UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission File Number: 1-15863
----------------------
IA GLOBAL, INC.
(Exact name of Registrant as specified in its charter)
----------------------
DELAWARE 13-4037641
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
533 AIRPORT BOULEVARD, SUITE 400
BURLINGAME, CA 94010
(Address of principal executive offices)
Registrant's telephone number: (650) 685-2403
----------------------
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of May 1, 2003 there were issued and outstanding 51,797,556 shares
of the Registrant's Common Stock.
IA GLOBAL, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. ----
Item 1. Financial Statements............................................2
Consolidated Balance Sheet......................................2
Consolidated Statements of Operations...........................3
Consolidated Statement of Cash Flows............................4
Notes to Consolidated Financial Statements......................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk....................................................12
Item 4. Controls and Procedures........................................13
PART II.
Item 1. Legal Proceedings..............................................13
Item 2. Changes in Securities and Use of Proceeds......................13
Item 3. Defaults Upon Senior Securities................................14
Item 4. Submission of Matters to a Votes of Security Holders...........14
Item 5. Other Information..............................................14
Item 6. Exhibits and Reports on Form 8-K...............................14
Signatures....................................................................15
Certifications................................................................16
FORWARD-LOOKING STATEMENTS
Some of the information in this report contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of
our financial condition; or
o state other "forward-looking" information.
We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or over which we have no control. The risk factors listed in
this report, as well as any other cautionary language in this report, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. You should be aware that the occurrence of the events described in
these risk factors and elsewhere in this report could have a material adverse
effect on our business, operating results and financial condition.
1
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IA GLOBAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, December 31,
2003 2002
------------ ------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash ............................................. $ 440,774 $ 444,383
Accounts receivable .............................. 265,330 -
Deferred license fee receivable .................. 145,396 -
Other current assets ............................. 290,653 -
------------ ------------
Total Current Assets ............................. 1,142,153 444,383
LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET ........ 110,432 812
INTANGIBLE ASSETS, NET ........................... 1,085,711 -
OTHER ASSETS ..................................... - 5,477
------------ ------------
$ 2,338,296 $ 450,672
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable ................................. $ 351,182 $ 246,353
Accrued expenses ................................. 456,821 31,000
Loan payable - related party ..................... 1,898,024 1,063,857
Deferred Revenue ................................. 830,011 -
Income taxes payable - foreign ................... 47,330 -
Other payable .................................... 7,133 -
------------ ------------
Total Current Liabilities ........................ 3,590,500 1,341,210
STOCKHOLDERS' DEFICIENCY
Series A Preferred stock $.01 par value
5,000 shares authorized, -0- and 1,000 issued
and outstanding, respectively .................. - -
Common stock, $.01 par value;
75,000,000 shares authorized,
51,797,556 and 51,797,556 issued
and outstanding, respectively .................. 517,976 517,976
Paid in capital .................................. 20,021,642 19,744,331
Accumulated deficit .............................. (21,741,634) (21,022,845)
Unearned compensation expense .................... - (80,000)
Unrealized foreign currency exchange ............. (189) -
Treasury stock ................................... (50,000) (50,000)
------------ ------------
Total Stockholder's deficiency ................... (1,252,205) (890,538)
------------ ------------
$ 2,338,296 $ 450,672
============ ============
See notes to consolidated financial statements.
2
IA GLOBAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
----------------------------
2003 2002
------------ ------------
(unaudited) (unaudited)
REVENUE ........................................ $ 5,149 $ 137,500
COST OF SALES .................................. 109,186 34,280
------------ ------------
GROSS PROFIT ................................... (104,038) 103,220
EXPENSES:
Selling, general and administrative expenses ... 531,727 272,889
------------ ------------
Total expenses ................................. 531,727 272,889
------------ ------------
INCOME (LOSS) FROM OPERATIONS .................. (635,765) (169,669)
OTHER INCOME (EXPENSE):
Interest income ................................ 1,054 -
Interest expense ............................... (79,071) -
Other income (expense) ......................... (4,676) 33
------------ ------------
Total other income (expense) ................... (82,693) 33
------------ ------------
INCOME (LOSS) BEFORE TAXES ..................... (718,457) (169,636)
INCOME TAX EXPENSE ............................. 332 -
------------ ------------
NET INCOME (LOSS) .............................. $ (718,789) $ (169,636)
============ ============
Other comprehensive income, net of tax:
Foreign currency translation adjustments ....... (189) -
Comprehensive Income ........................... $ (718,978) $ (169,636)
============ ============
Weighted average shares of common stock
outstanding .................................... 51,797,556 29,672,556
Net income (loss) per share .................... $ (0.01) $ (0.01)
============ ============
See notes to consolidated financial statements.
