form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
T
|
Quarterly Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
quarterly period ended September 30, 2008
or
*
|
Transition Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
transition period from __________ to __________
Commission
file Number 000-17288
aVINCI
MEDIA CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
75-2193593
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
11781
South Lone Peak Parkway, Suite 270, Draper, UT
|
84020
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (801) 495-5700
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days. Yes T
No *
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer *
|
|
Accelerated
filer *
|
Non-accelerated
filer *
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company T
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes *
No T
The
number of shares of common stock outstanding as of the close of business on
October 31, 2008 was 48,738,545.
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
TABLE
OF CONTENTS
|
Page
|
|
|
PART I.
FINANCIAL INFORMATION
|
Item
1. Financial Statements
|
|
Unaudited
Condensed Consolidated Balance Sheets as of September 30, 2008 and
December 31, 2007
|
3
|
Unaudited
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2008 and 2007
|
4
|
Unaudited
Condensed Consolidated Statement of Stockholders Equity (Deficit) for the
Nine Months Ended September 30, 2008
|
5
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2008 and 2007
|
6
|
Notes
to Condensed Consolidated Financial Statements
|
8
|
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
18
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
30
|
Item
4. Controls and Procedures
|
30
|
|
PART
II. OTHER INFORMATION
|
Item
1. Legal Proceedings
|
31
|
Item
1a. Risk Factors
|
31
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
31
|
Item
3. Defaults Upon Senior Securities
|
31
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
31
|
Item
5. Other Information
|
31
|
Item
6. Exhibits
|
31
|
PART I.
FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,845,593
|
|
|
$
|
859,069
|
|
Accounts
receivable
|
|
|
270,430
|
|
|
|
448,389
|
|
Marketable
securities available-for-sale
|
|
|
211,319
|
|
|
|
—
|
|
Inventory
|
|
|
42,519
|
|
|
|
21,509
|
|
Prepaid
expenses
|
|
|
270,932
|
|
|
|
100,799
|
|
Deferred
costs
|
|
|
189,134
|
|
|
|
294,602
|
|
Deposits
and other current assets
|
|
|
6,923
|
|
|
|
44,201
|
|
Total
current assets
|
|
|
3,836,850
|
|
|
|
1,768,569
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
729,201
|
|
|
|
990,523
|
|
Intangible
assets, net
|
|
|
93,543
|
|
|
|
74,689
|
|
Other
assets
|
|
|
20,408
|
|
|
|
20,408
|
|
Total
assets
|
|
$
|
4,680,002
|
|
|
$
|
2,854,189
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
75,964
|
|
|
$
|
75,118
|
|
Accrued
liabilities
|
|
|
741,551
|
|
|
|
823,772
|
|
Distributions
payable
|
|
|
—
|
|
|
|
308,251
|
|
Current
portion of capital leases
|
|
|
138,355
|
|
|
|
118,288
|
|
Current
portion of deferred rent
|
|
|
46,529
|
|
|
|
38,580
|
|
Notes
payable
|
|
|
—
|
|
|
|
1,000,000
|
|
Deferred
revenue
|
|
|
407,598
|
|
|
|
493,599
|
|
Total
current liabilities
|
|
|
1,409,997
|
|
|
|
2,857,608
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
|
130,094
|
|
|
|
222,611
|
|
Deferred
rent, net of current portion
|
|
|
39,338
|
|
|
|
71,839
|
|
Total
liabilities
|
|
|
1,579,429
|
|
|
|
3,152,058
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
B redeemable convertible preferred units, no par value, 12,000,000 units
authorized;
|
|
|
|
|
|
|
|
|
0
and 8,804,984 units outstanding, respectively (liquidation preferences of
$0 and $6,603,182, respectively)
|
|
|
—
|
|
|
|
6,603,182
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Deficit):
|
|
|
|
|
|
|
|
|
Series
A convertible preferred units, no par value, 3,746,485 units authorized; 0
and 3,533,720 units outstanding, respectively (liquidation preference of
$0 and $474,229, respectively)
|
|
|
—
|
|
|
|
474,229
|
|
|
|
|
|
|
|
|
|
|
Common
units, no par value, 90,000,000 units authorized; 0 and 29,070,777 units
outstanding, respectively
|
|
|
—
|
|
|
|
4,211,737
|
|
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, authorized 250,000,000 shares; issued and
outstanding 48,738,545 and 38,986,114 shares outstanding,
respectively
|
|
|
487,385
|
|
|
|
389,861
|
|
Additional
paid-in capital
|
|
|
22,428,903
|
|
|
|
(389,861
|
)
|
Accumulated
deficit
|
|
|
(19,723,734
|
)
|
|
|
(11,587,017
|
)
|
Accumulated
other comprehensive loss
|
|
|
(91,981
|
)
|
|
|
—
|
|
Total
stockholders’ equity (deficit)
|
|
|
3,100,573
|
|
|
|
(6,901,051
|
)
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$
|
4,680,002
|
|
|
$
|
2,854,189
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$
|
112,652
|
|
|
$
|
78,561
|
|
|
$
|
302,351
|
|
|
$
|
329,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
233,300
|
|
|
|
13,968
|
|
|
|
666,933
|
|
|
|
36,922
|
|
Research
and development
|
|
|
456,992
|
|
|
|
559,345
|
|
|
|
1,447,522
|
|
|
|
1,357,231
|
|
Selling
and marketing
|
|
|
398,854
|
|
|
|
444,291
|
|
|
|
1,365,650
|
|
|
|
958,285
|
|
General
and administrative
|
|
|
1,028,784
|
|
|
|
1,455,106
|
|
|
|
3,497,680
|
|
|
|
2,783,465
|
|
Depreciation
and amortization
|
|
|
58,143
|
|
|
|
76,137
|
|
|
|
172,349
|
|
|
|
160,760
|
|
Total
operating expense
|
|
|
2,176,073
|
|
|
|
2,548,847
|
|
|
|
7,150,134
|
|
|
|
5,296,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(2,063,421
|
)
|
|
|
(2,470,286
|
)
|
|
|
(6,847,783
|
)
|
|
|
(4,967,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
22,771
|
|
|
|
40,065
|
|
|
|
49,304
|
|
|
|
53,966
|
|
Interest
expense
|
|
|
(10,353
|
)
|
|
|
(7,224
|
)
|
|
|
(136,465
|
)
|
|
|
(678,390
|
)
|
Total
other income (expense)
|
|
|
12,418
|
|
|
|
32,841
|
|
|
|
(87,161
|
)
|
|
|
(624,424
|
)
|
Loss
before income taxes
|
|
|
(2,051,003
|
)
|
|
|
(2,437,445
|
)
|
|
|
(6,934,944
|
)
|
|
|
(5,591,447
|
)
|
Income
tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
loss
|
|
|
(2,051,003
|
)
|
|
|
(2,437,445
|
)
|
|
|
(6,934,944
|
)
|
|
|
(5,591,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
dividends and deemed dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
(976,000
|
)
|
|
|
(190,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
on Series B redeemable convertible preferred units
|
|
|
—
|
|
|
|
(133,160
|
)
|
|
|
(225,773
|
)
|
|
|
(175,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stockholders
|
|
$
|
(2,051,003
|
)
|
|
$
|
(2,570,605
|
)
|
|
$
|
(8,136,717
|
)
|
|
$
|
(5,956,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent shares used to calculate loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
48,738,122
|
|
|
|
38,986,114
|
|
|
|
43,114,327
|
|
|
|
38,986,114
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
AND
COMPREHENSIVE LOSS
(UNAUDITED)
|
|
|
|
|
Additional
|
|
|
LLC
Series A
|
|
|
|
|
|
|
|
|
Accumulated
Other
|
|
|
Members’/
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Convertible
|
|
|
LLC
Common
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Preferred
Units
|
|
|
Units
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2008
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
474,229 |
|
|
$ |
4,211,737 |
|
|
$ |
(11,587,017 |
) |
|
$ |
— |
|
|
$ |
(6,901,051 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retroactive
effect of shares issued in reverse merger dated June 6,
2008
|
|
|
38,986,114 |
|
|
|
389,861 |
|
|
|
(389,861 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Series A preferred units to common units
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(474,229 |
) |
|
|
474,229 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Series B preferred units to common units
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,603,182 |
|
|
|
— |
|
|
|
— |
|
|
|
6,603,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
common units issued upon conversion of Series B preferred
units
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
976,000 |
|
|
|
(976,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
units issued upon exercise of warrants
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
460,625 |
|
|
|
— |
|
|
|
— |
|
|
|
460,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
equity-based compensation
|
|
|
— |
|
|
|
— |
|
|
|
213,328 |
|
|
|
— |
|
|
|
125,101 |
|
|
|
— |
|
|
|
— |
|
|
|
338,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee
equity based instruments
|
|
|
— |
|
|
|
— |
|
|
|
37,642 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
37,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
on Series B redeemable convertible preferred units
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(225,773 |
) |
|
|
— |
|
|
|
(225,773 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of common units to common stock in connection with the reverse
merger
|
|
|
— |
|
|
|
— |
|
|
|
12,850,874 |
|
|
|
— |
|
|
|
(12,850,874 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
shares of Registrant at time of reverse merger dated June 6,
2008
|
|
|
9,742,633 |
|
|
|
97,426 |
|
|
|
9,712,968 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,810,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued upon exercise of options
