Registration
No. 333 -
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDERTHE SECURITIES ACT OF 1933
aVINCI
MEDIA CORPORATION
(Exact
name of registrant in its charter)
Delaware
|
|
000-17288
|
|
75-2193593
|
(State
or other Jurisdiction of
|
|
(Primary
Standard Industrial
|
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
|
Classification
Code Number)
|
|
Identification
No.)
|
11781
South Lone Peak Parkway, Suite 270
Draper,
UT 84020
(801) 495-5700
(Address
and telephone number of principal executive offices and principal place of
business)
Chett
B. Paulsen, Chief Executive Officer
aVINCI
MEDIA CORPORATION
11781
South Lone Peak Parkway, Suite 270
Draper,
UT 84020
(801) 495-5700
(Name,
address and telephone number of agent for service)
Copies
to:
Marc
Ross
Sichenzia
Ross Friedman Ference LLP
61
Broadway, 32nd Floor
New
York, New York 10006
(212) 930-9700
(212) 930-9725
(fax)
Approximate
date of proposed sale to the public: From time to time after this Registration
Statement becomes effective.
If any
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. o
Indicate
by a 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. (Check One)
Large
Accelerated Filer o
|
Accelerated
Filer o
|
Non-accelerated
Filer o
|
Smaller
Reporting Company x
|
(Do not
check if a smaller reporting company)
|
|
|
|
Proposed
|
|
|
|
|
|
|
|
|
|
maximum
|
|
Proposed
|
|
|
|
|
|
|
|
offering
|
|
maximum
|
|
|
|
(i) Title of each class of
|
|
Amount to be
|
|
price per
|
|
aggregate
|
|
Amount of
|
|
securities to be registered
|
|
registered
|
|
share
|
|
offering price
|
|
registration fee
|
|
Common
Stock, no par value
|
|
16,929,640
|
|
$
|
1.01
|
(1)
|
$
|
17,098,936
|
|
$
|
671.99
|
|
Common
Stock, no par value, issuable upon exercise of warrants exercisable at
$0.53 per share
|
|
949,350
|
|
$
|
0.53
|
(2)
|
$
|
503,156
|
|
$
|
19.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
17,878,990
|
|
|
|
$
|
17,602,092
|
|
$
|
691.76
|
|
(1)
|
Estimated
solely for purposes of calculating the registration fee in accordance with
Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the high and low price as reported on the
Over-The-Counter Bulletin Board on July 28, 2008 which was $1.01 per
share.
|
(2)
|
Pursuant
to Rule 457(g) under the Securities Act, the maximum offering price
per security represents the exercise price of the applicable preferred
stock, warrants or options.
|
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
SUBJECT
TO COMPLETION, DATED AUGUST 7, 2008
PRELIMINARY
PROSPECTUS
aVINCI
MEDIA CORPORATION
17,878,990
SHARES OF COMMON STOCK
This
prospectus relates to the resale by the selling stockholder of up to 17,878,990
shares of our common stock, consisting of up to 16,929,640 shares of common
stock and 949,350 shares issuable upon the exercise of common stock warrants.
The selling stockholder may sell common stock from time to time in the principal
market on which the stock is traded at the prevailing market price or in
negotiated transactions. We will pay the expenses of registering these shares,
other than any selling stockholder’s legal or accounting costs or
commissions.
Our
common stock is traded on the Over the Counter Bulletin Board Pink Sheets (“OTC
Pink Sheets”) under the symbol “AVMC.PK.” The closing sale price on the OTC Pink
Sheets on July 28, 2008, was $1.01 per share.
Investing
in these securities involves significant risks. See “Risk Factors” beginning on
page 3.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this Prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The date
of this prospectus is ___________, 2008.
The
information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by aVinci
Media Corporation with the Securities and Exchange Commission. The selling
stockholder may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
|
|
PROSPECTUS
SUMMARY
|
1
|
|
|
RISK
FACTORS
|
3
|
|
|
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
|
14
|
|
|
USE
OF PROCEEDS
|
14
|
|
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|
15
|
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS
|
17
|
|
|
BUSINESS
|
23
|
|
|
MANAGEMENT
|
30
|
|
|
EXECUTIVE
COMPENSATION
|
33
|
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
35
|
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
36
|
|
|
SELLING
STOCKHOLDER
|
37
|
|
|
DESCRIPTION
OF SECURITIES
|
38
|
|
|
PLAN
OF DISTRIBUTION
|
39
|
|
|
LEGAL
MATTERS
|
41
|
|
|
EXPERTS
|
41
|
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
41
|
|
|
AVAILABLE
INFORMATION
|
41
|
|
|
PART
II INFORMATION NOT REQUIRED IN PROSPECTUS
|
II-1
|
|
|
SIGNATURES
|
II-4
|
The
following summary highlights selected information contained in this prospectus.
This summary does not contain all the information you should consider before
investing in the securities. Before making an investment decision, you should
read the entire prospectus carefully, including the “Risk Factors” section, the
financial statements and the notes to the financial statements. In
this prospectus, the “Company,” “we,” “us,” and “our” refer to aVinci Media
Corporation.
aVinci
Media Corporation
aVinci
Media Corporation (formerly known as Secure Alliance Holdings Corporation and
hereinafter referred to as the “Company,” “we,” “us,” or “our”) is a Delaware
corporation. Between October 2, 2006 and June 6, 2008, the Company
was a shell public company and conducted no business activities other than
seeking appropriate merger acquisition candidates. In June 2008
(described in Recent Developments below), these efforts led to the acquisition
of Sequoia Media Group, LC (“Sequoia”) by way of a reverse merger.
Business
We
through our subsidiary Sequoia, deploy a software technology that employs
“Automated Multimedia Object Models,” its patent-pending way of turning consumer
captured images, video, and audio into complete digital files in the form of
full-motion movies, DVD’s, photo books, posters and streaming media
files. Sequoia filed its first provisional patent in early 2004 for
patent protection on various aspects of its technology with a full filing
occurring in early 2005, and Sequoia has filed several patents since that time
as part of its intellectual property strategy. Sequoia’s technology
carries the brand names of “aVinci” and “aVinci Experience.”
In May
2004 Sequoia signed its first client agreement with BigPlanet, a division of
NuSkin International, Inc. (“NuSkin”). Under the terms of the
BigPlanet agreement, Sequoia supplied BigPlanet with its software technology
that BigPlanet marketed, sold, and fulfilled for their
consumers. Revenues from BigPlanet represent substantially all of
Sequoia’s sales through 2007 at approximately $3.4 million from May 2004 through
December 2007. Sequoia’s agreement with BigPlanet expired on December
31, 2007. BigPlanet continues to offer Sequoia DVD products and pays
a per-product royalty for products made on a monthly basis resulting in a
royalty of approximately $2,000 per month.
Since
inception Sequoia has continued to develop and refine its technology to be able
to provide higher quality products through a variety of distribution models
including in-store kiosks, retail kits, and online
downloads. Sequoia’s business strategy has been to develop a product
solution that provides users with professionally created templates to
automatically create personalized products by simply adding user
images.
Sequoia’s
business efforts during 2006 and 2007 were directed at developing relationships
with mass retailers. Sequoia signed an agreement to provide its
technology in Meijer stores at the end of 2006. Due to an integration
problem issue with a third party supplier to Meijer, Sequoia was delayed in
deploying its software technology in Meijer stores until April 2008 after
finishing development with Meijer’s new vendor, Hewlett Packard.
During
2007, Sequoia signed an agreement with Fujicolor to deploy its technology on
their kiosks located in domestic Wal-Mart stores. Sequoia’s initial
integration and deployment with Fujicolor in domestic Wal-Mart stores took place
in the third quarter of 2007, with a software update scheduled for the third
quarter of 2008 to enhance the user experience and the product
offering.
In
January 2008, Sequoia signed an agreement with Costco.com, to deliver its DVD
product online. Sequoia’s DVD product began being offered at
Costco.com on the “photo” category at the end of March 2008.
Sequoia
is a Utah limited liability company organized on March 28, 2003 under the name
Life Dimensions, LC. In 2003, Sequoia changed its name from Life
Dimensions, LC to Sequoia Media Group, LC. Sequoia’s operations are
currently governed by a Board of Managers made up of five managers, three of
whom are the original founders and two of whom were appointed as part of a
private equity investment. Substantially all of its business is
conducted out of its Draper, Utah office. Sequoia also has an office
in Bentonville, Arkansas to help service Wal-Mart, which is one of its largest
retail customers.
Recent
Developments
Pursuant
to an Agreement and Plan of Merger and Reorganization dated December 6, 2007 and
amended March 31, 2008 (the “Merger Agreement”), by and among the Company, then
operating as Secure Alliance Holdings Corporation (the “Company”), SMG Utah, LC,
a Utah limited liability company (“Merger Sub”) and wholly owned subsidiary
of the Company, and Sequoia, Merger Sub merged with and into Sequoia, with
Sequoia remaining as the surviving entity and a wholly owned operating
subsidiary of the Company (the “Merger”). The Merger was effective on
June 6, 2008, upon the filing of Articles of Merger with the Utah Division of
Corporations. In connection with the Merger transaction, the Company
amended the Certificate of Incorporation to (i) change our name from Secure
Alliance Holdings Corporation to aVinci Media Corporation; (ii) increase
our authorized shares of common stock from 100,000,000 to 250,000,000;
(iii) authorize a class of preferred stock consisting of 50,000,000 shares
of $.01 per value preferred stock; and (iv) effect a 1-for-2 reverse stock
split.
In
connection with the Merger, the Company effected a 1-for-2 reverse split of its
issued and outstanding common stock. Accordingly, the 19,484,032
shares of our common stock issued and outstanding immediately prior to the
Merger were reduced to approximately 9,742,016 shares (subject to
rounding) as a result of the Merger. We issued 38,986,114 post
split shares of our common stock in the Merger to the holders of Sequoia
membership interests representing approximately 80% of the Company’s common
stock outstanding immediately after the Merger. As a result of the
reverse split and the Merger, there were 48,728,130 shares of our common stock
issued and outstanding on June 6, 2008.
Pursuant
to the Merger Agreement, we made a cash distribution of $2,000,000 (the
“Dividend”) to the Company’s stockholders of record as of May 20, 2008. The
Dividend was paid on June 4, 2008. The former holders of Sequoia
membership units did not receive any portion of the Dividend.
The
foregoing description of the Merger Agreement and the transactions contemplated
thereby do not purport to be complete and are qualified in their entireties by
reference to the Merger Agreement. Additional information about the
Merger and related proposals is set forth in the Company’s definitive Proxy
Statement filed with the Securities and Exchange Commission on April 29, 2008
and thereafter distributed to the Company’s stockholders.
Common
stock offered by selling stockholder
|
|
Up
to 17,878,990 shares, consisting of the following:
|
|
|
· 16,929,640
shares of common stock;
|
|
|
· 949,350
shares issuable upon the exercise of common stock
warrants;
|
|
|
|
Use
of proceeds
|
|
We
will not receive any proceeds from the sale of the common
stock.
|
|
|
|
Over-The-Counter
Bulletin Board Symbol
|
|
AVMC
|
This
investment has a high degree of risk. Before you invest you should carefully
consider the risks and uncertainties described below and the other information
in this prospectus. If any of the following risks actually occur, our business,
operating results and financial condition could be harmed and the value of our
stock could go down. This means you could lose all or a part of your
investment.
Risks
Related to Our Business
All
of the Company’s current operations are conducted through Sequoia, and since
Sequoia’s inception, it has been spending more than it makes which has required
it to rely upon outside financings to fund operations. If Sequoia is
not able to generate sufficient revenues to fund its business plans, Sequoia may
be required to limit operations.
The
Company’s operating subsidiary, Sequoia, has operated at a loss since
inception. Sequoia is not currently generating sufficient revenues to
cover its operating expenses or those of the Company. If Sequoia’s
revenues do not begin to grow, or if they decline and its expenses do not slow
or decline at a greater rate, Sequoia may be unable to generate positive cash
flow. The Company contemplates raising additional outside capital
within the next 12 month to help fund its current growth plans. If
new sources of financing are required, but are insufficient or unavailable,
Sequoia will be required to modify its growth and operating plans to the extent
of available funding, which would harm its ability to pursue our business
plans. If Sequoia ceases or stops operations, the Company’s shares
could become valueless. Historically, Sequoia has funded its
operating, administrative and development costs through the sale of equity
capital or debt financing. If Sequoia’s plans and/or assumptions
change or prove inaccurate, or Sequoia is unable to obtain further financing, or
such financing and other capital resources, in addition to projected cash flow,
if any, prove to be insufficient to fund operations, the continued viability of
Sequoia and the Company could be at risk. To the extent that any such
financing involves the sale of Company stock, current stockholders could be
substantially diluted. There is no assurance that Sequoia will be
successful in achieving any or all of these objectives over the coming
year.
Sequoia
anticipates its business will become highly seasonal in nature which may cause
its financial results to vary significantly by quarter.
The photo
retail business is very seasonal in nature with a significant proportion of
recurring revenues occurring the fourth quarter of the calendar year,
particularly around the Thanksgiving and Christmas
holidays. Additionally, any disruptions in operations during the
fourth quarter could greatly impact its annual revenues and have a significant
adverse effect on its relationships with its customers. Sequoia’s
limited revenue and operating history makes it difficult for it to assess the
impact of seasonal factors on its business or whether its business is
susceptible to cyclical fluctuations in the economy.
Sequoia’s
technology solutions and business approach are relatively new and if they are
not accepted in the marketplace, its business could be materially and adversely
affected.
Products
created with Sequoia’s technology have only been available in the marketplace
since 2005. Sequoia has been pursuing a business model that requires
retail and vendor partners to recognize the advantages of its technology to make
it available to end consumers. Having generated limited revenues,
there can be no assurance that Sequoia’s products will receive the widespread
market acceptance necessary to sustain profitable
operations. Sequoia’s operations may be delayed, halted, or altered
for any of the reasons set forth in these risk factors and other unknown
reasons. Such delays or failure would seriously harm Sequoia’s
reputation and future operations. If Sequoia’s products or its
business model are not accepted in the market place, its business could be
materially and adversely affected.
Sequoia’s
product solution focuses on an aspect of the digital photo industry that we
believe is not being addressed in any meaningful way. Sequoia
provides a nearly finished product that takes user images and combines them with
stock images to create context for user images in a themed
presentation. Sequoia also offers a unique DVD product that has not
been widely sold in the marketplace in the form it offers. The
uniqueness of Sequoia’s product solution results in Sequoia’s products going to
the market with a high level of uncertainty and risk. As the market
for its product technology is new and evolving, it is difficult to predict the
size of the market, the future growth rate, if any, or the level of premiums the
market will pay for Sequoia’s services. There can be no assurance
that the market for Sequoia’s services will emerge to a profitable level or be
sustainable. There can be no assurance that any increase in marketing
and sales efforts will result in a larger market or increase in market
acceptance for Sequoia’s services. If the market fails to develop,
develops more slowly than expected or becomes saturated with competitors, or if
Sequoia’s proposed services do not achieve or sustain market acceptance,
Sequoia’s proposed business, results of operations and financial condition will
continue to be materially and adversely affected.
Ultimately,
Sequoia’s success will depend upon consumer acceptance of its product delivery
model and its largely pre-configured products. Sequoia relies on its
retail and internet vending customers to market its products to end
consumers. While Sequoia assists retailers with their marketing
programs, Sequoia cannot assure that retailers will continue to market its
services or that their marketing efforts will be successful in attracting and
retaining end user consumers. The failure to attract end user
consumers will adversely affect Sequoia’s business. In addition, if
Sequoia’s service does not generate revenue for the retailer, whether because of
failure to market it, Sequoia may lose retailers as customers, which would
adversely affect its revenue.
Sequoia
has for the past few years depended on a single customer for a significant
portion of its revenue. If Sequoia is unable to replace that customer
and add additional customers it could materially harm its operating results,
business, and financial condition.
During
2004, 2005, 2006, and 2007, over 90% of Sequoia’s revenue was derived from a
single customer, BigPlanet. Sequoia’s contract with BigPlanet expired
on December 31, 2007. Sequoia continues to provide its technology to
BigPlanet on a monthly basis resulting in a few thousand dollars a month in
royalties. Sequoia added several additional customer contracts during 2007, but
they are generating less revenue per month than BigPlanet generated per month
over the last few years. If in the event Sequoia is unable to replace
the revenue generated from BigPlanet and increase revenue from current
customers, Sequoia’s operations and financial results will significantly suffer,
jeopardizing long-term operations. Sequoia may not succeed in
generating additional revenues, and Sequoia may be faced with intense price
competition, which may affect its gross margins, both of which could
significantly impact ongoing operations.
Sequoia
needs to develop and introduce new and enhanced products in a timely manner to
remain competitive.
The
markets in which Sequoia operates are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and relatively short product lives. The pursuit of necessary
technological advances and the development of new products require substantial
time and expense. To compete successfully in the markets in which
Sequoia operates, Sequoia must develop and sell new or enhanced products that
provide increasingly higher levels of performance and
reliability. For example, Sequoia’s business involves new digital
audio and video formats, such as DVD-Video and DVD-Audio, and, more recently,
the new recordable DVD formats including DVD-RAM, DVD-R/RW, and
DVD+RW.
Currently,
there is extensive activity in Sequoia’s industry targeting the introduction of
new, high definition formats including Blue Ray®. To the extent that
competing new formats remain incompatible, consumer adoption may be delayed and
Sequoia may be required to expend additional resources to support multiple
formats. Sequoia expends significant time and effort to develop new
products in compliance with these new formats. To the extent there is
a delay in the implementation or adoption of these formats, Sequoia’s business,
financial condition and results of operations could be adversely
affected. As new industry standards, technologies and formats are
introduced, there may be limited sources for the intellectual property rights
and background technologies necessary for implementation, and the initial prices
that Sequoia may negotiate in an effort to bring its products to market may
prove to be higher than those ultimately offered to other licensees, putting
Sequoia at a competitive disadvantage. Additionally, if these formats
prove to be unsuccessful or are not accepted for any reason, there will be
limited demand for Sequoia’s products. Sequoia cannot assure you that
the products it is currently developing or intend to develop will achieve
feasibility or that even if it is successful, the developed product will be
accepted by the market. Sequoia may not be able to recover the costs
of existing and future product development and its failure to do so may
materially and adversely impact its business, financial condition and results of
operations.
If
Sequoia is unable to respond to customer technological demands and improve its
products, its business could be materially and adversely affected.
To remain
competitive, Sequoia must continue to enhance and improve the responsiveness,
functionality and features of its solutions and its products. The
photo industry is characterized by rapid technological change, changes in user
and customer requirements and preferences and frequent new product and service
introductions. Sequoia’s success will depend, in part, on its ability
to license leading technologies useful in its business, enhance its existing
software offerings, develop new product offerings and technology that address
the varied needs of its existing and prospective customers and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. There can be no assurance that
Sequoia will successfully implement new technologies or adapt its solutions,
products, proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards. If Sequoia is unable to
adapt in a timely manner in response to changing market conditions or customer
requirements for technical, legal, financial or other reasons, its business
could be materially adversely affected.
Sequoia
expects to experience rapid growth. If it is unable to manage its
growing operations effective, Sequoia’s business could be negatively
impacted.
Expected
rapid growth in all areas of Sequoia’s business may place a significant strain
on its operational, human, and technical resources. Sequoia expects
that operating expenses and staffing levels will increase in the future to keep
pace with its customer demands and requirements. To manage its
growth, Sequoia must expand its operational and technical capabilities and
manage its employee base, while effectively administering multiple relationships
with various third parties, including business partners and
affiliates. Sequoia cannot assure that it will be able to effectively
manage its growth. The failure to effectively manage its growth could
result in an inability to meet its customer demands, leading to customer
dissatisfaction and loss. Loss of customers could negatively impact
Sequoia’s operating results.
Sequoia
competes with others who provide products comparable to its
products. If Sequoia is unable to compete with current and future
competitors, its business could be materially and adversely
affected.
The
digital photography products and services industries are intensely competitive,
and Sequoia expects competition to increase in the future as current competitors
improve their offerings, new participants enter the market or industry
consolidation further develops. Competition may result in pricing
pressures, reduced profit margins or loss of market share, any of which could
substantially harm Sequoia’s business and results of
operations. Sequoia’s success is dependent upon its ability to
maintain its current customers and obtain additional
customers. Digital image services are provided by a wide range of
companies. Competitors in the market for the provision of digital
imaging services include Snapfish (a Hewlett-Packard service), Pixology plc,
LifePics, and Shutterfly among numerous others. In addition, end
consumers have a wide variety of product choices such as prints, photo books,
calendars, and other print and image products. Sequoia competes for
photo imaging output dollars with its DVD and other product
offerings. Internet portals and search engines such as Yahoo!, AOL
and Google also offer digital photography solutions, and home printing solutions
offered by Hewlett Packard, Lexmark, Epson, Canon and others. Most of
Sequoia’s competitors have longer operating histories, significantly greater
financial, technical and marketing resources, greater name and product
recognition, and larger existing customer bases. Although Sequoia has
been able to enter into relationships with many potential competitors, it cannot
provide any assurance its relationships will continue or that its competitors
will not pursue their own product solutions that Sequoia currently provides to
them. With the large and varied competitors and potential competitors
in the marketplace, Sequoia cannot be certain that it will be able to compete
successfully against current and future competitors. If Sequoia is
unable to do so, it will have a material adverse effect on its business, results
of operations and financial condition.
Sequoia
relies on its ability to download software and fulfill orders for its
customers. If Sequoia is unable to maintain reliability of its
network solution it may lose both present and potential customers.
Sequoia’s
ability to attract and retain customers depends on the performance, reliability
and availability of its services and fulfillment network
infrastructure. Sequoia may experience periodic service interruptions
caused by temporary problems in its own systems or software or in the systems or
software of third parties upon whom it relies to provide such
service. Fire, floods, earthquakes, power loss, telecommunications
failures, break-ins and similar events could damage these systems and interrupt
Sequoia’s services. Computer viruses, electronic break-ins or other
similar disruptive events also could disrupt its services. System
disruptions could result in the unavailability or slower response times of the
websites Sequoia hosts for its customers, which would lower the quality of the
consumers’ experiences. Service disruptions could adversely affect
its revenues and, if they were prolonged, would seriously harm its business and
reputation. Sequoia does not carry business interruption insurance to
compensate for losses that may occur as a result of these
interruptions. Sequoia’s customers depend on Internet service
providers and other website operators for access to its
systems. These entities have experienced significant outages in the
past, and could experience outages, delays and other difficulties due to system
failures unrelated to Sequoia’s systems. Moreover, the Internet
network infrastructure may not be able to support continued
growth. Any of these problems could adversely affect Sequoia’s
business.
The
infrastructure relating to Sequoia’s services are vulnerable to unauthorized
access, physical or electronic computer break-ins, computer viruses and other
disruptive problems. Internet service providers have experienced, and
may continue to experience, interruptions in service as a result of the
accidental or intentional actions of Internet users, current and former
employees and others. Anyone who is able to circumvent Sequoia’s
security measures could misappropriate proprietary information or cause
interruptions in its operations. Security breaches relating to its
activities or the activities of third-party contractors that involve the storage
and transmission of proprietary information could damage its reputation and
relationships with its customers and strategic partners. Sequoia
could be liable to its customers for the damages caused by such breaches or it
could incur substantial costs as a result of defending claims for those
damages. Sequoia may need to expend significant capital and other
resources to protect against such security breaches or to address problems
caused by such breaches. Security measures taken by Sequoia may not
prevent disruptions or security breaches.
Sequoia
relies on third parties for the development and maintenance of photo kiosks and
backend Internet connections to reach its customers and such dependence on third
parties may impair its ability to generate revenues.
Sequoia’s
business relies on the use of third party photo kiosks and Internet systems and
connections as a convenient means of consumer interaction and
commerce. The success of Sequoia’s business will depend on the
ability of its customers to use such third party photo kiosks and Internet
systems and connections without significant delays or aggravation. As
such, Sequoia relies on third parties to develop and maintain reliable photo
kiosks and to provide Internet connections having the necessary speed, data
capacity and security, as well as the timely development of complementary
products such as high-speed modems, to ensure its customers have reliable access
to its services. The failure of Sequoia’s customer photo kiosk
providers and the Internet to achieve these goals may reduce its ability to
generate significant revenue.
Sequoia’s
penetration of a broader consumer market will depend, in part, on continued
proliferation of high speed Internet access for customers using kiosk and
vendors providing its software and products via the Internet. The
Internet has experienced, and is likely to continue to experience, significant
growth in the number of users and amount of traffic. As the Internet
continues to experience increased numbers of users, increased frequency of use
and increased bandwidth requirements, the Internet infrastructure may be unable
to support the demands placed on it. In addition, increased users or
bandwidth requirements may harm the performance of the Internet. The
Internet has experienced a variety of outages and other delays and it could face
outages and delays in the future. These outages and delays could
reduce the level of Internet usage as well as the level of traffic, and could
result in the Internet becoming an inconvenient or uneconomical source of
products and services, which would cause Sequoia’s revenue to
decrease. The infrastructure and complementary products or services
necessary to make the Internet a viable commercial marketplace for the long term
may not be developed successfully or in a timely manner.
Sequoia
has relied upon its ability to produce products with its proprietary technology
to establish customer relationships. If Sequoia is unable to protect
and enforce its intellectual property rights, Sequoia may suffer a loss of
business.
Sequoia’s
success and ability to compete depends, to a large degree, on its current
technology and, in the future, technology that it might develop or license from
third parties. To protect its technology, Sequoia has used the
following: confidentiality agreements, retention and safekeeping of source
codes, and duplication of such for backup. Despite these precautions,
it may be possible for unauthorized third parties to copy or otherwise obtain
and use Sequoia’s technology or proprietary information. In addition,
effective proprietary information protection may be unavailable or limited in
certain foreign countries. Litigation may be necessary in the future
to: enforce its intellectual property rights, protect its trade secrets, or
determine the validity and scope of the proprietary rights of
others. Such misappropriation or litigation could result in
substantial costs and diversion of resources and the potential loss of
intellectual property rights, which could impair Sequoia’s financial and
business condition. Although currently Sequoia is not engaged in any
form of litigation proceedings in respect to the foregoing, in the future,
Sequoia may receive notice of claims of infringement of other parties'
proprietary rights. Such claims may involve internally developed
technology or technology and enhancements that Sequoia may license from third
parties. Moreover, although Sequoia sometimes may be indemnified by
third parties against such claims related to technology that Sequoia has
licensed, such infringements against the proprietary rights of others and
indemnity there from may be limited, unavailable, or, where the third party
lacks sufficient assets or insurance, ineffectual. Any such claims
could require Sequoia to spend time and money defending against them, and, if
they were decided adversely to Sequoia, could cause serious injury to its
business operations.
The
future success of Sequoia’s business depends on continued consumer adoption of
digital photography.
Sequoia’s
growth is highly dependent upon the continued adoption by consumers of digital
photography. The digital photography market is rapidly evolving,
characterized by changing technologies, intense price competition, additional
competitors, evolving industry standards, frequent new service announcements and
changing consumer demands and behaviors. To the extent that consumer
adoption of digital photography does not continue to grow as expected, Sequoia’s
revenue growth would likely suffer. Moreover, Sequoia faces
significant risks that, if the market for digital photography evolves in ways
that Sequoia is not able to address due to changing technologies or consumer
behaviors, pricing pressures, or otherwise, its current products and services
may become unattractive, which would likely result in the loss of customers and
a decline in net revenues and/or increased expenses.
Other
companies’ intellectual property rights may interfere with Sequoia’s current or
future product development and sales.
Sequoia
has not conducted routine comprehensive patent search relating to its business
models or the technology it uses in its products or services. There
may be issued or pending patents owned by third parties that relate to Sequoia’s
business models, products or services. If so, Sequoia could incur
substantial costs defending against patent infringement claims or it could even
be blocked from engaging in certain business endeavors or selling its products
or services. Other companies may succeed in obtaining valid patents
covering one or more of Sequoia’s business models or key techniques Sequoia
utilizes in its products or services. If so, Sequoia may be forced to
obtain required licenses or implement alternative non-infringing
approaches. Sequoia’s products are designed to adhere to industry
standards, such as DVD-ROM, DVD-Video, DVD-Audio and MPEG video. A
number of companies and organizations hold various patents that claim to cover
various aspects of DVD, MPEG and other relevant technology. Sequoia
has entered into license agreements with certain companies and organizations
relative to some of these technologies. Such license agreements may
not be sufficient in the future to grant Sequoia all of the intellectual
property rights necessary to market and sell its products.
Sequoia’s
products rely upon the use of copyrighted materials that it licenses and its
inability to obtain needed licenses, remain compliant with existing license
agreements, or effectively account for and pay royalties to third parties could
substantially limit product development and deployment.
Sequoia’s
products incorporate copyrighted materials in the form of pictures, video,
audio, music, and fonts. Sequoia actively monitors the use of all
copyrighted materials and pays up-front and usage royalties as it fulfills
customer orders for products. If Sequoia were unable to maintain
appropriate licenses for copyrighted works, it would be required to limit its
product offerings, which would negatively impact its
revenues. Sequoia also seeks to license popular works to build into
its products and the photo merchandizing market is extremely
competitive. In the event Sequoia is unable to license works because
its technology is not competitive or it has inadequate capital to pay royalties,
it may not be able to effectively compete for photo-product production business
which would seriously impart its ability to sell products.
Sequoia
could be liable to some of its customers for damages that they incur in
connection with intellectual property claims.
Sequoia
has exposure to potential liability arising from infringement of third-party
intellectual property rights in its license agreements with
customers. If Sequoia is required to pay damages to or incur
liability on behalf of its customers, its business could be
harmed. Moreover, even if a particular claim falls outside of
Sequoia’s indemnity or warranty obligations to its customers, its customers may
be entitled to additional contractual remedies against it, which could harm
Sequoia’s business. Furthermore, even if Sequoia is not liable to its
customers, its customers may attempt to pass on to it the cost of any license
fees or damages owed to third parties by reducing the amounts they pay for its
products. These price reductions could harm Sequoia’s
business.
Legislation
regarding copyright protection or content interdiction could impose complex and
costly constraints on Sequoia’s business model.
Because
of its focus on automation and high volumes, Sequoia’s operations do not
involve, for the vast majority of its sales, any human-based review of
content. Although use of its software technology terms of use
specifically require customers to represent that they have the right and
authority to reproduce the content they provide and that the content is in full
compliance with all relevant laws and regulations, Sequoia does not have the
ability to determine the accuracy of these representations on a case-by-case
basis. There is a risk that a customer may supply an image or other
content that is the property of another party used without permission, that
infringes the copyright or trademark of another party, or that would be
considered to be defamatory, pornographic, hateful, racist, scandalous, obscene
or otherwise offensive, objectionable or illegal under the laws or court
decisions of the jurisdiction where that customer lives. There is,
therefore, a risk that customers may intentionally or inadvertently order and
receive products from Sequoia that are in violation of the rights of another
party or a law or regulation of a particular jurisdiction. If Sequoia
should become legally obligated in the future to perform manual screening and
review for all orders destined for a jurisdiction, Sequoia will encounter
increased production costs or may cease accepting orders for shipment to that
jurisdiction which could substantially harm its business and results of
operations.
The
loss of any of Sequoia’s executive officers, key personnel, or contractors would
likely have an adverse effect on its business.