3
IA GLOBAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31,
-------------------------
2003 2002
----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $ (718,789) $ (169,636)
Adjustments to reconcile net loss to
net cash used in operating activites:
Depreciation ....................................... 90,687 25,262
Impairment of fixed assets ......................... - -
Equity based compensation .......................... 80,000 61,447
Accounts receivable ................................ (265,330) -
Other current assets ............................... (290,653) -
Deferred license fee receivable .................... (145,396) -
Other payable ...................................... 7,133 -
Accounts payable ................................... 104,829 -
Accrued expenses ................................... 425,821 20,617
Income taxes payable - foreign ..................... 47,330 -
Deferred revenue ................................... 830,011 (137,500)
----------- -----------
NET CASH USED IN OPERATIONS ........................ 165,643 (199,810)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of capital expenditures .................. (200,496) -
Other assets ....................................... 5,477 -
Purchase of intangibles ............................ (1,085,711) -
----------- -----------
NET CASH PROVIDED BY (USED) IN INVESTING ACTIVITIES (1,280,730) -
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES:
Loan payable - related party ....................... 834,167 181,755
Contribution of capital ............................ 277,311 -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......... 1,111,478 181,755
----------- -----------
NET INCREASE (DECREASE) IN CASH .................... (3,609) (18,055)
CASH, beginning of the period ...................... 444,383 18,380
----------- -----------
CASH, end of the period ............................ $ 440,774 $ 325
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid .................................... $ - $ -
Taxes paid ....................................... - -
See notes to consolidated financial statements.
4
IA Global, Inc. and Subsidiaries
Notes to consolidated financial statements
1. BASIS OF PRESENTATION:
The accompanying unaudited financial statements of IA Global, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
prepare them for inclusion as part of the Form 10Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The financial
statements for the periods ended March 31, 2003 and 2002 are unaudited and
include all adjustments necessary to a fair statement of the results of
operations for the periods then ended. All such adjustments are of a normal
recurring nature. The results of the Company's operations for any interim period
are not necessarily indicative of the results of the Company's operations for a
full fiscal year. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report (Form 10K) filed with
the Securities and Exchange Commission for the year ended December 31, 2002.
2. GOING CONCERN:
These financial statements have been prepared assuming the Company will continue
as going concern. The Company has suffered recurring losses amounting to $20.0
million. The Company has borrowed funds from its shareholders to meet its daily
cash flow requirements during the recent two years; additional loans from
affiliates are not guaranteed but may occur. The Company will need to obtain
additional financings through debt or equity raises in order to continue its
operations for another twelve months. In January 2003, a loan agreement was
signed with PBAA FUND LTD, a related party, for the financing of acquisitions.
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. Intercompany items
and transactions have been eliminated in consolidation
CASH AND CASH EQUIVALENTS - The Company classifies highly liquid temporary
investments with an original maturity of an original maturity of three months or
less when purchased as cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment represent machinery, equipment
and software which are stated at cost less accumulated depreciation.
Depreciation of machinery and equipments is computed by the declining method
over the estimated useful lives of the related assets (approximately 4 - 15
years). Software developed or obtained for internal use is depreciated using the
straight-line method over the estimated useful life of the software, generally
not in excess of five years.
INTANGIBLE ASSETS -INTELLECTUAL PROPERTY - The Company has elected to amortize
the intellectual property over twenty-four months on a straight - line basis.
LONG - LIVED ASSETS - The Company reviews its long-lived assets for impairment
when changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Long-lived assets under certain circumstances are reported
at the lower of carrying amount or fair value. Assets to be disposed of and
assets not expected to provide any future service potential to the Company are
recorded at the lower of carrying amount or fair value less cost to sell.
