We record live events, such as concerts and conferences, and make the recorded content available for delivery to attendees generally within fifteen minutes after the conclusion of the live event. The recorded content is made available for pre-sale and sale at the venue and on our website, www.disclive.com. At this time, the recorded content is primarily delivered on compact disc.
We believe that we are one of the pioneers of on-site delivery of concert recordings. We have recorded live events for Cooder Graw, dada, Thirty Seconds to Mars, the Toadies, Flyleaf, the Pixies, The Fixx and Vertical Horizon, among others. During 2006, we recorded thirteen live events, two of which were music festivals. We sold, or delivered under contract, approximately 2,000 recordings of those events and prior events during 2006 at an average price of $25 per recording.
Our History
Immediatek was incorporated in August 1998, as Barrington Laboratories, Inc. In December 2000, Barrington Laboratories, Inc. changed its name to ModernGroove Entertainment, Inc. In late 2002, ModernGroove Entertainment, Inc. combined by “reverse merger” with Immediatek, Inc., a Texas corporation. As a result, the name of the Company was changed from ModernGroove Entertainment, Inc. to Immediatek, Inc and the prior business of ModernGroove Entertainment, Inc. was discontinued.
Immediatek provided technology consulting and outsourcing services until it acquired the assets of LCD Interactive, Inc. in the first calendar quarter of 2003. Utilizing the assets acquired, primarily the proprietary compact disc burning software, Immediatek changed its business efforts to focus on secure, digital media delivery solutions.
DiscLive was conceptualized by a couple of individuals while attending college. In early 2003, they began purchasing the necessary equipment and perfecting the manufacturing process. DiscLive became a reality in the spring of 2003 when it recorded three shows in New York City. Commercial implementation then ensued with the recording of additional artists. As acceptance for the product grew, DiscLive developed a faster and larger mobile manufacturing capacity. In March 2004, DiscLive entered into a new era, when it recorded its first artist that was represented by a major recording label. This also was its first entry into major arena venues.
In April 2004, Immediatek acquired DiscLive as a wholly-owned subsidiary. To complement its operations, DiscLive acquired assets from Moving Records, LLC in February 2005. These assets consisted of mobile recording and manufacturing equipment, including a mobile recording truck.
On June 8, 2006, a change in control of Immediatek occurred when it issued and sold shares of its Series A Convertible Preferred Stock to Radical. See “Introduction” and “—Developments —Developments During 2006.”
Our Business
Our services and products permit attendees at live events to walk away with a live recording of the event shortly following the live event and others to purchase the live event if they did not attend. With respect to the live music business, we generate a substantial portion of our revenue from the sale of our products and build our service costs into the price of the product. Accordingly, we pay all expenses associated with the product and pay the client a flat-fee per product sold. In the conference business, our expense and revenue model can be structured in a number of different ways; however, we generally prefer to include the costs of the product in the conference attendance fee to minimize sales risk. We believe that our services and products enable our clients to capture an additional revenue
source from the live event and provide attendees with a memorabilia of the event or valuable reference tool. Therefore, we endeavor to devise a structure in each case that benefits both the client and us.
Our Services
We offer our services to all types of live events, including, among others, concerts, conferences, conventions, lectures and speakers. Our services can be tailored to individual client needs and include:
Recording . If we are unfamiliar with the venue, prior to the day of the live event, we perform a walk through with our sound engineers to determine the specific recording needs. On or prior to the day of the live event, we arrive at the venue with our equipment, set it up and test recording quality. For musical performances and other live events that require the highest level of sound quality, we generally use a sound board feed or a multi-track split, mixed with ambient microphones, to create a professionally mastered recording. For these types of recordings, we provide a qualified sound engineer, who we require to be familiar with the performer in advance and who mixes and masters the recording. If the client so desires, the recordings can be made and mixed using ProTools ® , a recording software used by recording studios.
For live events where studio quality sound is not feasible or necessary, such as conferences, we provide all the necessary recording equipment, ranging from microphones to mixing boards. While not studio quality, we make high quality sound recordings of these events. We provide the necessary personnel to set up the equipment and record the live event.
Licensing . We obtain, or assist in obtaining, the appropriate mechanical or synchronization licenses from third-party publishers of copyrighted works of authorship. We track product inventory, product sales and account for the royalties payable under those licenses. See “—Back-Office Management.”
Product Procurement . We develop, together with the client, the design of the media artwork and the custom packaging prior to the live event, if custom packaging is requested. Generally, we outsource complex artwork design to one of our vendors. Upon completion of the artwork, we procure from our vendors the pre-printed media and custom packaging. We also make available our branded, pre-printed media and packaging as a cost savings measure in the event that custom media and packaging is not necessary or requested. We generally take shipment of, stock and manage these materials. See “—Back-Office Management.”
