<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the three month period ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to _________________
Commission file number 333-80849
Sunhawk.com Corporation
-----------------------
(Exact name of small business issuer as specified in its charter)
Washington 91-1568830
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
223 Taylor Ave. N., Suite 200, Seattle WA 98109-5017
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(Address of principal executive offices)
(206) 728-6063
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(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 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 [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 31, 2000, the registrant
had 0 shares of preferred stock outstanding and 3,009,380 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
TABLE OF CONTENTS
Form 10-QSB
Three months ended March 31, 2000
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1.
Balance Sheet 1
Statements of Operations 2
Statements of Shareholders' Equity 3
Statements of Cash Flows 4
Notes to Financial Statements 5 - 7
Item 2.
Management's Discussion And Analysis or Plan of Operation 8 - 12
PART II: OTHER INFORMATION 13
SIGNATURES 14
</TABLE>
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PART I -- FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
SUNHAWK.COM CORPORATION
Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
March 31, 2000
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<S> <C>
ASSETS
Current assets:
Cash and Cash Equivalents $ 10,593,186
Short-Term Investments (Held to Maturity) 2,025,944
Accounts Receivable 10,096
Inventory 16,464
Prepaid Expenses 380,235
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Total current assets 13,025,925
------------
Property and equipment, net 380,406
Other assets:
Digital sheet music masters (net of accumulated amortization
of $58,679) 475,551
Patents & trademarks, at cost (net of accumulated
amortization of $10,701) 110,190
Music catalog distribution rights (net of
accumulated amortization of $150,756) 1,168,362
Prepaid digital sheet music masters 985,966
Long-term Investment (Held to Maturity) 996,814
Prepaid Expenses 246,858
Deposits 27,484
------------
Total other assets 4,011,225
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Total assets $ 17,417,556
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of Credit $ 600,000
Accounts payable and accrued expenses 837,494
Payable to Eller McConney LLC 322,764
Payable to shareholder 290,000
------------
Total current liabilities 2,050,258
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Long-term liabilities:
Payable to Eller McConney LLC $ 1,000,000
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Total long-term liabilities 1,000,000
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Total liabilities 3,050,258
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Shareholders' equity
Preferred stock, no par value:
Authorized shares -- 10,000,000
Outstanding shares - none --
Common stock, no par value:
Authorized shares -- 30,000,000 20,875,468
Outstanding shares - 3,009,380 at March 31, 2000
Deferred stock-based compensation (1,701,056)
Accumulated deficit (4,807,114)
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Total shareholders' equity 14,367,298
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Total liabilities and shareholders' equity $ 17,417,556
============
</TABLE>
See accompanying notes to financial statements.
1
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SUNHAWK.COM CORPORATION
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
--------------------------------- ---------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 58,377 $ 28,897 $ 97,933 $ 45,394
Cost of goods sold:
Royalties, materials, shipping,
and credit card
processing fees 43,148 13,870 73,025 24,746
Amortization of digital sheet
music masters and music catalog
distribution rights 52,105 9,138 102,960 12,182
----------- ----------- ----------- -----------
Total Cost of Goods Sold 95,253 23,008 175,985 36,928
----------- ----------- ----------- -----------
Gross profit (loss) (36,876) 5,889 (78,052) 8,466
Selling, general and administrative 1,784,128 570,053 2,770,125 1,129,166
----------- ----------- ----------- -----------
Loss from operations (1,821,004) (564,164) (2,848,177) (1,120,700)
Other Income(expense) (342,906) (72,398) (359,228) (113,928)
----------- ----------- ----------- -----------
Net loss $(2,163,910) $ (636,562) $(3,207,405) $(1,234,628)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted $ (1.00) $ (0.71) $ (1.79) $ (0.97)
=========== =========== =========== ===========
Weighted average common shares for
net loss per share computations:
Basic and diluted 2,171,670 900,376 1,795,282 1,270,879
