UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
þ ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended September 30,
2010
or
¨ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ____________ to ________________
Commission
file number 333-123092
IMAGE
METRICS, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
20-1719023
|
|
(State
or other jurisdiction
of
incorporation or organization)
|
(I.R.S.
Employer
Identification
No.)
|
1918
Main Street, Santa Monica, California 90405
(Address
of principal executive offices) (Zip
Code)
Registrant’s
telephone number, including area code: (310) 656-6551
Securities
Registered Pursuant to Section 12(b) of the Act:
None
Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes þ No ¨
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
requirements for the past 90 days. Yes þ No ¨
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 (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such
files). Yes ¨ No ¨ Not
required
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
(Check one):
Large
accelerated filer
|
¨
|
|
Accelerated
filer
|
¨
|
Non-accelerated
filer
|
¨
|
Smaller reporting company
|
þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No þ
Aggregate
market value of the voting and non-voting stock of the registrant held by
non-affiliates of the registrant as of February 14,
2011: $10,866,116 (Non-affiliate holdings of
12,276,150 shares of common stock with a per share price of $0.49 and
6,555,139 shares of series A convertible preferred stock with a per share
value of $0.74).
As of
February 14, 2011, there were 17,869,277 shares of the issuer’s common stock,
par value $0.001 per share, issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None
IMAGE
METRICS, INC.
SEPTEMBER
30, 2010 ANNUAL REPORT ON FORM 10-K
TABLE
OF CONTENTS
Page
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Part
I
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3
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Item 1.
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Business
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3
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Item 1A.
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Risk
Factors
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10
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Item
1B.
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Unresolved
Staff Comments
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17
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Item
2.
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Properties
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17
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Item
3.
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Legal
Proceedings
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17
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Item
4.
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Removed
and Reserved
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17
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Part
II
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18
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Item
5.
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Market
For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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18
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Item
6.
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Selected
Financial Data
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19
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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19
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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27
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Item
8.
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Financial
Statements and Supplementary Data
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27
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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27
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Item
9A.
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Controls
and Procedures
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28
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Item
9B.
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Other
Information
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29
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Part
III
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30
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|||
Item
10.
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Directors,
Executive Officers and Corporate Governance
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30
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Item
11.
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Executive
Compensation
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35
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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37
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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38
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Item
14.
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Principal
Accountant Fees and Services
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39
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Part
IV
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41
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Item
15.
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Exhibits
and Financial Statement Schedules
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41
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CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
In
addition to historical information, this annual report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Any statements contained herein that are not statements of historical fact
should be construed as forward-looking statements, including statements that are
preceded or accompanied by such words as ”may,” “believe,” “could,”
“anticipate,” “would,” “might,” “plan,” “expect” and words of similar meaning or
the negative of these terms or other comparable terminology. Forward-looking
statements are based on current expectations and assumptions that are subject to
risks and uncertainties that could cause actual results to differ materially.
Factors that might cause such a difference include, but are not limited to,
those discussed in Item 1A. entitled “Risk Factors.” Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect
management’s opinions only as of the date of this Annual Report on Form 10-K. We
undertake no obligation to revise or update or publicly release the results of
any revision or update to these forward-looking statements, except as required
by U.S. federal securities laws. Readers should carefully review the risk
factors and other information described in this Annual Report on Form 10-K and
the other documents we file from time to time with the U.S. Securities and
Exchange Commission (SEC), including the quarterly reports on Form 10-Q to be
filed by Image Metrics in fiscal year 2011.
Unless
the content otherwise requires, “we,” “our,” “us” and similar expressions refer
to Image Metrics, Inc., a Nevada corporation (formerly International Cellular
Accessories, Inc. or “ICLA”), or Image Metrics Limited, a United Kingdom
company, separately prior to our share exchange transaction on March 10, 2010,
in which Image Metrics Limited became a wholly-owned subsidiary of Image
Metrics, Inc. and Image Metrics, Inc., as successor to the business of Image
Metrics Limited, after giving effect to the share exchange
transaction.
PART
I
Item
1. Business.
Overview
We are an
established provider of technology-based facial animation solutions to the
interactive entertainment industry. Using proprietary software and
mathematical algorithms that “read” human facial expressions, our technology
converts video footage of real-life actors into 3D computer generated animated
characters. We believe that our technology provides us with
competitive advantages and has been used to create some of the most notable
video games, music videos and movies made in the past five
years. Examples of our facial animation projects include the 2008
“Grand Theft Auto IV” video game, which generated over $500 million in sales for
Rockstar in its first week, the 2009 computer generated aging of Brad Pitt in
the feature film “The Curious Case of Benjamin Button,” which won three Academy
Awards® including one for achievement in visual effects, the 2009 Black Eyed
Peas’ “Boom Boom Pow” music video, which won the Grammy® Award for best short
form music video, and the 2010 “Red Dead Redemption” video game, which sold more
than 5 million copies in its first two weeks.
Our key
intellectual property consists of one patent registered in the United States,
four additional patents in process, the identification of 16 potential new
patents, and significant well-documented trade secrets. We are continually
updating our software and are prosecuting a roadmap of technology
innovations.
Founded
in the United Kingdom in October 2000 by scientific professionals with extensive
credentials in computer vision, we focused on facial animation. Soon after, we
applied that technology to the games market on the Sony Computer Entertainment
(London) video game, “The Getaway,” in 2002. Rockstar Games also saw the
benefits of our facial animation technology early on, using our services on
titles as early as “Manhunt” in 2003.
3
Following
our initial game industry success in the United Kingdom, we saw great potential
in the larger entertainment industry based in Hollywood, California. We
were especially interested in introducing our technology to the film industry,
which was pushing (and continues to push) the boundaries of photorealism in
computer-generated characters. In 2006, our Santa Monica office was
opened. We quickly expanded our customer base, working with film and
visual effects (VFX) studios, commercial producers and additional game
developers.
We offer
customers varying levels of services, depending upon their individual
requirements. We deliver what we believe is higher quality and more
believable computer-generated faces than any other solution on the market.
We believe that we are also able to deliver these services faster and more
affordably, and we continually strive to redefine what is possible in facial
animation.
Although
our core business is providing animation products and services to the gaming and
film industries, we plan to exploit our technology platform and current
infrastructure to gain cost-effective access to many other potential revenue
streams, such as television (particularly programming for children), the
development of real-time businesses in virtual worlds and social networking, and
licensing products and service into non-entertainment markets. Our primary
mission is to maximize revenue and gross margins from existing
business-to-business (B2B) businesses, and then to monetize additional
commercial applications, particularly in the business-to-consumer (B2C)
market.
We have a
strong executive team and board of directors with broad-based experience in
managing and ramping later-stage development companies. The collective
expertise of this group encompasses building B2B and B2C enterprises, technology
and product development, sales and marketing, financial structuring, mergers and
acquisitions, public company management and other requisite professional
skills.
Our
Chairman of the Board has spent the past 25 years at the forefront of computer
graphics, having participated in the design of the technology used in the motion
picture “Jurassic Park” and in building the graphics platform used by
Nintendo. One of our outside directors is the current Chairman of Virgin
Group Holdings, the holding company that owns brands such as Virgin Media and
Virgin Atlantic. Our Chief Executive Officer has more than 20 years of
management experience in the online games and entertainment industries. His
management roles include being the President and a director of Forterra Systems,
Inc., Senior Vice President, Programming and Production at Viacom's CBS Internet
Group, and Senior Vice President for Programming and Production at Sony Online
Entertainment.
Target
Markets and Customers
As facial
animation technology has improved, we believe that market demand has increased,
driven both by growing audience expectations and by the artistic demands of
producers to animate faces realistically and cost-effectively for the first
time. The simultaneous improvement in consumer hardware has further
expanded the number of platforms upon which our output can be
experienced.
In the
immediate future, we have two primary target markets: computer games
and animated films. These two key B2B markets, dominated by professional
graphic artists, continue to perform strongly against a difficult economic
environment. Animation is a product differentiator in both industries and
is expected to benefit from additional investment over time. Within these
two markets, our representative customers include:
Games:
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Activision
Blizzard, Inc.
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Code
Masters
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Rockstar
Games
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2K
Games
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Bethesda
Game Studios
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Electronic
Arts, Inc.
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Sony
Computer Entertainment
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||||||
CapCom
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MTV
Interactive
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Ubisoft
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||||||
Film:
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Digital
Domain
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Double
Negative
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Sony
Pictures Imageworks
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Threshold
Entertainment
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4
We own
and utilize patent protected technology to create highly realistic animated
faces. Our technology allows us to provide high quality animation at
a faster speed and lower cost than traditional methods of animation, e.g., hand
animation. The technology is typically used in the production of computer
games and high-budget films; however, new applications are expanding the market
to include television, advertising and eventually consumer-generated animated
content over the Internet (online gaming, social networking and virtual
worlds). We believe there is a large opportunity in online interaction
(i.e., social networking, virtual worlds and multiplayer games online), although
it is difficult to quantify the opportunity in its nascent
stage.
Competition
We
primarily compete with two legacy methods for creating facial
animation: hand animation and facial motion capture. Hand
animation requires highly talented artists for long periods of time, is
expensive to accomplish and is challenged in creating images which are realistic
and believable. Motion capture uses facial markers which capture only part
of a subject’s facial expressions and emotions. The process is
complicated, and we believe that the quality is low and the results are often
disappointing. Accordingly, we maintain a competitive advantage through
design quality, aesthetic potential, reliability and constant attention to
project timeframes and costs.
There
have been, and will continue to be, many attempts to create a directly competing
technology. Many companies in the film business which have attempted to
develop their own technology solution have not been satisfied with their own
results, and are now in various stages of discussion with us about adopting our
technology platform. There have been various technological
approaches launched by companies or incubated within the research community with
the purpose of creating software-based animation tools; however, we are not
aware of any direct competitor or technology that can offer the same value
proposition to the customer in any of our current or proposed
markets.
Technology
and Intellectual Property
Traditionally,
animated visual entertainment has relied on frame-by-frame animation or highly
invasive “motion-capture” (“mo-cap”) equipment to reproduce human facial
movements. Both methods are costly, labor-intensive and in the case of
mo-cap, require actors to wear special equipment in purpose-built studios.
Our software captures facial details direct from video footage and produces
potentially photo-real facial animation with minimal manual intervention,
eliminating the need for special equipment and substantially accelerating the
entire animation process. Our technology is superior to alternative
animation products in three principal respects:
|
·
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Quality. We
capture realism at a greater degree of fidelity and subtlety than any
other method of facial animation.
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·
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Speed. We remove a
massive amount of the most tedious portions of the animation process,
leading to faster turnaround times.
|
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·
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Simplicity. Our
solution is incredibly simple to use. No special cameras, no special
markers and no specific procedures are required. Traditional motion
capture solutions require tracking markers to be glued to the face, or
extensive make-up to be used, both of which cause discomfort to the
actors.
|
Adopting
our technology can make facial animation immediately faster, better or cheaper
for the customer. Our customers choose how to put this technological
leverage to work: Some use it to deploy high quality animation
faster, with turn-around times that would be difficult to match with traditional
methods. Some customers use the platform to raise the quality of their
animation for a specific amount of animator time. Still other customers
realize cost savings in their standard quality of animation, versus their past
methods.
5
We have
more than 60 man-years invested in our core computer vision software. Our
key intellectual property consists of one patent registered in the United
States, four additional patents in process, the identification of 16 potential
new patents, and significant (documented) trade secrets.
We are
continually updating our software and have built a pipeline of enhancements to
the features of our technology. Our next generation platform will
materially increase the speed at which a video may be analyzed, further
shrinking production time for creators of games and producers of animated
films. We also believe that we can efficiently use our existing technology
platform and its embedded costs to leverage into new markets such as television
and social networking, as most of the fixed costs have already been absorbed by
our existing video game and film businesses.
Products
and Services
Our key
areas of expertise are model-based analysis, where systems are created to learn
about objects as they appear in images, and model-based graphics, where systems
are built to learn how to make three dimensional (3D) objects move. To
date, most of our images have related to faces, but the range of potential
applications is much wider. We have already built a pipeline of facial
animation products and have created a software offering. These products
are offered on a full-service, software-as-a-service (SaaS), or software
licensing basis.
Full
Service and SaaS Offerings
In a SaaS
project, customers manage the creative process in-house and use their animators
to execute the animation. We provide the software tools, training and
process expertise they need to get the leverage out of our solution. In a
full service project, we provide both the animators and the technology to
deliver a finished product which is tailored to each customer’s
specifications.
Our
review of a customer’s needs usually indicates whether they should pursue a
full-service or SaaS solution. Generally, customers who want creative
control and have qualified animators gravitate towards a SaaS solution, while
those who are understaffed or for whom artistic direction is less important will
choose full-service.
Full
service commands higher revenue because of the value-added steps in the process,
but overall margin is lower due to the low-margin human component of
costs. We have traditionally been heavily full-service focused, and only
introduced the SaaS product in late fiscal 2008. Revenue from SaaS in
fiscal year 2010 represented less than 3% of our total annual revenue.
However, we believe that the market will rapidly adopt the SaaS product over the
coming 24 to 36 months, which will contribute to growing margins. Our revenues
for 2010 and 2009 were primarily derived from our full service
offerings.
Planned
Software Licensing
In 2011,
we plan to begin licensing our software to customers. Licensing should
enable us to quickly access large existing commercial and consumer markets
without significant up-front expenditures and start-up time.
Beyond
the professional entertainment market, we see untapped potential in online
consumer markets. According to independent investment banking firm Avista
Partners, there were more than 900 million interactive users in 2009 in the
United States alone, playing multiplayer games, interacting on social networks
and working together in virtual worlds.
The
common thread between these markets is that the users are fundamentally online
to interact with others via an “avatar”. An avatar is a computer
user’s representation of himself/herself or alter ego, in the form of a 3D model
used in computer games or a two-dimensional picture used on Internet forums or
in other communities. Almost every online character has a
face, and being able to project realistic facial movement in the world improves
intimacy and generates more natural and real interactions. As a result, we
believe that users will likely spend longer periods of time online, purchase
more goods and services, and their general satisfaction will be
enhanced.
6
We are
actively adapting our technology to address this opportunity. Our new
real-time technology captures real-time facial movement from any web-cam, and
transmits it into these virtual environments. We have identified early
development partners in these markets and believe that this product can be
first-to-market for applications such as in-world face-to-face interaction,
multiplayer gaming, in-world training, virtual video conferencing and in-world
conferences and symposia.
Growth
Strategy
After
nine years of product development, we believe that our technology has been
largely market tested, and since 2009 we have been transitioning our focus to
appropriately package and distribute our software products and animation
services. We have spent the past 30 months preparing the business to
capitalize on our core markets, as well as new market opportunities. We
have hired a qualified management team, seasoned board members and an
industry-experienced advisory board. We have refined the message to our
market and started gathering proof points on how to scale our revenue in these
markets.
We are
preparing to accelerate revenue growth and product development. Our growth
strategy includes the following elements:
|
·
|
Continue to penetrate the core
film and games markets. In 2009, we booked more business from
new customers than in the previous three years combined. Our new
sales force has developed a strong pipeline of business. We intend to
continue this growth through continued refinement of our product
messaging, and industry marketing and expansion of existing animation
service offerings.
|
|
·
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Create OEM/partnership programs
to accelerate sales. We have received unsolicited interest
from third-party service providers in reselling our facial animation
products and services. Traditional animation companies, motion
capture services, and audio capture services have had difficulty providing
high-quality facial animation at a profit, and we believe that our
products will provide them with an additional margin and revenue
opportunity. We believe that we can develop revenue-sharing
relationships with these companies that are beneficial for both
sides. In addition, the video game and film businesses are connected
to a rich industry of technology companies that we believe would make
fitting partners.
|
|
·
|
Market our products
globally. Our historic business assumes only sales from the
United States and the United Kingdom, where we have existing
operations. A large portion of the film and video game businesses
takes place in other geographic markets, and we intend to expand our sales
and marketing efforts to cover continental Europe, Southeast Asia, China,
India, Japan and South America. We believe that our expansion will
include hiring additional sales people in key geographical regions, and
creating partnership or strategic relationships with
others.
|
|
·
|
Develop the animated television
series market. Animated television series represent a
potentially rich untapped market for us, possibly doubling our aggregate
addressable market. There are many computer graphics applications in
the market, with a large number of face/seconds of animation, and there is
no current technology solution in the market for facial animation.
We believe that our product can be adapted to provide a highly
differentiated offering for this market. We plan to develop a
channel strategy to enter this market, to engage with partners to identify
the specific needs of this market, and to develop the appropriate product
for the market.
|
7
|
·
|
Explore opportunities in online
consumer interaction, including social networking, multiplayer games and
virtual worlds. A portion of the proceeds from our recent
private placements are being used to address the potential B2B and B2C
markets for our products within the virtual world where companies create
communities and attract users to interact through games, chatting and
social networking. We believe the revenue potential and scalability
from virtual worlds are significant. While this market is in its
early stage of development, we believe that a small amount of investment
now can position our company to be among the first-to-market in an
exciting and potentially lucrative space. Management believes that
there are multiple revenue opportunities, including licensing,
revenue-sharing on virtual goods and participation in premium
subscriptions.
|
|
·
|
Introduce new products into all
markets. Our technology roadmap includes a variety of new
proprietary products that we believe will have immediate uptake in the
market, and will raise our average revenue per customer in the
future. We also believe that customers will grow to rely on these
new products, which will increase switching costs and will increase
customer retention over time.
|
|
·
|
Pursue strategic mergers and
acquisitions. While our management team believes that focus
on organic growth is critical, we have engaged from time to time in
discussions with other technology companies about potential business
combinations. Our management team has significant experience in
mergers and the integration of operating companies, and we believe that
strategically appropriate, well-executed acquisitions could create
accelerated growth. Our ideal acquisitions would be complementary
businesses, assets and technologies that share the same customer target
and value proposition. These combinations could raise average
customer value, increase the depth of customer relationships and better
leverage our investment in developing our sales channels into these
markets.
|
Sales
and Marketing
Historically,
we have focused on developing technology rather than aggressively driving
sales. Our current sales force is structured for direct
sales to video game and film industry customers and greater account penetration
to further the adoption of our services and expansion into new revenue areas,
including international markets, social networking, virtual worlds and licensing
to entertainment and non-entertainment industries. Our sales professionals
are experienced in selling animation software and services and are organized by
geography.
The sales
team includes sales people and technical account managers who facilitate
adoption of the products by customers. In the future, the sales force
plans to spend most of its time addressing existing markets and the remainder of
its time expanding our channel sales opportunities. Each sales person
sells both game and film animation, so we do not believe there is a need for two
distinct sales teams. We have already begun to spend more time, effort and
money to enhance and expand our industry relationships by attending U.S. and
foreign trade shows, and other industry-specific B2B events. We have begun
to increase our public relations activity, and are developing an investor
relations and media capability, in order to expand our profile in the
marketplace.
Government
Regulation
Our
activities are not currently subject to any particular regulations by
governmental agencies other than that routinely imposed on corporate
businesses. However, a number of our customers and potential customers,
such as developers of interactive software games, are in industries where
software products containing graphic violence and sexually explicit material are
subject to consumer advocacy group opposition, government rating systems and, in
certain cases, retailer sales bans. To date, we have not been materially
impacted by these actions primarily because our work is specialized and only
pertains to a finite aspect of the overall video game, film or other media. We
cannot predict the impact of future regulations on either us or our
customers.
Employees
We had 38
full-time employees as of September 30, 2010, comprised of 28 employees in
product development, operations and engineering, 4 employees in sales and
marketing, and 6 employees in general, administrative and executive
management. In addition, we make use of a varying number of temporary
employees and outsourced service companies to manage the normal cyclical growth
and decline of animation staff requirements. None of our employees are
covered by a collective bargaining agreement, and our management considers
relations with our employees and vendors to be good.
8
Segment
Reporting
We
operate in a single reporting segment. Geographical financial information for
fiscal years 2010 and 2009 is presented in Note 13 to the Notes to Consolidated
Financial Statements included in Item 15 of this annual report on Form
10-K.
Available
Information
Our
annual, quarterly and current reports filed or furnished pursuant to the
Securities Exchange Act of 1934 are available free of charge on our website at
www.image-metrics.com, as soon as reasonably practicable after such reports have
been electronically filed or otherwise furnished to the SEC. We are not
including the information contained on our website as part of, or incorporating
it by reference into, this annual report on Form 10-K.
Item
1A. Risk Factors.
If any of the following risks
actually occur, our business, results of operations and financial condition
would likely suffer. In these circumstances, the market price of our
common stock could decline.
Risks
Relating to Our Business and Industry
We
have a history of operating losses and uncertain future profitability, and we
received a going concern qualification in our fiscal 2010 audit; there can be no
assurance that we will succeed.
We have
incurred losses from operating activities since we began operations and have an
accumulated deficit of $37.1 million as of September 30, 2010. We incurred
an operating loss of $7.0 million during the fiscal year ended September 30,
2010, and expect to continue operating at a loss for some period of
time. We continue to face the risks and difficulties of an early stage
company including the uncertainties of market acceptance, competition, cost
increases and delays in achieving business objectives. There can be no
assurance that we will succeed in addressing any or all of these risks, that we
will achieve future profitability, or that we will achieve profitability at any
particular time. The failure to do so would have a material adverse effect
on our business, financial condition and operating results. The report of
our independent registered public accounting firm with respect to our fiscal
year ended September 30, 2010 included in this annual report on Form 10-K
includes a going concern explanatory paragraph indicating that our recurring
operating losses and our current liabilities in excess of our current assets
raise substantial doubt about our ability to continue as a going concern.
Depending upon the results of our operations for fiscal 2011 and our ability to
raise additional capital, we may also receive a report with a going concern
explanatory paragraph from our independent registered public accountants in
connection with our financial statements to be included in our annual report
on Form 10-K for the fiscal year ending September 30,
2011.
Failure
to maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 could prevent us from producing reliable financial
reports or identifying fraud. In addition, current and potential
stockholders could lose confidence in our financial reporting, which could have
an adverse effect on our stock price.
Effective
internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud, and a lack of effective controls could preclude us
from accomplishing these critical functions. We are required to document
and test our internal control procedures in order to satisfy the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management
assessments of the effectiveness of an issuer’s internal controls over financial
reporting. Assigned to accounting issues at present are only Ron
Ryder, our Chief Financial Officer, and two financial consultants, which may be
deemed to be inadequate. Although we intend to augment our internal
controls procedures and expand our accounting staff, there is no guarantee that
this effort will be adequate.
During
the course of our testing, we may identify deficiencies which we may not be able
to remediate. In addition, if we fail to maintain the adequacy of our
internal accounting controls, as such standards are modified, supplemented or
amended from time to time, we may not be able to ensure that we can conclude on
an ongoing basis that we have effective internal controls over financial
reporting in accordance with Section 404. Failure to achieve and maintain
an effective internal control environment could cause us to face regulatory
action and also cause stockholders to lose confidence in our reported financial
information, either of which could have an adverse effect on our stock
price.
Management
concluded that, as of September 30, 2010(our year end prior to the share
exchange transaction), our internal controls and disclosure control processes
were not effective. Subsequent to September 30, 2010, we implemented
remedial actions to strengthen our internal controls and disclosure control
processes and have since remediated these deficiencies, although there can be no
assurance that such deficiencies will not reoccur.
10
Because
the video game and film industries are always evolving, their future growth and
ultimate size are difficult to predict. Our business will not grow if the
use of our facial animation services does not continue to grow.
We are a
provider of technology-based facial animation services to the entertainment
industry. Our industry is in the early stages of market acceptance of
products and related services and is subject to rapid and significant
technological change. Because of the new and evolving nature of facial
animation technology, it is difficult to predict the size of this specialized
market, the rate at which the market for our facial animation services will grow
or be accepted, if at all, or whether emerging computer-generated animation
technologies will render our services less competitive or obsolete. If the
market for our facial animation services fails to develop or grows slower than
anticipated, we would be significantly and materially adversely
affected.
