U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO 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 to:
Thomas C. Cook, Esq.
Thomas C. Cook & Associates, Ltd.
4955 South Durango, Suite 214
Las Vegas, Nevada 89113
Phone: (702) 952-8520
Fax: (702) 952-8521
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................. 4
Consolidated Balance Sheet (unaudited)............... 5
Consolidated Statements of Operations(unaudited)..... 6
Consolidated Statements of Cash Flows (unaudited).... 7
Notes to Consolidated Financial Statements........... 8-11
Item 2. Management's Plan
of Operation.......................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................... 20
Item 2. Changes in Securities and Use of Proceeds............ 20
Item 3. Defaults upon Senior Securities...................... 20
Item 4. Submission of Matters to a Vote
of Security Holders.................................. 20
Item 5. Other Information.................................... 20
Item 6. Exhibits and Reports on Form 8-K..................... 21
Signatures..................................................... 23
3
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.
4
Moderngroove Entertainment, Inc.
[formerly Barrington Laboratories, Inc.]
(a Development Stage Company)
Consolidated Balance Sheet
(Expressed in US Dollars)
CONSOLIDATED BALANCE SHEET
(unaudited)
March 31,
2001
-----------
Assets
Current assets:
Cash and equivalents $ -
Cash in trust -
Receivables 7,143
Prepaid consulting fees 485,833
Prepaid expenses 116,195
-----------
Total current assets 609,171
Property and equipment, net 374,592
Software development costs, net 533,937
-----------
$ 1,517,700
=============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Bank overdraft $ 3,160
Line of credit 314,475
Loan payable-related party 266,385
Accounts payable 289,874
Accrued liabilities 236,480
-----------
Total current liabilities 1,110,375
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Commitments -
-----------
Stockholders' Equity:
Common stock, $0.001 par value,
200,000,000 shares authorized,
30,650,700 shares issued and outstanding 30,651
Additional paid-in capital 2,838,708
Stock subscriptions receivable (120,000)
Deficit accumulated during development stage (2,337,531)
Accumulated other comprehensive income -
foreign exchange translation losses (4,503)
-----------
407,325
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$ 1,517,700
===========
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 September 20, 1999 (Inception) to March 31, 2001
(Expressed in US Dollars)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(unaudited) September 20
Three Months Ending 1999
March 31, (Inception)
-------------------- to March 31,
2001 2000 2001
--------- --------- ------------
(cumulative)
Revenue $ - $ - $ -
---------- --------- ----------
Costs of services and
operating expenses:
Advertising and promotion 10,932 1,966 46,277
Contractor fees 90,806 6,198 148,175
Depreciation and amortization 42,264 - 221,194
Research and development 40,533 - 376,136
General and administrative 379,544 83,276 1,536,195
---------- --------- ----------
564,079 91,440 2,327,977
---------- --------- ----------
Other income (expenses):
Interest expense (9,554) - (9,554)
-------- -------- -----------
(9,554) - (9,554)
-------- -------- -----------
Net (loss) $(573,633) $ (91,440) $(2,337,531)
========== ========== ============
Weighted average number of
common shares outstanding 30,290,144 20,441,667
========== ==========
Net (loss) per share -
basic and diluted $ (0.02) $ (0.00)
========== =========
The accompanying notes are an integral part of these financial statements.
6
Moderngroove Entertainment, Inc.
[formerly Barrington Laboratories, Inc.]
