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[November 19, 2012]
STUDIO ONE MEDIA, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD-LOOKING AND CAUTIONARY STATEMENTS This Quarterly Report (the "Report") includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended, and as contemplated under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to such matters as the Company's (and its subsidiaries) business strategies, continued growth in the Company's markets, projections, and anticipated trends in the Company's business and the industry in which it operates anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products and services, anticipated market performance and similar matters. All statements herein contained in this Report, other than statements of historical fact, are forward-looking statements.
When used in this Report, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," "budget," "budgeted," "believe," "will," "intends," "seeks," "goals," "forecast," and similar words and expressions are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, operating results, and financial position. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. We caution our readers that a variety of factors could cause our actual results to differ materially from the anticipated results or other matters expressed in the forward looking statements, including those factors described under "Risk Factors" and elsewhere herein. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Report will in fact transpire or prove to be accurate. These risks and uncertainties, many of which are beyond our control, include: · the sufficiency of existing capital resources and our ability to raise additional capital to fund cash requirements for future operations; · uncertainties involved in growth and growth rate of our operations, business, revenues, operating margins, costs, expenses and acceptance of any products or services; · volatility of the stock market, particularly within the technology sector; · our dilution related to all equity grants to employees and non-employees; · that we will continue to make significant capital expenditure investments; · that we will continue to make investments and acquisitions; · the sufficiency of our existing cash and cash generated from operations; · the increase of sales and marketing and general and administrative expenses in the future; · the growth in advertising revenues from our websites and studios will be achievable and sustainable; · that seasonal fluctuations in Internet usage and traditional advertising seasonality are likely to affect our business; and · general economic conditions.
Although we believe the expectations reflected in these forward-looking statements are reasonable, such expectations cannot guarantee future results, levels of activity, performance or achievements. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report.
All references in this report to "we," "our," "us," the "Company" or "Studio One" refer to Studio One Media, Inc. and its subsidiaries and predecessors.
20-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Corporate Background We are a Delaware public company traded on the Over-The-Counter Bulletin Board (ticker symbol: SOMD). As of September 30, 2012, there were 38,620,207 shares of Common Stock issued and outstanding. From April 2006 to June September 30, 2012, we have raised approximately $16.51 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.
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 (numerous patents 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 four primary sources: (1) MyStudio recording sessions; (2) digital advertising and sponsorship opportunities; (3) website advertising revenues; and (4) mastering or "AfterMastering"/,"ProMastering" of new music as well as existing catalog music. 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 financial results for the first quarter of fiscal 2013 were below our targets as the Company 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 existing lease arrangements. This contributed to an overall decline in sales.
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 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 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 well 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.
The X Factor The second season of The X Factor has recently begun on FOX Television Network. The new has gone through the audition process and is now down to the final twelve contestants. MyStudio has made a significant contribution to the show as two of the final twelve contestants, Carly Rose Soneclar and Emblem 3, have come from My Studio auditions. They both are among the contestants that are favored to win the contest.
All seven of the studios plus a newly introduced mobile Pepsi/MyStudio unit were used by aspiring musicians to audition for the show. The mobile Pepsi/MyStudio unit was utilized in nine cities throughout the United States. The mobile studio was a successful opportunity for us to showcase the quality and ease of use of the studios, as well as build brand awareness for MyStudio in advance of installing studios in other cities and building additional mobile studios.
As background, we announced in 2011 that we had 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.
21-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued In its inaugural season in 2011, the show gained a tremendous following as a result of its unique and entertaining format for finding top musical talents. During that season, the show featured some of the most talented aspiring singers ever performing in a nationally televised talent contest.
Coached by some of the top names in the music industry, the participants continued to improve upon their existing skills and gain significant exposure for their future careers.
For that season, it was reported that over 75,000 people auditioned for the show, including several thousand who participated in such auditions through MyStudio. A positively disproportionate number of MyStudio auditionees made it to all X Factor elimination levels, including three of the MyStudio acts making it into the top 32 nationally televised contestants. One of the MyStudio contestants, Drew Ryniewicz, made it into the top 3 female finalists. We are precluded from reporting the total number of persons who made it through to this year's boot camp until later in the broadcast season.
Television Production Agreement Late last calendar year, the Company signed an agreement with one of North America's largest television and movie production companies for the co-development of a television show 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 very 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 television "powerhouse" provides additional credibility to the quality of our studios and the opportunity for the show to be a success.
While we had hoped that the new show would begin airing in calendar 2012, both parties have agreed that additional investment in the content development process would be prudent and enhance the likelihood for the show's success. We are currently working to finalize agreements for the show's hosts and executive producers, which are 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.
We believe this is a very important development for the company. First, 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. Secondly, this should create an important revenue stream for the company due to the high traffic of visitors at Hard Rock locations. 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 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.
Hard Rock's management views MyStudio as an important element of its new customer acquisition strategy. The partnership underscores Hard Rock's commitment to its customers of offering high quality food in fun and entertaining environment. The placement of the studios within the Hard Rock venues allows patrons to live out their own fantasies and aspirations as "rock stars" through the creation of their own music videos using MyStudio.