Sequoia’s
greatest resource in developing and launching its products is its
labor. Sequoia is dependent upon its management, employees, and
contractors for meeting its business objectives. In particular, the
original founders and members of the senior management team play key roles in
Sequoia’s business and technical development. Sequoia does not carry
key man insurance coverage to mitigate the financial effect of losing the
services of any of these key individuals. Sequoia’s loss of any of
these key individuals most likely would have an adverse effect on its
business.
If
the collocation facility where much of Sequoia’s Internet computer and
communications hardware is located fails, its business and results of operations
would be harmed. If Sequoia’s Internet service to its primary
business office fails, its business relationships could be damaged.
Sequoia’s
ability to provide its services depends on the uninterrupted operation of its
computer and communications systems. Much of its computer hardware
necessary to operate its Internet service for downloading software and receiving
customer orders is located at a single third party hosting facility in Salt Lake
City, Utah. Sequoia’s systems and operations could suffer damage or
interruption from human error, fire, flood, power loss, telecommunications
failure, break-ins, terrorist attacks, acts of war and similar
events. Sequoia does have some redundant systems in multiple
locations, but if its primary location suffers interruptions its ability to
service customers quickly and efficiently will suffer.
Sequoia’s
technology may contain undetected errors that could result in limited capacity
or an interruption in service.
The
development of Sequoia’s software and products is a complex process that
requires the services of numerous developers. Sequoia’s technology
may contain undetected errors or design faults that may cause its services to
fail and result in the loss of, or delay in, acceptance of its
services. If the design fault leads to an interruption in the
provision of Sequoia’s services or a reduction in the capacity of its services,
Sequoia would lose revenue. In the future, Sequoia may encounter
scalability limitations that could seriously harm its business.
Sequoia
may divert its resources to develop new product lines, which may result in
changes to its business plan and fluctuations in its expenditures.
As
Sequoia has developed its technology, customers have required Sequoia to develop
various means of deploying its products. In order to remain
competitive and work around deployment issues inherent in working with third
party kiosk providers, Sequoia is continually developing new deployments and
product lines. Sequoia recently developed a new point-of-scan product
to provide customers with an alternative to getting its products from retail
kiosks that are sometimes busy or out of order. The development of
new product types may result in increased expenditures during the development
and implementation phase, which could negatively impact Sequoia’s results of
operations. In addition, Sequoia is a small company with limited
resources and diverting these resources to the development of new product lines
may result in reduced customer service turn around times and delays in deploying
new customers. These delays could adversely affect Sequoia’s business
and results of operations.
Sequoia
may undertake acquisitions to expand its business, which may pose risks to its
business and dilute the ownership of existing stockholders.
The
digital photo industry is undergoing significant changes. As Sequoia
pursues its business plans, the Company may pursue acquisitions of businesses,
technologies, or services. The Company is unable to predict whether
or when any prospective acquisition will be completed. Integrating
newly acquired businesses, technologies or services is likely to be expensive
and time consuming. To finance any acquisitions, it may be necessary
to raise additional funds through public or private
financings. Additional funds may not be available on favorable terms
and, in the case of equity financings, would result in additional dilution to
the Company’s existing stockholders. If the Company does acquire any
businesses, if Sequoia is unable to integrate any newly acquired entities,
technologies or services effectively, the Company’s business and results of
operations may suffer. The time and expense associated with finding
suitable and compatible businesses, technologies, or services could also disrupt
Sequoia’s ongoing business and divert management’s attention. Future
acquisitions by the Company could result in large and immediate write-offs or
assumptions of debt and contingent liabilities, any of which could substantially
harm its business and results of operations.
Requirements
under client agreements and Sequoia’s method of delivering products could cause
the deferral of revenue recognition, which could harm its operating results and
adversely impact its ability to forecast recognition revenue.
Sequoia’s
agreements with clients provide for various methods of delivering its technology
capability to end consumers and may include service and development requirements
in some instances. As Sequoia provides future point-of-scan
products that require future fulfillment of products by it, Sequoia may be
required to defer revenue recognition until the time the consumer submits an
order to have a product fulfilled rather than at the time our point-of-scan
product is sold. In addition, if Sequoia is obligated to provide
development and support services to customers, it may be required to defer
certain revenues to future periods which could harm its short-term operating
results and adversely impact its ability to accurately forecast
revenue.
Sequoia’s
pricing model may not be accepted and its product prices may decline, which
could harm its operating results.
Under its
current business model, Sequoia charges a royalty on each product produced using
its technology rather than selling software to its customers. If
Sequoia’s customers are offered software products to purchase that do not
require the payment of royalties, Sequoia’s business could
suffer. Additionally the market for photo products is intensely
competitive. It is likely that prices Sequoia’s customers charge end
consumers will decline due to competitive pricing pressures from other software
providers which will likely affect Sequoia’s product royalties and
revenues.
Sequoia
depends on third-party suppliers for media components of some of its products
and any failure by them to deliver these components could limit its ability to
satisfy customer demand.
Sequoia
currently sources DVD media and other components for use in its products from
various sources. Sequoia does not carry significant inventories of
these components and it has no guaranteed supply agreements for
them. Sequoia may in the future experience shortages of some product
components, which can have a significant negative impact on its
business. Any interruption in the operations of Sequoia’s vendors of
sole components could affect adversely its ability to meet its scheduled product
deliveries to customers. If Sequoia is unable to obtain a sufficient
supply of components from its current sources, it could experience difficulties
in obtaining alternative sources or in altering product designs to use
alternative components. Resulting delays or reductions in product
shipments could damage customer relationships and expose Sequoia to potential
damages that may arise from its inability to supply its customers with
products. Further, a significant increase in the price of one or more
of these components could harm Sequoia’s gross margins and/or operating
results.
Sequoia
relies on sales representatives and retailers to sell its products, and
disruptions to these channels would affect adversely its ability to generate
revenues from the sale of its products.
A large
portion of Sequoia’s projected revenue is derived from sales of products to
end-users via retail channels that it accesses directly and through a third
party network of sales representatives. If Sequoia’s relationship
with its sales representatives is disrupted for any reason, its relationship
with its retail customers could suffer. If Sequoia’s retail customers
do not choose to market its products in their stores, Sequoia’s sales will
likely be significantly impacted and its revenues would decrease. Any
decrease in revenue coming from these retailers or sales representatives and
Sequoia’s inability to find a satisfactory replacement in a timely manner could
affect its operating results adversely. Moreover, Sequoia’s failure
to maintain favorable arrangements with its sales representative may impact
adversely its business.
Changes
in financial accounting standards or practices may cause adverse unexpected
financial reporting fluctuations and affect Sequoia’s reported results of
operations.
A change
in accounting standards or practices can have a significant effect on Sequoia’s
reported results and may even affect its reporting of transactions completed
before the change is effective. New accounting pronouncements and
varying interpretations of accounting pronouncements have occurred and may occur
in the future. Changes to existing rules or the questioning of
current practices may adversely affect Sequoia’s reported financial results or
the way it conducts its business.
Government
regulation of the Internet and e-commerce is evolving, and unfavorable changes
or failure by Sequoia to comply with these regulations could substantially harm
its business and results of operations.
Sequoia
is subject to general business regulations and laws as well as regulations and
laws specifically governing the Internet and e-commerce. Existing and
future laws and regulations may impede the growth of the Internet or other
online services. These regulations and laws may cover taxation,
restrictions on imports and exports, customs, tariffs, user privacy, data
protection, pricing, content, copyrights, distribution, electronic contracts and
other communications, consumer protection, the provision of online payment
services, broadband residential Internet access and the characteristics and
quality of products and services. It is not clear how existing laws
governing issues such as property ownership, sales and other taxes, libel and
personal privacy apply to the Internet and e-commerce as the vast majority of
these laws were adopted prior to the advent of the Internet and do not
contemplate or address the unique issues raised by the Internet or
e-commerce. Those laws that do reference the Internet are only
beginning to be interpreted by the courts and their applicability and reach are
therefore uncertain. For example, the Digital Millennium Copyright
Act, or DMCA, is intended, in part, to limit the liability of eligible online
service providers for listing or linking to third-party websites that include
materials that infringe copyrights or other rights of others. Portions of the
Communications Decency Act, or CDA, are intended to provide statutory
protections to online service providers who distribute third-party
content. Sequoia relies on the protections provided by both the DMCA
and CDA in conducting its business. Any changes in these laws or
judicial interpretations narrowing their protections will subject Sequoia to
greater risk of liability and may increase its costs of compliance with these
regulations or limit our ability to operate certain lines of
business. The Children’s Online Protection Act and the Children’s
Online Privacy Protection Act are intended to restrict the distribution of
certain materials deemed harmful to children and impose additional restrictions
on the ability of online services to collect user information from
minors. In addition, the Protection of Children From Sexual Predators
Act of 1998 requires online service providers to report evidence of violations
of federal child pornography laws under certain circumstances. The
costs of compliance with these regulations may increase in the future as a
result of changes in the regulations or the interpretation of
them. Further, any failures on Sequoia’s part to comply with these
regulations may subject it to significant liabilities. Those current
and future laws and regulations or unfavorable resolution of these issues may
substantially harm Sequoia’s business and results of operations.
Sequoia’s
failure to protect the confidential information of its customers against
security breaches and the risks associated with credit card fraud could damage
its reputation and brand and substantially harm its business and results of
operations.
A
significant prerequisite to online commerce and communications is the secure
transmission of confidential information over public
networks. Sequoia’s failure to prevent security breaches could damage
its reputation and brand and substantially harm its business and results of
operations for customers using online services. Sequoia relies on
encryption and authentication technology licensed from third parties to effect
the secure transmission of confidential customer information, including credit
card numbers, customer mailing addresses and email
addresses. Advances in computer capabilities, new discoveries in the
field of cryptography or other developments may result in a compromise or breach
of the technology used by Sequoia to protect customer transaction
data. In addition, any party who is able to illicitly obtain a user’s
password could access the user’s transaction data or personal
information. Any compromise of Sequoia’s security could damage its
reputation and brand and expose it to a risk of loss or litigation and possible
liability, which would substantially harm its business and results of
operations. In addition, anyone who is able to circumvent Sequoia’s
security measures could misappropriate proprietary information or cause
interruptions in its operations. Sequoia may need to devote
significant resources to protect against security breaches or to address
problems caused by breaches.
Risks
Related to Our Common Stock
Our
authorized capital consists of 250,000,000 shares of common stock and 50,000,000
shares of preferred stock. Our preferred stock may be designated into
series pursuant to authority granted by our articles of incorporation, and on
approval from our Board of Directors. The Board of Directors, without any action
by our stockholders, may designate and issue shares in such classes or series as
the Board of Directors deems appropriate and establish the rights, preferences
and privileges of such shares, including dividends, liquidation and voting
rights. The rights of holders of other classes or series of stock that may be
issued could be superior to the rights of holders of our common shares. The
designation and issuance of shares of capital stock having preferential rights
could adversely affect other rights appurtenant to shares of our common stock.
Furthermore, any issuances of additional stock (common or preferred) will
dilute the percentage of ownership interest of then-current holders of our
capital stock and may dilute the Company’s book value per share.
Because
we acquired Sequoia by means of a reverse merger, we may not be able to attract
the attention of major brokerage firms.
Additional
risks to our investors may exist since we became public through a “reverse
merger.” Security analysts of major brokerage firms may not provide coverage for
the Company. In addition, because of past abuses and fraud concerns stemming
primarily from a lack of public information about new public businesses, there
are many people in the securities industry and business in general who view
reverse merger transactions with public shell companies with suspicion. Without
brokerage firm and analyst coverage, there may be fewer people aware of the
Company and its business, resulting in fewer potential buyers of our securities,
less liquidity, and depressed stock prices for our investors.
We
are subject to Sarbanes-Oxley and the reporting requirements of federal
securities laws, which can be expensive.
As a
public reporting company, we are subject to Sarbanes-Oxley and, accordingly, are
subject to the information and reporting requirements of the Securities Exchange
Act of 1934 and other federal securities laws. The costs of compliance with
Sarbanes-Oxley, of preparing and filing annual and quarterly reports, proxy
statements and other information with the SEC, furnishing audited reports to our
stockholders, and other legal, audit and internal resource costs attendant with
being a public reporting company will cause our expenses to be higher than if we
were privately held.
There
is not now, and there may not ever be an active market for shares of our common
stock.
In
general, there has been very little trading activity in shares of the Company’s
common stock. The small trading volume will likely make it difficult for our
stockholders to sell their shares as and when they choose. Furthermore, small
trading volumes are generally understood to depress market prices. As a result,
you may not always be able to resell shares of our common stock publicly at the
time and prices that you feel are fair or appropriate.
Because
it is a “penny stock,” you may have difficulty selling shares of our common
stock.
Our
common stock is a “penny stock” and is therefore subject to the requirements of
Rule 15g-9 under the Securities and Exchange Act of 1934. Under this rule,
broker-dealers who sell penny stocks must provide purchasers of these stocks
with a standardized risk-disclosure document prepared by the SEC. Under
applicable regulations, our common stock will generally remain a “penny stock”
for such time as its per-share price is less than $5.00 (as determined in
accordance with SEC regulations), or until we meet certain net asset or revenue
thresholds. These thresholds include (i) the possession of net tangible
assets (i.e., total assets less intangible assets and liabilities) in
excess of $2 million in the event we have been operating for at least three
years or $5 million in the event we have been operating for fewer than three
years, and (ii) the recognition of average revenues equal to at least $6
million for each of the last three years. We do not anticipate meeting any of
the foregoing thresholds in the foreseeable future.
The
penny-stock rules severely limit the liquidity of securities in the secondary
market, and many brokers choose not to participate in penny-stock transactions
because of the difficulties in effectuating trades in such securities. As a
result, there is generally less trading in penny stocks than in other stock that
are not penny stocks. If you become a holder of our common stock, you may not
always be able to resell shares of our common stock publicly at the time and
prices that you feel are fair or appropriate.
We
do not intend to pay dividends on our common stock for the foreseeable
future.
In
conjunction with the Merger, we paid a dividend to our stockholders of record
prior to the Merger. We do not anticipate that we will pay any
dividends for the foreseeable future. Accordingly, any return on an investment
in our Company will be realized, if at all, only when a stockholder sells his or
her shares of our common stock. Stockholders who received their
shares in exchange for Sequoia ownership interests, own restricted shares that
can be sold only if an exemption is available. Because the Company
was a “shell” company, exemptions under Rule 144 will not be available for use
by stockholders holding restricted securities until June 7, 2009.
Our
stock price has been volatile in response to market and other
factors.
The
market price for our common stock has been, and the market price for the our
stock after the Merger may continue to be, volatile and subject to price and
volume fluctuations in response to market and other factors, including the
following, some of which are beyond our control:
·
|
variations
in quarterly operating results from the expectations of securities
analysts or investors;
|
·
|
announcements
of technological innovations or new products or services by the Company or
its competitors;
|
·
|
general
technological, market or economic
trends;
|
·
|
investor
perception of the industry or prospects of the
Company;
|
·
|
investors
entering into short sale contracts;
|
·
|
regulatory
developments; and
|
·
|
additions
or departures of key personnel.
|
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
We and
our representatives may from time to time make written or oral statements that
are “forward-looking,” including statements contained in this prospectus and
other filings with the Securities and Exchange Commission, reports to our
stockholders and news releases. All statements that express expectations,
estimates, forecasts or projections are forward-looking statements. In addition,
other written or oral statements which constitute forward-looking statements may
be made by us or on our behalf. Words such as “expects,” “anticipates,”
“intends,” “plans,” “believes,” “seeks,” “estimates,” “projects,” “forecasts,”
“may,” “should,” variations of such words and similar expressions are intended
to identify forward-looking statements. Such
forward-looking statements are subject to a number of risks, assumptions and
uncertainties that could cause the Company's actual results to differ materially
from those projected in such forward-looking statements. We discuss many of
these risks, uncertainties and other factors in this prospectus in greater
detail in the section of this prospectus entitled “Risk Factors”. Forward
looking statements speak only as of the date made and are not guarantees of
future performance. We undertake no obligation to publicly update or revise any
forward-looking statements.
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholder. We will not receive any proceeds
from the sale of shares of common stock in this offering. However, we will
receive the sale price of any common stock we sell to the selling stockholder
upon exercise of the warrants owned by the selling stockholder. We expect the
proceeds, if any, received from the exercise of the warrants and the options to
be used for general working capital purposes.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock has traded over-the-counter on the Pink Sheets under the symbol
“SAHC.PK” since June 19, 2007. From March 26, 2003 to June 18, 2007,
our common stock traded over-the-counter on the Pink Sheets under the symbol
“ATMS”. From February 1998 to March 25, 2003, our common stock traded
on the NASDAQ stock market under the symbol “ATMS”. As of June 9,
2008, our post-merger, post reverse split trading symbol on the Pink Sheets is
“AVMC.PK”. The following table sets forth the quarterly high and low
bid information for our common stock for the two-year period ended September 30,
2007 and through July 28, 2008:
|
|
High
Bid
|
|
|
Low
Bid
|
|
Fiscal
Year Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Fiscal Quarter
|
|
$ |
.82 |
|
|
$ |
.44 |
|
Second
Fiscal Quarter
|
|
|
.78 |
|
|
|
.46 |
|
Third
Fiscal Quarter
|
|
|
.70 |
|
|
|
.52 |
|
Fourth
Fiscal Quarter
|
|
|
.84 |
|
|
|
.62 |
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Fiscal Quarter
|
|
$ |
1.00 |
|
|
$ |
.70 |
|
Second
Fiscal Quarter
|
|
|
1.38 |
|
|
|
.92 |
|
Third
Fiscal Quarter
|
|
|
2.00 |
|
|
|
1.24 |
|
Fourth
Fiscal Quarter
|
|
|
1.80 |
|
|
|
1.40 |
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Fiscal Quarter
|
|
$ |
1.74 |
|
|
$ |
1.20 |
|
Second
Fiscal Quarter
|
|
|
1.36 |
|
|
|
1.06 |
|
Third
Fiscal Quarter
|
|
|
2.25 |
|
|
|
.60 |
|
Fourth
Fiscal Quarter (through July 28, 2008)
|
|
|
1.34 |
|
|
|
1.01 |
|
Holders
As of
July 28, 2008 there were 48,737,928 shares of common stock outstanding and
approximately 1,032 stockholders of record.
Transfer
Agent and Registrar
Our
transfer agent is Computershare, 350 Indiana Street, Suite 800, Golden, CO
80401; telephone (303) 262-0600.
Dividend
Policy
Except
for the $2,000,000 Dividend that we have paid to our stockholders of record as
of April 16, 2008, we have not paid any cash dividends on our common stock to
date and do not anticipate we will pay dividends in the foreseeable future. The
payment of dividends in the future will be contingent upon revenues and
earnings, if any, capital requirements, and our general financial condition. The
payment of any dividends will be within the discretion of the then Board of
Directors. It is the present intention of the Board of Directors to retain all
earnings, if any, for use in the business operations. Accordingly, the Board
does not anticipate declaring any dividends in the foreseeable
future.
Warrants,
Options and Convertible Debt
There are no outstanding options or
warrants that would entitle any person to purchase the Company’s preferred
stock. Currently, there are outstanding options and warrants to
purchase shares of the Company’s common stock. Information about outstanding
options and warrants is as follows:
Holder
|
|
Shares
Underlying Option/Warrant (1)
|
|
|
Exercise
Price (1)
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jerrell
G. Clay
|
|
|
475,000 |
|
|
|
|
|
$ |
1.24 |
|
|
March
21, 2017
|
|
Stephen
P. Griggs
|
|
|
475,000 |
|
|
|
|
|
$ |
1.24 |
|
|
March
21, 2017
|
|
Chett
B. Paulsen
|
|
|
870,963 |
(2 |
) |
|
$ |
0.71 |
|
|
December
31, 2012
|
|
Richard
B. Paulsen
|
|
|
870,963 |
(2) |
|
$ |
0.71 |
|
|
December
31, 2012
|
|
Edward
B. Paulsen
|
|
|
609,674 |
(2) |
|
$ |
0.71 |
|
|
December
31, 2012
|
|
Amerivon
Investments LLC.
|
|
|
2,909,016 |
(3) |
|
|
(3 |
) |
|
|
(3 |
) |
Terry
Dickerson
|
|
|
705,479 |
(4) |
|
|
(4 |
) |
|
|
(4 |
) |
Other
Employees
|
|
|
423,941 |
(5) |
|
|
(5 |
) |
|
|
(5 |
) |
(1)
|
The
share amounts and exercise prices reflect the 1-for-2 reverse split
associated with the Merger.
|
(2)
|
Non-vested
options priced at $0.71.
|
(3)
|
Includes
949,350 shares of common stock underlying currently exercisable warrants
priced at $0.53, 653,222 shares of common stock underlying currently
exercisable options priced at $0.18, 653,222 non-vested options priced at
$0.18 and subject to sales performance in 2008, and 653,222 options priced
at $0.71 and subject to sales performance vesting in
2009.
|
(4)
|
Includes
351,651 currently vested options priced at $0.27, 92,540 non-vested
options priced at $0.27, and 261,289 non-vested options priced at
$0.71.
|
(5)
|
Includes
options held by employees that are exercisable at prices ranging from $.41
to $0.71 and which expire at various times from September 10, 2011 to
December 31, 2012.
|
Some of
the information in this filing contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,”
“estimate” and “continue,” or similar words. You should read statements that
contain these words carefully because they:
·
|
discuss
our future expectations;
|
·
|
contain
projections of our future results of operations or of our financial
condition; and
|
·
|
state
other “forward-looking”
information.
|
We
believe it is important to communicate our expectations. However, there may be
events in the future that we are not able to accurately predict or over which we
have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under “Risk Factors,”
“Business” and elsewhere in this prospectus.
Comparison
of the Three Months Ended March 31, 2008 and 2007
Revenues.
|
|
Three
Months Ended March 31, 2008
|
|
|
Three
Months Ended March 31, 2007
|
|
|
%
Change
|
|
Revenues
|
|
$ |
73,496 |
|
|
$ |
173,911 |
|
|
|
(58 |
%) |
Total
revenues decreased $100,415, or 58 percent, for the three months ended March 31,
2008, as compared to the same period in 2007. The decrease in revenue is due to
the expiration of Sequoia’s agreement with BigPlanet on December 31,
2007.
Four
customers accounted for a total of 94 percent of Sequoia’s revenues for the
three months ending March 31, 2008 (individually 51 percent, 17 percent, 15
percent, and 11 percent) compared to one customer accounting for all of the
revenue for the same period in 2007. No other single customer accounted for more
than 10 percent of Sequoia’s total revenues for the three months ended March 31,
2008 or the same period in 2007.
Operating
Expenses.
|
|
Three
Months
Ended
March 31, 2008
|
|
|
Three
Months Ended March 31, 2007
|
|
|
%
Change
|
|
Cost
of Goods Sold
|
|
$ |
173,097 |
|
|
$ |
21,615 |
|
|
|
701 |
% |
Research
and Development
|
|
|
560,377 |
|
|
|
344,429 |
|
|
|
63 |
% |
Selling
and Marketing
|
|
|
517,161 |
|
|
|
298,817 |
|
|
|
73 |
% |
General
and Administrative
|
|
|
1,144,240 |
|
|
|
597,120 |
|
|
|
92 |
% |
Depreciation
and Amortization
|
|
|
56,998 |
|
|
|
43,245 |
|
|
|
32 |
% |
Interest
Expense
|
|
|
71,289 |
|
|
|
342,242 |
|
|
|
(79 |
%) |
Sequoia’s
cost of goods sold expense increased $151,482, or 701%, for the three months
ended March 31, 2008, as compared to the same period in 2007. The increase is
primarily due to the change in the type of work being performed in 2008 versus
2007. In 2007, Sequoia primarily supplied software technology to build DVD
movies for a single customer – BigPlanet. In 2008, Sequoia has multiple
customers and the cost of goods sold includes not only fulfillment costs, but
also includes a portion of the cost of hardware to one of Sequoia’s
customers that purchased fulfillment equipment from Sequoia. (Both the revenue
and costs associated with this contract are being recognized over the life of
the contract.)
Sequoia’s
research and development expense increased $215,948, or 63%, for the three
months ended March 31, 2008 as compared to the same period in
2007. The increase is attributable to additional personnel and
related costs for new employees and consultants involved with technology
development for deployments and ongoing maintenance of Sequoia’s products in
Wal-Mart on kiosks, with various retailers online and with various retailers in
the form of hard good kits.
Selling
and marketing expense increased $218,344, or 73%, for the three months ended
March 31, 2008, as compared to the same period in 2007. The increase is
primarily due to additional personnel and the related costs for new
employees and consultants involved with Sequoia’s increased marketing efforts
directed at mass retailers.
Sequoia’s
general and administrative expense increased $547,120, or 92%, for the three
months ended March 31, 2008, as compared to the same period in 2007. The
increase is primarily due to an increase in consulting and outside services of
approximately $210,000 as a result of the consulting agreement with Amerivon
(see “Sequoia Transactions and Relationships” below, for more information on
this consulting agreement). An increase of approximately $113,000 is
attributable to increased professional consulting services provided by
accounting, financial and legal services associated with Sequoia’s funding
activities and pursuit of the Merger Agreement with Secure Alliance.
Approximately $80,000 of the increase is attributable to an increase in benefits
expense due to the increase in average headcount from year to year. Finally,
approximately $70,000 of the increase is attributable to a bonus accrual, and
approximately $39,000 is attributable to an increase in stock-based compensation
expense due to an increase in options year to year.
Depreciation
and amortization expense increased $13,753, or 32%, for the three months ended
March 31, 2008, as compared to the same period in 2007. The increase is
primarily due to the purchase of computer equipment deployed to fulfill product
for new customer accounts and for office furniture and equipment for new
employees which began to be depreciated by Sequoia.
Sequoia’s
interest expense decreased $270,953, or 79%, for the three months ended March
31, 2008, as compared to the same period in 2007. The decrease is due to the
conversion of Sequoia’s convertible debt into equity in May 2007. To
fund operations, Sequoia undertook a large private offering consisting of
12-month convertible debt, bearing interest at 10%. The offering was
taken in its entirety by Amerivon, who invested a total of
$830,000. In August of 2006, Amerivon invested an additional
$1,560,000 in a convertible debt offering, bearing interest at 9%, intended to
bridge Sequoia to a subsequent preferred equity offering targeting $5 to $7
million.
In
December 2006, Sequoia entered into various short-term loans with members of
Sequoia totaling $265,783 to fund operations until the funding transaction with
Amerivon closed. These loans bore interest at 10% per annum and were
payable on or before December 31, 2007. In May 2007, these loans were
repaid.
Comparison
of the Years Ended December 31, 2007 and 2006
Revenues.
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
Revenues
|
|
$ |
541,856 |
|
|
$ |
739,200 |
|
|
|
(27 |
%) |
More than
90% of all revenues generated in 2007 and 100% in 2006 came from Sequoia’s
agreement with BigPlanet. Under the terms of the agreement, BigPlanet
was obligated to pay Sequoia $1 million in annual minimum guaranteed royalties,
payable in 12 equal monthly installments of $83,333.33. Big Planet
timely paid each monthly installment during each of the 24 months through 2005
and 2006. The BigPlanet agreement included software development,
software license, post-contract support and training. Because the
contract included the delivery of a software license, Sequoia accounted for the
contract in accordance with Statement of Position (SOP) 97-2, Software
Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2 with
Respect to Certain Transactions. SOP 97-2 applies to activities that
represent licensing, selling, leasing, or other marketing of computer
software.
Because
the contract included services to provide significant production, modification,
or customization of software, in accordance with SOP 97-2, Sequoia accounted for
the contract based on the provisions of Accounting Research Bulletin
(ARB) No. 45, Long-Term Construction-Type Contracts, and the relevant
guidance provided by SOP 81-1, Accounting for Performance of Construction-Type
and Certain Production-Type Contracts. In accordance with these
provisions, Sequoia determined to use the percentage-of-completion method of
accounting to record the revenue for the entire contract. Sequoia
utilized the ratio of total actual costs incurred to total estimated costs to
determine the amount of revenue to be recognized at each reporting
date. Sequoia records billings and cash received in excess of revenue
earned as deferred revenue. The deferred revenue balance generally
results from contractual commitments made by customers to pay amounts to Sequoia
in advance of revenues earned. The unbilled accounts receivable
represents revenue that has been earned but which has not yet been
billed. Sequoia considers current information and events regarding
its customers and their contracts and establishes allowances for doubtful
accounts when it is probable that it will not be able to collect amounts due
under the terms of existing contracts.
As a
result of Sequoia’s use of the stated accounting methods, revenue recognition
recognized income in years other that the year cash was received. The
cash received under the BigPlanet agreement was the same in 2007 and 2006, or $1
million each year. As a result of applying the
percentage-of-completion method, revenue decreased from $748,069 in 2006 to
$541,856 in 2007, a 27% drop. The change in revenue recognition in
2007 from 2006 reflects the relationship between the percentage of Sequoia’s
total operating expenses directly associated with the BigPlanet agreement and
those related to other activities of the Company during each respective year of
the agreement. During 2006 a much greater percentage of Sequoia’s
resources were dedicated to the BigPlanet agreement than during 2007 because of
Sequoia’s pursuit of and work on additional customer accounts. The
BigPlanet agreement expired on December 31, 2007. The parties are in
negotiations to continue their business relationship.
Under the
original BigPlanet agreement, Sequoia provided its technology to BigPlanet for
it to use to market and sell customer products. Accordingly, Sequoia
did not have material costs of goods sold associated with the BigPlanet
revenues.
Sequoia
maintains its cash in bank demand deposit accounts, which at times may exceed
the federally insured limit. As of December 31, 2007 and 2006,
Sequoia had limited cash generating interest revenue and had not experienced any
losses.
Operating
Expenses.
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
Research
and Development
|
|
$ |
1,890,852 |
|
|
$ |
1,067,687 |
|
|
|
77 |
% |
Selling
and Marketing
|
|
|
1,351,860 |
|
|
|
547,448 |
|
|
|
147 |
% |
General
and Administrative
|
|
|
3,677,326 |
|
|
|
1,755,127 |
|
|
|
110 |
% |
Depreciation
and Amortization
|
|
|
277,458 |
|
|
|
103,160 |
|
|
|
169 |
% |
Interest
Expense
|
|
|
693,217 |
|
|
|
806,439 |
|
|
|
(14 |
%) |
Sequoia’s
research and development expense increased $823,165, or 77%, from 2006 to
2007. The increase is attributable to additional personnel and
related costs for new employees and consultants involved with technology
development for deployments and ongoing maintenance of Sequoia’s products in
Wal-Mart on kiosks, with various retailers online and with various retailers in
the form of hard good kits. In August 2007, Sequoia launched a kiosk
deployment in Wal-Mart and began selling its first hard good kits for the
Christmas season. Sequoia also developed an online platform in 2007
for selling products online and introduced this platform in the first quarter of
2008.
Selling
and marketing expense increased $804,412, or 147%, from 2006 to
2007. The increase was attributable to Sequoia’s increased marketing
efforts directed at mass retailers and an increased presence at the Photo
Marketing Association’s (“PMA”) annual trade show in February
2007. Additional personnel were hired to assist with development of
marketing materials resulting in additional personnel and associated costs of
approximately $725,000. An additional $80,000 was incurred in
preparation for the PMA show to pay for floor space, booth rental and set up at
the trade show held in February 2007. Expenses were incurred during
the last quarter of 2006 and the first quarter of 2007 for the PMA
show.
