Delaware
|
000-17288
|
75-2193593
|
||
(State
or other Jurisdiction of
|
(Primary
Standard Industrial
|
(I.R.S.
Employer
|
||
Incorporation
or Organization)
|
Classification
Code Number)
|
Identification
No.)
|
Large
Accelerated Filer o
|
Accelerated
Filer o
|
Non-accelerated
Filer o
|
Smaller
Reporting Company x
|
Proposed
|
||||||||||||||||
maximum
|
Proposed
|
|||||||||||||||
offering
|
maximum
|
|||||||||||||||
(i) Title of each class of
|
Amount to be
|
price per
|
aggregate
|
Amount of
|
||||||||||||
securities to be registered
|
registered
|
share
|
offering price
|
registration fee
|
||||||||||||
Common
Stock, no par value
|
16,929,640 | $ | 1.01 | (1) | $ | 17,098,936 | $ | 671.99 | ||||||||
Common
Stock, no par value, issuable upon exercise of warrants exercisable at
$0.53 per share
|
949,350 | $ | 0.53 | (2) | $ | 503,156 | $ | 19.77 | ||||||||
Total
|
17,878,990 | $ | 17,602,092 | $ | 691.76 | (3) |
(1)
|
Estimated
solely for purposes of calculating the registration fee in accordance with
Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the high and low price as reported on the Over the
Counter Pink Sheets on July 28, 2008 which was $1.01 per
share.
|
(2)
|
Pursuant
to Rule 457(g) under the Securities Act, the maximum offering price
per security represents the exercise price of the applicable preferred
stock, warrants or options.
|
(3)
|
Previously
paid.
|
PROSPECTUS
SUMMARY
|
5
|
RISK
FACTORS
|
7
|
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
|
18
|
USE
OF PROCEEDS
|
18
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|
19
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
21
|
BUSINESS
|
34
|
MANAGEMENT
|
42
|
EXECUTIVE
COMPENSATION
|
43
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
46
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
48
|
SELLING
STOCKHOLDER
|
49
|
DESCRIPTION
OF SECURITIES
|
51
|
PLAN
OF DISTRIBUTION
|
52
|
LEGAL
MATTERS
|
54
|
EXPERTS
|
54
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
54
|
AVAILABLE
INFORMATION
|
54
|
INDEX
TO FINANCIAL STATEMENTS
|
57
|
PART
II INFORMATION NOT REQUIRED IN PROSPECTUS
|
II-1
|
SIGNATURES
|
II-4
|
Common
stock offered by selling stockholder
|
Up
to 17,878,990 shares, consisting of the following:
|
|
· 16,929,640
shares of common stock;
|
||
· 949,350
shares issuable upon the exercise of common stock
warrants;
|
||
Use
of proceeds
|
We
will not receive any proceeds from the sale of the common
stock.
|
|
OTC Pink Sheets
Symbol
|
AVMC
|
·
|
variations
in quarterly operating results from the expectations of securities
analysts or investors;
|
·
|
announcements
of technological innovations or new products or services
by us or
our competitors;
|
·
|
general
technological, market or economic
trends;
|
·
|
investor
perception of the industry our
prospects;
|
·
|
investors
entering into short sale contracts;
|
·
|
regulatory
developments; and
|
·
|
additions
or departures of key personnel.
|
High
Bid
|
Low
Bid
|
|||||||
Fiscal
Year Ended September 30, 2006
|
||||||||
First
Fiscal Quarter
|
$ | .82 | $ | .44 | ||||
Second
Fiscal Quarter
|
.78 | .46 | ||||||
Third
Fiscal Quarter
|
.70 | .52 | ||||||
Fourth
Fiscal Quarter
|
.84 | .62 | ||||||
Fiscal
Year Ended September 30, 2007
|
||||||||
First
Fiscal Quarter
|
$ | 1.00 | $ | .70 | ||||
Second
Fiscal Quarter
|
1.38 | .92 | ||||||
Third
Fiscal Quarter
|
2.00 | 1.24 | ||||||
Fourth
Fiscal Quarter
|
1.80 | 1.40 | ||||||
Fiscal
Year Ended September 30, 2008
|
||||||||
First
Fiscal Quarter
|
$ | 1.74 | $ | 1.20 | ||||
Second
Fiscal Quarter
|
1.36 | 1.06 | ||||||
Third
Fiscal Quarter
|
2.25 | .60 | ||||||
Fourth
Fiscal Quarter (through September 17, 2008)
|
1.34 | .81 |
Holder
|
Shares
Underlying Option/Warrant (1)
|
Exercise
Price (1)
|
Expiration
Date
|
|||||||||||
Jerrell
G. Clay
|
475,000 | $ | 1.24 |
March
21, 2017
|
||||||||||
Stephen
P. Griggs
|
475,000 | $ | 1.24 |
March
21, 2017
|
||||||||||
Chett
B. Paulsen
|
870,963 | (2 | ) | $ | 0.71 |
December
31, 2012
|
||||||||
Richard
B. Paulsen
|
870,963 | (2 | ) | $ | 0.71 |
December
31, 2012
|
||||||||
Edward
B. Paulsen
|
609,674 | (2 | ) | $ | 0.71 |
December
31, 2012
|
||||||||
Amerivon
Investments LLC.
|
2,909,016 | (3 | ) | (3 | ) | (3 | ) | |||||||
Terry
Dickerson
|
705,479 | (4 | ) | (4 | ) | (4 | ) | |||||||
Other
Employees
|
423,941 | (5 | ) | (5 | ) | (5 | ) |
(1)
|
The
share amounts and exercise prices reflect the 1-for-2 reverse split
associated with the Merger.
|
(2)
|
Non-vested
options priced at $0.71.
|
(3)
|
Includes
949,350 shares of common stock underlying currently exercisable warrants
priced at $0.53, 653,222 shares of common stock underlying currently
exercisable options priced at $0.18, 653,222 non-vested options priced at
$0.18 and subject to sales performance in 2008, and 653,222 options priced
at $0.71 and subject to sales performance vesting in
2009.
|
(4)
|
Includes
351,651 currently vested options priced at $0.27, 92,540 non-vested
options priced at $0.27, and 261,289 non-vested options priced at
$0.71.
|
(5)
|
Includes
options held by employees that are exercisable at prices ranging from $.41
to $0.71 and which expire at various times from September 10, 2011 to
December 31, 2012.
|
·
|
discuss
our future expectations;
|
·
|
contain
projections of our future results of operations or of our financial
condition; and
|
·
|
state
other “forward-looking”
information.
|
Expected
dividend yield
|
– | |||
Expected
share price volatility
|
40% - 198 | % | ||
Risk-free
interest rate
|
4.06% - 7.50 | % | ||
Expected
life of options
|
2.5
years – 4.25 years
|
Six
Months Ended
June
30,
|
||||||||
2008
|
2007
|
|||||||
Revenues
|
100%
|
100%
|
||||||
Operating
expense:
|
||||||||
Cost
of sales
|
229%
|
9%
|
||||||
Research
and development
|
522%
|
318%
|
||||||
Selling
and marketing
|
510%
|
205%
|
||||||
General
and administrative
|
1,301%
|
529%
|
||||||
Depreciation
and amortization
|
60%
|
33%
|
||||||
Total
operating expense
|
2,622%
|
1,094%
|
||||||
Loss
from operations
|
(2,522%
|
)
|
(994%
|
)
|
||||
Other
income (expense):
|
||||||||
Interest
income
|
14%
|
5%
|
||||||
Interest
expense
|
(67%
|
)
|
(267%
|
)
|
||||
Total
other income (expense)
|
(53%
|
)
|
(262%
|
)
|
||||
Net
loss
|
(2,575%
|
)
|
(1,256%
|
)
|
||||
Preferred
dividends and deemed dividends
|
(514%
|
)
|
(76%
|
)
|
||||
Distributions
on Series B redeemable convertible preferred units
|
(119%
|
)
|
(17%
|
)
|
||||
Net
loss applicable to common stockholders
|
(3,208%
|
)
|
(1,349%
|
)
|
2007
|
2006
|
%
Change
|
||||||||||
Revenues
|
$ | 541,856 | $ | 739,200 | (27 | %) |
2007
|
2006
|
%
Change
|
||||||||||
Research
and Development
|
$ | 1,890,852 | $ | 1,067,687 | 77 | % | ||||||
Selling
and Marketing
|
1,351,860 | 547,448 | 147 | % | ||||||||
General
and Administrative
|
3,677,326 | 1,755,127 | 110 | % | ||||||||
Depreciation
and Amortization
|
277,458 | 103,160 | 169 | % | ||||||||
Interest
Expense
|
693,217 | 806,439 | (14 | %) |
Unaudited
|
||||||||||||||||
Six
Months Ended
|
Year
Ended
|
|||||||||||||||
June
30,
|
December
31,
|
|||||||||||||||
Statements
of Cash Flows
|
2008
|
2007
|
2007
|
2006
|
||||||||||||
Cash
Flows from Operating Activities
|
$ | (4,689,049 | ) | $ | (1,929,653 | ) | $ | (5,513,316 | ) | $ | (1,890,640 | ) | ||||
Cash
Flows from Investing Activities
|
(65,146 | ) | (360,563 | ) | (577,295 | ) | (414,995 | ) | ||||||||
Cash
Flows from Financing Activities
|
8,468,501 | 3,199,841 | 6,780,988 | 2,464,288 | ||||||||||||
Increase
in Cash and Cash Equivalents
|
3,714,306 | 909,625 | 690,377 | 158,653 |
Less
|
More
|
|||||||||||||||||||
than
1
|
1-3
|
4-5
|
than
5
|
|||||||||||||||||
Description
|
Total
|
year
|
years
|
years
|
years
|
|||||||||||||||
Long-term
debt
|
$ | — | — | — | — | — | ||||||||||||||
Capital
lease obligations
|
346,544 | 124,621 | 221,923 | — | — | |||||||||||||||
Operating
lease obligations
|
615,914 | 319,656 | 289,958 | 6,300 | — | |||||||||||||||
Notes
payable
|
— | — | — | — | — | |||||||||||||||
Purchase
obligations
|
97,000 | 97,000 | — | — | — | |||||||||||||||
Other
long-term liabilities under GAAP
|
— | — | — | — | — | |||||||||||||||
Totals
|
$ | 1,059,458 | 541,277 | 511,881 | 6,300 | — |
Name
|
Age
|
Position
|
Chett
B. Paulsen
|
52
|
President,
Chief Executive Officer, Director
|
Richard
B. Paulsen
|
48
|
Vice
President, Chief Technology Officer, Director
|
Edward
B. Paulsen
|
45
|
Secretary/Treasurer,
Chief Operating Officer, Director
|
Terry
Dickson
|
50
|
Vice
President Marketing and Business Development
|
Tod
M. Turley
|
46
|
Director
|
John
E. Tyson
|
65
|
Director
|
Jerrell
G. Clay
|
66
|
Director
|
Stephen
P. Griggs
|
50
|
Director
|
Annual
Base Salary
|
Annual
Bonus Target
|
|
Chett
B. Paulsen
|
$235,000
|
40%
|
Richard
B. Paulsen
|
$215,000
|
35%
|
Edward
B. Paulsen,
|
$195,000
|
40%
|
Terry
Dickson
|
$185,000
|
95%
|
Name
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards ($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Changes
in Pension Value and Nonqualified Deferred Compensation
Earnings
($)
|
All
Other Compensation ($)
|
Total
($)
|
Chett
B. Paulsen, CEO, President, Manager
|
2005
|
144,000
|
-
|
-
|
-
|
-
|
-
|
-
|
144,000
|
2006
|
163,167
|
144,400
|
-
|
-
|
-
|
-
|
-
|
307,567
|
|
2007
|
199,375
|
138,937
|
-
|
27,322
(1)
|
-
|
-
|
-
|
365,634
|
|
Richard
B. Paulsen, CTO, Manager
|
2005
|
120,000
|
-
|
-
|
-
|
-
|
-
|
-
|
120,000
|
2006
|
142,917
|
129,500
|
-
|
-
|
-
|
-
|
-
|
272,417
|
|
2007
|
183,333
|
118,125
|
-
|
27,322
(1)
|
-
|
-
|
-
|
328,780
|
|
Edward
B. Paulsen, CFO, COO, Manager
|
2005
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2006
|
44,423
|
53,495
|
-
|
-
|
-
|
-
|
-
|
97,918
|
|
2007
|
173,854
|
88,000
|
-
|
19,125
(2)
|
-
|
-
|
-
|
280,979
|
|
Terry
Dickson, VP Business Development
|
2005
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2006
|
103,231
|
131,625
|
-
|
31,250
(3)
|
-
|
-
|
-
|
266,106
|
|
2007
|
181,042
|
135,000
|
-
|
34,238
(4)
|
-
|
-
|
-
|
350,280
|
|
Mark
Petersen, VP Sales
|
2005
|
-
|
-
|
-
|
-
|
-
|
-
|
58,040
(5)
|
58,040
|
2006
|
25,000
|
6,250
|
-
|
-
|
-
|
-
|
4,453
|
35,703
|
|
2007
|
100,000
|
50,000
|
-
|
2,732
(6)
|
-
|
-
|
-
|
152,732
|
(1)
|
Non-qualified
option grant to purchase 870,963 common units at $.71 (determined to be
the fair market value on the date of grant). Option vests 50%
upon completing 12 months of employment on September 28, 2008, with the
balance vesting monthly on a pro rata basis over the next 24 months of
employment.
