|• VIDAROO CORPORATION FORM 10-K • EXHIBIT 21.1 • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32.1 • EXHIBIT 32.2 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABELS LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE|
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number 333-147932
(Exact name of registrant as specified in its charter)
8 N. Highland Ave, Winter Garden FL 34787
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value Per Share
Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes o No x
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 o No x
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes o No x
As of September 19, 2012, the aggregate market value of the issued and outstanding common stock held by non-affiliates of the registrant, based upon the closing price of the common stock as quoted on the OTC Markets of $0.015 was approximately $444,913. For purposes of the above statement only, all directors, executive officers and 10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
Number of shares of common stock outstanding as of September 19, 2012 was 67,437,365.
DOCUMENTS INCORPORATED BY REFERENCE – None
FOR THE FISCAL YEAR ENDED JUNE 30, 2012
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this annual report, references to "Vidaroo Corporation” and its consolidated subsidiaries, E360, LLC, Media Evolutions, Inc. d/b/a Vidaroo Productions, Vidaroo Licensing, LLC, Vidaroo Intellectual Property, Inc., and Vidaroo Support Services, LLC are collectively referred to herein as “we”, “our” or “us”. Where necessary, we have referred to certain of our subsidiaries by their individual name.
Except for the historical information contained herein, some of the statements in this Report contain forward-looking statements that involve risks and uncertainties. These statements are found in the sections entitled "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operation," and "Risk Factors." They include statements concerning: our business strategy; expectations of market and customer response; liquidity and capital expenditures; future sources of revenues; expansion of our proposed product line; and trends in industry activity generally. You can identify forward-looking statements by words such as "may," "will," "should," "shall," "expect," "plan," "could," "anticipate," "intend," "believe," "estimate," "predict," "potential," "goal," or "continue" or similar terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including, but not limited to, the risks outlined under "Risk Factors," that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For example, assumptions that could cause actual results to vary materially from future results include, but are not limited to: our ability to successfully develop and market our products to customers; our ability to successfully fund our operations and expansions plans through equity financing or other means; our ability to generate customer demand for our products in our target markets; the development of our target markets and market opportunities; our ability to manufacture suitable products at competitive cost; market pricing for our products and for competing products; the extent of increasing competition; technological developments in our target markets and the development of alternate, competing technologies in them; and sales of shares by existing shareholders. Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Unless we are required to do so under federal securities laws or other applicable laws, we do not intend to update or revise any forward-looking statements.
We are a Nevada Corporation with operating subsidiaries, E360, LLC (E360); Media Evolutions, Inc. d/b/a Vidaroo Productions (MEV); Vidaroo Licensing, LLC; Vidaroo Intellectual Property, Inc.; and Vidaroo Support Services, LLC. We were incorporated in Nevada on May 1, 2007 (operating as Gen2Media Corporation through April 26, 2010) for the purpose of acquiring a majority interest in E360. E360 is a Florida Limited Liability Company that was formed in Florida on July 21, 2006. We have a management agreement with MEV that provides us with control of MEV’s operations. MEV was incorporated in Florida on August 8, 2005. During the year ended June 30, 2012, Vidaroo established the wholly owned subsidiaries Vidaroo Licensing, LLC, Vidaroo Intellectual Property, Inc., and Vidaroo Support Services. These subsidiaries were formed to support the operations of the Entity and to expand potential capital related activities. Vidaroo Licensing, LLC is the exclusive sales agent for the sale of our Online Video Platform and has responsibility for the costs associated with delivering media over the content delivery network. Vidaroo Intellectual Property, Inc. is responsible for the continued development and ongoing maintenance of the software code for the Online Video Platform. Vidaroo Support Services, LLC is responsible for maintaining the infrastructure to support the operations of the operating subsidiaries.
We have never undergone a bankruptcy, receivership or similar proceedings, nor have there been any material reclassification, merger consolidation or sale of significant amount of assets not in the ordinary course of business.
We are a video technology company that licenses its Online Video Platform, and performs professional video production. Our Online Video Platform (“OVP”) is licensed under a Software-as-a-Service (“SaaS”) model. The SaaS model allows us to generate monthly recurring revenue that is potentially scalable and stable. The OVP’s design and implementation was production ready in January 2010. The OVP has been further developed in 2011 to include automation of the sign-up and account management functions as well as an automated affiliate portal. This functionality allows both users and our representatives to use or promote the OVP independent of personal contact with us..
Production services are performed both under our name, “Vidaroo” and under the trade name of our subsidiary, MEV. Our capabilities include creation and support of video imagery for the entertainment business, as well as providing support of video production for traditional media and corporate presentations, and in-house content production. We support our ability to deliver our production engagements through our professional production studio and custom turnkey digital playback system.
The Vidaroo platform as a whole is a series of web-based applications including the OVP, a centralized user console and an umbrella application for management of the platform. The OVP is divided into two editions, “Publisher”, our flagship product, and “Enterprise”. Accounts across both Publisher and Enterprise are “invite based” and allow for an unlimited number of users with varying permissions per account. The centralized user account allows for individual users to accept an account invite along with moving about different accounts on a single sign on
Publisher: Divided into a series of modules, Publisher is designed for simplicity, extensibility and ease of use. SaaS plans are modeled around the access to a given module and individual functionality within.
Enterprise: An ideal solution for large publishing companies, Enterprise allows management of multiple content destinations. Enterprise is designed to manage catalog content and syndicated channels across multiple Publishers.
The Vidaroo Platform is licensed in one of two programs.
