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STUDIO ONE MEDIA, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) RESULTS OF OPERSATIONS Revenues Year Ended June 30, 2014 2013 Session Revenues $ 36,192 $ 192,205 AfterMaster Revenues 146,307 85,532 Total Revenues $ 182,499 $ 277,737 Our business model currently generates revenues from three primary sources: 1. ProMaster HD online music mastering service designed for independent artists. 2. AfterMaster mastering, remastering and audio processing technology that makes music and other audio files sound significantly louder, fuller and clearer. 3. Paid user fees from customers who utilize the Fixed and Model studio to create an audio/video recording 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 and the development of the AfterMaster software algorithm. AfterMaster Revenue for the fiscal year ended June 30, 2014 increased as compared to the comparable fiscal year ended June 30, 2013 due primarily increase in mastering, and remastering of music. Session Revenue for the fiscal year ended June 30, 2014 decreased as compared to the comparable fiscal year ended June 30, 2013 due to the company moving away from the Studio Module. Cost of Revenues Year Ended June 30, 2014 2013Cost of Revenues (excluding depreciation and amortization) $ 381,780 $ 322,973 Cost of sales consists primarily of studio rent, attendant labor and Internet connectivity and excludes depreciation and amortization on the studios. The increase in cost of revenues for the fiscal year ended June 30, 2014 over the comparable fiscal year is attributable, primarily, the development of the AfterMaster Software. Other Operating Expenses Year Ended June 30, 2014 2013 Depreciation and Amortization Expense $ 114,330 $ 214,951 General and Administrative Expenses 3,212,694 3,033,876 Total $ 3,327,024 $ 3,248,827 General and administrative expenses consist primarily of compensation and related costs for our finance, legal, human resources, and information technology personnel; advertising expenses; rent and facilities; and expenses related to the issuance of stock compensation. The overall increase in general and administrative expenses are primarily a result of increase in professional fees. Professional fees increased from $464,030 during the fiscal year ended June 30, 2013 to $ 746,867and during the fiscal year ended June 30, 2014. The increase in professional fees is primarily attributable to our issuing more Common Stock and warrants to various consultants for services rendered during the year. Depreciation and amortization expense decreased due to the Company impairing assets related to the studios due to the decrease in revenue production and lack of use in the current year. 16 -------------------------------------------------------------------------------- Other Income and Expenses Year Ended June 30, 2014 2013 Interest Expense $ (1,579,617 ) $ (1,362,732 ) Other Income - 1,500 Gain (Loss) on Disposal of Property - (6,725 ) Gain (Loss) on Extinguishment of Debt (25,787 ) 188,436 Impairment of Assets (202,206 ) - Total $ (1,807,610 ) $ (1,179,521 ) The other income and expenses during the fiscal year ended June 30, 2014, totaling $1,807,610 of net expenses consisted almost entirely of interest expense. During the comparable period in 2013, other income and expenses totaled $1,179,521. Interest expense has increased primarily due to non-cash interest expense relating to warrants attached to recent debt issuances, as well as conversion features included in recent convertible debt issuances and penalties assessed on defaulted loans. These additional borrowings have been used in the development of the AfterMaster HD software. Net Income (Loss) Year Ended June 30, 2014 2013Net Income (Loss) $ (5,333,915 ) $ (4,473,584 ) Due to the Company's cash position, we use our Common Stock and warrants to pay many employees, vendors and consultants as well as to raise capital through incentives attached to our debt offerings. 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 stock base compensation expenses of $1,206,885 and $1,081,314 for fiscal years ended June 30, 2014 and 2013, our net loss would have been $4,127,030 and $3,392,270 for fiscal years ended June 30, 2014 and 2013, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company had revenues of $182,499 during the fiscal year ended June 30, 2014 as compared to $277,737 in the comparable period in 2013. The Company has incurred losses since inception of $46,985,129. At June 30, 2014, the Company had negative working capital of $6,584,539, which was a decrease in working capital of $2,749,890 from June 30, 2013 which was mostly due to increases in convertible notes, long-term portions of convertible notes becoming current in the year, increases in accounts payable and related party consulting service liabilities. 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. As of June 30, 2014, 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. 17 -------------------------------------------------------------------------------- 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. CRITICAL ACCOUNTING POLICIES Income Taxes - The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Revenue Recognition - The Company applies the provisions of FASB ASC 605, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. ASC 605 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue related to goods and services provided when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured. Valuation of Long-lived Assets - Long-lived tangible assets and definite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company uses an estimate of undiscounted future net cash flows of the assets over the remaining useful lives in determining whether the carrying value of the assets is recoverable. If the carrying values of the assets exceed the expected future cash flows of the assets, the Company recognizes an impairment loss equal to the difference between the carrying values of the assets and their estimated fair values. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent from other groups of assets. The evaluation of long-lived assets requires the Company to use estimates Stock-based Compensation - The Company follows the provisions of FASB ASC 718, "Share-Based Payment," which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Equity instruments issued to non-employees for goods or services are accounted for at fair value and are marked to market until service is complete or a performance commitment date is reached, whichever is earlier. The Company uses the Black-Scholes pricing model for determining the fair value of stock-based compensation. Convertible Securities and Derivatives - The Company estimates the fair values of the debt and warrants, and allocates the proceeds pro rata based on these values. The allocation of proceeds to the warrants results in the debt instrument being recorded at a discount from the face amount of the debt and the value allocated to the warrant is recorded to additional paid-in capital. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds from the convertible host instruments are first allocated to the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, resulting in those instruments being recorded at a discount from their face value. |