VIDAROO Corp - FORM 10-Q - February 21, 2013

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE QUARTERLYLY PERIOD ENDED DECEMBER 31, 2012
OR

¨  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

FOR THE TRANSITION FROM _______ TO ________.

COMMISSION FILE NUMBER 333-147932
 

VIDAROO CORPORATION  
(Exact Name of Registrant as Specified in its Charter)

Nevada
  
26-1358844
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
     
370 Center Pointe Cir. Suite 1166, Altamonte Springs, FL
  
32701
(Address of principal executive offices)
  
(Zip code)

Issuer's telephone number: (321) 293-3360

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 x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 Large accelerated filer o
Accelerated filer o
   
Non-accelerated filer o
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No x


APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:  As of February 8, 2013 there were 67,455,867 outstanding shares of the Registrant's Common Stock, $.001 par value.
 
 
 
 
VIDAROO CORPORATION
DECEMBER 31, 20112 QUARTERLY REPORT ON FORM 10-Q
 
 

 
 
CONSOLIDATED BALANCE SHEETS
 
 
   
December 31, 2012 (UNAUDITED)
    
 
June 30, 2012
  
Assets
            
             
Current:
            
Cash and cash equivalents
   $ 26,205     $ 67,911  
Accounts Receivable
     3,979       105,876  
Other Current Assets
     8,232       5,101  
            Total Current Assets
     38,416       178,888  
Furniture and Equipment:
                
Computer equipment
     116,816       114,582  
Office furniture and fixtures
     14,252       14,252  
      131,068       128,834  
    Less Accumulated depreciation
     (112,028 )      (106,701 )
Net Furniture and Equipment
     19,040       22,123  
                 
 Other Assets – Deposits
     4,872       4,872  
 Total Assets
   $ 62,328     $ 205,883  
                 
Liabilities and Stockholders' Deficit
                
                 
Current Liabilities:
                
Accounts Payable
   $ 212,212     $ 534,408  
Accrued Salaries
     340,594       167,060  
Deferred revenue
     31,867       35,099  
Accrued interest
     19,565       10,433  
Convertible secured promissory notes – Current portion
     14,117       10,291  
Promissory Notes and Notes payable – Current portion
     9,301       16,000  
Total Current Liabilities
     627,656       773,291  
                 
  Convertible secured promissory notes
     21,223       66,690  
  Promissory Notes and Notes payable
     3,931       38,121  
                 
Total Liabilities
     652,810       878,102  
                 
 Callable Preferred Stock, $0.001 par value; Callable at $0.10; Issued and Outstanding
                
  35,428,867 and 33,778,173 shares at December 31 and June 30, 2012, respectively
     541,736       515,325  
                 
                 
                 
Stockholders' (Deficit) Equity:
                
                 
     Common stock, $0.001 par value; 200,000,000 shares authorized;
                
         67,455,867 and 67,437,365 issued and outstanding at December 31 and June 30, 2012, respectively
     67,456       67,437  
 Additional paid in capital
     6,923,081       6,909,490  
    Accumulated Deficit
     (8,131,155 )     (8,176,291 )
                 
Vidaroo Corporation and subsidiaries Stockholders’ (Deficit)
     (1,140,618 )      (1,199,364 )
    Noncontrolling Interest
     8,400       11,820  
Total Stockholders’ Deficit
     (1,132,218 )     (1,187,544 )
Total Liabilities and Stockholders’ Deficit
   $ 62,328     $ 205,883  
 
See accompanying notes to consolidated financial statements.
 
 
 
 
VIDAROO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
 
 
   
Quarter Ended
    
Quarter Ended
    
6 Months Ended
    
6 Months Ended
  
   
12/31/12
    
12/31/11
    
12/31/12
    
12/31/11
  
                         
REVENUES
   $ 248,339     $ 416,544     $ 497,211     $ 724,834  
                                 
Cost of sales
     (86,366 )     (81,246 )     (170,443 )     (123,203 )
                                 
Operating margin
     161,973       335,298       326,768       601,631  
                                 
Operating expenses
                                
Selling, general and administrative
     287,294       395,721       592,945       740,235  
Depreciation and amortization
     2,023       6,216       5,317       12,612  
Total expenses
     289,317       401,937       598,262       752,847  
                                 
Loss from operations
     (127,344 )     (66,639 )     (271,494 )     (151,216 )
                                 
