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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 29, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 000-29901

 

 

PUBLIC MEDIA WORKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

     
Delaware   98-0220849

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

     

4000 Bridgeway, Ste. #401

Sausalito, CA 94965

  94965
(Address of principal executive offices)   (Zip Code)

(415) 524-5967

(Registrant’s telephone number, including area code)

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

     
Title of each class:   Name of each exchange on which registered:
None   None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001 per share

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No   x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨     No   x

 

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 periods that the registrant

 
 

 

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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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   ¨     NO   x

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

             
Large accelerated filer   ¨   Accelerated filer   ¨
       
Non-accelerated filer   ¨   Smaller Reporting Company   x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES   ¨     NO   x

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of last business day of the registrant’s most recently completed second fiscal quarter as reported on the OTC Bulletin Board ($0.06 per share), was approximately $2,117,000. Shares of the registrant’s common stock held by each officer and director of the registrant and by each person or entity who is known to own beneficially 10% or more of the registrant’s outstanding common stock have been excluded for purposes of the foregoing calculation on the basis that such persons and entities may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

As of May 31, 2012, the registrant had 63,315,615 shares of its common stock issued and outstanding.

 
 

 

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    Page  
   
Part I     4  
   
Item 1 Description of Business     4  
   
Item 1A Risk Factors     6  
   
Item 1B Unresolved Staff Comments     8  
   
Item 2 Properties     8  
   
Item 3 Legal Proceedings     8  
   
Item 4 Mine Safety Disclosures     9  
   
Part II     9  
   
Item  5 Market for Common Equity, Related Stockholder Matters and Issuer Sales of Equity Securities     9  
   
Item 6 Selected Financial Data and Supplementary Information     12  
   
Item  7 Management’s Discussion and Analysis of Financial Condition and Results of Operations     12  
   
Item 7A Quantitative and Qualitative Disclosures About Market Risk     17  
   
Item 8 Financial Statements and Supplementary Data     17  
   
Item  9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure     17  
   
Item 9A Controls and Procedures     17  
   
Item 9B Other Information     19  
   
Part III     19  
   
Item 10 Directors, Executive Officers and Corporate Governance     19  
   
Item 11 Executive Compensation     20  
   
Item  12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     21  
   
Item 13 Certain Relationships and Related Transactions, and Director Independence     21  
   
Item 14 Principal Accountant Fees and Services     22  
   
Part IV     22  
   
Item 15 Exhibits, Financial Statements and Reports on Form 8-K     22  
   
Signatures     26  
   
Consolidated Financial Statements     F-1  
 

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report contains statements that involve expectations, plans or intentions (such as those relating to future business or financial results, new features or services, or management strategies). These statements are forward-looking and are subject to risks and uncertainties, so actual results may vary materially. You can identify these forward-looking statements by words such as “may,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K and other reports we file with the SEC.

 

The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

This report should be read in conjunction with the financial statements and the related notes contained in this report.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

 

Bankruptcy Filing

 

On September 23, 2011, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Chapter 11 Proceeding”) in the United States Bankruptcy Court for the Central District of California, Riverside Division (the "Bankruptcy Court"). The Chapter 11 Case Number is: 6:11-bk-40137-MJ. The purpose in filing the Chapter 11 Case is to give the Company time to restructure its debt obligations to its secured and unsecured creditors. We intend to prepare a Disclosure Statement and a Plan of Reorganization that describes our plan to emerge from Chapter 11 as a viable company. We plan to file those documents with the Bankruptcy Court and submit them to all creditors for their approval with a view towards obtaining an Order from the Bankruptcy Court confirming our Plan of Reorganization so that we may successfully exit from Court protection. We remain committed to implementing a strategy to allow the Company to emerge from the Chapter 11 Proceeding. However, there can be no assurance regarding our ability to emerge from the Chapter 11 Proceeding. The uncertainty regarding these matters raises substantial doubt about our Company’s ability to continue as a going concern. 

 

Overview

 

Prior to our entering into the Chapter 11 Proceeding, the Company and its wholly-owned subsidiary, EntertainmentXpress, Inc., a California corporation (“EntertainmentXpress”), were engaged in the business of offering self-service kiosks which deliver DVD movies to consumers. We are no longer in this business.

 

Corporate History

 

Prior to May 2010, the Company was historically engaged in the development, production, marketing and distribution of film, music and television entertainment titles. The Company has an ownership interest in several film and television projects. As of May 4, 2010 with the acquisition of Entertainment Xpress, Inc., the Company focused exclusively on its kiosk business. In March 2011, the Company installed its first 25 kiosks under the DBA of “Spot. The difference™”.

 

The Company completed its share exchange of EntertainmentXpress on May 4, 2010. The Company owns 100% of the outstanding shares of EntertainmentXpress, which is a subsidiary of the Company. The EntertainmentXpress subsidiary is currently inactive. While our initial test marketing in mid-2010 was under the EntertainmentXpress brand, with the beta test of our new kiosks in March 2011, we began using the brand “Spot Rentals™” and “Spot. The difference™” tag line. In August 2011, the Company discontinued its kiosk operations due to having insufficient operating capital.

 

Historically, we were able to raise a limited amount of capital through private placements of our equity stock, but we are uncertain about our continued ability to raise funds privately.

 

During the year ended February 29, 2012 and through the date of this report, our management has been analyzing various alternatives available to our Company to be able to emerge from the Chapter 11 Proceedings. We are focusing on potential merger/acquisition opportunities with businesses who desire to be owned by a public company. There can be no assurance, however, that we will be able to complete any merger or acquisition. 

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At this stage, we can provide no assurance that we will be able to locate compatible business opportunities, or that any additional required financing can be completed in connection with a combination or merger with another business opportunity, or whether the opportunity's operations will be profitable.

 

 

We remain committed to implementing our turnaround strategy while maintaining our company during the chapter 11 restructuring process. However, there can be no assurance regarding these matters. There can be no assurance that our operational and financial turnaround strategy will be successful or that the DIP Lenders or the Bankruptcy Court will approve the plan ultimately proposed by our company and under such circumstances we could be forced to consider other alternatives to maximize potential recovery for our various creditor constituencies. The uncertainty regarding these matters raises substantial doubt about our company’s ability to continue as a going concern. 

 

Company Intellectual Property

 

We do not own any patents. The Company does own and maintain the Internet domain names www.entxprs.com, www.publicmediaworks.com, www.spotrentals.com. PMW has also registered numerous Internet domain names for specific projects. PMW owns a service mark for “PublicFilmWorks” and has a license agreement to use the trademarks “Spot Rentals™” and “Spot. The difference™.”    The Company has not filed applications to protect any other trade or service marks, and there can be no assurances the Company would receive such trade or service mark protection.

  

 

Employees

 

We currently have no employees other than our sole officer and director. We do engage consultants, attorneys and accountants as necessary.

 

Research and Development

 

We have incurred no research and development expenditures over the last two fiscal years.

 

Purchase of Significant Equipment

 

We do not intend to purchase any significant equipment over the next twelve months.

Publicly Available Information

 

We meet information reporting requirements of the Securities and Exchange Act of 1934 by filing, and furnishing to the Securities and Exchange Commission (“SEC”), reports including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as well as amendments thereto. These reports and related materials are available at the SEC website, www.sec.gov and the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549.

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ITEM 1A RISK FACTORS

 

 

You should carefully consider the following risk factors, the other information included herein and the information included in our other reports and filings with the SEC. Our business, bankruptcy, financial condition, and the trading price of our common stock could be adversely affected by these and other risks.

 

BANKRUPTCY PROCEEDINGS RISK

 

The Company is currently operating under Chapter 11 of the Bankruptcy Code and it is uncertain whether the company will be able to continue operating or whether holders of our common stock and other equity will receive any payment for their securities. On September 23, 2011 (the "Petition Date"), the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. The petition was filed in order to enable the Company to pursue reorganization efforts under Chapter 11 of the Bankruptcy Code. The Company continues to operate its business as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. In general, as debtor-in-possession, the Company is authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside of the ordinary course of business without the prior approval of the Bankruptcy Court. No assurance can be provided as to what values, if any, will be ascribed in the bankruptcy proceedings to the Company's prepetition liabilities, common stock and other securities. Based upon the status of the Company's plan of reorganization, it is uncertain whether holders of our securities will receive any payment in respect of such securities.

 

Additionally, should we be unable to comply with the Chapter 11 bankruptcy requirements or put forth a Plan of Reorganization within the required timeframes of the Bankruptcy Court rules, then the bankruptcy could be converted to a Chapter 7 liquidation proceeding in which event the Company shareholders would lose the entire value of their shares.

 

Changes in our board of directors, management and stockholders should we emerge from bankruptcy may lead to significant changes in our operations, business plans and results. Should we be successful in emerging from Chapter 11, it is likely a new board of directors and management would be appointed and the Company would be in a new line of business and have a new stockholder base. The new board of directors, new management or the new stockholders would likely change the current operations or business plans of the Company. As a result, when reviewing the description of the Company’s business, the consolidated financial statements and financial data, and any forward-looking information included in this report, you should consider the possibility that there may be significant changes to the Company’s operations, business plans, results and expectations following the Company’s emergence from bankruptcy.

 

Our common stocks, warrants and options may be cancelled upon our emergence from bankruptcy. Any approved plan of reorganization may provide that our outstanding shares of common stock, warrants and options will be cancelled upon our emergence from bankruptcy and that the holders of our common stock, warrants and options will receive no distributions under the plan of reorganization. As a result, any investment in the Company is highly speculative. Accordingly, we urge that appropriate caution be exercised with respect to existing and future investments in any equity or debt securities of the Company.

 

FINANCIAL RISKS

 

We require additional financing to sustain our operations and emerge from Chapter 11 and without it we may not be able to continue operations. We have never earned a profit and we anticipate that we will continue to incur losses for the foreseeable future. We continue to operate on a negative cash flow basis. We will need to raise additional financing in order to emerge from our Chapter 11 Proceedings. Our inability to raise additional working capital at all or to raise it in a timely manner would negatively impact our ability to fund our operations or emerge from Chapter 11. If we raise additional funds through the issuance of equity securities, this may cause significant dilution of our common stock, and holders of the additional equity securities may have rights senior to those of the holders of our common stock. If we obtain additional financing by issuing debt securities, the terms of these securities could restrict or prevent us from paying dividends and could limit our flexibility in making business decisions.

 

We have a history of losses, our auditors have stated that these losses raise substantial doubt about our ability to continue as a going concern and we expect to continue to operate at a loss for the foreseeable future. We have a history of continuing losses and negative cash flow from operations. From our inception in March 2000 through February 29, 2012, we had cumulative net losses of $19,482,451 and we had net loss in the year ended February 29, 2012 of $6,636,238. We expect to continue to incur losses for the foreseeable future.

 

Because of our history of continuing losses and our Bankruptcy, our auditors, in their report on our audited financial statements included elsewhere in this report, have stated that these losses raise substantial doubt about our ability to continue as a going concern. The going concern qualification from our auditors could have a negative impact on our future sales to customers, inhibit our ability to obtain financing terms from vendors and may adversely impact our ability to raise additional financing. Accordingly, we cannot assure you that we will ever be profitable. Whether we ever become profitable will depend on many factors, but principally on our ability to raise additional capital and to successfully market our products and services.

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Our financial statements have been prepared assuming that the Company will continue as a going concern. The factors described above raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. Our independent registered public accounting firm has included an explanatory paragraph expressing doubt about our ability to continue as a going concern in their audit reports for the fiscal years ended February 29, 2012 and February 28, 2011.

 

We cannot assure you that we will be able to generate sufficient revenue to fund our business. If we cannot continue as a going concern, we may need to substantially revise our business plan or cease operations.

 

We do not expect to pay dividends for the foreseeable future, and we may never pay dividends and, consequently, the only opportunity for investors to achieve a return on their investment is if a trading market develops and investors are able to sell their shares for a profit or if our business is sold at a price that enables investors to recognize a profit. We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, we cannot assure investors any return on their investment, other than in connection with a sale of their shares or a sale of our business. At the present time there is a limited trading market for our shares. Therefore, holders of our securities may be unable to sell them. We cannot assure investors that an active trading market will develop or that any third party would offer to purchase our business on acceptable terms and at a price that would enable our investors to recognize a profit.

 

CORPORATE AND OTHER RISKS

 

Limitations on director and officer liability and indemnification of our officers and directors by us may discourage stockholders from bringing suit against a director. The Company’s certificate of incorporation and bylaws provide, with certain exceptions as permitted by governing state law, that a director or officer shall not be personally liable to us or our stockholders for breach of fiduciary duty as a director, except for acts or omissions which involve intentional misconduct, fraud or knowing violation of law, or unlawful payments of dividends. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director. In addition, the Company’s certificate of incorporation and bylaws may provide for mandatory indemnification of directors and officers to the fullest extent permitted by governing state law.

