Attached files
file | filename |
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8-K/A - PIKSEL, INC. | v186953_8ka.htm |
EX-23.1 - PIKSEL, INC. | v186953_ex23-1.htm |
EX-99.2 - PIKSEL, INC. | v186953_ex99-2.htm |
Exhibit
99.1
Multicast
Media Technologies, Inc.
and
Subsidiaries
Consolidated
Financial Statements
December
31, 2009 and 2008
Multicast
Media Technologies, Inc. and Subsidiaries
Consolidated
Financial Statements
December
31, 2009 and 2008
Contents
Page
|
|
Independent
Auditor’s Report
|
1
|
Financial
Statements:
|
|
Consolidated
Balance Sheets
|
2
|
|
|
Consolidated
Statements of Operations
|
3
|
Consolidated
Statements of Stockholders’ Deficit
|
4
|
Consolidated
Statements of Cash Flows
|
5
|
Notes
to Consolidated Financial Statements
|
6
|
Independent
Auditor’s Report
To the
Board of Directors
Multicast
Media Technologies, Inc.
Atlanta,
GA
We have
audited the accompanying consolidated balance sheets of Multicast Media
Technologies, Inc. and Subsidiaries (collectively, the Company) as of December
31, 2009 and 2008 and the related consolidated statements of operations,
stockholders’ deficit and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Multicast Media
Technologies, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the
results of their operations and cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management’s plans
in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/
Bennett Thrasher PC
Bennett
Thrasher PC
May 27,
2010
- 1
-
Multicast
Media Technologies, Inc. and Subsidiaries
Consolidated
Balance Sheets
December
31, 2009 and 2008
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 636,661 | $ | 67,776 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $632,729 and
$447,000, respectively
|
734,988 | 852,590 | ||||||
Prepaid
expenses
|
7,611 | 6,529 | ||||||
Deferred
costs
|
109,655 | 131,261 | ||||||
Total
current assets
|
1,488,915 | 1,058,156 | ||||||
Property
and equipment, net
|
1,674,310 | 2,203,945 | ||||||
Deposits
|
4,067 | 5,105 | ||||||
Total
assets
|
$ | 3,167,292 | $ | 3,267,206 | ||||
Liabilities
and Stockholders' Deficit
|
||||||||
Current
liabilities:
|
||||||||
Line
of credit
|
$ | 2,499,800 | $ | 2,499,800 | ||||
Convertible
notes payable
|
1,962,453 | 500,000 | ||||||
Capital
leases - current portion
|
284,820 | 281,509 | ||||||
Accounts
payable
|
1,293,776 | 1,554,848 | ||||||
Customer
deposits and deferred revenue
|
621,191 | 485,706 | ||||||
Accrued
expenses
|
468,811 | 197,411 | ||||||
Total
current liabilities
|
7,130,851 | 5,519,274 | ||||||
Capital
leases - less current portion
|
124,150 | 357,314 | ||||||
Deferred
rent and other
|
12,176 | 131,282 | ||||||
Total
liabilities
|
7,267,177 | 6,007,870 | ||||||
Stockholders'
deficit:
|
||||||||
Series
C redeemable convertible preferred stock; $0.0001 par value; 23,000,000
shares authorized; 22,670,397 shares issued and
outstanding
|
6,092,941 | 5,591,702 | ||||||
Series
CC redeemable convertible preferred stock; $0.0001 par value; 5,000,000
shares authorized; 4,125,349 shares issued and outstanding
|
2,172,039 | 1,993,682 | ||||||
Series
B-2 convertible preferred stock; $0.0001 par value; 4,800,000 shares
authorized; 1,538,462 shares issued and outstanding
|
400,000 | 400,000 | ||||||
Series
B-1 convertible preferred stock; $0.0001 par value; 200,000 shares
authorized; 0 shares issued and outstanding
|
- | - | ||||||
Series
A convertible preferred stock; $0.0001 par value; 4,000,000 shares
authorized; 162,632 shares issued and outstanding
|
143,629 | 143,629 | ||||||
Common
stock; $0.0001 par value; 80,000,000 shares authorized; 28,421,075 and
27,921,075 shares issued and outstanding at December 31, 2009 and 2008,
respectively
|
2,843 | 2,793 | ||||||
Additional
paid-in-capital
|
1,139,633 | 922,499 | ||||||
Accumulated
deficit
|
(13,951,240 | ) | (11,695,239 | ) | ||||
Less
cost of 1,708,000 common shares held in treasury
|
(99,730 | ) | (99,730 | ) | ||||
Total
stockholders' deficit
|
(4,099,885 | ) | (2,740,664 | ) | ||||
Total
liabilities and stockholders' deficit
|
$ | 3,167,292 | $ | 3,267,206 |
See
accompanying notes to consolidated financial statements.