Sequoia’s
general and administrative expense increased $1,922,199, or 110%, from 2006 to
2007. New business development and operations personnel and
associated costs and sales materials accounted for approximately $801,000 of the
increase. Other costs associated with additional personnel such as
health care, office furniture, computers, phones and other infrastructure costs
across all departments totaled approximately $235,000. Approximately
$303,000 of the increase was attributable to an increase of contract labor
associated with platform (online and point-of-scan offerings) and product
development. An increase of approximately $115,000 was attributable
to increased professional consulting services provided by accounting, financial
and legal services associated with Sequoia’s funding activities and pursuit of
the Merger Agreement with Secure Alliance. Sequoia’s lease payments
increased as the company took out more space to house new employee growth by
approximately $301,000. Travel and entertainment costs increased
approximately $121,000 as Sequoia pursued business
opportunities. Equipment taxes, licensing and telephone expenses
increased by $56,000, all as a result of added personnel.
Depreciation
expense increased $174,298, or 169% from 2006 to 2007 as a result of purchasing
computer equipment deployed to fulfill product for new customer accounts and for
office furniture and equipment for new employees which began to be depreciated
by Sequoia.
Sequoia’s
interest expense decreased from $806,439 in 2006 to $693,217 in 2007 due to the
conversion of its convertible debt into equity during 2007. To fund
operations, Sequoia undertook a large private offering consisting of 12-month
convertible debt, bearing interest at 10%. The offering was taken in
its entirety by Amerivon, who invested a total of $830,000. In August
of 2006, Amerivon invested an additional $1,560,000 in a convertible debt
offering, bearing interest at 9%, intended to bridge Sequoia to a subsequent
preferred equity offering targeting $5 to $7 million.
In
December 2006, Sequoia entered into various short-term loans with members of
Sequoia totaling $265,783 to fund operations until the funding transaction with
Amerivon closed. These loans bore interest at 10% per annum and were
payable on or before December 31, 2007. In May 2007, these loans were
repaid.
Liquidity
and Capital Resources.
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Year
Ended
|
|
|
|
March
31,
|
|
|
December
31,
|
|
Statements
of Cash Flows
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
Cash
Flows from Operating Activities
|
|
$ |
(1,734,006 |
) |
|
$ |
(858,223 |
) |
|
$ |
(5,513,316 |
) |
|
$ |
(1,890,640 |
) |
Cash
Flows from Investing Activities
|
|
|
(24,720 |
) |
|
|
(51,386 |
) |
|
|
(577,295 |
) |
|
|
(414,995 |
) |
Cash
Flows from Financing Activities
|
|
|
1,885,118 |
|
|
|
930,375 |
|
|
|
6,780,988 |
|
|
|
2,464,288 |
|
Operating
Activities.
For the
three months ended March 31, 2008, net cash used in operating activities was
$(1,734,006) compared to $(858,223) for the same period in 2007. For
2007, net cash used in operating activities was $(5,513,316) compared to
$(1,890,640) in 2006. The changes were due primarily to
Sequoia’s pursuit of new customers and development of additional delivery
methods for its software technology which required substantial additional human,
equipment and property resources.
Investing
Activities.
For the
three months ended March 31, 2008, Sequoia’s cash flows from investing
activities was $(24,720) compared to $(51,386) for the same period in
2007. The change was due to purchasing less property and equipment in the three
months ended March 31, 2008 than in the same period in 2007. For
2007, Sequoia’s cash flows from investing activities were
$(577,295) compared to $(414,995) in 2006. The change
resulted primarily as a result of purchasing property and equipment to allow for
the fulfillment of products for customers and anticipated
customers.
Financing
Activities.
For the
three months ended March 31, 2008, financing activities provided a
net $1,885,118 of cash compared to $930,375 for the same period in 2007.
During the three months ended March 31, 2008, Sequoia received $1.5 million from
Secure Alliance in anticipation of closing the Merger Agreement. During this
period, Sequoia received $414,626 from Amerivon as they exercised a portion of
their warrants to purchase additional common units, and used $(29,508) for
principal payments under capital obligations. During the three months ended
March 31, 2007, Sequoia received $1 million from Amerivon, and $20,000 from
related party notes payable. Also during this period Sequoia made payments of
$(82,080) in loan costs, and $(7,545) for principal payments under
capital lease obligations.
Sequoia
has elected to grow its business through the use of outside capital beyond what
has been available from operations to capitalize on the growth in the digital
imaging industry. During the first half of 2006 Sequoia undertook a
private equity offering consisting of 12-month convertible debt, bearing
interest at 10%. The offering was taken in its entirety by Amerivon,
who invested a total of $829,250. At the time of the investment,
Amerivon placed a member on Sequoia’s Board of Managers. In August of
2006, Amerivon invested an additional $1,560,000 in a convertible debt offering,
bearing interest at 10%, intended to bridge Sequoia to a subsequent preferred
equity offering targeting $5 to $7 million. During the first quarter
of 2007, Amerivon provided additional bridge financing of $1,000,000 and an
additional $535,000 of bridge financing during the second quarter of
2007. In May 2007, Sequoia closed the preferred equity offering with
Amerivon at which time they converted approximately $2.4 million in aggregate
convertible debt held by Amerivon, together with accumulated interest into
common units of Sequoia. Amerivon also provided approximately $4.9
million in additional cash, which, along with $1.5 million of the bridge
financing principle provided during 2007, plus accumulated interest, was used to
purchase a total of $6.4 million worth of Sequoia’s Series B
preferred. Upon the closing of the Series B preferred offering,
Amerivon placed a second member on Sequoia’s Board of Managers.
In
anticipation of closing the Merger Agreement, Sequoia entered into a Loan
Agreement with Secure Alliance whereby Secure Alliance agreed to extend (and has
extended) to Sequoia $2.5 million to provide operating capital
through the closing of the transaction. A total of $1 million was
loaned to Sequoia during 2007, with an additional $1.5 million being loaned in
2008. In connection with the closing of the Merger Agreement on June
6, 2008, Sequoia received approximately $7.3 million to fund operations in
addition to the $2.5 million previously loaned to the Company by Secure
Alliance. Upon closing of the Merger, the $2.5 million notes payable
to Secure Alliance were eliminated. Management believes that the
funds received in connection with the Merger will be sufficient to sustain
operations at least through the year ending December 31, 2008.
New
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised
2007) (SFAS 141R), Business Combinations and SFAS No. 160
(SFAS 160), Noncontrolling Interests in Consolidated Financial Statements,
an amendment of Accounting Research Bulletin No. 51. SFAS 141R will
change how business acquisitions are accounted for and will impact financial
statements both on the acquisition date and in subsequent periods. SFAS 160
will change the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS 141R and SFAS 160 are effective for us beginning in the
first quarter of fiscal 2010. Early adoption is not permitted. The adoption of
SFAS 141R and SFAS 160 is not expected to have a material impact on
the Company’s financial statements.
In
September 2006, the FASB issued SFAS No. 157 (SFAS 157), Fair
Value Measurements, which defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value measurements.
SFAS 157 does not require any new fair value measurements but rather
eliminates inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. However, in February 2008, the FASB issued FSP
FAS 157-b which delays the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). This FSP partially defers the effective date of
Statement 157 to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years for items within the scope of this
FSP. Effective for fiscal 2008, the Company will adopt SFAS 157 except as
it applies to those nonfinancial assets and nonfinancial liabilities as noted in
FSP FAS 157-b. The adoption of SFAS 157 is not expected to have a
material impact on the Company’s financial statements.
In
July 2006, the FASB issued Financial Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement No. 109. FIN 48 clarifies the accounting for
uncertainty in income taxes by prescribing the recognition threshold a tax
position is required to meet before being recognized in the financial
statements. It also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2007
and as a result, is effective our first quarter of fiscal 2008. The cumulative
effects, if any, of applying FIN 48 will be recorded as an adjustment to
retained earnings as of the beginning of the period of adoption.
Additionally,
in May 2007, the FASB published FSP No. FIN 48-1 (FSP FIN 48-1),
Definition of Settlement in FASB Interpretation No. 48. FSP FIN 48-1
is an amendment to FIN 48. It clarifies how an enterprise should determine
whether a tax position is effectively settled for the purpose of recognizing
previously unrecognized tax benefits. If the Company closes the
merger with Secure Alliance Holdings Corporation as noted in note 11, the
Company will be required to comply with FIN 48-1 on the merger
date. The actual impact of the adoption of FIN 48 and FSP
FIN 48-1 on our consolidated results of operations and financial condition
will depend on facts and circumstances that exist on the date of adoption. The
Company is currently calculating the impact of the adoption of FIN 48 and
FSP FIN 48-1 but does not expect it to have a material impact on the
financial statements.
Off-Balance
Sheet Arrangements
Sequoia
does not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital resources that is material to investors. The following table
sets forth certain contractual obligations as of March 31, 2008 in summary
form:
|
|
|
|
|
Less
than 1
|
|
|
|
1-3
|
|
|
|
4-5
|
|
|
More
than 5
|
|
Description
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Long-term
debt
|
|
$ |
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Capital
lease obligations
|
|
|
388,085 |
|
|
|
166,162 |
|
|
|
221,923 |
|
|
|
– |
|
|
|
– |
|
Operating
lease obligations
|
|
|
695,134 |
|
|
|
317,990 |
|
|
|
369,494 |
|
|
|
7,650 |
|
|
|
– |
|
Notes
payable
|
|
|
2,747,361 |
|
|
|
2,747,361 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Purchase
obligations
|
|
|
97,000 |
|
|
|
97,000 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Total
|
|
$ |
3,927,580 |
|
|
|
3
,328,513 |
|
|
|
591,417 |
|
|
|
7,650 |
|
|
|
– |
|
As noted above, $2.5 million of the
notes payable outstanding were eliminated upon the closing of the Merger with
Secure Alliance.
Organizational
History
aVinci
Media Corporation (formerly known as Secure Alliance Holdings Corporation and
hereinafter referred to as the “Company,” “we,” “us,” or “our”) is a Delaware
corporation. Between October 2, 2006 and June 6, 2008, the Company
was a shell public company and conducted no business activities other than
seeking appropriate merger acquisition candidates. In June 2008
(described in Recent Developments below), these efforts led to the acquisition
of Sequoia Media Group, LC (“Sequoia”) by way of a reverse merger.
Pursuant
to an Agreement and Plan of Merger and Reorganization dated December 6, 2007 and
amended March 31, 2008 (the “Merger Agreement”), by and among the Company, then
operating as Secure Alliance Holdings Corporation (the “Company”), SMG Utah, LC,
a Utah limited liability company (“Merger Sub”) and wholly owned subsidiary
of the Company, and Sequoia, Merger Sub merged with and into Sequoia, with
Sequoia remaining as the surviving entity and a wholly owned operating
subsidiary of the Company (the “Merger”). The Merger was effective on
June 6, 2008, upon the filing of Articles of Merger with the Utah Division of
Corporations. In connection with the Merger transaction, the Company
amended the Certificate of Incorporation to (i) change our name from Secure
Alliance Holdings Corporation to aVinci Media Corporation; (ii) increase
our authorized shares of common stock from 100,000,000 to 250,000,000;
(iii) authorize a class of preferred stock consisting of 50,000,000 shares
of $.01 per value preferred stock; and (iv) effect a 1-for-2 reverse stock
split.
General
Development of Sequoia’s Business
Sequoia
is a Utah limited liability company organized on March 28, 2003 under the name
Life Dimensions, LC. In 2003, Sequoia changed its name from Life
Dimensions, LC to Sequoia Media Group, LC. Sequoia’s operations are
currently governed by a Board of Managers made up of five managers, three of
whom are the original founders and two of whom were appointed as part of a
private equity investment. Substantially all of its business is
conducted out of its Draper, Utah office. Sequoia also has an office
in Bentonville, Arkansas to help service Wal-Mart, which is one of its largest
retail customers.
Sequoia
has developed and deployed a software technology that employs “Automated
Multimedia Object Models,” its patent-pending way of turning consumer captured
images, video, and audio into complete digital files in the form of full-motion
movies, DVD’s, photo books, posters and streaming media
files. Sequoia filed its first provisional patent in early 2004 for
patent protection on various aspects of its technology with a full filing
occurring in early 2005, and Sequoia has filed several patents since that time
as part of its intellectual property strategy. Sequoia’s technology
carries the brand names of “aVinci” and “aVinci Experience.”
In May
2004 Sequoia signed its first client agreement with BigPlanet, a division of
NuSkin International, Inc. (“NuSkin”). Under the terms of
its BigPlanet agreement, Sequoia supplied them with its software technology that
they marketed, sold, and fulfilled for their consumers. Revenues from
BigPlanet represent substantially all of Sequoia’s sales through 2007 at
approximately $3.4 million from May 2004 through December
2007. Sequoia’s agreement with BigPlanet expired on December 31,
2007. BigPlanet continues to offer Sequoia DVD products and pays a
per-product royalty for products made on a monthly basis resulting in a royalty
of approximately $2,000 per month.
Since
inception, Sequoia has continued to develop and refine its technology to be able
to provide higher quality products through a variety of distribution models
including in-store kiosks, retail kits, and online
downloads. Sequoia’s business strategy has been to develop a product
solution that provides users with professionally created templates to
automatically create personalized products by simply adding end customer
images.
Sequoia’s
business efforts during 2006 and 2007 were directed at developing relationships
with mass retailers. Sequoia signed an agreement to provide its
technology in Meijer stores at the end of 2006. Due to an integration
problem issue with a third party supplier to Meijer, Sequoia has been delayed in
deploying its software technology in Meijer stores. However, Sequoia
is currently working with a new vendor, Hewlett Packard, and recently launched
its products in Meijer stores in April 2008.
During
2007, Sequoia signed an agreement with Fujicolor to deploy its technology on
their kiosks located in domestic Wal-Mart stores. Sequoia’s initial
integration and deployment with Fujicolor in domestic Wal-Mart stores took place
in the third quarter of 2007, with a software update scheduled for the third
quarter of 2008 to enhance the user experience and the product
offering.
In
January 2008, Sequoia signed an agreement with Costco.com, to deliver its DVD
product online. Sequoia’s DVD product began being offered at
Costco.com on the “photo” category at the end of March 2008.
Initial
operations before Sequoia’s formal entity organization in March 2003 were funded
through founder contributions. Operations since May 2004 have been
funded by royalty revenue received from BigPlanet, totaling approximately $3.4
million to date; from outside investment capital, totaling approximately $9.8
million to date; and from loans from Secure (associated with the Merger
transaction) totaling approximately $2.5 million.
From
pre-organization through Sequoia’s initial contract, the founders contributed
approximately $150,000. These initial contributions were provided in
exchange for promissory notes bearing interest at 10%, the principal and
interest of which were converted into convertible debentures bearing interest at
10% with a term of 13 months through January 31, 2005. The debentures
and interest were converted into Series A preferred membership interests (the
“Series A Preferred Units”) in January 2005. The preferences of
the Series A Preferred Units was the right to convert the Series A Preferred
Units into an investment in a future financing if, at anytime within 12 months
of receiving the Series A Preferred Units, Sequoia raised capital at a lower
valuation than such Series A Preferred Units holders’ initial investment (which
did not occur), and the right to receive distributions upon a liquidating event
before common unit holders receive distributions. All of the Series A
Preferred Units were converted into common units prior to the
Merger.
During
the fourth quarter of 2003, Sequoia initiated a small private offering that
closed in the first quarter of 2004. The offering consisted of
12-month convertible debt, bearing interest at the annual rate of
10%. In January 2005, all but $30,000 of the debt converted into
Series A preferred. In February 2005, Sequoia closed a private
offering of approximately $150,000 consisting of the sale of common units, and
it followed that offering with another offering in June of 2005, consisting of
the sale of common units through which Sequoia raised an additional
$173,000.
Needing
more capital to continue pursuing its business plan through 2006, Sequoia
undertook a larger private offering consisting of 12-month convertible debt,
bearing interest at 10%. The offering was taken in its entirety by
Amerivon Holdings LLC (“Amerivon”), who invested a total of
$829,250. At the time of the investment, Amerivon placed a member on
Sequoia’s Board of Managers. In August 2006, Amerivon invested an
additional $1,564,000 in a convertible debt offering, bearing interest at 9%,
intended to bridge Sequoia to a subsequent preferred equity offering targeting
$5 to $7 million. During the first quarter of 2007, Amerivon provided
additional bridge financing of $1,000,000 and an additional $535,000 of bridge
financing during the second quarter of 2007. In May 2007, Sequoia
closed the preferred equity offering with Amerivon at which time Amerivon
converted approximately $2.4 million in aggregate convertible debt held by
Amerivon, together with accumulated interest into common units of
Sequoia. Amerivon also provided approximately $4.9 million in
additional cash, which, along with $1.5 million of the bridge financing provided
during 2007, plus accumulated interest, was used to purchase a total of $6.4
million of Sequoia’s Series B preferred. Upon the closing of the
Series B preferred offering, Amerivon placed a second member on Sequoia’s Board
of Managers.
The
Series B preferred entitled its holders to redemption rights after four years,
annual dividends equal to 8% of the principal amount of the investment, and the
right to receive distributions before common and Series A preferred holders
receive distributions upon liquidation. The Series B preferred owners
converted all of their Series B preferred units into common units immediately
prior to the Merger.
Financial
Information about Operating Segments
Sequoia
conducts business within one operating segment in the United
States. From 2004 through 2007, Sequoia generated revenues primarily
with one customer, BigPlanet, a division of NuSkin. Beginning in
2008, Sequoia began generating revenues primarily through its agreements with
Fujicolor (in Wal-Mart stores), Costco.com, Meijer Stores and
Qualex.
Description
of Business
Software
Technology and Products
Sequoia
makes software technology that it packages in various forms available to mass
retailers, specialty retailers, Internet portals and websites that allow end
consumers to use an automated process to create products such as DVD
productions, photo books, posters, calendars, and other print media products
from consumer photographs, digital pictures, video, and other
media. Sequoia’s customers are retailers and other vendors and not
end consumers. Sequoia enables its customers to sell its products to
the end consumer who remain customers of its vendor and do not become its
customers directly. Sequoia currently delivers its technology to end
consumers through (i) third party photo kiosks at mass and specialty retail
outlets, (ii) retail kit shrink wrapped software at mass and specialty
retail outlets, (iii) simple software downloads through third party
Internet sites, (iv) simple software downloads though its own managed
Internet site to which third party Internet sites are linked, and (v) on
its own managed web servers on the world wide web to which third party Internet
sites are linked.
Generally
all of Sequoia’s products require the end consumer to simply supply digital
images. Sequoia supplies preformatted templates for an occasion,
event, or style such as a wedding, birthday, or activity that fits a particular
style. A template for a DVD generally includes six to eight different
scenes that incorporate background images related to that particular template
theme. Each scene is built around four to ten digital image frames,
or placeholders, where user supplied images are placed to have the appearance of
being part of the themed contextual images Sequoia supplies to support the
template theme. Sequoia utilizes a technique it calls “layering,”
(which is the subject of its patent) to stitch together its supplied images
with the user-supplied images to produce a themed DVD movie. Scenes
may involve panning over the user images as though they are photographs sitting
on a table, or having user images appear in frames sitting on a mantle as the
camera angle appears to change and move around the mantle piece, to describe a
few of the hundreds of scene effects Sequoia utilizes. Each template
also provides a pre-designated position and font for a unique title, and in some
instances subtitle and other text, to be added by the end
consumer. The scenes are assembled in an order to give the production
a feeling of telling a story. Each template also comes with a default
sound track selected to match the template theme. In some
applications of Sequoia’s software, the consumer can select from one of several
music selections fitted to the selected theme. All of the images and
music Sequoia supplies with the themed templates are owned by Sequoia or have
been fully licensed from the owners of the rights.
Using a
wedding DVD template that is supplied on a retail kiosk as an example, a
consumer brings a CD or photo storage card containing his or her images to a
kiosk located in a retailer’s store. The consumer inserts the image
storage device into the kiosk reader and the kiosk loads the user images onto
the kiosk. The user then chooses to make a DVD from a menu on the
kiosk at which point our software is launched. The user browses the
categories and selects “wedding” from among four to six categories of templates
and then selects “wedding day” from a few different wedding
templates. The user next selects 40 photos from his or her user
supplied images to be incorporated into the template and can rotate and move the
images into the preferred orientation and order. A title and
subtitle, such as “John and Jessica’s Wedding,” “November 14, 2007,” are typed
into the kiosk by the user and the user specifies the number of copies he or she
wants to purchase. With this, the user has successfully ordered a
wedding DVD.
Upon
completion of an order, Sequoia takes the order information and images and
builds the DVD product remotely at its offices. The user then gets
back a DVD case with the user’s pictures on the cover containing a DVD with the
user’s image printed on the DVD as a label and an insert containing thumbnail
sized images of each user image used to make the DVD. The DVD plays
on standard DVD players and starts with a customer or aVinci branded “spin-up”
to get to a standard navigation screen. The navigation screen shows a
user image in a contextual background consisting of wedding
flowers. By pressing the “Play” button, the movie is launched with
the first scene featuring a wedding announcement with John and Jessica’s name in
a rich stylistic font. The perceived camera angle then pans over to a
digitally created frame containing a picture of the bride supplied by the user,
while soft wedding themed music plays. The scenes transition with
pictures of flowers taking the viewer through the wedding day. The
DVD ends with credits for licensed media and audio used to produce the DVD
production.
Sequoia’s
photo books are created in the same fashion as described for DVDs, only
Sequoia’s templates are created and laid out to tell the themed story in the
form of a ten to twenty page, eight by eleven inch photo book. Book
pages are laid out by Sequoia’s design experts, printed on a digital press and
hardbound. Posters incorporate one or more user images into themed
art matching DVD and photo book themes. Sequoia is not currently
selling any photo books, posters, or other print products to end consumers
because Sequoia is still in the final stages of development. Sequoia
launched its first photo book and poster products during the second quarter of
2008.
Product
Delivery Model
Under
Sequoia’s business model, Sequoia integrates with retail or other vending
customers according to each customer’s business plan. Sequoia’s
customers maintain the end consumer relationship and control as much of the
image capture, product creation, and delivery of product as they desire based
largely upon the product delivery method they select. Sequoia does
the rest. Whatever Sequoia’s customers want to pass to it to manage,
Sequoia manages.
With its
kiosk model, Sequoia integrates with a third party kiosk provider and integrates
its software onto the kiosk. End consumers using the kiosk load their
images onto the kiosk and can make a variety of products. With
Sequoia’s software on the kiosk, when the consumer chooses to make a DVD
product, its software launches and takes the consumer through the process of
selecting a theme, a specific production type (called a storyboard), the photos
to be integrated into the product, a title, and the order
quantity. The kiosk then generates an order confirmation for the
consumer who uses the confirmation to pick up and pay for the order when
complete. Upon completion the kiosk order goes either to the
retailer’s lab to be fulfilled in store or to central processing to be fulfilled
remotely.
Retailers
and vendors can stock Sequoia’s retail kit product which consists of a small box
containing a CD containing a simplified version of its production software for a
specific production type (such as Wedding) and a product
code. The end consumer pays for the product at the store and can then
use the CD at home or work to place their prepaid product order. The
CD loads the software onto the customer’s computer and walks the customer
through the process of selecting his or her digital images to be used in
creating the product, typing any unique consumer information such as a
customized title and subtitle, entering order information for shipping, and
uploading the order information and image files for remote
fulfillment.
With
third party Internet sites, the process is similar to Sequoia’s retail kit
product except for how the consumer loads the simple software on his or her
computer and how he or she pays for the product order. With an
Internet vendor that manages Sequoia’s software through their site, Sequoia
supplies the vendor with its software download. The consumer then
downloads the simple software from the vendor’s web servers over the
Internet. The software loads and walks the customer through the
process of selecting his or her digital images to be used in creating the
product, typing any unique consumer information such as a customized title and
subtitle, entering order information for shipping, taking the consumer’s credit
card information to process the payment transaction for products ordered via a
secure Internet transaction, and uploading the order for remote
fulfillment.
In the
event a retailer or vendor wants Sequoia to manage the software download, they
simply provide a link on their website to Sequoia and Sequoia provides the
simple software download from its web servers over the Internet. The
consumer process then works as outlined for a third party Internet site
deployment. Following the software download, the software loads and
walks the customer through the process of selecting his or her digital images to
be used in creating the product, typing any unique consumer information such as
a customized title and subtitle, entering order information for shipping, taking
the consumers credit card information to process the payment transaction for
products ordered via a secure Internet transaction, and uploading the order for
remote fulfillment.
As a
companion to the retail kit product, Sequoia launched in the second quarter of
2008 a web site that will allow consumers who upload orders using the retail kit
software to order additional copies and additional products on the web
site. Under this business model, the consumer uploads the product
order purchased as a retail kit product. Upon receipt of the order,
Sequoia provides the consumer with a dialogue box asking if they would like to
add additional copies of the created product to his or her order, and if he or
she would like to order a companion photo book or poster to the
order. If the customer chooses to order additional products, Sequoia
processes the payment transaction for the products ordered via a secure Internet
transaction.
To date
Sequoia’s customers have elected to have products fulfilled
remotely. Sequoia fulfills all the products either in house or
through third party vending partners. Once a consumer orders a
product by selecting the product and the pictures and his or her images to be
used in creating the product, the order and images are received by Sequoia’s web
servers deployed by it in-house or with third party vendors Sequoia contracts
with to do its fulfillment work. The servers process the orders and
photos and pass the electronic filed off to computers that build the final
product and send the files to be burned on a DVD or printed on a print media
product such as a photo book or poster. Finished products are shipped
to retail customers for delivery to end customers or directly to end customers
depending on the retail customer’s business model.
Sequoia’s
revenue model generally relies on a per product royalty. With all
product deployments except the retail kit product, each time an end customer
makes a product utilizing Sequoia’s technology, Sequoia receives a royalty from
its retail customers. From the royalty received, Sequoia pays the
royalties associated with licensed media and technology. If Sequoia
is performing product fulfillment, Sequoia also pays the costs of goods
associated with production of the product. If Sequoia’s customer
utilizes in-store fulfillment, its customer pays the cost of goods associated
with production.
Sequoia
currently has fulfillment hardware deployed in two locations including its
Draper, Utah office and a Qualex (a subsidiary of Eastman Kodak
Company) facility in Allentown, Pennsylvania that allow for the fulfillment
of DVD products. Both locations have computer server configurations
and DVD burning and printing units. DVD supplies, including DVD media
supplied by Verbatim and Taiyo Yuden, DVD cases, and paper for printing DVD case
covers, are inventoried to be able to meet customer DVD fulfillment
needs. Sequoia’s photo book and poster product fulfillment operations
are in the implementation stage. Sequoia intends to fulfill photo
books and posters with third party fulfillment partners. Currently,
Sequoia has a fulfillment agreement with Qualex to build and ship many of its
DVDs, photo books and posters for select customers. Integration with
Qualex for creating DVD media was completed in February 2008.
Customers
In May
2004, Sequoia signed its first client agreement with BigPlanet, a division of
NuSkin. NuSkin is a global direct selling company. NuSkin
markets premium-quality personal care products under the Nu Skin® brand,
science-based nutritional supplements under the Pharmanex® brand, and
technology-based products and services under the Big Planet®
brand. BigPlanet, NuSkin’s technology division, offers its customers
ways to easily preserve, organize, share and enjoy photos
online. Under the terms of its BigPlanet agreement, Sequoia supplied
software technology to build DVD movies which BigPlanet marketed, sold, and
fulfilled for their consumers under their brand name
“PhotoMax.” Revenues from BigPlanet represented substantially all of
Sequoia’s sales through 2007 at approximately $3.4 million to
date. The agreement required an annual minimum guaranteed royalty of
$1 million, which was payable monthly in the amount of
$83,333.33. Sequoia’s agreement with BigPlanet expired on December
31, 2007 and Sequoia has been paid current through the end of the
term. BigPlanet continues to offer Sequoia DVD products and pays a
per-product royalty for products made on a monthly basis.
On
September 18, 2006, Sequoia signed an agreement to provide its technology in
Meijer stores. Meijer Distribution, Inc. (“Meijer”) is a
Michigan-based retailer that operates 181 super centers throughout the
mid-west. Sequoia’s agreement term with Meijer continues through a
date two years from the date Meijer first makes Sequoia’s software technology
available to end consumers, subject to automatic renewal for additional 12-month
periods after the initial term. Under the terms, Meijer purchases DVD
kits from Sequoia consisting of a pre-labeled DVD, DVD cover and paper for the
case cover, and inserts printed with thumbnail size images of all the user
photographs provided for use in the DVD production. Meijer placed and
paid for an initial purchase order of DVD kits, for approximately $109,000, but
due to an integration issue with a third party supplier to Meijer, the
deployment was delayed. Meijer entered into an agreement with Hewlett
Packard to deploy a photo kiosk solution in Meijer stores. Sequoia is
currently working with Hewlett Packard and Sequoia’s software was launched in
Meijer stores in April 2008 with full deployment through the 180 store chain in
May 2008.
In
January 2006, Sequoia signed an agreement with Storefront, a photo kiosk
company. Storefront anticipated deploying Sequoia’s software on
client kiosks in retailers such as King Soopers, Smith’s, Fred Meyer, Ralph’s
and others. Storefront has not deployed Sequoia’s software to date
and Sequoia does not know if they will ever deploy Sequoia software with their
customers.
On
September 1, 2007, Sequoia signed an agreement with Qualex, Inc.
(“Qualex”) to allow for the distribution of its software product to Qualex
customers. Qualex, a wholly owned subsidiary of Eastman Kodak, is the
largest wholesale and on-site photofinishing company in the world and it offers
traditional print and digital output solutions by operating a large network of
commercial and in store labs throughout the United States and
Canada. The agreement term is through September 30, 2009, at which
point it is subject to extension for additional 12-month terms at the election
of either party. Qualex will provide the fulfillment services for all
of its customers and Sequoia will receive a royalty per product
produced. Sequoia also signed a separate agreement with Qualex at the
same time that provides for Qualex to perform fulfillment services for select
customers. As part of the agreement, Sequoia has deployed its
fulfillment technology and equipment in Qualex’s Allentown, Pennsylvania
fulfillment center. Sequoia began processing live orders in February
2008 with Qualex.
During
2007 at the request of Wal-Mart, Sequoia signed an agreement with Fujicolor to
deploy its technology on Fujicolor kiosks located in domestic Wal-Mart
stores. Wal-Mart is a worldwide retailer with more than 5,000
domestic retail stores. Fujicolor is part of Fujifilm, which is a
world leader in photographic products and technology. Sequoia’s
initial integration and deployment with Fujicolor in domestic Wal-Mart stores
took place in the third quarter of 2007. Sequoia’s DVD product
offering is currently deployed throughout domestic Wal-Mart stores on Fujicolor
kiosks in more than 3,000 stores. Upon deployment with Fujicolor,
Sequoia intended to update the first version of its software within several
months. Because of software updates Fujicolor is making to its kiosks
generally, Sequoia has not been able to deploy any updates. Sequoia
is working with Fujicolor currently and anticipates updating its software in the
third quarter of 2008.