 

We are responsible for the indemnification of our officers and directors. Should our officers and/or directors require us to contribute to their defense, we may be required to spend significant amount of our capital. Our bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of our Company. This indemnification policy could result in substantial expenditures, which we may be unable to recoup. If these expenditures are significant, or involve issues which result in significant liability for our key personnel, we may be unable to continue operating as a going concern.

 

Our internal controls over financial reporting may not be effective, which could have a significant and adverse effect on our business. We are subject to various regulatory requirements, including the Sarbanes-Oxley Act of 2002. We, like all other public companies, must incur additional expenses and, to a lesser extent, diversion of our management’s time in our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal controls over financial reporting. If, in the future, management identifies one or more material weaknesses, or our external auditors are unable to attest that our management’s report is fairly stated or to express an opinion on the effectiveness of our internal controls, this could result in a loss of investor confidence in our financial reports, have an adverse effect on our stock price and/or subject us to sanctions or investigation by regulatory authorities. Also, it may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional staff in order to develop and implement appropriate internal controls and reporting procedures.

 

 

CAPITAL MARKET RISKS

 

Our common stock is thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares. There is limited market activity in our stock and we are too small to attract the interest of many brokerage firms and analysts. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained. While we are trading on the OTC Bulletin Board, the trading volume we will develop may be limited by the fact that many major institutional investment funds, including mutual funds, as well as individual investors follow a policy of not investing in Bulletin Board stocks and certain major brokerage firms restrict their brokers from recommending Bulletin Board stocks because they are considered speculative, volatile and thinly traded.

 

The market price of our common stock could be subject to wide fluctuations in response to quarterly variations in our revenues and operating expenses, announcements of new products or services by us, significant sales of our common stock, including “short” sales, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions.

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The application of the “penny stock” rules to our common stock could limit the trading and liquidity of the common stock, adversely affect the market price of our common stock and increase your transaction costs to sell those shares. As long as the trading price of our common stock is below $5 per share, the open-market trading of our common stock will be subject to the “penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The “penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they apply, require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and increasing the transaction costs for sales and purchases of our common stock as compared to other securities.

 

The stock market in general, and the market prices for penny stock companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance.

 

Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.

 

We may not be able to attract the attention of major brokerage firms, which could have a material adverse impact on the market value of our common stock. Security analysts of major brokerage firms may not provide coverage of our common stock since there is no incentive to brokerage firms to recommend the purchase of our common stock. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It will also likely make it more difficult to attract new investors at times when we require additional capital.

 

We may be unable to list our common stock on NASDAQ or on any securities exchange. Although we may apply to list our common stock on NASDAQ or the NYSE Amex in the future, we cannot assure you that we will be able to meet the initial listing standards, including the minimum per share price and minimum capitalization requirements, or that we will be able to maintain a listing of our common stock on either of those or any other trading venue. Until such time as we qualify for listing on NASDAQ, the NYSE Amex or another trading venue, our common stock will continue to trade on the OTC Bulletin Board or another over-the-counter quotation system, or on the “pink sheets,” where an investor may find it more difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock. In addition, rules promulgated by the Commission impose various practice requirements on broker-dealers who sell securities that fail to meet certain criteria set forth in those rules to persons other than established customers and accredited investors. Consequently, these rules may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock. It would also make it more difficult for us to raise additional capital.

 

Future sales of our equity securities could put downward selling pressure on our securities, and adversely affect the stock price. There is a risk that this downward pressure may make it impossible for an investor to sell his securities at any reasonable price, if at all. Future sales of substantial amounts of our equity securities in the public market, or the perception that such sales could occur, could put downward selling pressure on our securities, and adversely affect the market price of our common stock.

 

 

ITEM 1B UNRESOLVED STAFF COMMENTS

 

As a “smaller reporting company”, we are not required to provide the information required by this Item.

 

ITEM 2. PROPERTIES

 

We are currently operating from 4000 Bridgeway, Ste. #401, Sausalito, CA 94965.  Our office space is provided without charge by the sole officer and director of our company. We do not anticipate that we will require any additional premises in the foreseeable future.

 

ITEM 3. LEGAL PROCEEDINGS

 

We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. Other than described below, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

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On September 23, 2011, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Central District of California, Riverside Division (the "Bankruptcy Court"). The Chapter 11 Case Number is: 6:11-bk-40137-MJ.

 

The first meeting of creditors was held on October 31, 2011. Debtor is a publicly traded company. Its core business was the operation of video kiosks. In August 2011, Debtor ceased day-to-day operations because of software problems with its kiosks. This bankruptcy was filed shortly thereafter.

 

On or about November 22, 2011, Debtor filed a motion seeking to sell its assets. On November 30, 2011 the Court conducted a hearing on the Debtor's Motion to Sell. The Motion was granted and an Order authorizing the sale of assets to Signifi Solutions, Inc. was entered on December 20, 2011 with the proceeds being paid to consensual lien holders.

 

Since the sale of its assets, Debtor has sought third parties in order to complete a reverse merger. In November, 2011, Debtor reached an agreement with ELO Media ("ELO") regarding a reverse merger and started to prepare the necessary documents, including a Share Exchange Agreement and a Disclosure Statement. At a hearing on May 2, 2012 on the United States Trustee's Motion to Convert/Dismiss, Debtor represented that the documents were nearing completion and that Debtor anticipated filing its Disclosure Statement in the near future. The Court, at that hearing set a hearing on the Disclosure Statement for July 25, 2012 at 1:30 p.m. On or about May 24, 2012, ELO advised the Debtor that it had decided to withdraw from the transaction and would not be proceeding with the Share Exchange Agreement. Since then, Debtor sought other companies with which to merge, ultimately reaching a Memorandum of Understanding with a Private Company on June 12, 2012.

 

Debtor is in the process of negotiating a new Share Exchange Agreement with a Private Company and believes that it will be in a position to file its Disclosure Statement within approximately Thirty (30) days.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None

 

PART II

 

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER SALES OF EQUITY SECURITIES

Market Information

 

Our Common Stock currently trades on the OTC Bulletin Board under the symbol “PUBQE”. The following table sets forth the high and low closing bid prices for our Common Stock as reported on the OTC Bulletin Board for the last two fiscal years. The quotation for the Common Stock traded on the OTC Bulletin Board may reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.

 

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Public Media Works, Inc.  High Closing
Bid
   Low Closing
Bid
 
FISCAL YEAR ENDING FEBRUARY 29, 2012        
FIRST QUARTER (3/1/11 to 5/31/11)  $0.73   $0.44 
SECOND QUARTER (6/1/11 to 8/31/11)  $0.44   $0.05 
THIRD QUARTER (9/1/11 to 11/30/11)  $0.05   $0.00 
FOURTH QUARTER (12/1/11 to 2/29/12)  $0.01   $0.00 
FISCAL YEAR ENDING FEBRUARY 28, 2011          
FIRST QUARTER (3/1/10 to 5/31/10)  $1.80   $0.18 
SECOND QUARTER (6/1/10 to 8/31/10)  $2.00   $0.40 
THIRD QUARTER (9/1/10 to 11/30/10)  $3.90   $1.00 
FOURTH QUARTER (12/1/10 to 2/28/11)  $1.03   $0.38 

 

Holders

 

As of June 1, 2012, 63,315,615 shares of our common stock were issued and outstanding, and held by approximately 167 shareholders of record.

 

Transfer Agent

 

Our transfer agent is Holladay Stock Transfer, 2939 North 67th Place, Scottsdale, Arizona 85251, telephone (480) 481-3940.

 

Dividends

 

We have not paid any cash dividends on our common stock since our inception and do not anticipate or contemplate paying dividends in the foreseeable future.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

On November 12, 2007, our board of directors approved our 2007 Equity Incentive Plan which provides for the issuance of up to 1,000,000 options to purchase shares of our common stock. On August 2, 2010, our board of directors approved our 2010 Equity Incentive Plan which initially provided for the issuance of up to 3,500,000 options to purchase shares of our common stock. On March 7, 2011, the board of directors approved increasing the authorized shares under the plan to 6,000,000 options. The table below sets forth information as of February 28, 2011, with respect to compensation plans under which our common stock is authorized for issuance

 

         

Number of securities to be

issued upon exercise of

outstanding options

 

Weighted-average exercise price of

outstanding options

 

Number of securities remaining available

for future issuance under equity

compensation plans

1,025,000   $0.83   5,975,000

 

Recent Sales of Unregistered Securities

 

In February 2011, one holder of a stock option in the amount of 100,000 shares elected to exercise the stock option, using the cashless exercise feature of the option. The Company issued 68,750 shares of common stock. The shares of the Company’s common stock are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Securities Act or an exemption there under. The shares were issued in reliance on the exemption from registration under Section 4(2) of the Act. The issuance of shares was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the issuance of shares.

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From December 2010 through February 2011, the Company issued 82,000 shares of restricted common stock to five individuals serving as consultants to the Company. The shares of the Company’s common stock are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Securities Act or an exemption there under. The shares were issued in reliance on the exemption from registration under Section 4(2) of the Act. The offering was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the offering. The Company recorded consulting expense of $77,900 during the year ended February 28, 2011.

 

On May 23, 2011, the Company entered into an Agreement with George Mainas, Mainas Development Corporation (collectively “Mainas”) and Del Rey Management L.P. (“Del Rey”) whereby Del Rey purchased $250,000 of the debt due the Company to Mainas. The Company agreed to allow Del Rey the option to convert this debt into 1,000,000 shares of common stock and 1,000,000 warrants to purchase common stock of the Company for $0.40 per share for three years from the date of the Agreement. Also, on May 23, 2011, Del Rey notified the Company that it was exercising this option to convert. The shares of Company common stock will be issued without restriction under the Act under an exemption provided pursuant to Rule 144 of the Act. The warrants and shares of the Company’s common stock which may be issued upon exercise of the warrants are restricted securities, and may not be sold, transferred or otherwise disposed without registration under Act, or an exemption thereunder. The securities were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act and/or Rule 506 of Regulation D under the Act. The offering was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the offering.

 

In June 2011, one consultant made a cashless exercise of a stock option and 128,571 shares were issued. The shares of the Company’s common stock are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Act, or an exemption thereunder. The securities were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act. The issuance of shares was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the offering.

 

 

In June 2011, the Company issued 200,000 shares of common stock to a supplier.  In return, the supplier agreed to give the Company a discount on future purchases of kiosks. The shares of the Company’s common stock are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Act, or an exemption thereunder. The securities were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act. The issuance of shares was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the issuance of shares.

 

 

On August 2, 2011, the Company issued 600,000 shares to Salzwedel Financial Services for services to be rendered. The Company expensed this amount in the period ended November 30, 2011. The shares of the Company’s common stock are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Act, or an exemption thereunder. The securities were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act. The issuance of shares was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the issuance of shares.

 

 

In August 2011, one creditor elected to convert $7,408 of accounts payable into 74,085 shares of common stock of the Company. The shares of the Company’s common stock are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Act, or an exemption thereunder. The securities were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act. The issuance of shares was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the issuance of shares.

 

 

In the quarter ending August 31, 2011, the Company executed common stock agreements with five accredited investors for $137,000 in cash. The accredited investors received 1,370,000 shares of common stock and one investor received 750,000 warrants to purchase an additional share of the Company at $0.10 within three years. These sales triggered an anti-dilution clause in the aforementioned $400,000 conversion of debt to equity and an additional 2,121,750 shares of common stock were issued. The shares of the Company’s common stock are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Act, or an exemption thereunder. The securities were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act. The issuance of shares was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the issuance of shares.

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On January 23, 2012, the Company issued 25,000,000 restricted shares to an accredited investor for cash at a price of $0.002 per share and a total purchase price of $50,000. The shares of the Company’s common stock are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Act, or an exemption thereunder. The securities were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act. The offering was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the offering.

 

 

Repurchases of Equity Securities by the Company and Affiliates

 

None

 

ITEM 6. SELECTED FINANCIAL DATA AND SUPPLEMENTARY INFORMATION

 

As a smaller reporting company we are not required to provide the information required by this item.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this report.

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Proceedings Under Chapter 11 

 

The Company filed a voluntary petition on September 23, 2011 under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Central District of California, Riverside Division (the “Bankruptcy Court”). We will continue to operate our business as "debtor-in-possession" under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the order of the Court, as we devote renewed efforts to resolve our liquidity problems and develop a reorganization plan.

 

Pursuant to the provisions of the Bankruptcy Code, we are not permitted to pay any claims or obligations which arose prior to the filing date (prepetition claims) unless specifically authorized by the Court or as may ultimately be provided in a plan of reorganization. Similarly, claimants may not enforce any claims against us that arose prior to the date of the filing. In addition, as a debtor-in-possession, we have the right, subject to the Court's approval, to assume or reject any executory contracts and unexpired leases in existence at the date of the filing. Parties having claims as a result of any such rejection may file claims with the Court which will be dealt with as part of the Chapter 11 case.

