ON4 COMMUNICATIONS INC. - Quarter Report: 2008 August (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-Q
x QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly
period ended August
31, 2008
o TRANSITION REPORT UNDER
SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition
period from _________to _________
Commission File
Number: 333 -
118398
SOUND
REVOLUTION INC.
(Name of Small
Business Issuer in its charter)
|
Delaware
|
N/A
|
|
(State or
other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
|
3281 Chartwell
Green
|
V3E 3M9 |
|
Coquitlam, British
Columbia
|
(Zip
Code)
|
|
Canada
|
|
| (Address of principal executive offices) |
Issuer's telephone
number 604.376.0396
Former name, former
address, and former fiscal year, if changed since last report
Check whether the
registrant (1) filed all reports required to be filed by sections 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated
filer o Accelerated
filer o
Non-accelerated filer (Do not check if a smaller reporting company) o Smaller reporting
company þ
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act) Yes o
No þ
State the number of
shares outstanding of each of the issuer’s classes of common equity, as of the
latest practicable date:
As of October 6,
2008, the registrant’s outstanding common stock consisted of
258,478 shares.
Transitional Small
Business Disclosure Format (Check one): Yes þ No o
TABLE
OF CONTENTS
Safe
Harbor Statement
Certain statements
in this filing that relate to financial results, projections, future plans,
events, or performance are forward-looking statements and involve significant
risks and uncertainties, including, but not limited to, the following:
competition, promotional costs, and risk of declining revenues. Sound Revolution
Inc.’s actual results could differ materially from those anticipated in such
forward-looking statements as a result of a number of factors. These
forward-looking statements are made as of the date of this filing, and the
company assumes no obligation to update such forward-looking statements. The
following discusses our financial condition and results of operations based upon
our consolidated financial statements which have been prepared in conformity
with accounting principles generally accepted in the United States of America.
It should be read in conjunction with our financial statements and the notes
thereto included elsewhere herein. Unless otherwise noted, all dollar
references herein are in US dollars.
1
(A
Development Stage Company)
August 31,
2008
F-1
Sound Revolution,
Inc.
(A
Development Stage Company)
(Expressed in US
Dollars)
(Unaudited)
|
August 31, 2008
|
February 29, 2008
|
|
|
$
|
$
|
|
|
ASSETS
|
|
|
|
Current
Assets
|
|
|
|
Cash
|
2,070
|
1,794
|
|
Prepaid
expenses and other assets
|
10,856
|
11,378
|
|
Total Current
Assets
|
12,926
|
13,172
|
|
Investment
(Note 3)
|
–
|
10,000
|
|
Property and
Equipment (Note 4)
|
8,420
|
10,110
|
|
Web Site
Development Costs (Note 4)
|
791
|
33,833
|
|
Music
Rights
|
342
|
342
|
|
Total
Assets
|
22,479
|
67,457
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
Current
Liabilities
|
|
|
|
Accounts
payable and accrued expenses
|
65,271
|
43,241
|
|
Due to a
related party (Note 5(a))
|
1,000
|
2,250
|
|
Note payable
to related parties (Note 5(b))
|
522,843
|
441,243
|
|
Total Current
Liabilities
|
589,114
|
486,734
|
|
Stockholders’
Equity (Deficit)
|
|
|
|
Preferred
Stock: 10,000,000 share authorized; none
issued
|
–
|
–
|
|
Common
Stock: 100,000,000 shares authorized, $0.0001 par
value
258,444
(February 29, 2008 – 258,444) shares issued and outstanding
)
|
26
|
26
|
|
Additional
Paid-in Capital
|
352,822
|
352,822
|
|
Deficit
Accumulated During the Development Stage
|
(919,483)
|
(772,125)
|
|
Total
Stockholders’ Equity (Deficit)
|
(566,635)
|
(419,277)
|
|
Total
Liabilities and Stockholders’ Equity (Deficit)
|
22,479
|
67,457
|
(The accompanying
notes are an integral part of these consolidated financial
statements)
F-2
Sound Revolution,
Inc.
(A
Development Stage Company)
(Expressed in US
Dollars)
(Unaudited)
|
For
the
Three
Month
Period
Ended
|
For
the
Three
Month
Period
Ended
|
For
the
Six
Month
Period
Ended
|
For
the
Six
Month
Period
Ended
|
Accumulated
From
June
4, 2001
(Date
of Inception)
|
|
|
August
31, 2008
|
August
31, 2007
|
August
31, 2008
|
August
31, 2007
|
to
August 31, 2008
|
|
|
$
|
$
|
$
|
$
|
$
|
|
|
Sales
|
5
|
388
|
136
|
474
|
5,371
|
|
Cost of
Sales
|
(20)
|
(330)
|
(246)
|
(798)
|
(7,596)
|
|
Gross
Margin
|
(15)
|
58
|
(110)
|
(324)
|
(2,225)
|
|
Expenses
|
|
|
|
|
|
|
Directors
fees
|
–
|
5,949
|
–
|
11,272
|
22,485
|
|
Marketing
|
–
|
4,532
|
–
|
4,532
|
56,972
|
|
Management
fees (Note 5)
|
9,250
|
15,900
|
25,000
|
31,800
|
171,281
|
|
Professional
fees
|
53,406
|
11,659
|
69,107
|
19,010
|
223,041
|
|
Research and
development
|
–
|
–
|
–
|
30,273
|
77,629
|
|
Share based
compensation
|
–
|
–
|
–
|
25,670
|
109,726
|
|
General and
administrative
|
2,290
|
16,982
|
7,332
|
45,139
|
156,688
|
|
Interest
expense
|
–
|
8,182
|
–
|
15,639
|
61,977
|
|
Depreciation
and Amortization
|
9,638
|
8,862
|
35,809
|
14,292
|
116,002
|
|
Total
Expenses
|
74,584
|
72,066
|
137,248
|
197,627
|
995,801
|
|
Operating
Loss
|
(74,599)
|
(72,008)
|
(137,358)
|
(197,951)
|
(998,026)
|
|
Other
Income\(Loss)
|
|
|
|
|
|
|
Gain on issue
by subsidiary of its own shares outside the consolidated
group
|
–
|
–
|
–
|
3
|
–
|
|
Non-controlling
interest
|
–
|
–
|
–
|
70
|
–
|
|
Gain on
write-off of debt
|
–
|
–
|
–
|
–
|
88,718
|
|
Loss on sale
of subsidiary
|
–
|
–
|
–
|
–
|
(175)
|
|
Write-off of
investment
|
(10,000)
|
–
|
(10,000)
|
–
|
(10,000)
|
|
Net
Loss
|
(84,599)
|
(72,008)
|
(147,358)
|
(197,878)
|
(919,483)
|
|
Net Loss Per
Share – Basic and Diluted
|
(0.33)
|
(0.28)
|
(0.57)
|
(0.77)
|
|
|
Weighted
Average Shares Outstanding
|
258,444
|
257,177
|
258,444
|
256,469
|
|
(The accompanying
notes are an integral part of these consolidated financial
statements)
F-3
Sound Revolution,
Inc.
