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STUDIO ONE MEDIA, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) General Corporate Background We are a Delaware public company traded on the Over-The-Counter Bulletin Board (ticker symbol: SOMD). As of March 31, 2013, there were 41,923,246 shares of Common Stock issued and outstanding. From April 2006 to March 2013, we have raised approximately $20 million in the form of equity for purposes of research and development, the launch of MyStudio and AfterMaster and general corporate purposes. The Company's office and principal place of business is located at 7650 E. Evans Road, Suite C, Scottsdale, Arizona 85260 USA, and its telephone number is (480) 556-9303. The Company also operates research, recording and mastering studios located at 6671 Sunset Blvd., Suite 1520, Hollywood, CA 90028, and its telephone number is (310) 657-4886. Business Studio One Media, Inc. ("Studio One" or "the Company") is a diversified media and technology company. The Company's wholly-owned subsidiaries include MyStudio HD Recording Studios, Inc. and AfterMaster HD Audio Labs, Inc. Over the past several years, the Company and its subsidiaries have been engaged in the development and commercialization of proprietary (patents issued and pending), leading-edge audio and video technologies for professional and consumer use, including MyStudio® HD Recording Studios, AfterMaster™ HD Audio and ProMaster HD™. The Company has the ability to generate revenue from several sources including: (1) mastering or "AfterMastering"/"ProMastering" of audio; (2) MyStudio recording sessions; (3) digital advertising and sponsorship opportunities; (4) mobile studio lease revenues. The Company believes that Studio One's award winning and groundbreaking audio/video technologies and unique business models have the potential to have a significant impact in the entertainment and social media sectors. Business Update The Company is pleased to report that the financial results for the quarter ending March 31, 2013, reflect both record cash revenues and substantial reductions in operating costs and losses. Cash revenues for the three months was $179,578 vs. $88,400 (+103%) for the same period last year and also represents the highest cash revenue quarter since the Company's inception. Operational loss for the quarter was $548,268 vs. $1,104,514 (-50%) for the same period last year and operating costs declined 39%, resulting in a $0.02 loss per share for the quarter vs. $0.04 last year. The revenue increase was substantially due to revenues from the Company's new MyStudio mobile recording studio. The 27' mobile studio was built for rental to third party companies and can be viewed at www.MyStudio.net. The Studio is currently branded for the "Coors Light, Search For The Coldest" for a three month promotional tour ending at the end of June. The Company expects the mobile studio to continue to be the revenue leader for its studio operations in the near term. Based on the success of its first mobile studio the Company is evaluating the manufacture of additional studios. The Company also operates two stationary studios in the Hard Rock Cafe in Las Vegas and the Opry Mills Mall in Nashville, TN. This is in contrast to the seven studios that were operating last year. The Company has delayed installing additional studios in accordance with its agreement with Hard Rock International and other locations pending the outcome of the development of a proposed television series based on its studios. The Television show is being developed pursuant to a co-development agreement that the company entered into with Lionsgate Entertainment one of the world's largest film and television production companies. If the development and sale of the series is successful, MyStudio's will be placed in locations strategically relevant to the TV show. During the quarter, the Company entered into negotiations with one of the world's largest independent music websites to offer its ProMaster mastering services to its members. ProMaster is an online music mastering service designed for independent artists which utilizes proprietary AfterMaster audio technology developed by AfterMaster HD Audio Labs, Inc., a wholly owned subsidiary of Studio One Media, Inc. On April 25, 2013 the Company subsequently finalized a multi-year agreement with the website to ProMaster a minimum of 450,000 songs per month. The Company is responsible to deliver no less than 15,000 songs per day to the website which will then be offered for sale by the website. The agreement is a significant milestone for the Company and its AfterMaster audio technology. More information on AfterMaster and ProMaster can be found at AfterMasterHD.com and ProMasterHD.com respectively. 23 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued In addition, during the quarter, the Company began development of a DSP chip that will allow its AfterMaster technology to be utilized in consumer products such as headphones, televisions, portable stereos and computers. The Company expects to complete development of the DSP chip in the second or third calendar quarters of this year. The Company maintains an aggressive intellectual Property protection plan and was recently notified by the US Patent and Trademark Office that a fourth patent in its portfolio of pending patents has been allowed for issuance. The X Factor In April 2011, we entered into a multi-year strategic partnership with The X Factor in the United States. Led by Simon Cowell, a highly acclaimed entertainment entrepreneur and music producer with a notable ability to identify some of the world's top musical talent, The X Factor had tremendous success in Europe before being introduced into the U.S. last year. Mr. Cowell recognized the significant opportunity MyStudio offered in terms of broadening the audition base. Mr. Cowell and other reality television producers understand that their shows are only as good as the talent identified and MyStudio provides a revolutionary new technology for finding talent in a cost-effective, operationally-efficient manner. The Company conducted auditions for The X Factor in 2011 and 2012. Both seasons of The X Factor saw MyStudio make a significant contribution to the show with a positively disproportionate number of MyStudio auditioners making it to all X Factor elimination levels. Despite conducting less than 10% of the total auditions, two of the final four contestants, Carly Rose Sonenclar and Emblem 3 came from MyStudio auditions. The Company's studio's were not utilized for 2013 The X Factor auditions as there were not enough MyStudio locations available. The Company expects to resume The X Factor auditions in 2014. The success of The X Factor auditions led the Company to host auditions for "America's Next Top Model" late in the year. Television Production Agreement The Company is party to an agreement with one of North America's largest television and movie production companies for the co-development of a television show based on its MyStudio recording studios for national broadcast. The plan for the television show is to use content produced by MyStudio users to showcase their talents in a variety of categories (e.g., music and comedy). Since the signing, the Company and production company have worked closely on the development process to ensure a fresh and exciting concept that will capture national audiences. We