Sequoia
also became a Wal-Mart vendor and shipped Sequoia’s retail kit product to 200
Wal-Mart stores in June 2008, with a wider rollout anticipated based upon
initial sales in the 200 deployed stores.
In
January 2008, Sequoia signed an agreement with Costco.com, to deliver its DVD
product online. Sequoia’s DVD product began being offered at
Costco.com on the “photo” category at the end of March 2008.
In
addition to its current customers, Sequoia continues to actively negotiate
agreements and relationships with other mass and specialty retailers and other
vending partners.
Competitors
Sequoia’s
competitors consist primarily of professional videographers on the high-cost end
and slideshow software programs on the low-cost end, with varying software tools
in the middle. Unfamiliar evaluators on the surface may attempt to
compare the low-end slide show creator products with Sequoia’s products, but
when compared side by side differences are readily seen in production quality
and detail. Generally only user images are included in the slide show
and context; graphics, audio, and music are not included. Finished
productions are generally poor quality and lack any meaningful emotional
impact.
Software
providers who supply consumer tools or solutions for consumers to make their own
DVD productions include Adobe, Microsoft, Ulead, PhotoShow, Roxio, among
others. The closest direct competitive products to Sequoia’s
technology are software tools such as iPhoto, iMovie and Final Cut Pro from
Apple, each of which require users to spend a significant sum for the software,
devote extensive time to master software usage, and significant time to create
each individual production. Additional competitors include Simple
Star, MuVee, RocketLife, PhotoDex, and Smilebox all of which offer similar
products.
Common to
software tools are their lack of automation. The user spends a vast
amount of time mastering software to produce the same sort of automated results
that can otherwise be accomplished very quickly with Sequoia’s
products. A software user must first import media, organize it,
choose timing and effects, edit music to length then render the
production. The rendered production must then be committed to DVD
where the user has to then design a DVD interface before burning to DVD to have
any navigation capabilities.
Employees
As of
July 28, 2008, Sequoia had 34 full-time employees and 7 part-time
employees. Most of its employees work in its primary business office
in Draper, Utah.
Properties
Sequoia
currently leases approximately 13,000 square feet of office space at 11781 Lone
Peak Parkway, Suite 270, Draper, Utah 84020. Its current lease term
ends on April 30, 2010. Sequoia has a good relationship with its
landlord, DBSI Draper LeaseCo LLC. Sequoia conducts its corporate,
development, sales, and certain manufacturing operations out of its Draper
office. Sequoia’s main telephone number is (801) 495-5700 and
its facsimile number (801) 495-5701. Sequoia maintains a web
site at www.sequoiamg.com. Sequoia leases space in a computer
hardware collocation facility in Salt Lake City and has a good relationship with
the landlord.
In
Bentonville, Arkansas, Sequoia rents an office, on a month-to-month basis,
in an office suite consisting of one office of about 300 square feet
which houses one employee. Sequoia uses the office when it
visits Wal-Mart corporate offices.
Legal
Proceedings
On
December 17, 2007, Robert L. Bishop, who worked with Sequoia in a limited
capacity in 2004 and is a current member of a limited liability company that
owns an equity interest in Sequoia, filed a legal claim alleging a right to
unpaid wages and/or commissions (with no amount specified) and company
equity. The Complaint was served on Sequoia on January 7,
2008. Sequoia timely filed an Answer denying Mr. Bishop’s claims and
counterclaiming interference by Mr. Bishop with Sequoia’s capital raising
efforts. Sequoia intends to vigorously defend against Mr. Bishop’s
claims and pursue Sequoia’s counterclaim.
Intellectual
Property
In early
2003, through patent counsel, Sequoia performed an initial patent search for
products and processes similar to its software
technology. The patent search did not reveal any
conflicting intellectual property. In January 2004, Sequoia filed
initial patent applications seeking broad patent protection for its ideas,
technologies, point-of-sale business concept, and the system of automating
solutions through the use of pre-constructed templates.
Since its
initial filing, Sequoia has completed additional filings to extend and broaden
its patent protection. In February 2005, Sequoia filed for
international patent protection based on its original patents pending, filings
with the individual countries in Europe and Asia to secure the patents
internationally.
As part
of its product development, Sequoia routinely licenses media content such as
pictures, videos and audio to create products. Sequoia has numerous
license agreements with stock image and music sources that it routinely reviews
and keeps current.
In
accordance with the Merger Agreement, and as a result of the Merger, our Board
of Directors increased the size of the Board from two members to seven
members. The Board filled the five vacancies created by such increase
by appointing as additional directors Chett B. Paulsen, Richard B. Paulsen,
Edward B. Paulsen, John E. Tyson and Tod M. Turley. As a result of the Merger,
our directors and executive officers are as follows:
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Chett
B. Paulsen
|
|
52
|
|
President,
Chief Executive Officer, Director
|
Richard
B. Paulsen
|
|
48
|
|
Vice
President, Chief Technology Officer, Director
|
Edward
B. Paulsen
|
|
45
|
|
Secretary/Treasurer,
Chief Operating Officer, Director
|
Terry
Dickson
|
|
50
|
|
Vice
President Marketing and Business Development
|
Tod
M. Turley
|
|
46
|
|
Director
|
John
E. Tyson
|
|
65
|
|
Director
|
Jerrell
G. Clay
|
|
66
|
|
Director
|
Stephen
P. Griggs
|
|
50
|
|
Director
|
Chett B. Paulsen, President and Chief Executive
Officer, Director. Chett co-founded Sequoia in 2003 and serves
as its President and Chief Executive Officer. From 1998 to 2002,
Chett co-founded, served as President and then as Chief Operating Officer of
Assentive Solutions, Inc. (aka, iEngineer.com, Inc.), which developed
visualization and collaboration technologies for rich media content that was
ultimately sold to Oracle in 2002. During his tenure with Assentive,
the company raised more than $25 million in private and venture capital funding
from entities including Intel, Sun Microsystems, J.W. Seligman, and T.L.
Ventures. From 1995 to 1998, Chett founded and managed Digital
Business Resources, Inc., which sold communications technologies to Fortune 100
companies such as American Stores and Walgreens, among others. From
1984 to 1995, Chett worked at Broadcast International (NASDAQ
“BRIN”) playing key management roles including Executive Vice President,
Vice President of Operations and President of the Instore Satellite Network and
Business Television Network divisions of Broadcast where he implemented and
managed technology deployment in thousands of retail locations for Fortune 500
companies. During Chett’s tenure at BI, market capitalization rose to
over $200 million. Chett graduated from the University of Utah in
1982 with a B.S. degree in Film Studies.
Richard B. Paulsen, Vice President and Chief Technology
Officer, Director. Richard co-founded Sequoia in 2003 and
serves as its Vice President and Chief Technology Officer. From 1999
to 2003, Richard worked as a senior member of the technical staff for Wind River
Systems (NASDAQ “WIND”), managing a geographically diverse software development
team and continuing work on software technology Richard pioneered at Zinc
Software from 1990 to 1998 as one of Zinc’s founders. Zinc
subsequently sold to Wind River in 1998. From 1998 to 2000, Richard
enjoyed a sabbatical and served as the Director of Administrative Services for
Pleasant Grove City, Utah, the highest appointed office in the
city. From 1981 through 1990, Richard worked as a software consultant
and programmer working for the University of Utah Department of Computer Science
conducting software analysis, design and coding, and Custom Design Systems
developing custom user interface tools and managing the company’s core library
used by thousands of developers worldwide. Richard graduated with a
MBA degree, with an emphasis in financial and statistical methods, from the
University of Utah in 1987 after receiving a B.S. degree in Computer Science
from the University of Utah in 1985.
Edward “Ted” B. Paulsen, J.D.,
Secretary/Treasurer, Chief
Operating Officer, Director. Ted has served as legal counsel
since co-founding Sequoia in 2003, and joined the company full time as Chief
Operating Officer in September 2006. From 2003 to September 2006, Ted
served as the Chief Operating Officer and Corporate Secretary of Prime Holdings
Insurance Services, Inc. where he helped position the company operationally and
financially to secure outside capital and partner funding to support future
growth beyond the company’s then current annual revenue level. From
1995 through 2003, Ted worked as an associate and then partner with the law firm
of Gibson, Haglund & Paulsen and its predecessor. With a
securities focus, Ted has assisted emerging and growing businesses with
organizational, operational and legal issues and challenges. His
legal practice focused on assisting businesses properly plan and structure
business transactions related to seeking and obtaining
financing. Before moving to Utah and opening the Utah office of his
firm in 1996, Mr. Paulsen worked in Southern California from 1990 to 1995 with
the law firm of Chapman, Fuller & Bollard where he practiced in the areas of
business and employment litigation and business transactions. Ted
graduated from the University of Utah College of Law in 1990 after receiving a
B.S. degree in Accounting from Brigham Young University in 1987.
Terry Dickson, Vice President of Marketing and
Business Development. Terry has served as Sequoia’s Vice
President of Marketing and Business Development since May 2006. Prior
to joining Sequoia, Terry was an advisor to Sequoia from March 2004 through May
2006. Terry brings over 25 years of relevant software marketing,
sales and management experience to Sequoia. From April 2002 to April
2006, Terry served as the Chief Executive Officer of Avinti, Inc, a
venture-funded startup company developing email security
software. From September 2001 to April 2002, he served as the Vice
President of Marketing at venture-backed Lane15 Software in Austin,
Texas. Prior to that, Terry was the founding Marketing Vice President
at Vinca Corporation from 1998 to 2000, where he played the point role in
negotiating a $92 million acquisition to Legato Systems (NASDAQ: LGTO) in
1999. From 1993 to 1996, Terry served in several marketing positions
at the LANDesk software operation of Intel Corporation, including serving as the
Business Unit Manager. He also served as Intel’s Director of Platform
Marketing, and was appointed as Chairman of the Distributed Management Task
Force, an industry standards body consisting of the top 200 computer hardware
and software vendors. Terry received a BS Degree in Marketing in 1980
from Brigham Young University, and an MBA degree from the University of
Colorado, Boulder in 1981.
Tod M. Turley, Director. Tod was
appointed to the Board of Managers of Sequoia in March 2006, following an
investment in Sequoia by Amerivon Holdings. Tod has served as the
Chairman and Chief Executive Officer of Amerivon Holdings since
2003. Tod has also served as the Chairman and Chief Executive Officer
of Amerivon Investments LLC, a subsidiary of Amerivon Holdings (“Amerivon
Investments” and, together with Amerivon Holdings, “Amerivon”), since he
co-founded it in April 2007. Amerivon is a significant equity holder
and investor in Sequoia. Through its integrated approach of sales,
consulting and capital, Amerivon accelerates rapid growth plans for emerging
growth companies such as Sequoia. Previously, Mr. Turley served as
the Senior Vice President, Business Development of Amerivon Holdings from June
2001 to July 2003. Prior to Amerivon, Mr. Turley was the co-founder
and Senior Vice President of Encore Wireless, Inc. (private label wireless
service provider with a focus on “big-box” retailers). Earlier, he
served for 13 years as a corporate attorney and executive with emerging growth
companies in the telecommunications industry. He currently serves as
a director on a number of other boards of private companies, including Wireless
Advocates and Smart Pack Solutions. Tod graduated from the University
of Utah in 1985 with a BA in Economics and French, and subsequently graduated
from the University of Southern California with a J.D. in 1988.
John E. Tyson, Director. John
became a member of Sequoia’s Board of Managers in May 2007 as a representative
of Amerivon. John has served as the President of Amerivon Investments
LLC upon its formation in April 2007, and also serves as Executive Vice
President of Amerivon Holdings. John previously served as the
President of Amerivon Holdings from May 2005 through April
2007. Concurrently, from April 2005 through April 2007, John served
as the President of Xplane Corporation, an information design firm using visual
maps to make complex processes easier to understand and Corporate Visions Inc.,
a sales consulting and training company. Prior to that, John founded etNetworks
LLC, an IT training company (broadcasting IBM courses via satellite directly to
the Desktop PC) in 1997 and served as the company’s Chairman, Chief
Executive Officer and President through March 2005. From May 1980
through February 1995, John was the Chairman and Chief Executive Officer of
Compression Labs, Inc. (“CLI”), a NASDAQ company developing Video Communications
Systems. CLI pioneered the development of compressed digital video,
interactive videoconferencing and digital broadcast television, including the
systems used in today’s highly successful Hughes DirecTV® entertainment
network. Prior to CLI, John has held executive management positions
with AT&T, General Electric, and General Telephone &
Electronics. He currently serves as Chairman of the Board of Provant,
Inc., is a director on a number of boards of private companies, including
MicroBlend Technologies, Retail Inkjet Solutions, The Wright Company and
AirTegrity (a wireless networking company) and is an Advisory Board Member
of the University of Nevada-Reno, Engineering School.
Jerrell G. Clay, Director. Jerrell
has served as a Director of Secure Alliance since December 1990, and as our
Chief Executive Officer since October 3, 2006. Concurrently, Jerrell
has served as the co-Founder, Chairman of the Board and Chief Executive Officer
of 3 Mark Financial, Inc., an independent life insurance marketing organization,
since January 1997, and has served as President of Protective Financial
Services, Inc., one of the founding companies of 3 Mark Financial, Inc., since
1985. From 1962-1985, Jerrell held various positions within the
insurance industry, including general agent, branch manager, vice president and
branch agency director with a major life insurance company. Jerrell
currently serves as a member of the Independent Marketing Organization’s
Advisory Committee of Protective Life Insurance Company of Birmingham, Alabama
and is the past President of the Houston Chapter of the Society of Financial
Service Professionals. Jerrell is a Chartered Life Underwriter and a Registered
Securities Principal. Upon consummation of the Merger, Jerrell will
resign as our Chief Executive Officer, but will remain a director of the
Company.
Stephen P. Griggs, Director. Stephen
has served as a Director of Secure Alliance since June 2002, and was our
President and Chief Operating Officer from October 3, 2006 to the effective date
of the Merger and as our Principal Financial Officer and Secretary from April
20, 2007 to the effective date of the Merger. Stephen has been
primarily engaged in managing his personal investments since
2000. From 1988 to 2000, Stephen held various positions, including
President and Chief Operating Officer of RoTech Medical Corporation, a
NASDAQ-traded company. He holds a Bachelor of Science degree in
Business Management from East Tennessee State University and a Bachelor of
Science degree in Accounting from the University of Central
Florida. Upon consummation of the Merger, Stephen will resign as our
President and Chief Operating Officer, but will remain a director of the
Company.
Chett B.
Paulsen, Richard B. Paulsen and Edward B. Paulsen, the original founders of
Sequoia, are brothers.
Committees
of the Board of Directors
The Company has an audit and
compensation committee. The compensation committee is comprised of
Chett B. Paulsen, John E. Tyson and Tod M. Turley. The
compensation committee gathers information on industry salaries to set executive
compensation levels. This committee also reviews all equity grants to
employees.
The audit
committee, charged with closely reviewing the audit report received from the
auditors and providing a full report to Sequoia’s Board of Managers, is
comprised of Edward B. Paulsen, Tod M. Turley and Stephen Griggs.
We intend
to appoint such persons to the Board of Directors and committees of the Board of
Directors as are expected to be required to meet the corporate governance
requirements imposed by a national securities exchange, although we are not
required to comply with such requirements until we elect to seek listing on a
securities exchange. We do not currently have any independent
directors.
Compensation
Committee Interlocks and Insider Participation
None
of our executive officers serves as a member of the Board of Directors or
compensation committee of any other entity that has one or more of its
executive officers serving as a member of our Board of Directors.
Compensation
Discussion and Analysis
Sequoia’s
primary objective with respect to executive compensation is to design a reward
system that will align executives’ compensation with Sequoia’s overall business
strategies and attract and retain highly qualified executives. The plan rewards
revenue generation and achievement of revenue opportunities generated by signing
contracts with retailers to carry Sequoia’s products.
The
principle elements of executive compensation are salary, bonus and stock option
grants. Sequoia pays these elements of compensation to stay
competitive in the marketplace with its peers.
During
2007, Sequoia participated in a Pre-IPO and Private Company Total Compensation
Survey which polled 221 companies and just under 14,800 employees (the
“Survey”). Sequoia’s compensation committee, consisting of one
outside manager and one executive manager, examined the software companies who
participated in the Survey and determined to compensate its executives at
approximately the 25th percentile because of the relative small size of Sequoia
and the stage of revenue generation. Each executive position at
Sequoia is represented in the Survey and the data from such positions were used
in determining the executive salary levels for 2008. For years prior
to 2008, all executives were working for salaries Sequoia determined it could
afford and all were making salaries below market and below prior salary
levels.
The
Survey also assessed bonus and total compensation levels. Sequoia’s executive
bonuses for 2008 are consistent with the Survey at about the 25th
percentile. For years prior to 2008, bonuses were determined by
assessing revenue generation, contracts signed with customers including large
retailers, value creation through signed contracts and general contribution to
the achievement of company objectives to position the company for revenues and
additional outside capital investment. Sequoia’s compensation also
considered the number of kiosks on which its products were deployed as a result
of an executive’s efforts, since its products are delivered in one instance on
kiosks located in major retailers.
Additional
incentives in the form of options to purchase equity interests in Sequoia were
granted in 2007. Terry Dickson was granted 510,000 (444,191 post
Merger) options as incentive to join the company in 2006 and additional
300,000 (261,289 post Merger) options in 2007. The total grant
was negotiated between Sequoia and Mr. Dickson. The remaining
executives, Chett B. Paulsen, Richard B. Paulsen and Edward B. Paulsen have not
received any option grants or equity in the company from its formation until
2007. In September 2007, Sequoia’s Board of Managers approved stock
option grants to the original founders as recognition of their efforts in
generating revenues, signing major retail accounts, positioning the company for
future growth and to provide additional incentive to continue in their
management positions through a critical time of revenue and operational
growth. The options vest over three years, with 50% vesting upon
completion of one year of employment from the date of grant, or September 28,
2008, with the balance vesting monthly on a pro-rata basis over the following 24
months.
In
considering the elements of compensation, Sequoia considers its current cash
position in determining whether to adjust salaries, bonuses and stock option
grants. Sequoia, as a small private company, has used its outside
directors who sit on its Board of Managers (Tod M. Turley and John E.
Tyson) to help guide the executive compensation.
Summary
Compensation Table
Name
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Option ($)
|
Total
($)
|
Chett
B. Paulsen, CEO, President, Manager
|
2005
|
144,000
|
-
|
|
144,000
|
2006
|
163,167
|
144,400
|
|
307,567
|
2007
|
199,375
|
138,937
|
27,322(1)
|
365,634
|
|
|
|
|
|
|
Richard
B. Paulsen, CTO, Manager
|
2005
|
120,000
|
-
|
|
120,000
|
2006
|
142,917
|
129,500
|
|
272,417
|
2007
|
183,333
|
118,125
|
27,322(1)
|
328,780
|
|
|
|
|
|
|
Edward
B. Paulsen, CFO, COO, Manager
|
2005
|
-
|
-
|
|
-
|
2006
|
44,423
|
53,495
|
|
97,918
|
2007
|
173,854
|
88,000
|
19,125(2)
|
280,979
|
|
|
|
|
|
|
Terry
Dickson, VP Business Development
|
2005
|
-
|
-
|
|
-
|
2006
|
103,231
|
131,625
|
|
234,856
|
2007
|
181,042
|
135,000
|
8,197(3)
|
324,239
|
|
|
|
|
|
|
Mark
Petersen, VP Sales
|
2005
|
-
|
-
|
-
|
58,040(4)
|
2006
|
25,000
|
6,250
|
-
|
35,703(5)
|
2007
|
100,000
|
50,000
|
2,732(6)
|
152,732
|
(1)
|
Non-qualified
option grant to purchase 870,963 common units at $.71 (determined to be
the fair market value on the date of grant). Option vests 50%
upon completing 12 months of employment on September 28, 2008, with the
balance vesting monthly on a pro rata basis over the next 24 months of
employment.
|
(2)
|
Non-qualified
option grant to purchase 609,674 common units at $.71 (determined to be
the fair market value on the date of grant). The Option vests
50% upon completing of 12 months of employment at September 28, 2008, with
the balance vesting monthly on a pro rata basis over the next 24 months of
employment.
|
(3)
|
Non-qualified
option grant to purchase 261,289 common units at $.71 (determined to be
the fair market value on the date of grant). The Option vests
50% upon completing of 12 months of employment at September 28, 2008, with
the balance vesting monthly on a pro rata basis over the next 24 months of
employment.
|
(4)
|
Independent
contractor work.
|
(5)
|
Includes
$4,453 of other compensation.
|
(6)
|
Non-qualified
option grant to purchase 87,096 common units at $.71 (determined to be the
fair market value on the date of grant). Option vests 50% upon
completing of 12 months of employment at September 28, 2008, with the
balance vesting monthly on a pro rata basis over the next 24 months of
employment.
|
Grants
of Plan-Based Awards
As of the
date hereof, no specific awards have been granted or are contemplated under the
2008 Stock Incentive Plan.
Currently,
directors receive no compensation pursuant to any standard arrangement for their
services as directors. Nevertheless, we may in the future determine
to provide our directors with some form of compensation, either cash or options
or contractually restricted securities..
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information with respect to the beneficial
ownership of our voting securities following the completion of the Share
Exchange and the closing of the Securities Purchase Agreement by (i) any
person or group owning more than 5% of each class of voting securities,
(ii) each director, (iii) our chief executive officer and each other
executive officer whose cash compensation for the most recent fiscal year
exceeded $100,000 and (iv) all executive officers and directors as a group
as of June 6, 2008. Unless otherwise indicated, the address of the
below-listed persons is the Company’s address, 11781 South Lone Peak Parkway,
Draper, UT 84020.
Name
and Address of Beneficial Owner
|
|
Number
of Shares Beneficially Owned (1)
|
|
|
Percent
of Class
|
|
|
|
|
|
|
|
|
Chett
B. Paulsen (2) (3)
|
|
|
6,411,458 |
|
|
|
13.16 |
% |
Richard
B. Paulsen (2) (4)
|
|
|
4,239,744 |
|
|
|
8.70 |
% |
Edward
B. Paulsen (2) (5)
|
|
|
2,227,691 |
|
|
|
4.57 |
% |
Tod
M. Turley (2) (6)
|
|
|
18,532,212 |
|
|
|
36.82 |
% |
John
E. Tyson (2) (7)
|
|
|
18,590,535 |
|
|
|
36.94 |
% |
Jerrell
G. Clay (2) (8)
|
|
|
566,703 |
|
|
|
1.15 |
% |
Stephen
B. Griggs (2) (9)
|
|
|
475,000 |
|
|
<1.00
|
% |
Terry
Dickson(2) (10)
|
|
|
328,705 |
|
|
<1.00
|
% |
Mark
Petersen(2)
|
|
|
602,171 |
|
|
|
1.24 |
|
Amerivon
Investments LLC (11)
|
|
|
18,532,212 |
|
|
|
36.82 |
% |
Directors
and Executive Officers as a group (7 persons)
|
|
|
33,527,782 |
|
|
|
64.97 |
% |
|
|
|
|
|
|
|
|
|
Total
Shares Issued
|
|
|
48,737,928 |
|
|
|
100.00 |
% |
(1)
|
In
determining beneficial ownership of our common stock as of a given date,
the number of shares shown includes shares of common stock which may be
acquired on exercise of warrants or options or conversion of convertible
securities within 60 days of that date. In determining the percent of
common stock owned by a person or entity on July 28, 2008, (a) the
numerator is the number of shares of the class beneficially owned by such
person or entity, including shares which may be acquired within 60 days on
exercise of warrants or options and conversion of convertible securities,
and (b) the denominator is the sum of (i) the total shares of
common stock outstanding on July 28, 2008, and (ii) the total
number of shares that the beneficial owner may acquire upon conversion of
the preferred and on exercise of the warrants and options. Unless
otherwise stated, each beneficial owner has sole power to vote and dispose
of its shares.
|
(2)
|
These
are the officers and directors of the
Company.
|
(3)
|
These
shares are owned of record by P&D, LP, a family limited
partnership. In addition, Chett B. Paulsen has an option to
purchase 870,963 shares of stock at $0.27 per share. Such
option is not currently
exercisable.
|
(4)
|
These
shares are owned of record by 5 P’s in a Pod, LP, a family limited
partnership. In addition, Richard B. Paulsen has an option to
purchase 870,973 shares of common stock at $0.71 per
share. Such option is not currently
exercisable.
|
(5)
|
These
shares are owned of record by Family Enrichment, LP, a family limited
partnership. In addition, Edward B. Paulsen has an option to
purchase 609,674 shares of common stock at $0.71 per
share. Such option is not currently
exercisable.
|
(6)
|
Includes
(i) 16,929,640 shares owned of record by Amerivon Investments LLC,
(ii) 949,350 shares of common stock underlying currently exercisable
warrants owned by Amerivon Investments LLC, and (iii) 653,222 shares
of common stock underlying currently exercisable stock options owned by
Amerivon Investments LLC Amerivon Investments LLC is an
affiliate of Mr. Turley.
|
(7)
|
Includes
(i) 58,323 shares owned of record by Mr. Tyson, (ii) 16,929,640
shares owned of record by Amerivon Investments LLC, (iii) 949,350
shares of common stock underlying currently exercisable warrants owned by
Amerivon Investments LLC, and (iv) 653,222 shares of common stock
underlying currently exercisable stock options owned by Amerivon
Investments LLC Amerivon Investments LLC is an affiliate of Mr.
Tyson.
|
(8)
|
Includes
91,703 shares owned of record and 475,000 shares underlying currently
exercisable stock options.
|
(9)
|
Represents
475,000 shares underlying currently exercisable stock
options.
|
|
|
(10) |
Includes
88,102 shares owned of record and 240,603 shares underlying currently
exercisable stock options. |
|
|
(11) |
Includes
(i) 16,929,640 shares owned of record, (ii) 949,350 shares of
common stock underlying currently exercisable warrants, and
(iii) 653,222 shares of common stock underlying currently exercisable
options. These shares are also attributed to Mr. Turley and Mr.
Tyson as described in footnotes 6 and 7
above. |
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
In
December 2006, Sequoia entered into various loans with executives of Sequoia
totaling $265,783. These loans bore interest at 10% per annum and
were payable on or before December 31, 2007. Loan origination fees of
$20,005 were recorded as an asset to be amortized over the life of the
loans. On January 5, 2007, an additional $20,000 was loaned to
Sequoia. In April and May 2007, total outstanding principal, accrued
interest, and loan origination fees of $285,783, $10,376, and $20,005,
respectively, were repaid and the associated asset was fully
amortized.
Tod M.
Turley, a member of the Company’s Board of Directors, serves as the Chairman and
Chief Executive Officer of Amerivon Investments and Amerivon
Holdings. John E. Tyson, who is also a member of the Company’s Board
of Directors, serves as the President of Amerivon Investments
LLC. Amerivon is a significant investor and equity holder in
Sequoia.
During
2006, Amerivon invested a total of $2,390,000 in Sequoia’s convertible
debt. At the time of its initial investment, Amerivon placed Tod M.
Turley on Sequoia’s Board of Managers. During 2007, Amerivon (i)
converted $2,390,000 of Sequoia’s convertible debt into common units of Sequoia
membership interests, (ii) made a $2,000,000 bridge loan that was later
converted in Series B Preferred Units of Sequoia membership interests (the
“Series B preferred”) and (iii) purchased an additional $4,400,000 of Series B
preferred. Upon the closing of the Series B preferred offering,
Amerivon placed John E. Tyson on Sequoia’s Board of
Managers. Amerivon converted all of its preferred units to common
units in connection with the consummation of the Merger. In exchange
for the conversion, Amerivon also received an additional 1,525,000 shares of
Sequoia’s common units.
Additionally,
Sequoia entered into a consulting agreement with Amerivon on August 1, 2007
whereby Amerivon received $775,000 for advising Sequoia with regard to financial
transactions and preparing for entering the public market. The
consulting agreement called for payment of $10,000 per month for six months from
August 2007 to January 2008, with additional payments of $119,166 for the
following six months. Amerivon agreed to defer receipt of $109,116
each month until such time as the Sequoia has additional cash
available.
On July
1, 2007, Sequoia finalized a Sales Representative Agreement, which was amended
on November 7, 2007, with Amerivon Holdings LLC whereby Amerivon Holdings
LLC is entitled to receive up to a 10% commission on adjusted sales to customers
brought to the Company by Amerivon Holdings LLC. Amerivon Holdings
LLC also received an option to purchase a total of 1,959,666 common stock of the
Company: 653,222 options priced at $0.18 and subject to sales performance in
2007, 653,222 options priced at $0.18 and subject to sales performance in 2008,
and 653,222 options priced at $0.71 and subject to sales performance vesting in
2009. The sales goals for the first group of 653,222 options were met and the
options vested at the end of July, 2007, resulting in equity-based compensation
expense of $371,955.
Up to
17,878,990 shares of common stock are being offered by this prospectus, all of
which are being registered for sale for the accounts of the selling security
holder and include the following:
· 16,929,640
shares of common stock;
|
· 949,350
shares issuable upon the exercise of common stock
warrants;
|
Each of
the transactions by which the selling stockholder acquired their securities from
us was exempt under the registration provisions of the Securities
Act.
The
shares of common stock referred to above are being registered to permit public
sales of the shares, and the selling stockholder may offer the shares for resale
from time to time pursuant to this prospectus. The selling stockholder may also
sell, transfer or otherwise dispose of all or a portion of their shares in
transactions exempt from the registration requirements of the Securities
Act or pursuant to another effective registration statement covering those
shares.
Beneficial
ownership is determined in accordance with the rules of the SEC. Each selling
stockholder’s percentage of ownership of our outstanding shares in the table
below is based upon 48,737,928 shares of common stock outstanding as of
July 28, 2008.
|
Ownership Before Offering
|
|
After Offering(1)
|
|
Selling Stockholder
|
Number of
shares of
Common Stock
beneficially
owned
|
|
Number of
shares
offered
|
|
Number of
shares of
Common
Stock
beneficially
owned
|
|
Percentage
of
Common
Stock
Beneficially
owned
|
|
Amerivon
Investments LLC
|
19,838,656
|
(2)
|
|
17,878,990
|
(3)
|
1,959,666
|
(4)
|
|
4.0%
|
|
We will
not receive any proceeds from the resale of the common stock by the selling
stockholder. We will receive proceeds from the exercise of the warrants and
options.
(1)
|
Represents
the amount of shares that will be held by the selling stockholder after
completion of this offering based on the assumptions that (a) all shares
registered for sale by the registration statement of which this prospectus
is part will be sold and (b) no other shares of our common stock are
acquired or sold by the selling stockholder prior to completion of this
offering. However, the selling stockholder may sell all, some or none of
the shares offered pursuant to this prospectus or sell some or all of
their shares pursuant to an exemption from the registration provisions of
the Securities Act, including under Rule 144. To our knowledge there are
currently no agreements, arrangements or understanding with respect to the
sale of any of the shares that may be held by the selling stockholder
after completion of this offering or
otherwise.
|
(2)
|
Includes
currently exercisable warrants to purchase 949,350 shares of Common Stock
at $0.53 per share and currently exercisable options to purchase 653,222
shares of Common Stock at $0.18 per share. Also includes
653,222 non-vested options priced at $0.18 and subject to sales
performance in 2008 and 653,222 options priced at $0.71 and subject to
sales performance vesting in 2009.
|
(3)
|
Includes
currently exercisable warrants to purchase 949,350 shares of Common Stock
at $0.53 per share.
|
(4)
|
Includes
653,222 vested options priced at $0.18, 653,222 non-vested options priced
at $0.18, and subject to sales performance in 2008, and 653,222 options
priced at $0.71 and subject to sales performance vesting in
2009.
|
DESCRIPTION
OF SECURITIES
We are
authorized to issue up to 250,000,000 shares of common stock, $.01 par value and
50,000,000 shares of preferred stock, $.01 par value. As of July 28, 2008, there
were 48,737,928 shares of our common stock issued and outstanding and no shares
of preferred stock issued or outstanding. The following is a summary
of the material rights and privileges of our common stock and preferred
stock.