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
2
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SUNHAWK.COM CORPORATION
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION> Deferred
Common Stock Stock- Shareholders' Total
-------------------------------- based Accumulated Equity
Shares Amount Compensation Deficit (Deficit)
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1996 643,657 $ 901 -- $ (618,561) $ (617,660)
Exercise of common stock
Options 9,195 -- -- -- --
Sale of common stock 229,878 4 -- -- 4
Compensation related to sale of
common stock -- 96,316 -- -- 96,316
Net loss -- -- -- (910,983) (910,983)
------------ ------------ ----------- ------------ ------------
Balance, September 30, 1997 882,730 97,221 -- (1,529,544) (1,432,323)
Sale of common stock 8,829 100,000 -- -- 100,000
Net loss -- -- -- (1,475,579) (1,475,579)
------------ ------------ ----------- ------------ ------------
Balance, September 30, 1998 891,559 197,221 -- (3,005,123) (2,807,902)
Exercise of common stock
Options 28,121 225 -- -- 225
Issuance of common stock to
acquire music catalog
distribution rights 99,073 1,319,118 -- -- 1,319,118
Sale of common stock 112,659 1,500,000 -- -- 1,500,000
Conversion of notes payable
to shareholders, including
accrued interest of $286,039 267,968 3,568,406 -- -- 3,568,406
Forgiveness of note payable
to shareholder -- 1,000,000 -- -- 1,000,000
Recapitalization of
accumulated deficit due to
termination of "S"
corporation status
effective April 1, 1999 -- (4,239,751) -- 4,239,751 --
Net loss -- -- -- (2,834,337) (2,834,337)
------------ ------------ ----------- ------------ ------------
Balance, September 30, 1999 1,399,380 3,345,219 -- (1,599,709) 1,745,510
Issue common stock, net of $1,906,588
cost (unaudited) 1,610,000 15,407,922 -- -- 15,407,922
Deferred stock-based compensation -- 2,122,327 (2,122,327) -- 0
Amortization of stock-based compensation -- -- 28,414 -- 28,414
Issuance of warrants in conjunction
with bridge loan financing 392,857 392,857
Net loss (YTD) -- -- (3,207,405) (3,207,405)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2000 (unaudited) 3,009,380 20,875,468 (1,701,056) (4,807,114) 14,367,298
============ ============ =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
3
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SUNHAWK.COM CORPORATION
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
---------------------------------
2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,207,405) $ (1,234,628)
Adjustments to reconcile net loss to net cash
and cash equivalents used in operating activities:
Depreciation 51,081 15,005
Amortization 104,433 15,689
Amortization of stock deferred based compensation 28,414 --
Interest expense related to issuance of warrants 392,857 --
Changes in operating assets and liabilities:
Increase in accounts receivable (2,447) --
Decrease in inventory 627 247
Increase in prepaid expenses (622,524) --
Increase in deposits (250) --
Increase in accounts payable and accrued Expenses 128,227 13,655
Increase in payable to Eller McConney LLC 152,807 60,190
Accrued interest on notes payable to Shareholder (115,394) 113,928
------------ ------------
Net cash and cash equivalents used in
operating activities (3,089,574) (1,015,914)
------------ ------------
INVESTING ACTIVITIES
Purchases of property and equipment (177,647) (28,968)
Purchase of digital sheet music masters (92,945) (177,532)
Purchase of investments (3,022,758) --
Cost of patents and trademarks (13,207) (12,771)
------------ ------------
Net cash and cash equivalents used in
investing activities (3,306,557) (219,271)
------------ ------------
FINANCING ACTIVITIES
Proceeds from line of credit 900,000 --
Payments on line of credit (400,000) --
Proceeds from sale of common stock to existing shareholders -- 1,500,000
Proceeds from notes payable issued to shareholders -- 1,355,000
Proceeds from issuance of common stock, net of offering costs 16,471,017 --
Increase in deferred offering costs -- (54,188)
------------ ------------
Net cash and cash equivalents provided by
financing activities 16,971,017 2,800,812
------------ ------------
Net increase in cash and cash equivalents 10,574,886 1,565,627
Cash and cash equivalents at beginning of period 18,300 59,093
------------ ------------
Cash and cash equivalents at end of period $ 10,593,186 $ 1,624,720
============ ============
NONCASH SUPPLEMENTARY DISCLOSURE
Issuance of common stock in conjunction with the
acquisition of music catalog distribution rights -- $ 1,319,118
Conversion of notes payable and accrued interest
to shareholders to common stock -- (3,568,406)
Forgiveness of notes payable to shareholder -- (1,000,000)
Reclassification of Deferred offering costs to common stock 1,063,095 --
Prepayment of digital sheet music masters to
Eller McConney LLC 1,000,000 --
</TABLE>
See accompanying notes to financial statements.