The studios located on Hard Rock properties will also participate in other nationally sponsored contests and auditions that are coordinated through Studio One.
22-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Warner Music Nashville The Company recently 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.
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, 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 interest about using the studios for other reality television shows, live theater 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.
The new series is produced by One-to-One Magazine, a premier publication for single men and women. 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.
Our stated goal has been to gain a national footprint of studios throughout the United States. The recently announced Hard Rock partnership will aid in the accelerated rollout of new studios in the U.S. and abroad. We continue to believe that there is a tremendous opportunity for MyStudio in Asia as karaoke plays a significant role in the culture and entertainment. We continue to receive interest by foreign parties seeking to introduce MyStudio in various Asian markets. We will continue to evaluate those opportunities as we identify key partners that have the financial and operational wherewithal to support a large rollout of studios in the region.
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.
Studios We are currently in the process of relocating five studios in accordance with our agreement with Hard Rock International. When those studios are relocated, we will have a total of seven studios available for use by the general public.
During the year, we also built and successfully deployed the first mobile MyStudio, which was used throughout the country for The X Factor auditions.
There has been significant interest in mobile studios for several years. Pepsi was a sponsor of this studio for the recent X Factor auditions. Based on the success of this mobile studio, we believe that mobile studios could offer a significant revenue opportunity for the Company from both the session revenues, as well as the ability to sell advertising on the studios as they travel the United States promoting various contests and auditions.
In addition to our installed studio base noted above, we have taken possession of two additional studio chassis for future manufacture and installation.
Additionally, we have identified and begun to utilize alternative suppliers for other studio components which have and will allow us to lower the costs of manufacturing studios.
Subject to the availability of adequate capital, we expect to rollout additional studios - both fixed location and mobile - in the fiscal year ending June 30, 2013.
23-------------------------------------------------------------------------------- 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, 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. AfterMaster has received credits on a number of top selling albums.
Like all newly introduced technologies, the adoption period can take longer than expected. This too has been the case for AfterMaster despite the very favorable feedback from music industry leaders (e.g., record label executives, producers and musicians). With significant external forces adversely affecting the music industry, including industry consolidation and digital piracy, music industry executives have focused their resources on addressing such challenges. With recent stabilization within the industry, executives are now able to refocus their efforts on new revenue-enhancing opportunities. We believe that AfterMaster provides the record labels with such a significant opportunity as they are able to remonetize their catalogs by offering high definition ("HD") audio 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.
Further supporting our beliefs about the public's desire for higher quality audio is a growing grassroots movement by some of the top musicians who have publicly stated they are unhappy with the quality of the current state of digital audio. As we begin "AfterMastering" music for top selling and influential artists and they have an opportunity to experience the significant difference from our technology, we believe that the musician-led movement to improve the sound of their music could grow significantly. Additionally, artists recognize that they can greatly benefit through future royalties from the re-release in the HD format of their music. Accordingly, this could be a strong forcing function for the record labels to adopt such technologies broadly.
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 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 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 www.ProMasterHD.com. We have recently begun a viral marketing campaign for the product on various websites frequented by amateur musicians. Key spokespersons for the campaign include our own audio engineer 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 over 10 million independent songs are produced each month around the world, most of which will never be heard by anyone. 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.
24-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Corporate In November 2011, Board member Frank Perrotti, Jr. was elected to the position of Chairman of the Board of Directors of Studio One. Mr. Perrotti is a successful and well regarded businessman with proven experience in building corporations organically and through acquisitions. Mr. Perrotti has provided the Company with more than $3,600,000 in loans to date to assist in the financing needs required to build and install additional studios.
In March 2012, Joseph Desiderio was hired as the Company's new chief financial officer and was also elected to the Board of Directors. Mr. Desiderio brings more than 25 years of financial and operational experience to the Company having worked with both public and private companies. The Company's then CFO, Kenneth Pinckard, was named as General Counsel and remains on the Board of Directors.
The Company has been awarded three patents over the past year. 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.
Frank Perrotti, Jr. - Founder, Chairman and Chief Investment Officer of FPJ Investments ("FPJ"), a private investment firm based in New Haven, CT.
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.
25-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued 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 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.
[[Image Removed]] 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.
26-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued MyStudio Business Strategy We plan to continue installing MyStudios into key markets throughout the U.S.
followed by a roll-out into international markets. The ease and quality of the studios have created repeat users and increase traffic to the Company's website, www.mystudio.net.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, Mark Burnett Productions, 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.
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.
27-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued 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. MyStudio has successfully partnered with some of the 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.
It has been reported that over 75,000 people auditioned for the show's first season, including several thousand who participated in such auditions through MyStudio. 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.
28-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued We believe this is a very important development for the company. First, 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. Secondly, this should create an important revenue stream for the company due to the high traffic of visitors at Hard Rock locations. 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.
