NARROWSTEP
INC. AND
SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1. PREPARATION OF INTERIM FINANCIAL
STATEMENTS
Basis
of
Presentation.
Throughout
this document, Narrowstep Inc. and its subsidiaries are referred to as
“Narrowstep,” “we” or the “Company.” The interim condensed consolidated
financial statements have been prepared pursuant to the rules and regulations
of
the Securities and Exchange Commission (“SEC”) that permit reduced disclosure
for interim periods. We believe that these interim condensed consolidated
financial statements include all adjustments necessary to present fairly
the
results for the interim periods shown. The results for the interim periods
are
not necessarily indicative of the results of any other interim period or
for the
full year. The reader is referred to the audited consolidated
financial statements and notes thereto for the year ended February 28, 2007
filed as part of Narrowstep Inc. and Subsidiaries (collectively, the “Company”)
Form 10-KSB for such year.
Principles
of
Consolidation.
The interim
condensed consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Our subsidiaries operate in the TV over
the
Internet services industry both domestically and internationally providing
various services. All intercompany transactions have been eliminated
in consolidation.
Use
of
Estimates.
The preparation
of the interim condensed 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 condensed consolidated financial statements and the reported amounts
of
revenue and expenses during the reporting periods. Actual results could differ
from those estimates.
NOTE
2. SALE OF COMMON
STOCK
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.
NOTE
3. CONVERTIBLE NOTES
PAYABLE
On
March 2, 2007, the Company entered
into a Purchase Agreement (the “Purchase Agreement”) with a number of accredited
investors (the “Investors”) for the sale of its 12% Mandatorily Convertible
Notes (the “Notes”) and Warrants (the “Warrants”) for a total purchase price of
$7,110,000. The Notes, which mature on March 2, 2009, bear interest
at 12% per annum, payable at maturity. The Notes will mandatorily
convert at a 10% discount into the securities issued by the Company in any
subsequent private placement that results in gross proceeds to the Company
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% of 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 connection
with the August 8, 2007 financing, the full amount of the Notes were
automatically converted into an aggregate of 35,392,003 shares of common
stock
at a conversion price of $0.225 per share.
NOTE
4. 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.
NARROWSTEP
INC. AND
SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, 2007.
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 were 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 were 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 were exercisable until
January 7, 2008.
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 March 18, 2008.
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. All the restricted
stock granted to Mr. McCourt has fully vested by November 30, 2007, as
determined by the Company’s Compensation Committee.
Mr. McCourt elected to issue
back to the
Company 366,000 shares of restricted stock with an approximate value of $177,000
to cover the taxes due on the vested restricted stock, which the Company
paid
for on behalf of Mr. McCourt.
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
nine months ending, November 30, 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
nine months ending November 30, 2007, was $42,236 and $91,017 respectively.
The
total amount in receivables remained unpaid and was fully reserved for at
November 30, 2007.
NARROWSTEP
INC. AND
SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, $6,211 was unpaid as of November 30,
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.
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, $47,169 for the nine months ended November 30, 2007 and the balance
in
accounts receivable at November 30, 2007 is $4,889.
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.
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 otherwise transfer any shares of common stock owned by them,
subject to certain exceptions.
NOTE
5.
CONCENTRATIONS
The
largest four customers in the
aggregate accounted for $769,722, or 45% of our revenues for the three months
ended November 30, 2007 and approximately $1,656,458, or 36% of our revenues
for
the nine months ended November 30, 2007. The largest four customers in the
aggregate accounted for $525,367, or 32% of our revenues for the three months
ended November 30, 2006 and $1,220,661, or 28% of our revenues for the nine
months ended November 30, 2006. The accounts receivable balance for the largest
four customers was $547,163 as of November 30, 2007.
NOTE
6.
RECLASSIFICATION
The
presentation of the November 30,
2006 condensed consolidated statement of operations and comprehensive loss
has
been reclassified to conform to the November 30, 2007
presentation.