|
|
|
9,798 |
|
|
|
98 |
|
|
|
3,952 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on marketable securities available for sale
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
(91,981 |
) |
|
|
(91,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,934,944 |
) |
|
|
— |
|
|
|
(6,934,944 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2008
|
|
|
48,738,545 |
|
|
$ |
487,385 |
|
|
$ |
22,428,903 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(19,723,734 |
) |
|
$ |
(91,981 |
) |
|
$ |
3,100,573 |
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(6,934,944
|
)
|
|
$
|
(5,591,447
|
)
|
Adjustments
to reconcile net loss to net
|
|
|
|
|
|
|
|
|
cash
used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
333,176
|
|
|
|
277,839
|
|
Accretion
of debt discount
|
|
|
—
|
|
|
|
338,594
|
|
Equity-based
compensation
|
|
|
338,429
|
|
|
|
434,579
|
|
Non-employee
equity-based instruments
|
|
|
37,642
|
|
|
|
—
|
|
(Gain)
loss on disposal of equipment
|
|
|
(38
|
)
|
|
|
1,063
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
177,959
|
|
|
|
(83,522
|
)
|
Unbilled
accounts receivable
|
|
|
—
|
|
|
|
418,490
|
|
Inventory
|
|
|
(21,010
|
)
|
|
|
(18,081
|
)
|
Prepaid
expenses and other assets
|
|
|
(117,572
|
)
|
|
|
(7,629
|
)
|
Deferred
costs
|
|
|
105,468
|
|
|
|
—
|
|
Deposits
and other current assets
|
|
|
37,278
|
|
|
|
140,818
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(30,053
|
)
|
|
|
(84,986
|
)
|
Accrued
liabilities
|
|
|
(187,851
|
)
|
|
|
98,615
|
|
Deferred
rent
|
|
|
(24,552
|
)
|
|
|
77,634
|
|
Deferred
revenue
|
|
|
(86,001
|
)
|
|
|
128,096
|
|
Net
cash used in operating activities
|
|
|
(6,372,069
|
)
|
|
|
(3,869,937
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(44,887
|
)
|
|
|
(472,971
|
)
|
Purchase
of intangible assets
|
|
|
(26,354
|
)
|
|
|
(14,308
|
)
|
Net
cash used by investing activities
|
|
|
(71,241
|
)
|
|
|
(487,279
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from convertible debentures
|
|
|
—
|
|
|
|
1,535,000
|
|
Payment
of loan costs
|
|
|
—
|
|
|
|
(117,080
|
)
|
Proceeds
from related party notes payable
|
|
|
—
|
|
|
|
20,000
|
|
Payment
on members notes
|
|
|
—
|
|
|
|
(285,783
|
)
|
Proceeds
from issuance of Series B preferred units
|
|
|
—
|
|
|
|
4,675,000
|
|
Net
cash received in reverse merger
|
|
|
7,091,062
|
|
|
|
—
|
|
Proceeds
from notes payable
|
|
|
1,500,000
|
|
|
|
—
|
|
Proceeds
from exercise of warrants
|
|
|
460,625
|
|
|
|
—
|
|
Proceeds
from exercise of stock options
|
|
|
4,050
|
|
|
|
—
|
|
Payment
of accrued dividends
|
|
|
(534,024
|
)
|
|
|
—
|
|
Principal
payments under capital lease obligations
|
|
|
(91,879
|
)
|
|
|
(10,732
|
)
|
Net
cash provided by financing activities
|
|
|
8,429,834
|
|
|
|
5,816,405
|
|
Net
increase in cash and cash equivalents
|
|
|
1,986,524
|
|
|
|
1,459,189
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
859,069
|
|
|
|
168,692
|
|
Cash
and cash equivalents at end of period
|
|
$
|
2,845,593
|
|
|
$
|
1,627,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
32,630
|
|
|
$
|
19,586
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(UNAUDITED)
Supplemental
schedule of non-cash investing and financing activities:
During
the nine months ended September 30, 2008:
·
|
The
Company issued 1,525,000 common units to Amerivon Holdings, Inc. to induce
the conversion of preferred units to common units immediately prior to the
closing of the transaction between Secure Alliance Holdings Corporation
(SAH) and Sequoia Media Group (Sequoia). These inducement units were
recorded as a preferential dividend, thus increasing the accumulated
deficit and increasing the loss applicable to common stockholders by
$976,000.
|
·
|
The
Company acquired $19,429 of office equipment through capital lease
agreements.
|
·
|
The
Company incurred an unrealized loss on marketable securities
available-for-sale of $91,981.
|
·
|
The
Company converted $474,229 of Series A preferred units to common
units.
|
·
|
The
Company converted $6,603,182 of Series B preferred units to common
units.
|
·
|
The
Company converted $12,850,874 of common units to common stock in
connection with the reverse merger.
|
·
|
The
Company acquired the following balance sheet items as a result of the
reverse merger transaction:
|
o
|
Marketable
securities available-for-sale -
$303,300
|
o
|
Prepaid
expenses and other assets - $52,561
|
o
|
Note
receivable - $2,500,000 (eliminated against note payable owed to
SAH)
|
o
|
Interest
receivable - $103,835 (eliminated against interest payable to
SAH)
|
o
|
Accounts
payable - $30,899
|
o
|
Accrued
expenses - $209,465
|
During
the nine months ended September 30, 2007:
·
|
The
Company issued 3,566,667 Series B redeemable convertible preferred units
in exchange for a subscription receivable of
$2,675,000.
|
·
|
The
Company converted notes payable of $1,558,178 into 2,318,318 Series B
redeemable convertible preferred
units.
|
·
|
The
Company converted $2,602,668 of debentures payable and related accrued
interest into 7,523,355 common
units.
|
·
|
The
Company recorded debt discount associated with convertible debentures
payable of $8,129 as well as beneficial conversion feature of $171,875
both of which were converted to Series B redeemable convertible preferred
units.
|
·
|
The
Company accrued distributions payable on Series B redeemable preferred
units of $175,091.
|
·
|
The
Company acquired $193,048 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.
|
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Description
of Organization and Summary of Significant Accounting Policies
Organization
and Nature of Operations
aVinci
Media Corporation (the Company), is the result of a merger transaction between
Sequoia Media Group, LC (Sequoia), a Utah limited liability company, and Secure
Alliance Holdings Corporation (SAH), a publicly held company. The
Company is a Delaware corporation that 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.
Sequoia
was originally formed as a Utah limited liability company on March 15,
2003. On June 6, 2008, as discussed below in Note 2, Sequoia
completed a merger transaction with SAH, a publicly held
company. Because the owners of Sequoia obtained approximately 80% of
the common stock of SAH through the merger transaction, the merger has been
accounted for as a reverse merger. The historical financial
statements reflect the operations of Sequoia through the date of the reverse
merger and those of the combined entity from the date of the reverse merger
through the end of the period. In connection with the reverse merger
transaction, SAH changed its name to aVinci Media Corporation.
Basis
of Presentation
The
accompanying condensed consolidated financial statements are presented in
accordance with U.S. generally accepted accounting principles (US
GAAP).
Unaudited
Information
In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements as of September 30, 2008 and December 31, 2007 and for the
three and nine months ended September 30, 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 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 the Company’s registration statement filed on November 3, 2008, are adequate
to make the information presented not misleading. Results for the three and
nine-month periods ended September 30, 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. 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 47%, 20%, 15%, and 11% of total revenue during the nine
months ended September 30, 2008. One customer accounted for almost
all of the revenue for the nine months ended September 30, 2007. As
of September 30, 2008, two customers accounted for 61% and 34% of accounts
receivable.
Net
Loss per Common Share
Basic
earnings (loss) per share (EPS) is calculated by dividing income (loss)
available to common stockholders by the weighted-average number of common shares
outstanding during the period. The weighted average shares used in
the computation of EPS for the three and nine month periods ended September 30,
2008 and 2007 include the shares issued in connection with the reverse merger on
June 6, 2008 (see Note 2). In accordance with US GAAP, these shares
are retroactively reflected as having been issued at the beginning of each
reporting period.
Diluted
EPS is similar to Basic EPS except that the weighted-average number of common
shares outstanding is increased using the treasury stock method to include the
number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued. Such potentially dilutive
common shares include stock options and warrants. During 2007, potentially
dilutive common units also included convertible preferred units, redeemable
convertible preferred units and convertible notes and debentures. Shares having
an antidilutive effect on periods presented are not included in the computation
of dilutive EPS.
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
average number of shares of all stock options and warrants granted, all
convertible preferred units, redeemable convertible preferred units and
convertible debentures have been omitted from the computation of diluted net
loss per common share because their inclusion would have been anti-dilutive for
the three and nine-month periods ended September 30, 2008 and 2007.
