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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 June 30, 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
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(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)
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(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 [X] No [ ]
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 July 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 June 30, 2000
PART I: FINANCIAL INFORMATION
Item 1.
Balance Sheet
Statements of Operations
Statements of Shareholders' Equity
Statements of Cash Flows
Notes to Financial Statements
Item 2.
Management's Discussion And Analysis or Plan of Operation
PART II: OTHER INFORMATION
SIGNATURES
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
SUNHAWK.COM CORPORATION
Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
June 30, 2000
--------------
<S> <C>
ASSETS
Current assets:
Cash and Cash Equivalents $ 6,494,141
Short-Term Investments (Held to Maturity) 4,023,086
Accounts Receivable 6,147
Advance 3,250
Prepaid Expenses 249,227
------------
Total current assets 10,775,851
------------
Property and equipment, net 849,828
Other assets:
Digital sheet music masters (net of accumulated amortization
of $75,269) 527,991
Patents & trademarks, at cost (net of accumulated
amortization of $12,274) 122,151
Music catalog distribution rights (net of
accumulated amortization of $188,445) 1,130,673
Prepaid digital sheet music masters 941,584
Prepaid digital scans 506,882
Prepaid expenses 214,656
Deposits 27,584
------------
Total other assets 3,471,521
------------
Total assets $ 15,097,200
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of Credit $ 603,492
Accounts payable and accrued expenses 731,836
Payable to Eller McConney LLC 5,782
Payable to shareholder 290,000
Accrued interest to shareholder 7,385
------------
Total current liabilities 1,638,495
------------
Long-term liabilities:
Payable to Eller McConney LLC $ 1,000,000
------------
Total long-term liabilities 1,000,000
------------
Total liabilities 2,638,495
------------
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 19,322,534
Outstanding shares - 3,009,380 at June 30, 2000
Accumulated deficit (6,863,829)
------------
Total shareholders' equity 12,458,705
------------
Total liabilities and shareholders' equity $ 15,097,200
============
</TABLE>
See accompanying notes to financial statements.
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SUNHAWK.COM CORPORATION
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
--------------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 54,342 $ 30,547 $ 152,275 $ 75,941
Cost of goods sold:
Royalties, materials, shipping,
and credit card
processing fees 45,012 21,539 118,037 46,285
Amortization of digital sheet
music masters and music catalog
distribution rights 54,279 49,053 157,239 61,235
----------- ----------- ----------- -----------
Total Cost of Goods Sold 99,291 70,592 275,276 107,520
----------- ----------- ----------- -----------
Gross profit (loss) (44,949) (40,045) (123,001) (31,579)
Selling, general and administrative 2,159,970 636,361 4,930,095 1,765,527
----------- ----------- ----------- -----------
Loss from operations (2,204,919) (676,406) (5,053,096) (1,797,106)
Other Income(expense)
Interest income 163,117 10,589 237,750 10,589
Interest expense (14,913) -- (448,774) (113,928)
----------- ----------- ----------- ----------
Total Other Income(expense) 148,204 10,589 (211,024) (103,339)
----------- ----------- ----------- -----------
Net loss $(2,056,715) $ (665,817) $(5,264,120) $(1,900,445)
=========== =========== =========== ============
Net loss per share:
Basic and diluted(1) $ (0.68) $ (0.48) $ (2.39) $ (1.33)
=========== =========== =========== ============
Weighted average common shares for
net loss per share computations:
Basic and diluted(1) 3,009,380 1,390,849 2,198,505 1,433,274
=========== =========== =========== ===========
</TABLE>
------------
(1) Common stock equivalents have been excluded as their impact would be
anti-dilutive.
See accompanying notes to financial statements.