SOFTWARE DEVELOPMENT COSTS - The Company capitalizes software development costs
upon the establishment of technological feasibility, subject to net realizable
value considerations. These costs are included in the balance sheet in property
and equipment. Capitalization ends when the product is available for general
release. Capitalized software development costs are amortized over 24 months
using the higher of the straight line method or the ratio of current gross
revenues to the total of the current and expected future revenues of the
product. Costs capitalized comprise costs to adopt licensed internet
acceleration software to the Japanese Market.
5
SOFTWARE REVENUE AND COST RECOGNITION - The Company's revenue recognition
policies are in accordance with Statement of Position ("SOP") 97-2, Software
Revenue Recognition, as amended, and Staff Accounting Bulletin No. 101, Revenue
Recognition.
The Company sells its software and provides support service on a subscription
basis through Value Added Resellers ("VAR"), Internet Service Providers ("ISP")
or directly to end-users. End user subscribers to the service sign up for a
one-year license, and receive a copy of the I-accele software and full access to
the acceleration server maintained by the Company. Revenues are recognized
ratably over the license contract period beginning with the date the license is
delivered from the VAR, ISP or Company to the user. As distributed more fully in
Note 6, the company acquired a license to software used in its products. The
company pays a license fee for each customer using this product. Fees paid under
this license are capitalized as deferred license fee and amortized to cost of
sales over the one-year license period from the date of activation.
ADVERTISING COSTS - Advertising costs are expensed as incurred.
USE OF ESTIMATES - The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments,
including accounts receivable and accounts payable are carried at cost, which
approximates fair value due to the relatively short maturity of those
instruments.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In October 2001, the Financial
Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets. The objectives of SFAS No. 144 are to address
significant issues relating to the implementation of SFAS No. 121, Accounting
for the Impairment of Long-lived Assets to be Disposed of, and to develop a
single accounting model, based on the framework established by SFAS No.121.
Although SFAS No. 144 supercedes SFAS No. 121, it retains some fundamental
provisions of SFAS No. 121. SFAS No. 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. The Company did not have a material impact on the
Company's financial statements.
INCOME TAXES - Income taxes are accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
4. RISK OF CONCENTRATION
Significant Distributor - The Company's largest distributor is a VAR and
accounted for 87% of accounts receivable - trade as of March 31, 2003. No
amounts were recognized to revenue in the current period as no licenses were
on-sold from the VAR to the end-user. The Company anticipates that significant
distributor concentration will continue for the foreseeable future.
6
5. INTANGIBLE ASSETS
Included in intangible assets are the following;
o Software development costs, net of accumulated amortization, of
$136,619.
o Intellectual property of $1,034,092. The intellectual property arose
from the net difference in assets and liabilities acquired from the
Company acquiring a 76.9% equity interest in a privately held Japanese
corporation, "iAaccele", engaged in the business of providing an
internet data transmission acceleration service that targets
narrowband users. The Company financed this acquisition by borrowing
the 100 million or about $830,000 from a related party and the
assumption of indebtedness of iAccele.
6. INCOME TAXES
The Company management is not able to determine whether it is more likely than
not that the deferred tax assets will be realized. As a result, management has
provided a 100% valuation allowance against the net deferred tax assets.
7. RELATED PARTY
On February 10, 2003, the Company acquired a 76.9% equity interest in a
privately held Japanese corporation engaged in the business of providing an
internet data transmission acceleration service that targets narrowband users,
for 100 million Japanese Yen or $830,000.
The Company financed this acquisition by borrowing the 100 million Yen from a
related party. This loan bears interest at 4.5% per annum and is due and payable
on January 31, 2004. A one year extension for the payment of principal is
available, if requested by the Company in writing by January 31, 2004 at which
time an automatic extension will be granted until February 28, 2004. The full
one year extension request to January 31, 2005 is subject to approval by the
related party. If the loan is not repaid by January 31, 2004, the debt holder is
allowed to convert such debt into the Company's common stock based on 80% of the
average closing price for the 20 days prior to such exercise of the conversion
of the indebtedness due. The beneficial conversion feature of this loan has been
valued and recorded at $277,311 and will be amortized ratably through the
maturity date of January 31, 2004.
