Live
and will not proceed with the acquisition even on modified terms. In connection
with the Agreements the Company has loaned Live the sum of $56,000. This loan is
documented in two Promissory Notes and is collateralized by substantially all of
the assets of Live and personally guaranteed by Live's principal shareholder and
officer. The Company is presently attempting to collect its debts from Live in
the Los Angeles Superior Court.
On September 5, 2002, the Company entered into agreement with Sports Byline USA,
L.P. to own and operate a new, national radio network, Radio X. Radio X intends
to develop, produce, license, broadcast and distribute radio programs, targeted
to young males that will be distributed via traditional terrestrial stations,
via satellite and over the Internet. The Company has contributed the sum of
$100,000 to this business plus certain management services. Our partnership
interest is 50%, however, we have an overriding voting control over all matters
of the partnership. Radio X currently has three radio programs in distribution.
The Company intends to use the net proceeds from the Debenture to develop,
operate and expand the businesses of RTV and Radio X and to continue to seek
other opportunities for the Company. The Company believes that upon completing
the Debenture financing it will have sufficient capital to operate through the
end of 2003. The Company will, however, continue to seek additional capital to
fund further development, expansion and operation of its businesses. Upon
conversion of the Debentures into the Company common stock there will be
substantial shareholder dilution.
RESULTS OF OPERATIONS
Nine months ended September 30, 2003 compared to the nine months ended September
30, 2002
REVENUES
Revenues for the nine months ended September 30, 2003 were $39,998 as compared
to revenues for the nine months ended September 30, 2002 of $1,100. Of the
$39,998 of revenue, $30,000 was derived from video production and $9,998
revenues were derived from our consolidated subsidiary, Radio X Network.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATING EXPENSES
Compensation was $115,986 for the nine months ended September 30, 2003 compared
to $118,516 for the comparable period in 2002. Compensation relates solely to
compensation under our employment agreement with our president.
Amortization of radio programs of $10,192 and $1,027 for the nine months ended
September 30, 2003 and 2002, respectively, results from amortizing the radio
programs intangible assets that resulted from the investment by our subsidiary,
RadioTV Network, Inc, in the Radio X Network. The intangible asset is being
amortized using the straight-line method over the expected useful life of the
program of one year. Amortization in the comparable period in 2002 was minimal
since the investment was made in September 2002.
Consulting expense for the nine months ended September 30, 2003 was $15,758
compared to $187,899 for the nine months ended September 30, 2002.
The Debenture penalty of $427,150 and $985 for the nine months ended September
30, 2003 and 2002, respectively, represents the accrued penalty under the
provisions of the Convertible Debentures. The penalties relate to the deadlines
associated with the Company filing a Registration Statement in connection with
the Convertible Debentures and liquidated damages penalty for not having enough
authorized shares to allow for the issuance of all dilutive securities based on
a formula as stipulated in the Debenture agreement and a default penalty of
$176,260 on the June 28, 2003 and August 8, 2003 maturity of $500,000 of
debentures
For the nine months ended September 30, 2003, the Company had an impairment loss
of $20,910 as compared to $0 for the nine months ended September 30, 2002. The
impairment relates to certain capital stock received in a German private company
in lieu of a refund of a prepaid expense paid to a service provider. Since there
was no objective valuation data supporting the value of the capital stock
received, the Company elected to impair this asset.
Professional fees for the nine months ended September 30, 2003 were $56,853
compared to $27,119 for the nine months ended September 30, 2002. The increase
is primarily related to accounting and legal, audit and registration statement
related services regarding our filing a SB-2 and our quarterly and annual
reports.
Other selling, general and administrative expenses were $80,487 for the nine
months ended September 30, 2003 as compared to $87,768 for the nine months ended
September 30, 2002. The decrease in expenses is primarily due to a decrease in
advertising expense for the nine months ended September 30, 2003 as compared to
$24,425 for the nine months ended September 30, 2002 and a decrease in other
selling, general and administrative expenses for the nine months ended September
30, 2003 of $29,248 as compared to $63,343, offset by an increase in travel and
entertainment of $29,417, talent costs in Radio X of $9,800, insurance of
$6,015, telephone of $6,007.
Interest expense was $72,255 for the nine months ended September 30, 2003
compared to $493,168 for the nine months ended September 30, 2002. Interest
expense for the nine months ended September 30, 2003 is attributed to the
Convertible Debenture offering and includes accrued interest of the Convertible
Debentures and amortization of the debt discount as well as accrued interest on
the Convertible Debentures due to the default on payment. For the nine months
ended September 30, 2002, $475,795 of interest expense was recognized relating
to an imbedded beneficial conversion feature on the convertible debentures.
13
On February 4, 2003, the Company settled a lawsuit by issuing 1,000,000 common
shares and $6,500 in cash. The shares were valued at the quoted trading price of
$0.03 per share on the settlement date resulting in a total settlement expense
of $36,500.
As a result of these factors, we reported a net loss of $785,984 or $(.03) per
share for the nine months ended September 30, 2003 as compared to a net loss of
$919,003 or ($.04) per share for the nine months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, we had a stockholders' deficit of $1,245,320. Our
operations have been funded by an equity investor in our common stock where we
issued 183,088 common shares for $82,390 cash during 2002 and by the sale of
convertible debentures of $500,000 through September 30, 2003. These funds were
used primarily for working capital, capital expenditures, advances to third
parties in anticipation of entering into a merger or acquisition agreement and
to pay down certain related party loans. The cash balance at September 30, 2003
was $1,373 and we will have to minimize operations until we receive additional
cash flows from our businesses or complete our Debenture financing.