On Demand: Volume based recurring subscription with fees ranging from $49 to $299 a month. On Demand is designed to be completely self-service including sign up, training and support. On Demand was released in the fourth quarter of the year ended June 30, 2011, continues to be delivered currently and was available throughout the year ended June 30, 2012.
Enterprise: Recurring Enterprise licenses are one to two year contracts ranging from $599 to over $10,000 a month. Enterprise licensing supports the business models of video publishers with content destination sites drawing significant monthly website traffic. Enterprise licenses are supported by the business development efforts of our management.
We believe the following factors represent our business strengths, which are subject to our being adequately financed, trends and uncertainties listed on page 7 and material risk factors discussed in our Cautionary Note Regarding Forward Looking Statements section on page 10.
Scalable and stable business model: Management has selected a model for licensing of its OVP that is well accepted in the software industry and generates recurring SaaS revenue on a monthly basis. While generating recurring revenue from new clients is more difficult than periodic revenues, the benefit of the predictability and stability of recurring revenue is more powerful than revenue generated on an episodic basis. Further, we have targeted a delivery mechanism that is growing beyond video’s traditional parameters of media distribution. The broad applicability of its product is compelling to an audience that continues to see megatrend growth.
Best Practices in Software Development processes: The software development process uses an iterative framework for project management called SCRUM. SCRUM promotes agility through transparency, time boxing for releases and focused roles for increased productivity. These principles allow for updates to be released on an average of every 2 to 3 weeks.
Leverage Video Production: The historical experience and reputation achieved in high-end professional production allows the team to continue to secure high-end professional performance engagements and leverage that experience to grow into corporate video production. These capabilities also allow the company to extend services to clients utilizing our OVP.
Efficient Infrastructure: Vidaroo has focused considerable time and expense on building an infrastructure that enables us to operate efficiently and manage rapid growth. The operation of our video platform and related services allows for turnkey delivery of our services to our client base, creating a strong environment for high margin business.
The following is a brief description of certain key elements of our software.
Video Management: Upload through both the browser and FTP. Video uploaded is automatically encoded and moved to the primary content delivery network (“CDN"). The assets module provides multiple ways of browsing videos across an account including by tags and real time sorting. The user interface is highly scalable with current Publishers managing from hundreds to literally tens of thousands of videos from a single account. By default a thumbnail is derived during the upload process but can be easily changed using a dynamic interface by selecting any frame within the video or uploading a custom thumbnail.
Live Streaming: Fully integrated live streaming capabilities provide for complete ease in broadcasting a live event across one or more destinations. Live Event is structured around a unique concept called Context Oriented Syndication (“COS”). COS allows for a publisher to select multiple Channels or Players for syndicating a live event in real time. Essentially during the broadcast new Consumers enter the Live Event while existing Consumers are prompted with a dialog indicating the start of the broadcast. COS is highly flexible allowing for contextual change before and during a broadcast. The Channels context allows for archiving to the beginning or end of a given channel. Once the broadcast is complete, the broadcast is made instantly available. During a broadcast, all player functionality remains consistent including the ability to use social features such as auto posting to social destinations like Facebook where other users can then watch the broadcast directly from the destination along with using the same built in social tools to push elsewhere creating for a viral effect. The application of COS provides for powerful syndication with a very short amount of setup time.
Content Delivery & Syndication: Channels of content are organized into a series of Players. The entire process of creating Players is fully dynamic supporting an unlimited number of instances. Players can be embedded across one or more destinations. The process of embedding a Player on a website is as simple as copying and pasting a single line of code into the source of the website. One of the most powerful fundamental concepts built in at the core of our OVP is the ability to syndicate changes directly through Publisher without the need of modifying the code implemented at the destination. This reduces cost of publishing video by allowing for changes to be syndicated across many destinations by simply make a change in the backend. This concept is true for all aspects of the player including the content lineup, advertising and theme skinning.
Player Functionality: One of the most powerful aspects of the front-end player is the ability to theme it in an unlimited number of ways. There are a series of default themes to choose from in Publisher ranging from very small to very large. Custom themes are arranged into a series of components that define the type of functionality the user can interact with. Components include channel browsing, video regions (16:9 and 4:3), social capabilities, content linking, embedding, advertising and more.
Social Destinations: Users can post the player automatically by choosing from a number of third-party destinations including Facebook, Twitter, MySpace, Wordpress and others. Depending on the type of social destination, the player is either embedded inline directly on the site for sites like Facebook or in cases like Twitter the player is linked to. In all cases, everything syndicates with the player including advertising and content selection. Users also have an option to simply grab a link (URL to the player) or embed to implement manually on another destination. With distribution comes the ability to regulate whether or not a video can be embedded elsewhere, allowing control over the visibility of individual videos.
Analytics: Robust analytics were built from the ground up to be accessed in real time. All reports include the ability to filter on date range along with a graphical view for day-to-day visibility and a Data Table view for drilling deeper into a report. Publisher includes a series of reports for accessing video impressions across all contexts and video impressions within Channels. In all cases, video impressions get very detailed including the ability to view individual percentage breakdown of where users are dropping off within a given video. The analytics system was built to be highly scalable and allow for flexibility in report generation as the software continues to mature.