 

It is our intention to address all of our prepetition claims in a plan of reorganization in our Chapter 11 case. At this juncture, it is impossible to predict with any degree of certainty how such a plan will treat such claims and the impact that our Chapter 11 cases and any reorganization plan will have on the trading market for our stock. Generally, under the provisions of the Bankruptcy Code, holders of equity interests may not participate under a plan of reorganization unless the claims of creditors are satisfied in full under the plan or unless creditors accept a reorganization plan which permits holders of equity interests to participate. The formulation and implementation of a plan of reorganization in the Chapter 11 cases could take a significant period of time.

 

The Chapter 11 case is in good standing with the court having filed all required Monthly Operating Reports along with its Statement of Liability Insurance. The case is presently under no threat of being converted or liquidated under a chapter 7. The court has set a tentative time period for filing the Company’s Disclosure Statement and Plan of Reorganization by June 19, 2012; however the Company presently anticipates that it may move to voluntarily continue that date so that it might timely complete its Reorganization Plan. The Company anticipates that should it file its Motion for Continuance, it will be successful.

 

In November, 2011, Debtor reached an agreement with ELO Media ("ELO") regarding a reverse merger and started to prepare the necessary documents, including a Share Exchange Agreement and a Disclosure Statement. At a hearing on May 2, 2012 on the United States Trustee's Motion to Convert/Dismiss, Debtor represented that the documents were nearing completion and that Debtor anticipated filing its Disclosure Statement in the near future. The Court, at that hearing set a hearing on the Disclosure Statement for July 25, 2012 at 1:30 p.m. On or about May 24, 2012, ELO advised the Debtor that it had decided to withdraw from the transaction and would not be proceeding with the Share Exchange Agreement. Since then, Debtor sought other companies with which to merge, ultimately reaching a Memorandum of Understanding with a Private Company on June 12, 2012.

 

Debtor is in the process of negotiating a new Share Exchange Agreement with a Private Company and believes that it will be in a position to file its Disclosure Statement within approximately Thirty (30) days.

 

 

Results of Operations

 

Fiscal Year Ended February 29, 2012, Compared to Fiscal Year Ended February 28, 2011

 

We presently have no operations but our plan of operation is to identify and merge with a potential merger candidate/candidates to create new shareholder value and reestablish the Company going forward.

 

In fiscal 2012, the Company entered the start-up phase of operation and generated $39,116 in revenue. Revenue in fiscal 2012 came principally from 25 kiosks placed in operation in March 2011 and going through beta testing. The Company was using a newly manufactured kiosk and operating software. As the Company was unable to raise additional equity to continue operating the kiosks, in early September, 2011, the Company removed the kiosks and placed them in storage until they were sold on November 30, 2011. The remainder of revenue during periods came from a joint venture in Canada.  No future revenue is expected from this joint venture.

 

The Company’s revenues for the fiscal year ended February 28, 2011 was $7,139. Revenue in fiscal 2011 came from an unsuccessful early test of kiosks in Pizza Hut restaurants and two months of revenue from our Canadian venture. The restaurant did not have the required foot traffic to generate the number of rentals required to make the kiosks profitable.

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In fiscal 2012, the Company’s cost of revenue (direct operating expenses) was $169,604, compared to $7,077 in fiscal 2011. The increase in the direct operating expenses is a direct result of placing the kiosks in operations. Direct operating expenses principally include: amortization of our DVD and Blu-Ray movie inventory; commissions or fees to retailers; credit card fees and field operations support, such as loading and cleaning the kiosks and monitoring the kiosks. In addition, in fiscal 2012, the Company wrote off $16,117 of prepaid support due to its removing the kiosks from retail locations.

 

Operating expenses in fiscal 2012 amounted to $4,539,867 which consisted primarily of $3,563,034 non-cash charges related to issuance of stock, restricted stock and stock options to officers and consultants. General and administrative expenses decreased significantly compared to fiscal 2011 due to entering into bankruptcy proceedings on September 23, 2011, accordingly departure of all employees and discontinuing our operating activities.

 

Operating expenses in fiscal 2011 amounted to $7,567,046 due to new management after the share exchange agreement and the resulting operational expansion as we geared up to enter the kiosk-based DVD rental business. Included in operating expenses is $5,738,653 of stock compensation expense, related to restricted stock grants to employees and consultants, stock issuances to settle disputes with both vendors and former employees and employee and consultant stock option grants. An additional $735,190 was spent on outside consultants including legal fees $306,330, investor relations specialists $70,000 and other outside consultant in marketing, sales and finance $317,703.

 

Other expenses amounted to $1,976,175 and $109,368 for fiscal 2012 and 2011, respectively, other assets increased significantly in fiscal 2012 due to mainly the loss recorded on conversion of convertible debt to equity of $1,478,693 and an impairment charge related to assets that were disposed in November 2011 of $370,077. No such costs were recorded in fiscal 2011.

 

Liquidity and Capital Resources

 

In September 2011, the Company decided to cease operating the kiosks and place the kiosks in a safe warehouse location while it reorganized under a voluntary bankruptcy filing (Chapter 11). The Company is seeking $150,000 to allow it to operate under the protection of the U.S. bankruptcy laws while it converts most of its non-secured debt, including accounts payable, to equity as well as renegotiating its agreements with its secured creditor. Finally, it will need to raise additional equity to continue to fund its operations beyond the three to four months it believes it will take it to go through the bankruptcy process.  However, there can be no assurance as to whether, when, or upon what terms the Company will be able to consummate any additional financing.

 

Contractual Obligations

 

As a “smaller reporting company”, we are not required to provide tabular disclosure obligations.

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Off-Balance Sheet Arrangements

 

We do not have any significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our balance sheet, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Going Concern and Liquidity Matters

 

On September 23, 2011, the Company filed for protection under Chapter 11 of the Bankruptcy Code and as such, the accompanying consolidated financial statements have been prepared under the assumption that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. Historically, the Company has incurred significant losses, and has not demonstrated the ability to generate sufficient cash flows from operations to satisfy its liabilities and sustain operations. Our independent registered public accounting firm reported for 2012 and 2011 that these factors create substantial doubt as to the Company’s ability to continue as a going concern.

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Use of Estimates and Critical Accounting Policies

 

The preparation of our financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the 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. On an ongoing basis, management evaluates its estimates and assumptions, including those related to film development costs, income taxes, long lived asset valuation, revenue recognition and stock based compensation. Management bases its estimates and judgments on historical experience of operations and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions

 

Management believes the most critical accounting policies, among others, will affect its more significant judgments and estimates used in the preparation of our financial statements are discussed in Note 2 of the audited consolidated financial statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company we are not required to provide the disclosure required by this Item.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

See “Financial Statements” beginning on page F-1.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures.

 

Our disclosure controls and procedures are designed to provide reasonable assurances that material information related to our Company is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, who is also our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer, who is also our Chief Financial Officer, has determined that as of February 29, 2012, our disclosure controls were not effective for the reasons discussed below related to material weaknesses in our internal control over financial reporting.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

 

  1. pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

  2. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and

 

  3. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
     

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of February 28, 2012. In making this assessment, management used the framework set forth in the report entitled  Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system,

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including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on that assessment under such criteria, management concluded that the Company’s internal control over financial reporting was not effective as of February 29, 2012 due to control deficiencies that constituted material weaknesses.

 

We did not include an attestation report from our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the temporary rules of the SEC that permit the company to provide only management’s report.

 

Identified Material Weaknesses

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management identified the following internal control deficiencies, which it deemed material weaknesses during its assessment of our internal control over financial reporting as of February 29, 2012:

 

  1. Management in assessing its internal controls and procedures for fiscal 2012 identified a lack of sufficient segregation of duties, particularly in cash disbursements. Specifically, this material weakness is such that the design over the areas of cash disbursements relies primarily on detective controls and could be strengthened by adding preventative controls to properly safeguard company assets.

 

  2. In conjunction with the lack of segregation of duties, we did not institute specific anti-fraud controls.
     

In conclusion, our Chief Executive Officer, who is also our Chief Financial Officer, concluded that we did not maintain effective internal control over financial reporting as of February 29, 2012.

 

Management’s Remediation Initiatives

 

 

Our plan to remediate those material weaknesses remaining as of February 29, 2012 will depend on the outcome of our Bankruptcy filing.

 

 

Changes in Controls and Procedures

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There were no significant changes made in our internal controls over financial reporting during the quarter ended February 29, 2012 that have materially affected or are reasonably likely to materially affect these controls.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Our directors are elected by our shareholders to a term of one year and to serve until his or her successor is duly elected and qualified, or until his death, resignation or removal. Each of our officers is appointed by our board of directors to a term of one year and serves until his successor is duly elected and qualified, or until his death, resignation or removal from office.

 

Our bylaws provide that the number of directors which shall constitute our whole board of directors shall not be less than one or more than five. The number of directors is determined by resolution of our board of directors or by our shareholders at our annual meeting. Set forth below are the directors and officers of the Company as of June 1, 2012:

 

Name   Age   Position
         
Martin W. Greenwald   70   Chief Executive Officer, Secretary and Chairman of the Board of Directors
Bryan Subotnick   47   Director

 

Martin W. Greenwald was appointed as our Chairman of the Board, Chief Executive Officer and Secretary on August 2, 2010. Mr. Greenwald was appointed to our Board of Directors as of May 26, 2010. Mr. Greenwald served as Chairman of the Board of Image Entertainment, Inc., a NASDAQ listed company, from founding the company in 1981 until January 2010. From 1981 until 2008, Mr. Greenwald also served as CEO and President of Image Entertainment. From 1985 to 1997, Mr. Greenwald and his management team grew Image into the largest laserdisc production and distribution company in the United States with an estimated 40% market share and revenues consistently exceeding $100,000,000 per year. During that same period of time, Mr. Greenwald oversaw the acquisition of content, negotiating Image’s exclusive content agreements with studios such as Disney, Fox, Warner, MGM and a host of other major content suppliers. Image’s facilities at that time included a California corporate office with approximately 100 employees and a 60,000 square foot warehouse and distribution center located in Las Vegas, Nevada. Beginning in 1996, Mr. Greenwald revamped Image’s operation to focus on DVD content acquisition, production and distribution. Since 1996, Image became recognized as the largest independent DVD company in North America with an exclusive library of over 4,000 titles, including broadcast, digital, and VOD rights to many of these titles. Mr. Greenwald resigned from Image in 2010 as that company underwent a change of control.

 

Mr. Subotnick has been a director of the Company since March 25, 2011. Mr. Subotnick has served as the Chief Executive Officer and President of NYCe pLAy, LLC, a Los Angeles based technology company that develops, markets and sells smartphone applications, since the founding of the company in 2010. Since 2004, Mr. Subotnick has also been an active investor in a variety of investments including a telecommunications service provider and several internet start-ups in the entertainment, advertising and medical industries. From 1995 to 2004, Mr. Subotnick was Executive Vice President of Big City Radio, a Los Angeles based owner of radio stations, where he helped grow the company from 4 regional stations to 16 national stations and to become listed on the American Stock Exchange. While at Big City Radio, Mr. Subotnick managed many aspects of company operations, including acquisitions, programming, budgeting and client relations, and assisted in raising over $33 million in the company’s IPO and $174 million in a public debt offering. From 1994 to 1995, Mr. Subotnick was Vice President and General Counsel of Papamarkou & Company, an SEC registered asset management company based in New York, New York. Mr. Subotnick was a founder and general partner of Shanker & Subotnick, a law firm which concentrated on entertainment law. Mr. Subotnick was a Kings County Assistant District Attorney in New York, New York from 1991 to 1992, and worked in the prestigious Bear Stearns & Company bond trading and sales program from 1986 to 1988. Mr. Subotnick received his Bachelor of Science in Finance from Syracuse University, and his Juris Doctor from the Brooklyn Law School.

 

There are no family relationships among members of our management or our Board of Directors.

 

Leadership Structure

 

The chairman of our board of directors also serves as our chief executive officer. Our board of directors does not have a lead independent director. Our board of directors has determined that its leadership structure is appropriate and effective. Our board of directors believes that having a single individual serve as both chairman and chief executive officer provides clear leadership, accountability and promotes strategic development and execution as our company executes our strategy as a more communications-focused enterprise. Our board of directors also believes that there is a high degree of transparency among directors and company management.

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Nomination of Directors

 

There have not been any changes to the procedures by which shareholders may recommend nominees to the Company’s board of directors.

 

Code of Ethics

 

The Company has adopted a Code of Business Ethics and Conduct (the "Ethics Code") that applies to the every officer of and director to the Company. The Ethics Code is attached as an exhibit to its Form 10-KSB filed with the Commission on August 18, 2004. The Code is also available free of charge upon request to the Company at 4000 Bridgeway, Ste. #401, Sausalito, California 94965, Attn: Martin W. Greenwald.

 

Audit Committee and Financial Report

 

Our Company does not currently have an audit committee, audit committee charter or “audit committee financial expert.”

 

 

Audit Committee Pre-Approval Policies

 

We have not yet appointed an audit committee, and our board of directors currently acts as our audit committee. The Board of Directors has approved all of the fees paid and identified herein to the Company’s principal accountant.

 

Compensation Committee

 

The Company does not currently have a compensation committee.