4
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SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
BUSINESS AND ORGANIZATION
Sunhawk.com Corporation (Sunhawk.com) was incorporated in the state of
Washington on August 20, 1992. Sunhawk.com sells interactive digital sheet music
in its proprietary format, traditional printed sheet music, and CD-ROMs on their
Internet retail site at www.sunhawk.com. Sunhawk also sells its technology
solutions to owners of proprietary digital products interested in selling their
content over the Internet. Sunhawk.com's internally developed proprietary
technology, Solero(R), allows customers to view, play, print and store the
encrypted digital sheet music files. This technology can also be applied to
other proprietary digital content.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Sunhawk.com considers all liquid investments with maturities of 90 days or less
at purchase to be cash equivalents. Cash equivalents at March 31, 2000 amounted
to $3,504,163
DIGITAL SHEET MUSIC MASTERS
Digital sheet music masters are valued at cost less accumulated amortization.
Digital sheet music masters are amortized over the shorter of (1) the estimated
useful life of the music category, or (2) the estimated useful life of the
related electronic medium, or (3) the remaining term of the underlying music
licensing agreement (for licensed music). The amortization periods generally
range from five to fifteen years. Amortization expense is included in cost of
goods sold and was $14,416 and $9,138 for the three months ended March 31, 2000
and 1999, respectively, and $27,582 and $12,182 for the six months ended March
31, 2000 and 1999, respectively. Sunhawk.com periodically evaluates the digital
sheet music masters for impairment.
MUSIC CATALOG DISTRIBUTION RIGHTS
Music Catalog Distribution rights are stated at cost less accumulated
amortization. Amortization is calculated on a straight-line basis over the
remaining term of the underlying distribution agreement, approximately eight and
one-half years. Amortization expense is included in the cost of goods sold and
was approximately $37,700 for the three months ended March 31, 2000 and
approximately $75,400 for the six months ended March 31, 2000. Sunhawk.com
periodically evaluates these music catalog distribution rights for impairment.
USE OF ESTIMATES
These financial statements have been prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions that impact amounts reported in the financial statements and
accompanying notes. Actual results could differ from those amounts reported and
disclosed herein.
3. COMMON STOCK WARRANTS
As of March 31, 2000, we had outstanding warrants, with an expiration of
February 15, 2005, to purchase 435,013 shares of common stock, all of which are
fully exercisable at $12.00 per share.
4. DISTRIBUTION AGREEMENTS
In May and June 1998, Sunhawk.com entered into distribution agreements with
Warner Bros. Publications U.S. Inc. and EMI Christian Music Publishing,
respectively. These agreements provide Sunhawk.com with nonexclusive rights to
distribute selected digital sheet music from the respective music catalogs
maintained by Warner Bros. Publications U.S. Inc. and EMI Christian Music
Publishing. The terms of the agreements are approximately ten and five years,
respectively.
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The Warner Bros. Publications U.S. Inc. agreement provides Sunhawk.com with the
nonexclusive right to distribute selected digital sheet music from the Warner
Bros. Publications U.S. Inc. music catalog. As a nonforfeitable part of the
consideration and as inducement to enter into the agreement, Sunhawk.com agreed
to issue 99,073 shares of its common stock to Warner Bros. Publications U.S.
Inc., contingent upon either the closing of a firmly underwritten public
offering or the private sale or other disposition of 15% or more of
Sunhawk.com's common stock then authorized and outstanding.
As a result of the sale of common stock to certain founders on March 31, 1999,
the contingency was removed, the shares were issued to Warner Bros. Publications
U.S. Inc. and became fully vested and non-forfeitable under the terms of the
agreement. The value of the shares of common stock issued to Warner Bros.
Publications U.S. Inc. was measured at the fair value of common stock on
issuance date and capitalized as a long-term asset, which will be amortized over
the remaining life of the distribution agreement.