<PAGE>
SUNHAWK.COM CORPORATION
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Total
Common Stock Shareholders'
-------------------------------- Accumulated Equity
Shares Amount Deficit (Deficit)
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Balance, October 1, 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 15,413,168 15,413,168
Stock warrant-based consulting expense -- 171,290 171,290
Issuance of warrants in conjunction
with bridge loan financing 392,857 392,857
Net loss (YTD) -- (5,264,120) (5,264,120)
------------ ------------ ------------- -----------
Balance, June 30, 2000 (unaudited) 3,009,380 19,322,534 (6,863,829) 12,458,705
============= ============ ============= ===========
</TABLE>
See accompanying notes to financial statements.
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SUNHAWK.COM CORPORATION
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,264,120) $ (1,900,445)
Adjustments to reconcile net loss to net cash
and cash equivalents used in operating activities:
Depreciation 89,737 52,791
Amortization 160,285 69,050
Stock warrant-based consulting expense 171,290 --
Interest expense related to issuance of bridge loan warrants 392,857 --
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,502 --
(Increase) Decrease in inventory 17,091 (583)
Increase in Advance (3,250)
Increase in prepaid expenses (459,314) (20,000)
Increase in deposits (350) --
Decrease in accounts payable and accrued Expenses 22,569 253,399
Increase (Decrease) in payable to Eller McConney LLC (164,175) 104,696
Accrued interest on notes payable to Shareholder (108,009) 113,928
------------ ------------
Net cash and cash equivalents used in (5,143,887) (1,327,164)
operating activities ------------ ------------
INVESTING ACTIVITIES
Purchases of property and equipment (685,725) (81,940)
Purchase of digital sheet music masters (117,593) (286,791)
Prepayment for digital scans (506,882) --
Purchase of investments (4,023,086) --
Cost of patents and trademarks (26,741) (14,754)
------------ ------------
Net cash and cash equivalents used in
investing activities (5,360,027) (383,485)
------------ ------------
FINANCING ACTIVITIES
Issuance of common stock, net of offering costs 16,476,263 --
Proceeds from line of credit 1,503,492 --
Payment on line of credit (1,000,000) --
Proceeds from sale of common stock to existing shareholders 1,500,000
Proceeds from notes payable issued to shareholders 1,355,000
Increase in deferred offering costs -- (498,124)
------------ ------------
Net cash and cash equivalents provided by
financing activities 16,979,755 2,356,876
------------ ------------
Net increase in cash and cash equivalents 6,475,841 646,227
Cash and cash equivalents at beginning of period 18,300 59,093
------------ ------------
Cash and cash equivalents at end of period $ 6,494,141 $ 705,320
============ ============
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 for digital sheet music masters to
Eller McConney LLC 1,000,000 --
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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 is an Internet-based digital
rights management and digital publishing company. Sunhawk.com provides
digital rights management technology, content preparation and enhancement, and
a digital distribution infrastructure for the secure delivery of proprietary
digital products over the Internet. Currently, Sunhawk.com's primary product
is digital sheet music. Through Sunhawk.com's internally developed
proprietary technology, Solero -Registered Trademark-, customers are able to
view, play, print and store the encrypted digital sheet music file. Sunhawk
also sells its technology solutions to owners of proprietary digital products
interested in selling their content over the Internet.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Sunhawk.com considers all liquid investments with maturities of 90 days or less
at date of purchase to be cash equivalents. Cash and cash equivalents at
June 30, 2000 amounted to $6,494,141.
DIGITAL SHEET MUSIC MASTERS
Digital sheet music masters are valued at cost less accumulated amortization and
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 two to fifteen years.
Amortization expense is included in cost of goods sold and was $16,590 and
$11,364 for the three months ended June 30, 2000 and 1999, respectively, and
$44,172 and $23,546 for the nine months ended June 30, 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 $37,689 for both the three months ended June 30, 2000 and 1999
and $113,067 and $37,689 for the nine months ended June 30, 2000 and 1999,
respectively. 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.
RECLASSIFICATIONS
Certain amounts from 10-QSB for March 31, 2000 have been reclassified to be
consistent with the current presentation.