 

Compliance with Section 16(a) of the Exchange Act

 

Based solely upon a review of Forms 3, 4 and 5 furnished to the Company pursuant to Section 16(a)-3e of the Exchange Act, our Company noted no delinquencies for the fiscal year ending February 29, 2012 or through the date of this file, except for the following which were filed late: the Form 4 filed by Gregory Waring on March 11, 2011; the Form 4 filed by Garrett Cecchini on March 14, 2011; and the Form 4 filed by Joseph Merhi on March 16, 2011.

 

Shareholder Communications with the Board of Directors

 

The Board of Directors has not established a formal process for shareholders to send communications to its members. Any shareholder may send a communication to any member of the Board of Directors, in care of the Company’s address or in care of the address shown in the table of beneficial ownership on this page. If a communication is sent to the Company’s address, the Company will forward any such communication to the relevant member of the Board of Directors.

 

 

ITEM 11. EXECUTIVE COMPENSATION

 

                                     
Name and Position  Fiscal
Year
   Salary
($)
   Bonus
($)
   Stock
Awards ($)
   Option
Awards(1)
($)
   Non-equity
Incentive
Comp ($)
   Change in
Pension
Value and
Non-Qualified
Deferred
Compensation
Earnings
($)
   All Other
Compensation
($)
   Total
($)
 
                                     
Martin Greenwald (2)(6)   2012    0    0    0    0    0    0    0   $0 
Chief Executive Officer/Director   2011    0    0    1,000,000    500,000    0    0    0   $1,500,000 
Greg P Waring (3)   2012    105,750    0    0    0    0    0    0   $105,750 
Former Chief Operating Officer/President   2011    33,000    8,450    312,500    312,500    0    0    0   $666,450 
Ed Roffman (4)   2012    72,500    0    0    0    0    0    0   $72,500 
Former Chief Financial Officer   2011    34,000    0    342,000    189,000    0    0    0    565,000 
Garrett Cecchini (5)   2012    0    0    0    0    0    0    0   $0 
Former Chief Executive Officer/Director   2011    0    0    0    0    0    0    0    0 
                                              
Bryan Subotnick (6)   2012    0    0    0    0    0    0    0   $0 
Director   2011    0    0    0    0    0    0    0    0 
                                              

  

(1) The amounts in this column represent the aggregate grant date fair values of the stock option awards granted to the executive in fiscal year ended February 29, 2012 and February 28, 2011, respectively in accordance with stock compensation accounting.

 

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(2) Mr. Greenwald was named Chief Executive Officer and Chairman of the Board for Directors on August 2, 2010 with no cash compensation. In conjunction with this, he was granted 1,000,000 shares of restricted stock which he earns 83,333 per month. In March 2011, the Board of Directors, accelerated the vesting on these shares. Mr. Greenwald was also granted stock options for 500,000 shares with an original exercise price of $1.02 per share and vesting over twelve months. In March 2011, the Board of Directors accelerated the vesting on these options and reduced the exercise price to $0.55 per share.
(3) Mr. Waring was named President and Chief Operating Officer on November 18, 2010. In addition, Mr. Waring has deferred $8,000 which was paid in fiscal 2012. Mr. Waring was granted 250,000 shares of restricted stock. This stock has a repurchase right which decreases by 8.33% per month over his first year of employment. Mr. Waring also was granted stock options for 250,000 with an original exercise price of $1.25 per share. The exercise price was reduced in March 2011 to $0.55 per share.
(4) Mr. Roffman was named Chief Financial Officer on October 18, 2010. In addition, Mr. Roffman has deferred $7,000 which was paid in fiscal 2012. Mr. Roffman was granted 250,000 shares of restricted stock. This stock has a repurchase right which decreases by 8.33% per month over his first year of employment. Mr. Roffman also was granted stock options for 180,000 with an original exercise price of $1.05 per share. The exercise price was reduced in March 2011 to $0.55 per share.
(5) At February 28, 2011, Mr. Cecchini was owed $30,000 in compensation. In March 2011, the Company and Mr. Cecchini agreed to convert this into 120,000 share of restricted stock and a warrant to purchase 120,000 shares of stock at $0.25 per share. Mr. Cecchini resigned as Chief Executive Officer on August 2, 1010 and as a director on March 7, 2011.
(6) Mr. Greenwald and Mr. Subotnick have been diligently working in excess of the past year as the CEO and active Director of PMW without monetary compensation of any type. It is agreed and understood by both parties and PMW that they will accept compensation in the form of free trading shares only, resulting if and when PMW achieves a successful reorganization as a result of their efforts.

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The following table sets forth as of June 1, 2012, information regarding the beneficial ownership of our common stock with respect to (i) our officers and directors; (ii) by all directors and executive officers as a group; and (iii) all persons which the Company, pursuant to filings with the Securities and Exchange Commission (the “SEC”) and our stock transfer record by each person or group known by our management to own more than 5% of the outstanding shares of our common stock. Under the rules of the Securities and Exchange Commission, a person (or group of persons) is deemed to be a “beneficial owner” of a security if he or she, directly or indirectly, has or shares the power to vote or to direct the voting of such security, or the power to dispose of or to direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. A person is also deemed to be a beneficial owner of any security, which that person has the right to acquire within sixty (60) days, such as our warrants or options to purchase shares of our common stock. . Each percentage is based upon, the total number of shares outstanding at June 1, 2012, which was 63,315,615, and the total number of shares beneficially owned and held by each individual at June 1, 2012, plus the number of shares that such individual has the right to acquire within 60 days of June 1, 2012. Unless otherwise noted, each person has sole voting and investment power over the shares indicated below subject to applicable community property law.

 

         

Name and Address of Beneficial Owner (1)

  Amount and
Nature of
Beneficial
Ownership
   Percentage
of Class
Beneficially
Owned
 
Officers and Directors        
Martin W. Greenwald   2,083,333(2)   3.29%
5% Shareholders          
           

Stuart Subotnick

810 Seventh Avenue—29 th Floor

New York, New York 10019

   27,800,000(3)   43.90%

 

(1)Unless otherwise noted, the address is c/o 4000 Bridgeway, Ste. #401 Sausalito, CA 94965.

(2)Includes 1,000,000 shares issuable upon exercise of options exercisable within 60 days of June 1, 2012.

(3)Includes 1,400,000 shares issuable upon exercise of warrants exercisable within 60 days of June 1, 2012.

  

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Related Party Transactions . Our Company closely reviews transactions between the Company and persons or entities considered to be related parties (collectively “related parties”). Our Company considers entities to be related parties where an executive officer, director or a 5% or more beneficial owner of our common stock (or an immediate family member of these persons) has a direct or indirect material interest. Transactions of this nature require the approval of our management and our Board of Directors. We believe such transactions were at terms comparable to those we could have obtained from unaffiliated third parties. Since March 1, 2011, we have not had any transactions in which any of our related parties had or will have a direct or indirect material interest, nor are any such transactions currently proposed, except as noted below:

 

On March 7, 2011, the Company agreed to the conversion of $404,305 of debt payable to George Mainas into 1,617,220 shares of Company common stock and warrants to purchase 1,617,220 shares of Company common stock for $.25 per share for a term of three years. The amount of $30,000 of the debt payable which was converted into shares of Company common stock was derived from consulting fees accrued from the Company during the fiscal year ended February 28, 2011.

21
 

 

On March 7, 2011, the Company agreed to the conversion of $31,285 of debt payable to Garrett Cecchini into 125,140 shares of Company common stock and warrants to purchase 125,140 shares of Company common stock for $.25 per share for a term of three years. The amount of $30,000 of the debt payable which was converted into shares of Company common stock was derived from consulting fees accrued from the Company during the fiscal year ended February 28, 2011.

 

On May 23, 2011, the Company entered into an Agreement with George Mainas, Mainas Development Corporation (collectively “Mainas”) and Del Rey Management L.P. (“Del Rey”) whereby Del Rey purchased $250,000 of the debt due the Company to Mainas. The Company agreed to allow Del Rey the option to convert this debt into 1,000,000 shares of common stock and 1,000,000 warrants to purchase common stock of the Company for $0.40 per share for three years from the date of the Agreement. Also, on May 23, 2011, Del Rey notified the Company that it was exercising this option to convert. The shares of Company common stock will be issued without restriction under the Act under an exemption provided pursuant to Rule 144 of the Act. The warrants and shares of the Company’s common stock which may be issued upon exercise of the warrants are restricted securities, and may not be sold, transferred or otherwise disposed without registration under Act, or an exemption thereunder. The securities were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act and/or Rule 506 of Regulation D under the Act. The offering was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the offering.

 

On January 23, 2012, the Company issued 25,000,000 restricted shares to Stuart Subotnick for cash at a price of $0.002 per share and a total purchase price of $50,000.

Parent Companies. We do not have a parent company.

 

Director Independence

 

Martin Greenwald and Bryan Subotnick are not considered to be an independent director under the NASDAQ listing standards.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

 

Anton & Chia, LLP has been our independent registered public accounting firm since September 30, 2009 and was our independent registered public accounting firm for the fiscal year ended February 29, 2012.

 

For purposes of the tables below:

 

     
Audit Fees   include fees and expenses for professional services rendered for the audits of our annual financial statements for the applicable year and for the review of the financial statements included in our quarterly reports on Form 10-Q for the applicable year.
   
Audit-Related Fees   consist of fees billed for assurance and related services that are related to the performance of the audit or review

 

     
    of our financial statements and are not reported as audit fees.
   
Tax Fees   consist of preparation of our federal and state tax returns, review of quarterly estimated payments, and consultation concerning tax compliance issues.
   
All Other Fees   include any fees for services not covered above. Fees noted for both annual periods primarily represent fees associated with informal assessment of our internal controls and assisting us in the preparation or correspondence to the SEC.
     

The following table sets forth the aggregate fees billed for services in fiscal year ended February 29, 2012 by Anton & Chia, LLP:

 

Audit Fees  $50,336 
Audit Related Fees  $- 
Tax Fees  $- 
All Other Fees  $- 
Total  $50,336 

  

The following table sets forth the aggregate fees billed for services in fiscal year ended February 28, 2011 by Anton & Chia, LLP:

 

Audit Fees  $39,400 
Audit Related Fees  $- 
Tax Fees  $- 
All Other Fees  $- 
Total  $39,400 

  

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.

 

(a) Documents filed as part of this Report:

 

22
 

 

(1) Financial Statements—all consolidated financial statements of the Company as set forth under Item 8, on page F-1 of this Report.

 

(2) Financial Statement Schedules— As a smaller reporting company we are not required to provide the information required by this item.

 

(3) Exhibits

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Exhibit No.

 

Description    

  2.1   Exchange Agreement dated as of March 24, 2010 by and among the Company, EntertainmentXpress, Inc. and certain shareholders of EntertainmentXpress, Inc. (1)
   
  2.2   Amended and Restated Share Exchange Agreement dated as of April 23, 2010 by and among the Company, EntertainmentXpress, Inc. and certain shareholders of EntertainmentXpress, Inc. (14)
   
  3.1   Certificate of Incorporation (2)
   
  3.2   Certificate of Amendment of Certificate of Incorporation (3)
   
  3.3   Bylaws (4)
   
  3.4   Amended Bylaws (5)
   
  3.5   Certificate of Amendment of Certificate of Incorporation (6)
   
10.1   Promissory Note with George Mainas dated August 30, 2000 (7)
   
10.2   Memorialized Agreement between the Company and Mr. George Mainas dated December 31, 2003 (7)
   
10.3   Agreement and letter of credit between the Company and George Mainas dated August 18, 2004 (5)
   
10.5   2007 Equity Incentive Plan (8)
   
10.9   Loan Modification and Security Agreement dated August 14, 2009(9)
   
10.11   Debt Conversion Agreement dated January 12, 2010 (11)
   
10.13   Amendment to Loan Modification and Security Agreement dated May 4, 2010 (11)
   
10.19   2010 Equity Incentive Plan (12)
   
10.22   Collaboration Agreement with Signifi Solutions, Inc. and Spot Venture Distribution, Inc. dated November 8, 2010 (13)
   
10.23   Subscription Agreement with George Mainas dated January 10, 2011(13)
   
10.24   Warrant Agreement with George Mainas dated January 20, 2011(13)
   
10.26   Amendment to Master Purchase Agreement with Signifi Solutions, Inc. dated March 7, 2011 (14)
   
14.1   Code of Business Conduct and Ethics adopted June 16, 2004 (10)

 

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21       Listing of Subsidiaries (15)
   
31   Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, by Chief Executive Officer and Chief Financial Officer (15)
   
32.1   Certification pursuant to 18 U.S.C. §1350 by Chief Executive & Financial Officer (15)
   
 

 

(1) Incorporated by reference from the Company’s report on Form 8-K filed on March 24, 2010
(2) Incorporated by reference from the Company’s report on Form 8-K filed on October 20, 2008.
(3) Incorporated by reference from the Company’s Form 8-K filed on September 8, 2003.
(4) Incorporated by reference from the Company’s Form 10-SB filed on March 9, 2000.
(5) Incorporated by reference from Amendment No. 3 to the Company’s Form SB-2 filed September 1, 2004.
(6) Incorporated by reference from the Company’s report on Form 8-K filed on June 22, 2007.
(7) Incorporated by reference from Amendment No. 2 to the Company’s Form SB-2 filed June 29, 2004.
(8) Incorporated by reference from the Company’s report on Form 8-K filed on November 16, 2007.
(9) Incorporated by reference from the Company’s report on Form 8-K filed on August 18, 2009.
(10) Incorporated by reference from the Company’s Form 10K-SB filed on August 18, 2004.
(11) Incorporated by reference from the Company’s Form 10K- filed on May 10, 2010.
(12) Incorporated by reference from the Company’s Form 10Q filed on October 18, 2010
(13) Incorporated by reference from the Company’s Form 10Q filed on January 14, 2011
(14) Incorporated by reference from the Company’s Form 8-K filed on March 11,2011
(15) Attached as an exhibit to this report.

