OVERVIEW OF OUR BUSINESS
We have been providing financial and investment information within the investment community since 1989. In May 1999, we began offering our services on a subscription fee basis to the general public for the first time through our U.S. website. At www.jagnotes.com, we offer timely financial data and reports and commentary from the financial community.
From 1989 to 1992, we operated as an unincorporated business entity. In 1992, we incorporated in the State of New Jersey as New Jag, Inc. On December 14, 1993, JagNotes, Inc. merged with and into us, and we changed our name to JagNotes, Inc. We operated as JagNotes, Inc. until March 1999 when we were acquired by Professional Perceptions, Inc., a Nevada corporation, which subsequently changed its name to JagNotes.com Inc. JagNotes, Inc. remained a wholly-owned subsidiary of JagNotes.com Inc. until August 16, 1999 when it merged with and into JagNotes.com Inc.
Until 1999, we targeted only a limited audience of financial professionals and we did not engage in organized sales and marketing efforts. As discussed in more detail below, in 1999 we decided to change our focus by expanding onto the Internet and targeting retail subscribers with the hope of expanding our subscriber base and our business. In September 2000, we started an advertiser-based financial webcast which we sold on February 1, 2001 as we were unable to continue to fund its operating losses.
We undertook a corporate reorganization in January 2002 in order to distinguish and better manage our areas of business. On January 4, 2002, JAG Media LLC was formed as a Delaware limited liability company and a wholly owned subsidiary of JagNotes.com, Inc. The assets and liabilities of our current fax and Internet subscription business were transferred to JAG Media LLC. In order to better reflect the overall business in which we expected to engage and the corporate structure we intended to use to conduct that business, we changed our corporate name from JagNotes.com Inc. to JAG Media Holdings, Inc. effective April 8, 2002.
Our jagnotes.com website currently consists of a subscription-based service that offers two specific products, the JAGNotes (Upgrade/Downgrade) Report and the Rumor Room, providing timely market reports, including breaking news and potentially market moving information. We currently derive our revenues primarily from the sale of subscriptions.
We purchased certain development stage software and related assets in the United Kingdom on November 24, 2004, now being developed by our subsidiary, Pixaya (UK) Limited. On August 8, 2006, we changed the name of our subsidiary, JAG Media LLC, to Pixaya LLC in order to better reflect its role as owner of Pixaya (UK) Limited as well as the primary provider of support for the products of Pixaya (UK) Limited in the United States. We are continuing to finance the development and marketing by Pixaya (UK) Limited of one product, a mobile surveillance system which streams live video in real time from the point of use back to a control center and, if desired, to other locations. We have not yet made a sale of such product.
We have also decided to expand our business and are seeking acquisition candidates which may be engaged in unrelated lines of business. See “- Our Business Strategy”.
We are a Nevada corporation. Our address is 6865 S.W. 18th Street, Suite B13, Boca Raton, Florida 33433, and our telephone number is 866-300-7410.
OUR INDUSTRY GENERALLY
The growth of the Internet has changed the way investors seek information and manage their portfolios. Individual investors are increasingly seeking access to information that was formerly available only to financial professionals. Professional investors who have traditionally relied on print and other media for information are demanding faster information and greater accessibility.
As of September 18, 2006, there were over one billion Internet users worldwide, including over 207 million users in the United States. See Internet World Stats website (http://www.internetworldstats.com ).
According to tracking surveys conducted by Pew Internet & American Life Project as of November 2004, based on 147 million adult Internet users in the United States, approximately 44% use the Internet to obtain financial information and approximately 13% use the Internet to buy or sell stocks, bonds or mutual funds. According to these surveys, approximately 8% of those with Internet access obtain financial information on a typical day. ( http://www.pewinternet.org/trends/UsageOverTime.xls .) An updated Pew study published June 14, 2006 has confirmed that the 44% user rate for financial information has remained generally constant from 2000-2005. ( http://www.pewresearch.org/obdeck/?obdeck ID:31).
With respect to our Pixaya business unit, the mobile and wireless industries are experiencing significant growth and changing the way businesses operate and people communicate. Both industries are also giving rise to new forms of mobile entertainment, communication and information not available just a few short years ago. As of December 31, 2005 there were more than 200 million wireless subscribers in the U.S. and reported wireless minutes of use exceeded 1.4 trillion in 2005, representing a year over year growth of over 35%. By mid-year 2006 there were over 219 million users (72% of the U.S. population) and minutes of use for the first half of 2006 were up 27% over the first half of 2005.
See Cellular Telecommunications and Internet Association (http://www.ctia.org.); see Mobile Data News, January 26, 2006 ( http://www.mda-mobiledata.org ).
