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 June 30, 2003
Commission File Number: 1-15863
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IA Global, Inc.
(Exact name of Registrant as specified in its charter)
----------------------
Delaware 13-4037641
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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 August 1, 2003 there were issued and outstanding 65,130,889
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............................12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk....................................................17
Item 4. Controls and Procedures........................................18
PART II.
Item 1. Legal Proceedings..............................................18
Item 2. Changes in Securities and Use of Proceeds......................18
Item 3. Defaults Upon Senior Securities................................19
Item 4. Submission of Matters to a Votes of Security Holders...........19
Item 5. Other Information..............................................19
Item 6. Exhibits and Reports on Form 8-K...............................19
Signatures....................................................................21
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
our annual report on Form 10-K for the year ended December 31, 2002, 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.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IA GLOBAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, December 31,
2003 2002
------------ ------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 2,139,355 $ 444,383
Accounts receivable - trade ................... 372,263 -
Deferred license fee .......................... 106,692 -
Other Current Assets .......................... 179,750 -
------------ ------------
Total current assets ........................ 2,798,060 444,383
EQUIPMENT, NET ................................... 350,488 812
OTHER ASSETS
Software development costs, net ............... 129,255 -
Intangible Assets, Net ........................ 951,201 -
Other assets .................................. - 5,477
------------ ------------
$ 4,229,004 $ 450,672
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable - trade ...................... $ 326,252 $ 246,352
Accrued laibilities ........................... 284,439 31,000
Loan payable - related party .................. 834,534 1,063,857
Deferred revenue .............................. 1,069,626 -
Short Term Loan - related party ............... 454,175 -
Income taxes payable .......................... 17,582 -
------------ ------------
Total current liabilities ................... 2,986,608 1,341,209
STOCKHOLDER'S EQUITY:
Series A Preferred stock, $.01 par value,
5,000 shares authorized 1,158 and
-0- issued and outstanding, respectively
(liquidation value $1,158,000) .............. 12 -
Common stock, $.01 par value,
75,000,000 shares authorized,
65,130,889 and 51,797,556, issued and
outstanding, respectively ................... 651,309 517,976
Paid in capital ............................... 23,046,297 19,744,331
Accumulated deficit ........................... (22,407,838) (21,022,845)
Unearned compensation expense ................. - (80,000)
Treasury stock ................................ (50,000) (50,000)
Unrealized Foreign Exchange Gain (Loss) ....... 2,616 -
------------ ------------
Total stockholder's equity (deficiency) ..... 1,242,396 (890,538)
------------ ------------
$ 4,229,004 $ 450,671
============ ============
See notes to consolidated financial statements.
2
IA GLOBAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
----------------------------- ------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUE ................................... $ 99,164 $ 88,546 $ 105,018 $ 226,046
COST OF SALES ............................. 190,871 13,282 299,922 33,906
------------ ------------ ------------ ------------
GROSS PROFIT .............................. (91,707) 75,264 (194,904) 192,140
EXPENSES
Production ............................. - 10,535 - 24,815
Selling, general and administrative .... 579,845 325,024 971,466 597,289
------------ ------------ ------------ ------------
Total expenses .................. 579,845 335,559 971,466 622,104
------------ ------------ ------------ ------------
OPERATING LOSS ............................ (671,552) (260,295) (1,166,370) (429,964)
------------ ------------ ------------ ------------
OTHER INCOME:
Interest income ........................ 642 - 1,697 -
Interest expense ....................... (117,068) - (196,139) -
Other Income (Expense) ................. (19,207) - (23,849) 33
------------ ------------ ------------ ------------
Total other income .............. (135,633) - (218,291) 33
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES .................. (807,185) (260,295) (1,384,661) (429,931)
INCOME TAXES: ............................. - - 332 -
------------ ------------ ------------ ------------
NET LOSS .................................. $ (807,185) $ (260,295) $ (1,384,993) $ (429,931)
============ ============ ============ ============
Other comprehensive income, net of tax:
Foreign currency translation adjustments 2,805 - 2,616 -
------------ ------------ ------------ ------------
Comprehensive Income ...................... $ (804,380) $ (260,295) $ (1,382,377) $ (429,931)
============ ============ ============ ============
Weighted average shares of common
stock outstanding ...................... 51,797,556 29,672,556 51,797,556 29,672,556
Net loss per share ........................ $ (0.02) $ (0.01) $ (0.03) $ (0.01)
============ ============ ============ ============
See notes to consolidated financial statements.