Manufacturing . At the venue, we burn the recording made to the selected media and package it for sale. We have the capability to deliver up to approximately 800 compact discs within 30 minutes, with the first 200 compact discs coming off the burners within ten minutes after the conclusion of the live event. Our duplication process comes in two forms, either manual or robotic. The system brought to the venue depends upon the number of compact discs to be delivered at the venue. Each burner-drive self-checks every compact disc for errors prior to dispensing them; however , we do not guaranty that errors will not occur. We believe that our proprietary file transfer system makes us one of the fastest, most reliable providers of live event recordings with on-site delivery. For product that is shipped, we burn and package as ordered. We maintain a catalog of live events for consumers to order on our website. The ability to order certain products on our website may, however, depend on the quantity that we are allowed under contract to manufacture, as certain products are limited editions. We generally provide marketing support for the product prior to the live event and for a short period, usually three to four weeks, following the live event.
Back-Office Management . We account for, track and manage all product sales, product inventory, sales tax remittance, secure credit card transactions and mechanical, synchronization and other royalties. We believe that this service adds the most value to our clients.
Our Products
Our products are tailored to meet the client’s needs and desires. The physical product can vary and include, among others, single disc, multiple disc sets, compilation discs with various artists and downloadable media. As previously mentioned, our products are available with custom artwork and packaging. Our products also can be limited editions, whereby we only manufacture limited quantities and the product contains a production number.
Developments
Developments During 2006
Issuance and Sale of Series A Convertible Preferred Stock and Change in Control . See “Introduction — Change in Control” above.
Reverse Stock Split . See “Introduction — Reverse Stock Split” above.
New Basis of Accounting . See “Introduction — New Basis of Accounting” above.
Resignation and Appointment of Officers and Directors . Effective July 12, 2006, Zach Bair resigned from all positions held with us. On the same day, the boards of directors of Immediatek and DiscLive appointed Darin Divinia to fill the vacancy created by the resignations of Mr. Bair from the respective boards of directors. Mr. Divinia is serving for the unexpired terms. For so long as any shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement remain outstanding, the holders of a majority-in-interest of the shares of Series A Convertible Preferred Stock originally issued under the Purchase Agreement then outstanding have the right to designate all the persons to serve as directors on the board of directors of Immediatek and its subsidiaries. In connection with that right, Radical, as the sole stockholder of the Series A Convertible Preferred Stock, nominated Mr. Divinia to be appointed, and the Immediatek and DiscLive boards of directors appointed Mr. Divinia, to the respective board of directors. Mr. Divinia was then, and continues to be, employed by Radical Incubation LP, an affiliate of Radical.
Additionally, on July 12, 2006, the boards of directors of Immediatek and DiscLive appointed Travis Hill as Chief Executive Officer of Immediatek and DiscLive. Prior to this appointment, Mr. Hill served as Vice President — Artist Relations of DiscLive. Further, the boards of directors of Immediatek and DiscLive appointed Paul Marin as President and Secretary. Mr. Marin continues to serve as a director of Immediatek and DiscLive. Prior to being appointed as President and Secretary of Immediatek and DiscLive, Mr. Marin served as Vice President, Chief Operating Officer and Secretary of Immediatek.
Dismissal and Appointment of Independent Registered Public Accounting Firms . On September 12, 2006, we dismissed Beckstead and Watts, LLP as our independent registered public accounting firm. On September 13, 2006, we engaged KBA Group LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2006 and the interim periods immediately following their engagement.
Stock Transaction and Release . On October 13, 2006, Radical, Mr. Bair and we entered into a Stock Purchase Agreement, or the Stock Purchase Agreement, whereby Radical purchased 110,618 shares of Immediatek common stock owned by Mr. Bair for an aggregate purchase price of $221,236, or $2.00 per share of common stock. Mr. Bair previously issued a warrant to purchase 1,336 shares of Immediatek common stock owned by him to a third-party, which expired without exercise on February 19, 2007. Pursuant to the Stock Purchase Agreement, Radical has the right to purchase these shares from Mr. Bair at a purchase price of $2.00 per share. The last reported transaction in Immediatek common stock on October 13, 2006, by the Over-the-Counter Bulletin Board, or OTC Bulletin Board, was $2.00 per share. As of March 2, 2007, Radical beneficially owned 96% of the outstanding securities of Immediatek entitled to vote on matters required or permitted to be submitted to its stockholders. Further, pursuant to the Stock Purchase Agreement, Radical and we released Mr. Bair, and Mr. Bair released Radical and us, from, among other things, any and all actions, liabilities, obligations and damages arising prior to October 13, 2006; provided, however, Mr. Bair was not released in any manner from any stockholder derivative litigation and any obligations under that certain Agreement of Waiver, dated as of May 1, 2006, by and between Mr. Bair and us.
