SACRAMENTO, Calif., March 7 /PRNewswire-FirstCall/ -- Digital Music
Group, Inc. (NASDAQ:DMGI), a content owner and global leader in the
digital distribution of independently owned music and video
catalogs, today reported results for its fourth quarter and year
ended December 31, 2006. Revenue for the fourth quarter of 2006
totaled $2,790,553, compared to $454,440 in the fourth quarter of
2005. The Company's net loss for the fourth quarter of 2006 was
$770,329, or $0.09 per share, compared to a net loss of $363,128,
or $0.16 per share, in the fourth quarter of 2005. For the year
ended December 31, 2006, revenue totaled $5,564,949, compared to
$679,975 in the year ended December 31, 2005. The Company's net
loss for 2006 was $2,622,434, or $0.32 per share, compared to a net
loss of $1,557,614, or $0.69 per share, in 2005. During the first
quarter of 2006, Digital Music Group completed its initial public
offering and the concurrent acquisitions of Digital Musicworks
International, Inc. (DMI) and certain assets of Rio Bravo
Entertainment LLC, doing business as Psychobaby. DMI was deemed to
be the "accounting acquiror" in these transactions. On September 8,
2006, the Company completed the acquisition of Digital Rights
Agency, LLC (DRA), a leading worldwide digital music distributor
focused on independent record labels. Therefore, the Company's
GAAP-basis results reported herein for 2006 are the historical
results of DMI for the entire period plus the results of the
acquired companies for the period after their respective
acquisition dates. For 2005, the Company's GAAP-basis results
reported herein are for DMI only. The Company believes that pro
forma combined financial information, which reflects the results of
all the acquired companies as if they had been combined throughout
all periods presented, is helpful in understanding the Company's
overall results. 2006 Compared to 2005 * On a pro forma combined
basis, revenue totaled $10,201,101 for 2006, compared to $3,706,005
for 2005. * The Company's pro forma combined net loss for 2006 was
$2,757,145 or $0.32 per share, compared to a pro forma combined net
loss of $1,853,178, or $0.36 per share, in 2005. * Total paid
downloads (with albums presented as single track equivalents) for
2006 were 14,093,000, 2.6 times greater than 2005 when paid
downloads totaled 5,387,000. * On average, there were approximately
137,700 tracks available for sale during 2006, compared to
approximately 31,300 tracks available for sale during 2005. Tracks
available for sale were approximately 219,800 at December 31, 2006,
compared to approximately 63,700 at December 31, 2005. * The
average monthly download rate for the full year 2006 was 8.5 times,
compared to 14.3 times for the full year 2005. * Apple iTunes Store
accounted for 77% of the Company's pro forma combined revenue for
2006. DMGI's Chief Executive Officer, Mitchell Koulouris, said,
"Our 2006 revenue increased more than two and one-half times over
last year and reflects an eventful year. We used a portion of our
February 2006 IPO proceeds to acquire additional catalogs of music
recordings and finished 2006 with approximately 335,000 tracks
under management. Our purchase of Digital Rights Agency ("DRA") in
September enhanced our worldwide distribution capabilities to
include numerous mobile services and included thousands of tracks
of more contemporary music from current artists that added
diversity to our music offerings. During the second half of 2006,
we expanded our business model to include the digital distribution
of music videos, television, film and other video catalogs.
Finally, during 2006 we developed and refined our technology
platform and are well positioned to be the distributor of choice
for independent music, television, film and video catalog owners."