3
IA GLOBAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
-------------------------
2003 2002
----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $(1,384,993) $ (429,931)
Adjustments to reconcile net loss to net cash used
in operating activites:
Depreciation & amortization ........................ 285,380 48,228
Amortization of beneficial conversion feature ...... 98,796 -
Equity based compensation .......................... 80,000 122,894
Accounts receivable ................................ (372,263) -
Other current assets ............................... - 376
Deferred license fee receivable .................... (144,383) -
Accounts payable ................................... 79,900 13,455
Accrued expenses ................................... 347,949 (9,648)
Income taxes payable - foreign ..................... 17,582 -
Deferred revenue ................................... 1,069,626 (25,000)
----------- -----------
NET CASH USED IN OPERATIONS ........................ 77,594 (279,626)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of capital expenditures .................. (376,842) -
Other assets ....................................... 5,477 -
Purchase of intangibles ............................ (1,299,966) -
----------- -----------
NET CASH PROVIDED BY (USED) IN INVESTING ACTIVITIES (1,671,332) -
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from Loan payable - related party ......... 1,288,709 267,253
Proceeds from sale of stock ........................ 2,000,000 -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......... 3,288,710 267,253
----------- -----------
NET INCREASE (DECREASE) IN CASH .................... 1,694,972 (12,373)
CASH, beginning of the period ...................... 444,383 18,380
----------- -----------
CASH, end of the period ............................ $ 2,139,355 $ 6,007
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid ...................................... $ - $ -
Taxes paid ......................................... - -
Non-cash financing activites:
Conversion of debt to equity .............. $ 1,158,367 $ -
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 10-Q. 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 June 30, 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 10-K) 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 $22
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 the period beyond the end of the third quarter, September 2003.
In January 2003, a loan agreement was signed with PBAA FUND LTD, a related
party, for the financing of an acquisition and in June 2003 PBAA FUND LTD.
agreed to acquire $2.0 million of the Company's Common Stock through a private
placement.
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its majority and 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
5
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.
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 ("VARs"), Internet Service Providers
("ISPs") or directly to end-users. They purchase either 13 months/12 months/6
months/3 months/30 days license products, and receive a copy of the iAccele
software and full access to the acceleration server maintained by the Company.
Revenues are recognized ratably over the license period upon delivery of the
software by the VARs to the end user.
As detailed more fully in Note 8, the Company has a license agreement to use
certain internet acceleration technology which forms the basis of the iAccele
software service. The Company pays a license fee for each customer purchasing
this product. Fees paid under this license are capitalized as deferred license
fee and amortized to cost of sales over the life of the product period from the
month of selling and receiving the cash from the customers to the expiration
month of the product life span.
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.
STOCK BASED COMPENSATION PLANS - We account for our stock-based compensation
plans under Accounting Principles Board Opinion 25, (APB 25) Accounting for
Stock Issued to Employees and the related interpretation, for which no
compensation cost is recorded in the statement of operations for the estimated
fair value of stock options issued with an exercise price equal to the fair
value of the common stock on the date of grant. Statement of Financial
Accounting Standards No. 123 (SFAS 123) Accounting for Stock-Based Compensation,
as amended by Statement of Financial Accounting Standards No. 148 (SFAS 148)
Accounting for Stock-Based Compensation - Transition and Disclosure, requires
that companies, which do not elect to account for stock-based compensation as
prescribed by this statement, disclose the pro-forma effects on earnings and
earnings per share as if SFAS 123 has been adopted.
6
If we applied the recognition provisions of SFAS 123 using the Black-Scholes
option pricing model, the resulting pro-forma net income (loss) available to
common shareholders, and pro-forma net income (loss) available to common
shareholders per share would be as follows:
For the six months ended For the three months ended
--------------------------- --------------------------
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Net loss available to common
shareholders, as reported ..... $(1,382,377) $ (429,931) $(804,380) $ (260,295)
Deduct: Stock-based compensation,
net of tax .................... (106,846) - (104,372) -
----------- ----------- --------- -----------
Net loss available to common
shareholders, pro-forma ....... $(1,489,223) $ (429,931) $(908,752) $ (260,295)
=========== =========== ========= ===========
Basic earnings per share:
As reported - .......... $ (.03) $ (.01) $ (.02) $ (.01)
Pro-forma - ............ $ (.03) $ (.01) $ (.02) $ (.01)
The above stock-based employee compensation expense has been determined
utilizing a fair value method, the Black-Scholes option-pricing model.