Assets Held for Sale and Sold . Since June 8, 2006, we have identified non-essential assets with a net book value of $47,490 to be held for sale. We have sold a portion of these assets and will continue to dispose of the remainder. We have used the proceeds from the sale of certain of those assets to purchase $3,610 of new equipment to utilize in operations. As of December 31, 2006, we have disposed of $40,762 of our assets identified as held for sale.
Recent Developments
On February 21, 2007, we entered into a Sublease with HDNet LLC, an affiliate of Radical, whereby we sublease from HDNet LLC approximately 600 square feet of office space. The rent is $900 per month, utilities included. This Sublease commenced on March 1, 2007 and expires February 29, 2008. HDNet LLC leases this office space from Radical Computing, Inc., another affiliate of Radical.
On February 23, 2007, but effective as of January 1, 2007, we entered into a Management Services Agreement with Radical Incubation LP, an affiliate of Radical. Pursuant to this Management Services Agreement, personnel of Radical Incubation LP will provide certain management services to us, including, among others, legal, financial, marketing and technology. These services will be provided to us at a cost of $3,500 per month; however, we will not be required to pay these fees and, accordingly, will account for these costs of services as a deemed contribution to Immediatek.
Rights of Preferred Stockholders and Restrictions on Our Business
The terms of our Series A Convertible Preferred Stock, together with the Investor’s Rights Agreement that we entered into with Radical, provide certain rights to the holders of the Series A Convertible Preferred Stock and certain restrictions on how we may operate our business. Below is summary of the material terms of the Series A Convertible Preferred Stock and certain restrictions imposed upon us.
Dividends . The holders of the Series A Convertible Preferred Stock are not entitled to any preferential dividends. Holders of the Series A Convertible Preferred Stock, however, are entitled to participate on an as-converted basis in any cash dividends declared and paid on shares of our common stock.
If our legally available funds and assets are insufficient to pay the holders of shares of the Series A Convertible Preferred Stock the full amount to which they are entitled, the holders of the shares of Series A Convertible Preferred Stock and the holders of our capital stock that are on a parity with the Series A Convertible Preferred Stock will share ratably in any distribution of our remaining legally available funds and assets.
Ranking . The Series A Convertible Preferred Stock, with respect to rights on liquidation, winding up, corporate reorganization and dissolution, rank senior to the shares of our common stock and other junior stock.
Conversion . The shares of Series A Convertible Preferred Stock are convertible into that aggregate number of full shares of our common stock representing 95% of the total number of shares of our common stock outstanding after giving effect to the conversion. Accordingly, in the event that we should issue additional shares of common stock before conversion of the Series A Convertible Preferred Stock, the conversion price per share is subject to
downward adjustments in order to cause the holders of the Series A Convertible Preferred Stock, collectively, to own 95% of our outstanding shares of common stock upon conversion of all Series A Convertible Preferred Stock. The conversion price of a share of Series A Convertible Preferred Stock into shares of our common stock also is subject to adjustment, from time to time, for, among other reasons, stock splits, combinations, dividends and distributions.
Voting . The holders of the shares of Series A Convertible Preferred Stock are entitled to vote on all matters required or permitted to be voted upon by our stockholders. Each holder of a share of Series A Convertible Preferred Stock is entitled to the number of votes equal to the largest number of full shares of our common stock into which all shares of Series A Convertible Preferred Stock held by that holder could be converted. Except as required by law on matters requiring class voting, the holders of the Series A Convertible Preferred Stock and our common stock vote together as a single class.
Board of Directors . For so long as any shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement remain outstanding, the holders of a majority-in-interest of the shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement then outstanding have the right to designate all the persons to serve as directors on our board of directors and our subsidiaries. If the holders of the shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement then outstanding choose not to designate any directors, the holders of a majority-in-interest of the shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement then outstanding may appoint a designee to serve as an observer at all meetings of our or our subsidiaries’ board of directors and their respective committees.