Interest expense
     (8,867 )     (50,298 )     (24,131 )     (108,188 )
                                 
Nonoperating gains:
                                
Realized gain on troubled debt restructuring
     -       -       49,853       -  
Gain on adjustment to fair market value of financial instruments
     316,220       116,401       290,908       660,978  
                                 
                                 
NET INCOME (LOSS) TO COMMON SHAREHOLDERS
 OF VIDAROO CORPORATION
   $ 180,009     $ (536 )   $ 45,136     $ 401,574  
                                 
BASIC AND DILUTED
 NET INCOME (LOSS) PER COMMON SHARE
   $ 0.00     $ 0.00     $ 0.00     $ 0.01  
                                 
WEIGHTED AVERAGE SHARES
 OUTSTANDING
     67,455,867       66,442,767       67,451,550       66,316,976  
 
See accompanying notes to consolidated financial statements.
 
 
 
 
VIDAROO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT/EQUITY
(UNAUDITED)

 
   
Class A
    
Additional
                    
   
Common Stock
    
Paid-In
    
Accumulated
    
Noncontrolling
        
   
Shares
    
Amount
    
Capital
    
Deficit
    
Interest
    
Total
  
                                     
Balance at June 30, 2012
    
67,437,365
    
$
67,437
    
$
6,909,490
    
$
(8,176,291
)
  
$
11,820
    
$
(1,187,544
)
                                                 
Stock based compensation cost for Employees
    
18,502
      
19
      
9,612
      
-
      
-
      
9,631
  
                                                 
Stock based compensation issued relative to debt conversion
    
-
      
-
      
3,979
      
-
      
-
      
3,979
  
                                                 
Unrealized gain on fair value adjustment to noncontrolling interest
    
-
      
-
      
- 
      
- 
      
(3,420
)
    
(3,420
)
                                                 
Net Income
    
-
      
-
      
-
      
45,136
      
-
      
45,136
  
                                                 
Balance at December 31, 2012
    
67,455,867
    
$
67,456
    
$
6,923,081
    
$
(8,131,155
)
  
$
8,400
    
$
(1,132,218
)

 
See accompanying notes to consolidated financial statements.
 
 
 
VIDAROO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)
 
 
   
6 Months Ended
    
6 Months Ended
  
   
12/31/12
    
12/31/11
  
Cash Flows from Operating Activities:
            
Net Income
  
$
45,136
    
$
401,574
  
Adjustments to reconcile net income to net cash used
                
 by operating activities:
                
   Depreciation
    
5,317
      
12,615
  
   Accretion of accrued salaries
    
-
      
10,296
  
   Realized gain on troubled debt restructuring
    
(49,853
)
    
-
  
   Gain on adjustment to fair market value of financial instruments
    
(290,908
)
    
(660,978
 )
   Stock-based compensation
    
9,631
      
75,734
  
Net changes in:
                
   Other current assets
    
(3,131
) 
    
3,570
  
   Accrued salaries
    
173,534
      
6,178
  
   Accrued interest
    
24,375
      
106,263
  
   Accounts receivable
    
101,897
      
76
  
   Accounts payable and accrued expenses
    
(51,513
) 
    
70,264
  
   Deferred revenue
    
(3,232
)
    
(51,002
)
Net Cash Used By Operating Activities
    
(38,747
)
    
(25,410
)
                 
Cash Flows from Investing Activities:
                
Deposits
    
-
      
(3,312
)
Purchase of furniture and equipment
    
(2,234
) 
    
-
  
                 
Net Cash Used By Investing Activities
    
(2,234
)
    
(3,312
)
                 
Cash Flows from Financing Activities:
                
Repayments of notes payable
    
(725
) 
    
-
  
Net Cash Used By Financing Activities
    
(725
) 
    
-
  
                 
Net Decrease in Cash and Cash Equivalents
    
(41,706
) 
    
(28,722
)
                 
Cash and Cash Equivalents, Beginning
    
67,911
      
73,598
  
                 
Cash and Cash Equivalents, Ending
  
$
26,205
    
$
44,876
  
                 
Supplemental cash flow information:
                
Other disclosures:
                
   Interest Paid     
  
$
276
    
$
1,925
  
 
See accompanying notes to consolidated financial statements.
 