We have recorded no compensation expense for stock options granted to employees
during the three or six months ended June 30, 2003 and 2002.
In accordance with SFAS 123, the fair value of each option grant has been
estimated as of the date of the grant using the Blach-Scholes option pricing
model with the following weighted average assumptions:
For the Six months Ended June 30,
---------------------------------
2003 2002
---- ----
Risk free interest rate ........ 3.75 4.08%
Expected life .................. 10 years 10 years
Dividend rate .................. 0.00 0.00%
Expected volatility ............ 65% 75%
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -
FASB Interpretation ("FIN") No. 45: In November 2002, the FASB issued FIN No.
45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others," an interpretation of SFAS Nos.
5, 57 and 107, and rescission of FIN No. 34,"Disclosure of Indirect Guarantees
of Indebtedness of Others." FIN No. 45 elaborates on the disclosures to be made
by the guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this interpretation are applicable on
a prospective basis to guarantees issued or modified after March 31, 2002;
while, the provisions of the disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of such interpretation on January 1, 2003 did not have a material
impact on the Corporation's results of operations, financial position or cash
flows.
7
FIN No. 46: In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities," 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 of 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 also requires disclosures
about variable interest entities that companies are not required to consolidate
but in which a company has a significant variable interest. The consolidation
requirements of FIN No. 46 will apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements will apply to
entities established prior to January 31, 2003 in the first fiscal year or
interim period beginning after June 15, 2003. The disclosure requirements will
apply in all financial statements issued after January 31, 2003. The Corporation
has adopted the provisions of FIN No. 46, such provisions have not had a
material effect on its results of operation, financial position or the related
financial statement disclosures.
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.
Accounting for Financial Instruments - In May 2003, the FASB issued Statements
of Financial Accounting Standards No. 150 ("SFAS No. 150") "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity". SFAS No. 150 established standards for how an issuer classifies and
measures in its statement of financial position certain financial instruments
with characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. This SFAS is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of SFAS
No.150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of SFAS No. 150 will not have a
material effect on the financial statements.
4. RISK OF CONCENTRATION
Significant Distributor - The Company's largest distributor is a VAR that
accounted for 78% of accounts received for the six-month period ending June 30,
2003. A second VAR accounted for a further 19% of accounts receivable for the
same six-month period. The Company anticipates that significant distributor
concentration will continue for the foreseeable future.
5. EQUIPMENT
The Company purchased and subsequently leased 300 computers to an investee of
the major shareholder of the Company, ForeignTV Japan. The InterAsset Group owns
approximately 66% of ForeignTV Japan. The Company had a minority ownership in
the ForeignTV Japan, but was sold approximately one year ago. These computers
cost approximately $1,000 per machine or approximately $300,000. The Company
expects to receive about $600,000 over the term of these leases for the
equipment under lease. The terms of the leases are as follows;
o There are two leases one for 200 computers and one for 100 computers.
o The rental period for each lease is for 2 years.
o The lease contract shall be automatically extended for six months if
ForeignTV Japan does not object within one month of the contract
termination date.
8
o The monthly rental for the 200 computers is 1,900,000 Yen or approximately
$17,000.
o The monthly rental for the 100 computers is 950,000 Yen or approximately
$8,000.
o These computers are to be returned to the Company upon termination of the
leases.
These leases were not recorded as a financing lease, due to the fact that these
leasing transactions are between related parties under common control. The
revenues from each lease payment will be recorded upon receipt of each payment.
The leasee of these computers are not adequately capitalized, therefore the
collectibility of the lease payments are not guaranteed.
These computers are being depreciated over three years.
See subsequent events for additional computers leased.
6. INTANGIBLE ASSETS
Included in intangible assets are the following;
o Software development costs, net of accumulated amortization, of $129,255.
o Intellectual property of $951,201 net of accumulated amortization of
$219,510. 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, "iAccele", that is
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 Japanese Yen or about
$830,000 from a related party and the assumption of indebtedness of
iAccele.
7. 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.
8. 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 as well
as broadband 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
9
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.
