U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 2001
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[ ] Transition Report under Section 13 or 15(d)of the Exchange Act For the
Transition Period from ________ to ___________
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Commission File Number: 0-26073
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MODERNGROOVE ENTERTAINMENT, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 86-0881193
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1801 E. Tropicana, Suite 9
Las Vegas, NV 89119
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(Address of principal executive offices)
(604) 742-2000
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(Issuer's telephone number)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or 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 [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the Registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
1
Common Stock, $0.001 par value per share, 200,000,000 shares authorized,
30,300,700 issued and outstanding as of March 31, 2001. Preferred
Stock, $0.001 par value per share, 5,000,000 shares authorized, no
Preferred Stock issued nor outstanding as of March 31, 2001.
Traditional Small Business Disclosure Format (check one) Yes [ ] No [X]
Copies of Communications Sent to:
Thomas C. Cook, Esq.
Thomas C. Cook and Associates, Ltd.
3110 S. Valley View, Suite 106
Las Vegas, NV 89102
Tel: (702) 876-5941 - Fax: (702) 876-8865
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................... 3
Independent Auditor's Report....................... 4
Balance Sheet (unaudited)............................ 5
Consolidated Statements of Operations(unaudited)...... 6
Consolidated Statements of Cash Flows (unaudited)..... 7
Summary of Significant Accounting Policies............8-11
Notes to Consolidated Financial Statements...........12-16
Item 2. Management's Discussion and Analysis of Plan
of Operation.......................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................... 21
Item 2. Changes in Securities and Use of Proceeds............ 21
Item 3. Defaults upon Senior Securities...................... 21
Item 4. Submission of Matters to a Vote
of Security Holders.................................. 21
Item 5. Other Information..................................... 21
Item 6. Exhibits and Reports on Form 8-K...................... 22
Signatures...................................................... 23
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
The unaudited financial statements of registrant for the three months ended
March 31, 2001, follow. The financial statements reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of
the results for the interim period presented.
3
G. BRAD BECKSTEAD
---------------------------
Certified Public Accountant
330 E. Warm Springs
Las Vegas, NV 89119
702.528.1984
425.928.2877 (efax)
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
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Board of Directors
Moderngroove Entertainment, Inc.
(a Development Stage Company)
Las Vegas, NV
I have reviewed the accompanying balance sheet of Moderngroove Entertainment,
Inc. (a Nevada corporation) (a development stage company) as of March 31,
2001 and the related statements of operations for the three-months ended
March 31, 2001 and 2000 and for the period August 6, 1998 (Inception) to
March 31, 2001, and statements of cash flows for the three-month period
ending March 31, 2001 and 2000 and for the period August 6, 1998 (Inception)
to March 31, 2001. These financial statements are the responsibility of the
Company's management.
I conducted my reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, I
do not express such an opinion.
Based on my reviews, I am not aware of any material modifications that
should be made to the accompanying financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in the Notes to the
financial statements, the Company has had limited operations and has not
commenced planned principal operations. This raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in the Notes. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Another firm has previously audited, in accordance with generally
accepted auditing standards, the balance sheet of Moderngroove
Entertainment, Inc. (a development stage company) as of December 31,
2000, and the related statements of operations, stockholders' equity,
and cash flows for the year then ended (not presented herein) and in
their report dated January 24, 2001, they expressed an unqualified
opinion on those financial statements.
May 21, 2001
/s/ G. Brad Beckstead
-----------------------
G. Brad Beckstead, CPA
4
Moderngroove Entertainment, Inc.
[formerly Barrington Laboratories, Inc.]
(a Development Stage Company)
Consolidated Balance Sheet
(Expressed in US Dollars)
Balance Sheet
BALANCE SHEET
(unaudited)
March 31, December 31,
2001 2000
----------- ------------
Assets
Current assets:
Cash and equivalents $ - $ 18,923
Cash in trust - 100,155
Receivables 7,143 9,109
Prepaid expenses 116,195 8,623
----------- ----------
Total current assets 123,338 136,810
----------- ---------
Property and equipment, net 374,592 404,420
Software development costs, net 533,937 238,725
----------- ----------
Total Assets $ 1,031,868 $ 779,955
=========== ==========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Bank overdraft $ 3,160 $ 49,939
Line of credit 314,475 83,463
Loan payable-related party 266,385 -
Accounts payable 289,874 228,117
Accrued liabilities 236,480 19,196
----------- ----------
Total current liabilities 1,110,375 380,715
----------- ----------
Commitments - -
----------- ----------
Stockholders' Equity:
Common stock, $0.001 par value,
200,000,000 shares authorized,
30,300,700 shares issued
and outstanding 30,301 29,751
Additional paid-in capital 2,188,521 2,134,071
Stock subscriptions receivable (120,000) (120,000)
Deficit accumulated during
development stage (2,173,531) (1,641,713)
Accumulated other comprehensive
income - foreign exchange
translation losses (3,798) (2,869)
----------- -----------
Total stockholders' equity (78,507) 399,240
----------- ----------
Total Liabilities and Stockholders' Equity $ 1,031,868 $ 779,955
=========== ==========
The accompanying notes are an integral part of these financial statements.