Common
Stock
Subject
to the rights of the holders of any preferred stock that may be outstanding,
each holder of common stock on the applicable record date is entitled to receive
such dividends as may be declared by the Board of Directors out of funds legally
available therefrom, and in the event of liquidation, to share pro rata in any
distribution of our assets after payment, or providing for the payment, of
liabilities and the liquidation preference of any outstanding preferred stock.
Each holder of common stock is entitled to one vote for each share held of
record on the applicable record date on all matters presented to a vote of
stockholders, including the election of directors. Holders of common stock have
no cumulative voting rights or preemptive rights to purchase or subscribe for
any stock or other securities. Except as disclosed herein, there are no
conversion rights or redemption or sinking fund provisions with respect to the
common stock. All outstanding shares of common stock are, and the shares of
common stock offered hereby will be, when issued, fully paid and
nonassessable.
Preferred
Stock
We are
authorized to issue 50,000,000 shares of “blank check” preferred stock, none of
which as of the date hereof is designated or outstanding. The Board of Directors
is vested with authority to divide the shares of preferred stock into series and
to fix and determine the relative designation, powers, preferences and rights of
the shares of any such series and the qualifications, limitations, or
restrictions or any unissued series of preferred stock.
Adoption
of 2008 Stock Incentive Plan
As a
condition to the Closing of the Merger, the Company adopted a Stock Incentive
Plan (“2008 Stock Incentive Plan”) that can be used following the Closing
of the Merger. The Board of Directors believes that the adoption and
approval of a long-term stock incentive plan will facilitate the continued use
of long-term equity-based incentives and rewards for the foreseeable future and
is in the best interests of the Company. Stockholder approval of the
2008 Stock Incentive Plan was obtained, among other reasons, to ensure the tax
deductibility by the Company of awards under the 2007 Stock Incentive Plan for
purposes of Section 162(m) of the Internal Revenue Code. The Majority
Stockholders have approved the 2008 Stock Incentive Plan.
As of the
date hereof, no specific awards have been granted or are contemplated under the
2008 Stock Incentive Plan.
Transfer
Agent
Our
transfer agent is Computershare, 350 Indiana Street, Suite 800, Golden, CO
80401; telephone (303) 262-0600.
PLAN
OF DISTRIBUTION
We are
registering the shares of common stock previously issued and the shares of
common stock issuable upon exercise of the warrants and options to permit the
resale of these shares of common stock by the holder of the common stock,
warrants and options from time to time after the date of this prospectus.
We will not receive any of the proceeds from the sale by the selling stockholder
of the shares of common stock. We will bear all fees and expenses incident
to our obligation to register the shares of common stock.
The
selling stockholder and any of its pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on the over-the-counter market or any other stock exchange,
market or trading facility on which the shares are traded, or in private
transactions. These sales may be at fixed prices, at prevailing market
prices at the time of sale, at varying prices determined at the time of sale or
negotiated prices. The selling stockholder may use any one or more of the
following methods when selling shares:
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits investors;
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
·
|
privately
negotiated transactions;
|
·
|
to
cover short sales made after the date that this registration statement is
declared effective by the
Commission;
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
·
|
broker-dealers
may agree with a selling stockholder to sell a specified number of such
shares at a stipulated price per
share;
|
·
|
a
combination of any such methods of sale;
and
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
selling stockholder may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholder may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts
from the selling stockholder (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated.
The selling stockholder does not expect these commissions and discounts to
exceed what is customary in the types of transactions involved.
The
selling stockholder may from time to time pledge or grant a security interest in
some or all of the shares owned by them and, if they default in the performance
of their secured obligations, the pledgees or secured parties may offer and sell
shares of common stock from time to time under this prospectus, or under an
amendment to this prospectus under Rule 424(b)(3) or other applicable
provision of the Securities Act of 1933 amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
In
connection with the sale of our common stock or interests therein, the selling
stockholder may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholder may also sell shares of our common stock short and if such short
sale shall take place after the date that this registration statement is
declared effective by the Commission, the selling stockholder may deliver these
securities to close out such short sales, or loan or pledge the common stock to
broker-dealers that in turn may sell these securities. The selling
stockholder may also enter into option or other transactions with broker-dealers
or other financial institutions or the creation of one or more derivative
securities which require the delivery to such broker-dealer or other financial
institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
Upon us
being notified in writing by a selling stockholder that any material arrangement
has been entered into with a broker-dealer for the sale of common stock through
a block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, a supplement to this prospectus will be
filed, if required, pursuant to Rule 424(b) under the Securities Act,
disclosing (i) the name of each such selling stockholder and of the
participating broker-dealer(s), (ii) the number of shares involved,
(iii) the price at which such the shares of common stock were sold, (iv)the
commissions paid or discounts or concessions allowed to such broker-dealer(s),
where applicable, (v) that such broker-dealer(s) did not conduct any
investigation to verify the information set out or incorporated by reference in
this prospectus, and (vi) other facts material to the transaction. In
addition, upon us being notified in writing by a selling stockholder that a
donee or pledgee intends to sell more than 500 shares of common stock, a
supplement to this prospectus will be filed if then required in accordance with
applicable securities law.
The
selling stockholder also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this
prospectus.
The
selling stockholder and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Discounts, concessions,
commissions and similar selling expenses, if any, that can be attributed to the
sale of securities will be paid by the selling stockholder and/or the
purchasers.
We have
advised each selling stockholder that it may not use shares registered on this
registration statement to cover short sales of common stock made prior to the
date on which this registration statement shall have been declared effective by
the Commission. If a selling stockholder uses this prospectus for any sale
of the common stock, it will be subject to the prospectus delivery requirements
of the Securities Act unless an exemption therefrom is available. The
selling stockholder will be responsible to comply with the applicable provisions
of the Securities Act and Exchange Act, and the rules and regulations thereunder
promulgated, including, without limitation, Regulation M, as applicable to such
selling stockholder in connection with resales of their respective shares under
this registration statement.
Under the
securities laws of some states, the shares of common stock may be sold in such
states only through registered or licensed brokers or dealers. In
addition, in some states the shares of common stock may not be sold unless such
shares have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied
with.
There can
be no assurance that any selling stockholder will sell any or all of the shares
of common stock registered pursuant to the registration statement, of which this
prospectus forms a part.
Once sold
under the registration statement, of which this prospectus forms a part, the
shares of common stock will be freely tradable in the hands of persons other
than our affiliates.
We have
agreed to indemnify the selling stockholder against certain losses, claims,
damages and liabilities, including liabilities under the Securities Act.
Sichenzia
Ross Friedman Ference LLP, New York, New York will issue an opinion with respect
to the validity of the shares of common stock being offered hereby.
The
financial statements as of December 31, 2007 and December 31, 2006 and for the
years then ended included in this prospectus have been audited by Tanner LC,
independent registered public accounting firm, as stated in their report
appearing elsewhere herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and
auditing.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Subsequent
to completion of the Merger, the Board of Directors determined that it was in
the best interests of the Company to appoint the accounting firm used by Sequoia
Media Group, LC, prior to the Merger as the independent registered public
accounting firm in place of the Company’s previous accounting firm.
Effective
June 16, 2008, Hein & Associates, LLP (“Hein”) was notified that it was no
longer the independent registered public accounting firm of the
Company. The reports of Hein on the financial statements of the
Company for the fiscal years ended September 30, 2007 and 2006 did not contain
an adverse opinion or a disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles.
During
the fiscal years ended September 30, 2007 and 2006 and through June 12, 2008,
there were no disagreements with Hein on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which
disagreements, if not resolved to the satisfaction of Hein, would have caused
Hein to make a reference to the subject matter of the disagreement in its
reports on the Company’s financial statements for such periods. There
were no reportable events (as defined in Regulation S-B Item 304(a)(1)(iv))
during the fiscal years ended September 30, 2007 and 2006 or the subsequent
interim period through June 12, 2008.
On June
16, 2008, upon the authorization and approval of the full Board of Directors
acting as the audit committee of the Company, the Company appointed the
accounting firm of Tanner, LC (“Tanner”) as the Company’s independent registered
public accounting firm. No consultations occurred between the Company
and Tanner during the years ended September 30, 2007 and 2006 and through June
12, 2008 regarding either (i) the application of accounting principles to a
specific completed or contemplated transaction, the type of audit opinion that
might be rendered on the Company’s financial statements, or other information
provided that was an important factor considered by the Company in reaching a
decision as to an accounting, auditing or financial reporting issue, or
(ii) any matter that was the subject of disagreement or a reportable event
requiring disclosure under Item 304(a)(1)(iv) of Regulation S-B.
We have
filed a registration statement on Form S-1 under the Securities Act of 1933, as
amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of aVinci Media Corporation, filed as part
of the registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange
Commission.
We file
annual, quarterly and current reports and other information with the SEC under
the Securities Exchange Act of 1934, as amended. Our SEC filings are
available to the public over the Internet at the SEC’s website at
http://www.sec.gov. You may also read and copy any document we file at the SEC’s
public reference room located at 100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms and their copy charges. You may also request a copy of those
filings, excluding exhibits, from us at no cost. Any such request should be
addressed to us at: 11781 South Lone Peak Parkway Suite 22-270, Draper, Utah
84020.
Audited
Financial Statements of Sequoia Media Group, LC as of December 31, 2007
and 2006 and for the years then ended.
|
|
F-1
|
|
|
|
Unaudited
Financial Statements as of March 31, 2008 and for the Three Months Ended
March 31, 2008 and 2007
|
|
F-36
|
|
|
|
Unaudited
Proforma Condensed Combined Consolidated Financial Statements as of March
31, 2008 |
|
F-53
|
SEQUOIA
MEDIA GROUP, LC
Financial
Statements
As
of December 31, 2007 and 2006 and for the Years Then Ended
Together
with Report of Independent Registered Public Accounting Firm
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
To
the Members of
Sequoia
Media Group, LC
We have
audited the accompanying balance sheets of Sequoia Media Group, LC (the
Company), as of December 31, 2007 and 2006, and the related statements of
operations, changes in members’ deficit, and cash flows for the years then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion. We were not engaged to perform an audit of the
Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we
express no such opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Sequoia Media Group, LC as of
December 31, 2007 and 2006, and the results of its operations and its cash flows
for the years then ended, in conformity with U.S. generally accepted accounting
principles.
/s/ Tanner LC
Salt Lake City,
Utah
February
22, 2008
(except
for Note 12, which is dated June 6, 2008)
SEQUOIA MEDIA GROUP,
LC
Assets
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
|
|
$ |
859,069 |
|
|
$ |
168,692 |
|
Accounts
receivable
|
|
|
448,389 |
|
|
|
10,000 |
|
Unbilled
accounts receivable
|
|
|
- |
|
|
|
465,472 |
|
Inventory
|
|
|
21,509 |
|
|
|
4,331 |
|
Prepaid
expenses
|
|
|
100,799 |
|
|
|
53,757 |
|
Deferred
costs
|
|
|
294,602 |
|
|
|
- |
|
Deposits
and other current assets
|
|
|
44,201 |
|
|
|
72,559 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
1,768,569 |
|
|
|
774,811 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
990,523 |
|
|
|
309,008 |
|
Intangibles,
net
|
|
|
74,689 |
|
|
|
70,381 |
|
Other
assets
|
|
|
20,408 |
|
|
|
111,011 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,854,189 |
|
|
$ |
1,265,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Member's Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
75,118 |
|
|
$ |
104,832 |
|
Accrued
liabilities
|
|
|
823,772 |
|
|
|
820,143 |
|
Distribution
payable
|
|
|
308,251 |
|
|
|
- |
|
Current
portion of capital leases
|
|
|
118,288 |
|
|
|
- |
|
Current
portion of deferred rent
|
|
|
38,580 |
|
|
|
- |
|
Note
payable
|
|
|
1,000,000 |
|
|
|
- |
|
Convertible
debentures and notes payable
|
|
|
|
|
|
|
2,234,660 |
|
Related
party notes payable
|
|
|
- |
|
|
|
265,783 |
|
Deferred
revenue
|
|
|
493,599 |
|
|
|
11,250 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,857,608 |
|
|
|
3,436,668 |
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
|
222,611 |
|
|
|
- |
|
Deferred
rent, net of current portion
|
|
|
71,839 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
3,152,058 |
|
|
|
3,436,668 |
|
|
|
|
|
|
|
|
|
|
Series
B redeemable convertible preferred units, no
|
|
|
|
|
|
|
|
|
par
value, 12,000,000 units authorized; 8,804,984 and 0
|
|
|
|
|
|
|
|
|
units
outstanding, respectively (liquidation preference
|
|
|
|
|
|
|
|
|
of
$6,603,182 at December 31, 2007)
|
|
|
6,603,182 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members'
deficit
|
|
|
|
|
|
|
|
|
Series
A convertible preferred units, no par value,
|
|
|
|
|
|
|
|
|
3,746,485
units authorized; 3,533,720 units outstanding
|
|
|
|
|
|
|
|
|
(liquidation
preference of $474,229)
|
|
|
474,229 |
|
|
|
474,229 |
|
Common
units, no par value, 90,000,000 units
|
|
|
|
|
|
|
|
|
authorized;
29,070,777 and 21,547,422 units outstanding,
|
|
|
|
|
|
|
|
|
repectively.
|
|
|
4,211,737 |
|
|
|
1,103,679 |
|
Accumulated
deficit
|
|
|
(11,587,017 |
) |
|
|
(3,749,365 |
) |
|
|
|
|
|
|
|
|
|
Total
members' deficit
|
|
|
(6,901,051 |
) |
|
|
(2,171,457 |
) |
|
|
|
|
|
|
|
|
|
Total
liabilities and members' deficit
|
|
$ |
2,854,189 |
|
|
$ |
1,265,211 |
|
See
accompanying notes to financial statements.
SEQUOIA MEDIA GROUP,
LC
Statements
of Operations
For
the years ended December 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
541,856 |
|
|
$ |
739,200 |
|
|
|
|
|
|
|
|
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
57,068 |
|
|
|
- |
|
Research
and development
|
|
|
1,890,852 |
|
|
|
1,067,687 |
|
Selling
and marketing
|
|
|
1,351,860 |
|
|
|
547,448 |
|
General
and administrative
|
|
|
3,677,326 |
|
|
|
1,755,127 |
|
Depreciation
and amortization
|
|
|
277,458 |
|
|
|
103,160 |
|
|
|
|
|
|
|
|
|
|
Total
operating expense
|
|
|
7,254,564 |
|
|
|
3,473,422 |
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(6,712,708 |
) |
|
|
(2,734,222 |
) |
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
66,524 |
|
|
|
4,726 |
|
Interest
expense
|
|
|
(693,217 |
) |
|
|
(806,439 |
) |
|
|
|
|
|
|
|
|
|
Net
other income (expense)
|
|
|
(626,693 |
) |
|
|
(801,713 |
) |
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(7,339,401 |
) |
|
|
(3,535,935 |
) |
|
|
|
|
|
|
|
|
|
Deemed
distribution on Series B redeemable
|
|
|
|
|
|
|
|
|
convertible
preferred units
|
|
|
(190,000 |
) |
|
|
- |
|
Distributions
on Series B redeemable
|
|
|
|
|
|
|
|
|
convertible
preferred units
|
|
|
(308,251 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common units
|
|
$ |
(7,837,652 |
) |
|
$ |
(3,535,935 |
) |
|
|
|
|
|
|
|
|
|
Loss
per common unit - basic and diluted
|
|
$ |
(0.30 |
) |
|
$ |
(0.16 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average common units - basic
|
|
|
|
|
|
|
|
|
and
diluted
|
|
|
26,453,062 |
|
|
|
21,547,422 |
|
See
accompanying notes to financial statements.
SEQUOIA MEDIA GROUP,
LC
Statements
of Members' Equity (Deficit)
For
the year ended December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Accumulated
|
|
|
Member's
|
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2006
|
|
|
3,533,720 |
|
|
$ |
474,229 |
|
|
|
21,547,422 |
|
|
$ |
325,500 |
|
|
$ |
(213,430 |
) |
|
$ |
586,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of detachable warrants in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
connection
with debentures payable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
251,552 |
|
|
|
- |
|
|
|
251,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
conversion feature of convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debentures
payable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
489,268 |
|
|
|
- |
|
|
|
489,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based
payments made to employees
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
37,359 |
|
|
|
- |
|
|
|
37,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,535,935 |
) |
|
|
(3,535,935 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
3,533,720 |
|
|
|
474,229 |
|
|
|
21,547,422 |
|
|
|
1,103,679 |
|
|
|
(3,749,365 |
) |
|
|
(2,171,457 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of debentures payable and accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
payable into common units
|
|
|
- |
|
|
|
- |
|
|
|
7,523,355 |
|
|
|
2,602,668 |
|
|
|
- |
|
|
|
2,602,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
equity-based compensation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
505,390 |
|
|
|
- |
|
|
|
505,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of Issuance costs on Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
redeemable
convertible preferred units
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(190,000 |
) |
|
|
(190,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
on Series B redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
preferred units
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(308,251 |
) |
|
|
(308,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7,339,401 |
) |
|
|
(7,339,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
|
3,533,720 |
|
|
$ |
474,229 |
|
|
|
29,070,777 |
|
|
$ |
4,211,737 |
|
|
$ |
(11,587,017 |
) |
|
$ |
(6,901,051 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
SEQUOIA MEDIA GROUP, LC
Statements
of Cash Flows
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(7,339,401 |
) |
|
$ |
(3,535,935 |
) |
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
used
in operating activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
490,549 |
|
|
|
201,893 |
|
Accretion
of debt discount
|
|
|
338,594 |
|
|
|
582,230 |
|
Equity-based
compensation
|
|
|
505,390 |
|
|
|
37,359 |
|
Loss
on disposal of equipment
|
|
|
1,063 |
|
|
|
1,668 |
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(438,389 |
) |
|
|
(10,000 |
) |
Unbilled
accounts receivable
|
|
|
465,472 |
|
|
|
260,508 |
|
Inventory
|
|
|
(17,178 |
) |
|
|
(4,331 |
) |
Prepaid
expenses
|
|
|
(47,042 |
) |
|
|
(50,502 |
) |
Deferred
costs
|
|
|
(294,602 |
) |
|
|
- |
|
Other
current assets
|
|
|
28,358 |
|
|
|
(72,559 |
) |
Deposits
|
|
|
(5,409 |
) |
|
|
(14,999 |
) |
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(29,714 |
) |
|
|
5,761 |
|
Accrued
liabilities
|
|
|
236,225 |
|
|
|
775,350 |
|
Deferred
rent
|
|
|
110,419 |
|
|
|
- |
|
Deferred
revenue
|
|
|
482,349 |
|
|
|
(67,083 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(5,513,316 |
) |
|
|
(1,890,640 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(562,987 |
) |
|
|
(344,995 |
) |
Purchase
of intangible assets
|
|
|
(14,308 |
) |
|
|
(70,000 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(577,295 |
) |
|
|
(414,995 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from convertible notes and debentures
|
|
|
1,535,000 |
|
|
|
2,393,250 |
|
Proceeds
from note payable
|
|
|
1,000,000 |
|
|
|
- |
|
Payments
of loan costs
|
|
|
(117,080 |
) |
|
|
(194,745 |
) |
Proceeds
from related party notes payable
|
|
|
20,000 |
|
|
|
265,783 |
|
Payments
on related party notes payable
|
|
|
(285,783 |
) |
|
|
- |
|
Payments
on obligation under capital lease
|
|
|
(46,149 |
) |
|
|
- |
|
Proceeds
from issuance of Series B preferred units
|
|
|
|
|
|
|
|
|
net
of issuance costs of $190,000
|
|
|
4,675,000 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
6,780,988 |
|
|
|
2,464,288 |
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
690,377 |
|
|
|
158,653 |
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of year
|
|
|
168,692 |
|
|
|
10,039 |
|
|
|
|
|
|
|
|
|
|
Cash
at end of year
|
|
$ |
859,069 |
|
|
$ |
168,692 |
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest and income taxes
|
|
$ |
- |
|
|
$ |
- |
|
See
accompanying notes to financial statements.
SEQUOIA MEDIA GROUP,
LC
Statements
of Cash Flows
Continued
Supplemental
schedule of non-cash investing and financing activities:
During
the year ended December 31, 2007:
·
|
The
Company converted notes payable of $1,535,000 and $23,178 of related
accrued interest into 2,318,318 Series B redeemable convertible preferred
units.
|
·
|
The
Company converted $2,393,250 of debentures and notes payable and $209,418
of related accrued interest into 7,523,355 common
units.
|
·
|
The
Company recorded a debt discount of $8,129 and a beneficial conversion
feature of $171,875 in connection with the issuance of Series B redeemable
convertible preferred units.
|
·
|
The
Company accrued distributions payable on Series B redeemable convertible
preferred units of $308,251.
|
·
|
The
Company acquired $387,048 of fulfillment equipment and office furniture
through capital lease agreements.
|
·
|
The
Company recorded a deemed distribution of $190,000 due to the accretion of
issuance costs related to the Series B
offering.
|
During
the year ended December 31, 2006:
·
|
The
Company recorded a debt discount of $251,552 and a beneficial
conversion feature of $489,268 in connection with the issuance of
convertible debt.
|
See
accompanying notes to financial statements.
SEQUOIA MEDIA GROUP,
LC
Notes
to Financial Statements
1. Description
of rganization
and
Summary
of
Significant
Accounting
Policies
|
|
Organization
and Nature of Operations
Sequoia
Media Group, LC (the Company), a Utah limited liability company, was
formed on March 15, 2003. The Company develops and sells an
engaging way for anyone to tell their “Story” with personal digital
expressions. The Company’s products simplify and automate the
process of creating professional-quality multi-media productions using
personal photos and videos.
|
|
|
Basis
of Presentation
The
accompanying financial statements are presented in accordance with U.S.
generally accepted accounting principles.
|
|
|
Concentration
of Credit Risk and Significant Customer
The
Company maintains its cash in bank demand deposit accounts, which at times
may exceed the federally insured limit or may be maintained in non-insured
institutions. As of December 31, 2007 and December 31, 2006, the
Company had approximately $952,752 and $153,874 respectively, in excess of
the insured limits, primarily in cash equivalents. The Company has not
experienced any losses in these accounts and believes it is not exposed to
any significant credit risk with respect to cash.
|
|
|
Financial
instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. In the normal course
of business, the Company provides credit terms to its customers and
requires no collateral. Concentrations of accounts receivable and revenue
were as follows:
|
|
|
2007
|
|
|
|
Revenue
|
|
Accounts
Receivable
|
Customer
A
|
|
|
97.1 |
% |
|
18.6 |
% |
Customer
B
|
|
|
5.9 |
% |
|
3.9 |
% |
Customer
C
|
|
|
0 |
% |
|
77.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
Revenue
|
|
Accounts
Receivable
|
Customer
A
|
|
|
100.0 |
% |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
1. Description
of Organization
and
Summary of
Significant Accounting
Policies
Continued
|
|
Net
Loss per Common Unit
Basic
earnings (loss) per unit (EPS) is calculated by dividing income (loss)
available to common unit holders by the weighted-average number of common
units outstanding during the period.
Diluted
EPS is similar to Basic EPS except that the weighted-average number of
common units outstanding is increased using the treasury stock method to
include the number of additional common units that would have been
outstanding if the dilutive potential common units had been issued. Such
potentially dilutive common units include stock options and warrants,
convertible preferred stock, redeemable convertible preferred stock and
convertible notes and debentures. Units having an antidilutive effect on
periods presented are not included in the computation of dilutive EPS.
|
|
|
The
average number of units of all stock options and warrants granted, all
convertible preferred stock, redeemable convertible preferred stock and
convertible debentures have been omitted from the computation of diluted
net loss per common unit because their inclusion would have been
anti-dilutive for the years ended December 31, 2007 and 2006.
|
|
|
For
the years ended December 31, 2007 and 2006, the Company had 21,749,309 and
7,269,325 potentially dilutive units of common stock, respectively, not
included in the computation of diluted net loss per common unit because it
would have decreased the net loss per common unit. These options and
warrants, convertible preferred stock, redeemable convertible preferred
stock and convertible notes and debentures could be dilutive in the
future.
|
|
|
Use
of Estimates
The
preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect reported amounts
and disclosures. Accordingly, actual results could differ from
those estimates. Key estimates made by management in the
accompanying financial statements include the economic useful lives
assigned to property and equipment, recoverability of long-lived assets
based on expected future undiscounted cash flows, the fair value of the
Company’s units on the dates of share-based compensation awards and the
assumptions used in the Black-Scholes option-pricing model.
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
1. Description
of Organization
and
Summary of Significant Accounting Policies
Continued
|
|
Cash
Equivalents
The
Company considers all highly liquid investments with an initial maturity
of three months or less to be cash equivalents.
Accounts
Receivable
Accounts
receivable are recorded at net realizable values and are due within 30
days from the invoice date. The Company maintains allowances for doubtful
accounts, when necessary, for estimated losses resulting from the
inability of customers to make required payments. These allowances are
based on specific facts and circumstances pertaining to individual
customers and historical experience. Provisions for losses on receivables
are charged to operations. Receivables are charged off against the
allowances when they are deemed uncollectible. As of December
31, 2007 and 2006, there were no allowances for doubtful accounts required
against the Company’s receivables.
|
|
|
Inventories
Inventories
are stated at the lower of cost or market determined using the first-in,
first-out method.
|
|
|
Intangible
Assets
Intangible
assets consist of costs to acquire patents and licenses for use of certain
music tracks. All of the Company’s intangible assets have
finite useful lives.
|
|
|
Intangible
assets with finite useful lives are carried at cost, less accumulated
amortization. Amortization is calculated using the
straight-line method over estimated useful lives. Intangible
assets subject to amortization are reviewed for potential impairment
whenever events or circumstances indicate that carrying amounts may not be
recoverable. As of December 31, 2007 and 2006, management
determined that the carrying amounts of the Company’s intangible assets
were not impaired.
|
|
|
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and
amortization. Property and equipment consists of computers,
software and equipment, and furniture and fixtures. Depreciation and
amortization are calculated using the straight-line method over the
estimated economic useful lives of the assets or over the related lease
terms (if shorter), which are three and five years,
respectively.
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
1. Description
of Organization
and
Summary of
Significant Accounting
Policies
Continued
|
|
Property
and Equipment - Continued
Expenditures
that materially increase values or capacities or extend useful lives of
property and equipment are capitalized. Routine maintenance, repairs, and
renewal costs are expensed as incurred. Gains or losses from the sale or
retirement of property and equipment are recorded in the statements of
operations.
|
|
|
The
Company reviews its property and equipment for impairment when events or
changes in circumstances indicate that the carrying amount may be
impaired. If it is determined that the related undiscounted
future cash flows are not sufficient to recover the carrying value, an
impairment loss is recognized for the difference between carrying value
and fair value of the asset.
|
|
|
As
of December 31, 2007 and 2006, management determined the carrying
amounts of the Company’s property and equipment were not
impaired.
|
|
|
Revenue
Recognition and Deferred Revenue
Through
December 31, 2007, the Company generated the majority of its revenue from
one customer. The contract with this customer included software
development, software license, post-contract support (PCS), and
training. Because the contract included the delivery of a
software license, the Company accounted for the contract in accordance
with Statement of Position (SOP) 97-2, Software Revenue
Recognition, as modified by SOP 98-9, Modification of SOP 97-2 with
Respect to Certain Transactions. SOP 97-2 applies to
activities that represent licensing, selling, leasing, or other marketing
of computer software.
|
|
|
Because
the contract included services to provide significant production,
modification, or customization of software, in accordance with SOP 97-2,
the Company accounted for the contract based on the provisions of
Accounting Research Bulletin (ARB) No. 45, Long-Term Construction-Type
Contracts and the relevant guidance provided by SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type
Contracts. In accordance with these provisions, the
Company determined to use the percentage-of-completion method of
accounting to record the revenue for the entire contract. The
Company utilized the ratio of total actual costs incurred to total
estimated costs to determine the amount of revenue to be recognized at
each reporting date.
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
1. Description
of Organization
and
Summary of
Significant
Accounting
Policies
Continued
|
|
Revenue
Recognition and Deferred Revenue - Continued
As
of December 31, 2007, this contract was completed and all revenue under
this contract had been recognized. The Company has no further obligations
under this contract.
The
Company records billings and cash received in excess of revenue earned as
deferred revenue. The deferred revenue balance generally results from
contractual commitments made by customers to pay amounts to the Company in
advance of revenues earned. The unbilled accounts receivable represents
revenue that has been earned but which has not yet been billed. The
Company bills customers as payments become due under the terms of the
customer’s contract. The Company considers current information and events
regarding its customers and their contracts and establishes allowances for
doubtful accounts when it is probable that it will not be able to collect
amounts due under the terms of existing contracts.
|
|
|
Under
the current business model, the Company generates revenue from the sale of
software, equipment, software licenses, applications development and
implementation services, support, training services, and product
royalties. The Company continues to apply the guidance provided
in SOP 97-2 to recognize revenue on contracts that include a software
component. SOP 97-2 generally provides that until vendor
specific objective evidence (VSOE) of fair value exists for the various
components within the contract, that revenue is deferred until delivery of
all elements except for PCS and training has occurred. After all elements
are delivered except for PCS and training, deferred revenue is recognized
over the remaining term of the contract. Because of the
Company’s limited sales history, it does not have VSOE for the different
components that may be included in sales contracts.
|
|
|
Once
VSOE is established, the Company will allocate a portion of the contract
fee to each undelivered element based on the relative fair values of the
elements and allocate the fee for delivered software licenses using the
residual method. The Company plans to establish VSOE for the
various elements of its contracts based on the price charged when the same
element is sold separately. For consulting services, the Company plans to
base VSOE on the rates charged when the services are sold separately under
time-and-materials contracts. The Company intends to base VSOE
for training on the rates charged when training is sold separately for
supplemental training courses.
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
1. Description
of Organization
and
Summary of
Significant Accounting
Policies
Continued
|
|
Revenue
Recognition and Deferred Revenue - Continued
For
PCS, VSOE will be determined by reference to the renewal rate charged to
the customer in future periods.