- 2
-
Multicast
Media Technologies, Inc. and Subsidiaries
Consolidated
Statements of Operations
For
the Years Ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
Net
sales
|
$ | 13,354,571 | $ | 13,054,086 | ||||
Cost
of sales
|
5,065,168 | 4,458,814 | ||||||
Gross
margin
|
8,289,403 | 8,595,272 | ||||||
Selling,
general and administrative expenses
|
9,347,241 | 10,742,905 | ||||||
Loss
from operations
|
(1,057,838 | ) | (2,147,633 | ) | ||||
Other
expense:
|
||||||||
Interest
expense
|
(518,567 | ) | (262,811 | ) | ||||
Loss
on disposal of property and equipment
|
- | (44,914 | ) | |||||
Total
other expense
|
(518,567 | ) | (307,725 | ) | ||||
Loss
before provision for income taxes
|
(1,576,405 | ) | (2,455,358 | ) | ||||
Provision
for income taxes
|
- | - | ||||||
Net
loss
|
$ | (1,576,405 | ) | $ | (2,455,358 | ) |
See
accompanying notes to consolidated financial statements.
- 3
-
Multicast
Media Technologies, Inc. and Subsidiaries
Consolidated
Statements of Stockholders' Deficit
For
the Years Ended December 31, 2009 and 2008
Redeemable Preferred Stock
|
Redeemable Preferred Stock
|
Preferred Stock
|
Preferred Stock
|
Preferred Stock
|
Total
|
||||||||||||||||||||||||||||||||||||||||||||||
Series C
|
Series CC
|
Series B-2
|
Series B-1
|
Series A
|
Common Stock
|
Additional
|
Accumulated
|
Treasury Stock
|
Stockholders'
|
||||||||||||||||||||||||||||||||||||||||||
# Shares
|
Amount
|
# Shares
|
Amount
|
# Shares
|
Amount
|
# Shares
|
Amount
|
# Shares
|
Amount
|
# Shares
|
Amount
|
Paid-in-Capital
|
Deficit
|
# Shares
|
Amount
|
Deficit
|
|||||||||||||||||||||||||||||||||||
Balance,
January 1, 2008
|
22,670,397 | $ | 5,083,270 | 4,125,349 | $ | 1,821,071 | 1,538,462 | $ | 400,000 | - | $ | - | 362,632 | $ | 338,629 | 24,090,071 | $ | 2,409 | $ | 777,883 | $ | (8,558,838 | ) | 883,000 | $ | (99,730 | ) | $ | (235,306 | ) | |||||||||||||||||||||
Issuance
of restricted common stock
|
- | - | - | - | - | - | - | - | - | - | 3,806,004 | 381 | (381 | ) | - | - | - | - | |||||||||||||||||||||||||||||||||
Issuance
of common stock
|
- | - | - | - | - | - | - | - | - | - | 25,000 | 3 | (3 | ) | - | - | - | - | |||||||||||||||||||||||||||||||||
Acquisition
of treasury stock
|
- | - | - | - | - | - | - | - | - | - | - | - | - | - | 825,000 | - | - | ||||||||||||||||||||||||||||||||||
Redemptions
of preferred stock
|
- | - | - | - | - | - | - | - | (200,000 | ) | (195,000 | ) | - | - | 145,000 | - | - | - | (50,000 | ) | |||||||||||||||||||||||||||||||
Accretion
of preferred stock
|
- | 508,432 | - | 172,611 | - | - | - | - | - | - | - | - | - | (681,043 | ) | - | - | - | |||||||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | - | - | - | - | - | - | (2,455,358 | ) | - | - | (2,455,358 | ) | ||||||||||||||||||||||||||||||||
Balance,
December 31, 2008
|
22,670,397 | 5,591,702 | 4,125,349 | 1,993,682 | 1,538,462 | 400,000 | - | - | 162,632 | 143,629 | 27,921,075 | 2,793 | 922,499 | (11,695,239 | ) | 1,708,000 | (99,730 | ) | (2,740,664 | ) | |||||||||||||||||||||||||||||||
Equity
compensation related to stock options
|
- | - | - | - | - | - | - | - | - | - | - | - | 18,191 | - | - | - | 18,191 | ||||||||||||||||||||||||||||||||||
Issuance
of warrants in connection with debt financing
|
- | - | - | - | - | - | - | - | - | - | - | - | 136,493 | - | - | - | 136,493 | ||||||||||||||||||||||||||||||||||
Issuance
of common stock
|
- | - | - | - | - | - | - | - | - | - | 500,000 | 50 | 62,450 | - | - | - | 62,500 | ||||||||||||||||||||||||||||||||||
Accretion
of preferred stock
|
- | 501,239 | - | 178,357 | - | - | - | - | - | - | - | - | - | (679,596 | ) | - | - | - | |||||||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | - | - | - | - | - | - | (1,576,405 | ) | - | - | (1,576,405 | ) | ||||||||||||||||||||||||||||||||
Balance,
December 31, 2009
|
22,670,397 | $ | 6,092,941 | 4,125,349 | $ | 2,172,039 | 1,538,462 | $ | 400,000 | - | $ | - | 162,632 | $ | 143,629 | 28,421,075 | $ | 2,843 | $ | 1,139,633 | $ | (13,951,240 | ) | 1,708,000 | $ | (99,730 | ) | $ | (4,099,885 | ) |
See
accompanying notes to consolidated financial statements.