Advertising: Publisher includes a fully integrated ad server built from the ground up to support all aspects of syndication and video integration. Scheduling is made easy by targeting campaigns either at the channel level or at the player level allowing for cascading inheritance. A campaign allows for the binding of either in-stream and/or banner advertising. The workflow for setting up campaigns has been optimized for both speed and reuse. Campaigns support a rule-based pattern that makes campaign syndication across all aspects of the platform a reality. By default a campaign inherits a default ad policy but can be overwritten directly through the backend for creating advanced ad policy rules. We’ve found that most users are happy with our default IAB modeled Ad Policy. Ad Policies allow for the setting of the most granular ad settings including rotational settings for pre/mid/post roll video, overlay duration in seconds and even placement visibility. While we support a number of third party integrations, one of Publisher’s strong advantages over other OVPs is the ability to schedule any ad placement directly through the backend without any use of third-party systems. Banner advertising is made even more powerful when integrated into a player theme allowing for syndicated brand based player theming.
Software & Intellectual Property: Our software as a whole is built using enterprise concepts, patterns and principles for rapid application development. Nearly the entire platform has been built using open source technologies, which provides for quick to market and low scale out costs. Intellectual Property (“IP”) is divided into a series of modules and libraries using advanced development patterns that promote reuse and extensibility across the platform. The architecture is built using strict Model-View-Controller (“MVC”) pattern that separates the representation of information from the user’s interaction with it and encourages segmentation and further reuse.
Infrastructure: Our infrastructure is built to be completely on demand, highly scalable and cost effective. This is accomplished through the combination of cloud computing and the use of Content Delivery Networks. A primary objective is to allow the infrastructure to respond to demand by automatically scaling without outage.
Cloud Computing: We take advantage of cloud based infrastructure that houses applications, API’s and queue applications used for automation. The load balance arrays are designed to auto scale based on demand allowing for unforeseen fluctuations in demand. This includes cost savings by shutting down instances no longer needed. Our current database scale strategy includes a combination of vertical and horizontal scale using MySQL replication environment. In addition, we have a data warehouse that holds over a billion entries used for real time analytics.
Content Delivery Network: Our media is delivered using a combination strategy using multiple CDN. Video is streamed using RTMP from a peered CDN, which allows for nearly unlimited scale. Our cache and assets is delivered from a high availability CDN. We serve a significant amount of video a month affording us the ability to provide very competitive tiered pricing to our Enterprise customers along with making a margin. In addition, cost savings is passed down to lower cost SaaS plans creating for highly competitive plans. The management and delivery of media within our OVP is fully abstracted allowing for integration of multiple CDNs and reduced liability by not being tied directly to a given vendor.
We offer full production services that are utilized both for our own content, and for clients that request our services. Our production services range from full-scale digital video imagery for high-end professional entertainment content to support for a full array of video products, dependent upon the need of the client and scope of project. Digital video imagery engagements include the use of our custom turnkey digital playback system, production of video graphics and the synchronization of video and audio outputs delivered in the most complex of entertainment venues. Our production services also include the delivery of daily internet programming and other video content produced in our in-house professional studio in Orlando, Florida. Examples of our work include production of a daily web show for the Tribune Company and use of our playback system for Star Wars in Concert. These are in addition to live production work done in complex performance venues, including work for the Blacked Eyed Peas, Avicii, Live 8, and concerts for names from Mary J. Blige to Britney Spears.
The combination of our production services and software Platform gives us a potential competitive advantage over other providers because it is a “one stop shop” which can produce, package and deliver the content (using its own proprietary media player) in a customized fashion to the client and end users, digitally via the internet, which is a cost effective and efficient means of delivering this type of content to the market. For example our client Emmis Communications utilizes our OVP and has turned to us on multiple occasions to support their production needs.
Sales and Growth Strategy
As previously indicated, the OVP is licensed under a SaaS model.
In 2010, we launched our initial marketing interface (http://vidaroo.com/). In 2011, the marketing interface was updated to significantly expand the scope and breadth of collateral materials included. This initiative is aimed at building our Vidaroo brand name for the purpose of generating sales through our SaaS model. In 2012, we have continued to build our library of promotional and support assets on our site designed to aid the Entity’s goal of being able to scale delivery to a greater number of clients.
In the fiscal year ended June 30, 2011, on demand account sign-up directly through vidaroo.com was released. On demand plans all include a free 30 day trial and range in price from $49-$299 per month. Automation is a key strategy in scaling SaaS revenue. Account creation, billing, support and training are primary focuses in providing automated and on demand solutions to keep support staff to a minimum while providing a superior experience. In addition to the automation created for account sign-up and management, our affiliate program has been automated as well. The affiliate portal allows for automated promotion of the OVP by our affiliates as well as online monitoring of results and earned commissions. The goal of these two initiatives is to drive volume, growing and diversify our recurring revenue. During 2012, we have performed vertical online advertising initiatives to grow our on demand account signups and our affiliate program. We will attempt to continue these initiatives as well as perform broader industry and brand awareness programs in 2013.
Both through our on demand and affiliate programs, we have already experienced interest across certain verticals such as websites for radio stations, traditional and online TV networks, the faith based community, law firms, governmental entities, sports activities, online retailers, healthcare companies, and manufacturers, amongst others.
Our production capabilities continue to receive demand from the largest names in the entertainment business. Our proprietary digital playback system allows for the application of graphical video imagery synchronized with audio presentation. Our digital playback system combined with our technical knowledge of video production requirements continues to bring a high-end outcome that professional entertainers demand. Management also expects that the growth of video message delivery will impact the desire of corporate presenters to strive for a more professional presentation thus creating higher demand for professional corporate production. Sales and growth are expected to be realized through the historical channels, which is highly dependent on past customer lists, reputation and solicitation performed by the management team.