|
(2)
|
Non-qualified
option grant to purchase 609,674 common units at $.71 (determined to be
the fair market value on the date of grant). The Option vests
50% upon completing of 12 months of employment at September 28, 2008, with
the balance vesting monthly on a pro rata basis over the next 24 months of
employment.
|
(3)
|
Non-qualified
option grant to purchase 444,191 common units at $.28 (determined to be
the fair market value on the date of grant). The Option vests
50% upon completing of 12 months of employment at April 25, 2007, with the
balance vesting monthly on a pro rata basis over the next 24 months of
employment.
|
(4)
|
Non-qualified
option grant to purchase 261,289 common units at $.71 (determined to be
the fair market value on the date of grant). The Option vests
50% upon completing of 12 months of employment at September 28, 2008, with
the balance vesting monthly on a pro rata basis over the next 24 months of
employment.
|
(5)
|
Independent
contractor work.
|
(6)
|
Non-qualified
option grant to purchase 87,096 common units at $.71 (determined to be the
fair market value on the date of grant). Option vests 50% upon
completing of 12 months of employment at September 28, 2008, with the
balance vesting monthly on a pro rata basis over the next 24 months of
employment.
|
|
Outstanding
Equity Awards
|
Option
Awards
|
Stock
Awards
|
|||||||||||||||||||||||||||||||||
Name
|
Grant
Date
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
Number
of Securities Underlying Unexercised Options (#) Unexercisable
(1)
|
Option
Exercise Price
($)
|
Option
Expiration Date
|
Number
of Shares or Units of Stock That Have Not Vested (#)
|
Market
Value of Shares or Units of Stock That Have Not Vested ($)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
That Have Not Vested (#)
|
Equity
Incentive Awards: Market or Payout Value of Unearned Shares, Units or
Other Rights That Have Not Vested ($)
|
||||||||||||||||||||||||
Chett
B. Paulsen, CEO, President, Manager
|
9/28/2007
|
- | - | 870,963 | $ | 0.71 |
12/31/2012
|
- | - | - | - | |||||||||||||||||||||||
Richard
B. Paulsen, CTO, Manager
|
9/28/2007
|
- | - | 870,963 | $ | 0.71 |
12/31/2012
|
- | - | - | - | |||||||||||||||||||||||
Edward
B. Paulsen, CFO, COO, Manager
|
9/28/2007
|
- | - | 609,674 | $ | 0.71 |
12/31/2012
|
- | - | |||||||||||||||||||||||||
Terry
Dickson,
VP
Business Development
|
4/25/2006
|
351,651 | - | 92,540 | (2) | $ | 0.28 |
|
04/24/2011
|
- | - | - | - | |||||||||||||||||||||
9/28/2007
|
- | - | 261,289 | $ | 0.71 |
|
12/31/2012
|
- | - | - | - | |||||||||||||||||||||||
Mark
Petersen, VP Sales
|
9/28/2007
|
- | - | 87,096 | $ | 0.71 |
12/31/2012
|
- | - | - | - |
(1)
|
Unless
otherwise indicated, the non-qualified options vest 50% upon completing 12
months of employment on September 28, 2008, with the balance vesting
monthly on a pro rata basis over the next 24 months of
employment.
|
(2)
|
The
non-qualified options vested 50% upon completing 12 months of employment
at April 25, 2007, with the balance vesting monthly on a pro rata basis
over the next 24 months of
employment.
|
Name
and Address of Beneficial Owner
|
Number
of Shares Beneficially Owned (1)
|
Percent
of Class
|
|
||
Chett
B. Paulsen (2) (3)
|
6,411,458
|
13.16%
|
Richard
B. Paulsen (2) (4)
|
4,239,744
|
8.70%
|
Edward
B. Paulsen (2) (5)
|
2,227,691
|
4.57%
|
Tod
M. Turley (2) (6)
|
18,532,212
|
36.82%
|
John
E. Tyson (2) (7)
|
18,590,535
|
36.94%
|
Jerrell
G. Clay (2) (8)
|
566,703
|
1.15%
|
Stephen
B. Griggs (2) (9)
|
475,000
|
<1.00%
|
Terry
Dickson(2) (10)
|
328,705
|
<1.00%
|
Mark
Petersen(2)
|
602,171
|
1.24
|
Amerivon
Investments LLC (11)
|
18,532,212
|
36.82%
|
Directors
and Executive Officers as a group (7 persons)
|
33,527,782
|
64.97%
|
|
||
Total
Shares Issued
|
48,737,928
|
100.00%
|
(1)
|
In
determining beneficial ownership of our common stock as of a given date,
the number of shares shown includes shares of common stock which may be
acquired on exercise of warrants or options or conversion of convertible
securities within 60 days of that date. In determining the percent of
common stock owned by a person or entity on June 6, 2008, (a) the
numerator is the number of shares of the class beneficially owned by such
person or entity, including shares which may be acquired within 60 days on
exercise of warrants or options and conversion of convertible securities,
and (b) the denominator is the sum of (i) the total shares of
common stock outstanding on June 4, 2008, and (ii) the total number
of shares that the beneficial owner may acquire upon conversion of the
preferred and on exercise of the warrants and options. Unless otherwise
stated, each beneficial owner has sole power to vote and dispose of its
shares.
|
(2)
|
These
are the officers and directors of our
company .
|
(3)
|
These
shares are owned of record by P&D, LP, a family limited
partnership. In addition, Chett B. Paulsen has an option to
purchase 870,963 shares of stock at $0.27 per share. Such
option is not currently
exercisable.
|
(4)
|
These
shares are owned of record by 5 P’s in a Pod, LP, a family limited
partnership. In addition, Richard B. Paulsen has an option to
purchase 870,973 shares of common stock at $0.71 per
share. Such option is not currently
exercisable.
|
(5)
|
These
shares are owned of record by Family Enrichment, LP, a family limited
partnership. In addition, Edward B. Paulsen has an option to
purchase 609,674 shares of common stock at $0.71 per
share. Such option is not currently
exercisable.
|
(6)
|
Includes
(i) 16,929,640 shares owned of record by Amerivon Investments LLC,
(ii) 949,350 shares of common stock underlying currently exercisable
warrants owned by Amerivon Investments LLC, and (iii) 653,222 shares
of common stock underlying currently exercisable stock options owned by
Amerivon Investments LLC Amerivon Investments LLC is an
affiliate of Mr. Turley.
|
(7)
|
Includes
(i) 58,323 shares owned of record by Mr. Tyson, (ii) 16,929,640
shares owned of record by Amerivon Investments LLC, (iii) 949,350
shares of common stock underlying currently exercisable warrants owned by
Amerivon Investments LLC, and (iv) 653,222 shares of common stock
underlying currently exercisable stock options owned by Amerivon
Investments LLC. Amerivon Investments LLC is an affiliate of
Mr. Tyson.
|
(8)
|
Includes
91,703 shares owned of record and 475,000 shares underlying currently
exercisable stock options.
|
(9)
|
Represents
475,000 shares underlying currently exercisable stock
options.
|
(10)
|
Includes
88,102 shares owned of record and 240,603 shares underlying currently
exercisable stock options.
|
(11)
|
Includes
(i) 16,929,640 shares owned of record, (ii) 949,350 shares of
common stock underlying currently exercisable warrants, and
(iii) 653,222 shares of common stock underlying currently exercisable
options. These shares are also attributed to Mr. Turley and Mr.
Tyson as described in footnotes 6 and 7
above.
|
· 16,929,640
shares of common stock held by Amerivon Investments LLC;
|
· 949,350
shares issuable upon the exercise of common stock warrants by Amerivon
Investments LLC;
|
Ownership Before Offering
|
After Offering(1)
|
|||||||||||||||
Selling Stockholder
|
Number of
shares of
Common Stock
beneficially
owned
|
Number of
shares
offered
|
Number of
shares of
Common
Stock
beneficially
owned
|
Percentage
of
Common
Stock
Beneficially
owned
|
||||||||||||
Amerivon
Investments LLC (2)
|
19,838,656 | (3) | 17,878,990 | (4) | 1,959,666 | (5) | 4.0 | % |
(1)
|
Represents
the amount of shares that will be held by the selling stockholder after
completion of this offering based on the assumptions that (a) all shares
registered for sale by the registration statement of which this prospectus
is part will be sold and (b) no other shares of our common stock are
acquired or sold by the selling stockholder prior to completion of this
offering. However, the selling stockholder may sell all, some or none of
the shares offered pursuant to this prospectus or sell some or all of
their shares pursuant to an exemption from the registration provisions of
the Securities Act, including under Rule 144. To our knowledge there are
currently no agreements, arrangements or understanding with respect to the
sale of any of the shares that may be held by the selling stockholder
after completion of this offering or
otherwise.
|
(2)
|
Amerivon
Investments LLC’s voting and dispositive powers can be exercised by Tod M.
Turley and John E. Tyson, as the company’s CEO and President
respectively. Both Mr. Turley and Mr. Tyson are current members
of AVI Media’s board of directors. Amerivon Investments LLC for
purposes of this registration is an underwriter. Amerivon
Investments LLC is not a broker-dealer or an affiliate of a
broker-dealer.
|
(3)
|
Includes
currently exercisable warrants to purchase 949,350 shares of Common Stock
at $0.53 per share and currently exercisable options to purchase 653,222
shares of Common Stock at $0.18 per share. Also includes
653,222 non-vested options priced at $0.18 and subject to sales
performance in 2008 and 653,222 options priced at $0.71 and subject to
sales performance vesting in 2009.
|
(4)
|
Includes
currently exercisable warrants to purchase 949,350 shares of Common Stock
at $0.53 per share.
|
(5)
|
Includes
653,222 vested options priced at $0.18, 653,222 non-vested options priced
at $0.18, and subject to sales performance in 2008, and 653,222 options
priced at $0.71 and subject to sales performance vesting in
2009.
|
Equity
Compensation Plan Information
|
||||||||||||
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column (a))
|
|||||||||
Equity
compensation plans approved by security holders
|
950,000 | $ | 1.24 | 16,475 | ||||||||
Equity
compensation plans not approved by security holders
|
– | – | – | |||||||||
Total
|
950,000 | $ | 1.24 | 16,475 |
Equity
Compensation Plan Information
|
||||||||||||
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column (a))
|
|||||||||
Equity
compensation plans approved by security holders
|
– | – | 2,500,000 | |||||||||
Equity
compensation plans not approved by security holders
|
– | – | – | |||||||||
Total
|
– | – | 2,500,000 |
·
|
Warrants: 1,249,350
with a weighted average exercise price of $
0.68
|
·
|
Options: 5,521,904
with a weighted average exercise price of $
0.54
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits investors;
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
·
|
privately
negotiated transactions;
|
·
|
to
cover short sales made after the date that this registration statement is
declared effective by the
Commission;
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
·
|
broker-dealers
may agree with a selling stockholder to sell a specified number of such
shares at a stipulated price per
share;
|
·
|
a
combination of any such methods of sale;
and
|
·
|
any
other method permitted pursuant to applicable
law.