If
our products and services do not achieve market acceptance, we may never have
significant revenues or any profits.
If we are
unable to operate our business as contemplated by our business model or if the
assumptions underlying our business model prove to be unfounded, we could fail
to achieve our revenue and earnings goals within the time we have projected, or
at all, which would have a detrimental effect on our business. As a
result, the value of an investment in our company could be significantly reduced
or completely lost.
Our
ability to generate revenue is highly dependent on building and maintaining
relationships with film and visual effects (VFX) studios, commercial producers
and game developers. No assurance can be given that a sufficient number of
these companies will demand our facial animation services or other
computer-generated animation services, thereby expanding the overall market for
digital characters in films, games and other forms of entertainment and enabling
us to increase our revenue to the extent expected. In addition, the rate
of the market’s acceptance of other computer-generated animation technologies
cannot be predicted. Failure to attract and maintain a significant
customer base would have a detrimental effect on our business, operating results
and financial condition.
Our
future growth will be harmed if we are unsuccessful in developing and
maintaining good relationships with entertainment companies.
Our
business strategy may in the future be dependent on our ability to develop
relationships with entertainment companies to increase our customer base.
These companies recommend our services to their customers, provide us with
referrals and help us build presence in the market. These relationships
require a significant amount of time to develop. Currently, we have
established a limited number of these relationships. We must expand
current relationships and establish new relationships to grow our business in
accordance with our business plan. We may not be able to identify,
establish, expand and maintain good relationships with quality entertainment
companies. Additionally, it is uncertain that such relationships will
fully support and recommend our facial animation services. Our failure to
identify, establish, expand and maintain good relationships with quality
entertainment companies would have an adverse effect on our
business.
The
majority of the contracts we have with customers are cancelable for any reason
by giving 30 days advance notice.
Our
customers have historically engaged us to perform services for them on a
project-by-project basis and are required by us to enter into a written
contractual agreement for the work, labor and services to be performed.
Generally, our project contracts are terminable by the customer for any or no
reason on 30 days advance notice. If a number of our customers were to
exercise cancellation rights, our business and operating results would be
materially and adversely affected.
11
We
have a large concentration of business from a small number of accounts. A
decision by a key customer to discontinue or limit its relationship with us
could have a material adverse effect on our business.
We have
been highly dependent on sales of our facial animation products to a small
number of accounts. Approximately 69% and 83% of our revenue for the
fiscal years ended September 30, 2010 and 2009, respectively, resulted from
sales to Take-Two Interactive Software, Inc. (Rockstar
Games). Therefore, at present, a significant portion of our business
depends largely on the success of specific customers in the commercial
marketplace. Our business could be adversely affected if any of our key
customers’ share of the commercial market declined or if their customer base, in
turn, eroded in that market. A decision by one or more of our key
customers to discontinue or limit its relationship with us could result in a
significant loss of revenue to us and have a material adverse impact on our
business.
Our
facial animation services may become obsolete if we do not effectively respond
to rapid technological change on a timely basis.
Our
facial animation services are new and our business model is evolving. Our
services depend on the needs of our customers and their desire to create
believable facial performances in computer-generated characters. Since the
video game and film industries are characterized by evolving technologies,
uncertain technology and limited availability of standards, we must respond to
new research and development and technological changes affecting our customers
and collaborators. We may not be successful in developing and marketing,
on a timely and cost-effective basis, new or modified services, which respond to
technological changes, evolving customer needs and competition.
If
we fail to recruit and retain qualified senior management and other key
personnel, we will not be able to execute our business plan.
Our
business plan requires us to hire a number of qualified personnel, as well as
retain our current key management. The industry is characterized by heavy
reliance on software and computer graphics engineers. We must, therefore,
attract leading technology talent both as full-time employees and as
collaborators, to be able to execute our business strategy. Presently, our
key senior management and key personnel are Robert Gehorsam, Chief
Executive Officer, Ron Ryder, Chief Financial Officer, and Kevin
Walker, Ph.D., Chief Technology Officer.
The loss
of the services of one or more of our senior managers could impair our ability
to execute our business plan, which could hinder the development of products and
services. We have assumed certain employment agreements from our U.K.
predecessor with members of our key senior management team, along with
agreements with some of these members regarding confidentiality, non-competition
and invention assignment. Under California law, the non-competition
provisions in the employment agreements will likely be unenforceable, which
could result in one or more members of our senior management or key personnel
leaving us and then, despite our efforts to prevent them from doing so,
competing directly against us for customers, projects and
personnel.
If
we fail to protect our intellectual property, our current competitive strengths
could be eroded and we could lose customers, market share and
revenue.
Our
viability will depend on our ability to develop and maintain the proprietary
aspects of our technology to distinguish our services from our competitors’
products and services. To protect our proprietary technology, we rely
primarily on a combination of confidentiality procedures, copyright, trademark
and patent laws.
12
We hold a
United States patent which expires in 2025. We have a number of additional
filings pending, or issued, which cover the technology that is related to the
subject of our United States patent. In addition, we are developing a
number of new innovations for which we intend to file patent applications.
No assurance can be given that any of these patents will afford meaningful
protection against a competitor or that any patent application will be
issued. Patent applications filed in foreign countries are subject to
laws, rules, regulations and procedures that differ from those of the United
States, and thus there can be no assurance that foreign patent applications
related to United States patents will issue. If these foreign patent
applications issue, some foreign countries provide significantly less patent
protection than the United States. The status of patents involves complex
legal and factual questions and the breadth of claims issued is uncertain.
Accordingly, there can be no assurance that our patents, and any patents that
may be issued to us in the future, will afford protection against competitors
with similar technology. No assurance can be given that patents issued to
us will not be infringed upon or designed around by others or that others will
not obtain patents that we would need to license or design around. If
other companies’ existing or future patents containing broad claims are upheld
by the courts, the holders of such patents could require companies, including
us, to obtain licenses or else to design around those patents. If we are
found to be infringing third-party patents, there can be no assurance that any
necessary licenses would be available on reasonable terms, if at
all.
Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy aspects of our software or obtain and use information that we regard as
proprietary. Unauthorized use of our proprietary technology could harm our
business. Litigation to protect our intellectual property rights can be
costly and time-consuming to prosecute, and there can be no assurance that we
will be able to enforce our rights or prevent other parties from developing
similar technology or designing around our intellectual property.
Although
we believe that our products and services do not and will not infringe upon the
patents or violate the proprietary rights of others, it is possible such
infringement or violation has occurred or may occur which could have a material
adverse effect on our business.
Our
business is heavily reliant upon patented and patentable systems and methods
used in our facial animation technology and related intellectual property.
In the event that products and services we sell are deemed to infringe upon the
patents or proprietary rights of others, we could be required to modify our
products and services or obtain a license for the manufacture and/or sale of
such products and services. In such event, there can be no assurance that
we would be able to do so in a timely manner, upon acceptable terms and
conditions, or at all, and the failure to do any of the foregoing could have a
material adverse effect upon our business. Moreover, there can be no
assurance that we will have the financial or other resources necessary to
enforce or defend a patent infringement or proprietary rights violation
action. Any litigation would also require our management to devote their
time and effort to fight it, which would detract from their ability to implement
our business plan, and would have a negative impact on our operations. In
addition, if our products and services or proposed products and services are
deemed to infringe or likely to infringe upon the patents or proprietary rights
of others, we could be subject to injunctive relief and, under certain
circumstances, become liable for damages, which could also have a material
adverse effect on our business.
We
may in the future experience competition from film studios and game
developers.
Competition
in the development of facial animation technology is expected to become more
intense. Competitors range from university-based research and development
graphics labs to development-stage companies and major domestic and
international film studios and game developers. Many of these entities
have financial, technical, marketing, sales, distribution and other resources
significantly greater than those of our company. There can be no assurance
that we can continue to develop our facial animation technology or that present
or future competitors will not develop computer-generated animation technologies
that render our facial animation technology obsolete or less marketable or that
we will be able to introduce new products and product enhancements that are
competitive with other products marketed by industry participants.
13
If
we fail to properly identify, negotiate and execute potential business
combinations, any merger and acquisition activity may adversely affect the value
of an investment in our company.
We may
engage in mergers and acquisitions activity to accelerate our growth and market
presence, and our growth strategy includes such acquisitions. These
transactions may cause you to experience dilution in your equity ownership
percentage in our company, and there can be no assurance that we will be able to
successfully execute upon these potential acquisitions. These transactions
may have a significant impact upon our overall business, management focus and
ongoing cash requirements. If we fail to properly identify appropriate
strategic targets, negotiate advantageous financial terms, retain key personnel
from acquired companies, or properly complete and integrate these operations,
our business may be adversely affected.
Our
customers are on various payment schedules and our liquidity may be negatively
impacted if payment schedules change or customers are slow to pay.
We have
negotiated a variety of payment schedules with customers, and there is no
standard for payment cycles in our business. These payment schedules are
likely to change, and we may not be able to negotiate equally favorable payment
schedules in the future. Further, we are vulnerable to delays in payments by
customers for services rendered or the uncollectability of accounts
receivable. Either of these factors could have a material adverse
effect on our liquidity and working capital position. We are subject to
credit risks from time to time, particularly in the event that any of our
receivables represent sales to a limited number of customers. Failure to
properly assess and manage such risks could require us to make accounting
adjustments to our revenue recognition policies and our allowance for doubtful
accounts.
The
value of an investment in our company may be significantly reduced if we cannot
fully fund our growth strategy from projected revenue and the proceeds from
private placements.
We expect
that we will be able to fund the development and growth of our business from
existing and projected revenue, along with the net proceeds from debt and equity
private placements, to operate for the next 12 months. To execute our
growth strategy, we expect to need significant further development of both our
technology and our marketing infrastructure in existing and new markets.
We have not completely identified all of the development and marketing
requirements to successfully execute this strategy. If we are unable to
generate on our own, the necessary funds for operations and to fully implement
the actual required development, marketing and expansion activities, we will be
required to seek additional capital to fund these activities, and may not be
able to continue as a going concern. In addition, our plans or assumptions
with respect to our business, operations and cash flow may materially change or
prove to be inaccurate. In this case, we may be required to use part or
all of the net proceeds of private placements to fund such expenses and/or seek
additional capital. This will depend on a number of factors, including,
but not limited to:
·
|
the
growth, condition and size of the video game and film
industries;
|
·
|
the
rate of growth of customer interest in believable facial animation in
their games and films;
|
·
|
the
rate of market acceptance and new customer acquisition of our
services;
|
·
|
the
rate of new product introduction and uptake by
customers;
|
·
|
our
ability to negotiate favorable pricing and participation terms with
customers;
|
·
|
our
ability to negotiate favorable payment arrangements with customers;
and
|
·
|
our
ability to execute against our growth strategy and manage cash
effectively.
|
If we
attempt to raise additional capital, it may not be available on acceptable
terms, or at all. The failure to obtain required capital would have a
material adverse effect on our business. If we issue additional equity
securities in the future, stockholders could experience dilution or a reduction
in priority of their stock.
14
Our
ability to use net operating loss carryforwards to reduce future years' taxes
could be substantially limited if we experience an ownership change as defined
in the Internal Revenue Code.
Section 382
of the Internal Revenue Code contains rules that limit the ability of a company
to use its net operating loss carryforwards in years after an ownership change,
which is generally defined as any change in ownership of more than 50% of its
stock over a three-year testing period. These rules generally operate by
focusing on ownership changes among stockholders owning directly or indirectly
5% or more of the stock of a company and/or any change in ownership arising from
a new issuance of stock by the company. If, as a result of future transactions
involving our common stock, including purchases or sales of stock by 5%
stockholders, we undergo cumulative ownership changes which exceed 50% over the
testing period, our ability to use our net operating loss carryforwards would be
subject to additional limitations under Section 382.
Generally,
if an ownership change occurs, the annual taxable income limitation on the use
of net operating loss carryforwards is equal to the product of the applicable
long-term tax exempt rate and the value of the company's stock immediately
before the ownership change. Depending on the resulting limitation, a portion of
our net operating loss carryforwards could expire before we would be able to use
them.
As a
result of the exchange transaction in March 2010, we are completing a review of
the net operating losses incurred by Image Metrics Limited and Image Metrics CA,
Inc., a Delaware corporation and wholly-owned subsidiary of Image Metrics
Limited, prior to the transaction. Our inability to fully utilize our net
operating losses to offset taxable income generated in the future could have a
negative impact on our future financial position and results of
operations.
Disruption
and fluctuations in financial and currency markets could have a negative effect
on our business.
Financial
markets in the United States, Europe and Asia have been experiencing extreme
disruption in recent years, including, among other things, extreme volatility in
security prices, severely diminished liquidity and credit availability, rating
downgrades of certain investments and declining valuations of others.
Governments have taken unprecedented actions intended to address extreme market
conditions that include severely restricted credit and declines in real estate
values. While currently these conditions have not impaired our ability to
operate our business, there can be no assurance that there will not be a further
deterioration in financial markets and confidence in major economies, which can
then lead to challenges in the operation of our business. These economic
developments affect businesses such as ours in a number of ways. The tightening
of credit in financial markets adversely affects the ability of commercial
customers to finance purchases and operations and could result in a decrease in
orders and spending for our products as well as create supplier disruptions.
Economic developments could also reduce future government spending on our
products. We are unable to predict the likely duration and severity of the
current disruption in financial markets and adverse economic conditions and the
effects they will have on our business and financial condition.
Our
wholly owned subsidiary, Image Metrics Limited, operates in the United Kingdom
and we have several customers that pay us in foreign
currencies. Consequently, we are subject to fluctuations in foreign
currency exchange rates. Fluctuations in foreign currencies that we make and
receive payments in could negatively impact our financial results.
Risks
Related to Our Common Stock
There
is no active public market for our common stock and an active trading market may
not develop.
There is
currently no active public market for our common stock. An active trading
market may not develop or, if developed, may not be sustained. The lack of
an active market may impair the ability of stockholders to sell their shares at
the time they wish to sell them or at a price that they consider
reasonable. The lack of an active market may also reduce the market value
and increase the volatility of our shares of common stock. An inactive
market may also impair our ability to raise capital by selling shares of common
stock and may impair our ability to acquire other companies or assets by using
shares of our common stock as consideration.
15
Our
current management can exert significant influence over us and make decisions
that are not in the best interests of all stockholders.
As of
February 14, 2011, our executive officers and directors as a group beneficially
owned approximately 45.5% of our outstanding shares of common stock and voting
preferred stock. As a result, these stockholders will be able to assert
significant influence over all matters requiring stockholder approval, including
the election and removal of directors and any change in control. In
particular, this concentration of ownership of our outstanding shares of common
stock could have the effect of delaying or preventing a change in control, or
otherwise discouraging or preventing a potential acquirer from attempting to
obtain control. This, in turn, could have a negative effect on the market
price of our common stock. It could also prevent our stockholders from
realizing a premium over the market prices for their shares of common
stock. Moreover, the interests of the owners of this concentration of
ownership may not always coincide with our interests or the interests of other
stockholders and, accordingly, could cause us to enter into transactions or
agreements that we would not otherwise consider.
Our
common stock is considered “penny stock” and may be difficult to
sell.
The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market or exercise price of less than $5.00 per share,
subject to specific exemptions. The market price of our common stock may
be below $5.00 per share and therefore may be designated as a “penny stock”
according to SEC rules. This designation requires any broker or dealer
selling these securities to disclose certain information concerning the
transaction, obtain a written agreement from the purchaser and determine that
the purchaser is reasonably suitable to purchase the securities. These
rules may restrict the ability of brokers or dealers to sell our common stock
and may affect the ability of our stockholders to sell their shares. In
addition, since our common stock is quoted on the OTC Bulletin Board® (OTCBB),
a regulated quotation service that displays real-time quotes, last-sale prices,
and volume information in over-the-counter (OTC) equity securities.,
stockholders may find fewer buyers to purchase the stock or a lack of market
makers to support the stock price.
We
do not anticipate paying dividends in the foreseeable future; investors should
not buy our stock if they expect dividends.
We
currently intend to retain our future earnings to support operations and to
finance expansion and, therefore, we do not anticipate paying any cash dividends
on our common stock in the foreseeable future.
We
could issue “blank check” preferred stock without stockholder approval with the
effect of diluting then current stockholder interests and impairing their voting
rights, and provisions in our charter documents and under Nevada corporate law
could discourage a takeover that stockholders may consider
favorable.
Our
articles of incorporation authorize the issuance of up to 20,000,000 shares of
“blank check” preferred stock with designations, rights and preferences as may
be determined from time to time by our board of directors. Our board of
directors is empowered, without stockholder approval, to issue a series of
preferred stock with dividend, liquidation, conversion, voting or other rights
which could dilute the interest of, or impair the voting power of, our common
stockholders. The issuance of a series of preferred stock could be used as
a method of discouraging, delaying or preventing a change in control. For
example, it would be possible for our board of directors to issue preferred
stock with voting or other rights or preferences that could impede the success
of any attempt to change control of our company. In addition, advanced
notice is required prior to stockholder proposals.
16
No
assurance can be given that our shares of common stock will ever be listed on
Nasdaq or another national securities exchange.
Our
common stock currently trades in the over-the-counter market and is quoted on
the OTC Bulletin Board. We intend to apply to list the common stock for
trading on the Nasdaq Capital Market when we begin to approach the quantitative
eligibility criteria of that market including, among other items, $5.0
million in stockholders’ equity, $15.0 million market value for publicly-held
shares and a $4.00 bid price per share. No assurance can be given that we
will satisfy the initial listing requirements, or that our shares of common
stock will ever be listed on Nasdaq or another national securities
exchange.
Item
1B. Unresolved Staff Comments.
Not applicable for smaller reporting
companies.
Item
2. Properties.
We lease
approximately 8,000 square feet of office space in Santa Monica, California and
2,350 square feet of office space in Manchester, United Kingdom, to house our
administrative, marketing and product development activities. We pay
$20,000 per month in rent in Santa Monica, under a month-to-month lease, subject
to a 30-day cancellation right. We pay $7,000 per month in rent in
Manchester, under a lease that expires in November 2012. We believe
there are numerous available sites to relocate our offices, if
necessary.
Item
3. Legal Proceedings.
We are
not currently involved in any pending or threatened legal
proceedings.
Item
4. Removed and Reserved.
PART
II
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Common
Stock
The
following table sets forth the high and low closing prices for our common stock
for the periods indicated as reported by the OTC Bulletin Board. The information
represents prices quoted by broker-dealers on the OTC Bulletin Board. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions, and may not represent actual transactions.
Calendar Quarter
|
2010
|
|||||||
High
|
Low
|
|||||||
First
(from March 15, first day of trading)
|
$
|
1.80
|
$
|
1.53
|
||||
Second
|
$
|
1.70
|
$
|
1.60
|
||||
Third
|
$
|
1.65
|
$
|
0.60
|
||||
Fourth
|
$
|
1.20
|
$
|
1.05
|
On
February 14, 2011, the closing price of our common stock, as reported by the OTC
Bulletin Board, was $0.49 per share.
The
Securities Enforcement and Penny Stock Reform Act of 1990 requires additional
disclosure relating to the market for penny stocks in connection with trades in
any stock defined as a penny stock. The SEC has adopted regulations
that generally define a penny stock to be any equity security that has a market
price of less than $5.00 per share, subject to a few exceptions which we do not
meet. Unless an exception is available, the regulations require the
delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated with
it.
Holders
As of
February 14, 2011, there were 17,869,277 shares of our common stock issued and
outstanding and approximately 100 holders of record of our common stock.
However, we believe that there are significantly more beneficial holders of our
common stock as many beneficial holders hold their stock in “street
name.”
Dividends
We
currently intend to retain our future earnings to support operations and to
finance expansion and, therefore, we do not anticipate paying any cash dividends
on our common stock in the foreseeable future.
Recent
Sales of Unregistered Securities
We did
not issue any unregistered securities during the three months ended September
30, 2010 that were not previously reported in a current report on Form
8-K.
18
Issuer
Purchases of Equity Securities
There
were no stock repurchases during the three months ended September 30,
2010.
Item
6. Selected Financial Data.
|
Not
applicable for smaller reporting
companies
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Forward-Looking
Statements
In
addition to historical information, this annual report on Form 10-K contains
forward-looking statements that involve risks and uncertainties, many of which
are beyond our control. Our actual results could differ materially and adversely
from those anticipated in such forward-looking statements as a result of certain
factors, including those set forth in this report. Important factors that may
cause actual results to differ from these forward-looking statements include,
but are not limited to, for example:
|
·
|
our inability to raise sufficient
additional capital to operate our
business;
|
|
·
|
adverse economic
conditions;
|
|
·
|
unexpected costs, lower than
expected sales and revenues, and operating
deficits,
|
|
·
|
the ability of our products and
services to achieve market
acceptance;
|
|
·
|
our reliance on one customer for
a significant percentage of our
revenue;
|
|
·
|
the volatility of our operating
results and financial
condition;
|
|
·
|
our ability to develop and
maintain relationships with entertainment
companies;
|
|
·
|
our ability to protect our
intellectual property;
|
|
·
|
our ability to attract or retain
qualified senior management personnel, including software and computer
graphics engineers, and
|
|
·
|
the factors set forth under the
caption “Risk Factors” in Part I, Item 1A. and other factors discussed
from time to time in our news releases, public statements and/or filings
with the SEC.
|
All
statements, other than statements of historical facts, included in this report
regarding our strategy, future operations, financial position, estimated revenue
or losses, projected costs, prospects and plans and objectives of management
are forward-looking statements. When used in this report, the words “will,”
“may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,”
“plan” and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain such identifying
words. All forward-looking statements speak only as of the date of this report.
We undertake no obligation to update any forward-looking statements or other
information contained herein, except as required by U.S. federal securities
laws. Although we believe that our plans, intentions and expectations reflected
in or suggested by the forward-looking statements in this report are reasonable,
we cannot assure stockholders and potential investors that these plans,
intentions or expectations will be achieved. We disclose important factors that
could cause our actual results to differ materially from expectations under Part
I, Item 1A. entitled “Risk Factors.” These cautionary statements qualify all
forward-looking statements attributable to us or persons acting on our
behalf.
19
Introduction
The
following discussion should be read in conjunction with our audited financial
statements for the fiscal years ended on September 30, 2009 and 2008 included as
an exhibit in our Form 8-K/A filed with the SEC on April 14, 2010, and the
Consolidated Financial Statements and notes thereto included at the end of this
annual report on Form 10-K.
Description
of Our Company and Predecessor
We were
incorporated in the State of Nevada in October 2004. We were formed
to import and distribute a range of cellular accessories to wholesalers and
retailers throughout Canada and the United States. In March 2005, we
filed a registration statement with the SEC, which became effective in May 2005,
and we became a publicly-reporting and trading company. Our cellular
accessories business was discontinued in 2006 and we were inactive through March
10, 2010, though we continued to timely file our periodic reports with the
SEC.
On March
10, 2010, we acquired through an exchange offer all of the outstanding ordinary
shares and preferred shares of Image Metrics Limited, a private company
incorporated in England and Wales (“Image Metrics Ltd”). As a result
of the exchange offer, we are engaged in the business of providing
technology-based facial animation solutions to the interactive entertainment
industry. Effective March 10, 2010, we changed our corporate name to
Image Metrics, Inc. The term “Image Metrics” (as well as “we”, “our”,
and “us”) refers to Image Metrics Ltd prior to March 10, 2010, and to Image
Metrics, Inc. as of and after such date.