are pleased to be working with the aforementioned television production company as it has had a great rate of success in getting television shows produced and aired on major television networks. Its stature and reach as an international film and television "powerhouse" provides additional credibility to the quality of our studios and the opportunity for the show to be a success. We are currently working to finalize agreements for the show's hosts and executive producers, which are expected to be internationally renowned entertainers. We believe that the unique content of the show, coupled with the substantial fan base of the executive producers, will be of great interest to one of the national networks and accelerate the timing for the show's debut. The production of a national television show such as this has been a long-time goal of the Company's management team. We believe that such a show will allow for significant national and international exposure for MyStudio and thus drive substantially higher studio revenues. Based on the success of the show and the low cost of production, there is a significant possibility of rolling out such a format into many international markets. Hard Rock We recently announced a strategic partnership with globally-recognized Hard Rock International, the owner and operator of over 175 restaurants, hotels and casinos around the world. The partnership provides for us to install studios in Hard Rock locations. Three initial sites were announced, including the Hard Rock Café - Las Vegas, Hard Rock Café - Chicago and the Seminole Hard Rock Hotel Casino - Hollywood, Florida. We expect to announce additional locations in the future. To date, the Hard Rock Cafe in Las Vegas has been installed. We believe this is a very important development for the company as we have always sought to partner with leading companies in their respective fields where there will be a synergistic value for both parties. With the strong global brand of Hard Rock and the breadth of its properties around the world, the partnership should significantly enhance the brand awareness of MyStudio. The agreement provides for the companies to share in the revenues generated from the studio sessions, as well as on-studio advertising. In exchange for placing studios in the Hard Rock venues, a Hard Rock affiliate will be responsible for overhead costs of the studios, which includes labor and rent. Additionally, Hard Rock will be expected to promote the studios in its marketing campaigns, which could provide an additional uplift in session revenue for other non-Hard Rock MyStudio locations. Hard Rock intends to seek sponsors and other partners to further compliment the MyStudio/Hard Rock partnership to drive additional traffic to those venues. 24 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued The Company has delayed installation of additional studios in Hard Rock and other locations in the short term, pending the outcome of the development of a proposed TV show based on MyStudio. Warner Music Nashville The Company entered into an exclusive promotion agreement with Warner Music Nashville ("WMN") for the Company's Nashville based studio. WMN is one of the most important country and music labels with superstars such as Blake Shelton, Dwight Yoakam, Faith Hill and Big & Rich. The revenue sharing agreement calls for WMN to utilize MyStudio as an exciting and innovative way to promote its artists as well as connect with their fans by way of interaction with the studio at the mall and through online video contests. Country music fans will have the opportunity to create a variety of high definition videos and enter them into contests hosted by Warner Music Nashville and MyStudio. The Company expects the arrangement to raise awareness of its brand and generate increased revenues from promotions initiated by such a high profile partner in the Tennessee market. The Company expects the first promotion to begin in June. Additional Strategic Opportunities Since the introduction of the first studio, one of the primary objectives of the management team has been to develop strategic relationships with industry leaders in the music and entertainment fields. The Company has successfully partnered with leading names, such as The X Factor, and Hard Rock International that have allowed it to gain national branding exposure without having to expend significant capital for marketing. As a result of favorable exposure from The X Factor and positive feedback from other partnerships, we have received a significant number of in-bound enquires about using the studios for other reality television shows and a host of other auditions and contests. The studios have recently been used for casting for the upcoming new reality series entitled America's Most Eligible and Tyra Banks' America's Next Top Model. Earlier in the fiscal year, the studios were also used for casting and featured in the new series called Remodeled, which was led by supermodel agent Paul Fisher. The show centered around building a national network of new modeling talent. Mr. Fisher is also an important member of the Company's Advisory Board. Numerous other contests using the MyStudio technologies have been hosted in the current and prior years, including music, modeling and comedy. MyStudio represents a revolutionary change in how auditioning/casting can be performed. The quality of the audio and videos, coupled with a standardized easy-to-use viewing platform for casting agents, creates a compelling reason for widespread adoption of the technology. Additionally, production companies can realize substantial cost savings from the use of the studios as they may no longer have to hold "cattle calls", which require significant expenses for venue rental and associated labor. As management teams at television and motion picture companies face greater pressure to contain costs for their productions, MyStudio provides a compelling new technology that could very favorably impact their bottom lines as they seek top talent. Based on the high cost of creating a national marketing campaign, the Company to date has had to identify unique and alternative means of marketing its products without incurring major cash outlays. However, based on greater brand awareness from our high profile partnerships and increased inbound interest by prospective advertising partners, we have recently engaged a proven marketing firm with broad relations with major consumer brands to create revenue-generating partnerships and advertising for the Company. This new marketing firm was played an important role in one of recently announced partnerships. Accordingly, we expect to substantially increase advertising and sponsorship revenues in future quarters. Mobile Studios During the year, we also built and successfully deployed a temporary mobile MyStudio for Pepsi, which was used throughout the country for The X Factor auditions. Pepsi was a sponsor of the X Factor auditions. Based on the success of this mobile studio, we believed that mobile studios could offer a significant revenue opportunity for the Company from both promotional use, as well as the ability to sell advertising on the studios as they travel the United States promoting various contests and auditions. In January we completed the manufacture of our first mobile MyStudio and has to date operated at a profit. The studio is currently on a multi-city tour in conjunction with "Coors Light, Search for The Coldest" campaign. 