Fourth Quarter 2006 Compared to Fourth Quarter 2005 * Revenue for
the fourth quarter of 2006 totaled $2,790,553, compared to revenue
on a pro forma combined basis of $2,545,003 in the third quarter of
2006, and $1,587,385 in the fourth quarter of 2005. * The Company's
net loss for the fourth quarter of 2006 was $770,329, or $0.09 per
share, compared to a pro forma net loss of $954,467, or $0.11 per
share, in the third quarter of 2006 and $473,844, or $0.09 per
share, in the fourth quarter of 2005. The reduction in net loss
from the third quarter of 2006 resulted from increased revenue and
gross profit and a reduction in operating expenses, which included
non-recurring charges related to severance costs of $76,000 and
$113,000 in the fourth and third quarters, respectively. * There
were 3,785,000 paid downloads (with albums expressed in single
track equivalents) of the Company's music recordings during the
fourth quarter of 2006, a 9% increase over the third quarter of
2006 when paid downloads totaled 3,471,000, and 1.5 times greater
than the fourth quarter of 2005 when paid downloads totaled
2,288,000. * There were approximately 196,200 average tracks
available for sale during the fourth quarter of 2006, compared to
approximately 155,100 during the third quarter of 2006, and
approximately 52,300 during the fourth quarter of 2005. * The
average monthly download rate per track during the fourth quarter
of 2006 was approximately 6.4 times, compared to approximately 7.5
times in the third quarter of 2006, and 14.6 times in last year's
fourth quarter. * Apple iTunes Store accounted for 70% of the
Company's revenue for the fourth quarter of 2006. Commenting on the
quarter, Mr. Koulouris noted, "Our revenue for the fourth quarter
increased 75% over the fourth quarter of 2005 due primarily to the
steady increase in the number of tracks we have made available for
sale and revenue from mobile distribution which grew from less than
2% of our total revenue last year to over 10% this year. Revenue
associated with the increase in tracks was partially offset by a
decline in our average download rate. This decline in download rate
was due, in part, to the relatively small number of tracks
available for sale with a higher proportion of more popular and
holiday-oriented content in last year's fourth quarter. Seasonality
and consumer purchasing trends are still emerging in our industry.
DRA's catalogs, which contain more contemporary music from current
artists, downloaded at an average of 14.7 times per month during
the fourth quarter, compared to an average of 3.2 times per month
for the rest of our catalogs, which contain various genres but are
primarily older recordings, including past hits, out-of-print and
back catalog recordings, world music, classical music, previously
unreleased recordings, live performances and other music that may
no longer be available from traditional music retailers. The
recordings we have had available for sale for over a year have
experienced fairly consistent download rates each quarter during
2006. However, many of the catalogs and tracks added during 2006
have not experienced the same level of consumer demand or have
restricted territorial distribution rights which limit sales
opportunities." Management continues to focus on business
development, expanding sales channels, obtaining delivery of music
and video recordings, and processing and distributing these
recordings to online stores and mobile services where they can be
made available for purchase by consumers. At December 31, 2006, the
Company owned or controlled under digital distribution agreements
approximately 335,000 individual music recordings. Of these,
approximately 220,000 were available for sale at that date,
approximately 45,000 had been processed and transmitted to one or
more online stores where they were awaiting review and processing
by the stores before being posted for sale, approximately 40,000
were in various stages of the Company's digitization process, and
approximately 30,000 had not yet been delivered by the content
owners. In addition, at December 31, 2006, the Company had over
4,000 hours of video content under long-term distribution
agreements which it has just begun processing and delivering to
various distribution outlets. "We are continuing to build our video
catalog and list of world-class video distribution partners,"
continued Mr. Koulouris. "We signed new video distribution
agreements with Apple iTunes, YouTube, In2TV, BitTorrent, and
Movielink and are continuing to work with new video channel
partners, particularly in the mobile market. Adding music videos
and TV, film, and other video catalogs was a natural extension of
our business model, as the video and film markets have just begun
their migration from physical to digital distribution, much like
the pre-recorded music market three years ago. Although we do not
expect to achieve any meaningful revenue from video distribution
until the second half of 2007, we believe we are well positioned to
be an industry leader as this emerging market begins to mature."
Karen Davis, Chief Financial Officer, concluded, "Our financial
position remains strong with DMGI's December 31, 2006 balance sheet
showing $20.5 million in cash, no debt (except for minor equipment
leases), and stockholders' equity of $35.4 million." Conference
Call and Webcast Digital Music Group's management will host a
conference call and webcast tomorrow, March 8, 2007 at 11:00 a.m.