Overview
Image
Metrics is a provider of technology-based facial animation services to the
interactive entertainment and film industries. Using proprietary
software and mathematical algorithms that “read” human facial expressions, our
technology converts video footage of real-life actors into 3D computer generated
animated characters. We believe we are the leader in the field
of facial animation in terms of quality, cost and completion
time. Examples of our notable and innovative facial animation
projects include the 2010 “Red Dead Redemption” video game, which sold more than
5 million copies in its first two weeks, 2009 “Grand Theft Auto IV” video game,
which generated over $500 million in sales in its first week, the 2009 computer
generated aging of Brad Pitt in the feature film “The Curious Case of Benjamin
Button,” which won three Academy Awards® including one for achievement in visual
effects, and the 2009 Black Eyed Peas’ “Boom Boom Pow” music video, which won a
Grammy® Award for best short form music video.
Image
Metrics was founded in 2000 and has more than 60 man-years - and $14.0
million - invested in our computer vision based software. We
derive our revenues from the sale of consulting services, model building,
character rigging and animation services. Our key intellectual property consists
of one patent registered in the United States, four additional patents in
process, the identification of 16 potential new patents, and significant
well-documented trade secrets. We are continually updating our
software and are prosecuting a roadmap of technology
innovations.
Total
revenue during the fiscal year ended September 30, 2010 was $5.9 million,
up from $4.0 million during the fiscal year ended September 30,
2009. The increase in revenue is the result of our efforts to build
brand awareness, identify sales opportunities and build a broader customer
base. Our increased production and projects resulted in us delivering
821 minutes of animation to our customers during fiscal year 2010 compared to
530 minutes of animation delivered to customers in fiscal year
2009.
Gross
margin was 48% for the fiscal year ended September 30, 2010, compared to 25% for
the fiscal year ended September 30, 2009. The marked improvement is a
result of better management of our pipeline process management and higher number
of projects that increased our labor utilization.
20
Cash
flows used for operations were $8.8 million for the fiscal year ended
September 30, 2010, compared to $3.2 million for the fiscal year ended September
30, 2009. The increase in cash flows used for operations was
primarily the result of a decrease in deferred revenue, partially offset by
increased accounts payable and decreased other current assets. Cash flows from
financing activities were $8.5 million for the fiscal year ended September 30,
2010, compared to $4.1 million for the fiscal year ended September 30,
2009. Increased cash flows were the result of additional debt and
equity financings.
Impact
of Recently Issued Accounting Standards
In April
2010, the Financial Accounting Standards Board (“FASB”) issued ASU
No. 2010-17, “Revenue Recognition — Milestone
Method (Topic 605): Milestone Method of Revenue
Recognition”. This ASU provides guidance on defining a milestone and determining when it may be appropriate to apply
the milestone method of revenue recognition.
Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the
period in which the milestone is achieved only if the
milestone is judged to meet certain criteria to be
considered substantive. The updated guidance is effective on a prospective basis
for milestones achieved in fiscal years, and interim periods within those years,
beginning on or after June 15, 2010. Entities may elect to adopt the
amendments in the ASU retrospectively for all prior periods. The Company does
not expect the adoption of these provisions to have a material effect on its
consolidated financial statements.
In June
2008, the Emerging Issues Task Force issued EITF Consensus No. 07-05 Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock
for periods beginning after December 15, 2008. The objective of this Consensus
is to provide guidance for determining whether an equity-linked financial
instrument (or embedded feature) is indexed to an entity's own stock and it
applies to any freestanding financial instrument or embedded feature that has
all the characteristics of a derivative in of Statements of Accounting standards
No. 133 Accounting for Derivative Financial Instruments and Hedging Activities,
for purposes of determining whether the financial
instrument or embedded feature qualifies for the first part of the scope
exception in paragraph 11(a) of Statement 133 (the “Paragraph 11(a) Exemption).
This Issue also applies to any freestanding financial instrument that is
potentially settled in an entity's own stock, regardless of whether the
instrument has all the characteristics of a derivative in Statement 133, for
purposes of determining whether the instrument is within the scope of Issue
00-19 Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock. The Consensus requires the
application of a two-step approach that required the Company to (1) evaluate the
instrument’s contingent exercise provisions and (2) evaluate the instrument’s
settlement provisions. Based upon applying this approach to instruments within
the scope of the consensus, the Company determined that certain of its warrants,
that were contractually indexed to 643,894 shares of Common Stock and that are
classified in stockholders’ equity on September 30, 2008, will no longer meet
the definition of Indexed to a Company’s Own Stock provided in the Consensus.
Accordingly, effective on October 1, 2009, the Company is required to reclassify
those warrants, at their fair value of $0.26 million to liabilities where they
will continue to be measured at their respective fair values with corresponding
changes in fair values charged or credited to interest income or
expense.
Critical Accounting
Policies
A summary
of our significant accounting policies are disclosed in Note 1 of our
Consolidated Financial Statements included in Part IV, Item 1 of this Annual
Report on Form 10-K. The following discussion addresses our most
critical accounting policies, which are those that are both important to the
portrayal of our financial condition and results of operations and that require
significant judgment or use of complex estimates.
We
consider certain accounting policies related to revenue recognition, notes
payable, and deferred tax assets and liabilities to be critical policies due to
the significance of these items to our operating results and the estimation
processes and management judgment involved in each.
Revenue
Recognition
We derive
our revenue from the sale of consulting services, model building, character
rigging and animation services. The majority of services are sold in
multiple-element arrangements. We recognize revenue
pursuant to the requirements of the Financial Accounting Standards Board
Accounting Standards Codification (“ASC”) 605, as amended by ASU 2009-13, when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collectability is probable. A majority of our
animation revenue is recognized in this manner. Revenue is presented net of
sales, use and value-added taxes collected on behalf of our
customers.
For sales
that involve the delivery of multiple elements, we allocate revenue to each
undelivered element based on the element’s fair value as determined by
vendor-specific objective evidence (VSOE), which is the price charged when that
element is sold separately, or third party evidence (TPE). When VSOE
and TPE are unavailable, fair value is based on management’s best estimate of
selling price. When management’s estimate is used to determine fair
value, management makes its estimates using reasonable and objective evidence to
determine the price. For elements not yet sold separately, the fair
value is equal to the price established by our management if it is probable that
the price will not change before the element is sold separately. We review our
VSOE and TPE at least annually. If we conclude we are unable to establish fair
values for one or more undelivered elements within a multiple-element
arrangement using VSOE, we use TPE, being the price at which the vendor would
transact if the unit of accounting were sold by the vendor regularly on a
stand-alone basis or our best estimate of the selling price for that unit of
accounting. During fiscal years 2010 and 2009, the majority of our
revenue is related to contracts that involve the delivery of multiple elements,
as such, all the revenue associated with these contracts was recognized based on
estimated selling price.
Estimated
selling price for each deliverable is determined based on a calculation of
internal direct costs plus our anticipated profit margin, which is the method we
would use to price the same deliverable on a standalone basis, then compared for
reasonableness to available market information on prices charged by other
providers for similar services. Significant deliverables in the
arrangement qualify as separate units of account and are recognized throughout
the service period as the elements are delivered.
21
Notes
Payable
In
connection with the sale of debt or equity instruments, we may sell options or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain derivative instruments,
such as derivative features which in certain circumstances may be required to be
bifurcated from the associated host instrument and accounted for separately as a
derivative instrument liability.
For
options, warrants and warrant liability, we estimate fair value using either a
Monte Carlo Simulation, the Black-Scholes-Merton option pricing model. The
valuation techniques require assumptions related to the remaining term of the
instruments and risk-free rates of return, our current common stock price and
expected dividend yield, and the expected volatility of our common stock price
over the life of the instrument. Because of the limited trading history for our
common stock, we estimate the future volatility of our common stock price
based on the experience of other entities in our industry.
Deferred
Tax Assets and Liabilities
Significant
judgment is required in determining our provision for income taxes. We assess
the likelihood that our deferred tax asset will be recovered from future taxable
income, and to the extent we believe that recovery is not likely, we establish a
valuation allowance. We consider future taxable income projections, historical
results and ongoing tax planning strategies in assessing the recoverability of
deferred tax assets. However, adjustments could be required in the future if we
determine that the amount to be realized is less or greater than the amount that
we recorded. Such adjustments, if any, could have a material impact on our
results of our operations.
We record
a valuation allowance to reduce our deferred income tax assets to the amount
that is more likely than not to be realized. In evaluating our ability to
recover our deferred income tax assets, we consider all available positive and
negative evidence, including our operating results, ongoing tax planning and
forecasts of future taxable income on a jurisdiction by jurisdiction basis. Our
cumulative pre-tax loss in recent years represents sufficient negative evidence
for us to determine that the establishment of a full valuation allowance against
the deferred tax asset is appropriate. This valuation allowance offsets net
deferred tax assets associated with future tax deductions as well as
carryforward items. In the event we were to determine that we would be able to
realize our deferred income tax assets in the future in excess of their net
recorded amount, we would make an adjustment to the valuation allowance which
would reduce the provision for income taxes.
22
Results
of Operations
The
following table sets forth key components of our results of operations during
the fiscal years ended September 30, 2010 and 2009, both in dollars and as a
percentage of our net sales.
2010
|
2009
|
|||||||||||||||
Amount
|
% of
Revenue
|
Amount
|
% of
Revenue
|
|||||||||||||
Revenue
|
$ |
5,945
|
100 | % | $ | 3,952 | 100 | % | ||||||||
Cost
of Revenue (exclusive of depreciation shown separately
below)
|
(3,075 | ) |
-52
|
% | (2,965 | ) | -75 | % | ||||||||
Gross
Profit
|
2,870
|
48
|
% | 987 | 25 | % | ||||||||||
Operating
Expenses
|
||||||||||||||||
Selling
and Marketing
|
1,558 |
26
|
% | 2,706 | 68 | % | ||||||||||
Research
and Development
|
1,456
|
24
|
% | 2,190 | 55 | % | ||||||||||
Depreciation
|
196 | 3 | % | 218 | 6 | % | ||||||||||
General
and Administrative
|
6,649
|
112
|
% | 2,785 | 70 | % | ||||||||||
Total
Operating expenses
|
9,859
|
166
|
% | 7,899 | 200 | % | ||||||||||
Operating
Loss
|
(6,989
|
) |
-118
|
% | (6,912 | ) | -175 | % | ||||||||
0 | % | 0 | % | |||||||||||||
Interest
Expense (net)
|
(1,760
|
) |
-30
|
% | (404 | ) | -10 | % | ||||||||
Other
Income
|
(12
|
) | 0 | % | - | 0 | % | |||||||||
Loss
on Investment
|
(729 | ) | -12 | % | - | 0 | % | |||||||||
Foreign
Exchange (Loss) Gain
|
(164 | ) | -3 | % | 537 | 14 | % | |||||||||
Total
Other (Expenses) Income
|
(2,665
|
) |
-45
|
% | 133 | 3 | % | |||||||||
Loss
before taxes
|
(9,654
|
) |
-162
|
% | (6,779 | ) | -172 | % | ||||||||
Provision
for income taxes
|
- | 0 | % | - | 0 | % | ||||||||||
Net
Loss
|
$ |
(9,654
|
) |
-162
|
% | $ | (6,779 | ) | -172 | % |
Comparison
of Fiscal Years Ended September 30, 2010 and September 30, 2009
Total
revenue for the fiscal year ended September 30, 2010 increased by 50 % at $5.95
million, compared to $3.95 million in the fiscal year ended September 30,
2009. The increase in revenue is the result of our efforts to build
brand awareness, identify sales opportunities, and build a broader customer
base.
Cost
of Revenue, Excluding Depreciation and Amortization
Costs of
revenue primarily consist of direct personnel costs incurred to deliver
animation services. Costs of revenue, excluding depreciation and
amortization, increased by 4%, or $0.11 million, to $3.08 million for the fiscal
year ended September 30, 2010, from $2.97 million for the fiscal year ended
September 30, 2009. This decrease was the result of better management
of animation service focused labor, including more inefficient scheduling of
resources in alignment with customer needs. This improvement was
attributable to improved processes on managing our process pipeline and project
scheduling, as well as gaining efficiencies when removing the excess capacity
from our pipeline.
Sales
and Marketing
Sales and
marketing expenses primarily consist of compensation costs, including incentive
compensation, travel expenses, advertising, and other sales and marketing
related costs. Sales and marketing expenses decreased 42%, or $1.15
million, to $1.56 million for the fiscal year ended September 30, 2010 from
$2.71 million for the fiscal year ended September 30, 2009. The
lower expenses primarily were a result of fewer sales personnel, lower use of
consultants and lower incentive compensation.
23
As a
percentage of revenue, sales and marketing expenses for the fiscal year ended
September 30, 2010 decreased by 43% compared to the fiscal year ended September
30, 2009. During fiscal year 2009, the Company spent a significant
amount of money on buildings its sales team, its market presence and developing
its existing customer base. The expense from fiscal year 2009 had a
direct impact on increasing revenue in fiscal year 2010. The
increased revenue from direct efforts in fiscal year 2009 in combination with a
reduction in sales personnel throughout fiscal year 2010 resulted in lower sales
and marketing costs for fiscal year 2010.
Research
and Development
Research
and development expenses consist primarily of employee-related costs for product
research and development. Research and development expenses decreased 34%,
or $0.73 million, to $1.46 million for the fiscal year ended September 30, 2010
compared to $2.19 million for the fiscal year ended September 30,
2009. The decreases were attributable to fewer employees and a
reduction in incentive compensation for the remaining personnel. As a percentage
of revenue, research and development expenses decreased by 31% for the fiscal
year ended September 30, 2010 from September 30, 2009. This decrease
compared to revenue is a direct result of our continued service revenue
growth.
Depreciation
Depreciation
expense consists of depreciation of long-lived property and equipment.
Depreciation expenses remained materially consistent at approximately $0.20
million for the fiscal year ended September 30, 2010 compared to $0.22 million
for the fiscal year ended September 30, 2009.
As
a percentage of revenue, depreciation expense decreased to 3% for the fiscal
year ended September 30, 2010 from 6% for the fiscal year ended September 30,
2009. This decrease compared to revenue is a direct result of our
continued service revenue growth and minimal capital expenditures during the
fiscal year ended September 30, 2010.
General
and Administrative
General
and administrative expenses consist principally of employee-related costs,
professional fees and occupancy costs. General and administrative expenses
increased 139%, or $3.86 million, for the fiscal year ended September 30, 2010
from $2.79 million for the fiscal year ended September 30,
2009. The majority of the increased expenses were from the
increased number of personnel resulting in higher payroll by $1.71 million,
professional fees that increased by $1.55 million and were primarily incurred
for the March 210 share exchange transaction, debt and equity financing and
preparation and review of SEC filings, $0.30 of increased stock
compensation for options issued to employees and non-employee directors, and
$0.33 million of increased travel expenses.
Interest
Income (Expense)
Interest
income and expense is from our notes payable , fair value adjustment for warrant
liability and warrants associated with our notes payable. We
recorded net interest expense for the fiscal year ended September 30, 2010 of
$1.76 million compared to interest expense of $0.40 million in the fiscal year
ended September 30, 2009. This increase was attributable to the
issuance of convertible debt with detachable warrants during the fiscal
year 2010. The warrants had anti-dilution provisions and
are accounted for as a liability until exercised or expired. The
warrant liability resulted in interest expense of $1.2 million during fiscal
year 2010. The convertible debt issued in second quarter of fiscal
year 2010 had a beneficial conversion feature with a fair value of $0.63 million
that was recorded as interest expense.
As a
result of our change in control in March 2010, certain notes payable issued
between October 2006 and February 2010 went into default status. All outstanding
amounts related to these notes payable became immediately payable. As
such, we have classified all these notes payable as current on our Consolidated
Balance Sheets. These notes continue to accrue interest at 5% per
year until paid in full. The notes mature by their terms between May
2009 and February 2013.
Gain
(Loss) on Foreign Exchange Transactions
We had a
foreign currency translation loss of $0.16 million during the fiscal year ended
September 30, 2010 compared to a gain of $0.54 million during the fiscal year
ended September 30, 2009. During the fiscal year ended September 30,
2010, we experienced reduced volatility in the fluctuation of the exchange rates
of the European currencies for US dollars and lower amount of transactions
in foreign currencies compared to the fiscal year ended September 30,
2009, which resulted in a smaller foreign currency impact in fiscal year 2010
compared to fiscal year 2009.
Liquidity
and Capital Resources
We have
continued to finance operations through cash flows from operations, as well as
debt and equity private placements. The Company's ability to continue
as a going concern is dependent upon its ability to successfully raise further
capital through equity or debt financing. There is no assurance the
Company will be successful in its efforts to raise capital.
At
September 30, 2010, we had $0.38 million in cash and approximately $1.0 million
credit available under a secured convertible loan. Borrowings under
the loan (i) are secured by a first priority lien on all of our assets,
including the assets of our principal operating subsidiary, and a
cross-guarantee by that subsidiary, (ii) bear interest at 13.5% per annum,
payable at maturity, and (iii) may be converted at any time and from time to
time, at holder’s option, into shares of our common stock at a conversion price
of $1.00 per share. The loan matures on January 31, 2011, subject to
mandatory prepayment of principal and interest on the earliest maturity date of
any subsequent public or private debt financing received by us at any time
before maturity. The loan agreement includes customary affirmative and
negative covenants, and customary events of default as further described in
Footnote 4 in the footnotes to our audited financial statements included in
Section 15 of this annual report on Form 10-K. We have $2.8 million
of outstanding convertible promissory notes that are scheduled to mature in the
second quarter of fiscal year 2011.
Net cash
used for operating activities for the fiscal years ended September 30, 2010 and
2009 was $8.77 million and $3.21 million, respectively. Our net loss
of $9.47 million in the fiscal year ended September 30, 2010, was partially
adjusted for noncash interest of $1.62 million, stock compensation expense of
$0.42 million, depreciation of $0.20 million and foreign currency transaction
loss of $0.16 million. Operating cash flows were negatively impacted
by a $2.82 million decrease in deferred revenue, which was the result of
substantial work completed for our largest customer, $0.73 million decrease in
investments for the loss on Optasia, and $0.56 million in lower accrued
liabilities, primarily from the payout of employee incentive compensation
related to fiscal year 2009. Operating cash outflows were offset by
lower prepaid expenses of $0.81 million, increased accounts payable of $0.85
million and lower accounts receivable of $0.16 million.
Net cash
used for investing activities for the fiscal year ended September 30, 2010 and
2009 was fairly consistent at $0.16 million, and $0.19 million,
respectively. The primary purchases for September 30, 2010 and 2009
consisted of computer equipment and software.
Net cash
provided by financing activities was $8.47 million and $4.09 million for the
fiscal year ended September 30, 2010 and 2009, respectively. The net
cash provided from financing activities during fiscal year 2010, was from the
issuance of convertible notes, in the amount of $6.30 million and $3.23 million
received from the sale of stock. These cash receipts were partially
offset from payments on convertible and nonconvertible notes totaling $0.98
million and the issuance of debt costs totaling $0.08 million. The
net cash provided from financing activities in September 30, 2009, included
proceeds from the sale of stock of $1.56 million and issuance of debt totaling
$3.40 million, which was partially offset by payments on nonconvertible notes
for $0.42 million.
We have
certain convertible notes that are in default. These notes have not
had an adverse impact on our ability to secure additional debt or equity
financing and we do not anticipate the defaults on these notes to restrict our
ability to secure additional financing in the future. The convertible
notes accrue interest at 5% per annum, compounded annually. Upon
completion of the share exchange transaction on March 10, 2010, these
convertible notes entered a default status as a result of the change of
ownership. As of September 30, 2010, the principal and accrued
interest owed on these loans was $224,000. The noteholders have not
taken any steps to accelerate the notes, which mature by their terms between May
2009 and February 2013.
25
Off-Balance Sheet Arrangements,
Contractual Obligations and Contingent Liabilities and Commitments
We lease
various facilities and equipment in the United States and United Kingdom under
non-cancelable operating leases that expire through 2013. The lease agreements
generally provide for the payment of minimum annual rentals, pro rata share of
taxes, and maintenance expenses. Rental expense for all operating leases was
approximately $571,000 and $561,000 for fiscal years 2010 and 2009,
respectively.
26
As of
September 30, 2010, contractual obligations include minimum rental
commitments under non-cancelable operating leases and payments on notes payable
as follows (in thousands):
Less
than 1
|
More
than
|
|||||||||||||||||||
Contractual Obligations:
|
Total
|
Year
|
1-3 Years
|
3-5 Years
|
5 Years
|
|||||||||||||||
Operating
Lease Obligations
|
$
|
224
|
$
|
142
|
$
|
82
|
$
|
—
|
$
|
—
|
||||||||||
Notes Payable |
$
|
2,832
|
$
|
2,832
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||
Total |
$
|
3,056
|
$
|
2,974
|
$
|
82
|
$
|
—
|
$
|
—
|
Equity
Compensation Plan Information
There are
5,562,587 shares of common stock reserved for issuance under our 2009 Share
Incentive Plan and 2010 Incentive Compensation Plan. We adopted our 2010
Incentive Compensation Plan on March 10, 2010, and prior to that date, we did
not have in place an equity compensation plan. Also, on March 10, 2010, we
assumed Image Metrics Limited’s 2009 Share Incentive Plan.
The
following table provides information as of February 14, 2011, with respect to
the shares of common stock that may be issued under our existing equity
compensation plans.
Plan category
|
Number of shares of
common stock to be
issued upon exercise
of outstanding options
(a)
|
|
Weighted-average
exercise price of
outstanding options
(b)
|
|
Number of Securities
remaining
available for
future issuance
under equity compensation
plans (excluding
securities
reflected in column (a))
(c)
|
|||||||
Equity compensation
plans approved by security holders
|
3,684,705
|
$
|
1.10
|
294,756
|
||||||||
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|||||||||
Total
|
3,684,705
|
$
|
1.10
|
294,756
|
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
Not
applicable for smaller reporting companies
Item
8. Financial Statements and Supplementary Data.
The
response to this item is submitted as a separate section of this report
beginning on page F-1.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
We have
not had any changes in or disagreements with our accountants beyond what has
been previously reported in the Company’s current
report on Form 8-K filed with the SEC on May 20, 2010.
27
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our filings under the Securities Exchange Act of
1934 is (1) recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms
and (2) accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Under the
supervision and with the participation of our senior management, including our
chief executive officer, Robert Gehorsam and our chief financial officer, Ronald
Ryder, we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), as of the end of the period covered by this annual report
(the “Evaluation Date”). Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective as of September 30, 2010.
Management's
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Exchange Act Rule
13a-15(f)). Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes of
accounting principles generally accepted in the United
States. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance of achieving their control
objectives. In evaluating the effectiveness of our internal control
over financial reporting, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control – Integrated Framework.
28
Based on
management’s evaluation under the framework in Internal Control—Integrated
Framework, our management concluded that our internal control over financial
reporting was not effective as of September 30, 2010 due to material
weaknesses in the controls.
The
Company’s chief executive officer and chief financial officer concluded that
material weaknesses existed in properly applying the provisions of FASB
Accounting Standards Codification No. 820, “Fair Value Measurements and
Disclosures” and application of an appropriate transfer pricing
policy.
Subsequent
to September 30, 2010, the Company’s chief executive officer and chief financial
officer in discussion with the Company’s audit committee authorized the
restatement of the Company’s previously issued financial statements on form 10-Q
for the periods ended March 31 and June 30, 2010, and concluded, as a result of
the restatements, that material weaknesses in internal control over financial
reporting existed as of September 30, 2010. Management has made
significant changes subsequent to the September 30, 2010 balance sheet date and
is engaged in an ongoing effort to correct the material weaknesses in internal
control over financial reporting.
The
restatement of our financial statements involved previously issued financial
statements for the periods ended March 31 and June 30, 2010, and, in
management’s evaluation of the effectiveness of our disclosure controls and
procedures as of the end of the fiscal year covered by this report, our chief
executive officer and chief financial officer concluded, as a result of the
restatement, that material weaknesses in our internal control over financial
reporting continued, as described above, to exist as at September 30, 2010, and
that our internal control over financial reporting were not effective as of
September 30, 2010. Given these reportable conditions and material
weaknesses, management has devoted additional resources to resolving questions
that arose during the period covered by this report. As a result, we are
confident our financial statements, as of September 30, 2010, fairly present in
all material respects our financial condition and results of
operations.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.