- 4
-
Multicast
Media Technologies, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
For
the Years Ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (1,576,405 | ) | $ | (2,455,358 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
957,471 | 943,793 | ||||||
Non-cash
interest expense
|
98,946 | - | ||||||
Stock
compensation expense
|
18,191 | - | ||||||
Loss
on disposal of property and equipment
|
- | 44,914 | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
117,602 | 100,874 | ||||||
Prepaid
expenses
|
(1,082 | ) | 16,157 | |||||
Deferred
costs
|
21,606 | 118,132 | ||||||
Deposits
|
1,038 | (284 | ) | |||||
Accounts
payable
|
(261,072 | ) | 1,055,506 | |||||
Customer
deposits and deferred revenue
|
135,485 | (51,668 | ) | |||||
Accrued
expenses
|
271,400 | 82,264 | ||||||
Deferred
rent and other
|
(119,106 | ) | 12,176 | |||||
Net
cash used in operating activities
|
(335,926 | ) | (133,494 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property and equipment
|
(295,563 | ) | (703,095 | ) | ||||
Net
cash used in investing activities
|
(295,563 | ) | (703,095 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from convertible notes payable
|
1,500,000 | 500,000 | ||||||
Repayments
of notes payable
|
- | (1,000,000 | ) | |||||
Borrowings
under line of credit, net
|
- | 1,630,452 | ||||||
Repayment
of capital lease obligations
|
(299,626 | ) | (250,834 | ) | ||||
Preferred
stock redemptions
|
- | (50,000 | ) | |||||
Net
cash provided by financing activities
|
1,200,374 | 829,618 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
568,885 | (6,971 | ) | |||||
Cash
and cash equivalents, beginning of year
|
67,776 | 74,747 | ||||||
Cash
and cash equivalents, end of year
|
$ | 636,661 | $ | 67,776 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
paid during the year for interest
|
$ | 248,203 | $ | 227,782 | ||||
Non-cash
financing and investing transactions:
|
||||||||
Property
and equipment acquired through capital leases
|
$ | 69,773 | $ | 120,619 | ||||
Property
and equipment acquired through issuance of common stock
|
$ | 62,500 | $ | - |
See
accompanying notes to consolidated financial statements.
- 5
-
Multicast
Media Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December 31, 2009 and 2008
Note
1: Nature of Operations and Summary of Significant Accounting
Policies
Formation
of the Company and Nature of Operations
Multicast
Media Technologies, Inc. (Multicast) was incorporated in the State of Georgia in
May 2000 under the name Haywire Ventures, Inc. The name was changed to Multicast
Media Technologies, Inc. in August 2002. Multicast was created for the purpose
of holding the wholly owned operating subsidiary Multicast Media Networks, LLC,
a Georgia limited liability company and the ongoing development of its Digital
Media Management System (DMMS™), Active Digital Broadcast System (ADBS™),
Vidego™ software and INcode™ transcoding technologies.
Multicast
develops and licenses infrastructure software products and provides related
services to facilitate the use of digital media for live, 24/7 and on-demand
streaming video applications. These services enable customers to outsource the
encoding, storage, management and delivery of audio, video and other visual
content over the Internet or other high-speed communications networks.
Multicast’s technical infrastructure and proprietary software applications
comprise an end-to-end solution that includes rich media application support,
hosting, monitoring, storage, encoding, and media delivery. Multicast’s
solutions reduce the complexity and cost of internal solutions, while supporting
a variety of digital media strategies and customer business models.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Multicast
and its wholly owned subsidiaries Multicast Media Networks, LLC; Streamingfaith,
LLC; X3D, LLC; and P3 Integrators, LLC (collectively, the Company). All
significant intercompany transactions have been eliminated.
Going
Concern
The
Company has experienced recurring operating losses and cash usage from operating
activities, which have, in turn, resulted in concerns regarding liquidity and
its ability to maintain sufficient revenue levels or reduce costs such that it
will be able to service its outstanding obligations. The Company’s
operations and capital expenditures have been funded primarily through capital
raised from its preferred stock offerings and debt financing. As of
December 31, 2009, the Company had $636,661 of cash and a working capital
deficit of $5,641,936. The continuation of the Company’s business is contingent
upon, among other things, the ability to successfully renegotiate the senior
loan and other future maturities of debt, raise additional capital from existing
and future investors, and the ability to obtain satisfactory levels of
profitable operations. Whereas in the past, the Company believed it had access
to multiple options for additional capital, including debt, mezzanine or equity
funding, it has become increasingly difficult for the Company to secure
additional funding from these sources on acceptable terms or at all given the
present general credit market crisis and negative outlook for the economy as a
whole. There can be no assurances that the Company will be successful in
securing or restructuring any such funding, and as a result, in addition to the
other factors described above, there is a substantial doubt as to the Company's
ability to continue as a going concern. The consolidated financial
statements do not contain any adjustments that might result from the outcome of
this uncertainty.
- 6
-
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash on deposit in banks, time deposits, and overnight
investments. All cash and cash equivalents are carried at cost which
approximates fair value. The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents. At
times, cash and cash equivalent balances may exceed Federally insured amounts.