Eastern Time, 8:00 a.m. Pacific Time. To participate in the call,
interested parties are invited to dial 866-202-4367 (for domestic
callers) or 617-213-8845 (for international callers) at least five
minutes prior to the start time. The participant passcode is
92606431. A live webcast of the call will be available on DMGI's
website at http://investor.dmgi.com/. A replay of the call will be
available one hour after the call ends through March 15, 2007 by
dialing 888-286-8010 (for domestic callers) and 617-801-6888 (for
international callers). The reservation code is 43648915. A replay
of the webcast will also be archived on the Company's website.
Forward-Looking Statements This press release contains statements
that are considered to be forward-looking within the meaning of
federal securities law. Such forward-looking statements include,
but are not limited to, statements relating to seasonality and
consumer purchasing trends, management's focus and objectives,
plans for expanding the Company's video catalogs and list of video
distribution partners, the migration of video and film markets to
digital distribution, and expectations for revenue growth from
video. You should not place undue reliance on these forward-looking
statements, which are based on the Company's current views and
assumptions. Actual results could differ materially from those
anticipated in such forward-looking statements as a result of many
reasons, including risks, uncertainties and factors which include,
but are not limited to: * revenue and earnings expectations which
are difficult to predict because of the Company's limited operating
history and emerging nature of the digital media industry; * the
Company's ability to successfully integrate acquisitions, including
the acquisition of DRA; * the Company's ability to successfully
identify, acquire for a commercially reasonable valuation, and
process additional catalogs of sound and video recordings; * the
Company's ability to successfully enter into new sales channel
relationships; * competitive and economic conditions in the
Company's industry; * acceptance and adoption of the digital format
by consumers and potential changes in consumers' tastes and
preferences in music and video, and the extent to which the
Company's content will appeal to consumers; * the Company's limited
operating history in the acquisition, processing and sale of
digital video recordings; * the Company's limited ability to
influence the pricing models of online stores; * the Company's
dependence on online stores and mobile services to review, process
and make all of its digital offerings available on a comprehensive
and timely basis for purchase by consumers; * the Company's
dependence on Apple iTunes Store for the majority of its revenue; *
the Company may not have proper legal title to the digital rights
associated with music recordings the Company purchases or licenses,
or others may claim to have such rights; * potentially long delays
in receiving the master recordings and videos that the Company
acquires rights to; * the Company's ability to renew multi-year
agreements for digital rights to music and video recordings as they
expire; * music and video piracy; * differing interpretations of
and potential ambiguities in U.S. copyright laws; * availability,
terms and use of capital to continue to grow the Company's
business; and * maintaining adequate internal operating and
financial controls over the Company's business and financial
reporting. Many of the factors listed above are beyond DMGI's
control. Please refer to periodic reports filed with the SEC for
more information on these and other "risk factors" associated with
DMGI's business. The Company's forward-looking statements represent
estimates and assumptions only as of the date of this release.