(a Development Stage Company)
Consolidated Statement of Cash Flows
for the three months ending March 31, 2001 and 2000
and for the period September 20, 1999 (Inception) to March 31, 2001
(Expressed in US Dollars)
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(unaudited) September 20,
Three Months Ending 1999
March 31, (Inception) to
--------------------- March 31,
2001 2000 2001
--------- --------- ------------
Cash flows from operating activities
Net (loss) $(573,633) $ (91,440) $(2,337,531)
Depreciation and amortization expense 42,264 - 221,194
Shares issued for consulting services 97,167 - 219,354
Adjustments to reconcile net(loss) to
net cash (used) by operating activities:
(Increase) decrease in receivables 1,966 4,302 (7,266)
(Increase) decrease in prepaid expenses (107,572) 22,748 (116,491)
Increase (decrease) in accounts payable 61,397 (45,410) 291,996
Increase (decrease) in
other accrued liabilities 217,284 (2,920) 236,662
--------- --------- -----------
Net cash (used) by operating activities (261,127) (112,719) (1,492,082)
--------- --------- -----------
Cash flows from investing activities
Cash acquired upon reverse acquisition 18,923 - 18,923
Purchase of fixed assets (12,436) - (599,996)
Software development costs (295,212) - (536,191)
--------- --------- -----------
Net cash used by investing activities (288,725) - (1,117,264)
--------- --------- -----------
Cash flows from financing activities
Issuance of common stock - 250,000 250,000
Contributions by stockholder - 38,876 1,775,259
Bank overdraft (46,419) 19,271 3,628
Line of credit 231,012 (179,062) 315,262
Loan payable-related party 266,385 - 266,385
--------- --------- -----------
Net cash provided by financing activities 450,978 129,085 2,610,534
--------- --------- -----------
Net (decrease) increase in cash (98,874) 16,366 1,188
Foreign exchange effect on cash (1,281) - (1,188)
Cash - beginning 100,155 4,888 -
--------- --------- -----------
Cash - ending $ - $ 21,254 $ -
========= ========== ==========
Supplemental disclosures:
Interest paid $ - $ - $ -
========= ========== ==========
Income taxes paid $ - $ - $ -
========= ========== ==========
Non-cash transactions:
Shares issued for prepaid consulting
services less $97,167 charged
to expense during the period $ 485,833 $ -
========= ==========
Issuance of common stock in return for
subscriptions receivable $ - $ 120,000
========= ==========
The accompanying notes are an integral part of these financial statements.
7
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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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Basis of Presentation and Ability to Continue as a Going Concern
The consolidated interim financial statements included herein, presented
in accordance with United States generally accepted accounting principles
and stated in US dollars, have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures
are adequate to make the information presented not misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments, which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that
these consolidated interim financial statements be read in conjunction
with the financial statements of the Company and Modern Groove
Entertainment International, Inc. for the year ended December 31, 2000
and notes thereto included in the Company's 10-KSB annual report and the
8-K current report filed in connection with the acquisition of Modern
Groove Entertainment International, Inc. The Company follows the same
accounting policies in the preparation of interim reports.
Results of operations for the interim periods are not indicative of annual
results.
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 operating losses of approximately $2.3 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. These financial statements do not include
any adjustments that might arise from this uncertainty.
8
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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. Loans Payable and Line of Credit
a) On January 6, 2001, the operating loan outstanding at December 31, 2000
in the amount of $83,463 was repaid in full.
b) Subsequently, an operating line of credit of up to $330,000 was secured
with Canadian Imperial Bank of Commerce. The credit facility is renewable
in one-year increments at prime plus 3.0% with interest only payments of
$6,000 per month for the first year. The line of credit is collateralized
by all present and future assets of the Company and various guarantees
provided by stockholders of the Company. To March 31, 2001, the balance
outstanding under this facility was $314,475 (2000 - $Nil). On June 30,
2001, the line of credit was required to be reduced to approximately
$195,000. The Company has since received an extension on the repayment
to July 31, 2001.
c) Also in 2001, the Company received non-interest bearing advances of
$266,385 from a stockholder. The notes payable are unsecured without
specific repayment terms.
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2. Property and Equipment
March 31, 2001
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Accumulated
Cost Depreciation
-----------------------
Computer equipment $ 336,126 $ 125,632
Leasehold improvements 75,901 33,061
Computer software 3,592 45,744
Office equipment 33,303 8,159
Audio and sound equipment 26,697 6,877
Website development costs 48,446 -
-----------------------
594,065 219,473
----------------------
Net book value $ 374,592
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3. Software Development Costs
Software development costs capitalized during the period ended March 31,
2001 include the following:
March 31, 2001
Salaries and employee benefits $ 295,212
Consulting fees -
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$ 295,212
9
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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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4. 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 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 6).
On March 1, 2001, Company issued 550,000 shares of its $0.001 par value
common stock for consulting services valued at $583,000, based on the
trading price of the Company's common stock on that date. The consulting
services are being amortized on a straight-line basis over the six-month
term of the contract. During the three-month period ended March 31, 2001,
$97,167 was charged to expense as contractor fees, leaving $485,833
recorded as prepaid expense at March 31, 2001. Subsequent to March 31,
2001, the agreement was cancelled and the consultant returned 450,000
shares to the Company for services not performed.