Protective Provisions . Unless the directors designated by the holders of the shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement control our board of directors with respect to all actions, for so long as any shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement remain outstanding, except where the vote or written consent of the holders of a greater number of our shares is required by law or by our articles of incorporation, and in addition to any other vote required by law or by our articles of incorporation, we cannot, and we shall cause our subsidiaries not to, as applicable, without the prior vote or written consent of the holders of at least 75% of the shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement then outstanding:
(a) amend our articles or bylaws in any manner that would alter or change any of the rights, preferences, privileges or restrictions of the Series A Convertible Preferred Stock or the shares issuable upon conversion of the Series A Convertible Preferred Stock;
(b) reclassify any outstanding securities into securities having rights, preferences or privileges senior to, or on a parity with, the Series A Convertible Preferred Stock;
(c) authorize or issue any additional shares of capital stock (other than to holders of the Series A Convertible Preferred Stock);
(d) merge or consolidate with or into any corporation or other person;
(e) sell all or substantially all our respective assets in a single transaction or series of related transactions;
(f) license all or substantially all of our respective intellectual property in a single transaction or series of related transactions;
(g) liquidate or dissolve;
(h) alter any rights of the holders of the Series A Convertible Preferred Stock or change the size of the board of directors;
(i) declare or pay any dividends (other than dividends payable to us or our subsidiaries) on, or declare or make any other distribution, directly or indirectly, on account of, any shares of our common stock now or hereafter outstanding;
(j) repurchase any outstanding shares of capital stock;
(k) approve or modify by ten percent or more the aggregate amount of any annual or other operating or capital budget, or approve or modify by 50% or more any single line item of any such operating or capital budget;
(l) increase the salary of any officer or employee or pay any bonus to any officer, director or employee not contemplated in a budget or bonus plan approved by directors designated by the holders of the shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement then outstanding;
(m) retain, terminate or enter into any salary or employment negotiations or employment agreement with any employee or any future employee;
(n) incur indebtedness (other than trade payables) or enter into contracts or leases that require payments in excess of $5,000 in the aggregate;
(o) make or incur any single capital expenditure;
(p) award stock options, stock appreciation rights or similar employee benefits or determine vesting schedules, exercise prices or similar features;
(q) make any material change in the nature of our business or enter into any new line of business, joint venture or similar arrangement;
(r) pledge our assets or guarantee the obligations of any other individual or entity;
(s) recommend approval of any new equity incentive plan;
(t) form or acquire any subsidiary, joint venture or similar business entity; or
(u) directly or indirectly enter into, or permit to exist, any material transaction with any affiliate of us, any director or officer or any affiliate of a director or officer, or transfer, pay, loan or otherwise obligate us to give cash, services, assets or other items of value to affiliates, officers or directors or any affiliate of a officer or director or commit to do any of the preceding after June 8, 2006, except for employee compensation or for reimbursement of ordinary business expenses.
Registration and Other Rights . The Investor’s Rights Agreement grants Radical certain demand, piggy-back and shelf registration rights and sets forth the procedures pursuant to which those rights may be exercised and effected. The Investor’s Rights Agreement also grants Radical rights of first refusal to purchase any or all of the securities of Immediatek that Mr. Marin proposes to sell or otherwise transfer on the same terms and conditions as the proposed sale or transfer by him. In addition, the Investor’s Rights Agreement provides that Mr. Marin is prohibited from selling or otherwise transferring any securities of Immediatek owned by him for a period of three years. After three years, he can sell or otherwise transfer only half of the securities owned by him. If, however, Mr. Marin is terminated for a reason other than cause, upon his termination he can sell a total of ten percent of the securities owned by him in any given month.
Laws and Governmental Regulation
Copyright Laws . Our products are subject to copyright laws. We may become the subject of infringement claims or legal proceedings by third parties with respect to our current or future products if we do not obtain appropriate licenses. Any such claims could be time-consuming, divert management from our daily operations, result in litigation or cause product shipment delays. Moreover, an adverse outcome in litigation or a similar adversarial proceeding could subject us to significant liabilities to third parties or require us to cease the marketing or use of certain products, any of which could have a material adverse effect on our business and operating results.
E-Commerce and the Internet . The e-commerce environment is rapidly changing and federal and state regulation relating to the Internet and e-commerce is evolving. Currently, there are few laws or regulations uniquely applicable to the access of the Internet or e-commerce on the Internet. Laws and regulations may be enacted with respect to the Internet, covering issues such as user privacy, pricing, taxation, content, copyrights, distribution, antitrust and quality of products and services. Additionally, the growth of e-commerce may trigger the development of stricter consumer protection laws. The adoption of such laws or regulations could reduce the rate of growth of the Internet, which could potentially decrease the usage of our website or could otherwise have a material adverse effect on our business. In addition, applicability to the Internet of existing laws governing issues such as taxation, libel, obscenity and personal privacy is uncertain. The vast majority of these laws were adopted prior to the advent of the
Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies.
Employees
We currently have two full-time employees and two part-time employees. We are not a party to any collective bargaining agreement with a labor union, and we consider relations with our employees to be good.
Available Information
We currently are subject to the reporting requirements of the Securities Exchange Act of 1934 and, therefore, we file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, or the SEC. You may read and copy any document filed by us with the SEC at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the operation of the public reference room. Our SEC filings also are available to the public at the SEC’s web site at http://www.sec.gov.
Our filings with the SEC, as well as our Code of Business Conduct and Ethics, are available free of charge by emailing us with your address and the titles of the materials you are requesting at publicfilingsinfo@immediatek.com or calling us at (214) 744-8801. We will provide you copies of the requested materials as soon as reasonably practicable after we electronically file them with the SEC.