25 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued AfterMaster We continue to believe that AfterMaster is one of the most significant breakthroughs in digital audio and that it has the potential to create significant revenues for the Company. The feedback from music industry executives, leading artists, mastering houses, and top consumer products companies has been exceptional. The broad commercialization of this technology is a top priority for the management and Board of Directors of the Company. AfterMaster was an internally-developed, proprietary (patents-pending) mastering and remastering technology that makes music and other audio files sound significantly louder, fuller and clearer than traditionally mastered music. The technology can be applied to virtually all audio sources including music, radio, motion pictures and television. The technology has been used to enhance music created by such artists as Lady Gaga, Janet Jackson, and many others. We believe that AfterMaster provides record labels with such a significant opportunity as they are able to remonetize their catalogs by offering high definition ("HD") audio versions through the use of our technology. As such, we are in discussions with several leaders in music about utilizing our technology for the re-release of the HD versions of their catalogs. Such songs can be released in physical format (e.g., CDs) or digital downloads through leading online music retailers. In addition to the record labels, we are in discussions with other potential users of the technology. Such discussions include consumer electronics companies that see the opportunity to differentiate their products with enhanced audio capabilities offered through the use of an AfterMaster chip in their products. We believe this represents an enormous market for the Company to have its product integrated into phones, televisions, radios and a host of other products. As the convergence of features for such consumer electronics continues, it can be difficult for leading consumer electronics companies to differentiate their products. We believe that AfterMaster provides a unique and significant competitive opportunity for one or more of the leading consumer audio OEMs. The Company's Advisory Board of influential leaders in the music and motion picture industry are a critical element of the Company's marketing strategy for AfterMaster. ProMaster Utilizing technologies created in the development of AfterMaster, the Company has recently introduced a consumer version of AfterMaster which it has branded as ProMasterHD. The ProMaster product was recently introduced through a new relationship with music retail giant Guitar Center. Guitar Center has over 225 stores nationally and caters to recreational, amateur/aspiring and professional musicians. The ProMaster product will be marketed by Guitar Center in-store and through its catalogs, mailers and online advertising. Musicians are able to upload their files and have them mixed, mastered and/or remastered by ProMaster at an affordable price and a short turnaround period. Alternatively, musicians can send their music directly to our www.ProMasterHD.com. We have recently begun a viral marketing campaign for the product on various websites frequented by amateur musicians. Key individuals for the campaign include our VP of Audio and Rock and Roll Hall of Fame nominee Shelly Yakus and music producers Rodney Jerkins, Richard Perry and Andrew Dawson. Music industry sources have stated that millions independent songs are produced each month around the world. The expense of mastering such music for the amateur musician is often cost prohibitive, as it can cost over $500 per song. At a price of $34.99 per song, ProMaster creates a compelling offering for those seeking to significantly enhance the quality of their music for personal use or with intent to showcase their music in hopes of advancing their career aspirations. Based on the enormous addressable market for such a product, we believe that ProMaster has the potential to generate significant revenues for the Company. On April 25, 2013 the Company entered into a ground-breaking agreement with one of the worlds largest independent music websites. The multiyear agreement calls for the website to provide no less than 450,000 songs a month to ProMaster. The Company is responsible to deliver a minimum of 15,000 songs per day. The songs will be offered for resale and revenues split between the parties. 26-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Corporate Chief Financial Officer, Mr. Joe Desiderio resigned as CFO on April 17, 2013. He was replaced by Mirella Chavez, the Company's Chief Accounting Officer who has been employed with the Company for over five years. Ms. Chavez is currently acting CFO. Mr. Desiderio remains on the Board of Directors. The Company has been awarded four patents over the past eighteen months. The Company has a very aggressive intellectual property strategy to protect the MyStudio, AfterMaster and related technologies it has developed. The Company has a number of other patents pending. Over the past several years, the weak capital markets have constrained our growth and the full implementation of our business plan for the roll-out of new studios. Despite these difficulties, the Company has and continues to raise capital for studio operations and advancement of AfterMaster. We expect to continue raising required capital through both equity and debt financings to further our corporate objectives. As capital markets improve and we begin to see fruits of new and pending revenue opportunities, we believe that we will be able to raise substantial additional capital to execute our full business plan and create significant shareholder value through our MyStudio and AfterMaster products. Such funds are in addition to the aforementioned credit facility. Advisory Board Recognizing the significance of our technologies, we have been able to attract some of the leading music and entertainment executives to our Advisory Board. The Advisory Board is an important resource for the Company in terms of thought leadership and strategic introductions. This distinguished group includes: Ted Field - Chairman & CEO of Radar Pictures (over 60 motion pictures generating over $7 billion in gross revenues); co-founder of Interscope Records; former owner of Panavision. Paul Fisher - internationally recognized modeling agent; CEO of The Network. Jason Flom - former CEO of Atlantic Records, Virgin Music, Capitol Music Group and Lava Records. Sheila Jaffe - Emmy Award winning casting director; partner in Walken/Jaffe Casting; casting for notable shows as Entourage and The Sopranos. Rodney Jerkins - Grammy Award winning music producer/song writer; clients include Janet Jackson, Madonna, Lady Gaga among others. Allan Kaplan - serial entrepreneur and venture capitalist; Director of Clearview Capital Partners. Andrew Knight - Director of News Corporation; former Editor of The Economist. Paul Oreffice - former Chairman & CEO of The Dow Chemical Company; served on the Boards of The Coca-Cola Company, Morgan Stanley, CIGNA and Nortel. Richard Perry - world renown record producer and winner of seven Grammy Awards; clients include Barbra Streisand and Cher. Diane Warren - considered to be the world's most prolific songwriter; Golden Globe and Grammy Award winner. Charles Weber - former CEO of Lucas Films; former COO of Embassy Communications. MyStudio HD Recording Studios Studio One Media, Inc. has developed MyStudio, a self contained, state-of-the-art, high definition ("HD") interactive audio/video recording studio designed for installation in shopping malls and other high traffic areas. MyStudio offers consumers true professional recording studio-quality audio and HD broadcast-quality video with an ease, economy and convenience never before available to the public. MyStudio and its accompanying website www.MyStudio.net incorporate into a single entertainment venue some of the best elements of the world's leading Internet and entertainment properties including video sharing, social networking and talent-related television programming. MyStudio eliminates the high cost and technological and logistical barriers inherent in the creation of high quality production and uploading of video content onto the Internet for both amateurs and professionals alike. 