In addition, wireless carriers are updating their networks and are in the process of deploying their next-generation high-speed broadband networks, commonly referred to as 3G. Sprint, whose technology is based on the CDMA standard, intends to have its EVDO Rev A high-speed broadband network substantially deployed by the end of 2007 ( http://www.mobiletechnews.com/info/2006/08/03/104744.html ). Such 3G networks will significantly improve uplink and downlink speeds, thereby providing an enhanced user experience when viewing video, accessing the Internet or working with any large data files.
New forms of wireless are also experiencing significant growth. For example, municipal wireless networks, which provide wireless coverage to large portions of municipal areas, have seen significant growth over the past year and that growth is generally expected to continue in the near term.
2004 — 2007 U.S. Spending for Municipal Wireless Networks
| 2004 | 2005 | 2006 | 2007 | |||||||||||||
Spending ($ Millions) |
$ | 31.5 | $ | 76.5 | $ | 177.7 | $ | 405.6 | ||||||||
YTY Growth Rate |
N/A | 142 | % | 132 | % | 128 | % | |||||||||
See Municipal Wireless State of the Market Report September 2005 ( http://www.muniwireless.com ).
OUR PRODUCTS
We have been providing financial and investment information within the investment community since 1989. In May 1999, we began offering our services on a subscription fee basis to the general public for the first time through our U.S. website.
Our jagnotes.com website consists solely of a subscription-based service. During the last fiscal year, we discontinued the free portion of the Company’s website.
We offer our subscribers two targeted products: The JAGNotes (Upgrade/Downgrade) Report, targeted primarily at institutional subscribers, and the Rumor Room, targeted primarily at retail individual customers. These two products are accessible only to paid subscribers. Subscriptions are offered to individuals at the rate of $9.95 per month, or $99.95 per year. We have offered free trial subscriptions at times in the past and may do so in the future.
JAGNOTES (UPGRADE/DOWNGRADE) REPORT — The JAGNotes Report is a daily consolidated investment report that summarizes newly issued research, analyst opinions, upgrades, downgrades and analyst coverage changes from various investment banks and brokerage houses. Each morning we gather this information, then compile and release it in a concise, easy to read format before the markets open. We believe that this report gives early, convenient access to our subscribers of potentially market moving information which was traditionally not available in a convenient format when the market opens. This report is updated from time to time during the trading day.
Our current strategy involves phasing out retail subscribers for our JAGNotes Report and refocusing on institutional customers and professional traders. We have always maintained our original JAGNotes fax-based service for a limited number of mostly institutional subscribers. Through this service, we provide these subscribers faxed copies of our daily JAGNotes Report, which is provided through installments as information is received every weekday morning before the stock market opens. We also allow these subscribers access to our Internet-based information by providing them with a specified number of access codes. The price for this combined service is approximately $1,500 to $2,150 per year. The content of our website contains substantially all of the information provided in the faxed reports as well as updates of such information and the Rumor Room described below.
We intend to continue providing our combined fax/Internet service in the future primarily to institutional subscribers. We believe that some financial institutions are willing to pay a higher price for this combined service because they consider a faxed report to be a more user friendly means of receiving the information even if their employees have direct Internet access.
While we intend to focus our efforts exclusively on offering the JAGNotes Report to institutional customers, we recognize that it remains of interest to some retail customers as well. However, to avoid the cost of accessing such individuals we expect to do so almost exclusively through strategic affiliations such as our current arrangement with Track Data, as described under “Our Business Strategy”, below.
THE RUMOR ROOM — Because rumors can move equities, we have established the Rumor Room where we post rumors that have been heard on the street about various stocks. When we hear rumors, we post the information in the Rumor Room and indicate the date and time of the rumor. While we realize that rumors are inherently unreliable as indicated by a cautionary note introducing this portion of our site, we believe that every trader and investor — large and small — should have access to this information to determine its usefulness. The Rumor Room is available to our subscribers and updated whenever we receive relevant information.
Although targeted primarily at individual subscribers, the Rumor Room is also made available through our website to institutional investors as described above. As described below, if we can obtain funding and our English subsidiary, Pixaya, can complete development of its Pixaya Mobile software product, which delivers on-demand video/audio clips and text messages to mobile phones, we intend to try to distribute the Rumor Room through mobile phones as well. We believe such a distribution channel might better access our target audience. There can be no assurance, however, that such development will be successfully completed or, if completed, that customers will embrace this new mode of distribution. For the time being, we have stopped further development of this product in light of our lack of liquidity.