On December 7, 1999, Sunhawk.com entered into a distribution agreement with
Maranatha! Music (Maranatha). This agreement provided Sunhawk.com with the
non-exclusive right to promote, sell, license and distribute selected digital
sheet music from Maranatha's respective music catalog. The term of the agreement
is approximately five years.
On January 5, 2000, Sunhawk.com entered into a distribution agreement with Mel
Bay Publications, Inc. This agreement provides Sunhawk.com with the
non-exclusive and non-transferable right to distribute selected digital sheet
music from Mel Bay's music catalog. The term of the agreement is for
approximately five years.
5. CONSULTING AGREEMENTS
On February 15, 2000, Sunhawk.com entered into a consulting agreement with a
term of two years with a newly appointed member of Sunhawk.com's advisory
board. Pursuant to the Consulting Agreement, the advisory board member will
provide consulting services to Sunhawk.com, including developing strategic
alliances with third parties. As compensation for the services performed under
the Consulting Agreement, the advisory board member was issued a five-year
warrant to purchase 105,000 shares of Sunhawk.com's common stock. Certain shares
underlying this warrant are subject to Sunhawk.com's stock price achieving
specific closing prices over a period of time. The fair value of the warrants
is $807,806 at March 31, 2000, and is being amortized over the term of the
agreement. The fair value was determined using the Black-Scholes method of
valuation.
On February 18, 2000, Sunhawk.com entered into a consulting agreement with a
term of two years with a newly appointed member of its board of directors.
Pursuant to the Consulting Agreement, the board member will provide consulting
services to Sunhawk.com including introducing Sunhawk.com to content owners who
could benefit from Sunhawk.com's technology. As compensation for the services
performed under the Consulting Agreement, the board member was issued a
five-year warrant to purchase 120,000 shares of Sunhawk.com's common stock.
Certain shares underlying this warrant are subject to Sunhawk.com's stock price
achieving specific closing prices over a period of time. The fair value of the
warrants is $922,384 at March 31, 2000, and is being amortized over the term of
the agreement. The fair value was determined using the Black-Scholes method of
valuation.
Both Consulting Agreements are subject to performance criteria and may be
cancelled by either party providing sixty (60) days notice. The warrants may be
adjusted for stock splits, recapitalization, or reorganization of Sunhawk.com
and are exercisable at the initial public offering price of $12.00 per share.
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6. RELATED-PARTY TRANSACTIONS
Sunhawk.com pays to Eller McConney LLC, which is wholly owned by Marlin Eller
and Mary McConney, executive officers and trustees of a trust which owns a
majority of shares of Sunhawk.com, for certain services in connection with the
production of digital sheet music masters. Avtograf, a Russian joint stock
company in which Eller McConney LLC has a 94% interest, provides these services
under an informal agreement with Eller McConney LLC. At March 31, 2000,
Sunhawk.com owed $322,764 to Eller McConney LLC for services previously
rendered.
The digital sheet music masters for which production services were provided
represented approximately 47% and 44% of the digital sheet music acquired by
Sunhawk.com during the three months ended March 31, 2000 and 1999, respectively
and 55% and 43% for the six months ended March 31, 2000 and 1999, respectively.
Effective February 14, 2000, Sunhawk.com entered into a five-year assignment and
assumption agreement with Avtograf, Eller McConney LLC and Music Production
International, a Russian corporation. The assumption and assignment agreement
requires that Eller McConney LLC assign to Sunhawk.com all of its rights to
receive from Avtograf its services for the production of digital sheet music in
exchange for a letter agreement that provides, among other things, the payment
to Eller McConney LLC the amount of $1,000,000. Payment of the principal and
interest is based on the number of pages received and accepted from Music
Production International over a period of five years and is to be paid quarterly
in arrears with a maximum principal payment of $200,000 per annum. In connection
with this agreement, Avtograf will assign to Music Production International its
obligation to provide production services for digital sheet music. Thereafter,
Music Production International will be obligated to provide production services
for digital sheet music for Sunhawk.com at an anticipated minimum rate of 4,500
pages per month totaling 270,000 pages over a period of five years, at no
additional cost to Sunhawk.com. The letter agreement reflecting the future
payment of $1,000,000 to Eller McConney LLC is accounted for as a prepayment for
digital sheet music production services from Music Production International over
a period of five years, with recourse to Eller McConney LLC in the event of
non-performance. Neither Eller McConney LLC, Mr. Eller, Ms. McConney, nor
Sunhawk.com has an ownership interest in Music Production International.