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5. 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 March 31
2001 2001
---------------------------------
Salaries and employee benefits $ 40,533 $ 272,019
Consulting fees - 104,117
----------------------------------
$ 40,533 $ 376,136
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6. 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 was accounted for 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 was accounted
for as a recapitalization of MGEI.
10
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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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6. Reverse Acquisition with Modern Groove Entertainment International,
Inc (MGEI) - Continued.
The common stock issued was recorded at $18,564, being the fair value of
the Company's assets on the acquisition date.
Unaudited Pro-forma revenue, net loss and loss per share assuming the
transaction had been completed on September 20, 1999 (date of inception
of MGEI) is as follows:
Three months ended
March 31
2001 2000
-----------------------
Revenue $ - $ -
Net loss for the period $ (573,633) $ (91,440)
Loss per share $ (0.02) $ (0.00)
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.
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7. Equity Line and Warrant Agreement
On March 28, 2001, the Company entered into an investment agreement with
Swartz Private Equity, LLC ("Swartz"). The investment agreement entitles
the Company to issue and sell up to $20 million of its $0.001 par value
common stock to Swartz, subject to a formula based on stock price and
trading volume, from time to time over a three year period beginning on
the date that a registration statement qualifying the underlying common
stock is declared effective. An election by the Company to sell stock to
Swartz is referred to as a put right. As of March 31, 2001, Swartz does
not have a short position in the Company.
On March 28, 2001, the Company also delivered to Swartz, pursuant to a
Warrant Agreement, warrants to purchase 1,600,000 shares of its $0.001 par
value common stock expiring in six years. The warrants will have semi-annual
reset provisions. The warrants are exercisable in monthly allotments of
150,000 commencing on the date of issue, and have a term beginning on the
date of issuance and ending six years thereafter. The warrants are
considered to be anti-dilutive on March 31, 2001.
11
Item 2. MANAGEMENT'S PLAN OF OPERATIONS
OUR BUSINESS
Moderngroove is a Nevada corporation with business offices in Vancouver,
British Columbia. It carries on business through the British Columbia
subsidiary of its wholly-owned subsidiary, Modern Groove Entertainment
International, Inc., a Nevada corporation which maintains its offices in
Vancouver, BC. We were formed in Nevada on August 6, 1998 under the name
Barrington Laboratories, Inc. We were inactive until we acquired all the
issued and outstanding shares of Modern Groove Entertainment International,
Inc. ("International") on January 2, 2001. In connection with the
acquisition, we changed our corporate name to Moderngroove Entertainment
Inc. International carries on operations through its British Columbia
subsidiary, Modern Groove Entertainment Inc., developing videogames for
next-generation videogame consoles, such as the Sony PlayStation 2. The
acquisition was completed by share exchange reorganization whereby we
acquired all the issued and outstanding shares of International in exchange
for the issuance of 26 million shares of our common stock. The
stockholders of International controlled approximately 86% of Moderngroove
immediately after the share exchange and accordingly, the acquisition has
been treated like a reverse acquisition. Financial information contained
in this quarterly report is presented as a continuation of International.
Moderngroove is a licensed videogame developer for the Sony PlayStation 2
computer entertainment system. We have not yet earned any revenue and are
developing our first product for release in July 2001. Our development
teams are set up to 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 will 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. We expect that our future videogame
titles 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.
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.
12
The Company is a development stage company and consequently our focus over
the past two years has been on the development of our software technology
and the institution of a corporate structure that allows us the ability to
obtain financing to continue development until revenue commences. To date
the Company has not recognized any revenue. We expect revenues to commence
in August, 2001 from sales of our first videogame title, "moderngroove:
Ministry of Sound Edition". We anticipate that the expected commencement
and growth in revenues may enable us to attract additional financing to
allow us to add the needed resources in order to further development of our
ideas. Despite our expectations there can be no assurances that revenue
will commence or expected growth will be achieved. Should we be unable to
achieve revenues, our business and future success will be adversely
affected. International's independent auditors included in their report on
International's consolidated financial statements for the year ended
December 31, 2000 an explanatory paragraph regarding the International's
ability to continue as a going concern.