8. COMMITMENT
In November 2002, the Company assumed from ISX, a license agreement for the
non-exclusive use to certain internet acceleration technology. This technology
forms the basis of the Company's only product offering, and was originally
licensed by ISX in July 2002. The license agreement is renewable annually and
requires fixed royalties in the amount of approximately $13 per twelve month
license sold during the period. The Company must pay the royalties within twenty
days after the Company has collected from its customers. The Company has
incurred approximately $40,000 under this license agreement for the quarter
ended March 31, 2003.
9. SEGMENT INFORMATION
The Company's newly acquired subsidiary operates fully in Japan and under a
single segment. There is no current business if IA Global in the United States
other than paying professional fees associated with being a U.S. taxpayer and
publicly held in the U.S. The general administrative expenses of the parent
company were $ 307,168 during the first quarter ended March 31, 2003.
10. RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements in order to conform with the 2002 presentation.
7
11. STOCKHOLDER'S EQUITY
During the first quarter ended March 31, 2003, the following equity events
occurred;
The beneficial conversion rights for the loan from the related party was
recorded at $277,311 as a contribution to capital.
In February 2003, The Company signed three year employment agreements with two
of its' executives and granted 1,500,000 Incentive Stock options at $.08 per
share (fair market value at the date of the grant), exercisable immediately and
expiring on January 23, 2013.
12. NEW ACCOUNTING PRINCIPLES
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Entities", (FIN No. 46) an
interpretation of Accounting Research Bulletin No. 51. FIN No. 46 requires that
variable interest entities be consolidated by a company if that company is
subject to a majority of the risk and loss from the variable interest entity's
activities or is entitled to receive a majority of the entity's residual returns
or both. FIN No. 46 requires disclosures about variable interest entities that
companies are not required to consolidate but which the company has a
significant variable interest. The consolidation requirements will apply
immediately for newly formed variable interest entities created after January
31, 2003 and entities established prior to January 31, 2003, in the first fiscal
year or interim period beginning after June 30, 2003. The adoption of FIN No. 46
is not expected to have a material impact on our consolidated results of
operations and financial position.
In Apirl 2003, the FASB issued Statements of Financial Accounting Standards No.
149 ("SFAS No. 149"), an amendment to SFAS No. 133. SFAS No. 149 clarifies under
what circumstances a contract with initial investments meets the characteristics
of a derivative and when a derivative contains a financing component. This SFAS
is effective for contracts entered into or modified after June 30, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
In April 1999, we commenced operations on the Internet as a single
channel broadcaster that created, produced and distributed location-specific
programming using streaming video technology. We then expanded our business to
provide streaming audio and video content over six Internet "television"
networks, which in the aggregate hosted over 100 distinct channels targeted to
various market and segments and niches. During 2001, we refocused our business
model to de-emphasize the offering of thematic video-on-demand networks in favor
of a single network of special interest, continuously streaming broadband
entertainment channels, using a previously unavailable technology called
Simulated Live Stream, or SLS.
We have recently revised our business plan to expand into other areas
of media technology. We are shifting the revenue model from broadband
entertainment channels and revenues derived from advertising, to a renewed focus
on developing media technology products and services and on licensing revenues.
To this end, we may develop such media technology products and services
internally, or acquire them from other parties.
8
In the initial stage of the revision of our business plan, we have made
an acquisition of a 76.9% equity interest in iAccele Co., Ltd. ("iAccele"), a
privately held Japanese corporation. iAccele is engaged in the business of
providing an Internet data transmission acceleration service. Its main product
offering is named after the company, iAccele. This service allows narrow band
users, as well as broadband users, to accelerate their access to the Internet,
enabling them to increase the speed of downloading and uploading data from their
local machine to the Internet. This speeds up web browsing, network services and
accelerates email services. There is no need for the users to change their
provider of network connection. The iAccele product is based on a repeat
subscriber business model. The subscriber to the service signs up for a 3 month
or 1 year license, which provides them with a copy of the iAccele software and
full access to the acceleration server.