 
 
 

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
 
Description of Business
 
The accompanying financial statements include Vidaroo Corporation (“Vidaroo” or the “Entity”) and its consolidated subsidiaries: E360, LLC (“E360”); Media Evolutions, Inc., d/b/a Vidaroo Productions (“MEV”); Vidaroo Licensing, LLC; Vidaroo Intellectual Property, Inc.; Vidaroo Support Services, LLC.    Vidaroo was formed in May 2007 as a Nevada Corporation and was named Gen2Media until April 26, 2010.  Vidaroo has a majority ownership interest in E360.  Vidaroo has a management agreement with MEV that provides Vidaroo with control of MEV’s operations.

Vidaroo is a video technology company.  Vidaroo has developed an online video platform (OVP) that is licensed under a Software-as-a-Service model.  Vidaroo also provides video production services that are performed for clients either on location or in Vidaroo’s professional production studio.
 
Basis of Presentation
 
Unaudited Interim Financial Statements
The accompanying unaudited consolidated quarterly financial statements have been prepared on a basis consistent with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and pursuant to the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results expected for the full year or any future period. These statements should be read in conjunction with the Entity’s Annual Report on Form 10-K for the year ended June 30, 2012, as filed with the SEC on October 1, 2012 (the “2012 Annual Report”).
 
Use of Estimates
Preparing financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates presented and the reported amounts of revenues and expenses during the reporting periods presented. Significant estimates inherent in the preparation of the accompanying consolidated financial statements include estimates of revenues and related receivables expected to be collected, valuations of intangible assets and stock-based compensation. Estimates are based on past experience and other considerations reasonable under the circumstances. Actual results may differ from these estimates.
 
Basis of Consolidation
The accompanying consolidated financial statements include the accounts and transactions of Vidaroo and its subsidiaries E360, MEV, Vidaroo Licensing, LLC, Vidaroo Intellectual Property, Inc., and Vidaroo Support Services, LLC.  Vidaroo has a 98% and 95% interest in E360, as of December 31, 2012 and 2011, respectively. Ownership was acquired by Vidaroo in a stock exchange.  MEV is controlled by Vidaroo pursuant to a management agreement between the two companies.  All significant inter-entity accounts and transactions are eliminated in consolidation.

 
 
 
NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Revenue Recognition
Revenue is generated from monthly subscription fees from subscribers to the OVP.  Revenue is recognized ratably over the contract period for each subscriber.  Revenue is also generated in connection with the production of video content.  Revenue is recognized when services are rendered in accordance with the terms of the agreement provided that the collection of the associated receivable is reasonably assured and there are no remaining significant obligations.
   
Long-Lived Assets
The Entity evaluates the recoverability of its long−lived assets, including intangibles, for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable.  If such review indicates that the carrying amount of long−lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. No impairment charges were incurred during the six months ended December 31, 2012 and 2011.
 
Computer equipment and Office furniture and fixtures are recorded at cost depreciated on a straight line basis over their expected useful lives of 5 and 7 years, respectively.

Minority Interest
Minority interest represents the portion of E360 not owned by Vidaroo.

Stock-Based Compensation
The Entity provides stock based compensation to both its employees and vendors under certain circumstances.  The Entity is required to measure the cost of employee service received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.
 
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes resulting from temporary differences less estimated valuation allowances.  Such temporary differences result from differences in the carrying value of assets and liabilities for tax and financial reporting purposes.  Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.  Income tax expense is the tax payable or refundable for the period plus or minus change during the period in deferred tax assets and liabilities and valuation allowances.
 
 
 
Earnings per Common share
Basic earnings per common share excludes potentially dilutive securities and is computed by dividing net earnings(loss) by the weighted average number of common shares outstanding during the period.  Fully diluted earnings per share are not displayed as the impact of including those shares would be anti-dilutive. For the six months ended December 31, 2012 and 2011 the Entity had 63,404,912 and 22,494,115 potentially dilutive common shares, respectively, which were not included in the calculation of diluted income (loss) per share.
 
Financial Instruments
The entity reports its financial and non-financial assets and liabilities that are re-measured and reported at fair value at each reporting period. Three levels of inputs may be used to measure fair value:

 
●
 Level 1 - Active market provides quoted prices for identical assets or liabilities;
 
●
 Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable with market data; and
 
●
 Level 3 - Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumption that market participants would use in pricing.
 
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2012.

The Entity uses the market approach to measure fair value for its Level 1 financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial statements which include cash, trade receivables, borrowings, related party notes payable, accounts payable and certain accrued liabilities are valued using Level 1 inputs and are immediately available without market risk to principal. Fair values were assumed to approximate carrying values for these financial instruments since they are short term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand.