27 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued MyStudio enables users, for a fee, to record up to a five-minute personalized video with professional-quality backdrop, lighting and sound. The studios feature Hollywood-style green screen technology, and users can select from over a thousand HD virtual backgrounds (static and dynamic) and thousands of licensed karaoke tracks from Sony/ATV Music Publishing, EMI Music Publishing, Universal Music Group, BMG and others. The studio lighting is custom programmed for each virtual background, and the sound quality is derived from a specially engineered acoustic design and a proprietary audio signal sequencing process. Professional users, such as musicians and entertainers, often pay hundreds or thousands of dollars for comparable professionally produced audio and video. Finished videos are available for viewing within minutes of completion of the recording at www.MyStudio.net. Videos are protected with a privacy pass-code, and uses can decide whether to make their videos available to the public or keep them private. The website offers users the opportunity to share videos and create member profile pages in a dynamic social networking environment. Users may also create links between our website and other social networking sites or their own websites, such as their own small businesses. MyStudio members can enter contests, order free DVDs or CDs of their videos, download MP3 audio files (restrictions apply), access embedded codes or print high resolution photos from their video. MyStudio has been used to create videos for music, modeling, comedy, dating, job resumes, auditions, and personal messages and greetings. Users can also enter their videos into industry-sponsored music, casting, modeling and comedy contests. In addition, the Company has offered various themed holiday greetings, as well as greetings to U.S. troops overseas. Currently there are MyStudio locations included in the greater metropolitan areas of Phoenix, Nashville and Las Vegas. Four additional studios are in various stages of moving to Hard Rock locations. MyStudio Business Strategy We believe that MyStudio offers a service never before available to the public - a professional quality recording experience at an affordable price. The HD virtual backgrounds, professional lighting and specially engineered sound cannot be replicated by users at home or outside a professional studio. Connect Talent to Talent Seekers. MyStudio provides the aspiring artist or entertainer with a cost-effective, professional quality platform to showcase his or her talent. Entertainers often pay hundreds or thousands of dollars for comparable professionally produced audio and video products. Users can often afford to make numerous videos to showcase their talents due to relative minimal price point for using MyStudio. There have been several incidents where users' videos have allowed them to be discovered by talent agents. MyStudio played an integral part of the casting process to find talent for both seasons of The X Factor in the United States, as well as for other reality television shows. The studios provide entertainment recruiters with an entirely new method for locating talent. Using MyStudio's software casting applications, casting directors are able to review a standardized and efficient format for judging talent prospects. This contrasts with the inefficiencies of them receiving, loading and screening numerous formats of video (e.g., VHS and DVDs) for talent. Additionally, MyStudio allows prospective contestants the ability to perform their auditions on their own time and in unlimited quantities versus the current casting call standard of having only a few moments and a single opportunity in front of a casting agent. Reality television producers understand that their shows are only as good as the talent. MyStudio will allow for a greater number of contestants to try-out for these shows which provides producers with a much deeper well of talent. MyStudio has the ability to set a new standard and create a new marketplace for sellers and buyers of talent. We have focused significant efforts on this aspect of our business model and have formed strategic partnerships with Simon Cowell's The X Factor, Hard Rock International, Back Stage Casting and RealityWanted.com. Build an Online Community Featuring User-Generated Content. Our website www.mystudio.net captures the social networking phenomena Facebook and video sharing of YouTube and combines it with a superior audio/visual experience. Our website allows users to create personal profiles, share videos with family and friends and make their videos available to the public, all of which encourage user loyalty and viral growth opportunities. Expand the MyStudio Concept into New Vertical Industries. The potential utilization of the recording studios extends well beyond the entertainment industry. The studios can facilitate efficiency, personalization and differentiation in many industries including professional recruitment and staffing, Internet dating, corporate training, online greeting cards and business promotion. We expect to develop future partnerships for content and users with recruiting, dating and greeting card companies among others. 28 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued MyStudio Business Model Our "bricks and clicks" business model is currently based upon three primary sources of revenue: recording session fees from MyStudio and advertising/sponsorship revenue from the individual studios and advertising on www.MyStudio.net. We plan to continue driving recording session revenue through the use of industry-sponsored music, modeling and talent contests with new and repeat users, as well as the installation of additional studios. Additional studios are expected to drive exponential traffic to the MyStudio website as each new video generates unique website visitors due to the viral effect of our video sharing offering. We believe that the success of the studios depends on our ability to raise additional capital, deploy multiple studios and continue to create strategic partnerships that drive traffic to the studios. Our current installed base of studios is insufficient to generate adequate revenues to achieve overall profitability for the Company. By deploying multiple studios and gaining "critical mass", we believe that we will be able to successfully implement our business