The Company believes it mitigates any risks by depositing cash and investing in
cash equivalents with major financial institutions.
Accounts
Receivable
In the
normal course of business, the Company extends unsecured credit to its
customers. Accounts receivable are generally due under normal trade terms
requiring payment within 30 days from the invoice date. Unpaid accounts
receivable do not bear interest. Accounts receivable are stated at the amount
billed to the customer. Customer account balances with invoices over 90 days old
are considered delinquent.
The
carrying amount of accounts receivable is reduced by a valuation allowance that
reflects management's best estimate of the amounts that will not be collected.
The Company determines the allowance based on historical write-off experience
and economic data. Past-due balances over 90 days and over a specified amount
are reviewed individually for collectability. All other balances are reviewed on
a pooled basis. Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for recovery is
considered remote. As of December 31, 2009 and 2008, the Company’s allowance for
doubtful accounts was $632,729 and $447,000, respectively. The provision for
doubtful accounts is recorded as a charge to operating expenses.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the individual assets as
follows: computer equipment and software, 3 to 5 years; furniture and fixtures,
5 to 10 years; leasehold improvements, amortized over useful life or term of
lease; and vehicles, 7 years. Repairs and maintenance are charged to expense as
incurred, and improvements are capitalized.
Impairment
of Long-Lived Assets
The
Company evaluates long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. In the opinion of management, no long-lived assets were
impaired as of December 31, 2009 or 2008.
- 7
-
Revenue
Recognition
The
Company derives its revenue primarily from monthly subscriptions for software
licensing, support, hosting, monitoring, storage, encoding, and media
delivery.
Revenue
is recognized from services rendered once all of the following criteria have
been met: (1) pervasive evidence of an agreement exists; (2) the services have
been rendered; (3) the fee is fixed and determinable; and (4) collection of the
amounts due is reasonably assured. Subscription revenue is recognized monthly
over the term of the agreement. If payments are received in advance of delivery
of services, the amounts are deferred and recognized when the revenue
recognition criteria have been met.
Revenue
generated from initial set-up services is recognized pursuant to Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
605-25, Multiple-Element Arrangements. The
Company defers the amounts invoiced to the customer, along with the costs
incurred to perform the services at the time the services are provided, and
recognizes these amounts as revenue and cost of goods sold, respectively, over
the term of the initial subscription agreement.
The
Company records revenue from sales of third-party products on a “net” basis
pursuant to FASB ASC 605-45, Principal Agent
Considerations.
Income
Taxes
The
Company utilizes the asset and liability method of accounting for income
taxes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, as well as
operating loss, capital loss and tax credit carryforwards. Deferred
tax assets and liabilities are classified as current or non-current based on the
classification of the related assets and liabilities for financial reporting, or
according to the expected reversal dates of the specific temporary differences,
if not related to an asset or liability for financial
reporting. Valuation allowances are established against deferred tax
assets if it is more likely than not they will not be realized.
Stock-Based
Compensation
The
Company recognizes in the statements of operations the grant date fair value of
stock awards issued
to employees and directors over the requisite service
period.
The
Company accounts for all transactions in which goods or services are the
consideration received for issuance of equity instruments based on the fair
value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measured. The measurement date of the
fair value of the equity instrument issued is the earlier of the date on which
the counterparty’s performance is complete or the date on which it is probable
that performance will occur.
The fair value of the
stock options is determined on the grant date using the Black-Scholes option
pricing model. Expected volatility is based on the average historical
volatility of similarly structured business services companies. The
expected term of the options granted represents the period of time that
the options are expected to be outstanding. The Company used the
simplified method to estimate the expected term of the options. The
risk-free rate is based on U.S. Treasury yields in effect at the time of the
grant for the expected term of the options. Assumptions for the grants in
2009 and 2008 are as follows:
- 8
-
2009
|
2008
|
|||||||
Risk
free interest rate
|
1.72 | % | 1.50 | % | ||||
Volatility
factor
|
23.75 | % | 23.23 | % | ||||
Dividend
yield
|
0.00 | % | 0.00 | % | ||||
Expected
life (years)
|
5.5 - 6.25 | 5.75 |
Advertising
Costs
Advertising,
promotional, marketing, and sales consulting costs are expensed as incurred. The
Company incurred $397,993 and $472,798 of such costs for the years ended
December 31, 2009 and 2008, respectively, which are included in selling, general
and administrative expenses in the accompanying consolidated statements of
operations.
Impact
of Recent Accounting Pronouncements
In June
2009, the FASB issued FASB ASC 105, Generally Accepted Accounting
Principles, which establishes the FASB ASC as the sole source of
authoritative generally accepted accounting principles (GAAP). Pursuant to the
provisions of FASB ASC 105, the Company has updated references to GAAP in its
consolidated financial statements issued for the year ended December 31,
2009. The adoption of FASB ASC 105 did not impact the Company’s
consolidated financial position or results of operations.