As well as pursuing these new revenue sources, we still own the
proprietary rights to the VToob software, and are looking into the possibility
of licensing this software to other companies. We also believe that the
combination of Vtoob and iAccele may present us with new business opportunities
in the media technology industry. It is not certain yet what these opportunities
may be, or as to whether they will be profitable or not, if existing at all.
The acquisition of iAccele on February 10, 2003 has been accounted for
under the purchase method of accounting and, therefore, our historical results
of operations for the first quarter of 2003 include the results of operations of
iAccele subsequent to its acquisition date. This acquisition affects the
comparability of the historical results of operations of our first quarter of
2003 and the first quarter of 2002.
Our current business plan assumes that we will not derive any
significant revenues from advertising or other activities related to VToob,
except for the possibility of a licensing model as stated above. There is no
guarantee that we will be able to develop and support a version of VToob that
can be successfully licensed. The majority of revenue for the first quarter of
2003 has been recorded from our recently acquired company, iAccele.
Our business plan assumes that, subject to cash flow availability, we
will continue to seek out opportunities to acquire companies that have a
synergetic approach with iAccele or companies that have a strategic importance
to our general operations. In order to pursue such a strategy or to provide
additional capital to iAccele, if so required, it is reasonably expected that we
will require additional capital investments.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 VS. THREE MONTHS ENDED MARCH 31, 2002
We sustained a net loss of $718,789 for the three-month fiscal period
ended March 31, 2003 on revenues of $ 5,149, compared to a net loss of $169,636
for the three-month fiscal period ended March 31, 2002 on revenues of $137,500.
Revenues decreased approximately $132,000 or 96% due to a change in business
direction and deferral of license revenues that were attributable to iAccele.
All revenues for the quarter ended March 31, 2003 were attributed to iAccele and
represent license fees for iAccele software sold to Value Added Resellers
(VARs), Internet Service Providers(ISPs) or directly to end-users. As of March
31, 2003, we had deferred $830,011 of revenues since such revenues were unearned
as of such date. Of such deferred revenues, approximately $370,000 was
attributable to the quarter ended December 31, 2002 and approximately $460,000
was attributable to the quarter ended March 31, 2003. The iAccele software is
based on an ASP (Application Service Provider) model.
9
Revenue figures have been accounted for on the basis of the number of
users who have activated the software license key after they purchased the
iAccele software, rather than accruing revenues at the time the iAccele software
was purchased. In the case of VARs, revenue is received by iAccele on a monthly
accruals base but not recognized by us until the license key is activated by the
end user. This can lead to a significant time lag between cash being received by
us as well as being converted from deferred revenue to earned revenue in our
financial reports. Further, our accounting policy records revenue on a deferred
basis whereby the revenue derived is divided over the period of the licenses
validity span, currently a maximum of 12 months. On this basis, revenues were
$5,149 for the quarter ended March 31, 2003 while deferred revenues were
$830,011 as of March 31, 2003.
Net loss increased approximately $550,000 or 320% due to increased
expense for sales and marketing associated with the sales of iAccele software
license. The iAccele software licenses are for a period of either 3 months or 12
months and the revenue recognized above represents that portion of the license
fee that applies to the first quarter of 2003. A portion of expenditure related
to cost of sales is also deferred on the same basis as revenue for this period.
Cost of sales for the three-month period ended March 31, 2003, were
$109,186, compared to $34,280 for the three-month period ended March 31, 2002,
an increase of approximately $75,000 or 220%. Cost of sales for the current
period represents costs relating to the iAccele software.
Our production costs for the development of original content for the
three-month period ended March 31, 2003 were $0, compared to $14,280 for the
three-month period ended March 31, 2002, since there were no direct production
costs related to the operations of iAccele.
