As
filed
with the Securities and Exchange Commission on November 26, 2007
|
|
|
Registration
No. 333-134023
|
U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
----------------
POST-EFFECTIVE
AMENDMENT NO. 5
TO
FORM
SB-2
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
NARROWSTEP
INC.
(Exact
name of small business issuer in its charter)
----------------
Delaware
|
|
7371
|
|
33-1010941
|
(State
or other jurisdiction
|
|
(Primary
Standard Industrial
|
|
(I.R.S.
Employer
|
of
incorporation or organization)
|
|
Classification
Code Number)
|
|
Identification
no.)
|
116
Village Boulevard
Princeton,
NJ 08540
(609)
951-2221
(Address,
including zip code, and telephone number, including area code, of registrant's
principal executive offices)
----------------
David
C. McCourt
Chairman,
Interim Chief Executive Officer and Interim Chief Operating
Officer
Narrowstep
Inc.
116
Village Boulevard
Princeton,
NJ 08540
(609)
951-2221
(Name,
address, including zip code, and telephone number, including area code, of
agent
for service)
----------------
with
copies to
John
D.
Hogoboom, Esq.
Lowenstein
Sandler PC
65
Livingston Avenue
Roseland,
New Jersey 07068
(973)
597-2500
----------------
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or reinvestment
plans,
check the following box:
þ
If
this
Form is filed to register additional securities for an offering pursuant
to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering.
¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
number of the earlier effective registration statement for the same offering.
¨
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box.
¨
Approximate
date of commencement of proposed sale to the public:
From time to time
after this Registration Statement becomes effective.
The
Registrant hereby amends this Registration Statement on such date
or dates
as may be necessary to delay its effective date until the Registrant
shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with
Section
8(a) of the Securities Act of 1933 or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant
to
said Section 8(a), may
determine.
|
The
information contained in this prospectus is not complete and may be
changed. The selling stockholders may not sell these securities until
the post-effective amendment to this registration statement filed with the
Securities and Exchange Commission is declared effective. This
prospectus is not an offer to sell these securities and it is not soliciting
an
offer to buy these securities in any state where the offer or sale is not
permitted.
Subject
to completion dated November
__
, 2007
PROSPECTUS
Narrowstep
Inc.
25,349,994
Shares
Common
Stock, par value $0.000001 per share
This
prospectus relates to 25,349,994 shares of our common stock which may be
sold by
the selling stockholders named herein. 12,333,330 of such shares were
issued and outstanding on the date of this Prospectus. The remaining
13,016,664 shares are issuable upon the exercise of warrants and options
held by
the selling stockholders. We will not receive any of the proceeds
from the sale of our common stock by the selling stockholders. We
will receive the proceeds of any cash exercise of the warrants and
options. We will pay the expenses of registering the shares sold by
the selling stockholders, which we estimate to be approximately
$500,000.
Our
common stock is quoted on the OTC
Bulletin Board under the symbol “NRWS”. On November 19, 2007, the
last quoted per share bid price of our common stock on the OTC Bulletin Board
was $0.16.
This
investment involves a high degree of risk. You should not purchase shares
of our
common stock unless you understand the risks involved and can afford the
loss of
your entire investment. See “Risk Factors” beginning on page
3.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is November XX, 2007.
TABLE
OF CONTENTS
|
Page
|
Prospectus
Summary
|
1
|
Risk
Factors
|
3
|
Special
Note Regarding Forward-Looking
Statements
|
8
|
Use
of
Proceeds
|
9
|
Dividend
Policy
|
9
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
|
9
|
Our
Business.
|
17
|
Selling
Stockholders
|
23
|
Management
|
26
|
Related
Party
Transactions.
|
32
|
Principal
Stockholders
|
34
|
Description
of Capital
Stock.
|
36
|
Trading
Market for Our Shares
.
|
39
|
Where
You Can Find More
Information
|
40
|
Plan
of
Distribution
|
40
|
Legal
Matters
|
42
|
Experts
|
42
|
Index
to Consolidated Financial
Statements
|
43
|
|
|
|
|
|
|
|
|
|
“Narrowstep,”
“narrowstep.com,” “High.TV”, “Adserver,” “Narrowstep Player,” “PayGate,”
“DownloadServer,” “TelvOS,” “nCoder,” “nCoder Pro” and the Narrowstep logo
are trademarks of Narrowstep. All other trade names and
trademarks referred to in this prospectus are the property of their
respective owners.
|
|
|
|
|
|
|
You
should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different or additional
information. We are not making an offer of these securities in any
jurisdiction where the offer or sale is not permitted. You should not
assume that the information contained in this prospectus is accurate as of
any
date other than the date on the front cover of this prospectus.
PROSPECTUS
SUMMARY
This
summary highlights key information contained elsewhere in this prospectus
and
does not contain all of the information you should consider in making your
investment decision. You should read this summary together with the more
detailed information, including our financial statements and the related
notes,
contained elsewhere in this prospectus. You should carefully consider, among
other things, the matters discussed in “Risk Factors.”
Our
Business
Narrowstep
Inc. is a pioneer in the field of internet-based video content
delivery. Our mission is to host a global marketplace where we, for
our customers, distribute channels of video-based content and provide related
services, over the internet. Our system, which we have termed the
Television Operating System - TelvOS, enables comprehensive delivery of video
content and television-like programming to mobile, wireless, internet, broadband
and broadcast services. Our system provides a platform to enable
owners and users of video content to reach specific audiences by “Narrowcasting”
– targeting delivery of specific content to interested groups. We
believe Narrowcasting provides new business opportunities for content providers
to build commercial channels by creating a new model for delivering
content. In addition to enabling delivery of content, the Narrowstep
platform enables our clients to commercialize video-based
content. This can be achieved through directed advertising,
sponsorship, pay-per-view, subscription, microcharging and/or
ecommerce.
The
Offering
|
Common
stock being offered by
existing selling stockholders, including shares issuable upon the
exercise
of warrants and options
|
25,349,994
|
|
|
|
|
|
|
Common
stock outstanding as of
November 19, 2007
|
124,944,487
|
|
Our
common stock is quoted on the OTC
Bulletin Board under the symbol “NRWS”. On November 19, 2007, the
last quoted per share bid price of our common stock on the OTC Bulletin Board
was $0.16.
Principal
Executive Offices and Corporate Structure
Narrowstep
Inc. is a Delaware corporation whose principal executive offices are located
at
116 Village Blvd, Princeton, New Jersey and our telephone number is
609-951-2221. Narrowstep Inc. was incorporated on May 9, 2002 and is
the parent corporation of three wholly-owned subsidiaries:
Narrowstep
Ltd
., the operating company for the provision of Narrowcasting, which was
incorporated on April 9, 2002 under the laws of England and Wales;
Sportshows
Television Ltd.
, which produces video programs and other video based
content, was incorporated on March 1, 1994 under the laws of England and
Wales;
and
High
Television Ltd.
, a corporation incorporated under the laws of England and
Wales on July 18, 2002, to protect certain intellectual property rights to
our
internet channel High.TV.
Unless
the context otherwise requires, the terms “we,” “our” or “us” as used herein
refer to Narrowstep Inc. and its subsidiaries.
Summary
Consolidated Financial Information
The
following summary consolidated financial data should be read in conjunction
with
our Consolidated Financial Statements and Notes thereto and “Management's
Discussion and Analysis of Financial Condition and Results of Operations,”
included elsewhere in this prospectus. The summary consolidated
financial data for six month ended August 31, 2007 are derived from our
unaudited consolidated financial statements included elsewhere in this
prospectus while our year ended February 28, 2007 and February 28, 2006 are
derived from our audited Consolidated Financial Statements included in the
index
section of this prospectus. Our Consolidated Financial Statements for
the years ended February 28, 2007 and at February 28, 2006 were audited by
Rothstein Kass & Company, our independent registered public accounting
firm.
NARROWSTEP
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
SELECTED
FINANCIAL
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of
Operation Data
|
|
Unaudited
|
|
|
Audited
|
|
|
|
Six
month ended August
31,
|
|
|
Year
Ended February
28,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Total
revenue
|
|
|
2,876,650
|
|
|
|
2,712,890
|
|
|
|
6,008,835
|
|
|
|
2,706,262
|
|
Operating
Loss
|
|
|
(7,387,539
|
)
|
|
|
(2,541,813
|
)
|
|
|
(7,169,943
|
)
|
|
|
(4,268,987
|
)
|
Net
Loss
|
|
|
(8,182,401
|
)
|
|
|
(2,455,392
|
)
|
|
|
(7,061,474
|
)
|
|
|
(4,289,777
|
)
|
Comprehensive
Loss
|
|
|
(8,145,966
|
)
|
|
|
(2,412,409
|
)
|
|
|
(6,987,339
|
)
|
|
|
(4,326,446
|
)
|
Net
Loss per Common Share - Basic
and Diluted
|
|
|
(0.14
|
)
|
|
|
(0.05
|
)
|
|
|
(0.16
|
)
|
|
|
(0.13
|
)
|
Weighted-Average
Number of Shares
Outstanding, Basic and Diluted
|
|
|
56,603,692
|
|
|
|
45,192,724
|
|
|
|
45,240,652
|
|
|
|
32,190,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet
Data
|
|
Unaudited
August
31,
2007
|
|
|
|
|
|
|
February
28,
2007
|
|
|
February
28,
2006
|
|
|
|
$
|
|
|
|
|
|
|
$
|
|
|
$
|
|
Cash
and cash
equivalents
|
|
|
10,170,561
|
|
|
|
|
|
|
|
466,870
|
|
|
|
2,232,854
|
|
Short-term
investments
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
2,500,000
|
|
Property
and equipment,
net
|
|
|
2,677,606
|
|
|
|
|
|
|
|
1,234,557
|
|
|
|
289,148
|
|
Goodwill
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
1,157,581
|
|
Other
|
|
|
1,877,239
|
|
|
|
|
|
|
|
1,885,051
|
|
|
|
813,275
|
|
Total
Assets
|
|
|
14,725,406
|
|
|
|
|
|
|
|
3,586,478
|
|
|
|
6,992,858
|
|
Total
Liabilities
|
|
|
2,281,229
|
|
|
|
|
|
|
|
2,546,403
|
|
|
|
1,207,761
|
|
Total
Stockholders'
Equity
|
|
|
12,444,177
|
|
|
|
|
|
|
|
1,040,075
|
|
|
|
5,785,097
|
|
Total
Liabilities and
Stockholders' Equity
|
|
|
14,725,406
|
|
|
|
|
|
|
|
3,586,478
|
|
|
|
6,992,858
|
|
Risk
Factors
The
risks and uncertainties described
below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
may
also affect our business.
Risks
Relating to Our
Business
We
have a brief operating history which
makes it difficult to evaluate our business and predict our
success.
Narrowstep
Inc. was incorporated as a
start-up business on May 9, 2002. As a result, we have a brief operating
history
upon which to evaluate our business and prospects. Our historical results
of
operations are limited, so they may not give an accurate indication of our
future results of operations or prospects. We are in an early stage of
operations and we face risks and uncertainties relating to our ability to
successfully implement our business strategy. Our prospects must be considered
in light of these risks and the expenses and difficulties frequently encountered
in new and rapidly evolving businesses, such as internet-based video content.
These difficulties can include:
|
·
|
commercializing
new
technology;
|
|
·
|
finding
early
adopters;
|
|
·
|
getting
large customers to try the
product;
|
|
·
|
increasing
system
capacity;
|
|
·
|
developing
and enhancing software
products with limited
resources;
|
|
·
|
hiring
and maintaining key
employees with the correct
skills;
|
|
·
|
the
time and effort needed to
market the company and
products;
|
|
·
|
building
infrastructure to support
future growth;
|
|
·
|
setting
up and working effective
channels of distribution;
and
|
|
·
|
capital
raising to fund operations
through to breakeven.
|
We
may not be successful in meeting the
challenges we face. If we are unable to do so, our business will not be
successful and the value of our common stock will decline.
We
have a history of losses, are not
currently profitable and anticipate future losses.
Our
operating expenses have exceeded our
revenues in each quarter since inception. We had an accumulated
deficit of approximately $19.6 million as of February 28, 2007 and $12.5
million
as of February 28, 2006. Although our revenues have grown significantly since
2002, this growth may not be sustainable or indicative of future results
of
operations. We intend to continue to invest in internal expansion,
infrastructure, strategic acquisitions, integration of any acquired companies
into our existing operations, and our sales and marketing efforts. We cannot
be
certain when we will operate profitably, if ever.
If
we fail to maintain an effective
system of internal controls, we may not be able to accurately report our
financial results or prevent fraud. As a result, current and
potential stockholders could lose confidence in our financial reporting,
which
would harm our business and the price of our stock.
Effective
internal controls are
necessary for us to provide reliable financial reports and effectively prevent
fraud. If we cannot provide reliable financial reports or prevent fraud,
our
business and operating results could be harmed. On May 24, 2007, in connection
with its audit of our consolidated financial statements for the year ended
February 28, 2007, Rothstein, Kass & Company, P.C., our independent
registered public accounting firm, informed us and our audit committee of
certain deficiencies in our internal controls over financial reporting that
they
considered to be material and non-material weaknesses. The material weaknesses
were as follows:
|
·
|
We
did not record the stock-based
compensation expense on certain stock options, issued to one of
our
directors, on a timely basis. As a result of this, our third quarter
interim financial statements were
misstated.
|
The
non-material weaknesses were as
follows:
|
·
|
We
did not record a sufficient
allowance for bad debts related to a customer’s accounts receivable
balance that was in
question.
|
|
·
|
We
were recording invoices billed
to certain customers in such a manner that the result was to recognize
revenues on a cash basis, which is not in accordance with accounting
principals generally accepted in the
United States
.
|
Inferior
internal controls could harm
our operating results or cause us to fail to meet our reporting obligations
and
could also cause our current and potential stockholders to lose confidence
in
our reported financial information, which could have a negative effect on
the
price of our stock.
We
will need to obtain additional
capital in the future and if we are unable to do so on acceptable terms,
or at
the appropriate time, we may not be able to continue to develop and market
our
products and services, or even to continue as a going
concern.
We
do not currently generate revenues
sufficient to operate our business and do not believe we will do so in the
foreseeable future. As a result, we must rely on our ability to raise capital
from outside sources in order to continue operations in the long term. We
will
seek to raise additional capital through various financing alternatives,
including equity or possibly debt financings or corporate partnering
arrangements. However, we may not be able to raise additional needed capital
on
terms that are acceptable to us, or at all. If we do not receive an adequate
amount of additional financing in the future, we may not have sufficient
funds
to further develop and market our products and services, or even to continue
as
a going concern.
We
have received an opinion from our independent registered public accounting
firm
expressing doubt regarding our ability to continue as a going
concern.
Our
independent registered public accounting firm noted in their report accompanying
our consolidated financial statements for the fiscal year ended February
28,
2007 that we have reported significant losses from operations and require
additional financing to fund future operations and stated that those conditions
raised substantial doubt about our ability to continue as a going
concern. We cannot assure you that our plans to address these matters
will be successful. This doubt about our ability to continue as a
going concern could adversely affect our ability to obtain additional financing
at favorable terms, if at all, as such an opinion may cause investors to
lose
faith in our long-term prospects. If we cannot successfully continue as a
going
concern, our stockholders may lose their entire investment in us.
If
the internet-based video content
market does not grow, we will not be successful.
The
market for our products and services
is new and rapidly evolving. As a company in the internet-based video content
delivery field, our business model is based on an expectation that demand
for
internet-based video content will increase significantly and compete with
more
traditional methods of television broadcasting. There can be no assurance
that
there is a substantial market for the services we offer. If this market does
not
grow, we will not be able to achieve meaningful revenues and our business
will
fail.
If
high-speed internet access with video
viewing capability is not successfully adopted globally, there will be little
demand for our products and services.
The
success of our business is dependent
upon extensive use of the internet. The video content we deliver is best
viewed
over a high-speed internet connection. We believe increased internet
use may depend on the availability of greater bandwidth or data transmission
speeds or on other technological improvements, and we are largely dependent
on
third party companies to provide or facilitate these improvements. If networks
cannot offer high-speed services because of congestion or other reasons,
or if
high-speed internet access fails to gain wide market acceptance, we believe
there will be little demand for our products and services and our revenues
may
be insufficient to achieve and maintain profitability. The deployment of
corporate firewalls may also restrict the growth and availability of streaming
media services and adversely affect our business model by limiting access
to the
content broadcast through our service. Changes in content delivery
methods and emergence of new internet access devices such as TV set-top boxes
could dramatically change the market for streaming media products and
services if new delivery methods or devices do not use streaming media or
if
they provide a more efficient method for transferring data than streaming
media.
We
face substantial competition and if
we are unable to compete effectively, the demand for, or the prices of, our
products and services may decline.
We
face numerous competitors both in the
internet-based distribution market, and in the more traditional broadcasting
arena. Many of these companies have substantially longer operating histories,
significantly greater financial, marketing, manufacturing and technical
expertise, and greater resources and name recognition than we do. If we fail
to
attain commercial acceptance of our products and services and to be competitive
with these companies, we may not ever generate meaningful revenues. In addition,
new companies may emerge at any time with products or services that are
superior, or that the marketplace perceives are superior, to ours. There
are
relatively few barriers preventing companies from competing with us. We do
not
own any patented technology that precludes or inhibits others from entering
our
market. We may not be able to compete effectively with any potential future
competitors and the demand for, and prices of, our products and services
may
decline.
If
we are unable to continue development
of one or more of our products, our entire business strategy may be
unsuccessful.
Our
overall business strategy is
dependent upon providing effective solutions to our customers. We are
continuing the development and improvement of the products and services we
believe will be necessary for our future growth. We anticipate that
enhancements to our existing products will continue to take the majority
of the
time of our Chief Technology Officer and support from a number of developers
on
an ongoing basis. Development of any product, however, can be more
expensive and time-consuming than originally planned, and face unexpected
delays
or problems. Any delays in development could cause significant additional
expense, result in operating losses and lost corporate opportunities, and
create
significant marketing opportunities for our competition. Because we are
continuing to develop and improve a number of products, all of which are
integral to our complete solution, the possibility of a problem is much greater
than if we were developing only one product. Problems or delays in the continued
development and deployment of any of our products could defeat our business
strategy and substantially harm our prospects for future
revenues.
If
audio-video player software is not
readily available, our products will not gain
acceptance.
To
view our products, a viewer must have
an audio-video player such as Microsoft Media Player. If free distribution
of
player software does not continue or player software becomes less accessible,
the potential market for our products and services will not grow, which in
turn
would have an adverse effect on our revenues and ability to achieve and maintain
profitability.
If
we lose one or more of our major
clients our revenues will decline substantially.
For
the fiscal year ended February 28,
2007, our four largest clients accounted for approximately 23% of our
revenue. For the fiscal year ended February 28, 2006, our four
largest clients accounted for approximately 44% of our revenue. If we lose
one
or more of these clients, our revenues will decline
substantially.
If
we are unable to obtain and maintain
sufficient bandwidth from third party providers, our business will
suffer.
We
depend on network operators such as
Teleglobe and Interoute to distribute video over the internet. These
network operators may choose to compete with us, to enter into relationships
with competitors, to change the terms on which they distribute our channels,
including to increase their prices, or not to do business with us because
of our
size and lack of operating history. If we are unable to obtain sufficient
bandwidth on terms acceptable to us, the scalability and reliability of our
system would be adversely affected.
If
content owners do not adopt
internet-based delivery as a means for distributing their content, we may
not be
able to generate significant revenues.
The
success of our business model is
highly dependent on video content being available for distribution over the
internet. Content owners may choose not to make their content available over
the
internet. If sufficient content is not available we may not generate sufficient
revenues and our business may fail.
If
we lose the services of our interim
chief executive officer our business may suffer.
We
are heavily dependent upon the
continued services of David McCourt, Interim Chief Executive Officer. The
loss
of his services could seriously impede our success. We do not carry life
insurance on the life of our CEO. In the event that our CEO becomes unavailable
for any reason, our business may suffer.
As
a start-up business, we may be unable
to attract and retain the qualified technical, sales and support staff necessary
for our growth.
Our
ability to continue to develop and
market our products and services is dependent upon our ability to identify,
recruit, retain and motivate qualified personnel. As a start-up business,
salaries for our employees are significantly below those of competitors in
our
industry and most of our existing employees are stockholders or are otherwise
incentivized with periodic option grants. The low salaries and lack of assurance
of our ability to secure additional funding may affect our efforts to recruit
and retain additional personnel necessary to meet our growth targets. In
addition, if we continue to issue additional equity in order to finance the
business, future stock option grants may be less attractive to potential
new
hires and may not provide adequate motivation for existing personnel. If
we are
unable to hire and retain sufficient additional in-house personnel, we will
be
unable to complete development of our products and services, and our business
will suffer.
If
we are unable to protect our
intellectual property or if our intellectual property is found to infringe
another’s intellectual property, we may be unable to generate revenues based on
our products.
None
of our intellectual property is
covered by patents. We currently rely on a combination of trade
secret, nondisclosure and other contractual agreements, as well as existing
copyright and trademark laws to protect our confidential and proprietary
information, but this may not be sufficient to prevent third parties from
infringing upon or designing around our intellectual property to develop
a
competing product. We cannot be sure that our technology will not infringe
any
third party's intellectual property. In the event that a third party either
infringes upon our intellectual property or makes a claim that our products
infringe upon its proprietary rights, we may not have sufficient financial
or
other resources to enforce our rights or to successfully defend against any
claim. Any infringement of or by our intellectual property could restrict
our
ability to generate revenues from our products.
System
failures and/or security risks
may impair our operations.
The
core of our network infrastructure
could be vulnerable to unforeseen computer problems. We may experience
interruptions in service in the future as a result of the accidental or
intentional actions of internet users, current and former employees or others.
These risks are heightened by our reliance on a small number of network
providers. Unknown security risks may result in liability to
Narrowstep and also may deter new clients from using our products and services.
The security measures we implement may still be circumvented in the future,
which could impair our operations and have a material adverse effect on our
business.
As
a third-party distributor of
proprietary video content, we are vulnerable to claims of breach of content
rights which may harm our business.
As
a third-party deliverer of
proprietary video content, we rely on our clients to have the appropriate
rights
to use and distribute this content. If the rights of the content owners are
contravened, knowingly or otherwise, or if a content owner claims their rights
are contravened, we could be subject to substantial lawsuits which could
be
time-consuming and costly to defend and our reputation may be harmed for
having
delivered the content.
Risks
related to conducting business
outside of the
United
States
may adversely impact
our business.
We
market and sell our products and
services in Europe, Asia, and the
United States
.
As a result, we are subject to the
normal risks of doing business abroad. Risks include unexpected changes in
regulatory requirements, export and import restrictions, difficulties in
staffing and managing foreign operations, longer payment cycles, problems
in
collecting accounts receivable, potential adverse tax consequences, exchange
rate fluctuations, increased risks of piracy, limits on our ability to enforce
our intellectual property rights, discontinuity of our infrastructures,
subsidized competition from local nationalized providers and other legal
and
political risks. Such limitations and interruptions could have a material
adverse effect on our business.
Additional
equity financing will dilute
the ownership interest of our existing stockholders.
On
August 8, 2007, we closed a private
financing with a number of accredited investors for the sale of common stock
and
warrants for a total purchase price of $10,510,000. Pursuant to the financing
we
sold a total of 42,040,000 shares of common stock at a purchase price of
$0.25
per share. We also issued warrants to purchase an aggregate of 21,020,000
shares
of common stock at an exercise price of $0.50 per share, subject to
adjustment. The warrants are exercisable at any time on or prior to
August 8, 2012. The
warrants contain customary anti-dilution
provisions in the event of any stock split, reverse stock split,
reclassification or recapitalization of the Company. In addition, the
exercise price and the number of shares issuable upon the exercise of the
warrants are subject to adjustment on a full-ratchet basis in the event that
we
issue or are deemed to have issued shares of common stock at an effective
purchase price of less than $0.50 per share, subject to certain
exceptions. In the financing,
we issued to the placement
agents
warrants to purchase an aggregate of 1,706,400 shares of common
stock. Those warrants have the same terms as the warrants issued in
the financing, except that the warrants issued to the placement agents have
a
cashless exercise right. In connection with this financing, the
Company’s $7,110,000 in outstanding mandatorily 12% convertible notes were
automatically converted into an aggregate of 35,392,003 shares of common
stock
at a conversion price of $0.225 per share. These transactions
resulted in substantial dilution of the ownership interest of our existing
stockholders.
We
will need to raise additional capital
in the future to continue the development and marketing of our products and
services. We anticipate that we may raise capital in the future by selling
additional equity or financial instruments which are exchangeable or convertible
into equity. Any future equity or equity-related financings will dilute the
ownership interest of our existing stockholders.
Because
our assets are located primarily
in the
United
Kingdom
, it may be
difficult to proceed with an action, or to enforce a judgment, against
us.
Our
offices and assets are located
primarily in the
United
Kingdom
. As a result, it
may be difficult for stockholders located in the
United States
to pursue an action, or enforce a
judgment against us, in the event of any litigation.
Risks
Related to Investing in Shares
If
there is no active trading market for our stock, you may be unable to sell
the
shares.
There
can be no assurance that an active
trading market for our shares will ever develop in the
United States
,
or elsewhere. In the event that no
active trading market for the shares develops, it will be extremely difficult
for stockholders to dispose of the shares. In the event an active trading
market
develops, there can be no assurance that the market will be strong enough
to
absorb all of the shares which may be offered for sale by the
stockholders.
Our
stock price is highly volatile and
can fluctuate in response to many factors, some of which are beyond our
control.
The
trading price of our shares is
highly volatile and could be subject to wide fluctuations in response to
factors
such as actual or anticipated variations in quarterly operating results,
announcements of technological innovations, new sales forecasts, or new products
and services by us or our competitors, changes in financial estimates by
securities analysts, conditions or trends in internet markets, changes in
the
market valuations of other business service providers providing similar services
or products, announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures, capital commitments, additions or
departures of key personnel, sales of shares and other events or factors,
many
of which are beyond our control. Consequently, future announcements concerning
us or our competitors, litigation, or public concerns as to the commercial
value
of one or more of our products or services may cause the market price of
our
shares to fluctuate substantially for reasons which may be unrelated to
operating results. These fluctuations, as well as general economic, political
and market conditions, may have a material adverse effect on the market price
of
our shares. In addition, because our common stock is quoted on the OTC Bulletin
Board, price quotations will reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not represent actual
transactions.
In
addition, the stock market in general
has experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of many companies.
These broad market factors may materially adversely affect the market price
of
the shares, regardless of our operating performance.
Our
obligation to register shares of our
common stock for resale may adversely affect the price of our
stock.
In
addition to the shares covered
hereby, we are obligated to register for resale 69,497,545 shares of common
stock for various selling stockholders. The ability of these selling
stockholders to sell their shares on the open market or the perception that
such
sales may take place in the future may adversely impact the price of our
stock. In addition, if we fail to register these shares or, in
certain cases, fail to maintain the effectiveness of such registration, we
could
be subject to substantial monetary penalties.
Because
we have a limited offering qualification in California, sales of the shares
are
limited in California.
The
offering of our shares in California was approved on the basis of a limited
offering qualification where offers/sales can only be made to proposed
California investors based on their meeting certain suitability
standards. The California Department of Corporations refers to and
specified this standard as a “super suitability” standard, which requires any
California investor in our common stock to have not less than (i) $250,000
in
liquid net worth (a net worth exclusive of home, home furnishings and
automobile) plus $65,000 gross annual income, (ii) $500,000 in liquid net
worth,
(iii) $1,000,000 in net worth (inclusive), or (iv) $200,000 gross annual
income.
Because
the offering was approved in California on the basis of a limited offering
qualification, we were not required to demonstrate compliance with some of
the
merit regulations of the California Department of Corporations as found in
Title
10, California Code of Regulations, Rule 260.140 et seq. In addition,
the exemptions for secondary trading in California available under California
Corporations Code Section 25104(h) will not be available, although there
may be
other exemptions to cover private sales in California of a bona fide owner
of
our common stock for his own account without advertising and without being
effected by or through a broker dealer in a public offering. These
restrictions will make it more difficult to sell our shares in
California.
Certain
provisions of our charter and
by-laws could discourage potential acquisition proposals or a change in
control.
Certain
provisions of our Certificate of
Incorporation, By-Laws and
Delaware
law could discourage, delay or prevent
a change in control of our company or an acquisition of our company at a
price
which many stockholders may find attractive. The existence of these provisions
could limit the price that investors might be willing to pay in the future
for
shares of our common stock. Our Board of Directors, without further
stockholder approval, may issue preferred stock with voting, conversion and
other rights and preferences that could adversely affect the voting power
or
other rights of the holders of common stock.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements including, without limitation,
in
the discussions under the captions “Our Business,” “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and
elsewhere in this prospectus. Any and all statements contained in this
prospectus that are not statements of historical fact may be deemed
forward-looking statements. Terms such as may, might, would, should, could,
project, estimate, pro forma, predict, potential, strategy, anticipate, attempt,
develop, plan, help, believe, continue, intend, expect, future, and similar
terms and terms of similar import (including the negative of any of the
foregoing) may be intended to identify forward-looking statements. However,
not
all forward-looking statements may contain one or more of these identifying
terms. Forward-looking statements in this prospectus may include, without
limitation, statements regarding (i) a projection of revenues, income (including
income/loss), earnings (including earnings/loss) per share, capital
expenditures, dividends, capital structure, or other financial items, (ii)
the
plans and objectives of management for future operations, including plans
or
objectives relating to our products or services, (iii) our future financial
performance, including any such statement contained in a discussion and analysis
of financial condition by management or in the results of operations included
pursuant to the rules and regulations of the Securities and Exchange Commission,
and (iv) the assumptions underlying or relating to any statement described
in
subparagraphs (i), (ii), or (iii).
The
forward-looking statements are not meant to predict or guarantee actual results,
performance, events, or circumstances and may not be realized because they
are
based upon our current projections, plans, objectives, beliefs, expectations,
estimates, and assumptions and are subject to a number of risks and
uncertainties and other influences, many of which we have no control over.
Actual results and the timing of certain events and circumstances may differ
materially from those described by the forward-looking statements as a result
of
these risks and uncertainties. Factors that may influence or contribute to
the
inaccuracy of the forward-looking statements or cause actual results to differ
materially from expected or desired results may include, without limitation,
our
inability to successfully market our products and services, the inability
to
obtain adequate financing, insufficient cash flows and resulting illiquidity,
dependence upon significant customers, inability to expand our business,
government regulations, increased competition, changing customer preferences,
stock illiquidity, failure to implement our business plans or strategies,
and
ineffectiveness of our marketing program and our acquisition
opportunities. A description of some of the risks and uncertainties
that could cause our actual results to differ materially from those described
by
the forward-looking statements in this prospectus appears under the caption
“Risk Factors” and elsewhere in this prospectus.
Because
of the risks and uncertainties related to these factors and the forward-looking
statements, readers of this prospectus are cautioned not to place undue reliance
on the forward-looking statements. We disclaim any obligation to
update these forward-looking statements or to announce publicly the results
of
any revisions to any of the forward-looking statements contained in this
prospectus to reflect any new information or future events or circumstances
or
otherwise unless required to do so under applicable federal securities
laws.