5
Moderngroove Entertainment, Inc.
[formerly Barrington Laboratories, Inc.]
(a Development Stage Company)
Consolidated Statements of Operations
for the three months ending March 31, 2001 and 2000
and for the period August 6, 1998 (Inception) to March 31, 2001
(Expressed in US Dollars)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) (unaudited)
Three Months Ending August 6, 1998
March 31, (Inception) to
-------------------- March 31,
2001 2000 2001
--------- --------- ------------
(cumulative)
Revenue $ - $ - $ -
--------- --------- ----------
Cost of services and
operating expenses:
Advertising and promotion 10,932 1,966 46,277
Contractor fees 48,639 6,198 106,008
Depreciation and amortization 42,264 - 219,473
Research and development 40,533 - 376,136
General and administrative 379,544 83,276 1,722,330
--------- --------- ----------
Total expenses 521,913 91,276 2,470,225
--------- --------- ----------
Other income (expenses):
Interest expense (9,554) - (9,554)
-------- -------- -----------
(9,554) - (9,554)
-------- -------- -----------
Net (loss) $(531,467) $(91,440) $(2,479,779)
========== ========= ============
Weighted average
number of
common shares
outstanding 30,290,144 3,258,574 6,619,286
========== ========= ============
Net loss per share $ (0.02) $ (0.03) $ (0.37)
========== ========= ============
The accompanying notes are an integral part of these financial statements.
6
Moderngroove Entertainment, Inc.
[formerly Barrington Laboratories, Inc.]
(a Development Stage Company)
Consolidated Statements of Cash Flows
for the three months ending March 31, 2001 and 2000
and for the period August 6, 1998 (Inception) to March 31, 2001
(Expressed in US Dollars)
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited) (unaudited)
Three Months Ending August 6, 1998
March 31, (Inception) to
-------------------- March 31,
2001 2000 2001
--------- --------- ------------
Net loss $ (531,467) $ (91,440) $(2,479,779)
Depreciation and amortization 42,264 - 219,473
Shares issued for consulting services 55,000 - 361,250
Adjustments to reconcile net
(loss) to net cash (used)
by operating activities:
(Increase) decrease in receivables 1,966 4,302 (7,143)
(Increase) decrease in prepaid expenses (107,572) 22,748 (116,195)
Increase (decrease) in accounts payable 61,757 (45,410) 289,874
Increase (decrease) in
other accrued liabilities 217,284 (2,920) 236,480
-------- --------- ----------
Net cash (used) by
operating activities (260,768) (112,719) (1,496,040)
--------- --------- -----------
Cash flows from investing activities
Purchase of fixed assets (12,436) - (594,065)
Software development costs (295,212) - (533,939)
-------- --------- ----------
Net cash used
by investing activities (307,648) - (1,128,004)
-------- --------- -----------
Cash flows from financing activities
Issuance of common stock - 288,876 2,044,173
Cash in trust 100,155 - -
Bank overdraft (46,779) 19,271 3,160
Line of credit 231,012 (179,062) 314,475
Loan payable-related party 266,385 - 266,385
-------- --------- ---------
Net cash provided by
financing activities 550,773 129,085 2,628,193
-------- --------- ---------
Net (decrease) increase in cash (17,642) 16,366 4,150
Foreign exchange effect on cash (1,281) - (4,150)
Cash - beginning 18,923 4,888 -
-------- --------- ---------
Cash - ending $ - $ 21,254 $ -
======== ======== =========
Supplemental disclosures:
Interest paid $ - $ - $ -
======== ======== =========
Income taxes paid $ - $ - $ -
======== ======== =========
Non-cash transactions:
Number of shares issued for
consulting services 550,000 - 900,000
======== ======== =========
7
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Moderngroove Entertainment, Inc.
[formerly Barrington Laboratories, Inc.]
(a development stage company)
Summary of Significant Accounting Policies
March 31, 2001
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Basis of Presentation
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and include
the accounts of the Company and its wholly-owned subsidiary, Moderngroove
Entertainment, Inc. All significant inter-company balances and transactions
have been eliminated on consolidation. The Company is considered a
development stage company in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 7.
The Company has selected December 31 as its fiscal year end.