As of
September 30, 2008 and 2007, the Company had 8,338,913 and 15,959,795
potentially dilutive shares of common stock, respectively, not included in the
computation of diluted net loss per common share because it would have decreased
the net loss per common share. These options and warrants could be dilutive in
the future.
Use
of Estimates
The
preparation of financial statements in conformity with US GAAP 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
September 30, 2008 and December 31, 2007, there were no allowances for doubtful
accounts required against the Company’s receivables.
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 September 30, 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
September 30, 2008 and December 31, 2007, management determined the
carrying amounts of the Company’s property and equipment were not
impaired.
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Revenue
Recognition and Deferred Revenue
BigPlanet
Contract
Prior to
March 31, 2007, the Company generated the majority of its revenue from one
customer, BigPlanet, a division of NuSkin International, Inc. The contract with
BigPlanet 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.
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.
Integrated Kiosk Revenue
Contracts
Under the
kiosk revenue model, the Company integrates its technology with a kiosk provided
by a third party. The kiosk is placed in retail stores where the end
consumers utilize the kiosk to load their digital images and make a variety of
products. Under this revenue model, the Company enters into
agreements with the retail stores. The agreements provide for the
grant of a software license, installation of the software on the customer’s
kiosks, training, PCS, and order fulfillment. As compensation, the
agreements provide for the Company to receive payment on a per unit basis for
each order fulfilled. Because these contracts involve a significant software
component, the Company accounts for its revenue generated under these contacts
in accordance with the provisions of SOP 97-2 and SOP 98-9.
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 has
occurred.
Because
of the Company’s limited sales history, it does not have VSOE for the different
components that are included in the integrated kiosk revenue
contracts. Therefore, all revenue associated with the grant of the
license, installation, training, PCS, and product fulfillment is deferred until
all elements are delivered except for PCS, at which time deferred revenue is
recognized on a straight-line basis over the remaining term of the
contract.
Retail Kit
Revenue
The
Company has developed a retail kit product that retailers and vendors can stock
on their retail store shelves. The retail kit consists of a small box
containing a CD of a simplified version of the Company’s software and a product
code. The end consumer pays for the product at the store and can then
load the CD onto their personal computer and use the software and their personal
digital images to create movies, photo books, and streaming media
files. Once complete, the software assists the customer in uploading
the file for remote fulfillment. The Company may provide the
fulfillment services or such services may be provided by another fulfillment
provider. There is no additional fee for the fulfillment. The sale of
retail kits does not include PCS. In accordance with SOP 97-2, revenue from the
sale of the retail kits to the retail store is deferred until the fulfillment
services have been provided and the completed product has been shipped to the
consumer or until the Company’s obligation to provide fulfillment has expired
due to the passage of time.
Revenue from Third Party
Internet Sites
The
Company has agreed to provide the simplified version of its software to certain
third party Internet sites that would allow a customer to download the software
from the third party Internet site. 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 accordance with SOP 97-2, if the Company
provides the fulfillment services, revenue is deferred until the order has been
fulfilled and shipped to the consumer. If the fulfillment services
are provided by another supplier, revenue is recognized at the time the credit
card transaction is completed. There is no additional fee for the
fulfillment. Sales from third party Internet sites do not include
PCS.
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Revenue
from the Company’s Internet
Site
As a
companion to the retail kit product, the Company launched a web site that will
allow consumers who upload orders using the retail kit software to order
additional copies and additional products on the Company’s web
site. Revenue from such additional products is recognized upon
shipment of the product.
Other Revenue
Contracts
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
each separate component of the contract. During the quarter ended March 31,
2008, all elements of the contract were delivered except for PCS. 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.
Deferred
Revenue
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.
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 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
September 30, 2008 and 2007, was to record equity based compensation of
$176,359, and $410,150, respectively; and for the nine months ended September
30, 2008 and 2007 was to record equity based compensation of $338,429, and
$434,579, 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%
- 198%
|
Risk-free
interest rate
|
|
|
|
3.16%
- 7.50%
|
Expected
life of options
|
|
|
|
2.5
years – 6.5 years
|
Another
critical input in the Black-Scholes option pricing model is the current value of
the common stock underlying the stock options. We use the current
trading price as quoted on the OTC Pink Sheets to determine the value of our
common stock. Prior to becoming a public company, aVinci Media, LC
used cash sales of common and preferred units, conversions of debt instruments
into common units, and the exchange ratio that was estimated to be used in the
reverse merger transaction to determine the value of its common
units.
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Income
Taxes
For the
three and nine months ended September 30, 2008 and 2007, no provisions for
income taxes were required. We accrue income taxes under the provisions of SFAS
No. 109, Accounting for Income
Taxes. Prior to June 6, 2008, aVinci Media LC was a flow-through entity
for income tax purposes and did not incur income tax liabilities.
At
September 30, 2008, management has recognized a valuation allowance for the net
deferred tax assets related to temporary differences and current operating
losses. The valuation allowance was recorded in accordance with the provisions
of SFAS No. 109, Accounting
for Income Taxes, which requires that a valuation allowance be
established when there is significant uncertainty as the realizability of the
deferred tax assets. Based on a number of factors, the currently available,
objective evidence indicates that it is more likely than not that the net
deferred tax assets will not be realized.
In June
2008, following the merger transaction described in Note 2 below, we paid
$113,028 in federal income taxes for our September 30, 2007 federal income tax
return filed in the name of Secure Alliance Holdings Corporation (SAH). Also in
June 2008, we paid $85,434 towards estimated Texas Franchise Tax in the name of
SAH. Both of these items were accrued by SAH at the time of the merger
transaction. In August 2008, we made a final payment of $6,948 for SAH’s
September 30, 2007 federal income tax return. This income tax paid on behalf of
SAH was included in the accounting for the reverse merger.
Recent
Accounting Pronouncements
In
March 2008, the Financial Accounting Standards Board (FASB) issued SFAS
No. 161 (SFAS 161), “Disclosures about Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133.” SFAS 161 amends and
expands the disclosure requirements of Statement 133 with the intent to provide
users of financial statements with an enhanced understanding of how and why an
entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations, and how derivative instruments and related hedged items affect
an entity’s financial position, financial performance, and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company believes that the future requirements of SFAS 161 will
not have a material effect on its consolidated financial
statements.
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. The adoption of the accounting pronouncement had no effect on
the Company’s consolidated financial statements.
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 157-2 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 157-2. The adoption of SFAS 157 is not expected to have a
material impact on the Company’s financial statements.
Reclassifications
Certain
amounts in the 2007 financial statements have been reclassified to confirm to
the 2008 presentation.
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. Agreement
and Plan of Merger
Effective
December 6, 2007, SAH, a publicly held company, and Sequoia executed an
Agreement and Plan of Merger, whereby SAH agreed to acquire 100% of the issued
and outstanding equity units of Sequoia. Each issued and outstanding membership
interest of Sequoia would 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.
On June
6, 2008, the SAH and Sequoia closed the merger transaction described above. In
connection with the merger transaction, the unit holders of Sequoia exchanged
all of their units for shares of common stock of SAH. The number of shares of
SAH stock received in the merger represents approximately 80% of the total
outstanding shares of SAH. Because the unit holders of Sequoia obtained a
majority ownership in SAH through the merger, the transaction has been accounted
for as a reverse merger. Accordingly, the historical financial statements
reflect the operations of Sequoia through June 6, 2008 and reflect the
consolidated operations of SAH and Sequoia from June 6, 2008 through June 30,
2008. As a result of the merger, Sequoia received approximately $7.1
million in cash to fund operations in addition to the $2.5 million previously
loaned to Sequoia by SAH.
In
connection with the Agreement and Plan of Merger, Sequoia 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 provided for SAH
to loan a total of up to $2.5 million to Sequoia 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, Sequoia received $1,000,000 and
$500,000, respectively, under the Secured Note (see Note 5). In connection with
the merger closing, the $2.5 million notes payable were eliminated along with
the related interest payable of approximately $104,000.
3. Marketable
Securities Available-for-Sale
The
Company owns 2,022,000 shares of the common stock of Cashbox plc as a result of
the merger transaction (see Note 2). The Company determined the market value of
the shares and pursuant to SFAS No. 115, Accounting for Investments in Equity
and Debt Securities, and classified these shares as available for sale.
Pursuant to the SFAS No. 115 the unrealized change in fair value was excluded
from earnings and recorded net of tax as other comprehensive loss.
As of
September 30, 2008, the common stock of Cashbox plc was recorded at a fair value
of $211,319. Unrealized losses on these shares of common stock were $91,981,
which were included in stockholders' equity as of September 30,
2008.