Readers
should read this prospectus and the following discussion and analysis in
conjunction with the discussion under the caption “Risk Factors” in this
prospectus, our financial statements and the related notes thereto in this
prospectus, and other documents filed from time to time by Narrowstep with
the
Commission.
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale of the shares covered hereby by the
selling stockholders. We will however receive the proceeds from the
cash exercise of the warrants or options by the selling
stockholders. If all of the warrants and options were exercised for
cash, we would receive proceeds of approximately $31.0 million. We
intend to use the proceeds from any cash warrant or option exercise for general
corporate purposes. There can be no assurance that the warrants or
options will be exercised or as to the timing of any such exercise.
DIVIDEND
POLICY
We
have
never declared or paid any cash dividends on our capital stock. We
anticipate that we will retain any earnings to support operations and to
finance
the growth and development of our business. Therefore, we do not
expect to pay cash dividends in the foreseeable future. Any future
determination relating to our dividend policy will be made at the discretion
of
our board and will depend on a number of factors, including future earnings,
capital requirements, financial conditions and future prospects and other
factors the board may deem relevant.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
You
should read the following discussion and analysis in conjunction with the
consolidated financial statements and the notes included elsewhere in this
Registration Statement and the section “Risk Factors” in Item 1A, as well as
other cautionary statements and risks described elsewhere in this Registration
Statement, before deciding to purchase, sell or hold our common
stock.
Overview
We
provide our customers with technology
that allows them to transmit video content over the internet to targeted
audiences. Our services allow customers to format and manage content, create
programming, transmit programming to specific audiences and create and manage
subscription, pay-per-view and other revenue generation models. We also provide
production services to customers; however, production services have declined
as
a percentage of total revenues as our core "narrowcasting" service grows
in
importance.
We
were incorporated as a
Delaware
corporation in May 2002. Our
headquarters is in
Princeton
,
New
Jersey
and we have offices
in
London
and
New York City
. For
the fiscal year ended
February 28, 2007, approximately 80% of our total revenues were generated
from
customers in Europe, the Middle East and Africa, 13% was generated from
customers in the
United
States
and the remaining
7%
was generated from customers in the Asia Pacific region. We expect
our revenues from sources in the
United States
to continue to increase as a percentage
of total revenues as we begin to focus more on revenue opportunities
there.
How
We Generate
Revenue
We
generate revenue primarily from fees
we charge for the use of our technology and related services for narrowcasting
and from the sale of production services. Revenues from our narrowcasting
activities include fees paid for the establishment and maintenance of channels,
encoding and uploading of content, as well as the management of channels
on
behalf of clients. The fee charged for the establishment of a channel depends
on
the level of service desired by the customer and typically ranges from $5,000
to
$100,000. We also charge a monthly license fee which ranges from $1,000 to
$30,000, depending upon the range of features and capabilities being licensed,
which covers the use of the TelvOS system, cost of support, maintenance and
upgrades. In addition, based on the customer’s contract, we may obtain
additional revenues from content hosting (the storage of files on our network
on
a per gigabyte basis), content delivery (the cost of bandwidth, on a per
gigabyte basis, to deliver the content to the end viewer), and, to a lesser
extent, revenue sharing arrangements. These revenue sharing
arrangements come from monthly or annual subscription fees charged to the
viewer
for the channel, pay per view events, and in some cases from advertising
campaigns that we have provided for the content owner. The majority
of our customers sign twelve month contracts which are the basis of our billing
arrangements.
Revenues
for narrowcasting are
recognized in our financial statements as follows: any consulting
services or one-time setup fees for a customer channel are recognized once
the
work is completed and accepted by the customer. The monthly recurring
revenue items are, the monthly license fee, the monthly usage of bandwidth,
and
the amount of storage at time of billing. We currently do not use any
estimates for recording revenue. The revenue recognized during the
month is based on a contractual rate or monthly fee which covers the month
invoiced.
Revenues
from production services
include fees paid for the production, filming, editing and encoding of programs.
We charge our clients on a
time
and expense basis for these
services, typically on a project-by-project basis, although occasionally
under
longer term agreements. Revenues for production services are recognized only
when the project is completed and delivered to the
customer.
The
Company may receive payments in
advance for narrowcasting and production services. These payments are
deferred and recognized only when the revenue is earned as described
above.
73%
of our revenues for the fiscal year
ended February 28, 2007 came from narrowcasting and other services and 27%
came
from production services. 55% of our revenues for the fiscal year ended February
28, 2006 came from our narrowcasting activities and 45% came from production
services. We expect that the proportion of our revenues generated by our
narrowcasting business will continue to increase.
Key
Revenue
Drivers
Currently
we have identified several key
drivers that we believe significantly affect our revenue and operations and
we
are beginning to track these drivers. We expect to report these
drivers in future filings once our systems infrastructure is able to accurately
track and report the relevant data. Below is a description of the
drivers we believe are important to track and monitor in order to gauge the
success and/or indicate any problems occurring in the
business.
Average
Monthly Recurring
Revenue
which is total
monthly recurring revenue divided by the number of customers. We
believe that an increase in our average monthly recurring revenue, which
is the
largest component in our monthly billing for narrowcasting, indicates that
our
customers are increasing their usage of our TelvOS
capabilities.
Average
Bandwidth
Usage
which is the
total bandwidth usage divided by the total number of customers. An
increase in average bandwidth usage is an indicator of the popularity of
our
customer channels as a group. We expect that such an increase would have
a
positive effect on our related revenue streams, such as revenue sharing
arrangements, which includes subscription or advertising.
Average
Storage
which is the
total amount of content
stored divided by the total number of customers. We believe that an
increase in average storage is an indicator of new and fresh content which
can
also drive traffic and affect related revenue streams.
Results
of Operations: Three and six
months ended August 31, 2007 and 2006
NARROWSTEP
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
AND
COMPREHENSIVE LOSS (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
August
31,
2007
|
|
|
August
31,
2006
|
|
|
|
August
31,
2007
|
|
|
August
31,
2006
|
|
|
|
$
|
|
|
$
|
|
|
|
$
|
|
|
$
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Narrowcasting
and other
|
|
|
1,143,955
|
|
|
|
1,041,980
|
|
|
|
2,559,115
|
|
|
|
1,878,493
|
|
Production
services
|
|
|
141,902
|
|
|
|
526,387
|
|
|
|
317,535
|
|
|
|
834,397
|
|
Total
revenue
|
|
|
1,285,857
|
|
|
|
1,568,367
|
|
|
|
2,876,650
|
|
|
|
2,712,890
|
|
Costs
and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
1,361,524
|
|
|
|
711,085
|
|
|
|
2,587,315
|
|
|
|
1,133,303
|
|
Selling,
general and administrative
|
|
|
3,449,202
|
|
|
|
1,900,687
|
|
|
|
6,094,826
|
|
|
|
3,581,250
|
|
Research
& development
|
|
|
783,298
|
|
|
|
285,093
|
|
|
|
1,582,048
|
|
|
|
540,150
|
|
Total
operating expenses
|
|
|
5,594,024
|
|
|
|
2,896,865
|
|
|
|
10,264,189
|
|
|
|
5,254,703
|
|
Operating
Loss
|
|
|
(4,308,167
|
)
|
|
|
(1,328,498
|
)
|
|
|
(7,387,539
|
)
|
|
|
(2,541,813
|
)
|
Interest
income (expense), net
|
|
|
(599,280
|
)
|
|
|
41,166
|
|
|
|
(778,923
|
)
|
|
|
85,265
|
|
Currency
exchange income (loss)
|
|
|
(14,036
|
)
|
|
|
1,745
|
|
|
|
(15,939
|
)
|
|
|
1,156
|
|
Net
Loss
|
|
|
(4,921,483
|
)
|
|
|
(1,285,587
|
)
|
|
|
(8,182,401
|
)
|
|
|
(2,455,392
|
)
|
Foreign
currency translation
adjustment
|
|
|
18,963
|
|
|
|
6,219
|
|
|
|
36,435
|
|
|
|
42,983
|
|
Comprehensive
Loss
|
|
|
(4,902,520
|
)
|
|
|
(1,279,368
|
)
|
|
|
(8,145,966
|
)
|
|
|
(2,412,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss per Common Share - Basic
and Diluted
|
|
|
(0.07
|
)
|
|
|
(0.03
|
)
|
|
|
(0.14
|
)
|
|
|
(0.05
|
)
|
Weighted-Average
Number of Shares
Outstanding, Basic and Diluted
|
|
|
67,858,410
|
|
|
|
45,248,974
|
|
|
|
56,603,692
|
|
|
|
45,192,724
|
|
Consolidated
revenues
for the three months ended August 31, 2007 decreased by
$282,510, or 18%, to $1,285,857 as compared to $1,568,367 for the three months
ended August 31, 2006. Consolidated revenues for the six months ended August
31,
2007 increased by $163,760, or 6%, to $2,876,650 as compared to $2,712,890
for
the six months ended August 31, 2006 as follows:
Narrowcasting
and other revenues
for the three months ended August 31, 2007 increased
by $101,975, or 10%, to $1,143,955 as compared to $1,041,980 for the three
months ended August 31, 2006. Narrowcasting revenues for the six
months ended August 31, 2007 increased by $680,622, or 36%, to $2,559,115
as
compared to $1,878,493 for the six months ended August 31, 2006. The
increase in narrowcasting revenues resulted primarily from a net increase
in
customers, partially offset by sales allowances and adjustments given in
the
quarter. Although narrowcasting revenues increased quarter to
quarter, the rate of growth was less than in prior quarters as a result of
smaller content providers churning for non-payment. Many of these
content providers are simply undercapitalized. The Company is in the
process of refocusing its sales and marketing efforts on larger, more profitable
customers to whom the Company can sell a range of products and services and
away
from smaller content providers who have traditionally had lower margins and
higher payment default rates. Management expects that this shift in
strategic focus will accelerate the Company’s revenue growth.
Production
services revenues
for the three months ended August 31, 2007 decreased
by $384,485, or 73%, to $141,902 as compared to $526,387 for the three months
ended August 31, 2006. Production services revenues for the six
months ended August 31, 2007 decreased by $516,862, or 62%, to $317,535 as
compared to $834,397 for the six months ended August 31, 2006. As
previously disclosed, our strategic plan is to focus our resources on
narrowscasting and to deemphasize production services as a revenue source
of our
business. Consistent with this plan, revenues from this segment
continue to decline as we continue to fulfill current obligations and execute
on
our plan to exit this business segment.
Geographical
distribution of consolidated revenues:
|
|
|
|
|
|
Six
Months
Ended
|
|
|
|
August
31,
2007
|
|
|
August
31,
2006
|
|
|
Percent
|
|
|
|
$
|
|
|
$
|
|
|
Change
|
|
United
States
|
|
|
431,647
|
|
|
|
320,645
|
|
|
|
35
|
%
|
Europe,
Middle-East and Africa
|
|
|
2,388,230
|
|
|
|
2,313,928
|
|
|
|
3
|
%
|
Asia
Pacific
|
|
|
38,559
|
|
|
|
59,866
|
|
|
|
-36
|
%
|
Internet
Sales
|
|
|
18,214
|
|
|
|
18,451
|
|
|
|
-1
|
%
|
Total
|
|
|
2,876,650
|
|
|
|
2,712,890
|
|
|
|
6
|
%
|
Consolidated
costs and expenses
for the three months ended August 31, 2007 increased
by $2,697,159, or 93%, to $5,594,024 as compared to $2,896,865 for the three
months ended August 31, 2006. Consolidated expenses for the six
months ended August 31, 2007 increased by $5,009,486, or 95%, to $10,264,189
as
compared to $5,254,703 for the six months ended August 31, 2006 as
follows:
Operating
expenses
includes the cost of bandwidth, direct labor, sub-contracted
labor, consulting fees and depreciation. For the three months ended
August 31, 2007 these costs were $1,361,524, a 91%, increase over the $711,085
reported in the three months ended August 31, 2006. Operating expenses for
the
six months ended August 31, 2007 were $2,587,315, a 128% increase over the
$1,133,303 reported in the six months ended August 31, 2006. The
increase resulted primarily from increased headcount to meet customer support
needs in our narrowcasting business and to begin building out our internal
Content Delivery Network (CDN) system. This increase was offset in
part by a reduction in production expenses. We expect that operating
expenses will continue at these higher levels for the near term as we anticipate
that our CDN system will not be complete until approximately the fourth quarter
of this fiscal year. However, we expect that these expenses will
begin to decrease as a percentage of total revenues as we achieve more
efficiency in delivering and supporting our service offerings.
Selling,
general and administrative expenses
includes employee compensation and
related costs for personnel engaged in marketing, direct and reseller sales
support functions, the executive team and back office help. For the three
months
ended August 31, 2007 these costs were $3,449,202, a 81% increase over the
$1,900,687 reported for the three months ended August 31,
2006. SG&A for the six months ended August 31, 2007 costs were
$6,094,826, a 70% increase over the $3,581,250 reported for the six months
ended
August 31, 2006. The increase is primarily due to increased
headcount, primarily in direct sales, as we continue to build infrastructure
to
support a higher level of sales. The increase also resulted from
higher stock compensation expense attributable to the employment agreement
entered into with our interim CEO, under which he is paid only in restricted
stock and performance units.
Research
& development expenses
include employee compensation, stock options
and depreciation and any related costs for personnel primarily focused on
research and development efforts. For the three months ended August
31, 2007 these costs were $783,298, a 175% increase over the $285,093 reported
for the three months ended August 31, 2006. R&D expenses for the
six months ended August 31, 2007 were $1,582,048, a 193% increase over the
$540,150 reported for the six months ended August 31, 2006. The increase
in
research and development expenses resulted primarily from increased headcount
and increased third party expenses relating to the further development and
enhancement of our TelvOS system. The increase also resulted from
increased headcount to maintain the Company’s existing systems and to provide
customized support for our growing customer base. However, we expect
that these expenses will begin to decrease as a percentage of total revenues
as
we refocus our strategic direction on larger customers where customization
expenses can be spread over a higher revenue base.
Results
of Operations: Fiscal
Years Ended February 28, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
Audited
|
|
Year
ended
|
|
|
|
|
|
|
|
|
|
February
28, 2007
|
|
|
February
28, 2006
|
|
|
Inc
(Dec)
|
|
|
Percent
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Narrowcasting
and other
|
|
|
4,369,117
|
|
|
|
1,499,633
|
|
|
|
2,869,484
|
|
|
|
191
|
%
|
Production
services
|
|
|
1,639,718
|
|
|
|
1,206,629
|
|
|
|
433,089
|
|
|
|
36
|
%
|
Total
Revenue
|
|
|
6,008,835
|
|
|
|
2,706,262
|
|
|
|
3,302,573
|
|
|
|
122
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
2,655,395
|
|
|
|
1,804,879
|
|
|
|
850,516
|
|
|
|
47
|
%
|
Selling,
general and
administrative
|
|
|
8,206,223
|
|
|
|
4,779,764
|
|
|
|
3,426,459
|
|
|
|
72
|
%
|
Research
&
development
|
|
|
1,088,723
|
|
|
|
390,606
|
|
|
|
698,117
|
|
|
|
179
|
%
|
Impairment
charge on
long-lived
assets
|
|
|
1,228,437
|
|
|
|
-
|
|
|
|
1,228,437
|
|
|
|
0
|
%
|
Total
Operating expenses
|
|
|
13,178,778
|
|
|
|
6,975,249
|
|
|
|
6,203,529
|
|
|
|
89
|
%
|
Operating
Loss
|
|
|
(7,169,943
|
)
|
|
|
(4,268,987
|
)
|
|
|
(2,900,956
|
)
|
|
|
40
|
%
|
Other
income (expense),
net
|
|
|
118,814
|
|
|
|
(14,641
|
)
|
|
|
133,455
|
|
|
|
912
|
%
|
Currency
exchange
loss
|
|
|
(10,345
|
)
|
|
|
(6,149
|
)
|
|
|
4,196
|
|
|
|
68
|
%
|
Net
Loss
|
|
|
(7,061,474
|
)
|
|
|
(4,289,777
|
)
|
|
|
2,771,697
|
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount
|
|
|
56
|
|
|
|
34
|
|
|
|
22
|
|
|
|
|
|
Consolidated
revenues
for the fiscal year ended February 28, 2007 increased
$3,302,573, or 122%, to $6,008,835 from $2,706,262 for the fiscal year ended
February 28, 2006 as follows:
Narrowcasting
and other revenues
for the fiscal year ended February 28, 2007
increased approximately $2,900,000, or 191% over the prior year. This
increase in narrowcasting revenues resulted primarily from a net increase
in
customers. Narrowcasting revenues also include one-time
implementation fees, which will continue to contribute to revenue as more
customers are added. The addition of the sales team in the United
States has begun making strides in that market. As a result, we have
seen an increase of revenue in the United States over the prior year of 126%
(see geographical distribution below).
Production
services revenues
for the fiscal year ended February 28, 2007 increased
approximately $433,000, or 36% over the prior year. This increase in production
services revenues resulted primarily from revenues from new customers added
over
the past year and sales of previously recorded programming. This business
remains seasonal in nature and dependent on one-time
assignments. Since the end of fiscal 2007, the number of jobs has
decreased primarily as a result of the termination of employment of several
senior employees of this business and a decreased emphasis on the production
services business.
Geographical
distribution of consolidated revenues:
|
|
|
|
Audited
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
|
|
|
|
|
February
28,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Percent
|
|
|
|
$
|
|
|
$
|
|
|
Change
|
|
United
States
|
|
|
755,452
|
|
|
|
333,884
|
|
|
|
126
|
%
|
Europe,
Middle-East and Africa
|
|
|
4,794,144
|
|
|
|
2,137,260
|
|
|
|
124
|
%
|
Asia
Pacific
|
|
|
356,765
|
|
|
|
212,037
|
|
|
|
68
|
%
|
Internet
Sales
|
|
|
102,474
|
|
|
|
23,081
|
|
|
|
344
|
%
|
Total
|
|
|
6,008,835
|
|
|
|
2,706,262
|
|
|
|
122
|
%
|
Consolidated
costs and expenses
for the fiscal year ended February 28, 2007
increased approximately $6,200,000, or 89%, over the prior year as
follows:
Operating
expenses
includes the cost of bandwidth, direct labor, sub-contracted
labor, consulting fees and depreciation. For the fiscal year ended
February 28, 2007 these costs were approximately $2,700,000, a 47% increase
over
the prior year.
The
increase resulted primarily from increased headcount to meet customer support
needs and to begin building our internal CDN system. Operating expenses also
increased as a result of an increased use of independent contractors in order
to
meet the increased work load of the production service business. The
total costs of operations were offset in part by lower bandwidth costs
year-over-year, due to a large credit that was issued by our network carrier
related to an overcharge that applied towards costs recognized in fiscal
year
2006 and fiscal year 2007. Once the errors in our bills were
detected, the carrier issued the credit and corrected all future
invoices.
Selling,
general and administrative expenses
includes employee compensation and
related costs for personnel engaged in marketing, direct and reseller sales
support functions, the executive team and backoffice help. For the fiscal
year
ended February 28, 2007 these costs were approximately $8,200,000, a 72%
increase over the prior year. This increase is due increased headcount primarily
in direct sales. SG&A expenses were also adversely impacted by a
large increase in bad debt. This increase primarily resulted from the
failure of a number of narrowcasting customers to have sufficient capital
to
sustain their business models as well as non-payments by several production
services customers. We are pursing collection efforts where
appropriate. The Company has implemented new controls and procedures
aimed at minimizing bad debt expense in future periods. SG&A also
increased as a result of increased legal and accounting fees as well as
increased expenses to house a growing number of employees.
Research
& development expenses
include employee compensation, stock options
and depreciation and any related costs for personnel primarily focused on
research and development efforts. For the fiscal year ended February
28, 2007 these costs were approximately $1,100,000, a 179% increase over
the
prior year. During the fiscal year the company began to hire developers to
further enhance the TelvOS system and to add new functionality. Aside
from adding new capabilities to the TelvOS system, new employees were also
needed in order to maintain the system and support our growing customer
base.
Impairment
charge on long-lived assets
reflects the write off of the goodwill and
intangible assets of Sportshows Television, Ltd., our production services
business.
The
reason for the impairment was due to several factors. In the past the
production segment has not been profitable and the company is currently
re-evaluating the products and services being offered by the production
segment. Several senior employees of STV are no longer employed with
the Company. The prospects or sales leads generated from this segment
have been declining, and we have incurred significant bad debts related to
the
existing sales.
Trends
in Our
Business
During
2004, we completed the initial
development of our product suite and began to focus primarily on the sale
of
licenses to use our narrowcasting products. Since then, we have added
significantly to our customer base and expect growth in the number of clients
using our products and services to continue to increase. Revenues generated
by
our narrowcasting activities grew to exceed those from production services
in
the fiscal year ended February 28, 2007. In addition, we have increased our
U.S.
customer base which is becoming an
important source of revenue as we increase our focus on opportunities
there.
We
expect that our operating expenses
will continue to increase as we seek to improve and upgrade our products,
continue to build our infrastructure and devote resources to building a sales
and marketing network. We expect that non-operating expenses, such as
accounting, legal and other professional fees will decrease
as a percentage of
revenues
as we focus on holding
those costs down
and look for opportunities to reduce these costs through better management
and
through automation.
Liquidity
and Capital
Resources
We
had
$10,170,561 in cash and cash equivalents available at August 31, 2007 and
available bank overdraft facilities of $60,411.
Cash
was
used to meet the needs of the business including, but not limited to, payment
of
operating expenses, funding capital expenditures and, working
capital. We discuss many of these factors in detail
below.
We
have
financed our operations from inception through private equity financing.
From
inception through August 31, 2007, we sold and issued in exchange for services
an aggregate of 125,280,977 shares of our common stock for gross proceeds
of
approximately $25.3 million. In addition, we have granted options and
issued shares in lieu of cash in payment to third parties for services rendered
and in connection with the acquisition of Sportshows Television, Ltd. To
a
lesser extent, we have also used capital leases to fund some of our equipment
acquisitions. We have incurred significant losses since our
inception and, at August 31, 2007, had an accumulated deficit of approximately
$27.7 million.
Our
current ratio (current assets divided by current liabilities) relates to
our
ability to pay our short-term debts as they become due. At August 31, 2007,
our
current ratio was 5.7, compared to 0.9 at February 28, 2007. Our current
ratio
fluctuates primarily as we use cash to develop our business and raise additional
funds from private equity financing from time to time.
On
March
2, 2007, we closed a private financing with a number of accredited investors
for
the sale of our 12% Mandatorily Convertible Notes and warrants for a total
purchase price of $7,110,000. The notes, which were to mature on
March 2, 2009, bore interest at 12% per annum, payable at
maturity. The Notes were mandatorily convertible at a 10% discount
into securities we issued in any subsequent private placement that resulted
in
gross proceeds to us of at least $3,000,000 or, in the event of a sale of
the
Company prior thereto, shares of common stock valued at a discount of 10%
to the
per share price to be paid in the Company sale. The warrants are
exercisable at any time on or prior to March 2, 2012 for an aggregate of
3,555,000 shares of common stock at an exercise price of $0.60 per share,
subject to adjustment. The Company has the right to force the cash
exercise of the warrants if the common stock trades at or above $1.80 per
share
for at least 20 consecutive trading days. Both the notes and the
warrants contain customary anti-dilution provisions in the event of any stock
split, reverse stock split, reclassification or recapitalization of the
Company.
In the
financing, we issued to the placement agents warrants to purchase an aggregate
of 75,875 shares of common stock. Those warrants have the same terms
as the warrants issued in the financing.
On
August 8, 2007, we closed a private
financing with a number of accredited investors for the sale of common stock
and
warrants for a total purchase price of $10,510,000. Pursuant to the financing
we
sold a total of 42,040,000 shares of common stock at a purchase price of
$0.25
per share. We also issued warrants to purchase an aggregate of 21,020,000
shares
of common stock at an exercise price of $0.50 per share, subject to
adjustment. The warrants are exercisable at any time on or prior to
August 8, 2012. The
warrants contain customary anti-dilution
provisions in the event of any stock split, reverse stock split,
reclassification or recapitalization of the Company. In addition, the
exercise price and the number of shares issuable upon the exercise of the
warrants are subject to adjustment on a full-ratchet basis in the event that
we
issue or are deemed to have issued shares of common stock at an effective
purchase price of less than $0.50 per share, subject to certain
exceptions. In the financing,
we issued to the placement
agents
warrants to purchase an aggregate of 1,706,400 shares of common
stock. Those warrants have the same terms as the warrants issued in
the financing, except that the warrants issued to the placement agents have
a
cashless exercise right. In connection with this financing, the
Company’s $7,110,000 in outstanding mandatorily 12% convertible notes were
automatically converted into an aggregate of 35,392,003 shares of common
stock
at a conversion price of $0.225 per share.
With
the
completion of these financings we will have sufficient working capital to
fund
our operations for at least the next twelve months. We also are
making efforts to improve our financial position by evaluating ongoing operating
expenses, increasing our effort to collect outstanding receivables and
continuing to focus on increasing sales.
For
the six months ended August 31, 2007 (Unaudited)
Net
cash used in operating activities
was $5,557,029 for the six months
ended August 31, 2007, compared to $1,755,910 for the six months ended August
31, 2006. The increase in cash used in operations was due primarily to an
increase in our net loss. Our net loss for the period increased
significantly for the reasons described above.
Net
cash used in investing activities
was $1,725,248 for the six months
ended August 31, 2007, compared to $659,676 for the six months ended August
31,
2006. This increase resulted primarily from additional capital expenditures
needed to build out our CDN network.
Net
cash provided by financing activities
was $17,034,589 for the six
months ended August 31, 2007, compared to $1,352,116 for the six months ended
August 31, 2006. The increase resulted from the sale of common stock
on August 8, 2007 and the issuance of the Company’s 12% mandatorily convertible
notes issued March 2, 2007 as described below.
We
had
$10,170,561 in cash and cash equivalents available at August 31, 2007 and
available bank overdraft facilities of $60,411.
An
overdraft facility is a line of credit arrangement, negotiated with a bank
and
usually reviewable on an annual basis, whereby the bank's customer is permitted
to take its checking account into a debit balance on a pre-agreed interest
basis
up to an agreed amount. Amounts utilized under overdraft facilities are payable
on demand. At August 31, 2007 and February 28, 2007, the overdraft facilities
consisted of $20,137 and $19,600, respectively, with Barclays Bank PLC and
$40,274 and $39,000, respectively, with National Westminster Bank PLC (NatWest).
Neither facility was utilized on August 31, 2007 or February 28, 2007. The
interest rate on the Barclays facility is 5.75% above Barclays' variable
base
rate (which base rate was 5.25% per annum as of August 31, 2007). The interest
rate on the NatWest facility is 5.75% above NatWest's variable base rate
(which
base rate was 5.25% per annum as of August 31, 2007). The Barclays overdraft
facility was renewed on February 17, 2007. The NatWest overdraft
facility was renewed on May 31, 2007.
Our
current ratio (current assets divided by current liabilities) relates to
our
ability to pay our short-term debts as they become due. At August 31, 2007,
our
current ratio was 5.7, compared to 0.9 at February 28, 2007. Our current
ratio
fluctuates primarily as we use cash to develop our business and raise additional
funds from private financing from time-to-time.
As
of
August 31, 2007, our principal capital commitments consisted of obligations
outstanding under capital leases as shown in the table below:
|
|
|
|
|
|
(Unaudited)
|
|
|
|
August
31, 2007
|
|
|
|
$
|
|
Amounts
payable:
|
|
|
|
|
Within
12 months
|
|
|
180,021
|
|
Between
one and two years
|
|
|
160,143
|
|
Between
two and three years
|
|
|
75,400
|
|
Total
future commitment
|
|
|
415,564
|
|
Less:
finance charges allocated to future periods
|
|
|
(47,151
|
)
|
Present
Value
|
|
|
368,413
|
|
For
fiscal year ended February 28, 2007 (Audited)
Net
cash used in operating activities
was approximately $4,500,000 for the
fiscal year ended February 28, 2007 and approximately $2,700,000 for the
fiscal
year ended February 28, 2006. The increase in cash used in operations was
due
primarily to an increase in our net loss. This increase was primarily
due to an increase in sales and marketing expenses as we sought to build
our
narrowcasting customer base and an increase in the operations and development
to
enhance the TelvOS system capabilities.
Net
cash provided by (used in) investing activities
was approximately
$1,300,000 for the fiscal year ended February 28, 2007 and approximately
($2,700,000) for the fiscal year ended February 28, 2006. The increase over
the
prior year resulted from the sale of short-term investments offset in part
by
capital equipment purchased for our network.
Net
cash provided by financing activities
was approximately $1,400,000 for
the fiscal year ended February 28, 2007 and approximately $7,600,000 for
the
fiscal year ended February 28, 2006. The decrease resulted primarily
from the two equity financing completed during the fiscal year ended February
28, 2006.
As
of
February 28, 2007, our principal capital commitments consisted of obligations
outstanding under capital leases as shown in the table below:
|
|
|
|
Audited
|
|
|
|
|
|
February
28,
2007
|
|
|
|
$
|
|
Amounts
payable:
|
|
|
|
|
Within
12 months
|
|
|
104,235
|
|
Between
one and two years
|
|
|
99,388
|
|
Between
two and three years
|
|
|
45,725
|
|
Total
future commitment
|
|
|
249,348
|
|
Less:
finance charges allocated to future periods
|
|
|
(25,767
|
)
|
Present
Value
|
|
|
223,581
|
|
Stock-Based
Compensation
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123(R), “Accounting for Stock-Based Compensation (Revised).” SFAS No.
123(R) supersedes APB No. 25 and its related implementation
guidance. SFAS No. 123(R) establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for
goods
or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair
value
of the entity’s equity instruments or that may be settled by the issuance of
those equity instruments. SFAS No. 123(R) focuses primarily on
accounting for transactions in which an entity obtains employee services
in
share-based payment transactions. SFAS No. 123(R) requires a public
entity to measure the cost of employee services received in exchange for
an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service in exchange
for
the award the requisite service period (usually the vesting
period). No compensation costs are recognized for equity instruments
for which employees do not render the requisite service. The
grant-date fair value of employee share options and similar instruments will
be
estimated using option-pricing models adjusted for the unique characteristics
of
those instruments (unless observable market prices for the same or similar
instruments are available). If an equity award is modified after the
grant date, incremental compensation cost will be recognized in an amount
equal
to the excess of the fair value of the modified award over the fair value
of the
original award immediately before the modification. The Company
adopted SFAS No. 123(R), effective March 1, 2006. Based on stock options
that
vested during the year ended February 28, 2007, the Company recorded
approximately $702,000 in additional compensation expense for the fiscal
year
ended February 28, 2007, under SFAS No. 123(R).
Prior
to
March 1, 2006 the Company followed SFAS No. 123, "Accounting for Stock-Based
Compensation." The provisions of SFAS No. 123 allowed companies to
either expense the estimated fair value of stock options or to continue to
follow the intrinsic value method set forth in APB Opinion 25, "Accounting
for
Stock Issued to Employees" ("APB 25"), but disclose the pro forma effect
on net
income (loss) had the fair value of the options been expensed.