Industry and Market Overview
The distribution of online video has grown substantially in the past few years. The growth experienced to date is expected to continue and expand over the next few years. The number of ways to distribute video has also grown with the proliferation of social networks, viral distribution methodologies and devices on which to view online video. These choices have driven growth as well as challenges in delivering professional video. Economic and other factors indicate that Online Video distribution should continue to grow in the foreseeable future as indicated in the “Cisco Visual Networking Index: Forecast and Methodology, 2011-2016” published on May 30, 2012.
Organizations that develop and/or distribute proprietary content are increasingly faced with decisions regarding the distribution methodologies of that content. While there are solutions that offer free distribution, owners of proprietary content have a greater challenge in controlling and monetizing their content when making such a selection. Professional organizations are expected to select a methodology that allows them control over the syndication and distribution of content as well as managing tools to track metrics. While the industry is expected to continue expanding use of professional distribution platforms, the number of providers and alternatives to provide such services is also expected to increase.
The production of professional quality video is a mature industry. Production providers range from large movie houses to small support organizations. While the technology used to produce video has increased its output, top line video production continues to remain a very competitive industry. Entertainers and publishers have a wide range of production providers to choose from and have the ability to be highly selective in the organizations they choose to support their artistic endeavors.
Trends and Uncertainties
The following represents current market and industry trends and relevant uncertainties:
Research and Development
Costs associated with establishing the technological feasibility of our software are considered Research and Development. We incurred $273,000 and $320,000 in the years ended June 30, 2012 and 2011, respectively.
Concentrations of Revenue
During the years ended June 30, 2012 and 2011, we had two customers that accounted for 45% and 63% of our revenue, respectively. Should either or both of these customers decide that they no will longer purchase our products or use our services and we are unable to replace them with new customers, our revenues will be negatively impacted.
Patents and Trademarks
We have trademarked the name Vidaroo and received approval from the US Patent and Trademark Office for use of that name on September 4, 2012. We currently do not have any patents pending nor do we have immediate plans to file any patents.
We do not require governmental approval for our products or services and we are not aware of any existing or probable regulations that may impact our business.
Because our business does not involve the emission of any toxic substances, either directly or indirectly, we have no costs or compliance with state, federal or local environmental laws
As of June 30, 2012, we have 13 full-time employees which include 4 Executive Officers, 4 members of the software development team, 2 video production personnel, 2 operational support professionals and 1 office manager. We consider our relationship with our employees to be good.
We have not declared any cash dividends on our common stock since our inception and do not anticipate paying such dividends in the foreseeable future. We plan to retain any future earnings for use in our business. Any decisions as to future payments of dividends will depend on our earnings and financial position and such other facts, as the Board of Directors deems relevant.
Subsequent to June 30, 2012, we finalized agreements with holders of an additional $65,000 of Promissory notes payable plus accrued interest into 1,650,693 shares of Preferred Stock and 575,161 warrants to purchase our Common Stock exercisable at $0.10.
Smaller reporting companies are not required to provide risk factors under Item 1A.
We currently lease approximately 3,800 square feet of office space at 8 N. Highland Ave., Winter Garden, FL 34787. We currently pay monthly rent of $3,312 per month pursuant to a 37-month lease, effective August 1, 2011. The lease expires on August 31, 2014. We also lease warehouse space for which we pay a nominal amount on a month-to-month basis.
From time to time, we may be a defendant and plaintiff in various legal proceedings arising in the normal course of our business.
In August, 2010, we were served with a complaint alleging that our subsidiary, E360, unlawfully solicited the sales of securities in connection with an investment in that company. The complaint also attempts to join us to the claim. During the year ended June 30, 2012, we settled the matter by issuing 900,000 shares of our Common Stock in exchange for 3% of the outstanding interest in E360.
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.
No matters were submitted to a vote of our security holders during the year ended June 30, 2011.
During the year ended June 30, 2012, our security holders voted to: 1. Expand the number of shares of authorized common stock from 100,000,000 to 200,000,000 shares; 2. Create a class of preferred stock with 100,000,000 shares authorized; and 3. Re-elect the members of the Board of Directors.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our stock began trading in October, 2008 as an over the counter (“OTC”) security. In April 2010, we changed our name to Vidaroo Corporation, and our common stock currently trades as an OTC security under the trading symbol "VIDA". Our common stock is traded on the OTCQB marketplace, which identifies companies that are current in their reporting obligations to the SEC.
The following table sets forth the high and low bid prices for each quarter within the last two fiscal years.
As of June 30, 2012, the approximate number of our stockholders of record was 2,510.
We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain all future earnings to fund the operation of our business and do not anticipate paying dividends on our common stock in the foreseeable future.
Recent Issuances of Common Stock
During the year ended June 30, 2102, the Entity issued a total of 1,246,180 shares of common stock. 900,000 shares were issued to acquire the 3% interest previously not owned in E360 valued at $16,200; and 346,180 shares were issued as stock based compensation for employees valued at $56,648.
During the year ended June 30, 2011, the Entity issued a total of 1,055,153 shares of common stock. 430,153 were issued as Stock based compensation for employees valued at $61,870; and 625,000 were issued for professional services for consideration valued at $57,000.
Forward Looking Statements
Please see page i of this Annual Report for “Information Regarding Forward Looking Statements” appearing throughout this Annual Report.
The following discussion should be read in conjunction with the financial statements and notes thereto. Our fiscal year ends June 30. This document contains certain forward-looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. (See Part I, Item 1A, "Risk Factors "). These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include (i) changes in external factors or in our internal planning process which might impact trends in our results of operations; (ii) unanticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate; and (iv) various competitive market factors that may prevent us from competing successfully in the marketplace.
We are a video technology company. We license our Online Video Platform and perform professional video production.