PIXAYA — On November 24, 2004, through our English subsidiary now named Pixaya (UK) Limited, we purchased certain development stage software and related assets from TComm Limited, a company also organized in the United Kingdom. At the time of acquisition, TComm Limited was in various stages of development of four software products. The one product we have continued to develop is SurvayaCam (previously CCMTV), which consists of software programs and related hardware intended to permit field personnel to send real-time video streams from the field to a central location (or multiple locations) where they can be viewed. We are also now attempting to market SurvayaCam through demonstrations and pilot program deployments of the product. Some pilot programs involve us providing SurvayaCam software and hardware free of charge, while others involve the purchase of SurvayaCam at a discount price. In addition, we are attempting to develop a network of resellers who could function as the primary distribution channel for SurvayaCam.
Due to our lack of funding, we have for the time being discontinued developing Pixaya Mobile (previously known as TComm TV), which delivers on-demand video/audio clips and text messages to various Java-based and Symbian-based mobile phones. We have discontinued our support of the other two products we originally acquired. In addition, after the
acquisition we supported development of a new mobile phone product named “SOS Guides,” which are mobile travel guides that will be made available to users through their mobile phones. We intend to resume marketing the “SOS Guides” to travel agents, metropolitan tourist bureaus and other travel related companies as soon as we have sufficient funds to do so.
ADVERTISING REVENUE
While we expect the primary source of our revenue to be from subscriptions for our JAGNotes Report and the Rumor Room, we may supplement this with advertising revenue. Such revenues have, however, not been meaningful to date. We would not expect such revenues to become material until (i) there is a major upturn from current levels in Internet banner advertising generally or we are able to offer advertisers various media advertising alternatives to banners and (ii) we have been successful in increasing the number of unique visitors to our website.
OUR BUSINESS STRATEGY
The success of our business depends on our ability to obtain the requisite financing and be able to:
| o | reverse the current downward trend of our revenues; | |
| o | curtail costs to correspond with our revenues; and | |
| o | pursue merger and other expansion opportunities. |
Our strategy to reverse the current downward trend of our revenues has not been effective to date, as our revenues continue to decline. While pursuant to our strategy we have taken steps to curtail costs, we do not believe it is practicable to further curtail costs to the level that they will correspond with our revenues. Accordingly, while we have not abandoned our revenue and cost strategies, the primary focus of our strategy is the pursuit of merger and other expansion opportunities. Accordingly, we have principally used our limited available funds to support our attempts to find and consummate a merger, with a modest amount also being used to support Pixaya’s SurvayaCam, as we believe it has the best potential for the most immediate revenue return. Our strategy is to continue such an allocation of our limited funds.
In order to put ourselves in a position to implement our increased revenue and cost curtailment strategy if we obtain the requisite financing, we intend to try to re-position JAG Media’s two basic products so they are targeted more effectively at their respective markets: institutional customers (JAGNotes Report) and retail customers (the Rumor Room). In time, we hope that by refocusing our products on specific customer groups, JAG Media may become a more important information resource both for institutional customers, such as investors, brokers and investment advisers, and for individual retail customers.
o Increase Revenues.
We believe the institutional market for the JAG Notes Report, provided we have sufficient funds available to improve its content and distribution, offers an opportunity to achieve higher revenues at lower per unit cost than the retail market we have been pursuing. Accordingly, with respect to our JAGNotes Report, we plan to focus on servicing the institutional segment of our business. To assist us in this effort, if we have the requisite funding, we intend to investigate ways of using the Internet more effectively in distributing our product to the institutional market and help those customers in turn redistribute the product to their professional employees. Also, in order to access individual professional traders without incurring excessive marketing costs, we intend to pursue strategic affiliations, partnerships, joint ventures or other relationships with strategic partners, such as our current arrangements with Track Data, Comtex, Inc. and Acquire Media Corporation, financial information platforms for professional traders, whereby they offer our JAGNotes Report as part of their collection of subscriber services to the professional trading community. We have not, however, recently been successful in adding additional strategic partners.
With respect to the Rumor Room service, we believe that developing technologies, such as mobile phones, may give us a better distribution channel which can make the individual customer market for the Rumor Room cost effective as well, assuming we can obtain the necessary funds to improve the content and distribution of the product. If we are able to fund development of our Pixaya Mobile software, we will explore the feasibility of using mobile phones as a new distribution channel for our Rumor Room service.
Finally, as part of our strategy to increase revenues, since we believe that SurvayaCam has been developed to the point where we can do sales demonstrations and pilot program deployments, we intend to support Pixaya’s sales efforts for the product to the extent we have the funds to do so.
o Curtail Costs.
We sold our webcasting business and discontinued our efforts to market our Company Voice product to reduce our cash flow requirements. In addition, we have discontinued all our paid commentators and certain employees in order to save costs where we concluded that the cost was not justified by our subscribers’ interest and current revenue levels.