We have no other material commitments for capital expenditures except for the
anticipated launch of a RadioTV Network program in early 2004. We received an
additional $167,400, net of fees of $82,600 in convertible debenture financing
upon effectiveness of our registration statement. We may also receive financing
from the exercise of 500,000 outstanding warrants, which would provide maximum
funds of $75,000. Other than several thousand dollars to be generated from our
advertising sales from the broadcast of our initial program on the Radio X
Network, debenture proceeds and warrant exercise proceeds we have no external
sources of liquidity. Although we believe we will have sufficient capital to
fund our anticipated operations through fiscal 2003, we are not currently
generating meaningful revenues and, unless we raise additional capital, we may
not be able to continue operating beyond fiscal 2003.
Net cash used in operations during the nine months ended September 30, 2003 was
$140,677 and was substantially attributable to net loss of $785,984 offset
primarily by non-cash stock based expenses of $36,500, impairment loss of
$20,910, non-cash debt discount amortization of $12,774, amortization of
deferred debt issuance costs of $10,000, net changes in operating assets and
liabilities of $555,092. In the comparable period of 2002 we had net cash used
in operations of $196,387 primarily relating to the net loss of $919,003
primarily offset by interest expense of $475,795, stock-based consulting expense
of $106,700, and a change in accrued compensation of $92,500.
Net cash provided by financing activities for the nine months ended September
30, 2003 was $60,299 as compared to net cash provided by financing activities of
$536,369 for the nine months ended September 30, 2002. During the nine months
ended September 30, 2003, we received proceeds from a loan from our joint
venture partner of $50,000 and a loan from an officer of $10,299. The loan from
our joint venture partner came from funds held by that partner and due to our
controlled subsidiary, Radio X. In the comparable period of 2002, we received
equity proceeds from stockholders of $82,390, net proceeds from convertible debt
of $480,000, offset by payment on loans to officers of $26,021.
For the fiscal year ended December 31, 2002, our auditors have issued a going
concern opinion in connection with their audit of the Company's financial
statements. These conditions raise substantial doubt about our ability to
continue as a going concern if sufficient additional funding is not acquired or
alternative sources of capital developed to meet our working capital needs.
14
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 1 to the
audited financial statements included in our Annual Report on Form 10-K, as
amended, for the year ended December 31, 2002 as filed with the United States
Securities and Exchange Commission. We believe that the application of these
policies on a consistent basis enables us to provide useful and reliable
financial information about our operating results and financial condition.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
REVENUE RECOGNITION
We account for film revenues in accordance with the AICPA Accounting Standards
Executive Committee Statement of Position No. 00-2, "Accounting by Producers or
Distributors of Films" ("SOP 00-2").
We generally produce episodic television series and radio programs and generate
revenues from advertising sales and the sale of broadcast licenses. Advertising
revenues can vary significantly subject to a program's popularity and
distribution and general supply and demand and the terms of the licensing
arrangements may vary significantly from contract to contract and may include
fixed fees, variable fees with or without nonrefundable minimum guarantees, or
barter arrangements.
We recognize monetary revenues when evidence of a sale or licensing arrangement
exists, the license period has begun, delivery of the film to the licensee has
occurred or the film is available for immediate and unconditional delivery, the
arrangement fee is fixed or determinable, and collection of the arrangement fee
is reasonably assured. The Company recognizes only the net revenue due to the
Company pursuant to the formulas or amounts stipulated in the customer
contracts.
We recognize revenues from barter arrangements in accordance with the Accounting
Principles Board Opinion No. 29 "Accounting for Non-Monetary Exchanges," ("APB
29") as interpreted by EITF No. 93-11 "Accounting for Barter transactions
Involving Barter Credits." In general, APB 29 and it related interpretation
require barter revenue to be recorded at the fair market value of what is
received or what is surrendered, whichever is more clearly evident. We recognize
revenues from the sale of radio program advertising when the fee is determinable
and after the commercial advertisements are broadcast. Any amounts received from
customers for radio advertisements that have not been broadcast during the
period are recorded as deferred revenues until such time as the advertisement is
broadcast. We recognize radio program license fee revenues when evidence of a
licensing arrangement exists, the license period has begun, delivery of the
program to the licensee has occurred or is available for immediate and
unconditional delivery, the arrangement fee is fixed or determinable, and
collection of the arrangement fee is reasonably assured.
STOCK BASED COMPENSATION
We account for stock transactions with employees in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees." In accordance with Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," we adopted the pro forma disclosure requirements of
SFAS 123. We account for stock issued to non-employees in accordance with SFAS
123 and related interpretations.
15
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our chief
executive officer and chief financial officer, conducted an evaluation of our
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934 (the "Exchange Act") Rules 13a-14I) within 90 days of the filing date of
this Quarterly Report on Form 10-Q (the "Evaluation Date"). Based on their
evaluation, our chief executive officer and chief financial officer have
concluded that as of the Evaluation Date, our disclosure controls and procedures
are effective to ensure that all material information required to be filed in
this Quarterly Report on Form 10-Q has been made known to them in a timely
fashion.
Changes in Internal Controls
There have been no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls subsequent to
the Evaluation Date set forth above.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
In October 2003, we changed the number of authorized common shares to
5,000,000.
Item 4. Submission of Matters to Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification by Chief Executive Officer Pursuant to Section
302
31.2 Certification by Chief Financial Officer Pursuant to Section
302
32.1 Certification by Chief Executive Officer Pursuant to Section
906
32.2 Certification by Chief Financial Officer Pursuant to Section
906
Reports on Form 8-K
None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SUN NETWORK GROUP, INC.
Dated: November 19, 2003 By: /s/ T. Joseph Coleman
---------------------------
T. Joseph Coleman
Chief Executive Officer,
President and Director