|
Audited
Financial Statements of Sequoia Media Group, LC as of December 31, 2007
and 2006 and for the years then ended.
|
|
F-1
|
Unaudited
Financial Statements as of June 30, 2008 and for the Six Months Ended June
30, 2008 and 2007
|
F-35
|
|
Unaudited
Proforma Condensed Consolidated Financial Statements
|
F-51
|
|
215 South
State Street, Suite 800
Salt Lake City, Utah 84111
Telephone (801) 532-7444
Fax
(801) 532-4911
www.tannerco.com
|
|
Assets
|
2007
|
2006
|
||||||
Current
assets:
|
||||||||
Cash
|
$ | 859,069 | $ | 168,692 | ||||
Accounts
receivable
|
448,389 | 10,000 | ||||||
Unbilled
accounts receivable
|
- | 465,472 | ||||||
Inventory
|
21,509 | 4,331 | ||||||
Prepaid
expenses
|
100,799 | 53,757 | ||||||
Deferred
costs
|
294,602 | - | ||||||
Deposits
and other current assets
|
44,201 | 72,559 | ||||||
Total
current assets
|
1,768,569 | 774,811 | ||||||
Property
and equipment, net
|
990,523 | 309,008 | ||||||
Intangibles,
net
|
74,689 | 70,381 | ||||||
Other
Assets
|
20,408 | 111,011 | ||||||
Total
assets
|
$ | 2,854,189 | $ | 1,265,211 | ||||
Liabilities and
Member's Deficit
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 75,118 | $ | 104,832 | ||||
Accrued
liabilities
|
823,772 | 820,143 | ||||||
Distribution
payable
|
308,251 | - | ||||||
Current
portion of capital leases
|
118,288 | - | ||||||
Current
portion of deferred rent
|
38,580 | - | ||||||
Note
payable
|
1,000,000 | - | ||||||
Convertible
debentures and notes payable
|
2,234,660 | |||||||
Related
party notes payable
|
- | 265,783 | ||||||
Deferred
revenue
|
493,599 | 11,250 | ||||||
Total
current liabilities
|
2,857,608 | 3,436,668 | ||||||
Capital
lease obligations, net of current portion
|
222,611 | - | ||||||
Deferred
rent, net of current portion
|
71,839 | - | ||||||
Total
liabilities
|
3,152,058 | 3,436,668 | ||||||
Series
B redeemable convertible preferred units, no
|
||||||||
par
value, 12,000,000 units authorized; 8,804,984 and 0
|
||||||||
units
outstanding, respectively (liquidation preference
|
||||||||
of
$6,603,182 at December 31, 2007)
|
6,603,182 | - | ||||||
Commitments
and contingencies
|
||||||||
Members'
deficit
|
||||||||
Series
A convertible preferred units, no par value,
|
||||||||
3,746,485
units authorized; 3,533,720 units outstanding
|
||||||||
(liquidation
preference of $474,229)
|
474,229 | 474,229 | ||||||
Common
units, no par value, 90,000,000 units
|
||||||||
authorized;
29,070,777 and 21,547,422 units outstanding,
|
||||||||
repectively.
|
4,211,737 | 1,103,679 | ||||||
Accumulated
deficit
|
(11,587,017 | ) | (3,749,365 | ) | ||||
Total
members' deficit
|
(6,901,051 | ) | (2,171,457 | ) | ||||
Total
liabilities and members' deficit
|
$ | 2,854,189 | $ | 1,265,211 |
2007
|
2006
|
|||||||
Revenues
|
$ | 541,856 | $ | 739,200 | ||||
Operating
expense:
|
||||||||
Cost
of sales
|
57,068 | - | ||||||
Research
and development
|
1,890,852 | 1,067,687 | ||||||
Selling
and marketing
|
1,351,860 | 547,448 | ||||||
General
and administrative
|
3,677,326 | 1,755,127 | ||||||
Depreciation
and amortization
|
277,458 | 103,160 | ||||||
Total
operating expense
|
7,254,564 | 3,473,422 | ||||||
Loss
from operations
|
(6,712,708 | ) | (2,734,222 | ) | ||||
Other
income (expense):
|
||||||||
Interest
income
|
66,524 | 4,726 | ||||||
Interest
expense
|
(693,217 | ) | (806,439 | ) | ||||
Net
other income (expense)
|
(626,693 | ) | (801,713 | ) | ||||
Net
loss
|
(7,339,401 | ) | (3,535,935 | ) | ||||
Deemed
distribution on Series B redeemable
|
||||||||
convertible
preferred units
|
(190,000 | ) | - | |||||
Distributions
on Series B redeemable
|
||||||||
convertible
preferred units
|
(308,251 | ) | - | |||||
Net
loss applicable to common units
|
$ | (7,837,652 | ) | $ | (3,535,935 | ) | ||
Loss
per common unit - basic and diluted
|
$ | (0.30 | ) | $ | (0.16 | ) | ||
Weighted
average common units - basic
|
||||||||
and
diluted
|
26,453,062 | 21,547,422 |
Series
A Convertible
|
||||||||||||||||||||||||
Preferred
|
Common
|
Accumulated
|
Member's
|
|||||||||||||||||||||
Units
|
Amount
|
Units
|
Amount
|
Deficit
|
Deficit
|
|||||||||||||||||||
Balance,
January 1, 2006
|
3,533,720 | $ | 474,229 | 21,547,422 | $ | 325,500 | $ | (213,430 | ) | $ | 586,299 | |||||||||||||
Issuance
of detachable warrants in
|
||||||||||||||||||||||||
connection
with debentures payable
|
- | - | - | 251,552 | - | 251,552 | ||||||||||||||||||
Beneficial
conversion feature of convertible
|
||||||||||||||||||||||||
debentures
payable
|
- | - | - | 489,268 | - | 489,268 | ||||||||||||||||||
Equity-based
payments made to employees
|
- | - | - | 37,359 | - | 37,359 | ||||||||||||||||||
Net
loss
|
- | - | - | - | (3,535,935 | ) | (3,535,935 | ) | ||||||||||||||||
Balance,
December 31, 2006
|
3,533,720 | 474,229 | 21,547,422 | 1,103,679 | (3,749,365 | ) | (2,171,457 | ) | ||||||||||||||||
Conversion
of debentures payable and accrued
|
||||||||||||||||||||||||
interest
payable into common units
|
- | - | 7,523,355 | 2,602,668 | - | 2,602,668 | ||||||||||||||||||
Employee
equity-based compensation
|
- | - | - | 505,390 | - | 505,390 | ||||||||||||||||||
Accretion
of Issuance costs on Series B
|
||||||||||||||||||||||||
redeemable
convertible preferred units
|
- | - | - | - | (190,000 | ) | (190,000 | ) | ||||||||||||||||
Distributions
on Series B redeemable
|
||||||||||||||||||||||||
convertible
preferred units
|
- | - | - | - | (308,251 | ) | (308,251 | ) | ||||||||||||||||
Net
loss
|
- | - | - | - | (7,339,401 | ) | (7,339,401 | ) | ||||||||||||||||
Balance,
December 31, 2007
|
3,533,720 | $ | 474,229 | 29,070,777 | $ | 4,211,737 | $ | (11,587,017 | ) | $ | (6,901,051 | ) |
2007
|
2006
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (7,339,401 | ) | $ | (3,535,935 | ) | ||
Adjustments
to reconcile net loss to net cash
|
||||||||
used
in operating activities
|
||||||||
Depreciation
and amortization
|
490,549 | 201,893 | ||||||
Accretion
of debt discount
|
338,594 | 582,230 | ||||||
Equity-based
compensation
|
505,390 | 37,359 | ||||||
Loss
on disposal of equipment
|
1,063 | 1,668 | ||||||
Decrease
(increase) in:
|
||||||||
Accounts
receivable
|
(438,389 | ) | (10,000 | ) | ||||
Unbilled
accounts receivable
|
465,472 | 260,508 | ||||||
Inventory
|
(17,178 | ) | (4,331 | ) | ||||
Prepaid
expenses
|
(47,042 | ) | (50,502 | ) | ||||
Deferred
costs
|
(294,602 | ) | - | |||||
Other
current assets
|
28,358 | (72,559 | ) | |||||
Deposits
|
(5,409 | ) | (14,999 | ) | ||||
Increase
(decrease) in:
|
||||||||
Accounts
payable
|
(29,714 | ) | 5,761 | |||||
Accrued
liabilities
|
236,225 | 775,350 | ||||||
Deferred
rent
|
110,419 | - | ||||||
Deferred
revenue
|
482,349 | (67,083 | ) | |||||
Net
cash used in operating activities
|
(5,513,316 | ) | (1,890,640 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchase
of property and equipment
|
(562,987 | ) | (344,995 | ) | ||||
Purchase
of intangible assets
|
(14,308 | ) | (70,000 | ) | ||||
Net
cash used in investing activities
|
(577,295 | ) | (414,995 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from convertible notes and debentures
|
1,535,000 | 2,393,250 | ||||||
Proceeds
from note payable
|
1,000,000 | - | ||||||
Payments
of loan costs
|
(117,080 | ) | (194,745 | ) | ||||
Proceeds
from related party notes payable
|
20,000 | 265,783 | ||||||
Payments
on related party notes payable
|
(285,783 | ) | - | |||||
Payments
on obligation under capital lease
|
(46,149 | ) | - | |||||
Proceeds
from issuance of Series B preferred units
|
||||||||
net
of issuance costs of $190,000
|
4,675,000 | - | ||||||
Net
cash provided by financing activities
|
6,780,988 | 2,464,288 | ||||||
Net
change in cash
|
690,377 | 158,653 | ||||||
Cash
at beginning of year
|
168,692 | 10,039 | ||||||
Cash
at end of year
|
$ | 859,069 | $ | 168,692 | ||||
Cash
paid for interest and income taxes
|
$ | - | $ | - |
·
|
The
Company converted notes payable of $1,535,000 and $23,178 of related
accrued interest into 2,318,318 Series B redeemable convertible preferred
units.
|
·
|
The
Company converted $2,393,250 of debentures and notes payable and $209,418
of related accrued interest into 7,523,355 common
units.
|
·
|
The
Company recorded a debt discount of $8,129 and a beneficial conversion
feature of $171,875 in connection with the issuance of Series B redeemable
convertible preferred units.
|
·
|
The
Company accrued distributions payable on Series B redeemable convertible
preferred units of $308,251.
|
·
|
The
Company acquired $387,048 of fulfillment equipment and office furniture
through capital lease agreements.
|
·
|
The
Company recorded a deemed distribution of $190,000 due to the accretion of
issuance costs related to the Series B
offering.
|
·
|
The
Company recorded a debt discount of $251,552 and a beneficial
conversion feature of $489,268 in connection with the issuance of
convertible debt.
|
1. |
Description of
Organization
and Summary
of
Significant
Accounting
Policies
|
Organization and Nature of Operations |
Sequoia Media Group, LC (the Company), a Utah limited liability company, was formed on March 15, 2003. The Company develops os. and sells an engaging way for anyone to tell their “Story” with personal digital expressions. The Company’s products simplify and automate the process of creating professional-quality multi-media productions using personal photos and videos. | ||
Basis of Presentation | ||
The accompanying financial statements are presented in accordance with U.S. generally accepted accounting principles. | ||
Concentration of Credit Risk and Significant Customer | ||
The
Company maintains its cash in bank demand deposit accounts, which at times
may exceed the federally insured limit or may be maintained in non-insured
institutions. As of December 31, 2007 and December 31, 2006, the
Company had approximately $952,752 and $153,874 respectively, in excess of
the insured limits, primarily in cash equivalents. The Company has not
experienced any losses in these accounts and believes it is not exposed to
any significant credit risk with respect to cash.
|
||
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. In the normal course of business, the Company provides credit terms to its customers and requires no collateral. Concentrations of accounts receivable and revenue were as follows: |
2007
|
||||||||
Revenue
|
Accounts
Receivable
|
|||||||
Customer
A
|
97.1 | % | 18.6 | % | ||||
Customer
B
|
5.9 | % | 3.9 | % | ||||
Customer
C
|
0 | % | 77.5 | % | ||||
2006
|
||||||||
Revenue
|
Accounts
Receivable
|
|||||||
Customer
A
|
100.0 | % | 100.0 | % |
1. |
Description of
Organization
and Summary
of
Significant
Accounting
Policies
Continued
|
Net Loss per Common Unit |
Basic
earnings (loss) per unit (EPS) is calculated by dividing income (loss)
available to common unit holders by the weighted-average number of common
units outstanding during the period.