Had
compensation cost for the Company's stock option plan been determined based
on
the fair value at the grant or issue date prior to March 1, 2006 and consistent
with the provisions of SFAS No. 123(R), the Company's net loss and loss per
common share would have been reduced to the pro forma amounts indicated
below:
Audited
|
|
Year
Ended
|
|
|
|
February
28,
2006
|
|
|
|
$
|
|
Net
loss as reported
|
|
|
(4,289,777
|
)
|
Add:
Stock-based employee compensation included in
|
|
|
|
|
reported
net loss
|
|
|
695,297
|
|
Less:
Pro forma stock-based compensation expense
|
|
|
(3,019,437
|
)
|
Pro
forma net loss
|
|
|
(6,613,917
|
)
|
Basic
and diluted loss per common share as reported
|
|
|
(0.13
|
)
|
Pro
forma basic and diluted loss per common share
|
|
|
(0.21
|
)
|
Weighted-average
common shares outstanding
|
|
|
32,190,594
|
|
Foreign
Exchange
Risks
We
are a
Delaware
corporation and since our inception we
have been raising funds in US dollars. However, we have significant operations
in
London
,
and a substantial portion of our
business is conducted in sterling. This currency difference between our
fundraising and business operations represents a risk related to the rate
of
exchange from US dollars to sterling. We hold surplus funds mainly in US
dollars. A larger currency exchange risk results from our primary assets
being
denominated almost entirely in sterling. The dollar value of our assets,
and
thus our stockholders' equity, increases when the dollar weakens relative
to the
pound and vice versa. In the future, we expect to generate a greater percentage
of our revenues from operations in the
United States
which would be received in US dollars
and which should help mitigate the exchange risk.
Critical
Accounting Policies and
Estimates
The
preparation of our consolidated financial statements 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 amount of revenue
and
expenses during the reporting period. Actual results could differ
from those estimates.
Impact
of Recently Issued Accounting
Pronouncements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other
items
at fair value. SFAS 159 is effective for fiscal years beginning after November
15, 2007. The Company does not expect the adoption of SFAS 159 to have a
material impact on its consolidated financial position, results of operations
or
cash flows.
In
June 2006, the FASB issued FASB
Interpretation No.
48,
“
Accounting
for Uncertainty
in Income Ta
xes-an
Interpretation of FASB Statement No.
109”
(“
FIN No.
48”
).
FIN No. 48 clarifies what
criteria must be met prior to recognition of the financial statement benefit
of
a position
taken in a tax
return. FIN No. 48 will require companies to include
additi
onal qualitative and
quantitative disclosures within their financial statements. The disclosures
will
include potential tax benefits from positions taken for tax return purposes
that
have not been recognized for financial reporting purposes and a tabular
p
resentation
of significant changes
during each period. The disclosures will also include a discussion of the
nature
of uncertainties, factors which could cause a change, and an estimated range
of
reasonably possible changes in tax uncertainties.
FIN No.
48
will also require a company to
recognize a financial statement benefit for a position taken for tax return
purposes when it will be more-likely-than-not that the position will be
sustained. FIN No. 48 will be effective for fiscal years beginning
after
D
ecember 15,
2006.
The
adoption of
FIN No. 48
is not
expected to have a material impact on the company’s financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 is effective in fiscal years beginning after
November 15, 2007. Management is currently evaluating the impact that the
adoption of this statement will have on the Company’s consolidated financial
statements.
Off
Balance Sheet Arrangements
We
have
no off-balance sheet arrangements that have had or are reasonably likely
to have
a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
OUR
BUSINESS
General
Narrowstep
Inc. is a pioneer in the field of internet-based video content
delivery. Our objective is to provide world class tools to content
owners, best of breed tools to the internet television viewer, and to move
video
around the globe efficiently and effectively utilizing our own content delivery
network. Our proprietary operating system, which we have termed the
Television Operating System - TelvOS, provides comprehensive delivery of
video
content and television-like programming to mobile, wireless, internet, broadband
and broadcast services. Our system provides a platform to enable
owners and users of video content to reach specific audiences by “narrowcasting”
– targeting delivery of specific content to interested
groups. Narrowcasting provides new business opportunities for content
providers to build commercial channels by creating a new model for delivering
content. In addition to enabling delivery of content, the Narrowstep
platform enables our clients to commercialize video-based content. This can
be
achieved through directed advertising, sponsorship, pay-per-view, subscription,
and/or e-commerce.
Market
Overview
We
believe the media industry is in the
process of a fundamental transformation. The delivery of video
content, which previously has been dominated by terrestrial and satellite
cable
delivery systems, and national and cable broadcasters, is facing many of
the
same changes that publishing faced in the 1980s - desktop video, lower
production costs and easier distribution are changing the marketplace just
as
desktop publishing changed the publishing world forever.
Traditional
distribution of video
content on terrestrial bands, satellite and cable is now augmented by broadband
distribution on the internet. This model may fragment further as wireless
and
mobile networks provide newer and more efficient distribution for video content
through the delivery of television signals over internet protocol or TV over
IP.
Our goal is to establish our platform as the de facto standard for building
TV
over IP channels and delivering video content over broadband, mobile and
wireless networks.
We
believe that the delivery of video
content over the internet is an effective means of providing entertainment
and
information and has a multitude of applications. Internet-based
distribution of video content creates possibilities for directed programming
not
usually feasible in traditional broadcasting. Narrowcasting describes a field
that is evolving due to a number of factors which we believe are changing
the
traditional broadcast model:
|
·
|
New
Technology
. The
internet and mobile communications are two media that have taken
market
share from traditional TV viewing in recent years. Increasingly,
video
content is being made available over these
media.
|
|
·
|
Proliferation
of
Channels
.
Content owners are able to access viewers through distribution
on cable,
satellite and digital services. The number of traditional channels
has
increased markedly over the last 20 years as these distribution
media have
been exploited. The internet offers a further distribution medium
with
launch costs significantly lower than for a new cable or satellite
channel.
|
|
·
|
Targeted
Marketing
. We
believe that marketers are looking beyond broadcasting’s focus on broad,
mass markets and that content providers and advertisers are increasingly
seeking to differentiate and target specific
markets.
|
Narrowstep
was formed to provide content
delivery solutions for targeted video programming through an internet-based
delivery solution. Traditional delivery of video content is largely
achieved through the transmission of content over mass market media such
as
terrestrial transmission, satellite and cable systems based on a "play once,
view anywhere" model. Traditional broadcasting relies on diary
entries made by small samplings of viewers in order to gauge viewing habits
and
trends. These entries are then compiled into viewing surveys by market research
agencies such as Nielson and BARB in an effort to extrapolate audience
measurement and viewing trends among various populations. These technologies
and
the commercial model which pays for the deployment of traditional television
stations require the delivery of mass market audiences, since advertisers
pay
for audience delivery.
Using
internet protocol technology and
our content delivery solutions, it is possible to identify all individual
viewers of content by location, using their internet addresses, and by subject
interest, by recording the viewer's viewing habits. In addition, it is also
possible to require a viewer to register and provide additional detail in
order
to access content. As a result, content providers can target delivery of
video
content to specific individuals or groups of individuals. Since the internet
is
available globally, unlike most traditional broadcasting mechanisms which
are
generally limited to geographical regions, targeted audiences can also be
aggregated across the world providing a means of grouping a desired audience
in
sufficient numbers to make directed content economically
viable.
Narrowstep's
primary marketplace is in
the delivery of broadband TV over IP. Broadba
nd is experiencing
explosive growth.
More than two-thirds of all active U.S. Web users connect via broadband,
according to February 2006 data from Nielsen/NetRatings.
We
believe that the provision of
broadband content will be a fast-growth market in media and technology. In
addition, other network delivery systems such as wireless and mobile will
also
provide considerable market opportunities beyond the growth of broadband,
providing longevity to our plans and business model. The increasing availability
of bandwidth, combined with the significantly cheaper costs of internet
transmission as compared with traditional satellite and cable televisions,
as
well as the potential to reach a greater number of viewers due to its global
accessibility, are creating a market for internet-based video content which
we
believe is attractive to content providers, channel producers, and
advertisers.
Products
and
Services
We
provide a range of products and
services based on our core technology platform, TelvOS. This is a comprehensive
video and audio management and play-out system. It facilitates making video
and
audio content available as a live stream, distributing images of live events
over the network; as highlights, or video on demand; as searchable content
from
an archive; and as a 24 x 7 stream, like television. A video stream is not
downloaded to the viewer's computer; rather it is made available as a
continuously playing service, similar to traditional broadcast
television. Additionally, video can be offered for download with
integrated digital rights management.
From
the TelvOS platform, content can be
made available to the internet, broadband services, cable and satellite,
mobile
networks, wireless systems, and to digital signage, point of sale and point
of
information displays. All elements can be controlled in real time from a
web-based interface. The service can be commercialized using pay-per-view,
subscription, content syndication, advertising, sponsorship and e-commerce
functions, and can be controlled and changed in real time. It also provides
full
real time monitoring and statistical feedback to the channel
operator.
The
Narrowstep family of products and
services consists of the following:
TelvOS
- Core
System
The
TelvOS core system is a complete
platform for the management and play-out of rich media over the Internet
and
other IP networks. The TelvOS Core System includes a content management system
to manage, search, and publish rich media assets. Content can be
uploaded automatically or manually in any common computer audio, video or
streaming format and then managed with full metadata support. Metadata provides
detailed descriptions of the content and attaches details such as the length,
category and copyright owner. Channel owners can create video sequences for
play-out including advertising, station identifications and content trailers,
along with the programming content. The content can be made available to
viewers
as a live, ‘as it happens’ service; as video on demand; via an archive and
search function; and as scheduled programming streams in the Narrowstep Player.
The TelvOS Core System features control over in which territories the content
is
made available provides full security and digital rights management control
and
can include advertising and sponsorship support, along with pay-per-view
and
subscription payment packages. Once prepared, the content can be made available
to mobile, wireless, broadband and broadcast networks. This system enables
customers to build and manage video channels over multiple media
outlets. The TelvOS Core System provides detailed statistics on all
elements of the system’s performance, from the number of unique viewers to the
length of time the channel was watched and the number of advertisements
delivered.
TelvOS
provides clients with a complete
suite of content management tools. Content can be uploaded
automatically or manually in any common computer audio, video or streaming
format and then managed with full metadata support. A statistics
function delivers real time intelligence on the number of viewers, data
transferred and even the proportion of the data viewed or listened
to. In addition, a detailed search engine supports the retrieval of
content from the archive. TelvOS also allows clients to determine how
and when to make the content available to viewers. Our technology
enables clients to control where the content is available, provides full
security and digital rights management control and can include advertising
and
sponsorship support, along with pay-per-view, subscription and microcharging
options. Clients can use TelvOS to make video and audio content
available as a live stream, to distribute live event coverage, to play
highlights, to provide video on demand; to enable viewers to obtain searchable
content from an archive; and to provide continuous play video 24 hours per
day,
similar to broadcast and cable television.
Our
system enables clients to fully
commercialize broadband video distribution by providing complete control
and
management of advertising content. With TelvOS, clients can upload,
store and manage advertisements, infomercials and sponsored
programs. Advertising campaigns can be constructed in real time by
defining the required profile of the target audience and selecting how many
views of the advertisement - called ad impressions - are desired by the
advertiser. Advertisements are then automatically played out to any viewer
matching this profile. Where there are more ads than advertising slots, the
advertiser can bid for the slot, and the highest paying advertisement will
be
played out by default.
The
Narrowstep Player provides the
graphic user interface for viewers to access and control content from TelvOS
and
is not marketed as a separate product. During a viewer's initial connection,
the
Narrowstep Player automatically runs a bandwidth check to detect the viewer's
connection, device and platform and then provides the content in a format
and
size, and at a data rate most appropriate for the viewer. The Narrowstep
Player
then provides the viewer with controls over the video content being displayed,
including the ability to select between live content, scheduled content,
on
demand content and content in the video or audio archive. Where a pay-per-view
or subscription model is deployed the Narrowstep Player enables the viewer
to
pay for the content. Narrowstep Players can be embedded into an existing
website
or application, thus extending the reach of the channel through third party
web
site syndication.
AdServer
AdServer
is an online system that
enables the commercialization of broadband video distribution by providing
complete control and management of advertising content. Using adServer, clients
can upload, store and manage advertisements, infomercials and sponsored
programs. Advertising campaigns can be constructed in real time by defining
the
required profile of the target audience and selecting how many views of the
advertisement - called ad impressions - are desired by the advertiser as
well as
bidding terms. Advertisements are then automatically played out matching
the
viewer profile to the available campaigns while maximizing the advertising
revenue for the channel.
PayGate
PayGate
is an interface between the
TelvOS platform and payment gateways, such as PayPal and Cybersource. Any
item
on the platform, such as an on-demand video or a channel can have a payment
rule
attached to it which requires the viewer to pay before they can view or access
the content. PayGate supports single and recurring transactions for pay per
view
and subscription business models. All transactions are captured
and reported for each channel. Sensitive payment details are not stored,
but are
forwarded to a payment service provider (PSP) for
processing.
NCoder
NCoder
is an encoding hardware solution
that provides direct encoding capability for video content and attaches to
a
client's edit machine or network. Video files are placed in an upload file
folder on the nCoder by the client and the files are compressed into all
the
selected formats, sizes and data rates required and then uploaded into the
client's TelvOS account. The nCoder is offered in 2 tiers, nCoder and nCoder
Pro. The nCoder Pro includes faster encoding up to real time feeds in
multiple data formats.
DownloadServer
DownloadServer
is a product integrated
within TelvOS to offer secure downloads of any rich
media. Multiple files or file formats can be bundled into a
download pack and secured with Microsoft digital rights management
(DRM). Channel owners can configure the license terms of the
DRM of the download pack and payment rules such as pay per download and
subscription access.
We
also provide a full range of services
complementary to our technology platform, including:
Channel
and Player Set
Up
. We use our core
technology to establish internet channels and customized players for clients
according to their specifications which then operate under a license
arrangement. Player customization can be ongoing work through the life of
the channel, because an Internet TV channel, like any website, is constantly
being updated and improved.
Consulting
Services
. We provide a
variety of additional
consulting and management services. These vary depending upon client needs
and
include such things as advice on advertising and distribution strategies,
technology integration services, digital media, content acquisition, and
providing advertising for content through arrangements with
advertisers.
Customer
Service &
Support
: For our Internet
TV
channels, we provide 24x7 email and phone support as it pertains to the TelvOS
System.
Production
Services
. We provide a
full range of production
services for our clients, focusing on high quality content encoding, ingestion
into TelvOS, metadata entry, support for live streaming, and pre-production
and
production services.
Narrowstep’s
Content Delivery Network
(CDN)
Our
platform is generally deployed under
an application service provider model. Clients and partners are provided
with
logins and we control the applications and the platform they run on. The
Narrowstep platform and all Narrowstep products are operated on our servers;
under certain circumstances, we will install a copy of the server within
a
client's network. This is most likely to happen with internet service providers
and telecom partners.
Our
technology has been designed and
engineered to be scalable and replicable. When a client uploads a file to
any
Narrowstep server, this file is replicated to every server on the network,
unless otherwise configured. Our network is currently capable of handling
approximately 5,000 simultaneous users. We are currently in the process of
upgrading our CDN to increase the amount of simultaneous users to
10,000.
We
operate our core technology platform
on top of our content delivery network or “CDN”, which is hosted by some of the
world's leading internet service providers. We have points of presence or
“POP”
locations with each of Teleglobe and Interoute in
London
and Interoute in
New York
. More
recently, we added a
network within the network of Telewest Communications, one of only two cable
operators in the
United
Kingdom
, to deliver
services to their cable modem IP service, blueyonder. We plan to
continue investing in our own CDN which we believe will be cost effective
and
give us the ability to deliver the highest quality video to our end
users.
Sales
and
Marketing
To
date, we have sold and marketed our
services largely through direct approaches to potential clients. More
recently many sales leads have been generated by word of mouth, via our web
site
and by attending and presenting at various industry trade shows. As
of August 31, 2007, we had 17 full-time sales and marketing
employees.
We
have also established partnering or
reseller arrangements with third parties under which we have agreed to pay
our
partners a portion of the revenues they generate in reselling our products.
Under these arrangements partners are entitled to receive commissions of
between
10% and 30% for work resulting from introductions and are expected to continue
to provide related supporting services. We believe these arrangements
will enable us to enter specialized and more diverse geographical markets
than
we might otherwise be able to penetrate using solely our own sales efforts.
We
intend to continue to update our support arrangements, training and promotional
materials to provide additional support for our partners.
We
plan to continue expanding our sales
and marketing activities, including hiring additional employees for our sales
and marketing efforts and developing marketing programs, trade show
participation and speaking engagements. We plan to concentrate primarily
on the
following marketing techniques in the coming year:
|
·
|
Direct
sales - by our in-house
sales team;
|
|
·
|
Channel
sales - building a network
of resellers for our
products;
|
|
·
|
Public
relations - attracting
increased media coverage for our
business;
|
|
·
|
Trade
shows - exhibiting at key
trade shows in Europe and the
United States
;
and
|
|
·
|
Marketing
materials - updating our
literature, website and general marketing materials to more effectively
promote our business, products and
services.
|
Clients
Many
of our customers are producers,
owners of content or have rights to content. Many of these customers
use our solutions to address a specific niche in the
marketplace. Some examples of these niche areas are faith based
channels, Travel channels, and extreme sports. We also have customers that
are
cable operators that have also launched channels on the web and are using
our
services to broadcast and manage their content. In addition, we
provide
production services for various content owners or companies that
have rights to film a sporting event.
Competition
The
internet video distribution market
is highly competitive and subject to changing technology and market
dynamics. We believe the principal competitive factors in our market
include:
|
·
|
ability
to provide a complete
solution;
|
|
·
|
content
management
capabilities;
|
|
·
|
enabling
clients to monetize
content;
|
|
·
|
quality
of video stream;
and
|
We
believe we compete effectively in all
of these areas. TelvOS enables us to provide clients with a user
friendly complete end-to-end content management and delivery system whereas
many
of our competitors specialize on only one particular part of the video delivery
process. For example, certain of our competitors focus on player
design and build but do not provide tools for the direct control of content
delivery. Others focus on advertising and syndication without
addressing clients’ need to manage digital rights, content registration, and
content delivery. In addition to TelvOS, we provide a number of
complementary services, including channel and player set up and customization,
consulting services and production services. These service offerings
allow us to offer complete turn-key solutions to our
clients.
We
focus primarily on providing clients
with the ability to manage and stream long form video content (longer than
30
minute streams) compared to many of our competitors who provide short form
streaming tools. Although existing technology can be used to provide
both long form and short form streaming capability, the ability to provide
high
quality long form content depends primarily on the reliability of the network
used to stream the content and the availability of sufficient
bandwidth. Unlike many of our competitors, who contract with third
parties aggregators, such as Akamai, to carry their video content through
shared
networks, we contract directly with network owners to provide dedicated network
availability for the channels we host. In addition, to boost service
reliability we have established a number of points of presence (POPs) on
the
internet. These POPs enable us to route content more directly,
thereby enhancing the quality and reliability of our
channels.
Many
of our competitors have
significantly longer operating histories, significantly greater financial,
marketing and other resources, and significantly greater name recognition
than
us. In addition, costs of entry are low and as a result new entrants
may enter the market in the future with a commercial advantage that would
undermine our business model. We do not own any patented technology
that precludes or inhibits others from entering our market. As a
result, new entrants pose a threat to our business and we may face further
competition in the future from companies who do not currently offer competitive
services or products.
Intellectual
Property
Rights
Our
success is dependent in part upon
our proprietary TelvOS system. To date, we have not filed for any patents
or
registered copyrights relating to any of our intellectual property
rights.
We
currently rely on a combination of
trade secret, nondisclosure and other contractual agreements, as well as
existing copyright and trademark laws to protect our intellectual property.
We
require all personnel and outside contractors to execute agreements to keep
secret and confidential our proprietary technology and we have a policy of
not
providing third parties with any secret or proprietary information regarding
our
technology. Since our technology is centrally controlled by us, no third
parties
have access to the systems or source code. We cannot assure stockholders,
however, that these arrangements will be adequate to deter misappropriation
of
our proprietary information or that we will be able to detect unauthorized
use
and take appropriate steps to enforce our intellectual property
rights.
Government
Regulation
Few
existing laws or regulations
specifically apply to the internet, other than laws and regulations generally
applicable to businesses. Certain
U.S.
export controls and import controls of
other countries may apply to our products. Many laws and regulations, however,
are pending and may be adopted in the
United States
,
individual states and local
jurisdictions and other countries with respect to the internet. These laws
may
relate to many areas that impact our business, including content issues (such
as
obscenity, indecency and defamation), copyright and other intellectual property
rights, digital rights management, encryption, caching of content by server
products, personal privacy, taxation, e-mail, sweepstakes, promotions, network
and information security and the convergence of traditional communication
services with internet communications, including the future availability
of
broadband transmission capability and wireless networks. These types of
regulations are likely to differ between countries and other political and
geographic divisions. It is likely that other countries and political
organizations will impose or favor more and different regulation than that
which
has been proposed in the
United States
,
thus furthering the complexity of
regulation. In addition, state and local governments may impose regulations
in
addition to, inconsistent with, or stricter than federal regulations. The
adoption of such laws or regulations, and uncertainties associated with their
validity, interpretation, applicability and enforcement, may affect the
available distribution channels for and costs associated with our services,
and
may affect the growth of the internet. Although Narrowstep is able to control
the distribution of content on a territorial basis, such laws or regulations
may
harm our business. Our services may also become subject to investigation
and
regulation of foreign data protection and e-commerce authorities, including
those in the European Union. Such activities could result in additional costs
for us in order to comply with such regulation.
Many
laws governing issues such as
property ownership, copyright, patent and other intellectual property issues,
digital rights management, taxation, gambling, security, illegal or obscene
content, retransmission of media, and personal privacy and data protection
apply
to the internet. However, the vast majority of such laws were adopted before
the
advent of the internet and related technologies and their applicability to
the
internet continues to evolve.
In
addition to potential legislation
from local, state, federal and foreign governments, labor guild agreements
and
other laws and regulations that impose fees, royalties or unanticipated payments
regarding the distribution of media over the internet may directly or indirectly
affect our business. While we and our customers may be directly affected
by such
agreements, we are not a party to such agreements and have little ability
to
influence the degree such agreements favor or disfavor internet distribution
or
our business models. Changes to or the interpretation of these laws and the
entry into such industry agreements could:
|
·
|
limit
the growth of the
internet;
|
|
·
|
create
uncertainty in the
marketplace that could reduce demand for our
services;
|
|
·
|
increase
our cost of doing
business;
|
|
·
|
expose
us to increased litigation
risk, substantial defense costs and significant liabilities associated
with content available on our websites or distributed or accessed
through
our services, with our provision of services, and with the features
or
performance of our websites;
|
|
·
|
lead
to increased development
costs or otherwise harm our business;
or
|
|
·
|
decrease
the rate of growth of our
user base and limit our ability to effectively communicate with
and market
to our user base.
|
The
U.S. Digital Millennium Copyright
Act (DMCA) includes statutory licenses for the performance of sound recordings
and for the making of recordings to facilitate transmissions. Under these
statutory licenses, we and third party channel owners may be required to
pay
licensing fees for digital sound recordings we deliver in original and archived
programming and through retransmissions of radio broadcasts. The DMCA does
not
specify the rate and terms of the licenses, which are determined by arbitration
proceedings, known as CARP proceedings, supervised by the U.S. Copyright
Office.
Past CARP proceedings have resulted in proposed rates for statutory webcasting
that were significantly in excess of rates requested by webcasters. CARP
proceedings relating to music subscription and non-subscription services
offering music programming that qualify for various licenses under
U.S.
copyright law are pending. We cannot
predict the outcome of these CARP proceedings and may elect instead to directly
license music content for our subscription and/or non-subscription services,
either alone or in concert with other affected companies. Such licenses may
only
apply to music performed in the
United States
,
and the availability of corresponding
licenses for international performances is unclear. Therefore, our ability
to
find rights holders and negotiate appropriate licenses is uncertain. We and
third party channel owners may be affected by these rates, which may negatively
impact our revenues. Depending on the rates and terms adopted for the statutory
licenses, our business could be harmed both by increasing our own cost of
doing
business, as well as by increasing the cost of doing business for third party
channel owners. We anticipate future CARPs relating to music subscription
delivery services, which may also adversely affect the online distribution
of
music.
The
Child Online Protection Act and the
Child Online Privacy Protection Act impose civil and criminal penalties on
persons distributing material harmful to minors (e.g., obscene material)
over
the internet to persons under the age of 17, or collecting personal information
from children under the age of 13. We do not knowingly distribute harmful
materials to minors or collect personal information from children under the
age
of 13. The manner in which these Acts may be interpreted and enforced cannot
be
fully determined, and future legislation similar to these Acts could subject
us
to potential liability if we were deemed to be non-compliant with such rules
and
regulations, which in turn could harm our business.
There
are a large number of legislative
proposals before the United States Congress and various state legislatures
regarding intellectual property, digital rights management, copy protection
requirements, privacy, email marketing and security issues related to our
business. It is not possible to predict whether or when such legislation
may be
adopted, and certain proposals, if adopted, could materially and adversely
affect our business.
Employees
As
of August 31, 2007, Narrowstep had a
total of 72 employees of whom 24 were in operations, 21 in sales &
marketing, 13 in administration, and 14 in research & development. To date,
Narrowstep has been successful in recruiting and hiring individuals with
the
desired skills and experience.
None
of Narrowstep's employees are
represented by labor unions and Narrowstep has never experienced a work
stoppage. We believe our employee relations are good.
Properties
We
currently maintain offices in the
United Kingdom
and the
United States
.
Our facilities in London holds our
administrative, sales & marketing, customer service & developers which
we believe will be adequate to meet our office space needs for the next several
years as we currently utilize approximately 90% of the total office
space. On October 3, 2007 the company entered into a four year
building lease with Philips and Feeley located in
London
. On
July 22, 2007 the
company entered into a six year building lease with Princeton 202 Associates
Limited Partnership located in
Princeton
,
New
Jersey
. We are in temporary
space
in
Princeton
,
New
Jersey
and will occupy the
new space on
December 1, 2007. These facilities predominantly hold our sales and
sales support personnel as well as many of our senior executives and most
of our
back office staff. As of November 30, 2007, we will no longer have
offices in
New
York
.
Legal
Proceedings
During
the fiscal year we were not
involved in any legal proceedings.
SELLING
STOCKHOLDERS
Effective
as of February 22, 2006, we sold an aggregate of
12,333,330
shares of our common
stock at a purchase price of $0.60 per share to investors in a private placement
transaction pursuant to Rule 506 of the Securities Act. The investors
also received five-year warrants for an aggregate of 6,166,666 shares with
an
exercise price of $0.60 per share (subject to adjustment in certain
circumstances) and five-year warrants for an aggregate of 6,166,666 shares
with
an exercise price of $1.20 per share (subject to adjustment in certain
circumstances). In connection with this private placement, we also
issued options for an aggregate of 650,000 shares with an exercise price
of
$1.50 per share (subject to adjustment in certain circumstances), five-year
warrants for an aggregate of 16,666 shares with an exercise price of $0.60
per
share (subject to adjustment in certain circumstances) and five-year warrants
for an aggregate of 16,666 shares with an exercise price of $1.20 per share
(subject to adjustment in certain circumstances) to certain placement
agents. We are now registering for resale the shares of common stock
sold in the private placement and the shares of common stock underlying the
warrants and options issued in connection with the private
placement. We will not receive any proceeds from the resale of these
shares by the selling stockholders. We will however receive the
proceeds from the cash exercise of warrants by the selling stockholders.
None of the selling stockholders
has
held any position or office or had any material relationship with us or any
of
our predecessors or affiliates within three years of the date of this prospectus
other than Granahan McCourt Capital, LLC, which serves as an advisor to us,
and
Dominick & Dominick LLC, vFinance Investments Inc. and Thomas Suppanz (an
employee of vFinance Investments), each of which acted as a placement agent
in
connection with the private placement. In addition, vFinance
Investments has provided certain other financial advisory and market-making
services to us in exchange for an aggregate of 155,342 shares of our common
stock issued to it and certain of its employees.
All
of the warrants issued in connection
with the private placement are exercisable for a period of five years from
the
date of issuance. Beginning one year after the date of issuance, if
the warrant shares may not be freely sold to the public for any reason, the
warrants are exercisable on a cashless basis. If certain changes
occur to our capitalization, such as a stock split or stock dividend of the
common stock, then the exercise price and number of shares issuable upon
exercise of the warrants will be adjusted appropriately. In the event
that we issue or are deemed to issue additional shares of our common stock
in
certain non-exempt transactions for a price less than the exercise price
per
share under the warrants, then the exercise price will be adjusted downward
based on a broad-based weighted average anti-dilution formula provided in
the
warrants. Generally, if we have any capital reorganization,
reclassification of our capital stock, consolidation or merger in which we
are
not the survivor, or sale, transfer or other disposition of all or substantially
all of our assets to another corporation, then the warrant holder will have
the
right to receive in lieu of the warrant shares issuable upon exercise of
their
warrants, securities or assets as would have been issuable or payable with
respect to or in exchange for a number of warrant shares equal to the number
of
warrant shares immediately exercisable before such transaction took place
and
appropriate adjustments to the terms of the warrant, including the exercise
price, will be made. However, unless we and the warrant holder otherwise
agree,
if we have any capital reorganization, reclassification of our capital stock,
consolidation or merger in which we are not the survivor, or sale, transfer
or
other disposition of all or substantially all of our assets to another
corporation, in which the holders of our common stock receive consideration
per
share with a fair market value at least equal to 300% of the warrant exercise
price, then the warrant will be deemed to have been automatically exercised
pursuant to the warrant's cashless exercise provisions.
In
connection with the private placement, we entered into a registration rights
agreement with the investors to register the investors’ shares described
above. In accordance with the terms of the registration rights
agreement, we must use our best efforts to have this prospectus declared
effective as soon as practicable. If a prospectus covering the
registrable securities in connection with the private placement is not declared
effective by the SEC prior to July 31, 2006 then we must pay liquidated damages
to each investor in an amount equal to 1.0% of the portion of purchase price
paid by each investor for each 30-day period or pro rata for any portion
thereof
following the date by which this registration statement should have been
effective. In no event, however, shall the we be required to pay
liquidated damages in excess of 10% of the total purchase price in connection
with this provision.
The
table
below sets forth information concerning the resale of these shares, and includes
a list of the stockholders whose shares are being registered for resale,
the
number of shares we believe to be beneficially owned by each of the stockholders
as of October 15, 2007, the number of shares being registered and the number
of
shares they will beneficially own if they sell all of the shares being
registered, based upon 124,944,487 shares being outstanding.