Changes
in Internal Control Over Financial Reporting
Based on
management’s evaluation under the framework in Internal Control—Integrated
Framework, our management concluded that our internal control over financial
reporting was not effective as of September 30, 2010, due to the existence of
significant deficiencies constituting material weaknesses, as described in
greater detail below. A material weakness is a control deficiency, or
combination of control deficiencies, such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will
not be prevented or detected on a timely basis.
We made
the following changes to our internal control over financial reporting during
and after the year ended September 30, 2010 that have materially affected or are
reasonably likely to materially affect our internal control over financial
reporting:
|
(i)
|
We have retained a qualified
accountant to assist in the preparation of our public filings and assist
on accounting matters;
|
|
(ii)
|
We implemented the use of current
GAAP checklists and disclosure reporting
guides;
|
|
(iii)
|
Our key accounting personnel
attend continuing education seminars and read quarterly updates on
accounting guidance, trends, techniques and financial reporting
requirements; and
|
|
(iv)
|
Our
management team and key accounting personnel increased their knowledge of
derivative accounting and proper accounting treatment of derivatives and
use of the Monte Carlo Simulation
technique.
|
|
(v)
|
Our management team and key
accounting personnel increased their knowledge of fair value accounting
and transfer pricing
matters.
|
Item
9B. Other Information.
None
29
PART
III
Item 10. Directors, Executive Officers and
Corporate Governance.
The names
and ages of our directors and executive officers, and their positions, are as
follows:
Name
|
Age
|
Position
|
||
David
Rolston, Ph.D.
|
57
|
Chairman
of the Board
|
||
Robert
Gehorsam
|
55
|
Chief
Executive Officer and Director
|
||
Ron
Ryder
|
41
|
Chief
Financial Officer
|
||
Kevin
Walker, Ph.D.
|
35
|
Chief
Technology Officer and Co-Founder
|
||
Ranjeet
Bhatia
|
39
|
Director
|
||
Peter
Norris
|
|
52
|
|
Director
|
Unless
otherwise noted, all of our directors and executive officers joined our company
in the same positions that they held in Image Metrics Limited at the closing of
our share exchange transaction on March 10, 2010. The principal
occupations for the past five years (and, in some instances, for prior years) of
each of our directors and executive officers are as follows:
David Rolston, Ph.D., Chairman of the
Board, is a computer graphics pioneer, with more than 25 years of
experience in the industry. He joined the Board of Image Metrics Limited
in March 2008 and became its Chairman in August 2008. He has served as the
Chief Executive Officer of SiPort, Inc. since December 2009. Prior to
SiPort, he was the Chief Executive Officer of Forterra Systems Inc., a provider
of virtual worlds software, and had held this position since June 2005.
From 2001 until joining Forterra, he was General Manager and Vice President of
Engineering at ATI Technologies. He has also held the positions of Chief
Executive Officer of Multigen/Paradigm and General Manager/Director of Marketing
at Silicon Graphics. He received a Ph.D. in Computer Science and an M.S.E.
degree in Industrial Engineering from Arizona State University, and a B.S.E.
degree from Northern Arizona University.
Mr. Rolston’s more than 25 years of
experience in computer graphics, academic knowledge and day-to-day operational
leadership of other technology growth companies make him well qualified as a
member of our board.
Robert Gehorsam, Chief Executive
Officer and Director, joined our company in September 2010. Prior
to joining our company, Mr. Gehorsam was the President and a member of the board
of directors of Forterra Systems, Inc., a provider of virtual worlds software,
from June 2005 to January 2010, Chief Executive Officer from July 2004 to May
2005, and Vice President from May 2002 to June 2004. Prior to Forterra,
Mr. Gehorsam served as Senior Vice President, Programming and Production at
Viacom's CBS Internet Group, where he was responsible for content, creative,
production and operations for CBS.com, CBSnews.com and related wholly-owned CBS
internet properties, from June 2000 to July 2001. Prior to joining Viacom,
he was Senior Vice President for Programming and Production at Sony Online
Entertainment from May 1997 to May 2000. In addition to business planning
for Sony Online, he was directly responsible for all operations, product
acquisition and development, and technology for The Station@sony.com, one of the
world's most popular game destinations on the Internet. Mr. Gehorsam
received a B.A. degree from Grinnell College.
Mr.
Gehorsam brings extensive internet and digital media industry knowledge to the
company and a deep background in technology product development, production and
management, having worked in executive roles in the industry, making him well
qualified as a member of the board.
30
Ron Ryder, Chief Financial
Officer,
joined Image Metrics Limited as Chief Financial Officer in May 2009. From
October 2006 through May 2009, he was a Principal at Matrix Consulting , a
financial consulting firm in Los Angeles. He has advised on technical
issues for various companies including Robertson Properties Group, The Walt
Disney Company and Celetronix. From January 2005 through July 2006, he
served as Chief Financial Officer of Post Logic Studios with a focus on
operational management and ERP system implementation. He also served as
the Chief Financial Officer of Virgin Studios Group from _____ until its sale to
Accent Media in ______, and as an entertainment specialist for Ernst & Young
from 1995 to 1997. Mr. Ryder is a Certified Public Accountant, and
received his B.S. degree from Cal State
Northridge.
Kevin Walker, Ph.D., Chief Technology
Officer and Co-Founder, co-founded Image Metrics Limited in 2000 and
leads the team that invented and continues to develop our core technology.
Dr. Walker has published 11 technical white papers since 1997 relating to his
work on active appearance models and the use of computer vision in animation,
and holds several patents in the field. Dr. Walker received the British
Machine Vision Conference Best Poster Prize in 1997. He received his Ph.D.
in Computer Vision and Face Recognition and a B.Sc. degree in Computer Science
from the University of Manchester, England.
Ranjeet Bhatia, Director,
joined the Board of Directors of Image Metrics Limited in 2002. Mr. Bhatia
has served as the Managing Director of Saffron Hill Ventures Ltd., a private
equity fund, since May 2000. Prior to that, he worked as Senior Investment
Advisor to the Chairman of Loot Group of Companies and, more than ten
years ago, held various financial positions at Citigroup, DynCorp and Booz Allen
& Hamilton. He received an M.B.A. degree from UCLA, an M.A. degree
from Johns Hopkins University, and a B.A. degree from Occidental
College.
Mr.
Bhatia has extensive knowledge of capital markets and private equity investing
(with a focus on early-stage and growth companies) from experience with Saffron
Hill Ventures, making his input valuable to the board’s discussions of our
capital markets activities, cash management, liquidity needs and risk
analysis. As a director since 2002 and representative of the
company’s largest stockholder, Mr. Bhatia leads the board with his own history
of innovation and strategic vision for the company.
Peter Norris, Director, who joined our Board
of Directors in March 2010, was appointed non-executive Chairman of the Board of
Virgin Group Holdings, the holding company that owns brands such as Virgin Media
and Virgin Atlantic, in November 2009. Mr. Norris has over 30 years
experience in corporate finance and international capital markets, including
senior positions at Barings and Goldman Sachs. In 1995, he
founded boutique advisory firm New Boathouse Capital, which he sold to merchant
banking firm Quayle Munro in 2007, staying as chief executive of the combined
business until his appointment with Virgin Group. Mr. Norris received
a degree in Modern History from Oxford University.
Mr.
Norris’ experience as an investment banker and non-executive chairman of a major
media group, as well as intimate knowledge of the United States-United Kingdom
business environment, make him well qualified to be a member of the
board. Mr. Norris’ experience as a director of Virgin Group Holdings
gives him exposure to the corporate governance practices of a larger
company.
All
directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors, subject to board member
designations described below under “Board Composition”. Officers are
elected annually by the board of directors and serve at the discretion of the
board.
31
Advisory
Board
In
addition to our management team, we have established an advisory board with
members experienced in the video game industry, to advise and assist us in
gaining broad marketplace acceptance and to enhance our marketing
capabilities. Our advisory board is expected to meet on a regular basis,
and to be available to consult on an as-needed basis, with both management and
the board of directors. Under advisory agreements, advisory board members
are appointed for two-year terms. Members of the advisory board are
reimbursed by us for out-of-pocket expenses incurred in serving on advisory
board; to date, we have not established a formal compensation program for these
members. To our knowledge, none of the advisory board members has any
conflict of interest between their obligations to us and their obligations to us
and their obligations to others.
Geoff Heath was most recently
the Chief Executive Officer of NCSoft Europe, publisher of the online games
Lineage and City of Heroes. He held that role from 2004 until his
retirement in 2009. Prior to NCSoft, he was a key industry innovator in
the European games Industry. Mr. Heath established Activision’s presence
in Europe, along with advising Origin and Maxis (now both divisions of
Electronic Arts) as they entered the European marketplace. He established
Mindscape International and acted as non-executive chairman of Climax
Studios. Mr. Heath received the Officer of the British Empire and an
honorary Doctor of Arts degree from Abertay University,
Dundee.
Michel Kripalani is
President of Oceanhouse Media, Inc., a company he founded in January 2009.
Prior to starting Oceanhouse Media, he was Director of Business Development at
Autodesk. Mr. Kripalani joined Autodesk in 2004, where he spent a large
portion of his time managing relationships with Microsoft, Sony, Nintendo, and
middleware providers. A veteran of the video game industry, he founded
Presto Studios in 1991, which produced The Journeyman Project series, Myst 3:
Exile, Whacked!, and many other successful games. He received a B.A.
degree in Visual Arts from the University of California at San
Diego.
Board
Composition
Through
March 10, 2012 (two years after the closing of our share exchange transaction),
our board of directors will be composed of five directors. Dr. David
Rolston, Chairman of the Board, took one seat upon the completion of the share
exchange transaction in March 2010. One director will be nominated by each
of Saffron Hill Investors Guernsey Limited (Mr. Bhatia) and Verus International
(which is still considering candidates who have relevant business experience),
and two additional directors (Peter Norris and one person to be
determined). We have agreed that the director nominees will continue to be
nominated for election during this period. The composition of our board of
directors, and any future audit committee and compensation committee, will be
subject to the corporate governance provisions of our primary trading market,
including rules relating to the independence of directors.
Board
Committees
We
currently have an Audit Committee and Compensation Committee. We have not taken
any steps to create a Nominations and Governance Committee. In 2011,
our board of directors expects to create such committee, in compliance with
established corporate governance requirements. Currently, Dr. Rolston and
Mr. Norris are our only “independent” directors, as that term is defined under
Nasdaq rules.
Audit Committee. Our
Audit Committee currently has only one member, Dr. Rolston. The functions
of this committee include, among other things:
|
•
|
reviewing and pre-approving the
engagement of our independent auditors to perform audit services and any
permissible non-audit
services;
|
|
•
|
evaluating the performance of our
independent auditors and deciding whether to retain their
services;
|
|
•
|
reviewing our annual and
quarterly financial statements and reports and discussing the statements
and reports with our independent auditors and
management;
|
|
•
|
reviewing and approving
related-party transactions;
|
32
|
•
|
reviewing with our independent
auditors and management significant issues that may arise regarding
accounting principles and financial statement presentation, as well as
matters concerning the scope, adequacy and effectiveness of our financial
controls; and
|
|
•
|
establishing procedures for the
receipt, retention and treatment of complaints received by us regarding
financial controls, accounting or auditing
matters.
|
Our board
of directors has determined that Dr. Rolston qualifies as an audit committee
financial expert within the meaning of SEC regulations. In making this
determination, our board of directors has considered the nature and scope of Dr.
Rolston’s education and business experience. Our board of directors also has
determined that Dr. Rolston meets the independence requirements of Rule 10A-3 of
the Exchange Act, subject to the exemptions set forth therein. Both our
independent registered public accounting firm and management are expected to
periodically meet privately with our audit committee.
Compensation Committee.
Our compensation committee consists of Dr. Rolston and Peter Norris, each of
whom is a non-employee member of our board of directors. Dr. Rolston is the
chairman of our compensation committee. Our board of directors has determined
that each member of our compensation committee meets the requirements for
independence under the requirements of the Nasdaq rules. Our compensation
committee is responsible for, among other things:
|
•
|
reviewing and approving
compensation of our executive officers including annual base salary,
annual incentive bonuses, specific goals, equity compensation, employment
agreements, severance and change in control arrangements, and any other
benefits, compensations or
arrangements;
|
|
•
|
reviewing and recommending
compensation goals, bonus and option compensation criteria for our
employees; and
|
|
•
|
administering, reviewing and
making recommendations with respect to our equity compensation
plans.
|
Nominations and Governance
Committee. We plan to establish a nominations and governance
committee of the board of directors. The purpose of the nominations and
governance committee would be to select, or recommend for our entire board’s
selection, the individuals to stand for election as directors at the annual
meeting of stockholders and to oversee the selection and composition of
committees of our board. The nominations and governance committee’s duties
would also include considering the adequacy of our corporate governance and
overseeing and approving management continuity planning processes.
Indebtedness
of Directors and Executive Officers
None of
our directors or executive officers or their respective associates or affiliates
is indebted to us.
Family
Relationships
Our
directors and executive officers do not have any family relationship between
each other.
Legal
Proceedings
As of the
date of this Annual Report on Form 10-K, there are not any material proceedings
to which any of our directors, executive officers, affiliates or stockholders is
a party adverse to us.
33
Director
Compensation
We intend
to pay each non-employee director a participation fee for each regular and
special meeting of the board of directors attended and to award each such
director stock options granted under our incentive compensation
plan. Currently, we compensate directors through options granted
under our 2010 Incentive Compensation Plan, and in some cases through an annual
stipend. Our board of directors will review director compensation
annually and adjust it according to then current market conditions and good
business practices.
Employment
Agreements
We have
entered into employment agreements with each of Ron Ryder and Kevin Walker,
Ph.D. The employment agreements require each of the executives to devote
all of their time and attention during normal business hours to our business as
our Chief Financial Officer and Chief Technology Officer, respectively.
The employment agreements for Mr. Ryder and Dr. Walker have a term of three
years and may be renewed for an additional term of one year upon our and the
executive’s mutual agreement, provided the compensation committee of the board
of directors provides 90 days written notice of its desire to renew prior to the
expiration of the initial term. The employment agreements provide that
each of Mr. Ryder and Dr. Walker will receive a fixed annual base salary during
the term of the employment agreement. In addition, each executive is
entitled to (a) receive a cash bonus in an amount determined by the compensation
committee of the board of directors based on our company meeting or exceeding
certain mutually agreed-upon performance goals and (b) participate in our
incentive compensation plans.
The
employment agreements provide for termination of an executive’s employment
without any further obligation on our part upon the death or disability of the
executive or for cause. In the event that an executive’s employment is
terminated without cause or for good reason, we are obligated to pay such
executive his salary for the lesser of six months or the remainder of the
term. As of September 30, 2010, the maximum payout to Mr. Ryder and Dr.
Walker is $135,000 and $90,720, respectively. The employment
agreements also contain covenants (a) restricting the executive from engaging in
any activity competitive with our business during the term of the employment
agreement and in the event of termination for cause or without good reason, for
a period of one year thereafter, (b) prohibiting the executive from disclosing
confidential information regarding our company, (c) soliciting employees,
customers and prospective customers of our company during the term of the
employment agreement and for a period of one year thereafter, and (d) requiring
that all intellectual property developed by the executive and relating to the
business of our company constitutes our sole and exclusive
property.
Incentive
Compensation Plans
In March
2010, we adopted and assumed the Image Metrics Limited 2009 Share Incentive
Plan, which was adopted by its board of directors in November 2009.
Following is a summary of the material terms of the 2009 Share Incentive
Plan.
The
purpose of the plan is to allow our employees, directors, consultants and
strategic partners to participate in the company’s growth and to generate an
increased incentive for these persons to contribute to our future success and
prosperity and to focus on our growth. Employees, directors, independent
consultants and strategic partners are all eligible to receive awards under the
plan. The plan is administered by our board of directors (as successor to
Image Metrics Limited). As of September 30, 2010, there were 1,852,209
shares of common stock issuable upon the exercise of stock options granted under
the 2009 Share Incentive Plan, having exercise prices ranging from $0.04 to
$2.13 per share.
In March
2010, we also adopted the 2010 Incentive Compensation Plan following the closing
of the share exchange transaction. There are a total of 2,547,578 shares of
Common Stock available for issuance under the incentive plan. The purpose
of the 2010 Incentive Compensation Plan is to enable us to attract, retain and
motivate key employees, directors and, on occasion, independent consultants, by
providing them with stock options and restricted stock grants. Stock
options granted under the incentive compensation plan may be either incentive
stock options to employees, as defined in Section 422A of the Internal Revenue
Code of 1986, or non-qualified stock options. Our board of directors has
the power to determine the terms of any stock options granted under the
incentive plan, including the exercise price, the number of shares subject to
the stock option and conditions of exercise. Stock options granted under
the incentive plan are generally not transferable, vest in installments and are
exercisable during the lifetime of the optionee only by such optionee. The
exercise price of all incentive stock options granted under the incentive plan
must be at least equal to the fair market value of the shares of common stock on
the date of the grant. The specific terms of each stock option grant will
be reflected in a written stock option agreement. As of September 30,
2010, there were 1,933,347 shares of common stock issuable upon the exercise of
stock options granted under the 2010 Incentive Compensation Plan, having
exercise prices ranging from $0.12 to $2.02 per share.
34
Section
16(a) Beneficial Ownership Reporting Compliance
We do not
have securities registered under Section 12 of the Exchange Act and,
accordingly, our directors, officers and affiliates are not required to file
reports under Section 16(a) of the Exchange Act.
Code
of Ethics
Our board
of directors has adopted a code of ethics, which applies to all our directors,
officers and employees. Our code of ethics is intended to comply with the
requirements of Item 406 of Regulation S-K.
Our code
of ethics is posted on our Internet website at www.image-metrics.com. We
will provide our code of ethics in print without charge to any stockholder who
makes a written request to Ron Ryder, our Chief Financial Officer, at Image
Metrics, Inc., 1918 Main Street, 2nd Floor,
Santa Monica, California 90405. Any waivers of the application and any
amendments to our code of ethics must be made by our board of directors.
Any waivers of, and any amendments to, our code of ethics will be disclosed
promptly on our Internet website, www.image-metrics.com.
Item 11.
Executive Compensation.
The
following table sets forth information concerning the total compensation paid or
accrued by us during the two fiscal years ended September 30, 2010 and 2009 to
our Chief Executive Officer and our two most highly-compensated officers other
than the Chief Executive Officer.
|
Annual
Compensation
|
Long-Term
Compensation
|
||||||||||||||||||||||||||||
|
Awards
|
Payouts
|
||||||||||||||||||||||||||||
Name
and Principal
Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Other Annual
Compensation
($)
|
Restricted
Stock
Award(s)
($)
|
Securities
Underlying
Options/
SARs
(#)
|
LTIP
Payouts ($)
|
All Other
Compensation
($)
|
||||||||||||||||||||||
Robert
Gehorsam
|
2010
|
10,000
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
Chief
Executive Officer (1)
|
2009
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||
Michael
R. Starkenburg
|
2010
|
291,924
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||
Former
President and Chief Executive Officer (2)
|
2009
|
264,423
|
83,000
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||
Clifford
Chapman
|
2010
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||
Former
Chief Executive Officer (2)
|
2009
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||
Ron
Ryder
|
2010
|
249,231
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||
Chief
Financial Officer (3)
|
2009
|
73,558
|
39,000
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||
Brian
Waddle
|
2010
|
260,308
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||
EVP,
Sales (4)
|
2009
|
210,596
|
153,000
|
—
|
—
|
—
|
—
|
—
|
35
(1)
|
Mr. Gehorsam became our Chief
Executive Officer on September 10,
2010.
|
(2)
|
Mr. Starkenburg resigned as our
President and Chief Executive Officer effective September 10, 2010.
He had joined our predecessor, Image Metrics Limited, in February
2008.
|
(3)
|
Mr. Ryder joined our predecessor,
Image Metrics Limited, in May
2009.
|
(4)
|
Mr. Chapman resigned as an
officer and director of International Cellular Accessories effective March
10, 2010.
|
(5)
|
The determination of value of
option awards is based upon the Black-Scholes-Merton Option pricing model,
details and assumptions of which are set out in our financial
statements. The amounts represent annual amortization of fair value
of stock options granted to the named executive
officer.
|
Grants
of Plan Based Awards
Estimated
Future Payouts Under
Non-Equity
Incentive Plan Awards
|
Estimated
Future Payouts Under
Equity
Incentive Plan Awards
|
All
Other Stock
Awards:
Number
of
Shares
of Stock
|
All
Other Option
Awards:
Number
of
Securities
Underlying
|
Exercise
or
Base
Price of
Option
|
Grant
Date
Fair
Value of
Stock
and
Option
|
|||||||||||||||||||||||||||||||||||||||
Name
|
Grant
Date
|
Threshold
|
Target
|
Maximum
|
Threshold
|
Target
|
Maximum
|
or
Units
|
Options
|
Awards
|
Awards
|
|||||||||||||||||||||||||||||||||
($)
|
($)
|
($)
|
(#)
|
(#)
|
(#)
|
(#)
|
(#)
|
@($/Sh)
|
||||||||||||||||||||||||||||||||||||
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
(k)
|
(l)
|
|||||||||||||||||||||||||||||||||
Robert
Gehorsam
|
- | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
Chief
Executive Officer (1)
|
||||||||||||||||||||||||||||||||||||||||||||
Michael
R. Starkenburg
|
11/23/2009
|
1,199,847 | 0.12 | 107,890 | ||||||||||||||||||||||||||||||||||||||||
Former
President and Chief Executive Officer (2)
|
3/10/2010
|
1,098,000 | 1.00 |
538,020
|
||||||||||||||||||||||||||||||||||||||||
Clifford
Chapman
|
- | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
Former
Chief Executive Officer (2)
|
||||||||||||||||||||||||||||||||||||||||||||
Ron
Ryder
|
11/23/2009
|
224,971 | 0.12 | 20,561 | ||||||||||||||||||||||||||||||||||||||||
Chief
Financial Officer (3)
|
3/10/2010
|
205,875 | 1.00 |
100,879
|
||||||||||||||||||||||||||||||||||||||||
Brian
Waddle
|
11/23/2009
|
299,962 | 0.12 | 27,176 | ||||||||||||||||||||||||||||||||||||||||
Former
EVP, Sales (4)
|
3/10/2010
|
274,500 | 1.00 |
134,505
|
Outstanding
Equity Awards at Fiscal Year-End
The table
below summarizes the equity awards outstanding to our executive officers as of
September 30, 2010:
Option
Awards
|
Stock
Awards
|
|||||||||||||||||||||||||||||||||||
|
Equity
|
Equity
|
||||||||||||||||||||||||||||||||||
Equity
|
Incentive Plan
|
Incentive Plan
|
||||||||||||||||||||||||||||||||||
Incentive
Plan
|
Awards:
|
Awards:
|
||||||||||||||||||||||||||||||||||
Number of
|
Awards:
|
Market
|
Number of
|
Market or
|
||||||||||||||||||||||||||||||||
Number of
|
Securities
|
Number of
|
Number of
|
Value of
|
Unearned
|
Payout Value of
|
||||||||||||||||||||||||||||||
Securities
|
Underlying
|
Securities
|
Shares or
|
Shares or
|
Shares, Units
|
Unearned
|
||||||||||||||||||||||||||||||
Underlying
|
Unexercised
|
Underlying
|
Units of
|
Units of
|
or Other
|
Shares, Units or
|
||||||||||||||||||||||||||||||
Unexercised
|
Unearned
|
Unexercised
|
Option
|
Option
|
Stock That
|
Stock that
|
Rights That
|
Other Rights
|
||||||||||||||||||||||||||||
Options (#)
|
Options (#)
|
Unearned
|
Exercise
|
Expiration
|
Have Not
|
Have Not
|
Have Not
|
That Have
|
||||||||||||||||||||||||||||
Name
|
Exercisable
|
Unexercisable
|
Options (#)
|
Price ($)
|
Date
|
Vested (#)
|
Vested ($)
|
Vested (#)
|
Not Vested (#)
|
|||||||||||||||||||||||||||
Robert
Gehorsam, CEO
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Ron
Ryder, CFO
|
224,971 | — | $ | 0.12 |
11/28/2019
|
— | — | — | — | |||||||||||||||||||||||||||
34,313 | 171,562 | $ | 1.00 |
03/09/2020
|
- | - | - | - |
36
Director
Compensation
The table
below summarizes the compensation that we paid to non-management directors for
the fiscal year ended September 30, 2010.