(A
Development Stage Company)
For the Period from
June 4, 2001 (Date of Inception) to August 31, 2008
(Unaudited)
|
Deficit
|
|||||
|
Accumulated
|
|||||
|
Additional
|
During
the
|
||||
|
Common
Stock
|
Paid-in
|
Development
|
|||
|
Shares
|
Amount
|
Capital
|
Stage
|
Total
|
|
|
#
|
$
|
$
|
$
|
$
|
|
|
Balance –
June 4, 2001 (Date of Inception)
|
–
|
–
|
–
|
–
|
–
|
|
Issuance of
common stock for cash:
|
|
|
|
|
|
|
June 15,
2001
|
190,476
|
19
|
781
|
–
|
800
|
|
June 27,
2001
|
47,619
|
5
|
7,249
|
–
|
7,254
|
|
August 31,
2001
|
167
|
–
|
905
|
–
|
905
|
|
Net loss for
the period
|
–
|
–
|
–
|
(9,351)
|
(9,351)
|
|
Balance -
February 28, 2002
|
238,262
|
24
|
8,935
|
(9,351)
|
(392)
|
|
Net loss for
the year
|
–
|
–
|
–
|
(2,773)
|
(2,773)
|
|
Balance –
February 28, 2003
|
238,262
|
24
|
8,935
|
(12,124)
|
(3,165)
|
|
Net loss for
the year
|
–
|
–
|
–
|
(2,069)
|
(2,069)
|
|
Balance –
February 29, 2004
|
238,262
|
24
|
8,935
|
(14,193)
|
(5,234)
|
|
Issuance of
common stock for cash, July 2004
|
5,912
|
1
|
49,662
|
–
|
49,663
|
|
Issuance of
common stock for professional services, July 2004
|
345
|
–
|
2,900
|
–
|
2,900
|
|
Net loss for
the year
|
–
|
–
|
–
|
(42,380)
|
(42,380)
|
|
Balance –
February 28, 2005
|
244,519
|
25
|
61,497
|
(56,573)
|
4,949
|
|
Issuance of
common stock for professional services, July 2005
|
1,985
|
–
|
25,004
|
–
|
25,004
|
|
Net loss for
the year
|
–
|
–
|
–
|
(68,578)
|
(68,578)
|
|
Balance –
February 28, 2006
|
246,504
|
25
|
86,501
|
(125,151)
|
(38,625)
|
(The accompanying
notes are an integral part of these consolidated financial
statements)
F-4
Sound Revolution,
Inc.
(A
Development Stage Company)
For the Period from
June 4, 2001 (Date of Inception) to August 31, 2008
(Unaudited)
|
Common
Stock
|
|
|
|||
|
Shares
|
Amount
|
Additional Paid-in
Capital
|
Deficit AccumulatedDevelopment
Stage
|
Total
|
|
|
#
|
$
|
$
|
$
|
$
|
|
|
Balance –
February 28, 2006
|
246,504
|
25
|
86,501
|
(125,151)
|
(38,625)
|
|
Issuance of
common stock for professional services, March 2006
|
357
|
–
|
5,250
|
–
|
5,250
|
|
Issuance of
common stock for debt settlement, April 2006
|
72
|
–
|
1,000
|
–
|
1,000
|
|
Issuance of
common stock for management services, June 2006
|
476
|
–
|
5,000
|
–
|
5,000
|
|
Issuance of
common stock for professional services, July 2006
|
314
|
–
|
12,012
|
–
|
12,012
|
|
Issuance of
common stock for research and development, July 2006
|
95
|
–
|
1,880
|
–
|
1,880
|
|
Issuance of
common stock for consulting services, July 2006
|
191
|
–
|
3,760
|
–
|
3,760
|
|
Issuance of
common stock for consulting services, August 2006
|
100
|
–
|
1,974
|
–
|
1,974
|
|
Issuance of
common stock for research and development, August 2006
|
80
|
–
|
1,508
|
–
|
1,508
|
|
Issuance of
common stock for consulting services, August 2006
|
216
|
–
|
4,855
|
–
|
4,855
|
|
Issuance of
common stock for management services, August 2006
|
52
|
–
|
1,364
|
–
|
1,364
|
|
Issuance of
common stock for management services, August 2006
|
600
|
–
|
15,623
|
–
|
15,623
|
|
Issuance of
common stock for management services, August 2006
|
138
|
–
|
3,702
|
–
|
3,702
|
|
Issuance of
stock for consulting services, September 2006
|
–
|
–
|
2,464
|
–
|
2,464
|
|
Issuance of
stock options for management services, September 2006
|
–
|
–
|
48,300
|
–
|
48,300
|
|
Issuance of
common stock for web development services, September 2006
|
476
|
–
|
12,000
|
–
|
12,000
|
|
Issuance of
common stock for capital equipment, September 2006
|
538
|
–
|
13,560
|
–
|
13,560
|
|
Issuance of
common stock for research and development, September 2006
|
124
|
–
|
2,392
|
–
|
2,392
|
|
Issuance of
common stock for promotional services, September 2006
|
714
|
–
|
6,300
|
–
|
6,300
|
|
Issuance of
stock options for consulting services, October 2006
|
–
|
–
|
3,843
|
–
|
3,843
|
|
Issuance of
stock options for directors’ fees, November 2006
|
–
|
–
|
38,200
|
–
|
38,200
|
|
Issuance of
common stock for promotional services, November 2006
|
1,905
|
–
|
21,600
|
–
|
21,600
|
|
Issuance of
common stock for research and development, December 2006
|
354
|
–
|
5,948
|
–
|
5,948
|
|
Net loss for
the year
|
–
|
–
|
–
|
(415,178)
|
(415,178)
|
|
Balance –
February 28, 2007
|
253,306
|
25
|
299,036
|
(540,329)
|
(241,268)
|
(The accompanying
notes are an integral part of these consolidated financial
statements)
F-5
Sound Revolution,
Inc.