Our Online Video Platform (“OVP”) is licensed under a Software-as-a-Service (“SaaS”) model. The SaaS model allows us to generate monthly recurring revenue that is scalable and stable. The OVP’s design and implementation was production ready in January 2010. The OVP has been further developed in 2011 to include automation of the sign-up and account management functions as well as an automated affiliate portal. This functionality allows both users and representatives of the Entity to use or promote the OVP independent of personal contact with Vidaroo.
Production services are performed both as “Vidaroo” and under the trade name of our subsidiary, MEV. Our capabilities include creation and support of video imagery for top line names in the entertainment business. In addition, we provide support of video production for traditional media and corporate presentations, and in-house production of content. We support our ability to deliver our production engagements through our professional production studio and custom turnkey digital playback system.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition.
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 for services rendered in connection with the production of video content. Revenue is recognized when services are rendered or advertising has been delivered 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.
We provide stock based compensation to both our employees and vendors under certain circumstances. We are 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.
We report 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:
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of period end. We use 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 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
Year Ended June 30, 2012 Compared to Year Ended June 30, 2011.
Revenues increased by $54,864 to $1,720,564 or 3% for the year ended June 30, 2012. The year ended June 30, 2012 demonstrated ongoing movement in our shift to the generation of greater revenue from its SaaS model. Revenue from software licensing increased by 33%, growing by $118,000 to $479,000 for the year ended June 30, 2012. The growth in SaaS revenue was experienced in each of our revenue producing programs: on-demand; affiliate; and enterprise. Production revenue was steady during the year at $1,241,000.
Cost of Sales
Costs of sales increased by $49,315 to $438,609 or 13% for the year ended June 30, 2012. Cost of Sales consists of variable costs for incremental expenses beyond our established infrastructure. Costs associated with delivering digital video such as bandwidth, personnel and commissions of 32.3% in 2012 as compared to 37.5% in 2011 were charged for software licensing. The decrease in these costs as a percentage of sales was primarily due to the efficient nature of the scale associated with our SaaS product offering Costs associated with the delivery of video production support include rental equipment, facility charges, personnel and third party graphics were approximately 23% in 2012 compared to 16% in 2011. Organizational incentive compensation was the primary driver of the increase as that accounted for $66,000 of the $84,000 increase in overall production cost of sales.
Operating margin increased by $5,549 to $1,281,955 in the year ended June 30, 2012. Operating margin as a percentage of sales decreased to 75% in the year ended June 30, 2012 from 77% in the year ended June 30, 2011. While the overall Operating Margin was fairly stable the Operating Margin from software licensing grew substantially, increasing by $110,000 to $322,000 during the year. The increase was the result of a strong efficient infrastructure underpinning the growth in sales. This increased margin was offset by a decrease in the Operating Margin from production services that experienced stable revenue and increased cost associated with incentive compensation driving Operating Margin down by $81,000 to $956,000 during the year. Operating Margin was also impacted by the elimination of the advertising model in 2011 that had produced Operating Margin of $23,000 in the year ended June 30, 2011.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salary wages and benefits, and professional services, as well as expenses associated with occupying our physical facility. Selling, general and administrative expenses decreased by $204,542 to $1,684,017 for the year ended June 30, 2012. The primary driver of the decreased expenses was personnel related costs, which decreased by $141,000, including a decrease in Stock based Compensation of $38,000. The other significant decreases included occupancy costs of $56,000 as the movement to the new facility at the end of the year ended June 30, 2011 provided significant savings and reduced professional services of $21,000 as we continue to focus on maintaining an efficient infrastructure. The cost savings were offset by an increase in advertising expenses of $11,000, as we began to promote our software platform through online vertical promotions.
Depreciation and Amortization
Depreciation and Amortization expense decreased by $30,255 to $22,258 for the year ended June 30, 2012. The primary driver in the reduction was the completion of amortization for our intangible asset related to the acquisition of MEV in 2008.
Interest expense decreased by $46,532 to $189,262 for the year ended June 30, 2012. The reduction is due to the conversion of a significant portion of our outstanding indebtedness to Equity during the fourth quarter of the fiscal year.
Off-Balance Sheet Arrangements
Liquidity and Capital Resources
At June 30, 2012, we had a working capital deficit of $594,403 as compared to $1,858,498 at June 30, 2011, an improvement of $1,264,095. The debt restructuring completed during the year was the primary driver of the improvement.
While this represents a significant improvement, we continue to experience cash flow pressure from accumulation of working capital liabilities since we began operations. Additionally, we continue to have future capital requirements associated with servicing the remaining outstanding obligations related to our Convertible Secured Promissory Notes and Notes Payable. Based on our working capital and debt service requirements, we will need to either raise additional capital or improve operational results.
Although the Entity continues to have a working capital deficit, we have maintained operations for the past two years without reliance on additional capital.
Operating activities in the year ended June 30, 2012 resulted in cash inflows of $950. This provision of cash consisted of a net income of $411,666 offset by adjustments for noncash charges and gains of $611,321 and an increase in net working capital liabilities of $200,605.
Operating activities in the year ended June 30, 2011 resulted in cash inflows of $66,568. This provision of cash consisted of a net loss of $505,642 offset by adjustments for noncash charges and gains of $143,628 and an increase in net working capital liabilities of $379,070.
Net cash used by investing activities was $4,207 and $4,979 for the years ended June 30, 2011 and 2010, respectively. Investing activities were limited to small furniture and equipment purchases and changes in deposits in both years.