Foreign Currency Translation
The Company's functional currency is the Canadian dollar as all operations
to date have been conducted through the Company's Canadian subsidiary.
These consolidated financial statements are stated in US dollars as the
Company was incorporated in the United States and for comparison purposes
with other industry competitors registered with the Securities and Exchange
Commission ("SEC") in the United States. Assets and liabilities denominated
in Canadian dollars are translated to US dollars using the exchange rate in
effect at the period end date. Revenue and expenses are translated to US
dollars using the average rate of exchange for the respective period. Gains
and losses on exchange are recorded as comprehensive income (loss) and are
reported separately in Stockholders' Equity.
Cash and Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Financial Instruments
The Company's financial assets and liabilities consist of cash, cash in
trust, receivables, bank overdraft, accounts payable, accrued liabilities
and loans payable. Unless otherwise noted, it is management's opinion that
the Company is not exposed to significant interest, currency or credit
risks arising from these financial instruments. The fair values of these
financial instruments approximate their carrying values due to the short
term or demand nature of these assets and liabilities.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation based on the estimated useful life of the asset is calculated
at the following rates:
Computer equipment -- 30% diminishing-balance basis
Computer software -- 50% diminishing-balance basis
Office equipment -- 20% diminishing-balance basis
Audio and sound Equipment-- 20% diminishing-balance basis
Leasehold improvements are depreciated over the remaining term
of the underlying premises lease which approximates its estimated
useful life.
8
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Moderngroove Entertainment, Inc.
[formerly Barrington Laboratories, Inc.]
(a development stage company)
Summary of Significant Accounting Policies
March 31, 2001
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Property and Equipment - Continued
Direct costs associated with the development of the features, content and
functionality of the Company's website incurred during the application
development stage are capitalized and will be amortized over the estimated
useful life of 3 years once development is complete.
Software Development Costs
In accordance with SFAS No. 86 "Accounting for the Cost of Computer Software
to be Sold, Leased or Otherwise Marketed" software development costs are
expensed as incurred until technological feasibility in the form of a working
model has been established. Deferred software development costs will be
amortized over the estimated economic life of the software once the product
is available for general release to customers. Annual amortization,
thereafter, will be the greater of the amount computed using (a) the ratio
of current revenues to current and anticipated gross revenues for the product
and (b) the straight-line method over the product's economic life.
Impairment of Long-Lived Assets
On a quarterly basis, the Company evaluates the future recoverability of its
property and equipment and deferred software development costs in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-lived Assets to be
Disposed of". SFAS No. 121 requires recognition of impairment of longg-lived
assets in the event the net book value of such assets exceeds the estimated
undiscounted future cash flows attributable to such assets or the business
to which such assets relate. No impairment was required to be recognized
during the periods presented in these financial statements.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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 could materially differ from
these estimates. The assets which required management to make significant
estimates and assumptions in determining carrying values included property
and equipment and deferred software and website development costs.
Income Taxes
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes", which requires the Company to recognize deferred tax liabilities and
assets for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns using the
liability method. Under this method, deferred tax liabilities and assets are
determined based on the temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted rates
in effect in the years in which the differences are expected to reverse.
9
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Moderngroove Entertainment, Inc.
[formerly Barrington Laboratories, Inc.]
(a development stage company)
Summary of Significant Accounting Policies
March 31, 2001
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Loss Per Share
Loss per share is computed in accordance with SFAS No. 128, "Earnings
Per Share". Basic loss per share is calculated by dividing the net loss
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in earnings of an
entity. In loss periods, dilutive common equivalent shares are excluded
as the effect would be anti-dilutive.
For the period from September 20, 1999 (date of inception) to March 31,
2001 there were no common equivalent shares granted or outstanding.
Advertising
The Company follows the provisions of Statement of Position 93-7 in
accounting for the costs of advertising. Advertising costs are charged
to expense in the period incurred.
Revenue Recognition
The Company has not recognized revenues to date from the sale of software
products. Revenue is derived from software sold indirectly through
distributors and solution providers and directly to end-users. The Company
will follow the provisions of Statement of Position ("SOP") 97-2, "Software
Revenue Recognition", which has been amended by SOP 98-4 and SOP 98-9.
These statements set forth generally accepted accounting principles for
revenue recognized under software license and service arrangements.