(A
Development Stage Company)
For the Period from
June 4, 2001 (Date of Inception) to August 31, 2008
(Unaudited)
|
Common
Stock
|
|
|
|||
|
Shares
|
Amount
|
Additional
Paid-in Capital
|
Deficit
Accumulated During the Development Stage
|
Total
|
|
|
#
|
$
|
$
|
$
|
$
|
|
|
Balance –
February 28, 2007
|
253,306
|
25
|
299,036
|
(540,329)
|
(241,268)
|
|
Issuance of
stock options for management services, March 2007
|
–
|
–
|
10,622
|
–
|
10,622
|
|
Issuance of
common stock for management services, April 2007
|
3,571
|
1
|
22,499
|
–
|
22,500
|
|
Issuance of
stock options for directors’ fees, May 2007
|
–
|
–
|
6,297
|
–
|
6,297
|
|
Issuance of
common stock for consulting services, June 2007
|
763
|
–
|
7,368
|
–
|
7,368
|
|
Issuance of
common stock for directors’ fees, July 2007
|
350
|
–
|
5,000
|
–
|
5,000
|
|
Issuance of
common stock for directors’ fees, September 2007
|
454
|
–
|
2,000
|
–
|
2,000
|
|
Net loss for
the year
|
–
|
–
|
–
|
(231,796)
|
(231,796)
|
|
Balance –
February 29, 2008
|
258,444
|
26
|
352,822
|
(772,125)
|
(419,277)
|
|
Net loss for
the period
|
–
|
–
|
–
|
(147,358)
|
(147,358)
|
|
Balance
– August 31, 2008 (Unaudited)
|
258,444
|
26
|
352,822
|
(919,483)
|
(566,635)
|
(The accompanying
notes are an integral part of these consolidated financial
statements)
F-6
Sound Revolution,
Inc.
(A
Development Stage Company)
(Expressed in US
Dollars)
(Unaudited)
|
For
the
Six
Month
Period
Ended
|
For
the
Six
Month
Period
Ended
|
Accumulated
From
June
4, 2001
(Date
of Inception)
|
|
|
August
31, 2008
|
August
31, 2007
|
to
August 31, 2008
|
|
|
$
|
$
|
$
|
|
|
Operating
Activities
|
|
|
|
|
Net loss for
the period
|
(147,358)
|
(197,878)
|
(919,483)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
Depreciation
and amortization
|
35,809
|
14,292
|
116,002
|
|
Write-off of
outstanding debt
|
–
|
–
|
(88,718)
|
|
Shares issued
for services
|
–
|
34,868
|
164,941
|
|
Stock options
issued in exchange for services
|
–
|
25,670
|
109,726
|
|
Write-off of
investment
|
10,000
|
–
|
10,000
|
|
Change in
operating assets and liabilities
|
|
|
|
|
Prepaid
expenses and other assets
|
522
|
(8,919)
|
(10,856)
|
|
Accounts
payable and accrued expenses
|
22,030
|
14,985
|
154,989
|
|
Accrued
interest due to related parties
|
–
|
15,639
|
61,032
|
|
Net Cash Used
In Operating Activities
|
(78,997)
|
(101,343)
|
(402,367)
|
|
Investing
Activities
|
|
|
|
|
Purchase of
music rights
|
–
|
–
|
(291)
|
|
Purchase of
office equipment
|
–
|
–
|
(14,818)
|
|
Web site
development costs
|
(1,077)
|
(17,513)
|
(96,887)
|
|
Investment
|
–
|
–
|
(10,000)
|
|
Net Cash
Flows Used In Investing Activities
|
(1,077)
|
(17,513)
|
(121,996)
|
|
Financing
Activities
|
|
|
|
|
Advances from
related parties
|
80,350
|
128,532
|
462,811
|
|
Proceeds from
issuance of common stock
|
–
|
–
|
63,622
|
|
Net Cash
Flows Provided By Financing Activities
|
80,350
|
128,532
|
526,433
|
|
Foreign
exchange effect on cash
|
–
|
722
|
–
|
|
(Decrease)
Increase in Cash
|
276
|
10,398
|
2,070
|
|
Cash -
Beginning of Period
|
1,794
|
6,974
|
–
|
|
Cash - End of
Period
|
2,070
|
17,372
|
2,070
|
|
Non-cash
Investing and Financing Activities
|
|
|
|
|
Common stock
issued for property and equipment
|
–
|
–
|
13,560
|
|
Common stock
issued for debt settlement
|
–
|
–
|
1,000
|
|
Supplemental
Disclosures
|
|
|
|
|
Interest
paid
|
–
|
–
|
1,082
|
|
Income taxes
paid
|
–
|
–
|
–
|
(The accompanying
notes are an integral part of these consolidated financial
statements)
F-7
Sound Revolution,
Inc.
(A
Development Stage Company)
(Expressed in US
Dollars)
(Unaudited)
|
1.
|
Nature
of Operations and Continuance of
Business
|
Sound Revolution,
Inc. (the "Company"), was incorporated under the laws of the State of Delaware.
While the Company sponsored one marketing event to promote its intended purpose
in fiscal year 2004 and has begun to realize nominal revenues from its website,
it continues to be in the development stage. The Company is planning to pursue
the business of providing tools and services for music distribution and
promotion and is currently designing a website for this purpose. The Company has
two wholly-owned subsidiaries: (i) Sound Revolution Recordings, Inc., which was
incorporated in British Columbia, Canada on June 20, 2001, for the purpose of
carrying on music marketing services in British Columbia, and (ii) Charity
Tunes, Inc., which was incorporated in the State of Delaware on June 27, 2005
for the purpose of operating a website for the distribution of songs
online.
Going
Concern
As
shown in the financial statements, the Company is in the development stage and
has not yet developed a commercially viable product or generated significant
revenues from their intended business activities. In addition, the Company has
incurred losses since inception resulting in a net accumulated deficit of
$919,483 at August 31, 2008, and has used cash of $402,367 in operating
activities since inception. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
The Company will
need additional working capital to continue or to be successful in any future
business activities. Therefore, continuation of the Company as a going concern
is dependent upon obtaining the additional working capital necessary to
accomplish its objective. Management plans to seek debt or equity financing, or
a combination of both, to raise the necessary working capital.
The Company expects
that its cash requirements over the next 12 months will not exceed $2,000,000. A
major stockholder and a company controlled by the Company's former
CFO have agreed to make loans to the Company ($522,843 has been drawn through
August 31, 2008) to meet part of its capital requirements for that period. For
the balance of working capital it requires for the next 12 months, the Company
plans to generate cash from the sale of stock to the public and existing
stockholders. When possible, the Company plans to issue stock for professional
services it may require, except for services provided by the Company’s
independent auditor.