The
number of shares that may be
actually sold by any selling stockholder will be determined by the selling
stockholder. Because the selling stockholders may sell all, some or none
of the
shares of common stock which they hold, no estimate can be given as to the
number of shares of common stock that will be held by the selling stockholders
upon termination of the offering. The column showing number of shares owned
after the offering assumes that the selling stockholders will sell all of
the
shares covered by this prospectus. In addition, the selling stockholders
may
have sold, transferred or otherwise disposed of, or may sell, transfer or
otherwise dispose of, at any time or from time to time since the date
on
which
they provided the information, all
or a portion of the shares of common stock beneficially owned by them in
transactions exempt from the registration requirements of the Securities
Act of
1933, as amended, or the Securities Act. See “Plan of
Distribution.”
Name
of Beneficial
Owner
|
Amount
of Shares
Beneficially
Owned
Prior to
Offering
|
Amount
of Shares
Offered
|
Amount
of
Shares
to be
Beneficially
Owned
After
Secondary
Offering
|
%
of Shares to
be
Beneficially
Owned
After
Secondary
Offering
|
Granahan
McCourt Capital, LLC (1)
|
10,316,670(2)
|
10,000,000
|
316,670
|
*
|
MicroCapital
Fund LP(3)
|
2,250,000(4)
|
2,250,000
|
-
|
-
|
MicroCapital
Fund Ltd (3)
|
1,083,332(5)
|
1,083,332
|
-
|
-
|
Sano
Ventures XII LLC (6)
|
3,333,334(7)
|
3,333,334
|
-
|
-
|
Roger
L. Werner, Jr.
|
1,330,000(8)
|
1,000,000
|
330,000
|
*
|
Roberto
Ledeboer
|
5,000,000(9)
|
5,000,000
|
-
|
-
|
Sibex
Capital Fund (10)
|
1,333,332(11)
|
1,333,332
|
-
|
-
|
WBBS
SA (12)
|
333,332(13)
|
333,332
|
-
|
-
|
Richard
N. Molinsky
|
110,509(14)
|
100,000
|
10,509
|
*
|
Carolyn
R. Wall
|
233,332(15)
|
33,332
|
200,000
|
*
|
Andreas
F. Schneider
|
250,000(16)
|
200,000
|
50,000
|
*
|
Dominick
& Dominick LLC (17)
|
650,000(18)
|
650,000
|
-
|
-
|
vFinance
Investments Inc. (19)
|
16,666(20)
|
16,666
|
-
|
-
|
Thomas
Suppanz
|
16,666(21)
|
16,666
|
-
|
-
|
*
Less
than 1% of the outstanding shares.
(1)
David
C. McCourt is responsible for the voting, selection, acquisition and disposition
of the shares held by Granahan McCourt Capital, LLC, and thus may be deemed
to
be the beneficial owner of such shares. Mr. McCourt is the Chairman
of the Board, Interim Chief Executive Officer, Interim Chief Operating Officer
and a director of the Company.
(2)
Includes (i) 5,000,000 shares held by Granahan McCourt Capital LLC, (ii)
5,000,000 shares issuable upon the exercise of warrants owned by Granahan
McCourt Capital LLC which are exercisable within 60 days of October 15, 2007,
(iii) 16,670 shares held by Granahan McCourt Advisors, LLC, and (iv) 300,000
shares issuable upon the exercise of options granted to David C. McCourt
which
are exercisable within 60 days of October 15, 2007.
(3)
Ian
P. Ellis and Chris A. Jarrous are responsible for the voting, selection,
acquisition and disposition of the shares held by MicroCapital Fund LP and
MicroCapital Fund Ltd., and thus may be deemed to be the beneficial owners
of
such shares.
(4)
Includes 1,125,000 shares issuable upon the exercise of warrants owned by
MicroCapital Fund LP which are exercisable within 60 days of October 15,
2007.
(5)
Includes 541,666 shares issuable upon the exercise of warrants owned by
MicroCapital Fund Ltd. which are exercisable within 60 days of October 15,
2007.
(6)
Oded
Aboodi and Stanley Mauss of Sano Ventures XII LLC are responsible for the
voting, selection, acquisition and disposition of these securities on behalf
of
Sano Ventures XII LLC, and thus may be deemed to be the beneficial owners
of
such shares.
(7)
Includes 1,666,668 shares issuable upon the exercise of warrants owned by
Sano
Ventures XII LLC which are exercisable within 60 days of October 15,
2007.
(8)
Includes 830,000 issuable upon the exercise of options and warrants held
by Mr.
Werner which are exercisable within 60 days of October 15, 2007. Mr.
Werner is a member of our board of directors.
(9)
Includes 2,500,000 shares issuable upon the exercise of warrants owned by
Mr.
Lederboer which are exercisable within 60 days of October 15, 2007.
(10)
Oleg
S. Krasnoshchek and Viacheslav Chebotarevich of Sibex Capital Fund Inc. are
responsible for the voting, selection, acquisition and disposition of these
securities on behalf of Sibex Capital Fund Inc., and thus may be deemed to
be
the beneficial owners of such shares.
(11)
Includes 666,666 shares issuable upon the exercise of warrants owned by Sibex
Capital Fund Inc. which are exercisable within 60 days of October 15,
2007.
(12)
Sylvain Perret, Dominique Curchod and Thierry Legeret of WBBS SA are responsible
for the voting, selection, acquisition and disposition of these securities
on
behalf of WBBS SA, and thus may be deemed to be the beneficial owners of
such
shares.
(13)
Includes 166,666 shares issuable upon the exercise of warrants owned by WBBS
SA
which are exercisable within 60 days of October 15, 2007.
(14)
Includes 50,000 shares issuable upon the exercise of warrants owned by Mr.
Molinsky which are exercisable within 60 days of October 15, 2007.
(15)
Includes 216,666 shares issuable upon the exercise of options and warrants
held
by Ms. Wall which are exercisable within 60 days of October 15,
2007. Ms. Wall is our President, North America.
(16)
Includes 100,000 shares issuable upon the exercise of warrants owned by Mr.
Schneider which are exercisable within 60 days of October 15, 2007.
(17)
Mike
Campbell of Dominick & Dominick LLC is responsible for the voting,
selection, acquisition and disposition of these securities on behalf of Dominick
& Dominick LLC, and thus may be deemed to be the beneficial owner of such
shares.
(18)
Consists of 650,000 shares issuable upon the exercise of options owned by
Dominick & Dominick LLC which are exercisable within 60 days of October 15,
2007.
(19)
Mr.
Leonard Sokolow is the Chief Executive Officer of vFinance Investments and
is
responsible for the voting, selection, acquisition and disposition of these
securities on behalf of vFinance Investments, and thus may be deemed to be
the
beneficial owner of such shares.
(20)
Consists of 16,666 shares issuable upon the exercise of warrants owned by
vFinance Investments Inc. which are exercisable within 60 days of October
15,
2007.
(21)
Consists of 16,666 shares issuable upon the exercise of warrants owned by
Mr.
Suppanz which are exercisable within 60 days of October 15, 2007.
Other
than MicroCapital Fund LP, MicroCapital Fund Ltd., Dominick & Dominick LLC,
vFinance Investments and Thomas Suppanz, none of the Selling Stockholders
is a
broker-dealer or affiliate of a broker-dealer. MicroCapital Fund LP,
MicroCapital Fund Ltd., Dominick & Dominick LLC, vFinance Investments and
Thomas Suppanz have indicated to us that they obtained the shares of our
common
stock and warrants for shares of our common stock they own in the ordinary
course and that they have
no
agreement or understanding with respect to distributing those
shares.
MANAGEMENT
Executive
Officers and Directors
The
following table and subsequent
discussion sets forth information about our directors and executive officers
as
of October 15, 2007.
|
|
|
|
|
Name
|
|
Age
|
|
Positions
|
David
McCourt
|
|
50
|
|
Chairman
of the Board, Interim
Chief Executive
Officer,
Interim Chief Operating
Officer and Director
|
Lisa
VanPatten
|
|
43
|
|
Chief
Financial
Officer
|
Louis
Holder
|
|
36
|
|
Chief
Technology
Officer
|
Dennis
Edmonds
|
|
50
|
|
Director
|
Iolo
Jones
|
|
43
|
|
Director*
|
Roger
Werner
|
|
57
|
|
Director
|
John
Whyte
|
|
67
|
|
Director
|
*
Mr.
Jones ceased to be the Company’s Chief Strategy Officer in November
2007.
David
McCourt
, Chairman
of the Board, Interim Chief Executive Officer, Interim Chief Operating Officer
and a director, has been a director of Narrowstep since June
2006. Mr. McCourt became the Chairman of the Board and Interim Chief
Executive Officer in December 2006. Mr. McCourt became Interim Chief
Operating Officer in June 2007. Mr. McCourt is the Founder and Chief
Executive Officer of Granahan McCourt Capital, LLC, a private investment
firm
focused in the telecommunications and media industries, a position he has
held
since January 2005. Mr. McCourt has over 25 years of experience in
the telecommunications and media industries, founding or acquiring over ten
companies in four countries in North America and
Europe
. Mr.
McCourt served as the
Chairman and Chief Executive Officer of RCN Corporation (a cable television
operator) from October 1997 until December 2004. In 2005, Mr. McCourt
received an Emmy Award for his role as Executive Producer of the award-winning
children’s show “Reading Rainbow”. Mr. McCourt serves on the
National Advisory Board of JPMorgan Chase Bank, the North American Advisory
Board of the Michael Smurfit Graduate School of Business at
University
College
in
Dublin
,
Ireland
,
the Board of Overseers of the Robert
Wood Johnson Medicine and Dentistry of New Jersey.
Lisa
VanPatten
, Chief
Financial Officer, joined Narrowstep in December 2006. From 2004
until joining Narrowstep, Ms. VanPatten served as Controller and VP of Finance
at NYSE-listed Vonage where she managed the Company's financial, accounting
and
treasury function during its recent period of explosive growth. Ms.
VanPatten was also responsible for the consolidation of eight international
companies and was a key member of the Sarbanes-Oxley compliance team where
she
helped identify and document all internal control and procedure
gaps. From 2003 through 2004, Ms. VanPatten served as VP of Finance
for Princeton Lightwave Inc, a start-up where she assisted in the development
of
the new business plan, including the implementation of a new accounting system.
From 2000 through 2003, Ms. VanPatten served as the Director of Financial
Planning and Analysis at Nasdaq-listed RCN Inc, one of the first bundled
telecommunications services providers. While at RCN, Ms. VanPatten
was instrumental in implementing the processes, financial systems, and reporting
mechanisms necessary to scale a rapidly growing company. Mrs.
VanPatten holds a Bachelor of Science in Management, graduating Cum Laude,
from
Rider
University
;
she is also an accredited CPA in the
state of
New
Jersey
.
Louis
Holder
, Chief
Technology Officer, joined Narrowstep in April 2007 and is responsible for
our
technical operations, including our network and internal IT. From
April 2005 through April 2007, Mr. Holder was President of Novega Venture
Partners, a wholly-owned subsidiary of Vonage Holdings Corp, where he was
focused on the development of new business and product offerings. Mr.
Holder is one of the original co-founders of Vonage, where, from January
2001
through April 2005, he led the company’s technology infrastructure, products and
support services, including systems development and web application
development. Mr. Holder holds a bachelor’s degree in electrical
engineering with a minor in computer science from
Polytechnic University
,
New
York
.
Dennis
Edmonds
has been
a
director of Narrowstep since March 2004. Mr. Edmonds originally qualified
as a
lawyer in
South
Africa
, where he
established the
Johannesburg
law firm of Edmonds Dykes & Co. and
worked as a senior partner from June, 1987 to March, 1990. In April, 1990,
he
moved to the
United
Kingdom
where he worked for
the law firm of Alsop Wilkinson from June, 1993 to January, 1996 and thereafter
at the law firm of Donne, Mileham & Haddock until September, 2000. During
his career as a corporate lawyer Mr. Edmonds has advised a range of banks,
venture capitalists, corporations and governments on a spectrum of commercial
issues. In addition, from February 14, 2001 to March 29, 2004, Mr.
Edmonds served as a full time director of IcePartners.net, a private equity
investment company, where his role was in negotiating and structuring corporate
transactions and running investment companies.
Iolo
Jones
, a director,
founded Narrowstep in May
2002. Mr. Jones was Chief Executive Officer and President of Narrowstep until
his resignation from those positions on March 28, 2006 and he was Chief Strategy
Officer until November 2007. Mr. Jones holds degrees in Radio, Film
& Television and Educational Broadcasting from the
University
of
Kent
at
Canterbury
.
Roger
Werner
has been
a
director of Narrowstep since March 2006.
Mr. Werner is Chairman of WATV
Productions, LLC, a television production and marketing company.
Mr. Werner
is a graduate of
Trinity College in Hartford, CT, and holds a Masters in Business Administration
from the University of Virginia.
John
Whyte
has been
a director of Narrowstep since
June 27, 2006. Mr. Whyte has been the Managing Director of Whyte
WorldWide Professional Corporate Executives and related entities (Whyte
WorldWide PCE) (a management consulting firm), since July 1986. Mr.
Whyte has been a director of Commonwealth Telephone Enterprises, Incorporated
since January, 1997.
Corporate
Governance and Board Composition
Our
common stock is quoted on the OTC Bulletin Board inter-dealer quotation system,
which does not have director independence requirements. Under NASDAQ Rule
4200(a)(15), our board of directors is comprised of at least 50% independent
directors. Our board of directors believes that it is useful and appropriate
to
have our Chief Executive Officer also serve as the chairman of our board
of
directors.
Board
of Directors and Board
Committees
The
number of directors constituting the
Board of Directors is currently fixed at nine. Narrowstep’s amended
and restated certificate of incorporation divides the Board of Directors
into
three classes. The members of each class of directors serve for staggered
three-year terms. The Board of Directors is composed of (i) one Class I director
(Mr. Whyte), whose term expires upon the election and qualification of directors
at the annual meeting of stockholders to be held in 2008, (ii) two Class
II
directors (Messrs. Edmonds and Werner), whose terms expire upon the election
and
qualification of directors at the annual meeting of stockholders to be held
in
2009, and (iii) two Class III directors (Messrs. Jones and McCourt), whose
terms
expire upon the election and qualification of directors at the annual meeting
of
stockholders to be held in 2010.
Our
executive officers are elected by
and serve at the discretion of the Board of Directors. We have a standing
audit
committee of the Board of Directors. The members of the audit
committee are Messrs. Whyte, and
Edmonds
. Mr.
Whyte qualifies as an
“audit committee financial expert” within the meaning of the SEC
regulations. The audit committee oversees the retention, performance
and compensation of our independent auditors, and oversees and establishes
procedures concerning systems of internal accounting and
control.
We
have a standing compensation
committee of the Board of Directors. The members of the compensation committee
consist of Messrs. Whyte and Werner. The compensation committee's
duties are to review and evaluate the salaries and incentive compensation
of our
management and employees and administer our 2004 Stock Plan.
Code
of
Ethics
We
have adopted a code of ethics that is
applicable to our officers, directors and employees, including our principal
executive officer, principal financial officer, principal accounting officer
or
controller, or persons performing similar functions.
Indemnity
Agreements
Narrowstep
has entered into an indemnity
agreement with each of its directors and certain of its executive officers
containing provisions that may require Narrowstep, among other things, to
indemnify to the fullest extent permitted by law its executive officers and
directors against liabilities that may arise by reason of their status or
service as executive officers or directors and to advance expenses incurred
as a
result of any proceeding against them as to which they could be
indemnified.
Executive
Compensation
Summary
of Cash and Certain Other Compensation
The
following table sets forth, for the fiscal year ended February 28, 2007,
a
summary of the compensation earned by each person who served as our principal
executive officer during the fiscal year, the two additional most highly
compensated executives who were serving as such at the end of the fiscal
year
and two additional executives who would have been the most highly compensated
executives had they been serving as executive officers as of the end of the
fiscal year. In this document, we refer to these executive officers
as the “Named Officers”.
SUMMARY
COMPENSATION TABLE
Name
and Principal
Position
|
Fiscal
Year
|
Salary(1)
($)
|
Bonus(1)
($)
|
Option
Awards(2)
($)
|
All
Other
Compensation
($)
|
Total
($)
|
David
C. McCourt
Chairman,
Interim Chief Executive Officer and Interim Chief Operating
Officer(3)
|
2007
|
--
|
--
|
80,820
|
--
|
80,820
|
Stephen
Beaumont
President
and Chief Executive Officer (4)
|
2007
2006
|
298,156
143,988
|
--
--
|
120,539
255,283
|
--
--
|
418,695
399,271
|
Iolo
Jones
Founder
and Chief Strategy
Officer
(5)
|
2007
2006
|
187,248
143,988
|
--
--
|
--
478,025
|
--
--
|
187,248
622,013
|
Clifford
Webb
Chief
Operating
Officer
(6)
|
2007
2006
|
187,248
134,989
|
--
--
|
--
507,100
|
--
--
|
187,248
642,089
|
Steven
Crowther
Chief
Financial Officer (7)
|
2007
2006
|
191,452
146,500
|
--
--
|
86,856
450,655
|
--
--
|
278,308
597,155
|
Lisa
VanPatten
Chief
Financial Officer
|
2007
|
38,974
|
--
|
--
|
--
|
38,974
|
(1)
Amounts paid to Messrs. Beaumont, Jones and Webb were paid in British pounds
and
are converted to dollars at a conversion rate of $0.5341 per pound for fiscal
year 2007 and $0.5556 per pound for fiscal year 2006.
(2)
The
value of option awards granted to the Named Officer has been estimated pursuant
to SFAS 123(R) using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life: 2.0 years; volatility: 75%;
risk
free interest rate: 4.72% to 5.12%; and dividend yield: none. See
Note 6 to Notes to the Consolidated Financial Statements. In certain
instances, option award values reflect, in part, the vesting of options granted
in prior periods.
(3)
Mr.
McCourt became Chairman and Interim Chief Executive Officer in December 2006
and
Interim Chief Operating Officer in June 2007.
(4)
Mr.
Beaumont ceased to be the Company’s President and Chief Executive Officer in
December 2006.
(5)
Mr.
Jones ceased to be the Company’s Chief Strategy Officer in November
2007.
(6)
Mr.
Webb ceased to be the Company’s Chief Operating Officer in January
2007.
(7)
Mr.
Crowther ceased to be the Company’s Chief Financial Officer in June
2006.
We
did
not make any stock awards or pay any non-equity incentive plan compensation
or
non-qualified deferred compensation earnings to any of the Named Officers
in
respect of the periods covered by the Summary Compensation Table.
Other
than as described in the Summary Compensation Table, the Company did not
pay any
other compensation or provide any perquisites to any of the Named Officers
during the periods covered by the Summary Compensation Table
persons.
Employment
Agreements
David
McCourt.
David
McCourt, our Chairman, Interim Chief Executive Officer and Interim Chief
Operating Officer, is a party to an employment agreement with Narrowstep
Inc.,
dated June 8, 2007. The term of the agreement shall continue until
November 30, 2009 with a 1 year automatic renewal beginning on each December
1
thereafter unless the Company or Executive provides the other with written
notice of non-renewal not less than 90 days prior to the commencement of
any
such new 1 year period. Under his employment agreement, Mr. McCourt
will receive no initial cash compensation. He will receive 1,250,000
Restricted stock units on a date that is two years after its applicable vesting
date, or earlier based on performance. He has also received 2,500,000
restricted shares of Common Stock which vested upon the occurrence of certain
events as described in the agreement.
Pursuant
to the terms of his employment
agreement, On June 8, 2007 the compensation committee agreed to vest 950,000
restricted shares of Common Stock based on meeting specific performance
milestones. 729,169 Restricted stock units vested based on the
agreement as of June 30, 2007.
Iolo
Jones
. Iolo Jones
is a party to an employment
agreement with Narrowstep Ltd., our wholly-owned subsidiary, dated March
28,
2006. His employment agreement generally continues until terminated by either
party upon one years’ notice if received in the first year of the agreement and,
thereafter upon six months' notice or until he is 65 years old. Under his
employment agreement, Mr. Jones is entitled to receive a base salary of $183,000
per year, subject to yearly review on March 1 of every year beginning in
2007.
If
Mr. Jones's employment is terminated
by us without cause on less than six months' notice, Mr. Jones is entitled
to
receive his salary for that part of the period of notice which was not given.
If
Mr. Jones's employment is terminated for cause as specified in the employment
agreement, our obligation to pay any further compensation ends. Mr. Jones’
employment agreement prohibits him from contacting or dealing with our
customers, suppliers or employees during the six month notice period and
his
agreement prohibits him from soliciting, in a manner that directly or indirectly
competes with us, our employees, customers, or suppliers with whom he had
personal dealings in the normal course of his employment for a period of
twelve
months after he stops working for us. Under his employment agreement, Mr.
Jones
is also bound to keep certain information confidential and to assign to us
any
intellectual property developed by him during the term of his
employment. Mr. Jones may be paid a bonus from time to time, at the
discretion of our Board of Directors.
Pursuant
to the terms of his prior
employment agreement, Mr. Jones was granted options for 942,664 shares in
March
2005 due to dilution in his stock ownership interest occurring on or prior
to
December 31, 2004. On February 13, 2006, our Board of Directors
unanimously confirmed that it is in the best interests of Narrowstep and
its
stockholders that no further options be issued to Mr. Jones pursuant to the
terms of the “antidilution provisions” of his prior employment agreement which
has now been terminated.
Pursuant
to the terms of his employment
agreement, we notified Mr. Jones in November 2007 that we were terminating
his
employment.
Director
Compensation
Directors
are eligible to receive
options to purchase shares of our common stock. There is no set formula for
these grants and they may vary from director to director and from month to
month. In addition, our non-employee directors are entitled to
monthly compensation equal to a grant of options for 2,000 shares for each
month
of service, such options to be granted on a semi-annual basis and to have
an
exercise price equal to the fair market value of the common stock on the
date of
grant. Each director is also reimbursed for reasonable travel and other
out-of-pocket expenses incurred in attending meetings of the Board of
Directors.
The
following table sets forth certain information regarding the compensation
we
paid to our non-employee directors during the fiscal year ended February
28,
2007.
Name
|
Fees
Earned
or
Paid
in
Cash
($)
|
Option
Awards
($)(1)
|
All
Other
Compensation
($)
|
Total
($)
|
Rajan
Chopra
|
--
|
103,710(2)
|
--
|
103,710
|
Dennis
Edmonds
|
--
|
1,952(3)
|
--
|
1,952
|
Shelly
Palmer
|
--
|
1,952(4)
|
--
|
1,952
|
Peter
Sidall
|
--
|
1,952(5)
|
--
|
1,952
|
Roger
Werner
|
--
|
143,379(6)
|
--
|
143,379
|
Jack
Whyte
|
--
|
80,280(7)
|
--
|
80,280
|
(1)
The
value of option awards granted to the non-employee directors has been estimated
pursuant to SFAS 123(R) using the Black-Scholes option pricing model with
the
following weighted average assumptions: expected life: 2.0 years; volatility:
75%; risk free interest rate: 4.72% to 5.12%; and dividend yield:
none. See Note 6 to Notes to the Consolidated Financial
Statements.
(2)
Mr. Chopra held options to acquire
an aggregate of 300,000 shares of common stock as of February 28, 2007, all
of
which were presently exercisable as of that date. Mr. Chopra resigned
as a director effective October 7, 2007.
(3)
Mr. Edmonds held options to acquire
an aggregate of 133,957 shares of common stock as of February 28, 2007, all
of
which were presently exercisable as of that date.
(4)
Mr. Palmer held options to acquire
an aggregate of 306,000 shares of common stock as of February 28, 2007, all
of
which were presently exercisable as of that date. Mr. Palmer resigned
as a director effective February 14, 2007.
(5)
Mr. Sidall held options to acquire
an aggregate of 171,234 shares of common stock as of February 28, 2007, all
of
which were presently exercisable as of that date. Mr. Sidall resigned
as a director effective October 20, 2006.
(6)
Mr. Werner held options to acquire
an aggregate of 330,000 shares of common stock as of February 28, 2007, all
of
which were presently exercisable as of that date.
(7)
Mr. Whyte held options to acquire an
aggregate of 300,000 shares of common stock as of February 28, 2007, all
of
which were presently exercisable as of that date.
Certain
directors of the Company, or
entities that they control, are parties to consulting and other arrangements
with the Company. For a description of these arrangements, see Item
13. Certain Relationships and Related Transactions -- Transactions
with companies in which certain persons hold an interest.
2004
Stock Plan
The
Narrowstep Inc. 2004 Stock Plan (the “Plan”) was adopted by vote of our Board of
Directors on December 15, 2003
and became effective on
January 1, 2004. The Plan was amended by vote of the Board of
Directors in July, 2004, and the Plan, as amended, was approved by stockholders
in July, 2004. The Plan is designed to attract, retain and reward our
employees, directors and consultants by allowing them to participate in
Narrowstep’s growth through the acquisition of shares of our common stock or
other performance awards. 27,000,000 shares are reserved for issuance
under the Plan. No more than 5,000,000 shares may be the subject of
awards to any participant during any calendar year.
The term of
the Plan is 10 years, and options granted under the Plan can have a term
of no
more than 10 years.
Under
the
Plan, participants may be awarded stock options, stock appreciation rights,
restricted stock, restricted stock units, performance units, performance
shares
and other stock based awards. Options awarded under the Plan may be
either incentive stock options under Section 422 of the Internal Revenue
Code of
1986, as amended or non-qualified options. The Plan is administered
by our Board of Directors or by a committee appointed by the
Board. The Board (or such committee) has authority to, among other
things, determine when awards will be granted, the award recipients, the
size
and type of each award, vesting and forfeiture terms and all other terms
and
conditions of awards. The Board may also amend, suspend or terminate
the Plan at any time, but without stockholder approval, no amendment may
increase the number of shares available for issuance under the Plan, materially
change eligibility terms or extend the term of the Plan.
None
of
the Named Officers exercised any stock options during the fiscal year ended
February 28, 2007. The Company has not made any stock awards to any
of the Named Officers.
The
following table sets forth, for each of the Named Officers, information
regarding stock options outstanding at February 28, 2007 for each of the
Named
Officers. Each of the stock option grants referred to in the table
below were granted pursuant to our 2004 Stock Plan. The vesting dates applicable
to each stock award are set forth in footnotes that follow the columnar
explanations below the table.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
Name
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Option
Exercise
Price
($)
|
Option
Expiration Date
|
David
C. McCourt
|
300,000
|
--
|
0.67
|
6/27/11
|
Stephen
Beaumont
|
200,000
225,000
250,000
|
--
--
--
|
1.50
1.50
1.00
|
12/31/07
12/31/07
12/31/07
|
Iolo
Jones
|
942,664
|
--
|
1.20
|
2/28/15
|
Clifford
Webb
|
1,000,000
|
--
|
1.20
|
12/31/07
|
Steven
Crowther
|
500,000
500,000
50,000
|
--
--
--
|
1.20
1.20
0.90
|
6/30/07
6/30/07
6/30/07
|
(1)
Options covering 166,667 shares vested on July 1, 2007 and options covering
166,667 shares vested on July 1, 2008.
(2)
Options covering 83,333 shares vested on July 1, 2007 and options covering
83,333 shares vested on July 1, 2008.
RELATED
PARTY TRANSACTIONS
Options
granted to current directors.
The Company has granted to Roger Werner,
a member of the Board of Directors, options to purchase 300,000 shares at
an
exercise price of $1.18 on March 28, 2006 which are exercisable until March
28,
2016. The Company has granted to both David McCourt and Jack Whyte,
members of the board of directors, options to purchase 300,000 shares at
an
exercise price of $0.67 per share on June 7, 2006 which are exercisable until
June 27, 2011. All the option granted above fully vested on the date
granted.
On
May
23, 2006, the Company granted options to purchase 6,000 shares to Dennis
Edmonds, a member of the Board of Directors, at an exercise price of $0.75
per
share. These options vested on the grant date and are exercisable
until May 23, 2016.
On
December 2, 2005, the Company entered into a consultancy agreement with Roger
L.
Werner Jr. Pursuant to this agreement, on May 23, 2006, Mr. Werner was granted
options to purchase 30,000 shares at an exercise price of $0.75 per share,
for
consultancy services for the year ended February 28, 2006.
Options
granted to former directors.
The Company has granted Shelly
Palmer, a former member of the Board of Directors, options to purchase 6,000
shares at an exercise price of $0.75 per share. These options were granted
and
vested on May 23, 2006 and are no longer exercisable. The Company has granted
Peter Sidall, a former member of the Board of Directors, options to purchase
6,000 shares at an exercise price of $0.75 per share. These options were
granted
and vested on May 23, 2006 and are exercisable until December 31, 2007 pursuant
to the terms of his separation agreement. The Company had granted
options to Cliff Webb, a former officer and Board member, options to purchase
1,000,000 shares at an exercise price of $1.20 per share. The options
are fully vested and exercisable until December 31, 2007 pursuant to the
terms
of his separation agreement. The Company granted Rajan Chopra, a
former member of the Board of Directors, options to purchase 300,000 shares
at
an exercise price of $0.80 on September 28, 2006 which are exercisable until
September 28, 2016.
Options
granted to current officers.
On February 8, 2007, the Company granted
options to purchase 200,000 shares to Lisa VanPatten, our Chief Financial
Officer, at an exercise price of $0.92 per share. These options vest
over a three-year period and expire on February 8, 2017. On April 30,
2007, the Company granted options to purchase 250,000 shares to Lou Holder,
our
Chief Technology Officer, at an exercise price of $0.68 per
share. These options vest over a three-year period and expire on
April 30, 2017.
On
June
8, 2007, Narrowstep entered into an employment Agreement with David C. McCourt
who was granted 1,250,000 shares of restricted stock units which vest monthly
until November 30, 2007 and 2,500,000 shares of restricted stock which vest
based on meeting certain performance milestones, to be determined by the
Company’s Compensation Committee.
Options
granted to former officers.
The Company has granted options
to purchase 1,000,000 shares to Steven Crowther, our former Senior Vice
President and Chief Financial Officer, at an exercise price of $1.20 per
share. 500,000 of these options were granted and vested on March 1,
2005 and are exercisable until February 28, 2015. 500,000 of these
options were granted on August 11, 2005, 100,000 of which vested immediately
and
the remaining 400,000 vested on July 1, 2006. These options are exercisable
until August 11, 2015. On January 17, 2006, the Company granted Steven Crowther
additional options to purchase 100,000 shares, at an exercise price of $0.90
per
share. 50,000 of these options vested immediately on January 17,
2006. In connection with the Separation and General Release Agreement
between us and Mr. Crowther, the period during which Mr. Crowther may exercise
his vested options was extended from September 29, 2006 until June 29, 2007.
These options have since expired.
The
Company has granted options to purchase a total of 900,000 shares to Stephen
Beaumont, our former President and Chief Executive Officer. 200,000 of these
options were granted on November 15, 2005 at an exercise price of $1.50,
100,000
vested immediately and the remainder vested on February 1, 2006. The remaining
options were granted on February 28, 2006, 250,000 at an exercise price of
$1.00
per share, which vested immediately, and 450,000 at an exercise price of
$1.50
per share, 225,000 of which vested on June 30, 2006 and 225,000 of which
vested
on December 31, 2006. In connection with the Separation and General
Release Agreement between us and Mr. Beaumont, the period during which Mr.