4. Accrued
Liabilities
Accrued
liabilities consisted of the following:
|
|
September
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
Bonuses
payable
|
|
$ |
416,520 |
|
$ |
554,000 |
Payroll
and payroll taxes payable
|
|
|
257,125 |
|
|
229,245 |
Other
|
|
|
67,906 |
|
|
40,527 |
|
|
|
|
|
|
|
|
Totals
|
|
$ |
741,551 |
|
$ |
823,772 |
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. Notes
Payable
In
connection with the Agreement and Plan of Merger (see Note 2), Sequoia entered
into a Loan and Security Agreement and Secured Note with SAH on December 6, 2007
in order to ensure adequate funds through the merger closing date. The agreement
provided for SAH to loan a total of up to $2.5 million to Sequoia 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 Sequoia, 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 6, 2008, the balance of notes
payable of $2.5 million and the related accrued interest of approximately
$104,000 were eliminated.
6. Related
Party Transactions
Consulting
Agreement
During
the three and nine months ended September 30, 2008, pursuant to an agreement
executed during the year ended December 31, 2007, the Company recorded expense
of $0 and $725,000, respectively, for consulting services from Amerivon
Holdings, Inc. (Amerivon), the parent company of a significant shareholder.
During the three and nine months ended September 30, 2008, the Company paid
Amerivon $695,000 and $745,000, respectively, for this agreement.
On July
1, 2008 we entered into a new sales and consulting agreement with Amerivon that
terminated the agreement referenced above that was executed during the year
ended December 31, 2007. During the three and nine months ended September 30,
2008, the Company recorded expense of $683 for consulting services under this
new agreement. During the three and nine months ended September 30, 2008, the
Company paid Amerivon $485 for this agreement.
Distributions
The
former Series B redeemable convertible preferred unit holders were entitled to a
cumulative annual distribution of $.06 per unit. During the nine months ended
September 30, 2008 and 2007, the Company accrued $225,773 and $175,091,
respectively, for distributions due on the Series B redeemable convertible
preferred units held by Amerivon. The Company paid Amerivon $447,783 for the
accrued distributions in June 2008.
Warrant
Exercise
On
January 30, 2008, Amerivon exercised 1,504,680 warrants to purchase common units
of Sequoia for cash received of $414,625; and on June 5, 2008, Amerivon
exercised 87,096 warrants to purchase common units of Sequoia for a total price
of $46,000. These exercises, along with Amerivon’s conversion of convertible
preferred units, increased Amerivon’s ownership percentage to 45.4% of all
common units prior to the merger on June 6, 2008.
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, all of which was
accreted to interest expense as of June 30, 2007.
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 intangible 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.
7. Common
and Preferred Units
Previous
to the merger (see Note 2), as of December 31, 2007, the Company had authorized
90,000,000 common units and 20,000,000 preferred units, all with no par value.
Previous to the merger, the Company had designated 3,746,485 preferred units as
Series A and 12,000,000 preferred units as Series B.
Series
A Convertible Preferred Units
During
2008, there were no Series A preferred units issued. As of 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
2008, there were no Series B preferred units issued. As of 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.
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Common
Units
As of
June 5, 2008 and December 31, 2007, there were 44,762,086 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 Amerivon Investments LLC, on
June 5, 2008, immediately preceding 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 Amerivon
Investments LLC.
8. Options
and Warrants
Common
Share Warrants
The
following tables summarize information about common share warrants as of
September 30, 2008 and December 31, 2007:
|
|
|
|
|
|
As
of September 30, 2008 |
|
|
As
of September 30, 2008 |
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Exercise
Price
|
|
|
Number
of Warrants Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Weighted
Average Exercise Price
|
|
|
Number
of
Warrants
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
$ |
0.53 |
|
|
|
949,350 |
|
|
|
0.8 |
|
|
$ |
0.53 |
|
|
|
949,350 |
|
|
|
0.53 |
|
|
|
1.16 |
|
|
|
300,000 |
|
|
|
5.8 |
|
|
|
1.16 |
|
|
|
75,000 |
|
|
|
1.16 |
|
|
$ |
.53
– 1.16 |
|
|
|
1,249,350 |
|
|
|
2.0 |
|
|
$ |
0.68 |
|
|
|
1,024,350 |
|
|
|
0.57 |
|
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
As
of December 31, 2007 |
|
|
|
|
Outstanding
and Exercisable
|
|
Exercise
Price
|
|
|
Number
of Warrants Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
Weighted
Average Exercise Price
|
|
|
$ |
0.28 |
|
|
|
1,504,680 |
|
|
|
0.1 |
|
|
$ |
0.28 |
|
|
|
0.53 |
|
|
|
1,036,446 |
|
|
|
1.5 |
|
|
|
0.53 |
|
|
$ |
.28
-.53 |
|
|
|
2,541,126 |
|
|
|
0.7 |
|
|
$ |
0.38 |
|
During
the nine months ended September 30, 2008, 87,096 warrants with an exercise price
of $0.53 were exercised for a total of $46,000. In January 2008, the Company
received proceeds of $414,625 upon the exercise of 1,504,680 warrants at an
exercise price of $0.28. For the nine months ended September 30, 2008, a total
of 1,591,776 warrants were exercised. All common unit warrants outstanding as of
the date of the merger (see Note 2) were converted into warrants to purchase the
common stock of SAH.
Common
Share Options
The
following tables summarize information about common share options:
|
|
September 30, 2008
|
|
|
|
Number
of shares
|
|
Weighted-
Average Exercise Price
|
|
Outstanding
at beginning of period
|
|
|
6,605,161 |
|
|
$ |
0.64 |
|
Granted
|
|
|
617,559 |
|
|
|
0.93 |
|
Exercised
|
|
|
(9,798 |
) |
|
|
0.41 |
|
Cancelled
|
|
|
(123,459 |
) |
|
|
0.70 |
|
Outstanding
at end of period
|
|
|
7,089,563 |
|
|
|
0.67 |
|
Exercisable
at period end
|
|
|
3,050,637 |
|
|
|
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options
granted during the period
|
|
$ |
0.93 |
|
|
|
|
|
|
|
|
As
of September 30, 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)
|
|
|
$ |
0.18 |
|
|
|
1,306,444 |
|
|
|
3.8 |
|
|
$ |
0.18 |
|
|
|
653,222 |
|
|
$ |
0.18 |
|
|
|
3.3 |
|
|
|
0.28 |
|
|
|
444,191 |
|
|
|
2.6 |
|
|
|
0.28 |
|
|
|
379,413 |
|
|
|
0.28 |
|
|
|
2.6 |
|
|
|
0.41 |
|
|
|
235,160 |
|
|
|
2.9 |
|
|
|
0.41 |
|
|
|
177,459 |
|
|
|
0.41 |
|
|
|
2.9 |
|
|
|
0.71 |
|
|
|
3,536,109 |
|
|
|
4.4 |
|
|
|
0.71 |
|
|
|
1,444,710 |
|
|
|
0.71 |
|
|
|
4.3 |
|
|
|
0.93 |
|
|
|
617,659 |
|
|
|
9.9 |
|
|
|
0.93 |
|
|
|
— |
|
|
|
0.93 |
|
|
|
— |
|
|
|
1.24 |
|
|
|
950,000 |
|
|
|
2.5 |
|
|
|
1.24 |
|
|
|
395,833 |
|
|
|
1.24 |
|
|
|
2.5 |
|
|
$ |
.18
- 1.24 |
|
|
|
7,089,563 |
|
|
|
4.4 |
|
|
$ |
0.67 |
|
|
|
3,050,637 |
|
|
$ |
0.60 |
|
|
|
3.5 |
|
As of
September 30, 2008, options outstanding had an aggregate intrinsic value of
$2,649,736.
As of
September 30, 2008, there was approximately $1,363,137 of total unrecognized
equity-based compensation cost related to option grants that will be recognized
over a weighted average period of 1.93 years. All common unit options
outstanding as of the date of the merger (see Note 2) were converted into
options to purchase the common stock of SAH.
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9. 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.
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
|
|
$ |
79,200 |
|
2009
|
|
|
309,100 |
|
2010
|
|
|
139,400 |
|
2011
|
|
|
5,400 |
|
2012
|
|
|
3,600 |
|
|
|
|
|
|
Total
|
|
$ |
536,700 |
|
Rental
expense under operating leases for the nine months ended September 30, 2008 and
2007 totaled $157,481 and $279,804, respectively.
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. This amount is due November 15, 2008.
Warranty
Obligations
The
Company provides a 90-day warranty on certain manufactured products. As of
September 30, 2008 and December 31, 2007, these obligations were not
significant. The Company does not expect these obligations to become significant
in the future and no related liability has been accrued as of September 30, 2008
and December 31, 2007.
10. Fair
Value
SFAS No.
157 establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. SFAS No. 157 describes three levels of inputs that aVinci
uses to measure fair value:
·
|
Level
1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the
measurement date.
|
·
|
Level
2: Level 1 inputs for assets or liabilities that are not actively traded.
Also consists of an observable market price for a similar asset or
liability. This includes the use of “matrix pricing” used to value debt
securities absent the exclusive use of quoted
prices.
|
·
|
Level
3: Consists of unobservable inputs that are used to measure fair value
when observable market inputs are not available. This could include the
use of internally developed models, financial forecasting,
etc.
|
Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability between market participants at the balance sheet date. When
possible, the Company looks to active and observable markets to price identical
assets or liabilities. When identical assets and liabilities are not traded in
active markets, the Company looks to observable market data for similar assets
and liabilities. However, when certain assets and liabilities are not traded in
observable markets aVinci must use other valuation methods to develop a fair
value.