Name
|
Fiscal
Year
|
Fees Earned ($)
|
(A)
|
Stock
Awards
($)
|
Options
Awards
($)
(1)
|
Nonqualified
Deferred
Compensation
Earnings ($)
|
Other Annual
Compensation
($)
|
Total
($)
|
||||||||||||||||||||||
David
Rolston, Ph.D., Chairman of the Board
|
2010
|
$ | 58,403 | — | — |
47,530
|
— | — | $ |
105,933
|
||||||||||||||||||||
Ranjeet
Bhatia, Director
|
2010
|
- | — | — | — | — | — | — | ||||||||||||||||||||||
Peter
Norris, Director
|
2010
|
$ | - | — | — |
31,442
|
— | — | $ |
31,4420
|
(1)
|
The
determination of value of option awards is based upon the Black-Scholes
Option pricing model, details and assumptions of which are set out in our
financial statements. The amounts represents the fair value of
stock options granted to the named executive officer that vested during
fiscal year 2010.
|
Item 12.
|
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters.
|
The
following table sets forth information regarding the number of shares of our
common stock beneficially owned on February 14, 2011, by:
|
·
|
each person who is known by us to
beneficially own 5% or more of our common
stock,
|
|
·
|
each of our directors and
executive officers, and
|
|
·
|
all of our directors and
executive officers as a
group.
|
Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. Shares of
our common stock which may be acquired upon exercise of stock options or
warrants which are currently exercisable or which become exercisable within 60
days after the date indicated in the table are deemed beneficially owned by the
optionees. Subject to any applicable community property laws, the persons
or entities named in the table above have sole voting and investment power with
respect to all shares indicated as beneficially owned by them.
Name (1)
|
Number of
Shares
Beneficially
Owned (2)
|
Percentage of
Shares
Beneficially
Owned (3)
|
||||||
5% or
Greater Stockholder:
|
||||||||
Saffron
Hill Entities
|
13,915,722 | (4) | 42.4 | % | ||||
Executive
Officers and Directors:
|
||||||||
David
Rolston, Ph.D
|
352,650 | (5) | 1.2 | % | ||||
Robert
Gehorsam
|
25,000 | (5) | * | |||||
Ron
Ryder
|
299,315 | (5) | 1.0 | % | ||||
Kevin
Walker, Ph.D
|
889,493 | (6) | 3.1 | % | ||||
Peter
Norris
|
33,333 | (5) | * | |||||
Ranjeet
Bhatia
|
13,915,722 | (4) | 42.4 | % | ||||
All
executive officers and directors as a group (5 persons)
|
15,515,513 | 45.5 | % |
37
* Less
than 1% of outstanding shares of common stock.
(1)
|
Other than the 5% or greater
stockholder listed above, the address of each person is c/o Image Metrics,
Inc., 1918 Main Street, 2nd Floor, Santa Monica, California
90405.
|
(2)
|
Unless
otherwise indicated, includes shares owned by a spouse, minor children and
relatives sharing the same home, as well as entities owned or controlled
by the named person. Also includes shares if the named person has the
right to acquire those shares within 60 days after February 14, 2011, by
the exercise or conversion of any warrant, stock option or convertible
preferred stock. Unless otherwise noted, shares are owned of record and
beneficially by the named
person.
|
(3)
|
The
calculation in this column is based upon 28,499,813 shares of common stock
outstanding on February 14, 2011, which assumes the conversion of all
10,630,536 shares of our series A convertible preferred stock into common
stock. The shares of common stock underlying warrants and stock options
are deemed outstanding for purposes of computing the percentage of the
person holding them but are not deemed outstanding for the purpose of
computing the percentage of any other
person.
|
(4)
|
Includes (a) 1,210,089 shares of
our common stock held by Saffron Hill Investors Guernsey Limited, (b)
1,497,307 shares of our common stock held by Saffron Hill Ventures Limited
Partnership, (c) 1,923,702 shares of our common stock held by Saffron Hill
Ventures Limited Partnership II and (d) 962,030 shares of our common stock
held by SHIG1 Ltd., which are related entities in which Ranjeet Bhatia is
an officer who exercises voting and dispositive power with respect to the
shares held by the Saffron Hill entities. Also includes
3,975,397 shares of common stock issuable upon the conversion of our
series A convertible preferred stock and 4,347,197 shares of common stock
issuable upon the exercise of warrants. The address of the
Saffron Hill entities is 4-5 Park Place, London SW1A 1LP, United
Kingdom.
|
(5)
|
Represents shares of our common
stock issuable to the named individual upon the exercise of stock options
issued from our share incentive
plans.
|
(6)
|
Includes
(a) 352,720 shares of our common stock and (b) 536,773 shares of our
common stock issuable to Dr. Walker upon the exercise of stock options
issued from our share incentive
plans.
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
From
March 2009 through September 2009, Image Metrics Limited issued a series of
convertible loan notes and other notes in the aggregate principal amount of
$2.715 million to Saffron Hill Ventures, our single largest shareholder.
These notes provided that they mature one year from issuance or, if
earlier, upon the consummation by Image Metrics Limited of a merger, combination
or sale of all or substantially all of Image Metrics Limited’s stock or
assets. The notes, plus interest of approximately $116,897, were converted
into Units in our March 2010 private placement on the same terms and conditions
as other investors participating in that private placement, except that Saffron
Hill Ventures received a separate warrant to purchase one full share of Common
Stock per Unit as the lead investor. Whereas other investors in the
March 2010 private placement purchased units for $1 with each unit consisting of
one share of series A preferred stock of image Metrics, Inc. and a warrant to
purchase one-half share of common stock of Image Metrics,
Inc.
In
December 2009 and January 2010, Saffron Hill Ventures provided a total of
$550,000 in bridge financing to Image Metrics Limited. Saffron Hill
Ventures received bridge notes which (i) became due and payable upon the date of
the closing of the March 2010 private placement, (ii) bore interest at 10% per
annum, with minimum interest payable equal to 4% of the principal amount of the
note and default interest of 18% per annum, and (iii) were converted into the
March 2010 private placement at a discounted unit price of 80% of the per unit
purchase price. The securities received upon the conversion of the bridge
notes in the private placement are locked-up for six months. Warrants to
purchase a number of shares of our common stock equal to 40% of the principal
amount of the bridge note, plus accrued and unpaid interest, were also issued on
the maturity date.
As a
result of the Company initiating the March 10, 2010 private equity offering,
Series B Preferred Ordinary shareholders were entitled to purchase a defined
amount of additional shares of Series B Preferred Ordinary at par value of
$0.08. In February 2010, the Company sold to SHV 145,933 shares of
its Series B Preferred Ordinary shares at $0.08 per share. This
sale of Series B Preferred Ordinary shares was accounted for as a deemed
dividend in the amount of $470,000 and recorded as a reduction to retained
earnings.
38
On March
10, 2010, we entered into a one-year agreement with Saffron Hill Ventures to
provide corporate development and corporate finance expertise, as well as
ongoing advisory services, to us. Under the agreement, Saffron Hill
Ventures will receive monthly consulting fees of $2,500 for 12
months.
In May
2010, Saffron Hill Ventures provided $650,000 in bridge loans as part of an
interim bridge financing. Saffron Hill Ventures’ investment was on the
same terms and conditions as other investors participating in the bridge
financing.
Concurrently
with the closing of our share exchange transaction in March 2010, we redeemed
8,600,000 shares of our common stock from our former director, Clifford Chapman,
and certain other individuals for aggregate consideration of $200 and then
cancelled those shares.
Our board
of directors has determined that David Rolston, Ph.D. and Peter Norris are the
only members of our board of directors who qualify as “independent” directors
under Nasdaq’s definition of independence.
Item 14.
|
Principal Accountant Fees and
Services.
|
Audit
Fees
Audit
services consist of the audit of the annual consolidated financial statements of
us, and other services related to filings and registration statements filed by
us and our subsidiaries and other pertinent matters. Audit fees
billed to us by BDO for fiscal year 2010 totaled approximately
$200,000. Audit Fees billed to us by Ernst & Young LLP for fiscal
year 2009 totaled approximately $236,000.
Audit
related fees
Audit
related fees consist of assurance and related services by the principal
accountant that are reasonably related to the performance of the audit or review
of our financial statements. BDO did not provide any audit related
services for fiscal year 2010 . Audit Fees billed to us by Ernst
& Young LLP for fiscal years 2010 and 2009 totaled approximately $76,000 and
$236,000, respectively.
Tax
Fees
During
the fiscal years ended September 30, 2010 and 2009; BDO did not render services
to us for tax compliance, tax advice or tax planning.
During
fiscal years ended September 30, 2010 and 2009; Ernst & Young LLP provided
tax research services to us and billed us $86,000 and $0,
respectively.
All
Other Fees
During
the fiscal years ended September 30, 2010 and 2009; our principal accountant did
not render services to us for any other services beyond what is listed
above.
39
Auditor
Independence
Our Audit
Committee considered that the work done for us in fiscal 2010 by BDO was
compatible with maintaining BDO ’s independence.
Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-audit Services of
Independent Auditors
Consistent
with SEC policies regarding auditor independence, the Audit Committee has
responsibility for appointing, setting compensation and overseeing the work of
the independent auditor. In recognition of this responsibility, the
Audit Committee has established a policy to pre-approve all audit and
permissible non-audit services provided by the independent auditor.
1. Audit
services include audit work performed of financial statements, as well as work
that generally only the independent auditor can reasonably be expected to
provide, including statutory audits, and attest services and consultation
regarding financial accounting and/or reporting standards.
2. Audit-Related
services are for assurance and related services that are reasonably related to
the audit or review of our financial statements.
3. Tax
services include all services performed by the independent auditor’s tax
personnel except those services specifically related to the audit of the
financial statements, and includes fees in the areas of tax compliance, tax
planning, and tax advice.
4. Other Fees
are those associated with products or services not captured in the other
categories.
The Audit
Committee of the Board of Directors considered and authorized all services
provided by our principal accountant.
40
PART
IV – FINANCIAL INFORMATION
ITEM
15. Exhibits and Financial Statement Schedules.
Exhibit
Number |
Description
|
|
2.1
|
Share
Exchange Agreement, dated as of March 10, 2010, between International
Cellular Accessories and Image Metrics Limited. (1)
|
|
*3.1
|
Articles
of Incorporation of International Cellular Accessories.
|
|
3.2
|
Certificate
of Amendment to Articles of Incorporation amending (i) the name of
International Cellular Accessories to Image Metrics, Inc. and (ii) the
number and classes of capital stock of Image Metrics, Inc. including the
preferences, rights and limitations of Series A Convertible Preferred
Stock, filed March 10, 2010, with the Secretary of State of the State of
Nevada. (1)
|
|
*3.3
|
Bylaws
of Image Metrics, Inc.
|
|
4.1
|
Form
of Image Metrics, Inc. Warrant to Purchase Common Stock.
(1)
|
|
10.1
|
Form
of Private Placement Subscription Agreement to purchase units in Image
Metrics, Inc. (1)
|
|
10.2
|
2009
Stock Incentive Plan (as assumed by Image Metrics, Inc.)
(2)
|
|
14.1
|
Code
of Business Conduct and Ethics. (3)
|
|
14.2
|
Code
of Ethics for the CEO and Senior Financial Officers.
(3)
|
|
21.1
|
Subsidiaries
of Image Metrics, Inc. (2)
|
|
*31.1
|
Certification
by the Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
*31.2
|
Certification
by the Chief Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
||
*32.1
|
Certification
by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
41
*32.2
|
Certification
by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
|
Filed
herewith.
|
(1)
|
Incorporated
herein by reference to Form 8-K dated March 10, 2010, filed with the SEC
on March 11, 2010.
|
(2)
|
Incorporated
herein by reference to Form 8-K/A dated March 10, 2010, filed with the SEC
on March 16, 2010.
|
42
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date:
February 14, 2011
IMAGE
METRICS, INC.
|
|||
By:
|
/s/ Robert Gehorsam
|
||
Robert
Gehorsam
|
|||
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name
|
Title
|
Date
|
||
/s/ David Rolston, Ph.D.
|
Chairman
of the Board
|
December
xx, 2010
|
||
David
Rolston, Ph.D.
|
||||
/s/ Robert Gehorsam
|
Chief
Executive Officer and Director
|
December
xx, 2010
|
||
Robert
Gehorsam
|
(principal
executive officer)
|
|||
/s/ Ron Ryder
|
Chief
Financial Officer
|
December
xx, 2010
|
||
Ron
Ryder
|
(principal
financial and accounting officer)
|
|||
/s/ Ranjeet Bhatia
|
Director
|
December
xx, 2010
|
||
Ranjeet
Bhatia
|
||||
/s/ Peter Norris
|
Director
|
December
xx, 2010
|
||
Peter
Norris
|
43
IMAGE
METRICS, INC. AND SUBSIDIARIES
FORM
10-K
ITEMS
8 and 15(a) (1) and (2)
INDEX
OF FINANCIAL STATEMENTS AND SCHEDULES
The
following financial statements of Image Metrics, Inc. and its subsidiaries
required to be included in Items 8 and 15(a) (1) are listed below:
Page
|
|
Report
of independent registered public accountants
|
F-2
|
Consolidated
balance sheets as of September 30, 2010 and 2009
|
F-3
|
For
the years ended September 30, 2010 and 2009:
|
|
Consolidated
statements of operations
|
F-4
|
Consolidated
statements of shareholders' equity (deficit)
|
F-5
|
Consolidated
statements of cash flows
|
F-6
|
Notes
to consolidated financial statements
|
F-7
|
The
financial statement schedules of Image Metrics, Inc. and its
subsidiaries to be included in Item 15(a)(2) are omitted because the conditions
requiring their filing do no exist or because the required information is given
in the financial statements, including the notes thereto.
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
Report
of Independent Registered Public Accounting Firm
Board of
Directors
Image
Metrics, Inc.
Santa
Monica, California
We have
audited the accompanying consolidated balance sheets of Image Metrics, Inc. as
of September 30, 2010 and the related consolidated statements of operations,
stockholders’ deficit, and cash flows for the year then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion. 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 audit provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Image Metrics, Inc. at
September 30, 2010, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
As
described in Note 1, as of October 1, 2009, the Company adopted the guidance in
Accounting Standards Codification 815-40 regarding whether an instrument is
considered indexed to an entity’s own stock.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency that raise 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 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Los
Angeles, California
February
14, 2011
F-2
Image
Metrics, Inc.
Consolidated
Balance Sheets
(Amounts
in thousands of US Dollars, except share data)
September 30,
2010
|
September 30,
2009
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 375 | $ | 803 | ||||
Restricted
cash
|
60 | 100 | ||||||
Accounts
receivable
|
259 | 422 | ||||||
Prepaid
and other current assets
|
175 | 256 | ||||||
Total
current assets
|
869 | 1,581 | ||||||
Property
and equipment (net)
|
139 | 177 | ||||||
Investment
in Optasia
|
- | 729 | ||||||
139 | 906 | |||||||
Total
assets
|
$ | 1,008 | $ | 2,487 | ||||
Liabilities
and shareholders’ deficit
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 1,392 | $ | 539 | ||||
Accrued
expenses and other current liabilities
|
656 | 1,219 | ||||||
Deferred
revenue
|
5,699 | 8,522 | ||||||
Notes
payable, net of discounts
|
2,231 | 830 | ||||||
Notes
payable to related party, net of discount
|
599 | - | ||||||
Warrant
liability
|
2,646 | - | ||||||
Total
current liabilities
|
13,223 | 11,110 | ||||||
Notes
payable (noncurrent portion)
|
- | 80 | ||||||
Notes
payable to related party (noncurrent portion)
|
- | 2,078 | ||||||
Total
liabilities
|
13,223 | 13,268 | ||||||
Shareholders’
deficit
|
||||||||
Common
Stock, $0.001 par value. Authorized 75,000,000 shares; issued and
outstanding 15,869,277 and 11,851,637 shares at September 30, 2010 and
September 30, 2009, respectively
|
16 | 12 | ||||||
Series
A Convertible Preferred stock, $0.001 par value. Authorized
20,000,000 shares; issued and outstanding 10,330,536 and 0 shares at
September 30, 2010 and September 30, 2009, respectively
|
7,400 | - | ||||||
Additional
paid-in-capital
|
17,933 | 15,445 | ||||||
Accumulated
deficit
|
(37,318 | ) | (25,983 | ) | ||||
Accumulated
other comprehensive loss
|
(246 | ) | (255 | ) | ||||
Total
shareholders’ deficit
|
(12,215 | ) | (10,781 | ) | ||||
Total
liabilities and shareholders’ deficit
|
$ | 1,008 | $ | 2,487 |
See notes
to the consolidated financial statements.
F-3
Image
Metrics, Inc.
Consolidated
Statements of Operations
(Amounts
in thousands of US Dollars, except share data)
|
September 30,
|
|||||||
|
2010
|
2009
|
||||||
Revenue
|
$ | 5,945 | $ | 3,952 | ||||
Cost
of revenue (exclusive of depreciation shown separately
below)
|
(3,075 | ) | (2,965 | ) | ||||
Gross
profit
|
2,870 | 987 | ||||||
Operating
expenses
|
||||||||
Selling
and marketing
|
1,558 | 2,706 | ||||||
Research
and development
|
1,456 | 2,190 | ||||||
Depreciation
and amortization
|
196 | 218 | ||||||
General
and administrative
|
6,649 | 2,785 | ||||||
Total
operating expenses
|
9,859 | 7,899 | ||||||
Operating
loss
|
(6,989 | ) | (6,912 | ) | ||||
Interest
expense (net)
|
(1,760 | ) | (404 | ) | ||||
Optasia
investment impairment
|
(729 | ) | - | |||||
Foreign
exchange gain (loss)
|
(164 | ) | 537 | |||||
Other
expenses
|
(12 | ) | - | |||||
Total
other (expense) income, net
|
(2,665 | ) | 133 | |||||
Loss
before provision for income taxes
|
(9,654 | ) | (6,779 | ) | ||||
Provision
for income taxes
|
- | - | ||||||
Net
loss
|
$ | (9,654 | ) | $ | (6,779 | ) | ||
Deemed
dividend
|
(1,417 | ) | - | |||||
Net
loss attributable to common stock
|
(11,071 | ) | (6,779 | ) | ||||
Basic
and diluted net loss per share of common stock
|
$ | (0.91 | ) | $ | (0.57 | ) | ||
Weighted
average shares used in computing basic and diluted net loss per share of
common stock
|
12,134,609 | 11,851,637 |
See notes
to the consolidated financial statements.
F-4
Image Metrics,
Inc.
Consolidated
Statement of Stockholders Equity and Comprehensive Income
(Amounts
in thousands of US Dollars, except share data)
|
Common stock and Additional
Paid-in Capital
|
Series A Preferred stock
|
Accumulated
|
Accumulated Other
Comprehensive
|
Total Stockholders'
|
Comprehensive
|
||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Deficit
|
Gain (Loss)
|
Equity
|
Income (loss))
|
||||||||||||||||||||||||
Balance,
September, 2008
|
7,043,620
|
8,869
|
-
|
-
|
(19,204
|
)
|
(137
|
)
|
(10,472
|
)
|
||||||||||||||||||||||
Comprehensive
income
|
||||||||||||||||||||||||||||||||
Net
income
|
-
|
-
|
-
|
-
|
(6,779
|
)
|
-
|
(6,779
|
)
|
(6,779
|
)
|
|||||||||||||||||||||
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
-
|
(118
|
)
|
(118
|
)
|
(118
|
)
|
|||||||||||||||||||||
Total
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(6,897
|
)
|
|||||||||||||||||||||||
Stock
option exercises
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
Issuance
of warrants
|
-
|
301
|
-
|
-
|
-
|
-
|
301
|
|||||||||||||||||||||||||
Stock
compensation expense
|
-
|
96
|
-
|
-
|
-
|
-
|
96
|
|||||||||||||||||||||||||
Issuance
of stock
|
4,808,017
|
6,191
|
-
|
-
|
-
|
-
|
6,191
|
|||||||||||||||||||||||||
Balance,
September, 2009
|
11,851,637
|
15,457
|
-
|
-
|
(25,983
|
)
|
(255
|
)
|
(10,781
|
)
|
||||||||||||||||||||||
Comprehensive
income
|
||||||||||||||||||||||||||||||||
Net
income
|
-
|
-
|
-
|
-
|
(9,654
|
)
|
-
|
(9,654
|
)
|
(9,654
|
)
|
|||||||||||||||||||||
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
-
|
9
|
9
|
9
|
||||||||||||||||||||||||
Total
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(9,645
|
)
|
|||||||||||||||||||||||
Stock
option exercises
|
17,640
|
2
|
-
|
-
|
-
|
-
|
2
|
|||||||||||||||||||||||||
Deemed
dividend
|
-
|
1,417
|
-
|
-
|
(1,417
|
)
|
-
|
-
|
||||||||||||||||||||||||
Adoption
of EITF 07-05
|
(264
|
) |
(264
|
) | ||||||||||||||||||||||||||||
Exchange
of warrants
|
-
|
231
|
-
|
-
|
-
|
(231
|
) | |||||||||||||||||||||||||
Stock
compensation expense
|
-
|
422
|
-
|
-
|
-
|
-
|
422
|
|||||||||||||||||||||||||
Issuance
of Series A preferred stock
|
-
|
630
|
10,330,536
|
7,400
|
-
|
8,030
|
||||||||||||||||||||||||||
Reverse
acquisition
|
4,000,000
|
(210
|
)
|
-
|
-
|
-
|
-
|
(210
|
)
|
|||||||||||||||||||||||
Balance,September,
2010
|
15,869,277
|
17,949
|
10,330,536
|
7,400
|
(37,3182
|
)
|
(246
|
)
|
(12,215
|
)
|
See notes
to the consolidated financial statements.
F-5
Image
Metrics, Inc.