Beaumont may exercise his vested options was extended until December 31,
2007.
Transactions
with companies in which certain persons hold an
interest.
Shelly Palmer, a former director of the Company,
is the owner of a consulting company, SLP Productions Inc. Pursuant to an
unwritten agreement between the parties, SLP Productions billed the Company
$38,000 and $36,000 for fiscal year ending February 28, 2007 and February
28,
2006, respectively for consulting services. For the six months
ending, August 31, 2007 no further consulting services were
performed.
Narrowstep
Ltd. has developed a channel for LTR Consultancy. John Goedegebuure, a founder
and shareholder of Narrowstep Inc., is the Managing Director and a shareholder
of LTR Consultancy. Total revenue and total receivables from LTR
Consultancy for fiscal year ending February 28, 2007, was $185,480 and $53,614
respectively. Total revenue and total receivables from LTR
Consultancy for the six months ending August 31, 2007, was $42,236 and $97,807
respectively. The total amount in receivables remained unpaid and was fully
reserved for at August 31, 2007.
Pursuant
to an Investor Relations Agreement with the Company, LTR Consultancy earned
fees
for investor relations services of $33,705, for fiscal year ended February
28,
2007. Of these fees, $5,892 was unpaid as of August 31,
2007.
On
December 2, 2005, the Company entered into a consultancy agreement with Roger
L.
Werner Jr. Pursuant to this agreement, on May 23, 2006, Mr. Werner
was granted options to purchase 30,000 shares at an exercise price of $0.75
per
share, for consultancy services for the year ended February 28,
2006. Mr. Werner became a shareholder of the Company on February 22,
2006 and a director of the Company on March 28, 2006.
On
May
30, 2006, the Company entered into an advisory agreement with Granahan McCourt
Advisors, LLC. David C McCourt, Chairman of the Board of Directors,
Interim Chief Executive Officer and Interim Chief Operating Officer, is the
beneficial owner of Granahan McCourt Advisors, LLC and Granahan McCourt Capital,
LLC, a shareholder in the Company. Pursuant to this agreement,
Granahan McCourt Advisors, LLC was issued 100,000 shares of common stock
on May
30, 2006 and received warrants to purchase 6,000 shares, with an exercise
price
equal to $0.95 per share. Mr. McCourt became a director of the
Company on June 27, 2006, was named as Chairman of the Board and interim
Chief
Executive Officer in December 2006 and was named interim Chief Operating
Officer
in June 2007. The Company paid Granahan McCourt Advisors, LLC $80,000
for consulting services and $9,000 to cover out of pocket expenses for fiscal
year ending February 28, 2007. Mr. McCourt voluntarily terminated the
advisory agreement once he became interim Chief Executive Officer and forfeited
the remaining balance in the contract.
Outdoor
Channel, a Narrowstep customer, began utilizing our services in May
2007. The Chief Executive Officer and President of Outdoor Channel is
Roger L. Werner Jr., a Director of Narrowstep. We billed Outdoor
Channel, $33,204 for the six months ended August 31, 2007 and the balance
in
accounts receivable at August 31, 2007 is $2,500.
In
connection with our August 2007 financing, Mr. McCourt purchased 4,000,000
shares of common stock and warrants to purchase 2,000,000 shares of common
stock
for a total purchase price of $1,000,000. In addition, Mr. McCourt
entered into a lock up agreement pursuant to which he and certain entities
controlled by him agreed for a period of nine months from August 8, 2007
not to
sell, dispose or other wise transfer any shares of common stock owned by
them,
subject to certain exceptions.
PRINCIPAL
STOCKHOLDERS
The
following table sets forth
information about the beneficial ownership of our common stock for (i) each
person known by us to own beneficially more than five percent of our outstanding
common stock, (ii) each director and named executive officer, and (iii) all
directors and executive officers as a group Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission. Except
as indicated by footnote and subject to community property laws where
applicable, to our knowledge, the persons named below have sole voting and
investment power with respect to the shares of common stock shown as
beneficially owned by them. The numbers in the table reflect shared
held as of October 15, 2007 and are based upon 124,944,487 shares being
outstanding: In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, shares of common stock subject
to
options or warrants held by that person that are exercisable as of October
15,
2007, or will become exercisable within 60 days thereafter are deemed
outstanding, while such shares are not deemed outstanding for purposes of
computing percentage ownership of any other person.
Name
and Address of Beneficial Owner
|
|
Number
of Shares Beneficially owned
|
|
Percent
of Class
|
|
|
|
|
|
Iolo
Jones
|
|
6,005,164
|
(1)
|
3.8%
|
103
B. South Hill Park
|
|
|
|
|
London
NW3 2SP
|
|
|
|
|
United
Kingdom
|
|
|
|
|
|
|
|
|
|
Renaissance
Capital
|
|
27,000,000
|
(2)
|
17.1%
|
8080
N. Central Expressway, Suite 210-LB 59
|
|
|
|
|
Dallas,
TX 75206-1857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Austin
Lewis
|
|
14,276,667
|
(3)
|
9.0%
|
45
Rockefeller Plaza, Ste 2570
|
|
|
|
|
New
York, NY 10111
|
|
|
|
|
|
|
|
|
|
David
C. McCourt
|
|
20,904,236
|
(4)
|
13.2%
|
Granahan
& McCourt, LLC
|
|
|
|
|
PO
Box AQ
|
|
|
|
|
Princeton,
NJ 08542
|
|
|
|
|
|
|
|
|
|
Barry
Sternlich
|
|
7,877,778
|
(5)
|
5.0%
|
591
W. Putnam Ave.
|
|
|
|
|
Greenwich,
CT 06830
|
|
|
|
|
|
|
|
|
|
Oded
Aboodi and Stanley Mauss
|
|
12,072,224
|
(6)
|
7.7%
|
Sano
Ventures XII LLC
|
|
|
|
|
c/o
Stanley Mauss
|
|
|
|
|
1700
Broadway, 17
th
Floor
|
|
|
|
|
New
York, NY 10019
|
|
|
|
|
|
|
|
|
|
Dennis
Edmonds
|
|
133,957
|
(7)
|
*
|
Battersea
Studios
|
|
|
|
|
80
Silverthorne Road
|
|
|
|
|
London,
SW8 3HE, UK
|
|
|
|
|
|
|
|
|
|
Roger
Werner
|
|
2,151,667
|
(8)
|
1.4%
|
10
Barnstable Lane
|
|
|
|
|
Greenwich,
CT 08630
|
|
|
|
|
|
|
|
|
|
Lisa
VanPatten
|
|
-
|
|
*
|
116
Village Bldv, Suite 200
|
|
|
|
|
Princeton,
NJ 08540
|
|
|
|
|
|
|
|
|
|
Louis
Holder
|
|
-
|
|
*
|
116
Village Bldv, Suite 200
|
|
|
|
|
Princeton,
NJ 08540
|
|
|
|
|
|
|
|
|
|
John
Whyte
|
|
300,000
|
(9)
|
*
|
35
Crescent Street, Unit 617
|
|
|
|
|
Waltham,
MA 02453
|
|
|
|
|
|
|
|
|
|
Stiassni
Capital Partners LP
|
|
10,500,822
|
(10)
|
6.7%
|
3400
Palos Verdes Drive West
|
|
|
|
|
Rancho
Palos Verdes, CA 90275
|
|
|
|
|
|
|
|
|
|
All
Directors and Executive Officers as a group (8 persons)
|
|
29,495,024
|
(11)
|
18.7%
|
*
Less than 1% of the outstanding shares.
(1) Includes
942,664 shares issuable upon the exercise of options owned by Mr. Jones which
are exercisable within 60 days of October 15, 2007.
(2) Includes
(i) 4,000,000 shares and 2,000,000 shares issuable upon the exercise of warrants
owned by Renaissance Capital Growth & Income Fund III, Inc. which are
exercisable within 60 days of October 15, 2007, (ii) 8,000,000 shares and
4,000,000 shares issuable upon the exercise of warrants owned by Renaissance
US
Growth Investment Trust PLC which are exercisable within 60 days of October
15,
2007, (iii) 4,000,000 shares and 2,000,000 shares issuable upon the exercise
of
warrants owned by US Special Opportunities Trust PLC which are exercisable
within 60 days of October 15, 2007, (iv) 2,000,000 shares and 1,000,000 shares
issuable upon the exercise of warrants owned by Premier RENN US Emerging
Growth
Fund Limited which are exercisable within 60 days of October 15,
2007.
(3) Includes
(i) 2,028,000 shares and 566,500 shares issuable upon the exercise of warrants
owned by LAM Opportunity Fund which are exercisable within 60 days of October
15, 2007, (ii) 9,478,667 shares and 2,203,500 shares issuable upon the exercise
of warrants owned by Lewis Opportunity Fund, LP which are exercisable within
60
days of October 15, 2007
(4)
Includes (i) 7,488,889 shares held by Granahan McCourt Capital LLC, (ii)
5,256,000 shares issuable upon the exercise of warrants owned by Granahan
McCourt Capital LLC which are exercisable within 60 days of October 15,
2007, (iii) 100,000 shares held by Granahan McCourt Advisors, LLC,
and (iv) 6,136,510 shares, 300,000 shares issuable upon the exercise of options,
1,250,000 restricted stock units and 2,000,000 shares issuable upon the exercise
of warrants granted to David C. McCourt which are all exercisable within
60 days
of October 15, 2007. Mr. McCourt is responsible for the voting,
selection, acquisition and disposition of the shares held by Granahan McCourt
Capital, LLC, and thus may be deemed to be the beneficial owner of such
shares. Mr. McCourt is a director of the Company.
(5)
Includes 1,600,000 shares and 800,000 shares issuable upon the exercise of
warrants owned by Starwood Capital which are exercisable within 60 days of
October 15, 2007
(6)
Consists of (i) 8,155,556 shares owned by Sano Ventures XII LLC and (ii)
3,916,668 shares issuable upon the exercise of warrants owned by Sano Ventures
XII LLC which are exercisable within 60 days of October 15,
2007. Obed Aboodi and Stanley Mauss are responsible for the voting,
selection, acquisition and disposition of the shares held by Sano Ventures
XII
LLC and thus may be deemed to be the beneficial owners of such
shares.
(7)
Consists of 133,957 shares issuable upon the exercise of options held by
Mr.
Edmonds which are exercisable within 60 days of October 15, 2007.
(8)
Includes 905,000 shares issuable upon the exercise of options and warrants
held
by Mr. Werner which are exercisable within 60 days of October 15,
2007.
(9)
Consists of 300,000 shares issuable upon the exercise of options held by
Mr.
Whyte which are exercisable within 60 days of October 15, 2007.
(10)
Includes (i) 5,742,222 shares held by Stiassni Capital Partners LP, (ii)
5,256,000 shares issuable upon the exercise of warrants owned by Staiassni
Capital Partners LP which are exercisable within 60 days of October 15, 2007
and
(iii) 300,000 shares issuable upon the exercise of options within 60 days
of
October 15, 2007. Nicholas Stiassni is responsible for the voting,
selection, acquisition and disposition of the shares held by Stiassni Capital
Partners LP, and thus may be deemed to be the beneficial owner of such
shares.
(11)
Includes 11,387,621 shares issuable upon the exercise of options and warrants
held by the directors and executive officers, or entities related to them,
which
are exercisable within 60 days of October 15, 2007.
DESCRIPTION
OF CAPITAL
STOCK
Narrowstep’s
authorized capital stock consists of 450,000,000 shares of common stock,
par
value $0.000001 per share, and 50,000,000 shares of preferred stock, par
value
$0.000001 per share. The following summary description of
Narrowstep’s capital stock is qualified by reference to Narrowstep’s Amended and
Restated Certificate of Incorporation (the “Charter”) and Amended and Restated
By-Laws (the “By-Laws”) which are filed as exhibits to the registration
statement of which this prospectus is a part. As of October 15, 2007,
Narrowstep had 124,944,487
fully paid and
non-assessable shares of common stock and no shares of preferred stock issued
and outstanding. In addition, Narrowstep had outstanding options and warrants
exercisable for 51,630,813
shares of common stock as of
October 15, 2007.
Common
Stock
Holders
of common stock are entitled to one vote per share for each share held of
record
on all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Directors are elected by a majority of the votes of the shares
present in person or by proxy at the meeting. The holders of common
stock are entitled to receive ratably such lawful dividends as may be declared
by the Board of Directors. However, such dividends are subject to
preferences that may be applicable to the holders of any outstanding shares
of
preferred stock. We have not paid any cash dividends on our common
stock and do not expect to do so in the foreseeable future. In the
event of a liquidation, dissolution or winding up of the affairs of Narrowstep,
whether voluntarily or involuntarily, the holders of common stock will be
entitled to receive pro rata all of the remaining assets of Narrowstep available
for distribution to its stockholders. Any such pro rata distribution
would be subject to the rights of the holders of any outstanding shares of
preferred stock. The common stock has no preemptive, redemption,
conversion or subscription rights. All of the outstanding shares of
our common stock are, and the shares issuable upon exercise of outstanding
options and warrants will be, when issued, fully paid and
nonassessable. The rights, powers, preferences and privileges of
holders of common stock are subject to, and may be adversely affected by,
the
rights of the holders of shares of any series of preferred stock which
Narrowstep may designate and issue in the future.
Preferred
Stock
The
Board
of Directors is authorized, subject to any limitations prescribed by Delaware
law, without further stockholder approval, to issue from time to time up
to an
aggregate of 50,000,000 shares of preferred stock, in one or more
series. The Board of Directors is also authorized, subject to the
limitations prescribed by Delaware law, to establish the number of shares
to be
included in each series and to fix the designations, preferences, rights
and any
qualifications, limitations or restrictions of the shares of any series,
including the dividend rights, dividend rates, conversion rights, voting
rights,
redemption terms and prices, liquidation preferences and the number of shares
constituting any series. The Board of Directors is authorized to
issue preferred stock with voting, conversion and other rights and preferences
that could adversely affect the voting power or other rights of the holders
of
common stock.
As
of
August 31, 2007, Narrowstep had no shares of preferred stock
outstanding. Narrowstep has no current plans to issue any preferred
stock. However, the issuance of preferred stock or of rights to purchase
preferred stock could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
a
majority of the outstanding common stock of Narrowstep.
Limitation
of Liability and Indemnification of Directors and Officers
The
Charter provides that no director of Narrowstep shall be personally liable
to
Narrowstep or to its stockholders for monetary damages for breach of fiduciary
duty as a director, except that the limitation shall not eliminate or limit
liability to the extent that the elimination or limitation of such liability
is
not permitted by the Delaware General Corporation Law as the same exists
or may
hereafter be amended.
The
Charter further provides for the indemnification of Narrowstep's directors
and
officers to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law, including circumstances in which indemnification is otherwise
discretionary. A principal effect of these provisions is to limit or eliminate
in most situations the potential liability of Narrowstep's directors for
monetary damages arising from breaches of their duty of care. These provisions
may also shield directors from liability under federal and state securities
laws.
Narrowstep
has entered into an indemnity agreement with each of its directors and certain
of its executive officers containing provisions that may require Narrowstep,
among other things, to indemnify to the fullest extent permitted by law its
executive officers and directors against liabilities that may arise by reason
of
their status or service as executive officers or directors and to advance
expenses incurred as a result of any proceeding against them as to which
they
could be indemnified.
Officers,
directors or other persons controlling Narrowstep may be entitled under these
indemnification provisions to indemnification for liabilities arising under
the
Securities Act of 1933. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors, officers
and controlling persons of Narrowstep pursuant to the foregoing provisions,
we
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities
Act
and is, therefore, unenforceable.
Anti-Takeover
Effects of Provisions of Delaware Law and Narrowstep’s Amended and Restated
By-Laws, Amended and Restated Certificate of Incorporation, and Delaware
Law
Narrowstep's
Charter, Narrowstep's By-Laws and Delaware General Corporation Law contain
provisions that could discourage, delay or prevent a change in control of
Narrowstep or an acquisition of Narrowstep at a price which many stockholders
may find attractive. The existence of these provisions could limit
the price that investors might be willing to pay in the future for shares
of our
common stock.
Charter
and By-laws
The
Charter provides for the division of the Board of Directors into three classes
as nearly as equal in size as possible with staggered three-year terms, although
two classes are currently up for election at the same time as a result of
our
not holding an annual meeting in 2005. In addition, the Charter
provides that directors may be removed without cause by the affirmative vote
of
the holders of 75% of the shares of capital stock of Narrowstep entitled
to vote
or with cause by the affirmative vote of the holders of a majority of the
shares. The By-Laws provide that, except as otherwise provided by law
or the Charter, newly created directorships resulting from an increase in
the
authorized number of directors or vacancies on the Board may be filled only
by:
|
·
|
a
majority of the directors then in office, even though less than
a quorum
may then be in office, or
|
|
·
|
the
sole remaining director.
|
These
provisions prevent a stockholder from enlarging the Board and filling the
new
directorships with this stockholder's own nominees without Board
approval. These provisions of the By-Laws may have the effect of
discouraging a third party from initiating a proxy contest, making a tender
offer or otherwise attempting to gain control of Narrowstep, or attempting
to
change the composition or policies of the Board, even though these attempts
might be beneficial to Narrowstep or its stockholders.
The
Charter provides that, unless otherwise prescribed by law, only the Chairman
of
the Board, a majority of the Board of Directors, or the President is able
to
call a special meeting of stockholders. The Charter and the By-Laws
also provide that, unless otherwise prescribed by law, stockholder action
may be
taken only at a duly called and convened annual or special meeting of
stockholders and may not be taken by written consent. These provisions, taken
together, prevent stockholders from forcing consideration by the stockholders
of
stockholder proposals over the opposition of the Board, except at an annual
meeting.
The
By-Laws provide that any action required or permitted to be taken by the
stockholders of Narrowstep at an annual meeting or special meeting of
stockholders may only be taken if Narrowstep is given proper advance notice
of
the action (the “Notice Procedure”). The Notice Procedure affords the
Board an opportunity to consider the qualifications of proposed director
nominees or the merit of stockholder proposals, and, to the extent deemed
appropriate by the Board, to inform stockholders about such
matters. The Notice Procedure also provides a more orderly procedure
for conducting annual meetings of stockholders. The By-Laws do not
give the Board any power to approve or disapprove stockholder nominations
for
the election of directors or proposals for action. However, the
Notice Procedure may prevent a contest for the election of directors or the
consideration of stockholder proposals. This could deter a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal if the proper advance notice procedures
are not followed, without regard to whether consideration of such nominees
or
proposals might be harmful or beneficial to Narrowstep and its
stockholders.
Narrowstep,
without stockholder approval, can issue shares of common stock and preferred
stock up to the number of shares authorized for issuance in its
Charter. Narrowstep could use these additional shares for a variety
of corporate purposes. These purposes include future public offerings
to raise additional capital, corporate acquisitions and employee benefit
plans. Narrowstep's ability to issue these shares of common stock and
preferred stock could make it more difficult or discourage an attempt to
obtain
control of Narrowstep by means of a proxy contest, tender offer, merger or
otherwise.
The
General Corporation Law of Delaware provides generally that the affirmative
vote
of a majority of the shares issued and outstanding is required to amend a
corporation's certificate of incorporation or by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. The Charter requires the affirmative vote of the holders
of at least 75% of the issued and outstanding shares of our capital stock
to
amend many Charter provisions, including provisions relating to any reduction
in
the number of authorized shares of our capital stock, our staggered Board,
and
director and officer indemnification. The Charter and the By-Laws
require the affirmative vote of the Board or the holders of at least 75%
of the
issued and outstanding shares of capital stock of Narrowstep entitled to
vote to
amend or repeal any of the provisions of the By-Laws. The 75%
stockholder vote would be in addition to any separate class vote that might
be
required pursuant to the General Corporation Law of Delaware or the terms
of any
series of preferred stock that might be outstanding at the time any amendments
are submitted to stockholders.
Delaware
Law
Narrowstep
is subject to Section 203 of the Delaware General Corporation Law which,
subject
to certain exceptions, prohibits a Delaware corporation from engaging in
any
business combination with any interested stockholder for a period of three
years
following the time that such stockholder became an interested
stockholder.
Section
203 does not apply if:
|
·
|
prior
to such time, the board of directors of the corporation approved
either
the business combination or the transaction which resulted in the
stockholder becoming an interested
stockholder;
|
|
·
|
upon
consummation of the transaction which resulted in the stockholder
becoming
an interested stockholder, the interested stockholder owned at
least 85%
of the voting stock of the corporation outstanding at the time
the
transaction commenced, excluding for purposes of determining the
voting
stock (but not the outstanding voting stock owned by the interested
stockholder) those shares owned by persons who are directors and
also
officers and by employee stock plans in which employee participants
do not
have the right to determine confidentially whether shares held
subject to
the plan will be tendered in a tender or exchange offer;
or
|
|
·
|
at
or subsequent to such time, the business combination is approved
by the
board of directors and authorized at an annual or special meeting
of
stockholders, and not by written consent, by the affirmative vote
of at
least 66 2/3%of the outstanding voting stock which is not owned
by the
interested stockholder.
|
The
application of Section 203 may limit the ability of stockholders to approve
a
transaction that they may deem to be in their best interests.
Section
203 defines “business combination” to include generally:
|
·
|
any
merger or consolidation involving the corporation and the interested
stockholder;
|
|
·
|
any
sale, lease, transfer, pledge or other disposition of 10% or more
of the
assets of the corporation to or with the interested
stockholder;
|
|
·
|
subject
to limited exceptions, any transaction which results in the issuance
or
transfer by the corporation of any stock of the corporation to
the
interested stockholder;
|
|
·
|
any
transaction involving the corporation which has the effect of increasing
the proportionate share of the stock of any class or series of
the
corporation beneficially owned by the interested stockholder;
or
|
|
·
|
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided
by or
through the corporation.
|
In
general, Section 203 defines an “interested stockholder” as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation or an affiliate or associate of the corporation which was the
owner
of 15% or more of the outstanding voting stock of the corporation at any
time
within the past three years, and any entity or person associated with,
affiliated with or controlling or controlled by such entity or
person.
Transfer
Agent
The
Registrar and Transfer Company is the transfer agent for our common
stock. The address for The Registrar and Transfer Company is 10
Commerce Drive, Cranford, New Jersey 07016-3752 and its phone number
is (908) 497-2300.
TRADING
MARKET FOR OUR SHARES
Our
Common stock has traded on the OTC Bulletin Board under the symbol “NRWS” since
August 4, 2005. Prior to that time, there was no public trading
market for our common stock. As of September 28, 2007, we had 124
holders of record.
The
following table sets for the period indicated, the high and low sales prices
of
our common stock as reported by the OTC Bulletin Board, on the trading day
during the respective period:
Fiscal
Year 2008
|
High
|
Low
|
Third
Quarter (through November 19, 2007)
|
$0.60
|
$0.14
|
Second
Quarter
|
$0.60
|
$0.21
|
First
Quarter
|
$0.95
|
$0.53
|
Fiscal
Year 2007
|
High
|
Low
|
Fourth
Quarter
|
$1.29
|
$0.83
|
Third
Quarter
|
$1.04
|
$0.75
|
Second
Quarter
|
$0.92
|
$0.61
|
First
Quarter
|
$0.68
|
$0.61
|
Fiscal
Year 2006
|
High
|
Low
|
Fourth
Quarter
|
$1.49
|
$0.52
|
Third
Quarter*
|
$1.70
|
$0.95
|
|
|
|
|
|
|
*
The OTC Bulletin Board first began publishing quotations for our
common
stock on September 13, 2005
|
On
November 19, 2007, the closing price
of our common stock was $0.16 per share.
As
of November 19, 2007 we had
124,944,487 shares outstanding. There can be no assurance that an
active trading market for our shares will ever develop in the
United States
,
or elsewhere. In the event that no
active trading market for the shares develops, it will be extremely difficult
for stockholders to dispose of the shares. In the event an active trading
market
develops, there can be no assurance that the market will be strong enough
to
absorb all of the shares which may be offered for sale by the
stockholders.
There
is a limited trading market for
our shares on the OTC Bulletin Board. The trading price of our shares is
highly
volatile and could be subject to wide fluctuations in response to factors
such
as actual or anticipated variations in quarterly operating results,
announcements of technological innovations, new sales forecasts, or new products
and services by us or our competitors, changes in financial estimates by
securities analysts, conditions or trends in internet markets, changes in
the
market valuations of other business service providers providing similar services
or products, announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures, capital commitments, additions or
departures of key personnel, sales of shares and other events or factors,
many
of which are beyond our control. Consequently, future announcements concerning
us or our competitors, litigation, or public concerns as to the commercial
value
of one or more of our products or services may cause the market price of
our
shares to fluctuate substantially for reasons which may be unrelated to
operating results. These fluctuations, as well as general economic, political
and market conditions, may have a material adverse effect on the market price
of
our shares. In addition, because our common stock is quoted on the OTC Bulletin
Board, price quotations will reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not represent actual
transactions.
In
addition, the stock market in general
has experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of many companies.
These broad market factors may materially adversely affect the market price
of
the shares, regardless of our operating performance.
Impact
of the “Penny Stock” Rules on Buying or Selling Our Shares.
The
SEC has adopted penny stock regulations which apply to securities traded
over-the- counter. Our shares are subject to these regulations. These
regulations generally define a penny stock to be any equity security that
has a
market price of less than $5.00 per share or an equity security of an issuer
with net tangible assets of less than $5,000,000 as indicated in audited
financial statements, if the corporation has been in continuous operations
for
less than three years. Subject to certain limited exceptions, the rules for
any
transaction involving a penny stock require the delivery, prior to the
transaction, of a risk disclosure document prepared by the broker-dealer
that
contains certain information describing the nature and level of risk associated
with investments in the penny stock market. The broker-dealer also must disclose
the commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Monthly account
statements must be sent by the broker-dealer disclosing the estimated market
value of each penny stock held in the account or indicating that the estimated
market value cannot be determined because of the unavailability of firm quotes.
In addition, the rules impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and institutional accredited investors (generally institutions
with
assets in excess of $5,000,000). These practices require that, prior to the
purchase, the broker-dealer determined that transactions in penny stocks
were
suitable for the purchaser and obtained the purchaser's written consent to
the
transaction. If a market for our common stock does develop and our shares
trade
below $5.00 per share, our common stock will be a penny stock. Consequently,
the
penny stock rules will likely restrict the ability of broker-dealers to sell
our
shares and will likely affect the ability of purchasers in the offering to
sell
our shares in the secondary market.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the SEC a registration statement on Form SB-2 under the Securities
Act of 1933 with respect to the common stock offered hereby. This prospectus
does not contain all of the information set forth in the registration statement,
certain portions of which are omitted as permitted by the rules and regulations
of the SEC. For further information pertaining to us and the common stock
to be
sold in the offering, reference is made to the registration statement, including
the exhibits thereto and the financial statements and notes filed as a part
thereof. Statements contained in this prospectus as to the contents
of any contract or any other document referred to are not necessarily complete,
and, in each instance, reference is made to the copy of the contact or document
filed as an exhibit or incorporated by reference, and each such statement
is
qualified in all respects by reference to such contract or other
document.
Copies
of
the registration statement, the exhibits thereto and any documents incorporated
by reference, may be inspected, without charge, at the public reference facility
maintained by the SEC at 100 F Street, NE, Washington, D.C. 20549. Please
call
the SEC at 1-800-SEC-0330 for information regarding the public reference
rooms.
Copies of such material may also be obtained from the Public Reference Section
of the SEC at the same address at prescribed rates. Such materials can also
be
inspected on the SEC's website at
http://www.sec.gov
.
We
make available through our website
(http://www.narrowstep.com), free of charge, our Annual Reports on Form 10-KSB,
Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K, and amendments
to
those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as soon as reasonably practicable
after such reports are electronically filed with, or furnished to, the
Securities and Exchange Commission. The information available on or
that can be accessed through our website is not incorporated by reference
into
and is not a part of this
prospectus.
PLAN
OF DISTRIBUTION
Sales
by Selling Stockholders.
The
selling stockholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock
or
interests in shares of common stock received after the date of this prospectus
from a selling stockholder as a gift, pledge, partnership distribution or
other
transfer, may, from time to time, sell, transfer or otherwise dispose of
any or
all of their shares of common stock or interests in shares of common stock
on
any stock exchange, market or trading facility on which the shares are traded
or
in private transactions. These dispositions may be at fixed prices,
at prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale,
or at
negotiated prices.
The
selling stockholders may use any one or more of the following methods when
disposing of shares or interests therein:
-
ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers;
-
block trades in which the
broker-dealer will attempt to sell the shares as agent, but may position
and
resell a portion of the block as principal to facilitate the
transaction;
-
purchases by a broker-dealer as
principal and resale by the broker-dealer for its account;
-
an exchange distribution in
accordance with the rules of the applicable exchange;
-
privately negotiated
transactions;
-
short sales effected after the date
the registration statement of which this prospectus is a part is declared
effective by the SEC;
-
through the writing or settlement of
options or other hedging transactions, whether through an options exchange
or
otherwise;
-
broker-dealers may agree with the
selling stockholders to sell a specified number of such shares at a stipulated
price per share; and
-
a combination of any such methods of
sale.
The
selling stockholders may, from time to time, pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured
parties
may offer and sell the shares of common stock, from time to time, under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or
other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus. The selling
stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this
prospectus.
In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The
selling stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or
more
derivative securities which require the delivery to such broker-dealer or
other
financial institution of shares offered by this prospectus, which shares
such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
aggregate proceeds to the selling stockholders from the sale of the common
stock
offered by them will be the purchase price of the common stock less discounts
or
commissions, if any. Each of the selling stockholders reserves the
right to accept and, together with their agents from time to time, to reject,
in
whole or in part, any proposed purchase of common stock to be made directly
or
through agents. We will not receive any of the proceeds from this
offering. Upon any exercise of the warrants or options by payment of cash,
however, we will receive the exercise price of the warrants or
options.
The
selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act, provided
that they meet the criteria and conform to the requirements of that
rule.
The
selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
"underwriters" within the meaning of Section 2(11) of the Securities
Act. Any discounts, commissions, concessions or profit they earn on
any resale of the shares may be underwriting discounts and commissions under
the
Securities Act. Selling stockholders who are "underwriters" within
the meaning of Section 2(11) of the Securities Act will be subject to the
prospectus delivery requirements of the Securities Act.
To
the
extent required, the shares of our common stock to be sold, the names of
the
selling stockholders, the respective purchase prices and public offering
prices,
the names of any agents, dealer or underwriter, and any applicable commissions
or discounts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
prospectus.
In
order
to comply with the securities laws of some states, if applicable, the common
stock may be sold in these jurisdictions only through registered or licensed
brokers or dealers. In addition, in some states the common stock may
not be sold unless it has been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.
We
have
advised the selling stockholders that the anti-manipulation rules of Regulation
M under the Exchange Act may apply to sales of shares in the market and to
the
activities of the selling stockholders and their affiliates. In
addition, to the extent applicable we will make copies of this prospectus
(as it
may be supplemented or amended from time to time) available to the selling
stockholders for the purpose of satisfying the prospectus delivery requirements
of the Securities Act. The selling stockholders may indemnify any
broker-dealer that participates in transactions involving the sale of the
shares
against certain liabilities, including liabilities arising under the Securities
Act.
