form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
T
|
Quarterly Report Pursuant to
Section 13 or 15(d) of the SecuritiesExchange Act of
1934
|
For the
quarterly period ended September 30, 2009
or
*
|
Transition Report Pursuant to
Section 13 or 15(d) of the SecuritiesExchange Act of
1934
|
For
the transition period from __________ to __________
Commission
file Number 000-17288
aVINCI
MEDIA CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
75-2193593
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
11781
South Lone Peak Parkway, Suite 270, Draper, UT
|
84020
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (801) 495-5700
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days. Yes x
No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer o
|
|
Accelerated
filer o
|
Non-accelerated
filer o
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o
No x
The
number of shares of common stock outstanding as of the close of business on
October 30, 2009 was 51,462,227
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
TABLE
OF CONTENTS
|
Page
|
|
|
PART I.
FINANCIAL INFORMATION
|
|
|
|
3
|
|
4
|
|
5
|
|
6
|
|
8
|
|
15
|
|
23
|
|
23
|
|
PART
II. OTHER INFORMATION
|
|
24
|
|
24
|
|
24
|
|
24
|
|
24
|
|
24
|
|
24
|
PART I.
FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,136
|
|
|
$
|
1,071,053
|
|
Accounts
receivable
|
|
|
375,423
|
|
|
|
261,592
|
|
Marketable
securities available-for-sale
|
|
|
87,091
|
|
|
|
131,754
|
|
Inventory
|
|
|
163,413
|
|
|
|
187,184
|
|
Prepaid
expenses
|
|
|
80,305
|
|
|
|
233,045
|
|
Deferred
costs
|
|
|
16,844
|
|
|
|
143,944
|
|
Deposits
and other current assets
|
|
|
5,987
|
|
|
|
5,987
|
|
Total
current assets
|
|
|
735,199
|
|
|
|
2,034,559
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
313,509
|
|
|
|
622,685
|
|
Intangible
assets, net
|
|
|
88,543
|
|
|
|
91,043
|
|
Other
assets
|
|
|
164,787
|
|
|
|
160,212
|
|
Total
assets
|
|
$
|
1,302,038
|
|
|
$
|
2,908,499
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
145,905
|
|
|
$
|
129,874
|
|
Accrued
liabilities
|
|
|
213,492
|
|
|
|
239,809
|
|
Current
portion of capital leases
|
|
|
120,981
|
|
|
|
143,199
|
|
Deferred
revenue
|
|
|
517,044
|
|
|
|
344,574
|
|
Total
current liabilities
|
|
|
997,422
|
|
|
|
857,456
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
|
4,981
|
|
|
|
92,423
|
|
Deferred
rent, net of current portion
|
|
|
99,734
|
|
|
|
27,151
|
|
Total
liabilities
|
|
|
1,102,137
|
|
|
|
977,030
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, authorized 50,000,000 shares:
|
|
|
|
|
|
|
|
|
Series
A convertible preferred stock, 1,500,000 designated; shares issued and
outstanding: 1,202,627 at September 30, 2009 and no shares at December 31,
2008 (Aggregate liquidation preference of $1,234,983 at September 30,
2009)
|
|
|
12,026
|
|
|
|
—
|
|
Common
stock, $0.01 par value, authorized 250,000,000 shares; shares issued and
outstanding: 51,462,227 shares at September 30, 2009 and 48,738,545 shares
at December 31, 2008
|
|
|
514,622
|
|
|
|
487,385
|
|
Additional
paid-in capital
|
|
|
25,069,397
|
|
|
|
22,635,430
|
|
Accumulated
deficit
|
|
|
(25,361,907
|
)
|
|
|
(21,191,346
|
)
|
Accumulated
other comprehensive loss
|
|
|
(34,237
|
)
|
|
|
—
|
|
Total
stockholders’ equity
|
|
|
199,901
|
|
|
|
1,931,469
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
1,302,038
|
|
|
$
|
2,908,499
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
Revenues
|
|
$
|
313,784
|
|
|
$
|
112,652
|
|
|
$
|
673,728
|
|
|
$
|
302,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
184,327
|
|
|
|
233,300
|
|
|
|
586,770
|
|
|
|
666,933
|
|
Research
and development
|
|
|
172,663
|
|
|
|
456,992
|
|
|
|
614,117
|
|
|
|
1,447,522
|
|
Selling
and marketing
|
|
|
215,284
|
|
|
|
398,854
|
|
|
|
756,463
|
|
|
|
1,365,650
|
|
General
and administrative
|
|
|
1,176,016
|
|
|
|
1,086,927
|
|
|
|
2,868,792
|
|
|
|
3,670,029
|
|
Total
operating expense
|
|
|
1,748,290
|
|
|
|
2,176,073
|
|
|
|
4,826,142
|
|
|
|
7,150,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,434,506
|
)
|
|
|
(2,063,421
|
)
|
|
|
(4,152,414
|
)
|
|
|
(6,847,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on marketable securities
|
|
|
(2,659
|
)
|
|
|
—
|
|
|
|
(2,659
|
)
|
|
|
—
|
|
Interest
income
|
|
|
191
|
|
|
|
22,771
|
|
|
|
2,174
|
|
|
|
49,304
|
|
Interest
expense
|
|
|
(5,209
|
)
|
|
|
(10,353
|
)
|
|
|
(17,662
|
)
|
|
|
(136,465
|
)
|
Total
other income (expense)
|
|
|
(7,677
|
)
|
|
|
12,418
|
|
|
|
(18,147
|
)
|
|
|
(87,161
|
)
|
Loss
before income taxes
|
|
|
(1,442,183
|
)
|
|
|
(2,051,003
|
)
|
|
|
(4,170,561
|
)
|
|
|
(6,934,944
|
)
|
Income
tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
loss
|
|
|
(1,442,183
|
)
|
|
|
(2,051,003
|
)
|
|
|
(4,170,561
|
)
|
|
|
(6,934,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
dividend on Series A convertible preferred stock
|
|
|
(105,928
|
)
|
|
|
—
|
|
|
|
(688,131
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
distribution on Series B redeemable convertible preferred
units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(976,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
on Series B redeemable convertible preferred units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(225,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stockholders
|
|
$
|
(1,548,111
|
)
|
|
$
|
(2,051,003
|
)
|
|
$
|
(4,858,692
|
)
|
|
$
|
(8,136,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common and common equivalent shares used to calculate loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
50,843,926
|
|
|
|
48,738,122
|
|
|
|
49,488,578
|
|
|
|
43,114,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stockholders
|
|
$
|
(1,548,111
|
)
|
|
$
|
(2,051,003
|
)
|
|
$
|
(4,858,692
|
)
|
|
$
|
(8,136,717
|
)
|
Unrealized
gain (loss) on marketable securities available-for-sale
|
|
|
(19,395
|
)
|
|
|
(10,596
|
)
|
|
|
(34,237
|
)
|
|
|
(91,981
|
)
|
Comprehensive
loss
|
|
$
|
(1,567,506
|
)
|
|
$
|
(2,061,599
|
)
|
|
$
|
(4,892,929
|
)
|
|
$
|
(8,228,698
|
)
|
See
accompanying Notes to Condensed Consolidated Financial Statements
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
AND
COMPREHENSIVE LOSS
(UNAUDITED)
|
|
|
|
|
Series
A Convertible
|
|
|
Additional
|
|
|
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
Common
Stock
|
|
|
Preferred
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2009
|
|
|
48,738,545 |
|
|
$ |
487,385 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
22,635,430 |
|
|
$ |
(21,191,346 |
) |
|
$ |
— |
|
|
$ |
1,931,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A convertible preferred stock issuance
|
|
|
— |
|
|
|
— |
|
|
|
1,202,627 |
|
|
|
12,026 |
|
|
|
1,190,601 |
|
|
|
— |
|
|
|
— |
|
|
|
1,202,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
|
2,723,682 |
|
|
|
27,237 |
|
|
|
— |
|
|
|
— |
|
|
|
334,592 |
|
|
|
— |
|
|
|
— |
|
|
|
361,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based
compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
908,774 |
|
|
|
— |
|
|
|
— |
|
|
|
908,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on marketable securities available for sale
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(34,237 |
) |
|
|
(34,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,170,561 |
) |
|
|
— |
|
|
|
(4,170,561 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2009
|
|
|
51,462,227 |
|
|
$ |
514,622 |
|
|
|
1,202,627 |
|
|
$ |
12,026 |
|
|
$ |
25,069,397 |
|
|
$ |
(25,361,907 |
) |
|
$ |
(34,237 |
) |
|
$ |
199,901 |
|
See
accompanying Notes to Condensed Consolidated Financial
Statements
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,170,561
|
)
|
|
$
|
(6,934,944
|
)
|
Adjustments
to reconcile net loss to net
|
|
|
|
|
|
|
|
|
cash
used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
310,326
|
|
|
|
333,176
|
|
Common
stock issued for services
|
|
|
361,829
|
|
|
|
—
|
|
Equity-based
compensation
|
|
|
908,774
|
|
|
|
376,071
|
|
(Gain)
loss on disposal of equipment
|
|
|
(200
|
)
|
|
|
(38
|
)
|
Loss
on marketable securities
|
|
|
2,659
|
|
|
|
—
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(113,831
|
)
|
|
|
177,959
|
|
Inventory
|
|
|
23,771
|
|
|
|
(21,010
|
)
|
Prepaid
expenses and other assets
|
|
|
148,165
|
|
|
|
(117,572
|
)
|
Deferred
costs
|
|
|
127,100
|
|
|
|
105,468
|
|
Deposits
and other current assets
|
|
|
—
|
|
|
|
37,278
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
16,031
|
|
|
|
(30,053
|
)
|
Accrued
liabilities
|
|
|
15,078
|
|
|
|
(187,851
|
)
|
Deferred
rent
|
|
|
31,188
|
|
|
|
(24,552
|
)
|
Deferred
revenue
|
|
|
172,470
|
|
|
|
(86,001
|
)
|
Net
cash used in operating activities
|
|
|
(2,167,201
|
)
|
|
|
(6,372,069
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of property and equipment
|
|
|
1,550
|
|
|
|
1,000
|
|
Proceeds
from sale of marketable securities
|
|
|
7,767
|
|
|
|
—