The Entity considers its Debt instruments and certain accrued liabilities to have Level 3 inputs.  Those inputs include the fair value of Vidaroo’s common stock and the number of shares the Entity has offered to convert its outstanding debt and accrued interest to equity of the Entity.

 
 
 
NOTE 3.  DEBT
 
Notes Payable

In connection with the management agreement entered into with MEV, Vidaroo became obligated for the repayment of certain notes payable outstanding at the time of the initiation of the management agreement. These notes were guaranteed by Mark Argenti and Ian McDaniel along with a third party obligor.  During June, 2010 the third party obligor exercised his right as guarantor on these loans and satisfied the original obligation.   During the year ended June 30, 2012, Vidaroo agreed to interest and repayment terms with the obligor.  This Note Payable now carries interest at 12% and will begin a repayment schedule commencing on April 1, 2013 and carry equal monthly payments of $2,000 until satisfaction of the both the principal and interest
 
Convertible Secured Promissory Notes Payable
 
During the year ended June 30, 2009 the Entity issued debt instruments in the form of promissory notes with a face value of $600,000 (the “Notes”). The Notes carry interest at 12% and are due and payable in full at the earlier of either minimum equity financing of $1 million or one year. Interest can be received monthly or accrued and paid at maturity at the option of the holder. The Notes are secured by all assets of the Entity.

The holders of the Notes have the option, but not the obligation, to convert the outstanding principal into common stock at any time under any of the following terms: A conversion price of $0.25 per share; a conversion price of 30% less than price per share obtained in the next round of financing completed by the Entity; a conversion price of 30% less than the price per share paid in the event of a sale of the Entity, or $0.13 per share in the event the Entity does not raise a minimum of $1 million in additional financing within one year of issuance.

The notes contain warrants to purchase shares valued at 20% of the face value of the note assuming a stock value of $0.25 per share and an exercise price of $0.001 per share. If the value of common stock at the time of conversion is less than $0.25, the payee shall receive additional warrants to bring the total value of warrants issued under this program to be equal to 20% of the face value of the Note. The Notes also included a beneficial conversion feature as the obligations can convert into equity for an exercise price less than the share price at the time of issuance at the option of the holder. Based on these features, the proceeds from debt were split between the value of the warrants and the debt. Further, the debt obligation must have value assigned to the beneficial conversion feature. These valuations cause the proceeds from these notes to be allocated to additional paid capital with $248,953 assigned to the value of the warrants and the remaining $351,047 assigned to the beneficial conversion feature. The face value of the debt will be accreted to interest expense over the 1-year term of the debt.  

During the year ended June 30, 2010, the Entity and the holders of the Notes agreed to extend the terms of repayment for these notes.  The notes were either extended through August 1, 2010, March 31, or June 30, 2011.  Under the terms of the extensions, the holders were provided with additional consideration.  Those Note holders that extended through August were provided with additional shares of Common Stock and those that extended through 2011 received an increase in the interest rate from 12% to 13%.  

As of June 30, 2011, the Entity defaulted on its obligation to pay interest and repay principal on these Notes.  

During the year ended June 30, 2012, Vidaroo and the holders of the Convertible Secured Promissory Notes came to agreement to restructure the terms of the Notes.  Of the $590,000 outstanding, holders of $390,000 of the Notes agreed to accept 10,499,922 shares of preferred stock plus 3,658,549 warrants to purchase Common Stock of Vidaroo at an exercise price of $0.10.

Also during the year ended June 30, 2012, the holders of $200,000 of the Convertible Secured Promissory Notes agreed to a repayment schedule starting in April, 2013 and the conversion of accrued interest into 1,837,920 shares of preferred stock and 640,397 warrants to purchase shares of common stock at an exercise price of $0.10.
 
 
 

 
Promissory Notes Payable

During the years ended June 30, 2011 and 2010 the Entity issued debt instruments in the form of promissory notes with a face value of $538,000 and $331,500, respectively (the “Promissory Notes”) and bear interest at 12%. These Promissory Notes were issued in two traunches.  Traunch I had an original face value of $231,500 and was due and payable one year from issuance.  Traunch I was issued during the fourth quarter of the year ended June 30, 2009 and therefore was originally due during the quarter ending June 30, 2010.  Traunch II has a face value of $638,000 and was originally due and payable on December 31, 2010.   Monthly interest payments were required.
 
