U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended November 30, 2014

 

Commission File Number: 000-55140

 

STREAMTRACK, INC.

(Exact name of registrant as specified in its charter)

 

Wyoming		26-2589503
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

347 Chapala Street

Santa Barbara, California 93101

(Address of principal executive offices)

 

(805) 308-9151

(Registrant’s telephone number, including area code)

 

____________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x    No ¨

 

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.

 

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x
(Do not check if a smaller reporting company)

 

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

 

At January 14, 2015 there were 839,588,899 shares of the issuer’s common stock outstanding.

 

 

 

TABLE OF CONTENTS

 

			Page
PART I
Item 1.	Financial Statements			3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation			17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			23
Item 4.	Controls and Procedures			23
PART II
Item 1.	Legal Proceedings			24
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			24
Item 3.	Defaults Upon Senior Securities			24
Item 4.	Mine Safety Disclosures			24
Item 5.	Other Information			24
Item 6.	Exhibits			25

 

2

  

SteamTrack Inc.

Balance Sheet

November 30, 2014

 

				As of November 30, 2014				As of August 31, 2014
Assets:
	Current assets
		Cash		$	2,711			$	26,590
		Accounts receivable, net of allowances of $6,000 and $6,000 at November 30, 2014 and August 31, 2014, respectively			260,057				314,731
		Prepaid expenses			12,754				16,858
		Other current assets			12,282				10,150
	Total current assets				287,804				368,329
	Property and equipment, net				541,622				499,315
	Other assets
		Notes receivable			173,625				171,000
		Other assets			45,853				45,853
		Total other assets			219,478				216,853
Total assets				$	1,048,904			$	1,084,497
Liabilities and Stockholders' Deficit
	Current liabilities
		Account payable and accrued expenses		$	1,069,737			$	1,109,456
		Line of credit			547,495				532,305
		Derivative liabilities embedded within convertible notes payable			5,598,325				1,022,350
		Capital lease payable - in default			59,204				63,704
		Related party payables			92,619				8,062
		Convertible notes payable, net of discount of $10,345 and $79,328, respectively			922,485				745,445
		Related party convertible notes payable, net of discount of $9,142 and $15,046, respectively			165,858				309,951
	Total current liabilities				8,455,723				3,791,273
	Long term liabilities
		Convertible notes payable, net of discount of $45,833 and $0, respectively			14,167				10,000
		Related party convertible notes payable, net of discount of $735,078 and $0, respectively			103,363				85,134
		Related party payables			-				626,864
		Total long term liabilities			117,530				721,998
Total liabilities					8,573,253				4,513,271
Commitments and contingencies (note 5)
Stockholders' Deficit:
		Preferred stock; $0.0001 par value; 4,799,900 shares authorized; 0 shares issued and outstanding as of November 30, 2014 and August 31, 2014			-				-
		Series A preferred stock; $0.0001 par value; 100 shares authorized; 0 shares issued and outstanding as of November 30, 2014 and August 31, 2014			-				-
		Series B preferred stock; $0.0001 par value; 200,000 shares authorized; 200,000 shares issued and outstanding as of November 30, 2014 and August 31, 2014			20				20
		Common stock, $0.0001 par value; 1,000,000,000 shares authorized; 443,047,233 shares issued and outstanding at November 30, 2014; 202,247,023 shares issued and 184,786,023 shares outstanding as of August 31, 2014			44,305				18,479
		Additional paid-in capital			3,041,053				2,109,652
		Accumulated deficit			(10,609,727	)			(5,556,925	)
Total stockholders' deficit					(7,524,349	)			(3,428,774	)
Total liabilities and stockholders' deficit				$	1,048,904			$	1,084,497

 

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

 

3

 

SteamTrack Inc.

Income Statement

November 30, 2014

 

			For the Three Months Ended November 30, 2014				For the Three Months Ended November 30, 2013
Revenues:
	Advertising		$	309,108			$	515,577
	Services			11,000				8,250
Total revenues				320,108				523,827
Costs of sales:
	Media network			105,582				127,943
	Depreciation and amortization			68,646				82,296
	Colocation services			38,334				47,700
	Broadcaster commissions			45,131				63,793
	Other costs			2,454				73,025
Total costs of sales				260,147				394,757
Gross profit				59,961				129,070
Operating expenses:
	Product development			8,999				82,752
	Officer compensation			48,000				120,000
	Marketing and sales			40,849				42,639
	Other expenses			217,359				156,569
Total operating expenses				315,207				401,960
Loss from operations				(255,246	)			(272,890	)
Other income (expense):
	Other income (expense)			(26,457	)			2,625
	Interest expense (including accretion of debt discount of $122,569 and $9,612, respectively)			(195,126	)			(77,683	)
	Loss on extinguishment			-				111,865
	Change in fair value of derivatives			(4,575,975	)			588,329
Total other income (expense)				(4,797,558	)			625,136
Income (loss) before provision for income taxes				(5,052,804	)			352,246
Provision for income taxes				-				-
Net income (loss)			$	(5,052,804	)		$	352,246
Basic net income (loss) per common share attributable to common stockholders			$	(0.02	)		$	0.02
Diluted net income (loss) per common share attributable to common stockholders			$	(0.02	)		$	0.01
Weighted-average number of shares used in computing basic and dilutive per share amounts				294,532,882				17,592,780
Weighted-average number of shares used in computing dilutive per share amounts				294,532,882				39,119,011

 

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

 

4

 

SteamTrack Inc.

Statements of Cash Flows

 

		For the Three Months Ended November 30, 2014				For the Three Months Ended November 30, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(5,052,804	)		$	352,246
Adjustments to reconcile net income (loss) to net cash   used in operating activities:
Stock-based compensation and stock for services			-				1,636
Depreciation and amortization			132,317				82,860
Re-measurement of derivative liabilities			4,575,975				(588,329	)
Accretion of debt discount			122,569				9,612
Stock issued for services and finance fees			23,392				-
Amortization of finance fees			-				11,458
Changes in operating assets and liabilities:
Accounts receivable			54,674				(86,019	)
Prepaid expenses			4,104				(107,493	)
Note receivable			(2,625	)			-
Other current assets			(2,132	)			(2,625	)
Accounts payable and accrued expenses			23,312				131,271
Related party payables			84,557				-
Net cash used in operating activities			(36,661	)			(195,383	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment			(174,624	)			-
Net cash used in investing activities			(174,624	)			-
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible promissory notes			50,000				-
Payments on related party notes payable			(25,284	)			-
Proceeds from line of credit			15,190				120,548
Payments on capital lease			(4,500	)			-
Proceeds from issuance of convertible promissory notes - related parties			152,000				-
Net (payments) advances to Factor			-				73,069
Net cash provided by financing activities			187,406				193,617
Change in cash and cash equivalents			(23,879	)			(1,766	)
Cash and cash equivalents, beginning of period			26,590				7,980
Cash and cash equivalents, end of period		$	2,711			$	6,214
Supplemental disclosures of cash flow information:
Cash paid for interest		$	-			$	-
Cash paid for income taxes		$	-			$	-
Non cash investing and financing activities:
Issuance of common stock for conversion of debt and accrued interest		$	41,942			$	22,140
Issuance of preferred stock in satisfaction of amounts owed to officers		$	-			$	200,000
Acquisition of assets with issuance of common stock		$	-			$	42,500
Beneficial conversion feature recorded on convertible debt		$	828,864			$	-
Issuance of common stock for accounts payable		$	63,029			$	-

 

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

 

5

 

StreamTrack, Inc.