|
|
Purchase
of property and equipment
|
|
|
—
|
|
|
|
(45,887
|
)
|
Purchase
of intangible assets
|
|
|
—
|
|
|
|
(26,354
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
9,317
|
|
|
|
(71,241
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
cash received in reverse merger
|
|
|
—
|
|
|
|
7,091,062
|
|
Proceeds
from notes payable
|
|
|
—
|
|
|
|
1,500,000
|
|
Proceeds
from exercise of warrants to common units
|
|
|
—
|
|
|
|
460,625
|
|
Proceeds
from exercise of stock options
|
|
|
—
|
|
|
|
4,050
|
|
Proceeds
from sale of Series A convertible preferred stock
|
|
|
1,202,627
|
|
|
|
—
|
|
Payment
of accrued dividends
|
|
|
—
|
|
|
|
(534,024
|
)
|
Principal
payments under capital lease obligations
|
|
|
(109,660
|
)
|
|
|
(91,879
|
)
|
Net
cash provided by financing activities
|
|
|
1,092,967
|
|
|
|
8,429,834
|
|
Net
change in cash and cash equivalents
|
|
|
(1,064,917
|
)
|
|
|
1,986,524
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,071,053
|
|
|
|
859,069
|
|
Cash
and cash equivalents at end of period
|
|
$
|
6,136
|
|
|
$
|
2,845,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
17,662
|
|
|
$
|
32,630
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(UNAUDITED)
Supplemental
schedule of non-cash investing and financing activities:
During
the nine months ended September 30, 2009:
●
|
We
incurred an unrealized loss on marketable securities available-for-sale of
$34,237.
|
During
the nine months ended September 30, 2008:
●
|
We
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.
|
●
|
We
acquired $19,429 of office equipment through capital lease
agreements.
|
●
|
We
incurred an unrealized loss on marketable securities available-for-sale of
$91,981.
|
●
|
We
converted $474,229 of Series A preferred units to common
units.
|
●
|
We
converted $6,603,182 of Series B preferred units to common
units.
|
●
|
We
converted $12,850,874 of common units to common stock in connection with
the reverse merger.
|
●
|
We
acquired the following balance sheet items as a result of the reverse
merger transaction:
|
o
|
Marketable
securities available-for-sale -
$303,300
|
o
|
Prepaid
expenses and other assets - $52,561
|
o
|
Note
receivable - $2,500,000 (eliminated against note payable owed to
SAH)
|
o
|
Interest
receivable - $103,835 (eliminated against interest payable to
SAH)
|
o
|
Accounts
payable - $30,899
|
o
|
Accrued
expenses - $209,465
|
See accompanying Notes to Condensed Consolidated
Financial Statements
aVINCI
MEDIA CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Description
of Organization and Summary of Significant Accounting Policies
Organization
and Nature of Operations
aVinci
Media Corporation (the “Company”, “we”, “us”, “our”) was formed as a result of a
merger transaction between Sequoia Media Group, LC (Sequoia), a Utah limited
liability company, and Secure Alliance Holdings Corporation (SAH), a publicly
held company. We are a Delaware corporation that develops and sells
an engaging way for anyone to tell their “Story” with personal digital
expressions. Our products simplify and automate the process of creating
professional-quality multi-media productions using personal photos and
videos.
Basis
of Presentation
The
accompanying condensed consolidated financial statements are presented in
accordance with U.S. generally accepted accounting principles (US
GAAP).
Unaudited
Information
In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements as of September 30, 2009 and for the three and nine months
ended September 30, 2009 and 2008 reflect all adjustments (consisting only of
normal recurring items) necessary to present fairly the financial information
set forth therein. The consolidated balance sheet as of December 31, 2008,
presented herein is derived from the audited consolidated balance sheet
presented in our annual report on Form 10-K at that date. Certain amounts in the
prior periods’ financial statements have been reclassified to conform to the
current period presentation. Certain information and note disclosures normally
included in financial statements prepared in accordance with US GAAP have been
condensed or omitted pursuant to SEC rules and regulations, although we believe
that the following disclosures, when read in conjunction with the annual
financial statements and the notes included in our Form 10-K for the year ended
December 31, 2008, are adequate to make the information presented not
misleading. Results for the three and nine month periods ended September 30,
2009 are not necessarily indicative of the results to be expected for the year
ending December 31, 2009.
Net
Loss per Common Share
Basic
earnings (loss) per share (EPS) is calculated by dividing income (loss)
available to common stockholders by the weighted-average number of common shares
outstanding during the period. The weighted-average shares used in
the computation of EPS for the three and nine month periods ended September 30,
2009 and 2008 include the shares issued in connection with the reverse merger on
June 6, 2008. In accordance with US GAAP, these shares are
retroactively reflected as having been issued at the beginning of the periods
presented.
Diluted
EPS is similar to Basic EPS except that the weighted-average number of common
shares outstanding is increased using the treasury stock method to include the
number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued. Such potentially dilutive
common shares include stock options and warrants. Shares having an antidilutive
effect on periods presented are not included in the computation of dilutive
EPS.
The
average number of shares of all stock options and warrants granted, all
convertible preferred units, redeemable convertible preferred units and
convertible debentures have been omitted from the computation of diluted net
loss per common share because their inclusion would have been anti-dilutive for
the three and nine month periods ended September 30, 2009 and 2008.
As of
September 30, 2009 and 2008, we had 16,229,854 and 8,338,913 potentially
dilutive shares of common stock, respectively, not included in the computation
of diluted net loss per common share because it would have decreased the net
loss per common share. Stock options and warrants could be dilutive in the
future.
Use
of Estimates
The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
Income
Taxes
At
September 30, 2009, management had recorded a full valuation allowance against
the net deferred tax assets related to temporary differences and current
operating losses because there is significant uncertainty as to the
realizability of the deferred tax assets. Based on a number of factors, the
currently available, objective evidence indicates that it is
more-likely-than-not that the net deferred tax assets will not be
realized.
Recently
Adopted Accounting Standards
In
March 2008, the Financial Accounting Standards Board (FASB) issued Topic
815, “Derivatives and Hedging.” Topic 815 amends and expands the disclosure
requirements with the intent to provide users of financial statements with an
enhanced understanding of how and why an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted for, and how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. Topic 815 was effective
beginning in the first quarter of fiscal 2009. The adoption of this guidance had
no effect on our consolidated financial position or results of
operations.
In
December 2007, the FASB issued Topic 805, “Business Combinations,” and
Topic 810, “Consolidation.” Topic 805 changes how business acquisitions are
accounted for and impacts financial statements both on the acquisition date and
in subsequent periods. Topic 810 changes the accounting and reporting for
minority interests, which is recharacterized as noncontrolling interests and
classified as a component of equity. Topic 805 and Topic 810 were effective for
us beginning in the first quarter of fiscal 2009. The adoption of Topic 805 and
Topic 810 had no effect on our consolidated financial position or results of
operations.
In April
2009, the FASB issued three new standards, to address concerns about
(1) measuring the fair value of financial instruments when the markets
become inactive and quoted prices may reflect distressed transactions and
(2) recording impairment charges on investments in debt securities. The
FASB also issued a third standard to require disclosures of fair values of
certain financial instruments in interim financial statements.
Topic
820, “Fair Value Measurements and Disclosures,” provides additional guidance to
highlight and expand on the factors that should be considered in estimating fair
value when there has been a significant decrease in market activity for a
financial asset. This standard also requires new disclosures relating to fair
value measurement inputs and valuation techniques (including changes in inputs
and valuation techniques).