Revenue from the sale of hardware and software will be recognized upon
delivery of the product when persuasive evidence of an arrangement exists,
the price is fixed or determinable and collection is probable. Direct
sales to end-users are expected to be evidenced by concurrent payment for
the product via credit card and are governed by a license agreement. For
licensing of the Company's software to OEMs and other resellers, revenue
will not be recognized until the OEM sells the software to an end-user
customer. For licensing of software through indirect sales channels, revenue
will be recognized when the reseller, value-added reseller or distributor
sells the software to an end-user customer. The Company considers all
arrangements with payment terms extending beyond twelve months and other
arrangements with payment terms longer than normal not to be considered
fixed or determinable. If collectibility is not considered probable,
revenue will be recognized when the fee is collected. Product returns will
be reserved for in accordance with SFAS 48. Until the Company can establish
a history of returns, recognition of revenue will be deferred on sales to
distributors having right of return privileges until the return period
expires. Once a reliable return history is created, such returns will be
estimated using historical return rates.
In the future, the Company may offer software arrangements to its customers
whereby the software license would include the rights to related products
such as upgrades and technical support. In such arrangements, the Company
will allocate the total cost of the arrangement among each deliverable
based upon the relative fair value of each of the deliverables, determined
based on vendor-specific objective evidence of fair value.
Freight charges billed to customers will be included in sales while the
associated freight costs will be included in cost of sales.
10
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Moderngroove Entertainment, Inc.
[formerly Barrington Laboratories, Inc.]
(a development stage company)
Summary of Significant Accounting Policies
March 31, 2001
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New Accounting Pronouncement
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 required companies to
recognize all derivatives contracts as either assets or liabilities on the
balance sheet and to measure them at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative
not designated as a hedging instrument, the gain or loss is recognized in
income in the period of change. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standards on January 1, 2001
to affect its financial statements.
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11
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Moderngroove Entertainment, Inc.
[formerly Barrington Laboratories, Inc.]
(a development stage company)
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
March 31, 2001
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1. Nature of Business and Continuing Operations
The Company was organized on August 6, 1998, under the laws of the
State of Nevada, as Barrington Laboratories, Inc. On December 18,
2000, the Company amended its Articles of Incorporation to rename
the Company Moderngroove Entertainment, Inc.
The Company currently has no revenues and, in accordance with SFAS
#7, is considered a development stage company.
In January 2001, the Company's stockholders completed a share
exchange agreement with Modern Groove Entertainment International,
Inc. ("MGEI", Note 9), a British Columbia company. The Company
carries on operations through its wholly-owned British Columbia
subsidiary, Moderngroove Entertainment, Inc. The Company is
developing an interactive music and television network that
consumers will access through next-generation videogame consoles.
These consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applicable
to a going concern which contemplates the realization of assets
and the satisfaction of liabilities and commitments in the normal
course of business. As at March 31, 2001, the Company has not
recognized revenue to date and has accumulated combined operating
losses of approximately $2.1 million since inception. The Company's
ability to continue as a going concern is contingent upon the
successful completion of additional financing arrangements, the
development of its interactive entertainment products and its
ability to achieve and maintain profitable operations. Management
plans to raise equity capital to finance the operating and capital
requirements of the Company. It is management's intention to raise
new equity financing of approximately $3,000,000 within the
upcoming year. Amounts raised will be used to further development
of the Company's products, to provide financing for marketing and
promotion, to secure additional property and equipment and for
other working capital purposes. While the Company is expending
its best efforts to achieve the above plans, there is no assurance
that any such activity will generate funds that will be available
for operations.
These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The Company's financial statements
do not include any adjustments related to the recoverability and
classification of recorded asset amounts or the amounts and
classification of liabilities that may be necessary should the
Company be unable to continue in existence.
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2. Loans Payable
The 2000 operating loan was due on demand and bears interest at
the bank's prime rate plus 2%, calculated and payable monthly. It
was secured by a general security agreement covering all assets and
a CDN $150,000 ($100,155) term deposit in trust. On January 6, 2001,
the operating loan was repaid in full out of proceeds of the term
deposit.
A $314,475 operating line of credit was secured with the Canadian
Imperial Bank of Commerce. The note is renewable in one-year
increments at prime plus 3.0% with interest only payments of
approximately $4,000 per month for the first year.
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12
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Moderngroove Entertainment, Inc.
[formerly Barrington Laboratories, Inc.]
(a development stage company)
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
March 31, 2001
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3. Property and Equipment
March 31, 2001 December 31, 2000
Accumulated) Accumulated)
Cost Depreciation Cost Depreciation
Computer equipment $ 336,126 $ 125,632 $326,370 $ 101,482
Leasehold improvements 75,901 33,061 75,307 26,799
Computer software 73,592 45,744 72,560 36,816
Office equipment 33,303 8,159 32,249 6,554
Audio and sound equipment 26,697 6,877 26,697 5,558
Website development costs 48,446 - 48,446 -
-------------------------------------------
594,065 219,473 581,629 177,209
--------------------------------------------
Net book value $ 374,592 $ 404,420
---------------------------------
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4. Software Development Costs
March 31, 2001 December 31, 2000
-------------- -----------------
Salaries and employee benefits $ 295,212 $ 209,667
Consulting fees - 29,060
---------------------------------
$ 295,212 238,727
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5. Stockholders' Equity
The Company is authorized to issue 5,000,000 shares of $0.001 par
value preferred stock and 200,000,000 shares of $0.001 par value
common stock pursuant to the laws of the State of Nevada.