Notes to Consolidated Financial Statements

(unaudited)

 

1. Nature of Business

 

StreamTrack, Inc. (the “Company”) is a digital media and technology services company. The Company provides audio and video streaming and advertising services through its RadioLoyalty^TM Platform (the “Platform”) to over 5,500 internet and terrestrial radio stations and other broadcast content providers. The Platform consists of a web-based and mobile player that manages streaming audio and video content, social media engagement, display and video ad serving within the web player and is also capable of replacing audio ads with video ads within the web player in a live or on-demand environment. The Company offers the Platform directly to its broadcasters and integrates or white labels its technologies with web-based internet radio guides and other web-based content providers. The Company is also continuing development of WatchThis™, a patent-pending technology to provide web, mobile and IP television streaming services that are e-commerce enabled within streamed content. The Company was incorporated as a Wyoming corporation on May 6, 2008.

 

Basis of Presentation

 

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Form 10-K for the year ended August 31, 2014. In the opinion of management, all adjustments necessary in order for the financial statements to be not misleading have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, StreamTrack Media, Inc. and RadioLoyalty, Inc., California corporations. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the consolidated financial statements include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position for the periods presented.

 

Going Concern

 

The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. For the three months ended November 30, 2014, the Company recorded a loss of $5,052,804 and used cash flow from operations of $36,661. As of November 30, 2014, the Company had a working capital deficit of $8,167,919, which excluding the derivative liability was $2,569,594, indicated that the Company may have difficulty continuing as a going concern.

 

Management is confident but cannot guarantee that the Company will be able to raise additional capital in order to repay debts and continue operations. For the twelve months ending August 31, 2015, the Company is obligated to make payments on certain operating leases, convertible debts, and a capital lease, among others of $144,420, $1,149,770, and $63,704, respectively. The Company’s normal operating costs are also significant and include consulting fees, professional fees, product development costs and marketing and sales costs associated with management’s business plan. Since inception and through the date of these financial statements, the Company has successfully raised a significant amount of capital through debt and equity offerings. The Company anticipates launching several new product offerings and initiating certain new significant partnerships during the fiscal year ending August 31, 2015. The Company expects those products and partnerships to be profitable but notes that it will require an unknown amount of capital for product development and commercial deployment. The Company will attempt to have its potential partners pay for the some of these costs but management cannot be certain that it will succeed in implementing such arrangements. Management may potentially make a business decision to move forward, delay, or cancel certain partnerships because of the Company’s overall capital needs. Nonetheless, the ability of the Company to continue as a going concern is dependent on the successful execution of the business plan in order to reach break-even and become profitable. If the Company is unable to become profitable and sustain positive cash flow, the Company could be forced to modify its business operations or possibly cease operations entirely. Management cannot provide any assurances that the Company will be successful in its operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Estimates are used for determining the allowance for doubtful accounts, the fair value of RL’s common stock through August 31, 2013, stock-based compensation, fair values of warrants to purchase common stock, derivative liabilities and income taxes. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, the Company’s financial statements could be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result.

 

6

 

2. Composition of Certain Financial Statement Captions

 

Property and Equipment

 

Property and equipment consisted of the following:

 

		November 30, 2014				August 31, 2014
Software		$	1,421,856			$	1,247,232
Servers, computers, and other related equipment			198,924				198,924
Leasehold improvements			1,675				1,675
			1,622,455				1,447,831
Less accumulated depreciation and amortization			(1,080,833	)			(948,516	)
Property and equipment, net		$	541,622			$	499,315

 

Depreciation expense totaled $132,317 and $82,860 for the three months ended November 30, 2014 and 2013, respectively. There have been no write-offs or impairments of property and equipment since the Company’s inception on November 30, 2011.

 

Note Receivable

 

At November 30, 2014, note receivable consisted of a $150,000 convertible promissory note and $23,625 in accrued interest. The note bears interest at 7% and is due from a digital content provider on or before August 28, 2016. The balance owed can be converted into either preferred stock or common stock of the digital content provider, at the Company’s election, subject to certain conditions and contingencies. The Company agreed to work with the digital content provider to make modifications to its Universal Player^TM technology platform to better suit the digital content provider’s specific needs. The Company received a $25,000 deposit previously. The Company has received the remaining fees, which are recorded as a note receivable. The Company expects to earn additional revenue from the client beginning fiscal 2015.

 

Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consisted of the following:

 

		November 30, 2014				August 31, 2014
Accounts payable		$	770,999			$	854,207
Accrued interest			98,627				75,736
Accrued broadcaster commissions			79,191				60,695
Accrued consulting fees			43,333				43,333
Credit card			77,587				75,485
Accounts payable and accrued expenses		$	1,069,737			$	1,109,456

 

7

 

3. Fair Value

 

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Fair value measurements are required to be disclosed by level within the following fair value hierarchy:

 

Level 1– Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

 

Level 2 – Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

 

Level 3 – Inputs lack observable market data to corroborate management’s estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

 

When determining fair value, whenever possible the Company uses observable market data, and relies on unobservable inputs only when observable market data is not available. Fair-value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of November 30, 2014 and August 31, 2014. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable, prepaids, accounts payable, accrued liabilities, notes payable, and convertible notes payable. Fair values for these items were assumed to approximate carrying values because of their short term in nature or they are payable on demand.

 

The fair value of these financial assets and liabilities was determined using the following inputs:

 

		Fair Value Measurement Using
		Quoted Prices in Active Markets for Identical Instruments (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
Fair values as of November 30, 2014
Liabilities:
Derivative liabilities		$	-			$	5,598,325				-				5,598,325
Total liabilities measured at fair value		$	-			$	5,598,325				-				5,598,325
Fair values as of August 31, 2014
Liabilities:
Derivative liabilities			-			$	1,022,350				-				1,022,350
Total liabilities measured at fair value		$	-			$	1,022,350				-				1,022,350

 

The Company’s derivative liabilities were classified as Level 2 within the fair value hierarchy because they were valued using significant other observable inputs. At each reporting period, the Company calculates the derivative liability using the Black-Scholes pricing model taking into account variables such as expected life, risk free interest rate, expected volatility, the fair market value of the Company's common stock and the conversion price.

 

4. Asset Acquisition / Disposition

 

Asset Acquisition

 

On November 21, 2013, the Company, entered into an Asset Purchase Agreement with Robot Fruit, Inc., a New York Corporation ("Robot Fruit") pursuant to which, the Company issued 850,000 shares of common stock in exchange for Robot Fruit Mobile Application Development Platform and related code and intellectual property. The Company accounted for the purchase as an asset acquisition as the assets did not meet the definition of a business. In connection with the agreement, the Company determined the fair market value of the common stock issued to be $42,500, which was recorded as software within property and equipment on the accompanying balance sheet. The Company determined the expected life of the asset acquired to be 36 months.