plan, attract a greater number of strategic partnerships and achieve profitability. Recording Session Revenue. Each studio is designed to record videos during a mall or store's operating hours, which can average 11 hours per day. MyStudio charges a fee per session for use of the studio. Each session lasts up to five minutes. There are two pay stations on the studio to expedite the song and background selection and payment process. Additionally, users may prepay their sessions from home and have an opportunity to select from a greater variety of songs and backgrounds. These payment options increase throughput for those using the studio. MyStudio offers over 1,000 HD backgrounds from which to select, or users may provide their own custom backgrounds. Additionally, MyStudio currently offers thousands of songs licensed from Sony/ATV Music Publishing, EMI Music Publishing, Universal Music Group and others for karaoke usage. In many instances, users perform their own songs using their guitar, keyboard or other instruments, which may be plugged into the studios for a professionally sounding quality video. On-Studio Advertising and Sponsorship Revenue. The exterior of the studios contain eight (8) 37" LCD flat screen monitors that are used to display videos produced through MyStudio and promote advertising messages from selected sponsors and third party advertisers. We have sold advertising on the studios, and we believe that we will be able to secure national advertising sponsors when we have a greater number of studios in operation and through our partnership with Hard Rock International. Website Advertising Revenue. The number of visitors, visitor demographics and the time spent on a website are the primary drivers behind advertising-based revenue models for Internet properties. The user-generated content created through MyStudio is the primary traffic generator for the MyStudio website. We expect web traffic to grow substantially as additional studios are launched. We believe that our web property can create significant value for our shareholders. The leading social media websites, such as Facebook, have created substantial valuations for themselves based on website advertising. Unlike a number of other social media and Internet companies, we are not solely dependent upon website advertising to generate revenues. Our more diverse "bricks and clicks" business model allows our shareholders to benefit from multiple revenue streams, with the website being just one of the Company's valuation drivers. MyStudio Marketing and Promotion Strategy Our business plan calls for the establishment of regular events, auditions and contests to drive traffic to the studios; this revenue strategy has been confirmed by a marked increase in studio traffic when contests and promotions have been offered. Our marketing and promotion strategy is designed to drive traffic through the studios which in turn drives traffic to our website. To date, we have not invested significant dollars for marketing as we believe such marketing efforts would not have been prudent without a national footprint for MyStudio. We expect to significantly increase our national marketing efforts to drive sponsorship and advertising revenues later in the future. We did, however, recently engage a national marketing agency to assist us in securing advertising and sponsorship opportunities. With a broader installed studio base in major metropolitan markets and continued favorable feedback from the high profile auditions that we have and are hosting, we believe that we will have a much greater opportunity to gain national attention of large sponsors who understand the opportunity to partner with MyStudio for contests and auditions to favorably market their own businesses. To date, we have sold sponsorships that have led to increased utilization of the studio, as well as advertising monies. We remain focused on forming strategic partnerships at the local, regional and national level with talent seekers (the television, music, film, performing arts and modeling industries), the media (radio and television stations and printed media) and corporate sponsors who may seek access to our expanding user base. Such partnerships are designed to generate industry-sponsored music, modeling and talent contests to stimulate trial of and demand for the studios. 29 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued MyStudio has successfully partnered with top names in the entertainment business, as described below. In 2011, we announced a multi-year partnership with Simon Cowell's The X Factor, which has been one of the most successful new music-centric show introductions in the United States over the past few years. We believe that this agreement, among others, demonstrates that the Company has established its ability to partner with some of the leading producers in the music and entertainment business. Led by Mr. Cowell, a highly acclaimed entertainment entrepreneur and music producer with a notable ability to identify some of the world's top musical talent, The X Factor has had tremendous success in Europe. The show debuted last fall on the FOX Network and has recently begun its second season. In its inaugural season, the show quickly generated a very significant following throughout the United States. The high quality of the talent selected to participate in the show has been a key source of fan enthusiasm for the show since its debut. Mr. Cowell recognized the significant opportunity provided by MyStudio in broadening the contestant base for his show. MyStudio allowed for contestants to visit the MyStudio locations in addition to the primary casting cities where "cattle calls" were held. Despite the enormous number of persons auditioning for the show, three of the acts using MyStudio made it into the show's final 32 to date, as well as one of those acts advancing as a final three female's finalist. The studios were used again this year for Season 2 with both the fixed location and new Pepsi/MyStudio mobile unit being utilized. Through the first four shows of the current season, there were 21 contestants that had been approved to go to the next level called "boot camp". Of those 21, three were contestants who auditioned at MyStudio. The studios were used for two other reality television shows recently, including America's Most Eligible and Remodeled. The partnership with The X Factor demonstrated that the MyStudio recording studios are an efficient means for allowing for a large number of people in multiple cities to try-out for reality television shows and finding top talent. Accordingly, we expect television, theater and motion pictures to begin to follow Mr. Cowell's lead in utilizing this technology to enhance their casting processes and thereby creating the potential for a number of other strategic partnerships for the Company as we install additional studios. Our partnership with The X Factor has also allowed the Company to gain national attention for its studios without having to expend significant amounts of internal funds to achieve a comparable level of positive exposure and brand development. We recently announced a strategic partnership with globally-recognized Hard Rock International, the owner and operator of over 175 restaurants, hotels and casinos around the world. The partnership provides for us to install studios in Hard Rock locations. Three initial sites were announced, including