We
have
agreed to indemnify the selling stockholders against liabilities, including
liabilities under the Securities Act and state securities laws, relating
to the
registration of the shares offered by this prospectus.
We
have
agreed with the selling stockholders to keep the registration statement of
which
this prospectus constitutes a part effective until the earlier of (1) such
time
as all of the shares covered by this prospectus have been disposed of pursuant
to and in accordance with the registration statement or (2) the date on which
all of the shares may be sold pursuant to Rule 144(k) of the Securities
Act.
LEGAL
MATTERS
The
validity of the shares offered under this prospectus is being passed upon
for us
by Lowenstein Sandler PC, Roseland, New Jersey.
EXPERTS
Rothstein,
Kass & Company, P.C., our
independent registered public accounting firm, have audited our consolidated
financial statements as of and for the year ended February 28, 2007 as set
forth
in their report. We have included these consolidated financial
statements in the prospectus in reliance on the report of Rothstein, Kass
&
Company, P.C. given on their authority as experts in accounting and
auditing.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
Report
of independent registered public accounting
firm…………………………………………………….
|
44
|
Consolidated
balance sheet…………………………………………………………………………………...
|
45
|
Consolidated
statements of operations and comprehensive loss
……………………………………..……...
|
46
|
Consolidated
statements of changes in stockholders’ equity
………………………………………………..
|
47
|
Consolidated
statements of cash flows ………………………………………………………………..……..
|
48
|
Notes
to consolidated financial
statements…………………………………………………………………...
|
49
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
Narrowstep
Inc.
We
have
audited the accompanying consolidated balance sheet of Narrowstep Inc. and
Subsidiaries (collectively, the “Company”) as of February 28, 2007, and the
related consolidated statements of operations and comprehensive loss, changes
in
stockholders’ equity, and cash flows for each of the years in the two year
period ended February 28, 2007. 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. An audit
includes 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 also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, 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 consolidated financial position of the Company
as
of February 28, 2007, and the results of its consolidated operations and
its
consolidated cash flows for the years in the two year period ended February
28,
2007, in conformity with accounting principles generally accepted in the
United
States.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has reported significant losses
from operations, had an accumulated deficit, utilized a significant amount
of
cash from operations, and requires additional financing to fund future
operations. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern. Management's plans regarding those matters
also
are described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty
.
/s/
Rothstein, Kass & Company, P.C.
Roseland,
New Jersey
April
18,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NARROWSTEP
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
August
31,
2007
|
|
|
February
28,
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
|
10,170,561
|
|
|
|
466,870
|
|
Accounts
receivable, net of
allowance for doubtful accounts
|
|
|
1,211,993
|
|
|
|
1,403,779
|
|
of
$1,574,090
and $940,534, respectively
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current
assets
|
|
|
420,672
|
|
|
|
332,192
|
|
Total
current
assets
|
|
|
11,803,226
|
|
|
|
2,202,841
|
|
Property
and equipment,
net
|
|
|
2,677,606
|
|
|
|
1,234,557
|
|
Software
development costs,
net
|
|
|
244,574
|
|
|
|
149,080
|
|
Total
Assets
|
|
|
14,725,406
|
|
|
|
3,586,478
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Unearned
revenue
|
|
|
191,004
|
|
|
|
384,295
|
|
Accounts
payable
|
|
|
877,672
|
|
|
|
960,580
|
|
Net
obligations under capital
leases, current
|
|
|
151,058
|
|
|
|
88,110
|
|
Accrued
expenses and other current
liabilities
|
|
|
844,140
|
|
|
|
977,948
|
|
Total
current
liabilities
|
|
|
2,063,874
|
|
|
|
2,410,933
|
|
Net
obligations under capital
leases, long-term
|
|
|
217,355
|
|
|
|
135,470
|
|
Total
Liabilities
|
|
|
2,281,229
|
|
|
|
2,546,403
|
|
Commitments
and
Contingencies
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock, $0.000001 par value
450,000,000 shares authorized,
|
|
|
125
|
|
|
|
45
|
|
125,280,977 issued
and
outstanding at August 31, 2007 and
|
|
|
|
|
|
|
|
|
45,348,974 issued
and
outstanding at February 28, 2007
|
|
|
|
|
|
|
|
|
Additional
paid-in
capital
|
|
|
40,093,676
|
|
|
|
20,543,688
|
|
Accumulated
deficit
|
|
|
(27,737,934
|
)
|
|
|
(19,555,533
|
)
|
Accumulated
other comprehensive
income
|
|
|
88,310
|
|
|
|
51,875
|
|
Total
Stockholders'
Equity
|
|
|
12,444,177
|
|
|
|
1,040,075
|
|
Total
Liabilities and
Stockholders' Equity
|
|
|
14,725,406
|
|
|
|
3,586,478
|
|
See
Notes to Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
AND
COMPREHENSIVE
LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Six
Months
Ended
|
|
|
Year
Ended
|
|
|
|
August
31,
|
|
|
February
28,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Narrowcasting
and
other
|
|
|
2,559,115
|
|
|
|
1,878,493
|
|
|
|
4,369,117
|
|
|
|
1,499,633
|
|
Production
services
|
|
|
317,535
|
|
|
|
834,397
|
|
|
|
1,639,718
|
|
|
|
1,206,629
|
|
Total
revenue
|
|
|
2,876,650
|
|
|
|
2,712,890
|
|
|
|
6,008,835
|
|
|
|
2,706,262
|
|
Costs
and
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
2,587,315
|
|
|
|
1,133,303
|
|
|
|
2,655,395
|
|
|
|
1,804,879
|
|
Selling,
general and
administrative
|
|
|
6,094,826
|
|
|
|
3,581,250
|
|
|
|
8,206,223
|
|
|
|
4,779,764
|
|
Research
&
development
|
|
|
1,582,048
|
|
|
|
540,150
|
|
|
|
1,088,723
|
|
|
|
390,606
|
|
Impairment
charge on long-lived
assets
|
|
|
-
|
|
|
|
-
|
|
|
|
1,228,437
|
|
|
|
-
|
|
Total
operating
expenses
|
|
|
10,264,189
|
|
|
|
5,254,703
|
|
|
|
13,178,778
|
|
|
|
6,975,249
|
|
Operating
Loss
|
|
|
(7,387,539
|
)
|
|
|
(2,541,813
|
)
|
|
|
(7,169,943
|
)
|
|
|
(4,268,987
|
)
|
Other
income (expense),
net
|
|
|
(778,923
|
)
|
|
|
85,265
|
|
|
|
118,814
|
|
|
|
(14,641
|
)
|
Currency
exchange income
(loss)
|
|
|
(15,939
|
)
|
|
|
1,156
|
|
|
|
(10,345
|
)
|
|
|
(6,149
|
)
|
Net
Loss
|
|
|
(8,182,401
|
)
|
|
|
(2,455,392
|
)
|
|
|
(7,061,474
|
)
|
|
|
(4,289,777
|
)
|
Foreign
currency translation
adjustment
|
|
|
36,435
|
|
|
|
42,983
|
|
|
|
74,135
|
|
|
|
(36,669
|
)
|
Comprehensive
Loss
|
|
|
(8,145,966
|
)
|
|
|
(2,412,409
|
)
|
|
|
(6,987,339
|
)
|
|
|
(4,326,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss per Common Share - Basic
and Diluted
|
|
|
(0.14
|
)
|
|
|
(0.05
|
)
|
|
|
(0.16
|
)
|
|
|
(0.13
|
)
|
Weighted-Average
Number of Shares
Outstanding, Basic and Diluted
|
|
|
56,603,692
|
|
|
|
45,192,724
|
|
|
|
45,240,652
|
|
|
|
32,190,594
|
|
See
Notes to Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NARROWSTEP
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Stock
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
Subscription
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Receivable
|
|
|
Deficit
|
|
|
Income/(Loss)
|
|
|
Total
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Balances
- March 1,
2005
|
|
|
30,375,743
|
|
|
|
30
|
|
|
|
9,323,577
|
|
|
|
-
|
|
|
|
(8,204,282
|
)
|
|
|
14,409
|
|
|
|
1,133,734
|
|
Common
stock sold in private
placement, net of expenses
|
|
|
14,420,389
|
|
|
|
15
|
|
|
|
9,822,503
|
|
|
|
(1,560,000
|
)
|
|
|
|
|
|
|
|
|
|
|
8,262,518
|
|
Commission
paid for private
placement services including related party transactions of
$760,702
|
|
|
|
|
|
|
|
|
|
|
(1,532,675
|
)
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
(1,382,675
|
)
|
Fair
value of warrants issued in
connection with private placement.
|
|
|
|
|
|
|
|
|
|
|
710,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
710,550
|
|
Payment
for services in
kind
|
|
|
255,342
|
|
|
|
|
|
|
|
649,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
649,619
|
|
Stock
options
exercised
|
|
|
85,000
|
|
|
|
|
|
|
|
42,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,500
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,289,777
|
)
|
|
|
|
|
|
|
(4,289,777
|
)
|
Foreign
currency translation
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,669
|
)
|
|
|
(36,669
|
)
|
Stock
based compensation
charge
|
|
|
|
|
|
|
|
|
|
|
695,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
695,297
|
|
Balances
- February 28,
2006
|
|
|
45,136,474
|
|
|
|
45
|
|
|
|
19,711,371
|
|
|
|
(1,410,000
|
)
|
|
|
(12,494,059
|
)
|
|
|
(22,260
|
)
|
|
|
5,785,097
|
|
Issuance
of common stock
subscribed, net of commissions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,410,000
|
|
|
|
|
|
|
|
|
|
|
|
1,410,000
|
|
Payment
for services in kind to
related parties
|
|
|
100,000
|
|
|
|
|
|
|
|
68,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,000
|
|
Warrants
exercised
|
|
|
100,000
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Stock
options
exercised
|
|
|
12,500
|
|
|
|
|
|
|
|
6,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,250
|
|
Placement
legal
fees
|
|
|
|
|
|
|
|
|
|
|
(46,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,668
|
)
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,061,474
|
)
|
|
|
|
|
|
|
(7,061,474
|
)
|
Foreign
currency translation
gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,135
|
|
|
|
74,135
|
|
Stock
based compensation
charge
|
|
|
|
|
|
|
|
|
|
|
803,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
803,735
|
|
Balances -
February 28,
2007
|
|
|
45,348,974
|
|
|
|
45
|
|
|
|
20,543,688
|
|
|
|
-
|
|
|
|
(19,555,533
|
)
|
|
|
51,875
|
|
|
|
1,040,075
|
|
Issuance
of restricted
stock
|
|
|
2,163,510
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
3
|
|
Convertible
debt financing, net of
expenses
|
|
|
35,392,003
|
|
|
|
35
|
|
|
|
7,843,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,843,056
|
|
Common
stock sold in private
placement, net of expenses
|
|
|
42,040,000
|
|
|
|
42
|
|
|
|
10,068,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,068,116
|
|
Issued
warrants
|
|
|
|
|
|
|
|
|
|
|
19,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,625
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,182,401
|
)
|
|
|
|
|
|
|
(8,182,401
|
)
|
Foreign
currency translation
gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,435
|
|
|
|
36,435
|
|
Stock
based compensation
charge
|
|
|
|
|
|
|
|
|
|
|
1,619,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,619,270
|
|
Balances -
August 31,
2007 (unaudited)
|
|
|
124,944,487
|
|
|
|
125
|
|
|
|
40,093,676
|
|
|
|
-
|
|
|
|
(27,737,934
|
)
|
|
|
88,310
|
|
|
|
12,444,179
|
|
See
Notes to Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Six
Months Ended August
31,
|
|
|
Years
Ended February
28
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(8,182,401
|
)
|
|
|
(2,455,392
|
)
|
|
|
(7,061,474
|
)
|
|
|
(4,289,777
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful accounts
|
|
|
633,556
|
|
|
|
53,904
|
|
|
|
738,821
|
|
|
|
(103,695
|
)
|
Depreciation
and amortization
|
|
|
439,978
|
|
|
|
255,126
|
|
|
|
573,934
|
|
|
|
520,806
|
|
Loss
on disposal of property and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,437
|
|
Stock-based
compensation expense
|
|
|
1,619,270
|
|
|
|
814,497
|
|
|
|
803,735
|
|
|
|
695,297
|
|
Interest
on short-term investment
|
|
|
-
|
|
|
|
(57,609
|
)
|
|
|
(57,609
|
)
|
|
|
-
|
|
Fair
value of options and warrants granted to third party
suppliers
|
|
|
19,625
|
|
|
|
-
|
|
|
|
-
|
|
|
|
649,619
|
|
Impairment
charge on long-lived assets
|
|
|
|
|
|
|
|
|
|
|
1,228,437
|
|
|
|
-
|
|
Interest
on debt issuance
|
|
|
853,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Changes
in net cash attributable to changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, gross
|
|
|
(441,770
|
)
|
|
|
(970,495
|
)
|
|
|
(1,724,206
|
)
|
|
|
64,075
|
|
Prepaid
expenses and other current assets
|
|
|
(88,480
|
)
|
|
|
(73,705
|
)
|
|
|
(196,650
|
)
|
|
|
(48,335
|
)
|
Unearned
revenue
|
|
|
(193,291
|
)
|
|
|
214,457
|
|
|
|
207,667
|
|
|
|
176,628
|
|
Accounts
payable, accrued expenses and other current liabilities
|
|
|
(216,716
|
)
|
|
|
463,307
|
|
|
|
1,009,503
|
|
|
|
(364,063
|
)
|
Net
Cash Used in Operating Activities
|
|
|
(5,557,029
|
)
|
|
|
(1,755,910
|
)
|
|
|
(4,477,842
|
)
|
|
|
(2,694,008
|
)
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(1,583,660
|
)
|
|
|
(580,675
|
)
|
|
|
(1,132,945
|
)
|
|
|
(124,749
|
)
|
Purchase
of short-term investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,500,000
|
)
|
Payments
for software development costs
|
|
|
(141,588
|
)
|
|
|
(79,001
|
)
|
|
|
(120,136
|
)
|
|
|
(101,776
|
)
|
Proceeds
from sale of short-term investments
|
|
|
-
|
|
|
|
-
|
|
|
|
2,557,609
|
|
|
|
-
|
|
Net
Cash Provided by (Used in) Investing Activities
|
|
|
(1,725,248
|
)
|
|
|
(659,676
|
)
|
|
|
1,304,528
|
|
|
|
(2,726,525
|
)
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
10,127,457
|
|
|
|
1,379,403
|
|
|
|
1,431,333
|
|
|
|
7,590,393
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
-
|
|
|
|
6,250
|
|
|
|
7,250
|
|
|
|
42,500
|
|
Payments
on capital leases
|
|
|
(42,998
|
)
|
|
|
(33,537
|
)
|
|
|
(75,298
|
)
|
|
|
(47,742
|
)
|
Net
Proceeds from issuance of debt instrument
|
|
|
6,950,130
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
Cash Provided by Financing Activities
|
|
|
17,034,589
|
|
|
|
1,352,116
|
|
|
|
1,363,285
|
|
|
|
7,585,151
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
9,752,312
|
|
|
|
(1,063,470
|
)
|
|
|
(1,810,029
|
)
|
|
|
2,164,618
|
|
Effect
of exchange rates on change in cash
|
|
|
(48,621
|
)
|
|
|
14,098
|
|
|
|
44,045
|
|
|
|
9,445
|
|
Cash
and cash equivalents at the beginning of year
|
|
|
466,870
|
|
|
|
2,232,854
|
|
|
|
2,232,854
|
|
|
|
58,791
|
|
Cash
and Cash Equivalents at the End of the Year
|
|
|
10,170,561
|
|
|
|
1,183,482
|
|
|
|
466,870
|
|
|
|
2,232,854
|
|
See
Notes to Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment under capital leases
|
|
|
188,781
|
|
|
|
133,875
|
|
|
|
196,769
|
|
|
|
-
|
|
Common
stock issued pursuant to consulting agreement
|
|
|
-
|
|
|
|
-
|
|
|
|
68,000
|
|
|
|
-
|
|
Supplemental
disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
converted to equity
|
|
|
6,950,130
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
on debt issuance was paid out with common
shares
|
|
|
853,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
NARROWSTEP
INC.
AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Basis of Presentation
Organization
and Going Concern at Fiscal year ending February 28, 2007
Narrowstep
Inc. was incorporated in Delaware on May 9, 2002 and adopted a fiscal
year-end of February 28
th
(or 29
th
). The
accompanying consolidated financial statements include the accounts of
Narrowstep Inc. and its wholly-owned subsidiaries Narrowstep Ltd. and Sportshows
Television Ltd. (“STV”), (collectively, the “Company”).
Narrowstep
Inc. is in the business of developing, producing, transmitting and managing,
via
the Internet, television-like channels of streaming video broadcasts which
are
tailored for, and targeted to, specific audiences. Narrowstep Ltd.
also offers a comprehensive range of related services which facilitate channel
development, including consulting, channel design, maintenance, operation
and
content production. STV’s main business is the filming and production of
sporting events, plus distribution of TV programs internationally. The main
areas of specialization are water sports such as sail boat racing, windsurfing,
and extreme sports such as mountain biking, skating and snow
sports.
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. The
Company has incurred cumulative losses of approximately $19,600,000 since
inception. The Company has a working capital deficit of approximately
$208,000 and has utilized cash from operations over the past two fiscal years
of
approximately $7,172,000. These factors among others, raise
substantial doubt about the company’s ability to continue as a going
concern.
On
March
2, 2007 the company raised $7,110,000 in a debt offering that is mandatorily
convertible into common stock in a subsequent financing round (See Note
11). With the completion of this financing the Company has sufficient
working capital to fund our operations for the next six to nine
months. Management will continue to pursue various financing options
in order to fully fund our longer term cash requirements. In
addition, we are making efforts to improve our financial position by evaluating
ongoing operating expenses, increasing our effort to collect outstanding
receivables and continuing to focus on increasing revenues.
There
are
currently no commitments in place for additional financing, nor can assurances
be given that such financing will be available. While the Company is confident
that it will raise the capital necessary to fund operations, there can be
no
assurances in that regard. The consolidated financial statements do not include
any adjustments that may arise as a result of this uncertainty.
Organization
at six months ending August 31, 2007 (unaudited)
On
August 8, 2007, we closed a private
financing with a number of accredited investors for the sale of common stock
and
warrants for a total purchase price of $10,510,000. Pursuant to the financing
we
sold a total of 42,040,000 shares of common stock at a purchase price of
$0.25
per share. We also issued warrants to purchase an aggregate of 21,020,000
shares
of common stock at an exercise price of $0.50 per share, subject to
adjustment. The warrants are exercisable at any time on or prior to
August 8, 2012. The
warrants contain customary anti-dilution
provisions in the event of any stock split, reverse stock split,
reclassification or recapitalization of the Company. In addition, the
exercise price and the number of shares issuable upon the exercise of the
warrants are subject to adjustment on a full-ratchet basis in the event that
we
issue or are deemed to have issued shares of common stock at an effective
purchase price of less than $0.50 per share, subject to certain
exceptions. In the financing,
we issued to the placement
agents
warrants to purchase an aggregate of 1,706,400 shares of common
stock. Those warrants have the same terms as the warrants issued in
the financing, except that the warrants issued to the placement agents have
a
cashless exercise right. In connection with this financing, the
Company’s $7,110,000 in outstanding mandatorily 12% convertible notes were
automatically converted into an aggregate of 35,392,003 shares of common
stock
at a conversion price of $0.225 per share.
With
the
completion of this financing we will have sufficient working capital to fund
our
operations for at least the next twelve months.
Basis
of presentation
The
consolidated financial statements include the accounts of the Company and
its
wholly-owned subsidiaries and are expressed in US dollars. All
inter-company accounts and transactions have been eliminated in
consolidation.
2.
Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of the consolidated financial statements 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 amount of revenue
and
expenses during the reporting period. Actual results could differ
from those estimates.
Revenue
Recognition
The
Company’s two primary sources of revenue are production services and Internet TV
channel building or “narrowcasting”.
Internet
TV channel building service revenue includes the following: (i) consulting
fees charged to assist customers in the design and development of the customer's
channel, (ii) consulting fees related to recording and encoding of specific
customer content, and (iii) monthly license fees charged for ongoing
maintenance, support, upgrades and content hosting activity. The
minimum license period is 12 months unless it is an evaluation
license. Revenues for the consulting fees are only recognized once
the design and development of the channel is completed and accepted by the
customer. Recording and encoding fees are due on delivery of the
tapes or on completion of the upload of the encoded material onto the Company’s
servers. Monthly license fees are recognized month-by-month starting
with the month when the channel starts narrowcasting. Any up-front
fees are deferred until the revenue is earned by either completion of the
consulting activity or month-by-month hosting activity.
Production
services revenues include the following: (i) preparation,
scripting and filming of a single or multiple series of
events, (ii) live editing and encoding of such events, (iii) editing
of footage and final production into programs in the Company’s editing suites,
and (iv) copying and delivery of the programs. Revenues are
recognized once delivery of a program, in the form of edited tape, takes
place. If it is a series then payments are staged and revenues
recognized on completion of each discrete program. Any up-front fees
are deferred and only recognized once the program, editing and production
are
complete. Until the revenues are earned and recognized any cash
received up-front is treated as unearned revenue and any costs incurred in
connection with services that have not been completed are capitalized as
prepaid
expenses.
The
Company’s revenue recognition policy complies with the Securities and Exchange
Commission Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue
Recognition”, amended by SAB 104. Revenue is recognized when all of the
following criteria are met:
|
·
|
Persuasive
evidence of an arrangement exists – A non-cancelable signed agreement
between the Company and the customer is considered to be evidence
of an
arrangement.
|
|
·
|
Delivery
has occurred or services have been rendered – Although deposits or
prepayments are common with orders, revenues are recognized only
on the
delivery of content or channel or service. Revenue from
resellers is recognized upon sell-through to the end
customer.
|
|
·
|
The
seller's price to the buyer is fixed or determinable – All our customers
sign a written contract that states the price the customer will
pay for
the monthly license fee and for the bandwidth and storage
usage. Our contracts terms are typically 12
months. If the customer decides to cancel a channel, all of the
development work, content production, initial license and monthly
license
fees to-date remain due and
non-cancelable.
|
|
·
|
Collectibility
is reasonably assured – The Company runs normal business credit checks on
unknown new customers to minimize the risk of a customer avoiding
payment. Collection is deemed probable if the Company expects
that the customer will be able to pay amounts under the arrangement
as
payments become due. If the Company determines that collection
is not
probable, the revenue is deferred and recognized upon cash
collection. The Company also seeks a deposit wherever possible
before commencing work on a new
contract.
|
Fair
Value of Financial Instruments
The
fair
value of the Company's assets and liabilities, which qualify as financial
instruments under Statement of Financial Accounting Standards (“SFAS”) No. 107,
"Disclosures About Fair Value of Financial Instruments," approximates the
carrying amounts presented in the consolidated balance sheet.
Cash
and Cash Equivalents
For
the
purposes of the consolidated statements of cash flows, the Company considers
all
highly-liquid debt instruments purchased with maturities of three months
or less
to be cash equivalents. At February 28, 2007 cash and cash
equivalents consisted of checking and money market accounts aggregating
$466,870. As of February 28, 2007 and at various times during the
year, balances of cash at financial institutions exceeded the federally insured
limit. The Company has not experienced any losses in such accounts
and believes it is not subject to any significant credit risk on cash and
cash
equivalents.
As
of
August 31, 2007 cash and cash equivalents consisted of checking and money
market
accounts aggregating $10,170,561 (unaudited)
Short-Term
Investments
As
of
February 28, 2007, there were no short-term investments. Short-term
investments as of February 28, 2006 consisted of a certificate of deposit
which
matured on September 25, 2006
.
As
of
August 31, 2007, there were no short-term investments (unaudited).
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable represent uncollateralized customer obligations due under normal
trade terms generally requiring payment within 30 days from the invoice date.
Follow-up calls and correspondence is made if unpaid accounts receivable
go
beyond the invoice due date. Payments of accounts receivable are allocated
to
the specific invoices identified on the customer’s remittance
advice.
Accounts
receivable are stated at the amount management expects to collect from
outstanding balances. The carrying amounts of accounts receivable is reduced
by
a valuation allowance that reflects management’s best estimate of the amounts
that will not be collected. Management individually reviews all accounts
receivable balances that exceed the due date and estimates the portion, if
any,
of the balance that will not be collected. Management provides for probable
uncollectible amounts through a charge to earnings and a credit to a valuation
allowance based on its assessment of the current status of individual accounts.
Balances that are still outstanding after management has used reasonable
collection efforts are written off through a charge to the valuation allowance
and a credit to accounts receivable.
Property
and Equipment
Property
and equipment are stated at cost net of accumulated depreciation and
amortization. Costs of additions and substantial improvements to
property and equipment are also capitalized. Maintenance and repairs
are charged to operations, while betterments and improvements are
capitalized. The Company computes depreciation and amortization for
all property and equipment using the straight-line method over the estimated
useful lives of assets. The estimated useful lives of assets are as
follows: Computer & other Equipment are 3 years, Furniture and Fixtures are
4 years, Motor Vehicles are 4 years and Leasehold improvements are over the
term
of the lease.
Impairment
of Long-Lived Assets
The
Company adheres to SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” and periodically assesses the recoverability of the carrying
amounts of long-lived assets, including intangible assets. A loss is
recognized when expected undiscounted future cash flows are less than the
carrying amount of the asset. The impairment loss is the difference
by which the carrying amount of the asset exceeds its fair value.
Software
Development Costs
The
Company accounts for its internal use software under SOP 98-1, “Accounting for
the Costs of Computer Software Developed for or Obtained for Internal Use”,
which requires the capitalization of certain costs incurred in connection
with
developing or obtaining software for internal use. Capitalized
software development costs consist primarily of programmers' compensation
and
benefits, where applicable. These costs are amortized over a period
not to exceed three years beginning when the asset is substantially ready
for
use. Costs incurred during the preliminary project stage, as well as
maintenance and training costs are expensed as incurred.
During
the years ended February 28, 2007 and 2006, the Company capitalized $120,136
and
$101,776 respectively, and recorded amortization expense of $128,491 and
$129,850, respectively.
During
the six months ended August 31, 2007, the Company capitalized $144,588 and
recorded amortization expense of $49,062 (unaudited)
Goodwill
and Other Intangible Assets
Goodwill
is the excess of the purchase price over the fair value of net assets acquired
in business combinations accounted for under the purchase method. In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill
and indefinite-lived intangible assets are not amortized, but instead are
tested
for impairment at least annually. Intangible assets that have finite
useful lives are amortized over their useful lives, which range from three
to
seven years.
Foreign
Currency Translation
The
Company complies with the accounting and disclosure requirements of SFAS
No. 52
“Foreign Currency Translation.” For operations outside the United
States that prepare financial statements in currencies other than the
U.S. dollar, statement of operations amounts are translated at an average
exchange rate for the year. Assets and liabilities are translated at
period end exchange rates. Translation adjustments are presented as a component
of accumulated other comprehensive income (loss) within stockholders’
equity. Gains and losses from foreign currency transactions are
included in the consolidated statements of operations.
Advertising
and Promotional Costs
Advertising
and promotional costs are expensed as incurred. Such costs are
included in selling, general and administrative expenses in the accompanying
consolidated statements of operations. Advertising and promotional
costs charged to operations were $457,051 and $77,824 for the years ended
February 28, 2007 and February 28, 2006, respectively.
Advertising
and promotional costs charged to operations were $104,764 for the six months
ended August 31, 2007 (unaudited).
Comprehensive
Income
The
Company complies with SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes rules for the reporting and display
of comprehensive income (loss) and its components. SFAS No. 130
requires the Company's change in the foreign currency translation adjustments
to
be included in other comprehensive income (loss).
Income
Taxes
Narrowstep
Inc., the parent company, is a United States corporation and files corporate
income tax returns in the United States. Narrowstep Ltd. and STV are
companies incorporated in England and Wales and, as such, file their own
corporate income tax returns in the United Kingdom. The provision for
income taxes is based on reported income before income taxes. Deferred income
taxes are provided in accordance with SFAS No. 109 “Accounting for Income
Taxes”, for the effect of temporary differences between the amounts of assets
and liabilities recognized for financial reporting purposes and the amounts
recognized for income tax purposes. Deferred tax assets and
liabilities are measured using currently enacted tax laws and the effects
of any
changes in income tax laws are included in the provision for income taxes
in the
period of enactment. Valuation allowances are recognized to reduce deferred
tax
assets when it is more likely than not that the asset will not be realized.
In
assessing the likelihood of realization, the Company considers estimates
of
future taxable income, the character of income needed to realize future benefits
and all available evidence.
Stock-Based
Compensation
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123(R), “Accounting for Stock-Based Compensation (Revised).” SFAS No.
123(R) supersedes APB No. 25 and its related implementation
guidance. SFAS No. 123(R) establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for
goods
or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair
value
of the entity’s equity instruments or that may be settled by the issuance of
those equity instruments. SFAS No. 123(R) focuses primarily on
accounting for transactions in which an entity obtains employee services
in
share-based payment transactions. SFAS No. 123(R) requires a public
entity to measure the cost of employee services received in exchange for
an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service in exchange
for
the award the requisite service period (usually the vesting
period). No compensation costs are recognized for equity instruments
for which employees do not render the requisite service. The
grant-date fair value of employee share options and similar instruments will
be
estimated using option-pricing models adjusted for the unique characteristics
of
those instruments (unless observable market prices for the same or similar
instruments are available). If an equity award is modified after the
grant date, incremental compensation cost will be recognized in an amount
equal
to the excess of the fair value of the modified award over the fair value
of the
original award immediately before the modification. The Company
adopted SFAS No. 123(R), effective March 1, 2006. Based on stock options
that
vested during the year ended February 28, 2007, the Company recorded
approximately $702,000 in additional compensation expense for the year ended
February 28, 2007, under SFAS No. 123(R).
Prior
to
March 1, 2006 the Company followed SFAS No. 123, "Accounting for Stock-Based
Compensation." The provisions of SFAS No. 123 allowed companies to
either expense the estimated fair value of stock options or to continue to
follow the intrinsic value method set forth in APB Opinion 25, "Accounting
for
Stock Issued to Employees" ("APB 25"), but disclose the pro forma effect
on net
income (loss) had the fair value of the options been expensed.