On August 7, 1998, the Company issued 3,000,000 shares of its $0.001
par value common stock to a director for cash of $10,000.
On February 28, 1999, the Company issued 750,700 shares of its $0.001
par value common stock, at $0.05 per share, pursuant to a Rule 504,
Regulation D of the Securities and Exchange Commission Act of 1933
offering, for total cash of $37,535.
On November 22, 2000, the Company issued 350,000 shares of its $0.001
par value common stock in exchange for services valued at $306,250.
The 350,000 shares were issued in connection with a Form S-8 filed
with the Securities and Exchange Commission.
On January 2, 2001, the Company issued 26 million shares of its
$0.001 par value common stock pursuant to a "reverse-merger"
agreement with Modern Groove Entertainment International, Inc.
(Note 9).
13
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Moderngroove Entertainment, Inc.
[formerly Barrington Laboratories, Inc.]
(a development stage company)
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
March 31, 2001
-------------------------------------------------------------------------
5. Stockholders' Equity - Continued
On March 1, 2001, Company issued 550,000 shares of its $0.001 par
value common stock for consulting services valued at $55,000.
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6. Commitments
The Company has an operating lease for its premises at approximately
$5,700 per month, expiring in December 2002. The minimum annual lease
payments in connection with this lease are as follows:
2001 $68,500
2002 $68,500
------------------------------------------------------------------------
7. Research and Development
The Company expensed the following software research and development
costs during the period:
Period from
September 20, 1999
Three months (date of inception)
ended March 31 to December 31
2001 2000
Salaries and employee benefits $ 40,533 $ 231,486
Consulting fees - 84,784
-----------------------------
$ 40,533 $ 316,270
=============================
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8. Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"), which requires use of the liability method. SFAS No.
109 provides that deferred tax assets and liabilities are recorded
based on the differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting
purposes, referred to as temporary differences. Deferred tax assets
and liabilities at the end of each period are determined using the
currently enacted tax rates applied to taxable income in the periods
in which the deferred tax assets and liabilities are expected to be
settled or realized.
14
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Moderngroove Entertainment, Inc.
[formerly Barrington Laboratories, Inc.]
(a development stage company)
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
March 31, 2001
-------------------------------------------------------------------------
8. Income Taxes - Continued
The tax effects of the temporary differences that give rise to the
Company's deferred tax assets are as follows:
2000 1999
----------------------------
Tax loss carryforwards $ 508,000 $ 42,000
Property and equipment 81,000 4,000
Deferred research and development 152,000 9,000
Valuation allowance (741,000) (55,000)
-----------------------------
$ $
=============================
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before
provision for income taxes as follows:
Period from
September 20, 1999
Year ended (inception)
December 31, to December 31,
2000 1999
------------ ---------------
(Benefit) at the federal statutory rate $ (559,000) $ (41,000)
Effect of difference in Canadian
tax rates (190,000) (14,000)
Stock compensation and other
Permanent differences 63,000 -
Increase in valuation allowance $ 686,000 (55,000)
---------------------------
$ - $ -
===========================
At December 31, 2000, the Company has operating losses carried forward
for income tax purposes in Canada of approximately $1,110,000 which
may be applied to reduce future years' taxable income. The losses
expire as follows:
2006 -- $ 90,000
2007 -- $ 1,020,000
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15
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Moderngroove Entertainment, Inc.
[formerly Barrington Laboratories, Inc.]
(a development stage company)
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
March 31, 2001
-------------------------------------------------------------------------
9. Reverse Acquisition with Modern Groove Entertainment International,
Inc (MGEI).
On December 18, 2000, the Company entered into an agreement with MGEI
whereby the Company acquired all of the issued and outstanding common stock
of MGEI in exchange for 26 million voting shares of the Company's $0.001
par value common stock. The acquisition closed and the shares were
exchanged on January 2, 2001. The acquisition will be accounted for in
subsequent fiscal periods using the purchase method of accounting as
applicable to reverse acquisitions because the former stockholders of the
MGEI controlled the Company's common stock immediately upon conclusion of
the transaction. Under reverse acquisition accounting, the post-
acquisition entity will be accounted for as a recapitalization of the
Company.