 

8

 

Disposition

 

On November 15, 2013, the Company entered into an Asset Purchase Agreement with Dane Media, LLC (the "Agreement"), a New Jersey limited liability corporation ("Dane Media") pursuant to which, for an aggregate purchase price of $150,000, Dane Media purchased from StreamTrack, its (i) Student Matching Services (as defined in the Agreement), (ii) each of (A) www.studentmatchingservice.com and (B) www.studentmatchingservices.com, and (iii) each of the (A) Call Center Agreement, and the (B) Data/List Management Agreement (as each are described in the Agreement).

 

Pursuant to the Agreement, the Company shall not compete with Dane Media in call center verified education leads for a period of 12 months following execution of the Agreement. The Company will continue to operate its advertising and lead generation business in various other vertical markets. Moreover, pursuant to the Agreement, the Company forgave certain payments owed by Dane Media to the Company of $38,135 which were invoiced between September 1, 2013 and November 15, 2013. The $150,000 purchase price was paid according to the following schedule: $50,000 upon closing of the transaction; $50,000 on December 13, 2013; and $50,000 on December 31, 2013. In connection, with the transaction the Company recorded a gain on sale of $111,865. The Company did not reclass the income and expenses directly related to the disposition of the education related lead generation to discontinued operations. The Company still operates within the advertising and lead generation business services with other verticals.

 

5. Commitments and Contingencies

 

On October 23, 2013, the Superior Court in the Judicial District of Danbury, Connecticut entered an order approving the stipulation of the parties (the "Stipulation") in the matter of ASC Recap LLC ("ASC") v. StreamTrack, Inc. Under the Stipulation, the Company agreed to issue, as settlement of liabilities owed by the Company to ASC in the aggregate amount of $766,288 (the "Claim Amount"), shares of common stock (the "Settlement Shares") as follows:

 

(a) In one or more tranches as necessary, 3,740,000 shares of common stock (the "Initial Issuance") and an additional 200,000 shares of common stock as a settlement fee.

 

(b) Through the Initial Issuance and any required additional issuances, that number of shares of common stock with an aggregate value equal to (A) the sum of 

 

(i) the Claim Amount and (ii) reasonable attorney fees and trade execution fees in the amount of $75,000, divided by (B) the Purchase Price (defined under the Stipulation as the market price (defined as the lowest closing bid price of the Company's common stock during the valuation period set forth in the Stipulation) less the product of the Discount (equal to 25%) and the market price. The parties reasonably estimated that the fair market value of the Settlement Shares and all other amounts to be received by ASC is equal to approximately $1,100,000.

 

(c) If at any time during the valuation period the closing bid price of the Company's common stock is below 90% of the closing bid price on the day before an issuance date, the Company will immediately cause to be issued to ASC such additional shares as may be required to effect the purposes of the Stipulation.

 

(d) Notwithstanding anything to the contrary in the Stipulation, the number of shares beneficially owned by ASC will not exceed 9.99% of the Company's outstanding common stock.

 

In connection with the Settlement Shares, the Company relied on the exemption from registration provided by Section 3(a)(10) under the Securities Act.

 

In connection with the settlement, during the three months ended November 30, 2014 the Company issued 105,663,000 shares of common stock to ASC in which gross proceeds of $86,421 were generated from the sale of the common shares. In connection with the transaction, ASC received fees of $23,392 and provided payments of $63,029 to settle outstanding vendor payables. The remaining amount on the settlement of liabilities owed by the Company to ASC is in the aggregate amount of $253,492 as of November 30, 2014. The Company cannot reasonably estimate the amount of proceeds ASC expects to receive from the sale of these shares which will be used to satisfy the liabilities. Thus, the Company accounts for the transaction as the shares are sold and the liabilities are settled. All amounts are included within accounts payable. Shares which are held by ASC at each reporting period are accounted for as issued but not outstanding.

 

Legal Proceedings

 

The Company is potentially subject to various legal proceedings and claims arising in the ordinary course of its business. There are no pending legal proceedings against the Company as of the date of these financial statements.

 

9

 

6. Capital Lease

 

The Company periodically leases computer servers and related hardware under capital lease agreements. The lease terms are typically from three to five years, depending on the type of equipment. The leased equipment typically has a bargain purchase price, and qualifies for treatment as a capital lease. For book purposes, the assets are amortized over their estimated useful lives.

 

Assets under capital lease, included within property and equipment on the balance sheet, as of November 30, 2014 and August 31, 2014 were as follows:

 

		November 30, 2014				August 31, 2014
Servers		$	147,049			$	147,049
Less: accumulated depreciation			(147,049	)			(147,049	)
Net assets under capital lease		$	-			$	-

 

On March 22, 2013, the Company reached a settlement and release agreement with IBM Credit, LLC (“IBM”) the lessor associated with the Company’s computer servers and software classified under capital lease. The balance owed to IBM as of March 22, 2013 was agreed to be $108,704. Payments of $9,000 per month are scheduled in order to satisfy this balance. The final payment due March 1, 2014 is for $9,704. As of November 30, 2014 and as of the date of these financial statements, the Company was in default of this agreement and the amount outstanding of $59,204 is reflected as a current liability on the accompanying balance sheet. 

 

7. Related Party Transactions

 

The Company has only been operating since November 30, 2011. As a result, the Company has an extremely limited credit history. The Company’s Chief Executive Officer, and the Chief Executive Officer of StreamTrack Media, Inc. (the “Executives”) use their personal credit cards to fund operations on a frequent basis. If the Company did not have access to these credit cards, the Company would have to rely exclusively on external sources of capital. The Company’s external sources of capital are not always readily available. Once the Company’s track record is more established and results of operations are profitable, then external sources of capital should become more readily available. As a result, in time-constrained circumstances, the use of personal credit cards is necessary until such time as the Company is able to build up its own credit-worthiness and access more readily available and significant credit.

 

The related party payable as of November 30, 2014 and August 31, 2014 consists of unpaid compensation and non-interest bearing cash advances and charges on personal credit lines made on behalf of the Company by the Executives. The balances owed to the Executives are not secured and are due on demand. Interest will be charged on these balances. During the three months ended November 30, 2014, the Executives converted a significant portion of amounts due to them for unpaid compensation and other advances to long-term convertible notes payable, see Note 8 for additional information. In addition, the Executives agreed to a temporary reduction in their annual salary from $240,000 to $50,000 per annum for the period from December 1, 2014 to May 31, 2015.

 

See Notes 8 and 10 for additional related party transactions.

 

8. Debt Instruments

 

Asset-Based Debt Financing

 

On April 11, 2013, the Company executed a non-dilutive asset-based debt financing (the “Lender Financing”) with a third party (the “Lender”). The Lender Financing consists of a $250,000 line of credit, subsequently increased to $520,000, secured by all of the Company’s assets. The Company’s management also executed limited recourse guarantees with the Lender. Interest is payable monthly based on a floating interest rate determined based on a formula outlined in detail within the financing agreement. The Company anticipates the effective monthly interest rate charged on the outstanding balance owed to the third party will be between 2.6% and 1.1%. The Lender Financing was due and payable in full on September 30, 2013.

 

On September 15, 2014, the Company executed an extension to this agreement whereby the maturity date has been extended to December 31, 2015. The Lender financing is currently capped at $520,000 which begins decreasing to $500,000 on December 31, 2014; $450,000 on March 31, 2015; $400,000 on June 30, 2015 and $300,000 by September 30, 2015.