The
following table presents financial assets and liabilities measured on a
recurring basis:
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
Description
|
|
Balance
at September 30, 2008
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Available-for-sale
securities
|
|
$ |
211,319 |
|
|
$ |
211,319 |
|
|
|
— |
|
|
|
— |
|
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
Overview
Through
our subsidiary, aVinci Media, LC, we 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. We make software technology that it packages in various forms
available to mass retailers, specialty retailers, Internet portals and web sites
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. Under our
business model, our customers are retailers and other vendors. We
enable our customers to sell our products to the end consumer who remain
customers of the vendor. Only a small percentage of our business will
be generated from the ultimate consumer. Through 2007, aVinci Media,
LC generated revenues through the sales of DVD products created using its
technology. During 2008, aVinci Media, LC intends to deploy its technology to
create photo books and posters.
We will
continue to utilize the current revenue model of entering into agreements and
receiving a fee for each product made using our technology. Our
revenue model generally includes a per product fee. With all product
deployments, except with respect to our retail kit product, we receive a fee
from our retailer customer each time an end customer makes a product utilizing
our technology. From the fees received, we pay the fees associated
with licensed media and technology. If we are performing product fulfillment, we
also pay the costs of goods associated with the production of the product. If
our customer utilizes in-store fulfillment, its end consumer pays the cost of
goods associated with production.
aVinci
Media, LC signed its first agreement in 2004 under which it supplied its
software technology to BigPlanet, a company that markets, sells, and fulfilled
personal DVD products for its customers. Through 2006 all of aVinci’s revenues
were generated through BigPlanet. Under the terms of this agreement, BigPlanet
was required to make minimum annual guaranteed payments to aVinci in the amount
of $1 million to be paid in 12 equal monthly installments. The BigPlanet
agreement included software development, software license, post-contract support
and training. As a result of the agreement terms, aVinci Media, LC determined to
use the percentage-of-completion method of accounting to record the revenue for
the entire contract. aVinci Media, LC utilized the ratio of total actual costs
incurred to total estimated costs incurred related to BigPlanet to determine the
proportional amount of revenue to be recognized at each reporting
date. The BigPlanet agreement expired on its terms at the end of
2007. During the last months of the agreement term, BigPlanet
reassessed and repositioned its photo offering and determined it would not
actively pursue photo archiving which generated the sale of DVD movies as an
ancillary product offering using the our technology. Accordingly the
agreement was not renewed based upon BigPlanet’s business
strategy. Revenues from BigPlanet now generate less than $2,000 per
month.
During
2006, aVinci Media, LC signed an additional agreement to provide its technology
in Meijer stores. The technology began being deployed in Meijer stores in April
2008 and has begun generating revenues in each store where the technology has
been deployed. Full deployment in all 180 Meijer stores occurred in May
2008.
In 2007,
aVinci Media, LC signed an agreement with Fujicolor to deploy its technology on
Fujicolor kiosks located in domestic Wal-Mart stores. aVinci Media, LC has begun
generating limited revenues through Wal-Mart and anticipates generating
additional revenues through its Wal-Mart deployment during 2008.
Future
Model
We plan
to continue with a strategy of focusing on mass retailers to offer our products
on kiosks, online and through software take-home kits. We believe we
can capitalize on consumers trending away from traditional print output for
images by offering DVD photo archiving, DVD photo movies, photobook and poster
print products.
On
October 23, 2008, we announced that we will begin offering our aVinci® Studio
Photo DVD kits in approximately 6,300 Walgreens stores across the U.S. The
Walgreens product launch is scheduled for mid-November 2008, in time for the
holiday gifting season. The kits, which retail for under $25, include
a finished professional quality DVD production that is mailed directly to the
end customer. A new feature to aVinci’s software allows customers to
preview and order matching photo books and/or posters with
“one-click.”
Although
we currently manufacture DVDs for certain customers in our Draper, Utah facility
and use services of local third-party vendors to produce print DVD covers and
inserts and to assemble and ship final products (e.g., through a services
agreement, we began using Qualex Inc. to manufacture DVD and print product
orders for certain customers), we hope to begin offering our products though an
in-store DVD burning model.
Negotiations
and testing are ongoing with several large retailers to provide our product by
the end of 2008 through an in-store DVD burning model in addition to its current
deployment platforms of kiosk, online and retail software kit. We can
provide no assurances that our current negotiations will result in any further
agreements.
On
October 2, 2008, we announced an agreement with Preclick to distribute our photo
movie software along with Preclick's Walmart Digital Photo Manager software on
millions of photo CD discs distributed by Walmart each year. Preclick
is the default photo manager software distributed with all CD lab orders
fulfilled by Walmart Photo Centers. Beginning in November 2008, aVinci Studio
software will come preinstalled on all CDs distributed by Walmart with the
Preclick Digital Photo Manager.
We
showcase our products on aVinciStudio.com. We do not plan to actively
promote sales via this website as we want end users to purchase products through
our customers.
Basis of
Presentation
Net Revenues.
We currently generate revenues from our customers as they use our
technology to create DVD products and from providing software through retail and
online outlets that allow end consumers access to the technology to generate
product orders which we produce and ship. Customers then pay a fee on orders
produced. Our ongoing revenue agreements are generally multiple element
contracts that may include software licenses, installation and set-up, training
and post contract customer support (PCS). For some of the agreements, we produce
DVDs for the end customer. For other agreements, we provide blank DVD materials
and the customer produces DVDs for the end customer. For other contracts, we do
not provide any materials and our customer fulfills the orders for the end
consumer. Vendor specific objective evidence of fair value (VSOE) does not exist
for any of the elements of these contracts. Therefore, revenue under the
majority of these contracts is deferred until all elements of the contract have
been delivered except for PCS. At that time, the revenue is recognized over the
remaining term of the contract on a straight-line basis. Beginning in 2008, we
will allow customers to place orders via our website and pay using credit cards.
Revenues for orders placed online will be recognized upon shipment of the
product.
In the
past, we also generated revenue from a licensing agreement with
BigPlanet. Under the BigPlanet Agreement, a minimum guaranteed
royalty of $1 million per year was required. The BigPlanet agreement
expired on its terms at the end of 2007. During the last months of
the agreement term, BigPlanet reassessed and repositioned its photo offering and
determined it would not actively pursue photo archiving which generated the sale
of DVD movies as an ancillary product offering.
As we
expand our product offerings through additional customers, we believe our
business and revenues will be subject to seasonal fluctuations prevalent in the
photo industry. A substantial portion of our revenues (estimated at between
20-40%) will likely occur during the holiday season in the fourth quarter of the
calendar year. we expect to experience lower net revenues during the first,
second and third quarters than we experiences in the fourth quarter. This trend
follows the typical photo and retail industry patterns.
We have
begun tracking key metrics to understand and project revenues and costs in the
future, which include the following:
Average Order
Size. Average order size includes the number of products per order and
the net revenues for a given period of time divided by the total number of
customer orders recorded during that same period. As we expand our product
offerings, we expect to increase the average order size in terms of products
ordered and revenue generated per order.
Total Number of
Orders. For each customer, we monitor the total number of orders for a
given period, which provides an indicator of revenue trends for such customer.
Orders are typically processed and shipped within three business days after a
customer order is received.
We
believe the analysis of these metrics provides us with important information on
our overall revenue trends and operating results. Fluctuations in these metrics
are not unusual and no single factor is determinative of its net revenues and
operating results.
Cost of Revenues.
Our cost of revenues consist of direct materials including DVDs, DVD
cases, picture sheet inserts, third-party printing, assembly and packaging
costs, payroll and related expenses for direct labor, shipping charges,
packaging supplies, distribution and fulfillment activities, rent for production
facilities and depreciation of production equipment. Cost of revenues also
includes payroll and related expenses for personnel engaged in customer service.
In addition, cost of revenues includes any third-party software or patents
licensed, as well as the amortization of capitalized website development
costs.
Operating
Expenses. Operating expenses consist of sales and marketing, research and
development and general and administrative expenses. We anticipate that each of
the following categories of operating expenses will increase in absolute dollar
amounts.
Research
and development expense consists of personnel and related costs for employees
and contractors engaged in the development and ongoing maintenance of our
deployment of its products or various delivery platforms including online, web
and shrinkwrap deployments. Research and development expense also includes
co-location and bandwidth costs.
Sales and
marketing expense consists of costs incurred for marketing programs and
personnel and related expenses for our customer acquisition, product marketing,
business development and public relations activities.
General
and administrative expense includes general corporate costs, including rent for
the corporate offices, insurance, depreciation on information technology
equipment and legal and accounting fees. In addition, general and administrative
expense includes personnel expenses of employees involved in executive, finance,
accounting, human resources, information technology and legal roles. Third-party
payment processor and credit card fees will also be included in general and
administrative expense in 2008. We also anticipate both an additional
one-time cost and a continuing cost associated with public reporting
requirements and compliance with the Sarbanes-Oxley Act of 2002, as well as
additional costs such as investor relations and higher insurance
premiums.