Unaudited Pro-forma revenue, net loss and loss per share assuming the
transaction had been completed on September 20, 1999 (date of inception)
is as follows:
Period from
September 20, 1999
Year Ended (date of inception)
December 31 to December 31
2000 1999
-------------------------------------
Revenue $ - $ -
Net loss for the period (1,658,654) (119,265)
Loss per share $ (0.06) $ (0.01)
The continuing company has retained December 31 as its fiscal year end.
Concurrent with the acquisition, the Company has changed its legal name
to Moderngroove Entertainment, Inc.
------------------------------------------------------------------------
16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS
The current core business of MODERNGROOVE ENTERTAINMENT, INC. is the
development of videogame software for next-generation videogame consoles,
such as the Sony PlayStation 2.
Moderngroove is a licensed developer for next-generation videogame consoles,
which are best described as high-powered PCs that sit in the living room
and anchor the home entertainment systems of the future. They have better
graphics than their predecessors, play DVD movies, and access the Internet
at high speed - ultimately making new forms of entertainment possible. Such
consoles are projected to be in 50 million U.S. homes (150 million
worldwide) by 2006. (NPD Group)
Our development teams build videogame software from original concepts
through to completion, including the creation and programming of all art,
audio and visual effects. Once a videogame is developed by our team, we
work with a videogame publisher, who earns a portion of the royalties for
manufacturing the videogame disks and packaging, as well as sales, marketing
and distribution of the videogame. Popular titles that are updated and re-
released annually are called franchises, providing videogame developers and
publishers with reliable income streams. Perpetual market demand for new
music will assist Moderngroove's development of initial music titles into
franchises.
Future videogame titles developed by Moderngroove will ship with an internally
developed web browser, that will enable consumers to surf moderngroove's
website via their PlayStation 2. Once at our website, consumers will be able
to enhance their game-play experience by interacting with people around the
world who also own the videogame and subscribe to receive value-added content
on demand. As the number of videogame titles that includes this web browser
grows, the content available on our website will become more diverse, much
like a television station with multiple program topics. Ultimately we
envision this website that is accessed via the PlayStation 2 and viewed on
your television screen to become much like a television network. The key
difference will be that our interactive music and television network will
offer content on demand.
To build this network, Moderngroove relies on a business development team who
works closely with an internal licensing department and multiple production
teams who develop videogame software titles, the network interface and the
network architecture. Moderngroove works with artists, record labels, and
entertainment studios to license audio and video entertainment for inclusion
in videogame titles, and as part of the content available from the
interactive music and television network. The company's videogame industry
personnel are working with music labels and entertainment studios to develop
brand-lead entertainment titles for next-generation videogame consoles.
Music titles for videogame consoles constitute a relatively untapped market:
less than 10 notable titles currently exist across all platforms, though
recent titles have sold over a million units each. (NPD Group)
To achieve television quality content delivery, Moderngroove's network
architecture team has developed a proprietary content storage and delivery
system. The network architecture developed by Moderngroove makes it
possible for even the most popular entertainment content to completely
circumvent the Internet congestion that plagues today's net-delivered
media.
Moderngroove's primary business is videogame development, however, over
time it is expected that videogames will serve as only a key to an entire
network of consumer entertainment on-demand.
Going Concern - As a development stage Company, the Company has yet to
generate any revenues. In addition, the Company does not expect to generate
any revenues until the second half of 2001. The Company's Financial
Statements are prepared using generally accepted accounting principles
applicable to a going concern, which contemplates the realization of assets
and liquidation of liabilities in the normal course of business. However,
the Company does not have significant cash or other material assets, nor does
it have an established source of revenues sufficient to cover its operating
costs and to allow it to continue as a going concern. The Company is
actively traded on the OTC-BB and seeks to raise additional capital via a
private placement offering, pursuant to Regulation D Rule 505/506. Until
that time, the stockholder/officers and or directors have committed to
advancing the operating costs of the Company, interest free.
Unclassified Balance Sheet - In accordance with the provisions of SFAS No.
53, the Company has elected to present an unclassified balance sheet.
Loss Per Share
--------------
Net loss per share is provided in accordance with Statement of Financial
Accounting Standards No. 128 (SFAS #128) "Earnings Per Share". Basic loss per
share is computed by dividing losses available to common stockholders by the
weighted average number of common shares outstanding during the period.
Diluted loss per share reflects per share amounts that would have resulted if
dilative common stock equivalents had been converted to common stock. As of
March 31, 2001, the Company had no dilutive common stock equivalents such
as stock options.
Results of Operations
---------------------
As a development stage company, the Company has yet to generate any revenues.
In addition, the Company does not expect to generate any revenues until the
second half of 2001. For the quarter ended March 31, 2001, the Company
experienced a net loss of $531,467 compared to a net loss of $91,440 in the
same quarter last year. The loss for this quarter, compared to the same
period last year, is substantially larger as the company is in full
development of their first videogame title, network architecture and network
interface; whereas last year during the same period, research and initial
development plans were still underway, requiring far less resources.