 

Convertible Notes Payable

 

The Company relied on various financings from a lender since 2010 (the “Creditor”). Each note issued by the Creditor (the “Creditor Notes”) bears interest per annum at a rate of 8%, has a default interest rate of 22% and is generally payable within six months from the issuance date. In April 2014, the Creditor entered into an exchange agreement with another lender whereby they transferred their interest in the Creditor Notes to another lender. See below for additional information.

 

10

 

Vendor Convertible Note

 

On November 1, 2012, the Company issued a convertible note for $140,000 (the “Vendor Note”) to a former Vendor ("Vendor"). The Vendor Note was executed on November 1, 2012 and was immediately convertible into the Company’s common stock at a 50% discount to the lowest bid price as quoted on the OTC Markets for the five days prior to the conversion date. The table below details the transactions with the Vendor during the three months ended November 30, 2014.

 

Vendor Note, principal balance as of August 31, 2014		$	35,300
Conversion of Vendor Note to common stock (69,750,000) common shares issued)			(16,050	)
Vendor Note, principal balance, November 30, 2014		$	19,250

 

As a result of the fact that the number of shares the Vendor Note was convertible into was indeterminable, the Company determined a derivative liability was embedded within the Vendor Note. The Company measured the derivative liability using the input attributes disclosed below and recorded a derivative liability of $190,927 as of November 1, 2012. As a result of the valuation of the derivative liability being in excess of the value of the proceeds of the Vendor Note by $50,927, this amount was recorded within change in fair value of derivatives by the Company on November 1, 2012. The debt discount associated with the Vendor Note was immediately expensed to interest expense as a result of the Vendor Note being immediately convertible and due on demand.

 

As of May 31, 2014, the conversion price of the Vendor Note is based upon a 50% discount to lowest five days bid prices of the Company’s common stock over the five-day period prior to conversion. As a result, the lower the stock price at the time the Vendor converts the Vendor Note, the more common shares the Vendor will receive. To the extent the Vendor converts the Vendor Note and then sells its common stock, the common stock may decrease due to the additional shares in the market. This could allow the Vendor to receive greater amounts of common stock upon conversion. The sale of each share of common stock further depresses the stock price. Due to the floating conversion price of the notes, the Company does not know the exact number of shares that the Vendor would be issued upon conversion. The table below details the number of shares of the Company’s common stock the Vendor would be issued, if the Vendor elected to convert the Vendor Note to common shares on each reporting date. The shares issuable upon conversion of the Vendor Note may result in substantial dilution to the interests of the Company’s other shareholders.

  

Creditor #2 Convertible Promissory Notes

 

In April 2014, the Creditor entered into an exchange agreement with another lender (the “Creditor #2”), whereby the Creditor transferred the Creditor's notes and accrued interest to Creditor #2. In April, the Company entered into i) a note agreement for $284,560 representing amounts transferred from the Creditor; ii) two $125,000 notes in which the proceeds were received on the same date (collectively referred to as the “Creditor #2 Notes”) with Creditor #2. The Creditor #2 Notes bears interest per annum at 10.0%, payable six months after the issuance date and is convertible on the date of issuance based upon based upon a 45% discount to lowest trading price, for the 15 trading days prior to conversion. As a result, the lower the stock price at the time the Creditor #2 converts the Creditor #2 Notes, the more common shares the Creditor #2 will receive. The table below details the transactions with the Creditor #2 during the three months ended November 30, 2014.

 

Creditor #2 Notes, principal balance as of August 31, 2014		$	464,449
Conversion of Creditor #2 Notes to common stock (82,848,210 common shares issued)			(25,892	)
Creditor #2 Notes, principal balance as of November 30, 2014		$	438,557

  

To the extent the Creditor #2 converts the Creditor #2 Notes and then sells its common stock, the market price of the common stock may decrease due to the additional shares in the market. This could allow the Creditor #2 to receive greater amounts of common stock upon conversion. The sale of each share of common stock could further depress the stock price. Due to the floating conversion price of the notes, the Company does not know the exact number of shares that the Creditor #2 would be issued upon conversion. The shares issuable upon conversion of the Creditor #2 Notes may result in substantial dilution to the interests of the Company’s other shareholders. In this regard, even though the investor may not hold shares amounting to more than 9.99% of the outstanding shares at one time, this restriction does not prevent the investor from selling some of its holdings and then receiving additional shares. In this way, the investor could sell more than the 9.99% limit while never holding more than the limit.

 

During the three months ended November 30, 2014, the Company amortized the remaining discount of $62,500 to interest expense. The discount was the result of a derivative liability recorded in connection with the Creditor #2 Notes in fiscal 2014.

 

11

 

Convertible Promissory Notes

 

As of November 30, 2014, the Company has 18 convertible promissory notes issued between December 2011 and November 2014. The convertible promissory notes bear interest at ether 4% or 8% per annum and are due in full, including principal and interest, three years from the issuance date ranging from December 2014 to September 2017. The convertible promissory notes also include a conversion option whereby the holders may elect at any time to convert any portion or the entire balance into the Company’s common stock at conversion prices ranging from $0.0001 to $1.25. The table below details the transactions associated with the convertible promissory notes during the three months ended November 30, 2014.

 

Convertible Promissory Notes, principal balance as of August 31, 2014		$	745,134
Proceeds received from additional Convertible Promissory Notes - Related Party			152,000
Conversion of accrued salaries and advances to Convertible Promissory Notes - Related Party			626,864
Proceeds received from additional Convertible Promissory Notes			50,000
Payments on Convertible Promissory Notes - Related Party			(25,284	)
Convertible Promissory Notes, principal balance as of November 30, 2014		$	1,548,714

 

Of the convertible promissory notes outstanding, $410,134 are held by related parties. These related parties consist of the Company's officers, former officers, significant shareholders or entities controlled by these individuals. As of August 31, 2014, $175,000 of these notes were included within the current portion of convertible promissory notes on the accompanying balance sheet as the note was due within one year of the balance sheet.

 

For some of the convertible promissory notes, the conversion feature associated with the convertible promissory notes provide for a rate of conversion that is below market value. This conversion feature is accounted for as a beneficial conversion feature. A beneficial conversion feature was recorded and classified as a debt discount on the balance sheet at the time of issuance of each convertible promissory note with a corresponding credit to additional paid-in capital.

 

In addition, six of the convertible promissory notes received warrants to purchase shares of the Company's common stock. The valuation of the stock warrants and the beneficial conversion feature associated with the issuance of convertible promissory notes utilized valuation inputs and related figures provided by a professional and independent valuation firm. The Company allocated the a portion of the proceeds received from the convertible promissory notes to the warrants using the relative fair value resulting in a debt discount to each convertible promissory note.

 

The discounts are amortized over the term of the convertible promissory note using the straight line method. The amortized value for each period is recorded as an offset against the debt discount on the balance sheet, classified as interest expense - accretion in the statement of operations and as accretion of debt discount within the statement of cash flows. During the three months ended November 30, 2014, the Company recorded a beneficial conversion feature of $828,864 in connection with the issuance of $828,864 in convertible notes. Of the $828,864, $89,500 related to proceeds received from the Company's Chief Executive Officer, $62,500 in proceeds from the Chief Executive Officer of StreamTrack Media, Inc., $50,000 in proceeds from a third party, $316,758 in salary and advances due to our Chief Executive Officer converted to a convertible note payable and $310,106 in salary and advances due to StreamTrack Media, Inc.'s Chief Executive Officer converted to a convertible note payable. During the three months ended November 30, 2014 and 2013, $122,569 and $9,612 of the discounts were amortized to interest expense, respectively. As of November 30, 2014, $800,398 discounts remained which will be expensed in fiscal 2015 through 2017.