the Hard Rock Café - Las Vegas, Hard Rock Café - Chicago and the Seminole Hard Rock Hotel Casino - Hollywood, Florida. We expect to announce additional locations in the future. We believe this is a very important development for the company. The agreement provides for the companies to share in the revenues generated from the studio sessions, as well as on-studio advertising. In exchange for placing studios in the Hard Rock venues, they will be responsible for overhead costs of the studios, which includes labor, utilities and rent. Additionally, Hard Rock will promote the studios in its marketing campaigns, which could provide an additional uplift in session revenue for other non-Hard Rock MyStudio locations. Hard Rock intends to seek sponsors and other partners to further compliment the MyStudio/Hard Rock partnership to drive additional traffic and generate revenue at those venues. The partnership underscores Hard Rock's commitment to its customers of offering high quality food and fun in an entertaining environment. Mark Burnett Productions ("MBP") has used MyStudio in the casting of its shows, including Are You Smarter Than a Fifth Grader and Bully Beatdown. MBP is a leading production company for primetime television, cable and the Internet, and has produced over 1,100 hours of television programming which regularly air in over 70 countries around the world. MyStudio has been used by entertainment leaders Simon Fuller, Perez Hilton and Jamie King in their casting for Boy Band, a contest to identify five males between the ages of 13 and 21 with outstanding dance and vocal talent to form a high profile band. Mr. Fuller is the producer of American Idol. Mr. Hilton is a famous celebrity gossip columnist with a very extensive following. Mr. King is a world renowned choreographer. MyStudio was selected by Boy Band for the convenience and ease by potential contestants and was responsible for finding one of the Boy Band members. In addition to Boy Band, Mr. Fuller, through 19 Entertainment and MySpace, used MyStudio for the auditions of If I Can Dream, a reality television show offered through Hulu.com. The studios were used by a number of aspiring artists to perform their audition demos in hopes of being selected to join the cast of the show. 30 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued The Company is party to an agreement with one of North America's largest television and movie production companies for the co-development of a television show based on its MyStudio recording studios for national broadcast. The plan for the television show is to use content produced by MyStudio users to showcase their talents in a variety of categories (e.g., music and comedy). Since the signing, the Company and production company have worked closely on the development process to ensure a fresh and exciting concept that will capture national audiences. We are pleased to be working with the aforementioned television production company as it has had a great rate of success in getting television shows produced and aired on major television networks. Its stature and reach as an international film and television "powerhouse" provides additional credibility to the quality of our studios and the opportunity for the show to be a success. We are currently working to finalize agreements for the show's hosts and executive producers, which are expected to be internationally renowned entertainers. We believe that the unique content of the show, coupled with the substantial fan base of the executive producers, will be of great interest to one of the national networks and accelerate the timing for the show's debut. The production of a national television show such as this has been a long-time goal of the Company's management team. We believe that such a show will allow for significant national and international exposure for MyStudio and thus drive substantially higher studio revenues. Based on the success of the show and the low cost of production, there is a significant possibility of rolling out such a format into many international markets. We continue to pursue additional reality TV, music, modeling and comedy audition opportunities. AfterMaster HD Audio We have developed a revolutionary audio mastering technology branded AfterMaster, for which the technology is held by AfterMaster HD Audio Labs, Inc., a wholly-owned subsidiary of the Company. We believe that the AfterMaster process for mastering audio makes music significantly louder, fuller and clearer than traditionally mastered music. The technology is a proprietary, patents-pending combination of hardware and software which was developed by our audio engineering team. It can be applied on virtually all audio sources including, music, radio, television and film. The AfterMaster process can be used to create both a master from a master audio mix or to "AfterMaster" existing music that has already been mastered. The technology allows any mastered audio to be remastered without the need to access the master mix. The business model includes the mastering and "AfterMastering" of both new music releases as well as catalog music. We believe that AfterMaster can be the technological impetus that can revitalize the music industry by providing consumers with a new leap in sound quality and added value. Some music industry experts who have recently been introduced to our technologies have equated it with high definition television: this technology has the opportunity to do for music what HD has done for television. We continue to believe that AfterMaster is one of the most significant breakthroughs in digital audio and that it has the potential to create significant revenues for the Company. The feedback from music industry executives, leading artists, mastering houses and top consumer products companies has been exceptional. The broad commercialization of this technology is a top priority for the management and Board of Directors of the Company. AfterMaster was an internally-developed, patents-pending mastering and remastering technology that makes music and other audio files sound significantly louder, fuller and clearer than traditionally mastered music. The technology can be applied to virtually all audio sources including music, radio, motion pictures and television. The technology has been used to enhance music created by such artists as Lady Gaga, Janet Jackson, Aerosmith and many others. We are in discussions with several leaders in music about utilizing our technology for the re-release of the HD versions of their catalogs. Such songs can be released in physical format (e.g., CDs) or digital downloads through leading online music retailers. In addition to the record labels, we are in discussions with other potential users of the technology. Such discussions include several consumer electronics companies that see the opportunity to differentiate their products with enhanced audio capabilities offered through the use of AfterMaster. We believe this represents an enormous market for the Company to have its product integrated into phones, televisions, radios and a host of other products. The Company's Advisory Board of influential leaders in the music and motion picture can play a critical element of the Company's marketing strategy for AfterMaster. 