Effective
June 30, 2009, the Company adopted a new accounting standard for subsequent
events, as codified in FASB ASC 855-10, Subsequent
Events. The update modifies the names of the two types of
subsequent events either as recognized subsequent events (previously referred to
in practice as Type I subsequent events) or non-recognized subsequent events
(previously referred to in practice as Type II subsequent events). In
addition, the standard modifies the definition of subsequent events to refer to
events or transactions that occur after the balance sheet date, but before the
financial statements are available to be issued (for nonpublic
entities). It also requires the disclosure of the date through which
subsequent events have been evaluated. The update did not result in
significant changes in the practice of subsequent event disclosures, and
therefore the adoption did not have a material impact on the Company’s
consolidated financial statements.
The
Company has evaluated events and transactions occurring subsequent to December
31, 2009 through May 27,
2010, the issuance date of the consolidated financial statements. During this
period, there were no recognized subsequent events requiring recognition in the
consolidated financial statements, and no non-recognized subsequent events
requiring disclosure other than those disclosed.
In June
2006, the FASB issued ASC 740, Income Taxes (formerly
referenced as FASB Financial Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109), which clarifies the
accounting for uncertainty in income taxes recognized in an entity’s financial
statements and prescribes a recognition threshold and measurement attribute for
financial statement recognition of tax positions taken or to be taken on a tax
return. Additionally, FASB ASC 740 provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. In December 2008, the FASB deferred the
effective date of FASB ASC Topic 740 for nonpublic entities to fiscal years
beginning after December 15, 2008, with early adoption permitted. The
Company adopted FASB ASC 740 on January
1, 2009. The adoption of FASB ASC 740 did not impact the Company’s
consolidated financial position or results of operations.
- 9
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Note
2: Property and Equipment
Property
and equipment as of December 31, 2009 and 2008 consisted of the
following:
2009
|
2008
|
|||||||
Computer
equipment and software
|
$ | 4,930,183 | $ | 4,510,228 | ||||
Furniture
and fixtures
|
191,637 | 183,756 | ||||||
Leasehold
improvements
|
63,146 | 63,146 | ||||||
Vehicles
|
26,111 | 26,111 | ||||||
5,211,077 | 4,783,241 | |||||||
Less
accumulated depreciation and amortization
|
(3,536,767 | ) | (2,579,297 | ) | ||||
$ | 1,674,310 | $ | 2,203,944 |
Depreciation
and amortization expense of property and equipment totaled $957,471 and $943,793
for the years ended December 31, 2009 and 2008, respectively.
Note
3: Debt
Line
of Credit
The
Company has a $2,500,000 line of credit with a bank. In June 2009, the Company
entered into an agreement to amend the revolving line of credit agreement. Under
the amendment, Formula Advances (subject to a borrowing base) shall not exceed
$1,500,000 provided that such amount shall increase by $125,000 per quarter
beginning on September 30, 2009. Non-formula Advances (not subject to a
borrowing base) shall not exceed $1,000,000 provided that such amount shall
decrease by $125,000 per quarter beginning on September 30, 2009. Formula
Advances bear interest at the greater of 5.50% or 2.50% above the Prime rate
(3.25% at December
31, 2009). Non-formula Advances bear interest at the greater of 5.50% or 3.25%
above the Prime rate. The revolving line of credit is secured by substantially
all assets of the Company as well as guarantees by certain stockholders. As of
December 31, 2009, total Formula Advances and Non-formula Advances outstanding
under the line of credit agreement were $1,749,800 and $750,000, respectively.
Under the agreement, the Company is required to make monthly payments of
interest and may repay the outstanding borrowings at any time without penalty.
The agreement matures in June 2010, at which time all principal and accrued
interest are due. There was no additional availability under the
Company’s line of credit at December 31, 2009.
The
Company is required to adhere to certain financial and nonfinancial covenants
under the line of credit agreement. As of December 31, 2009, the Company was in
compliance with such covenants.
Note
Payable
In
February 2009, the Company entered into an agreement with a certain vendor to
convert accounts payable totaling $700,000 into a promissory note payable. The
promissory note payable bears interest at 5%, and requires the Company to make
twelve consecutive monthly payments. At December 31, 2009, the remaining balance
of $119,106 is shown as a component of accounts payable. At December
31, 2008, the current portion of $580,894 is included in accounts payable and
the long-term portion of $119,106 is included in deferred rent and other on the
accompanying consolidated balance sheets.
- 10
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Convertible
Notes Payable
In
October 2008, the Company entered into two convertible promissory notes payable
agreements with a certain stockholder. Total proceeds were $500,000. The notes
bear interest at 10%. The notes were amended in December 2009 to extend the
maturity date to April 2010 under the same terms. The notes are
automatically convertible into shares of common stock at the then offering
price. Upon the execution of the notes payable agreements, the Company granted
667,224 warrants to purchase the Company’s common stock at an exercise price of
$.01 per share. The grant date fair value of warrants issued
was not considered significant as the underlying stock was deemed to have
nominal value.
In
January 2009, the Company entered into two convertible promissory notes payable
agreements with a certain stockholder with similar terms to the above notes.