During the quarter ended June 30, 2003, the Company borrowed 52,500,000 Yen from
an affiliate of its major shareholder or approximately $454,000. This financing
was made in four separate advances. These advances bear interest at rates
ranging from 3.5% to 6.7% per annum. These advances mature during the following
dates: 5,500,000 Yen or approximately $45,000 on July 25, 2003, 7,000,000 Yen or
approximately $62,000 on July 27, 2003, 10,000,000 Yen or approximately $89,000
on August 1, 2003 and 30,000,000 Yen or approximately $258,000 on December 1,
2003. The Company has repaid 18,500,000 Yen or approximately $160,000 on July
25th. The remaining 4,000,000 Yen due and outstanding due on August 1, 2003 was
deferred with a new note until the end of 2003.
On June 30, 2003, Inter Asset Japan LBO Fund No.1 ("IAJ"), a principal
shareholder, elected to convert its $1,064,000 note due from the Company, plus
accrued interest of $95,000 into Series B Preferred Stock at the conversion rate
of $1,000 per share. The Company issued 1,158 shares of Series B Preferred Stock
in exchange for the note and accrued interest.
As of June 30, 2003 the Company agreed to sell 13,333,333 shares of its Common
Stock to PBAA Fund Ltd, a principal shareholder, for $2,000,000, or $.15 per
share, subject to approval of the shareholders of the Company.
The acquisition of the Common Stock by PBAA Fund Ltd. increased its ownership of
the Company to 26.6%, and collectively with IAJ and Terra Firma Fund Ltd, which
three entities may be deemed to constitute a group for purposes of Rule 13d-3
under the Securities Exchange Act of 1934, to 80.9%.
See terms of leased equipment to an affiliated party in June 2003, in Note 5.
9. COMMITMENT
In November 2002, the Company assumed from InfoshowerX Co. Ltd ("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 $180,000 under this
license agreement for the quarter ended June 30, 2003.
10. SEGMENT INFORMATION
The Company's newly acquired subsidiary operates fully in Japan and under a
single segment. There is no current business of 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 approximately $123,000 and $348,000 for the three and six months
ended June 30, 2003, respectively.
10
11. RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements in order to conform with the 2002 presentation.
12. STOCKHOLDER'S EQUITY
During the six months ended June 30, 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 a total of 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.
In April 2003, the board of directors voted to amend the conversion price for
the 1,678,433 warrants outstanding from the original IPO from an exercise price
of $9.00 per share to $3.50 per share.
In June 2003, the Company granted 4,975,000 stock options with an exercise price
of $.20 per share, which was the market price at the grant date. Four million
five hundred thousand of the stock options were issued to the directors and
officers, which vest over three years. Four hundred and seventy-five thousand
options are performance based stock options. As of June 30, 2003, none of the
performance based stock options were earned. The term of these 4,975,000 stock
options granted are for a term of ten years.
In June 2003 the Company agreed to sell $2,000,000 of its Common Stock to an
affiliated party, pending approval of the sale by the Company's shareholders.
Also in June 2003, an affiliated party converted approximated $1,159,000 of
indebtedness, including the interest thereon into 1,158 shares of Series B
Preferred Stock. The 1,158 shares of Preferred Stock are convertible into
11,580,000 shares of Common Stock, subject to approval by the Company's
shareholders of an amendment to the Company's Certificate of Incorporation
increasing its authorized common stock to at least 100,000,000 shares.
13. SUBSEQUENT EVENT
In August 2003, the Company entered into a transaction with ForeignTV Japan, an
affiliate, for the leasing of 300 computers. The terms of the transaction are
similar to an earlier lease transaction discussed in Note 5, above.
The Company had cash of approximately $2.14 million and current liabilities of
approximately $3.0 million at June 30, 2003. Subsequent to this there were
additional cash payments through August 15, 2003, including (i) an advanced
payment to Fan Club Entertainment, (ii) capital expenditures by iAccele as per
computer leasing transaction discussed above, (iii) the partial repayment of
liabilities by iAccele, and (iv) the payment of contractual fees by iAccele.
Taking into consideration these additional cash payments, the Company had a cash
position of approximately $500,000 as of August 19, 2003.
11
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.
At the beginning of 2003, we revised our business plan to expand into
other areas of media entertainment and technology. We have shifted the revenue
model from broadband entertainment channels and revenues derived predominantly
from advertising, to a renewed focus on developing media technology products,
services and on licensing revenues. To this end, we may develop such media
entertainment and technology products and services internally, or acquire them
from other parties.
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., 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 user to change his provider of network
connection. The iAccele product is based on a repeat subscriber business model.
The subscriber to the service signs up for products from 3 month up to 13 months
license, which provides them with a copy of the iAccele software and full access
to the acceleration server.