Except as required by law, DMGI undertakes no obligation to update
any forward-looking statement to reflect events or circumstances
occurring after the date of this release. Use of Non-GAAP Measures
Management believes that non-GAAP revenue and net loss presented on
a pro forma combined basis included in this release are useful
measures of operating performance because they include the
operations of DMGI and the operations of DMI and the Psychobaby
catalog assets that were acquired on February 7, 2006, and the
acquisition of DRA on September 8, 2006, as if they had been
acquired as of the beginning of all periods presented. However,
these non-GAAP measures should be considered in addition to, not as
a substitute for or superior to, revenue, net loss and gross profit
margin provided by operating activities, or other financial
measures prepared in accordance with GAAP. A reconciliation of the
pro forma combined statements of operations to the GAAP statements
is included in the attached tables of financial information. About
Digital Music Group, Inc. Founded in 2005, Digital Music Group,
Inc. (NASDAQ:DMGI) is a content owner and global leader in the
digital distribution of independently owned music, TV, film and
video catalogs. DMGI acquires the digital rights to media catalogs
and digitally encodes them into multiple formats for distribution
to online music, mobile, and video stores. Our retailers include:
the iTunes Store, YouTube, Google Video, RealNetworks, Napster,
Wal-Mart Music, Yahoo! Music, InfoSpace, Moderati, Zingy, 9Squared,
and many others. For more information, please visit
http://www.dmgi.com/. Digital Music Group is a trademark of Digital
Music Group, Inc. Other names mentioned herein are the property of
their respective owners. Investor Relations Contact Digital Music
Group, Inc.: Karen Davis, Chief Financial Officer, Telephone: (916)
239-6010 x2505. Allen & Caron Inc: Jesse Deal, Account Manager,
Telephone: (212) 691-8087, e-mail: Press Contact Allen & Caron
Inc.: Len Hall, VP Media Relations, Telephone: (949) 474-4300,
e-mail: Digital Music Group, Inc. Unaudited Condensed Statements of
Operations (including reconciliation of reported results to pro
forma combined results, adjustments shown below) Quarter ended
December 31, 2006 2005 Digital Digital Digital Music Music Music
Group, Inc. Group, Inc. Group, Inc. Pro Forma (as reported) (as
reported) Combined Revenue $2,790,553 $454,440 $1,587,385 Cost of
revenue: Royalties and payments to content owners 1,927,221 163,320
1,119,201 Amortization of digital rights 151,389 7,469 65,617
Write-down of non-productive assets -- 221,914 221,914 Gross profit
711,943 61,737 180,653 Operating, general and administrative
expenses 1,743,905 421,847 642,250 Income (loss) from operations
(1,031,962) (360,110) (461,597) Interest income 276,105 1,933 3,037
Interest and other income (expense) (14,472) (4,951) (15,284)
Income (loss) before income taxes (770,329) (363,128) (473,844)
Income taxes -- -- -- Net income (loss) $(770,329) $(363,128)
$(473,844) Net loss per common share- basic and diluted $(0.09)
$(0.16) $(0.09) Weighted average common shares-basic and diluted(1)
9,024,941 2,249,941 5,119,941 Digital Music Group, Inc. Adjustments
to Reconcile Unaudited Condensed Statements of Operations, as
Reported to Pro Form Combined Results Quarter ended December 31,
2005 Digital Digital Rio Bravo Rights Music Entertain- Agency
Group, Inc. ment ProForma (prior to (prior to (prior to Adjust-
acquis- acquis- acquis- ments(2) ition) ition) ition) Revenue
$990,232 $-- $142,713 $-- Cost of revenue: Royalties and payments
to content owners 844,411 -- 111,470 -- Amortization of digital
rights -- -- -- 58,148 Write-down of non-productive assets -- -- --
-- Gross profit 145,821 -- 31,243 (58,148) Operating, general and
administrative expenses 187,031 28,294 670 4,408 Income (loss) from
operations (41,210) (28,294) 30,573 (62,556) Interest income 1,104
-- -- -- Interest and other income (expense) -- (10,333) -- --
Income (loss) before income taxes (40,106) (38,627) 30,573 (62,556)
Income taxes -- -- -- -- Net income (loss) $(40,106) $(38,627)
$30,573 $(62,556) (1) For the quarter ended December 31, 2005,
weighted average shares outstanding include the 2,249,941 shares
attributable to DMI, the acquiring company for accounting purposes.
The pro forma combined weighted average shares outstanding for this
period also include the 2,425,000 shares of DMGI outstanding at the
IPO date, the 25,000 shares issued on February 7, 2006 in
connection with the acquisition of Rio Bravo Entertainment LLC, and
the 420,000 shares issued on September 8, 2006 in connection with
the acquisition of Digital Rights Agency, LLC , as if the
acquisitions had occurred at the beginning of the period. (2)
Amortization and depreciation of the fair value of the assets of
Digital Rights Agency, LLC and Rio Bravo Entertainment as if
acquired at the beginning of the period. Digital Music Group, Inc.