For the quarter ended March 31, 2001, the Company incurred general and
administrative expenses of $379,544; contractor fees of $48,639; advertising
and promotion costs of $10,932; research and development costs of $40,533
and, depreciation and amortization expenses of $42,264. General and
administration expenses account for the majority of this quarter's loss, as
these expenses include salaries for development teams, which were ramped up
to reach critical development milestones. The videogame development team
completed the Company's first title for the PlayStation 2 and initiated
research and development efforts on development plans for two new videogame
titles. The network architecture team was also ramped up to near
completion of the network alpha, which will move the development of the
network architecture into the test phase.
The Company's overall loss from operations since inception is: $2,479,779,
as the bulk of the foreseeable research and development for the next five
years is required at the beginning of the planning period, during the
development stage of the Company, to create the foundation for videogame
and network products that are scheduled for release through 2006.
The basic loss per share for the quarter ended March 31, 2001 was ($0.02)
compared to ($0.03) per share in the same quarter last year. The Company
does not have any material commitments for capital expenditures.
Plan of Operation
-----------------
Moderngroove's first videogame title, "moderngroove: Ministry of Sound
Edition", is slated for release throughout the UK and Europe in late Spring,
2001, with North American and Japanese releases scheduled for early Summer,
2001. This first release for the PlayStation 2 is a stand-alone product and
does not include the proprietary web browser that enables consumer access to
the Company's interactive music and television network, as this network is
still in development. A working beta of the interactive music and television
network is scheduled for release later this year, with plans to unveil it at
the ECTS trade show in London, England in September, 2001. The first title
with network access is planned for release in February, 2002, with another
network accessing title scheduled for release in October, 2002. Moderngroove
expects that month-over-month profitability will occur once these latter titles
have been released.
Liquidity and Capital Resources
-------------------------------
The Company's primary sources of liquidity since its inception have been the
sale of shares of common stock from shareholders, which were used during the
period from inception through December 31, 2000. An original stock offering
was made pursuant to Nevada Revised Statues Chapter 90.490 (hereinafter
referred to as the "Offering"). This Offering was made in reliance upon an
exemption from the registration provisions of Section 5 of the Securities Act
of 1993 (the "Act"), as amended, pursuant to Regulation D, Rule 504 of the
Act. On August 7, 1998, founding shareholders purchased three million
(3,000,000) shares of the Company's authorized but unissued treasury stock
for cash. Additionally, the Company sold seven hundred fifty thousand seven
hundred (750,700) shares of Common Stock of the Company during the Offering
to approximately sixty-seven (67) shareholders in the State of Nevada. The
offering was closed February 28, 1999. As of December 31, 1999, the Company
had three million seven hundred fifty thousand seven hundred (3,750,700)
shares of its $0.001 par value common voting stock issued and outstanding
which are held by approximately sixty-eight (68) shareholders of record,
including the Company's founder.
On November 22, 2000, the Company issued 350,000 shares in exchange for
services. The 350,000 shares issued in December, 2000 in connection with a
Form S-8 filed the U.S. Securities and Exchange Commission have been valued
at their fair market value of $306,250.
On December 18, 2000, the Company entered into a Share Exchange agreement
with Modern Groove Entertainment International, Inc., a separate Nevada
Corporation, whereby all of the issued and outstanding shares of Modern
Groove Entertainment International, Inc., were exchanged for 26,000,000
restricted common shares of the company's stock, effective January 1, 2001.
On March 8, 2001, 2001 the Company issued 550,000 shares in exchange for
services. The 550,000 shares issued in March, 2001 in connection with a
Form S-8 filed the U.S. Securities and Exchange Commission have been valued
at their fair market value of $550,000.
19
Moderngroove is a developmental stage company. The Company's business office
and development studio is located in Vancouver, British Columbia, Canada, with
an American headquarters in Huntington Beach, California. The Company has
been active for approximately two years and currently has 40 employees,
eighty-five percent of whom are dedicated to product development. Focusing
initially on videogame development for the next generation of videogame
consoles, such as the Sony PlayStation 2, the company will extend their
offerings of interactive entertainment to include additional console platforms
and personal computers within the next two years. Although the majority of
product revenues will be derived from videogame sales initially, the Company
is developing the network architecture and interface to support the delivery
of network products from their interactive music and television network that
consumers access via the Internet, to support long-term growth.
Market For Company's Common Stock
---------------------------------
Until September 14, 1999, there was no public trading market for the
Company's stock. On that day the Company's common stock was cleared for
trading on the OTC Bulletin Board system under the symbol BRRT. At the
Company's annual shareholder meeting on December 18, 2000, the shareholders
approved a name change for the Company to Moderngroove Entertainment, Inc.,
and the Company subsequently changed its name and trading symbol to: MODG. A
limited market exists for the trading of the Company's common stock.
