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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-27575
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NETRADIO CORPORATION
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(Exact name of registrant as specified in its charter)
Minnesota 41-1819471
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(State of incorporation or organization) (I.R.S. Employer Identification No.)
43 Main Street, SE, Suite 149,Minneapolis, Minnesota 55414
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(Address of principal executive offices) (Zip Code)
(612) 378-2211
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ ] Yes [X] No
The number of shares outstanding of each of the registrant's classes of
capital stock, as of November 12, 1999 was: Common Stock, no par value,
10,003,900 shares.
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NETRADIO CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE COMPANY HAS AMENDED THE FOLLOWING:
LIQUIDITY AND CAPITAL RESOURCES -
PARAGRAPH NO. 8.
CAUTIONARY STATEMENT
SIGNATURES
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
NetRadio Corporation is a leading Internet broadcaster of originally
programmed audio entertainment through its Web Site, http://www.NetRadio.com.
NetRadio.com is an Internet Marketing platform that uses audio content to
attract a large and diverse audience and retain listeners onsite for extended
periods of time. More than 1,000,000 unique listeners per month access
NetRadio.com's 120 channels of music and information on demand, 24 hours a day,
seven days a week. The site connects with music enthusiasts through 15
interactive music communities ranging from Jazz, Modern Rock and New Age to
Vintage Rock and Classical. The innovative NetRadio.com marketing platform
combines a broad musical offering with a proprietary online music store,
CDPoint, that enables listeners to "listen, click and buy" the music they hear.
Our revenues are generated from sales of audio merchandise through our online
store, CDPoint, and from Internet Advertising. Our Internet advertising revenues
consist of banner advertisements placed on our Web site, special promotional
advertisements and audio advertisements.
We recognize banner advertising revenues over the period in which the
advertisement is displayed on our Web site. We derive promotional advertising
revenues from product or artist related promotions, and recognize these revenues
over the term of the promotion. We derive audio advertising revenues from the
sales of advertising spots, and recognize these revenues when the audio
advertising is broadcast.
We believe that our success will depend largely on our ability to program and
broadcast original audio content to attract and retain listeners and to generate
e-commerce and advertising revenues. Accordingly, we intend to invest heavily to
develop and maintain content and network infrastructure and to expand
e-commerce. We expect to continue to incur substantial operating losses for the
foreseeable future.
In view of the rapidly evolving nature of our business and our limited operating
history, we believe that period-to-period comparisons of revenues and operating
results, including gross margin and operating margin, are not necessarily
meaningful and should not be relied upon as indications of our future
performance.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues increased to $374,074 for the three months ended
September 30, 1999 from $50,627 for the three months ended September 30, 1998,
a 639% increase, and consisted of product sales and Internet advertising
revenues. Net revenues increased to $779,740 for the nine months ended
September 30, 1999 from $163,423 for the nine months ended September 30, 1998,
a 377% increase.
PRODUCT SALES. Product sales for the three months ended September 30,
1999 consisted of $172,220 of sales of audio merchandise, including shipping and
handling costs, compared with $5,698 in product sales for the three months ended
September 30, 1998. Product sales for the nine months ended September 30, 1999
consisted of $430,827 of sales of audio merchandise, including shipping and
handling costs, compared with $5,698 in product sales for the nine months ended
September 30, 1998. We began selling audio merchandise in the third quarter of
1998 when we opened our online store, CDPoint, which became fully operational in
November 1998.
INTERNET ADVERTISING. Internet advertising revenues for the three
months ended September 30, 1999 were $201,854 compared to $44,929 for the three
months ended September 30, 1998, an increase of 349%. Internet advertising
revenues for the nine months ended September 30, 1999 were $348,913, compared to
$157,725 for the nine months ended September 30, 1998, an increase of 121%.
Internet advertising revenues reflect audio and banner advertising sales as well
as promotional advertising revenues.
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COST OF REVENUES
Cost of revenues includes the cost of audio merchandise that we sell,
including fulfillment costs through third party vendors which ship directly to
our customers, and include costs incurred in connection with the development of
specific advertising or promotional campaigns. Costs of revenues increased to
$158,232 for the three months ended September 30, 1999 from $13,937 for the
three months ended September 30, 1998. Costs of revenues increased to $400,648
for the nine months ended September 30, 1999 from $23,995 for the nine months
ended September 30, 1998. The increase in cost of revenues was due primarily to
the increased product sales associated with the opening of our online music
store.