Our selling, general and administrative expenses were $531,727 for the
three-month fiscal period ended March 31, 2003, compared to $272,889 for the
three-month period ended March 31, 2002, an increase of approximately $260,000
or 95%. For the current period, the expenses consisted primarily of employee and
independent contractor expense, rent, overhead, equipment and depreciation,
amortization of intellectual property professional and consulting fees, sales
and marketing costs, and other general and administrative costs. The difference
in the current period compared to the prior period is primarily due to the
acquisition of iAccele on February 10, 2003,and the sales and marketing expenses
associated with iAccele software license sales.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through
sales of our equity securities in our initial public offering, from several
private placements and loans from affiliated entities. Net proceeds from these
sales have totaled approximately $19.2 million as of March 31, 2003, with
approximately $8.8 million raised in the initial public offering and the balance
raised in the private placements and equity issued for services in the amount of
approximately $10.4 million. Additional funding was obtained in the form of
loans from related parties, of which approximately $1.9 million was outstanding
at March 31, 2003.
For the three months ended March 31, 2003, we used cash of
approximately $170,000 in connection with our operating activities. Such amount
was primarily attributable to the acquisition of iAccele, net losses, offset in
part by unearned compensation expenses, depreciation and amortization, and
increases in accounts receivable, deferred license fees, other current assets,
accrued expenses and deferred revenue. For the three months ended March 31,
2003, approximately $1,280,000 were used by investing activities, primarily the
purchase of iAccele, and $1,110,000 were provided by financing activities.
10
On February 10, 2003, we acquired an approximately 76.9% equity
interest in iAccele, a privately held Japanese corporation engaged in the
business of providing an Internet data transmission acceleration service that
targets narrowband users, as well as broadband users, for 100.0 million Japanese
Yen, or approximately $830,000 based on the Japanese Yen/US dollar exchange rate
on that date.
In order to finance this purchase, we borrowed 100.0 million Japanese
Yen from PBAA Fund Ltd., a British Virgin Islands limited liability company. The
principal amount of this loan, together with interest thereon at 4.50 percent
per annum, is due and payable on January 31, 2004. We may defer payment of the
principal amount of this loan, but not accrued interest, for one additional year
with the consent of PBAA. We may prepay all or specified minimum portions of
this loan at any time after March 31, 2003 upon payment of certain prepayment
penalties.
If this loan is not repaid by January 31, 2004, PBAA will be afforded
the right to convert any portion of the then unpaid principal amount of the
loan, as well as any then accrued but unpaid interest thereon, into shares of
our common stock at a per share conversion price equal to the Japanese Yen
equivalent of 80% of the average of the US dollar closing price of our common
stock on the American Stock Exchange in the 20 consecutive trading days
immediately prior to the date upon which PBAA gave us notice of conversion, or,
if our common stock is not then traded on the American Stock Exchange, the
closing bid price for our common stock as reported by the Nasdaq Stock Market or
such other primary exchange or stock bulletin board on which our common stock is
then traded. By way of illustration, had such conversion occurred on February
10, 2003, PBAA would have received 7,335,145 shares of our common stock which,
when added to those shares currently beneficially owned by PBAA and its
affiliates would increase their collective ownership of our common stock to
approximately 78.9%.
We had cash of approximately $450,000 and current liabilities of
approximately $3.6 million at March 31,2003. Our cash expenditures are
approximately $200,000 per month.
At March 31, 2003, iAccele was delinquent in a payment of 15.0 million
Japanese Yen, or approximately $130,000 based on the Japanese Yen/US dollar
exchange rate on that date, to Infoshower Exchange Corp. ("Infoshower X").
iAccele originally owed InfoshowerX 150.0 million Japanese Yen, or approximately
$1,300,000 based on the Japanese Yen/US dollar rate on that date, under
contractual obligations between the two companies prior to our acquisition of an
equity interest in iAccele. Of this 150.0 million Japanese Yen, 30.0 million
Japanese Yen was paid by iAccele prior to our acquisition of an equity interest
in iAccelle, 70.0 million Japanese Yen was paid by iAccele from our payment for
an equity interest in iAccelle and 35.0 million Japanese Yen was paid by iAccele
between February 10, 2003 and March 31, 2003. iAccele remained delinquent in the
payment of the balance of 15.0 million Japanese Yen as of May 20, 2003. We own
76.9% of the outstanding common stock of iAccele while InfoShower Exchange Corp.