Had
compensation cost for the Company's stock option plan been determined based
on
the fair value at the grant or issue date prior to March 1, 2006 and consistent
with the provisions of SFAS No. 123(R), the Company's net loss and loss per
common share would have been reduced to the pro forma amounts indicated
below:
|
|
|
|
|
|
Year
Ended
|
|
|
|
February
28,
2006
|
|
|
|
$
|
|
Net
loss as reported
|
|
|
(4,289,777
|
)
|
Add:
Stock-based employee compensation included in
|
|
|
|
|
reported
net loss
|
|
|
695,297
|
|
Less:
Pro forma stock based compensation expense
|
|
|
(3,019,437
|
)
|
Pro
forma net loss
|
|
|
(6,613,917
|
)
|
Basic
and diluted loss per common share as reported
|
|
|
(0.13
|
)
|
Pro
forma basic and diluted loss per common share
|
|
|
(0.21
|
)
|
Weighted-average
common shares outstanding
|
|
|
32,190,594
|
|
Pension,
Post-Retirement and Other Employee Benefit Plans
Certain
employees of STV are covered by a non-contributory defined contribution pension
plan. Pension costs charged to operations were $12,330 and $12,250
for the years ended February 28, 2007 and 2006, respectively.
Pension
costs charged to operations were $690 for the six months ended August 31,
2007
(unaudited).
Borrowings
An
overdraft facility is a line of credit arrangement, negotiated with a bank
and
usually renewable on an annual basis, whereby the bank's customer is permitted
to take its checking account into a debit balance on a pre-agreed interest
basis
up to an agreed amount. Amounts utilized under overdraft facilities are payable
on demand. At February 28, 2007 and February 28, 2006, the overdraft
facilities consisted of approximately $19,600 and $70,000 with Barclays Bank
PLC, respectively and approximately $39,000 and $34,000 with Natwest Bank
PLC,
respectively. Neither facility was utilized on February 28, 2007. The
interest rate on the Barclays facility is 5.75% above Barclays’ variable base
rate (which base rate was 5.25% per annum as of February 28, 2007). The interest
rate on the Natwest facility is 5.75% above Natwest's variable base rate
(which
base rate was 5.25% per annum as of February 28, 2007). The Barclays overdraft
facility was renewed on February 17, 2007. The Natwest facility was renewed
on
May 31, 2007.
At
August
31, 2007 the overdraft facilities consisted of $20,137 with Barclays Bank
PLC
and $40,274 with National Westminster Bank PLC. Neither facility was
utilized on August 31, 2007 (unaudited).
Impacts
of Recent Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other
items
at fair value. SFAS 159 is effective for fiscal years beginning after November
15, 2007. The Company does not expect the adoption of SFAS 159 to have a
material impact on its consolidated financial position, results of operations
or
cash flows.
In
June 2006, the FASB issued FASB
Interpretation No.
48,
“
Accounting
for Uncertainty
in Income Taxes-an Interpretation
of FASB Statement No.
109”
(“
FIN No.
48”
).
FIN No. 48 clarifies what
criteria must be met prior to recognition of the financial statement benefit
of
a position taken in a tax return. FIN No. 48 will require companies to
include additional qualitative and
q
uantitative
disclosures within their
financial statements. The disclosures will include potential tax benefits
from
positions taken for tax return purposes that have not been recognized for
financial reporting purposes and a tabular presentation of signif
i
cant
changes during each period. The
disclosures will also include a discussion of the nature of uncertainties,
factors which could cause a change, and an estimated range of reasonably
possible changes in tax uncertainties.
FIN No. 48
will also require
a
company to recognize
a
financial statement benefit for a position taken for tax return purposes
when it
will be more-likely-than-not that the position will be sustained.
FIN No. 48 will be effective for fiscal years beginning after
December 15, 2006.
The adoption of
FIN No. 48
is not
expected to have a material impact on the company’s financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 is effective in fiscal years beginning after
November 15, 2007. Management is currently evaluating the impact that the
adoption of this statement will have on the Company’s consolidated financial
statements.
Reclassifications
The
presentation of the February 28, 2006 consolidated statement of operations
and
comprehensive loss has been reclassified to conform to the February 28, 2007
presentation.
3.
Goodwill and Intangible Assets
Goodwill
and intangible assets relate to the Company’s acquisition of STV. At the end of
the fiscal year, the Company evaluated the goodwill and intangible assets,
and
determined that these assets were impaired. The carrying value of the
goodwill of $1,157,581 was written off during the fourth quarter of fiscal
2007. The net intangible assets, of $70,856 as of February 28, 2007,
were also written off during the fourth quarter of fiscal 2007.
The
reason for the impairment was due to several factors. In the past the
production segment has not been profitable and the Company is currently
re-evaluating the products and services being offered by the production
segment. Several senior employees of STV are no longer employed with
the Company. The prospects or sales leads generated from this segment
have been declining, and we have incurred significant bad debts related to
the
existing sales.
4. Property
and Equipment
Property
and equipment consists of the following at February 28, 2007:
|
|
|
|
|
|
|
|
|
|
February
28, 2007
|
|
|
|
$
|
|
Leasehold
improvements
|
|
|
174,095
|
|
Furniture
and fixtures
|
|
|
102,026
|
|
Computer
& other equipment
|
|
|
2,486,641
|
|
Motor
vehicles
|
|
|
25,530
|
|
Less: Accumulated
depreciation and amortization
|
|
|
(1,553,735
|
)
|
Net
Book Value
|
|
|
1,234,557
|
|
The
Company leases certain equipment under capital lease
arrangements. Depreciation for assets recorded under capital lease
agreements is included within depreciation in the consolidated statements
of
operations. Assets recorded under capital lease agreements included
in computer and other equipment consisted of equipment with a cost of $532,007,
with an associated balance of accumulated depreciation of $336,989, as of
February 28, 2007.
Property
and equipment consists of the following at August 31, 2007:
|
|
|
|
Unaudited
|
|
|
|
|
|
August
31, 2007
|
|
|
|
$
|
|
Leasehold
improvements
|
|
|
178,512
|
|
Furniture
and fixtures
|
|
|
74,813
|
|
Computer
& other equipment
|
|
|
3,425,453
|
|
Motor
vehicles
|
|
|
26,178
|
|
Construction
in progress
|
|
|
916,066
|
|
Less: Accumulated
depreciation and amortization
|
|
|
(1,943,416
|
)
|
Net
Book Value
|
|
|
2,677,606
|
|
Assets
recorded under capital lease agreements included in computer and other equipment
consisted of equipment with a cost of $733,336, with an associated balance
of
accumulated depreciation of $422,496, as of August 31, 2007
(unaudited).
5. Accrued
Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consists of the following at February
28,
2007:
|
|
|
|
|
|
|
|
|
|
February
28,
2007
|
|
|
|
$
|
|
Compensation
accrual
|
|
|
311,183
|
|
Professional
fees accrual
|
|
|
601,557
|
|
Other
accrual
|
|
|
65,208
|
|
Total
|
|
|
977,948
|
|
Accrued
expenses and other current liabilities consists of the following at August
31,
2007 (unaudited):
|
|
|
|
|
|
|
|
|
|
August
31, 2007
|
|
|
|
$
|
|
Compensation
accrual
|
|
|
286,589
|
|
Professional
fees accrual
|
|
|
546,527
|
|
Other
accrual
|
|
|
11,024
|
|
Total
|
|
|
844,140
|
|
6.
Stock Option Plan
In
December 2003, the Board of Directors adopted the Narrowstep Inc. 2004 Stock
Option Plan. The purpose of the stock option plan is to allow the
Company to provide a means by which eligible employees, Board members and
certain non-employees may be given an opportunity to benefit from increases
in
value of its common shares. The stock option plan is administered by
the Board of Directors. The Board is empowered to determine from time-to-time
which of the persons eligible under the stock option plan shall be granted
awards; when and how each award shall be granted; what type or combination
of
types of awards shall be granted; the provisions of each award granted,
including the time or times when a person shall be permitted to receive common
shares pursuant to an award; and the number of common shares with respect
to
which an award shall be granted to each person; to construe and interpret
the
stock option plan and awards granted under it, and to establish, amend and
revoke rules and regulations for its administration.
The
Board, at any time, and from time to time, may amend the stock option
plan.
The
following table summarizes activity of the Company's stock option plan for
the
years ended February 28, 2007 and 2006 and for Quarters ending May 31, 2007
(unaudited) and August 31, 2007 (unaudited):
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Weighted-
Avg
Exercise
Price
|
|
|
|
|
|
|
$
|
|
Outstanding
at February 28, 2005
|
|
|
3,396,358
|
|
|
|
0.22
|
|
Granted
|
|
|
6,960,855
|
|
|
|
1.17
|
|
Exercised
|
|
|
(85,000
|
)
|
|
|
0.50
|
|
Forfeited
|
|
|
(150,000
|
)
|
|
|
0.20
|
|
Outstanding
at February 28, 2006
|
|
|
10,122,213
|
|
|
|
0.95
|
|
Granted
|
|
|
2,666,500
|
|
|
|
0.89
|
|
Exercised
|
|
|
(12,500
|
)
|
|
|
0.50
|
|
Forfeited
|
|
|
(504,106
|
)
|
|
|
0.85
|
|
Outstanding
at February 28, 2007
|
|
|
12,272,107
|
|
|
|
0.94
|
|
Granted
|
|
|
250,000
|
|
|
|
0.68
|
|
Exercised
|
|
|
0
|
|
|
|
0.00
|
|
Forfeited
|
|
|
(1,326,000
|
)
|
|
|
1.93
|
|
Outstanding
at May 31, 2007
(unaudited)
|
|
|
11,196,107
|
|
|
|
0.82
|
|
Granted
|
|
|
2,247,267
|
|
|
|
0.55
|
|
Exercised
|
|
|
0
|
|
|
|
0.00
|
|
Forfeited
|
|
|
(1,262,500
|
)
|
|
|
0.91
|
|
Outstanding
at August 31, 2007
(unaudited)
|
|
|
12,180,874
|
|
|
|
0.82
|
|
The
following table contains
information concerning outstanding stock options as of February 28,
2007
:
|
|
|
|
|
|
|
|
|
|
|
Weighted
Avg
|
Number
of
|
|
Weighted
Avg
|
Weighted
Avg
|
Number
of
|
Exercise
Price
of
|
Options
|
Range
of
|
Exercise
Price
of
|
Remaining
|
Options
|
Options
|
Outstanding
|
Exercise
Prices
|
Options
Outstanding
|
Contractual
Life
|
Exercisable
|
Exercisable
|
1,567,252
|
$0.00
- $0.30
|
$0.20
|
2.17
|
1,567,252
|
$0.20
|
1,020,000
|
$0.31
- $0.45
|
$0.40
|
1.84
|
1,010,000
|
$0.40
|
317,500
|
$0.46
- $0.60
|
$0.50
|
3.29
|
317,500
|
$0.50
|
653,000
|
$0.61
- $0.75
|
$0.68
|
6.86
|
653,000
|
$0.68
|
430,000
|
$0.76
- $0.90
|
$0.83
|
9.37
|
380,000
|
$0.82
|
2,135,000
|
$0.91
- $1.05
|
$0.95
|
6.98
|
750,000
|
$1.00
|
4,552,664
|
$1.06
- $1.20
|
$1.20
|
5.97
|
4,052,664
|
$1.20
|
128,500
|
$1.21
- $1.35
|
$1.25
|
8.32
|
128,500
|
$1.25
|
1,468,191
|
$1.36
- $1.50
|
$1.50
|
3.99
|
1,468,191
|
$1.50
|
12,272,107
|
$0.00
- $1.50
|
$0.94
|
5.20
|
10,327,107
|
$0.93
|
The
following table contains
information concerning outstanding stock options as of August 31, 2007
(unaudited)
:
|
|
|
|
|
|
|
|
|
|
Number
of
|
Weighted
Avg
|
Number
of
|
|
Weighted
Avg
|
Weighted
Avg
|
Options
|
Exercise
Price
of
|
Options
|
Range
of
|
Exercise
Price
of
|
Remaining
|
Outstanding
|
Options
Outstanding
|
Outstanding
|
Exercise
Prices
|
Options
Outstanding
|
Contractual
Life
|
and
Exercisable
|
and
Exercisable
|
1,567,252
|
$0.00
- $0.30
|
$0.20
|
1.67
|
1,567,252
|
$0.20
|
1,020,000
|
$0.31
- $0.45
|
$0.40
|
1.34
|
1,010,000
|
$0.40
|
2,437,267
|
$0.46
- $0.60
|
$0.55
|
8.58
|
210,000
|
$0.50
|
897,000
|
$0.61
- $0.75
|
$0.68
|
7.33
|
647,000
|
$0.68
|
330,000
|
$0.76
- $0.90
|
$0.81
|
9.02
|
330,000
|
$0.81
|
2,100,000
|
$0.91
- $1.05
|
$0.95
|
6.43
|
750,000
|
$1.00
|
2,252,664
|
$1.06
- $1.20
|
$1.20
|
7.85
|
2,002,664
|
$1.20
|
108,500
|
$1.21
- $1.35
|
$1.25
|
8.51
|
108,500
|
$1.25
|
1,468,191
|
$1.36
- $1.50
|
$1.50
|
3.54
|
1,468,191
|
$1.50
|
12,180,874
|
$0.00
- $1.50
|
$0.82
|
5.58
|
8,093,607
|
$0.87
|
On
May 3,
2006 the Company issued warrants to purchase 40,000 shares at an exercise
price
of $1.01 and are exercisable until May 3, 2011. On October 16, 2006
the Company issued warrants to purchase 6,000 shares at an exercise price
of
$0.95 and are exercisable until October 16, 2011. All warrants were
issued for consultancy services for the fiscal year ended February 28,
2007.
The
fair
value of options and warrants granted during the years ended February 28,
2007
and 2006 were estimated using the Black-Scholes option pricing model with
the
following weighted average assumptions:
|
|
|
Expected
life in
years
|
|
2
|
Risk-free
interest rate
|
|
4.72%
to 5.12%
|
Volatility
|
|
75%
|
Dividend
Yield
|
|
Nil
|
7. Income
Taxes
The
Company did not incur taxes due to the net losses in the fiscal years ended
February 28, 2007 and 2006 and six months ended August 31, 2007
(unaudited). The components of net loss before income taxes are as
follows.
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Six
Months Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
August
31, 2007
|
|
February
28, 2007
|
|
February
28, 2006
|
|
|
$
|
|
$
|
|
$
|
United
States
|
|
|
(5,466,769
|
)
|
|
(5,399,827
|
)
|
|
(2,427,885
|
Foreign
|
|
|
(2,715,632
|
)
|
|
(1,661,647
|
)
|
|
(1,861,892
|
Net
Loss
|
|
|
(8,182,401
|
)
|
|
(7,061,474
|
)
|
|
(4,289,777
|
The
provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
August
31, 2007
|
|
|
February
28, 2007
|
|
|
February
28, 2006
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Income
tax at the federal statutory rate of 35%
|
|
|
(2,863,840
|
)
|
|
|
(2,471,516
|
)
|
|
|
(1,501,422
|
)
|
Non-deductible
costs
|
|
|
801,997
|
|
|
|
1,061,698
|
|
|
|
525,797
|
|
Change
in valuation allowances
|
|
|
1,921,404
|
|
|
|
1,329,895
|
|
|
|
884,781
|
|
Foreign
tax rate differences
|
|
|
135,782
|
|
|
|
83,082
|
|
|
|
93,095
|
|
Other
|
|
|
4,657
|
|
|
|
(3,159
|
)
|
|
|
(2,251
|
)
|
Total
provision for income taxes
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Deferred
income taxes reflect the tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. The components of deferred income
tax
assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
August
31, 2007
|
|
|
February
28, 2007
|
|
|
February
28, 2006
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Net
operating loss
carryforwards
|
|
|
(5,890,309
|
)
|
|
|
(3,904,964
|
)
|
|
|
(2,551,340
|
)
|
Allowance
for bad debts
|
|
|
(663,556
|
)
|
|
|
(329,187
|
)
|
|
|
|
|
Gross
deferred tax assets
|
|
|
(6,553,865
|
)
|
|
|
(4,234,151
|
)
|
|
|
(2,551,340
|
)
|
Depreciation
and amortization
|
|
|
103,759
|
|
|
|
39,819
|
|
|
|
16,090
|
|
Gross
deferred tax liabilities
|
|
|
103,759
|
|
|
|
39,819
|
|
|
|
16,090
|
|
Less: valuation
allowance
|
|
|
6,450,106
|
|
|
|
4,194,332
|
|
|
|
2,535,250
|
|
Net
Book Value
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Management
regularly assesses the ability to realize deferred tax assets based upon
the
weight of available evidence, including such factors as the recent earnings
history and expected future taxable income. The methodology used by management
to determine the amount of deferred tax assets that are likely to be realized
is
based upon the Company’s recent earnings and estimated future taxable income in
applicable tax jurisdictions.
The
Company has not generated any taxable income to date, and therefore has not
had
to pay any income tax since its inception. The Company has provided a full
valuation allowance against the deferred tax asset since it is more likely
than
not that the asset will not be recovered. For the fiscal year ended
February 28, 2007, the Company's net operating loss carryforward, at the
expected tax rates for its operations, is approximately $5,570,000 which
is
deductible against future taxable income generated in the United Kingdom,
which
will remain in place until utilized and approximately $5,526,000 which is
deductible against future taxable income generated in the United States,
which
will remain available until utilized or begin to expire through February
28,
2025.
8. Reportable
Segments
The
Company complies with SFAS No. 131, “Disclosures about Segments of an Enterprise
and Related Information.” SFAS No. 131 requires disclosures of
segment information on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments.
Narrowstep
Inc. manages its business as two main segments, Narrowstep Ltd. which consists
of a single operating segment - “narrowcasting” (i.e. the provision of
television channels to niche audiences globally), and STV’s business - the
production of specialized sailing and extreme sports activities.
Management
relies on an internal management reporting process that provides revenue
and
segment operating income (loss) for making financial decisions and allocating
resources based on these segments. Management believes that segment-operating
income (loss) is an appropriate measure of evaluating the operational
performance of the Company's segments. However, this measure should
be considered in addition to, not as a substitute for, or superior to, income
(loss) from operations or other measures of financial performance prepared
in
accordance with accounting principles generally accepted in the United
States.
Summarized
information by segment for the years ended February 28, 2007 and 2006 is
as
follows:
|
|
Fiscal
Year Ended
|
|
|
|
February
28, 2007
|
|
|
February
28, 2006
|
|
|
|
Narrowcasting
|
|
|
Production
|
|
|
|
|
|
Narrowcasting
|
|
|
Production
|
|
|
|
|
|
|
and
other
|
|
|
Services
|
|
|
Total
|
|
|
and
other
|
|
|
Services
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Total
revenue by segment
|
|
|
4,369,117
|
|
|
|
1,639,718
|
|
|
|
6,008,835
|
|
|
|
1,499,633
|
|
|
|
1,206,629
|
|
|
|
2,706,262
|
|
Operating
expenses
|
|
|
(7,085,971
|
)
|
|
|
(2,263,992
|
)
|
|
|
(9,349,963
|
)
|
|
|
(2,692,066
|
)
|
|
|
(1,577,894
|
)
|
|
|
(4,269,960
|
)
|
Depreciation
and amortization
|
|
|
(488,119
|
)
|
|
|
(43,498
|
)
|
|
|
(531,617
|
)
|
|
|
(344,253
|
)
|
|
|
(134,238
|
)
|
|
|
(478,491
|
)
|
Interest
expense
|
|
|
(13,075
|
)
|
|
|
(152
|
)
|
|
|
(13,227
|
)
|
|
|
(12,817
|
)
|
|
|
(4,354
|
)
|
|
|
(17,171
|
)
|
Interest
income
|
|
|
130,825
|
|
|
|
1,216
|
|
|
|
132,041
|
|
|
|
2,021
|
|
|
|
510
|
|
|
|
2,531
|
|
Operating
loss by segment
|
|
|
(3,087,223
|
)
|
|
|
(666,708
|
)
|
|
|
(3,753,931
|
)
|
|
|
(1,547,482
|
)
|
|
|
(509,347
|
)
|
|
|
(2,056,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
corporate expenses
|
|
|
|
|
|
|
|
|
|
|
(1,233,054
|
)
|
|
|
|
|
|
|
|
|
|
|
(845,716
|
)
|
Impairment
of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
(1,228,437
|
)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Stock
based compensation charges
|
|
|
|
|
|
|
|
|
|
|
(803,735
|
)
|
|
|
|
|
|
|
|
|
|
|
(695,297
|
)
|
Costs
related to options and warrants
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
(649,619
|
)
|
Amortization
of intangible assets
|
|
|
|
|
|
|
|
|
|
|
(42,317
|
)
|
|
|
|
|
|
|
|
|
|
|
(42,316
|
)
|
Total
Net Loss
|
|
|
|
|
|
|
|
|
|
|
(7,061,474
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,289,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
equipment and software development
|
|
|
1,301,293
|
|
|
|
82,344
|
|
|
|
1,383,637
|
|
|
|
399,982
|
|
|
|
35,332
|
|
|
|
435,314
|
|
SEGMENT
REPORTING FOR 6 MONTHS ENDED 8/31/06 AND 8/31/07
Summarized
information by geographic region for the six months ended August 31, 2007
and
2006 is as follows (unaudited):
|
|
|
|
|
|
Six
Months
Ended
|
|
|
|
August
31,
2007
|
|
|
August
31,
2006
|
|
|
Percent
|
|
|
|
$
|
|
|
$
|
|
|
Change
|
|
United
States
|
|
|
431,647
|
|
|
|
320,645
|
|
|
|
35
|
%
|
Europe,
Middle-East and Africa
|
|
|
2,388,230
|
|
|
|
2,313,928
|
|
|
|
3
|
%
|
Asia
Pacific
|
|
|
38,559
|
|
|
|
59,866
|
|
|
|
-36
|
%
|
Internet
Sales
|
|
|
18,214
|
|
|
|
18,451
|
|
|
|
-1
|
%
|
Total
|
|
|
2,876,650
|
|
|
|
2,712,890
|
|
|
|
6
|
%
|
Summarized
information by geographic region for the years ended February 28, 2007 and
2006
is as follows:
|
|
|
|
|
|
Year
Ended
|
|
|
|
|
|
|
February
28,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Percent
|
|
|
|
$
|
|
|
$
|
|
|
Change
|
|
United
States
|
|
|
755,452
|
|
|
|
333,884
|
|
|
|
126
|
%
|
Europe,
Middle-East and Africa
|
|
|
4,794,144
|
|
|
|
2,137,260
|
|
|
|
124
|
%
|
Asia
Pacific
|
|
|
356,765
|
|
|
|
212,037
|
|
|
|
68
|
%
|
Internet
Sales
|
|
|
102,474
|
|
|
|
23,081
|
|
|
|
344
|
%
|
Total
|
|
|
6,008,835
|
|
|
|
2,706,262
|
|
|
|
122
|
%
|
Major
Customers
For
the
fiscal year ended February 28, 2007, the largest four customers in the aggregate
accounted for approximately $1,400,000, or 23% of revenues compared with
approximately $1,200,000, or 44% of revenues, for the fiscal year ended February
28, 2006. The accounts receivable balance for the largest four
customers was approximately $479,000 as of February 28, 2007.
For
the
six months ended August 31, 2007, the largest four customers in the aggregate
accounted for approximately $924,000 or 32% of revenues compared with
approximately $732,000 or 27% of our revenue for the six months ended August
31,
2006 (unaudited). The accounts receivable balance for the largest
four customers was approximately $834,000 as of August 31, 2007
(unaudited).
9. Related
Party Transactions
Options
granted to current directors.
The Company has granted to Roger Werner,
a member of the Board of Directors, options to purchase 300,000 shares at
an
exercise price of $1.18 on March 28, 2006 which are exercisable until March
28,
2016. The Company has granted to both David McCourt and Jack Whyte,
members of the board of directors, options to purchase 300,000 shares at
an
exercise price of $0.67 per share on June 7, 2006 which are exercisable until
June 27, 2011. All the option granted above fully vested on the date
granted.
On
May
23, 2006, the Company granted options to purchase 6,000 shares to Dennis
Edmonds, a member of the Board of Directors, at an exercise price of $0.75
per
share. These options vested on the grant date and are exercisable
until May 23, 2016.
On
December 2, 2005, the Company entered into a consultancy agreement with Roger
L.
Werner Jr. Pursuant to this agreement, on May 23, 2006, Mr. Werner was granted
options to purchase 30,000 shares at an exercise price of $0.75 per share,
for
consultancy services for the year ended February 28, 2006.
Options
granted to former directors.
The Company has granted Shelly
Palmer, a former member of the Board of Directors, options to purchase 6,000
shares at an exercise price of $0.75 per share. These options were granted
and
vested on May 23, 2006 and are no longer exercisable. The Company has granted
Peter Sidall, a former member of the Board of Directors, options to purchase
6,000 shares at an exercise price of $0.75 per share. These options were
granted
and vested on May 23, 2006 and are exercisable until December 31, 2007 pursuant
to the terms of his separation agreement. The Company had granted
options to Cliff Webb, a former officer and Board member, options to purchase
1,000,000 shares at an exercise price of $1.20 per share. The options
are fully vested and exercisable until December 31, 2007 pursuant to the
terms
of his separation agreement. The Company granted Rajan Chopra, a
former member of the Board of Directors, options to purchase 300,000 shares
at
an exercise price of $0.80 on September 28, 2006 which are exercisable until
September 28, 2016.
Options
granted to current officers.
On February 8, 2007, the Company granted
options to purchase 200,000 shares to Lisa VanPatten, our Chief Financial
Officer, at an exercise price of $0.92 per share. These options vest
over a three-year period and expire on February 8, 2017. On April 30,
2007, the Company granted options to purchase 250,000 shares to Lou Holder,
our
Chief Technology Officer, at an exercise price of $0.68 per
share. These options vest over a three-year period and expire on
April 30, 2017.
On
June
8, 2007, Narrowstep entered into an employment Agreement with David C. McCourt
who was granted 1,250,000 shares of restricted stock units which vest monthly
until November 30, 2007 and 2,500,000 shares of restricted stock which vest
based on meeting certain performance milestones, to be determined by the
Company’s Compensation Committee.
Options
granted to former officers.
The Company has granted options
to purchase 1,000,000 shares to Steven Crowther, our former Senior Vice
President and Chief Financial Officer, at an exercise price of $1.20 per
share. 500,000 of these options were granted and vested on March 1,
2005 and are exercisable until February 28, 2015. 500,000 of these
options were granted on August 11, 2005, 100,000 of which vested immediately
and
the remaining 400,000 vested on July 1, 2006. These options are exercisable
until August 11, 2015. On January 17, 2006, the Company granted Steven Crowther
additional options to purchase 100,000 shares, at an exercise price of $0.90
per
share. 50,000 of these options vested immediately on January 17,
2006. In connection with the Separation and General Release Agreement
between us and Mr. Crowther, the period during which Mr. Crowther may exercise
his vested options was extended from September 29, 2006 until June 29, 2007.
These options have since expired.
The
Company has granted options to purchase a total of 900,000 shares to Stephen
Beaumont, our former President and Chief Executive Officer. 200,000 of these
options were granted on November 15, 2005 at an exercise price of $1.50,
100,000
vested immediately and the remainder vested on February 1, 2006. The remaining
options were granted on February 28, 2006, 250,000 at an exercise price of
$1.00
per share, which vested immediately, and 450,000 at an exercise price of
$1.50
per share, 225,000 of which vested on June 30, 2006 and 225,000 of which
vested
on December 31, 2006. In connection with the Separation and General
Release Agreement between us and Mr. Beaumont, the period during which Mr.
Beaumont may exercise his vested options was extended until December 31,
2007.
Transactions
with companies in which certain persons hold an
interest.
Shelly Palmer, a former director of the Company,
is the owner of a consulting company, SLP Productions Inc. Pursuant to an
unwritten agreement between the parties, SLP Productions billed the Company
$38,000 and $36,000 for fiscal year ending February 28, 2007 and February
28,
2006, respectively for consulting services. For the six months
ending, August 31, 2007 no further consulting services were
performed.
Narrowstep
Ltd. has developed a channel for LTR Consultancy. John Goedegebuure, a founder
and shareholder of Narrowstep Inc., is the Managing Director and a shareholder
of LTR Consultancy. Total revenue and total receivables from LTR
Consultancy for fiscal year ending February 28, 2007, was $185,480 and $53,614
respectively. Total revenue and total receivables from LTR
Consultancy for the six months ending August 31, 2007, was $42,236 and $97,807
respectively. The total amount in receivables remained unpaid and was fully
reserved for at August 31, 2007.
Pursuant
to an Investor Relations Agreement with the Company, LTR Consultancy earned
fees
for investor relations services of $33,705, for fiscal year ended February
28,
2007. Of these fees, $5,892 was unpaid as of August 31,
2007.
On
December 2, 2005, the Company entered into a consultancy agreement with Roger
L.
Werner Jr. Pursuant to this agreement, on May 23, 2006, Mr. Werner
was granted options to purchase 30,000 shares at an exercise price of $0.75
per
share, for consultancy services for the year ended February 28,
2006. Mr. Werner became a shareholder of the Company on February 22,
2006 and a director of the Company on March 28, 2006.
On
May
30, 2006, the Company entered into an advisory agreement with Granahan McCourt
Advisors, LLC. David C McCourt, Chairman of the Board of Directors,
Interim Chief Executive Officer and Interim Chief Operating Officer, is the
beneficial owner of Granahan McCourt Advisors, LLC and Granahan McCourt Capital,
LLC, a shareholder in the Company. Pursuant to this agreement,
Granahan McCourt Advisors, LLC was issued 100,000 shares of common stock
on May
30, 2006 and received warrants to purchase 6,000 shares, with an exercise
price
equal to $0.95 per share. Mr. McCourt became a director of the
Company on June 27, 2006, was named as Chairman of the Board and interim
Chief
Executive Officer in December 2006 and was named interim Chief Operating
Officer
in June 2007. The Company paid Granahan McCourt Advisors, LLC $80,000
for consulting services and $9,000 to cover out of pocket expenses for fiscal
year ending February 28, 2007. Mr. McCourt voluntarily terminated the
advisory agreement once he became interim Chief Executive Officer and forfeited
the remaining balance in the contract.
Outdoor
Channel, a Narrowstep customer, began utilizing our services in May
2007. The Chief Executive Officer and President of Outdoor Channel is
Roger L. Werner Jr., a Director of Narrowstep. We billed Outdoor
Channel, $33,204 for the six months ended August 31, 2007 and the balance
in
accounts receivable at August 31, 2007 is $2,500.
In
connection with our August 2007 financing, Mr. McCourt purchased 4,000,000
shares of common stock and warrants to purchase 2,000,000 shares of common
stock
for a total purchase price of $1,000,000. In addition, Mr. McCourt
entered into a lock up agreement pursuant to which he and certain entities
controlled by him agreed for a period of nine months from August 8, 2007
not to
sell, dispose or other wise transfer any shares of common stock owned by
them,
subject to certain exceptions.
Commission
paid to stockholders
The
Company paid commissions to certain stockholders for raising funds of $478,124
during the fiscal year ended February 28, 2006. The Company paid commissions
of
$150,000 to certain shareholders during fiscal year ended February 28, 2007
for
raising funds during the fiscal year ended February 28, 2006. There was no
outstanding amount payable in connection with these commissions as of February
28, 2007.
10. Commitments
When
a
lease is classified as an operating lease, the risks and rewards remain with
the
lessor and the lease expenses are treated as operating expense.
The
Company has non-cancelable operating leases to occupy the following properties:
Princeton NJ, which terminates on November 30, 2007; and New York, NY, which
terminates on November 30, 2007.