Financing activities used $2,430 and produced $3,500 in the years ended June 30, 2012 and 2011, respectively. Activity in 2012 consisted of debt repayments while 2011 included inflows of $5,000 from the issuance of debt and $1,500 were used for debt repayments.
The following table represents the Entity’s committed obligations under its facility and equipment leases as well as purchasing commitments for infrastructure such as wireless connectivity and bandwidth requirements for the OVP.
Effect of Recently Issued Accounting Pronouncements
See Note 2 of the Consolidated Financial Statements in Item 8 for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition.
Our consolidated financial statements, together with the independent registered public accounting firm's report of Patrick Rodgers, CPA, PA, begin on page F-1, immediately after the signature page.
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 June 30, 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 June 30, 2012, our disclosure controls and procedures were not effective. This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our disclosure controls and therefore may be considered “material weaknesses.”
Our size and depth of accounting personnel assignment of tasks does not allow for proper maintenance of segregation of duties. Additionally, we do not have an audit committee to oversee the financial reporting and disclosure process.
Management’s Annual 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 June 30, 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 as of June 30, 2012, was not effective in the specific areas described in the “Disclosure Controls and Procedures” section above and as specifically described in the paragraphs below.
As of June 30, 2012, our Chief Executive Officer and Chief Financial Officer identified the following specific material weaknesses in our internal controls over its financial reporting process:
In light of the forgoing, once we have adequate funds, management plans to hire additional personnel, establish an audit committee and implement an audit committee charter for oversight of the financial reporting and disclosure process. We believe these actions will remediate the material weaknesses. However, the material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
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 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
There has been no change in our internal control over financial reporting during the quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Information with regards to the Directors and Officers of the Entity as of June 30, 2012 is set forth below:
Mark E. Argenti, age 41, has served as Chief Executive Officer since July 9, 2009. Mr. Argenti served as Chief Creative Officer from May 17, 2007 through July 8, 2009, and has served as a Director since May 17, 2007.
Prior to his appointment as CEO, Mr. Argenti directed the daily operations of Vidaroo subsidiary Media Evolutions - a company he originally co-founded with Ian McDaniel. In addition, he was instrumental in creating, developing and managing operations of E360 and oversaw all of the Entity's video production projects and studio activities. On the technology development front, Mr. Argenti, in collaboration with Mr. McDaniel, pioneered a proprietary video playback technology that continues to be used by us and our clients to this day; and he teamed with Ian and Entity President Mary Spio to design, develop and commercialize our first stage online video platform as well as providing creative guidance to Mr. Morgan for the current platform’s marketing interface.
Ian McDaniel, age 38, has served as an Officer and Director since May 17, 2007.
Upon Mr. Argenti’s appointment as Chairman and CEO, Mr. McDaniel began serving as the President of our production services. Mr. McDaniel has served as a pioneering force in the Entertainment industry for nearly two decades, driven by his knowledge of advanced and emerging technologies that enable ‘off the hook' media production for the world's leading artists and broadcast media companies. Teamed with Mark Argenti, he co-founded Media Evolutions and has provided pre- and post-production design and editing expertise for numerous large-scale projects such as Justin Timberlake, Live from Memphis and Will Smith, Live in Concert. In addition, he has worked on shows for NBC, ABC, MTV, VH1, HBO, Showtime, Discovery Channel, History Channel and A&E.
Micheal Morgan, age 25, has served as President and Chief Technology Officer since November 10, 2010. Prior to his appointment to President, Mr. Morgan acted as Chief Operating/Technology Officer and Director since August 14, 2009 and as VP of Development from October 2008 through the time of his appointment as an Officer and Director in 2009.
During his tenure, Mr. Morgan designed and developed our current online video platform. Mr. Morgan continues to serve as Director of Interactive at Magnify Agency, a creative and software development firm; co-founder and served as Vice President of ZEN3 from March 2007 to October 2008 and Vice President of Web Development at AdepTech, Inc., a technology services company from June 2004 to March 2007. During his career, he has architected systems for use in Nuclear Quality Control, Software-as-a-Service (SaaS), distributed HIPAA-based secure health care software, and e-commerce dataflow automation. He holds several industry certifications and is an active participant in industry-related and civic organizations. Mr. Morgan attended the University of Central Florida, where he focused his studies on Digital Interactive Systems.
Thomas J. Moreland, age 45, has served as Chief Financial Officer since September 23, 2008.
Prior to joining us, Mr. Moreland held several senior financial roles for public companies, including Vice President of Finance for Nasdaq-listed Priority HealthCare from January 2005 to July 2006 and AMEX-listed PainCare Holdings, Inc. from September 2006 to February 2008. In these capacities, he was largely responsible for strategic planning, operational performance and SEC reporting compliance. Additionally, he served as Controller and Chief Accounting Officer for Devereux, a national non-profit provider of behavioral health care services. He began his career working as an audit manager with international accounting firm Ernst & Young.
There are no family relationships between or amongst executive officers or directors.
This section describes the compensation program for our executive officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the number of and percent of our common stock beneficially owned by:
The percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares of our capital stock outstanding on June 30, 2012, and all shares of our common stock issuable to that person in the event of the exercise of outstanding options and other derivative securities owned by that person which are exercisable within 60 days of June 30, 2012. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of our capital stock owned by them.
(1) This column represents the total number of votes each named stockholder is entitled to vote upon matters presented to the shareholders for a vote.
(2) Applicable percentage ownership is based on 67,437,365 shares of Common Stock outstanding as of June 30, 2012, together with 57,576,418 securities exercisable or convertible into shares of Common Stock within 60 days of June 30, 2012, for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock that are currently exercisable or exercisable within 60 days of June 30, 2012, are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(3) Mary Spio was an Executive Officer from May 17, 2007 through July 23, 2010.