7. BRIDGE FINANCING LOAN AGREEMENTS
On January 12, 2000, Sunhawk.com entered into an Agency Agreement with Joseph
Gunnar & Co., LLC to obtain from third parties bridge financing loans totaling
$1,000,000. The loans bore interest at a rate of 8.5% per annum and were repaid
in full from proceeds received from the initial public offering. In conjunction
with the bridge financing loans, a total of 41,680 warrants were granted to
the third parties and are exercisable commencing six months following the
closing date of the offering at the initial public offering price of $12.00. The
warrants may be adjusted for stock splits, recapitalization, or reorganization
of Sunhawk.com.
8. SUBSEQUENT EVENTS
On April 14, 2000, Sunhawk.com entered into a Letter of Intent agreement with
Copyright Control Services, Inc. (Copyright) whereby Sunhawk.com will acquire
all of the assets from, and assume certain of the liabilities of Copyright in
exchange for 400,000 shares of Sunhawk.com's common stock. Additionally, certain
executives of Copyright will receive a three-year warrant agreement to purchase
up to an additional 600,000 shares of Sunhawk.com's common stock at a strike
price of (i) $24 per share for Year One; (ii) $30 per share for Year Two; and
(iii) $36 per share for Year Three. Also, as part of the closing of the
agreement, Sunhawk.com will retain the services of certain of Copyright's
executives. Copyright Control Services (CCS) offers custom tailored anti-piracy
services to all businesses that are losing revenue or value from copyright
infringement on the Internet. In the event that Sunhawk.com's stock price
exceeds $26.00 per share on or before the closing of this deal, Sunhawk.com may
terminate this transaction without liability to Copyright. Conversely, in the
event that Sunhawk.com's stock equals or is less than $6.50 per share on or
before the closing of this deal, Copyright may terminate this transaction
without liability to Sunhawk.com. The purchase is expected to close by June 1,
2000.
On April 27, 2000, Sunhawk.com entered into an $850,000 line-of-credit agreement
with a financial institution. On May 1, 2000, $600,000 was drawn down on the
line-of-credit to pay off the previous line of credit. The applicable interest
rate is Prime plus 0.05% (9.05% at April 27, 2000). The line-of-credit matures
on May 15, 2005.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Sunhawk.com Corporation was incorporated in August 1992 and began
distributing and selling digital sheet music over the Internet in March 1997.
From the date of incorporation until March 1997, our operating activities
consisted principally of the following:
- creating our digital sheet music catalog;
- developing and patenting our technology;
- establishing international operations for the production of digital
sheet music;
- negotiating for the rights to distribute and sell sheet music;
- developing a corporate infrastructure for the management of data;
- producing digital sheet music;
- creating and distributing CD-ROM collections; and
- developing the Sunhawk.com web site.
In September 1996, we began selling CD-ROMs of the complete works of
Scott Joplin, and in July 1997, we began selling CD-ROMs of Handel's Messiah,
both containing digital sheet music in our Solero(R) format. We launched our
website in February 1997 and made our first sale of digital sheet music in March
1997. In 1998, we established our strategic alliances and entered into contracts
with Warner Bros. Publications U.S. Inc. and EMI Christian Music Publishing for
the right to sell and distribute selected portions of their sheet music
catalogs. From March 1997 through March 31, 2000 we sold approximately 35,484
digital sheet music products and approximately 3,585 traditional printed sheet
music products and CD-ROMs. Through March 31, 2000, substantially all of our
sales have been derived from the sale of digital or printed sheet music and
CD-ROMs through our web site and from special promotions and services for our
strategic partners.
Sales are primarily derived from digital and printed sheet music offered
over the Internet and either downloaded directly from our web site or ordered
from our web site and delivered via regular mail or overnight courier. Sales are
net of any applicable discounts, and sales of traditional printed sheet music
include shipping and handling charges. A customer's account is settled by
directly charging his credit card. For digital sheet music downloaded over the
Internet, revenues are recognized upon execution of the order. Revenues from
sales of traditional printed sheet music are recognized upon shipment of the
printed sheet music from our offices in Seattle, Washington.