Diluted
EPS is similar to Basic EPS except that the weighted-average number of
common units outstanding is increased using the treasury stock
method to include the number of additional common units that would have
been outstanding if the dilutive potential common units had
been issued. Such potentially dilutive common units include stock options
and warrants, convertible preferred stock, redeemable
convertible preferred stock and convertible notes and debentures. Units
having an antidilutive effect on periods presented are not included in the
computation of dilutive
EPS.
|
||
The
average number of units of all stock options and warrants granted, all
convertible preferred stock, redeemable convertible preferred stock and
convertible debentures have been omitted from the computation of diluted
net loss per common unit because their inclusion would have been
anti-dilutive for the years ended December 31, 2007 and
2006.
|
||
For the years ended December 31, 2007 and 2006, the Company had 21,749,309 and 7,269,325 potentially dilutive units of common stock, respectively, not included in the computation of diluted net loss per common unit because it would have decreased the net loss per common unit. These options and warrants, convertible preferred stock, redeemable convertible preferred stock and convertible notes and debentures could be dilutive in the future. | ||
Use of Estimates | ||
The
preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect reported amounts
and disclosures. Accordingly, actual results could differ from
those estimates. Key estimates made by management in the
accompanying financial statements include the economic useful lives
assigned to property and equipment, recoverability of long-lived assets
based on expected future undiscounted cash flows, the fair value of the
Company’s units on the dates of share-based compensation awards and the
assumptions used in the Black-Scholes option-pricing
model.
|
1. | Description of Organization
and
Summary of
Significant
Accounting
Policies
Continued
|
Cash Equivalents |
The Company considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents. | ||
Accounts Receivable | ||
Accounts receivable are recorded at net realizable values and are due within 30 days from the invoice date. The Company maintains allowances for doubtful accounts, when necessary, for estimated losses resulting from the inability of customers to make required payments. These allowances are based on specific facts and circumstances pertaining to individual customers and historical experience. Provisions for losses on receivables are charged to operations. Receivables are charged off against the allowances when they are deemed uncollectible. As of December 31, 2007 and 2006, there were no allowances for doubtful accounts required against the Company’s receivables. | ||
Inventories | ||
Inventories
are stated at the lower of cost or market determined using the first-in,
first-out method.
|
||
Intangible Assets | ||
Intangible assets consist of costs to acquire patents and licenses for use of certain music tracks. All of the Company’s intangible assets have finite useful lives. | ||
Intangible assets with finite useful lives are carried at cost, less accumulated amortization. Amortization is calculated using the straight-line method over estimated useful lives. Intangible assets subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. As of December 31, 2007 and 2006, management determined that the carrying amounts of the Company’s intangible assets were not impaired. | ||
Property and Equipment | ||
Property
and equipment are stated at cost less accumulated depreciation and
amortization. Property and equipment consists of computers,
software and equipment, and furniture and fixtures. Depreciation and
amortization are calculated using the straight-line method over the
estimated economic useful lives of the assets or over the related lease
terms (if shorter), which are three and five years,
respectively.
|
1. | Description of Organization and Summary | Property and Equipment - Continued |
of Significant Accounting Policies Continued | Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized. Routine maintenance, repairs, and renewal costs are expensed as incurred. Gains or losses from the sale or retirement of property and equipment are recorded in the statements of operations. | |
The
Company reviews its property and equipment for impairment when events or
changes in circumstances indicate that the carrying amount may be
impaired. If it is determined that the related undiscounted
future cash flows are not sufficient to recover the carrying value, an
impairment loss is recognized for the difference between carrying value
and fair value of the asset.
|
||
As of December 31, 2007 and 2006, management determined the carrying amounts of the Company’s property and equipment were not impaired. | ||
Revenue Recognition and Deferred Revenue | ||
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.
|
1. |
Description of
Organization
and Summary
of Significant
Accounting
Policies
Continued
|
BigPlanet Contract - Continued |
As of December 31, 2007, this contract was completed and all revenue under this contract had been recognized. The Company has no further obligations under this contract. | ||
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 initial sale of the software license, installation of the software, training, post contract support (PCS), order fulfillment, and ongoing royalty payments based on volume of product generated through the kiosk using the Company’s technology. 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 and training 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 sale of the license, installation, training, PCS, and product fulfillment is deferred until all elements are delivered except for PCS and training, 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.
|
1. | Description of Organization and Summary | Retail Kit Revenue - Continued |
of Significant Accounting Policies Continued | 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. 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.
|
||
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 are 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 each separate component of the contract. During the
quarter ended March 31, 2008, all elements of the contract were delivered
except for PCS and training. In accordance with SOP 97-2, deferred revenue
is being recognized over the remaining term of the contract on a
straight-line basis.
|
||
The Company capitalized the direct cost of the equipment and is amortizing it as the related revenue is recognized. | ||
1. |
Description
of Organizationand
Summary
|
Deferred Revenue |
of
Significant Accounting
Policies
Continued
|
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 | ||
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R) (revised 2004), Share-Based Payment which amends SFAS No. 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. The Company adopted SFAS No.123(R) using the modified prospective method. The modified prospective method requires that compensation cost be recognized beginning with the effective date based on the requirements of SFAS No. 123(R) for all equity-based payments granted after the effective date and all non-vested equity-based payments granted prior to the effective date. The Company did not issue any employee equity-based payments prior to January 1, 2006. The effect of accounting for equity-based awards under SFAS No. 123(R) for the years ended December 31, 2007 and 2006, was to record $505,390, and $37,359, respectively, of equity-based compensation expense in general and administrative expense. | ||
The fair value of each share-based award was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions. |
Expected
dividend yield
|
– | |||
Expected
share price volatility
|
40 | % | ||
Risk-free
interest rate
|
4.06% - 4.89 | % | ||
Expected
life of options
|
2.5
years – 4.25 years
|
1. |
Description
of Organization
and
Summary
of
Significant Accounting
Policies
Continued
|
Income Taxes |
Under the provisions of the Internal Revenue Code and applicable state laws, the Company is taxed similar to a partnership, and as a result, is not directly subject to income taxes. The results of its operations are included in the tax returns of its members. Therefore, no provision or benefit for income taxes has been included in the accompanying financial statements. | ||
Pro forma income tax
expense, as if the Company had been a taxable entity would have
been $0 for each year presented in the statements of
operations
|
||
Recent Accounting Pronouncements | ||
In
December 2007, the FASB issued SFAS No. 141 (revised 2007)
(SFAS 141R), Business Combinations
and SFAS No. 160 (SFAS 160), Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research
Bulletin No. 51. SFAS 141R will change how business
acquisitions are accounted for and will impact financial statements both
on the acquisition date and in subsequent periods. SFAS 160 will
change the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component
of equity. SFAS 141R and SFAS 160 are effective for us beginning
in the first quarter of fiscal 2010. Early adoption is not permitted. The
adoption of SFAS 141R and SFAS 160 is not expected to have a
material impact on the Company’s financial
statements.
|
||
In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities. Under SFAS 159, companies may elect to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective beginning in the first quarter of fiscal 2008. | ||
In
September 2006, the FASB issued SFAS No. 157 (SFAS 157),
Fair Value
Measurements, which defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value
measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in
various prior accounting pronouncements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007. However, in February
2008, the FASB issued FSP FAS 157-b which delays the effective date
of SFAS 157 for all nonfinancial
|
||
1. |
Description
of Organization
and
Summary
of
Significant Accounting
Policies
Continued
|
Recent Accounting Pronouncements - Continued |
assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This FSP partially defers the effective date of Statement 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. Effective for fiscal 2008, the Company will adopt SFAS 157 except as it applies to those nonfinancial assets and nonfinancial liabilities as noted in FSP FAS 157-b. The adoption of SFAS 157 is not expected to have a material impact on the Company’s financial statements. | ||
In
July 2006, the FASB issued Financial Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109.
FIN 48 clarifies the accounting for uncertainty in income taxes by
prescribing the recognition threshold a tax position is required to meet
before being recognized in the financial statements. It also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2007 and as a
result, is effective our first quarter of fiscal 2008. The cumulative
effects, if any, of applying FIN 48 will be recorded as an adjustment
to retained earnings as of the beginning of the period of adoption.
Additionally, in May 2007, the FASB published FSP No. FIN 48-1
(FSP FIN 48-1),
|
||
Definition of Settlement in
FASB Interpretation No. 48. FSP FIN 48-1 is an amendment
to FIN 48. It clarifies how an enterprise should determine whether a
tax position is effectively settled for the purpose of recognizing
previously unrecognized tax benefits. If the Company closes the
merger with Secure Alliance Holdings Corporation as noted in Note 10, the
Company will be required to comply with FIN 48-1 on the merger
date. The actual impact of the adoption of FIN 48 and
FSP FIN 48-1 on our consolidated results of operations and financial
condition will depend on facts and circumstances that exist on the date of
adoption. The Company is currently calculating the impact of the adoption
of FIN 48 and FSP FIN 48-1 but does not expect it to have a
material impact on the financial
statements.
|
1. |
Description of
Organization
and
Summary
of Significant
Accounting
Policies
Continued
|
Reclassifications – Certain amounts in the 2006 financial statements have been reclassified to confirm to the 2007 presentation. |
2. | Property and Equipment |
Property
and equipment consisted of the following as of
December 31:
|
2007
|
2006
|
|||||||
Computers,
software and equipment
|
$ | 1,212,558 | $ | 381,391 | ||||
Furniture
and fixtures
|
125,676 | 13,159 | ||||||
Leasehold
Improvements
|
4,100 | - | ||||||
1,342,334 | 394,550 | |||||||
Less
accumulated depreciation and amortization
|
(351,811 | ) | (85,542 | ) | ||||
$ | 990,523 | $ | 309,008 |
Depreciation of property and equipment for the years ended December 31, 2007 and 2006 was $267,457 and $95,660, respectively. | ||
3. |
Intangible
Assets
|
Intangible assets consisted of the following at December 31: |
2007
|
2006
|
|||||||
Patent
costs
|
$ | 62,189 | $ | 47,881 | ||||
License
– music tracks
|
30,000 | 30,000 | ||||||
92,189 | 77,881 | |||||||
Accumulated
amortization
|
(17,500 | ) | (7,500 | ) | ||||
$ | 74,689 | $ | 70,381 |
Amortization expense for the years ended December 31, 2007 and 2006 was $10,000 and $7,500, respectively. |
3. |
Intangible Assets Continued
|
As
of December 31, 2007, the Company had not begun to amortize capitalized
patent costs as the patent had not yet been granted. Amortization related
to the license for music tracks for the years ended December 31, 2008 and
2009 will be $10,000 and $2,500, respectively.
|
4. |
Accrued Liabilities
|
Accrued liabilities consisted of the following as of December 31: |
2007
|
2006
|
|||||||
Bonuses
payable
|
$ | 554,000 | $ | 538,222 | ||||
Payroll
and payroll taxes payable
|
229,245 | 136,318 | ||||||
Interest
payable
|
- | 125,476 | ||||||
Other
|
40,527 | 20,127 | ||||||
$ | 823,772 | $ | 820,143 |
5. |
Notes and Convertible Debentures Payable
|
Notes and convertible debentures payable consisted of the following as of December 31: |
2007
|
2006
|
|||||||
Note
payable to Secure Alliance Holdings Corporation (see Note 10), interest at
10% per annum, due December 31, 2008, secured by all assets of the
Company
|
$ | 1,000,000 | $ | - | ||||
Convertible
notes payable to an institutional investor, interest at 10% per annum, due
June 5, 2007, less debt discount of $44,497 as of December 31,
2006. As noted below, during 2007, these notes were converted
into common units.