Consolidated
Statements of Cash Flows
(Amounts
in thousands of US Dollars, except share data)
|
2010
|
2009
|
||||||
Operating
activities:
|
||||||||
Net
loss
|
$
|
(9,654
|
)
|
$
|
(6,779
|
)
|
||
Adjustments
to reconcile net loss to net cash used for operating
activities:
|
||||||||
Depreciation
and amortization
|
196
|
218
|
||||||
Stock-based
compensation
|
421
|
96
|
||||||
Non-cash
interest expense
|
1,623
|
243
|
||||||
Foreign
currency transaction loss (gain) and other
|
164
|
(537
|
)
|
|||||
loss
on Optasia
|
729
|
4007
|
||||||
Changes
in assets and liabilities:
|
||||||||
Restricted
cash
|
40
|
|||||||
Accounts
receivable
|
163
|
(409
|
)
|
|||||
Prepaid
expenses, other current and other non-current assets
|
81
|
(53
|
)
|
|||||
Deferred
revenue
|
(2,823
|
)
|
4,007
|
|||||
Accounts
payable
|
853
|
53
|
||||||
Accrued
expenses and other liabilities
|
(563
|
)
|
(46
|
)
|
||||
Total
adjustments
|
884
|
)
|
3,572
|
|||||
Net
cash used for operating activities
|
(8,770
|
)
|
(3,207
|
)
|
||||
Investing
activities:
|
||||||||
Purchase
of fixed assets
|
(158
|
)
|
(185
|
)
|
||||
Net
cash used for investing activities
|
(158
|
)
|
(185
|
)
|
||||
Financing
activities:
|
||||||||
Proceeds
from exercise of stock options
|
2
|
-
|
||||||
Payments
on nonconvertible notes
|
(418
|
)
|
(865
|
)
|
||||
Payments
on convertible notes
|
(566
|
)
|
-
|
|||||
Proceeds
from issuance of nonconvertible notes
|
-
|
2,050
|
||||||
Proceeds
from issuance of Convertible Notes and warrants to related
parties
|
1,375
|
849
|
||||||
Proceeds
from issuance of Convertible Notes and warrants to nonrelated
parties
|
4,925
|
500
|
||||||
Proceeds
from sale of stock and warrants
|
3,231
|
1,553
|
||||||
Payment
of debt issuance costs
|
(80
|
)
|
-
|
|||||
Net
cash provided by financing activities
|
8,469
|
4,087
|
||||||
Effects
of exchange rates on cash and cash equivalents
|
31
|
-
|
||||||
Net increase
(decrease) in cash and cash equivalents
|
(428
|
)
|
695
|
|||||
Cash
and cash equivalents, beginning of year
|
803
|
108
|
||||||
Cash
and cash equivalents, end of year
|
$
|
375
|
$
|
803
|
||||
Supplemental
disclosure of cash flow information:
|
||||||||
Cash
paid during the period:
|
||||||||
Interest
|
$
|
136
|
$
|
106
|
||||
Income
taxes
|
1
|
1
|
||||||
Non-cash
financing activities:
|
||||||||
Conversion
of notes payable to Series A preferred shares
|
$
|
5,921
|
$
|
4,859
|
||||
Issuance
of warrants in connection with convertible notes payable
|
$
|
341
|
$
|
-
|
||||
Beneficial
conversion feature recorded in connection with convertible notes
payable
|
$
|
630
|
$
|
-
|
||||
Beneficial
conversion feature in connection with Series A convertible preferred
stock
|
$
|
670
|
$
|
|||||
Beneficial
conversion feature in connection with Series B convertible preferred
stock
|
$
|
470
|
$
|
|||||
Exchange
of warrants
|
$
|
231
|
$
|
See notes
to consolidated financial statements.
F-6
Image
Metrics, Inc.
Notes
to Consolidated Financial Statements
1. Description of Business and Summary of
Significant Accounting Policies
Nature
of Business
Image
Metrics, Inc. is a leading global provider of technology-based facial animation
services to the interactive entertainment and film industries. Any
references to the “Company” or “Image Metrics” are to Image Metrics, Inc. and
its consolidated subsidiary.
Basis
of Presentation
The
Company’s consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America on
a going concern basis, which presumes that the Company will be able to realize
its assets and discharge its liabilities in the normal course of business for
the foreseeable future.
The
Company has incurred significant operating losses and has accumulated a $37.1
shares that vested during fiscal year 2010 million deficit as of September 30,
2010. The Company's ability to continue as a going concern is dependent upon its
ability to successfully raise further capital through equity or debt financing
and improvement of its results of operations. The Company had in
place a credit facility that was expected to provide the Company sufficient cash
to fund operations at least through January 2011. In addition, the
Company was anticipating to close up ot $1.0 million in additional equity
sales. Additional funds for operations was expected to come from
customer payments, new sales, joint development arrangements and a larger credit
facility.
These
conditions indicate a material uncertainty that casts substantial doubt about
the Company’s ability to continue as a going concern. The
Company believes it will secure the necessary debt or equity financing to
continue operations and meet its obligations. Thus, we have continued
to adopt the going concern basis of accounting in preparing the financial
statements.
These
consolidated financial statements do not include any adjustments to the amounts
and classifications of assets and liabilities that might be necessary should the
Company be unable to continue as a going concern.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary. Intercompany accounts and transactions have
been eliminated in consolidation.
Reverse
Merger
On March
10, 2010, we acquired through an exchange offer all of the outstanding ordinary
shares and preferred shares of Image Metrics Limited, a private company
incorporated in England and Wales (“Image Metrics LTD”), in exchange for
11,851,637 shares of our common stock, par value $.001 per share. In the merger,
we exchanged 11,851,637 shares of our common stock, par value $.001 per share
for all of the outstanding share capital of Image Metrics LTD comprised of
2,125,197 shares of ordinary stock, 300,607 A ordinary stock, 1,567,178
preferred ordinary stock and 2,725,633 series B preferred ordinary
stock. As a result, Image Metrics LTD is now our wholly-owned
subsidiary. The transaction is referred to in this annual report on Form 10-K as
the exchange transaction.
Prior to
the exchange transaction, the Company was named International Cellular
Accessories (“ICLA”) and did not have any operations and had nominal
assets. Subsequent to the exchange transaction, the former Image
Metrics LTD shareholders held a majority of the voting interest in the
Company. Therefore, the exchange transaction was determined to be the
merger of a private operating company, Image Metrics, LTD, into a public
non-operating shell, ICLA. Accordingly, the Company accounted for the
exchange as a capital transaction in which Image Metrics LTD issued stock for
the net monetary assets of the Company accompanied by a
recapitalization. The pre-acquisition financial statements of the
accounting acquirer, Image Metrics LTD, became the historical financial
statements of the combined companies. These historical consolidated
financial statements of the Company do not include the operations of ICLA for
any periods, but only reflect the operations of Image Metrics LTD and its
subsidiary. Additionally, the Company’s pre-exchange transaction
equity has been restated to reflect the equivalent number of common shares of
the Company received by Image Metrics LTD shareholders in the exchange
transaction, with differences between the par value of the Company and Image
Metrics LTD’s stock recorded as an adjustment to additional paid in capital.
Upon the exchange transaction, the Company adjusted its capitalization to
reflect the legally issued and outstanding shares existing pursuant to the
exchange.
F-7
Concentration
of Credit Risk
The
Company’s largest single customer accounted for 69% and 78% of total
consolidated revenue for the fiscal years ended September 30, 2010 and 2009,
respectively. The Company’s relationship with the customer is
governed by a contract between the two parties which identifies games and game
characters upon which the Company will work, prices for the services to be
rendered, and specified payments to be made by the customer to the Company. As
of September 30, 2010 and September 30, 2009, the Company did not have any
outstanding accounts receivable from this customer.
Revenue
Recognition
The
Company derives its revenues from the sale of consulting services, model
building, character rigging and animation services. The majority of services are
sold in multiple-element arrangements. The Company recognizes revenue
pursuant to the requirements of the Financial Accounting Standards Board
Accounting Standards Codification (“ASC”) 605, as amended by Accounting
Standards Update (“ASU”) 2009-13, “Revenue Recognition - Multiple-Deliverable
Revenue Arrangements”, when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and collectability is
probable. Revenue is presented net of sales, use and value-added taxes collected
on behalf of the Company’s customers.
For sales
that involve the delivery of multiple elements, the Company allocates revenue to
each undelivered element based on the element’s fair value as determined by
vendor-specific objective evidence (“VSOE”), which is the price charged when
that element is sold separately, or third party evidence
(“TPE”). When VSOE and TPE are unavailable, fair value is based on
management’s best estimate of selling price. When management’s
estimate is used to determine fair value, management makes its estimates using
reasonable and objective evidence to determine the price. For
elements not yet sold separately, the fair value is equal to the price
established by the Company’s management if it is probable that the price will
not change before the element is sold separately. The Company reviews its VSOE
and third party evidence at least annually. As the Company has concluded it is
unable to establish fair values for one or more undelivered elements within a
multiple-element arrangement using VSOE, the Company uses TPE or the Company’s
best estimate of the selling price for that unit of accounting, being the price
at which the vendor would transact if the unit of accounting were sold by the
vendor regularly on a standalone basis. During fiscal year 2009 and 2010, the
majority of our revenue is related to contracts that involve the delivery of
multiple elements, as such, all the revenue associated with these contracts were
recognized based on estimated selling price.
Estimated
selling price for each deliverable is determined based on a calculation of
internal direct costs plus our anticipated profit margin, which is the method we
would use to price the same deliverable on a standalone basis, then compared for
reasonableness to available market information on prices charged by other
providers for similar services. Significant deliverables in the
arrangement qualify as separate units of account and are recognized throughout
the service period as the elements are delivered.
Non-Marketable
Equity Securities
The
Company has accounted for its investment in Optasia Medical, Ltd. (“Optasia”) at
cost, because it does not have significant influence over the underlying
investee. The Company recorded an impairment charge for the total amount of its
investment in the current fiscal year.
The
Company periodically reviews its marketable securities, as well as its
non-marketable equity securities, for impairment. As of September 30, 2010, the
Company did not own any marketable securities. If the Company
concludes that any of these investments are impaired, the Company determines
whether such impairment is “other-than-temporary.” Factors the Company considers
to make such determination include the duration and severity of the impairment,
the reason for the decline in value and the potential recovery period, and its
intent to sell, or whether it is more likely than not that the Company will be
required to sell, the investment before recovery. If any impairment is
considered “other-than-temporary,” the Company will write down the asset to its
fair value and take a corresponding charge to its Consolidated Statements of
Operations.
Accounting
for Notes Payable with Equity Instruments
In
connection with the sale of debt or equity instruments, we may sell options or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain derivative instruments,
such as derivative features which in certain circumstances may be required to be
bifurcated from the associated host instrument and accounted for separately as a
derivative instrument liability.
F-8
For
options, warrants and bifurcated derivative features that are accounted for as
derivative instrument liabilities, we estimate fair value using either Monte
Carlo Simulation, quoted market prices of financial instruments with similar
characteristics or other valuation techniques. The valuation techniques require
assumptions related to the remaining term of the instruments and risk-free rates
of return, our current common stock price and expected dividend yield, and the
expected volatility of our common stock price over the life of the option.
Because of the limited trading history for our common stock, we estimate the
future volatility of our common stock price based the experience of other
entities considered comparable to our company.
Deferred
Tax Assets and Liabilities
Significant
judgment is required in determining our provision for income taxes. We assess
the likelihood that our deferred tax asset will be recovered from future taxable
income, and to the extent we believe that recovery is not likely, we establish a
valuation allowance. We consider future taxable income projections, historical
results and ongoing tax planning strategies in assessing the recoverability of
deferred tax assets. However, adjustments could be required in the future if we
determine that the amount to be realized is less or greater than the amount that
we recorded. Such adjustments, if any, could have a material impact on the
results of the Company’s operations.
We record
a valuation allowance to reduce our deferred income tax assets to the amount
that is more likely than not to be realized. In evaluating our ability to
recover our deferred income tax assets, we consider all available positive and
negative evidence, including our operating results, ongoing tax planning and
forecasts of future taxable income on a jurisdiction by jurisdiction basis. Our
cumulative pre-tax loss in recent years represents sufficient negative evidence
for us to determine that the establishment of a full valuation allowance against
the deferred tax asset is appropriate. This valuation allowance offsets net
deferred tax assets associated with future tax deductions as well as
carryforward items. In the event we were to determine that we would be able to
realize our deferred income tax assets in the future in excess of their net
recorded amount, we would make an adjustment to the valuation allowance which
would reduce the provision for income taxes.
Foreign
Currency Translation and Remeasurement
During
the fiscal year ended September 30, 2008, the Company’s functional currency was
the British pound (“GBP”). Transactions in foreign currencies were
translated into GBP at the rates of exchange current at the dates of the
transactions.
The
financial statements of the Company’s wholly owned subsidiary, Image Metrics,
Inc., were measured in its functional currency, the United States dollar
(“US$”). Assets and liabilities were translated at the balance sheet
date at the average exchange rate prevailing on that day and income and expense
items were translated at average exchange rates prevailing during the period.
The related translation adjustments were recorded as a component of
comprehensive income (loss) within stockholder’s equity. Gains and
losses from foreign currency transactions are included in the consolidated
statements of income.
During
the fiscal year ended September 30, 2009 the Company’s functional currency
became the US dollar. The Company’s monetary assets and liabilities
were remeasured at the balance sheet date at the average exchange rate
prevailing on that day, certain non-monetary assets and liabilities and equity
were remeasured at average monthly historical rates at the time the transactions
occurred, and income and expense items were remeasured at average exchange rates
prevailing during the period. Remeasurement adjustments for
intercompany payables were recorded as a component of comprehensive income,
while all other remeasurement adjustments were charged to income and
expense.
F-9
The
Company’s functional currency is the US dollar in fiscal year 2010.
Subsequent
Events
In
May 2009, the FASB issued ASC 855, “Subsequent Events”, which establishes
the general standards of accounting for and disclosures required for events
occurring after the balance sheet date but before financial statements are
issued or are available to be issued. Under ASC 855 the effects of all
subsequent events that provide additional evidence about conditions that existed
at the date of the balance sheet, including the estimates inherent in the
process of preparing financial statements, are required to be recognized in the
financial statements. Subsequent events that provide evidence about
conditions that did not exist at the date of the balance sheet but arose after
the balance sheet date but before financial statements are issued or are
available to be issued should not be recognized in the financial statements but
may need to be disclosed to prevent the financial statements from being
misleading. In accordance with this standard, we evaluated subsequent
events through the filing date of this Annual Report on Form 10-K.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported and disclosed in the financial
statements and accompanying notes. Actual results could differ from those
estimates. On an ongoing basis, the Company evaluates its estimates,
including those related to revenue recognition, valuation of deferred tax assets
and tax contingency reserves and fair value of the Company’s options and
warrants to purchase common stock. Changes in estimates resulting from
continuing changes in the economic environment will be reflected in the
financial statements in future periods.
Impact
of Recently Issued Accounting Standards
In April
2010, the FASB issued ASU No. 2010-17, “Revenue Recognition —
Milestone Method (Topic 605): Milestone Method of Revenue Recognition”.
This ASU provides guidance on defining a milestone and determining when it may
be appropriate to apply the milestone method of revenue recognition.
Consideration that is contingent on achievement of a milestone in its entirety
may be recognized as revenue in the period in which the milestone is achieved
only if the milestone is judged to meet certain criteria to be considered
substantive. The updated guidance is effective on a prospective basis for
milestones achieved in fiscal years, and interim periods within those years,
beginning on or after June 15, 2010. Entities may elect to adopt the
amendments in the ASU retrospectively for all prior periods. The Company does
not expect the adoption of these provisions to have a material effect on its
consolidated financial statements.
In June
2008, the Emerging Issues Task Force issued EITF Consensus No. 07-05 Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock
for periods beginning after December 15, 2008. The objective of this Consensus
is to provide guidance for determining whether an equity-linked financial
instrument (or embedded feature) is indexed to an entity's own stock and it
applies to any freestanding financial instrument or embedded feature that has
all the characteristics of a derivative in of Statements of Accounting standards
No. 133 Accounting for Derivative Financial Instruments and Hedging Activities,
for purposes of determining whether the financial instrument or embedded feature
qualifies for the first part of the scope exception in paragraph 11(a) of
Statement 133 (the “Paragraph 11(a) Exemption). This Issue also applies to any
freestanding financial instrument that is potentially settled in an entity's own
stock, regardless of whether the instrument has all the characteristics of a
derivative in Statement 133, for purposes of determining whether the instrument
is within the scope of Issue 00-19 Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. The
Consensus requires the application of a two-step approach that required the
Company to (1) evaluate the instrument’s contingent exercise provisions and (2)
evaluate the instrument’s settlement provisions. Based upon applying this
approach to instruments within the scope of the consensus, the Company
determined that certain of its warrants, that were contractually indexed to
643,894 shares of Common Stock and that are classified in stockholders’ equity
on September 30, 2008, will no longer meet the definition of Indexed to a
Company’s Own Stock provided in the Consensus. Accordingly, effective on October
1, 2009, the Company is required to reclassify those warrants, at their fair
value of $0.26 million to liabilities where they will continue to be measured at
their respective fair values with corresponding changes in fair values charged
or credited to interest income or expense.
2. Cost Method
Investments
As of
July 31, 2010, the Company maintained a long-term investment in its previously
wholly-owned subsidiary, Optasia Medical, Ltd. (“Optasia”). In
October 2006, the Company sold the subsidiary to a group of investors which was
led by the Company’s largest investor, Saffron Hill Ventures. Upon
the sale of Optasia, the Company retained 34% ownership in
Optasia. The Company did not have the ability to exert “significant
influence” as defined by ASC 323, “Investments- Equity methods and Joint
Ventures” and accounted for the investment using the cost
method. The investment is reviewed periodically for indicators
of impairment and, if indentified as having such indicator(s), would be subject
to further analysis to determine if the investment is other-than-temporarily
impaired.
On July
31, 2010, Optasia was placed into Administrative Receivorship in the United
Kingdom. Optasia was subsequently sold by the Administrator to
Saffron Hill Ventures for an undisclosed amount. The sale eliminated
any remaining ownership the Company had in Optasia. During the third
quarter of 2010, the Company wrote off its investment in Optasia resulting in
the Company recording a loss on investment of $729,000. The loss was recorded in
other expense on the Statement of Operations.
F-10
3. Fair
Value Measurements
The
Company follows guidance that requires certain fair value disclosures regarding
the Company’s financial and non-financial assets and
liabilities. Fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing an
asset or a liability. The Company does not have any financial assets
required to be recorded at fair value on a recurring basis, nor financial assets
and liabilities required to be recorded at fair value on a non-recurring
basis. The Company does record a liability for its outstanding
warrants at fair value, see note 9 for further discussion.
The
Company measures its investments in non-marketable equity securities at fair
value. Fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or a liability. A three-tier value
hierarchy is established as a basis for considering such assumptions and for
inputs used in the valuation methodologies in measuring fair value:
Level 1 - Observable
inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2 - Include other
inputs that are directly or indirectly observable in the
marketplace.
Level 3 - Unobservable
inputs which are supported by little or no market activity.
The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value.
The
Company’s investment in Optasia and its warrants liability are classified within
Level 3 because they are valued using significant inputs unobservable in the
market. (See note 1 for methodology used to determine fair
value.)
Assets
and liabilities measured at fair value on a nonrecurring basis as of September
30, 2010 were as follows (in thousands):
Description
|
September
30,
2010
|
Quoted Prices in Active
Markets for Identical Assets
(Level
1)
|
Significant Other
Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
||||||||||||
Warrant
liability
|
$ | 2,646 | — | — | $ | 2,646 |
Assets
and liabilities measured at fair value on a nonrecurring basis as of September
30, 2009 were as follows (in thousands):
Description
|
|
September
30,
2009
|
|
Quoted Prices in Active
Markets for Identical Assets
(Level
1)
|
Significant Other
Observable Inputs
(Level
2)
|
|
Significant
Unobservable Inputs
(Level
3)
|
|||||||||
Investment
in Optasia
|
|
$ |
729
|
|
—
|
—
|
|
$ |
729
|
The
following table summarizes the activity of the assets and liabilities recorded
at fair value using significant unobservable inputs for the fiscal year ended
September 30, 2010 (in thousands):
Description
|
|
Balance
at
September
30, 2009
|
|
Realized
loss
|
|
Balance
at
September
30, 2010
|
|
|||
Investment
in Optasia
|
|
$ |
729
|
|
$
|
729
|
|
$ |
0
|
F-11
The
warrants liability which is included within current liabilities, represents the
fair value of the warrants outstanding. The warrants contain
anti-dilution provisions that cause a downward adjustment in the exercise price
if the Company issues shares of its common stock at a price below the trigger
price then in effect. As of September 30, 2010, the trigger price was
$1.00.
Currently,
there is not an observable market for this type of derivative and, as such, we
determined the value of the derivative using a Monte Carlo Simulation, which
takes into consideration the fair market value of the Company’s stock, the
warrant strike price, the life of the warrant, the volatility of our common
stock, the risk-free interest rate, and assumptions about events triggering down
round repricing of the warrants. The underlying security of the
warrants are unregistered common stock, as such, the Company has determined the
value of an unregistered share of common stock has a lower value than a
registered share of common stock for lack of a market for these
shares. The discount for lack of marketability was determined based
on the put value of an option on the common shares underlying the warrants using
a Black-Scholes-Merton model with a six month estimated
life. The six month estimated life was determined to be the expected
time before the underlying security would be registered.
The
valuation methodologies used by the Company as described above may produce a
fair value calculation that may not be indicative of net realizable value or
reflective of future fair values. Furthermore, although management believes its
valuation methods are appropriate and consistent with other market participants,
the use of different methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different fair value measurement
at the reporting date.
The
following table presents a reconciliation for our assets and
liabilities measured and recorded at fair value on a recurring basis, using
significant unobservable inputs (Level 3) for the fiscal year ended September
30, 2009 (in thousands):
|
|
Level 3
|
|
|
Balance
at September 30, 2008
|
$
|
-
|
||
Issuance
of warrants with derivatives
|
||||
Total
gains or losses (realized/unrealized):
|
-
|
|||
Included
in earnings (or changes in net assets)
|
-
|
|||
Included
in other comprehensive income
|
-
|
|||
Transfers
in to Level 3
|
-
|
|||
Balance
at September 30, 2009
|
$
|
-
|
The
following table presents a reconciliation for our assets and
liabilities measured and recorded at fair value on a recurring basis, using
significant unobservable inputs (Level 3) for the fiscal year ended September
30, 2010 (in thousands):
|
|
Level 3
|
|
|
Balance
at September 30, 2009
|
$
|
-
|
||
Issuance
of warrants
|
2,120
|
|||
Total
gains or losses (realized/unrealized):
|
-
|
|||
Included
in earnings (or changes in net assets)
|
495
|
|||
Included
in other comprehensive income
|
-
|
|||
Transfers
in to Level 3
|
263
|
|||
Settlement
|
(232
|
) | ||
Balance
at September 30, 2010
|
$
|
2,646
|
For
assets and liabilities recorded at other than fair value, the carrying value of
cash and cash equivalents, accounts receivable, accounts payable, other current
liabilities and short-term debt approximate their fair value because of the
short-term maturity of these instruments. The fair-value of long-term
debt is estimated using a discounted cash flow method based on the Company’s
current borrowing rates for similar types of financing without a quoted market
price. During this fiscal year, the cost basis was evaluated for
impairment and was determined to be fully impaired. The fair value
and carrying value, before applying discounts, of the Company’s notes payable
are summarized as follows (in thousands), see note 4 for further details on the
Company’s debt:
September
30, 2010
|
September 30, 2009
|
|||||||||||||||
Carrying
value
|
Fair
value
|
Carrying
value
|
Fair
value
|
|||||||||||||
Liabilities
|
||||||||||||||||
Current
portion of notes payable
|
$
|
2,305
|
$ |
2,305
|
$
|
956
|
$
|
948
|
||||||||
Current
portion of notes payable to related party
|
650
|
650
|
-
|
-
|
||||||||||||
Noncurrent
portion of notes payable
|
-
|
-
|
114
|
112
|
||||||||||||
Noncurrent
portion of notes payable to related party
|
-
|
-
|
2,077
|
1,734
|
||||||||||||
$
|
2,955
|
$ |
2,955
|
$
|
3,147
|
$
|
2,794
|
|||||||||
Discount
on notes payable
|
(123
|
) |
(159
|
) | ||||||||||||
2,832
|
2,955
|
2,988
|
2,794
|
4. Notes Payable
Q4
2010 Secured Convertible Loan
On
September 9, 2010, the Company established a secured convertible loan
facility. The facility is for a maximum of $2,600,000, of which
$1,625,000 million of promissory notes were issued by the Company as of
September 30, 2010 to one individual. The debt bears interest at
13.5% per year and originally was to mature on January 31, 2011 or, in the event
that a subsequent financing is consummated, then the maturity date will be the
earliest maturity date of any indebtedness incurred in the subsequent
financing.