owns the balance of the capital stock of iAccele
Inter Asset Japan LBO No. 1 Fund ("IAJ") beneficially owns 49.1% of our
common stock, PBAA Fund Ltd. owns 7.7% of our common stock and Terra Firm Fund
Ltd. owns 25.3% of our common stock, or 76.5% in the aggregate. Such entities
have stated in a Schedule 13D that they may be deemed a "group" for purposes of
Rule 13d-3 under the Securities Exchange Act of 1934. The beneficial ownership
of IAJ includes 10,638,570 shares of common stock that are issuable upon
conversion of a promissory note in the amount of $1,063,857. IAJ also
beneficially owns directly and indirectly 42.7% of the common stock of
InfoShowerX. Alan Margerison, President, Chief Executive Officer and a director
of our company, serves as President and Chief Executive Officer of Inter Asset
Japan KK (Kabushiki Gaisha), an affiliate of IAJ. Hiroshi Kubori, a director of
our company, owns approximately 5% of the capita; stock of InfoShowerX.
11
With our limited current cash resources, we expect to be able to
support our operations through the end of the second quarter of the year 2003.
In order to reduce costs, we and iAccele's management are reviewing the business
operations of iAccele to determine if any of iAccele's operating costs can be
reduced. Regardless of any reduction in operating costs, we will need to obtain
additional financing in order to continue our current operations and to sustain
our cash flow needs, including the cash flow needs of iAccele. Moreover, if we
raise additional capital through borrowing or other debt financing, we would
incur substantial interest expense. Sales of additional equity securities will
dilute on a pro rata basis the percentage ownership of all holders of common
stock. If we do raise more equity capital in the future, it is likely that it
will result in substantial dilution to our present stockholders. Any inability
to obtain additional financing will materially adversely affect us, including
possibly requiring us to significantly curtail or cease business operations. We
can give no assurances that we will be able to raise additional financing from
any party, including from any related party.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46, "Consolidation of Variable Entities", (FIN
No. 46) an interpretation of Accounting Research Bulletin No. 51. FIN No. 46
requires that variable interest entities be consolidated by a company if that
company is subject to a majority of the risk and loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. FIN No. 46 requires disclosures about variable
interest entities that companies are not required to consolidate but which the
company has a significant variable interest. The consolidation requirements will
apply immediately for newly formed variable interest entities created after
January 31, 2003 and entities established prior to January 31, 2003, in the
first fiscal year or interim period beginning after June 30, 2003. The adoption
of FIN No. 46 is not expected to have a material impact on our consolidated
results of operations and financial position.
In April 2003, the FASB issued Statements of Financial Accounting Standards No.
149 ("SFAS No. 149"), an amendment to SFAS No. 133. SFAS No. 149 clarifies under
what circumstances a contract with initial investments meets the characteristics
of a derivative and when a derivative contains a financing component. This SFAS
is effective for contracts entered into or modified after June 30, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in trading market risk sensitive instruments and do
not purchase hedging instruments or "other than trading" instruments that are
likely to expose us to market risk, foreign currency exchange, commodity price
or equity price risk. We have purchased no options and entered into no swaps. We
have no bank borrowing facility that could subject us to the risk of interest
rate fluctuations.
On February 10, 2003, we acquired a 76.9% equity interest in iAccele
Co., Ltd., a privately held Japanese corporation engaged in the business of
providing an Internet data transmission acceleration service that targets
narrowband users, as well as broadband users. iAccele is currently sold through
various distribution outlets in Japan, including retail stores.
12
In order to finance the purchase of iAccele, we borrowed 100.0 million
Japanese Yen from PBAA Fund Ltd., a British Virgin Islands limited liability
company. The principal amount of this loan, together with interest thereon at
4.5% per annum, is due and payable on January 31, 2004. We may defer payment of
the principal amount of this loan, but not accrued interest, for one additional
year with the consent of PBAA. We may prepay all or specified minimum portions
of this loan at any time after March 31, 2003 upon payment of certain prepayment
penalties. If this loan is not repaid by January 31, 2004, PBAA will be afforded
the right to convert any portion of the then unpaid principal amount of the
loan, as well as any then accrued but unpaid interest thereon, into shares of
our common stock at a per share conversion price equal to the Japanese Yen
equivalent of 80% of the average of the US dollar closing price of our common
stock on the American Stock Exchange in the 20 consecutive trading days
immediately prior to the date upon which PBAA gave us notice of conversion, or,
if our common stock is not then traded on the American Stock Exchange, the
closing bid price for our common stock as reported by the Nasdaq Stock Market or
such other primary exchange or stock bulletin board on which our common stock is
then traded.