|
- | 1,519,503 | ||||||
Convertible
debentures payable to an institutional investor, with interest at 10% per
annum, due January 31, 2007, less debt discount of $114,093 as of December
31, 2006. As noted below, during 2007, these debentures were
converted into common units.
|
- | 715,157 | ||||||
$ | 1,000,000 | $ | 2,234,660 |
5. |
Notes and Convertible Debentures Payable Continued
|
During the first quarter of 2006, the Company entered into a convertible debenture financing arrangement with an institutional investor, through which the Company issued convertible debentures totaling $829,250. This amount consisted of cash of $775,000 and loan origination fees of $54,250 which were recorded as an asset to be amortized over the life of the loan. These convertible debentures payable had a stated interest rate of 10% per annum. On May 8, 2007, these debentures and accrued interest of $106,832 were converted into 3,900,341 common units. |
Detachable warrants for the purchase of 1,727,605 common units, which expire in 2008, were granted in connection with these convertible debentures. The warrants were valued at a total of $178,330 and were recorded as a discount to debt, with a corresponding increase to members’ equity. | ||
In addition, at the date of issuance the conversion rate of the convertible debentures was less than the fair value of the Company’s common units. Therefore, a beneficial conversion feature valued at $489,268 was recorded as a discount to debt, with a corresponding increase recorded as members’ equity. | ||
During the year ended December 31, 2007 and 2006, the Company accreted $114,093 and $553,505, respectively, of the debt discount arising from the warrants and the beneficial conversion feature to interest expense using the effective interest method. | ||
During August, September and October 2006, the Company entered into a convertible note payable financing arrangement with an institutional investor, through which the Company issued convertible notes payable totaling $1,564,000. This amount consisted of cash of $1,443,510 and loan origination fees of $120,490 which were recorded as an asset to be amortized over the life of the loan. These convertible notes payable had a stated interest rate of 10% per annum. On May 8, 2007, these convertible notes payable of $1,564,000 along with accrued interest of $102,586 were converted to 3,623,014 common units. The remaining unamortized loan costs and debt discount were recognized as interest expense on the conversion date. | ||
5. |
Convertible Debentures and Notes Payable
Continued
|
Warrants for the purchase of 1,190,000 common units were granted in 2006 in connection with these convertible notes payable and expire in 2009. The warrants were valued at a total of $73,222 and were recorded as a discount to debt, with a corresponding increase to members’ equity |
During the years ended December 31, 2007 and 2006, the Company accreted $44,497 and $28,725, respectively, of the debt discount related to the warrants to interest expense using the effective interest method. | ||
As of December 31, 2007, the debt discount had been fully amortized. As of December 31, 2006, the unamortized debt discount was $44,497. | ||
On January 19, 2007 and again on February 14, 2007, the Company issued $500,000 of convertible notes payable to an institutional investor. These convertible notes payable accrued interest at 9% per annum, and were due on June 30, 2007. These convertible notes payable, plus accrued interest of $23,178, were converted into 1,604,985 Series B redeemable convertible preferred units at $.6375 per unit. A beneficial conversion feature in the amount of $171,875, was accreted to interest expense in full during the year ended December 31, 2007. | ||
On April 9, 2007, the Company issued a convertible note payable to an institutional investor for $535,000. This amount consisted of cash of $500,000 and financing costs of $35,000. This convertible note payable bore no interest, and was due on June 30, 2007. On June 5, 2007, this convertible note payable of $535,000 was converted into 713,333 Series B redeemable convertible preferred units at $.75 per unit. | ||
In
connection with the Agreement and Plan of Merger (see Note 10), the
Company entered into a Loan and Security Agreement and Secured Note with
Secure Alliance Holdings Corporation on December 6, 2007 in order to
ensure adequate funds through the merger closing date. The agreement
provides for Secure to loan a total of up to $2.5 million to the Company
through the merger closing date. A total of $1 million was received under
the Secured Note as of December 31, 2007. The amounts advanced
under the Secured Note are secured by all assets of the Company, accrue
interest at 10% per annum and principal and interest are due and payable
on December 31,
2008.
|
5. |
Convertible
Debentures and Notes Payable
Continued
|
If
the Company receives additional capital or conducts any sale of its assets
other than in the ordinary course of business prior to the due date, the
Company is obligated to use said proceeds to reduce the principal and
interest then payable under the Secured Note, up to the amount required to
pay the Secured Note in full.
|
6. | Capital Lease Obligations |
The
Company leases certain equipment and fixtures
under noncancelable long-term leases. These leases
provide the Company the option to purchase the leased assets at the end of
the initial lease terms at a bargain purchase price. Assets
held under these capital leases included in property and equipment were as
follows at December 31:
|
2007
|
2006
|
|||||||
Computers
and equipment
|
$ | 349,448 | $ | - | ||||
Furniture
and fixtures
|
37,600 | - | ||||||
387,048 | - | |||||||
Less
accumulated amortization
|
(53,623 | ) | - | |||||
$ | 333,425 | $ | - |
Depreciation expense for assets held under capital leases during the year ended December 31, 2007 was $53,623. | ||
Capital lease obligations have imputed interest rates from approximately 7% to 22% and are payable in aggregate monthly installments of approximately $13,000, maturing through 2010. The leases are secured by equipment. |
6. | Capital Lease Obligations Continued |
Future
maturities and minimum lease payments on the capital lease obligations are
as follows as of December 31,
2007:
|
Minimum
Lease Payments:
|
||||
2008
|
$ | 156,609 | ||
2009
|
154,089 | |||
2010
|
98,416 | |||
409,114 | ||||
Amount
representing interest
|
(68,215 | ) | ||
Total
principle
|
340,899 | |||
Current
portion
|
(118,288 | ) | ||
Long-term
portion
|
$ | 222,611 |
7. | Related Party Transactions |
In
December 2006, the Company entered into various loans with members of the
Company totaling $265,783. These loans bore interest at 10% per
annum and were payable on or before December 31,
2007. Loan origination fees of $20,005 were recorded as an
asset to be amortized over the life of the loans. On January 5,
2007, an additional $20,000 was loaned to the Company. In April
and May 2007, total outstanding principal, accrued interest, and loan
origination fees of $285,783, $10,376, and $20,005, respectively, were
paid and the associated asset was fully amortized.
|
The
institutional investor holding the convertible debentures and convertible
notes payable referenced in Note 5 qualifies as a related party based upon
its beneficial ownership. As described in Note 5, as of
December 31, 2006, a related party investor held convertible debentures in
the amount of $2,393,250 (before discount). As described in
Note 5, on May 8, 2007, these debentures and related accrued interest were
converted into 7,523,355 common units, or approximately 26% of the common
units outstanding after conversion.
|
||
Additionally, as described in Note 5, in January, February, and April of 2007, the Company issued $1,535,000 of additional convertible notes payable to the same institutional investor. In May and June of 2007, the notes payable and related accrued interest were converted into 2,318,318 Series B redeemable convertible preferred units. |
7. | Related Party Transactions Continued |
In
May and June of 2007, the Company also issued 6,486,666 Series B
redeemable convertible preferred units to the same institutional investor
in exchange for $2,000,000, net of issuance costs of $190,000, and a
subscription receivable of $2,675,000. The subscription receivable was
received in two installments on August 3, 2007 and September 11,
2007.
|
|
||
The Series B preferred units vote on an “as converted” to common units basis. Therefore, when combined with the 8,180,255 common units held, the institutional investor holds 16,985,239 equivalent votes, equivalent to 41% of the voting units outstanding at December 31, 2007. In connection with the sale of the Series B preferred units, the institutional investor appointed two individuals to the Board of Managers. | ||
Additionally, the Company entered into a Consulting Agreement (see Note 10) with the related party investor on August 1, 2007 whereby the investor will receive up to $775,000 over the next 12 month period for advising the Company with regard to financial transactions. The Company may terminate the agreement upon 30 days notice. | ||
On July 1, 2007, the Company finalized a Sales Representative Agreement with the related party investor whereby such investor is entitled to receive up to a 10% commission on adjusted sales to customers brought to the Company by the investor. The investor also received an option to purchase a total of 2,250,000 common units of the Company. A total of 1,500,000 of these options have an exercise price of $.16 and the remaining 750,000 options have an exercise price of $.52. The options vest at the rate of 750,000 per year at year end in 2007, 2008 and 2009 upon the achievement of certain sales levels. A formalized option agreement was executed on November 20, 2007 changing the exercise price of 750,000 options from $0.52 to $0.62 and the vesting dates to 2008, 2009, and 2010. The sales goals for the first group of 750,000 options was met and the options vested at the end of July, 2007, resulting in equity-based compensation expense of $371,955. |
8 . | Common and Preferred Units |
As
of December 31, 2006, the Company had authorized 90,000,000 common units
and 10,000,000 preferred units, all with no par value. As of
December 31, 2006, the Company had designated 3,746,485 preferred units as
Series A. On May 1, 2007, the Company modified the operating
agreement, thereby increasing the number of authorized preferred units to
20,000,000 and designating 12,000,000 preferred units as Series
B.
|
Series A Convertible Preferred Units | ||
During the years ended December 31, 2007 and 2006, there were no Series A preferred units issued. As of December 31, 2007 and 2006, there were 3,533,720 Series A preferred units outstanding. | ||
Series B Redeemable Convertible Preferred Units | ||
During the year ended December 31, 2007, there were 8,804,984 Series B preferred units issued as follows: | ||
On
January 19, 2007 and again on February 14, 2007, the Company issued
$500,000 of convertible notes payable to an institutional
investor. These convertible notes payable accrued interest at
9% per annum, and were due on June 30, 2007. These convertible
notes payable, plus accrued interest of $23,178, were converted into
1,604,985 Series B redeemable convertible preferred units at $.6375 per
unit. A beneficial conversion feature in the amount of $171,875, was
accreted to interest expense in full during the year ended December 31,
2007.
|
||
On
April 9, 2007, the Company issued a convertible note payable to an
institutional investor for $535,000. This amount consisted of
cash of $500,000 and financing costs of $35,000. This
convertible note payable bore no interest, and was due on June 30,
2007. This convertible note payable of $535,000 was converted
into 713,333 Series B redeemable convertible preferred units at $.75 per
unit.
|
||
In May and June of 2007, the Company issued 6,486,666 Series B redeemable convertible preferred units at $0.75 per unit to an institutional investor for a payment of $2,000,000, net of issuance costs of $190,000, and the issuance of a subscription receivable of $2,675,000. Payment of the subscription receivable was received in two installments on August 3, 2007 and September 11, 2007. | ||
As
of December 31, 2007, there were 8,804,984 units of Series B preferred
units
outstanding.
|
8. | Common and Preferred Units Continued |
Rights
and Preferences of Convertible Preferred
Units
The rights, terms, and preferences of the Series A convertible
preferred units and Series B redeemable convertible preferred units are as
follows:
|
● Voting - The Series A
convertible preferred units and the Series B redeemable convertible
preferred units vote on an “as if converted” to common unit basis together
with the Company’s common units on all matters put to a vote of the
holders of the common units. As long as at least 6.4 million Series B
redeemable convertible preferred units are outstanding, the Board of
Managers shall consist of five managers, two of whom shall be elected by a
majority of the outstanding Series B redeemable convertible preferred unit
holders and the remainder elected by the holders of Series A convertible
preferred units and common units, voting as a single
class.
|
||
● Distributions - Series B
redeemable convertible preferred units holders are entitled to a
cumulative annual distribution of $.06 per unit. Series A
convertible preferred unit holders are entitled to receive distributions
from the Company as established by the Board of
Managers.