We are not aware of further costs which can be curtailed at this point without unduly adversely affecting our business. Many of our general and administrative costs are related to being a public company and these costs are difficult to reduce in light of the recent Sarbanes-Oxley legislation and its new requirements. While we will continue to look for cost savings and intend as well to explore ways to reduce cash expenditures through the issuance of shares, we do not believe it is possible as a practical matter to reduce costs on an accrual or cash basis to a level commensurate with our current or expected revenues.
o Pursue Merger and Other Expansion Opportunities.
This portion of our strategy represents our highest priority.
We have looked at various possible acquisitions over the past three years. Over that period we have increased our efforts to find a compatible merger candidate and have considered dividing our business to help jump start its growth and perhaps attain access to more funding sources. A merger candidate need not be in our specific line of business, but could be in another line of business related to the stock market or software or it could be in an unrelated line of business. Our current strategy is to not foreclose any attractive candidate based upon its line of business.
We also are pursuing the possibility, subject to available funding, of spinning off one of our two major services in order to maximize the chances of successfully developing both such services by focusing them on their respective target customer bases.
Pursuant to the above strategy, we have located a possible merger candidate, Cryptometrics, Inc. While there can be no assurance that the transaction will ever be consummated, on December 27, 2005 we entered into a merger agreement, which was subsequently amended effective January 24, 2007 and February 26, 2007 (the “Merger Agreement”), with Cryptometrics pursuant to which Cryptometrics would merge with our newly created subsidiary (the “Merger”). In consideration of the Merger, the stockholders of Cryptometrics would acquire 394,700,016 shares of our common stock which would, upon issuance, represent approximately 89.66% of our outstanding common stock, in exchange for all of the issued and outstanding capital stock of Cryptometrics. In such case, our existing public stockholders would experience significant dilution from the issuance of such shares to the stockholders of Cryptometrics. If consummated, the transaction would be accounted for as a reverse acquisition in which Cryptometrics would be deemed the acquirer for accounting purposes.
Until we agree otherwise, the Merger Agreement may be canceled with or without any reason by either us or Cryptometrics with no liability. In any case, the Merger Agreement will automatically terminate if the closing does not occur by April 6, 2007, unless the parties otherwise agree to extend such date. The provisions of the Merger Agreement provide that if we cancel the Merger Agreement prior to the automatic termination date, we will issue 500,000 shares of our common stock to Cryptometrics. Additionally, the consummation of the Merger is subject to various conditions set forth in the Merger Agreement, including, among others, (i) the representations and warranties of the parties being true and correct (ii) our shares of common stock having been authorized for trading on the OTC Bulletin Board or the OTC Pink Sheets and (iii) the limitation of our aggregate indebtedness to $4,350,000. There is no assurance that the proposed merger between us and Cryptometrics will be consummated, or if it is consummated, that it will be pursuant to the terms described above.
The Merger Agreement, including the amendments thereto, are included as Exhibits 99.3, 99.4 and 99.5 to this Annual Report on Form 10-KSB and should be reviewed for further information regarding the Merger.
We are also considering a possible spin off of either the Rumor Room, together with our related Pixaya Mobile software development business, or the JagNotes Report. Any such spin off might possibly be done in connection with a merger with another enterprise which may be in an unrelated line of business. We believe our two products might be better repositioned and developed as their own corporate entities which might also appeal to different investors. We have not made a final decision as to any spin off or entered into any term sheet in connection with any merger related to such a spin off. There can be no assurance that any such spin off, with or without a merger, will prove feasible or be consummated.
We will require additional funds in order to implement our business strategy. At our current usage rate of cash, the cash generated from our operations will not be sufficient to fund the liquidity requirements of our current business strategy.
Accordingly, we will need to raise additional funds through public or private financing, strategic relationships, mergers or other arrangements. There can be no assurances that we will be able to do so.
Note: These are our strategies, goals and targets. We believe in them, but we cannot guarantee that we will be successful in implementing them or that, even if implemented, they will be effective in creating a profitable business. Strategies that in the past we thought would be successful have not proven effective. In addition we are dependent on having sufficient cash to carry out our strategy. Alternatively, we may have to continue to reduce services to a level subscribers or customers may not find valuable. Please read “Risk Factors” beginning on page 12 of this Annual Report on Form 10-KSB before making any investment decision.
REGULATION
The securities industry is subject to extensive regulation under federal and state laws in the United States, and companies that provide financial advice to investors are generally required to register as investment advisers at either the federal or state level. We believe that our business consists of a publishing activity for which investment adviser registration and regulation do not apply under applicable federal or state law, and thus we are not registered as an investment adviser with either the SEC or any of the various states. The regulatory environment in which we operate is subject to change, however, and we could be required to register as an investment adviser with an appropriate regulatory agency at some point in the future.