Total proceeds were $500,000. The notes are automatically convertible into
shares of new common stock at the then offering price. Upon the execution of the
notes payable agreements, the Company granted 667,224 warrants to purchase the
Company’s common stock at an exercise price of $.01 per share. The
warrants were valued at $67,044 based on the relative fair value of the warrant
to the note, using the Black-Scholes valuation model. The debt
discount is being amortized over the term of the note as interest expense and
totaled $50,526 in 2009. The outstanding balance on the debt was
$500,000 at December 31, 2009. The remaining unamortized discount was
$16,518 at December 31, 2009.
In April
2009, the Company entered into two convertible promissory notes payable
agreements with a certain stockholder. Total proceeds were
$1,000,000. The notes bear interest at 10% and mature in April 2010. The notes
are automatically convertible into shares of capital stock at the then offering
price. Upon the execution of the notes agreements, the Company granted 643,359
warrants to purchase the Company’s common stock at an exercise price of $.01 per
share. The warrants were valued at $69,449 based on the relative fair value of
the warrants to the notes, using the Black-Scholes valuation
model. The debt discount is being amortized over the term of the
note as interest expense and totaled $48,420 in 2009. The
outstanding balance on the debt was $1,000,000 at December 31,
2009. The remaining unamortized discount was $21,029 at December 31,
2009.
The
convertible notes payable and warrants were paid with the proceeds from the sale
of the Company to KIT digital (Note 11).
Note
4: Capital Leases
The
Company leases certain property and equipment under agreements that are
classified as capital leases. The cost of property and equipment under capital
leases is included in the accompanying consolidated balance sheets and consisted
of the following as of December 31, 2009 and 2008:
2009
|
2008
|
|||||||
Computer
equipment and software
|
$ | 949,800 | $ | 1,124,744 | ||||
Less
accumulated depreciation
|
(545,149 | ) | (653,917 | ) | ||||
Property
and equipment under capital leases, net
|
$ | 404,651 | $ | 470,827 |
- 11
-
Scheduled
maturities of the future minimum lease payments under the capital leases are as
follows:
Year
ending December 31,
2010
|
$ | 325,672 | ||
2011
|
123,904 | |||
2012
|
12,151 | |||
461,727 | ||||
Less
amount representing interest
|
(52,757 | ) | ||
Present
value of minimum lease payments
|
408,970 | |||
Less
current portion
|
(284,820 | ) | ||
$ | 124,150 |
Note
5: Income Taxes
Significant
components of the Company’s deferred tax assets and liabilities as of December
31, 2009 and 2008 are as follows:
2009
|
2008
|
|||||||
Net
operating loss carryforwards
|
$ | 4,028,227 | $ | 3,387,103 | ||||
Depreciation
and amortization
|
(235,749 | ) | (191,515 | ) | ||||
Stock
compensation
|
6,905 | - | ||||||
Other
|
1,420 | 1,414 | ||||||
Deferred
revenue
|
159,686 | 119,913 | ||||||
Allowance
for doubtful accounts
|
240,184 | 287,240 | ||||||
4,200,673 | 3,604,155 | |||||||
Less
valuation allowance
|
(4,200,673 | ) | (3,604,155 | ) | ||||
Deferred
tax asset, net
|
$ | - | $ | - |
As of
December 31, 2009, the Company has
approximately $10.6 million in Federal and state net operating loss
carryforwards to offset future taxable income that, if not utilized, expire
beginning in 2020. The utilization of such net operating loss carryforwards and
realization of tax benefits in future years depends predominantly upon
generating future taxable income. Consequently, due to the uncertainties
surrounding the realization of the benefits of its net favorable tax attributes
in future tax returns, the Company has recorded a full valuation allowance
against its net deferred tax assets as of December 31, 2009, as management has
deemed it is more likely than not that the deferred tax assets will not be
utilized. The Company has not made a determination as to whether an
ownership change has occurred for purposes of Section 382 that would limit the
usage of net operating loss carryforwards. If a Section 382 ownership
change had occurred, the utilization of the net operating losses would be
limited and could expire with the Company receiving no benefit from these
losses.
The
income tax benefit for the years ended December 31, 2009 and 2008
differs from the amount determined by applying the U.S. statutory Federal income
tax rate to the pretax accounting loss primarily as a result of state income
taxes and establishment of changes in the valuation allowance.
- 12
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Note
6: Preferred Stock
The
authorized shares of preferred stock may be offered in one or more
series. The Company’s Board of Directors (the Board) is authorized to
resolve any designations, preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications, and terms and
conditions with respect to the issuance of preferred stock prior to the issuance
of any shares of such series.
The
rights, preferences, and privileges attached to the Company’s Series A, B-1,
B-2, C and CC convertible preferred stock are as follows:
Conversion
All
Series of preferred stock are convertible, at the option of the holder at any
time after the date of issuance, into fully paid and non assessable shares of
common stock by dividing the purchase price paid for such shares by the
conversion price. The conversion price shall initially be equal to the purchase
price paid and is as follows: $0.21 per share of Series C; $0.42 per share of
Series CC; $0.26 per share of Series B-2; $1.25 per share of Series B-1; and
$1.00 per share of Series A. Conversion of all outstanding shares of preferred
stock shall occur automatically if the Company completes a qualified public
offering.