For
time-and-materials contracts, the Company plans to estimate a profit range
and recognize the related revenue using the lowest probable level of
profit estimated in the range. Billings in excess of revenue recognized
under time-and-material contracts will be deferred and recognized upon
completion of the time-and-materials contract or when the results can be
estimated more precisely.
|
|
|
For
fixed-price contracts, the Company intends to recognize revenue using the
percentage-of-completion method of accounting and following the guidance
in SOP 81-1. The Company will make adjustments, if necessary, to the
estimates used in the percentage-of-completion method of accounting as
work progresses under the contract and as experience is
gained.
|
|
|
The
Company intends to recognize support revenue from contracts for ongoing
technical support and unspecified product updates ratably over the support
period.
|
|
|
The
Company plans to recognize training revenue as the services are
performed.
|
|
|
The
Company plans to recognize license revenues from software licenses that do
not include services or where the related services are not considered
essential to the functionality of the software, when the following
criteria are met: a signed noncancellable license agreement with
nonrefundable fees has been obtained; the software product has been
delivered; there are no uncertainties surrounding product acceptance; the
fees are fixed and determinable; and collection is considered
probable.
|
|
|
For
certain contracts for which reasonably dependable estimates cannot be made
or for which inherent hazards make estimates doubtful, the Company
recognizes revenue under the completed-contract method of contract
accounting. In one contract entered into during 2007, the Company sold
fulfillment equipment, hardware and software installation, and software
licenses. The Company currently has deferred all revenues related to these
contracts as there is no VSOE established for the software portion of the
product. Revenues will continue to be deferred, in accordance with SOP
97-2, until delivery of all elements except for PCS and training have
occurred.
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
1. Description
of Organization
and
Summary of Significant
Accounting
Policies
Continued
|
|
Revenue
Recognition and Deferred Revenue - Continued
Deferred
revenues will be recognized over the remaining term of the
contract. The Company capitalized the direct cost of the
equipment and will amortize it as the related revenue is
recognized.
The
Company entered into two additional contracts during 2007 in which the
Company sells its product through a retailer. The product includes both
software and the means to submit data to the Company for fulfillment. The
Company currently has deferred all revenues related to these contracts as
there is no VSOE established for the software portion of the product.
Revenues will continue to be deferred, in accordance with SOP 97-2, until
the time fulfillment is complete or the obligation to fulfill the order
has expired.
|
|
|
Software
Development Costs
Costs
for the development of new software products and substantial enhancements
to existing software products are expensed as incurred until technological
feasibility has been established, at which time any additional costs are
capitalized. The costs to develop software have not been
capitalized as management has determined that its software development
process is essentially completed concurrent with the establishment of
technological feasibility.
|
|
|
Accounting
for Equity Based Compensation
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123(R) (revised 2004), Share-Based Payment
which amends SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to
Employees. The Company adopted SFAS No.123(R) using the
modified prospective method. The modified prospective method requires that
compensation cost be recognized beginning with the effective date based on
the requirements of SFAS No. 123(R) for all equity-based payments granted
after the effective date and all non-vested equity-based payments granted
prior to the effective
date. The Company did not issue any
employee equity-based payments
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
1. Description
of Organization
and
Summary of
Significant Accounting
Policies
Continued
|
|
Accounting
for Stock Based Compensation -
Continued
prior
to January 1, 2006. The effect of accounting for equity-based
awards under SFAS No. 123(R) for the years ended December 31, 2007 and
2006, was to record $505,390, and $37,359, respectively, of equity-based
compensation expense in general and administrative expense.
|
|
|
The
fair value of each share-based award was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions.
|
Expected
dividend yield
|
– |
Expected
share price volatility
|
40 |
% |
Risk-free
interest rate
|
4.06%
- 4.89 |
% |
Expected
life of options
|
2.5
years – 4.25 years
|
|
|
Income
Taxes
Under
the provisions of the Internal Revenue Code and applicable state laws, the
Company is taxed similar to a partnership, and as a result, is not
directly subject to income taxes. The results of its operations are
included in the tax returns of its members. Therefore, no provision or
benefit for income taxes has been included in the accompanying financial
statements.
|
|
|
Pro
forma income tax expense, as if the Company had been a taxable entity
would have been $0 for each year presented in the statements of
operations
|
|
|
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007)
(SFAS 141R), Business Combinations
and SFAS No. 160 (SFAS 160), Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research
Bulletin No. 51. SFAS 141R will change how business
acquisitions are accounted for and will impact financial statements both
on the acquisition date and in subsequent periods. SFAS 160 will
change the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component
of equity. SFAS 141R and SFAS 160 are effective for us beginning
in the first quarter of fiscal 2010. Early adoption is not permitted. The
adoption of SFAS 141R and SFAS 160 is not expected to have a
material impact on the Company’s financial
statements.
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
1. Description
of Organization
and
Summary of
Significant Accounting
Policies
Continued
|
|
Recent
Accounting Pronouncements - Continued
In
February 2007, the FASB issued SFAS No. 159 (SFAS 159),
The Fair Value Option
for Financial Assets and Financial Liabilities. Under
SFAS 159, companies may elect to measure certain financial
instruments and certain other items at fair value. The standard requires
that unrealized gains and losses on items for which the fair value option
has been elected be reported in earnings. SFAS 159 is effective
beginning in the first quarter of fiscal 2008.
|
|
|
In
September 2006, the FASB issued SFAS No. 157 (SFAS 157),
Fair Value
Measurements, which defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value
measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in
various prior accounting pronouncements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007. However, in February
2008, the FASB issued FSP FAS 157-b which delays the effective date
of SFAS 157 for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). This FSP
partially defers the effective date of Statement 157 to fiscal years
beginning after November 15, 2008, and interim periods within those
fiscal years for items within the scope of this FSP. Effective for fiscal
2008, the Company will adopt SFAS 157 except as it applies to those
nonfinancial assets and nonfinancial liabilities as noted in FSP
FAS 157-b. The adoption of SFAS 157 is not expected to have a
material impact on the Company’s financial statements.
|
|
|
In
July 2006, the FASB issued Financial Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109.
FIN 48 clarifies the accounting for uncertainty in income taxes by
prescribing the recognition threshold a tax position is required to meet
before being recognized in the financial statements. It also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2007 and as a
result, is effective our first quarter of fiscal 2008. The cumulative
effects, if any, of applying FIN 48 will be recorded as an adjustment
to retained earnings as of the beginning of the period of adoption.
Additionally, in May 2007, the FASB published FSP No. FIN 48-1
(FSP FIN 48-1),
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
1. Description
of Organization
and
Summary of
Significant Accounting
Policies
Continued
|
|
Recent
Accounting Pronouncements – Continued
Definition of Settlement in
FASB Interpretation No. 48. FSP FIN 48-1 is an amendment
to FIN 48. It clarifies how an enterprise should determine whether a
tax position is effectively settled for the purpose of recognizing
previously unrecognized tax benefits. If the Company closes the
merger with Secure Alliance Holdings Corporation as noted in Note 10, the
Company will be required to comply with FIN 48-1 on the merger
date. The actual impact of the adoption of FIN 48 and FSP
FIN 48-1 on our consolidated results of operations and financial
condition will depend on facts and circumstances that exist on the date of
adoption. The Company is currently calculating the impact of the adoption
of FIN 48 and FSP FIN 48-1 but does not expect it to have a
material impact on the financial statements.
|
|
|
Reclassifications
– Certain amounts in the 2006 financial statements have been reclassified
to confirm to the 2007 presentation.
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
2. Property and Equipment
|
|
Property
and equipment consisted of the following as of
December 31:
|
|
|
2007
|
|
|
2006
|
|
Computers,
software and equipment
|
|
$ |
1,212,558 |
|
|
$ |
381,391 |
|
Furniture
and fixtures
|
|
|
125,676 |
|
|
|
13,159 |
|
Leasehold
Improvements
|
|
|
4,100 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,342,334 |
|
|
|
394,550 |
|
Less
accumulated depreciation and amortization
|
|
|
(351,811 |
) |
|
|
(85,542 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
990,523 |
|
|
$ |
309,008 |
|
|
|
Depreciation
of property and equipment for the years ended December 31, 2007 and
2006 was $267,457 and $95,660, respectively.
|
|
|
|
3. Intangible Assets |
|
Intangible assets consisted of the following at December
31: |
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Patent
costs
|
|
$ |
62,189 |
|
|
$ |
47,881 |
|
|
|
|
30,000 |
|
|
|
30,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
92,189 |
|
|
|
77,881 |
|
Accumulated
amortization
|
|
|
(17,500 |
) |
|
|
(7,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
74,689 |
|
|
$ |
70,381 |
|
|
|
Amortization
expense for the years ended December 31, 2007 and 2006 was $10,000 and
$7,500, respectively.
|
|
|
|
|
|
As
of December 31, 2007, the Company had not begun to amortize capitalized
patent costs as the patent had not yet been granted. Amortization related
to the license for music tracks for the years ended December 31, 2008 and
2009 will be $10,000 and $2,500,
respectively. |
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
4. Accrued
Liabilities
|
|
Accrued
liabilities consisted of the following as of December
31: |
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Bonuses
payable
|
|
$ |
554,000 |
|
|
$ |
538,222 |
|
Payroll
and payroll taxes payable
|
|
|
229,245 |
|
|
|
136,318 |
|
Interest
payable
|
|
|
- |
|
|
|
125,476 |
|
Other
|
|
|
40,527 |
|
|
|
20,127 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
823,772 |
|
|
$ |
820,143 |
|
5. Notes
and Convertible
Debentures Payable
|
|
Notes
and convertible debentures payable consisted of the following as of
December 31:
|
|
|
2007
|
|
|
2006
|
|
Note
payable to Secure Alliance Holdings Corporation (see Note 10), interest at
10% per annum, due December 31, 2008, secured by all assets of the
Company
|
|
$ |
1,000,000 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Convertible
notes payable to an institutional investor, interest at 10% per annum, due
June 5, 2007, less debt discount of $44,497 as of December 31,
2006. As noted below, during 2007, these notes were converted
into common units.
|
|
|
- |
|
|
|
1,519,503 |
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
5. Notes
and Convertible
Debentures Payable Continued
|
|
|
|
|
2007
|
|
|
2006
|
|
Convertible
debentures payable to an institutional investor, with interest at 10% per
annum, due January 31, 2007, less debt discount of $114,093 as of December
31, 2006. As noted below, during 2007, these debentures were
converted into common units.
|
|
|
- |
|
|
|
715,157 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,000,000 |
|
|
$ |
2,234,660 |
|
|
|
During
the first quarter of 2006, the Company entered into a convertible
debenture financing arrangement with an institutional investor, through
which the Company issued convertible debentures totaling
$829,250. This amount consisted of cash of $775,000 and loan
origination fees of $54,250 which were recorded as an asset to be
amortized over the life of the loan. These convertible
debentures payable had a stated interest rate of 10% per annum. On May 8,
2007, these debentures and accrued interest of $106,832 were converted
into 3,900,341 common units.
|
|
|
|
|
|
Detachable
warrants for the purchase of 1,727,605 common units, which expire in 2008,
were granted in connection with these convertible
debentures. The warrants were valued at a total of $178,330 and
were recorded as a discount to debt, with a corresponding increase to
members’ equity.
|
|
|
|
|
|
In addition,
at the date of issuance the conversion rate of the convertible debentures
was less than the fair value of the Company’s common
units. Therefore, a beneficial conversion feature valued at
$489,268 was recorded as a discount to debt, with a corresponding increase
recorded as members’ equity. |
|
|
|
|
|
During the
year ended December 31, 2007 and 2006, the Company accreted $114,093 and
$553,505, respectively, of the debt discount arising from the warrants and
the beneficial conversion feature to interest expense using the effective
interest method. |
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
5. Convertible
Debentures
and Notes Payable
Continued
|
|
During
August, September and October 2006, the Company entered into a convertible
note payable financing arrangement with an institutional investor, through
which the Company issued convertible notes payable totaling
$1,564,000. This amount consisted of cash of $1,443,510 and
loan origination fees of $120,490 which were recorded as an asset to be
amortized over the life of the loan. These convertible
notes payable had a stated interest rate of 10% per annum. On May 8, 2007,
these convertible notes payable of $1,564,000 along with accrued interest
of $102,586 were converted to 3,623,014 common units. The remaining
unamortized loan costs and debt discount were recognized as interest
expense on the conversion date.
|
|
|
Warrants
for the purchase of 1,190,000 common units were granted in 2006 in
connection with these convertible notes payable and expire in
2009. The warrants were valued at a total of $73,222 and were
recorded as a discount to debt, with a corresponding increase to members’
equity.
|
|
|
During
the years ended December 31, 2007 and 2006, the Company accreted $44,497
and $28,725, respectively, of the debt discount related to the warrants to
interest expense using the effective interest method.
|
|
|
As
of December 31, 2007, the debt discount had been
fully amortized. As of December 31, 2006, the
unamortized debt discount was $44,497.
|
|
|
On
January 19, 2007 and again on February 14, 2007, the Company issued
$500,000 of convertible notes payable to an institutional
investor. These convertible notes payable accrued interest at
9% per annum, and were due on June 30, 2007. These convertible
notes payable, plus accrued interest of $23,178, were converted into
1,604,985 Series B redeemable convertible preferred units at $.6375 per
unit. A beneficial conversion feature in the amount of $171,875, was
accreted to interest expense in full during the year ended December 31,
2007.
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
5. Convertible
Debentures
and Notes Payable
Continued
|
|
On
April 9, 2007, the Company issued a convertible note payable to an
institutional investor for $535,000. This amount consisted of
cash of $500,000 and financing costs of $35,000. This
convertible note payable bore no interest, and was due on June 30,
2007. On June 5, 2007, this convertible note payable of
$535,000 was converted into 713,333 Series B redeemable convertible
preferred units at $.75 per unit.
|
|
|
|
|
|
In
connection with the Agreement and Plan of Merger (see Note 10), the
Company entered into a Loan and Security Agreement and Secured Note with
Secure Alliance Holdings Corporation on December 6, 2007 in order to
ensure adequate funds through the merger closing date. The agreement
provides for Secure to loan a total of up to $2.5 million to the Company
through the merger closing date. A total of $1 million was received under
the Secured Note as of December 31, 2007. The amounts advanced
under the Secured Note are secured by all assets of the Company, accrue
interest at 10% per annum and principal and interest are due and payable
on December 31, 2008.
|
|
|
|
|
|
If
the Company receives additional capital or conducts any sale of its assets
other than in the ordinary course of business prior to the due date, the
Company is obligated to use said proceeds to reduce the principal and
interest then payable under the Secured Note, up to the amount required to
pay the Secured Note in full.
|
|
|
|
6. Capital
Lease Obligations
|
|
The
Company leases certain equipment and fixtures
under noncancelable long-term leases. These leases
provide the Company the option to purchase the leased assets at the end of
the initial lease terms at a bargain purchase price. Assets
held under these capital leases included in property and equipment were as
follows at December 31:
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Computers
and equipment
|
|
$ |
349,448 |
|
|
$ |
- |
|
Furniture
and fixtures
|
|
|
37,600 |
|
|
|
- |
|
|
|
|
387,048 |
|
|
|
- |
|
Less
accumulated amortization
|
|
|
(53,623 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
333,425 |
|
|
$ |
- |
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
6. Capital
Lease
Obligations Continued
|
|
Depreciation
expense for assets held under capital leases during the year ended
December 31, 2007 was $53,623. |
|
|
Capital
lease obligations have imputed interest rates from approximately 7% to 22%
and are payable in aggregate monthly installments of approximately
$13,000, maturing through 2010. The leases are secured by
equipment.
|
|
|
|
|
|
Future
maturities and minimum lease payments on the capital lease obligations are
as follows as of December 31, 2007:
|
|
|
|
Minimum
Lease Payments:
|
|
|
|
2008
|
|
$ |
156,609 |
|
2009
|
|
|
154,089 |
|
2010
|
|
|
98,416 |
|
|
|
|
409,114 |
|
Amount
representing interest
|
|
|
(68,215 |
) |
|
|
|
|
|
Total
principal
|
|
|
340,899 |
|
Current
portion
|
|
|
(118,288 |
) |
|
|
|
|
|
Long-term
portion
|
|
$ |
222,611 |
|
7. Related
Party Transactions
|
|
In December
2006, the Company entered into various loans with members of the Company
totaling $265,783. These loans bore interest at 10% per annum
and were payable on or before December 31, 2007. Loan
origination fees of $20,005 were recorded as an asset to be amortized over
the life of the loans. On January 5, 2007, an additional
$20,000 was loaned to the Company. In April and May 2007, total
outstanding principal, accrued interest, and loan origination fees of
$285,783, $10,376, and $20,005, respectively, were paid and the associated
asset was fully amortized. |
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
7. Related
Party Transactions Continued
|
|
The
institutional investor holding the convertible debentures and convertible
notes payable referenced in Note 5 qualifies as a related party based upon
its beneficial ownership. As described in Note 5, as of
December 31, 2006, a related party investor held convertible debentures in
the amount of $2,393,250 (before discount). As described in
Note 5, on May 8, 2007, these debentures and related accrued interest were
converted into 7,523,355 common units, or approximately 26% of the common
units outstanding after conversion.
|
|
|
Additionally,
as described in Note 5, in January, February, and April of 2007, the
Company issued $1,535,000 of additional convertible notes payable to the
same institutional investor. In May and June of 2007, the notes payable
and related accrued interest were converted into 2,318,318 Series B
redeemable convertible preferred units.
|
|
|
In
May and June of 2007, the Company also issued 6,486,666 Series B
redeemable convertible preferred units to the same institutional investor
in exchange for $2,000,000, net of issuance costs of $190,000, and a
subscription receivable of $2,675,000. The subscription receivable was
received in two installments on August 3, 2007 and September 11,
2007.
|
|
|
The
Series B preferred units vote on an “as converted” to common units basis.
Therefore, when combined with the 8,180,255 common units held, the
institutional investor holds 16,985,239 equivalent votes, equivalent to
41% of the voting units outstanding at December 31, 2007. In connection
with the sale of the Series B preferred units, the institutional investor
appointed two individuals to the Board of Managers.
|
|
|
Additionally,
the Company entered into a Consulting Agreement (see Note 10) with the
related party investor on August 1, 2007 whereby the investor will receive
up to $775,000 over the next 12 month period for advising the Company with
regard to financial transactions. The Company may terminate the
agreement upon 30 days notice.
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
7. Related
Party
Transactions
Continued
|
|
On
July 1, 2007, the Company finalized a Sales Representative Agreement with
the related party investor whereby such investor is entitled to receive up
to a 10% commission on adjusted sales to customers brought to the Company
by the investor. The investor also received an option to
purchase a total of 2,250,000 common units of the Company. A
total of 1,500,000 of these options have an exercise price of $.16 and the
remaining 750,000 options have an exercise price of $.52. The
options vest at the rate of 750,000 per year at year end in 2007, 2008 and
2009 upon the achievement of certain sales levels. A formalized option
agreement was executed on November 20, 2007 changing the exercise price of
750,000 options from $0.52 to $0.62 and the vesting dates to 2008, 2009,
and 2010. The sales goals for the first group of 750,000 options was met
and the options vested at the end of July, 2007, resulting in equity-based
compensation expense of $371,955.
|
8.
Common and Preferred
Units
|
|
As
of December 31, 2006, the Company had authorized 90,000,000 common units
and 10,000,000 preferred units, all with no par value. As of
December 31, 2006, the Company had designated 3,746,485 preferred units as
Series A. On May 1, 2007, the Company modified the operating
agreement, thereby increasing the number of authorized preferred units to
20,000,000 and designating 12,000,000 preferred units as Series
B.
|
|
|
Series
A Convertible Preferred Units
During
the years ended December 31, 2007 and 2006, there were no Series A
preferred units issued. As of December 31, 2007 and 2006, there
were 3,533,720 Series A preferred units outstanding.
Series
B Redeemable Convertible Preferred Units
During
the year ended December 31, 2007, there were 8,804,984 Series B preferred
units issued as follows:
|
|
|
On
January 19, 2007 and again on February 14, 2007, the Company issued
$500,000 of convertible notes payable to an institutional
investor. These convertible notes payable accrued interest at
9% per annum, and were due on June 30, 2007. These convertible
notes payable, plus accrued interest of $23,178, were converted into
1,604,985 Series B redeemable convertible preferred units at $.6375 per
unit. A beneficial conversion feature in the amount of $171,875, was
accreted to interest expense in full during the year ended December 31,
2007.
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
8. Common
and Preferred
Units Continued
|
|
On
April 9, 2007, the Company issued a convertible note payable to an
institutional investor for $535,000. This amount consisted of
cash of $500,000 and financing costs of $35,000. This
convertible note payable bore no interest, and was due on June 30,
2007. This convertible note payable of $535,000 was converted
into 713,333 Series B redeemable convertible preferred units at $.75 per
unit.
|
|
|
In
May and June of 2007, the Company issued 6,486,666 Series B redeemable
convertible preferred units at $0.75 per unit to an institutional investor
for a payment of $2,000,000, net of issuance costs of $190,000, and the
issuance of a subscription receivable of $2,675,000. Payment of the
subscription receivable was received in two installments on August 3, 2007
and September 11, 2007.
|
|
|
As
of December 31, 2007, there were 8,804,984 units of Series B preferred
units outstanding.
|
|
|
Rights
and Preferences of Convertible Preferred Units
The
rights, terms, and preferences of the Series A convertible preferred units
and Series B redeemable convertible preferred units are as
follows:
|
|
|
· Voting - The Series A
convertible preferred units and the Series B redeemable convertible
preferred units vote on an “as if converted” to common unit basis together
with the Company’s common units on all matters put to a vote of the
holders of the common units. As long as at least 6.4 million Series B
redeemable convertible preferred units are outstanding, the Board of
Managers shall consist of five managers, two of whom shall be elected by a
majority of the outstanding Series B redeemable convertible preferred unit
holders and the remainder elected by the holders of Series A convertible
preferred units and common units, voting as a single class.
|
|
|
· Distributions -
Series B redeemable convertible preferred units holders are entitled to a
cumulative annual distribution of $.06 per unit. Series A
convertible preferred unit holders are entitled to receive distributions
from the Company as established by the Board of Managers.
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
8.
Common and Preferred
Units Continued
|
|
Rights
and Preferences of Convertible Preferred Units - Continued
· Liquidation – The assets
of the Company are distributed as follows in the event of liquidation,
dissolution or winding up of the Company (including the sale of
substantially all of the assets of the Company): i) the Series B
redeemable convertible preferred units are entitled to a liquidation
preference of $0.75 per unit, plus all accrued and unpaid distributions;
ii) the Series A convertible preferred units are entitled to a liquidation
preference in the amount of $0.1335 per unit; iii) the common units are
entitled to $0.1335 per unit; and iv) any remaining assets are distributed
among the holders of Series A convertible preferred units, Series B
redeemable convertible preferred units and common units, pro rata, on an
as-converted to common unit basis.
|
|
|
In
the event that there are not sufficient assets available for the entire
liquidation preference of a given class, the assets of the Company are
distributed ratably among the holders of such class on a pro rata
basis.
|
|
|
· Redemption (Series B
only) – The Company has the right to redeem Series B redeemable
convertible preferred units for $.75 per unit plus all accrued and unpaid
distributions, with a written notice of not less than 45 days and not more
than 60 days, subject to holders’ first right to convert Series B
redeemable convertible preferred units to common units. The Series B
redeemable convertible preferred unit holders have at least 45 days from
receiving notice from the Company to decide whether to have Series B
redeemable convertible preferred units redeemed for cash or converted to
common units. At anytime after four years from the date of
issuance, the Series B redeemable convertible preferred unit holders have
the right to have the Company redeem all or a portion of Series B
redeemable convertible preferred units. Within 60 days after
receipt of a written notice, the Company is required to redeem such units
at $.75 per unit plus all accrued and unpaid distributions.
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
8. Common
and Preferred
Units Continued
|
|
Rights
and Preferences of Convertible Preferred Units -Continued
· Conversion (Series A) -
The Series A convertible preferred units are convertible at any time at
the option of the holder into common units, one for one. Series
A convertible preferred units automatically convert on the earliest of i)
the effective date of the registration statement for the Company’s initial
public offering of the common units, ii) the date on which the common
units are listed or sale on a national stock exchange or have their sales
or bid price quoted on NASDAQ, iii) the merger or consolidation of the
Company with another company, iv) the sales of all of the outstanding
common units, v) the sales of substantially all of the Company’s assets,
or vi) the approval of the holders of a majority of the outstanding Series
A convertible preferred units.
|
|
|
· Conversion (Series B) -
The Series B redeemable convertible preferred units are convertible at any
time at the option of the holder into common units, one for
one. However, if the Company subsequently sells common units
(New Issuance) for less than the Series B redeemable convertible preferred
unit purchase price of $.75 (Conversion Price), a broad based, weighted
average adjustment is made to the Conversion Price by multiplying the
Conversion Price by the following fraction: the numerator is
the number of units outstanding prior to a New Issuance plus the number of
units the new consideration would purchase at the conversion price in
effect prior to a New Issuance, and the denominator is the number of units
outstanding prior to a New Issuance plus the number of additional units
issued in the New Issuance. Series B redeemable convertible
preferred units automatically convert to common units on the earliest of
i) the effective date of the registration statement for the Company’s
initial public offering of the common units if a) the per common units
offering price is at least 200% of the redemption price of the Series B
redeemable convertible preferred units, and b) the public offering will
result in gross proceeds of at least $40 million, or ii) thirty days after
written the Company if within ninety days after a merger or consolidation
of the Company with another company all of the following have occurred: a)
the common units issuable upon conversion are registered for resale, b)
the average volume weighted average per common
|
|
|
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
8. Common and Preferred
Units Continued
|
|
Rights
and Preferences of Convertible Preferred Units - Continued
· Conversion (Series B) –
Continued
unit price of the common units for twenty consecutive trading days prior
to the date of notice of conversion is given is not less than 200% of the
redemption price of the Series B redeemable convertible preferred units,
and c) the daily average trading volume for twenty consecutive trading
days prior to the date notice of conversion is given is not less than 5%
of the outstanding common units.
|
|
|
· Common Units
Reserved - The
Company must at all times reserve and keep available out of its authorized
but unissued common units, solely for the purpose of effecting the
conversion of preferred units, the number of units needed to do
so. This totaled 12,338,704 and 3,533,720 as of December 31,
2007 and December 31, 2006, respectively.
|
|
|
|
|
|
Common
Units
Subject
to the rights of holders of Series A convertible preferred units and
Series B redeemable convertible preferred units, common unit holders are
entitled to receive distributions when, as and if declared by the Board of
Managers. Common unit holders are entitled to one vote for each
common unit held.
|
|
|
|
9. Options and Warrants
|
|
Common
Unit Warrants
The
following tables summarize information about common unit warrants as of
December 31, 2007 and December 31,
2006:
|
|
|
|
As
of December 31, 2007
Outstanding
and Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
Price
|
|
|
Number
of Warrants Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.24 |
|
|
|
1,727,605 |
|
|
|
0.1 |
|
|
$ |
0.24 |
|
|
0.46 |
|
|
|
1,190,000 |
|
|
|
1.5 |
|
|
|
0.46 |
|
$ |
.24-.46 |
|
|
|
2,917,605 |
|
|
|
0.7 |
|
|
$ |
0.33 |
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
9. Options and Warrants
Continued
|
|
Common Unit Warrants
- Continued |
|
|
|
As
of December 31, 2006
Outstanding
and Exercisable
|
|
Exercise
Price
|
|
|
Number
of Warrants Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.24 |
|
|
|
1,727,605 |
|
|
|
1.1 |
|
|
$ |
0.24 |
|
|
0.46 |
|
|
|
1,190,000 |
|
|
|
2.5 |
|
|
|
0.46 |
|
$ |
.24-.46 |
|
|
|
2,917,605 |
|
|
|
1.7 |
|
|
$ |
0.33 |
|
|
|
Warrants
for the purchase of 2,917,605 common units were granted in 2006 in
connection with convertible debt and expire in 2008, and 2009. The
warrants were valued at a total of $251,552 and are included as a
component of members’ deficit in the accompanying statements of members’
deficit.
|
|
|
|
|
|
Subsequent to
December 31, 2007, 1,727,605 warrants with an exercise price of $.24 were
exercised for total proceeds of $414,626 received by the Company in
January 2008.
|
|
|
|
|
|
Common
Unit Options
The
following tables summarize information about common unit
options:
|
|
|
December
31, 2007
|
|
|
December
30, 2006
|
|
|
Number
of shares
|
|
|
Weighted-
Average Exercise Price
|
|
|
Number
of Shares
|
|
Weighted-
Average Exercise Price
|
Outstanding
at beginning of year
|
|
|
818,000 |
|
|
$ |
0.29 |
|
|
|
- |
|
$ |
- |
Granted
|
|
|
5,695,000 |
|
|
|
0.50 |
|
|
|
818,000 |
|
|
0.29 |
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
- |
Cancelled
|
|
|
(20,000 |
) |
|
|
0.36 |
|
|
|
- |
|
|
- |
Outstanding
at end of year
|
|
|
6,493,000 |
|
|
|
0.47 |
|
|
|
818,000 |
|
|
0.29 |
Exercisable
at year end
|
|
|
1,253,250 |
|
|
|
0.21 |
|
|
|
- |
|
|
|
Weighted
average fair value of
options
granted during the year
|
|
$ |
0.29 |
|
|
|
|
|
|
$ |
0.14 |
|
|
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
9. Options and Warrants
Continued
|
|
Common Unit Options
-
Continued
|
|
|
|
|
|
|
As
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
Exercisable
|
|
|
|
|
Exercise
Price
|
|
|
Number
of Options Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
Weighted
Average Exercise Price
|
|
|
Number
of Options Exercisable
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
$ |
0.16 |
|
|
|
1,500,000 |
|
|
|
4.5 |
|
|
$ |
0.16 |
|
|
|
750,000 |
|
|
$ |
0.16 |
|
|
|
4.0 |
|
|
|
0.24 |
|
|
|
510,000 |
|
|
|
3.3 |
|
|
|
.24 |
|
|
|
340,000 |
|
|
|
.24 |
|
|
|
3.3 |
|
|
|
0.36 |
|
|
|
288,000 |
|
|
|
3.7 |
|
|
|
.36 |
|
|
|
163,250 |
|
|
|
.36 |
|
|
|
3.7 |
|
|
|
0.62 |
|
|
|
4,195,000 |
|
|
|
5.2 |
|
|
|
0.62 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
$ |
.16-.62 |
|
|
|
6,493,000 |
|
|
|
4.8 |
|
|
$ |
0.47 |
|
|
|
1,253,250 |
|
|
$ |
0.21 |
|
|
|
3.8 |
|
|
|
|
|
|
|
As
of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
Exercisable
|
|
|
|
|
Exercise
Price
|
|
|
Number
of Options Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
Weighted
Average Exercise Price
|
|
|
Number
of Options Exercisable
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
$ |
0.24 |
|
|
|
510,000 |
|
|
|
4.3 |
|
|
$ |
0.24 |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
0.36 |
|
|
|
308,000 |
|
|
|
4.7 |
|
|
|
0.36 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
.24–.36 |
|
|
|
818,000 |
|
|
|
4.5 |
|
|
$ |
.24–.36 |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
As
of December 31, 2007 and 2006, options outstanding had an aggregate
intrinsic value of $471,864 and $45,900, respectively.
|
|
|
|
|
|
As
of December 31, 2007 and 2006, there was approximately $780,636 and
$77,015, respectively, of total unrecognized equity-based compensation
cost related to option grants that will be recognized over a weighted
average period of 2.6 and 2.4 years
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
10. Commitments
and
Contingencies
|
|
Litigation
– On December 17, 2007, Robert L. Bishop, who worked with
the Company in a limited capacity in 2004 and is a current member of a
limited liability company that owns an equity interest in the Company,
filed a legal claim against the Company for unpaid wages and/or
commissions (with no amount specified) and promised equity. The
complaint was served on the Company on January 7, 2008. The
Company timely filed an answer denying Mr. Bishop’s
claim. Management believes the demand for payment is without
basis, evidence, or meaningful information and intends to vigorously
defend against it. Due to the early stage of the proceedings,
management is unable to estimate the likelihood of a negative outcome or
estimate the potential liability due to this claim. |
|
|
|
|
|
Operating
Leases - The Company has operating leases for office space and
co-location services with terms expiring in 2009, 2010, and 2012. Future
minimum lease payments are approximately as
follows:
|
Years
Ending December 31,
|
|
Amount
|
|
|
|
|
|
2008
|
|
$ |
218,300 |
|
2009
|
|
|
211,900 |
|
2010
|
|
|
67,600 |
|
2011
|
|
|
5,400 |
|
2012
|
|
|
3,600 |
|
|
|
|
|
|
|
|
$ |
506,800 |
|
|
|
Rental
expense under operating leases totaled $340,828 and $71,831 for the years
ended December 31, 2007 and 2006, respectively.
|
|
|
|
|
|
Agreement
and Plan of Merger
Effective
December 6, 2007, Secure Alliance Holdings Corporation (SAH) a publicly
held company and the Company executed an Agreement and Plan of Merger,
whereby SAH agreed to acquire 100% of the issued and outstanding equity
units of the Company. Each issued and outstanding membership interest of
the Company will be converted into the right to receive
.87096285 post-split shares of the SAH’s common stock, or approximately
80% of its post-reorganization outstanding common
stock.