The loans
are secured by a first priority security interest in all assets of Image
Metrics. The debt is convertible at the option of the holder into common stock
of the Company at a conversion price equal to $1.00 per share.
In the
event the Company fails to repay the promissory notes in full on or before the
maturity date, the promissory notes’ interest rate will be increased to 18% per
annum. The Company may, at its option, prepay all or any part
of the principal of the promissory notes without payment of any premium or
penalty.
The
Company had recognized interest expense during the fiscal year ended September
30, 2010 of $17,000 related to this loan. As of September 30, 2010,
the Company had $17,000 of accrued interest for this loan. As of
September 30, 2010, the amount outstanding for this loan was
$1,625,000.
Until the
secured convertible loan is paid in full, the Company is required to obtain
written consent of the lender to perform any of the following: issue any secured
debt, make any loans or advances, purchase equity of an individual, firm or
corporation, merge or consolidate with another corporation, sell assets outside
of the normal course of business or for a price below fair market value, enter
into a new line of business, or change state of incorporation.
As of
February 14, 2011, the principal and all accrued interest on theloan remained
outstanding. The Company and the holder of the loan were in
negotiations of extending the monetary size and length of the
loan. The Company expects the loan facility will be increased to
$5.2 million and extending the maturity date to January 31,
2013.
F-12
Q3
2010 Bridge Loan
During
the third quarter of 2010, the Company established a $1,500,000 million credit
facility (“Q3 2010 Bridge Loan”). Between May and July 2010,
the Company issued $1,500,000 million in promissory notes under this
facility. The payment of the promissory notes and the Company’s
obligations thereunder are not secured by any collateral. The
promissory notes bear interest at 10% per annum and mature at the earlier of
February 24, 2011 or such date the Company completes a private placement of
units consisting of one share of the Company’s series A convertible preferred
stock and a detachable warrant to purchase one-half share of its common stock
(an “Offering”); provided that, at any closing of an Offering, not more than 50%
of the closing net proceeds will be repaid to any lender before a minimum of
$2,500,000 in aggregate net proceeds have been raised by the
Company. Upon the Company completing an Offering, the holders of
these notes have the option to convert the principal and accrued interest into
the Offering at the price of $1.00. In the event the Company fails to
repay the promissory notes in full on or before the maturity date, the
promissory notes’ interest rate will be increased to 18% per annum and the
promissory notes will be convertible into common stock of the Company at a
conversion price of $0.50 per share. The Company may, at its
option, prepay all or any part of the principal of the promissory notes without
payment of any premium or penalty. The holders of the notes also
received warrants to purchase 450,000 shares of the Company’s common stock at
$1.50 per share and have expiration dates between May and July
2014. The Company, through the use of the Black-Scholes-Merton option
pricing method, assigned a fair value of $14,000 to these warrants and recorded
a discount against the Q3 2010 Bridge Loan for an equal amount that will be
amortized as interest expense over the period the notes remain
outstanding.
The
warrants contain anti-dilution provisions that cause a downward adjustment in
the exercise price if the Company issues shares of its common stock at a price
below the trigger price then in effect. As of September 30, 2010, the
trigger price was $1.00. These warrants are treated as derivatives and recorded
as warrants liability on the balance sheet. Currently, there is not
an observable market for this type of derivative and, as such, the Company
determined the value of the derivative using a Monte Carlo Simulation, which
takes into consideration the fair market value of the Company’s stock, the
warrant strike price, the life of the warrant, the volatility of our common
stock, and the risk-free interest rate. The underlying security of
the warrants are unregistered common stock, as such, the Company has determined
the value of an unregistered share of common stock has a lower value than a
registered share of common stock for lack of a registered marketability for
these shares. The discount for lack of market ability was determined
based on the put value of an option on the common shares underlying the warrants
using a Black-Scholes-Merton model with a six month estimated
life. The one year estimated life was determined to be the expected
time before the underlying security would be registered.
The
Company, through the use of a Monte Carlo Simulation method, assigned a fair
value of $219,000 to these warrants and recorded a discount against the Q3 2010
Bridge Loan for an equal amount that will be amortized as interest expense over
the period the notes remain outstanding.
During
the 4th quarter
of fiscal year 2010, $450,000 of the promissory notes was converted into equity
as part of the Q3 2010 Private Offering, see note 9 for further
discussion. As of September 30, 2010, the Company had $984,000 in
promissory notes outstanding under this credit facility, including $650,000
issued to Saffron Hill Ventures Guernsey LTD. As of September 30,
2010, the Company had accrued interest related to these notes in the amount of
$32,000 and had recognized interest expense for the fiscal year ended September
30, 2010 of $51,000. As of September 30, 2010, the unamortized
balance of the discount was $77,000.
ICLA
Notes
Between
May 10, 2006 and February 22, 2010, the Company issued an aggregate of $196,000
of convertible notes. The convertible notes accrue interest at 5% per annum,
compounded annually. We are currently in default of these convertible
notes. Upon completion of the share exchange transaction on March 10,
2010, these convertible notes entered a default status as a result of the
Company having a change of ownership. As of September 30, 2010, the
principal and accrued interest owed on these loans was
$224,000.
Saffron
Hill Ventures II 2009 Loan
On April
27, 2009, Image Metrics LTD signed a loan agreement with its largest
shareholder, Saffron Hill Ventures (“SHV”) in the amount of $1,200,000. The loan
bore interest at 6.0% plus the Bank of England base rate. The
effective interest rate as of March 10, 2010 was 6.5%. The loan’s
principal and all accrued interest were converted into equity as part of the
Company’s private offering that closed on March 10, 2010. (See note 9
for further discussion.)
Private
Individual Loan
On March
13, 2009, Image Metrics LTD signed a loan agreement with a private individual.
The loan facility was for a maximum of $500,000 and bore interest at 5.0% plus
London Interbank Offered Rate (LIBOR), the effective interest rate as of March
10, 2010 was 5.23%. All principal and accrued interest was converted into equity
as part of the Company’s private offering that closed on March 10, 2010, see
note 9 for further discussion.
Saffron
Hill Ventures Loans
Between
July 2005 and April 2008, Image Metrics LTD signed three loan agreements with
Saffron Hill Ventures Limited Partnership (“SHVLP”). The loan facilities’
available amounts were £450,000, £1,000,000 and £1,500,000, respectively, with
the proceeds to be used for general working capital. The £450,000
loan bore interest at LIBOR plus 2%, and the other loans bore interest at LIBOR
plus 8%.
F-13
The loan
for £450,000 had beneficial contingent conversion rights, whereby the loan could
be converted into equity of Image Metrics LTD at a discount. The
contingency was based upon the Company completing a successful equity offering
which raises at least £100,000. The conversion price would have been
equal to 80% of the share price in the offering. Upon receiving
proceeds from the loan, the Company recorded a discount on the note equal to the
intrinsic value of the beneficial conversion rights in the amount of $222,000.
In accordance with ASC 470-20 “Debt with Conversion and Other Options”, the
Company did not recognize this discount into earnings as the contingency had not
been removed.
On
October 27, 2008, Image Metrics LTD converted the loans from SHVLP into series B
preferred ordinary shares of Image Metrics LTD’s stock, which were converted to
ordinary shares and then exchanged for common stock as part of the exchange
transaction (see notes 1 and 8 for further discussion).
ETV
Capital 2008 Loan
On March
3, 2008, Image Metrics LTD signed a loan agreement with ETV Capital, Inc.
(“ETV”). The loan facility was for a maximum of $1,000,000 with the proceeds to
be used for general working capital. The loan is to be paid in equal
installments commencing July 2008 and continuing through December 31, 2010 at a
fixed interest rate of 11.43%. The loans are secured by a first
priority security interest in all assets of Image Metrics LTD.
As part
of the loan agreement, ETV received warrants to purchase shares of stock of
Image Metrics LTD. The warrants would have allowed ETV to purchase up
to £140,000 of Image Metrics LTD’s shares at an exercise price equal to the
lower of £1.65 or the price offered to investors in the next equity offering
made by Image Metrics LTD and are treated as derivatives and recorded as
warrants liability on the balance sheet. Currently, there is not an
observable market for this type of derivative and, as such, the Company
determined the value of the derivative using a Monte Carlo Simulation, which
takes into consideration the fair market value of the Company’s stock, the
warrant strike price, the life of the warrant, the volatility of our common
stock, the risk-free interest rate, and assumptions about events triggering down
round repricing of the warrants. Prior to March 15, 2010, the
Company’s common stock was not traded on any stock exchange, as such, the
Company, through the use of a third party valuation firm, determined the fair
value of its common stock as of October 1, 2009 and December 31,
2009. These warrants were exchanged on March 10, 2010 for new
warrants to purchase shares of Common Stock in the Company (see note
9 for further discussion).
Upon
receipt of the loan proceeds, the Company allocated the proceeds based on the
fair values of the warrants and the debt. The Company, through the
use of a Monte Carlo Simulation method, assigned a fair value of $102,000 to
these warrants and recorded a discount against the ETV Capital 2008 Loan Q3 2010
Bridge Loan for an equal amount that will be amortized as interest expense over
the period the notes remain outstanding. The unamortized
balance of the discount was $27,000 and $67,000 as of September 30, 2010 and
2009, respectively. The Company recognized $40,000 of interest
expense for the fiscal years ended September 30, 2010 and 2009, from the
amortization of this discount.. The Company recognized $40,000 and $85,000 of
interest expense for fiscal year ended September 30, 2010 and 2009,
respectively, for the contractual interest obligation on the note.
ETV,
also, received options to purchase up to $200,000 of shares of equity of Image
Metrics LTD in the Company’s first offering after the loan was established.
These options expired unexercised in December 2008. The Company determined the
value of these options through the use of the Black-Scholes- Merton option
pricing model. The value assigned to these options was $214,000 and a
corresponding notes payable discount in an equal amount was recorded at the time
of issuance. The amortization of the discount is combined with warrants
discussed above.
Royal
Bank of Scotland Loan
In
January 2002, Image Metrics LTD obtained a bank loan for £250,000. The loan bore
interest at 2.5% per annum. The loan was guaranteed under the Small
Firms Loans Guarantee Scheme in the United Kingdom. The loan was paid off in
February 2010.
5. Property
and Equipment, Net
Property
and equipment, net as of September 30, 2010 and 2009 consisted of the following
(in thousands):
2010
|
2009
|
|||||||
Computers
& computer equipment
|
$
|
783
|
$
|
676
|
||||
Software
|
43
|
-
|
||||||
Furniture
& fixtures
|
175
|
167
|
||||||
Leasehold
improvements
|
149
|
149
|
||||||
Office
equipment
|
93
|
93
|
||||||
1,243
|
1,085
|
|||||||
Less
accumulated depreciation
|
(1,104
|
)
|
(908
|
)
|
||||
Property
and equipment, net
|
$
|
139
|
$
|
177
|
F-14
6. Accrued
Expense(s) and Other Current Liabilities
Accrued
expenses and other current liabilities are summarized as follows (in
thousands):
2010
|
2009
|
|||||||
Accrued
payroll related costs
|
$
|
417
|
$
|
921
|
||||
Accrued
professional and legal costs
|
25
|
124
|
||||||
Accrued
directors compensation
|
20
|
22
|
||||||
Accrued
interest
|
61
|
-
|
||||||
Deferred
rent
|
90
|
70
|
||||||
Other
|
43
|
82
|
||||||
$
|
656
|
$
|
1,219
|
7. Notes Payable
The
Company’s notes payable and scheduled maturities are summarized as follows (in
thousands):
2010
|
2009
|
|||||||
Image
Metrics Promissory Notes 2011
|
$
|
-
|
$
|
853
|
||||
Saffron
Hill Ventures II 2009 loan
|
-
|
1,225
|
||||||
Private
Individual Loan
|
-
|
500
|
||||||
ETV
Capital Loan
|
150
|
536
|
||||||
ICLA
Notes
|
196
|
—
|
||||||
Q4
2010 Secured Convertible Notes
|
1,625
|
—
|
||||||
Q3
Bridge Loan (nonrelated party)
|
334
|
—
|
||||||
Q3
Bridge Loan (related party)
|
650
|
—
|
||||||
Royal
Bank of Scotland loan
|
-
|
33
|
||||||
Total
notes payable
|
2,955
|
3,147
|
||||||
Discount
on notes payable
|
(123
|
)
|
(159
|
)
|
||||
Less
portion due within one year
|
(2,832
|
)
|
(830
|
)
|
||||
$
|
-
|
$
|
2,158
|
8. Income
Taxes
Deferred
income taxes reflect the tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. A valuation allowance is established when uncertainty exists as to
whether all or a portion of the net deferred tax assets will be realized. The
Company has a total net deferred tax asset before valuation allowance of
$12,210,000 and $9,431,000 as of September 30, 2010 and 2009,
respectively. This is mainly in respect of tax losses which are
available to carry forward to offset against future taxable profits. These
losses will only be available for offset when the company makes taxable
profits. As the timing of these profits is not certain it has been
assumed the losses will not be recoverable in the foreseeable
future.
F-15
Components
of the Company’s loss before tax as of September 30, 2010 and 2009 are as
follows (in thousands):
2010
|
2009
|
|||||||
United
Kingdom
|
$ | (3,431 | ) | $ | (1,421 | ) | ||
United
States
|
(6,223 | ) | (5,358 | ) | ||||
$ | (9,654 | ) | $ | (6,779 | ) |
Components
of the Company’s consolidated net deferred tax asset as of September 30, 2010
and 2009 are as follows (in thousands):
2010
|
2009
|
|||||||
United
Kingdom
|
||||||||
Tax
assets
|
$ | 5,093 | $ | 4,081 | ||||
Tax
liabilities
|
- | - | ||||||
United
States
|
||||||||
Tax
assets
|
6,942 | 5,387 | ||||||
Tax
liabilities
|
(10 | ) | (37 | ) | ||||
Valuation
allowance
|
(12,035 | ) | (9,431 | ) | ||||
$ | - | $ | - |
Components
of the net deferred tax asset available to offset taxable profits in the United
Kingdom as of September 30, 2010 and 2009 are as follows (in
thousands):
2010
|
2009
|
|||||||
Deferred
tax assets
|
||||||||
Net
operating losses carryforwards
|
$ | 3,675 | $ | 2,675 | ||||
Revenue
recognition
|
993 | 993 | ||||||
Share
based payments expense
|
355 | 338 | ||||||
Fixed
assets
|
44 | 46 | ||||||
Other
items
|
26 | 29 | ||||||
Gross
deferred tax assets
|
5,093 | 4,081 | ||||||
Deferred
tax liabilities
|
||||||||
Gross
deferred tax liabilities
|
- | - | ||||||
Valuation
allowance
|
(5,093 | ) | (4,081 | ) | ||||
Net
deferred tax assets
|
$ | - | $ | - |
Components
of the net deferred tax asset available to offset taxable profits in the US as
of September 30, 2010 and 2009 are as follows (in thousands):
2010
|
2009
|
|||||||
Deferred
tax assets
|
||||||||
Net
operating losses carryforwards
|
$ | 6,572 | $ | 5,186 | ||||
Revenue
|
204 | 73 | ||||||
Stock
based compensation expense
|
166 | 128 | ||||||
Gross
deferred tax assets
|
6,942 | 5,387 | ||||||
Deferred
tax liabilities
|
||||||||
Fixed
assets
|
$ | (10 | ) | $ | (37 | ) | ||
Gross
deferred tax liabilities
|
(10 | ) | (37 | ) | ||||
Valuation
allowance
|
(6,932 | ) | (5,350 | ) | ||||
Net
deferred tax assets
|
$ | - | $ | - |
F-16
Actual
income tax expense differs from that obtained by applying the statutory rate
applicable to the parent company to income before income taxes as follows (in
thousands):
2010
|
2009
|
|||||||
Income
tax benefit at the United States statutory income tax rate of 35% for
fiscal
year 2010
and at
the United Kingdom statutory
income tax rate of 28% for
fiscal year 2009
|
$ | 2,615 | $ | 1,898 | ||||
Research
and development expenses
|
- | 61 | ||||||
Nondeductible
expenses and other items
|
43 | (59 | ) | |||||
Rate
change impact
|
- | - | ||||||
Incremental
tax benefit from foreign
operations
|
350 | 370 | ||||||
Change
in valuation allowance
|
(3,008 | ) | (2,270 | ) | ||||
$ | - | $ | - | |||||
The
income tax benefit for the fiscal years ended September 30, 2010 and 2009
consisted of the following:
2010
|
2009
|
|||||||
United
Kingdom
|
||||||||
Current
(investment credit)
|
$ | - | $ | 5 | ||||
Deferred
|
1,022 | 414 | ||||||
United
States
|
||||||||
Current
|
- | - | ||||||
Deferred
|
1,986 | 1,851 | ||||||
Valuation
allowance
|
(3,008 | ) | (2,270 | ) | ||||
$ | - | $ | - |
As
required by ASC 740-10-25 “Income Taxes”, the Company has evaluated the positive
and negative evidence bearing upon the realizability of its deferred tax assets.
The Company has concluded, in accordance with the applicable accounting
standards, that it is more likely than not that the Company may not realize the
benefit of its deferred tax assets in the foreseeable future. Accordingly, the
net deferred tax assets have been fully reserved. The Company evaluates the
positive and negative evidence on an annual basis.
At
September 30, 2010, the Company had US net operating loss carryforward of
approximately $21,911,000 available to reduce future taxable
income, which will expire at various dates beginning in 2026. At September 30,
2010, the Company had United Kingdom net operating loss carryfoward of
approximately $10,123,000 available to reduce future taxable
income in the same trade. The net operating losses in the United Kingdom
currently do not have any expiration dates. The Company has evaluated the impact
of ASC 740-10-25 on its financial statements. The evaluation of a tax position
in accordance with ASC 740-10-25 is a two-step process. The first step is
recognition: The Company determines whether it is more-likely-than-not that a
tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position. In evaluating whether a tax position has met the more-likely-than-not
recognition threshold, the Company presumes that the position will be examined
by the appropriate taxing authority that would have full knowledge of all
relevant information. The second step is measurement: A tax position that meets
the more-likely-than-not recognition threshold is measured to determine the
amount of benefit to recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than 50 percent
likely of being realized upon ultimate settlement. Tax positions that previously
failed to meet the more-likely-than-not recognition threshold will be recognized
in the first subsequent financial reporting period in which that threshold is
met. Previously recognized tax positions that no longer meet the
more-likely-than-not recognition threshold would be derecognized in the first
subsequent financial reporting period in which that threshold is no longer
met.
F-17
The
Company believes that its income tax filing positions and deductions will be
sustained on audit and does not anticipate any adjustments that will result in a
material change to its financial position. Therefore, no reserves for uncertain
income tax positions have been recorded pursuant to ASC 740-10-25. The Company
did not record a cumulative effect adjustment related to the adoption of ASC
740-10-25. Tax years ended September 30, 2006 through 2010 remain subject to
examination by the major tax jurisdictions in the US where the Company is
subject to tax. Tax years ended September 30, 2009 and 2010 remain subject to
examination in the United Kingdom were the Company is subject to tax. The
Company did not incur or pay any interest or penalties related to income taxes
during fiscal years 2010 and 2009.
9. Shareholders’
Equity
Classes
of Shares
The
Company’s Board of Directors has authorized two classes of shares, common stock
and preferred stock. The rights of the holders of the two classes of
shares are identical, except preferred stock receives priority if the Company
was to have a liquidation or reduction of capital, and preferred stock
shareholders are not entitled to receive dividends. The only currently
designated preferred stock is the Series A Convertible Preferred
Stock. Series A Convertible Preferred Stock may be converted at
any time at the option of the stockholder and automatically convert upon sale or
transfer of common stock at a ratio of 1:1.
Saffron
Hill Venture Loans Conversion
On
October 27, 2008, Image Metrics LTD converted the Saffron Hill Venture Loans
into Series B Preferred Ordinary shares of its stock, which were converted to
ordinary shares and then exchanged for common stock as part of the exchange
transaction, see note 1 for further discussion. The outstanding principal and
accrued interest on this date was £2,902,000 and was converted into 1,759,390
Series B Preferred stock at a conversion price of £1.65 per
share. The exchange did not result in a gain or loss (see note 4
for further discussion).
December
2008 Private Equity Offering
In
December 2008, Image Metrics LTD completed a private equity fund raising round
by selling 599,393 shares of its Series B Preferred Ordinary shares at £1.65 per
share for a total raise of £989,000. The round was fully subscribed
by two of Image Metrics LTD’s existing investors, one of which was a member of
Image Metrics LTD’s Board of Directors. The Series B Preferred
Ordinary shares were converted to ordinary shares and then exchanged for common
stock as part of the exchange transaction (see note 1 for further
discussion).
March
2010 Private Equity Offering
On March
10, 2010, the Company closed the first round of a private equity
offering. The Company sold 8,394,098 units, each consisting of one
share of the Company’s Series A Convertible Preferred Stock and a detachable,
transferable warrant to purchase common stock at an exercise price of $1.50 per
share, for $8.0 million gross proceeds. The $8.0 million included the
conversion of $5.41 million of its notes payable. The proceeds from the first
close were reduced by $0.46 million for transaction costs, which primarily
consist of legal fees and broker commissions and $0.47 million for debt
repayments, yielding net proceeds of $1.66 million. Each share of
Series A Convertible Preferred Stock is initially convertible into one share of
common stock at any time. Each warrant entitles the holder to purchase
one-half share of common stock at an exercise price of $1.50 per share through
March 26, 2014, subject to redemption provisions based on the trading price and
trading volume of our common stock. The value assigned to the
warrants and the Series A Convertible Preferred Stock was based on an enterprise
valuation performed by the Company as described under “Warrant liability” in
this footnote.
F-18
Simultaneously
with the close of the private equity offering, Image Metrics LTD exchanged all
of its outstanding equity for 11,851,637 shares of the Company. As a
result, Image Metrics LTD became a wholly-owned subsidiary of the
Company.
In
connection with the exchange transaction, Saffron Hill Ventures and other
potential investors provided Image Metrics LTD with bridge
financing. The bridge financing provided working capital while Image
Metrics LTD worked to complete the private equity offering. On
January 10, 2010, Image Metrics LTD established a credit instrument in the
amount of $2,000,000 in 10% Unsecured Convertible Notes.
The
interest paid on the 10% Unsecured Convertible Notes was 4% of the total
principal of $2.0 million. The note holders also received warrants to
purchase 663,000 shares of common stock of the Company, 210,600 warrants of
which were issued to Saffron Hill Ventures. Each warrant
provides the holder the right to purchase one share of the Company’s common
stock at $1.50 per share. The warrants contain
anti-dilution provisions which cause a downward adjustment in the exercise price
if the Company issues shares of its common stock at a price below the trigger
price then in effect. As of September 30, 2010, the trigger price was
equal to $1. The warrants were recorded as a warrant liability on the
balance sheet.
Currently,
there is not an observable market for this type of derivative and, as such, we
determined the value of the derivative using a Monte Carlo Simulation, which
takes into consideration the fair market value of the Company’s stock, the
warrant strike price, the life of the warrant, the volatility of our common
stock, the risk-free interest rate, and the assumption about events triggering
down round pricing of the warrants. The underlying security of the
warrants are unregistered common stock, as such, the Company has determined the
value of an unregistered share of common stock has a lower value than a
registered share of common stock for lack of a market for these
shares. The discount for lack of marketability was determined based
on the put value of an option on the common stock underlying the warrants
using a Black-Scholes-Merton model with a six month estimated
life. The one year estimated life was determined to be the expected
time before the underlying security would be registered. The warrant
liability fair value was determined at time of each issuance and is revalued at
the end of each reporting period to fair value using a Monte Carlo
Simulation with any changes being recorded to the interest expense in the
period the change occurs. The Company recorded interest expense of $0.20
million during the fiscal year ended September 30, 2010 associated with these
warrants. $1.6 million of the 10% Unsecured Convertible Notes were
converted into equity as part of the Company’s private equity offering that
closed on March 10, 2010. The remaining $0.4 million of the notes
were repaid with the proceeds from the private offering.