NOTE
7. SUBSEQUENT
EVENTS
On
December 18, 2007, Narrowstep Inc.
received the resignations of Iolo Jones and Dennis Edmonds as members of
the
Company’s Board of Directors. At the time of Mr. Edmonds resignation,
he also served on the Audit Committee and the Compensation and Corporate
Governance Committee of the Board.
On
December 18, 2007, the Compensation
and Corporate Governance Committee granted and vested 1,250,000 restricted
shares to Davd C. McCourt pursuant to Mr. McCourt’s employment agreement with
the company.
Item
2. Management’s Discussion and Analysis or Plan of
Operation
.
For
ease of reading, Narrowstep Inc. is
referred to as “Narrowstep,” “we” or the “Company” throughout this document and
the names of the particular subsidiaries providing the services generally
have
been omitted. Narrowstep is a holding company whose subsidiaries operate
in the
TV over the Internet services industry both domestically and internationally
providing distribution services and equipment. You should read this discussion
in conjunction with the interim condensed consolidated financial statements,
accompanying notes and management’s discussion and analysis of financial
condition and results of operations included in our Annual Report on Form
10-KSB
for the year ended February 28, 2007.
Consolidated
revenues
for the three
months ended November 30, 2007 increased by $65,126, or 4%, to $1,714,711
as
compared to $1,649,585 for the three months ended November 30, 2006.
Consolidated revenues for the nine months ended November 30, 2007 increased
by
$228,886, or 5%, to $4,591,361 as compared to $4,362,475 for the nine months
ended November 30, 2006 as follows:
Narrowcasting
and
other revenues
for the three
months ended November 30, 2007 increased by $571,571, or 49%, to $1,735,539
as
compared to $1,163,968 for the three months ended November 30,
2006. Narrowcasting revenues for the nine months ended November 30,
2007 increased by $1,252,193, or 41%, to $4,294,654 as compared to $3,042,461
for the nine months ended November 30, 2006. The increase in
quarter-to-date and year-to-date revenue resulted primarily from the addition
of
new customers while focusing on retaining its larger and more profitable
customers. Narrowcasting revenue for the nine months ended November
30, 2007 from U.S. customers increased by 29% compared to the nine months
ended
November 30, 2006 as the Company continues to focus and build that
market.
Production
services
revenues
for the three
months ended November 30, 2007 decreased by $506,445, or -104%, to ($20,828)
as
compared to $485,617 for the three months ended November 30,
2006. Production services revenues for the nine months ended November
30, 2007 decreased by $1,023,307, or -78%, to $296,707 as compared to $1,320,014
for the nine months ended November 30, 2006. Production service
revenue for the quarter end were negative due to billing adjustments that
were
not offset by any revenue for the quarter. Our strategic plan is to focus
our
resources on narrowcasting and to deemphasize production services as a revenue
source of our business. Consistent with this plan, revenues from this
area continue to decline as we continue to fulfill current obligations and
execute on our plan to exit this business area.