Cost of goods sold consists principally of the costs associated with
royalty payments, materials, amortization of the cost of producing digital
masters, shipping costs and credit card processing fees. Our contracts with
publishers require us to remit the appropriate royalty to the respective
publisher. Royalty payments range from 10% to 70% and are based on actual sales,
less credit card processing fees and shipping costs, if any. Materials costs
consist of CD-ROMs and the cost of printed sheet music books. Shipping costs and
credit card processing fees include costs related to the shipping of traditional
printed sheet music and the processing of credit card payments for printed and
digital sheet music.
Amortization of the cost of producing digital masters relates to the
digital sheet music and is based on the shorter of estimated useful lives or the
term of the distribution contracts for the digital masters. Amortization of the
music catalog distribution rights began in the quarter ended June 30, 1999,
resulting in an increase in cost of goods sold. The amortization of music
catalog distribution rights is approximately $38,000 per quarter through the
remaining term of the Warner Bros. Publications U.S. Inc. contract, which ends
December 31, 2007.
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<PAGE> 11
We expect that our cost of goods sold will increase significantly as we
accelerate our production of digital sheet music and enter into additional
strategic partnerships to further develop and expand our catalog of digital
sheet music and recorded music.
Selling expenses consist primarily of promotional and advertising
expenditures, including payroll and payroll-related expenses. We have incurred
little advertising expenditures to date as we have focused our efforts on
creating our digital sheet music catalog and securing strategic alliances and
the rights to digitize sheet music. We expense all advertising costs as
incurred, and we expect selling expenses to increase significantly as we seek to
increase the number of Solero(R) Viewers downloaded from our web site or
distributed on CD-ROMs and enhanced CDs, drive customer traffic to our web site,
enhance our brand name awareness and otherwise promote the sale of our products.
General and administrative expenses consist primarily of management salaries and
expenses, insurance premiums, rent, telephone costs, travel expenses for general
business, legal and professional fees, staff salaries, other payroll expenses
and other related expenses for general corporate functions.
To date we have incurred and expect to continue to incur substantial
costs in order to:
- expand our sheet music catalog;
- produce, distribute and sell digital and printed sheet music;
- develop our technologies;
- acquire patents and other intellectual property rights;
- acquire the rights to sheet music;
- secure and maintain relationships with, among others, Warner Bros.
Publications U.S. Inc. and EMI Christian Music Publishing;
- further develop and extend the application of our DRM and encryption
technologies;
- extend our technology into other content areas;
- further develop our operational infrastructure and web site;
- distribute and sell certain recorded music;
- increase the size of our staff;
- expand our sales, marketing and business development efforts; and
- upgrade our software and hardware.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO THE
SIX MONTHS ENDED MARCH 31, 1999
Sales
Sales for the six months ended March 31, 2000 were $97,933 compared to $45,394
for the six months ended March 31, 1999. This increase in sales resulted from
providing a wider selection of music titles in our Solero(R) format, an increase
in our print sheet music sales and increased advertising of our product. In
addition, in order to increase customer traffic to our web site, we offered a
variety of promotional features on our web site and provided special services
for our strategic partners.
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Cost of goods sold
Cost of goods sold for the six months ended March 31, 2000 were $175,985
compared to $36,928 for the six months ended March 31, 1999. The increase in
cost of goods sold was primarily due to the amortization of $75,378 of the music
catalog distribution rights. Amortization of these rights did not commence until
third quarter of fiscal year 1999. The increase was also due to an increase
during the six months ended March 31, 2000 in the proportion of royalty-bearing
sales to sales of public domain titles, which do not bear royalties, as well as
an increase in the cost related to the print music sales. Additionally,
amortization of digital sheet music masters during the six months ended March
31, 2000 increased as the number of digital sheet music titles produced during
that period increased. For the six months ended March 31, 2000, royalty payments
accounted for $32,262, or 32.9% of sales. Costs associated with the amortization
of digital sheet music masters accounted for $27,582, or 28.2% of sales and
costs associated with the amortization of music catalog distribution rights were
$75,378, or 77.0% of sales. For the six months ended March 31, 1999, royalty
payments accounted for $12,637, or 27.8% of sales, and costs associated with the
amortization of digital sheet music masters accounted for $12,182, or 26.8% of
sales.