OPERATING EXPENSES
OPERATIONS AND TECHNICAL SUPPORT. Operations and technical support
expenses consist primarily of data communications expenses, personnel expenses
associated with broadcasting, software and content license fees, operating
supplies and overhead. Operations and technical support expenses were $2,071,721
for the three months ended September 30, 1999, compared to $352,202 for the
three months ended September 30, 1998. Operations and technical support expenses
were $4,067,238 for the nine months ended September 30, 1999, compared to
$957,940 for the nine months ended September 30, 1998. The increase in
operations and technical support expenses were due primarily to the building of
technical and personnel infrastructure necessary to meet listener demand and
provide e-commerce opportunities to listeners.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel expenses associated with Internet advertising and the marketing of our
Web site. Sales and marketing expenses were $1,166,045 for the three months
ended September 30, 1999, compared to $88,670 for the three months ended
September 30, 1998. The increase in sales and marketing expenses in the three
month period was due primarily to online advertising of $575,845 that did not
occur in the prior year period and the growth in our sales force and marketing
staff. Sales and marketing expenses were $1,951,483 for the nine months ended
September 30, 1999, compared to $246,343 for the nine months ended September 30,
1998. The increase in sales and marketing expenses for the nine month period was
due primarily to online advertising of $725,045, the use of $150,000 in
advertising from ValueVision, and the growth in our sales force and marketing
staff.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of administrative personnel expenses, professional fees, depreciation
and amortization, and expenditures for facility costs. General and
administrative expenses were $906,874 for the three months ended September 30,
1999, compared to $362,726 for the three months ended September 30, 1998.
General and administrative expenses were $3,183,351 for the nine months ended
September 30, 1999, compared to $958,217 for the nine months ended September 30,
1998. The increase in general and administrative expenses for the three month
period was partially due to the recognition of $259,000 in non-cash compensation
expense associated with the acceleration of vesting in stock options as part of
an executive officer's severance agreement. The increase in general and
administrative expenses in the nine month period was due primarily to a
recognition of $1,138,625 in non-cash compensation expense associated with the
issuance of stock options to employees and directors with exercise prices below
the estimated fair market value of our common stock on the date of grant, and
the acceleration of vesting of stock options as part of an executive officer's
severance agreement. The remaining increases reflect the costs associated with
adding key personnel and building infrastructure.
Interest expense for the three months ended September 30, 1999 was
$288,050, compared to $5,663 for the three months ended September 30, 1998.
Interest expense for the nine months ended September 30, 1999 was $602,206,
compared to $18,832 for the nine months ended September 30, 1998. The increase
in both the three and nine month periods was due to the accrual of interest
expense associated with the advances from Navarre Corporation, which had
provided funds to us prior to completion of our initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $1,876,454 at
September 30, 1999, compared to a working capital deficit of $176,032 at
December 31, 1998.
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Net cash used in operating activities was $5,812,438 and $1,844,423 for
the nine months ended September 30, 1999 and 1998, respectively. Net cash used
in operating activities for the nine months ended September 31, 1999 was
primarily composed of our net losses offset in part by depreciation and
amortization, an increase in accounts payable and accrued expenses and non-cash
compensation expense associated with the issuance of stock options.
Accounts receivable grew to $196,808 at September 30, 1999 from $26,313
at December 31, 1998 and consisted primarily of agency-placed advertising
revenue accounts. Advertising revenues placed by an agency typically are
collected in 60 to 90 days. We expect advertising revenue accounts generally to
be collected within 60 to 90 days in the future.
The increase in prepaid expenses, other current assets, deferred
revenue and accrued expenses from December 31, 1998 to September 30, 1999
was primarily due to the execution of two contracts with RealNetworks in May
1999.
The increase in accounts payable to $1,741,466 at September 30, 1999
from $1,022,639 at December 31, 1998 was due primarily to higher operating
expenses as we developed the infrastructure necessary to manage the growth of
our business.
Net cash used in investing activities for the nine months ended
September 30, 1999 and 1998 was $1,456,188 and $248,097, respectively. Net
cash used in investing activities in these periods was related primarily to
purchases of property and equipment.
We generated net cash from financing activities of $7,305,229 and
$2,096,198 for the nine months ended September 30, 1999 and 1998, respectively.
Net cash from financing activities for the nine months ended September 30, 1999
was generated primarily from $8,023,786 in advances from Navarre.
We believe that the net proceeds from our October 14, 1999 initial
public offering, together with our current cash and cash equivalents, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 18 months.