 

25
 

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

         
   

Public Media Works, Inc.

    (Registrant)
   
Date: June 28, 2012  

/s/ Martin W. Greenwald

    By:   Martin W. Greenwald
    Title:   Chief Executive & Chief Financial Officer

 

POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer of Public Media Works, Inc., a Delaware corporation, hereby constitutes and appoints Martin W. Greenwald acting individually, as his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead in any and all capacities, to sign any and all amendments to this annual report on Form 10-K and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done that such annual report and its amendments shall comply with the Securities Act, and the applicable rules and regulations adopted or issued pursuant thereto, as fully and to all intents and purposes as he or she might or could do

26
 

 

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in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitute or re-substitute, may lawfully do or cause to be done by virtue hereof.

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

 

               

/s/ Martin W. Greenwald

Martin W. Greenwald

 

 

 

 

     

Chief Executive & Financial Officer,

Director

    June 28, 2012

 

 

s/ Bryan Subotnick

Bryan Subotnick

 

 

 

 

 

 

 

 

Director

  June 28, 2012

 

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PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

INDEX TO FINANCIAL STATEMENTS

 

         
    Page  
Report of Independent Registered Public Accounting Firm     F-1  
Consolidated Balance Sheets     F-2  
Consolidated Statements of Operations     F-3  
Consolidated Statements of changes in Stockholders’ Equity (Deficit)     F-4  
Consolidated Statements of Cash Flows     F-5  
Notes to Consolidated Financial Statements     F-6  

 

 
 

 

Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Public Media Works, Inc. (Debtor-in-Possession)

 

We have audited the accompanying consolidated balance sheets of Public Media Works, Inc. (the “Company”) as of February 29, 2012 and February 28, 2011, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Public Media Works, Inc. as of February 29, 2012 and February 28, 2011, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred significant recurring net losses and negative cash flows from operations through February 29, 2012, it has an accumulated deficit of $19,482,451. In addition, on September 23, 2011, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans as to these matters are described in Note 2. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

ANTON & CHIA, LLP

 

Newport Beach, California

June 20, 2012

F-1
 

 

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PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

Consolidated Balance Sheets

 

    February 29,     February 28,  
    2012     2011  
Assets            
Current assets:            
     Cash   $ -     $ 385,888  
     Accounts receivable, net     -       6,561  
     Inventory     -       61,564  
     Prepaid expenses and other assets     2,000       346,728  
          Total current assets     2,000       800,741  
     Deposits on kiosks     -       394,206  
     Other assets     -       11,485  
          Total assets   $ 2,000     $ 1,206,432  
Liabilities and Stockholders’ Equity (Deficit)                
Current liabilities:                
     Accrued liabilities-post petition   $ 19,002     $ -  
     Convertible note-post petition     50,000       -  
     Total liabilities not subject to compromise     69,002       -  
     Liabilities subject to compromise     1,032,254       1,167,837  
          Total liabilities     1,101,256       1,167,837  
Stockholders’ equity (deficit)                
       Common stock $0.0001 par value, 125,000,000 shares                
       authorized 63,315,615 and 30,208,459 issued and                
       outstanding as of February 29, 2012 and February 28,                
       2011, respectively     6,332       3,021  
     Additional paid-in capital     18,376,863       12,901,495  
     Subscriptions receivable     -       (30,000 )
     Accumulated deficit     (19,482,451 )     (12,835,921 )
          Total stockholders’ equity (deficit)     (1,099,256 )     38,595  
          Total liabilities and stockholders’ equity (deficit)   $ 2,000     $ 1,206,432  

 

 

The accompanying notes are an integral part of these consolidated financial statements.

F-2
 

 

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PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

Consolidated Statements of Operations

For the years ended,

 

 

   February 29,   February 28, 
   2012   2011 
Revenue  $39,116   $7,139 
Cost of revenue   169,604    7,077 
     Gross profit (loss)   (130,488)   62 
Operating expenses          
     Depreciation   48,996    5,188 
     General and administrative expenses   4,490,871    7,561,858 
Total operating expenses   4,539,867    7,567,046 
Loss from operations   (4,670,355)   (7,566,984)
Other expenses:          
     Interest, net   52,487    85,662 
     Loss on conversion of debt to equity   1,478,693    - 
     Loss on sale of assets   71,370    23,706 
     Impairment on equipment   370,077    - 
     Other expense   3,548    - 
        Total other expenses   1,976,175    109,368 
           
Loss before income taxes   (6,646,530)   (7,676,352)
Provision for income taxes   -    - 
Net loss  $(6,646,530)  $(7,676,352)
           
Net loss per common share – basic and diluted  $(0.17)  $(0.36)
           
     Weighted average number of shares – basic and diluted   38,914,623    21,594,114 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

F-3
 

 

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PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEARS ENDED FEBRUARY 29, 2012 AND FEBRUARY 28, 2011

 

           Additional             
   Common Stock   Paid-in   Subscription   Accumulated     
   Shares   Amount   Capital   Receivable   Deficit   Total 
Balance - February 28, 2010   5,886,440   $588   $4,036,228        $(5,159,569)  $(1,122,753)
                               
Issuance of shares to acquire EntertainmentXpress   13,685,773    1,369    (1,369)   -    -    - 
Shares cancelled   (3,250,000)   (325)   325    -    -    - 
Shares sold for cash   6,176,329    618    2,241,105    -    -    2,241,723 
Shares issued for conversion of note principal, interest and payables   2,545,962    255    836,326    -    -    836,581 
Shares issued for exercise of stock option   68,750    7    (7)   -    -    - 
Shares issued for exercise of stock warrant   10,000    1    9,999    -    -    10,000 
Shares issued for consulting services rendered   3,863,540    386    2,850,178    -    -    2,850,564 
Shares issued to employees for services rendered   1,221,665    122    1,202,594    -    -    1,202,716 
Subscriptions receivable   -    -    -    (30,000)   -    (30,000)
Warrants issued for cash   -    -    173,770    -    -    173,770 
Share-based compensation in connection with stock option grants   -    -    1,552,346    -    -    1,552,346 
Net loss   -    -    -    -    (7,676,352)   (7,676,352)
Balance - February 28, 2011   30,208,459    3,021    12,901,495    (30,000)   (12,835,921)   38,595 
                               
Stock issued for cash   26,611,915    2,661    263,339    -    -    266,000 
Stock issued for services   2,570,835    257    842,868    -    -    843,125 
Stock issued upon conversion of debt   3,795,835    380    1,712,295    -    -    1,712,675 
Stock issued upon exercise of options   128,571    13    (13)   -    -    - 
Subscribed stock issued   -    -    -    30,000    -    30,000 
Share based compensation (option and warrants)   -    -    2,631,879    -    -    2,631,879 
BCF related to convertible note   -    -    25,000    -    -    25,000 
Net loss   -    -    -    -    (6,646,530)   (6,646,530)
Balance - February 29, 2012   63,315,615   $6,332   $18,376,863   $-   $(19,482,451)  $(1,099,256)

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

F-4
 

 

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PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

Consolidated Statements of Cash Flows

For the Years ended,

 

   February 29, 2012   February 28, 2011 
OPERATING ACTIVITIES:        
       Net loss  $(6,646,530)  $(7,676,352)
             Adjustments to reconcile net loss to cash used in operating activities:          
             Depreciation   48,996    5,188 
             Amortization   110,551    - 
             Impairment of equipment   370,077    - 
             Interest expense accrued but unpaid on convertible of debt   27,488    85,662 
             Share based compensation   3,563,034    5,463,485 
             Warrants issued for services   11,086    315,002 
             Loss on disposal of assets   71,370    23,706 
             Loss on conversion of debt to equity   1,478,693    46,550 
             Bad debt expense   7,794    - 
             Debt discount   25,000    - 
       Changes in operating assets and liabilities:          
             Accounts receivable   (1,233)   (6,561)
             Prepaid expenses and other assets   35,111    (30,061)
             Inventory   (94,728)   (85,270)
             Other assets   9,731    (11,485)
             Payables and accrued liabilities-post petition   19,002    - 
             Accounts payable and accrued expenses and accrued interest   228,502    323,241 
Net cash used in operating activities   (736,056)   (1,546,895)
INVESTING ACTIVITIES:          
             Deposit on Kiosk   -    (394,206)
             Purchase of equipment   (199,742)   (49,482)
Net cash used in investing activities   (199,742)   (443,688)
FINANCING ACTIVITIES:          
             Issuance of common stock for cash   266,000    2,251,723 
             Subscriptions receivable   30,000    (30,000)
             Due to stockholders   166,000    (15,074)
             Payments on note payable   (27,090)   - 
             Convertible note-post petition   50,000    - 
             Equipment contributed to settle debt   -    20,355 
             Notes payable-short term   65,000    16,423 
             Proceeds from notes payable to stockholders   -    133,000 
Net cash provided by financing activities   549,910    2,376,427 
Net increase (decrease) in cash   (385,888)   385,844 
Cash - beginning of period   385,888    44 
Cash - end of period  $-   $385,888 
           
SUPPLEMENTAL DISCLOSURES OF NON CASH FINANCING ACTIVITIES          
Common stock issued upon reverse merger  $-   $1,369 
Conversion of accounts payable to convertible promissory note  $-   $75,000 
Cancellation of common shares  $-   $(325)
Common stock issued for consulting services  $468,125   $2,850,564 
Common stock issued to directors, officers and advisors  $275,000   $1,202,716 
Conversion of notes payable and interest to equity  $791,408   $475,028 
Common stock issued as prepayment on kiosks  $100,000   $- 
Sale of assets to pay down secured note  $145,000   $- 
           

 

 

The accompanying notes are an integral part of these consolidated financial statements.

F-5
 

 

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PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2012

 

1. Description of Business

 

Public Media Works, Inc. (formerly Burnam Management, Inc.) was incorporated under the laws of the State of Delaware on March 3, 2000. The Company was originally engaged in the development, production, marketing and distribution of film, music and television entertainment media. On August 30, 2003, the Company entered into a share exchange agreement with EntertainmentXpress, Inc., a private company formed to pursue opportunities in the film/TV and entertainment industry. The share exchange agreement is essentially a reverse merger with Public Media Works, Inc., the surviving company.

 

On September 23, 2011, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Chapter 11 Proceeding”) in the United States Bankruptcy Court for the Central District of California, Riverside Division (the "Bankruptcy Court"). The Chapter 11 Case Number is: 6:11-bk-40137-MJ. The purpose in filing the Chapter 11 Case is to give the Company time to restructure its debt obligations to its secured and unsecured creditors. We intend to prepare a Disclosure Statement and a Plan of Reorganization that describes our plan to emerge from Chapter 11 as a viable company. We plan to file those documents with the Bankruptcy Court and submit them to all creditors for their approval with a view towards obtaining an Order from the Bankruptcy Court confirming our Plan of Reorganization so that we may successfully exit from Court protection. We remain committed to implementing a strategy to allow the Company to emerge from the Chapter 11 Proceeding. However, there can be no assurance regarding our ability to emerge from the Chapter 11 Proceeding. The uncertainty regarding these matters raises substantial doubt about our Company’s ability to continue as a going concern. 

 

Reverse Merger Accounting

 

On March 24, 2010, the Company entered into a share exchange agreement with EntertainmentXpress, Inc., a California corporation (“EntXpress”) and certain shareholders of EntXpress (the “EntXpress Sellers”) which owned more than 50% of the outstanding stock of EntXpress. On April 23, 2010, the Company, EntXpress Sellers holding 100% of the outstanding stock of Entertainment Xpress entered into an amended and restated share exchange agreement (the “Share Exchange Agreement”). The closing under the Share Exchange Agreement occurred on May 4, 2010. Under the terms of the Share Exchange Agreement, the Company acquired EntXpress by obtaining 100% of its outstanding stock and in exchange, the Company issued to EntXpress Sellers, 13,685,773 shares of the Company’s stock.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) as promulgated in the United States of America.