We believe that we are one of the pioneers of on-site delivery of concert recordings. We have recorded live events for Cooder Graw, dada, Thirty Seconds to Mars, the Toadies, Flyleaf, the Pixies, The Fixx and Vertical Horizon, among others. During 2006, we recorded thirteen live events, two of which were music festivals. We sold, or delivered under contract, approximately 2,000 recordings of those events and prior events during 2006 at an average price of $25 per recording.
Our History
Immediatek was incorporated in August 1998, as Barrington Laboratories, Inc. In December 2000, Barrington Laboratories, Inc. changed its name to ModernGroove Entertainment, Inc. In late 2002, ModernGroove Entertainment, Inc. combined by “reverse merger” with Immediatek, Inc., a Texas corporation. As a result, the name of the Company was changed from ModernGroove Entertainment, Inc. to Immediatek, Inc and the prior business of ModernGroove Entertainment, Inc. was discontinued.
Immediatek provided technology consulting and outsourcing services until it acquired the assets of LCD Interactive, Inc. in the first calendar quarter of 2003. Utilizing the assets acquired, primarily the proprietary compact disc burning software, Immediatek changed its business efforts to focus on secure, digital media delivery solutions.
DiscLive was conceptualized by a couple of individuals while attending college. In early 2003, they began purchasing the necessary equipment and perfecting the manufacturing process. DiscLive became a reality in the spring of 2003 when it recorded three shows in New York City. Commercial implementation then ensued with the recording of additional artists. As acceptance for the product grew, DiscLive developed a faster and larger mobile manufacturing capacity. In March 2004, DiscLive entered into a new era, when it recorded its first artist that was represented by a major recording label. This also was its first entry into major arena venues.
In April 2004, Immediatek acquired DiscLive as a wholly-owned subsidiary. To complement its operations, DiscLive acquired assets from Moving Records, LLC in February 2005. These assets consisted of mobile recording and manufacturing equipment, including a mobile recording truck.
On June 8, 2006, a change in control of Immediatek occurred when it issued and sold shares of its Series A Convertible Preferred Stock to Radical. See “Introduction” and “—Developments —Developments During 2006.”
Our Business
Our services and products permit attendees at live events to walk away with a live recording of the event shortly following the live event and others to purchase the live event if they did not attend. With respect to the live music business, we generate a substantial portion of our revenue from the sale of our products and build our service costs into the price of the product. Accordingly, we pay all expenses associated with the product and pay the client a flat-fee per product sold. In the conference business, our expense and revenue model can be structured in a number of different ways; however, we generally prefer to include the costs of the product in the conference attendance fee to minimize sales risk. We believe that our services and products enable our clients to capture an additional revenue
source from the live event and provide attendees with a memorabilia of the event or valuable reference tool. Therefore, we endeavor to devise a structure in each case that benefits both the client and us.
Our Services
We offer our services to all types of live events, including, among others, concerts, conferences, conventions, lectures and speakers. Our services can be tailored to individual client needs and include:
Recording . If we are unfamiliar with the venue, prior to the day of the live event, we perform a walk through with our sound engineers to determine the specific recording needs. On or prior to the day of the live event, we arrive at the venue with our equipment, set it up and test recording quality. For musical performances and other live events that require the highest level of sound quality, we generally use a sound board feed or a multi-track split, mixed with ambient microphones, to create a professionally mastered recording. For these types of recordings, we provide a qualified sound engineer, who we require to be familiar with the performer in advance and who mixes and masters the recording. If the client so desires, the recordings can be made and mixed using ProTools ® , a recording software used by recording studios.
For live events where studio quality sound is not feasible or necessary, such as conferences, we provide all the necessary recording equipment, ranging from microphones to mixing boards. While not studio quality, we make high quality sound recordings of these events. We provide the necessary personnel to set up the equipment and record the live event.
Licensing . We obtain, or assist in obtaining, the appropriate mechanical or synchronization licenses from third-party publishers of copyrighted works of authorship. We track product inventory, product sales and account for the royalties payable under those licenses. See “—Back-Office Management.”
Product Procurement . We develop, together with the client, the design of the media artwork and the custom packaging prior to the live event, if custom packaging is requested. Generally, we outsource complex artwork design to one of our vendors. Upon completion of the artwork, we procure from our vendors the pre-printed media and custom packaging. We also make available our branded, pre-printed media and packaging as a cost savings measure in the event that custom media and packaging is not necessary or requested. We generally take shipment of, stock and manage these materials. See “—Back-Office Management.”