In addition, we operate in an environment of uncertainty about potential government regulation of the Internet and Internet-based service providers. We believe that our business is not currently subject to direct regulation other than regulations applicable to businesses generally. However, the Internet is evolving rapidly, and governmental agencies have not yet been able to adapt all existing regulations to the Internet environment. The United States Congress has passed legislation that regulates certain aspects of the Internet, including on-line content, copyright infringement, user privacy, liability for third-party activities and jurisdiction. Specifically, with respect to one aspect of copyright law, on October 28, 1998, the United States Congress passed the Digital Millennium Copyright Act (“DMCA”). The DMCA includes statutory licenses for the performance of sound recordings and for the making of recordings to facilitate transmissions. Under these statutory licenses, depending on our future business activities, we and our customers may be required to pay licensing fees in connection with digital sound recordings which we might deliver to our customers. Additionally, federal, state, local and foreign governmental organizations also are considering other legislative and regulatory proposals that would regulate the Internet. Although we are also contemplating distribution by mobile phone, that sector is also regulated and there is currently a focus on regulation in that sector, so that changes can be anticipated.
We cannot predict what new laws will be enacted or how courts will interpret both existing and new laws. As a result, we are uncertain as to how new laws or the application of existing laws may affect our business. For example, while we are not aware of any pending laws or regulations that would restrict our ability to disseminate market-based rumors and other information of unsubstantiated reliability, it is possible that such laws or regulations may be passed in the future. Increased regulation in this area could decrease the demand for our services, increase our cost of doing business or otherwise have a material adverse effect on our business, results of operations and financial condition. In addition, the ways in which internet companies deal with copyrighted content which appears on their sites are in flux.
COMPETITION
Providing financial information and analysis over the Internet is an intensely competitive business. A large number of web-based financial information providers are competing for subscribers, customers, advertisers, content providers, analysts, commentators and staff. In addition, cable television is an increasingly important source of financial news and therefore competition.
Our business competes to a different degree with the following information sources, many of which provide their information without charge:
| o | Online financial news and information providers including Yahoo Finance, Marketwatch, TheStreet.com, Forbes.com, Briefing.com, America Online Personal Finance, Reuters and MotleyFool.com; | |
| o | Internet portals and search engines such as AOL, MSN and Yahoo; | |
| o | Traditional media sources such as The Wall Street Journal, Investor’s Business Daily, The Financial Times, Barrons, CNN/Money, and MSN Money/CNBC, all of which also have an Internet presence; |
| o | Terminal-based financial news providers including Bloomberg, Reuters and Dow Jones; and | |
| o | Online brokerage firms such as TD Ameritrade, E*Trade Financial, Charles Schwab and Fidelity. |
Because there is not a readily defined market in which we compete, we cannot predict which information source or sources will be our primary competition in the future. However, we expect competition from each of the above information sources to intensify and increase in the future. Most of our current and potential competitors have greater name recognition, larger financial, technical and marketing resources, and more extensive customer bases than we do, all of which could be leveraged to gain market share to our detriment. Such advantages would also permit our competitors to enter new sectors such as distribution through mobile phones, more easily than we will be able to do.
It is not difficult for new competitors to enter the market. Many blogs now provide financial information at no cost. Much of the information we provide is publicly available and we do not have any patented or otherwise protected technologies that would preclude or inhibit competitors from entering our markets. Our current and future competitors may develop or offer services that have significant price, content, creative or other advantages over the services we provide.
In order for us to successfully compete in this business, we will need to reliably provide valuable services to a greater number of institutional and other subscribers who are willing to pay us fees sufficient to support such services. We believe that over time, if we can obtain sufficient funding, a successful implementation of our business strategy will allow us to compete successfully as a focused provider of timely investment information to institutional and retail customers.
INTELLECTUAL PROPERTY
We are the owner of the trademarks JAG NOTES, AHEAD OF THE MONEY, STREETSIDE and STREETSIDE WITH DAN DORFMAN. Each of the foregoing trademarks was approved in 2002 and has a duration period of ten years, at which time each of the trademarks must be renewed or they will expire. We do not consider these trademarks to be material to our business.
WEBSITE TECHNICAL INFORMATION
We lease one web server, which is the computer system on which all the content for our jagnotes.com website is maintained and through which we operate our jagnotes.com website. Our U.S. server is maintained by Woodbourne Solutions and is located at their facility in Germantown, Maryland.