The accompanying
financial statements do not include any adjustments to the recorded assets or
liabilities that might be necessary should the Company fail in any of the above
objectives and is unable to operate for the coming year.
|
2.
|
Summary
of Significant Accounting
Principles
|
Basis of Presentation and
Principles of Consolidation
These consolidated
financial statements are prepared in conformity with accounting principles
generally accepted in the United States and are presented in US dollars, unless
otherwise noted, and include the accounts of the Company and its subsidiaries,
Sound Revolution Recordings, Inc., and Charity Tunes, Inc. All inter-company
accounts and transactions have been eliminated. The Company’s fiscal year end is
February 28.
Interim Period Consolidated
Financial Statements
The interim period
consolidated financial statements have been prepared by the Company pursuant to
the rules and regulations of the U.S. Securities and Exchange Commission (the
"SEC"). Certain
information and footnote disclosure normally included in consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such SEC rules
and regulations. The interim period consolidated financial statements should be
read together with the audited consolidated financial statements and
accompanying notes included in the Company's audited consolidated financial
statements for the year ended February 29, 2008. In the opinion of the Company,
the unaudited consolidated financial statements contained herein contain all
adjustments (consisting of a normal recurring nature) necessary to present a
fair statement of the results of the interim periods presented.
Cash
Cash consists of
funds held in checking accounts at a bank in Canada.
F-8
Sound Revolution,
Inc.
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
(Unaudited)
2. Summary
of Significant Accounting Principles (Continued)
Music
Rights
In
February 2003, the Company purchased for $298 ($400 Canadian) the rights to
represent a musician artist in the release of his first musical album. The
artist is also an officer of the Company. Music rights include non-inclusive use
of and distribution rights to the songs in various multi-media formats from the
musician's first album. The music rights will be tested at least annually for
impairment. There has been no impairment of music rights in any of the periods
presented. The cost of the music rights will be expensed upon the release of the
musician's first album and realization of the related royalties. The cost of
music rights will not be carried beyond expiration of the license term on August
31, 2009. Changes in foreign exchange rates since acquisition increased the
carrying cost to $342.
Impairment of Long-Lived
Assets
In
accordance with FAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, management tests long-lived assets to be
held and used for recoverability whenever events or changes in circumstances
indicate that their carrying amount may not be recoverable. No impairment of
intangible assets was recorded during 2008 and 2007.
Property and
Equipment
Property and
equipment, consisting primarily of office equipment, is stated at cost and is
depreciated using the straight-line method over the estimated lives of the
related assets of five years.
Website Development
Costs
Website development
costs are accounted for in accordance with Emerging Issues Task Force EITF 00-2,
“Accounting for Web Site
Development Costs,” with applicable guidance from AICPA statement of
Position 98-1, “Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use.”
The Company’s internal website development processes are relatively short-term
in nature. The costs incurred in the preliminary stages of development are
expensed as incurred. Once an application has reached the development stage,
internal and external costs, if direct and incremental, will be capitalized and
amortized, on a straight-line basis over the estimated useful life, if
management believes such costs are significant. Maintenance and enhancement
costs are typically expensed as incurred unless such costs relate to substantial
upgrades and enhancements to the website that result in added functionality in
which case the costs will be capitalized and amortized on a straight-line basis,
over the estimated useful life, if management believes such costs are
significant.
Website development
costs are amortized using the straight-line method over the estimated useful
life of one year.
Revenue Recognition and Cost
of Revenue
The Company
recognizes revenue from the online sale music in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial
Statements.” The Company accounts for revenue as a principal using the
guidance in EITF 99-19, “Reporting Revenue Gross as a
Principal vs. Net as an Agent”. Revenue consists of the sale of music and
is recognized only when the price is fixed or determinable, persuasive evidence
of an arrangement exists, the product is shipped, and collectibility is
reasonably assured.
Estimates
The preparation of
financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The Company regularly
evaluates estimates and assumptions related to the useful life and
recoverability of long lived assets, stock-based compensation and deferred
income tax asset valuation allowances. The Company bases its estimates and
assumptions on current facts, historical experience and various other factors
that it believes to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities and the accrual of costs and expenses that are not readily apparent
from other sources. The actual results experienced by the Company may differ
materially and adversely from the Company’s estimates. To the extent there are
material differences between the estimates and the actual results, future
results of operations will be affected.
F-9
Sound Revolution,
Inc.
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
(Unaudited)
2. Summary
of Significant Accounting Principles (Continued)
Notes Payable to Related
Parties
The Company has
notes payable to a related party that was bearing interest at 10%. Interest was
charged and was payable quarterly on any outstanding balance beginning on
September 1, 2004 to February 29, 2008. (prior to that date the borrowings from
the related party were non-interest bearing). Starting March 1, 2008, the notes
are unsecured, non-interest bearing and are payable on demand.
Research and Development
Expenses
Research and
development costs are expensed as incurred.
Earnings Per
Share
The Company
computes net income (loss) per share in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 128, "Earnings per Share". SFAS
No. 128 requires presentation of both basic and diluted earnings per share (EPS)
on the face of the income statement. Basic EPS is computed by dividing net
income (loss) available to common shareholders (numerator) by the weighted
average number of shares outstanding (denominator) during the period. Diluted
EPS gives effect to all dilutive potential common shares outstanding during the
period using the treasury stock method and convertible preferred stock using the
if-converted method. In computing diluted EPS, the average stock price for the
period is used in determining the number of shares assumed to be purchased from
the exercise of stock options or warrants. Diluted EPS excludes all dilutive
potential shares if their effect is anti-dilutive.
Income
Taxes
The Company
accounts for income taxes using the asset and liability method in accordance
with SFAS No. 109, “Accounting
for Income Taxes”. The asset and liability method provides that deferred
tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial reporting and tax
bases of assets and liabilities, and for operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured using the
currently enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company records a valuation allowance to reduce
deferred tax assets to the amount that is believed more likely than not to be
realized.
In
July 2006, the FASB issued Financial Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in
Income Taxes”, as an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”
(“SFAS 109”). This Interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with SFAS 109 and prescribes a recognition threshold of more-likely-than-not to
be sustained upon examination. Measurement of the tax uncertainty occurs if the
recognition threshold has been met. This Interpretation also provides guidance
on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal year
beginning after December 15, 2006. Differences between the amounts recognized in
the statements of financial position prior to the adoption of FIN 48 and the
amounts reported after adoption should be accounted for as a cumulative-effect
adjustment recorded to the beginning balance of retained earnings. The adoption
of FIN 48 had no impact to the Company. Since the Company has not filed a US
federal income tax since inception all tax years remain open to IRS
audit.