Since we translate foreign currencies into U.S. dollars for reporting
purposes, we are exposed to the impact of foreign currency fluctuations.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, under the
supervision and with the participation of management, including our Chief
Executive Officer and our Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our
Chief Executive Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiaries)
required to be included in our periodic SEC filings. There have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the first quarter of 2003, we granted stock options to our two
executive officers to purchase an aggregate of 1,500,000 shares of common stock.
The grants were not registered under the Securities Act of 1933 because the
stock options either did not involve an offer or sale for purposes of Section
2(a)(3) of the Securities Act of 1933, in reliance on the fact that the stock
options were granted for no consideration, or were offered and sold in
transactions not involving a public offering, exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2).
On February 10, 2003, we acquired a 76.9% equity interest in iAccele
Co., Ltd., a privately held Japanese corporation engaged in the business of
providing an Internet data transmission acceleration service that targets
narrowband users, as well as broadband users, for 100.0 million Japanese Yen, or
approximately $825,000 based on the Japanese Yen/US dollar exchange rate on that
date.
13
In order to finance this purchase, we borrowed 100.0 million Japanese
Yen from PBAA Fund Ltd., a British Virgin Islands limited liability company. The
principal amount of this loan, together with interest thereon at 4.50% per
annum, is due and payable on January 31, 2004. We may defer payment of the
principal amount of this loan, but not accrued interest, for one additional year
with the consent of PBAA. We may prepay all or specified minimum portions of
this loan at any time after March 31, 2003 upon payment of certain prepayment
penalties.
If this loan is not repaid by January 31, 2004, PBAA will be afforded
the right to convert any portion of the then unpaid principal amount of the
loan, as well as any then accrued but unpaid interest thereon, into shares of
our common stock at a per share conversion price equal to the Japanese Yen
equivalent of 80% of the average of the US dollar closing price of our common
stock on the American Stock Exchange in the 20 consecutive trading days
immediately prior to the date upon which PBAA gave us notice of conversion, or,
if our common stock is not then traded on the American Stock Exchange, the
closing bid price for our common stock as reported by the Nasdaq Stock Market or
such other primary exchange or stock bulletin board on which our common stock is
then traded. By way of illustration, had such conversion occurred on February
10, 2003, PBAA would have received 7,335,145 shares of our common stock which,
when added to those shares currently beneficially owned by PBAA and its
affiliates would increase their collective ownership of our common stock to
approximately 78.9%.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
None
(B) REPORTS OF FORM 8-K
On February 25, 2003 we filed with the Commission a report on Form 8-K
dated February 25, 2003 under Items 2 (Acquisition or Disposition of Assets) and
7 (Financial Statements, Proforma Financial Information and Exhibits) announcing
our acquisition of a 76.9% equity interest in iAccele Co., Ltd. and filing
documents related to such acquisition.
On April 15, 2003 we filed with the Commission a report on Form 8-K
dated April 15, 2003 under Item 9 (Regulation FD Disclosure) furnishing the
Section 906 Certifications of our Annual Report on Form 10-K.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
IA GLOBAL, INC.
(Registrant)
Date: May 20, 2003
By: /s/ Alan Margerison
Alan Margerison,
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 20, 2003
By: /s/ Satoru Hirai
Satoru Hirai,
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
15
CERTIFICATIONS
I, Alan Margerison, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IA Global, Inc.
("registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003 /s/ Alan Margerison
-------------------
Alan Margerison
President and Chief Executive Officer
16
CERTIFICATIONS
I, Satoru Hirai , certify that:
1. I have reviewed this quarterly report on Form 10-Q of IA Global, Inc.
("registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003 /s/ Satoru Hirai
----------------
Satoru Hirai
Chief Operating Officer and
Chief Financial Officer
17