Topic
320, “Investments - Debt and Equity Securities,” will change (1) the
trigger for determining whether an other-than-temporary impairment exists and
(2) the amount of an impairment charge to be recorded in earnings. To
determine whether an other-than-temporary impairment exists, an entity will be
required to assess the likelihood of selling a security prior to recovering its
cost basis. This is a change from the current requirement for an entity to
assess whether it has the intent and ability to hold a security to recovery or
maturity. This standard also expands and increases the frequency of existing
disclosure about other-than-temporary impairments and requires new disclosures
of the significant inputs used in determining a credit loss, as well as a
rollforward of that amount each period.
Topic
825, “Financial Instruments,” increases the frequency of fair value disclosures
from annual to quarterly to provide financial statement users with more timely
information about the effects of current market conditions on their financial
instruments.
The
provisions of these three standards were effective for us beginning the second
quarter of 2009. The adoption of these three standards did not have a material
effect on our consolidated financial position or results of
operations.
In
May 2009, the FASB issued Topic 855, “Subsequent Events,” which provides
guidance to establish general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Topic 855 also requires entities to
disclose the date through which subsequent events were evaluated as well as the
rationale for why that date was selected. Topic 855 is effective for interim and
annual periods ending after June 15, 2009, and accordingly, we adopted this
standard during the second quarter of 2009. Topic 855 requires that public
entities evaluate subsequent events through the date that the financial
statements are issued. We evaluated subsequent events through the time of filing
these financial statements with the SEC on November 10, 2009.
In June
2009, the FASB issued Topic 105, “Generally Accepted Accounting Principles.”
This standard establishes the FASB Accounting Standards Codification™ (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. The Codification is effective for interim and
annual periods ending after September 15, 2009, and as of the effective
date, all existing accounting standard documents will be superseded. The
Codification is effective for us in the third quarter of 2009. The adoption of
this guidance had no effect on our consolidated financial position or results of
operations.
Recent
Accounting Standards Not Yet Adopted
In
June 2009, the FASB issued a new accounting standard which modifies how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The new
guidance clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose and
design and a company’s ability to direct the activities of the entity that most
significantly impact the entity’s economic performance. This standard requires
an ongoing reassessment of whether a company is the primary beneficiary of a
variable interest entity. This standard also requires additional disclosures
about a company’s involvement in variable interest entities and any significant
changes in risk exposure due to that involvement. This standard is effective for
fiscal years beginning after November 15, 2009. We believe that the future
requirements of this standard will not have a material effect on our
consolidated financial statements.
In
October 2009, the FASB issued Accounting Standards Update No. 2009-13 (FASB ASU
09-13), “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements (a consensus of the FASB Emerging Issues Task Force).” FASB ASU
09-13 updates the existing multiple-element arrangement guidance currently in
FASB Topic 605-25 (Revenue Recognition – Multiple-Element Arrangements). This
new guidance eliminates the requirement that all undelivered elements have
objective evidence of fair value before a company can recognize the portion of
the overall arrangement fee that is attributable to the items that have already
been delivered. Further, companies will be required to allocate revenue in
arrangements involving multiple deliverables based on the estimated selling
price of each deliverable, even though such deliverables are not sold separately
by either company itself or other vendors. This new guidance also significantly
expands the disclosures required for multiple-element revenue arrangements. The
revised guidance will be effective for the first annual period beginning on or
after June 15, 2010. We may elect to adopt the provisions prospectively to new
or materially modified arrangements beginning on the effective date or
retrospectively for all periods presented. We are currently evaluating the
impact FASB ASU 09-13 will have on our consolidated financial
statements.
In
October 2009, the FASB issued Accounting Standards Update No. 2009-14
(FASB ASU 09-14), “Certain Revenue Arrangements That Include Software Elements—a
consensus of the FASB Emerging Issues Task Force,” that reduces the types of
transactions that fall within the current scope of software revenue recognition
guidance. Existing software revenue recognition guidance requires that its
provisions be applied to an entire arrangement when the sale of any products or
services containing or utilizing software when the software is considered more
than incidental to the product or service. As a result of the amendments
included in FASB ASU No. 2009-14, many tangible products and services that
rely on software will be accounted for under the multiple-element arrangements
revenue recognition guidance rather than under the software revenue recognition
guidance. Under this new guidance, the following components would be excluded
from the scope of software revenue recognition guidance: the tangible
element of the product, software products bundled with tangible products where
the software components and non-software components function together to deliver
the product’s essential functionality, and undelivered components that relate to
software that is essential to the tangible product’s functionality. FASB ASU
09-14 also provides guidance on how to allocate transaction consideration when
an arrangement contains both deliverables within the scope of software revenue
guidance (software deliverables) and deliverables not within the scope of that
guidance (non-software deliverables). This guidance will be effective for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. We may elect to adopt the provisions
prospectively to new or materially modified arrangements beginning on the
effective date or retrospectively for all periods presented. However, we must
elect the same transition method for this guidance as that chosen for FASB ASU
No. 2009-13. We are currently evaluating the impact FASB ASU 09-14 will
have on our consolidated financial statements.
Reclassifications
Certain
amounts in the 2008 financial statements have been reclassified to conform to
the 2009 presentation.
2. Going
Concern and Liquidity
Our
financial statements have been prepared under the assumption that we will
continue as a going concern. The report of our independent registered
public accounting firm included in our Annual Report on Form 10-K for the year
ended December 31, 2008, filed with the Securities and Exchange Commission,
includes an explanatory paragraph expressing substantial doubt as to our ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
We have
operated at a loss since inception and are not currently generating sufficient
revenues to cover our operating expenses. We are continuing to work
to obtain new customers and to increase revenues from existing
customers. We contemplate raising additional outside capital within the
next 12 months to help fund current growth plans (see Note 3 below).
We have reduced monthly expenses throughout 2009 and raised approximately $1.2
million of a planned $1.5 million capital raise from outside sources from April
2009 through November 10, 2009. We intend to raise an additional
$300,000 under our current capital raise, and an additional $500,000 round for
next year. With the outside capital and with increased revenues from new and
existing customers, we believe we will be able to fund operations through 2010
based on our current plans and projections. In the event we are not
able to meet our revenue projections through the end of 2009 and 2010, we may be
required to raise additional capital and further reduce operating
expenses.
If new
sources of financing are insufficient or unavailable, we will modify
our growth and operating plans to the extent of available funding, if
any. Any decision to modify our business plans would harm our ability
to pursue our growth plans. If we cease or stop operations, our
shares could become valueless. Historically, we have funded
operating, administrative and development costs through the sale of equity
capital or debt financing. If our plans and/or assumptions change or
prove inaccurate, or we are unable to obtain further financing, or such
financing and other capital resources, in addition to projected cash flow, if
any, prove to be insufficient to fund operations, our continued viability could
be at risk. To the extent that any such financing involves the sale
of our common stock or common stock equivalents, our current stockholders could
be substantially diluted. There is no assurance that we will be
successful in achieving any or all of these objectives in 2009 or
2010.
3. Series
A Convertible Preferred Stock
Offering
In March
2009, we initiated a private offering pursuant to Section 4(2) of the Securities
Act of 1933, as amended, and Rule 506 promulgated thereunder to raise up to an
additional $1.5 million in two phases, $750,000 from April to June 2009 and an
additional $750,000 by the end of December 2009. The investment is in
the form of Series A convertible preferred shares, $0.01 per share par value
with a stated value of $1.00 per share, convertible into common shares at the
rate of $0.20 per common share. For each Series A convertible preferred
share, investors in the offering also receive a warrant to purchase 1.25 shares
of common stock at $0.25 per share at any time within five years. As of
September 30, 2009, we had received proceeds of $1,202,627 from the sale of
1,202,627 Series A convertible preferred shares. The Series A shares also carry
a cumulative dividend at an annual rate of 8%. Cumulative dividends not
accrued or declared as of September 30, 2009 are $32,356.
Deemed
Dividend
For the
three and nine months ended September 30, 2009, deemed dividends of $105,928 and
$688,138, respectively, were recorded as a result of a beneficial conversion
feature on the Series A convertible preferred shares. The beneficial
conversions were calculated as the difference between the proceeds received from
the sale of the Series A convertible preferred stock and the fair value of the
underlying common stock into which the preferred shares are
convertible. These were recorded as preferential dividends, thus
increasing the loss applicable to common stockholders.
4. Equity-Based
Compensation
We
currently have a stock option plan that allows us to grant stock options,
restricted stock and other equity based awards to employees, directors, and
consultants. The plan is discussed in more detail in our Annual Report on Form
10-K.
Equity-based
compensation expense, included in general and administrative expense in the
consolidated statements of operations, totaled $539,807 and $214,001,
respectively for the three months ended September 30, 2009 and 2008; and totaled
$908,774 and $376,071, respectively for the nine months ended September 30, 2009
and 2008.
As
reported on Form 8-K, filed with the Securities and Exchange Commission on July
15, 2009, Jerrell G. Clay and Stephen B. Griggs resigned from our Board of
Directors effective as of July 15, 2009. Consequently, we recognized
the remaining expense on options held by Mr. Clay and Mr. Griggs in July
2009.