The Entity has no independent directors and has had no transactions with related parties in excess of $120,000.
The following documents are included as exhibits to this Annual Report:
(1) Incorporated by reference to the Entity’s registration statement on Form SB-2 filed with the Securities and Exchange Commission on December 7, 2007.
(2) Incorporated by reference to the Entity’s Form 8-K filed with the Securities and Exchange Commission on August 19, 2009.
(3) Incorporated by reference to the Entity’s Form 8-K filed with the Securities and Exchange Commission on July 28, 2010.
(4) Incorporated by reference to the Entity’s Form 10-K filed with the Securities and Exchange Commission on September, 28 2009.
(5) Incorporated by reference to the Entity’s Information Statement Pursuant to Section 14(c) of the Securities Exchange Act of 1934 filed with the Securities and Exchange Commission on August 4, 2011.
(6) Incorporated by reference to the Entity’s Form 8-K filed with the Securities and Exchange Commission on May 21, 2012.
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.
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.
VIDAROO CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JUNE 30, 2012 AND 2011
To the Board of Directors and Management
Winter Garden, Florida
I have audited the accompanying consolidated balance sheet of Vidaroo Corporation and Subsidiaries (the "Entity") as of June 30, 2012 and 2011 and the related consolidated statements of operations and retained earnings, shareholders’ deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Entity’s management. My responsibility is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Entity is not required to have, nor was I engaged to perform, an audit of its internal control over financial reporting. My 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 Entity’s internal control over financial reporting. Accordingly, I express no such opinion. An audit 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. I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vidaroo Corporation and Subsidiaries as of June 30, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Entity will continue as a going concern. As discussed in Note 12 to the financial statements, the Entity has suffered losses from operations and has cash needs in excess of its resources 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 12. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
VIDAROO CORPORATION AND SUBSIDIARIES
See accompanying notes to consolidated financial statements.
VIDAROO CORPORATION AND SUBSIDIARY
See accompanying notes to consolidated financial statements.
VIDAROO CORPORATION AND SUBSIDIARIES
See accompanying notes to consolidated financial statements.
VIDAROO CORPORATION AND SUBSIDIARIES
See accompanying notes to consolidated financial statements.
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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 June 30, 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.
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.
Certain reclassifications have been made to the prior year balances to conform to the current year presentation.
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 from services rendered in connection with the production of video content. Revenue is recognized when services are rendered and has been delivered 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.
The Company 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 years ended June 30, 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.
Vidaroo has a 98% ownership interest in E360. Noncontrolling interest represents the portion of E360 not owned by Vidaroo. At June 30, 2011, Vidaroo had a 95% ownership interest in E360 and acquired the additional 3% through the issuance of Vidaroo stock during the year ended June 30, 2012.
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 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 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.
Deferred Financing Costs
The Entity recognized deferred financing costs in connection with its Promissory Notes and Convertible Secured Promissory Notes. These costs will be amortized over the term of the debt and represent fees paid to a placement agent in connection with the issuance of this debt.
Earnings per Common share
Basic earnings per common share excludes potentially dilutive securities and is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Fully diluted earnings per share is equivalent to basic earnings per share for the years ended June 30, 2012 and 2011, as the impact of including those shares would be anti-dilutive. For the years ended June 30, 2012 and 2011 the Entity had 64,249,288 and 19,626,374 potentially dilutive common shares, respectively.
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:
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 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 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.
Research and Development
Based on the nature of the Entity’s software development methodology, costs incurred are considered to be connected with the establishment of technological feasibility in accordance with ASC 985-20-25 “Costs of Software to Be Sold, Leased or Marketed”. Research and Development costs incurred during the years ended June 30, 2012 and 2011 were $273,000 and $320,000, respectively.
NOTE 3. RECENT ACCOUNTING STANDARDS
On June 16, 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income (Topic 220),” which requires companies to report total net income, each component of comprehensive income, and total comprehensive income on the face of the income statement, or as two consecutive statements. The components of comprehensive income will not be changed, nor does the ASU affect how earnings per share is calculated or reported. These amendments will be reported retrospectively upon adoption. The adoption of the ASU will be required for the Company’s March 31, 2012 Form 10-Q filing, and is not expected to have a material impact on the Company.
In May 2011, the FASB issued an accounting standard update which works to achieve common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards. The update both clarifies the FASB’s intent about the application of existing fair value guidance, and also changes certain principles regarding measurement and disclosure. The update is effective prospectively and is effective for annual periods beginning after December 15, 2011. Early application is permitted for interim periods beginning after December 15, 2011. The Company is currently evaluating the effect the update will have on its consolidated financial statements.
In January 2010, the FASB issued an accounting standard update on fair value measurements and disclosures. The update requires more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009; except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this update did not have an effect on the Company’s consolidated financial statements.
NOTE 4. RELATED PARTY TRANSACTIONS
During the year ended June 30, 2012, the Entity and its Officers agreed to convert its outstanding accrued payroll obligations into Options to purchase Common Stock. The Entity awarded 18,193,775 Options to purchase its Common Stock exercisable at $0.05 in return for forgiveness of its outstanding payroll obligation of $97,582. The number of Options to purchase Common in return for forgiveness of the payroll obligation was done at fair value as determined by using the Black-Scholes valuation methodology
As of June 30, 2012, the Entity has an outstanding obligation to Mark Argenti and Ian McDaniel of $31,255 and $31,255, respectively for incentive compensation under each individual’s employment contract.