31 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued ProMaster Utilizing technologies created in the development of AfterMaster, the Company has recently introduced a consumer version of AfterMaster which it has branded as ProMaster HD. The ProMaster product was recently introduced through a new relationship with music retail giant Guitar Center. Guitar Center has over 225 stores nationally and caters to recreational, amateur/aspiring and professional musicians. The ProMaster product will be marketed by Guitar Center through its catalogs, mailers and online advertising. Musicians are able to upload their files and have them mixed, mastered and/or remastered by ProMaster at an affordable price and a short turnaround period. Alternatively, musicians can send their music directly to our website www.ProMasterHD.com. Music industry sources have stated that millions of songs by independent musicians are produced each month around the world.. The expense of mastering such music for the amateur musician is often cost prohibitive, as it can cost over $500 per song. At a price of $34.99 per song, ProMaster creates a compelling offering for those seeking to significantly enhance the quality of their music for personal use or with intent to showcase their music in hopes of advancing their career aspirations. In April, 2013 the company finalized a multi-year agreement with one of the worlds largest independent music websites to offer its ProMaster mastering services to its members. The agreement calls for the website to provide to ProMaster a minimum of 450,000 songs per month. The Company is responsible to deliver no less than 15,000 songs per day to the website which will then be offered for sale by the website. The agreement is a significant milestone for the Company and its AfterMaster audio technology. More information on AfterMaster and ProMaster can be found at AfterMasterHD.com and ProMasterHD.com respectively. Based on the enormous addressable market for such a product, we believe that ProMaster has the potential to generate significant revenues for the Company. Intellectual Property and Licensing We have implemented an aggressive intellectual property program including the filing of numerous foreign and domestic patent applications and trademark applications with the U.S. Patent and Trademark Office, all of which are designed to protect what we believe is innovative and proprietary technology. We also enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with third parties, and we rigorously control access to proprietary technology. We currently have four patents issued with numerous patents and trademarks pending. Employees As of March 31, 2012 we employed eight full-time and seven part-time employees. We expect to seek additional employees in the next year to handle anticipated potential growth. We believe that our relationship with our employees is good. None of our employees are members of any union nor have they entered into any collective bargaining agreements. The Company believes that continued to embark on several key initiatives, which included redefining our product, staffing, pricing, marketing and demographics. These initiatives included testing of off-site session purchases, promotional sessions, multiple fee changes, testing new locations and staffing, all of which had varying effect on sales. In addition, the Company experienced a decline in studio revenues as it was not able to launch studios in new Hard Rock locations until it fulfilled among other things existing lease arrangements. The information collected through the various initiatives has led the company to a new operational plan for its recording studios. The plan includes locating studios at venues which will offer cost and revenue sharing arrangements, as well as promotional and marketing support. Such partnerships eliminate rents and direct staffing costs for the Company, resulting in significant operational cost savings while providing new promotional and sales opportunities for revenue generation. The Company recently entered into a revenue sharing agreement with Hard Rock International to relocate up to five of its existing seven studios to Hard Rock venues in the United States. The first Hard Rock/MyStudio opened in Las Vegas in October 2012. In addition, the Company entered into a revenue sharing and marketing agreement for its Nashville based studio with Warner Music Nashville ("WMN"). The agreement calls for WMN to use the studio to create awareness for its popular artists and look for new talent through contests and other interactive initiatives at the studio. As a result of the new initiatives and realignment on our objectives, we believe that the Company is positioned to capitalize on its MyStudio and AfterMaster technologies in the upcoming year. We are encouraged by the growing interest in using MyStudio for casting purposes for national television shows and believe that MyStudio provides a compelling technological breakthrough for talent seekers. Additionally, we remain very positive on the opportunity for AfterMaster to provide significant future revenues for the Company and its potential to greatly improve digital audio for music, motion pictures and television. 32 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Facilities Pursuant to a lease originally dated January, 2006, we currently occupy approximately 11,800 square feet of office space located at 7650 E. Evans Rd., Suite C, Scottsdale, Arizona on a month-by month basis. The total lease expense is approximately $9,609 per month, payable in cash and Common Stock of the Company. We lease an office in Los Angeles for use by our audio team in connection with our AfterMaster product. This lease expires on December 31, 2014. The total lease expense for the facility is approximately $6,040 per month, and the total remaining obligations under these leases at March 31, 2013 were approximately $126,840. We also lease one retail location in Opry Mills Mall Nashville, Tennessee in connection with our MyStudio Kiosk. This lease expires on June 01, 2013. The total lease expense for the facility is approximately $3,000 per month, and the total remaining obligations under these leases at March 31, 2013 were approximately $6,000. 33-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued RESULTS OF OPERATIONS Revenues (Unaudited) Nine months Ended March 31, 2013 2012 Session Revenues $ 210,431 $ 104,561 Advertising Revenues 2,000 17,116 AfterMaster Revenues 49,769 77,600 Total Revenues $ 262,200 $ 199,277 Our business model currently generates revenues from five primary sources: 1) Paid user fees from customers who utilize the Fixed studios to create an audio/video recording; 2) Advertising revenue from the external monitors located on each MyStudio facility; 3) Advertising revenue from our website; 4) AfterMaster revenue; and 5) Revenues from mobile tour. The revenues from each of the first two of these sources as well as the fifth source are expected to increase proportionally to the number of studios we place in operation. The revenue from advertising on the website will depend on the number and length of visits to our website by MyStudio users and other viewers. Revenues from AfterMaster services resulted primarily from audio services provided to producers and artists on a contract basis. This source of revenue is expected to grow in coming years, and the Company is expecting to generate additional revenues from pay-per-play downloads. The revenue for the nine months ended March 31, 2013 increased by $62,923 to $262,200 