Interest
Expense. Interest expense consists of interest costs recognized under
capital lease obligations and for borrowed money.
Income
Taxes. Prior to the Merger, aVinci Media, LC had been a limited liability
company and not subject to entity taxation. Going forward, aVinci Media, LC
anticipates making provision for income taxes depending on the statutory rate in
the countries where it sells its products. Historically, aVinci Media, LC has
only been subject to taxation in the United States. If aVinci Media, LC
continues to sell its products to customers located within the United States,
aVinci Media, LC anticipates that its long-term future effective tax rate will
be between 38% and 45%, without taking into account the use of any of the net
operating loss carry forwards. However, we anticipate that in the future we may
further expand our sales of products to customers located outside of the United
States, in which case it would become subject to taxation based on the foreign
statutory rates in the countries where these sales took place and our effective
tax rate could fluctuate accordingly.
Critical Accounting Policies
and Estimates
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.
Revenue
Recognition and Deferred Revenue.
BigPlanet
Contract: Prior to March 31, 2007, the Company generated the
majority of its revenue from one customer, BigPlanet, a division of NuSkin
International, Inc. The contract with BigPlanet 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.
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.
Integrated Kiosk Revenue
Contracts: Under the kiosk revenue model, the Company
integrates its technology with a kiosk provided by a third party. The
kiosk is placed in retail stores where the end consumers utilize the kiosk to
load their digital images and make a variety of products. Under this
revenue model, the Company enters into agreements with the retail
stores. The agreements provide for the grant of a software license,
installation of the software on the customer’s kiosks, training, PCS, and order
fulfillment. As compensation, the agreements provide for the Company
to receive payment on a per unit basis for each order fulfilled. Because these
contracts involve a significant software component, the Company accounts for its
revenue generated under these contacts in accordance with the provisions of SOP
97-2 and SOP 98-9.
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 has
occurred.
Because
of the Company’s limited sales history, it does not have VSOE for the different
components that are included in the integrated kiosk revenue
contracts. Therefore, all revenue associated with the grant of the
license, installation, training, PCS, and product fulfillment is deferred until
all elements are delivered except for PCS, at which time deferred revenue is
recognized on a straight-line basis over the remaining term of the
contract.
Retail Kit
Revenue: The Company has developed a retail kit product that
retailers and vendors can stock on their retail store shelves. The
retail kit consists of a small box containing a CD of a simplified version of
the Company’s software and a product code. The end consumer pays for
the product at the store and can then load the CD onto their personal computer
and use the software and their personal digital images to create movies, photo
books, and streaming media files. Once complete, the software assists
the customer in uploading the file for remote fulfillment. The
Company may provide the fulfillment services or such services may be provided by
another fulfillment provider. There is no additional fee for the
fulfillment. The sale of retail kits does not include PCS. In accordance with
SOP 97-2, revenue from the sale of the retail kits to the retail store is
deferred until the fulfillment services have been provided and the completed
product has been shipped to the consumer or until the Company’s obligation to
provide fulfillment has expired due to the passage of time.
Revenue from Third Party Internet
Sites: The Company has agreed to provide the simplified
version of its software to certain third party Internet sites that would allow a
customer to download the software from the third party Internet
site. 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 accordance with SOP 97-2, if the Company provides the
fulfillment services, revenue is deferred until the order has been fulfilled and
shipped to the consumer. If the fulfillment services are provided by
another supplier, revenue is recognized at the time the credit card transaction
is completed. There is no additional fee for the fulfillment. Sales
from third party Internet sites do not include PCS.
Revenue from the Company’s Internet
Site: As a companion to the retail kit product, the Company
launched a web site that will allow consumers who upload orders using the retail
kit software to order additional copies and additional products on the Company’s
web site. Revenue from such additional products is recognized upon
shipment of the product.
Other Revenue
Contracts: 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 each separate component of the contract.
During the quarter ended March 31, 2008, all elements of the contract were
delivered except for PCS. 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.
Deferred
Revenue: 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.
Accounting for
Equity Based Compensation. We account for equity-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 fair value of each share-based award is
estimated on the date of grant using the Black-Scholes option pricing
model.
Results of
Operations
For the
first nine months of 2008, we had revenues of $302,351, an operating loss of
$6,847,783, a net loss of $6,934,944, and a net loss applicable to common
stockholders of $8,136,717. This compares to revenues of $329,640, an operating
loss of $4,967,023, a net loss of $5,591,447, and a net loss applicable to
common stockholders of $5,956,538 for the same period in 2007.
The
following table sets forth, for the periods indicated, the percentage
relationship of selected items from our statements of operations to total
revenues.
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
207%
|
|
|
|
18%
|
|
|
|
220%
|
|
|
|
11%
|
|
Research
and development
|
|
|
406%
|
|
|
|
712%
|
|
|
|
479%
|
|
|
|
412%
|
|
Selling
and marketing
|
|
|
354%
|
|
|
|
565%
|
|
|
|
452%
|
|
|
|
291%
|
|
General
and administrative
|
|
|
913%
|
|
|
|
1,852%
|
|
|
|
1,157%
|
|
|
|
844%
|
|
Depreciation
and amortization
|
|
|
52%
|
|
|
|
97%
|
|
|
|
57%
|
|
|
|
49%
|
|
Total
operating expense
|
|
|
1,932%
|
|
|
|
3,244%
|
|
|
|
2,365%
|
|
|
|
1,607%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,832%
|
)
|
|
|
(3,144%
|
)
|
|
|
(2,265%
|
)
|
|
|
(1,507%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
20%
|
|
|
|
51%
|
|
|
|
16%
|
|
|
|
17%
|
|
Interest
expense
|
|
|
(9%
|
)
|
|
|
(9%
|
)
|
|
|
(45%
|
)
|
|
|
(206%
|
)
|
Total
other income (expense)
|
|
|
(11%
|
)
|
|
|
(42%
|
)
|
|
|
(29%
|
)
|
|
|
(189%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(1,821%
|
)
|
|
|
(3,102%
|
)
|
|
|
(2,294%
|
)
|
|
|
(1,696%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
dividends and deemed dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
(323%
|
)
|
|
|
(58%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
on Series B redeemable convertible preferred units
|
|
|
—
|
|
|
|
(170%
|
)
|
|
|
(74%
|
)
|
|
|
(53%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stockholders
|
|
|
(1,821%
|
)
|
|
|
(3,272%
|
)
|
|
|
(2,691%
|
)
|
|
|
(1,807%
|
)
|
Revenues.
Total
revenues increased $34,091, or 43 percent, to $112,652 for the three months
ended September 30, 2008, as compared to $78,561 for the same period in 2007.
The increase in revenue during the three months ended September 30, 2008 over
the same period in 2007 is primarily due to the increase in the number of
customers from year to year. For the nine months ended September 30, 2008, total
revenues decreased $27,289, or 8% to $302,351 as compared to $329,640 for the
same period in 2007. The decrease in revenue for the nine months ended is due to
the expiration of aVinci’s agreement with BigPlanet on December 31,
2007.
Four
customers accounted for a total of 94 percent of aVinci’s revenues for the three
months ending September 30, 2008 (individually 47 percent, 19 percent, 15
percent, and 13 percent) compared to one customer accounting for 98 percent of
the revenue for the same period in 2007. Four customers accounted for a total of
93 percent of aVinci’s revenues for the nine months ending September 30, 2008
(individually 47 percent, 20 percent, 15 Percent and 11 percent) compared to one
customer accounting for almost all of the revenue for the same period in 2007.
No other single customer accounted for more than 10 percent of aVinci’s total
revenues for the three and nine months ended September 30, 2008 or the same
periods in 2007.
Operating
Expenses.
Cost of Goods
Sold. Our cost of goods sold increased $219,332 to $233,300 for the three
months ended September 30, 2008, compared to $13,968 for the same period in
2007. For the nine months ended September 30, 2008, cost of goods sold increased
$630,011 to $666,933 compared to $36,922 for the same period in 2007. The
increases in cost of goods sold are primarily due to the change in the type of
work being performed in 2008 versus 2007. In 2007, we primarily supplied
software technology to build DVD movies for a single customer – BigPlanet. In
2008, we have 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
customer that purchased fulfillment equipment. (Both the revenue and costs
associated with this contract are being recognized over the life of the
contract.) For the three and nine months ended September 30, 2008 cost of goods
sold includes $188,256 and $547,361 respectively, in costs associated with
fulfillment; and $45,044 and $119,572, respectively, for the cost of
hardware
Research and
Development. Our research and development expense decreased $102,353, or
18%, to $456,992 for the three months ended September 30, 2008, compared to
$559,345 for the same period in 2007. The decrease is primarily due to a
decrease in the average headcount during this period from year to year.