During the year ended June 30, 2011, the Entity defaulted on its obligation to pay interest and repay principal on these Notes.  
 
During the year ended June 30, 2012, the Entity negotiated with the holders of these notes to restructure the terms of the obligation.  The Entity and certain holders of the Notes agreed to convert $760,000 of the $863,570 still outstanding plus the related accrued interest into 19,782,796 shares of Preferred Stock and 6,893,034 warrants to purchase its Common Stock exercisable at $0.10 as of June 30, 2012.  During the six months ended December 31, 2012, the Entity finalized agreements with holders of an additional $65,000 of the obligation plus accrued interest into 1,650,693 shares of Preferred Stock and 575,161 warrants to purchase its Common also exercisable at $0.10.

The remaining balance of $34,000 was unable to be negotiated and shall remain a short-term obligation of Vidaroo.
 
NOTE 4. FAIR VALUE MEASUREMENTS

The Notes Payable, Convertible Secured Promissory Notes and Promissory Notes are stated at fair value.   Fair value is as follows:

   
Face value
    
Adjustment to face value
    
Fair value as of December 31, 2012
  
                   
Promissory Notes and Notes Payable
  
$
74,885
    
$
(61,653
)
  
$
13,232
  
Convertible Secured Promissory Notes Payable
    
200,000
      
(164,660
)
    
35,340
  
Accrued interest
    
47,160
      
(27,595
)
    
19,565
  
Total
  
$
322,045
    
$
(253,908
)
  
$
68,137
  
 
The Level 3 inputs used include the number of shares offered to the holders of the Notes along with fair value of the Company’s Common Stock for those Note holders that converted these debt instruments into Equity during the year ended June 30, 2012 and the six months ended December 31, 2012.  

Noncontrolling interest is also stated at fair value.  Fair value is as follows:

   
 
Face value
    
Adjustment to face value
    
Fair value as of December 31, 2012
  
Noncontrolling interest
  
$
110,400
    
$
(102,000
)
  
$
8,400
  
 
The Level 3 inputs used include the number of shares provided to the holders of the Noncontrolling interest that converted into Vidaroo’s Common Stock during the year ended June 30, 2012, along with fair value of the Company’s Common Stock.
 
 
 
Certain accrued expenses are considered to be stated at fair value through the use of Level 3 inputs.  Fair value is as follows:

   
 
Face value
    
Adjustment to face value
    
Fair value as of December 31, 2012
  
Accrued expenses
  
$
330,908
    
$
(270,683
)
  
$
60,225
  

Fair value for the certain accrued expenses included above are estimated based on the potential number of shares that would be offered to the Entity’s creditors for settlement of these obligations along with the fair value of such shares.

NOTE 5.  CAPITAL STOCK

The Entity’s authorized capital stock consists of 200,000,000 shares of Class A common stock with a par value of $0.001.  The Entity also has authorized 100,000,000 shares of preferred stock with a par value of $0.001.  
 
The Entity has previously filed a registration statement with the SEC that went effective July 11, 2008 and is therefore a reporting public company.  The Entity filed a form 15c2-11 with FINRA and requested permission to trade on the OTC Bulletin Board.  The Entity’s stock began trading on October 3, 2008.
 
 
 
NOTE 6. STOCK BASED COMPENSATION

The following table represents activity for the Entity’s outstanding options and warrants as of and for the six months ended December 31, 2012:   
   
Number of Shares Outstanding Under Options and Warrants
    
Weighted Average Exercise Price
  
             
 Balance, June 30, 2012
    
62,616,180
      
0.08
  
                 
 Granted
    
575,155
      
0.10
  
 Forfeited or expired
    
(1,520,000
) 
    
0.05
  
                 
 Balance, December 31, 2012
    
61,671,335
    
$
0.09
  
 Exercisable, December 31, 2012
    
 57,049,001
      
 0.09
  
 
The following table is a summary of the Entity’s non-vested stock options
 
   
Number of shares
    
Weighted-Average Grant-Date Fair Value
  
Non-vested balance, June 30, 2012
    
7,065,392
    
$
0.08
  
                 
  Granted
    
575,155
      
0.10
  
  Vested
    
(1,629,463
)
    
0.07
  
  Forfeited/Expired
    
(1,388,750
) 
    
0.05
  
                 
Non-vested balance, December 31, 2012
    
4,622,334
    
$ 
0.05
  
 
Unrecognized compensation cost related to unvested stock options and warrants at December 31, 2012 was $40,603 and is expected to be recognized over a weighted average period of 18 months.