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
10. Commitments and
Contingencies
Continued
|
|
Agreement
and Plan of Merger -
Continued
The
Company is considered the acquirer for accounting purposes; therefore,
this merger will be accounted for as a reverse acquisition. As
a result of the merger, the Company will receive approximately $9.8
million in cash to fund operations.
|
|
|
|
|
|
In
connection with the Agreement and Plan of Merger, the Company entered into
a Loan and Security agreement and Secured Note with SAH on December 6,
2007 in order to ensure adequate funds through the closing date. The
agreement provides for SAH to loan a total of up to $2.5 million to the
Company through the closing date. A total of $1 million was received under
the Secured Note on December 6, 2007. On January 15, 2008
and February 15, 2008, the Company received $1,000,000 and $500,000,
respectively, under the Secured Note (see Note 6).
|
|
|
|
|
|
Contingency
- The Company has executed a letter agreement with an institutional
investor which provides for the issuance of an additional 1,525,000 common
units upon the voluntary conversion of all outstanding Series B preferred
units owned by the investor. The agreement calls for the conversion of the
Series B preferred units into common units immediately preceding the
closing of the merger described above.
|
|
|
|
|
|
Purchase Commitments –
On November 29, 2007, the Company entered into an agreement which includes
a noncancelable purchase commitment for minimum guaranteed royalties in
the amount of $97,000.
|
|
|
|
|
|
Warranty Obligations –
The Company provides a 90-day warranty on certain manufactured products.
As of December 31, 2007, these obligations have not been significant. The
Company does not expect these obligations to become significant in the
future and no related liability has been accrued as of December 31, 2007
and 2006.
|
|
|
|
|
|
Litigation
– On
December 17, 2007, Robert L. Bishop, who worked with the Company in a
limited capacity in 2004 and is a current member of a limited liability
company that owns an equity interest in the Company, filed a legal claim
alleging a right to unpaid wages and/or commissions (with no amount
specified) and company equity. The complaint was served on the
Company on January 7, 2008. The Company timely filed an Answer
denying Mr. Bishop’s claims and counterclaiming interference by Mr. Bishop
with the Company’s capital raising efforts. The Company intends
to vigorously defend against Mr. Bishop’s claims and pursue its
counterclaim.
|
SEQUOIA
MEDIA GROUP, LC
Notes
to Financial Statements
Continued
11. Retirement
Plan
|
|
On
January 1, 2007, the Company established a 401(k) defined contribution
plan that covers eligible employees who have completed a minimum of three
months of service and who are 21 years of age or
older. Employees may elect to contribute to the plan up to 100
percent of their annual compensation up to a limit of $16,000 in 2008, and
increasing by $500 each year thereafter for inflation or as defined and
limited by the Internal Revenue Code. To date, the Company has
not made any employer contributions to the plan and is not required to do
so.
|
12. Subsequent
Events
|
|
Note
Payable – In January and February, 2008, the Company received an
additional $1,500,000 under the Secured Note (see Note 5).
|
|
|
Warrant
Exercise – On January 31, 2008, an institutional investor exercised
warrants to purchase 1,727,605 common equity units of the Company with an
exercise price of $.24 per unit and total proceeds of
$414,625.
|
|
|
Modification
to Merger Agreement – The Company agreed to amend its agreement
with Secure Alliance Holdings, Inc. (SAH) to provide for a 1 for 2 reverse
stock split rather than a 1 for 3 reverse stock split upon consummation of
the merger. Accordingly, each outstanding membership interest
in the Company will be converted into the right to receive .87096285
post-split shares of SAH common stock.
|
|
|
Closing of
Merger Agreement – On June 5, 2008, the Company closed the merger
transaction with SAH. In connection with the merger transaction, the
unit holders of the Company exchanged all of their units for shares of
common stock of SAH. The number of shares of SAH stock received in
the merger represent approximately 80% of the total outstanding shares of
SAH. Because the unit holders of the Company obtained a majority
ownership in SAH through the merger, the transaction will be accounted for
as a reverse merger. As a result of the merger, the Company
received approximately $7.3 million in cash to fund operations in addition
to the $2.5 million previously loaned to the Company by SAH.
|
SEQUOIA
MEDIA GROUP, LC
Financial
Statements (Unaudited)
As
of March 31, 2008 and December 31, 2007
and
for the Three Months Ended March 31, 2008 and 2007
SEQUOIA
MEDIA GROUP, LC
Unaudited
Balance Sheets
|
|
March
31,
|
|
|
December
31,
|
|
Assets
|
|
2008
|
|
|
2007
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
|
|
$ |
985,461 |
|
|
$ |
859,069 |
|
Accounts
receivable
|
|
|
299,166 |
|
|
|
448,389 |
|
Inventory
|
|
|
40,302 |
|
|
|
21,509 |
|
Prepaid
expenses
|
|
|
94,949 |
|
|
|
100,799 |
|
Deferred
costs
|
|
|
265,142 |
|
|
|
294,602 |
|
Deposits
and other current assets
|
|
|
9,030 |
|
|
|
44,201 |
|
Total
current assets
|
|
|
1,694,050 |
|
|
|
1,768,569 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
926,178 |
|
|
|
990,523 |
|
Intangibles,
net
|
|
|
72,614 |
|
|
|
74,689 |
|
Other
assets
|
|
|
20,408 |
|
|
|
20,408 |
|
Total
assets
|
|
$ |
2,713,250 |
|
|
$ |
2,854,189 |
|
|
|
|
|
|
|
|
|
|
Liabilities and
Members’ Deficit
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
55,280 |
|
|
$ |
75,118 |
|
Accrued
liabilities
|
|
|
1,183,825 |
|
|
|
823,772 |
|
Distribution
payable
|
|
|
439,604 |
|
|
|
308,251 |
|
Current
portion of capital leases
|
|
|
129,171 |
|
|
|
118,288 |
|
Current
portion of deferred rent
|
|
|
50,771 |
|
|
|
38,580 |
|
Note
payable
|
|
|
2,500,000 |
|
|
|
1,000,000 |
|
Deferred
revenue
|
|
|
468,125 |
|
|
|
493,599 |
|
Total
current liabilities
|
|
|
4,826,776 |
|
|
|
2,857,608 |
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
|
201,649 |
|
|
|
222,611 |
|
Deferred
rent, net of current portion
|
|
|
63,714 |
|
|
|
71,839 |
|
Total
liabilities
|
|
|
5,092,139 |
|
|
|
3,152,058 |
|
|
|
|
|
|
|
|
|
|
Series
B redeemable convertible preferred units, no par
|
|
|
|
|
|
|
|
|
value,
12,000,000 units authorized; 8,804,984 units
|
|
|
|
|
|
|
|
|
outstanding,
respectively (liquidation preference
|
|
|
|
|
|
|
|
|
of
$6,603,182
|
|
|
6,603,182 |
|
|
|
6,603,182 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members’
deficit:
|
|
|
|
|
|
|
|
|
Series
A convertible preferred units, no par value, 3,746,485
|
|
|
|
|
|
|
|
|
units
authorized, 3,533,720 units outstanding (liquidation
|
|
|
|
|
|
|
|
|
preference
of $474,229)
|
|
|
474,229 |
|
|
|
474,229 |
|
Common
units, no par value, 90,000,000 units authorized:
|
|
|
|
|
|
|
|
|
30,798,382
and 29,070,777 units outstanding,
|
|
|
|
|
|
|
|
|
respectively.
|
|
|
4,700,607 |
|
|
|
4,211,737 |
|
Accumulated
deficit
|
|
|
(14,156,907 |
) |
|
|
(11,587,017 |
) |
Total
members’ deficit
|
|
|
(8,982,071 |
) |
|
|
(6,901,051 |
) |
|
|
|
|
|
|
|
|
|
Total
liabilities and members’ deficit
|
|
$ |
2,713,250 |
|
|
$ |
2,854,189 |
|
See
accompanying notes to financial statements.
SEQUOIA
MEDIA GROUP, LC
Unaudited
Statements of Operations
|
|
Three-Months
Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
73,496 |
|
|
$ |
173,911 |
|
|
|
|
|
|
|
|
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
173,097 |
|
|
|
21,615 |
|
Research
and development
|
|
|
560,377 |
|
|
|
344,429 |
|
Selling
and marketing
|
|
|
517,161 |
|
|
|
298,817 |
|
General
and administrative
|
|
|
1,144,240 |
|
|
|
597,120 |
|
Depreciation
and amortization
|
|
|
56,998 |
|
|
|
43,245 |
|
|
|
|
|
|
|
|
|
|
Total
operating expense
|
|
|
2,451,873 |
|
|
|
1,305,226 |
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(2,378,377 |
) |
|
|
(1,131,315 |
) |
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
11,129 |
|
|
|
4,546 |
|
Interest
expense
|
|
|
(71,289 |
) |
|
|
(342,242 |
) |
|
|
|
|
|
|
|
|
|
Net
other income (expense)
|
|
|
(60,160 |
) |
|
|
(337,696 |
) |
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(2,438,537 |
) |
|
|
(1,469,011 |
) |
|
|
|
|
|
|
|
|
|
Distributions
on Series B redeemable
|
|
|
|
|
|
|
|
|
convertible
preferred units
|
|
|
(131,353 |
) |
|
|
– |
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common units
|
|
$ |
(2,569,890 |
) |
|
$ |
(1,469,011 |
) |
|
|
|
|
|
|
|
|
|
Loss
per common unit – basic and diluted
|
|
$ |
(0.09 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average common units – basic
|
|
|
|
|
|
|
|
|
and
diluted
|
|
|
30,228,842 |
|
|
|
21,547,422 |
|
See
accompanying notes to financial statements.
SEQUOIA
MEDIA GROUP, LC
Unaudited
Statement of Changes in Members’ Deficit
Three-Months
Ended March 31, 2008
|
|
Series
A Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Accumulated
|
|
|
Members’
|
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2008
|
|
|
3,533,720 |
|
|
$ |
474,229 |
|
|
|
29,070,777 |
|
|
$ |
4,211,737 |
|
|
$ |
(11,587,017 |
) |
|
$ |
(6,901,051 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common units from exercise of warrants
|
|
|
– |
|
|
|
– |
|
|
|
1,727,605 |
|
|
|
414,626 |
|
|
|
– |
|
|
|
414,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
equity-based compensation
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
74,244 |
|
|
|
– |
|
|
|
74,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
on Series B redeemable convertible preferred units
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(131,353 |
) |
|
|
(131,353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(2,438,537 |
) |
|
|
(2,438,537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2008
|
|
|
3,533,720 |
|
|
$ |
474,229 |
|
|
|
30,798,382 |
|
|
$ |
4,700,607 |
|
|
$ |
(14,156,907 |
) |
|
$ |
(8,982,071 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial
statements.
SEQUOIA
MEDIA GROUP, LC
Unaudited
Statements of Cash Flows
|
|
Three-Months
Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,438,537 |
) |
|
$ |
(1,469,011 |
) |
Adjustments
to reconcile net loss to net
|
|
|
|
|
|
|
|
|
cash
used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
110,607 |
|
|
|
147,422 |
|
Accretion
of debt discount
|
|
|
– |
|
|
|
136,275 |
|
Equity-based
compensation
|
|
|
74,244 |
|
|
|
14,351 |
|
(Gain)
Loss on disposal of equipment
|
|
|
(38 |
) |
|
|
1,063 |
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
149,223 |
|
|
|
2,500 |
|
Unbilled
accounts receivable
|
|
|
– |
|
|
|
72,830 |
|
Inventory
|
|
|
(18,793 |
) |
|
|
– |
|
Prepaid
expenses
|
|
|
5,850 |
|
|
|
50,511 |
|
Deferred
costs
|
|
|
29,460 |
|
|
|
85,499 |
|
Other
current assets
|
|
|
171 |
|
|
|
– |
|
Deposits
|
|
|
35,000 |
|
|
|
(54,163 |
) |
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(19,838 |
) |
|
|
(75,498 |
) |
Accrued
liabilities
|
|
|
360,053 |
|
|
|
113,318 |
|
Deferred
rent
|
|
|
4,066 |
|
|
|
– |
|
Deferred
revenue
|
|
|
(25,474 |
) |
|
|
116,680 |
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(1,734,006 |
) |
|
|
(858,223 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(24,295 |
) |
|
|
(51,386 |
) |
Purchase
of intangible assets
|
|
|
(425 |
) |
|
|
– |
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(24,720 |
) |
|
|
(51,386 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from convertible notes and debentures
|
|
|
– |
|
|
|
1,000,000 |
|
Proceeds
from notes payable
|
|
|
1,500,000 |
|
|
|
– |
|
Payments
of loan costs
|
|
|
– |
|
|
|
(82,080 |
) |
Proceeds
from related party notes payable
|
|
|
– |
|
|
|
20,000 |
|
Proceeds
from conversion of warrants to common units
|
|
|
414,626 |
|
|
|
– |
|
Payments
on obligations under capital lease
|
|
|
(29,508 |
) |
|
|
(7,545 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
1,885,118 |
|
|
|
930,375 |
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
126,392 |
|
|
|
20,766 |
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
859,069 |
|
|
|
168,692 |
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$ |
985,461 |
|
|
$ |
189,458 |
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest and income taxes
|
|
$ |
11,428 |
|
|
$ |
673 |
|
See
accompanying notes to financial statements
SEQUOIA
MEDIA GROUP, LC
Unaudited
Statements of Cash Flows
Continued
Supplemental
schedule of non-cash investing and financing activities:
During
the three months ended March 31, 2008:
·
|
The
Company accrued distributions payable on Series B redeemable convertible
preferred units of $131,353.
|
·
|
The
Company acquired $19,429 of office equipment through capital lease
agreements.
|
During
the three months ended March 31, 2007:
·
|
The
Company acquired $37,600 of office furniture through capital lease
agreements.
|
See
accompanying notes to financial statements
Unaudited
Notes to Financial Statements
1. Description
of Organization and Summary of Significant Accounting Policies
Organization
and Nature of Operations
Sequoia
Media Group, LC (the Company), a Utah limited liability company, was formed on
March 28, 2003. The Company develops and sells an engaging way for
anyone to tell their “Story” with personal digital expressions. The
Company’s products simplify and automate the process of creating
professional-quality multi-media productions using personal photos and
videos.
Basis
of Presentation
The
accompanying financial statements are presented in accordance with U.S.
generally accepted accounting principles.
Unaudited
Information
In the
opinion of management, the accompanying unaudited financial statements as of
March 31, 2008 and for the three months ended March 31, 2008 and 2007 reflect
all adjustments (consisting only of normal recurring items) necessary to present
fairly the financial information set forth therein. Certain information and note
disclosures normally included in financial statements prepared in accordance
with U.S. generally accepted accounting principles (US GAAP) have been condensed
or omitted pursuant to SEC rules and regulations, although the Company believes
that the following disclosures, when read in conjunction with the annual
financial statements and the notes included in this filing, are adequate to make
the information presented not misleading. Results for the three-month
period ended March 31, 2008 are not necessarily indicative of the results to be
expected for the year ended December 31, 2008.
Concentration
of Credit Risk and Significant Customer
The
Company maintains its cash in bank demand deposit accounts, which at times may
exceed the federally insured limit or may be maintained in non-insured
institutions. As of March 31, 2008 and December 31, 2007, the Company had
approximately $985,361 and $952,752, respectively, in excess of the insured
limits, primarily in cash equivalents. The Company has not experienced any
losses in these accounts and believes it is not exposed to any significant
credit risk with respect to cash.
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of accounts receivable. In the normal course of business,
the Company provides credit terms to its customers and requires no
collateral.
Four
customers accounted for 51%, 17%, 15%, and 11% of total revenue during the three
months ended March 31, 2008. One customer accounted for 100% of total
revenue for the three months ended March 31, 2007. As of March 31,
2008, two customers accounted for 61% and 30% of accounts
receivable.
SEQUOIA
MEDIA GROUP, LC
Unaudited
Notes to Financial Statements
Net
Loss per Common Unit
Basic
earnings (loss) per unit (EPS) is calculated by dividing income (loss) available
to common unit holders by the weighted-average number of common units
outstanding during the period.
Diluted
EPS is similar to Basic EPS except that the weighted-average number of common
units outstanding is increased using the treasury stock method to include the
number of additional common units that would have been outstanding if the
dilutive potential common units had been issued. Such potentially dilutive
common units include stock options and warrants, convertible preferred stock,
redeemable convertible preferred stock and convertible notes and debentures.
Units having an antidilutive effect on periods presented are not included in the
computation of dilutive EPS.
The
average number of units of all stock options and warrants granted, all
convertible preferred stock, redeemable convertible preferred stock and
convertible debentures have been omitted from the computation of diluted net
loss per common unit because their inclusion would have been anti-dilutive for
the periods ended March 31, 2008 and 2007.
For the
three months ended March 31, 2008 and 2007, the Company had 18,541,704 and
7,269,325 potentially dilutive units of common stock, respectively, not included
in the computation of diluted net loss per common unit because it would have
decreased the net loss per common unit. These options and warrants, convertible
preferred stock, redeemable convertible preferred stock and convertible notes
and debentures could be dilutive in the future.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Cash
Equivalents
The
Company considers all highly liquid investments with an initial maturity of
three months or less to be cash equivalents.
Accounts
Receivable
Accounts
receivable are recorded at net realizable values and are due within 30 days from
the invoice date. The Company maintains allowances for doubtful accounts, when
necessary, for estimated losses resulting from the inability of customers to
make required payments. These allowances are based on specific facts and
circumstances pertaining to individual customers and historical experience.
Provisions for losses on receivables are charged to operations. Receivables are
charged off against the allowances when they are deemed
uncollectible. As of March 31, 2008 and December 31, 2007, there were
no allowances for doubtful accounts required against the Company’s
receivables.
SEQUOIA
MEDIA GROUP, LC
Unaudited
Notes to Financial Statements
Inventories
Inventories
are stated at the lower of cost or market determined using the first-in,
first-out method.
Intangible
Assets
Intangible
assets consist of costs to acquire patents and licenses for use of certain music
tracks. All of the Company’s intangible assets have finite useful
lives.
Intangible
assets with finite useful lives are carried at cost, less accumulated
amortization. Amortization is calculated using the straight-line
method over estimated useful lives. Intangible assets subject to
amortization are reviewed for potential impairment whenever events or
circumstances indicate that carrying amounts may not be
recoverable. As of March 31, 2008 and December 31, 2007, management
determined that the carrying amounts of the Company’s intangible assets were not
impaired.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and
amortization. Property and equipment consists of computers, software
and equipment, and furniture and fixtures. Depreciation and amortization are
calculated using the straight-line method over the estimated economic useful
lives of the assets or over the related lease terms (if shorter), which are
three and five years, respectively.
Expenditures
that materially increase values or capacities or extend useful lives of property
and equipment are capitalized. Routine maintenance, repairs, and renewal costs
are expensed as incurred. Gains or losses from the sale or retirement of
property and equipment are recorded in the statements of
operations.
The
Company reviews its property and equipment for impairment when events or changes
in circumstances indicate that the carrying amount may be
impaired. If it is determined that the related undiscounted future
cash flows are not sufficient to recover the carrying value, an impairment loss
is recognized for the difference between carrying value and fair value of the
asset.
As of
March 31, 2008 and December 31, 2007, management determined the carrying
amounts of the Company’s property and equipment were not impaired.
Revenue
Recognition and Deferred Revenue
Prior to
March 31, 2007, the Company generated nearly all of its revenue from one
customer. The contract with this customer included software
development, software license, post-contract support (PCS), and
training. Because the contract included the delivery of a software
license, the Company accounted for the contract in accordance with Statement of
Position (SOP) 97-2, Software
Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2 with
Respect to Certain Transactions. SOP 97-2 applies to
activities that represent licensing, selling, leasing, or other marketing of
computer software.
SEQUOIA
MEDIA GROUP, LC
Unaudited
Notes to Financial Statements
Because
the contract included services to provide significant production, modification,
or customization of software, in accordance with SOP 97-2, the Company accounted
for the contract based on the provisions of Accounting Research Bulletin (ARB)
No. 45, Long-Term
Construction-Type Contracts and the relevant guidance provided by SOP
81-1, Accounting for
Performance of Construction-Type and Certain Production-Type
Contracts. In accordance with these provisions, the Company
determined to use the percentage-of-completion method of accounting to record
the revenue for the entire contract. The Company utilized the ratio
of total actual costs incurred to total estimated costs to determine the amount
of revenue to be recognized at each reporting date.
As of
December 31, 2007, this contract was completed and all revenue under this
contract had been recognized. The Company has no further obligations under this
contract.
The
Company records billings and cash received in excess of revenue earned as
deferred revenue. The deferred revenue balance generally results from
contractual commitments made by customers to pay amounts to the Company in
advance of revenues earned. Revenue earned but not billed is classified as
unbilled accounts receivable in the balance sheet. The Company bills
customers as payments become due under the terms of the customer’s contract. The
Company considers current information and events regarding its customers and
their contracts and establishes allowances for doubtful accounts when it is
probable that it will not be able to collect amounts due under the terms of
existing contracts.
Under the
current business model, the Company generates revenue from the sale of software,
equipment, software licenses, applications development and implementation
services, support, training services, and product royalties. The
Company continues to apply the guidance provided in SOP 97-2 to recognize
revenue on contracts that include a software component. SOP 97-2
generally provides that until vendor specific objective evidence (VSOE) of fair
value exists for the various components within the contract, that revenue is
deferred until delivery of all elements except for PCS and training has
occurred.
After all
elements are delivered except for PCS and training, deferred revenue is
recognized over the remaining term of the contract. Because of the
Company’s limited sales history, it does not have VSOE for the different
components that may be included in sales contracts.
Once VSOE
is established, the Company will allocate a portion of the contract fee to each
undelivered element based on the relative fair values of the elements and
allocate the fee for delivered software licenses using the residual
method. The Company plans to establish VSOE for the various elements
of its contracts based on the price charged when the same element is sold
separately. For consulting services, the Company plans to base VSOE on the rates
charged when the services are sold separately under time-and-materials
contracts. The Company intends to base VSOE for training on the rates
charged when training is sold separately for supplemental training
courses.
For PCS,
VSOE will be determined by reference to the renewal rate charged to the customer
in future periods.
SEQUOIA
MEDIA GROUP, LC
Unaudited
Notes to Financial Statements
For
time-and-materials contracts, the Company plans to estimate a profit range and
recognize the related revenue using the lowest probable level of profit
estimated in the range. Billings in excess of revenue recognized under
time-and-material contracts will be deferred and recognized upon completion of
the time-and-materials contract or when the results can be estimated more
precisely.
For
fixed-price contracts, the Company intends to recognize revenue using the
percentage-of-completion method of accounting and following the guidance in SOP
81-1. The Company will make adjustments, if necessary, to the estimates used in
the percentage-of-completion method of accounting as work progresses under the
contract and as experience is gained.
The
Company intends to recognize support revenue from contracts for ongoing
technical support and unspecified product updates ratably over the support
period.
The
Company plans to recognize training revenue as the services are
performed.
The
Company plans to recognize license revenues from software licenses that do not
include services or where the related services are not considered essential to
the functionality of the software, when the following criteria are met: a signed
noncancellable license agreement with nonrefundable fees has been obtained; the
software product has been delivered; there are no uncertainties surrounding
product acceptance; the fees are fixed and determinable; and collection is
considered probable.
For
certain contracts for which reasonably dependable estimates cannot be made or
for which inherent hazards make estimates doubtful, the Company recognizes
revenue under the completed-contract method of contract accounting.
In one
contract entered into during 2007, the Company sold fulfillment equipment,
hardware and software installation, and software licenses. The Company deferred
all revenues related to these contracts as there was no VSOE established for the
software portion of the product. During the quarter ended March 31, 2008, all
elements of the contract were delivered except for PCS and
training. In accordance with SOP 97-2, deferred revenue is being
recognized over the remaining term of the contract on a straight-line
basis.
The
Company capitalized the direct cost of the equipment and is amortizing it as the
related revenue is recognized.
The
Company entered into additional contracts during 2007 and 2008 in which the
Company sells its product through a retailer. The product includes both software
and the means to submit data to the Company for fulfillment. As there was no
VSOE for the software portion of the product, the Company deferred all revenues
related to these contracts until the only undelivered element of the contract
was PCS and training in accordance with SOP 97-2. During the quarter
ended March 31, 2008, the Company started recognizing revenue under these
contracts on a straight-line basis over the remaining term of the
contract.
SEQUOIA
MEDIA GROUP, LC
Unaudited
Notes to Financial Statements
Software
Development Costs
Costs for
the development of new software products and substantial enhancements to
existing software products are expensed as incurred until technological
feasibility has been established, at which time any additional costs are
capitalized. The costs to develop software have not been capitalized
as management has determined that its software development process is
essentially completed concurrent with the establishment of technological
feasibility.
Accounting
for Equity Based Compensation
The
Company accounts for equity-based-based compensation in accordance with
Statement of Financial Accounting Standards (SFAS) No. 123(R) (revised 2004),
Share-Based Payment
which requires recognition of expense (generally over the vesting period) based
on the estimated fair value of equity-based payments granted. The
effect of accounting for equity-based awards under SFAS No. 123(R) for the three
months ended March 31, 2008 and 2007, was to record $74,244, and $14,351,
respectively, of equity-based compensation expense in general and administrative
expense.
The fair
value of each share-based award was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions.
Expected
dividend yield
|
|
|
|
–
|
Expected
share price volatility
|
|
|
|
40%
|
Risk-free
interest rate
|
|
|
|
4.06%
- 4.89%
|
Expected
life of options
|
|
|
|
2.5
years – 4.25 years
|
Income
Taxes
Under the
provisions of the Internal Revenue Code and applicable state laws, the Company
is taxed similar to a partnership, and as a result, is not directly subject to
income taxes. The results of its operations are included in the tax returns of
its members. Therefore, no provision or benefit for income taxes has been
included in the accompanying financial statements.
Pro forma
income tax expense, as if the Company had been a taxable entity would have been
$0 for each period presented in the statements of operations.
Reclassifications
Certain
amounts in the 2007 financial statements have been reclassified to confirm to
the 2008 presentation.
2. Agreement
and Plan of Merger
Effective
December 6, 2007, Secure Alliance Holdings Corporation (SAH) a publicly held
company and the Company executed an Agreement and Plan of Merger, whereby SAH
agreed to acquire 100% of the issued and outstanding equity units of the
Company. Each issued and outstanding membership interest of the Company will be
converted into the right to receive .87096285 post-split shares of the SAH’s
common stock, or approximately 80% of its post-reorganization outstanding common
stock.
SEQUOIA
MEDIA GROUP, LC
Unaudited
Notes to Financial Statements
On June
5, 2008, the Company closed the merger transaction described above. In
connection with the merger transaction, the unit holders of the Company
exchanged all of their units for shares of common stock of SAH. The number
of shares of SAH stock received in the merger represent approximately 80% of the
total outstanding shares of SAH. Because the unit holders of the Company
obtained a majority ownership in SAH through the merger, the transaction will be
accounted for as a reverse merger. As a result of the merger, the
Company received approximately $7.3 million in cash to fund operations in
addition to the $2.5 million previously loaned to the Company by
SAH.
In
connection with the Agreement and Plan of Merger, the Company entered into a
Loan and Security agreement and Secured Note with SAH on December 6, 2007 in
order to ensure adequate funds through the closing date. The agreement provides
for SAH to loan a total of up to $2.5 million to the Company through the closing
date. A total of $1 million was received under the Secured Note on
December 6, 2007. On January 15, 2008 and February 15, 2008, the
Company received $1,000,000 and $500,000, respectively, under the Secured Note
(see Note 4). In connection with the merger closing the $2.5 million
notes payable were eliminated.
3. Accrued
Liabilities
Accrued
liabilities consisted of the following:
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
Bonuses
payable
|
|
$ |
689,000 |
|
|
$ |
554,000 |
|
Payroll
and payroll taxes
payable
|
|
|
209,536 |
|
|
|
229,245 |
|
Contractual
payments
|
|
|
213,333 |
|
|
|
- |
|
Interest
payable
|
|
|
59,861 |
|
|
|
- |
|
Other
|
|
|
12,095 |
|
|
|
40,527 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,183,825 |
|
|
$ |
823,772 |
|
4. Notes
Payable
In
connection with the Agreement and Plan of Merger (see Note 2), the Company
entered into a Loan and Security Agreement and Secured Note with Secure Alliance
Holdings (SAH) Corporation on December 6, 2007 in order to ensure adequate funds
through the merger closing date. The agreement provides for (SAH) to loan a
total of up to $2.5 million to the Company through the merger closing date. A
total of $1 million was received under the Secured Note as of December 31,
2007. An additional $1,500,000 was advanced during the three months
ended March 31, 2008. The amounts advanced under the Secured Note
were secured by all assets of the Company, accrued interest at 10% per annum and
principal and interest were due and payable on December 31, 2008. As
disclosed in Note 2, in connection with the merger on June 5, 2008, the balance
of notes payable of $2.5 million was eliminated.
SEQUOIA
MEDIA GROUP, LC
Unaudited
Notes to Financial Statements
5. Related
Party Transactions
Consulting
Agreement
During
the three months ended March 31, 2008, pursuant to an agreement executed during
the year ended December 31, 2007, the Company recorded expense of $243,333 for
consulting services from Amerivon Holdings, Inc. (Amerivon), a significant
shareholder of the Company.
Warrant
Exercise
On
January 30, 2008, Amerivon exercised 1,727,605 warrants to purchase common units
of the Company for a total price of $414,626. This exercise increased Amerivon’s
ownership percentage to 32.2% of common units and 43.4% of all common and
convertible preferred units.