Additional research and development resources were needed during the quarter
ending September 30, 2007 in preparation for the launching of our products at
Wal-Mart. The decrease in headcount accounts for approximately $65,000 of the
decrease. For the nine months ended September 30, 2008, research and development
increased $90,291, or 7% to $1,447,522 as compared to $1,357,231, for the same
period in 2007. The increase in research and development expenses for the nine
month period is due to an increase in personnel and related costs of
approximately $122,000 for new employees and consultants involved with both the
technology development for deployments and the ongoing maintenance of our
products, with various retailers online and with various retailers in the form
of hard good kits.
Selling and
Marketing. Our selling and marketing expense decreased $45,437, or 10%,
to $398,854 for the three months ended September 30, 2008, compared to $444,291
for the same period in 2007. The decrease is due to marketing and advertising
costs incurred during the quarter ended September 30, 2007 associated with the
launch of our product at Wal-Mart. Marketing and advertising expenses decreased
by almost $79,000 from year to year. For the nine months ended September 30,
2008, selling and marketing increased $407,365, or 43% to $1,365,650 compared to
$958,285, for the same period in 2007. The increase is due to additional
personnel and the related costs for new employees which increased approximately
$240,000; and the costs for consultants involved with increased marketing
efforts directed at mass retailers, which increased approximately
$173,000.
General and
Administrative. Our general and administrative expense decreased
$426,322, or 29%, to $1,028,784 for the three months ended September 30, 2008,
compared to $1,455,106 for the same period in 2007. The decrease is due to a
decrease of $234,000 in stock-based compensation expense due to a large option
grant to Amerivon Holdings, Inc. (Amerivon) on July 1, 2007. General and
administrative expenses also decreased due to a $90,000 decrease in the use of
outside contractors used during 2007 to help launch our product at Wal-Mart, and
due to a $112,000 decrease in bonuses from year to year. For the nine months
ended September 30, 2008, general and administrative expenses increased
$714,215, or 26% to $3,497,680 compared to $2,783,465, for the same period in
2007. The increase for the nine months ended September 30, 2008, is due to a
$537,000 increase in consulting and outside services as a result of the
consulting agreement with Amerivon (see “Related Party Transactions” below, for
more information on this consulting agreement). The increase for the nine months
ended September 30, 2008 are also attributable to fees incurred as a result of
the reverse merger transaction (see Note 2, in Notes to Condensed Consolidated
Financial Statements); legal and accounting fees of approximately $205,000; and
directors and officers’ liability insurance of $180,000.
Interest
Expense. Our interest expense increased $3,129, or 43%, to $10,353 for
the three months ended September 30, 2008, compared to $7,224 for the same
period in 2007. For the nine months ended September 30, 2008, interest expense
decreased $541,925 or 80% to $136,465 compared to $678,390 for the same period
in 2007. The decrease is due to the accretion of debt discount of $338,594 and
the conversion of convertible debt into equity in May 2007. To fund operations,
aVinci Media LC undertook in the first quarter of 2006 a large private offering
consisting of 12-month convertible debt, bearing interest at 10%. The offering
was taken in its entirety by Amerivon Investments, LLC, 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%.
In
December 2006, aVinci Media LC entered into various short-term loans from its
members totaling $285,783 to fund operations until the funding transaction with
Amerivon Investments, LLC 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.
Income Tax
Expense. For the three and nine months ended September 30, 2008 and 2007,
no provisions for income taxes were required. We accrue income taxes under the
provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes.
Prior to June 6, 2008, aVinci Media LC was a flow-through entity for income tax
purposes and did not incur income tax liabilities.
At
September 30, 2008, management has recognized a valuation allowance for the net
deferred tax assets related to temporary differences and current operating
losses. The valuation allowance was recorded in accordance with the provisions
of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes,
which requires that a valuation allowance be established when there is
significant uncertainty as the realizability of the deferred tax assets. Based
on a number of factors, the currently available, objective evidence indicates
that is more likely than not that the net deferred tax assets will not be
realized.
In June
2008, following the merger transaction described in Note 2 of Notes to Condensed
Consolidated Financial Statements, we paid $113,028 in federal income taxes for
our September 30, 2007 federal income tax return filed in the name of Secure
Alliance Holdings Corporation. Also in June 2008, we paid $85,434 towards
estimated Texas Franchise Tax in the name of Secure Alliance Holdings
Corporation. Both of these items were accrued for at the time of the merger
transaction. In August 2008, we made a final payment of $6,948 for Secure
Alliance Holdings Corporation’s September 30, 2007 federal income tax
return.
Preferred
Dividends and Deemed Dividends. We recorded a preferred dividend of
$976,000 for the nine months ended September 30, 2008, to reflect the conversion
of Series B preferred units to common units immediately prior to the closing of
the Merger with aVinci Media LC. The conversion included an additional 1,525,000
common units that were issued upon conversion in order to induce conversion. The
inducement units were recorded as a preferential dividend, thus increasing the
accumulated deficit and increasing the loss applicable to common stockholders.
We recorded a deemed dividend of $190,000 for the nine months ended September
30, 2007, due to the accretion of issuance costs related to the Series B
offering.
Distributions on
Series B redeemable convertible preferred units. The Series B redeemable
convertible preferred unit holders were entitled to an annual distribution of
$0.06 per unit. The distributions on Series B redeemable convertible preferred
units decreased $133,160, or 100%, to $0 for the three months ended September
30, 2008, compared to $133,160 for the same period in 2007. For the nine months
ended September 30, 2008, distributions on Series B redeemable convertible
preferred units increased $50,682, or 29% to $225,773 compared to $175,091, for
the same period in 2007. The changes are due to the distribution accrual
beginning in May 2007, and ending (due to the reverse merger) in June
2008.
Balance
Sheet Items
The
following were changes in our balance sheet accounts. Many of the changes were
as a result of the Merger. See Note 2 of Notes to Condensed Consolidated
Financial Statements for more information on the Merger.
Cash. Cash increased
$1,986,524, or 231%, to $2,845,593 at September 30, 2008, from $859,069 at
December 31, 2007. The increase is due to the cash received in connection with
the reverse merger.
Marketable Securities-Available-for
Sale. We own 2,022,000 shares of the common stock of Cashbox plc. As of
September 30, 2008, the common stock in Cashbox plc was recorded at a fair value
of $211,319. Unrealized losses on these shares of common stock, included in
stockholders’ equity, were $91,981 as of September 30, 2008.
Property and Equipment, net.
Property and equipment decreased $261,322, or 26%, to $729,201 at September 30,
2008, from $990,523 at December 31, 2007. The decrease is due to depreciation
expense ($326,000) exceeding fixed asset additions ($67,000).
Distributions Payable.
Distributions payable decreased $308,251, or 100%, to $0 at September 30, 2008,
from $308,251 at December 31, 2007. The decrease is a result of paying off all
accrued distributions, and the elimination of the Series B convertible preferred
units as a result of the reverse merger.
Notes Payable. Notes payable
decreased $1,000,000, or 100%, to $0 at September 30, 2008, from $1,000,000 at
December 31, 2007. The decrease is due to the notes payable balance being
eliminated as a result of the reverse merger. The amount has been reclassified
to an intercompany account which has been eliminated in
consolidation.
Equity Accounts. As a result
of the reverse merger, Sequoia’s Series A and B convertible preferred units and
Common Units were exchanged for common stock.
Liquidity and
Capital Resources.
|
|
Unaudited
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
Statements
of Cash Flows
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
$ |
(6,372,069 |
) |
|
$ |
(3,869,937 |
) |
Cash
Flows from Investing Activities
|
|
|
(71,241 |
) |
|
|
(487,279 |
) |
Cash
Flows from Financing Activities
|
|
|
8,429,834 |
|
|
|
5,816,405 |
|
Increase
in cash and cash equivalents
|
|
|
1,986,524 |
|
|
|
1,459,189 |
|
Operating
Activities. For the nine months ended September 30, 2008, net cash used
in operating activities was $(6,372,069) compared to $(3,869,937) for the same
period in 2007. The changes were due to higher operating expenses for the nine
months ended September 30, 2008 for the pursuit of new customers and development
of additional delivery methods for software technology which required
substantial additional human, equipment and property resources.
Investing
Activities. For the nine months ended September 30, 2008, aVinci’s cash
flows used in investing activities was $(71,241) compared to $(487,279) for the
same period in 2007. The change was due to purchasing less property and
equipment in the nine months ended September 30, 2008 than in the same period in
2007. During 2007 we purchased property and equipment to allow for the
fulfillment of products for customers and anticipated customers.
Financing
Activities. For the nine months ended September 30, 2008, financing
activities provided a net $8,429,834 of cash compared to $5,816,405 for the same
period in 2007. During the nine months ended September 30, 208, we received
approximately $7.1 million in cash as a result of the reverse merger. During
this period, aVinci Media LC received $460,625 from Amerivon Investments, LLC
from the pre-merger exercise of 1,827,606 warrants to purchase additional common
units (converted to 1,591,776 shares after the merger), used $534,024 for
payment of accrued distributions, and used $91,879 for principal payments under
capital lease obligations. During the nine months ended September 30, 2007,
aVinci Media LC received $4.7 million from Amerivon Investments, LLC for the
issuance of the Series B preferred units, and $1.5 million from the issuance of
the convertible debentures. Also during this period aVinci Media LC made
payments of $285,783 on loans to management, and $117,080 in loan
costs.