The factors cited for raising substantial doubt as to International's
ability to continue as a going concern are the fact that no revenues have
yet to be earned and recurring losses since inception of International in
September 1999. Management's plans include (1) the necessity for additional
financing arrangements, (2) the development of its interactive entertainment
products, and (3) the ability to generate revenue and achieve and maintain
profitable operations.
The company has already begun the execution of the following plan to achieve
profitability and allay doubts as to its ability to continue as a going
concern. This includes: (1) an equity line agreement for long-term financing
through securities offerings, (2) completion of the first interactive
entertainment product for the Sony PlayStation 2 and testing of the
developed components of the network architecture, and (3) a signed
publishing and distribution agreement for the first interactive
entertainment product throughout the UK and Europe.
The reverse acquisition of the Company by International provides
International with the access to public markets through the Company's
quotation on the NASD OTC:BB. Further, the company has established an
equity line agreement with Swartz Private Equity of up to $20,000,000 with
common shares and shares underlying warrants registered under this
prospectus. This investment agreement is subject to a formula based on our
stock price and trading volume. Management believes that proceeds from any
offerings using this line, together with our anticipated cash flow from
sales of the company's products, will be sufficient to support currently
anticipated working capital requirements. At the current price and
trading volume of our common stock, the Swartz agreement would provide
$79,711 per 20-day trading period.
Additionally, the company has completed development for release in June
2001 of their first videogame title "Moderngroove: Ministry of Sound
Edition" for the PlayStation 2 computer entertainment system. Additional
titles for the PlayStation 2 and other next generation entertainment
consoles are currently in development. The company has also signed an
13
agreement with Ubi Soft Entertainment SA to manufacture, publish, market
and distribute "Moderngroove: Ministry of Sound Edition" throughout the
UK and Europe. The company has already received recoupable and non-
refundable advances on royalties on a 100,000 unit guarantee. The
advances are paid on the following schedule; 25% upon execution of the
agreement; 25% upon completion of the Gold Master for the product; 25%
upon commercial release of the product; and 25% 30-days after commercial
release of the product. These advances are guaranteed and could only be
prevented if Moderngroove failed to complete a Sony-approved Gold Master
of the product. We expect to complete this product for release in July
2001.
To date, we have not generated any revenue and we have incurred substantial
operating losses since inception. The operating loss for the quarter ended
March 31, 2001 was $573,633 compared to $91,440 for the quarter ended March
31, 2000. This significant difference is due to the fact that the company's
overall product development and operational efforts were in the concept and
planning stages last year (March 31, 2000) compared to this year (March 31
2001). The majority of the Company's financing to date was received
subsequent to March 31, 2000. Product development is now in the
implementation stages, which requires full development teams and
significantly more administrative resources. The costs of which are
reflected in the increase in general and administrative expenses of
$296,268 from general and administrative expenses of $83,276 for the
quarter ended March 31, 2000.
Financing for operations of International prior to the acquisition was
provided via notes payable from International's 40% stockholder, which were
forgiven upon the share exchange with the Company. In the first quarter of
2001, the Company obtained an operating loan from the Canadian Imperial
Bank of Commerce ("CIBC") with a credit limit of $330,000 that bears
interest at the bank's prime rate plus 3% per year. The total amount of
the operating line is currently outstanding. The loan is secured by a
general security agreement covering all assets, shares and various personal
guarantees. The loan agreement with CIBC required us to reduce the loan
balance to $195,000 by June 30, 2001. Due to current cash constraints, we
were unable to repay the loan amount on that date and have since received a
one-month extension from the CIBC on further repayments. The Company has
also received $335,000 from Lafoten Capital Corporation, a company
controlled by Arthur W. Skagen, stockholder of the Company.
CASH REQUIREMENTS
As of March 31, 2001 the Company had a working capital deficiency of
$501,024 compared with a working capital deficiency of $262,468 at December
31, 2000.