 

9. Derivatives

 

Creditor Notes

 

Upon the six-month anniversary (180 days) of all financings with the Creditor, the shares underlying the Creditor’s Notes were eligible to be sold under Rule 144 under the Securities Act of 1933, as amended. As a result of the conversion price not being fixed, the number of shares of the Company’s common stock that were issuable upon the conversion of the Creditor’s Notes was indeterminable until such time as the Creditor elects to convert to common stock.

 

12

 

On the six-month anniversary of Creditor Notes, the Company measures and records a derivative liability using the input attributes disclosed below. On November 30, 2013, the Company re-measured the derivative liability using the weighted average input attributes below and determined the value to be $3,501 of which $478,560 was classified as “change in fair value of derivatives” and was recorded for the three months ended November 30, 2013 in the statement of operations.

 

		November 30, 2013
Expected life (in years)			0.10
Balance of note and accrued interest outstanding		$	328,072
Stock price		$	0.0300
Effective conversion price		$	0.0375
Shares issuable upon conversion			8,748,587
Risk-free interest rate			0.04	%
Expected volatility			61.83	%
Expected dividend yield			-

 

Creditor #2 Note

 

The Creditor #2 Notes were executed on April 15, 2014 and were immediately convertible into the Company’s common stock at rates ranging from 45% - 55% discount to the lowest trading price for the 15 days prior to the conversion date. As a result of the fact that the number of shares the Creditor #2 Notes was convertible into was indeterminable, the Company determined a derivative liability was embedded within the Creditor #2 Notes. The Company measured the derivative liability using the input attributes disclosed below and recorded a derivative liability of $3,158,190 as of April 15, 2014 of which $1,219,891 was included within “change in fair value of derivatives” due to a portion of the derivative liability being in excess of the $250,000 in proceeds received and $1,481,723, which included offset of $206,576 from relief of the derivative liability related to the Creditor Notes, within “Loss on extinguishment” due to extinguishment accounting on the Creditor Note transferred to Creditor #2.

  

On November 30, 2014, the Company re-measured the derivative liability using the input attributes below and determined the value to be $5,425,075 of which $4,478,756 was classified as “change in fair value of derivatives” and was recorded for the three months ended November 30, 2014 in the statement of operations.

 

		November 30, 2014
Expected life (in years)			0.50
Balance of note outstanding		$	441,743
Stock price		$	0.0019
Effective conversion price		$	0.0001
Shares issuable upon conversion			3,013,930,640
Risk-free interest rate			0.18	%
Expected volatility			308.36	%
Expected dividend yield			-

 

Vendor Note

 

The Vendor Note was executed on November 1, 2012 and was immediately convertible into the Company’s common stock at a 50% discount to the lowest bid price as quoted on the OTC Bulletin Board for the five days prior to the conversion date. As a result of the fact that the number of shares the Vendor Note was convertible into was indeterminable, the Company determined a derivative liability was embedded within the Vendor Note. The Company measured the derivative liability using the input attributes disclosed below and recorded a derivative liability of $190,927 as of November 1, 2012. As a result of the valuation of the derivative liability being in excess of the value of the proceeds of the Vendor Note by $50,927, a deemed dividend of $50,927 was recorded by the Company on November 1, 2012. The debt discount of $140,000 associated with the Vendor Note was immediately expensed to interest expense – accretion as a result of the Vendor Note being immediately convertible and due on demand.

 

On November 30, 2014, the Company re-measured the derivative liability using the input attributes below and determined the value to be $173,250 of which $97,219 was classified as “change in fair value of derivatives” and was recorded for the three months ended November 30, 2014 in the statement of operations.

 

13

 

On November 30, 2013, the Company re-measured the derivative liability using the weighted average input attributes below and determined the value to be $186,245 of which $108,769 was classified as “change in fair value of derivatives” and was recorded for the three months ended November 30, 2013 in the statement of operations.

 

		November 30, 2014							November 30, 2013
Expected life (in years)			0.50							0.10
Balance of note outstanding		$	19,250						$	96,500
Stock price		$	0.0019						$	0.0300
Effective conversion price		$	0.0002						$	0.0100
Shares issuable upon conversion			96,250,000							9,650,000
Risk-free interest rate			0.18		%					0.18	%
Expected volatility			380.36		%					61.83	%
Expected dividend yield			-		%					-	%

 

10. Stockholders’ Equity

 

Series A Preferred Stock

 

Each share of Series A Preferred Stock has voting rights equal to the voting equivalent of the common stock into which it is convertible at the time of the vote. The holders of the Series A Preferred Stock are not entitled to dividends. The Series A Preferred Stock has no preferential rights to the Company’s common stock and will share in any liquidation proceeds with the common stock on an as converted basis.

 

Series B Preferred Stock

 

On October 25, 2013, the Company filed a Certificate of Designation of Series B Preferred Stock (the "Series B Certificate of Designation") with the Secretary of State of Wyoming. Pursuant to the Series B Certificate of Designation, the Company designated 200,000 shares of its blank check preferred stock as Series B Preferred Stock. The Series B Preferred Stock will rank senior to the common stock, Series A Preferred Stock and any subsequently created series of preferred stock that does not expressly rank pari passu with or senior to the Series B Preferred Stock (the "Junior Stock"). The Series B Preferred Stock will not be entitled to dividends. In the event of a liquidation, the Series B Preferred Stock will be entitled to a payment of the Stated Value of $1.00 per share prior to any payments being made in respect of the Junior Stock. Each share of Series B Preferred Stock will entitle the holder to vote on all matters voted on by holders of common stock as a single class. With respect to any such vote, each share of Series B Preferred Stock will entitle the holder to cast such number of votes equal to 0.000255% of the total number of votes entitled to be cast. Effective upon the closing of a Qualified Financing, all issued and outstanding shares of Series B Preferred Stock will automatically convert into common stock in an amount determined by dividing the product of the number of shares being converted and the Stated Value by the Conversion Price. The Conversion Price will be equal to the price per share of the common stock sold under the Qualified Financing (or, if the Qualified Financing involves the sale of securities convertible into common stock, by the conversion price of such convertible securities). A "Qualified Financing" is defined as the sale by the Company in a single offering of common stock or securities convertible into common stock for gross proceeds of at least $5,000,000.

 

On October 31, 2013, the Company entered into amendment, waiver and exchange agreements (the "Exchange Agreements") with Michael Hill (the Company's chief executive officer and director) and Aaron Gravitz (the Company's director). Under each Exchange Agreement, the Company issued to each of Mr. Hill and Mr. Gravitz 100,000 shares of Series B Preferred Stock in exchange for $100,000 in unpaid compensation.

 

Common Stock

 

Each share of common stock has the right to one vote per share. The holders of common stock are also entitled to receive dividends as and when declared by the board of directors of the Company, whenever funds are legally available, subject to the rights under any outstanding preferred stock.