Our Board
of Directors authorized on July 28, 2009, effective August 7, 2009, the
repricing of certain stock options (the “Options”), previously issued to our
employees, officers and members of the Board of Directors pursuant to the
Company’s 2008 Incentive Stock Plan at the greater of $0.40 per share and the
closing price of our stock on July 28, 2009. As a result, the exercise
price of the Options was lowered to $0.40, and we recognized expense of $57,020
for the three and nine months ended September 30, 2009. There was no change in
the number of shares subject to each Option, vesting or other terms. The
repricing was implemented to realign the value of the Options with their
intended purpose, which is to retain and motivate company employees, officers
and directors. Prior to the repricing, many of the Options had exercise prices
well above the recent market prices of our common stock on the OTC Bulletin
Board.
We
granted 910,182 shares of common stock to employees on April 1, 2009, in lieu of
cash compensation as a result of the employees taking a reduced salary beginning
in November 2008 and continuing throughout 2009. The shares were valued at the
closing price of our common stock on April 1, 2009 and resulted in compensation
expense of $13,279 and $43,571, respectively, for the three and nine months
ended September 30, 2009.
We
granted 1,813,500 shares of common stock to consultants and others for services
rendered during the nine months ended September 30, 2009, resulting in expense
of $270,392. These shares were valued at the closing price of our common stock
as the services were performed as required by FASB ASC 505-50, “Equity-Based
Payments to Non-Employees.”
As of
September 30, 2009, there was approximately $621,293 of unrecognized
equity-based compensation expense related to option grants that will be
recognized over a weighted average period of 1.3 years.
5. Commitments
and Contingencies
Litigation
On
December 17, 2007, Robert L. Bishop, who worked with aVinci Media’s (AVI Media)
predecessor, Sequoia Media Group, LC, in a limited capacity in 2004 and is a
current member of a limited liability company, LifeCinema, LLC, that owns an
equity interest in aVinci, filed a legal claim in the Third Judicial District
Court for Salt Lake County, State of Utah, alleging a right to unpaid wages
and/or commissions (with no amount specified) and company equity. The
Complaint was served on AVI Media on January 7, 2008. AVI Media
timely filed an answer denying Mr. Bishop’s claims and counterclaiming
interference by Mr. Bishop with AVI Media’s capital raising
efforts. AVI Media is defending against Mr. Bishop’s claims and
discovery is ongoing. On April 30, 2009, defendants filed a motion
for summary judgment based upon the fact Mr. Bishop did not file suit within the
four year statute of limitations applicable to oral contracts (upon which
plaintiff is suing), and upon the grounds that no agreement exists because there
was no meeting of the minds. The court deferred ruling on the motion
pending Mr. Bishop conducting depositions of company executives. On
June 16, 2009 Mr. Bishop filed an amended complaint which alleges that defendant
Chett B. Paulsen is responsible for a portion of the equity Bishop is claiming
in the action. On June 30, 2009 Bishop filed a motion for leave to
file a second amended complaint to add claims for fraud and negligent
misrepresentation. Defendants objected to the motion on the ground of
failing to state a claim, the “futility doctrine” under Utah law, and failing to
timely file the claims. Defendants filed a second motion for summary
judgment on July 28, 2009 on the grounds that Bishop’s action is barred by Utah
statute which requires “investment advisor” agreements to be in
writing. The matter has been submitted to the court for oral argument
but no date has been set to hear the motion.
Operating
Leases
We have
operating leases for office space with terms expiring in 2012 and 2013. Future
minimum lease payments are approximately as follows:
Years
Ending December 31,
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Amount
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On April
1, 2009, we signed an amendment to the operating lease for our primary office
space in Draper, Utah. The amendment modified the monthly lease payments and
extended the lease expiration date from June 30, 2010 to June 30,
2013. As a cost saving measure, on or about October 30, 2009, we
signed a non-binding letter of intent to sublease a portion of our space to a
third party with an option for the third party to sublease the remaining space
upon 60 days notice. Upon execution of a sublease, we intend to move
to a subdivided portion of our current facility. We expect costs associated with
the sublease to be minimal.
Rental
expense under operating leases for the nine months ended September 30, 2009 and
2008 totaled $168,935 and $157,481, respectively.
Purchase
Obligations
Under the
terms of a consumer products license agreement with ESPN Enterprises, Inc.
(ESPN), we guaranteed ESPN minimum royalty amounts in 2009, 2010 and 2011. We
began offering ESPN licensed products in June 2009, and we have accrued expenses
and made payments towards the minimum amounts due by the end of each calendar
year.
In June
2009 we agreed to purchase directors and officers’ liability insurance for a
year’s period with the premium to be paid in equal monthly installments over the
term of the insurance coverage.
6. Fair
Value
FASB
Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. FASB Topic
820 describes three levels of inputs that aVinci uses to measure fair
value:
·
|
Level
1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the
measurement date.
|
·
|
Level
2: Level 1 inputs for assets or liabilities that are not actively traded.
Also consists of an observable market price for a similar asset or
liability. This includes the use of “matrix pricing” used to value debt
securities absent the exclusive use of quoted
prices.
|
·
|
Level
3: Consists of unobservable inputs that are used to measure fair value
when observable market inputs are not available. This could include the
use of internally developed models, financial forecasting,
etc.
|
Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability between market participants at the balance sheet date. When
possible we look to active and observable markets to price identical assets or
liabilities. When identical assets and liabilities are not traded in active
markets, we look to observable market data for similar assets and liabilities.
However, when certain assets and liabilities are not traded in observable
markets aVinci must use other valuation methods to develop a fair
value.
The
following table presents financial assets and liabilities measured on a
recurring basis:
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
Description
|
|
Balance
at September 30, 2009
|
|
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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
|
|
$ |
87,091 |
|
|
$ |
87,091 |
|
|
|
— |
|
|
|
— |
|
7. Related
Party Transactions
Consulting
Agreement
During
the three and nine months ended September 30, 2008, pursuant to an agreement
executed during the year ended December 31, 2007, we recorded expense of $0 and
$725,000, respectively, for consulting services from Amerivon Holdings, Inc.
(Amerivon), a significant shareholder of the Company. During the three and nine
months ended September 30, 2008, we paid Amerivon $0 and $745,000, respectively,
for this agreement.
On July
1, 2008 we entered into a new sales and consulting agreement with Amerivon that
terminated the agreement referenced above that was executed during the year
ended December 31, 2007. During the three and nine months ended September 30,
2009, we recorded expense of $3,115 and $6,436, respectively, for consulting
services under this new agreement. No payments were made under this agreement
during 2009. During the three and nine months ended September 30, 2008, we
recorded expense of $683 for consulting services under this new agreement.
During the three and nine months ended September 30, 2008, we paid Amerivon $485
for this agreement.
On April
15, 2009 we issued 500,000 shares of common stock to Amerivon for consulting
services under a consulting agreement dated March 31, 2009. Under the terms of
this agreement, John E. Tyson, a director for the Company, is to serve as
aVinci’s Chairman of the Board and the Chairman of aVinci’s Executive
Committee. These shares had a fair value of $35,000 and were expensed
immediately.
Series
A Convertible Preferred Stock
On April
3, 2009 Amerivon purchased 350,000 shares of Series A convertible preferred
stock for $350,000.
On May
22, 2009 John Tyson, our Chairman of the Board, purchased 10,000 shares of
Series A convertible preferred stock for $10,000.
Board
Compensation
On July
23, 2009, our Board of Directors approved the issuance of 50,000 shares of the
Company’s common stock to each non-management director serving on the board for
the period June 6, 2008 through June 5, 2009. Consequently Tod M. Turley, John
E. Tyson, Stephen P. Griggs, and Jerrell G. Clay each received 50,000 shares of
the Company’s common stock. These shares had a total fair value of $68,000 and
were expensed immediately.
Option
Re-pricing
On July
23, 2009, our Board of Directors authorized, effective August 7, 2009, the
re-pricing of certain stock options, previously issued to company employees,
officers and members of the Board of Directors pursuant to the Company’s 2008
Incentive Stock Plan at the greater of $0.40 per share and the closing price of
our stock on July 28, 2009 (the “Options”). As a result, the exercise price of
the Options was lowered to $0.40. There was no change in the number of shares
subject to each Option, vesting or other terms. The re-pricing was implemented
to realign the value of the Options with their intended purpose, which is to
retain and motivate company employees, officers and directors. Prior to the
re-pricing, many of the Options had exercise prices well above the recent market
prices of our common stock on the OTC Bulletin Board.
As a
result of the option re-pricing Stephen P. Griggs and Jerrell G. Clay, former
directors, each had 475,000 options re-priced. We recorded a total expense of
$46,000 related to the re-pricing of these options.
Distributions
The
former Series B redeemable convertible preferred unit holders were entitled to a
cumulative annual distribution of $0.06 per unit. During the nine months ended
September 30, 2008 we accrued $225,773 for distributions due on the Series B
redeemable convertible preferred units held by Amerivon. We paid Amerivon
$447,783 for the accrued distributions in June 2008.