|
||
● Liquidation – The assets
of the Company are distributed as follows in the event of liquidation,
dissolution or winding up of the Company (including the sale of
substantially all of the assets of the Company): i) the Series B
redeemable convertible preferred units are entitled to a liquidation
preference of $0.75 per unit, plus all accrued and unpaid distributions;
ii) the Series A convertible preferred units are entitled to a liquidation
preference in the amount of $0.1335 per unit; iii) the common units are
entitled to $0.1335 per unit; and iv) any remaining assets are distributed
among the holders of Series A convertible preferred units, Series B
redeemable convertible preferred units and common units, pro rata, on an
as-converted to common unit basis.
|
||
In
the event that there are not sufficient assets available for the entire
liquidation preference of a given class, the assets of the Company are
distributed ratably among the holders of such class on a pro rata
basis.
|
8. | Common and Preferred Units Continued |
Rights
and Preferences of Convertible Preferred Units - Continued
|
● Redemption (Series B
only) – The Company has the right to redeem Series B redeemable
convertible preferred units for $.75 per unit plus all accrued and unpaid
distributions, with a written notice of not less than 45 days and not more
than 60 days, subject to holders’ first right to convert Series B
redeemable convertible preferred units to common units. The Series B
redeemable convertible preferred unit holders have at least 45 days from
receiving notice from the Company to decide whether to have Series B
redeemable convertible preferred units redeemed for cash or converted to
common units. At anytime after four years from the date of
issuance, the Series B redeemable convertible preferred unit holders have
the right to have the Company redeem all or a portion of Series B
redeemable convertible preferred units. Within 60 days after
receipt of a written notice, the Company is required to redeem such units
at $.75 per unit plus all accrued and unpaid
distributions.
|
||
● Conversion (Series A) -
The Series A convertible preferred units are convertible at any time at
the option of the holder into common units, one for one. Series
A convertible preferred units automatically convert on the earliest of i)
the effective date of the registration statement for the Company’s initial
public offering of the common units, ii) the date on which the common
units are listed or sale on a national stock exchange or have their sales
or bid price quoted on NASDAQ, iii) the merger or consolidation of the
Company with another company, iv) the sales of all of the outstanding
common units, v) the sales of substantially all of the Company’s assets,
or vi) the approval of the holders of a majority of the outstanding Series
A convertible preferred
units.
|
8. |
Common and
Preferred
Units
Continued
|
Rights
and Preferences of Convertible Preferred Units -Continued
|
● Conversion (Series B) -
The Series B redeemable convertible preferred units are convertible at any
time at the option of the holder into common units, one for
one. However, if the Company subsequently sells common units
(New Issuance) for less than the Series B redeemable convertible preferred
unit purchase price of $.75 (Conversion Price), a broad based, weighted
average adjustment is made to the Conversion Price by multiplying the
Conversion Price by the following fraction: the numerator is
the number of units outstanding prior to a New Issuance plus the number of
units the new consideration would purchase at the conversion price in
effect prior to a New Issuance, and the denominator is the number of units
outstanding prior to a New Issuance plus the number of additional units
issued in the New Issuance. Series B redeemable convertible
preferred units automatically convert to common units on the earliest of
i) the effective date of the registration statement for the Company’s
initial public offering of the common units if a) the per common units
offering price is at least 200% of the redemption price of the Series B
redeemable convertible preferred units, and b) the public offering will
result in gross proceeds of at least $40 million, or ii) thirty days after
written the Company if within ninety days after a merger or consolidation
of the Company with another company all of the following have occurred: a)
the common units issuable upon conversion are registered for resale, b)
the average volume weighted average per common unit price of the common
units for twenty consecutive trading days prior to the date of notice of
conversion is given is not less than 200% of the redemption price of the
Series B redeemable convertible preferred units, and c) the daily average
trading volume for twenty consecutive trading days prior to the date
notice of conversion is given is not less than 5% of the outstanding
common units.
|
||
● Common Units Reserved –
The Company must at all times reserve and keep available out of its
authorized but unissued common unites, solely for the purpose of effecting
the conversion of preferred units, the number of units needed to do
so. This totaled 12,338,704 and 3,533,720 as of
December 31, 2007 and December 31, 2006,
respectively.
|
||
8. |
Common and
Preferred
Units
Continued
|
Common Units |
|
Subject to the rights of holders of Series A convertible preferred units and Series B redeemable convertible preferred units, common unit holders are entitled to receive distributions when, as and if declared by the Board of Managers. Common unit holders are entitled to one vote for each common unit held. | |
9. | Options and Warrants | Common Unit Warrants |
|
The following tables summarize information about common unit warrants as of December 31, 2007 and December 31, 2006: |
|
As
of December 31, 2007
|
|||||||||||||
|
Outstanding
and Exercisable
|
|||||||||||||
Exercise
Price
|
Number
of Warrants Outstanding
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
|||||||||||
$ | 0.24 | 1,727,605 | 0.1 | $ | 0.24 | |||||||||
0.46 | 1,190,000 | 1.5 | 0.46 | |||||||||||
$ | .24-.46 | 2,917,605 | 0.7 | $ | 0.33 |
As of December
31, 2006
|
||||||||||||||
Outstanding
and Exercisable
|
||||||||||||||
Exercise
Price
|
Number
of Warrants Outstanding
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
|||||||||||
$ | 0.24 | 1,727,605 | 1.1 | $ | 0.24 | |||||||||
0.46 | 1,190,000 | 2.5 | 0.46 | |||||||||||
$ | .24-.46 | 2,917,605 | 1.7 | $ | 0.33 |
Warrants for the purchase of 2,917,605 common units were granted in 2006 in connection with convertible debt and expire in 2008, and 2009. The warrants were valued at a total of $251,552 and are included as a component of members’ deficit in the accompanying statements of members’ deficit. |
9. | Options and Warrants Continued | Common Unit Warrants - Continued |
|
Subsequent to December 31, 2007, 1,727,605 warrants with an exercise price of $.24 were exercised for total proceeds of $414,625 received by the Company in January 2008. | |
Common Unit Options | ||
The
following tables summarize information about common unit
options:
|
December
31, 2007
|
December
30, 2006
|
|||||||||||||||
Number
of shares
|
Weighted-
Average Exercise Price
|
Number
of Shares
|
Weighted-
Average Exercise Price
|
|
||||||||||||
Outstanding
at beginning of year
|
818,000 | $ | 0.29 | - | $ | - | ||||||||||
Granted
|
5,695,000 | 0.50 | 818,000 | 0.29 | ||||||||||||
Exercised
|
- | - | - | - | ||||||||||||
Cancelled
|
(20,000 | ) | 0.36 | - | - | |||||||||||
Outstanding
at end of year
|
6,493,000 | 0.47 | 818,000 | 0.29 | ||||||||||||
Exercisable
at year end
|
1,253,250 | 0.21 | - | |||||||||||||
Weighted
average fair value of options
granted during the year
|
$ | 0.29 | $ | 0.14 |
As
of December 31, 2007
|
||||||||||||||||||||||||||
Outstanding
|
Exercisable
|
|||||||||||||||||||||||||
Exercise
|
Number
of Options
|
Remaining
Contractual Weighted Average
Actual Life |
|
Number
of Options
|
|
Average
Exercise
|
Weighted
Average Remaining Contractual
|
|||||||||||||||||||
Price
|
Outstanding
|
(Years)
|
Price
|
Exercisable
|
Price
|
Life
(Years)
|
||||||||||||||||||||
$ | 0.16 | 1,500,000 | 4.5 | $ | 0.16 | 750,000 | $ | 0.16 | 4.0 | |||||||||||||||||
0.24 | 510,000 | 3.3 | .24 | 340,000 | .24 | 3.3 | ||||||||||||||||||||
0.36 | 288,000 | 3.7 | .36 | 163,250 | .36 | 3.7 | ||||||||||||||||||||
0.62 | 4,195,000 | 5.2 | 0.62 | - | ||||||||||||||||||||||
$ | .16-.62 | 6,493,000 | 4.8 | $ | 0.47 | 1,253,250 | $ | 0.21 | 3.8 |
9. | Options andWarrants Continued | Common Unit Options - Continued |
As
of December 31, 2006
|
|||||||||||||||||||||||||||
Outstanding
|
Exercisable
|
||||||||||||||||||||||||||
Exercise
Price
|
Number
of Options Outstanding
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
Number
of Options Exercisable
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|||||||||||||||||||||
$ | 0.24 | 510,000 | 4.3 | $ | 0.24 | - | $ | - | - | ||||||||||||||||||
0.36 | 308,000 | 4.7 | 0.36 | - | - | - | |||||||||||||||||||||
$ | .24–.36 | 818,000 | 4.5 | $ | .24–.36 | - | - | - |
As of December 31, 2007 and 2006, options outstanding had an aggregate intrinsic value of $471,864 and $45,900, respectively. | ||
As of December 31, 2007 and 2006, there was approximately $780,636 and $77,015, respectively, of total unrecognized equity-based compensation cost related to option grants that will be recognized over a weighted average period of 2.6 and 2.4 years. | ||
10. | Commitments and Contingencies | Litigation |
|
On December 17, 2007, Robert L. Bishop, who worked with the Company in a limited capacity in 2004 and is a current member of a limited liability company that owns an equity interest in the Company, filed a legal claim against the Company for unpaid wages and/or commissions (with no amount specified) and promised equity. The complaint was served on the Company on January 7, 2008. The Company timely filed an answer denying Mr. Bishop’s claim. Management believes the demand for payment is without basis, evidence, or meaningful information and intends to vigorously defend against it. Due to the early stage of the proceedings, management is unable to estimate the likelihood of a negative outcome or estimate the potential liability due to this claim. |
10. | Commitments and Contingencies Continued | Operating Leases |
|
The Company has operating leases for office space and co-location services with terms expiring in 2009, 2010, and 2012. Future minimum lease payments are approximately as follows: |
Years
Ending December 31,
|
Amount
|
|||
2008
|
$ | 218,300 | ||
2009
|
211,900 | |||
2010
|
67,600 | |||
2011
|
5,400 | |||
2012
|
3,600 | |||
|
||||
$ | 506,800 |
Rental expense under operating leases totaled $340,828 and $71,831 for the years ended December 31, 2007 and 2006, respectively. | ||||
|
Agreement and Plan of Merger | |||
Effective December 6, 2007, Secure Alliance Holdings Corporation (SAH) a publicly held company and the Company executed an Agreement and Plan of Merger, whereby SAH agreed to acquire 100% of the issued and outstanding equity units of the Company. Each issued and outstanding membership interest of the Company will be converted into the right to receive .87096285 post-split shares of the SAH’s common stock, or approximately 80% of its post-reorganization outstanding common stock. | ||||
The Company is considered the acquirer for accounting purposes; therefore, this merger will be accounted for as a reverse acquisition. As a result of the merger, the Company will receive approximately $9.8 million in cash to fund operations. | ||||
In
connection with the Agreement and Plan of Merger, the Company entered into
a Loan and Security agreement and Secured Note with SAH on December 6,
2007 in order to ensure adequate funds through the closing date. The
agreement provides for SAH to loan a total of up to $2.5 million to the
Company through the closing date. A total of $1 million was received under
the Secured Note on December 6, 2007. On January 15, 2008
and February 15, 2008, the Company received $1,000,000 and $500,000,
respectively, under the Secured Note (see Note 6).
|
10. |
Commitments
and
Contingencies Continued
|
Contingency
The Company has executed a letter agreement with an
institutional investor which provides for the issuance of an additional
1,525,000 common units upon the voluntary conversion of all outstanding
Series B preferred units owned by the investor. The agreement calls for
the conversion of the Series B preferred units into common units
immediately preceding the closing of the merger described
above.
|
Purchase
Commitments
On
November 29, 2007, the Company entered into an agreement which includes a
noncancelable purchase commitment for minimum guaranteed royalties in the
amount of $97,000
|
||
Warranty
Obligations
The
Company provides a 90-day warranty on certain manufactured products. As of
December 31, 2007, these obligations have not been significant. The
Company does not expect these obligations to become significant in the
future and no related liability has been accrued as of December 31, 2007
and 2006.
|
||
11. | Retirement Plan | On January 1, 2007, the Company established a 401(k) defined contribution plan that covers eligible employees who have completed a minimum of three months of service and who are 21 years of age or older. Employees may elect to contribute to the plan up to 100 percent of their annual compensation up to a limit of $16,000 in 2008, and increasing by $500 each year thereafter for inflation or as defined and limited by the Internal Revenue Code. To date, the Company has not made any employer contributions to the plan and is not required to do so. |
12. | Subsequent Events |
Note
Payable
In
January and February, 2008, the Company received an additional $1,500,000
under the Secured Note (see Note 5).
|
|
||
Warrant
Exercise
On January 31,
2008, an institutional investor exercised warrants to purchase 1,727,605
common equity units of the Company with an exercise price of $.24 per unit
and total proceeds of
$414,625 .
|
12. | Subsequent Events Continued |
Modification
to Merger Agreement
|
|
The
Company agreed to amend its agreement with Secure Alliance Holdings, Inc.