The total intrinsic value of options exercised during the six months ended December 31, 2012 and 2011 and was $0. The aggregate intrinsic value of the outstanding options and warrants at December 31, 2012 and 2011 was $0.  
 
NOTE 7. RELATED PARTY TRANSACTIONS

As of December 31, 2012, the Entity has an outstanding obligation to both Mark Argenti and Ian McDaniel of $47,178 for incentive compensation under each individual’s employment contract of which $14,223 was earned in the six months ended December 31, 2012.

Also as of December 31, 2012 and 2011, the Entity had an outstanding payroll obligation of $110,000 and $78,047, respectively to its Officers.

 
 
 
NOTE 8.  INCOME TAXES
 
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes resulting from temporary differences. Such temporary differences result from differences in the carrying value of assets and liabilities for tax and financial reporting purposes. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

The components of deferred tax assets are as follows:
 
   
12/31/12
    
6/30/12
  
             
Accumulated Net loss
  
$
8,131,155
    
$
8,587,957
  
                 
Valuation allowance
    
(8,131,155
)
    
(8,587,957
)
                 
Net deferred tax assets
  
$
-
    
$
-
  
 
NOTE 9.  GOING CONCERN

Through December 31, 2012, the Entity has accumulated losses of $8,131,155.  The Entity expects to generate revenues from its SaaS platform and Production service offerings.  The Entity will either need generate substantial revenue from receiving monthly subscription fees for its software platform or raise capital to maintain its operations.
 
The Entity faces all the risks common to companies in their early stages of operations including under capitalization and uncertainty of funding sources, high initial expenditure levels, uncertain revenue streams, and difficulties in managing growth.  In view of these conditions, the ability of the Entity to continue as a going concern is in substantial doubt and dependent upon achieving a profitable level of operations and on the ability of the Entity to obtain necessary financing to fund ongoing operations.  The Entity’s financial statements do not reflect any adjustments that might result from the outcome of this uncertainty.  The future of the Entity hereafter will depend in large part on the Entity’s ability to monetize its investment in its technology and services, and successfully raise capital from external sources to pay for planned expenditures. The Entity continues to seek other sources of financing in order to support existing operations and expand the range and scope of its business.  However, there are no assurances that any such financing can be obtained on acceptable terms, if at all.
 
NOTE 10. CONTRACTUAL OBLIGATIONS

Given the cash flow difficulties of the Entity, there are various contractual obligations under which the Entity has not met its economic requirements.  The economic impact of these instances of noncompliance have been accounted for in the Entity’s Consolidated Financial Statements.  Management does not believe that any of the individual instances of noncompliance other than those disclosed herein would have a material adverse effect on the Entity and therefore require further disclosure.
 
NOTE 11. SUBSEQUENT EVENTS

Effective January 1, 2013, Vidaroo appointed Thomas Moreland as Chairman of the Board and Chief Executive Officer, in addition to his pre-existing duties as Chief Financial Officer, Secretary and Treasurer.  Concurrent with this appointment, Vidaroo accepted the resignation of Mark Argenti as Chairman and Chief Executive Officer, Micheal Morgan as President and Chief Technology Officer and Ian McDaniel as Production President.

Effective with the management transition that took place on January 1, 2013, Vidaroo has elected to pursue software licensing as its sole source of revenue.  Production services accounted for $254,508 and $486,665 in revenue for the six months ended December 31, 2012 and 2011, respectively.

Subsequent to December 31, 2012, Vidaroo’s licensing agreement for its online video platform with Emmis Communication’s was terminated in the normal course of business with an effective date of February 28, 2013 consistent with its contractual terms.  Prior to its termination, Vidaroo earned a monthly fee of $28,655 from this license.
 
Also subsequent to December 31, 2012, Vidaroo engaged the services of Sales Outsourcing Specialists to lead its efforts in sales on a fully outsourced basis for a monthly retainer plus a percentage of sales as incentive compensation.
 