Warrants
On
January 30, 2008, Amerivon exercised 1,504,680 warrants to purchase common units
of Sequoia for cash received of $414,625; and on June 5, 2008, Amerivon
exercised 87,096 warrants to purchase common units of Sequoia for a total price
of $46,000. These exercises, along with Amerivon’s conversion of convertible
preferred units, increased Amerivon’s ownership percentage to 45.4% of all
common units prior to the merger on June 6, 2008.
On July
15, 2009, Stephen P. Griggs and Jerrell G. Clay, former directors, each received
warrants to purchase up to 200,000 shares of common stock of the Company for
$0.30 a share at anytime on or before 10 years from the date of issuance. We
recorded a total expense of $77,000 for the issuance of these
warrants.
8. Subsequent
Events
As
discussed in Note 3 above, we are continuing to raise capital through the
offering of Series A convertible preferred stock. From October 1,
2009 through November 10, 2009, we sold 230,627 shares of Series A convertible
preferred stock for cash proceeds of $230,627.
On
October 2, 2009 we entered into a $100,000 Promissory Note with John E. Tyson,
the Company’s chairman. The terms of the note are 30 days, bearing
simple interest at 24% per annum with a $500 origination fee. On
November 1, 2009, Mr. Tyson agreed to extend the terms of the Promissory Note an
additional 30 days.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Some of
the information in this filing contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,”
“estimate” and “continue,” or similar words. You should read statements that
contain these words carefully because they:
·
|
discuss
our future expectations;
|
·
|
contain
projections of our future results of operations or of our financial
condition; and
|
·
|
state
other “forward-looking”
information.
|
We
believe it is important to communicate our expectations. However, there may be
events in the future that we are not able to accurately predict or over which we
have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under “Risk Factors,”
“Business” and elsewhere in this prospectus.
Overview
Through
our subsidiary, aVinci Media, LC, we deploy a software technology that employs
“Automated Multimedia Object Models,” a patent-pending way of turning consumer
captured images, video, and audio into complete digital files in the form of
full-motion movies, DVD’s, photo books, posters and streaming media
files. We make software technology and package the software in
various forms available to mass retailers, specialty retailers, Internet portals
and web sites that allow end consumers to use an automated process to create
products such as DVD productions, photo books, posters, calendars, and other
print media products from consumer photographs, digital pictures, video, and
other media. Under our business model, our customers are retailers, online
vendors and end customers. We enable our retail and online customers
to sell our products to the end consumer who remain customers of the
vendor. Through 2007, aVinci Media, LC generated revenues through the
sales of DVD products created using its technology. During 2008, new photo book
and poster product offerings were made available. Currently on websites www.avincistudio.com
and www.myESPNhighlights.com,
we sell products directly to end customers. During 2009 we launched
myESPN Highlights which gives retailers, photographers, and photo labs the
ability to showcase youth sports images in an authentic SportsCenter™ "highlight
reel," complete with commentary by ESPN's Karl Ravech. Products include
"customizable" SportsCenter branded digital photo products including
personalized DVD movies, photo books and posters. In November 2009 we
introduced additional personalized myESPN Highlights trading cards, 8
x 10 memory mates (a print photo product featuring an athlete and team) and
fleece blankets.
Currently
our products are available at the following retailers: Meijer (approximately 179
stores), Walmart (approximately 3,300 domestic stores), Walgreens (approximately
6,500 stores), and Costco (online at Costco.com). Walgreens officially launched
the product line in its stores on June 28, 2009. Our products are also available
to other customers and online at www.avincistudio.com.
During
June 2009, we launched our newest product offering, myESPN Highlights pursuant
to the licensing agreement we entered into with ESPN at the end of
2008. We made limited myESPN Highlights products available through
Walmart stores in June 2009 and also launched a direct to consumer website at
www.myESPNhighlights.com. To
distribute and market the product, we created a distribution program to allow
sports photographers and other interested parties to register with aVinci as
sales associates to carry the myESPN Highlights product
line. Photographers who are currently actively working with sports
programs and athletic events provide an opportunity for us to utilize an
established industry as a direct sales force. Sales associates make a
commission on any sales they make to end customers. We continue to
actively recruit and register sales associates to sell myESPN Highlight
products.
On or
about the last week of September, we reached a verbal agreement with Fujicolor
to deploy our new archival software that allows customers to save digital files
on CD, SD cards or other electronic media to DVD, in Walmart stores. As an
advance against site license fees associated with deployment of our archive
software, Fujicolor paid us approximately $247,500 in October
2009. The parties to the agreement intend to memorialize the verbal
agreement in a written document that will provide for a three-year term with
license fees of approximately $1 million per year starting in 2010.
During
October 2009, we memorialized in a written contract our agreement with Walgreens
to provide our DVD products for in-store fulfillment in approximately 6,500
domestic Walgreens stores. Our DVD products have been available in
Walgreens stores since June 2009 and Walgreens has produced over 140,000 DVDs
from June through October.
Subsequent
to the end of the quarter, in November 2009 we introduced a new product offering
to commercial photo labs servicing the youth sports market that allows the labs
to offer, sell and create print products including trading cards, 8 x 10 prints
and posters. Upon the creation of products, lab customers pay a
royalty for products produced. We have engaged several labs and are
in negotiations with several more at the present time.
Because
of the success we have had working with ESPN to create personalized products
associated with a leading brand, we are engaged in discussions with other
leading brands, including ESPN’s parent company Disney, to create similar
product lines to leverage personalized association with the brands using our
technology.
Critical
Accounting Policies and 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. We base our assumptions, judgments and
estimates on historical experience and various other factors that we believe to
be reasonable under the circumstances. Accordingly, actual results could differ
from those estimates.
We
believe that the assumptions, judgments and estimates involved in the accounting
for revenue recognition, and equity-based compensation have the greatest
potential impact on our Condensed Consolidated Financial Statements. These areas
are key components of our results of operations and are based on complex rules
which require us to make judgments and estimates, so we consider these to be our
critical accounting policies. Historically, our assumptions, judgments and
estimates relative to our critical accounting policies have not differed
materially from actual results.
There
have been no significant changes in our critical accounting policies and
estimates during the nine months ended September 30, 2009 as compared to the
critical accounting policies and estimates disclosed in Management’s Discussion
and Analysis of Financial Condition and Results of Operations included in our
Annual Report on Form 10-K for the year ended December 31,
2008.
Results
of Operations
For the
first nine months of 2009, revenues increased 123% and operating losses
decreased by 40% over the same period in 2008. For the nine months
ended September 30, 2009, we had revenues of $673,728, an operating loss of
$4,152,414, a net loss of $4,170,561, and a net loss applicable to common
stockholders of $4,858,692. This compares to revenues of $302,351, an operating
loss of $6,847,783, a net loss of $6,934,944, and a net loss applicable to
common stockholders of $8,136,717 for the same period in 2008.
Revenues.
Total
revenues increased $201,132, or 179%, to $313,784 for the three months ended
September 30, 2009, as compared to $112,652 for the same period in 2008. The
increase in revenue during the three months ended September 30, 2009 over the
same period in 2008 is primarily due to sales in Walgreen’s stores as a result
of significant marketing efforts surrounding the launch of aVinci products in
Walgreen’s stores throughout the United States at the end of the second quarter
and the start of the third quarter of 2009. For the nine months ended September
30, 2009, total revenues increased $371,377 or 123% to $673,728 as compared to
$302,351 for the same period in 2008. The increase in revenue for the nine
months ended is also due to the launch of aVinci products in Walgreen’s stores
throughout the United States during the second and third quarters of
2009.
Two
customers accounted for a total of 88% of aVinci’s revenues for the three months
ended September 30, 2009 (individually 75%, and 13%) compared to four customers
accounting for 94% of the revenue for the same period in 2008 (individually 47%,
19%, 15 percent, and 13%). Two customers accounted for a total of 79% of
aVinci’s revenues for the nine months ended September 30, 2009 (individually
58%, and 21%) compared to four customers accounting for 93% of aVinci’s revenue
for the same period in 2008 (individually 47%, 20%, 15%, and 11%). No other
single customer accounted for more than 10% of aVinci’s total revenues for the
three and nine months ended September 30, 2009 or the same period in
2008.
Operating
Expenses.
Cost of Goods
Sold. Our cost of goods sold decreased $48,973, or 21%, to $184,327 for
the three months ended September 30, 2009, compared to $233,300 for the same
period in 2008. The decrease in cost of goods sold is primarily due to $44,000
in cost related to the sale of equipment to a customer during 2008, and to
increased sale of products produced in retail stores during 2009 for which our
cost of goods sold are minimal. As we continue to replace product sales that we
fulfill in our facility with sales of products fulfilled in store, we expect our
costs of good sold to continue to decrease because our customers assume the cost
of the raw materials and labor used to produce products from us. For
the nine months ended September 30, 2009, cost of goods sold decreased $80,163
or 12% to $586,770 as compared to $666,933 for the same period in 2008. The
decrease in cost of goods sold is primarily due to $118,000 in cost related to
the sales for equipment sold to a customer during 2008, and a reduction in labor
costs of $45,000 associated with product production in our facility during 2009.