Fair Value of Financial
Instruments
Financial
instruments consist of cash, accounts payable and accrued expenses, and the note
payable to related parties. The fair value of these financial instruments
approximates their carrying amounts due to their short-term nature and/or
approximation of current market interest rates.
Stock Based
Compensation
The Company records
stock-based compensation in accordance with SFAS No. 123R “Share Based Payments”, using
the fair value method.
All transactions in
which goods or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. Equity instruments issued to employees
and the cost of the services received as consideration are measured and
recognized based on the fair value of the equity instruments
issued.
F-10
Sound Revolution,
Inc.
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
(Unaudited)
2. Summary
of Significant Accounting Principles (Continued)
Recently Issued Accounting
Pronouncements
In
May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 163,
“Accounting for Financial
Guarantee Insurance Contracts – An interpretation of FASB Statement No.
60”. SFAS 163 requires that an insurance enterprise recognize a claim
liability prior to an event of default when there is evidence that credit
deterioration has occurred in an insured financial obligation. It also clarifies
how Statement 60 applies to financial guarantee insurance contracts, including
the recognition and measurement to be used to account for premium revenue and
claim liabilities, and requires expanded disclosures about financial guarantee
insurance contracts. It is effective for financial statements issued for fiscal
years beginning after December 15, 2008, except for some disclosures about the
insurance enterprise’s risk-management activities. SFAS 163 requires that
disclosures about the risk-management activities of the insurance enterprise be
effective for the first period beginning after issuance. Except for those
disclosures, earlier application is not permitted. The adoption of this
statement is not expected to have a material effect on the Company’s financial
statements.
In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. It is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles”. The adoption
of this statement is not expected to have a material effect on the Company’s
financial statements.
|
3.
|
Investment
|
On
September 21, 2006 the Company entered into a Wholesale Digital Download and
Master Tone agreement with CD Baby, Inc to obtain the rights to sell over
1,000,000 songs and ring tones. The initial term of the agreement is for one
year and shall extend on a year to year basis. The Company has paid CD Baby
$10,000 for 100,000 songs (at $0.10 per song). The Company agreed to pay an
additional $90,000 for the remaining 900,000 songs, which it is not obligated to
do. Upon sales of the songs, the Company is obligated to pay royalties to CD
Baby Inc. of between 60% and 70% of the sale price. The Company does
not intend to renew the agreement and therefore the carrying cost of $10,000 has
been charged to operations during the fiscal quarter ended August 31,
2008.
|
4.
|
Property
and Equipment
|
|
|
August
31, 2008
|
February
29, 2008
|
||
|
Cost
|
Accumulated
Depreciation and
Amortization
|
Net Carrying Value
|
Net
Carrying Value
|
|
|
$
|
$
|
$
|
$
|
|
|
Equipment
|
16,745
|
8,325
|
8,420
|
10,110
|
|
Website
Development Costs
|
108,626
|
107,835
|
791
|
33,833
|
|
125,371
|
116,160
|
9,211
|
43,943
|
|
5.
|
Related
Party
Transactions
|
|
|
a)
|
During the
period ended August 31, 2008, a former director of the Company received
$25,000 (2007 - $31,800) in management fees pursuant to a management
agreement. As at August 31, 2008, $1,000 (February 29, 2008 - $2,250) is
owed to him.
|
|
|
b)
|
The Company
has notes payable of $522,843 (February 29, 2008 - $441,243) to a related
party that was bearing interest at 10%. Interest was charged and was
payable quarterly on any outstanding balance beginning on September 1,
2004 to February 29, 2008 (prior to that date the borrowings from the
related parties were non-interest bearing). From March 1, 2008, the notes
are non-interest bearing, unsecured and are payable on
demand.
|
| 6. | Common Stock |
On June 10, 2008, the Company
completed a reverse stock split on the basis of one new share of common stock in
exchange for every forty-two old shares of common stock outstanding. All per
share amounts have been retroactively restated to reflect the reverse stock
split The Company also increased its
authorized capital from 100,000,000 to 110,000,000 shares of which 100,000,000
shares of the total authorized capital shall be common stock and 10,000,000
shares shall be preferred stock.
F-11
Sound Revolution,
Inc.
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
(Unaudited)
|
7.
|
Stock
Options
|
The following table
summarizes the continuity of the Company’s stock options:
|
Shares
#
|
Weighted
Average
Exercise
Price
$
|
Weighted
Average
Remaining
Contractual
Life
(years)
#
|
Aggregate
Intrinsic
Value
$
|
|
|
Outstanding,
February 29, 2008
|
7,738
|
66.15
|
0.73
|
–
|
|
Granted
|
–
|
–
|
–
|
–
|
|
Exercised
|
–
|
–
|
–
|
–
|
|
Cancelled
|
–
|
–
|
–
|
–
|
|
Outstanding,
August 31, 2008
|
7,738
|
66.15
|
0.23
|
–
|
|
Exercisable,
August 31, 2008
|
7,738
|
66.15
|
0.23
|
–
|
At August 31, 2008,
there were no unvested stock options.
|
8.
|
Commitments
|
|
|
a)
|
On January 3,
2008, the Company through its wholly owned subsidiary Charity Tunes Inc.,
entered into an Agency and Promotion agreement (the “Agreement”) with
World Wildlife Fund Canada (“WWF-Canada”) to raise money and awareness of
WWF-Canada’s cause through the participation in promotional programs with
Charity Tunes. The term of the agreement is one year, extended from year
to year with a termination notice of 30 days prior to the end of a term by
either party.