On July 31, 2003, we signed a Letter of Intent with Fan Club
Entertainment Co, Ltd., a privately held Japanese corporation, whereby we would
acquire a 67% equity stake in the company. Fan Club Entertainment, will provide
advertising, merchandising, publishing, website and data management services to
Cyberbred Co., Ltd., an affiliated company of Fan Club Entertainment, which has
recently signed a 5-year agreement with Marvel Entertainment Inc. and Marvel
Characters Inc. to manage their fan club in Japan. Consummation of the proposed
acquisition is subject to the preparation and execution of a definitive purchase
agreement and customary closing conditions. There can be no assurance given that
this transaction will be consummated.
On August 01, 2003, we signed a Letter of Intent with London Wall
Investment Pty. Ltd., a privately held Australian corporation, whereby we would
acquire a 50% equity stake in a newly formed company to be called, iAccele
Australia Pty Ltd for a nominal value. We would further, provide iAccele
Australia with an unsecured loan of AUD$50,000, approximately $35,000 based on
the Australian /US dollar exchange rate on that date, for operating costs of the
business. If the transaction is consummated, iAccele Australia, would be a sales
and marketing operation for the iAccele product initially in Australia and New
Zealand, subject to signing a license agreement with iAccele. Consummation of
the proposed acquisition is further subject to the preparation and execution of
a definitive purchase agreement and customary closing conditions. There can be
no assurance given that this transaction will be consummated.
12
We still own the proprietary rights to the VToob software, and have
been looking into the possibility of licensing this software to other companies.
At this time, we do not believe that the Vtoob software can be effectively
marketed, and that the costs of pursuing this product any further would be
greater than any anticipated return. We have therefore decided not to focus our
resources on the development or marketing of Vtoob software. Similarly we will
not be focusing our resources on the broadcasting channel of StreamingUSA.com,
which utilizes the vToob software.
Our business plan for 2003 had assumed that we would not derive any
significant revenues from advertising or other activities related to VToob,
except for the possibility of a licensing model as stated above. No revenues
have been forthcoming from such licensing model, for the six-month period ended
June 30, 2003, and none can be reasonably expected from now on. The majority of
revenue for the first half of 2003 has been recorded from our recently acquired
company, iAccele.
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 half 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 half of 2003
and the first half of 2002.
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 June 30, 2003 vs. three months ended June 30, 2002
Six months ended June 30, 2003 vs. six months ended June 30, 2002
We sustained a net loss of $807,185 for the three-month fiscal period
ended June 30, 2003 on revenues of $99,164, compared to a net loss of $260,295
for the three-month fiscal period ended June 30, 2002 on revenues of $88,546. We
sustained a net loss of $1,384,993 for the six-month fiscal period ended June
30, 2003 on revenues of $105,018, compared to a net loss of $429,931 for the
six-month fiscal period ended June 30, 2002 on revenues of $226,046.
Revenues decreased approximately $121,028, or 54%, for the six-month
fiscal period ended June 30, 2002, due to a change in business direction, and
sales of iAccele software. The majority of revenues for the six-month period
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 June 30, 2003, we had deferred $1,069,626 of revenues. The
deferred revenue balance has increased 125% from $368,567 at December 31, 2002
to $830,011 as of March 31, 2003 or $461,444. The deferred revenues increased
another 29% from $830,011 as of March 31, 2003 to $1,069,626 or $239,615 as of
June 30, 2003. The increases in deferred revenues is for two reasons; the VARS
may pay for the iAccel software before it is distributed and when the VARS has
distributed the software, such revenues from the software sold is amortized over
the term of the individual license. The software licenses range from thirty days
to thirteen months. The Company has currently sold predominately twelve and
thirteen month licenses for the iAccle software sold. The iAccele software is
based on an ASP (Application Service Provider) model.
13
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 was not recognized by us until the license key was activated
by the end user. This can lead to a significant time lag between cash being
received by us and being converted from the 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 evenly over the period of
the licenses validity span, currently a maximum of 13 months (previously 12
months).
On this basis, revenues were $105,018 for the six-month period ended
June 30, 2003 while deferred revenues were $1,069,626 as of June 30, 2003. Based
on the number of license keys distributed to users through VARs, as at June 30,
2003, we have recorded an average activation rate of 10% for iAccele software.