 
 

Vidaroo is a video technology company.  The Entity licenses its Online Video Platform, and performs professional video production.  Vidaroo’s Online Video Platform (“OVP”) is licensed under a Software-as-a-Service (“SaaS”) model.  The SaaS model allows the Company to generate monthly recurring revenue that is scalable and stable.  The OVP’s functionality allows both users and representatives or affiliates of the Entity to use or promote the OVP based on automated interfaces independent of personal contact with the Entity.  Our Production capabilities include creation and support of video imagery for top line names in the entertainment business.  We also provide support of video production for traditional media and corporate presentations, as well as in-house production of content.  

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. References in this section to "Vidaroo Corporation," “Vidaroo,” the "Entity," "we," "us," and "our" refer to Vidaroo Corporation and our direct and indirect subsidiaries on a consolidated basis unless the context indicates otherwise.

This Quarterly report contains forward looking statements relating to our Entity's future economic performance, plans and objectives of management for future operations, projections of revenue mix and other financial items that are based on the beliefs of, as well as assumptions made by and information currently known to, our management. The words "expects," "intends," "believes," "anticipates," "may," "could," "should" and similar expressions and variations thereof are intended to identify forward-looking statements. The cautionary statements set forth in this section are intended to emphasize that actual results may differ materially from those contained in any forward looking statement.

The following discussion and analysis should be read in conjunction with the consolidated financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
 
Overview
 
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
 
RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED DECEMBER 31, 2012 COMPARED TO THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011.  Our fiscal year runs from July 1 to June 30.
 
Revenue
 
Revenue decreased by $168,205 to $248,339 and $227,623 to $497,211 in the three and six months ended December 31, 2012 as compared to 2011, respectively. The decrease in revenue for both the quarter and six months was driven by production services, which fell by $163,025 and $232,157, respectively. SaaS revenue for the three and six months ended December 31, 2012 was $125,067 and $251,588, respectively, growing by $3,625 and $10,945, respectively over 2011. This growth was largely due to low cost web-based promotional activities, direct sales from the Entity’s affiliates without the use of external capital or resources to leverage marketing initiatives. 
 
 
 
 
Cost of Sales

During the three and six months, the Entity incurred cost of sales in conjunction with the direct provision of services to our clients.   These expenses consist of bandwidth to deliver licensing of the online video platform, sales commissions, and production personnel as well as equipment to facilitate the provision of our production services.  Cost of sales increased by $5,120 to $86,366 and $47,240 to $170,443 in the three and six months, respectively, ended December 31, 2012 as compared to 2011.  The increase was due predominantly to costs associated with our production services as the cost of providing our software licensing remained stable between the periods.

Operating Margin

The operating margin generated by the services and technologies provided decreased by $173,325 to $161,973 and $274,863 to $326,768 during the three and six months ended December 31, 2012, respectively, in comparison 2011.  The operating margin on the services and technologies produced an Operating Margins of 65% and 55% in the three and six months ended December 31, 2012, respectively.  This compares unfavorably to Operating Margins from the prior year of 80% and 83% in the three and six months ended December 31, 2011, respectively.   Lower Margins in addition to lower revenue earned in the Production business account for the decrease in year over year Margins as the current year engagements had a higher variable cost structure for the Entity while the Margins in Software Licensing were stable with a minor increase year over year.
 
Selling General and Administrative

Selling General and Administrative costs generally consist of salaries, including stock-based compensation, professional fees, office expenses and other administrative costs.  These costs decreased by $108,427 to $287,294 and $147,380 to $592,945 for the three and six months ended December 31, 2012, respectively, in comparison to 2011.  The reduction relates primarily to stock based compensation and professional fees.  Stock based compensation decreased by $45,380 and $66,102 for the three and six month periods, respectively, as a direct result of the contracting with Executive Officers completed in prior years.  Professional fees decreased by $39,409 and $48,929 for the three and six months, respectively, which was a result of the litigation outstanding in the prior year, which has since been resolved.

Loss from operations

The degradation in Loss from Operations for the three and six months ended December 31, 2012 was a direct result of the decrease in revenue produced from our production services.  While we have been able to keep discretionary spending to a minimum the decrease in both revenue and operating margin from production services has directly impacted the Loss from Operations.
 
Nonoperating Gains

The realized gain on troubled debt restructuring did not exist in the prior year as the debt was converted into Equity on the fourth quarter of the year ended June 30, 2012 with continuation of a portion of the settlement into the six months ended December 31, 2012.