 

Detachable Stock Warrants

 

As of November 30, 2014, the Company has a total of 362,500 detachable stock warrants outstanding. The warrants have a three-year term and are exercisable into the Company’s common stock at an exercise price of $0.41 per share.

 

Stock Based Compensation

 

The fair value of the Company’s Restricted Stock Units (“RSUs”) is expensed ratably over the vesting period. RSUs vest daily on a cliff basis over the service period, generally three years. The Company recorded stock-based compensation expense related to restricted stock units of $8,262 during the three months ended November 30, 2013. As of November 30, 2014, all compensation costs related to RSUs has been recognized.

 

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11. Net Income (Loss) Per Share

 

Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period.

 

Diluted net loss per share is computed by giving effect to all potential shares of common stock, including convertible debt instruments, preferred stock, restricted stock unit grants and detachable stock warrants. Basic and diluted net loss per share for the three months ended November 30, 2014 was the same as the inclusion of all potential common shares outstanding would have been anti-dilutive. The following is the calculation of dilutive shares for the three months ended November 30, 2013.

 

		For the Three Months Ended November 30, 2013
Weighted-average common shares outstanding used in computing basic net income per share:			17,592,780
Common stock equivalents:
Creditor Notes			8,748,587
Vendor Note			9,650,000
Convertible promissory notes			3,127,644
Series B Preferred Stock (A)			-
Weighted-average common shares outstanding used in computing dilutive net income per share:			39,119,011

 

The following is the reconciliation of net income used in the calculation of the dilutive income per share for the three months ended November 30, 2013.

 

	For the Three Months Ended November 30, 2013
Net income available to common stock holders:	$	352,246
Adjustments:
Accrued interest on convertible notes		25,823
Accretion of discount on convertible notes		9,612
Net income used in the calculation of the dilutive income per share:	$	387,681

 

(A) The Series B Preferred Stock is only convertible on a qualified financing in excess of $5.0 million. Thus, the potential dilutive shares have not been included within the calculation.

 

The warrants outstanding have been excluded from the table above as their exercise prices are greater than the average closing price of the Company's common stock for the three months ended November 30, 2013.

 

15

 

12. Subsequent Events

 

In December 2014, we entered into a $15,000 convertible note payable with our Chief Executive Officer. Under the terms of the agreement, the note incurs interest at 8%, is due in two years and convertible into common stock at $0.0001 per share.

 

In December 2014, we entered into a $15,000 convertible note payable with the Chief Executive Officer of StreamTrack Media, Inc. Under the terms of the agreement, the note incurs interest at 8%, is due in two years and convertible at $0.0001 per share.

 

In December 2014, we entered into a $114,350 convertible note payable, in which proceeds of $81,479 are to be received, with a third party. Under the terms of the agreement, the note incurs interest at 4%, is due in two years and convertible at current market price discounted at 10% based upon the lowest five day period prior to the date of conversion.

 

In December 2014, the holder of a $150,000 convertible note payable sold the note to a third party. In connection with this sale, the Company agreed to adjust the conversion price of the convertible note payable from a fixed rate to a variable conversion price based upon 75% of the lowest closing bid price for the Company's common stock for the five trading days immediately preceding the conversion date. The Company expects to account for the transaction as an extinguishment and will record a derivative liability in connection with the new terms of the convertible note payable.

 

In December 2014, the Company designated 20,000 shares of preferred stock as Series C Convertible Preferred ("Series C") stock. Each share of Series C is convertible into $150 in fair market value of the Company's common. The fair value will be equal to the average closing market price of the Company's common stock during the 10 trading days prior to the conversion of the Series C.

 

Subsequent to November 30, 2014, the Company issued 122,490,000 shares of common stock in connection with $36,694 in convertible notes payable.

 

Subsequent to November 30, 2014, the Company issued 127,760,000 shares of common stock in connection with the settlement of accounts payable and related fees of $135,051.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in this report and those in our Form 10-K for the fiscal year ended August 31, 2014 filed with the Securities and Exchange Commission December 15, 2014

 

Overview

 

StreamTrack, Inc. (“StreamTrack,” or the “Company”) is a digital media and technology services company. The Company provides audio and video streaming and advertising services through the RadioLoyalty^TM Platform (the “Platform”) to a global group of over 5,500 internet and terrestrial radio stations and other broadcast content providers.

 

Our business model is focused on the following core principles:

 

1.	We barter with audio content providers, namely internet and terrestrial radio stations, to obtain control and management of their desktop advertising opportunity (“Ad Inventory”). We also routinely purchase any Ad Inventory the content providers have not previously transferred to us by barter.
2.	In exchange for the Ad Inventory, we pay for all internet and mobile streaming costs associated with the broadcaster’s content that is streamed through our platform. We barter in order to scale our business. The end result of the barter is that we aggregate Ad Inventory from broadcasters that management believes can reach substantial size while maintaining a primarily fixed cost structure for our hardware, content delivery, labor and other costs, respectively.
3.	We re-broadcast original audio broadcast content through the Platform in a streaming media format in desktop and mobile environments. By re-broadcasting we ensure that we do not pay any royalties. Royalties are the responsibility of our broadcasters. This is a substantial advantage for us as many of our competitors pay royalties of up to 70% of revenues generated from licensed broadcast content.
4.	We serve advertisements (“Ads”) within the Platform in audio, display and video formats in a desktop environment and display ads in a mobile environment using our RadioLoyaltyTM Apps.
5.	Ads are served by our automated systems based on geography and demographics data, among others.
6.	The primary technology that makes our Platform unique in the industry is that we are able to re-broadcast audio content with geographically targeted Ads that replace Ads served within an original broadcast targeting a listener in a certain geography. By having this capability we can also choose to replace audio Ads that do not generate as high Ad revenues with video-based Ads that generate much higher Ad revenues. In effect, we make the broadcaster’s original broadcast capable of delivering Ads that are geographically targeted throughout a global broadcast marketplace while also utilizing video Ads and our proprietary video in-stream technology to increase advertising rates.
7.	All of our primary technology that supports the Platform is automated and capable of operating in a live environment. Audio content is streamed, Ads are targeted and served, audio Ads are replaced as needed and video Ads replace audio Ads, as desired and when possible.

 

Advertising revenue constitutes the majority of our total revenue, representing 96.6% of total revenue for the three months ended November 30, 2014. We anticipate this trend will continue and our revenues will be generated primarily from advertising. Our advertising revenue for the three months ended November 30, 2014 was almost entirely derived from advertising delivered on desktop devices.

 

We deliver content on mobile devices through our RadioLoyalty^TM app but we do not currently generate significant mobile advertising revenues. Management believes that mobile advertising represents an opportunity for the Company in the coming years and on an ongoing basis. Management expects the mobile advertising market will grow at substantial rates in the coming years. However, many challenges exist in this market. We believe these challenges will be solved primarily with new technologies. We believe our current technologies and other technology under development will solve some of these challenges. By solving these challenges we will be able to monetize the mobile listenership we are growing today.