Net loss for the six-month period ending June 30, 2003, increased
approximately $955,000, or 220%, due to increased expense for Sales and
Marketing associated with the sales of iAccele software license, Cost of Sales
and Interest Expense. The iAccele software licenses are for a fixed period and
the revenues recognized above represents that portion of the license fee that
applies to the first half of 2003. A portion of expenditures related to cost of
sales is also deferred on the basis of the term of the iAccele software.
Our production costs for the development of our original content for
the three-month period ended June 30, 2003, were $0, compared to $10,535 for the
three-month period ended June 30, 2002. Our production costs for the development
of our original content for the six-month period ended June 30, 2003, were $0,
compared to $24,815 for the six-month period ended June 30, 2002. Production
costs for the prior period include the cost of (i) data communications, (ii)
software license fees; (iii) content license fees, where necessary in order to
acquire additional content; and (iv) the expense of hiring and compensating
employees and independent contractors who handle production and delivery of our
content. Based on the change in business model, and move to an ASP service,
there are no direct production costs to be recorded in the first half of 2003.
Cost of sales for the three-month period ended June 30, 2003, were
$190,871, compared to $13,282 for the three-month period ended June 30, 2002 an
increase of approximately $180,000 or 1300%. Cost of sales for the six-month
period ended June 30, 2003, were $299,922, compared to $33,906 for the six-month
period ended June 30, 2002, an increase of approximately $266,000 or 780%. Cost
of sales for the current period represent the costs relating to the iAccele
software.
Our selling, general and administrative expenses were $579,845 for the
three-month fiscal period ended June 30, 2003, compared to $325,024 for the
three-month period ended June 30, 2002, an increase of approximately $255,000,
or 78%. Our selling, general and administrative expenses were $971,466 for the
six-month fiscal period ended June 30, 2003, compared to $597,289 for the
six-month period ended June 30, 2002, an increase of approximately $374,000, or
63%. For the current periods, 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 periods compared to the prior periods is primarily due to the
acquisition of iAccele on February 10, 2003, and the sales and marketing
expenses associated with iAccele software license sales.
In June 2003, the Company granted 4,975,000 stock options with an
exercise price of $.20 per share, which was the market price at the grant date.
An aggregate of three million five hundred thousand to the two executives and
one million were granted to the directors, which vest over three years. Four
hundred and seventy-five thousand options are performance based stock options.
As of June 30, 2003, none of the performance based stock options were earned.
The term of these 4,975,000 stock options granted are for a term of ten years.
14
We have recorded no compensation expense for stock options granted to
employees during the three or six months ended June 30, 2003 and 2002.
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 $23.6 million as of June 30, 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 $17.8 million, including $1.2 million loan from a related party
converted to equity, and a $2.0 million subscription to acquire common stock.
Additional funding was obtained in the form of loans from related parties, of
which approximately $830,000 was outstanding at June 30, 2003.
For the six months year ended June 30, 2003, we used cash of
approximately $77,600 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 six months ended June 30, 2003,
approximately $1.67 million was used by investing activities, primarily the
purchase of iAccele and $3.29 million were provided by financing activities.
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 and
a principal shareholder of our 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 82.5%
On June 30, 2003, we agreed to sell to PBAA, 13,333,333 shares of our
common stock at an average price of $0.15 per share, for a total of $2.0
million, representing an approximate 25% discount to the trailing five-day
average closing price of our common stock ending June 15, 2003, the date PBAA
Fund made its investment commitment. As PBAA Fund's purchase price per share was
at a discount to market, our shareholders will be asked to ratify and approve
this transaction, as required by the applicable rules of the American Stock
Exchange at the our forthcoming 2003 annual meeting of shareholders.
15
On June 30, 2003, Inter Asset Japan LBO No.1 Fund ("IAJ"), elected to
convert its $1,064,000 Mezzanine Finance Loan Note due from the Company, plus
accrued interest of $95,000 into Series B Preferred Stock at the conversion rate
of $1,000 per share. We issued 1,158 shares of Series B Preferred Stock in
exchange for the note and accrued interest.
We had cash of approximately $2.14 million and current liabilities of
approximately $3.0 million at June 30, 2003. Our cash expenses are approximately
$150,000 per month. The cash we had at June 30, 2003 and our monthly cash
expenses do not take into account additional cash payments through August 15,
2003, including (i) an advanced payment to Fan Club Entertainment as discussed
below, (ii) capital expenditures by iAccele, including the purchase of 300
computers as discussed below, (iii) the partial repayment of liabilities by
iAccele, and (iv) the payment of contractual fees by iAccele. Taking into
consideration these additional cash payments, we had on a pro forma basis a cash
position of approximately $500,000 as of June 30, 2003.