Geographical
distribution of
consolidated revenues:
|
(Unaudited)
|
Nine
Months
Ended
|
|
|
November
30,
2007
|
November
30,
2006
|
Percent
|
|
|
$
|
$
|
Change
|
|
United
States
|
671,467
|
519,562
|
29%
|
|
Europe,
Middle-East and Africa
|
3,789,082
|
3,622,617
|
5%
|
|
Asia
Pacific
|
109,908
|
201,108
|
-45%
|
|
Internet
Sales
|
20,904
|
19,188
|
9%
|
|
Total
|
4,591,361
|
4,362,475
|
5%
|
Consolidated
costs
and expenses
for the three
months ended November 30, 2007 increased by $1,410,843, or 45%, to $4,555,711
as
compared to $3,144,868 for the three months ended November 30,
2006. Consolidated expenses for the nine months ended November 30,
2007 increased by $6,420,329, or 76%, to $14,819,900 as compared to $8,399,571
for the nine months ended November 30, 2006 as follows:
Operating
expenses
includes the cost
of bandwidth, direct labor, sub-contracted labor, consulting fees and
depreciation. For the three months ended November 30, 2007 these
costs were $1,516,689, a 113%, increase over the $713,176 reported in the
three
months ended November 30, 2006. Operating expenses for the nine months ended
November 30, 2007 were $4,104,004, a 122% increase over the $1,846,479 reported
in the nine months ended November 30, 2006. The increase resulted
primarily from increased headcount to meet customer support needs in our
narrowcasting business and to complete the build out of our internal Content
Delivery Network (CDN) system. This increase was offset in part by a
reduction in production expenses. The Company has recently made
various cuts in its operating expenses as a result of streamlining the sales
support process. This reduction will be reflected gradually over the
next two quarters.
Selling,
general and
administrative expenses
include 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 November 30, 2007 these costs were $2,322,616, a 7% increase over the
$2,161,159 reported for the three months ended November 30,
2006. SG&A for the nine months ended November 30, 2007 costs were
$8,417,442, a 47% increase over the $5,742,409 reported for the nine months
ended November 30, 2006. The increase is primarily due to increased
headcount, primarily in direct 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. The Company has recently made various
headcount reductions in selling and administration personnel as a result
of
reorganizing and consolidating some positions. The head count reduction
contributed to an increase in severance expense during the
quarter. However, the salary reduction associated with the decrease
in headcount will be reflected gradually over the next two
quarters.
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 November 30, 2007 these costs were $716,406, a 165%
increase over the $270,533 reported for the three months ended November 30,
2006. R&D expenses for the nine months ended November 30, 2007
were $2,298,454, a 184% increase over the $810,683 reported for the nine
months
ended November 30, 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. We should also see further
reductions in the coming quarters as existing projects are
completed.
Liquidity
and Capital Resources
Net
cash used in
operating activities
was
$7,824,254 for the nine months ended November 30, 2007, compared to $3,467,675
for the nine months ended November 30, 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
$2,894,562 for the nine months ended November 30, 2007, compared to net cash
provided by investing activities of $1,633,072 for the nine months ended
November 30, 2006. This increase resulted primarily from additional capital
expenditures needed to build out our CDN network and an increase in software
development costs for the TelvOS system offset by the redemption of a short-term
investment in the prior year.
Net
cash provided by
financing activities
was
$16,795,843 for the nine months ended November 30, 2007, compared to $1,314,828
for the nine months ended November 30, 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 $6,558,875 in cash and cash
equivalents available at November 30, 2007 and available bank overdraft
facilities of $62,111.
We
have financed our operations from
inception primarily through private sales of our equity and convertible debt
securities. From inception through November 30, 2007, we issued an aggregate
of
124,944,487 shares of our common stock for gross proceeds of approximately
$31.8
million. In addition, we have issued warrants in connection with
certain of our fundraising activities and 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 November 30, 2007, had an accumulated deficit of approximately $30.5
million.
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 November
30, 2007 and February 28, 2007, the overdraft facilities consisted of $20,704
and $19,600, respectively, with Barclays Bank PLC and $41,407 and $39,000,
respectively, with National Westminster Bank PLC (NatWest). Neither facility
was
utilized on November 30, 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 November 30, 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 November 30, 2007). The Barclays overdraft facility was renewed
on February 17, 2007. The NatWest overdraft facility was
renewed
on October 10,
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 November 30, 2007, our current ratio was 4.4,
compared to 0.5 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.
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.