Unrealized gain on adjustment to the fair market value of financial instruments increased by $199,819 to $316,220 for the three months while decreasing by $370,070 to $290,908 for the six months ended December 31, 2012 in comparison to 2011.  For the three months ended December 31, 2012, the increase relates to the further evaluation of certain accrued expenses by using Level 3 inputs for valuation where Level 1 inputs were used previously.  The decrease for the six months ended December 31, 2012 relates to the nature of the troubled debt restructuring.  While ongoing negotiations caused the larger gain in the prior year, the significant reduction in the outstanding balance of our debt during the year ended June 30, 2012 caused the current year adjustment to be much lower.
 
 
 

 
Liquidity and Capital Resources

The Entity had net working capital of $(589,240) at December 31, 2012, an improvement of $5,163 compared to June 30, 2012.  The improvement is due to the gain on adjustment to the fair market value of outstanding indebtedness offset by the Entity’s Operating losses which have been absorbed into working capital through increased short term liabilities or decrease short term assets.

The Entity has incurred operating losses since its inception.  The Entity’s auditor has emphasized uncertainty regarding our ability to continue as a going concern in his audit report for the year ended June 30, 2012. As shown in the accompanying financial statements, while the Entity realized net income of $45,136 for the six months ended December 31, 2012 it was driven by the fair market value adjustment to the Entity’s debt while there remains an accumulated deficit of $8,131,155 as of December 31, 2012.
 
Other components of the Entity’s working capital and changes therein are discussed as follows:

Cash and Cash Equivalents. For the six month period ended December 31, 2012, cash and cash equivalents decreased to $26,205 from $67,911 at June 30, 2012 primarily due to cash used in operating activities.

Cash Flows from Operating Activities. Net cash used by operating activities was $38,747 for the six months ended December 31, 2012, an increase of $13,337 over the first six months of the prior year.  While in aggregate the changes between the two years is not significant, the current year result was aided by the increase in accrued salaries due to lack of payment of certain executive salaries.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

N/A.


Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, 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 (“Exchange Act”), as of December 31, 2012. Disclosure controls and procedures are those controls and procedures designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act filings is (1) recorded, processed, summarized and reported within the time periods specified in 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.
 
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2012, our disclosure controls and procedures were ineffective due to the lack of segregation of duties and the lack of audit committee oversight. Upon the acquisition of adequate capital the Entity intends to remediate the deficiencies through the deployment of additional personnel and implementation of an audit committee.
 
 
 
 
Management’s Quarterly Report on Internal Control Over Financial Reporting
 
Management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a – 15(f).  Management conducted an assessment as of December 31, 2012 of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  Based on that evaluation, management concluded that our internal control over financial reporting was ineffective as of December 31, 2012.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements should they occur. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the control procedure may deteriorate.
 
This Quarterly 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 Quarterly Report. As required by SEC Rule 13a-15(b), our company carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer, of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, management concluded that our disclosure controls and procedures were ineffective at the reasonable assurance level.
 
Changes in Internal Control Over Financial Reporting
 
None.
 
 
 

PART II
OTHER INFORMATION

In August, 2011, a judgment in favor of our former lessor was granted in the amount of $151,924.  The Entity does not dispute that the premises were vacated prior to lease termination and is currently in settlement discussions.  This case was originally filed by Sand Lake West Business Park, Inc. on May 25, 2011 in the Circuit Court of the Ninth Judicial Circuit in and for Orange County, Florida.


None.


None


As of December 31, 2012, we have $34,000 of outstanding Promissory Notes that we have not met our contractual obligation for the payment of principal and interest. We have attempted to convert these Notes into Equity, similar to the conversions that occurred in the year ended June 30, 2012 but have been unable to come to terms with the Note holders.


None.


None.

There were no material changes to the procedures by which security holders may recommend nominees to the registrant’s board of directors.


Exhibit Number
  
Description
     
 
     
 
     
 
     
 
     
EX-101.INS**   XBRL INSTANCE DOCUMENT
     
EX-101.SCH**   XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
     
EX-101.CAL**   XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
     
EX-101.DEF**   XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
     
EX-101.LAB**   XBRL TAXONOMY EXTENSION LABELS LINKBASE
     
EX-101.PRE**   XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

   
 
 
 
Pursuant to the requirements 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.
 
 
VIDAROO CORPORATION
  
       
DATE: February 21, 2013
By:
/s/ Thomas Moreland
  
   
Thomas Moreland
  
   
Chief Executive and Financial Officer (Principal executive, financial and accounting officer)
  
       
       

 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
20

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