(SAH) to provide for a 1 for 2 reverse stock split rather than a 1 for 3
reverse stock split upon consummation of the
merger. Accordingly, each outstanding membership interest in
the Company will be converted into the right to receive .87096285
post-split shares of SAH common stock.
|
|
Closing of Merger Agreement | ||
On June 6, 2008, the Company closed the merger transaction with SAH. In connection with the merger transaction, the unit holders of the Company exchanged all of their units for shares of common stock of SAH. The number of shares of SAH stock received in the merger represent approximately 80% of the total outstanding shares of SAH. Because the unit holders of the Company obtained a majority ownership in SAH through the merger, the transaction will be accounted for as a reverse merger. As a result of the merger, the Company received approximately $7.3 million in cash to fund operations in addition to the $2.5 million previously loaned to the Company by SAH. |
June
30,
2008
|
||||
Assets
|
||||
Current
Assets:
|
||||
Cash
and cash equivalents
|
$ | 4,573,375 | ||
Accounts
receivable
|
239,354 | |||
Marketable
securities available-for-sale
|
221,915 | |||
Prepaid
expenses
|
274,102 | |||
Other
current assets
|
285,238 | |||
Total
current assets
|
5,593,984 | |||
Property
and equipment, net
|
832,357 | |||
Intangible
assets, net
|
96,044 | |||
Other
assets
|
20,408 | |||
Total
assets
|
$ | 6,542,793 | ||
Liabilities and
Stockholders’ Equity
|
||||
Current
Liabilities:
|
||||
Accounts
payable
|
$ | 173,856 | ||
Accrued
liabilities
|
565,869 | |||
Current
portion of capital leases
|
133,680 | |||
Current
portion of deferred rent
|
44,864 | |||
Deferred
revenue
|
451,391 | |||
Total
current liabilities
|
1,369,660 | |||
Capital
lease obligations, net of current portion
|
166,488 | |||
Deferred
rent, net of current portion
|
51,526 | |||
Total
liabilities
|
1,587,674 | |||
Commitments
and contingencies
|
||||
Common
stock, $.01 par value, authorized 250,000,000 shares; issued and
outstanding 48,737,928 shares
|
487,379 | |||
Additional
paid-in capital
|
22,221,856 | |||
Accumulated
deficit
|
(17,672,731 | ) | ||
Accumulated
other comprehensive loss
|
(81,385 | ) | ||
Total
stockholders’ equity (deficit)
|
4,955,119 | |||
Total
liabilities and stockholders’ equity
|
$ | 6,542,793 |
Six
Months Ended
June
30,
|
||||||||
2008
|
2007
|
|||||||
Revenues
|
$ | 189,699 | $ | 251,080 | ||||
Operating
expense:
|
||||||||
Cost
of sales
|
433,633 | 22,954 | ||||||
Research
and development
|
990,530 | 797,886 | ||||||
Selling
and marketing
|
966,796 | 513,994 | ||||||
General
and administrative
|
2,468,896 | 1,328,359 | ||||||
Depreciation
and amortization
|
114,206 | 84,623 | ||||||
Total
operating expense
|
4,974,061 | 2,747,816 | ||||||
Loss
from operations
|
(4,784,362 | ) | (2,496,736 | ) | ||||
Other
income (expense):
|
||||||||
Interest
income
|
26,533 | 13,901 | ||||||
Interest
expense
|
(126,112 | ) | (671,166 | ) | ||||
Total
other income (expense)
|
(99,579 | ) | (657,265 | ) | ||||
Loss
before income taxes
|
(4,883,941 | ) | (3,154,001 | ) | ||||
Income
tax benefit
|
- | - | ||||||
Net
loss
|
(4,883,941 | ) | (3,154,001 | ) | ||||
Preferred
dividends and deemed dividends
|
(976,000 | ) | (190,000 | ) | ||||
Distributions
on Series B redeemable convertible preferred units
|
(225,773 | ) | (41,931 | ) | ||||
Net
loss applicable to common stockholders
|
$ | (6,085,714 | ) | $ | (3,385,932 | ) | ||
Basic
and diluted loss per common share
|
$ | (0.15 | ) | $ | (0.09 | ) | ||
Weighted
average common and common equivalent shares used to calculate loss per
share:
|
||||||||
Basic
and diluted
|
40,278,631 | 38,986,114 |
Common
Stock
|
Additional
Paid-
|
LLC
Series Convertible Preferred
|
LLC
Common
|
Accumulated
|
Accumulated
Other Comprehensive
|
Members'/
Stockholders'
Equity
|
||||||||||||||||||||||||||
Shares
|
Amount
|
in
Capital
|
Units
|
Units
|
Deficit
|
Loss
|
(
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
|
- | - | 36,969 | - | 125,101 | - | - | 162,070 | ||||||||||||||||||||||||
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
|
9,742,016 | 97,420 | 9,719,922 | - | - | - | - | 9,817,342 | ||||||||||||||||||||||||
Common
stock issued upon exercise of options
|
9,798 | 98 | 3,952 | - | - | - | - | 4,050 | ||||||||||||||||||||||||
Unrealized
loss on marketable securities available
for
sale
|
- | - | - | - | - | (81,385 | ) | (81,385 | ) | |||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | (4,883,941 | ) | - | (4,883,941 | ) | ||||||||||||||||||||||
Balance,
June 30, 2008
|
48,737,928 | $ | 487,379 | $ | 22,221,856 | $ | - | $ | - | $ | (17,672,731 | ) | $ | (81,385 | ) | $ | 4,955,119 | |||||||||||||||
2008
|
2007
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (4,883,941 | ) | $ | (3,154,001 | ) | ||
Adjustments
to reconcile net loss to net
|
||||||||
cash
used in operating activities
|
||||||||
Depreciation
and amortization
|
221,424 | 297,713 | ||||||
Accretion
of debt discount
|
- | 338,593 | ||||||
Equity-based
compensation
|
162,070 | 24,429 | ||||||
(Gain)
loss on disposal of equipment
|
(38 | ) | 1,063 | |||||
Decrease
(increase) in:
|
||||||||
Accounts
receivable
|
209,035 | (78,333 | ) | |||||
Unbilled
accounts receivable
|
- | 245,660 | ||||||
Inventory
|
(22,748 | ) | (22,383 | ) | ||||
Prepaid
expenses
|
(120,742 | ) | 50,511 | |||||
Deferred
costs
|
60,424 | - | ||||||
Deposits
and other current assets
|
37,398 | 18,985 | ||||||
Increase
(decrease) in:
|
||||||||
Accounts
payable
|
67,839 | 181,748 | ||||||
Accrued
liabilities
|
(363,533 | ) | 52,182 | |||||
Deferred
rent
|
(14,029 | ) | - | |||||
Deferred
revenue
|
(42,208 | ) | 114,180 | |||||
Net
cash used in operating activities
|
(4,689,049 | ) | (1,929,653 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchase
of property and equipment
|
(38,791 | ) | (360,563 | ) | ||||
Purchase
of intangible assets
|
(26,355 | ) | - | |||||
Net
cash used by investing activities
|
(65,146 | ) | (360,563 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from convertible debentures
|
- | 1,535,000 | ||||||
Payment
of loan costs
|
- | (117,080 | ) | |||||
Payment
on members notes
|
- | (265,783 | ) | |||||
Proceeds
from issuance of Series B preferred units
|
- | 2,050,000 | ||||||
Net
cash received in reverse merger
|
7,098,010 | - | ||||||
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
|
(60,160 | ) | (2,296 | ) | ||||
Net
cash provided by financing activities
|
8,468,501 | 3,199,841 | ||||||
Net
increase in cash and cash equivalents
|
3,714,306 | 909,625 | ||||||
Cash
and cash equivalents at beginning of period
|
859,069 | 168,692 | ||||||
Cash
and cash equivalents at end of period
|
$ | 4,573,375 | $ | 1,078,317 | ||||
Cash
paid for income taxes
|
$ | 113,028 | $ | - | ||||
Cash
paid for interest
|
$ | 22,277 | $ | 12,362 |
·
|
The
Company issued 1,525,000 common units to Amerivon Holdings Inc. (Amerivon)
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 inducements
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 $81,385.
|
·
|
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
|
Cash
- $7,098,010
|
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 - $103,834 (eliminated against interest payable to
SAH)
|
o
|
Accounts
payable - $30,899
|
o
|
Accrued
expenses - $209,465
|
·
|
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 acquired $37,600 of office furniture through capital lease
agreements.