Manufacturing . At the venue, we burn the recording made to the selected media and package it for sale. We have the capability to deliver up to approximately 800 compact discs within 30 minutes, with the first 200 compact discs coming off the burners within ten minutes after the conclusion of the live event. Our duplication process comes in two forms, either manual or robotic. The system brought to the venue depends upon the number of compact discs to be delivered at the venue. Each burner-drive self-checks every compact disc for errors prior to dispensing them; however , we do not guaranty that errors will not occur. We believe that our proprietary file transfer system makes us one of the fastest, most reliable providers of live event recordings with on-site delivery. For product that is shipped, we burn and package as ordered. We maintain a catalog of live events for consumers to order on our website. The ability to order certain products on our website may, however, depend on the quantity that we are allowed under contract to manufacture, as certain products are limited editions. We generally provide marketing support for the product prior to the live event and for a short period, usually three to four weeks, following the live event.
Back-Office Management . We account for, track and manage all product sales, product inventory, sales tax remittance, secure credit card transactions and mechanical, synchronization and other royalties. We believe that this service adds the most value to our clients.
Our Products
Our products are tailored to meet the client’s needs and desires. The physical product can vary and include, among others, single disc, multiple disc sets, compilation discs with various artists and downloadable media. As previously mentioned, our products are available with custom artwork and packaging. Our products also can be limited editions, whereby we only manufacture limited quantities and the product contains a production number.
Developments
Developments During 2006
Issuance and Sale of Series A Convertible Preferred Stock and Change in Control . See “Introduction — Change in Control” above.
Reverse Stock Split . See “Introduction — Reverse Stock Split” above.
New Basis of Accounting . See “Introduction — New Basis of Accounting” above.
Resignation and Appointment of Officers and Directors . Effective July 12, 2006, Zach Bair resigned from all positions held with us. On the same day, the boards of directors of Immediatek and DiscLive appointed Darin Divinia to fill the vacancy created by the resignations of Mr. Bair from the respective boards of directors. Mr. Divinia is serving for the unexpired terms. For so long as any shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement remain outstanding, the holders of a majority-in-interest of the shares of Series A Convertible Preferred Stock originally issued under the Purchase Agreement then outstanding have the right to designate all the persons to serve as directors on the board of directors of Immediatek and its subsidiaries. In connection with that right, Radical, as the sole stockholder of the Series A Convertible Preferred Stock, nominated Mr. Divinia to be appointed, and the Immediatek and DiscLive boards of directors appointed Mr. Divinia, to the respective board of directors. Mr. Divinia was then, and continues to be, employed by Radical Incubation LP, an affiliate of Radical.
Additionally, on July 12, 2006, the boards of directors of Immediatek and DiscLive appointed Travis Hill as Chief Executive Officer of Immediatek and DiscLive. Prior to this appointment, Mr. Hill served as Vice President — Artist Relations of DiscLive. Further, the boards of directors of Immediatek and DiscLive appointed Paul Marin as President and Secretary. Mr. Marin continues to serve as a director of Immediatek and DiscLive. Prior to being appointed as President and Secretary of Immediatek and DiscLive, Mr. Marin served as Vice President, Chief Operating Officer and Secretary of Immediatek.
Dismissal and Appointment of Independent Registered Public Accounting Firms . On September 12, 2006, we dismissed Beckstead and Watts, LLP as our independent registered public accounting firm. On September 13, 2006, we engaged KBA Group LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2006 and the interim periods immediately following their engagement.
Stock Transaction and Release . On October 13, 2006, Radical, Mr. Bair and we entered into a Stock Purchase Agreement, or the Stock Purchase Agreement, whereby Radical purchased 110,618 shares of Immediatek common stock owned by Mr. Bair for an aggregate purchase price of $221,236, or $2.00 per share of common stock. Mr. Bair previously issued a warrant to purchase 1,336 shares of Immediatek common stock owned by him to a third-party, which expired without exercise on February 19, 2007. Pursuant to the Stock Purchase Agreement, Radical has the right to purchase these shares from Mr. Bair at a purchase price of $2.00 per share. The last reported transaction in Immediatek common stock on October 13, 2006, by the Over-the-Counter Bulletin Board, or OTC Bulletin Board, was $2.00 per share. As of March 2, 2007, Radical beneficially owned 96% of the outstanding securities of Immediatek entitled to vote on matters required or permitted to be submitted to its stockholders. Further, pursuant to the Stock Purchase Agreement, Radical and we released Mr. Bair, and Mr. Bair released Radical and us, from, among other things, any and all actions, liabilities, obligations and damages arising prior to October 13, 2006; provided, however, Mr. Bair was not released in any manner from any stockholder derivative litigation and any obligations under that certain Agreement of Waiver, dated as of May 1, 2006, by and between Mr. Bair and us.