Dividend Policy
---------------
The Company has never paid or declared any dividend on its Common Stock and
does not anticipate paying cash dividends in the foreseeable future.
Forward-Looking Statements
--------------------------
This Form 10-QSB includes "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. All statements, other than
statements of historical facts, included or incorporated by reference in this
Form 10-QSB which address activities, events or developments which the
Company expects or anticipates will or may occur in the future, including
such things as future capital expenditures (including the amount and nature
thereof), finding suitable merger or acquisition candidates, expansion and
growth of the Company's business and operations, and other such matters are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions and expected future
developments as well as other factors it believes are appropriate in the
circumstances. However, whether actual results or developments will conform
with the Company's expectations and predictions is subject to a number of
risks and uncertainties, general economic market and business conditions;
the business opportunities (or lack thereof) that may be presented to and
pursued by the Company; changes in laws or regulation; and other factors,
most of which are beyond the control of the Company.
20
Consequently, all of the forward-looking statements made in this Form 10-QSB
are qualified by these cautionary statements and there can be no assurance
that the actual results or developments anticipated by the Company will be
realized or, even if substantially realized, that they will have the expected
consequence to or effects on the Company or its business or operations. The
Company assumes no obligations to update any such forward-looking statements.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not a party to any legal proceedings.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
During the quarter ended March 31, 2001, no matters were submitted to the
Company's security holders.
ITEM 5. Other Information
On January 2, 2001, T. J. Jesky and Skyelan Rose resigned as Directors
of the Company. Pursuant to Nevada NRS 78.335, their vacancies were
replaced with John Stroppa and Steven Zur as Company Directors.
21
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
The following documents are included or incorporated by reference as exhibits
to this report:
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- -------------------------------------------------------------------
(3) ARTICLES OF INCORPORATION AND BY-LAWS
3.1 Articles of Incorporation of the Company Filed August 6, 1998(1)
3.2 By-Laws of the Company adopted September 23, 1998(1)
3.3 Amendment to Articles of Incorporation Filed December 18, 2000(3)
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4.1 Facsimile of specimen common stock certificate (2)
(23) CONSENT OF EXPERTS AND COUNSEL
23.1 Letter of Consent from G. Brad Beckstead, CPA (1)
(27) FINANCIAL DATA SCHEDULE(1)
27.1 Financial Data Schedule(2)
27.2 Financial Data Schedule(3)
----------
(1) Previously filed as an exhibit to our registration statement on Form
10-SB (the "Registration Statement"), which was filed on May 14, 1999,
and incorporated herein by reference.
(2) Previously filed as an exhibit to our annual report on Form 10KSB,
which was filed on March 8, 2000, and incorporated herein by reference.
(3) Previously filed as an exhibit to our amended annual report on
Form 10KSB/A, which was filed on April 10, 2001, and incorporated herein
by reference.
(b) REPORTS ON FORM 8-K
Moderngroove filed a Current Report during the fiscal year ended December
31, 2000, dated December 19, 2000, on Form 8-K containing information
pursuant to Item 5 ("Other Materially Important Events"); Item 6
("Resignations of Registrant's Directors"); and Item 7 ("Financial Statements
and Exhibits") entitled "Share Exchange Agreement."
During the First Quarter, 2001, Moderngroove filed three additional Current
Reports, the first was dated March 2, 2001, on Form 8-K containing
information pursuant to Item 1 ("Changes in Control of Registrant"); Item 2
("Acquisition or Disposition of Assets"); Item 6 ("Resignations of
Registrant's Directors"); and Item 7 ("Financial Statements") entitled
"Moderngroove Entertainment International, Inc. Audited Consolidated
Financial Statements and Unaudited Pro Forma Consolidated Financial
Information."
A Current Report was filed on March 7, 2001, on Form 8-K containing
information pursuant to Item 4 ("Changes in Accountants") entitled "Changes
in Registrant's Certifying Account." (See Item 8 above, entitled, "Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure."
A Current Report was filed on March 28, 2001, on Form 8-K containing
information pursuant to Item 1 ("Changes in Control of Registrant"); See
Item 5 concerning Company Directors.
22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: May 21, 2001 Moderngroove Entertainment, Inc.
--------------------------------
Registrant
By: /s/ John Stroppa
-----------------------
John Stroppa
President, Chief Executive Officer
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: May 21, 2001 Moderngroove Entertainment, Inc.
--------------------------------
Registrant
By: /s/ Steven Zur
-----------------------
Steven Zur
Corporate Secretary
23