3. COMMON STOCK WARRANTS
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As of June 30, 2000, there were 285,015 warrants which had vested, with an
exercise expiration of February 15, 2005. All warrants are fully exercisable
at $12.00 per share. There is also a potential for an additional 149,998
warrants to vest provided certain price targets are achieved.
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.
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 is being
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.
On June 26, 2000, Sunhawk.com entered into a license and distribution agreement
with Naxos of America, Inc. (Naxos). This agreement provides Sunhawk.com with
the right to convert Naxos' graphical and audio media into Sunhawk.com's digital
format and to distribute it online. The term of the agreement is for
approximately two years at which time it will continue on an annual basis.
CONVERSION AGREEMENT
On May 16, 2000, Sunhawk.com entered into a conversion agreement with Music
Production International, Inc. (MPI), a Russian corporation. Under this
agreement, MPI will provide Sunhawk.com with digital scans in exchange for a
high speed foil-stamping and die-cutting machine valued at approximately
$500,000. This agreement is accounted for as a prepayment for digital scan
production services and will be amortized over a period of six years. This
agreement is collateralized by a security interest in the high speed
foil-stamping and die-cutting machine until such time as MPI's obligations
under the Conversion Agreement are completed to Sunhawk.com's satisfaction.
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
$426,349 at June 30, 2000, and is being amortized over the term of the
agreement. The fair value was determined using the Black-Scholes method of
valuation. The amortization was $66,680 for the three months ended June 30,
2000 and $79,940 for the nine months ended June 30, 2000. As of June 30,
2000, 35,002 warrants have vested.
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
<PAGE>
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 $487,200 at June 30, 2000, and is being amortized over the term of the
agreement. The fair value was determined using the Black-Scholes method of
valuation. The amortization expense was $76,196 for the three months ended
June 30, 2000 and $91,350 for the nine months ended June 30, 2000. As of June
30, 2000, 40,000 warrants have vested.
Both Consulting Agreements are subject to individual 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.
7. LINE OF CREDIT
On April 27, 2000, Sunhawk.com entered into an $850,000 line-of-credit
agreement with a financial institution. As of June 30, 2000, borrowings
totaling approximately $600,000 were outstanding. Borrowings under the line
of credit bear interest at Prime plus 0.5% (10.0% at June 30, 2000) and are
due on May 15, 2005. The line-of-credit is collateralized by a $1,000,000
short-term investment held by Sunhawk.com.
8. RELATED-PARTY TRANSACTIONS
Prior to February 14, 2000, Sunhawk.com paid Eller McConney LLC, wholly owned
by Marlin Eller and Mary McConney, executive officers of Sunhawk.com 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, provided these services under an informal agreement with
Eller McConney LLC. At June 30, 2000, Sunhawk.com owed $5,782 to Eller
McConney LLC for services previously rendered.
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. Under this agreement, Eller
McConney LLC assigned all of its rights to receive services for the
production of digital sheet music from Avtograf to Sunhawk.com 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 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 assigned its obligation to provide production
services for digital sheet music to Music Production International. As such,
Music Production International is 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.
9. STOCK OPTION PLAN
Effective April 28, 2000, Sunhawk.com's Board of Directors amended Sunhawk.com
Corporation's 1996 Stock Option Plan to increase the number of shares the Board
is authorized to issue to 800,000 subject to shareholder approval.