On July
22, 2007 the company entered
into a six year building lease with Princeton 202 Associates Limited Partnership
located in
Princeton
,
New
Jersey
which we will occupy
on December 1,
2007. On October 3, 2007 the company entered into a four year
building lease with Philips and Feeley located in
London
(unaudited).
The
total
remaining rental commitment at February 28, 2007 is approximately $163,000.
For
the years ended February 28, 2007 and 2006, rental expense was $386,700 and
$111,800 respectively. For the period ending August 31, 2007 and
2006, rent expense was $218,300 and $126,800 respectively.
When
a
lease is classified as a capital lease, the present value of the lease expenses
is treated as debt. Assets held under capital leases are capitalized in the
balance sheet and are depreciated over their estimated useful
lives. The interest element of the rental obligation is charged to
the Statements of Operations over the period of the lease and represents
a
constant proportion of the balance of capital repayment
outstanding.
As
of
February 28, 2007, our principal capital commitments consisted of obligations
outstanding under capital leases as shown in the table below:
|
|
|
|
|
|
|
|
|
|
February
28,
2007
|
|
|
|
$
|
|
Amounts
payable:
|
|
|
|
|
Within
12 months
|
|
|
104,235
|
|
Between
one and two years
|
|
|
99,388
|
|
Between
two and three years
|
|
|
45,725
|
|
Total
future commitment
|
|
|
249,348
|
|
Less:
finance charges allocated to future periods
|
|
|
(25,767
|
)
|
Present
Value
|
|
|
223,581
|
|
As
of
August 31, 2007, our principal capital commitments consisted of obligations
outstanding under capital leases as shown in the table below
(unaudited):
|
|
|
|
|
|
|
|
|
|
August
31, 2007
|
|
|
|
$
|
|
Amounts
payable:
|
|
|
|
|
Within
12 months
|
|
|
180,021
|
|
Between
one and two years
|
|
|
160,143
|
|
Between
two and three years
|
|
|
75,400
|
|
Total
future commitment
|
|
|
415,564
|
|
Less:
finance charges allocated to future periods
|
|
|
(47,151
|
)
|
Present
Value
|
|
|
368,413
|
|
At
February 28, 2007 the Company has two employment agreements outstanding,
one
with Iolo Jones, Founder and Chief Strategy Officer and the other with Jason
Jack, Chief Software Architect. These agreements stay in effect until
employment is terminated. For fiscal year ending February 28, 2007,
Iolo Jones was paid a salary of $187,248 and Jason Jack was paid a salary
of
$180,336.
11. Subsequent
Events
On
March
2, 2007, we closed a private financing with a number of accredited investors
for
the sale of our 12% Mandatorily Convertible Notes and warrants for a total
purchase price of $7,110,000. The notes, which were to mature on
March 2, 2009, bore interest at 12% per annum, payable at
maturity. The Notes were mandatorily convertible at a 10% discount
into securities we issued in any subsequent private placement that resulted
in
gross proceeds to us of at least $3,000,000 or, in the event of a sale of
the
Company prior thereto, shares of common stock valued at a discount of 10%
to the
per share price to be paid in the Company sale. The warrants are
exercisable at any time on or prior to March 2, 2012 for an aggregate of
3,555,000 shares of common stock at an exercise price of $0.60 per share,
subject to adjustment. The Company has the right to force the cash
exercise of the warrants if the common stock trades at or above $1.80 per
share
for at least 20 consecutive trading days. Both the notes and the
warrants contain customary anti-dilution provisions in the event of any stock
split, reverse stock split, reclassification or recapitalization of the
Company
. In the
financing, we issued to the placement agents warrants to purchase an aggregate
of 75,875 shares of common stock. Those warrants have the same terms
as the warrants issued in the financing.
PART
II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item
24. Indemnification of Directors and
Officers
The
Delaware General Corporation Law and our Amended and Restated Certificate
of
Incorporation and Amended and Restated By-laws provide for indemnification
of
our directors and officers for liabilities and expenses that they may incur
in
those capacities. In general, directors and officers are indemnified with
respect to actions taken in good faith in a manner reasonably believed to
be in,
or not opposed to, the best interests of Narrowstep, and with respect to
any
criminal action or proceeding, actions that the indemnitee had no reasonable
cause to believe were unlawful. We refer you to our Amended and Restated
Certificate of Incorporation and Amended and Restated By-laws, incorporated
by
reference in this registration statement.
Item
25. Other Expenses of Issuance and Distribution.
|
Amount
to be paid
|
SEC
Registration
Fee
|
$ 2,489.00
|
Blue
Sky Fees and Expenses (excluding legal
fees)
|
$ 5,000.00
|
Legal
Fees and
Expenses
|
$ 317,000.00
|
Accountants'
Fees and
Expenses
|
$ 158,000.00
|
Miscellaneous
|
$ 17,511.00
|
TOTAL
|
$ 500,000.00
|
The
foregoing expenses, except for the SEC fees, are estimated.
Item
26. Recent Sales of Unregistered Securities.
The
following sets forth information relating to all previous sales of shares
by the
Registrant which sales were not registered under the Securities
Act:
The
following table sets forth information regarding all securities sold by us
for
cash consideration since August 1, 2004:
Class
of
Purchasers
|
Date
of Sale
|
Title
of
Securities
|
Number
of
Securities
|
Aggregate
Purchase
Price
|
Form
of
Consideration
|
Investors
in Private Offering
(22
persons)
|
May
1, 2004 - December 31, 2004
|
Common
|
1,247,632
|
$1,497,158
|
Cash
|
Investors
in Private Offering
(7
persons)
|
December,
2004 ($0.20)
|
Common
|
1,294,467
|
$
258,893
|
Cash
|
Investors
in Private Offering (2 persons)
|
January,
2005 ($0.20)
|
Common
|
35,922
|
$ 7,184
|
Cash
|
Investors
in Private Offering
(12
persons)
|
January
1, 2005 - March 31, 2005 ($1.20)
|
Common
|
1,006,667
|
$
1,208,000
|
Cash
|
Investors
in Private Offering
(28
persons)
|
May
16, 2005 - August 5, 2005 ($1.20)
|
Common
|
1,394,389
|
$1,673,267
|
Cash
|
Investors
in Private Offering
(11
persons)
|
February
22, 2006
|
Common
and Warrants for Common
|
24,666,662
|
$7,400,000
|
Cash
|
Investors
in Private Offering
(16
persons)
|
March
2, 2007
|
Notes
and Warrants for Common
|
3,555,000
|
$7,110,000
|
Cash
|
Investors
in Private Offering
(24
persons)
|
August
8, 2007
|
Common
and Warrants for Common
|
64,766,400
|
$10,510,000
|
Cash
|
Except
as
set forth below, all sales made beginning and after May, 2004 were made in
reliance upon Regulation S to non-U.S. persons in offshore transactions
with no directed selling efforts in the United States. In accordance
with Regulation S, the certificates evidencing such issuances bore restrictive
legends and the Narrowstep bylaws contained a provision requiring refusal
of
transfers not made in accordance with the provisions of Regulation S, pursuant
to registration under the Securities Act, or pursuant to an available exemption
from registration. The issuances made in December 2004 and January
2005 for $0.20 were made
to
non-U.S. persons outside the United States and with no directed selling efforts
in the United States in reliance on the general statement in Rule 901
promulgated under the Secur
ities Act and the SEC
’
s
analysis of that rule and offshore
offerings set forth in Release
No. 33-6863 (1990). All other
issuances were made to accredited investors in reliance on Rule 506 under
the
Securities Act.
On
March
2, 2007, we closed a private financing with a number of accredited investors
for
the sale of our 12% Mandatorily Convertible Notes and warrants for a total
purchase price of $7,110,000. The notes, which were to mature on
March 2, 2009, bore interest at 12% per annum, payable at
maturity. The Notes were mandatorily convertible at a 10% discount
into securities we issued in any subsequent private placement that resulted
in
gross proceeds to us of at least $3,000,000 or, in the event of a sale of
the
Company prior thereto, shares of common stock valued at a discount of 10%
to the
per share price to be paid in the Company sale. The warrants are
exercisable at any time on or prior to March 2, 2012 for an aggregate of
3,555,000 shares of common stock at an exercise price of $0.60 per share,
subject to adjustment. The Company has the right to force the cash
exercise of the warrants if the common stock trades at or above $1.80 per
share
for at least 20 consecutive trading days. Both the notes and the
warrants contain customary anti-dilution provisions in the event of any stock
split, reverse stock split, reclassification or recapitalization of the
Company.
In the
financing, we issued to the placement agents warrants to purchase an aggregate
of 75,875 shares of common stock. Those warrants have the same terms
as the warrants issued in the financing.
On
August 8, 2007, we closed a private
financing with a number of accredited investors for the sale of common stock
and
warrants for a total purchase price of $10,510,000. Pursuant to the financing
we
sold a total of 42,040,000 shares of common stock at a purchase price of
$0.25
per share. We also issued warrants to purchase an aggregate of 21,020,000
shares
of common stock at an exercise price of $0.50 per share, subject to
adjustment. The warrants are exercisable at any time on or prior to
August 8, 2012. The
warrants contain customary anti-dilution
provisions in the event of any stock split, reverse stock split,
reclassification or recapitalization of the Company. In addition, the
exercise price and the number of shares issuable upon the exercise of the
warrants are subject to adjustment on a full-ratchet basis in the event that
we
issue or are deemed to have issued shares of common stock at an effective
purchase price of less than $0.50 per share, subject to certain
exceptions. In the financing,
we issued to the placement
agents
warrants to purchase an aggregate of 1,706,400 shares of common
stock. Those warrants have the same terms as the warrants issued in
the financing, except that the warrants issued to the placement agents have
a
cashless exercise right. In connection with this financing, the
Company’s $7,110,000 in outstanding mandatorily 12% convertible notes were
automatically converted into an aggregate of 35,392,003 shares of common
stock
at a conversion price of $0.225 per share.
Each
of
the above purchasers had access to all relevant information necessary to
evaluate the investment and represented to Narrowstep that the shares were
being
acquired for investment.
The
following table
sets forth
information regarding all
options
and warrants granted by Narrowstep and securities sold by Narrowstep other
than
for cash
since August 1, 2004, other than options for shares of common
stock covered by our registration statement on Form S-8 filed with respect
to
the Narrowstep Inc. 2004 Stock Plan.
Name
|
Class
|
Date
|
Type
|
No
granted
|
Value,
$
|
Consideration
|
Iolo
Jones (1)
|
Employee
|
March
2005
|
Common
Options
|
942,664
|
-
|
Employment
agreement
|
Adamao
Ltd. (2)
|
Third
party supplier
|
March
1, 2004 - August 31, 2004
|
Common
Shares
|
541,300
|
608,822
|
Finance
services
|
Jonny
Bradley (3)
|
Third
party supplier
|
March
2005
|
Common
Options
|
15,000
|
12,150
|
Consulting
Services
|
Allard
de Stoppelaar, Anthony Aries and others (4)
|
Third
party supplier
|
August
31, 2005
|
Common
Warrants
|
630,000
|
322,130
|
Fund
raising services
|
vFinance
Investments and others (5)
|
Third
party supplier
|
September
14, 2005
|
Common
Shares
|
155,342
|
260,975
|
Consulting
Services
|
Rhone
International Consulting LLC (6)
|
Third
party supplier
|
September
19, 2005
|
Common
Shares
|
100,000
|
165,000
|
Consulting
Services
|
Rhone
International Consulting LLC (6)
|
Third
party supplier
|
September
19, 2005
|
Common
Warrants
|
100,000
|
164,076
|
Consulting
Services
|
Dominick
& Dominick LLC (7)
|
Third
party
supplier
|
February
22, 2006
|
Common
Options
|
650,000
|
360,860
|
Fund
raising services
|
vFinance
Investments and Thomas Suppanz (8)
|
Third
party
supplier
|
February
22, 2006
|
Common
Warrants
|
33,334
|
26,011
|
Fund
raising services
|
Patrick
Sikorski and Christopher Sachs (9)
|
Third
Party Supplier
|
May
3, 2006
|
Common
Warrants
|
40,000
|
17,520
|
Introduction
Services and Release
|
Granahan
McCourt Advisors (10)
|
Third
Party Supplier
|
May
30, 2006
|
Common
Shares
|
100,000
|
26,883
|
Consulting
Services
|
Granahan
McCourt Advisors
(11)
|
Third
Party Supplier
|
May
30, 2006
|
Common
Warrants
|
6,000
|
2,700
|
Consulting
Services
|
Theodore
Marolda, Jack Brimberg, Jay Tomlinson and John Kaiser (12)
|
Third
Party Supplier
|
March
2, 2007
|
Common
Warrants
|
75,875
|
19,636
|
Consulting
Services
|
William
Morris Agency, LLC (13)
|
Third
Party Supplier
|
March
8, 2007
|
Common
Warrants
|
50,000
|
19,625
|
Consulting
Services
|
Accredited
Investors (14)
|
Investors
|
August
8, 2007
|
Common
Shares
|
35,392,003
|
7,963,301
|
Conversion
of Notes
|
Merriman
Curhan Ford & Co. (15)
|
Third
Party Supplier
|
August
8, 2007
|
Common
Warrants
|
1,023,840
|
511,920
|
Consulting
Services
|
Theodore
Marolda, Jack Brimberg and Jay Tomlinson (16)
|
Third
Party Supplier
|
August
8, 2007
|
Common
Warrants
|
682,560
|
341,280
|
Consulting
Services
|
The
option values used in the above
table are fair market valuations based on SFAS123 in the case of third party
suppliers, and intrinsic value measured under APB 25 in the case of
employees.
(1)
On
March 1, 2005 the Company
granted options to purchase 942,664 shares to Iolo Jones at an exercise price
of
$1.20 per share. These options were granted and vested on March 1,
2005 and are exercisable until February 28, 2015. These options were
granted outside of the Narrowstep Inc. 2004 Stock Plan.
(2)
An aggregate of 731,911 shares were
issued to Adamao Ltd. as compensation for Peter Lloyd's services as our Chief
Financial Officer pursuant to the agreement dated November 20, 2003 between
Adamao Ltd. and Narrowstep. Adamao Ltd. received 190,611 shares as
compensation for services from November 2003 to February 2004, 203,692 shares
as
compensation for services from March 1, 2004 to April 31, 2004, and 541,300
shares as compensation for services from March 1, 2004 to August 31,
2004. The issuances were made to
a non-U.S. person outside
the
United States
and with no directed selling
effor
ts in the
United
States
in reliance on the
general statement in
Rule 901 promulgated under the Securities Act and the SEC
’
s
analysis of that rule and offshore
offerings set forth in Release
No. 33-6863 (1990).
(3)
Options for an aggregate of 15,000 shares at an exercise price of $0.50 per
share were granted on March 1, 2005 and options for an aggregate of 5,000
shares
at an exercise price of $1.25 per share were granted on February 28, 2006
to
Jonny Bradley as compensation for his consulting services. These
options were granted pursuant to the Narrowstep Inc. 2004 Stock Plan in reliance
on Rule 701 of the Securities Act.
(4)
Effective August 31, 2005, warrants
to purchase an aggregate of 275,000 shares of our common stock at an exercise
price of $1.20 were granted to each of Allard De Stoppelaar and Anthony Aries,
as compensation for services in connection with our fundraising efforts.
Warrants to purchase an aggregate of 80,000 shares of our common stock at
an
exercise price of $1.20 were granted to five stockholders nominated by Mr.
De
Stoppelaar and Mr. Aries. Mr. De Stoppelaar is a founder and he and
Mr. Aries provided fund raising services to Narrowstep and were paid certain
commission in the form of warrants. The issuances were made to
non-U.S. persons outside the
United States
and with no directed selling efforts in
the
United
States
in reliance on the
general statement in Rule 901 promulgated under the Securities Act and the
SEC’s
analysis of that rule and offshore offerings set forth in Release No. 33-6863
(1990).
(5)
Effective September 14, 2005,
109,517 shares of our common stock were granted at par to vFinance Investments
Inc., 31,068, shares of our common stock were granted at par to Carmelo
Troccoli, an employee of vFinance Investments and 14,747 shares of our common
stock were granted at par to Jonathan Rich, an employee of vFinance Investments.
These shares were granted pursuant to a consultancy agreement between Narrowstep
Inc. and vFinance Investments Inc. of the same date. The issuances
were made in reliance on Section 4(2) of the Securities Act.
(6)
Effective September 19, 2005,
100,000 shares of our common stock at par and warrants to purchase an aggregate
of 100,000 shares of our common stock at an exercise price of $0.01 per share
were granted to Rhone International Consulting LLC pursuant to an investor
relations agreement with Narrowstep Inc. of the same date. The
issuances were made in reliance on Section 4(2) of the Securities
Act.
(7)
Effective February 22, 2006, options
to purchase an aggregate of 650,000 shares of our common stock at an exercise
price of $1.50 per share were granted to Dominick & Dominick LLC as
compensation for services in connection with our fundraising
efforts. The grant was made in a private placement in reliance on
Rule 506 under the Securities Act.
(8)
Effective February 22, 2006,
warrants to purchase 8,333 shares of our common stock at an exercise price
of
$0.60 per share and warrants to purchase 8,333 shares of our common stock
at an
exercise price of $1.20 per share were granted to vFinance Investments and
warrants to purchase 8,333 shares of our common stock at an exercise price
of
$0.60 per share and warrants to purchase 8,333 shares of our common stock
at an
exercise price of $1.20 per share were granted to Thomas Suppanz, an employee
of
vFinance Investments, as compensation for services in connection with our
fundraising efforts. The grant was made in a private placement in
reliance on Rule 506 under the Securities Act.
(9)
Effective May 3, 2006, warrants to
purchase 20,000 shares of our common stock at an exercise price of $1.01
per
share were granted to each of Patrick Sikorski and Christopher Sachs in
consideration of certain introductions made and provision of a general
release.
(10)
On May 30, 2006, the Company
entered into an advisory agreement with Granahan McCourt Advisors, LLC. David
C
McCourt is the beneficial owner of Granahan McCourt Advisors, LLC and Granahan
McCourt Capital, LLC, a shareholder in the Company. Pursuant to this agreement,
Granahan McCourt Advisors, LLC was granted 100,000 shares of common stock
on May
30, 2006 which vest ratably over the year of the contract. Mr.
McCourt became a director of the Company on June 27, 2006.
(11)
On May 30, 2006, the Company
entered into an advisory agreement with Granahan McCourt Advisors, LLC. David
C
McCourt is the beneficial owner of Granahan McCourt Advisors, LLC and Granahan
McCourt Capital, LLC, a shareholder in the Company. Pursuant to this agreement,
Granahan McCourt Advisors, LLC was granted warrants to purchase 6,000 shares,
with an exercise price of $0.95 per share. Mr. McCourt became a
director of the Company on June 27, 2006.
(12)
On March 2, 2007, warrants to
purchase 37,938 shares of our common stock at an exercise price of $0.60
per
share were granted to Theodore Marolda, warrants to purchase 26,000 shares
of
our common stock at an exercise price of $0.60 per share were granted to
Jack
Brimberg, warrants to purchase 11,187 shares of our common stock at an exercise
price of $0.60 per share were granted to Jay Tomlinson and warrants to purchase
750 shares of our common stock at an exercise price of $0.60 per share were
granted to John Kaiser. The grants were made in a private placement
in reliance on Rule 506 under the Securities Act.
(13)
On March 6, 2007, the Company
entered into a strategic alliance agreement with
William
Morris
Agency
,
LLC. Pursuant to this agreement,
William
Morris
Agency
,
LLC was granted warrants to purchase
50,000 shares, with an exercise price of $0.91 per share. The grant
was made in a private placement in reliance on Rule 506 under the Securities
Act.
(14)
On August 8, 2007, upon the
completion of our private sale of shares of common stock and warrants, the
Company’s outstanding mandatorily convertible notes and all accrued interest
thereon (calculated through March 8, 2008) were automatically converted into
an
aggregate of 35,392,003 shares of common stock at a conversion price of $0.225
per share. The shares were issued in reliance on Rule 506 under the
Securities Act and Section 3(a)(9) of the Securities Act.
(15)
On August 8, 2007, warrants to
purchase 1,023,840 shares of our common stock at an exercise price of $0.50
per
share were granted to Merriman Curhan Ford & Co. (“MCF”) in partial payment
of placement agency fees owed to MCF in connection with the August
financing. The grant was made in a private placement in reliance on
Rule 506 under the Securities Act.
(16)
On August 8, 2007, warrants to
purchase 341,310 shares of our common stock at an exercise price of $0.50
per
share were granted to Theodore Marolda, warrants to purchase 238,750 shares
of
our common stock at an exercise price of $0.50 per share were granted to
Jack
Brimberg and warrants to purchase 102,500 shares of our common stock at an
exercise price of $0.50 per share were granted to Jay Tomlinson. The
grants were made in a private placement in reliance on Rule 506 under the
Securities Act.
Item
27. Exhibits.
The
exhibits filed as a part of this
Registration Statement are as follows (filed herewith unless otherwise
noted):
Exhibit
No.
Description
3.1
|
Amended
and Restated Certificate of Incorporation
(1)
|
3.2
|
Amended
and Restated By-laws (2)
|
4.1
|
Specimen
Common Stock Certificate (3)
|
5.1
|
Opinion
of Lowenstein Sandler PC*
|
10.1
|
Employment
Agreement by and between Narrowstep Limited and Iolo Jones dated
March 28,
2006 (4)
|
10.2
|
Agreement
by and between Narrowstep Ltd. and Jason Jack, dated October 1,
2002
(5)
|
10.2.1
|
First
Amendment to Employment Agreement by and among Narrowstep Limited,
Narrowstep Inc., and Jason Jack, dated November 24, 2004
(6)
|
10.4
|
Server
Hosting Agreements between Narrowstep and Teleglobe Ltd., dated
October
23, 2003 (7)
|
10.5†
|
Agency
Agreement between Narrowstep Inc. and Global Sportnet, dated February
4,
2004 (8)
|
10.6
|
Narrowstep
Inc. 2004 Restated Stock Plan (9)
|
10.7
|
Letter
Agreement by and between Narrowstep Inc. and Allard de Stoppelaar,
dated
May 11, 2005 (10)
|
10.8
|
Purchase
Agreement by and among
Narrowstep Inc. and the Investors set forth on the signature pages
dated
February 22, 2006 (11)
|
10.9
|
Registration
Rights Agreement by
and among Narrowstep Inc. and the Investors named in the Purchase
Agreement dated as of February 22, 2006
(12)
|
10.10
|
Form
of Warrant to Purchase Shares
of Narrowstep Common Stock at the Warrant Price of $0.60 per Share
(13)
|
10.11
|
Form
of Warrant to Purchase Shares
of Narrowstep Common Stock at the Warrant Price of $1.20 per Share
(14)
|
10.12
|
Employment
Agreement dated October
3, 2005 by and between Narrowstep Inc. and Carolyn Wall.
(15)
|
10.13
|
Agreement
dated May 30, 2006 by
and between Narrowstep Inc. and Granahan McCourt Advisors LLC.
(16)
|
10.14
|
Purchase
Agreement by and among
Narrowstep Inc. and the Investors set forth on the signature pages
thereto
dated March 2, 2007 (17)
|
10.15
|
Form
of 12% Mandatorily
Convertible Note, dated as of March 2, 2007
(18)
|
10.16
|
Form
of Warrant to Purchase Shares
of Narrowstep Common Stock at the Warrant Price of $0.60 per Share,
dated
as of March 2, 2007 (19)
|
10.17
|
Purchase
Agreement by and among
Narrowstep Inc. and the Investors set forth on the signature pages
thereto
dated August 8, 2007 (20)
|
10.18
|
Registration
Rights Agreement by
and among Narrowstep Inc. and the Investors named in the Purchase
Agreement dated as of August 8, 2007
(21)
|
10.19
|
Form
of Warrant to Purchase Shares
of Narrowstep Common Stock at the Warrant Price of $0.50 per Share,
dated
as of August 8, 2007 (22)
|
10.20
|
Form
of Lock Up Agreement, dated
as of August 8, 2007 (23)
|
16.1
|
Letter
on change in certifying accountants
(24)
|
22.1
|
Subsidiaries
of the registrant (25)
|
23.1
|
Consent
of Lowenstein Sandler PC*
|
23.2
|
Consent
of Rothstein, Kass & Company,
P.C.
|
_____________________
*
Previously filed.
(1)
Previously filed as exhibit 3.1 to the Company’s Amendment No. 1 to Form SB-2
(Registration No. 333-145900) which was filed on November 8, 2007 and
incorporated herein by reference.
(2)
Previously filed as exhibit 3.5 to the Company’s Amendment No. 2 to Form SB-2
(Registration No. 333-108632) which was filed on December 6, 2004 and
incorporated herein by reference.
(3)
Previously filed as exhibit 4.1 to the Company’s Form SB-2 (Registration No.
333-108632) which was filed on September 9, 2003 and is incorporated herein
by
reference.
(4)
Previously filed as Exhibit 10.2.3 to the Company’s Form SB-2 (Registration No.
333-134023) which was filed on May 11, 2006 and incorporated herein by
reference.
(5)
Previously filed as exhibit 10.4 to the Company’s Amendment No. 2 to Form SB-2
(Registration No. 333-108632) which was filed on December 6, 2004 and
incorporated herein by reference.
(6)
Previously filed as exhibit 10.4.1 to the Company’s Amendment No. 2 to Form SB-2
(Registration No. 333-108632) which was filed on December 6, 2004 and
incorporated herein by reference.
(7)
Previously filed as exhibit 10.9 to the Company’s Amendment No. 1 to Form SB-2
(Registration No. 333-108632) which was filed on July 12, 2004 and incorporated
herein by reference.
(8)
Previously filed as exhibit 10.12 to the Company’s Amendment No. 4 to Form SB-2
(Registration No. 333-108632) which was filed on March 4, 2005 and incorporated
herein by reference.
(9)
Previously filed as exhibit 16.1 to the Company’s Amendment No. 1 to Form SB-2
(Registration No. 333-108632) which was filed on July 12, 2004 and incorporated
herein by reference.
(10)
Previously filed as exhibit 10.23 to the Company’s Post Effective Amendment No.
2 to Form SB-2 (Registration No. 333-108632) which was filed on August 8,
2005
and incorporated herein by reference.
(11)
Previously filed as exhibit 10.1 to
Form 8-K which was filed on February 22, 2006 and incorporated herein by
reference.
(12)
Previously filed as exhibit 10.2 to
Form 8-K which was filed on February 22, 2006 and incorporated herein by
reference.
(13)
Previously filed as exhibit 10.3 to
Form 8-K which was filed on February 22, 2006 and incorporated herein by
reference.
(14)
Previously filed as exhibit 10.4 to Form 8-K which was filed on February
22,
2006 and incorporated herein by reference.
(15)
Previously filed as exhibit 10.29 to the Company’s Form SB-2 (Registration No.
333-134023) which was filed on May 11, 2006 and incorporated herein by
reference.
(16)
Previously filed as exhibit 10.23 to Post-Effective Amendment No. 1 to the
Company’s Form SB-2 (Registration No. 333-134023) which was filed on September
12, 2006 and incorporated herein by reference.
(17)
Previously filed as exhibit 10.1 to
Form 8-K which was filed on March 6, 2007 and incorporated herein by
reference.
(18)
Previously filed as exhibit 10.3 to
Form 8-K which was filed on March 6, 2007 and incorporated herein by
reference.
(19)
Previously filed as exhibit 10.2 to
Form 8-K which was filed on March 6, 2007 and incorporated herein by
reference.
(20)
Previously filed as exhibit 10.1 to
Form 8-K which was filed on August 10, 2007 and incorporated herein by
reference.
(21)
Previously filed as exhibit 10.2 to
Form 8-K which was filed on August 10, 2007 and incorporated herein by
reference.
(22)
Previously filed as exhibit 10.3 to
Form 8-K which was filed on August 10, 2007 and incorporated herein by
reference.
(23)
Previously filed as exhibit 10.4 to
Form 8-K which was filed on August 10, 2007 and incorporated herein by
reference.
(24)
Previously filed as exhibit 16.1 to Form 8-K/A which was filed on December
20,
2005 and incorporated herein by reference.
(25)
Previously filed as exhibit 22.1 to the Company’s Amendment No. 1 to Form SB-2
(Registration No. 333-108632) which was filed on July 12, 2004 and incorporated
herein by reference.
†
Confidential portions of this agreement have been omitted and filed separately
with the Securities and Exchange Commission pursuant to an application for
confidential treatment.
Item
28. Undertakings.
The
undersigned registrant hereby undertakes:
(1)
To
file, during any period in which offer or sales are being made, a post-effective
amendment to this registration statement:
(i)
To
include any prospectus required by section 10(a)(3) of the Securities Act
of
1933, as amended; (ii) to reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the laws or high end of the estimated
maximum
offering range may be reflected in the form of prospectus filed with the
Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in the volume and price represent no more than a twenty percent
(20%) change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the effective registration statement;
and (iii) to include any additional or changed material information on the
plan
of distribution.
(2)
For
determining liability under the Securities Act of 1933, as amended, the Company
will treat each such post-effective amendment as a new registration statement
of
the securities offered, and the offering of such securities at that time
to be
the initial
bona fide
offering.
(3)
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933,
as
amended, may be permitted to directors, officers and controlling persons
of the
small business issuer pursuant to the foregoing provisions, or otherwise,
the
small business issuer has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities
Act
of 1933, as amended, and is, therefore, unenforceable.
In
the event that a claim for
indemnification against such liabilities (other than the payment by the
small business issuer of expenses incurred or paid by a director, officer
or
controlling person of the small business issuer in the successful defense
of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled
by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933, as amended, and will be governed
by the
final adjudication of such issue.
SIGNATURES
In
accordance with the requirement of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of
the
requirements of filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in Princeton, New Jersey on
November 26, 2007.
|
David
C. McCourt, Chairman of the Board of
Directors,
|
|
Interim
Chief Executive Officer, Interim Chief Operating Officer and
Director
|
In
accordance with the requirements of the Securities Act of 1933, this
registration statement was signed below by the following persons on behalf
of
the Registrant and in the capacities and on the dates indicated:
Signature
|
|
Title
|
Date
|
|
|
|
|
*
|
|
Chairman
of the Board of Directors,
|
November
26, 2007
|
David
C. McCourt
|
|
Interim
Chief Executive Officer, Interim Chief Operating
|
|
|
|
Officer
and Director (Principal Executive Officer)
|
|
|
|
|
|
*
|
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
November
26, 2007
|
Lisa
VanPatten
|
|
|
|
|
|
|
|
*
|
|
Director
|
November
26, 2007
|
Dennis
Edmonds
|
|
|
|
|
|
|
|
*
|
|
Director
|
November
26, 2007
|
Iolo
Jones
|
|
|
|
|
|
|
|
*
|
|
Director
|
November
26, 2007
|
Roger
Werner
|
|
|
|
|
|
|
|
*
|
|
Director
|
November
26, 2007
|
John
Whyte
|
|
|
|
|
|
|
|
*By:
/s/
DAVID C. McCOURT
Attorney-in-Fact