 

Proceedings Under Chapter 11

The Company filed a voluntary petition on September 23, 2011 under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Central District of California, Riverside Division (the “Bankruptcy Court”). We will continue to operate our business as "debtor-in-possession" under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the order of the Court, as we devote renewed efforts to resolve our liquidity problems and develop a reorganization plan.

 

Pursuant to the provisions of the Bankruptcy Code, we are not permitted to pay any claims or obligations which arose prior to the filing date (prepetition claims) unless specifically authorized by the Court or as may ultimately be provided in a plan of reorganization. Similarly, claimants may not enforce any claims against us that arose prior to the date of the filing. In addition, as a debtor-in-possession, we have the right, subject to the Court's approval, to assume or reject any executory contracts and unexpired leases in existence at the date of the filing. Parties having claims as a result of any such rejection may file claims with the Court which will be dealt with as part of the Chapter 11 case.

 

It is our intention to address all of our prepetition claims in a plan of reorganization in our Chapter 11 case. At this juncture, it is impossible to predict with any degree of certainty how such a plan will treat such claims and the impact that our Chapter 11 cases and any reorganization plan will have on the trading market for our stock. Generally, under the provisions of the Bankruptcy Code, holders of equity interests may not participate under a plan of reorganization unless the claims of creditors are satisfied in full under the plan or unless creditors accept a reorganization plan which permits holders of equity interests to participate. The formulation and implementation of a plan of reorganization in the Chapter 11 cases could take a significant period of time.

 

The Chapter 11 case is in good standing with the court having filed all required Monthly Operating Reports along with its Statement of Liability Insurance. The case is presently under no threat of being converted or liquidated under a Chapter 7. The court has set a tentative time period for filing the Company’s Disclosure Statement and Plan of Reorganization by June 19, 2012; however the Company presently anticipates that it may move to voluntarily continue that date so that it might timely complete its Reorganization Plan. The Company anticipates that should it file its Motion for Continuance, it will be successful.

F-6
 

 

2. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Public Media Works, Inc. and its wholly-owned subsidiary, EntertainmentXpress, Inc. (Collectively, the “Company”). All intercompany accounts and transactions have been eliminated in consolidation.

 

The consolidated financial statements as of February 29, 2012 and for the twelve months then ended were prepared in accordance with ASC 852 “reorganizations”, which does not change the application of US GAAP with respect to the preparation of our financial statements. As such, the financial statements for the twelve months ended February 29, 2012 reflect the estimated realizable values of our assets and estimated fair value of our liabilities, and are therefore not comparable to the financial statements for the twelve months ended February 28, 2011. As part of the Chapter 11 filing, we anticipate the development and implementation of a plan of reorganization to restructure our debt obligations and business operations. Confirmation of a plan of reorganization would likely materially alter the classifications and amounts reported in our consolidated financial statements. In addition, prepetition obligations that may be impacted by the Chapter 11 reorganization process have been classified on the Consolidated Balance Sheet in liabilities subject to compromise. These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Going Concern and Liquidity Matters

 

On September 23, 2011, the Company filed for protection under Chapter 11 of the Bankruptcy Code and as such, the accompanying consolidated financial statements have been prepared under the assumption that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. Historically, the Company has incurred significant losses, and has not demonstrated the ability to generate sufficient cash flows from operations to satisfy its liabilities and sustain operations.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise substantial doubt about the Company’s ability to do so. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

 

Management may seek to raise additional working capital through various financing sources subject to bankruptcy court approval, including the sale of the Company’s equity and debt securities, which may not be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired.

F-7
 

 

Table of Contents

 

PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2012

 

2. Summary of Significant Accounting Policies (Continued)

 

Cash and Cash Equivalents

 

Cash equivalents are comprised of certain highly liquid investments with maturities of three months or less when purchased. The Company maintains its cash in bank deposit accounts which at times may exceed federally insured limits. The Company did not have any cash equivalents outstanding as of February 29, 2012 and February 28, 2011.

 

The Company minimizes credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. At February 29, 2012 and February 28, 2011, the balances exceeded the federally insured limit by $0 and $135,888, respectively.

 

Inventory

 

Inventory was mainly comprised of our DVD and Blu-ray rental library and merchandise inventories held for rental and resale. Inventory, mainly consisted of finished goods, was stated at the lower of cost or market. Our DVD and Blu-ray library was capitalized and amortized to estimated salvage value (sales value of used DVDs and Blu-ray discs) on a straight-line basis to direct operating expense over the average estimated high usage periods of the DVDs and Blu-rays which is typically four months. Inventory also included a small amount of DVD cases and radio frequency identification devices (RFID tags). Due to our removing our kiosks from operation and the filing of the bankruptcy petition, the Company wrote all inventories down to its estimated net realizable value and took a charge of approximately $26,000. On November 22, 2011, the bankruptcy court approved the sale of majority of the Company’s assets and accordingly on November 30, 2011, the Company executed the Asset Purchase Agreement whereby majority of Company’s assets including its inventory were sold for an amount of $145,000.

 

Equipment

 

At February 28, 2011, equipment is stated at cost, less accumulated depreciation. Due to the filing of the bankruptcy petition, at November 30, 2011, the Company wrote all equipment down to its estimated net realizable value and in the twelve months ended February 29, 2012, the Company recorded an impairment expense of approximately $370,000.

 

Expenditures for maintenance and repairs were charged to expense as incurred. Included in the cost of the kiosk is the cost to deliver and install the kiosk as well as applicable sales tax. Items of property and equipment with costs greater than $1,000 were capitalized and depreciated on a straight-line basis over the estimated useful lives, as follows:

 

Description   Estimated Useful Life
Office equipment and furniture   2 to 5 years
Kiosks   5 years
     

Revenue Recognition

 

The Company recognized net revenue from DVD movie rentals on a ratable basis during the term of a consumer’s rental transaction. Revenue from a direct sale out of the kiosk of previously rented movies is recognized at the time of sale. On rental transactions for which the related DVDs have not yet been returned to the kiosk at month-end, revenue is recognized with a corresponding receivable recorded in the balance sheet, net of a reserve for potentially uncollectible amounts. We record revenue net of refunds and applicable sales taxes collected from consumers. The Company had minimal revenues from DVD movie rentals during the years.

F-8
 

 

Table of Contents

 

PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2012

 

2. Summary of Significant Accounting Policies (Continued)

 

Share-Based Payment Arrangements

 

Generally, all forms of share-based payments, including stock option grants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expenses resulting from share-based payments are recorded in operating expenses in the consolidated statement of operations.

 

Net Loss per Common Share – Basic and Diluted

 

Net loss per common share – basic and diluted is computed based on the weighted average number of shares outstanding for the period. Diluted net loss per common share is computed by dividing net loss by the weighted average shares outstanding assuming all dilutive potential common shares were issued. As of February 29, 2012 and February 28, 2011, the Company had 11,595,791 and 8,497,291 warrants outstanding, respectively. As of February 29, 2012 and February 28, 2011, the Company had 1,025,000 and 4,005,000 stock options outstanding, respectively. Neither was included in the net loss per common share due to the options and warrants being anti-dilutive. Additionally, there were no adjustments to net loss to determine net loss available to common stockholders. As such, basic and diluted net loss per common share equals net loss, as reported, divided by the weighted average common shares outstanding for the respective periods.

F-9
 

 

Table of Contents

 

PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2012

 

2. Summary of Significant Accounting Policies (Continued)

 

Recent Issued and Adopted Accounting Pronouncements

 

Adopted -

 

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Under the amendments of this ASU will result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. This ASU is effective during interim and annual periods beginning after December 15, 2011. The adoption of this standard did not have a material impact to our consolidated financial statements.

 

Not Adopted -

 

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This update will enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments and derivative instruments. The requirements of this update are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Entities should provide the disclosures required retrospectively for all comparative periods presented. We are currently evaluating the impact of adopting ASU 2011-11 on the consolidated financial statements.

 

3. Proceedings Under Chapter 11 of the Bankruptcy Code

 

On  September 23, 2011  (the  "Petition  Date"),  the  Company  filed a voluntary  petition for relief under Chapter 11 of the Bankruptcy  Code with the Bankruptcy  Court.  The petition was filed in order to enable the Company to pursue reorganization efforts under Chapter 11 of the Bankruptcy Code.  The Company continues to operate its business as debtor-in-possession under the jurisdiction  of the  Bankruptcy  Court and in  accordance  with the  applicable provisions  of the  Bankruptcy  Code and  orders  of the  Bankruptcy  Court.  In general, as debtor-in-possession, the Company is authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside of the ordinary course of business without the prior approval of the Bankruptcy Court.

 

No assurance can be provided as to what values, if any, will be ascribed in the bankruptcy proceedings to the Company's prepetition liabilities, common stock and other securities.  Based upon the status of the Company's plan of reorganization, it is uncertain whether holders of our securities will receive any payment in respect of such securities.

 

Subject to certain exceptions under the Bankruptcy Code, the Bankruptcy Filing automatically enjoins, or stays, the continuation of any judicial or administrative proceedings or other actions against the Company or its property to recover on, collect or secure a claim arising prior to the Petition Date. Thus, for example,  creditor  actions to obtain  possession of property from the Company,  or to create,  perfect or enforce any lien against the property of the Company,  or to collect on or otherwise exercise rights or remedies with respect to a Prepetition  claim are enjoined unless and until the Bankruptcy Court lifts the automatic stay.

 

In order to successfully exit Chapter 11 bankruptcy, the Company will need to propose, and obtain Bankruptcy Court confirmation of, a plan of reorganization that satisfies the requirements of the Bankruptcy Code. A plan of reorganization would, among other things, resolve the Debtors' prepetition obligations, set forth the revised capital structure of the newly reorganized entity, and provide for corporate governance subsequent to exit from bankruptcy.

 

Under section 365 of the Bankruptcy Code, the Company may assume, assume and assign, or reject executory contracts and unexpired leases, including real property and equipment leases, subject to the approval of the Bankruptcy Court and certain other conditions. Rejection constitutes a court-authorized breach of the lease or contract in question and, subject to certain exceptions, relieves the Company of its future obligations under such lease or contract but creates a deemed prepetition claim for damages caused by such breach or rejection. Parties whose contracts or leases are rejected may file claims against the Company for damages.

F-10
 

 

The Company sold substantially all of its assets effective November 30, 2011 and the currently proposed plan of reorganization restricts the Company's management to liquidating the Company's assets and making distributions on allowed claims until all allowed claims are satisfied and reserves are established for disputed claims. When and if all allowed claims are satisfied or fully reserved for, it is not known at this time whether the Company will commence new business opportunities or liquidate, and the mechanism for making this determination has yet to be established. The ability of the Company to continue as a going concern is dependent upon, among other things, (i) acquiring assets; (ii) the ability of the Company to generate cash from operations; (iii) the ability of the Company to maintain adequate cash on hand; (iv) the ability of the Company to obtain confirmation of and to consummate a plan of reorganization under the Bankruptcy Code; and, (v) the cost, duration and outcome of the reorganization process. Uncertainty as to the outcome of these factors raises substantial doubt about the Company’s ability to continue as a going concern. The Company is currently evaluating various courses of action to address the operational issues it is facing. There can be no assurance that any of these efforts will be successful. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

 

As a result of the Bankruptcy Filing, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as a debtor-in-possession under the protection of Chapter 11, and subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business, the Company may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the financial statements. No adjustments to liabilities were recognized during the twelve months ended February 29, 2012.

 

Further, a plan of reorganization could materially change the amounts and classifications reported in our financial statements.  Our historical financial statements do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

 

Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, post-petition liabilities and prepetition liabilities must be satisfied or reserved for in full before shareholders of the Company are entitled to receive any distribution or retain any property under a plan of reorganization.  The ultimate recovery, if any, to creditors and shareholders of the Company will not be determined until confirmation and consummation of a plan of reorganization.  No assurance can be given as to what values, if any, will be ascribed in the Bankruptcy to each of these constituencies or what types or amounts of distributions, if any, they would receive.  Accordingly, the Company urges that extreme caution be exercised with respect to existing and future investments in any of the Company's liabilities and/or securities.

 

Reorganization Items

 

Reorganization items represent the direct and incremental costs related to the Company’s Chapter 11 case, such as professional fees incurred, net of interest income earned on accumulated cash, if any, during the Chapter 11 process.  These restructuring activities may result in additional charges and other adjustments for expected allowed claims (including claims that have been allowed by the Court) and other reorganization items that could be material to the Company’s financial position or results of operations in any given period.

 

4. Prepaid Expenses and Other Assets

 

Prepaid expenses principally consisted of deferred costs related to stock compensation to vendors where stock has been issued for services to be rendered in the future. Stock is subject to repurchase if services are not rendered.

 

   February 29,
2012
   February 28,
2011
 
Investor relations fees  $   $316,667 
Deposits       2,500 
Insurance       4,182 
Rent       8,621 
Legal retainer       5,983 
Other   2,000    8,775 
Total prepaid expenses and deposits  $2,000   $346,728 

 

The Company had a four to eight week lead time between when it orders a kiosk and when it is delivered for deployment. Upon order and again prior to shipment, the Company had to make partial payment for the cost of the kiosk. As the manufacturer retains ownership until the kiosk is deployed, these up-front payments were treated as deposits until the kiosks are received. As of February 29, 2012, the Company had no kiosks on order compared to 25 at February 28, 2011.