The Company will collect an amount equal
to a minimum of 10% of the purchase price of a song or other digital
content or products sold in its website for which purchasers select
WWF-Canada as the recipient of the donation. Donations collected will be
forwarded to WWF-Canada every calendar quarter if donations owed by
Charity Tunes are at least $100.
|
|
|
b)
|
On August 31,
2004, the Company entered into an agreement with its current director and
chief financial officer, Penny Green, and Bacchus Entertainment Ltd., a
company 100% owned by Penny Green, whereby the net amount of monies
borrowed by the Company from Penny Green or Bacchus Entertainment would
all convert to a loan payable by the Company to Bacchus Entertainment and
that Bacchus Entertainment would make further loans to the Company from
time to time with interest accruing at the annual rate of 10% up to an
aggregate of $70,000. On November 30, 2004, pursuant an addendum, the
parties agreed that interest on the loan monies would accrue quarterly and
would be due within 45 days of the end of each quarter. On January 1,
2007, the loan agreement was again amended so that additional amounts
loaned to the Company by Penny Green or Bacchus Entertainment would be
subject to the loan agreement and so monthly payments will not be required
until September 1, 2007. On June 30, 2007, this agreement was further
amended to extend the payment period to January 1, 2008. On January 1,
2008, this agreement was further amended to waive the January 1, 2008
payment deadline and to make payment due on demand. On May 30, 2008, the
amounts due to related parties were consolidated into one and are now due
to Penny Green. As at March 1, 2008, these amounts are non-interest
bearing, unsecured and due on
demand.
|
|
|
c)
|
On July 10,
2007, the Company entered into a consulting agreement (the “Agreement”)
with Velocity Communications Ltd. (“Velocity”). Pursuant to the Agreement,
Velocity will create and implement a comprehensive investor and public
relations strategy for the Company for the North American market. The term
of the Agreement is for 12 months. In consideration for Velocity’s
services, the Company will compensate Velocity with 10,000 restricted
common shares per month during the term of the Agreement, payable in
advance. The Company will also pay to Velocity a flat fee of $1,500 per
month to cover all expenses. If the Agreement is terminated by either of
the parties, any compensation paid to Velocity and not accrued at
the time of termination will be refundable to the Company. At May 6, 2008,
Velocity had not provided any services to the Company and the agreement
was terminated.
|
|
|
d)
|
On October
10, 2007, the Company entered into an amendment agreement with Puretracks
Inc. (“Puretracks”), whereby the Company agreed to pay to Puretracks,
effective as of August 29, 2007, CDN$0.09 per track and CDN$1.08 per album
download from the Company’s Charity Tunes website in Canada and $0.08 per
track and $0.96 per album downloaded from the Company’s Charity Tunes
website in the United States.
|
F-12
Sound Revolution,
Inc.
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
(Unaudited)
|
9.
|
Reclassifications
|
Certain items for
the period ended May 31, 2007, have been reclassified to conform to the current
period presentation.
|
10.
|
Subsequent
Event
|
On
September 8, 2008, the former president of the Company resigned and agreed to
settle all outstanding amounts and to cancel all outstanding options in his name
for $1,000. This amount is included in Notes payable to related
parties at August 31, 2008.
On
September 15, 2008 the former director, chief financial officer, principal
accounting officer, secretary and treasure resigned.
On
September 15, 2008 the Company appointed a new director, president, chief
executive officer, chief financial officer, principal accounting officer,
secretary and treasurer. The terms of engagement and compensation for the
appointee’s services as an officer and director have not been
finalized.
F-13
RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED AUGUST 31, 2008 COMPARED TO THE SIX
MONTHS ENDED AUGUST 31, 2007, AND FOR THE PERIOD FROM JUNE 4, 2001 (DATE OF
INCEPTION) TO AUGUST 31, 2008.
Revenues:
During the six
months ended August 31, 2008, we realized total revenue of $136 compared to $474
for the six months ended August 31, 2007 and we incurred a net loss of $147,358
for the six months ended August 31, 2008 compared to a net loss of $197,878 for
the same period in 2007. During the three months ended August 31,
2008, our total revenue came to $5 as compared to $388 in revenue for the
three months ended August 31, 2007. As of August 31, 2008, we accumulated $5,371
in revenue from our inception of June 4, 2001. During the period ended August
31, 2008, we incurred a net loss of $84,599 as compared to the net loss of
$72,008 incurred during the same period in 2007.
From June 4, 2001
(date of inception) to August 31, 2008 we have accumulated total expenses of
$995,801 and a net loss of $919,483. Although we have begun to realize nominal
revenue from website activity, we still consider ourselves to be in the
development stage for financial statement presentation.
Expenses:
The major
components of our expenses for the six months ended August 31, 2008 are
management fees, professional fees, depreciation and amortization, and general
administrative expenses which include telephone fees, couriers, postage, and
corporate fees including corporate expenses, software development and office
supplies.
Our management fees
for the six months ended August 31, 2008 were $25,000 compared to $31,800 for
the same period ended August 31, 2007. For the period of three month ended
August 31, 2008, our management fees came to $9,250, which is a decrease of
$6,650 as compared to the results of $15,900 for the same quarter of 2007. The
decrease is due to the resignation of Garry Newman as our director. Our total
accumulated management fees from June 4, 2001 (date of inception) to August 31,
2008 are $171,281.
For the six months
ended August 31, 2008 we did not incur any expense related to director’s fees,
whereas we spent $11,272 on director’s fees during the six months ended August
31, 2007. Our director’s fees for the three months ended August 31, 2008 were $0
compared to $5,949 for the same period ended August 31, 2007. Our total
accumulated director’s fees from June 4, 2001 (date of inception) to August 21,
2008 are $22,485.
We incurred no
interest expense during the six months ended August 31, 2008. For the six months
ended August 31, 2007 our interest expense amounted to $15,639. Our interest
expense for the three months ended August 31, 2008 was $0 compared to $8,182 for
the same period ended August 31, 2007. The drop in the interest expense was the
result of the latest amendment to the loan agreement between Penny Green,
Bacchus Entertainment and us. Our total accumulated interest expense
from June 4, 2001 (date of inception) to August 31, 2008 is
$61,977.
2
Our general and
administrative expenses for the six months ended August 31, 2008 were $7,332
compared to $45,139 for the six months ended August 31, 2007. During the three
months ended August 31, 2008 our general and administrative expenses came to
$2,290, which was a decrease of $14,692 as compared to the results of $16,982
for the three months ended August 31, 2008. This decrease in general and
administrative expenses is mainly the result of decreased software development
costs. Our accumulated general and administrative expenses from June 4, 2001
(date of inception) to August 31, 2008 are $156,688.
We did not have any
research and development expenses for the six months ended August 31, 2008,
whereas we expended $30,273 on research and development in the same period of
2007 which mainly related to the development cost on our website. Our research
and development costs for the three months ended August 31, 2008 were $0
compared to $0 for the same period ended August 31, 2007.. Our accumulated
research and development costs from June 4, 2001 (date of inception) to August
31, 2008 are $77,629.
For the six months
ended August 31, 2008 we spent $69,107 on professional fees as compared to
$19,010 for the same period of 2007. Our professional fees for the three months
ended August 31, 2008 were $53,406 compared to $11,659 for the same period ended
August 31, 2007. Our professional fees are mainly attributable to our auditor
costs. Our total accumulated professional fees from June 4, 2001 (date of
inception) to August 31, 2008 are $223,041.