These decreases were partially offset by increases recognized during the nine
months ended September 30, 2009 of $45,000 in expiring license fees, $29,000 in
increased retailer fees, and $24,000 in increased postage due to additional
sales volume.
For the
three and nine months ended September 30, 2009 the majority of cost of goods
sold are for costs associated with fulfillment. For the three and nine months
ended September 30, 2008, cost of goods sold includes $188,300 and $547,400,
respectively, in costs associated with fulfillment; and $45,000 and $119,600,
respectively, for the cost of hardware sold to a customer.
Research and
Development. Our research and development expense decreased $284,329, or
62%, to $172,663 for the three months ended September 30, 2009, compared to
$456,992 for the same period in 2008. The decrease is primarily due to a
decrease in the average employee headcount during this period from year to year.
Additional research and development resources were needed during the quarter
ended September 30, 2008 in preparation for the launching of our products at
Costco and Meijer. The decrease in employee headcount accounts for approximately
$229,000 of the decrease. Reduced usage of outside resources reduced expenses by
approximately $41,000. For the nine months ended September 30, 2009, research
and development decreased $833,405, or 58% to $614,117 as compared to
$1,447,522, for the same period in 2008. The decease in expenses for the nine
month period is also primarily due to the decrease in the average employee
headcount from 2008 to 2009 for the same reasons stated above. The decrease in
employee headcount accounts for approximately $725,000 of the decrease. Reduced
usage of outside resources reduced the nine month research and development
expense by $87,000.
Selling and
Marketing. Our selling and marketing expense decreased $183,570, or 46%,
to $215,284 for the three months ended September 30, 2009 compared to $398,854
for the same period in 2008. For the nine months ended September 30, 2009,
selling and marketing decreased $609,187, or 45% to $756,463 compared to
$1,365,650, for the same period in 2008. The decreases are primarily due to a
decrease in the average employee headcount during these periods from year to
year as additional resources were needed in 2008 to help launch our products at
various mass retailers. For the three and nine months ended September 30, 2009,
the decrease in employee headcount accounts for approximately $114,000 and
$384,000, respectively, of the decrease; and the decrease in the use of outside
resources accounts for approximately $62,000 and $80,000, respectively, of the
decrease from 2008. Finally, for the nine months ended September 30, 2009,
marketing expenses decreased by approximately $138,000 as 2008 included
increased marketing expense associated with the launch of our products at
various mass retailers.
General and
Administrative. Our general and administrative expense increased $89,089,
or 8%, to $1,176,016 for the three months ended September 30, 2009, compared to
$1,086,927 for the same period in 2008. The increase is primarily due to the
increase in stock-based compensation expense of $269,000. The majority of this
increase was due to the recognition of the remaining option expense for options
granted to two former directors due to the acceleration of vesting upon their
resignation in July 2009, and additional stock-based compensation resulting from
the repricing of the majority of our options in August 2009 (see Note 4 above).
General and administrative expenses also increased by approximately $218,000 due
to the issuance of stock and warrants for outside services including stock
granted to non-employee directors for their past year’s service. These increases
were offset by decreases in salaries of $155,000 and benefits of $46,000 due to
reduced overall headcount and reduced employee benefits. Other general and
administrative expenses decreased including reductions in investor related
expenses of $55,000 due to increased activity in 2008 following the reverse
merger in June 2008, and reduced insurance expense of $49,000 due to the
purchase of “run-off” directors and officers’ liability insurance after the
reverse merger transaction. Finally, legal and accounting fees decreased by
$29,000 from 2008 to 2009 due to higher fees in 2008 associated with the reverse
merger transaction.
For the
nine months ended September 30, 2009, general and administrative expenses
decreased $801,237, or 22% to $2,868,792 compared to $3,670,029, for the same
period in 2008. The decrease is primarily due to a decrease of $375,000 in
consulting and outside services. The revised consulting agreement
with Amerivon resulted in a decrease to general and administrative expense of
approximately $745,000. This decrease was offset by an increase in
2009 of other consulting and outside services. Employee benefits decreased by
$199,000 due to a decrease in overall headcount from year to year, and reduced
employee benefits. Insurance expense decreased by $127,000 from 2008 to 2009,
due to the payment of “run-off” directors and officers liability insurance as
described above. Finally, travel expenses decreased by $72,000 from 2008 to 2009
due to the reduction in overall average employee headcount and travel related
expenses.
Interest
Expense. Our interest expense decreased $5,144, or 50%, to $5,209 for the
three months ended September 30, 2009, compared to $10,353 for the same period
in 2008. For the nine months ended September 30, 2009, interest expense
decreased $118,803, or 87% to $17,662 compared to $136,465, for the same period
in 2008. In connection with the Agreement and Plan of Merger, aVinci Media, LC
entered into a Loan and Security Agreement and Secured Note with Secure Alliance
Holdings (“SAH”) on December 6, 2007 in order to ensure adequate funds through
the merger closing date. The agreement provided for SAH to loan a total of up to
$2.5 million to aVinci Media, LC through the merger closing date. A total of $1
million was received under the Secured Note as of December 31, 2007. An
additional $1,500,000 was advanced during the three months ended March 31, 2008.
The amounts advanced under the Secured Note were secured by all assets of aVinci
Media, LC, accrued interest at 10% per annum and principal and interest were due
and payable on December 31, 2008. In connection with the merger on June 6, 2008,
the balance of notes payable of $2.5 million and the related accrued interest of
approximately $104,000 were eliminated.
Income Tax
Expense. For the three and nine months ended September 30, 2009 and 2008,
no provisions for income taxes were required. Prior to June 6, 2008, aVinci
Media LC was a flow-through entity for income tax purposes and did not incur
income tax liabilities.
At September 30, 2009, management has
recognized a valuation allowance for the net deferred tax assets related to
temporary differences and current operating losses. The valuation allowance was
recorded because there is significant uncertainty as the realizability of the
deferred tax assets. Based on a number of factors, the currently available,
objective evidence indicates that it is more-likely-than-not that the net
deferred tax assets will not be realized.
Deemed Dividend
on Series A Convertible Preferred Stock. Deemed dividends of $105,928 and
$688,131 were recorded for the three and nine months ended September 30, 2009,
respectively, as a result of a beneficial conversion feature on the Series A
convertible preferred shares. The beneficial conversions were
calculated as the difference between the proceeds received from the sale of the
Series A convertible preferred stock and the fair value of the underlying common
stock into which the preferred shares are convertible. These were recorded as
preferential dividends, thus increasing the loss applicable to common
stockholders.
Deemed
Distribution on Series B Redeemable Convertible Preferred Units. aVinci
recorded a deemed distribution of $976,000 for the nine months ended September
30, 2008, to reflect the issuance of 1,525,000 common units that were issued in
order to induce conversion of the Series B preferred units to common units
immediately preceeding the reverse merger. The inducement units were recorded as
a deemed distribution, thus increasing the loss applicable to common
stockholders.
Distributions on
Series B Redeemable Convertible Preferred Units. The Series B redeemable
convertible preferred unit holders were entitled to an annual distribution of
$0.06 per unit. The distributions on Series B redeemable convertible preferred
units decreased $225,773, or 100%, to $0 for the nine months ended September 30,
2009, compared to $225,773 for the same period in 2008. The change is due to the
distribution accrual beginning in May 2007, and ending (due to the reverse
merger) in June 2008.
Balance
Sheet Items.
The
following were changes in our balance sheet accounts.
Cash. Cash decreased
$1,064,917, or 99%, to $6,136 at September 30, 2009, from $1,071,053 at December
31, 2008. The decrease is due to continued cash operating deficits. We did
receive $1,202,627 during the nine months ended September 30, 2009 as a result
of the issuance of the Series A convertible preferred shares (see Note 3 above)
to help cover the operating deficit.
Accounts receivable. Accounts
receivable increased $113,831, or 44%, to $375,423 at September 30, 2009 from
$261,592 at December 31, 2008. The increase is primarily due to invoicing
Fujicolor $247,500 for an advance against site license fees associated with
deployment of our archive software.
Prepaid Expenses. Prepaid
expenses decreased $152,740, or 66%, to $80,305 at September 30, 2009 from
$233,045 at December 31, 2008. The decrease is due to several factors including
recognizing expiring and other music license fees of $66,000, recognizing
prepaid directors and officers insurance of $37,000, recognizing prepaid
conference fees of $24,000, recognizing prepaid medical benefits of $22,000,
recognizing prepaid investor relations expenses of $17,000 and recognizing
prepaid rent of $7,000. These decreases were partially offset by an
increase in prepaid legal fees of $18,000.
