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 September 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.
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 from professional 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.
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 three months ended September 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.
Noncontrolling 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 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 quarters ended September 30, 2012 and 2011 the Entity had 65,853,927 and 20,556,233 potentially dilutive common shares, respectively, which were not included in the calculation of diluted 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:
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Level 1
- Active market provides quoted prices for identical assets or liabilities;
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Level 2
- Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable with market data; and
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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.
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Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 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.
The Entity considers its Debt instruments to have Level 3 inputs. Those inputs include the fair value of Vidaroo’s common stock and the number of shares the Entity is offering to convert its current outstanding debt and accrued interest to equity of the Entity.
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” and therefore are considered Research and Development.
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.
The recent accounting standards disclosed shall be read in conjunction with the disclosures made in the Entity's Annual Report on form 10-K for the fiscal year ended June 30, 2012.
NOTE 4. RELATED PARTY TRANSACTIONS
As of September 30, 2012, the Entity has an outstanding obligation to both Mark Argenti and Ian McDaniel of $39,478 for incentive compensation under each individual’s employment contract of which $8,223 was earned in the quarter ended September 30, 2012.
Also as of September 30, 2012 and 2011, the Entity had an outstanding payroll obligation of $50,000 and $15,417 to its Officers
NOTE 5. 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, 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. During the three months ended September 30, 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 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:
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Face value
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Adjustment to face value
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Fair value as of September 30, 2012
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Promissory Notes and Notes Payable
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Convertible Secured Promissory Notes Payable
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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 three months ended September 30, 2012.
Noncontrolling interest is also stated at fair value. Fair value is as follows:
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Face value
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Adjustment to face value
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Fair value as of September 30, 2012
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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.
NOTE 7. 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 8. STOCK BASED COMPENSATION
The following table represents activity for the Entity’s outstanding stock options and warrants as of and for the three months ended September 30, 2012:
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Number of Shares Outstanding Under Options and Warrants
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Weighted Average Exercise Price
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)
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Balance, September 30, 2012
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Exercisable, September 30, 2012
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The following table is a summary of the Entity’s non-vested stock options
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Number of shares
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Weighted-Average Grant-Date Fair Value
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Non-vested balance, June 30, 2012
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Non-vested balance, September 30, 2012
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Unrecognized compensation cost related to unvested stock options and warrants at September 30, 2012 was $45,155 and are expected to be recognized over a weighted average period of 21 months.
The total intrinsic value of options exercised during the three months ended September 30, 2012 and 2011 and was $0. The aggregate intrinsic value of the outstanding options at September 30, 2012 and 2011 was $0.
NOTE 9. 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 10. GOING CONCERN
Through September 30, 2012, the Entity has accumulated losses of $8,311,164.
The Entity expects to generate revenues from its SaaS platform and Production service offerings. The Entity will either receive a monthly fee for its software platform and engagement fees 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 11. 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.