On
March 2, 2007, the Company entered
into a Purchase Agreement (the “Purchase Agreement”) with a number of accredited
investors (the “Investors”) for the sale of its 12% Mandatorily Convertible
Notes (the “Notes”) and Warrants (the “Warrants”) for a total purchase price of
$7,110,000. The Notes, which mature on March 2, 2009, bear interest
at 12% per annum, payable at maturity. The Notes will mandatorily
convert at a 10% discount into the securities issued by the Company in any
subsequent private placement that results in gross proceeds to the Company
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 connection
with the August 8, 2007 financing, the full amount of the Notes was
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 the August
financing we believe that we have sufficient working capital to fund our
operations for the next twelve months. Management will continue to
pursue various financing options in order to fully fund our longer term cash
requirements. We also are making efforts to improve our financial
position by reducing ongoing operating expenses and continuing to focus on
increasing sales.
As
of November 30, 2007, our principal
capital commitments consisted of obligations outstanding under capital leases
as
shown in the table below (unaudited):
|
|
November
30, 2007
|
|
|
$
|
|
Amounts
payable:
|
|
|
Within
12 months
|
188,207
|
|
Between
one and two years
|
148,814
|
|
Between
two and three years
|
52,471
|
|
Total
future commitment
|
389,492
|
|
Less:
finance charges allocated to future periods
|
(
40,926)
|
|
Present
Value
|
348,566
|
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.
Item
3.
Controls and Procedures
As
of the end of the period covered by
this report, the Company's management, with the participation of the Company's
chief executive officer and chief financial officer, evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined
in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")). Based on such evaluation, our chief executive officer and
chief financial officer have concluded that our disclosure controls and
procedures were effective as of November 30, 2007 to ensure that the information
required to be disclosed by us in the reports that we file or submit under
the
Exchange Act is recorded, processed, summarized and reported, within the
time
periods specified in the Commission's rules and forms.
There
have not been any changes in the
Company's internal control over financial reporting (as such term is defined
in
Rule 13a-15(f) under the Exchange Act) during the last fiscal quarter to
which
this report relates that have materially affected, or are reasonably likely
to
materially affect, the Company's internal control over financial
reporting.
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
a
material weakness and significant deficiencies. The material weakness was
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
significant deficiencies 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.
In
response to the deficiencies in our
internal controls identified by Rothstein, Kass & Company, P.C. we restated
our results for the fiscal third quarter ended November 30, 2006 and for
the
fiscal year ended February 28, 2007. We have taken appropriate steps
to correct these deficiencies in our internal controls identified by Rothstein,
Kass & Company, P.C.
We
will be documenting and testing our
internal control procedures in order to satisfy the requirements of Section
404
of the Sarbanes-Oxley Act of 2002. Pursuant to Section 404, beginning with
our
fiscal year ending February 29, 2008, we will be required to include in our
annual report on Form 10-KSB a management assessment of the effectiveness
of our
internal controls over financial reporting. For the fiscal year
ending February 28, 2010, a report by our independent registered public
accounting firm will be included opining on the operating effectiveness of
our
internal controls over financial reporting. We are exposed to increased costs
associated with complying with these requirements, and will be spending
management time and resources to document and test our internal controls
in
anticipation of Section 404 reporting requirements. In addition, we cannot
assure you that we will not in the future identify material weaknesses or
significant deficiencies in our internal controls over financial reporting
that
we have not discovered to date.
If
we are not able to complete testing
of all of our internal controls, or if during the course of our testing we
identify deficiencies that we are not able to remediate in time, we and/or
our
independent registered public accounting firm may not be able to complete
our/its respective assessments before the deadline for compliance with the
requirements of Section 404 of the Sarbanes-Oxley Act. If we fail to timely
complete our evaluation and testing in order to allow for the assessment
by our
management, or if our independent registered public accounting firm cannot
timely attest to the effectiveness of our internal controls, we could be
subject
to regulatory scrutiny and a loss of public confidence in our internal controls,
which could harm our business and our stock price. Further, if our independent
registered public accounting firm is not satisfied with our internal controls
over financial reporting or with the level at which they are documented,
designed, operated or reviewed, it may decline to opine on the operating
effectiveness of our internal controls over financial reporting or may issue
a
qualified report identifying significant deficiencies and / or material weakness
in our internal controls. This could result in significant additional
expenditures responding to the Section 404 internal control audit, a diversion
of management attention and a decline in our stock price.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report contains forward-looking
statements including, without limitation, in the discussion under the caption
"Management's Discussion and Analysis of Financial Condition and Results
of
Operations." Any and all statements contained in this report 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 report 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
obtain adequate financing, insufficient cash flows and resulting illiquidity,
our dependence upon significant customers, our 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 report appears under the caption "Risk Factors" and elsewhere
in the most recent Registration Statement on Form SB-2 and Form 10-KSB that
we
have filed with the Securities and Exchange Commission.