from $199,277 over the comparable nine month period ended March 31, 2012 the increase was substantially due to revenues from the Company's new MyStudio mobile recording studio. Cost of Sales (Unaudited) Nine Months Ended March 31, 2013 2012Cost of Sales (excluding depreciation and amortization) $ 270,772 $ 593,525 Cost of sales consists primarily of studio rent, attendant labor and Internet connectivity and excludes depreciation and amortization on the studios. The decrease in cost of sales for the nine months ended March 31, 2013, over the comparable period for the prior fiscal year, is attributable, primarily, to the Company operating fewer studios in the current year. Other Operating Expenses (Unaudited) Nine Months Ended March 31, 2013 2012 Cost of Barter Exchanges $ - $ 23,500Depreciation and Amortization Expense 138,494 370,598 General and Administrative Expenses 2,075,665 3,009,105 Total $ 2,214,159 $ 3,403,203 34-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued General and administrative expenses consist primarily of compensation and related costs for personnel and facilities to our finance, human resources, facilities, information technology, advertising, and expenses related to the issuance of stock compensation. General and administrative expenses decreased in the nine-month period ended March 31, 2013 compared to the nine months ended March 31, 2012 due to a 31% decrease in overhead expenses such as studio rent, employee and consultant expenses. The decrease in general and administrative expenses is due to the fact that our efforts during the period were focused primarily remapping the company to run more efficiently with lower overhead expenses. Other general and administrative expenses also decrease in 2013, when compared to the same period in 2012, as a result of the Company installing and deploying new studios, which did not occur in the current period. Other Income and Expenses (Unaudited) Nine Months Ended March 31, 2013 2012 Interest Expense $ (969,703 ) $ (925,519 ) Gain (Loss) on Extinguishment of Debt - 191 Total $ (969,703 ) $ (925,328 ) The other income and expenses during the nine months ended March 31 2013, totaled $986,965 of net expenses, which consists of interest expense. During the comparable period in 2012, other income and expenses totaled $925,328 of net expenses, which was a combination of interest expense ($925,519) and other income ($191). Interest has increased due to additional financing secured during the period. (Unaudited) Nine Months Ended March 31, 2013 2012 Net Income (Loss) $ (3,190,934 ) $ (5,096,591 ) Due to the Company's cash position, we use our Common Stock as currency to pay many employees, vendors and consultants. Once we have raised additional capital from outside sources, as well as generated cash flows from operations, we expect to reduce the use of Common Stock as a significant means of compensation. Under FASB ASC 718, "Accounting for Stock-Based Compensation", these non-cash issuances are expensed at the equity instruments fair market value. Absent these large non-cash expenses, our net loss would be $2,221,231 and $3,403,091 for the periods ended March 31, 2013 and 2012, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company had revenues of $262,200 during the nine months ended March 31, 2013 as compared to $199,277 in the comparable period of 2012. The Company has incurred losses since inception of $40,368, 564. At March 31, 2013, the Company has negative working capital of $4,165,193, which is a decrease in working capital of $1,118,459 from June 30, 2012. The decrease in the working capital was primarily due to lower cash balances and additional short-term borrowings. The future of the Company as an operating business will depend on its ability to obtain sufficient capital contributions and/or financing as may be required to sustain its operations. Management's plan to address these issues includes a continued exercise of tight cost controls to conserve cash and obtaining additional debt and/or equity financing. As we continue our activities, we will continue to experience net negative cash flows from operations, pending receipt of significant revenues that generate a positive sales margin. The Company expects that additional operating losses will occur until net margins gained from sales revenue is sufficient to offset the costs incurred for marketing, sales and product development. Until the Company has achieved a sales level sufficient to break even, it will not be self-sustaining or be competitive in the areas in which it intends to operate. In addition, the Company will require substantial additional funds to continue production and installation of the additional studios and to fully implement its marketing plans. 35 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued The Company's management team believes that its success depends on the Company's ability to raise additional capital, deploy multiple studios and create strategic partnerships that drive traffic to the studios. The Company's current seven studios are insufficient to generate adequate revenues to achieve overall profitability for the Company. By deploying multiple studios, the Company believes that it will be able to successfully implement its business plan, attract a greater number of strategic partnerships and achieve profitability. As of March 31, 2013, the existing capital and anticipated funds from operations were not sufficient to sustain Company operations or the business plan over the next twelve months. We anticipate substantial increases in our cash requirements which will require additional capital to be generated from the sale of Common Stock, the sale of Preferred Stock, equipment financing, debt financing and bank borrowings, to the extent available, or other forms of financing to the extent necessary to augment our working capital. In the event we cannot obtain the necessary capital to pursue our strategic business plan, we may have to significantly curtail our operations. This would materially impact our ability to continue operations. There is no assurance that the Company will be able to obtain additional funding when needed, or that such funding, if available, can be obtained on terms acceptable to the Company. Recent global events, as well as domestic economic factors, have recently limited the access of many companies to both debt and equity financings. As such, no assurance can be made that financing will be available, or available on terms acceptable to the Company, and, if available, it may take either the form of debt or equity. In either case, any financing will have a negative impact on our financial condition and will likely result in an immediate and substantial dilution to our existing stockholders. Although the Company intends to engage in a subsequent equity offering of its securities to raise additional working capital for operations and studio manufacturing, the Company has no firm commitments for any additional funding, either debt or equity, at the present time. Insufficient financial resources may require the Company to delay or eliminate all or some of its development, marketing and sales plans, which could have a material adverse effect on the Company's business, financial condition and results of operations. There is no certainty that the expenditures to be made by the Company will result in a profitable business proposed by the Company. |