Notes
Payable and Series B Redeemable Convertible Preferred Units
On
January 19, 2007 and again on February 14, 2007, the Company issued $500,000 of
convertible notes payable to Amerivon. These convertible notes
payable accrued interest at 9% per annum, and had a maturity date of June 30,
2007. A beneficial conversion feature in the amount of $171,875 was
recognized, $67,375 of which was accreted to interest expense as of March 31,
2007.
6. Common
and Preferred Units
As of
March 31, 2008 and December 31, 2007, the Company had authorized 90,000,000
common units and 20,000,000 preferred units, all with no par
value. The Company has designated 3,746,485 preferred units as Series
A and 12,000,000 preferred units as Series B.
Series
A Convertible Preferred Units
During
the period ended March 31, 2008, there were no Series A preferred units
issued. As of March 31, 2008 and December 31, 2007, there were
3,533,720 Series A preferred units outstanding. In connection with
the merger disclosed in Note 2 all series A preferred units were converted to
common units and exchanged for common shares of SAH.
Series
B Redeemable Convertible Preferred Units
During
the period ended March 31, 2008, there were no Series B preferred units
issued.
As of
March 31, 2008 and December 31, 2007, there were 8,804,984 units of Series B
preferred units outstanding. In connection with the merger disclosed
in Note 2 all series B preferred units were converted to common units and
exchanged for common shares of SAH.
SEQUOIA
MEDIA GROUP, LC
Unaudited
Notes to Financial Statements
Common
Units
As of
March 31, 2008 and December 31, 2007, there were 30,798,382 and 29,070,777
common units outstanding respectively. In connection with the merger
disclosed in Note 2, all common units held were exchanged for common shares of
SAH.
In
accordance with an executed letter agreement with an institutional investor, on
June 5, 2008, immediately proceeding the closing of the merger described in Note
2, the Company issued an additional 1,525,000 common units upon the voluntary
conversion of all outstanding Series B preferred units owned by the
investor.
7. Options
and Warrants
Common
Unit Warrants
The
following tables summarize information about common unit warrants as of March
31, 2008 and December 31, 2007:
|
|
|
As
March 31, 2008
Outstanding
and Exercisable
|
|
Exercise
Price
|
|
|
Number
of Warrants Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Weighted
Average Exercise Price
|
|
$ |
0.46 |
|
|
|
1,190,000 |
|
|
|
1.25 |
|
|
$ |
0.46 |
|
|
|
|
As
of December 31, 2007
Outstanding
and Exercisable
|
|
Exercise
Price
|
|
|
Number
of Warrants Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Weighted
Average Exercise Price
|
|
$ |
0.24 |
|
|
|
1,727,605 |
|
|
|
0.1 |
|
|
$ |
0.24 |
|
|
0.46 |
|
|
|
1,190,000 |
|
|
|
1.5 |
|
|
|
0.46 |
|
$ |
.24-.46 |
|
|
|
2,917,605 |
|
|
|
0.7 |
|
|
$ |
0.33 |
|
During
the three months ended March 31, 2008, 1,727,605 warrants with an exercise price
of $.24 were exercised for total proceeds of $414,625 received by the
Company. All common unit warrants outstanding as of the date of the
merger (described in Note 2) were converted into warrants to purchase the common
stock of SAH.
SEQUOIA
MEDIA GROUP, LC
Unaudited
Notes to Financial Statements
Common
Unit Options
The
following tables summarize information about common unit options:
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
|
Number
of shares
|
|
|
Weighted-
Average Exercise Price
|
|
|
Number
of Shares
|
|
|
Weighted-
Average Exercise Price
|
|
Outstanding
at beginning of year
|
|
|
6,493,000 |
|
|
$ |
0.21 |
|
|
|
818,000 |
|
|
$ |
0.29 |
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
5,695,000 |
|
|
|
0.50 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cancelled
|
|
|
43,000 |
|
|
|
0.51 |
|
|
|
(20,000 |
) |
|
|
0.36 |
|
Outstanding
at end of year
|
|
|
6,450,000 |
|
|
|
0.47 |
|
|
|
6,493,000 |
|
|
|
0.47 |
|
Exercisable
at year end
|
|
|
1,303,125 |
|
|
|
0.21 |
|
|
|
1,253,250 |
|
|
|
0.21 |
|
Weighted
average fair value of
options
granted during the year
|
|
$ |
- |
|
|
|
|
|
|
$ |
0.29 |
|
|
|
|
|
As
of March 31, 2008
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Exercise
Price
|
|
|
Number
of Options Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
Weighted
Average Exercise Price
|
|
|
Number
of Options Exercisable
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
$ |
0.16 |
|
|
|
1,500,000 |
|
|
|
4.3 |
|
|
$ |
0.16 |
|
|
|
750,000 |
|
|
$ |
0.16 |
|
|
|
3.8 |
|
|
|
0.24 |
|
|
|
510,000 |
|
|
|
3.1 |
|
|
|
.24 |
|
|
|
371,875 |
|
|
|
.24 |
|
|
|
3.1 |
|
|
|
0.36 |
|
|
|
270,000 |
|
|
|
3.5 |
|
|
|
.36 |
|
|
|
185,250 |
|
|
|
.36 |
|
|
|
3.4 |
|
|
|
0.62 |
|
|
|
4,170,000 |
|
|
|
4.9 |
|
|
|
0.62 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
$ |
.16-.62 |
|
|
|
6,450,000 |
|
|
|
4.6 |
|
|
$ |
0.47 |
|
|
|
1,303,125 |
|
|
$ |
0.21 |
|
|
|
3.5 |
|
As
of December 31, 2007
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Exercise
Price
|
|
|
Number
of Options Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
Weighted
Average Exercise Price
|
|
|
Number
of Options Exercisable
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
$ |
0.16 |
|
|
|
1,500,000 |
|
|
|
4.5 |
|
|
$ |
0.16 |
|
|
|
750,000 |
|
|
$ |
0.16 |
|
|
|
4.0 |
|
|
|
0.24 |
|
|
|
510,000 |
|
|
|
3.3 |
|
|
|
.24 |
|
|
|
340,000 |
|
|
|
.24 |
|
|
|
3.3 |
|
|
|
0.36 |
|
|
|
288,000 |
|
|
|
3.7 |
|
|
|
.36 |
|
|
|
163,250 |
|
|
|
.36 |
|
|
|
3.7 |
|
|
|
0.62 |
|
|
|
4,195,000 |
|
|
|
5.2 |
|
|
|
0.62 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
$ |
.16-.62 |
|
|
|
6,493,000 |
|
|
|
4.8 |
|
|
$ |
0.47 |
|
|
|
1,253,250 |
|
|
$ |
0.21 |
|
|
|
3.8 |
|
SEQUOIA
MEDIA GROUP, LC
Unaudited
Notes to Financial Statements
As of
March 31, 2008 and December 31, 2007, options outstanding had an aggregate
intrinsic value of $704,535 and $710,121, respectively.
As of
March 31, 2008, there was approximately $721,762, respectively, of total
unrecognized equity-based compensation cost related to option grants that will
be recognized over a weighted average period of 2.35 years. All
common unit options outstanding as of the date of the merger (described in Note
2) were converted into options to purchase the common stock of SAH.
8. Commitments
and Contingencies
Litigation
On
December 17, 2007, Robert L. Bishop, who worked with the Company in a limited
capacity in 2004 and is a current member of a limited liability company that
owns an equity interest in the Company, filed a legal claim alleging a right to
unpaid wages and/or commissions (with no amount specified) and company
equity. The complaint was served on the Company on January 7,
2008. The Company timely filed an Answer denying Mr. Bishop’s claims
and counterclaiming interference by Mr. Bishop with the Company’s capital
raising efforts. The Company intends to vigorously defend against Mr.
Bishop’s claims and pursue its counterclaim.
Warranty
Obligations
The
Company provides a 90-day warranty on certain manufactured products. As of
March 31, 2008 and December 31, 2007, these obligations have not been
significant. The Company does not expect these obligations to become significant
in the future and no related liability has been accrued as of March 31, 2008 and
December 31, 2007.
UNAUDITED
PRO FORMA CONDENSED COMBINED
CONSOLIDATED
FINANCIAL STATEMENTS
The
following unaudited proforma condensed combined balance sheet aggregates the
balance sheet of Secure Alliance Holdings Corporation (“SAH”) and the balance
sheet of Sequoia Media Group, LC (“Sequoia”) as of March 31, 2008, accounting
for the transaction as a recapitalization of Sequoia with the issuance of shares
for the net assets of SAH (a reverse acquisition) and using the assumptions
described in the following notes, giving effect to the transaction, as if the
transaction had occurred as of March 31, 2008. The transaction was
not completed as of March 31, 2008.
The
following unaudited proforma condensed combined statements of operations combine
the results of operations of Sequoia for the three months ended March 31, 2008
and SAH for the three months ended March 31, 2008 and the results of operations
of Sequoia for the year ended December 31, 2007 and SAH for the year ended
September 30, 2007 as if the transaction had occurred as of the October 1,
2006.
The
proforma condensed combined financial statements should be read in conjunction
with the separate financial statements and related notes thereto of Sequoia and
SAH. These proforma financial statements are not necessarily
indicative of the combined financial position, had the acquisition occurred on
the date indicated above, or the combined results of operations which might have
existed for the periods indicated or the results of operations as they may be in
the future.
Unaudited
Pro Forma Condensed Combined Balance Sheet
March
31, 2008
|
|
Sequoia
|
|
|
SAH
|
|
|
|
|
Pro
Forma Adjustments
|
|
|
Pro
Forma Combined
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
985,461 |
|
|
$ |
9,363,061 |
|
[F |
] |
|
|
(2,000,000 |
) |
|
$ |
8,348,522 |
|
Marketable
securities available-for-sale
|
|
|
- |
|
|
|
303,300 |
|
[F |
] |
|
|
(303,300 |
) |
|
|
- |
|
Accounts
receivable
|
|
|
299,166 |
|
|
|
33,470 |
|
[F |
] |
|
|
(33,470 |
) |
|
|
299,166 |
|
Notes
receivable
|
|
|
- |
|
|
|
2,500,000 |
|
[J |
] |
|
|
(2,500,000 |
) |
|
|
- |
|
Inventory
|
|
|
40,302 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
40,302 |
|
Prepaid
expenses
|
|
|
94,949 |
|
|
|
76,718 |
|
|
|
|
|
|
|
|
|
171,667 |
|
Deferred
costs
|
|
|
265,142 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
265,142 |
|
Deposits
and other current assets
|
|
|
9,030 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
9,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
1,694,050 |
|
|
|
12,276,549 |
|
|
|
|
|
|
|
|
|
9,133,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
926,178 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
926,178 |
|
Intangible
assets, net
|
|
|
72,614 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
72,614 |
|
Other
Assets
|
|
|
20,408 |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
24,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,713,250 |
|
|
$ |
12,280,549 |
|
|
|
|
|
|
|
|
$ |
10,157,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Members' Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
55,280 |
|
|
$ |
106,433 |
|
|
|
|
|
|
|
|
$ |
161,713 |
|
Accrued
liabilities
|
|
|
1,183,825 |
|
|
|
157,901 |
|
|
|
|
|
|
|
|
|
1,341,726 |
|
Distributions
payable
|
|
|
439,604 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
439,604 |
|
Current
portion of capital leases
|
|
|
129,171 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
129,171 |
|
Current
portion of deferred rent
|
|
|
50,771 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
50,771 |
|
Note
payable
|
|
|
2,500,000 |
|
|
|
- |
|
[J |
] |
|
|
(2,500,000 |
) |
|
|
- |
|
Deferred
revenue
|
|
|
468,125 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
468,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
4,826,776 |
|
|
|
264,334 |
|
|
|
|
|
|
|
|
|
2,591,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
|
201,649 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
201,649 |
|
Deferred
rent, net of current portion
|
|
|
63,714 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
63,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
5,092,139 |
|
|
|
264,334 |
|
|
|
|
|
|
|
|
|
2,856,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
B redeemable convertible preferred units, no
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
par
value, 12,000,000 units authorized;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,804,984
outstanding,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(liquidation
preference of $6,603,182)
|
|
|
6,603,182 |
|
|
|
- |
|
[B |
] |
|
|
(6,603,182 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members'
equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A convertible preferred units, no par value,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,746,485
units authorized, 3,533,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
units
outstanding (liquidation preference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$474,229)
|
|
|
474,229 |
|
|
|
- |
|
[B |
] |
|
|
(474,229 |
) |
|
|
- |
|
Common
units, no par value, 90,000,000 units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
authorized;
30,798,382, units outstanding
|
|
|
4,700,607 |
|
|
|
- |
|
[B |
] |
|
|
8,053,411 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
[E |
] |
|
|
(12,754,018 |
) |
|
|
|
|
Common
stock, $.01 par value, authorized 100,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares;
issued and outstanding 19,484,524 shares
|
|
|
- |
|
|
|
194,840 |
|
[A |
] |
|
|
(97,420 |
) |
|
|
487,281 |
|
|
|
|
|
|
|
|
|
|
[C |
] |
|
|
389,861 |
|
|
|
|
|
Additional
paid-in capital
|
|
|
- |
|
|
|
30,127,147 |
|
[A |
] |
|
|
97,420 |
|
|
|
21,946,182 |
|
|
|
|
|
|
|
|
|
|
[F |
] |
|
|
(2,333,470 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
[C |
] |
|
|
(389,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
[E |
] |
|
|
12,754,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[D |
] |
|
|
(18,309,072 |
) |
|
|
|
|
Accumulated
deficit
|
|
|
(14,156,907 |
) |
|
|
(18,309,072 |
) |
[D |
] |
|
|
18,309,072 |
|
|
|
(15,132,907 |
) |
|
|
|
|
|
|
|
|
|
[B |
] |
|
|
(976,000 |
) |
|
|
|
|
Accumulated
other comprehensive income
|
|
|
- |
|
|
|
3,300 |
|
[F |
] |
|
|
(3,300 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
members' equity (deficit)
|
|
|
(8,982,071 |
) |
|
|
12,016,215 |
|
|
|
|
|
|
|
|
|
7,300,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and members' equity (deficit)
|
|
$ |
2,713,250 |
|
|
$ |
12,280,549 |
|
|
|
|
|
|
|
|
$ |
10,157,029 |
|
Unaudited
Pro Forma Condensed Combined Statements of Operations
|
|
Sequoia
|
|
|
SAH
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months ended
|
|
|
Three
Months ended
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
March
31, 2008
|
|
|
March
31, 2008
|
|
|
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
73,496 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
$ |
73,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
173,097 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
173,097 |
|
Research
and development
|
|
|
560,377 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
560,377 |
|
Selling
and marketing
|
|
|
517,161 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
517,161 |
|
General
and administrative
|
|
|
1,144,240 |
|
|
|
505,057 |
|
|
|
|
|
|
|
|
|
1,649,297 |
|
Depreciation
and amortization
|
|
|
56,998 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
56,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expense
|
|
|
2,451,873 |
|
|
|
505,057 |
|
|
|
|
|
|
|
|
|
2,956,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(2,378,377 |
) |
|
|
(505,057 |
) |
|
|
|
|
|
|
|
|
(2,883,434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
11,129 |
|
|
|
132,615 |
|
|
[H |
] |
|
|
(80,000 |
) |
|
|
63,744 |
|
Interest
expense
|
|
|
(71,289 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
(71,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(60,160 |
) |
|
|
132,615 |
|
|
|
|
|
|
|
|
|
|
(7,545 |
) |
Loss
before income taxes and discontinued operationsfrom continuing
operations
|
|
|
(2,438,537 |
) |
|
|
(372,442 |
) |
|
|
|
|
|
|
|
|
|
(2,890,979 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(2,438,537 |
) |
|
|
(372,442 |
) |
|
|
|
|
|
|
|
|
|
(2,890,979 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
dividends and deemed dividends
|
|
|
(131,353 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
(131,353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common unit/shareholders
|
|
$ |
(2,569,890 |
) |
|
$ |
(372,442 |
) |
|
|
|
|
|
|
|
|
$ |
(3,022,332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(0.09 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
30,228,842 |
|
|
|
19,444,794 |
|
|
[A |
] |
|
|
(9,802,268 |
) |
|
|
48,628,640 |
|
|
|
|
|
|
|
|
|
|
|
[I |
] |
|
|
38,986,114 |
|
|
|
|
|
Unaudited
Pro Forma Condensed Combined Statements of Operations
|
|
Sequoia
|
|
|
SAHC
|
|
|
|
|
|
Pro
Forma Adjustments
|
|
|
Pro
Forma Combined
|
|
|
|
Year
ended
|
|
|
Year
ended
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
541,856 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
$ |
541,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
57,068 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
57,068 |
|
Research
and development
|
|
|
1,890,852 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
1,890,852 |
|
Selling
and marketing
|
|
|
1,351,860 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
1,351,860 |
|
General
and administrative
|
|
|
3,677,326 |
|
|
|
1,333,467 |
|
|
|
|
|
|
|
|
|
5,010,793 |
|
Depreciation
and amortization
|
|
|
277,458 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
277,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expense
|
|
|
7,254,564 |
|
|
|
1,333,467 |
|
|
|
|
|
|
|
|
|
8,588,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(6,712,708 |
) |
|
|
(1,333,467 |
) |
|
|
|
|
|
|
|
|
(8,046,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on disposal of 3CI pursuant to class-action settlement
|
|
|
- |
|
|
|
|
|
|
[G |
] |
|
|
(5,380,121 |
) |
|
|
(5,380,121 |
) |
Reorganization
fee paid to Laurus
|
|
|
- |
|
|
|
(6,508,963 |
) |
|
|
|
|
|
|
|
|
|
(6,508,963 |
) |
Interest
income
|
|
|
66,524 |
|
|
|
580,861 |
|
|
|
|
|
|
|
|
|
|
647,385 |
|
Interest
expense
|
|
|
(693,217 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(693,217 |
) |
Gain
on collection of receivable
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Gain
on CCC bankruptcy settlement
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Other
expenses
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(626,693 |
) |
|
|
(5,928,102 |
) |
|
|
|
|
|
|
|
|
|
(11,934,916 |
) |
Loss
before income taxes and discontinued operations
|
|
|
(7,339,401 |
) |
|
|
(7,261,569 |
) |
|
|
|
|
|
|
|
|
|
(19,981,091 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
- |
|
|
|
75,808 |
|
|
|
|
|
|
|
|
|
|
75,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(7,339,401 |
) |
|
|
(7,337,377 |
) |
|
|
|
|
|
|
|
|
|
(20,056,899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
dividends and deemed dividends
|
|
|
(498,251 |
) |
|
|
- |
|
|
[B |
] |
|
|
(976,000 |
) |
|
|
(1,474,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations applicable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common unit/shareholders
|
|
$ |
(7,837,652 |
) |
|
$ |
(7,337,377 |
) |
|
|
|
|
|
|
|
|
$ |
(21,531,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
|
33,499,128 |
|
|
[A |
] |
|
|
(9,802,268 |
) |
|
|
43,431,974 |
|
|
|
|
|
|
|
|
|
|
|
[I |
] |
|
|
38,986,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[G |
] |
|
|
(19,251,000 |
) |
|
|
|
|
NOTE
1 – PROFORMA ADJUSTMENTS
On
December 6, 2007, SAH entered into an Agreement and Plan of Merger wherein SAH
would acquire 100% of Sequoia through the issuance of 38,986,114 shares of
restricted common stock in a transaction wherein Sequoia would become a
wholly-owned subsidiary of SAH. After effectiveness of the
transaction, the former Sequoia unit holders will own approximately 80% of the
issued and outstanding shares of SAH. Because the shares issued in
the transaction represent control of the total shares of the outstanding common
stock immediately following the transaction, the transaction will be accounted
for as a reverse acquisition. The merger became effective on June 5,
2008.
Pro forma
adjustments on the attached financial statements include the
following:
|
[A]
|
To
record the 1 for 2 reverse stock split of SAH common
stock.
|
|
[B]
|
To
reflect the conversion of Sequoia preferred units to Sequoia common
units immediately prior to the closing of the transaction between SAH and
Sequoia. The conversion includes an additional 1,525,000
common units that were issued upon conversion in order to induce
conversion. These inducement units will be recorded as a
preferential dividend, thus increasing the accumulated deficit and
increasing the loss applicable to common
unit/shareholders.
|
|
[C]
|
To
record the acquisition of Sequoia by SAH through the issuance of
38,986,114 shares of common stock. The ownership interests of
the former owners of Sequoia in the combined enterprise will be greater
than that of the ongoing shareholders of SAH and, accordingly, the
management of Sequoia will assume operating control of the combined
enterprise. Consequently, the acquisition will be accounted for
as the recapitalization of Sequoia, wherein Sequoia purchased the assets
of SAH and accounted for the transaction as a “Reverse Acquisition” for
accounting purposes.
|
[D]
|
To
eliminate the accumulated deficit of SAH at the date of acquisition to
reflect the purchase by Sequoia for accounting
purposes.
|
|
[E]
|
To
eliminate the Sequoia common units for
consolidation.
|
|
[F]
|
To
remove assets that will be distributed to SAH shareholders prior to the
merger. Prior to the effectiveness of the reverse merger, SAH
will distribute $2 million in cash and 2,022,000 shares of Cashbox, a
publicly listed UK company to the shareholders of
SAH.
|
[G]
|
To
remove expenses, gains, and shares repurchased in connection with the sale
of SAH’s prior operations. Such operations have been disposed
and will not be a continuing component of the combined
company.
|
|
[H]
|
To
remove interest income related to the $2 million of cash that will be
retained by the SAH stockholders (see note F
above).
|
|
[I]
|
To
record the issuance of 38,986,114 shares of SAH’s common stock in
connection with the reverse acquisition. Dilutive earnings per
share were not presented, as the effect was anti-dilutive for the periods
presented.
|
|
[J]
|
To
eliminate $2,500,000 note payable / receivable between SAH and
Sequoia.
|
PART
II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
following table sets forth the costs and expenses payable by us in connection
with the issuance and distribution of the securities being registered. None of
the following expenses are payable by the selling stockholder. All of the
amounts shown are estimates, except for the SEC registration fee.
SEC
registration fee
|
|
$ |
692 |
|
Accounting
fees and expenses
|
|
|
10,000 |
|
Legal
fees and expenses
|
|
|
45,000 |
|
Miscellaneous
|
|
|
500 |
|
TOTAL
|
|
$ |
56,192 |
|
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the
Delaware General Corporation Law (the “DGCL”) provides, in general, that a
corporation incorporated under the laws of the State of Delaware, as we are, may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than a
derivative action by or in the right of the corporation) by reason of the fact
that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another enterprise, against expenses
(including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person’s conduct was unlawful. In the case of a
derivative action, a Delaware corporation may indemnify any such person against
expenses (including attorneys’ fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification will be made in respect of any claim, issue or matter as to
which such person will have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery of the State of Delaware or
any other court in which such action was brought determines such person is
fairly and reasonably entitled to indemnity for such expenses.
Our
Certificate of Incorporation and Bylaws provide that we will indemnify our
directors, officers, employees and agents to the extent and in the manner
permitted by the provisions of the DGCL, as amended from time to time, subject
to any permissible expansion or limitation of such indemnification, as may be
set forth in any stockholders’ or directors’ resolution or by contract. In
addition, our director and officer indemnification agreements with each of our
directors and officers provide, among other things, for the indemnification to
the fullest extent permitted or required by Delaware law, provided that no
indemnitee will be entitled to indemnification in connection with any claim
initiated by the indemnitee against us or our directors or officers unless we
join or consent to the initiation of the claim, or the purchase and sale of
securities by the indemnitee in violation of Section 16(b) of the Exchange
Act.
Any
repeal or modification of these provisions approved by our stockholders will be
prospective only and will not adversely affect any limitation on the liability
of any of our directors or officers existing as of the time of such repeal or
modification.
We are
also permitted to apply for insurance on behalf of any director, officer,
employee or other agent for liability arising out of his actions, whether or not
the DGCL would permit indemnification.
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES.
During the first half of 2006 Sequoia
undertook a private offering consisting of 12-month convertible debt, bearing
interest at 10%. The offering was taken in its entirety by Amerivon,
who invested a total of $829,250. In August of 2006, Amerivon
invested an additional $1,564,000 in a convertible debt offering, bearing
interest at 10%, intended to bridge Sequoia to a subsequent preferred equity
offering targeting $5 to $7 million. During the first quarter of
2007, Amerivon provided additional bridge financing of $1,000,000 and an
additional $535,000 of bridge financing during the second quarter of
2007. In May 2007, Sequoia closed the preferred equity offering with
Amerivon at which time they converted approximately $2.4 million in aggregate
convertible debt held by Amerivon, together with accumulated interest into
common units of Sequoia. Amerivon also provided an additional $4
million in cash, which, along with $1.5 million of the bridge financing
principle provided during 2007, plus accumulated interest, was used to purchase
a total of $6.4 million worth of Sequoia’s Series B preferred.
Such
membership interests were not registered and were issued in reliance on Section
4(2) of the Securities and Exchange Act of 1933, as amended.
ITEM
16. EXHIBITS.
The
following exhibits are included as part of this Form S-1. References to “the
Company” in this Exhibit List mean aVinci Media Corporation, a Nevada
corporation.
Exhibit
|
|
Description
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger dated December 6, 2007 (incorporated by reference to
exhibit 2.1 to the registrant’s current report on Form 8-K filed on
December 6, 2007).
|
|
|
|
2.2
|
|
Amendment
to Agreement and Plan of Merger dated March 31, 2008 (incorporated by
reference to exhibit 2.1 to the registrant’s current report on Form 8-K
filed on April 4, 2008.
|
|
|
|
3.1
|
|
Articles
of Merger relating to the merger of Merger Sub. with and into Sequoia,
Inc. (incorporated by reference to exhibit 3.1 to the registrant’s current
report on Form 8-K filed on June 11, 2007).
|
|
|
|
3.2
|
|
Certificate
of Amendment to Certificate of Incorporation regarding name change,
increase in authorized shares, authorization of preferred stock and a
reverse split (incorporated by reference to exhibit 3.1 to the
registrant’s current report on Form 8-K filed on June 11,
2007).
|
|
|
|
5.1
*
|
|
Legal
Opinion and Consent
|
|
|
|
10.1
|
|
Employment
Agreement – Chett B. Paulsen (incorporated by reference to the
registrant’s current report on Form 8-K filed on June 11,
2007).
|
|
|
|
10.2
|
|
Employment
Agreement – Richard B. Paulsen (incorporated by reference to the
registrant’s current report on Form 8-K filed on June 11,
2007).
|
|
|
|
10.3
|
|
Employment
Agreement – Edward B. Paulsen (incorporated by reference to the
registrant’s current report on Form 8-K filed on June 11,
2007).
|
|
|
|
10.4
|
|
Employment
Agreement – Terry Dickson (incorporated by reference to the registrant’s
current report on Form 8-K filed on June 11, 2007).
|
|
|
|
10.5
|
|
2008
Stock Incentive Plan (incorporated by reference to the Definitive Proxy
Statement filed April 29, 2008).
|
|
|
|
23.1
*
|
|
Consent
of Tanner LC
|
|
|
|
|
|
23.2
*
|
|
Consent
of Sichenzia Ross Friedman Ference LLP (contained in Exhibit
5.1)
|
* Filed
herewith.
The
undersigned registrant hereby undertakes to:
(1) File,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement to:
(i) Include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933,
as amended (the “Securities Act”);
(ii) Reflect
in the prospectus any facts or events which, individually or together, represent
a fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of the securities offered would not exceed
that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) under the Securities Act
if, in the aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the “Calculation
of Registration Fee” table in the effective registration statement,
and
(iii) Include
any additional or changed material information on the plan of
distribution.
(2) For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3) File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(4) For
purposes of determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act as part of this registration
statement as of the time it was declared effective.
(5) For
determining any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of those
securities.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Pursuant
to the requirements of the Securities Act of 1933, the registrant certifies that
it has reasonable grounds to believe that it meets all of the requirements for
filing on Form S-1 and has duly caused this registration statement to be signed
on its behalf by the undersigned, in the City of Draper, State of Utah, on
August 6, 2008.
|
aVINCI
MEDIA CORPORATION:
|
|
|
|
|
By:
|
/s/
Chett B. Paulsen
|
|
|
Chett
B. Paulsen
|
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
/s/
Chett B. Paulsen
|
|
President,
Chief Executive Officer, Director |
August
6, 2008
|
Chett
B. Paulsen
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
/s/
Richard B. Paulsen
|
|
Vice
President, Chief Technology Officer, Director
|
August
6, 2008
|
Richard
B. Paulsen
|
|
|
|
|
|
|
|
/s/
Edward B. Paulsen
|
|
Secretary/Treasurer,
Chief Operating Officer, Director |
August
6, 2008
|
Edward
B. Paulsen
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
/s/
Tod M. Turley
|
|
Director
|
August
6, 2008
|
Tod
M. Turley
|
|
|
|
|
|
|
|
/s/
John E. Tyson
|
|
Director
|
August
6, 2008
|
John
E. Tyson
|
|
|
|
|
|
|
|
/s/
Jerrell G. Clay
|
|
Director
|
August
6, 2008
|
Jerrell
G. Clay
|
|
|
|
|
|
|
|
/s/
Stephen P. Griggs
|
|
Director
|
August
6, 2008
|
Stephen
P. Griggs
|
|
|
|
Exhibit
|
|
Description
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger dated December 6, 2007 (incorporated by reference to
exhibit 2.1 to the registrant’s current report on Form 8-K filed on
December 6, 2007).
|
|
|
|
2.2
|
|
Amendment
to Agreement and Plan of Merger dated March 31, 2008 (incorporated by
reference to exhibit 2.1 to the registrant’s current report on Form 8-K
filed on April 4, 2008.
|
|
|
|
3.1
|
|
Articles
of Merger relating to the merger of Merger Sub. with and into Sequoia,
Inc. (incorporated by reference to exhibit 3.1 to the registrant’s current
report on Form 8-K filed on June 11, 2007).
|
|
|
|
3.2
|
|
Certificate
of Amendment to Certificate of Incorporation regarding name change,
increase in authorized shares, authorization of preferred stock and a
reverse split (incorporated by reference to exhibit 3.1 to the
registrant’s current report on Form 8-K filed on June 11,
2007).
|
|
|
|
5.1
*
|
|
Legal
Opinion and Consent
|
|
|
|
10.1
|
|
Employment
Agreement – Chett B. Paulsen (incorporated by reference to the
registrant’s current report on Form 8-K filed on June 11,
2007).
|
|
|
|
10.2
|
|
Employment
Agreement – Richard B. Paulsen (incorporated by reference to the
registrant’s current report on Form 8-K filed on June 11,
2007).
|
|
|
|
10.3
|
|
Employment
Agreement – Edward B. Paulsen (incorporated by reference to the
registrant’s current report on Form 8-K filed on June 11,
2007).
|
|
|
|
10.4
|
|
Employment
Agreement – Terry Dickson (incorporated by reference to the registrant’s
current report on Form 8-K filed on June 11, 2007).
|
|
|
|
10.5
|
|
2008
Stock Incentive Plan (incorporated by reference to the Definitive Proxy
Statement filed April 29, 2008).
|
|
|
|
23.1
*
|
|
Consent
of Tanner LC
|
|
|
|
|
|
23.2
*
|
|
Consent
of Sichenzia Ross Friedman Ference LLP (contained in Exhibit
5.1)
|
II-5