Selling, general and administrative expenses
Selling expenses for the six months ended March 31, 2000, were $351,902,
including advertising costs of $283,141, compared to $78,090, with advertising
costs of $58,170, for the six months ended March 31, 1999. Selling expenses for
both periods consisted primarily of expenditures incurred in connection with
advertising, attending trade shows, expansion of our web site and
payroll-related expenses, as well as marketing consulting. General and
administrative expenses for the six months ended March 31, 2000 were $2,418,223
compared to $1,051,076 for the six months ended March 31, 1999. The increase
was primarily due to the expansion of our production capabilities to grow our
digital sheet music catalog, professional fees, hiring additional key management
personnel, increases in corporate facility expenses necessary to operate the
business, and fees related to bridge financing in the six months ended March 31,
2000.
Other Income/(Expense)
Other income/(expense) for the six months ended March 31, 2000 and 1999 was
($359,228) and ($113,928), respectively. The decrease in other income/(expense)
primarily relates to interest expense recognized for the issuance of warrants
related to the bridge loan financing and the conversion of loans made to us by
the Eller McConney 1995 Family Living Trust into common stock on March 31, 1999.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1999
Sales
Sales for the three months ended March 31, 2000 were $58,377 compared to $28,897
for the three months ended March 31, 1999. This increase in sales resulted from
providing a wider selection of music titles in our Solero(R) format and
increased advertising of our product. In addition, in order to increase customer
traffic to our web site, we offered a variety of promotional features on our web
site and provided special services for our strategic partners.
Cost of goods sold
Cost of goods sold for the three months ended March 31, 2000 were $95,253
compared to $23,008 for the three months ended March 31, 1999. The increase in
cost of goods sold was primarily due the amortization of approximately $38,000
of the music catalog distribution rights. Amortization of these rights did not
commence until third quarter of fiscal year 1999. The increase was also due to
an increase during the three months ended March 31, 2000 in the proportion of
royalty-bearing sales to sales of public domain titles, which do not bear
royalties. Additionally, amortization of digital sheet music masters during the
three months ended March 31, 2000 increased as the number of digital sheet music
titles produced during that period increased. For the three months ended March
31, 2000, royalty payments accounted for $19,150, or 32.8% of sales. Costs
associated with the amortization of digital sheet music masters accounted for
$14,416, or 24.7% of sales and costs associated with the amortization of music
catalog distribution rights were $37,689, or 64.5% of sales. For the three
months ended March 31, 1999, royalty payments accounted for $7,900, or 27.3% of
sales, and costs associated with the amortization of digital sheet music masters
accounted for $9,138, or 31.6% of sales.
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Selling, general and administrative expenses
Selling expenses for the three months ended March 31, 2000, were $171,069
including advertising costs of $123,318, compared to $57,181, with advertising
costs of $42,147, for the three months ended March 31, 1999. Selling expenses
for both periods consisted primarily of expenditures incurred in connection with
advertising, attending trade shows, expansion of our web site and
payroll-related expenses. In the third quarter of 1999, we initiated our
strategic marketing plan. As part of this plan, we experienced a significant
increase in advertising and marketing consultant costs as part of the new
strategic marketing plan. General and administrative expenses for the three
months ended March 31, 2000 were $1,613,059 compared to $512,872 for the three
months ended March 31, 1999. The increase was primarily due to the expansion of
our production capabilities to grow our digital sheet music catalog,
professional fees, hiring key management personnel, increases in corporate
facility expenses necessary to operate the business for both periods, and fees
related to bridge financing in the three months ended March 31, 2000.
Other Income/(Expense)
Other income/(expense) for the three months ended March 31, 2000 and 1999 was
($342,906) and ($72,398), respectively. The decrease in other income/(expense)
primarily relates to interest expense recognized for the issuance of warrants
related to the bridge loan financing and the conversion of loans made to us by
the Eller McConney 1995 Family Living Trust into common stock on March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily with funds received
from the sale of equity to and loans from the Eller and McConney 1995 Family
Living Trust. As of March 31, 2000, we had cash and cash equivalents of
$10,593,186 and working capital of $10,975,667.