During the six
months ended August 31, 2008 we had no share based compensation expense, whereas
we spent $25,670 on share based compensation during the six months of the same
period in the previous year. We did not spend any amounts on share based
compensation during the three months ended August 31, 2008 nor during the three
months ended August 31, 2007. From June 4, 2001 (date of inception) to August
31, 2008 we issued $109,726 in stock based compensation. The decrease in stock
based compensation during our past quarterly period is the result of decreased
activities and the corresponding issuance of stock as payment for consulting
services, promotional services, research & development services, and for
capital equipment.
3
We
incurred a net loss of $147,358 and our loss per share came to $0.57 for the six
months ended August 31, 2008 as compared to a net loss of $197,878 and a loss
per share of $0.77 for the same period of the previous year. Our net loss for
the three months ended August 31, 2008 was $84,599 and our loss per share was
$0.33 compared to a net loss of $72,008 and loss per share of $0.28 for the same
period in 2007. Our net loss from June 4, 2001 (date of inception) to August 31,
2008 is $919,483.
As of August 31,
2008, we had cash of $2,070. We intend to continue to make financial investments
in marketing, digital music rights acquisitions, technology, software
development and website development. We expect to incur substantial losses over
the next year.
As a result of our
operating loss of $998,026 from inception on June 4, 2001 through August 31,
2008, and the $175 loss we incurred on the sale of our subsidiary, Buzz Tub
Media Inc., we generated a net deficit accumulated during the development stage
of $919,483. We met our cash requirements during the development stage through
the receipt of $415,560 advanced by Penny Green, our former Director and Chief
Financial Officer, and by Bacchus Entertainment Ltd. (“Bacchus Entertainment”),
a company 100% owned by Penny Green, as well as $63,622 received in exchange for
the sales of our common stock in private placements. We have generated nominal
revenues in this period, and realized a negative cash flow from operations of
$78,997 for the three months ended August 31, 2008 compared to a negative cash
flow from operations of $101,343 for the same period in 2007. From June 4, 2001
(date of inception) to August 31, 2008, we have realized a negative cash flow
from operations of $402,367. We have achieved liquidity from June 4, 2001 (date
of inception) to August 31, 2008 principally from $415,560 advanced by Penny
Green and Bacchus Entertainment.
On August 31, 2004,
Penny Green and Bacchus Entertainment entered into an agreement with us whereby
the net amount of monies borrowed by us from Penny Green and Bacchus
Entertainment would all convert to a loan owed by us to Bacchus and that Bacchus
would make further loans to us from time to time with interest accruing at the
annual rate of 10% up to an aggregate of $70,000. On November 30, 2004, pursuant
to an addendum, the parties agreed that interest on the loan monies would accrue
quarterly and would be due within 45 days of the end of each quarter. On January
1, 2007 the loan agreement was again amended so that additional amounts loaned
to us by Penny Green or Bacchus Entertainment will be subject to the loan
agreement and so monthly payments will not be required until September 1, 2007.
On June 30, 2007 this agreement was further amended to extend the payment period
to January 1, 2008. On January 1, 2008, this agreement was further amended to
waive the January 1, 2008 payment deadline and to make the payment due upon
demand.
Subsequent to the
year end, on May 30, 2008 Penny Green and Bacchus Entertainment entered
into an agreement with us whereby all monies and interest owed by us to Bacchus
Entertainment were assigned to Penny Green. Under the agreement the parties
agreed that no further interest will be charged on any outstanding balance of
the monies loaned and we shall pay the full amount of the loan, being $411,017,
on demand to Penny Green.
4
Our losses for the
three months ended August 31, 2008 were $84,599 or $28,200 per month compared to
$72,008 or $24,003 per month for the same period 2007.
We estimate that
our expenses over the next 12 months (beginning in June 2008) will be
approximately as follows:
|
Planned
Expenses
|
Amount
|
|
Legal
and Accounting
|
$100,000
|
|
Management/
Director Fees
|
$60,000
|
|
General
Administration and working capital (includes office supplies and
expenses, travel)
|
$100,000
|
|
Total
|
$260,000
|
As
of August 31, 2008, we had cash of $2,070 and we believe that we need
approximately an additional $2,000,000 to meet our capital requirements over the
next 12 months. Our intention is to seek equity financing from our existing
shareholders and from friends or family of our officers and Directors through
private placements. We intend to seek additional financing of approximately
$2,000,000 to complete and launch our products into the market. We also intend
to seek consultants willing to accept our common stock as partial or full
consideration for services.
If
we are unable to raise the necessary capital to meet our capital requirements,
we may not be able to pay our internet hosting fees, which may mean that our
website and digital music will no longer be available to the public, or our
auditor fees, which could result in our failure to comply with accounting
disclosure requirements.
If
we expand in the future, and if we successfully license additional music
libraries or any film libraries, we will incur additional personnel costs. In
order for us to attract and retain quality personnel, management anticipates
that it will need to offer competitive salaries, issue common stock to
consultants and employees, and grant Sound Revolution stock options to future
employees. We anticipate that we will need approximately $300,000 per year
beginning in mid-2008 to pay salaries to employees or consultants in working in
the areas of marketing, sales, music acquisition and accounting.
The effect of
inflation on our operating results has not been significant. Our operations are
located primarily in Canada. There are no legal or practical restrictions on our
ability to transfer funds between Sound Revolution and our subsidiary
companies.
The license
agreement with CD Baby, Inc. of September 21, 2006 has been terminated as of
September 21, 2008.
Plan
of Operation for the 12 Months ending August 31, 2009
Research
and Development
During the six and
three months ended August 31, 2008, we incurred $0 in expenses related to
research and development. We do not anticipate that we will spend anything on
research and development over the next 12 months.
Purchase
of Significant Equipment
None.
Employees
We currently have
no employees.
Subsequent
Events
On
September 8, 2008, Robin Ram resigned as our President, Chief Executive Officer
and Director. On September 14, 2008, we accepted a resignation of Penny Green,
who was our Chief Financial Officer, Secretary and Treasurer.
On September 15,
2008, Catherine LeBlanc was appointed as our sole Director, President, Chief
Executive Officer, Chief Financial Officer, Principal Accounting Officer,
Secretary and Treasurer. The terms of Ms. LeBlanc’s engagement and compensation
for services as an officer and Director have not been finalized as of the date
of this report.