 

We are also continuing development of WatchThis™, a patent-pending merchandising in-stream technology to provide web-based and IP television streaming services with a unique e-commerce advertising capability. The technology is functional in a local environment. Our development efforts are currently focused on technical issues associated with operating the technology in a live streaming environment. If and once the technology is functional in a live streaming environment, management plans to use the in-video advertising method technology to create a video encode with keywords that tag frames with corresponding merchandise within video content. These tags would communicate with our advertising database to deliver the highest paying advertiser in real-time. Consumers would be able to view this content, select tagged products within the content, and complete purchases throughout the broadcast.

 

In November 2013, we completed an asset purchase of RobotFruit, a mobile loyalty and application platform. Robot Fruit provides a complete SAAS based mobile platform for publishers and content owners to directly sell their mobile web and in-app ad inventory on leading mobile devices. The platform is a self-service mobile loyalty and development platform that has an easy to use interface which enables station owners, content owners, business owners, artists and bands to quickly deploy in HTML5, native iOS and Android based application environments. We anticipate making the technology available to broadcasters, content owners and artists in the coming months.

 

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Key Metrics:

 

We track listener hours because we believe it is the best key indicator of the growth of our Platform business. Revenues from advertising through our Platform represented substantially all of our revenues for the three ended November 30, 2014. We also track the number of active users on our Platform as well as the RadioLoyalty^TM app as indicators of the size and quality of our audience, which are particularly important to potential advertisers. Additionally, the Company anticipates launching several new product offerings and initiating certain new significant partnerships during the fiscal year ending August 31, 2015. The Company expects those products and partnerships to be profitable but notes that it will require an unknown amount of capital for product development and commercial deployment. Once these products are launched we will determine key indicators of growth for those products.

 

We calculate actual listener hours using our internal analytics systems. Some of our competitors do not always calculate their listener hours in the same way we do. As a result, their stated listener hours may not represent a truly comparable figure.

 

Player launches are defined as the number of individual times the UniversalPlayer™ was launched.

 

Registered users are defined as the number of users who have signed up for an account with us in order to access our broadcasters’ content and to earn loyalty points. The number of registered users may overstate the number of actual unique individuals who have signed up for an account with us in order to earn loyalty points, as an individual may register for, and use, multiple accounts under unique registration information. This is in breach of our terms and conditions but we may not be able to effectively manage and authenticate registration information in order to ensure each user is a unique individual. We define registered users as those who have signed up with us to receive loyalty points. We calculate this by the number of submissions we receive from users signing up for our loyalty service.

 

We calculate listener hours as follows. When the UniversalPlayer^TM is launched a session is created - this is considered the listener's start time. At one minute following the launch of the UniversalPlayer^TM, we record 1 minute of listening time. If a session lasts between 1 and 59 seconds, we record 30 seconds of listening time. At ten-minute intervals following the session being created, we count each 10 minute period as listening time. So for example, if a user launched the UniversalPlayer^TM at 11:00am, we will recognize 1 minute of listening time at 11:01, then 10 minutes of listening time at 11:10, 20 minutes at 11:20, etc.

 

Stations are defined as the total of all stations created by broadcasters that utilize the Platform. A single broadcaster may create many stations and these stations may be active or inactive.

 

Events are user interactions such as a 10 minute interval, clicking song like/dislike, sharing what they are listening to, checking the news through our news app in the player, etc. The last event we see for the user is considered the end of their session. We then take that time minus the time the session started to determine how long the session is. So for example, if a user launched the UniversalPlayer^TM at 11am, and liked a song at 11:07am, but exited the player at 11:09am, we would recognize 7 minutes of listening.

 

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Comparison of the Three Months Ended November 30, 2014 and November 30, 2013

 

		For the Three Months Ended November 30, 2014				For the Three Months Ended November 30, 2013
Revenue:
Advertising		$	309,108			$	515,577
Services			11,000				8,250
Total revenue		$	320,108			$	523,827

 

Revenues for the three months ended November 30, 2014 and 2013, totaled $320,108 and $523,827 respectively. We generated revenues from video and display Ads utilizing our Platform. The quarterly year over year decline can be attributed to several factors. Education related revenue decreased quarterly year over year by $60,587.40 as a result of the sale of the education call center in 2013 and no education related revenue in 2014. Video revenue decreased quarterly year over year by $60,758.56 attributable to overall industry technical changes and ad related errors including Vpaid errors, ad response times, increased latency, creative errors and creative load time. Tighter buying and targeting criteria by Customers as a result of quality scoring from companies such as Integral Ad Science and ForensIQ also reduced buys from some Customers. Display revenue decreased quarterly year over year by $81,829.44. Our largest buyer of display traffic decreased by $138,244.59 quarterly year over year as a result of decreased demand. While we were able to make up for some of this shortfall with other Customers, the decrease from this Customer accounted for the majority of the decline. The Company began focusing more of its effort on filling advertisements in the display and video category within the Platform itself as opposed to display and video advertisements in traditional internet webpage formats. We anticipate generating additional advertising revenues from the launch of several new product offerings and certain new significant partnerships during the year ending August 31, 2015.

  

		For the Three Months Ended November 30, 2014				For the Three Months Ended November 30, 2013
Costs of revenues:
Media network		$	105,582			$	127,843
Depreciation and amortization			68,646				82,296
Colocation services			38,334				47,700
Broadcaster commissions			45,131				63,793
Other			2,454				73,025
Total costs of revenue		$	260,147			$	394,757

 

 

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Costs of revenues for the three months ended November 30, 2014 and 2013, totaled $260,147 and $394,757, respectively. Each reporting period we have recorded substantial amortization costs associated with the Platform. The amortization costs associated with the Platform have been fully amortized as of November 30, 2014. In order to operate the Platform and the RadioLoyalty^TM mobile and tablet apps and our ad-serving technologies, we require substantial computing power, hosting and streaming hosting. We operate a substantial technology center at our offices in Santa Barbara, California but also utilize a contracted facility in Los Angeles, California, to support our operations and ensure our systems and content delivery maintain our service level agreements. We refer to these costs as colocation services. Colocation services costs should increase as our business grows. However, our current costs should remain fixed until and if we reach a substantial listener hours level that exceeds approximately 15,000,000 hours per month. We currently generate approximately 750,000 listener hours per month. Our advertising sales arrangements with over 5,500 stations facilitate us paying the broadcasters a monthly revenue sharing fee. We refer to these costs as broadcaster commissions. Broadcaster commissions are paid on ad inventory we purchase from the broadcasters, not on Ad Inventory we receive as a barter from the broadcasters. Other costs of sales include media network costs associated with the distribution of our content across a variety of advertising networks, streaming costs, and various application technologies that support our primary product offerings. 

 

		Three Months Ended November 30, 2014				Three Months Ended November 30, 2013
Operating expenses
Product development		$	8,999			$	82,752
Officer compensation			48,000				120,000
Sales and marketing			40,849				42,639
Other			217,359				156,569
Total operating expenses		$	315,207			$	401,960

 

Operating expenses for the three months ended November 30, 2014 and 2013, totaled $315,207 and $401,960, respectively. Product development costs were associated with continuing improvements to the software and related infrastructure for our primary product offering as well as development work on our online product portfolio and the WatchThis^TM technology, as well as Officer compensation related to accrued but primarily unpaid salaries for our two primary executives officers. Marketing and sales costs incurred were primarily related to the labor costs of employing our sales force. Our sales force markets our products on a daily basis. We expect these costs to increase in the current fiscal year. Rents were primarily related to three leases we are obligated under for our Santa Barbara, California office. Consultant expenses included fees incurred with certain personnel primarily related to finance, business development and investor relations services. Professional fees included accounting, auditing and legal fees associated with public company matters. Travel and entertainment was associated with ongoing business development and investor relations activities. Other operating costs include telecom, depreciation, utilities, travel and entertainment and various other costs of doing business.