On March
26, 2010, the Company closed the second round of its private equity
offering. The Company sold 925,000 units, each consisting of one
share of the Company’s Series A Convertible Preferred Stock and a detachable,
transferable warrant to purchase common stock, for $0.93 million in gross
proceeds. The proceeds from the second close were reduced by $0.07
million for broker commission and expenses yielding net proceeds of $0.86
million. Each share of Series A Convertible Preferred Stock is
initially convertible into one share of common stock at any time. Each
warrant entitles the holder to purchase one-half share of common stock at an
exercise price of $1.50 per share through March 26, 2014, subject to redemption
provisions based on the trading price and trading volume of our common stock.
The value assigned to the warrants and the Series A Convertible Preferred
Stock was determined using a Monte Carlo Simulation. The fair value
of the common stock into which the convertible preferred stock was convertible
into on the date of issuance exceeded the proceeds allocated to the redeemable
convertible preferred stock by $0.6 million, resulting in a beneficial
conversion feature that was recognized as an increase to additional paid-in
capital and as a deemed dividend to the convertible preferred
stockholders.
Q4
2010 Private Equity Offering
On July
26, August 31 and September 20, 2010, the Company closed three rounds of a
private equity offering. The Company sold 959,438 units, each
consisting of one share of the Company’s Series A Convertible Preferred Stock
and a detachable, transferable warrant to purchase ½ a share of the
Company’s common stock at an exercise price of $1.50 per share, for $950,000 in
gross proceeds. The $950,000 in gross proceeds included the
conversion of $450,000 promissory notes from the Q3 2010 Bridge Loan. The
proceeds from this offering were reduced by $142,000 for transaction costs,
which primarily consisted of legal fees and broker commissions, yielding net
proceeds of $358,000.
Each
share of Series A Convertible Preferred Stock is initially convertible into one
share of common stock at any time. Each warrant entitles the holder to
purchase one-half share of common stock at an exercise price of $1.50 per share
through March 26, 2014, subject to redemption provisions based on the trading
price and trading volume of our common stock. The value assigned to
the warrants and the Series A Convertible Preferred Stock was determined using a
Monte Carlo Simulation. The fair value of the common stock into which
the convertible preferred stock was convertible into on the date of issuance
exceeded the proceeds allocated to the redeemable convertible preferred stock by
$0.6 million, resulting in a beneficial conversion feature that was recognized
as an increase to additional paid-in capital and as a deemed dividend to the
convertible preferred stock.
F-19
Warrant
Liability
During
the fiscal year ended September 30, 2010, in connection with the issuance of the
Company’s bridge loans and private placements, the Company issued warrants to
purchase 8,301,239 shares of common stock at an exercise price of $1.50 per
share, 225,000 shares of common stock at an exercise price of $1.00 and 465,700
shares of common stock at an exercise price of $1.20 per share. The warrants are
exercisable at the option of the holders at any time through their expiration
dates, which occur between March and September 2014. The warrants
were recorded as a warrant liability on the balance sheet. The warrant liability
fair value was determined at time of each issuance. The fair value
was determined using the Black-Scholes-Merton option pricing model. The warrant
liability is revalued at the end of each reporting period to fair value using
the Black-Scholes-Merton option pricing model with any changes being recorded to
the interest expense in the period the change occurs.
The
warrants associated with the bridge loans and private placements contain
anti-dilution provisions that cause a downward adjustment in the exercise price
if the Company issues shares of its common stock at a price below the trigger
price then in effect. As of September 30, 2010, the trigger price was
equal to $1. The warrants were recorded as a warrant liability on the
balance sheet.
Currently,
there is not an observable market for this type of derivative and, as such, we
determined the value of the derivative using a Monte Carlo Simulation, which
takes into consideration the fair market value of the Company’s stock, the
warrant strike price, the life of the warrant, the volatility of our common
stock, the risk-free interest rate, and the assumptions about events triggering
down round repricing of the warrants. The underlying security of the
warrants are unregistered common stock, as such, the Company has determined the
value of an unregistered share of common stock has a lower value than a
registered share of common stock for lack of a market for these
shares. The discount for lack of market was determined based on the
put value of an option on the common stock underlying the warrants using
a Black-Scholes-Merton model with a six month estimated
life. The one year estimated life was determined to be the expected
time before the underlying security would be registered. The warrant
liability fair value was determined at time of each issuance and is revalued at
the end of each reporting period to fair value using the Monte Carlo simulation
with any changes being recorded to the interest expense in the period the change
occurs.
The fair
value of the warrants was estimated to be $2,646,000 million as of September 30,
2010. The following assumptions were used to estimate the fair value
of the warrants as of September 30, 2010:
September
30, 2010
|
||||
Common
stock fair value
|
$ | 1.07 | (1) | |
Volatility
|
53 | % | ||
Contractual
term (years)
|
3.44 | |||
Risk-free
rate
|
0.64 | % | ||
Expected
dividend yield
|
0.0 | % |
|
(1)
|
The
common stock underlying the warrant is not registered with U.S. Securities
and Exchange Commission; therefore, the underlying security is not
tradeable on the OTC Bulletin Board. The Company applied a discount
for lack of market to the market value of its common stock to determine
the fair value of the Company’s common stock. The discount for lack of
market was determined based on an analysis completed by management based
upon the value of a put option on the common stock using the
Black-Scholes-Merton model.
|
During
the fiscal year ended September 30, 2010, the Company recorded $1.20
million of interest expense for these
warrants.
SEC
Registration Rights
Pursuant
to a subscription agreement with the selling stockholders relating to our March
and July - September 2010 private placements and the Q4 2010 Secured Convertible
Loan, the Company committed to meeting certain SEC registration requirements,
including the requirement to file a Form S-1. If the Company fails to meet
any of these obligations, the Company could be required to pay damages of
$178,000 (2% of the aggregate offering price) per month up to 12% until the
default is cured to the investors who subscribed to the March private
placement. These damages can be waived if the Company's Board of Directors
determines the Company's management has exerted its best efforts to meet the
requirements.
In May
2010, the Company’s Board of Directors granted the Company an indefinite waiver
of its obligations to meet its requirement to file a Form S-1. In
addition, in August 2010, the Board of Directors granted the Company a waiver of
its obligation to meets its requirement to file Form 8-Ks and a Form 10-Q for
the period ended September 30, 2010. As a result of these waivers,
the Company is not subject to pay its investors any damages; therefore, the
Company has not recorded any liabilities for such damages.
On
November 1, 2010, the Company filed a Form S-1. The Form S-1 was a
registration for the sale of up to 21,397,955 shares of our common stock by the
selling stockholders listed in the Form S-1. These shares consist of
10,330,538 shares of common stock issuable upon conversion of our series A
convertible preferred stock, 8,767,417 shares of common stock issuable upon
exercise of our warrants and 2,300,000 shares of common stock issuable upon
conversion of all of the principal and accrued interest of our convertible
promissory notes. The distribution of the shares by the selling stockholders is
not subject to any underwriting agreement. We will receive none of the
proceeds from the sale of the shares by the selling stockholders, except upon
exercise of the warrants. We will bear all expenses of registration
incurred in connection with this offering, but all selling and other expenses
incurred by the selling stockholders will be borne by them. As of
February 14, 2011, the Form S-1 was under review by the US Securities and
Exchange Committee.
F-20
ETV
Equity Rights
As part
of the loan agreements with ETV, the Company granted ETV rights to purchase
shares of equity of Image Metrics LTD. On March 10, 2010, ETV
exchanged these warrants and options to purchase equity shares of Image Metrics
LTD for warrants to purchase up to 224,522 preferred shares of the Company at an
exercise price of $1.50. As of September 30, 2010, all the warrants
were outstanding. The Company compared the fair value of the ETV options and
warrants prior to exchange and subsequent to the exchange and concluded the
value did not increase; therefore, the Company did not record any additional
interest expense for this exchange. The remaining discount associated
with these warrants will continue to amortize over the remaining period of the
loan. (See note 4 for additional discussion.)
Stock
Based Compensation
The
Company has a share option plan wherein options to purchase shares of common
stock may be granted to directors, employees and consultants of the Company.
Options generally become exercisable over a period between zero and three years
and generally expire between five and ten years after the date of grant. If an
employee leaves the Company, unvested shares are forfeited immediately. Vested
shares are forfeited if not exercised within forty (40) days of
separation.
The board
of directors may amend or modify the stock incentive plan at any time, with
stockholder approval. All grants and awards are settled in equity and settled
through the issuance of shares that have been authorized and were previously
unissued.
The
Company’s share option plan can issue up to 5,562,587 shares. As of September
30, 2010, the company had 1,743,747 shares available to be granted.
Accounting
for Stock Based Compensation
Effective
October 1, 2006, the Company adopted the provisions of ASC 718,
“Compensation - Stock Compensation”, which provides guidance on valuation
methods available and other matter. ASC 718 requires all stock-based
compensation be recognized as an expense in the financial statements and that
such cost be measured based on the fair value of the award issued on the date of
grant. ASC 718 also requires the Company to estimate forfeitures in
calculating the expense relating to stock-based compensation as opposed to
recognizing forfeitures as an expense reduction as they occur. The
Company elected to apply ASC 718 on a prospective basis.
The
Company estimates the fair value of each option on the date of grant using the
Black-Scholes-Merton option pricing model based on the assumptions described
below. The expected life of the option is calculated using the
simplified method set out in ASC 718-10-S99-1 FN76. The simplified method
defines the life as the average of the contractual term of the options and the
weighted-average vesting period for all option tranches. The Company
uses the simplified method as it does not have sufficient exercise data from its
own experience to determine a reasonable estimate. The expected volatility of
stock awards is based upon the historical volatility of similar entities whose
share prices are publicly available. The risk-free interest rate is
based on the yield curve of a zero coupon bond issued by the United States
government on the date the award is granted with a maturity equal to the
expected term of the award. The dividend yield reflects that the
Company has not historically paid regular cash dividends from
inception.
The
Company issued 4,121,948 grants to employees or non-employee directors during
the fiscal year ended September 30, 2010 and did not issue any grants to
employees or non-directors during the fiscal year ended September 30,
2009.
The
weighted average assumptions used in the Black-Scholes-Merton option pricing
model to calculate the fair values of the options accounted for under ASC 718
were as follows:
F-21
September
30,
|
||||||||
2010
|
2009
|
|||||||
Expected
term (in years)
|
5.82
|
5.69
|
||||||
Expected
volatility
|
50
|
% |
59
|
% | ||||
Risk-free
rate
|
2.39
|
% |
4.86
|
% | ||||
Dividend
rate
|
0
|
0
|
Under the
stock plan, the Company has assumed and issued share options to non-employees
excluding directors. The total options outstanding to non-employee non-directors
were 300,985 and 83,317 as of September 30, 2010 and 2009,
respectively.
Options
issued to consultants are expensed in accordance with ASC 505. Under
this guidance, the fair value of the equity instruments is re-measured each
period until the instruments vest. The incremental change is recorded as an
expense in the period in which the change occurred.
On May 1,
2009, the Company extended the term of a fully vested option granted to a
departing employee. At the time of the employment status change, the
employee’s outstanding option was exchanged for a new option to purchase 83,317
shares of the Company’s stock. The option was immediately exercisable
at an exercise price of $0.67 as there was no longer a required service
period. The Company recorded $25,000 of additional stock compensation
expense, which represented the incremental fair value of the new option compared
to the exchanged option.
On March
10, 2010, the Company exchanged 191,020 held by two individuals, who previously
were directors of Image Metrics Limited, for new options. The new
options had a life of 18 months, which was 17 months longer than the exchanged
options. The exercise price and number of options remained consistent
with the exchanged options. The options were immediately exercisable,
24,330 had an exercise price of $0.12 per share and 166,690 had an exercise
price of $1.01 per share. The Company recorded additional
compensation of $33,000 for the incremental change in value of the new options
compared to the exchanged options.
The
following table summarizes the stock option activity under the plan for the
fiscal years ended September30, 2010 and 2009 (monetary values presented in
$):
Share
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
(years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Outstanding
at September 30, 2008
|
638,354
|
0.81
|
5.83
|
554,661
|
||||||||||||
Granted
|
83,317
|
1.01
|
9.58
|
|||||||||||||
363,389
|
0.54
|
|||||||||||||||
Expired
|
-
|
-
|
-
|
|||||||||||||
Forfeited
|
-
|
-
|
-
|
|||||||||||||
Exercised
|
-
|
-
|
-
|
|||||||||||||
Outstanding
at September 30, 2009
|
358,282
|
1.07
|
6.02
|
2,187
|
||||||||||||
Granted
|
4,621,948
|
0.53
|
6.47
|
|||||||||||||
Expired
|
-
|
-
|
-
|
|||||||||||||
Forfeited
|
(1,143,750
|
)
|
1.00
|
|||||||||||||
Exercised
|
(17,640
|
)
|
0.12
|
4,857
|
||||||||||||
Outstanding
at the end of the year
|
3,818,840
|
0.44
|
8.38
|
2,920,419
|
||||||||||||
Vested
and expected to vest at the end of the year
|
3,612,630
|
0.43
|
7.16
|
2,920,419
|
||||||||||||
Exercisable
at the end of the year
|
3,167,384
|
0.30
|
8.15
|
2,920,419
|
F-22
The
following table summarizes information about stock options outstanding at
September 30, 2010.
Options
Outstanding
|
Weighted
Average
Remaining
Contractual
Term
(years)
|
Weighted
Average
Exercise
Price
|
Options
exercisable
|
Weighted
Average
Exercise
price
|
||||||||||||||||
Range of exercise prices
|
||||||||||||||||||||
$0.04-$0.12
|
2,473,368
|
9.09
|
0.12
|
2,473,368
|
0.12
|
|||||||||||||||
$1.00-$1.01
|
1,311,185
|
7.12
|
1.00
|
659,728
|
1.00
|
|||||||||||||||
$2.02-$2.13
|
34,287
|
4.45
|
2.07
|
34,287
|
2.07
|
The
Company records stock-based compensation expense over the requisite service
period which is equal to the vesting period. For the fiscal years
ended September 30, 2010 and 2009, stock-based compensation expense recognized
in the amount of $421,000 and $96,000, respectively, all of which was included
in selling, general and administrative. For the period ended September 30, 2010
and 2009, the total fair value of shares vested was $415,000 and $96,000,
respectively. The weighted average grant date fair value of options
granted during the fiscal year ended September 30, 2010 was
$0.29.
As of
September 30, 2010, the unrecognized compensation cost related to nonvested
stock options was $900,000. The weighted average period over which
the unrecognized compensation as of September 30, 2010 will be recognized is 2.4
years. As of September 30, 2010 and 2009, the Company had 3,818,840
and 358,282 options outstanding, respectively.
During
the fiscal years ended September 30, 2010 and 2009, the Company received $2,000
and $0, respectively, from the exercise of stock options.
10. Comprehensive Loss
The table
below reconciles the Company’s net loss with its comprehensive loss, (in
thousands):
September
30,
|
||||||||
2010
|
2009
|
|||||||
Net
loss
|
$
|
(9,654
|
) |
$
|
(6,779
|
) | ||
Foreign
currency translation adjustments
|
9
|
(118
|
) | |||||
Comprehensive
loss
|
$
|
(9,645
|
) |
$
|
(6,897
|
) |
11. Net Loss per Common
Stock
Basic net
loss per common stock excludes dilution for potentially dilutive securities and
is computed by dividing loss applicable to common stock shareholders by the
weighted average number of common shares outstanding during the period. Diluted
net loss per common stock reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Potentially dilutive securities are excluded from the
computation of diluted net loss per share for all of the periods presented in
the accompanying statements of operations because the reported net loss in each
of these periods results in their inclusion being anti-dilutive. Common stock
equivalent shares consist of the shares issuable upon conversion of Series A
Convertible Preferred Stock and the exercise of stock options and warrants using
the treasury stock method. For the fiscal year ended September 30, 2010, shares
of potential common stock of approximately 5.4 million were not included in the
diluted calculation because the effect would be anti-dilutive. There
were not any shares of potential common stock that would have been considered
anti-dilutive during the twelve months ended September 30,
2009.
F-23
12. Commitments and
Contingencies
Operating
Leases
The
Company has entered into non-cancellable operating leases for office
space. Rent expense for operating leases was $571,000 and $561,000
for the fiscal years ended September 30, 2010 and 2009,
respectively. The Company is committed under operating leases with
terminations through November 2012 and has the option to renew for five years.
The Company received one year of free rent under its UK office’s operating
lease, upon inception of the lease. This rent free period is spread over
the minimum lease period. All leases under the Company are expensed on a
straight-line basis. The total future minimum lease rentals are scheduled to be
paid as follows (in thousands):
Fiscal
year ending
|
||||
2011
|
142
|
|||
2012
|
82
|
|||
Thereafter
|
-
|
|||
Total
future minimum lease payments
|
$
|
224
|
Letter
of Credit
In
connection with one of its office space leases, the Company has fulfilled its
security deposit requirement with an irrevocable standby letter of
credit. The value of the letter of credit was $60,000 and $100,000 at
September 30, 2010 and 2009, respectively. Under the terms of the
lease, the security deposit requirement is reduced by $20,000 on the anniversary
date of each lease year through the lease end date. There is an
annual fee of 0.25% payable on the available balance of the letter of
credit. The letter of credit expires on March 31, 2011. The letter of
credit was undrawn at March 31, 2010 and 2009. Under the terms of
this arrangement, the Company is required to maintain on deposit with the bank a
compensating balance in the form of a certificate of deposit equal to the amount
of the standby letter of credit. At September 30, 2010 and September
30, 2009, the certificate of deposit is included in restricted
cash.
13. Business Segment
Information
The
Company primarily operates in two geographic business segments: the North
American region, which includes the United States and Canada, and Europe.
Revenue is assigned based on the region where the services are performed.
Expenses incurred are assigned to each respective region based on which region
incurred the expense. The following table summarizes revenue recognized by
region (in thousands):
September
30,
|
||||||||
2010
|
2009
|
|||||||
Europe
|
$
|
4,597
|
$
|
105
|
||||
North
America
|
1,348
|
3,847
|
||||||
Total
revenue
|
$
|
5,945
|
$
|
3,952
|
The
following table summarizes net loss by region (in thousands):
September
30,
|
||||||||
2010
|
2009
|
|||||||
Europe
|
$
|
(3,431
|
) |
$
|
(1,421
|
) | ||
North
America
|
(6,223
|
) |
(5,358
|
) | ||||
Total
net loss
|
$
|
(9,654
|
) |
$
|
(6,779
|
) |
F-24
The
following table summarizes interest expense, depreciation and loss on investment
by region (in thousands):
September
30,
|
||||||||
2010
|
2009
|
|||||||
Europe
|
||||||||
Interest
Expense
|
206
|
404
|
||||||
Depreciation
|
39
|
78
|
||||||
Optasia
investment impairment
|
727
|
-
|
||||||
North
America
|
||||||||
Interest
Expense
|
1,555
|
-
|
||||||
Depreciation
|
158
|
140
|
||||||
Optasia
investment impairment
|
2
|
-
|
14. Related Party
Transactions
During
the fiscal years ending September 30, 2010 and 2009, the Company entered into
transactions, in the ordinary course of business, with Optasia Medical Limited.
The value of services provided by Optasia was $13,000 and $31,000 during the
twelve months ended September 30, 2010 and 2009, respectively. The
amount due to Optasia as of September 30, 2010 and 2009 was $0 and $31,000,
respectively.
During
the fiscal year ended September 30, 2010, the Company had incurred interest
expense of $128,000 to SHV, its largest shareholder. As of September
30, 2010 and 2009, the company had accrued interest payable to SHV of $17,000
and $27,000, respectively.
In
October 2008, the Company converted its Saffron Hill Ventures Loans into Series
B Preferred Ordinary shares (see notes 4 and 8 for further
discussion). These shares were subsequently exchanged for shares of
common stock in connection with March 10, 2010 exchange
transaction.
In
December 2008, the Company sold an aggregate of 599,393 shares of its Series B
Preferred Ordinary shares at $2.46 per share for a total of 1,474,000 to two of
the Company’s existing investors, one of which is also a member of the Company’s
Board of Directors. These shares were subsequently exchanged for
shares of common stock in connection with March 10, 2010 exchange
transaction.
As a
result of the Company initiating the March 10, 2010 private equity offering,
Series B Preferred Ordinary shareholders were entitled to purchase a defined
amount of additional shares of Series B Preferred Ordinary at par value of
$0.08. In February 2010, the Company sold to SHV 145,933 shares of
its Series B Preferred Ordinary shares at $0.08 per share. This
sale of Series B Preferred Ordinary shares was accounted for as a deemed
dividend in the amount of $470,000 and recorded as a reduction to retained
earnings.
During
the fiscal years ended September 30, 2010 and 2009, the Company received loan
proceeds in the amount of $1,375,000 and $2,902,000, respectively, from its
principal investor, SHV. The Company did not make any loan payments
to SHV during the fiscal years ended September 30, 2010 and 2009. As
of September 30, 2010, the Company had outstanding notes payable to SHV of
$650,000.
In
connection with the March 10, 2010 private equity offering, SHV converted all of
its outstanding notes payable into Series A Convertible Preferred Stock and
purchased an additional $500,000 of Series A Convertible Preferred Stock and
warrants (see notes 1, 4 and 8 for further discussion).
15.
Subsequent events
On
February 11, 2011, the Company amended and restated the loan facility,
increasing the maximum size from $2.6 million to $5.2 million and extending the
maturity date to January 31, 2013. In addition to these changes, the
amended and restated loan facility contains certain provisions that require
additional cash payments to be made to the lender that are calculated based on
certain product revenues over the next five years. The required
payments to the lender in any given period could be material to the overall
financial statements. As of February 14, 2011, promissory notes
totaling $2.0 million had been issued from this facility. The
principal and any accrued interest on the promissory notes are due and payable
in full on January 31, 2013.
In
October 2010, the Company issued 1,309,991 options to purchase common shares of
the Company at an exercise price of $1.00 to David Rolston, the Chairman of the
Board, and 367,750 options to purchase common shares of the Company at an
exercise price of $1.20 to certain employees, including 150,000 options to
Robert Gehorsam, the Company’s Chief Executive Officer.
F-25
On
November 29, 2010 and December 2, 2010, we sold an aggregate of 200,000 units,
with each unit consisting of one share of our series A convertible preferred
stock, par value $.001 per share, and a detachable, transferable warrant to
purchase common stock, at a purchase price of $1.00 per unit. Each
share of series A convertible preferred stock is initially convertible into one
share of common stock at any time. Each warrant entitles the holder to purchase
one-half share of common stock at an exercise price of $1.50 per share through
November 30, 2014, subject to redemption provisions based on the trading price
and trading volume of our common stock.
On
January 31, 2011, pursuant to an Asset Purchase Agreement, dated as of December
30, 2010, as amended, we purchased specified technology and intellectual
property related assets of Big Stage Entertainment, Inc., a Delaware corporation
(“Big Stage”), for an aggregate of 2,000,000 shares of our common stock, the
assumption of $575,343 of Big Stage bank debt and the payment of approximately
$85,000 of deal-related expenses on behalf of Big Stage. The purchase
price was determined as a result of arm's-length negotiations between the
parties. We did not acquire all of the assets or business previously
conducted by Big Stage, or any of its employees.
Big Stage
developed technologies for the creation of three-dimensional facial models for
use in television, video games and consumer markets. We intend to use
the acquired technology assets to complement aspects of our facial animation
software platform. Big Stage did not have any material relationship
or association with us prior to the acquisition.
F-26