Our Pixaya website is hosted by InnoTech. InnoTech has offices located in southern California and Raleigh, North Carolina. Its Internet data center is located in Orange County, California. The Pixaya website is maintained internally by Pixaya employees.
EMPLOYEES
As of July 31, 2006, we had 9 employees. As of that date, we had entered into employment agreements with 4 of our employees and our two executives.
EQUITY LINE OF CREDIT WITH CORNELL CAPITAL
As of April 9, 2002, we entered into, and on July 8, 2004 and July 21, 2004, we amended, an Equity Line Purchase Agreement with Cornell Capital Partners, L.P. for a $10 million equity line pursuant to which we were able to sell our shares of common stock to Cornell Capital from time to time. The purpose of such sales was to provide us with general working capital, including funds which might be required by virtue of our strategic plan. This agreement superseded our original equity line purchase agreement with Cornell Capital, dated August 17, 2001. Effective May 25, 2006, as a condition of a new financing from Cornell Capital, we terminated the Equity Line Purchase Agreement with Cornell Capital, which had been scheduled to expire on August 28, 2006. As of its termination, $4,035,000 of our equity line had been utilized.
$2,000,000 PROMISSORY NOTE
On February 2, 2005 we borrowed $2,000,000 from Cornell Capital Partners, L.P. The $2,000,000 loan was evidenced by a Promissory Note dated as of January 25, 2005 executed by us and Cornell Capital, the repayment of which was subsequently extended on August 5, 2005. We used the proceeds of the loan for working capital and general corporate purposes.
Under the terms of the Promissory Note, as amended, the face amount of the Promissory Note and interest on the amount from time to time outstanding at a rate of 12% per year was payable either (i) out of the net proceeds to be received by us upon delivery of put notices under the Equity Line Purchase Agreement with Cornell Capital or (ii) in full by us within 753 calendar days of January 25, 2005 regardless of the availability of proceeds under the Equity Line Purchase Agreement, unless an extension were mutually agreed to by the parties in writing. Pursuant to the Promissory Note, we deposited in escrow 35 put notices under the Equity Line Purchase Agreement in an amount of $60,000 each and one request for a put under the Equity Line Purchase Agreement in an amount of $181,017. None of such put notices was ever released from escrow until they were all returned to us for cancellation. We paid to Cornell Capital a fee of $100,000 in connection with this transaction as well as a $5,000 documentation fee.
As permitted by the terms of the Promissory Note, we opted to make three (3) interest payments to Cornell Capital, each in the amount of $20,000, paid in a single lump sum of $60,000 on August 5, 2005.
CONVERTIBLE DEBENTURES
Effective May 25, 2006, pursuant to a letter agreement with Cornell Capital, we converted $250,000 of the outstanding $2,000,000 principal of the Promissory Note into 1,250,000 shares of our common stock which we issued to Cornell Capital. We converted the remaining $1,750,000 of the principal of the Promissory Note and $150,000 in accrued and unpaid interest into a $1,900,000 10% Secured Convertible Debenture which we also issued to Cornell Capital on May 25, 2006.
In addition to refinancing our existing Promissory Note dated January 25, 2005, as amended August 5, 2005, in favor of Cornell Capital, in May 2006 we obtained further financing in the principal amount of $2,250,000 from Cornell Capital. In connection with all such financings, we issued three secured convertible debentures, bearing interest at 10% per year and payable in three years, in the aggregate principal amount of $4,150,000.
We may, in our sole discretion, redeem any and all amounts owed under such secured convertible debentures provided that the closing bid price of our common stock is less than the fixed conversion price, initially $0.40 per share, at the time we deliver notice to Cornell of our desire to redeem any amounts owed. We must pay a redemption premium of 10% on any amounts redeemed.
In connection with the $2,250,000 financing, we and our subsidiary, JAG Media LLC, entered into Security Agreements with Cornell Capital effective May 25, 2006, which provide that the secured convertible debentures will remain secured by our assets and those of JAG Media LLC until the registration statement covering the shares into which such secured convertible debentures are convertible has been effective for 60 days. At such time, the security interests will automatically terminate provided our common stock is trading on the Nasdaq OTC Bulletin Board at a price above $0.08 per share and there has occurred no event of default under the secured convertible debentures.
Cornell Capital has the right to convert the secured convertible debentures, at its sole option, into shares of our common stock at a conversion price which shall be the lower of (i) $0.40 per share or (ii) a 10% discount to the lowest volume weighted average price, as reported by Bloomberg, of our common stock during the 30 trading days prior to the conversion date.