10. OTHER
On April 14, 2000, Sunhawk.com entered into a Letter of Intent agreement with
Copyright Control Services, Inc. (Copyright). On June 13, 2000 an amendment to
the Letter of Intent agreement was entered into consisting of the following
revisions: (1) Copyright shareholders, which for purposes of this amendment also
include Paul Bandrowski and the @visory group, shall receive total consideration
of 1,950,938 shares of Sunhawk.com's common stock for the acquisition of
Copyright. 825,000 shares will be issued to Copyright at the closing of the
transaction with the
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<PAGE>
remaining to be held in escrow pending the satisfaction of Sunhawk.com of the
market capitalization thresholds within a two-year period. Both the issued
and escrowed shares will be subject to certain "lock-up" provisions. Also as
part of this revision, Copyright will not receive a three-year warrant
agreement to purchase additional shares as outlined in the original Letter of
Intent; (2) In addition to retaining the services of certain of Copyright's
executives, both a Copyright executive and Paul Bandrowski will be nominated
to Sunhawk.com's Board of Directors whereby Mr. Bandrowski will serve as
Vice-Chairman; and (3) The purchase of Copyright is expected to close by
September 30, 2000.
11. SUBSEQUENT EVENT
On August 1, 2000, Sunhawk.com signed a definitive agreement with Copyright
Control Services, Inc. (Copyright) for a share exchange valued at
approximately $31,000,000. In this transaction, Sunhawk.com will exchange up
to 1,950,938 shares of its common stock for 8,616,336 shares of Copyright's
common and 1,252,884 shares of Copyright's preferred stock. See Exhibit 10.2
for complete agreement.
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, operating activities
consisted principally of the following:
- creating our digital sheet music catalog;
- developing and patenting our technology;
- establishing international supplier arrangements 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;
- 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 -Registered Trademark 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 June 30, 2000
we sold approximately 35,484 digital sheet music products and approximately
3,585 traditional printed sheet music products and CD-ROMs. Through June 30,
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.
<PAGE>
Amortization of the cost of producing digital masters relates to the digital
sheet music and is based on the shorter of estimated useful lives, the
estimated useful life of the electronic medium, 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.
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 expense all
advertising costs as incurred, and we expect selling expenses to increase
significantly as we seek to increase the number of Solero -Registered
Trademark- 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, stock-based compensation 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 Digital Rights
Management (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 NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE
NINE MONTHS ENDED JUNE 30, 1999
Sales
Sales for the nine months ended June 30, 2000 were $152,275 compared to
$75,941 for the nine months ended June 30, 1999. This increase in sales
resulted from providing a wider selection of music titles in our Solero
-Registered Trademark- format, and an increase in our print sheet music
sales. In addition, we offered a variety of promotional features on our web
site and provided special services for our strategic partners.
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<PAGE>
Cost of goods sold
Cost of goods sold for the nine months ended June 30, 2000 were $275,276
compared to $107,520 for the nine months ended June 30, 1999. The increase in
cost of goods sold was primarily due to the amortization of $113,067 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 nine months ended June 30, 2000 in the cost related
to the print music sales. Additionally, amortization of digital sheet music
masters during the nine months ended June 30, 2000 increased as the number of
digital sheet music titles produced during that period increased. For the
nine months ended June 30, 2000, royalty payments accounted for $49,992 or
32.8% of sales. Costs associated with the amortization of digital sheet music
masters accounted for $44,172, or 29.0% of sales and costs associated with
the amortization of music catalog distribution rights were $113,067, or 74.3%
of sales. For the nine months ended June 30, 1999, royalty payments accounted
for $27,337, or 36.0% of sales. Costs associated with the amortization of
digital sheet music masters accounted for $23,546, or 31.0% of sales and
costs associated with the amortization of music catalog distribution rights
were $37,689, or 49.6% of sales.
Selling, general and administrative expenses
Selling expenses for the nine months ended June 30, 2000, were $616,976,
including advertising costs of $451,485 compared to selling expenses of
$157,896, with advertising costs of $134,309, for the nine months ended June
30, 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 nine months ended
June 30, 2000 were $4,313,119 compared to $1,607,631 for the nine months
ended June 30, 1999. The increase was primarily due to the expansion of our
production capabilities to grow our digital sheet music catalog, stock-based
compensation expenses, professional fees, hiring additional key management
personnel, and fees related to the bridge financing in the nine months ended
June 30, 2000.
Other Income/(Expense)
Other income/(expense) for the nine months ended June 30, 2000 and 1999 was
($211,024) and ($103,339), 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.