In connection with the offering, ValueVision International, Inc. agreed
to purchase 550,000 additional shares of our common stock for $500,000, which
occurred at the closing of the offering.
In connection with the offering, we entered into a separation agreement
with Navarre in March 1999 under which Navarre agreed to contribute to the
capital of NetRadio $5,234,840 of principal indebtedness owed by NetRadio to
Navarre as of December 31, 1998. In connection with the execution of the
separation agreement, NetRadio and Navarre agreed to enter into a Multiple
Advance Note. Under the separation agreement, NetRadio and Navarre agreed at the
closing of the initial public offering that a Term Note would replace this
Multiple Advance Note. Under the Term Note, NetRadio agreed to repay to Navarre
all amounts advanced to NetRadio beginning January 1, 1999, plus accrued
interest on $5,234,840 of principal indebtedness incurred through December 31,
1998. The Term Note bears interest at Midwest prime plus one half-percentage
point. Interest payments are due monthly. The principal balance of the Term
Note, approximately $9.6 million, is due on November 14, 2001.
We may need to raise additional funds, in the future, through public or
private financings, or other arrangements. There can be no assurance that these
additional financings, if needed, will be available on terms attractive to us,
if at all. Our failure to raise capital when needed could have a material
adverse effect on our business, results of operations and financial condition.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of our then-current shareholders will be reduced.
Furthermore, these equity securities might have rights, preferences or
privileges senior to those of our common stock.
YEAR 2000 COMPLIANCE
STATE OF READINESS. Our information technology, or IT, systems
(servers, encoders, routers, etc.) and non-IT systems (desktop computers,
printers, etc.) consist of software developed either in-house or purchased from
third parties, and hardware purchased from vendors. Our systems and other
business resources rely upon IT systems and non-IT systems provided by service
providers and, therefore, may be vulnerable to those service providers' failure
to remedy their own presently unknown Year 2000 issues. These service providers
include those for our network elements and e-mail services and the landlord for
our leased office spaces. We have contacted our principal vendors of hardware
and software, who have notified us that the hardware and software that
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they have supplied to us is either presently Year 2000 compliant or will be
compliant before the Year 2000. However, we may nonetheless be affected by
presently unknown Year 2000 issues related to non-compliant IT systems or
non-IT systems operated by us or by third parties. We currently have underway
a substantial assessment of our internal and external (third-party) IT
systems and non-IT systems. At this point in our assessment, we are not aware
of any Year 2000 problems relating to systems operated by us or by third
parties that would have a material adverse effect on our business, results of
operations, or financial conditions without taking into account our efforts
to avoid Year 2000 problems.
COST. Based on our assessment to date, we do not anticipate that costs
associated with remediating our non-compliant IT systems and non-IT systems
will be material.
RISKS. To the extent that our Year 2000 assessment is finalized without
identifying any additional material non-compliant IT systems operated by us or
third parties, the most reasonably likely worst case Year 2000 scenario is a
systems failure beyond our control, such as a prolonged telecommunications or
electrical failure. A failure of this kind could prevent us from operating our
business or prevent users from accessing our Web site. We believe that the
primary business risks, in the event of a failure, would include, but not be
limited to, lost advertising and audio merchandising revenue, increased
operating costs, loss of customers or persons accessing our Web site, or other
business interruption of a material nature, as well as claims of mismanagement,
misrepresentation or breach of contract.
CONTINGENCY PLAN. As discussed above, we are engaged in an ongoing Year
2000 assessment. We plan to conduct a full-scale Year 2000 simulation of our IT
systems. The results of this simulation and assessment will be taken into
account in determining the nature and extent of any contingency plans.
CAUTIONARY STATEMENT
This Form 10-Q contains forward-looking statements within the meaning
of federal securities laws. These statements include statements regarding
intent, belief, or current expectations of the Company and its management. These
forward-looking statements are not guarantees of the future performance and
involve a number of risks and uncertainties that may cause the Company's actual
results to differ materially from the results discussed in these statements.
Please refer to the "Risk Factor" section of the Company's prospectus dated
October 14, 1999 for cautionary statements on important factors to consider in
evaluating the forward-looking statements included in this Form 10-Q.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: 12/7/99 NETRADIO CORPORATION
By /s/ Edward A Tomechko
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Edward A. Tomechko
Chief Executive Officer and President
(Principal Executive Officer)
By /s/ Michael P. Wise
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Michael P. Wise
Chief Financial Officer and Vice President
(Principal Financial and Accounting Officer)
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