Previously,
aVinci Media LC had elected to grow its business through the use of outside
capital beyond what had been available from operations to capitalize on the
growth in the digital imaging industry. During the first half of 2006 aVinci
Media LC undertook a private equity offering consisting of 12-month convertible
debt, bearing interest at 10%. The offering was taken in its entirety by
Amerivon Investments, LLC, who invested a total of $829,250. At the time of the
investment, Amerivon Inveestments, LLC placed a member on aVinci Media LC’s
Board of Managers. In August of 2006, Amerivon Investments, LLC invested an
additional $1,564,000 in a convertible debt offering, bearing interest at
10%.
In
anticipation of closing the Merger Agreement, Secure Alliance Holdings
Corporation (SAH), entered into a Loan Agreement with aVinci Media LC whereby
SAH agreed to extend to aVinci Media LC $2.5 million to provide operating
capital through the closing of the transaction. A total of $1 million was loaned
to aVinci Media LC 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,
aVinci Media LC received approximately $7.1 million to fund operations in
addition to the $2.5 million previously loaned by SAH to aVinci Media LC. Upon
closing of the Merger, the $2.5 million notes payable by aVinci Media LC was
eliminated. Management believes that the funds received in connection with the
Merger will be sufficient to sustain operations at least through January 31,
2008. Based on the cash run rate of our current growth and operating plans, the
current cash resources are anticipated to fund operations through April 2009.
Additional cash of approximately $2.2 million will be needed to fund operations
through the end of 2009 based on our current plans. We may, however, choose to
modify our growth and operating plans to the extent of available funding, if
any. As disclosed in the risk factors, we are presently taking steps to raise
additional funds to continue operations for the next 12 months and
beyond.
Our plan
is to pursue a private offering of debt, convertible debt or common stock to
raise approximately $1 million to $1.5 million during the fourth quarter of 2008
to help fund operations through 2009. This capital raise will
potentially be dilutive of current shareholders. Because our business
is highly seasonal with as much as 40% of annual sales coming during the
year-end holiday season, the total amount to be raised will be determined by
estimating the total sales upon the close of the holiday season deployment date
of November 15, 2008. We are currently working with several of our
mass retailer customers to finalize several deployments by November 15, 2008;
although, we can provide no assurances the deployments will occur. In
the event additional outside capital cannot be raised, we plan to take action to
cut operating expenses related to future product enhancements and deployments
and continue only with expenses associated with servicing and selling the
products deployed as of December 2008.
Related Party
Transactions
Consulting
Agreement. During the three and nine months ended September 30, 2008,
pursuant to an agreement executed during the year ended December 31, 2007, we
recorded expense of $0 and $725,000, respectively, for consulting services from
Amerivon Holdings, Inc., the parent company of a significant shareholder. During
the three and nine months ended September 30, 2008, we paid Amerivon Holdings,
Inc. $695,000 and $745,000, respectively, for this agreement.
On July
1, 2008 we entered into a new sales and consulting agreement with Amerivon that
terminated the agreement referenced above that was executed during the year
ended December 31, 2007. During the three and nine months ended September 30,
2008, the company recorded expense of $683 for consulting services under this
new agreement. During the three and nine months ended September 30, 2008, the
Company paid Amerivon $485 for this agreement.
Distributions.
The former Series B redeemable convertible preferred unit holders were
entitled to a cumulative annual distribution of $.06 per unit. During the nine
months ended September 30, 2008 and 2007, $202,696 and $41,931, respectively,
was accrued for distributions due on the Series B redeemable convertible
preferred units held by Amerivon Investments, LLC. We paid Amerivon Investments,
LLC $447,783 for the accrued distributions in June 2008.
Warrant Exercise.
On January 30, 2008, Amerivon Investments, LLC exercised 1,504,680
warrants to purchase common units for cash received of $414,625; and on June 5,
2008, Amerivon Investments, LLC exercised 87,096 warrants to purchase common
units for a total price of $46,000. These exercises, along with Amerivon’s
conversion of convertible preferred units, increased Amerivon Investments, LLC
ownership percentage to 45.4% of all common units prior to the merger on June 6,
2008.
Notes Payable and
Series B Redeemable Convertible Preferred Units. On January 19, 2007 and
again on February 14, 2007, Amerivon Investments, LLC was issued $500,000 of
convertible notes payable. 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, all of which was accreted to
interest expense as of June 30, 2007.
In
December 2006, aVinci Media LC entered into various loans from its members of
the Company totaling $285,783. 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 intangible asset to be amortized over the life of the loans.
On January 5, 2007, an additional $20,000 was loaned was loaned by the managers.
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.
New
Accounting Pronouncements
In
March 2008, the Financial Accounting Standards Board (FASB) issued SFAS
No. 161 (SFAS 161), “Disclosures about Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133.” SFAS 161 amends and
expands the disclosure requirements of Statement 133 with the intent to provide
users of financial statements with an enhanced understanding of how and why an
entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations, and how derivative instruments and related hedged items affect
an entity’s financial position, financial performance, and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company believes that the future requirements of SFAS 161 will
not have a material effect on its consolidated financial
statements.
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 was effective beginning in the first quarter of
fiscal 2008. The adoption of this accounting pronouncement did not
have any effect on the Company’s consolidated financial statements.
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 157-2 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 157-2. The adoption of SFAS 157 is not expected to have a
material impact on the Company’s financial statements.
Off-Balance
Sheet Arrangements
aVinci
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.
Contractual
Obligations and Commitments
The
following table sets forth certain contractual obligations as of September 30,
2008 in summary form:
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than
1
|
|
|
1-3 |
|
|
4-5 |
|
|
than
5
|
|
Description
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Long-term
debt
|
|
$ |
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Capital
lease obligations
|
|
|
305,004 |
|
|
|
166,162 |
|
|
|
133,842 |
|
|
|
— |
|
|
|
— |
|
Operating
lease obligations
|
|
|
536,694 |
|
|
|
321,321 |
|
|
|
210,423 |
|
|
|
4,950 |
|
|
|
— |
|
Notes
payable
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Purchase
obligations
|
|
|
97,000 |
|
|
|
97,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other
long-term liabilities under GAAP
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Totals
|
|
$ |
938,698 |
|
|
|
584,483 |
|
|
|
349,265 |
|
|
|
4,950 |
|
|
|
— |
|
As noted
in Financing Activities
above, under Liquidity and
Capital Resources, $2.5 million of the notes payable outstanding were
eliminated upon the closing of the Merger between Secure Alliance Holdings and
Sequoia Media Group.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
applicable.
ITEM
4. CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934 (the “Exchange Act”)) designed to provide
reasonable assurance that the information required to be disclosed in our
reports under the Exchange Act is processed, recorded, summarized and reported
within the time periods specified in the SEC’s rules and forms and that such
information is accumulated and communicated to our management, including our
Principal Executive Officer and Principal Financial and Accounting Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, our management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As
required by SEC Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of our management, including our
Principal Executive Officer and Principal Financial and Accounting Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report. Based
on this evaluation, Chett B. Paulsen, our Principal Executive Officer, and
Edward B. Paulsen, our Principal Financial and Accounting Officer, concluded
that these disclosure controls and procedures were effective at the reasonable
assurance level as of September
30, 2008.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting identified
in connection with the evaluation required by Rule 13a-15(d) or Rule 15d-15(d)
under the Exchange Act that occurred during the quarter ended September 30, 2008
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART
II-OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
We are
not aware of any material pending or threatened legal proceedings, other than
ordinary routine litigation incidental to our business, involving our company or
our property.
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.
ITEM
1A. RISK
FACTORS
There
have been no material changes from the risk factors disclosed in the “Risk
Factors” section of our amended Form S-1 as filed with the SEC on November 4,
2008.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not
applicable.
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM
5. OTHER
INFORMATION
Not
applicable.
ITEM
6. EXHIBITS
(a)
Exhibits
Exhibit
Number
|
Description
of Exhibit
|
|
|
31.1
|
Certification
of the Principal Executive Officer pursuant to Exchange Act Rule
13a-14(a)
|
|
|
31.2
|
Certification
of the Principal Financial and Accounting Officer pursuant to Exchange Act
Rule 13a-14(a)
|
|
|
32
|
Certification
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002
|
|
|
10.14 |
Quatex,
Inc. and Sequoia Media Group, LC Services Agreement, dated September 1,
2007 |
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
aVinci
Media Corporation
|
|
|
|
|
|
November
14, 2008
|
By:
|
/s/ Chett
B. Paulsen |
|
|
|
Chett
P. Paulsen
|
|
|
|
Principal
Executive Officer
|
|
|
|
|
|
|
|
|
|
November
14, 2008
|
By:
|
/s/ Edward
B. Paulsen |
|
|
|
Edward
B. Paulsen
|
|
|
|
Principal
Financial and Accounting Officer
|
|
|
|
|
|
32