Deferred Costs. Deferred
costs decreased $127,100, or 88%, to $16,844 at September 30, 2009, from
$143,944 at December 31, 2008. The decrease is due to Qualex cancelling its
contract with us in December 2008. As a result of the cancelled contract, Qualex
returned equipment to us and we discontinued recognizing the related deferred
costs and deferred revenue over the life of the original contract.
Property and Equipment, net.
Property and equipment decreased $309,176, or 50%, to $313,509 at September 30,
2009, from $622,685 at December 31, 2008. The decrease is due to depreciation
expense of $308,000.
Deferred Revenue. Deferred
revenue increased $172,470, or 50%, to $517,044 at September 30, 2009, from
$344,574 at December 31, 2008. The increase is a result of increased sales
contracts for which all of the criteria for revenue recognition were not yet
complete at September 30, 2009. The increase was partially offset due to Qualex
cancelling its contract with us when they ceased all operations in December
2008. As a result of the cancelled contract, Qualex returned equipment to us and
we discontinued recognizing the related deferred costs and deferred revenue over
the life of the original contract.
Liquidity
and Capital Resources
|
|
Unaudited
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
Statements
of Cash Flows
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
$ |
(2,167,201 |
) |
|
$ |
(6,372,069 |
) |
Cash
Flows from Investing Activities
|
|
|
9,317 |
|
|
|
(71,241 |
) |
Cash
Flows from Financing Activities
|
|
|
1,092,967 |
|
|
|
8,429,834 |
|
Increase
(Decrease) in cash and cash equivalents
|
|
|
(1,064,917 |
) |
|
|
1,986,524 |
|
Operating
Activities. For the nine months ended September 30, 2009, net cash used
in operating activities was $(2,167,201) compared to $(6,372,069) for the same
period in 2008. The changes were due to higher operating expenses for the nine
months ended September 30, 2008 for the pursuit of new customers and development
of additional delivery methods for software technology which required
substantial additional human, equipment and other resources.
Investing
Activities. For the nine months ended September 30, 2009, aVinci’s cash
flows provided by investing activities was $9,317 compared to cash used of
$(71,241) for the same period in 2008. The change was due to purchasing less
property and equipment in the nine months ended September 30, 2009 than in the
same period in 2008, and due to proceeds received from the sale of marketable
securities, at a realized loss, in 2009.
Financing
Activities. For the nine months ended September 30, 2009, financing
activities provided $1,092,967 of cash compared to providing $8,429,834 for the
same period in 2008. During the nine months ended September 30, 2009, we
received $1,202,627 from the sale of Series A convertible preferred stock and we
used $109,660 for principal payments under capital lease obligations. During the
nine months ended September 30, 2008, aVinci received approximately $7.1 million
in cash as a result of the reverse merger; and $1.5 million from SAH in
anticipation of closing the Merger Agreement. During this period, aVinci
received $460,625 from Amerivon as they exercised a portion of their warrants to
purchase additional common units, used $(534,024) for payment of accrued
distributions, and used $(91,879) for principal payments under capital
obligations.
As
discussed in Note 3 above, in March 2009, we initiated a private offering
pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder to raise up to an additional $1.5 million in two phases,
$750,000 from April to June 2009 and an additional $750,000 by the end of
December 2009. The investment is in the form of Series A convertible
preferred shares, $0.01 per share par value with a stated value of $1.00 per
share, convertible into common shares at the rate of $0.20 per common
share. For each Series A convertible preferred share, investors in the
offering also receive a warrant to purchase 1.25 shares of common stock at $0.25
per share at any time within five years. As of September 30, 2009, we had
received proceeds of $1,202,627 from the sale of 1,202,627 Series A convertible
preferred shares. The Series A shares also carry a cumulative dividend at an
annual rate of 8%. Cumulative dividends not accrued or declared as of
September 30, 2009 are $32,356.
We have
operated at a loss since inception and are not currently generating sufficient
revenues to cover our operating expenses. As of September 30, 2009,
we have negative working capital of $262,233 compared with a working capital
surplus of $1,177,103 at December 31, 2008. We are continuing to work to obtain
new customers and to increase revenues from existing customers. We
contemplate raising additional outside capital within the next 12 months to help
fund current growth plans (see Note 3 above). We have reduced
monthly expenses throughout 2009 and raised approximately $1.2 million of a
planned $1.5 million capital raise from outside sources from April 2009 through
November 10, 2009. We intend to raise an additional $300,000 under
our current capital raise, and an additional $500,000 round for next year. With
the outside capital and with increased revenues from new and existing customers,
we believe we will be able to fund operations through 2010 based on our current
plans and projections. In the event we are not able to meet our
revenue projections through the end of 2009 and 2010, we may be required to
raise additional capital and further reduce operating expenses.
If new
sources of financing are insufficient or unavailable, we will modify
our growth and operating plans to the extent of available funding, if
any. Any decision to modify our business plans would harm our ability to
pursue our aggressive growth plans. If we cease or stop operations,
our shares could become valueless. Historically, we have funded
operating, administrative and development costs through the sale of equity
capital or debt financing. If our plans and/or assumptions change or
prove inaccurate, or we are unable to obtain further financing, or such
financing and other capital resources, in addition to projected cash flow, if
any, prove to be insufficient to fund operations, our continued viability could
be at risk. To the extent that any such financing involves the sale
of our common stock or common stock equivalents, our current stockholders could
be substantially diluted. There is no assurance that we will be
successful in achieving any or all of these objectives in 2009.
New
Accounting Standards
In
March 2008, the Financial Accounting Standards Board (FASB) issued Topic
815, “Derivatives and Hedging.” Topic 815 amends and expands the disclosure
requirements with the intent to provide users of financial statements with an
enhanced understanding of how and why an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted for, and how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. Topic 815 was effective
beginning in the first quarter of fiscal 2009. The adoption of this guidance had
no effect on our consolidated financial position or results of
operations.
In
December 2007, the FASB issued Topic 805, “Business Combinations,” and
Topic 810, “Consolidation.” Topic 805 changes how business acquisitions are
accounted for and impacts financial statements both on the acquisition date and
in subsequent periods. Topic 810 changes the accounting and reporting for
minority interests, which is recharacterized as noncontrolling interests and
classified as a component of equity. Topic 805 and Topic 810 were effective for
us beginning in the first quarter of fiscal 2009. The adoption of Topic 805 and
Topic 810 had no effect on our consolidated financial position or results of
operations.
In April
2009, the FASB issued three new standards, to address concerns about
(1) measuring the fair value of financial instruments when the markets
become inactive and quoted prices may reflect distressed transactions and
(2) recording impairment charges on investments in debt securities. The
FASB also issued a third standard to require disclosures of fair values of
certain financial instruments in interim financial statements.
Topic
820, “Fair Value Measurements and Disclosures,” provides additional guidance to
highlight and expand on the factors that should be considered in estimating fair
value when there has been a significant decrease in market activity for a
financial asset. This standard also requires new disclosures relating to fair
value measurement inputs and valuation techniques (including changes in inputs
and valuation techniques).
Topic
320, “Investments - Debt and Equity Securities,” will change (1) the
trigger for determining whether an other-than-temporary impairment exists and
(2) the amount of an impairment charge to be recorded in earnings. To
determine whether an other-than-temporary impairment exists, an entity will be
required to assess the likelihood of selling a security prior to recovering its
cost basis. This is a change from the current requirement for an entity to
assess whether it has the intent and ability to hold a security to recovery or
maturity. This standard also expands and increases the frequency of existing
disclosure about other-than-temporary impairments and requires new disclosures
of the significant inputs used in determining a credit loss, as well as a
rollforward of that amount each period.
Topic
825, “Financial Instruments,” increases the frequency of fair value disclosures
from annual to quarterly to provide financial statement users with more timely
information about the effects of current market conditions on their financial
instruments.
The
provisions of these three standards were effective for us beginning the second
quarter of 2009. The adoption of these three standards did not have a material
effect on our consolidated financial position or results of
operations.
In
May 2009, the FASB issued Topic 855, “Subsequent Events,” which provides
guidance to establish general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Topic 855 also requires entities to
disclose the date through which subsequent events were evaluated as well as the
rationale for why that date was selected. Topic 855 is effective for interim and
annual periods ending after June 15, 2009, and accordingly, we adopted this
standard during the second quarter of 2009. Topic 855 requires that public
entities evaluate subsequent events through the date that the financial
statements are issued. We have evaluated subsequent events through the time of
filing these financial statements with the SEC on November 10,
2009.
In June
2009, the FASB issued Topic 105, “Generally Accepted Accounting Principles.”
This standard establishes the FASB Accounting Standards Codification™ (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. The Codification is effective for interim and
annual periods ending after September 15, 2009, and as of the effective
date, all existing accounting standard documents will be superseded. The
Codification is effective for us in the third quarter of 2009. The adoption of
this guidance had no effect on our consolidated financial position or results of
operations.