Assets Held for Sale and Sold . Since June 8, 2006, we have identified non-essential assets with a net book value of $47,490 to be held for sale. We have sold a portion of these assets and will continue to dispose of the remainder. We have used the proceeds from the sale of certain of those assets to purchase $3,610 of new equipment to utilize in operations. As of December 31, 2006, we have disposed of $40,762 of our assets identified as held for sale.
Recent Developments
On February 21, 2007, we entered into a Sublease with HDNet LLC, an affiliate of Radical, whereby we sublease from HDNet LLC approximately 600 square feet of office space. The rent is $900 per month, utilities included. This Sublease commenced on March 1, 2007 and expires February 29, 2008. HDNet LLC leases this office space from Radical Computing, Inc., another affiliate of Radical.
On February 23, 2007, but effective as of January 1, 2007, we entered into a Management Services Agreement with Radical Incubation LP, an affiliate of Radical. Pursuant to this Management Services Agreement, personnel of Radical Incubation LP will provide certain management services to us, including, among others, legal, financial, marketing and technology. These services will be provided to us at a cost of $3,500 per month; however, we will not be required to pay these fees and, accordingly, will account for these costs of services as a deemed contribution to Immediatek.
Rights of Preferred Stockholders and Restrictions on Our Business
The terms of our Series A Convertible Preferred Stock, together with the Investor’s Rights Agreement that we entered into with Radical, provide certain rights to the holders of the Series A Convertible Preferred Stock and certain restrictions on how we may operate our business. Below is summary of the material terms of the Series A Convertible Preferred Stock and certain restrictions imposed upon us.
Dividends . The holders of the Series A Convertible Preferred Stock are not entitled to any preferential dividends. Holders of the Series A Convertible Preferred Stock, however, are entitled to participate on an as-converted basis in any cash dividends declared and paid on shares of our common stock.
If our legally available funds and assets are insufficient to pay the holders of shares of the Series A Convertible Preferred Stock the full amount to which they are entitled, the holders of the shares of Series A Convertible Preferred Stock and the holders of our capital stock that are on a parity with the Series A Convertible Preferred Stock will share ratably in any distribution of our remaining legally available funds and assets.
Ranking . The Series A Convertible Preferred Stock, with respect to rights on liquidation, winding up, corporate reorganization and dissolution, rank senior to the shares of our common stock and other junior stock.
Conversion . The shares of Series A Convertible Preferred Stock are convertible into that aggregate number of full shares of our common stock representing 95% of the total number of shares of our common stock outstanding after giving effect to the conversion. Accordingly, in the event that we should issue additional shares of common stock before conversion of the Series A Convertible Preferred Stock, the conversion price per share is subject to
downward adjustments in order to cause the holders of the Series A Convertible Preferred Stock, collectively, to own 95% of our outstanding shares of common stock upon conversion of all Series A Convertible Preferred Stock. The conversion price of a share of Series A Convertible Preferred Stock into shares of our common stock also is subject to adjustment, from time to time, for, among other reasons, stock splits, combinations, dividends and distributions.
Voting . The holders of the shares of Series A Convertible Preferred Stock are entitled to vote on all matters required or permitted to be voted upon by our stockholders. Each holder of a share of Series A Convertible Preferred Stock is entitled to the number of votes equal to the largest number of full shares of our common stock into which all shares of Series A Convertible Preferred Stock held by that holder could be converted. Except as required by law on matters requiring class voting, the holders of the Series A Convertible Preferred Stock and our common stock vote together as a single class.
Board of Directors . For so long as any shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement remain outstanding, the holders of a majority-in-interest of the shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement then outstanding have the right to designate all the persons to serve as directors on our board of directors and our subsidiaries. If the holders of the shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement then outstanding choose not to designate any directors, the holders of a majority-in-interest of the shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement then outstanding may appoint a designee to serve as an observer at all meetings of our or our subsidiaries’ board of directors and their respective committees.