Because
of the risks and uncertainties
related to these factors and the forward-looking statements, readers 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 report 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 report and the
following discussion and analysis in conjunction with the financial statements
and the related notes contained in this report and the other documents we
file
from time to time with the Securities and Exchange
Commission.
PART
II - OTHER
INFORMATION
Item
4. Submission of Matters to a Vote of Security
Holders.
Annual
Meeting of Stockholders.
(a)
The annual meeting of the stockholders of Narrowstep Inc. was held on September
28, 2007, in Princeton, New Jersey. Stockholders representing 100,517,139,
or
80%, of the common stock outstanding as of the August 10, 2007 record date
were
present in person or by proxy.
(b)
Election of Directors:
VOTES
|
Nominee
|
|
For
|
|
%
|
|
Withheld*
|
|
%
|
|
Rajan
Chopra
|
|
95,597,629
|
|
95.1
|
|
4,919,510
|
|
4.9
|
|
David
McCourt
|
|
95,426,769
|
|
94.9
|
|
5,090,370
|
|
5.4
|
|
Iolo
Jones
|
|
90,833,045
|
|
90.4
|
|
9,684,094
|
|
9.6
|
*Includes
shares represented at the meeting by proxy where the shareowner withheld
authority to vote for the indicated director or directors, as well as shares
present at the meeting that were not voted for such director or
directors.
(c)
In addition to the Directors elected above, Dennis Edmonds, Roger Werner
and
Jack Whyte continued as directors after the annual meeting. Messrs. Chopra,
Edmonds and Jones have since resigned as directors of the Company.
(d)
Holders of common stock voted at this meeting on the following matter, which
was
set forth in our proxy statement.
|
|
For
|
%
1
For
|
Against
|
%
1
Against
|
Abstain
|
%
1
Abstain
|
|
Amend
Certificate of Incorporation
2
to
clarify certain provisions concerning the
election
of directors.
|
95,590,119
|
76.3
|
3,661,181
|
2.9
|
1,265,839
|
1.0
|
1
Percentages are based on the total common stock voted.
2
Percentages are based on the total common stock outstanding. Approval of
this
proposal required a seventy five percent majority of the outstanding shares
of
Narrowstep common stock.
Item
6.
Exhibits
|
|
EXHIBIT
31.1
|
CERTIFICATION
FILED PURSUANT TO
EXCHANGE ACT RULES 13a-14 AND 15d-14 AS ADOPTED PURSUANT TO SECTION
302 OF
THE SARBANES-OXLEY ACT OF 2002
|
|
|
|
|
|
|
EXHIBIT
31.2
|
CERTIFICATION
FILED PURSUANT TO
EXCHANGE ACT RULES 13a-14 AND 15d-14 AS ADOPTED PURSUANT TO SECTION
302 OF
THE SARBANES-OXLEY ACT OF 2002
|
|
|
|
|
|
|
EXHIBIT
32.1
|
CERTIFICATION
OF CHIEF EXECUTIVE
OFFICER FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
|
|
|
|
|
|
|
EXHIBIT
32.2
|
CERTIFICATION
OF CHIEF FINANCIAL
OFFICER FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
|