If we issue shares of common stock or rights, warrants, options or other securities or debt that are convertible into or exchangeable for shares of common stock, being common stock equivalents, entitling any person to acquire shares of common stock or common stock equivalents, at a price per share less than the then fixed conversion price, then, at the sole option of the holder of a debenture, the fixed conversion price shall be adjusted to mirror the lower conversion, exchange or purchase price for such new common stock, or common stock equivalents, at issue. No such adjustment shall be made as a result of issuances and exercises of options for compensatory purposes under our 1999 Long-Term Incentive Plan. The fixed conversion price of the secured convertible debentures is also subject to adjustment in connection with certain corporate transactions.
Cornell Capital may not convert the secured convertible debentures into an amount of shares of our common stock that would result in it owning in excess of 4.99% of the then total outstanding shares of our common stock, unless Cornell Capital chooses to waive such restriction, which waiver would be subject to a 65-day notice period. See “Risk Factors “ for a description of the special risks posed by our issuance of the secured convertible debentures.
We paid Cornell Capital a commitment fee equal to 10% of the disbursements of $2,250,000 at closing, as well as a $15,000 structuring fee and their counsel’s fee of $15,000.
There were two conversions aggregating $75,000 for 404,905 shares of our common stock under one of the secured convertible debentures during our fiscal year ended July 31, 2006.
The secured convertible debentures were amended, conditioned upon the effectiveness of our Merger with Cryptometrics, by letter agreements dated as of January 24, 2007 and February 26, 2007. See Item 6, Management Discussion and Analysis – “Recent Events.”
WARRANTS
In connection with the $2,250,000 new financing, we also issued to Cornell Capital five warrants to purchase 12,000,000 shares of our common stock as follows: (i) Warrant No. CCP-1 exercisable for 2,000,000 shares at an exercise price of $0.40 per share; (ii) Warrant No. CCP-2 exercisable for 2,000,000 shares at an exercise price of $0.50 per share; (iii) Warrant No. CCP-3 exercisable for 2,000,000 shares at an exercise price of $0.60 per share; (iv) Warrant No. CCP-4 exercisable for 3,000,000 shares at an exercise price of $0.70 per share; and (v) Warrant No. CCP-5 exercisable for 3,000,000 shares at an exercise price of $0.80 per share. All five warrants expire in May 2011.
The exercise price and number of shares issuable pursuant to each of the warrants are also subject to adjustment in certain circumstances. In the event that we issue or sell any common stock, or are deemed to have issued or sold common stock through issuing stock options or convertible securities at or representing a price per share less than the exercise price of the warrants in effect immediately prior to such issuance or sale, then immediately after the issuance or sale, the exercise price of the warrants then in effect will be reduced to an amount equal to the price at which the common stock was, or was deemed to be, sold or issued. No such adjustment shall be made as a result of issuances of shares under our 1999 Long-Term Incentive Plan. Upon each adjustment to the exercise price of the warrants, the number of shares issuable upon exercise of the warrants will be adjusted to the number of shares determined by multiplying the exercise price in effect immediately prior to such adjustment by the number of shares of common stock issuable upon exercise of the warrants immediately prior to such adjustment and dividing the product by the exercise price resulting from such adjustment. The exercise price and the number of shares issuable pursuant to each of the warrants is also subject to adjustment in connection with certain corporate transactions.
Unless it waives such restriction, which waiver would be subject to a 65-day notice period, Cornell Capital may not exercise the warrants for an amount of shares of our common stock that would result in it owning in excess of 4.99% of the then outstanding shares of our common stock. See “Risk Factors — Risks Related to our Capital Structure” for a description of the special risks posed by our issuance of the warrants. See also Item 6, Management Discussion and Analysis – “Recent Events.”
ACQUISITION OF SOFTWARE DEVELOPMENT BUSINESS
On November 24, 2004, we entered into a Business Sale Agreement with TComm Limited, a company organized in the United Kingdom, and Pixaya (UK) Limited (formerly known as TComm (UK) Limited), a company organized in the United Kingdom and our wholly-owned subsidiary. Effective October 3, 2005, TComm (UK) Limited formally changed its name to Pixaya (UK) Limited. The transactions contemplated by the Business Sale Agreement were consummated on November 24, 2004. Under the Business Sale Agreement, Pixaya purchased TComm Limited’s software development business which is focused on streaming video solutions and all of its assets related to that business. The business acquired has not generated any significant revenue as of the date of the acquisition or through July 31, 2006.
The acquired product lines we intend to continue to develop include: (1) SurvayaCam (previously known as CCMTV), which consists of software programs (and related hardware) intended to enable field personnel to send real-time video streams from the field to a central point where they can be viewed and archived, as well as to other locations where they can be viewed, and (2) when funds again become available, Pixaya Mobile (previously known as TComm TV), which delivers on-demand video/audio clips to various java-based and Symbian-based mobile phones. Because some of the acquired product lines are still under development, it is difficult for us to estimate the amount of resources that will be required to complete the development of these product lines. During our fiscal years ending July 31, 2006 and July 31, 2005, we estimate that we spent $152,000 and $196,000, respectively, on such software development, which was the only research and development activity we undertook during such years.