Dividend
Rights
The
holders of the Series C and Series CC redeemable convertible preferred stock are
entitled to receive cumulative dividends at rate per annum of $0.01685 and
$0.03351, respectively compounding semi-annually, whether or not declared by the
Board. The holders of the Series C and Series CC will receive an
in-kind payment of the cumulative dividend in the form of additional Series C
and CC convertible preferred shares when and if declared by the
Board. No dividends will be paid on the Company’s other preferred or
common stock unless all cumulative dividends in arrears on the Series C and
Series CC preferred stock have been paid. Dividends in arrears on the
Company’s Series C and Series CC convertible preferred stock at December 31,
2009 was $1,318,124 and $467,411, respectively.
Liquidation
Preference
In the
event of any liquidation, dissolution, or winding up of the affairs of the
Company, either voluntarily or in the event of any insolvency, the order of
liquidation of any remaining assets will be as follows: Series C and Series CC
convertible preferred stock; Series B-2 and Series B-1 convertible preferred
stock; Series A convertible preferred stock; and common stock. The
holders of the preferred stock are entitled to the original purchase price per
share plus all accrued but unpaid dividends. The liquidation preferences at
December 31, 2009, on the Series C, Series CC, Series B-2, Series B-1, and
Series A preferred stock were $6,092,941, $2,195,626, $400,000, $0, and
$143,629, respectively. Any remaining assets shall be distributed to the holders
of the common stock.
Redemption
The
Series C and Series CC convertible preferred stock are redeemable at the option
of the holder after the fourth anniversary of the Series CC original issuance
date (December 2010). The redemption price is equal to the greater of
the sum of the original purchase price plus accrued dividends, compounded
semi-annually, or the fair market value. The preferred stock is being
periodically accreted to its estimated redemption price over the redemption
period. During the year ended December 31, 2009, $501,239 and
$178,357 was accreted to Series C and Series CC, respectively.
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-
Voting
Rights
The
holder of each share of preferred stock shall be entitled to the number of votes
equal to the number of shares of common stock into which each share of Preferred
Stock could be converted on the record date for the vote or written consent of
stockholders and, except as otherwise required by law, shall have voting rights
and powers equal to the voting rights and powers of the Common
Stock.
Protective
Provisions
As long
as any of Series C convertible preferred stock shares remain outstanding, the
Company shall not, without first obtaining the written approval of the holders
of at least a majority of the outstanding shares of Series C convertible
preferred stock, undertake certain action, including any liquidation, sale or
merger of the Company.
Note
7: Stock-Based Compensation
Stock
Options
In June
2000, the Board and the stockholders approved the 2000 Stock Incentive Plan (the
Plan) which authorizes a committee of directors of the Company (the Committee)
appointed by the Board to grant to selected employees, directors of the Company
and key consultants and advisors, incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock awards, and restricted
units to such participants. The Committee shall determine the exercise price,
vesting, and expiration of the options.
A summary
of the activity under the Plan since January 1, 2008 is as follows:
Number
of
|
Weighted-Avg
|
|||||||||||
Options
|
Exercise Price
|
Exercise Price
|
||||||||||
Options
outstanding as of January 1, 2008
|
990,000 | $ | 0.12 - 0.50 | $ | 0.27 | |||||||
Granted
|
- | - | - | |||||||||
Exercised
|
- | - | - | |||||||||
Forfeited
/ Cancelled
|
- | - | - | |||||||||
Options
outstanding as of December 31, 2008
|
990,000 | 0.12 - 0.50 | 0.27 | |||||||||
Granted
|
1,734,535 | 0.12 | 0.12 | |||||||||
Exercised
|
- | - | - | |||||||||
Forfeited
/ Cancelled
|
(110,000 | ) | 0.18 - 0.50 | 0.25 | ||||||||
Options
outstanding as of December 31, 2009
|
2,614,535 | $ | 0.12 - 0.50 | $ | 0.17 | |||||||
Options
exercisable as of December 31, 2009
|
905,000 |
- 14
-
For
options outstanding and exercisable as of December 31, 2009, the exercise price
ranges and weighted-average remaining lives were:
Weighted-Avg
|
|||||||||||||
Number
of
|
Remaining
|
Number
of
|
|||||||||||
Exercise
|
Options
|
Contractual
Life
|
Options
|
||||||||||
Price
|
Outstanding
|
In Years
|
Exercisable
|
||||||||||
$ |
0.12
|
1,834,535 | 7.43 | 125,000 | |||||||||
0.18
|
500,000 | 7.40 | 500,000 | ||||||||||
0.41
|
30,000 | 8.00 | 30,000 | ||||||||||
0.50
|
250,000 | 3.77 | 250,000 | ||||||||||
2,614,535 | 905,000 |
A summary
of the status of the Company’s unvested options since January 1, 2008 is as
follows:
Number
of
|
Weighted-Avg
|
|||||||
Options
|
Exercise Price
|
|||||||
Unvested
options as of January 1, 2008
|
241,667 | $ | 0.17 | |||||
Granted
|
- | - | ||||||
Vested
|
(229,167 | ) | 0.17 | |||||
Forfeited
/ Cancelled
|
- | - | ||||||
Unvested
options as of December 31, 2008
|
12,500 | 0.12 | ||||||
Granted
|
1,734,535 | 0.12 | ||||||
Vested
|
(37,500 | ) | 0.12 | |||||
Forfeited
/ Cancelled
|
- | - | ||||||
Unvested
options as of December 31, 2009
|
1,709,535 | $ | 0.12 |
The grant
date fair value of the options granted during the year ended December 31, 2009
was $58,786. During 2009, the Company recorded $18,191 in
compensation expense. As of December 31, 2009, there was $40,595 of
total unrecognized compensation cost related to non-vested shared-based
compensation arrangements granted under the Plan, which is expected to be
recognized over a weighted-average period of two years. The tax
benefit to the Company related to this expense was immaterial. No
options have been exercised under the plan.