|
Expected
dividend yield
|
-
|
|||
Expected
share price volatility
|
40%
- 198%
|
|||
Risk-free
interest rate
|
4.06%
- 7.50%
|
|||
Expected
life of options
|
2.5
years – 4.25 years
|
June
30,
2008
|
December
31, 2007
|
||||||
Bonuses
payable
|
$ | 270,000 | $ | 554,000 | |||
Payroll
and payroll taxes payable
|
267,674 | 229,245 | |||||
Other
|
28,195 | 40,527 | |||||
Totals
|
$ | 565,869 | $ | 823,772 |
As
June 30, 2008
Outstanding
|
As
June 30, 2008
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 | 1.0 | $ | 0.53 | 949,350 | 0.53 | |||||||||||||||
1.16 | 300,000 | 6.0 | 1.16 | - | - | |||||||||||||||||
$ | .53 – 1.16 | 1,249,350 | 2.2 | $ | 0.68 | 949,350 | 0.53 |
Number
of shares
|
Weighted-
Average Exercise Price
|
|||||||
Outstanding
at January 1, 2008
|
6,605,161 | $ | 0.64 | |||||
Granted
|
- | - | ||||||
Exercised
|
(9,798 | ) | 0.41 | |||||
Cancelled
|
(123,459 | ) | 0.70 | |||||
Outstanding
at June 30, 2008
|
6,471,904 | 0.64 | ||||||
Exercisable
at June 30, 2008
|
1,510,430 | 0.46 | ||||||
Weighted
average fair value of
options
granted during the period
|
$ | - |
|
As
of June 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 | 4.0 | $ | 0.18 | 653,222 | $ | 0.18 | 3.5 | |||||||||||||||||
0.28 | 444,191 | 2.8 | 0.28 | 351,651 | 0.28 | 2.8 | ||||||||||||||||||||
0.41 | 235,160 | 3.2 | 0.41 | 162,761 | 0.41 | 3.2 | ||||||||||||||||||||
0.71 | 3,536,109 | 4.7 | 0.71 | 26,129 | 0.71 | 4.5 | ||||||||||||||||||||
1.24 | 950,000 | 2.7 | 1.24 | 316,667 | 1.24 | 2.7 | ||||||||||||||||||||
$ | .18 - 1.24 | 6,471,904 | 4.1 | $ | 0.64 | 1,510,430 | $ | 0.46 | 3.2 |
Years
Ending December 31,
|
Amount
|
|||
2008
|
$ | 158,400 | ||
2009
|
309,100 | |||
2010
|
139,400 | |||
2011
|
5,400 | |||
2012
|
3,600 | |||
Total
|
$ | 615,900 |
·
|
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 Measurements at Reporting Date Using
|
||||||||||||||||
Description
|
Balance
at June 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
|
$ | 221,915 | $ | 221,915 | - | - |
Sequoia Six
Months ended |
SAH Six
Months ended |
Pro
Forma Adjustments
|
Pro
Forma Combined
|
|||||||||||||||||
Sales
|
$ | 189,699 | $ | - | $ | 189,699 | ||||||||||||||
Operating
expense:
|
||||||||||||||||||||
Cost
of sales
|
433,633 | - | 433,633 | |||||||||||||||||
Research
and development
|
990,530 | - | 990,530 | |||||||||||||||||
Selling
and marketing
|
966,796 | - | 966,796 | |||||||||||||||||
General
and administrative
|
2,468,896 | 730,288 | 3,199,184 | |||||||||||||||||
Depreciation
and amortization
|
114,206 | - | 114,206 | |||||||||||||||||
Total
operating expense
|
4,974,061 | 730,288 | 5,704,349 | |||||||||||||||||
Income
(loss) from operations
|
(4,784,362 | ) | (730,288 | ) | (5,514,650 | ) | ||||||||||||||
Other
income (expense):
|
||||||||||||||||||||
Interest
income
|
26,533 | 246,176 |
[C],[D]
|
(123,000 | ) | 149,709 | ||||||||||||||
Interest
expense
|
(126,112 | ) | - |
[D]
|
98,000 | (28,112 | ) | |||||||||||||
Total
other income (expense)
|
(99,579 | ) | 246,176 | 121,597 | ||||||||||||||||
Loss
before income taxes and discontinued operationsfrom continuing
operations
|
(4,883,941 | ) | (484,112 | ) | (5,393,053 | ) | ||||||||||||||
Income
tax expense
|
- | - | - | |||||||||||||||||
Loss
from continuing operations
|
(4,883,941 | ) | (484,112 | ) | (5,393,053 | ) | ||||||||||||||
Preferred
dividends and deemed dividends
|
(1,201,773 | ) | - | (1,201,773 | ) | |||||||||||||||
Net
loss applicable to common unit/shareholders
|
$ | (6,085,714 | ) | $ | (484,112 | ) | $ | (6,594,826 | ) | |||||||||||
Basic
and diluted earnings (loss) per share:
|
||||||||||||||||||||
Loss
from continuing operations
|
$ | (0.15 | ) | $ | (0.16 | ) | ||||||||||||||
Basic
weighted average common shares outstanding
|
40,278,631 | 40,278,631 | ||||||||||||||||||
Sequoia Year
ended |
SAHC Year
ended |
Pro
Forma Adjustments
|
Pro
Forma Combined
|
|||||||||||||||||
Sales
|
$ | 541,856 | $ | - | $ | 541,856 | ||||||||||||||
Operating
expense:
|
||||||||||||||||||||
Cost
of sales
|
57,068 | - | 57,068 | |||||||||||||||||
Research
and development
|
1,890,852 | - | 1,890,852 | |||||||||||||||||
Selling
and marketing
|
1,351,860 | - | 1,351,860 | |||||||||||||||||
General
and administrative
|
3,677,326 | 1,333,467 | 5,010,793 | |||||||||||||||||
Depreciation
and amortization
|
277,458 | - | 277,458 | |||||||||||||||||
Total
operating expense
|
7,254,564 | 1,333,467 | 8,588,031 | |||||||||||||||||
Income
(loss) from operations
|
(6,712,708 | ) | (1,333,467 | ) | (8,046,175 | ) | ||||||||||||||
Other
income (expense):
|
||||||||||||||||||||
Reorganization
fee paid to Laurus
|
- | (6,508,963 | ) | (6,508,963 | ) | |||||||||||||||
Interest
income
|
66,524 | 580,861 | 647,385 | |||||||||||||||||
Interest
expense
|
(693,217 | ) | (693,217 | ) | ||||||||||||||||
Total
other income (expense)
|
(626,693 | ) | (5,928,102 | ) | (6,554,795 | ) | ||||||||||||||
Loss
before income taxes and discontinued operations
|
(7,339,401 | ) | (7,261,569 | ) | (14,600,970 | ) | ||||||||||||||
Income
tax expense
|
- | 75,808 | 75,808 | |||||||||||||||||
Loss
from continuing operations
|
(7,339,401 | ) | (7,337,377 | ) | (14,676,778 | ) | ||||||||||||||
Preferred
dividends and deemed dividends
|
(498,251 | ) | - | [B | ] | (976,000 | ) | (1,474,251 | ) | |||||||||||
Net
loss from continuing operations applicable
|
||||||||||||||||||||
to
common unit/shareholders
|
$ | (7,837,652 | ) | $ | (7,337,377 | ) | $ | (16,151,029 | ) | |||||||||||
Basic
earnings (loss) per share:
|
||||||||||||||||||||
Loss
from continuing operations
|
(0.38 | ) | (0.33 | ) | ||||||||||||||||
Basic
weighted average common shares outstanding
|
19,563,447 | [A | ] | (9,802,268 | ) | 48,747,293 | ||||||||||||||
[E | ] | 38,986,114 | ||||||||||||||||||
SEC
registration fee
|
$ | 692 | ||
Accounting
fees and expenses
|
20,000 | |||
Legal
fees and expenses
|
50,000 | |||
Miscellaneous
|
500 | |||
TOTAL
|
$ | 71,192 |
Exhibit
|
Description
|
2.1
|
Agreement
and Plan of Merger dated December 6, 2007 (incorporated by reference to
exhibit 2.1 to the registrant’s current report on Form 8-K filed on
December 6, 2007).
|
2.2
|
Amendment
to Agreement and Plan of Merger dated March 31, 2008 (incorporated by
reference to exhibit 2.1 to the registrant’s current report on Form 8-K
filed on April 4, 2008.
|
3.1
|
Articles
of Merger relating to the merger of Merger Sub. with and into AVI Media,
Inc. (incorporated by reference to exhibit 3.1 to the registrant’s current
report on Form 8-K filed on June 11, 2007).
|
3.2
|
Certificate
of Incorporation of American Medical Technologies, Inc. (incorporated by
reference to Exhibit 2 of the Form 10 dated November 7, 1988 as amended by
Form 8 dated February 2, 1989), as amended by the Amendment to Certificate
of Incorporation dated July 16, 1997 (incorporated by reference to Exhibit
3 of our Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1997) and the Certificate of Amendment to Certificate of Incorporation
regarding name change, increase in authorized shares, authorization of
preferred stock and a reverse split (incorporated by reference to exhibit
3.1 to the registrant’s current report on Form 8-K filed on June 11,
2007).
|
5.1
*
|
Legal
Opinion and Consent
|
10.1
|
Employment
Agreement – Chett B. Paulsen (incorporated by reference to the
registrant’s current report on Form 8-K filed on June 11,
2007).
|
10.2
|
Employment
Agreement – Richard B. Paulsen (incorporated by reference to the
registrant’s current report on Form 8-K filed on June 11,
2007).
|
10.3
|
Employment
Agreement – Edward B. Paulsen (incorporated by reference to the
registrant’s current report on Form 8-K filed on June 11,
2007).
|
10.4
|
Employment
Agreement – Terry Dickson (incorporated by reference to the registrant’s
current report on Form 8-K filed on June 11, 2007).
|
10.5
|
2008
Stock Incentive Plan (incorporated by reference to the Definitive Proxy
Statement filed April 29, 2008).
|
10.6
|
Loan
and Security Agreement, dated as of December 6, 2007, between Sequoia
Media Group, LC and Secure Alliance Holdings Corporation (incorporated by
reference to Exhibit 10.18 of our Annual Report on Form 10-K for the
fiscal year ended September 30, 2007).
|
10.7
*
|
Consulting
Agreement between Amerivon Holdings LLC and aVinci Media, LC, effective as
of August 1, 2007
|
10.8
*
|
Sales
Representation Agreement between Amerivon Holdings LLC and aVinci Media,
LC, effective as of July 1, 2008
|
10.9
*
|
Sales
Representation Agreement Amendment between Amerivon Holdings LLC and
aVinci Media, LC, as of November 7, 2007 to be effective as of July 1,
2007
|
10.10
*
|
Sales
Consulting Agreement between Amerivon Holdings LLC and aVinci Media, LC,
effective as of July 1, 2008
|
23.1
*
|
Consent
of Tanner LC
|
23.2
*
|
Consent
of Sichenzia Ross Friedman Ference LLP (contained in Exhibit
5.1)
|
/s/
Chett B. Paulsen
|
President,
Chief Executive Officer, Director
|
September
25, 2008
|
||
Chett
B. Paulsen
|
(Principal
Executive Officer)
|
|||
/s/
Richard B. Paulsen
|
Vice
President, Chief Technology Officer, Director
|
September
25, 2008
|
||
Richard
B. Paulsen
|
||||
/s/
Edward B. Paulsen
|
Secretary/Treasurer,
Chief Operating Officer, Director
|
September
25, 2008
|
||
Edward
B. Paulsen
|
(Principal
Financial and Accounting Officer)
|
/s/
Tod M. Turley
|
Director
|
September
25, 2008
|
||
Tod
M. Turley
|
||||
/s/
John E. Tyson
|
Director
|
September
25, 2008
|
||
John
E. Tyson
|
||||
|
Director
|
September
25, 2008
|
||
Jerrell
G. Clay
|
||||
/s/
Stephen P. Griggs
|
Director
|
September
25, 2008
|
||
Stephen
P. Griggs
|
Exhibit
|
Description
|
2.1
|
Agreement
and Plan of Merger dated December 6, 2007 (incorporated by reference to
exhibit 2.1 to the registrant’s current report on Form 8-K filed on
December 6, 2007).
|
2.2
|
Amendment
to Agreement and Plan of Merger dated March 31, 2008 (incorporated by
reference to exhibit 2.1 to the registrant’s current report on Form 8-K
filed on April 4, 2008.
|
3.1
|
Articles
of Merger relating to the merger of Merger Sub. with and into AVI Media,
Inc. (incorporated by reference to exhibit 3.1 to the registrant’s current
report on Form 8-K filed on June 11, 2007).
|
3.2
|
Certificate
of Incorporation of American Medical Technologies, Inc. (incorporated by
reference to Exhibit 2 of the Form 10 dated November 7, 1988 as amended by
Form 8 dated February 2, 1989), as amended by the Amendment to Certificate
of Incorporation dated July 16, 1997 (incorporated by reference to Exhibit
3 of our Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1997) and the Certificate of Amendment to Certificate of Incorporation
regarding name change, increase in authorized shares, authorization of
preferred stock and a reverse split (incorporated by reference to exhibit
3.1 to the registrant’s current report on Form 8-K filed on June 11,
2007).
|
5.1
*
|
Legal
Opinion and Consent
|
10.1
|
Employment
Agreement – Chett B. Paulsen (incorporated by reference to the
registrant’s current report on Form 8-K filed on June 11,
2007).
|
10.2
|
Employment
Agreement – Richard B. Paulsen (incorporated by reference to the
registrant’s current report on Form 8-K filed on June 11,
2007).
|
10.3
|
Employment
Agreement – Edward B. Paulsen (incorporated by reference to the
registrant’s current report on Form 8-K filed on June 11,
2007).
|
10.4
|
Employment
Agreement – Terry Dickson (incorporated by reference to the registrant’s
current report on Form 8-K filed on June 11, 2007).
|
10.5
|
2008
Stock Incentive Plan (incorporated by reference to the Definitive Proxy
Statement filed April 29, 2008).
|
10.6
|
Loan
and Security Agreement, dated as of December 6, 2007, between Sequoia
Media Group, LC and Secure Alliance Holdings Corporation (incorporated by
reference to Exhibit 10.18 of our Annual Report on Form 10-K for the
fiscal year ended September 30, 2007).
|
10.7
*
|
Consulting
Agreement between Amerivon Holdings LLC and aVinci Media, LC, effective as
of August 1, 2007
|
10.8
*
|
Sales
Representation Agreement between Amerivon Holdings LLC and aVinci Media,
LC, effective as of July 1, 2008
|
10.9
*
|
Sales
Consulting Agreement between Amerivon Holdings LLC and aVinci Media, LC,
effective as of July 1, 2008
|
23.1
*
|
Consent
of Tanner LC
|
23.2
*
|
Consent
of Sichenzia Ross Friedman Ference LLP (contained in Exhibit
5.1)
|