Risks and Uncertainties
The Company has continued to incur losses and its ability to realize the
carrying value of its assets is dependent upon achieving profitable results.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1999
Sales
Sales for the three months ended June 30, 2000 were $54,342 compared to
$30,547 for the three months ended June 30, 1999. This increase in sales
resulted from providing a wider selection of music titles in our Solero
-Registered Trademark- format and increased advertising of our product. In
addition, 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 June 30, 2000 were $99,291
compared to $70,592 for the three months ended June 30, 1999. The increase in
cost of goods sold was primarily due to an increase in amortization of the
digital sheet music masters during the three months ended June 30, 2000. This
increase was due to an increase in digital sheet music titles produced during
the period. For the three months ended June 30, 2000, royalty payments
accounted for $17,730 or 32.6% of sales. Costs associated with the
amortization of digital sheet music masters accounted for $16,590, or 30.5%
of sales and costs associated with the amortization of music catalog
distribution rights were $37,689, or 69.4% of sales. For the three months
ended June 30, 1999, royalty payments accounted for $14,700, or 48.1% of
sales. Costs associated with the amortization of digital sheet music masters
accounted for
<PAGE>
$11,364, or 37.2% of sales and costs associated with the amortization of
music catalog distribution rights were $37,689, or 123.4% of sales.
Selling, general and administrative expenses
Selling expenses for the three months ended June 30, 2000, were $227,303
including advertising costs of $168,344, compared to $79,807, with
advertising costs of $76,139, for the three months ended June 30, 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 June 30, 2000 were $1,932,667 compared to $556,554 for
the three months ended June 30, 1999. The increase was primarily due to the
expansion of our production capabilities to grow our digital sheet music
catalog, professional fees, and hiring key management personnel and in the
three months ended June 30, 2000.
Other Income/(Expense)
Other income/(expense) for the three months ended June 30, 2000 and 1999 was
$148,204 and $10,589, respectively. The increase in other income/(expense)
primarily relates to interest income received from the investment of excess
funds received in the initial public offering.
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. Additionally, 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 $16.5 million in net proceeds. As
of June 30, 2000, we had cash and cash equivalents of $6,494,141, short-term
investments of $4,023,086 and working capital of $9,137,356.
Net cash used in operating activities totaled $5,143,887 for the nine months
ended June 30, 2000 compared with net cash used in operating activities of
$1,327,164 for the nine months ended June 30, 1999. The increase in net cash
used in operating activities for the nine months ended June 30, 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 $5,360,027 for the nine months
ended June 30, 2000 compared to $383,485 for the nine months ended June 30,
1999. The increase in cash used in investing activities for the nine months
ended June 30, 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 $16,979,755 for the nine months
ended June 30, 2000 compared to $2,356,876 for the nine months ended June 30,
1999. The increase in net cash for financing activities for the nine months
ended June 30, 2000, as compared to prior year, was primarily derived from
proceeds received from the initial public offering.
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
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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.
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 10.1 Amendment #1 to the Letter of Intent dated
June 13, 2000.
Exhibit 10.2 Shares Exchange Agreement for Copyright Control
Services.
Exhibit 10.3 Form of Contingent Share Agreement with certain
former shareholders of Copyright Control Services,
Inc.
Exhibit 10.4 Form of Contingent Share Agreement with @Visory,
LLC.
Exhibit 10.5 Form of Amendment to @Visory consulting
Exhibit 10.6 Form of Registration Rights Agreement
Exhibit 10.7 License and Distribution Agreement with Naxos of
America, Inc.
Exhibit 27.1 Financial Data Schedule
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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 August 14, 2000 /s/ Marlin Eller
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Marlin Eller, Chief Executive Officer
Date August 14, 2000 /s/ Tricia Parks-Holbrook
-------------- --------------------------------------
Tricia Parks-Holbrook,
Chief Financial Officer