NOTE 5. DEBT
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, 2011 and 2010, $0 and $342,479, respectively, was accreted to interest.
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 in exchange for $290,000 outstanding plus accrued interest.
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. Subsequent to June 30, 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 shall remain a short-term obligation of Vidaroo.
NOTE 6. FAIR VALUE MEASUREMENTS
The Notes Payable, Convertible Secured Promissory Notes and Promissory Notes are stated at fair value. Fair value is as follows:
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. During the years ended June 30, 2012 and 2011, the Entity recorded an unrealized (loss) gain of $(157,504) and $394,607, respectively. This gain had the effect of increasing the unrealized gain at June 30, 2011 of $394,607 to the $237,103 reported as of June 30, 2012.
Noncontrolling interest is also stated at fair value. Fair value is as follows:
The Level 3 inputs used include the number of shares being offered to the holders of the Noncontrolling interest along with fair value of the Company’s Common Stock. During the years ended June 30, 2012 and 2011, the Entity recorded an unrealized gain of $98,580 and $0, respectively.
NOTE 7. COMMON STOCK
The Entity’s authorized common stock consists of 200,000,000 shares of common stock with a par value of $0.001. 67,437,365 shares were outstanding as of June 30, 2012. During the year ended June 30, 2012, the Entity increased the number of authorized shares from 100,000,000 to 200,000,000.
During the year ended June 30, 2012, the Entity issued a total of 1,246,180 shares of Common Stock. 346,180 shares were issued for stock based compensation valued at $56,648; and 900,000 were issued for the conversion of 3% of the minority interest in E360 for consideration valued at $16,200.
During the year ended June 30, 2011, the Entity issued a total of 1,055,153 shares of common stock. 430,153 were issued as Stock based compensation for employees valued at $61,870; and 625,000 were issued for professional services for consideration valued at $57,000.
NOTE 8. CALLABLE PREFERRED STOCK
During the year ended June 30, 2012, the Entity amended its Articles of Incorporation to authorize the creation and issuance of 100,000,000 shares of “blank check” preferred stock (“Preferred Stock”) with a par value of $0.001.
Pursuant to authorization of the class of Preferred Stock the Entity issued 33,778,173 shares of Preferred Stock. These shares carry an annual coupon of 5% and are callable by the Entity at $0.10. The dividend is payable annually within 30 days of December 31. Should the dividend go unpaid, the Entity would be prohibited from increasing Executive compensation or paying cash bonuses under the terms of its settlement agreement with the previous holders of its Convertible Secured Promissory Notes and Promissory Notes Payable.
NOTE 9. STOCK BASED COMPENSATION
The Entity accounts for stock based compensation awards including employee stock options and warrants issued to external parties for newly issued awards as well as those modified, repurchased, or cancelled after the effective date, and to the unvested portion of awards outstanding as of the effective date. The Entity uses the Black-Scholes option-pricing model to value its stock option and warrant grants.
The estimated fair value of each option or warrant grant is determined on the date of grant using Black-Scholes option pricing model. The Black-Scholes model is dependent upon key inputs estimated by management, including the expected term of an option and the expected volatility of our common stock price over the expected term. The Entity determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. The risk-free interest rate is based on the yield on zero-coupon U.S. treasury securities at the time of grant for a period commensurate with the expected term. The expected volatility is calculated based on the historical experience of internet-related companies with a price volatility ranging from 42% to 117%. We estimated our volatility to be 73% to 75%.
Compensation cost arising from non-vested stock granted to employees and from non-employees stock awards is recognized as expense using the graded vesting attribution method over the vesting period. As of June 30, 2011, there was $291,208 of remaining unrecognized compensation cost related to non-vested stock; that cost is expected to be recognized over a weighted average period of 2.3 years.
During the years ended June 30, 2012 and 2011, the Entity issued shares as well as options and warrants for shares of stock in connection with the recruitment of directors, officers and employees as well as for professional service vendors and the conversion of certain debt instruments into Equity of the Entity. Based on these activities, compensation cost of $357,213 and $451,858 was recognized in the years ended June 30, 2012 and 2011, respectively.
The following table summarizes the Entity’s stock options and warrants outstanding as of June 30, 2012 and 2011, as well as option and warrant activity during the year then ended:
The following table is a summary of the Entity’s non-vested stock options
The weighted average fair value of options and warrants granted during the years ended June 30, 2012 and 2011 was $0.06 and $0.05 per share, respectively. The total intrinsic value of options exercised during the years ended June 30, 2012 and 2011, was $0. The aggregate intrinsic value of the outstanding options at June 30, 2012 and 2011 was $0.
NOTE 10. 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:
NOTE 11. CONCENTRATIONS OF REVENUE
During the year ended June 30, 2012 and 2011, we had two customers that accounted for 45% and 63% of our revenue, respectively.
NOTE 12. GOING CONCERN
The Entity became operational during the year ended June 30, 2009 and exited the development stage. The Entity began to realize substantial revenue in year ended June 30, 2009, which has grown by over $621,000 to $1,720,564 in the year ended June 30, 2012. Through June 30, 2012 the Entity has accumulated losses of $8,176,291. The Entity expects to generate revenues from corporate clients and partners in the way of software licensing revenue, as well as for its production services.
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 13. SUBSEQUENT EVENTS
Subsequent to June 30, the Entity finalized agreements with holders of an additional $65,000 of Promissory notes payable plus accrued interest into 1,650,693 shares of Preferred Stock and 575,161 warrants to purchase our Common Stock exercisable at $0.10.