 

5. Equipment and Asset Purchase Agreement

 

On November 22, 2011, the bankruptcy court approved the sale of majority of the Company’s assets and accordingly on November 30, 2011, the Company executed the Asset Purchase Agreement whereby majority of the Company’s assets including its inventory were sold for an amount of $145,000 to an unrelated party. Accordingly, as of February 29, 2012 and February 28, 2011, the Company did not have any assets in place. In relation to the Asset Purchase Agreement, the Company recorded approximately $71,000 as loss on sale of assets.

 

Depreciation expense for the twelve months ended February 29, 2012 and February 28, 2011 amounted to $48,996 and $5,188, respectively. During the twelve months ended February 29, 2012, and right before the consummation of the Asset Purchase Agreement, the Company wrote its equipment down to estimated net realizable value and recorded an impairment expense of approximately $370,000.

F-11
 

 

Table of Contents

 

PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2012

 

6. Liabilities Subject to Compromise

 

Liabilities subject to compromise at February 29, 2012 and February 28, 2011 include the following pre-petition liabilities:

 

   February 29,   February 28, 
   2012   2011 
Accounts payable and accrued liabilities  $448,531   $271,562 
Due to stockholders   180,000    14,000 
Note payable   65,000    27,090 
8% Note to George Mainas/Mainas Development Corporation   48,687    465,409 
9% Line of Credit to George Mainas/Mainas Development Corporation   207,307    310,835 
7% Note payable to Steve Davis   27,423    26,441 
10% Note due to Niesar Vestal, LLP   55,306    52,500 
 Total liabilities subject to compromise  $1,032,254   $1,167,837 

 

On November 30, 2011 and in relation to the Asset Purchase Agreement mentioned above, the court approved the sale of majority of the Company’s assets and concurrently using the funds from the sale to partially pay down the 8% Note to George Mainas which was the only secured note. Accordingly, the balance of this note was re-classified to liabilities subject to compromise as no more assets are available to satisfy the secured credit obligation.

 

7. Convertible Note-Post Petition

 

During the twelve months ended February 29, 2012, the Company issued two unsecured convertible notes for a total amount of $50,000 (first note was dated November 9, 2011 for $25,000 and second note was dated December 14, 2011 for an amount of $25,000) and bears interest at 8% per year. The term of the notes is one year from the date where the Company obtains the Bankruptcy Court approval for the financing; the Company obtained such approval on November 22, 2011. The outstanding principal and interest on these notes are convertible at any time on or after the date of Bankruptcy Court approval into Company’s shares of common stock on the basis of five (5) shares for each $0.01. In accordance with the applicable guidance in GAAP, the Company recorded a beneficial conversion feature (BCF) for an amount of $25,000 on date of issuance. The BCF amount was calculated as the difference between the market price and conversion price on date of issuance and was charged to operations on such date.

F-12
 

 

Table of Contents

 

PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2012

 

8. Common Stock

 

On April 23, 2010, the Company issued 150,000 shares to Bespoke Growth Partners an investor relations consulting firm in exchange for services to be provided by the firm. The Company recorded $148,500 in compensation expense in the year ended February 28, 2011 as the agreement has been terminated.

 

On May 4, 2010, as the result of completing the acquisition of Entertainment Express, Inc. (“EntertainmentXpress”), the Company issued 13,685,753 shares of common stock as defined in that certain Amended and Restated Exchange Agreement, dated as of April 23, 2010 by and among the Company and EntertainmentXpress with a stated exchange ratio of one Company share for every one EntertainmentXpress share, pursuant to the terms and conditions set forth in the agreement.

 

On May 4, 2010, and concurrently with executing the acquisition of Entertainment Express, the Company executed a debt conversion agreement with an accredited investor for cash of $133,000, which was converted into 133,000 shares of the Company’s common stock priced at $1.00 per share, which was converted on the same day into common stock. The debt agreement also provided the accredited investor for each common share received upon conversion, a warrant to purchase an additional share of the Company’s common stock at $1.25 within 1 year, unless called sooner. The Company has the right to call the warrants if the Company’s trading price is at least $2.25 for 7 days or more. If called, the warrants must be exercised within the 10 days or they will expire. The Company recorded interest expense related to the issuance of these warrants in the amount of $166,079. The Company recorded a loss on the conversion of debt of $46,550.

 

On May 6, 2010, the Company issued 100,000 shares to Company directors and advisors for services rendered as follows: 20,000 shares to Joseph Merhi; 20,000 shares to Al Hayes; 20,000 shares to Edward Frumkes; 20,000 shares to Corbin Bernsen; and 20,000 shares to Elie Samaha. The Company recorded $125,000 in compensation expense in the year ended February 28, 2011 as the grants were for past services and vested immediately to the holder.

 

On May 6, 2010, the Company issued 600,000 shares to the Capital Communications Group pursuant to an investor relations consulting agreement dated March 12, 2010. The Company recorded $164,384 in compensation expense in the year ended February 28, 2011 and the remaining expense of $585,616 will be amortized over the remaining year of the contract.

 

On May 6, 2010, after completion of the EntertainmentXpress acquisition, the Company cancelled 3,376,984 outstanding shares of common stock as follows: 1,100,000 shares issued to Geoffrey Mulligan & Penny Wright Mulligan; 350,000 shares issued to Interven Capital; 175,000 shares issued to Janice Bittaglia; 1,526,984 shares issued to Larry Gitlin; and 225,000 shares issued to Mark Smith. The outstanding shares of common stock were cancelled pursuant to contractual agreements between the individuals and the Company.

 

On May 25, 2010, the Company executed a common stock and warrant agreement with an accredited investor for $35,000 in cash. The accredited investor received 35,000 common stock and 35,000 warrants to purchase an additional share of the Company at $1.25 within 1 year.

 

On May 26, 2010, the Company then re-issued 126,984 common shares to Larry Gitlin.

 

Between June 7, 2010 and August 3, 2010, the Company executed a series of common stock and warrant agreements with accredited investors for $59,500 in cash. The accredited investors received 59,500 shares of common stock and 59,500 warrants to purchase additional shares of the Company’s common stock at $1.25 per share. The warrants have a term of 1 year.

 

On July 15, 2010, the Company issued a total of 300,000 shares of common stock to Richard Waxman (150,000 shares) and Imran Sayeed (150,000 shares) as part of a settlement agreement. The Company recorded $102,690 in compensation expense for the year ended February 28, 2011.

 

On August 2, 2010, the Company issued 800,000 shares of common stock to Salzwedel Financial Communications pursuant to an investor relations consulting agreement dated August 2, 2010. The Investor Relations Agreement is for a term of six months (unless earlier terminated), and provides for the Company’s issuance of 800,000 shares of restricted common stock and $10,000 per month in compensation expense during the term of the contract. On February 2, 1011, the Agreement was extended for an additional six months and the Company issued an additional 1,000,000 shares of common stock to Salzwedel Financial Communications. The Company recorded $503,311 in compensation expense for the year ended February 28, 2011.

 

On August 2, 2010 the Company agreed to issue up to 1,000,000 shares of restricted common stock to Martin W. Greenwald, pursuant to his employment agreement dated August 2, 2010 to serve as the Company’s Chief Executive Officer. The shares of the common stock are restricted shares, and may not be sold, transferred or otherwise disposed without registration under the Securities Act or an exemption therein. Shares are earned and issued monthly on the anniversary date (second day of each month) of his Agreement. The shares of common stock were offered and sold within the exemption from registration under Section 4(2) of the Act. The offering was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by Mr. Greenwald in connection with the issuance. As of February 29, 2012, 416,665 shares have been issued and the Company recorded $579,452 in compensation expense for the year ended February 28, 2011. In March 2011, the Board of Directors accelerated the vesting on the remaining 583,335 shares.

F-13
 

 

Between August 9, 2010 and August 31, 2010, the Company executed a series of common stock and warrant agreements with accredited investors for $301,000 in cash. The accredited investors received 430,000 shares of common stock and 430,000 warrants to purchase additional shares of the Company’s common stock at $0.70 per share. The warrants have a term of 3 years. During the year ended February 28, 2011, one investor exercised a warrant for 10,000 shares.

 

On August 12, 2010, the Company entered into a Teaming Agreement with Modular Conversions, LLC, pursuant to which the parties agreed to work together to place DVD movie and game kiosks and 3D screens into convenience stores which may be built-out by Modular Conversions, LLC. The Teaming Agreement is for a term of ten years. In connection with the Teaming Agreement, the Company agreed to issue warrants to purchase up to 700,000 shares of common stock at an exercise price of $1.10 per share for a term of 5 years to Modular Conversions, LLC. 100,000 warrants vested upon execution of the agreement and the remaining 600,000 warrants will be issued upon the placement of Company kiosks and 3D screens under the terms of the Teaming Agreement. The warrants and shares of the common stock underlying the warrants are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Securities Act or an exemption there under. The warrants were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act. The issuance of warrants was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by Modular Conversions, LLC in connection with the offering. The Company recorded $103,890 expense as related to the warrants for the year ended February 28, 2011. The Company and 3DMC agreed to mutually terminate the Collaboration Agreement effective January 12, 2011.

F-14
 

 

Table of Contents

 

PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2012

 

8. Common Stock (Continued)

 

On September 1, 2010, the Company issued 211,540 shares of restricted Company common stock to Mr. Corbin Bernsen in exchange for services rendered. The shares of the Company’s common stock are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Securities Act or an exemption there under. The shares were issued in reliance on the exemption from registration under Section 4(2) of the Act. The issuance of stock was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the consultant in connection with the offering. During the year ended February 28, 2011, the Company recorded consulting expense of $253,848 related to this Agreement.

 

From September 22, 2010 through September 30, 2010, the Company sold 951,429 shares of restricted Company common stock to 9 accredited investors. In connection with the issuance of common stock, the Company also issued warrants to purchase 926,429 shares of restricted common stock at $.70 per share and 5,000 shares at $1.00 per share for a term of 3 years, and issued warrants to purchase 20,000 shares of restricted common stock at $1.00 per share for a term of 1 year. The investors receiving the 931,429 shares and 931,429 warrants with a $.70 exercise price were granted piggyback registration rights for the shares of common stock and shares underlying the warrants. The aggregate consideration received by the Company from the sale of securities included $649,500 in cash and $22,500 in cancellation of the Company’s payment obligation under a teaming agreement. The warrants and shares of the Company’s common stock are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Securities Act of 1933, as amended (the “Act”), or an exemption thereunder. The securities were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act and/or Rule 506 of Regulation D under the Act. The offering was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the offering.

 

On September 27, 2010, in connection with the Company entering into a consulting agreement with Joseph Abrams, the Company agreed to issue 900,000 shares of restricted Company common stock to Mr. Abrams or his assignees. The consulting agreement provides that the Company may repurchase 300,000 of the shares of Company common stock for a total purchase price of $15 if the consulting agreement is terminated by the Company on or before December 15, 2010, and may repurchase 300,000 shares of Company common stock for a total purchase price of $15 if the consulting agreement is terminated by the Company on or before March 15, 2011. The shares of the Company’s common stock are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Securities Act or an exemption there under. The shares were issued in reliance on the exemption from registration under Section 4(2) of the Act. The issuance of stock was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the consultant in connection with the offering. During the year ended February 28, 2011, the Company recorded consulting expense of $730,325 related to this Agreement.

 

Effective October 12, 2010, the Company issued 20,000 shares of restricted Company common stock to one individual serving as consultant to the Company. The shares of the Company’s Common Stock are restricted shares, and may not be sold, transferred or otherwise disposed without registration under the Securities Act or an exemption there under. The shares of Company common stock were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act. The Company recorded consulting expenses of $34,000 during the year ended February 28, 2011.

 

On October 18, 2010, the Company appointed Ed Roffman as the Chief Financial Officer of the Company. In connection with Mr. Roffman’s appointment, the Company agreed to enter into an employment agreement with him pursuant to which he will receive 180,000 shares of Company common stock to with a Company right to repurchase such shares for $.01 a share which right shall elapse at the rate of 15,000 shares per month for a period of 12 months. The shares of the common stock are restricted shares, and may not be sold, transferred or otherwise disposed without registration under the Securities Act or an exemption therein. The shares of common stock were offered and sold within the exemption from registration under Section 4(2) of the Act. The offering was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by Mr. Roffman in connection with the issuance. The Company recorded $118,415 in compensation expense for the year ended February 28, 2011.

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Table of Contents

PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2012

 

8. Common Stock (Continued)

 

 On October 26, 2010, the Company issued 15,000 shares of restricted Company common stock to DVD Kiosk Solutions as part of a settlement of a dispute. The shares of the common stock are restricted shares, and may not be sold, transferred or otherwise disposed without registration under the Securities Act or an exemption therein. The shares of common stock were offered and sold within the exemption from registration under Section 4(2) of the Act. The offering was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by DVD Kiosk Solutions in connection with the issuance. The Company recorded $29,850 in expense for the year ended February 28, 2011.