Unaudited Condensed Statements of Operations (including
reconciliation of reported results to pro forma combined results)
Year Ended December 31, 2006 Digital Digital Rights Music Digital
Music Agency LLC Group, Inc. Group, Inc. (prior to (prior to (as
reported) acquisition) acquisition) Revenue $5,564,949 $4,572,956
$-- Cost of revenue: Royalties and payments to content owners
3,329,698 3,880,289 -- Amortization of master recordings and
digital rights 422,489 -- -- Gross profit 1,812,762 692,667 --
Operating, general and administrative expenses 5,655,161 733,800
10,000 Income (loss) from operations (3,842,399) (41,133) (10,000)
Interest income 1,251,396 5,923 -- Interest expense (13,649)
(1,538) (4,667) Other expense (16,982) -- -- Income (loss) before
income taxes (2,621,634) (36,748) (14,667) Income taxes (800) --
Net income (loss) $(2,622,434) $(36,748) $(14,667) Net loss per
common share- basic and diluted ($0.32) Weighted average common
shares- basic and diluted(1) 8,071,393 Digital Music Group, Inc.
Unaudited Condensed Statements of Operations (including
reconciliation of reported results to pro forma combined results)
Year Ended December 31, 2006 Rio Bravo Digital Music Entertainment
Group, Inc. (prior to Pro Forma Pro Forma acquisition) Adjustments
Combined (2) Revenue $63,196 $-- $10,201,101 Cost of revenue:
Royalties and payments to content owners 50,556 -- 7,260,543
Amortization of master recordings and digital rights -- 86,118
508,607 Gross profit 12,640 (86,118) 2,431,951 Operating, general
and administrative expenses 624 9,194 6,408,779 Income (loss) from
operations 12,016 (95,312) (3,976,828) Interest income -- --
1,257,319 Interest expense -- -- (19,854) Other expense -- --
(16,982) Income (loss) before income taxes 12,016 (95,312)
(2,756,345) Income taxes -- -- (800) Net income (loss) $12,016
$(95,312) $(2,757,145) Net loss per common share- basic and diluted
($0.32) Weighted average common shares- basic and diluted(1)
8,615,283 (1) For the year ended December 31, 2006, weighted
average shares outstanding for the pro forma combined statements
include (i) for the entire period, the 2,249,941 shares
attributable to DMI, the acquiring company for accounting purposes,
(ii) from February 7, 2006 until the end of the period, the
2,425,000 shares of DMGI outstanding at the IPO date and the 25,000
shares issued in connection with the acquisition of certain assets
of Rio Bravo Entertainment LLC, (iii) from September 8, 2006 until
the end of the period, the 420,000 shares issued in connection with
the acquisition of Digital Rights Agency, LLC, and (iv) from
February 7, 2006 until the end of the period, the 3,900,000 shares
sold in the IPO. The pro forma combined weighted average shares
outstanding for this period also include the shares in (ii) and
(iii) above for the entire period, as if these transactions had
occurred on January 1, 2006. (2) Amortization and depreciation of
the fair value of the assets of Digital Rights Agency, LLC and Rio
Bravo Entertainment as if acquired at the beginning of the period.
Digital Music Group, Inc. Unaudited Condensed Statements of
Operations (including reconciliation of reported results to pro
forma combined results) Year Ended December 31, 2005 Digital
Digital Rights Music Digital Music Agency LLC Group, Inc. Group,
Inc. (prior to (prior to (as reported) acquisition) acquisition)
Revenue $679,975 $2,650,304 $-- Cost of revenue: Royalties and
payments to content owners 232,294 2,214,476 -- Amortization of
digital rights 22,518 -- -- Write-down of non-productive assets
295,356 -- -- Gross profit 129,807 435,828 -- Operating, general
and administrative expenses 1,550,423 468,100 75,055 Income (loss)
from operations (1,420,616) (32,272) (75,055) Interest income 5,567
2,680 -- Interest expense (141,765) -- (10,333) Income (loss)
before income taxes (1,556,814) (29,592) (85,388) Income taxes
(800) Net income (loss) $(1,557,614) $(29,592) $(85,388) Net loss
per common share- basic and diluted $(0.69) Weighted average common
shares- basic and diluted(1) 2,249,941 Digital Music Group, Inc.