In
June 2009, the FASB issued a new accounting standard, which modifies how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The new
guidance clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose and
design and a company’s ability to direct the activities of the entity that most
significantly impact the entity’s economic performance. This standard requires
an ongoing reassessment of whether a company is the primary beneficiary of a
variable interest entity. This standard also requires additional disclosures
about a company’s involvement in variable interest entities and any significant
changes in risk exposure due to that involvement. This standard is effective for
fiscal years beginning after November 15, 2009. We believe that the future
requirements of this standard will not have a material effect on our
consolidated financial statements.
In
October 2009, the FASB issued Accounting Standards Update No. 2009-13 (FASB ASU
09-13), “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements (a consensus of the FASB Emerging Issues Task Force).” FASB ASU
09-13 updates the existing multiple-element arrangement guidance currently in
FASB Topic 605-25 (Revenue Recognition – Multiple-Element Arrangements). This
new guidance eliminates the requirement that all undelivered elements have
objective evidence of fair value before a company can recognize the portion of
the overall arrangement fee that is attributable to the items that have already
been delivered. Further, companies will be required to allocate revenue in
arrangements involving multiple deliverables based on the estimated selling
price of each deliverable, even though such deliverables are not sold separately
by either company itself or other vendors. This new guidance also significantly
expands the disclosures required for multiple-element revenue arrangements. The
revised guidance will be effective for the first annual period beginning on or
after June 15, 2010. We may elect to adopt the provisions prospectively to new
or materially modified arrangements beginning on the effective date or
retrospectively for all periods presented. We are currently evaluating the
impact FASB ASU 09-13 will have on our consolidated financial
statements.
In
October 2009, the FASB issued Accounting Standards Update No. 2009-14
(FASB ASU 09-14), “Certain Revenue Arrangements That Include Software Elements—a
consensus of the FASB Emerging Issues Task Force,” that reduces the types of
transactions that fall within the current scope of software revenue recognition
guidance. Existing software revenue recognition guidance requires that its
provisions be applied to an entire arrangement when the sale of any products or
services containing or utilizing software when the software is considered more
than incidental to the product or service. As a result of the amendments
included in FASB ASU No. 2009-14, many tangible products and services that
rely on software will be accounted for under the multiple-element arrangements
revenue recognition guidance rather than under the software revenue recognition
guidance. Under this new guidance, the following components would be excluded
from the scope of software revenue recognition guidance: the tangible
element of the product, software products bundled with tangible products where
the software components and non-software components function together to deliver
the product’s essential functionality, and undelivered components that relate to
software that is essential to the tangible product’s functionality. FASB ASU
09-14 also provides guidance on how to allocate transaction consideration when
an arrangement contains both deliverables within the scope of software revenue
guidance (software deliverables) and deliverables not within the scope of that
guidance (non-software deliverables). This guidance will be effective for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. We may elect to adopt the provisions
prospectively to new or materially modified arrangements beginning on the
effective date or retrospectively for all periods presented. However, we must
elect the same transition method for this guidance as that chosen for FASB ASU
No. 2009-13. We are currently evaluating the impact FASB ASU 09-14 will
have on our consolidated financial statements.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
resources that is material to investors.
Contractual
Obligations and Commitments
The
following table sets forth certain contractual obligations as of September 30,
2009 in summary form:
|
|
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Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than
1
|
|
|
1-3
|
|
|
4-5
|
|
|
than
5
|
|
Description
|
|
Total
|
|
|
Year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Capital
lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
|
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|
|
|
|
|
As a cost
saving measure, on or about October 30, 2009, we signed a non-binding letter of
intent to sublease a portion of our space to a third party with an option for
the third party to sublease the remaining space upon 60 days
notice. Upon execution of a sublease, we intend to move to a
subdivided portion of our current facility. We expect costs associated with the
sublease to be minimal.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
applicable.
ITEM
4. CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934 (the “Exchange Act”)) designed to provide
reasonable assurance that the information required to be disclosed in our
reports under the Exchange Act is processed, recorded, summarized and reported
within the time periods specified in the SEC’s rules and forms and that such
information is accumulated and communicated to our management, including our
Principal Executive Officer and Principal Financial and Accounting Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, our management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As
required by SEC Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of our management, including our
Principal Executive Officer and Principal Financial and Accounting Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report. Based
on this evaluation, Chett P. Paulsen, our Principal Executive Officer, and
Edward B. Paulsen, our Principal Financial and Accounting Officer, concluded
that these disclosure controls and procedures were effective at the reasonable
assurance level as of September 30, 2009.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting identified
in connection with the evaluation required by Rule 13a-15(d) or Rule 15d-15(d)
under the Exchange Act that occurred during the quarter ended September 30, 2009
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART
II-OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
We are
not aware of any material pending or threatened legal proceedings, other than
the litigation referenced below.
On
December 17, 2007, Robert L. Bishop, who worked with aVinci Media’s (AVI Media)
predecessor, Sequoia Media Group, LC, in a limited capacity in 2004 and is a
current member of a limited liability company, LifeCinema, LLC, that owns an
equity interest in aVinci, filed a legal claim in the Third Judicial District
Court for Salt Lake County, State of Utah, alleging a right to unpaid wages
and/or commissions (with no amount specified) and company equity. The
Complaint was served on AVI Media on January 7, 2008. AVI Media
timely filed an answer denying Mr. Bishop’s claims and counterclaiming
interference by Mr. Bishop with AVI Media’s capital raising
efforts. AVI Media is defending against Mr. Bishop’s claims and
discovery is ongoing. On April 30, 2009, defendants filed a motion
for summary judgment based upon the fact Mr. Bishop did not file suit within the
four year statute of limitations applicable to oral contracts (upon which
plaintiff is suing), and upon the grounds that no agreement exists because there
was no meeting of the minds. The court deferred ruling on the motion
pending Mr. Bishop conducting depositions of company executives. On
June 16, 2009 Mr. Bishop filed an amended complaint which alleges that defendant
Chett B. Paulsen is responsible for a portion of the equity Bishop is claiming
in the action. On June 30, 2009 Bishop filed a motion for leave to
file a second amended complaint to add claims for fraud and negligent
misrepresentation. Defendants objected to the motion on the ground of
failing to state a claim, the “futility doctrine” under Utah law, and failing to
timely file the claims. Defendants filed a second motion for summary
judgment on July 28, 2009 on the grounds that Bishop’s action is barred by Utah
statute which requires “investment advisor” agreements to be in
writing. The matter has been submitted to the court for oral argument
but no date has been set to hear the motion.
ITEM
1A. RISK
FACTORS
There
have been no material changes from the risk factors disclosed in the “Risk
Factors” section of our Form 10-K as filed with the SEC on March 31,
2009.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The
Company issued and sold 1,202,627 shares of its Series A Convertible Preferred
Stock, $0.01 per share par value, with a stated value of $1.00 per share with
five-year warrants to purchase 1,503,283 shares of the Company’s common stock at
an exercise price of $0.25 per share to accredited investors. The
Company received $1,202,627 as consideration for the Series A Convertible
Preferred Stock and the accompanying warrants. The Series A Convertible
Preferred Stock will carry a cumulative dividend at an annual rate of 8%.
The issuance and sale of these securities took place in a private placement
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933. The Series A Convertible Preferred Stock is convertible into the
Company’s common stock at $0.20 per share or 6,013,135 shares. The
proceeds from the sale of the Series A Convertible Preferred Stock have been
used to fund ongoing operations.
On July
15, 2009, Stephen P. Griggs and Jerrell G. Clay, former directors, each received
warrants to purchase up to 200,000 shares of common stock of the Company for
$0.30 a share at anytime on or before 10 years from the date of issuance. We
recorded a total expense of $77,000 for the issuance of these
warrants.
On July
23, 2009, our Board of Directors approved the issuance of 50,000 shares of the
Company’s common stock to each non-management director serving on the board for
the period June 6, 2008 through June 5, 2009. Consequently Tod M. Turley, John
E. Tyson, Stephen P. Griggs, and Jerrell G. Clay each received 50,000 shares of
the Company’s common stock. These shares had a total fair value of $68,000 and
were expensed immediately.
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM
5. OTHER
INFORMATION
Not
applicable.
ITEM
6. EXHIBITS
(a)
Exhibits
Exhibit
Number
|
Description
of Exhibit
|
|
|
3.3
|
Certificate
of Designation of Series A Convertible Preferred Stock
|
31.1
|
Certification
of the Principal Executive Officer pursuant to Exchange Act Rule
13a-14(a)
|
31.2
|
Certification
of the Principal Financial and Accounting Officer pursuant to Exchange Act
Rule 13a-14(a)
|
32
|
Certification
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
aVinci
Media Corporation
|
|
|
|
Date:
November 10, 2009
|
By:
|
/s/
Chett B. Paulsen
|
|
|
|
Principal
Executive Officer
|
Date:
November 10, 2009
|
By:
|
/s/
Edward B. Paulsen
|
|
|
|
Principal
Financial and Accounting Officer
|
25