Restricted
Stock
In
September 2008, the Company granted 1,648,000 shares of restricted common stock
to a member of management. The shares vest ratably over two years as defined in
the respective restricted stock issuance agreement.
In
November 2008, the Company granted 8,200,000 shares of restricted common stock
to members of management, which vest as follows: 3,600,000 shares vest upon
grant and 4,600,000 shares vest in December
2010.
- 15
-
There was
no compensation expense recognized for the restricted stock issuances as the
underlying stock was deemed to have nominal value.
The
following table summarizes unvested restricted stock activity since January 1,
2008:
Weighted-Avg
|
||||||||
Number
of
|
Grant
Date
|
|||||||
Options
|
Fair Value
|
|||||||
Unvested
restricted stock as of January 1, 2008
|
- | $ | - | |||||
Granted
|
9,848,000 | - | ||||||
Vested
|
(3,806,004 | ) | - | |||||
Forfeited
/ Cancelled
|
(1,441,996 | ) | - | |||||
Unvested
restricted stock as of December 31, 2008
|
4,600,000 | - | ||||||
Granted
|
- | - | ||||||
Vested
|
- | - | ||||||
Forfeited
/ Cancelled
|
- | - | ||||||
Unvested
restricted stock as of December 31, 2009
|
4,600,000 | $ | - |
Warrants
In
connection with the convertible notes agreements entered into during 2009 and
2008, the Company issued warrants to purchase 1,310,583 and 667,224,
respectively, of the Company’s common stock (Note 3). The warrants
are exercisable upon conversion of the debt and have an exercise price of $0.01
per share.
In March
2007, the Company issued 239,064 warrants to purchase the Company’s common stock
at $0.42 per share in conjunction with the Series B-2 preferred stock issuance.
The warrants expire in March 2012. The grant date fair value of warrants issued
was not considered significant as the underlying stock was deemed to have
nominal value.
Note
8: Stockholders’ Equity
During
2008, the Company acquired 825,000 shares of the Company’s common stock at no
cost.
During
2008, the Company issued 25,000 shares of common stock to an
employee. There was no expense recognized for the common stock as the
underlying stock was deemed to have nominal value.
Note
9: Retirement Plan
During
2006, the Company adopted a qualified 401(k) plan which covers substantially all
employees meeting certain eligibility requirements. Participants may contribute
a portion of their compensation to the plan, up to the maximum amount permitted
under Section 401(k) of the Internal Revenue Code. Matching contributions by the
Company are discretionary. For the years ended December 31, 2009 and 2008, the
Company made no matching contributions to the plan.
- 16
-
Note
10: Commitments and Contingencies
Operating
Leases
The
Company leases its office space and certain equipment under noncancelable
agreements accounted for as operating leases expiring at various dates through
2013. The leases generally require that the Company pay taxes, maintenance and
insurance. Management expects that in the normal course of business, leases that
expire will be renewed or replaced by other leases.
Future
minimum rental payments under noncancelable operating leases with initial or
remaining lease terms in excess of one year as of December 31, 2009 were as
follows:
2010
|
$ | 310,236 | ||
2011
|
322,645 | |||
2012
|
335,551 | |||
2013
|
171,065 | |||
$ | 1,139,497 |
Rent
expense under operating leases was $393,419 and $469,796 for the years ended
December 31, 2009 and 2008, respectively.
In July
2008, the Company renewed its corporate office lease for a term of 5 years at a
monthly rate of approximately $25,000, which increases 4% on an annual
basis. The total amount of base rent payments is charged to expense on a
straight-line basis over the lease term and any difference in actual payments is
recorded to deferred rent. The Company recognized a deferred rent
obligation of $12,176 as of December 31, 2009 and 2008, which is included in
deferred rent and other in the accompanying consolidated balance
sheets.
Litigation
The
Company from time to time may be involved in certain litigation and claims in
the ordinary course of business. Although it is difficult to predict the
ultimate outcome of any potential or threatened litigation, management believes
that any ultimate liability will not materially affect the financial position or
results of operations of the Company.
Note
11: Subsequent Events
In March
2010, the Company was acquired by KIT digital for approximately $18 million in
cash and KIT digital stock. The merger consideration is subject to
adjustment upwards or downwards as a result of working capital and final stock
valuation adjustments.
* * * *
*
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