At June 30, 2003, iAccele was delinquent in a payment of 8.0 million
Japanese Yen, or approximately $60,000 based on the Japanese Yen/US dollar
exchange rate on that date, to Infoshower Exchange Corp. ("ISX"). iAccele
originally owed ISX 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, 42.0 million Japanese Yen was paid by iAccele
between February 10, 2003 and June 30, 2003 and the balance of 8.0 million
Japanese Yen was paid in August 2003. We own 76.9% of the outstanding common
stock of iAccele while ISX owns the balance of the capital stock of iAccele.
During the three months ended June 30, 2003, iAccele purchased 300
computers for an aggregate purchase price of approximately $ 300,000. iAccele is
leasing all of these computers to ForeignTV Co. Ltd. for a term of 2 years for
aggregate lease payments over the term of the lease of $600,000. We previously
held a minority ownership in ForeignTV, a Japanese limited liability company,
but this was sold approximately one year ago. IAJ, a principal shareholder of
our company, currently owns approximately 66% of the outstanding shares of
ForeignTV.
During the three months ended June 30, 2003, Inter Asset Japan KK
(Kabushiki Gaisha), a Japanese limited liability company, loaned iAccele an
aggregate of approximately $ 450,000 in four separate arrangements for the
financing of the computers described in the prior paragraph and for its working
capital. The loans are for a term of 1 to 5.5 months and bear interest at 3.5%
to 6.7% per annum. As of August 5, 2003, iAccele repaid approximately $ 160,000
of this loan plus accrued interest of approximately $ 1,000. The outstanding
amount of approximately $ 290,000 due to Inter Asset Japan KK is due in
December, 2003 and bears interest at 3.5% per annum. Inter Asset Japan KK is the
sole general partner of IAJ. Alan Margerison, President, Chief Executive Officer
and a director of our company, is chairman of Inter Asset Japan KK.
In August 2003, iAccele entered into a transaction with ForeignTV for
the leasing of an additional 300 computers. The terms of the lease are similar
to an earlier lease transaction discussed above.
16
IAJ beneficially owns 41.2% of our common stock, PBAA Fund Ltd. owns
20.1% of our common stock and Terra Firm Fund Ltd. owns 25.3% of our common
stock, or 80.9% 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 1,158
shares of Series B Preferred Stock that are convertible to 11,580,000 of our
common stock, subject to adjustment. Such conversion is subject to approval by
our shareholders to an amendment to our Certificate of Incorporation increasing
our authorized Common Stock to at least 100,000,000 shares.
IAJ also beneficially owns directly and indirectly 42.7% of the common
stock of ISX. Alan Margerison, President, Chief Executive Officer and a director
of our company, previously served as President and Chief Executive Officer of
Inter Asset Japan KK (Kabushiki Gaisha), the sole general partner of IAJ, but
has stepped down his post to concentrate further on our company. He has been
appointed Chairman of Inter Asset Japan KK and remains a director of that
company. Hiroshi Kubori, a director of our company, owns approximately 5% of the
capital stock of ISX. As stated above, ISX owns the balance of the capital stock
of iAccele or 23.1%.
On July 31, 2003, we signed a Letter of Intent with Fan Club
Entertainment Co, Ltd., a privately held Japanese corporation, whereby we would
acquire a 67% equity stake in the company. Fan Club Entertainment, will provide
advertising, merchandising, publishing, website and data management services to
Cyberbred Co., Ltd., an affiliated company to Fan Club Entertainment, which has
recently signed a 5-year agreement with Marvel Entertainment Inc. and Marvel
Characters Inc. to manage their fan club in Japan. We have advanced the purchase
price of 134.0 million Japanese Yen, or approximately $1.14 million based on the
Japanese Yen/US dollar exchange rate on that date, for this transaction, subject
to official completion of all contracts. Consummation of the proposed
acquisition is subject to the preparation and execution of a definitive purchase
agreement and customary closing conditions. There can be no assurance given that
this transaction will be consummated.
With our limited current cash resources, we expect to be able to
support our operations through the end of the third quarter of the year 2003.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.
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.