5
Critical
Accounting Policies
Our critical
accounting policies, including their underlying assumptions and judgments, are
disclosed in the Notes to the consolidated Financial Statements. These policies
have been consistently applied in all material respects and address such matters
as revenue recognition and depreciation methods. The preparation of the
financial statements in conformity with generally accepted accounting principles
in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles in the United States, with no need for the application of
management’s judgment. There are also areas in which management’s judgment in
selecting any viable alternative would not produce a materially different
result. The following are what management considers Sound Revolution’s critical
accounting policies to be:
The Company
recognizes revenue from the online sale music in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition in
Financial Statements.” The Company accounts for revenue as a principal using the
guidance in EITF 99-19, “Reporting Revenue Gross as a Principal vs. Net as an
Agent”. Revenue consists of the sale of music and is recognized only when the
price is fixed or determinable, persuasive evidence of an arrangement exists,
the product is shipped, and collectibility is reasonably assured.
Stock-Based
Compensation
Prior to the March
1, 2006 adoption of the Financial Accounting Standards Board (“SFAS”) Statement
No. 123(R), “Share-Based Payment” (“SFAS 123R”), we accounted for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations. As permitted by SFAS Statement No. 123,
“Accounting for Stock-Based Compensation” (“SFAS 123”), stock-based compensation
was included as a pro forma disclosure in the notes to the consolidated
financial statements. We had no employee stock-based compensation issued and
outstanding prior to March 1, 2006.
Effective March 1,
2006, we adopted the fair value recognition provisions of SFAS 123R using the
modified-prospective transition method. Under this transition method,
stock-based compensation expenses are recognized in the consolidated financial
statements for granted, modified, or settled stock options. Compensation
expenses recognized include the estimated expenses for stock options granted on
and subsequent to March 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS 123R, and the estimated expenses for the
portion vesting in the period for options granted prior to, but not vested as of
March 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of SFAS 123. Results for prior periods have not been
restated, as provided for under the modified-prospective method.
6
Known
Material Trends and Uncertainties
As of August 31,
2008 we have no off balance sheet transactions that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
We believe that the
above discussion contains a number of forward-looking statements. Our actual
results and our actual plan of operations may differ materially from what is
stated above. Factors which may cause our actual results or our actual plan of
operations to vary include, among other things, decisions of our board of
Directors not to pursue a specific course of action based on its re-assessment
of the facts or new facts, changes in the online music sales or music
distribution industry or general economic conditions.
During the period
ended August 31, 2008, our former director received $25,000 (2007 - $31,800) in
management fees pursuant to a management agreement. As at August 31, 2008,
$1,000 is owed to him.
We have notes
payable of $522,843 (February 29, 2008 - $441,243) to a related party that was
bearing interest at 10%. Interest was charged and was payable quarterly on any
outstanding balance beginning on September 1, 2004 to February 29, 2008 (prior
to that date the borrowings from the related parties were non-interest bearing).
From March 1, 2008, the notes are non-interest bearing, unsecured and are
payable on demand.
Item
3. Quantitative and Qualitative Disclosure About Market
Risk.
Not applicable.
Evaluation
of Disclosure Controls and Procedures
Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f)). Our internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
Because of our
inherent limitations, our internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our Chief Executive
Officer and Chief Financial Officer assessed the effectiveness of our internal
control over financial reporting as of February 29, 2008. In making this
assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated
Framework.
Management
conducted a walk through of the procedures and controls documented in this memo
or relied on personal knowledge where no walk through was possible in order to
test the effectiveness of our internal control over financial
reporting.
A material weakness
is a deficiency, or combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. In its assessment of the effectiveness of
internal control over financial reporting as of February 29, 2008, we determined
that there were control deficiencies that constituted material weaknesses, as
described below.
|
1.
|
Certain
entity level controls establishing a “tone at the top” were considered
material weaknesses. We have no audit committee and none of our directors
is considered to be a financial expert. There is no policy on fraud and no
code of ethics at this time, though we plan to implement such policies in
fiscal 2008.
|
|
2.
|
There are no
preventative and detective IT systems in place to prevent and/or detect
fraud other than password protection. There are no software based
accounting controls in place to prevent double entries, monitor
performance, etc. Caseware software is used to record all accounting
transactions.
|
|
3.
|
We lack a
sufficient complement of personnel to maintain segregation of duties in
the area of cash management and financial
reporting.
|
7
The recommendations
to remediate these deficiencies are as follows:
|
1.
|
Appoint a
minimum of two independent directors to the board of directors and then
implement an audit committee to review all financial statements and SEC
filings and oversee the development of corporate
policies.
|
|
2.
|
Hire
additional staff to assist with cash management and financial reporting
duties.
|
|
3.
|
Consider
purchasing basic accounting software to record accounting transactions and
print cheques. However, a basic accounting program may not be GAAP
compliant and may not provide an adequate audit trail. We need to evaluate
all options.
|
Accordingly, we
concluded that these control deficiencies resulted in a reasonable possibility
that a material misstatement of the annual or interim financial statements will
not be prevented or detected on a timely basis by the company’s internal
controls.
As a result of the
material weaknesses described above, management has concluded that the Company
did not maintain effective internal control over financial reporting as of
February 29, 2008 based on criteria established in Internal Control—Integrated
Framework issued by COSO..
We did not change
our internal control over financial reporting during our last fiscal quarter of
2008 in connection with the results of Management’s report, nor have we made any
changes to our internal control over financial reporting as of August 31,
2008.
8
Management is not
aware of any legal proceedings contemplated by any governmental authority
against us. None of our directors, officers or affiliates are (i) a party
adverse to us in any legal proceedings, or (ii) have an adverse interest to us
in any legal proceedings.
None.
None.
On June 10, 2008,
holders of a majority (72%) of the outstanding shares of our common stock
approved (i) a 1-for-42 reverse stock split of the outstanding shares of our
common stock and (ii) an increase in the number of our authorized share capital
from 100,000,000 to 110,000,000 shares, of which 100,000,000 are common and
10,000,000 are preferred shares. As the result of the reverse split,
our issued and outstanding capital was decreased from 10,854,629 to 258,444
shares of common stock. We amended our Articles of Incorporation to effect the
aforementioned changes by filing a Certificate of Amendment with the Delaware
Secretary of the State.
None.
9
(a)
Exhibits
Certifications
10
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
SOUND REVOLUTION
INC.
|
|
|
(Registrant)
|
|
|
Date: October
10, 2008
|
By: /s/
Catherine LeBlanc
|
|
Catherine
LeBlanc,
Chief Executive Officer, Chief Financial Officer, President, Treasurer and Secretary |