 

		Three Months Ended November 30, 2014				Three Months Ended November 30, 2013
Other income (expenses)
Other income (expense)		$	(26,457	)		$	2,625
Interest expense			(72,557	)			(68,071	)
Interest expense – accretion			(122,569	)			(9,612	)
Gain on disposal of education lead generation			-				111,865
Change in fair value of derivatives			(4,575,975	)			588,329
Total other income (expenses)		$	(4,797,558	)		$	625,136

 

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Other (expense) income for the three months ended November 30, 2014 and 2013, totaled $(4,797,558) and $625,136, respectively. We generated interest income on the note receivable. We incurred interest expense calculated on our convertible promissory notes and fees charged by the provider of our factoring line of credit, among others. During November 2013, we completed the sales of our education lead generation vertical, Student Matching Service. We also recorded the accretion of various debt discounts associated with our convertible promissory notes. The accretion is a result of the amortization of the debt discounts associated with the convertible promissory notes over the term of the convertible promissory notes. As a result of the derivative classification regarding the beneficial conversion feature on some of our convertible notes, the derivative liabilities have to be re-measured as of each reporting date. For the three months ended November 30, 2014 and 2013, the re-measurement resulted in an increase (decrease) to the derivative liabilities of $4,575,975 and ($588,329), respectively. If the convertible promissory notes issued to the Creditor #2 remain outstanding at any time subsequent to the six-month anniversary of the date the convertible promissory notes were issued, a derivative liability exists and will have to be measured as of each reporting date. Similarly, if any portion of the Vendor Note remains outstanding at the reporting date, the derivative liability has to be re-measured as of the reporting date. During the three months ended November 30, 2014, the Company's stock price increased substantially from August 31, 2014 which impacted the valuation of the derivative liabilities.

 

We did not generate taxable profits for the three months ended November 30, 2014 and 2013, respectively. As a result, no provision for income taxes was recorded during either period.

 

Liquidity and Capital Resources

 

As of November 30, 2014 we had cash totaling $2,711, which consisted of cash funds held at major financial institutions. We had net a working capital deficit of $8,167,919 as of November 30, 2014, compared to a net working capital deficit of $3,422,944 as of August 31, 2014. Our principal uses of cash during the three months ending November 30, 2014 were funding our operations.

 

Going Concern

 

The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. For the three months ended November 30, 2014, the Company recorded an operating loss of $5,052,804 and used cash flow from operations of $36,661. As of November 30, 2014, the Company had a working capital deficit of $8,167,919, indicated that the Company may have difficulty continuing as a going concern.

 

Management is confident but cannot guarantee that the Company will be able to raise additional capital in order to repay debts and continue operations. During the year ending August 31, 2015, the Company is obligated to make payments on certain operating leases, convertible debts, and a capital lease, among others. The Company’s normal operating costs are also significant and include consulting fees, professional fees, product development costs and marketing and sales costs associated with management’s business plan. Additionally, the Company is currently in default on its capital lease. As a result, the lessor may decide to take back its equipment. If that occurs then the Company would likely need to lease third party servers in order to continue operating its business. Since inception and through August 31, 2014, the Company has successfully raised a significant amount of capital. Additionally, the Company anticipates launching several new product offerings in the second quarter of its fiscal year ending August 31, 2015. The Company expects those products to be profitable but notes that it will require significant capital for product development and ultimately commercial deployment. However, the ability of the Company to continue as a going concern is dependent on the successful execution of the business plan in order to reach break-even and become profitable. If the Company is unable to become profitable or sustain its cash flow, the Company could be forced to modify its business operations or possibly cease operations entirely. Management cannot provide any assurances that the Company will be successful in its operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

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Working Capital Related Party Financing

 

The Company has only been operating since November 30, 2011. As a result, the Company has an extremely limited credit history. The Company’s Chief Executive Officer, and the Chief Executive Officer of StreamTrack Media, Inc. use their personal credit cards to fund operations on a frequent basis. If the Company did not have access to these credit cards, the Company would have to rely exclusively on external sources of capital. The Company’s external sources of capital are not always readily available. Once the Company’s track record is more established and results of operations are profitable, then external sources of capital should become more readily available. As a result, in time-constrained circumstances, the use of personal credit cards is necessary until such time as the Company is able to build up its own credit-worthiness and access more readily available and significant credit.

 

Capital Expenditures

 

Based on current estimates, we believe that our anticipated capital expenditures will be adequate to implement our current plans.

 

Historical Trends

 

The following table summarizes our cash flow data for the three months ended November 30, 2014 and 2013.

 

	Three Months Ended November 30, 2014					Three Months Ended November 30, 2013
Net cash used in operating activities		$	(36,661	)		$	(195,383	)
Net cash used in investing activities			(174,624	)
Net cash provided by financing activities			187,406				193,617

 

Cash flow used in operating activities totaled $36,661 for the three months ended November 30, 2014, compared to $195,383 used for the three months ended November 30, 2013. Operating cash flow was negative during the three months ended November 30, 2014 as we continued operations and a focused effort on product development and efforts towards certain potential significant partnerships with third parties within the digital media industry.

 

Cash flow used in investing activities totaled $174,624 for the three months ended November 30, 2014, compared to $0 for the three months ended November 30, 2013. The increase in cash used in investing activities relates to internally developed products in which the capitalization criteria has been met.

 

Cash flow provided by financing activities totaled $187,406 for the three months ended November 30, 2014, compared to $193,617 for the three months ended November 30, 2013. We raised substantial capital through the issuance of convertible promissory notes, net proceeds from the line of credit, and advances from our primary executive officers during the three months ended November 30, 2014 and 2013, respectively.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..

 

Not required for a smaller reporting company.

 

Item 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of November 30, 2014. This evaluation was accomplished under the supervision and with the participation of our Chief Executive Officer, who also serves as our Chief Financial Officer, who concluded that our disclosure controls and procedures are currently effective to ensure that all material information required to be filed in the quarterly report on Form 10-Q has been made known to them.

 

For purposes of this section, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seg.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by in our reports filed under the Securities Exchange Act of 1934, as amended (the "Act") is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this Quarterly Report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer (Principal Executive and Financial Officer); of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer (Principal Executive and Financial Officer) concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and which also are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer (Principal Executive and Financial Officer), to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls over Financial Reporting

 

There has not been any changes in our internal controls over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

The Company is not, currently, party to any legal proceeding.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

Item 4. MINE SAFETY DISCLOSURES

 

None

 

Item 5. OTHER INFORMATION

 

None

 

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Item 6. EXHIBITS

 

(a) Exhibits:

 

Number		Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	STREAMTRACK, INC.
Date: January 14, 2015	By:	/s/ Michael Hill
	Name:	Michael Hill
	Title:	Chairman of the Board of Directors, Chief Executive Officer, President, and Chief Financial Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

 

 

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