The Company needs funding in order to carry on operations. Currently, with
little cash resources available, we are heavily dependent upon the
continuing co-operation of creditors and remaining employees in deferring
their payment requests. Without direct injections of cash from our
directors and stockholders, we currently have no means of settling expenses
14
or payables in cash. Accordingly, we have reduced operations to minimum
levels until we can arrange external financing. We may consider issuing
equity securities as settlement of certain outstanding debts. The Company
has finalized an equity line with Swartz Private Equity, LLC to provide
funding through the sale of the Company's common stock. The Company has the
right at its sole discretion to put common stock to Swartz, subject to
certain limitations and conditions based upon trading volume of the
Company's common stock. However, due to the current limited trading volume
of the Company's common stock, the Company would not be able to raise
significant funding from this arrangement. Based upon 30 consecutive
trading days beginning May 17, 2001 and subject to the volume limitations,
the Company would be able to raise in any 20 day put period approximately
$79,711. At these current levels, the Company would be unable to raise
sufficient capital to fund operations; therefore, the Company is attempting
to increase interest in our Company which would help increase daily trading
volumes.
We estimate our minimum cash requirements on an operating basis over the
next twelve months to be $1,600,000. In the event that the Swartz equity
line does not provide us to raise sufficient capital to cover our minimum
operating cash requirements or we are unsuccessful in raising additional
financing, we anticipate that we could not sustain our business operations
without further short-term financing from our significant shareholders and
directors. Deficiencies in cash will be covered by additional loans and
advances by directors and or shareholders until such time that we can
attract new equity investors. Should we be unable to attract equity
investors, cutbacks would be necessary which would slow down and/or reduce
the number of products in development, until such funds were otherwise
available externally. Alternatively, we could consider development
contracts that would see us take advances from a publisher on a monthly
or quarterly basis. Although this option could provide cash inflows to
sustain development operations and development teams it would be less
beneficial to us.
Moderngroove plans to commence sales of its first videogame title
"Moderngroove: Ministry of Sound Edition" for the PlayStation 2 computer
entertainment system in July 2001. Additional titles for the PlayStation
2 and other next generation entertainment consoles are currently in
development. The company has signed an agreement with Ubi Soft
Entertainment SA to manufacturer, publish, market and distribute
"Moderngroove: Ministry of Sound Edition" throughout the UK and Europe.
The release of this title will guarantee a minimum $425,000 in the form
of an advance on royalties. Unit sales beyond 100,000 will generate
additional revenues for the Company.
In addition to packaged product development (videogame titles), the Company
will continue to research and develop their proprietary network
architecture. The Company will also continue to sign licensing agreements
for content (e.g. music, filmed content, etc.) to include in packaged
product, as well as for distribution via this network. The Company also
plans to license the network architecture for third party use, upon
completion of development.
15
We believe, based on currently proposed plans and assumptions relating to
our operations, that our existing cash and short-term financing available
from directors is sufficient to complete this Registration Statement at
which time the Swartz equity line is available to us. We anticipate that
commencement of revenue in July 2001 and the implementation of an effective
investor relations program will enable us to raise the necessary funding
required to finance our operations and working capital for at least twelve
months.
In the event that our plans or assumptions change or prove inaccurate (due
To delays in product development, the inability to sign any significant
sales agreements or generate revenues, unfavourable economic conditions, or
other unforeseen circumstances), there can be no assurance that such
additional financing would be available to us, or if available, that the
terms of such additional financing will be acceptable to us.
We expect that further development and marketing of our products combined
with the planned introduction of new products or updated versions of our
existing products will lead to increased revenues in fiscal years 2002 and
2003. Although we expect to recognize revenues in 2001, we do not
anticipate this to materialize until the third and fourth quarter of
fiscal 2001. Consequently, we will require a minimum of approximately $1.6
million over the period ending June 30, 2002 in order to accomplish our
goals. The cash requirements of $1.6 million are based on our estimates
for operational costs for the twelve months ending June 30, 2002. We
estimate that approximately $1,000,000 is required for product development
(including developer and programmer salaries), $120,000 will be required
to support an investor relations program. The balance of $480,000 will be
required to support general corporate expenses, including expenses in
connection with the engaging of both senior and intermediate management
personnel and other general operating expenses including capital
expenditures. We intend to obtain the cash necessary through the sale
of our equity securities (as discussed above).
RESEARCH AND DEVELOPMENT
The computer software industry is characterized by rapid technological
change and is highly competitive in regard to timely product innovation.
Accordingly, we believe that our future success depends on our ability
to enhance our current software programs to meet a wide range of customer
needs and to develop new software programs rapidly to attract new
customers and provide additional solutions to existing customers.