On January 12, 2000, Sunhawk.com entered into an Agency Agreement with Joseph
Gunnar & Co., LLC to obtain from third parties bridge financing loans totaling
$1,000,000. The loans, which closed on January 26, 2000, bore interest at a rate
of 8.5% per annum and were repaid in full from proceeds received from the
initial public offering. A total of 41,680 warrants were granted to the third
parties and are exercisable commencing six months following the closing date of
the offering at the initial public offering price of $12.00. The warrants may be
adjusted for stock splits, recapitalization, or reorganization of Sunhawk.com.
At the closing of the bridge financing, Sunhawk.com paid Joseph Gunnar & Co.,
LLC (i) a commission equal to 7% of the aggregate loan amount; (ii) a
structuring fee equal to 3% of the aggregate loan amount; (iii) reimbursement of
out-of-pocket expenses; and (iv) reimbursement of reasonable fees and
disbursements of counsel to Joseph Gunnar & Co., LLC. The loans were paid in
full on February 22, 2000.
On February 15, 2000, we issued 1,610,000 shares of common stock in an initial
public offering at the price of $12.00 per share. The offering generated
approximately $19 million in proceeds.
Net cash used in operating activities totaled $3,089,574 for the six months
ended March 31, 2000 compared with net cash used in operating activities of
$1,015,914 for the six months ended March 31, 1999. The increase in net cash
used in operating activities for the six months ended March 31, 2000, as
compared to the prior year, was primarily attributable to increases in
advertising, the expansion of our production capabilities to grow our digital
sheet music catalog, prepaid expenses, professional fees, hiring key management
personnel, and increases in corporate facility expenses necessary to operate the
business.
Net cash used in investing activities was $3,306,557 for the six months ended
March 31, 2000 compared to $219,271 for the six months ended March 31, 1999. The
increase in cash used in investing activities for the six months ended March 31,
2000, as compared to the prior year, was primarily due to the purchase of short
and long-term investments with proceeds received from the initial public
offering and an increase in equipment purchases to upgrade our website
capabilities.
Net cash provided by financing activities was $16,971,017 for the six months
ended March 31, 2000 compared to $2,800,812 for the six months ended March 31,
1999. The increase in net cash for financing activities for the six months ended
March 31, 2000, as compared to prior year, was primarily derived from proceeds
received from the initial public offering.
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YEAR 2000 COMPLIANCE
Although we have not experienced any Year 2000 problems, it is possible that
Year 2000-related issues may cause problems or disruptions. While we believe
that all of our systems are Year 2000 compliant, we cannot assure you that we
will not discover a problem during 2000 that needs to be upgraded, modified or
replaced. In addition, we depend on a number of third-party vendors to provide
both information and non-information technology systems and services. While we
believe that our material third-party systems and services are Year 2000
compliant, we cannot be sure that we will not experience any problems during
2000. We also cannot provide any assurance that governmental agencies, utility
companies, Internet access companies and others outside of our control will not
experience any future Year 2000 problems.
We believe that the Year 2000 issue will not have a material adverse
effect on our business, financial condition or operating results. However,
despite all of our efforts to-date towards insuring Year 2000 compliance, latent
issues may still surface in the future that require upgrades, modifications or
replacement, all of which could be time-consuming and expensive. In addition,
there can be no assurance that utility companies, Internet access companies and
our third-party vendors will be Year 2000 compliant. The failure by such
entities to be Year 2000 compliant could result in a systemic failure such as a
prolonged Internet, telecommunications or electrical failure.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
13.3
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 10.3 Retainer Agreement with The Otto Law Group, PLLC
dated February 20, 2000.
Exhibit 10.4 Executed letter agreement with Eller McConney LLC
for prepayment of digital masters dated February
15, 2000.
Exhibit 10.5 Letter of Intent to Acquire Copyright Control
Services, Inc. dated April 14, 2000.
Exhibit 10.6 Form of Warrant Agreement
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Sunhawk.com Corporation
---------------------------------------
(Registrant)
Date May 16, 2000 /s/ Marlin Eller
-------------- -------------------------------------
Marlin Eller, Chief Executive Officer
Date May 16, 2000 /s/ Tricia Parks-Holbrook
-------------- --------------------------------------
Tricia Parks-Holbrook,
Chief Financial Officer
14