 

On November 22, 2010, the Company appointed Gregory Waring as President and Chief Operating Officer of the Company. In connection with Mr. Waring’s appointment, the Company agreed to enter into an employment agreement with him pursuant to which he will receive 250,000 shares of Company common stock with a Company right to repurchase such shares for $.01 a share which right shall elapse at the rate of 20,833 shares per month for a period of 12 months. The shares of the common stock are restricted shares, and may not be sold, transferred or otherwise disposed without registration under the Securities Act or an exemption therein. The shares of common stock were offered and sold within the exemption from registration under Section 4(2) of the Act. The offering was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by Mr. Waring in connection with the issuance. The Company recorded $92,349 in compensation expense for the year ended February 28, 2011.

 

On November 24, 2010, the Company issued 375,000 shares to Mr. Mark Smith, the former Chief Financial Officer of the Company, pursuant to the terms of a settlement agreement. The shares of the common stock are restricted shares, and may not be sold, transferred or otherwise disposed without registration under the Securities Act or an exemption therein. The shares of common stock were offered and sold within the exemption from registration under Section 4(2) of the Act. The offering was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by Mr. Smith in connection with the issuance. The Company recorded $412,500 in compensation expense for the year ended February 28, 2011.

 

From December 13, 2010 through February 28, 2011, the Company sold 4,700,400 shares of restricted Company common stock to 34 accredited investors for a total of $1,175,100. In connection with the issuance of common stock, the Company also issued warrants to purchase 4,700,400 shares of restricted common stock at $0.25 per share for a term of 3 years. In addition, the Company agreed to convert $524,491 of debt (including accounts payable, as well as ling-term debt and related accrued interest) on the same terms issuing 2,097,962 shares and warrants. The investors were granted piggyback registration rights for the shares of common stock and shares underlying the warrants. The warrants and shares of the Company’s common stock are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Securities Act of 1933, as amended (the “Act”), or an exemption thereunder. The securities were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act and/or Rule 506 of Regulation D under the Act. The offering was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the offering.

 

In February 2011, one holder of a stock option in the amount of 100,000 shares elected to exercise the stock option, using the cashless exercise feature of the option. The Company issued 68,750 shares of common stock. The shares of the Company’s common stock are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Securities Act or an exemption there under. The shares were issued in reliance on the exemption from registration under Section 4(2) of the Act.

 

From December through February 2011, the Company issued 82,000 shares of restricted common stock to five individuals serving as consultants to the Company. The shares of the Company’s common stock are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Securities Act or an exemption there under. The shares were issued in reliance on the exemption from registration under Section 4(2) of the Act. The Company recorded consulting expense of $77,900 during the year ended February 28, 2011.

F-16
 

 

Table of Contents

 

PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2012

 

8. Common Stock (Continued)

 

On March 7, 2011, the board of directors accelerated the vesting on 583,335 shares due Martin W. Greenwald, CEO and Chairman under an employment agreement between Mr. Greenwald and the Company. The Board also authorized an additional 500,000 fully vested shares to be issued to Mr. Greenwald. The Company recorded $695,646 in expense related to these issuances in the nine months ended November 30, 2011.

 

On March 7, 2011, the Company issued 687,500 shares to four consultants for services rendered. The Company recorded $378,125 in consulting expense in the year ended February 29, 2012 as the grants were for past services and vested immediately to the holder.

 

On March 7, 2011, the Company executed a common stock and warrant agreement with an accredited investor for $79,000 in cash. The accredited investor received 316,000 common stock and 316,000 warrants to purchase an additional share of the Company at $0.40 within three years. As of February 29, 2012, the accredited investor held 316,000 warrants related to this purchase.

 

In May and June 2011, the Company agreed to convert $400,000 of long-term debt and related interest by issuing 1,600,000 common shares and 1,600,000 warrants. The investors were granted piggyback registration rights for the shares of common stock and shares underlying the warrants. The shares of the Company’s common stock are freely trading securities, under SEC Rule 144. The warrants have a life of three years and are convertible at $0.40 per share.

 

In June 2011, one consultant made a cashless exercise of a stock option and 128,571 shares were issued.

 

In June 2011, the Company issued 200,000 shares of common stock to a supplier.  In return, the supplier agreed to give the Company a discount on future purchases of kiosks.

 

On August 2, 2011, the Company issued 600,000 shares to Salzwedel Financial Services for services to be rendered. The Company expensed this amount in the year ended February 29, 2012.

 

In August 2011, one creditor elected to convert $7,408 of accounts payable into 74,085 shares of common stock of the Company.

 

In the quarter ending August 31, 2011, the Company executed common stock agreements with five accredited investors for $137,000 in cash. The accredited investors received 1,370,000 shares of common stock and one investor received 750,000 warrants to purchase an additional share of the Company at $0.10 within three years. These sales triggered an anti-dilution clause in the aforementioned $400,000 conversion of debt to equity and an additional 2,121,750 shares of common stock were issued.

 

On January 23, 2012, the Company issued 25,000,000 restricted shares to Stuart Subotnick for cash at a price of $0.002 per share and a total purchase price of $50,000.

F-17
 

 

Table of Contents

 

PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2012

 

9. Share Based Compensation

 

Stock Options

 

The Company has 2007 and 2010 Equity Incentive Plans. The 2007 Equity Incentive Plan, which permits the grant of awards in the form of incentive stock options, nonstatutory stock options, stock appreciation rights, stock awards and stock units to its key employees for up to 1 million shares of common stock. The Company believes that such awards promote the long-term success of the Company and the creation of stockholder value by offering key employees an opportunity to acquire a proprietary interest in the success of the Company, or to increase such interest, and to encourage such key employees to continue to provide services to the Company and to attract new individuals with outstanding qualifications. Awards are generally granted with an exercise price that approximates the market price of the Company’s common stock at the date of grant.

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Because the Black-Scholes option valuation model incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on historical volatilities of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from estimates and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

       
    February 29, 2012     February 28, 2011  
Expected Volatility     70 %     1,570 %
Expected dividends     0 %     0 %
Expected terms (in years)   1 to 3       5  
Risk-free rate   0.25% to 1.22     1.48-1.98 %
Forfeiture rate     20 %     0 %

 

A summary of option activity as of February 29, 2012 and February 28, 2011, and changes during the years then ended is presented below:

 

       Weighted-   Average     
       Average   Remaining   Aggregate 
       Exercise   Contractual   Intrinsic 
   Options   Price   Life (Years)   Value 
Outstanding at February, 2011   4,005,000   $0.99    3.67   $205,000 
Granted   3,015,000    0.55    4.00     
Exercised   (200,000)   0.10         
Forfeited or expired   (5,795,000)   0.96         
Outstanding at February 29, 2012   1,025,000    0.83    3.72     
Exercisable at February 29, 2012   1,025,000   $0.83    3.72     

 

   Options   Weighted-
Average
Exercise
Price
   Average
Remaining
Contractual
Life (Years)
   Aggregate
Intrinsic
Value
 
Outstanding at February 28, 2010   600,000   $0.20    2.09   $205,000 
Granted   4,072,000   $1.16    ——   $ 
Exercised   (100,000)  $0.25       $ 
Forfeited or expired   (567,000)  $1.20       $ 
                     
Outstanding at February 28, 2011   4,005,000   $0.99    3.67   $205,000 
                     
Exercisable at February 28, 2011   2,370,918   $0.89    3.16   $205,000 

 

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Table of Contents

 

PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2012

 

9. Share Based Compensation (Continued)

 

One option grant for 100,000 shares was exercised (cashless) during the year ended February 28, 2011. During the twelve months ended February 29, 2012, 128,571 shares were issued in connection with the cashless exercise of 200,000 options.

 

There was no unvested compensation as of February 29, 2012. During the twelve months ended February 29, 2012, 3,015,000 stock options were granted. The Company has recorded a stock option expense of $1,058,745 in twelve months ended February 29, 2012, in general and administrative expenses. Due to the Company filing for bankruptcy and termination of almost all employees, an additional 4,345,000 option were forfeited during the quarter ended November 30, 2011 which represent the number of options that were not exercised within 90 days of termination for the respective employees, total number of options forfeited during fiscal 2012 was 5,795,000.

 

Warrants

 

The fair value of each warrant is estimated on the date of grant using the Black-Scholes valuation model that uses the assumptions noted in the following table. Because the Black-Scholes valuation model incorporates ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and employee termination and forfeiture rates within the valuation model. The expected term of warrants granted is derived from estimates and represents the period of time that warrants granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in effect at the time of grant.

 

       
    February 29, 2012     February 28, 2011  
Expected Volatility     70 %     1,560 %
Expected dividends     0 %     0 %
Expected terms (in years)   3.0       3.0  
Risk-free rate   0.79     1.42 %
Forfeiture rate     20 %     0 %

 

 

A summary of warrant activity as of February 29, 2012 and February 28, 2011, and changes during the years then ended is presented below:

 

   Warrants   Weighted-
Average
Exercise
Price
   Average
Remaining
Contractual
Life (Years)
   Aggregate
Intrinsic
Value
 
Outstanding at February 28, 2011   8,497,291   $0.36    2.81   $2,379,427 
Granted   3,316,000   $0.26    2.59     
Exercised      $         
Forfeited or expired   (217,500)  $1.25         
Outstanding at February 29, 2012   11,595,791   $0.32    1.93     
Exercisable at February 29, 2012   11,595,791   $0.32    1.93     

 

   Warrants   Weighted-
Average
Exercise
Price
   Average
Remaining
Contractual
Life (Years)
   Aggregate
Intrinsic
Value
 
Outstanding at February 28, 2010      $       $ 
Granted   9,107,291   $0.41         
Exercised   (10,000)  $1.00         
Forfeited or expired   (600,000)  $1.10         
Outstanding at February 28, 2011   8,497,291   $0.36    2.81   $2,379,427 
Exercisable at February 28, 2011   8,497,291   $0.36    2.81   $2,379,427 

 

F-19
 

 

There were no warrants exercised during the year ended February 29, 2012. There were no unvested warrants as of February 29, 2012. During the year ended February 29, 2012, the Company issued 3,316,000 warrants to six investors at an average exercise price $0.26.

 

10. Income Taxes

 

The Company has commenced analyzing filing positions in all of the federal and state jurisdictions (California) where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The last tax return filed by the Company was for the year ended February 28, 2007.

 

Due to the existence of a full valuation allowance against deferred tax assets, future changes in our unrecognized tax benefits will not impact the Company’s effective tax rate.

 

As a corporation, the Company is primarily subject to U.S. federal and state income tax. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of February 29, 2012 and February 28, 2011, the Company had no accruals for interest or penalties related to income tax matters.

F-20
 

 

Table of Contents

 

PUBLIC MEDIA WORKS, INC.

(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2012

 

10. Income Taxes (Continued)

 

The provision for income tax consists of the following components at February 29, 2012 and February 28, 2011: 

           
    2012    2011 
Current:          
Federal income taxes  $   $ 
State income taxes         
Deferred        
           
   $   $ 
           

The following reconciles income taxes reported in the financial statements to taxes that would be obtained by applying regular tax rates to income before taxes:

 

         
   2012   2011 
Expected tax benefit using regular rates  $2,658,612   $3,070,540 
State minimum tax        
Valuation allowance   (2,658,612)   (3,070,540)
Tax Provision  $   $ 
           

As a result of the implementation of certain provisions of ASC 740, Income Taxes, (formerly FIN 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109) , the Company performed an analysis of its previous tax filings and determined that there were no positions taken that it considered uncertain. Therefore, there was no provision for uncertain tax positions for the years ended February 29, 2012 and February 28, 2011. Future changes in uncertain tax positions are not expected to have an impact on the effective tax rate due to the existence of the valuation allowance. The Company will continue to classify income tax penalties and interest, if any, as part of interest and other expenses in its statements of operations. The Company has incurred no interest or penalties as of February 29, 2012 and February 28, 2011.

 

11. Subsequent Events

 

In November, 2011, Debtor reached an agreement with ELO Media ("ELO") regarding a reverse merger and started to prepare the necessary documents, including a Share Exchange Agreement and a Disclosure Statement. At a hearing on May 2, 2012 on the United States Trustee's Motion to Convert/Dismiss, Debtor represented that the documents were nearing completion and that Debtor anticipated filing its Disclosure Statement in the near future. The Court, at that hearing set a hearing on the Disclosure Statement for July 25, 2012 at 1:30 p.m. On or about May 24, 2012, ELO advised the Debtor that it had decided to withdraw from the transaction and would not be proceeding with the Share Exchange Agreement. Since then, Debtor sought other companies with which to merge, ultimately reaching a Memorandum of Understanding with a Private Company on June 12, 2012.

 

Debtor is in the process of negotiating a new Share Exchange Agreement with a Private Company and believes that it will be in a position to file its Disclosure Statement within approximately Thirty (30) days.

F-21