17
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
Our management carried out an evaluation, with the participation of our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of June 30, 2003. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
There has not been any change in our internal control over financial
reporting in connection with the evaluation required by Rule 13a-15(d) under the
Exchange Act that occurred during the quarter ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 30, 2003, we received a cash infusion of $2 million from PBAA
Fund Ltd., an open ended limited liability investment company incorporated in
the British Virgin Islands as a "Private Fund" ("PBAA"), in exchange for an
aggregate of 13,333,333 shares of our common stock. This investment was based on
a purchase price per share of $0.15, representing an approximate 25% discount to
the trailing 5-day average closing price of the common stock ending June 15,
2003, the date upon which PBAA made its investment commitment. As PBAA's
purchase price per share was at a discount to market, our shareholders will be
asked to ratify and approve this transaction, as required by Section 713 of the
American Stock Exchange Guide, at our forthcoming 2003 annual meeting of
shareholders. Upon consummation of this transaction, PBAA beneficially owned
17,343,133 shares of common stock, representing approximately 26.6% of our
outstanding Common Stock. The agreement to issue our common stock was not
registered under the Securities Act of 1933 because the common stock was offered
and sold in a transaction not involving a public offering, exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2).
18
On June 30, 2003, Inter Asset Japan LBO No. 1 Fund, a Japanese limited
partnership ("IAJ"), converted approximately $1,064,000 in principal amount of
our outstanding convertible indebtedness, as well as approximately $95,000 of
accrued interest thereon, into 1,158 shares of our Series B preferred stock. IAJ
may elect to convert the 1,158 shares of preferred stock into 11,580,000 shares
of our common stock, subject to approval by our shareholders of an amendment to
our Certificate of Incorporation increasing our authorized common stock to at
least 100,000,000 shares. Upon consummation of this transaction, IAJ
beneficially owned 31,580,000 shares of common stock, representing approximately
41.2% of our outstanding common stock. The issuance our preferred stock was not
registered under the Securities Act of 1933 because the common stock was offered
and sold in a transaction not involving a public offering, exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2).
PBAA, IAJ and Terra Firma Fund Ltd., an open ended limited liability
investment company incorporated in the British Virgin Islands as a "Private
Fund" ("Terra Firma"), may be deemed to constitute a "group" for the purposes of
Rule 13d-3 under the Securities Exchange Act of 1934 and beneficially owned in
the aggregate 80.9% of our outstanding common stock as of June 30, 2003.
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
31.1 - Rule 13a-14(a)/15d-14(a) Certifications
31.2 - Rule 13a-14(a)/15d-14(a) Certifications
32.1 - Section 1350 Certifications
32.2 - Section 1350 Certifications
19
(b) Reports of Form 8-K
During the quarter ended June 30, 2003, we filed or submitted the
following current reports on Form 8-K with the Securities and Exchange
Commission:
Current report on Form 8-K, dated April 14, 2003, was filed on April
15, 2003. The item reported was:
o Item 9 - Regulation FD Disclosure, which furnished the Section 906
certification that accompanied our quarterly report on Form 10-Q for
the quarter ended March 31, 2003.
An amendment to the current report on Form 8-K, dated February 25,
2003, was filed on May 16, 2003. The item reported was:
o Item 7 - Financial Statements and Exhibits, which filed (i) the balance
sheet of I-accele Corp. as of December 31, 2002 and the related
statements of operations, stockholder's deficiency and cash flows for
the period from July 19, 2002 (inception) through December 31, 2002,
expressed in Japanese yen and (ii) the pro forma financial information
of IA Global, Inc. as of December 31, 200 and for the year ended
December 31, 2002.
Current report on Form 8-K, dated May 20, 2003, was filed on May 20,
2003. The item reported was:
o Item 9 - Regulation FD Disclosure, which furnished the Section 906
certification that accompanied our quarterly report on Form 10-Q for
the quarter ended March 31, 2003.
Current report on Form 8-K, dated July 7, 2003, was filed on July 10,
2003. The items reported were:
o Item 5 - Other Events and Required FD Disclosure, which reported the
issuance of a press release announcing that (a) The PBAA Fund Ltd., our
majority shareholder, had invested an additional $2.0 million into our
company and (b) in a contemporaneous transaction, approximately $1.16
million of outstanding convertible debt had been exchanged for Series B
preferred stock at the predetermined conversion price.
o Item 7 - Financial Statements and Exhibits, which identified the
exhibit filed with the Form 8-K.
20
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: August 19, 2003 By: /s/ Alan Margerison
Alan Margerison,
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 19, 2003 By: /s/ Satoru Hirai
Satoru Hirai,
Chief Operating Officer and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
21