The purchase price paid to TComm Limited consisted of (i) 250,000 shares of our common stock, having a value based on the closing price of our common stock as of the close of business on the day prior to the acquisition, equal to approximately $42,500 and (ii) the payment of approximately $19,200 in cash. In addition, TComm Limited agreed not to compete with the business conducted by Pixaya for a period of two years from the closing date of the transaction. The Business Sale
Agreement also contains customary representations and warranties. TComm Limited has agreed to indemnify Pixaya for any damages which may result from a breach of its warranties but only if the damages exceed approximately $20,000. TComm Limited entered into a lockup agreement with us pursuant to which it agreed not to sell or otherwise transfer our shares of common stock for a period of one year.
In connection with entering into the Business Sale Agreement, Pixaya entered into employment agreements on November 24, 2004 with four individuals, all of whom were previously employed by the TComm Limited. The employment agreements have a term of three years and automatically renew unless terminated by either party.
STOCK DIVIDEND
On March 18, 2003, we announced our intention to declare a special stock dividend. To effect such dividend, we filed a Certificate of Designation with the Secretary of State of the State of Nevada on April 11, 2003 which designated a new series of Class B common stock, par value $0.00001 per share, which was distributed by dividend to the stockholders of record as of the close of business on April 14, 2003 in the ratio of one share of Series 2 Class B common stock for every 100 shares of common stock. Such shares of Series 2 Class B common stock are non-voting, have dividend and liquidation rights equal to the common stock and are redeemable, which redemption by JAG Media is mandatory to the fullest extent permitted by law within six months following final resolution of any related successor lawsuit to our now dismissed action in Texas federal court against various brokerage firms at a redemption price which is the greater of (a) par value or (b) ninety percent of the net proceeds to us of such lawsuit after payment of fees and expenses incurred in connection with such lawsuit and all taxes on net income accrued or paid with respect to such net amount. The shares of Series 2 Class B common stock do not have a CUSIP number.
Our transfer agent has completed the issuance and mailing of Series 2 Class B common stock dividend certificates to all registered beneficial shareholders and to all beneficial owners who appear on beneficial owner lists supplied by brokers which are consistent with their share position with the Depository Trust Company. As of February 14, 2007, Series 2 Class B common stock dividend certificates had not yet been mailed to certain beneficial owners because as of such date approximately eleven brokers had failed to submit a beneficial owner list to our transfer agent.
RECAPITALIZATION
At the Annual Meeting on February 11, 2004, our stockholders approved, among other matters, a proposal to amend and restate Article Fourth of the Articles of Incorporation of JAG Media to:
o increase the aggregate authorized number of shares of all classes of stock from 200,000,000 to 300,440,000 of which (w) 250,000,000 shares shall be designated common stock, par value $0.00001 per share, (x) 400,000 shares shall be designated Series 2 Class B common stock, par value $0.00001 per share, (y) 40,000 shares shall be designated Series 3 Class B common stock, par value $0.00001 per share and (z) 50,000,000 shares shall be designated preferred stock, par value $0.00001 per share; and
o reclassify each outstanding share of our existing Class A common stock and Series 1 Class B common stock into one share of common stock upon surrender of physical share certificates representing the existing Class A common stock and Series 1 Class B common stock for new common stock certificates.
The above-described recapitalization was effected on June 4, 2004 upon the filing of a Certificate of Amendment to JAG Media’s Articles of Incorporation with the Secretary of State of the State of Nevada. As a result of the recapitalization, the old shares of Class A common stock and Series 1 Class B common stock only represent the right to receive the applicable number of shares of the new common stock. The holder of such old shares not surrendered will not have the right to vote or to receive any dividends or other distributions payable by us after the Effective Date until such shares have been exchanged for the new common stock.
2005 SHAREHOLDERS MEETING
Our Articles of Incorporation as amended on June 4, 2004, also required that the new “certificate only” shares must bear the name of the beneficial owner on the face of each stock certificate. As required by SEC regulation Rule 17Ad-20 which was adopted November 30, 2004 and became effective March 7, 2005, this requirement was deleted by a further amendment of our Articles of Incorporation at our shareholders meeting on February 24, 2005. Accordingly, our shares of Common Stock can now trade in certificate form or in book entry form through the Depository Trust Company.
2006 SHAREHOLDERS MEETING
At the 2006 Annual Stockholders Meeting hel