Protective Provisions . Unless the directors designated by the holders of the shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement control our board of directors with respect to all actions, for so long as any shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement remain outstanding, except where the vote or written consent of the holders of a greater number of our shares is required by law or by our articles of incorporation, and in addition to any other vote required by law or by our articles of incorporation, we cannot, and we shall cause our subsidiaries not to, as applicable, without the prior vote or written consent of the holders of at least 75% of the shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement then outstanding:
(a) amend our articles or bylaws in any manner that would alter or change any of the rights, preferences, privileges or restrictions of the Series A Convertible Preferred Stock or the shares issuable upon conversion of the Series A Convertible Preferred Stock;
(b) reclassify any outstanding securities into securities having rights, preferences or privileges senior to, or on a parity with, the Series A Convertible Preferred Stock;
(c) authorize or issue any additional shares of capital stock (other than to holders of the Series A Convertible Preferred Stock);
(d) merge or consolidate with or into any corporation or other person;
(e) sell all or substantially all our respective assets in a single transaction or series of related transactions;
(f) license all or substantially all of our respective intellectual property in a single transaction or series of related transactions;
(g) liquidate or dissolve;
(h) alter any rights of the holders of the Series A Convertible Preferred Stock or change the size of the board of directors;
(i) declare or pay any dividends (other than dividends payable to us or our subsidiaries) on, or declare or make any other distribution, directly or indirectly, on account of, any shares of our common stock now or hereafter outstanding;
(j) repurchase any outstanding shares of capital stock;
(k) approve or modify by ten percent or more the aggregate amount of any annual or other operating or capital budget, or approve or modify by 50% or more any single line item of any such operating or capital budget;
(l) increase the salary of any officer or employee or pay any bonus to any officer, director or employee not contemplated in a budget or bonus plan approved by directors designated by the holders of the shares of the Series A Convertible Preferred Stock originally issued under the Purchase Agreement then outstanding;
(m) retain, terminate or enter into any salary or employment negotiations or employment agreement with any employee or any future employee;
(n) incur indebtedness (other than trade payables) or enter into contracts or leases that require payments in excess of $5,000 in the aggregate;
(o) make or incur any single capital expenditure;
(p) award stock options, stock appreciation rights or similar employee benefits or determine vesting schedules, exercise prices or similar features;
(q) make any material change in the nature of our business or enter into any new line of business, joint venture or similar arrangement;
(r) pledge our assets or guarantee the obligations of any other individual or entity;
(s) recommend approval of any new equity incentive plan;
(t) form or acquire any subsidiary, joint venture or similar business entity; or
(u) directly or indirectly enter into, or permit to exist, any material transaction with any affiliate of us, any director or officer or any affiliate of a director or officer, or transfer, pay, loan or otherwise obligate us to give cash, services, assets or other items of value to affiliates, officers or directors or any affiliate of a officer or director or commit to do any of the preceding after June 8, 2006, except for employee compensation or for reimbursement of ordinary business expenses.
Registration and Other Rights . The Investor’s Rights Agreement grants Radical certain demand, piggy-back and shelf registration rights and sets forth the procedures pursuant to which those rights may be exercised and effected. The Investor’s Rights Agreement also grants Radical rights of first refusal to purchase any or all of the securities of Immediatek that Mr. Marin proposes to sell or otherwise transfer on the same terms and conditions as the proposed sale or transfer by him. In addition, the Investor’s Rights Agreement provides that Mr. Marin is prohibited from selling or otherwise transferring any securities of Immediatek owned by him for a period of three years. After three years, he can sell or otherwise transfer only half of the securities owned by him. If, however, Mr. Marin is terminated for a reason other than cause, upon his termination he can sell a total of ten percent of the securities owned by him in any given month.
Laws and Governmental Regulation
Copyright Laws . Our products are subject to copyright laws. We may become the subject of infringement claims or legal proceedings by third parties with respect to our current or future products if we do not obtain appropriate licenses. Any such claims could be time-consuming, divert management from our daily operations, result in litigation or cause product shipment delays. Moreover, an adverse outcome in litigation or a similar adversarial proceeding could subject us to significant liabilities to third parties or require us to cease the marketing or use of certain products, any of which could have a material adverse effect on our business and operating results.
E-Commerce and the Internet . The e-commerce environment is rapidly changing and federal and state regulation relating to the Internet and e-commerce is evolving. Currently, there are few laws or regulations uniquely applicable to the access of the Internet or e-commerce on the Internet. Laws and regulations may be enacted with respect to the Internet, covering issues such as user privacy, pricing, taxation, content, copyrights, distribution, antitrust and quality of products and services. Additionally, the growth of e-commerce may trigger the development of stricter consumer protection laws. The adoption of such laws or regulations could reduce the rate of growth of the Internet, which could potentially decrease the usage of our website or could otherwise have a material adverse effect on our business. In addition, applicability to the Internet of existing laws governing issues such as taxation, libel, obscenity and personal privacy is uncertain. The vast majority of these laws were adopted prior to the advent of the
Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies.
Employees
We currently have two full-time employees and two part-time employees. We are not a party to any collective bargaining agreement with a labor union, and we consider relations with our employees to be good.
Available Information
We currently are subject to the reporting requirements of the Securities Exchange Act of 1934 and, therefore, we file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, or the SEC. You may read and copy any document filed by us with the SEC at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the operation of the public reference room. Our SEC filings also are available to the public at the SEC’s web site at http://www.sec.gov.
Our filings with the SEC, as well as our Code of Business Conduct and Ethics, are available free of charge by emailing us with your address and the titles of the materials you are requesting at publicfilingsinfo@immediatek.com or calling us at (214) 744-8801. We will provide you copies of the requested materials as soon as reasonably practicable after we electronically file them with the SEC.