Hard Rock's management views MyStudio as an important element of its new customer acquisition strategy. The partnership underscores Hard Rock's commitment to its customers of offering high quality food and fun in an entertaining environment. The placement of the studios within the Hard Rock venues allows patrons to live out their own fantasies and aspirations as "rock stars" through the creation of their own music videos using MyStudio.
The studios located on Hard Rock properties will also participate in other nationally sponsored contests and auditions that are coordinated through Studio One.
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.
We have an ongoing partnership with RealityWanted.com, a leading source for reality TV casting calls in the U.S. The partnership provides for members of both companies to create audition videos for hundreds of top reality television shows. Most reality TV applicants are missing one of the most critical components to being selected - the video. This partnership created a turnkey reality TV casting platform to help complete the casting process. Users can easily supplement their RealityWanted.com profiles with a high-quality video that better promotes their talents and unique personality traits, thus giving them a greater chance of being selected for a reality television show. We also have a partnership with Back Stage Casting, the entertainment industry's most recognized resource for real-time casting and audition information, acting advice, job listings and entertainment news. Utilizing MyStudio, Back Stage is able to offer its members and audition pieces for specific casting calls. Film, theater and television productions are asking actors to submit audition videos specific to their projects to streamline the casting process and identify the most talented candidates. MyStudio offers actors a high quality, convenient and inexpensive way to create their professional videos and increase their chances of being selected. A number of contests using MyStudio have been sponsored by some high-profile music, modeling and comedy companies. We expect to continue entering into additional strategic partnerships with other high profile companies in the music, television, modeling and comedy fields to further traffic to our studios. We continue to aggressively 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.
29-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued 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, Madonna 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 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 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 over 10 million songs are produced each month around the world, most of which will never be heard by anyone. 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.
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 three patents approved with numerous patents and trademarks pending.
Employees As of the end of our fiscal year on September 30, 2012, we employed eight full-time and five part-time employees, including attendants at the MyStudio locations. 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.
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 August 31, 2013. The total lease expense for the facility is approximately $4,305 per month, and the total remaining obligations under these leases at September 30, 2012 were approximately $47,355.
We also lease one retail location in Opry Mills Mall Nashville, Tennessee in connection with our MyStudio Kiosk. This lease expires on February 01, 2013. The total lease expense for the facility is approximately $3,000 per month, and the total remaining obligations under these leases at September 30, 2012 were approximately $12,000.
30-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued RESULTS OF OPERATIONS Revenues Three Months Ended September 30, 2012 2011 Session Revenues $ 8,325 $ 10,750 Advertising Revenues 2,000 1,996 AfterMaster Revenues 10,900 32,400 Total Revenues $ 21,255 $ 45,146 Our business model currently generates revenues from four primary sources: 1) Paid user fees from customers who utilize the Fixed and Model 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; and 4) AfterMaster revenue.
The revenues from each of the first two of these sources is 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 three months ended September 30, 2012 decreased to $21,255 from $45,146 over the comparable three month period ended September 30, 2011 due to a decrease in AfterMaster income this quarter.
Cost of Sales Three Months Ended September 30, 2012 2011 Cost of Sales (excluding depreciation and amortization) $ 124,646 $ 188,435 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 three months ended September 30, 2012, over the comparable period for the prior fiscal year, is attributable, primarily, to the Company operating fewer studios in the current year.
31-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Other Costs and Expenses Three Months Ended September 30, 2012 2011 Depreciation and amortization expense 27,420 110,880 General and administrative expenses 879,604 1,094,964 Total $ 907,024 $ 1,394,279 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 three-month period ended September 30, 2012 compared to the three months ended September 30, 2011 due to a decrease in advertising expenses from $23,856 in 2011 to $25 in 2012. The decrease in advertising expenses is due to the fact that our efforts during the quarter were focused primarily on the X Factor auditions and the relocation of studios after the auditions were completed. Professional fees also decreased from $699,782 in 2011 to $498,263 in 2012. The decrease in professional fees is primarily attributable to our issuing less Common Stock and warrants to various employees and consultants for services rendered during the period. Other general and administrative expenses also decrease in 2012, when compared to the same period in 2011, as a result of the Company installing and deploying new studios, which did not occur in the current period.
Other Income and Expenses The other income and expenses during the quarter ended September 30, 2012, totaling $331,168 of net expenses, which consists of interest expense. During the comparable period in 2011, other income and expenses totaled $243,061 of net expenses, which was a combination of interest expense (243,374) and other income (313). Interest has increased due to additional financing secured during the period.
Net Income/(Loss) Three Months Ended September 30, 2012 2011 Net Income/(Loss) $ (1,341,613 ) $ (1,592,194 ) 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 $618,891 and $1,170,801 for the periods ended September 30, 2012 and 2011, respectively.
LIQUIDITY AND CAPITAL RESOURCES The Company had revenues of $21,225 during the three months ended September 30, 2012 as compared to $45,146 in the comparable quarter of 2011. The Company has incurred losses since inception of $38,519,243. At September 30, 2012, the Company has negative working capital of $3,797,253, which is a decrease in working capital of $938,483 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.
32 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued 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.
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 September 30, 2012, 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.
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