To March 31, 2001, International expended $910,073 (including $533,937
capitalized as software development costs) on the development of its
technology. Should financing allow, we will expend a significant amount
of time in the next 12 months on research and development activities.
These activities will focus on the development of additional videogame
titles, in addition to our proprietary web browser and network
architecture.
16
MARKETING PLAN
The market for Moderngroove's first title is comprised of consumers who
own a next-generation videogame console. The target segment Moderngroove
will serve within this market are referred to as Generation Y and young
Generation X types, further defined by the following demographics: 18-34
year olds; moderate to high level of disposable income, regardless of
income; reside in Europe, North America or Japan; slight skew towards
males; live in close proximity to a major metropolitan area (>500K);
early-adopters of technology; ethnically diverse; live with parents or in
childless households; socially active; listen to modern music; wear urban
clothing and are influenced by urban lifestyle, music and videogame media.
The market for Moderngroove's products will expand as new and diverse
titles are launched across multiple platforms. As next-generation
videogame consoles move beyond the early adopters to the mainstream
consumer, Moderngroove's market will continue to grow. This expanded
growth will also move Moderngroove's products beyond North America, Europe
and Japan, and into other parts of Asia and the world.
Moderngroove's products and services will benefit from a channel marketing
strategy that compliments internal marketing with publisher and licensor
marketing efforts. All costs and efforts associated with marketing titles
produced by Moderngroove will be the responsibility of the publisher,
including public relations, communications and advertising. Through
promotion of each titles' Web browser feature that enables consumers to
access value-added content online, publishers will indirectly market the
network product. Proprietary Web browsers with Moderngroove's titles will
also act as seeds to the network product, in so much as they will include
the interface required to access the network. High penetration of physical
product in the market will increase awareness and consumption of the
network product. The complimentary physical products and media properties
of licensors will also be leveraged to promote network product.
EMPLOYEES
The company had thirty-eight employees, eighty percent (32) of whom were
dedicated to product development. Effective May 15, 2001, we reduced our
workforce by twenty-six to reduce operating costs, while maintaining a
core of twelve employees until sufficient funding is secured. Moderngroove
is not a party to any collective bargaining agreements. Moderngroove
considers its relations with employees to be good. The Company anticipates
to rehire those employees temporarily laid off as new development projects
move from the research and planning phase into full-scale development.
PURCHASE OF EQUIPMENT
The Company develops videogame titles for next generation entertainment
consoles, and plans to include additional consoles that will be introduced
to the market later this year, in their development plans. As a result,
the Company plans to purchase development hardware for the development of
videogame software for these new consoles, namely the Microsoft Xbox and
Nintendo GAMECUBE. Development hardware costs will range from $60,000 to
$180,000 based on the number of videogame titles the Company budgets it's
resources for.
17
As the Company completes development of the network architecture, a
significant number of servers will need to be purchased and deployed as
part of the testing and prototype development for network products.
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, we have not entered into derivative contracts either to hedge
existing risks or for speculative purposes. Accordingly, the adoption of
the new standards on January 1, 2001 did not affect our financial
statements.
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
18
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.
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.
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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
On December 18, 2000, the Company's shareholders approved and the board of
directors announced 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 to be exchanged for
26,000,000 restricted common shares of the company's stock. The shares
were ultimately exchanged on January 2, 2001.
On March 8, 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 $583,000, based upon the trading price of our
common stock on the date of issuance. Subsequent to March 31, 2001, the
Company has reached agreement with the consultants to cancel the agreements
and further services would not be provided. In connection therewith, the
consultants returned 450,000 shares of common stock to the Company for
services yet to be provided.
On March 28, 2001, we entered into an investment agreement with Swartz
Private Equity, LLC. The investment agreement entitles us to issue and
sell up to $20 million of our common stock to Swartz, subject to a formula
based on stock price and trading volume, from time to time over a three
year period beginning on the date that this registration statement is
declared effective.
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.
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ITEM 6. 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)
----------
(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."
21
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."
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: August 15, 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: August 15, 2001 Moderngroove Entertainment, Inc.
--------------------------------
Registrant
By: /s/ Steven Zur
-----------------------
Steven Zur
Corporate Secretary
23