Unaudited Condensed Statements of Operations (including
reconciliation of reported results to pro forma combined results)
Year Ended December 31, 2005 Rio Bravo Digital Music Entertainment
Group, Inc. (prior to Pro Forma Pro Forma acquisition) Adjustments
Combined (2) Revenue $375,726 $-- $3,706,005 Cost of revenue:
Royalties and payments to content owners 290,935 -- 2,737,705
Amortization of digital rights -- 232,592 255,110 Write-down of
non-productive assets -- -- 295,356 Gross profit 84,791 (232,592)
417,834 Operating, general and administrative expenses 12,141
20,642 2,126,361 Income (loss) from operations 72,650 (253,234)
(1,708,527) Interest income -- -- 8,247 Interest expense -- --
(152,098) Income (loss) before income taxes 72,650 (253,234)
(1,852,378) Income taxes (800) Net income (loss) $72,650 $(253,234)
$(1,853,178) Net loss per common share- basic and diluted $(0.36)
Weighted average common shares- basic and diluted(1) 5,119,941 (1)
For the year ended December 31, 2005, weighted average shares
outstanding include the 2,249,941 shares attributable to DMI, the
acquiring company for accounting purposes. The proforma combined
weighted average shares outstanding for this period also include
the 2,425,000 shares of DMGI outstanding at the IPO date, the
25,000 shares issued on February 7, 2006 in connection with the
acquisition of Rio Bravo Entertainment LLC and the 420,000 shares
issued on September 8, 2006 in connection with the acquisition of
Digital Rights Agency, LLC as if these transactions had occurred at
the beginning on January 1, 2005. (2) Amortization and depreciation
of the fair value of the assets of Digital Rights Agency, LLC and
Rio Bravo Entertainment as if acquired at the beginning of the
period. Digital Music Group, Inc. Unaudited Condensed Balance
Sheets December 31, 2006 2005 Assets Current assets: Cash and cash
equivalents $20,505,674 $468,490 Accounts receivable 1,687,492
244,278 Current portion of royalty advances 1,326,379 292,438 Other
current assets 492,799 152,139 Total current assets 24,012,344
1,157,345 Long-term assets: Furniture and equipment, net 803,203
162,153 Digital rights, net 3,033,239 1,196,047 Master recordings,
net 1,777,480 -- Royalty advances, less current portion 4,230,403
490,000 Goodwill 4,429,781 -- Other assets 39,289 12,074 Total
assets $38,325,739 $3,017,619 Liabilities and Stockholders' Equity
Current liabilities: Accounts payable and other current liabilities
$885,686 $417,215 Royalties payable 1,883,773 138,608 Current
portion of capital lease obligations 50,496 44,540 Total current
liabilities 2,819,955 600,363 Long-term liabilities 101,796 --
Total liabilities 2,921,751 600,363 Stockholders' equity: Common
Stock 90,350 22,500 Additional paid-in capital 40,138,284 4,640,291
Subscription receivable -- (43,323) Accumulated deficit (4,824,646)
(2,202,212) Total stockholders' equity 35,403,988 2,417,256 Total
liabilities and stockholders' equity $38,325,739 $3,017,619
DATASOURCE: Digital Music Group, Inc. CONTACT: Investors, Karen
Davis, Chief Financial Officer of Digital Music Group, Inc.,
+1-916-239-6010, ext. 2505; or Jesse Deal, Account Manager of Allen
& Caron Inc., +1-212-691-8087, , for Digital Music Group, Inc.;
or Media, Len Hall, VP Media Relations of Allen & Caron Inc.,
+1-949-474-4300, , for Digital Music Group, Inc. Web site:
http://www.dmgi.com/
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