Attached files
file | filename |
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8-K/A - PIKSEL, INC. | v169587_8ka.htm |
EX-99.2 - PIKSEL, INC. | v169587_ex99-2.htm |
EX-99.3 - PIKSEL, INC. | v169587_ex99-3.htm |
Exhibit
99.1
Financial
Statements
December
31, 2008 and 2007
With
Independent Auditors’ Report
The
FeedRoom, Inc.
Table
of Contents
December
31, 2008 and 2007
Independent
Auditors’ Report
|
1
|
|
Financial
Statements
|
||
Balance
Sheets
|
2
|
|
Statements
of Operations
|
3
|
|
Statements
of Stockholders’ Equity (Deficit)
|
4
|
|
Statements
of Cash Flows
|
5
|
|
Notes
to Financial Statements
|
|
6-17
|
WithumSmith+Brown,
PC
A
Professional Corporation
Certified
Public Accountants and Consultants
One
Spring Street
New
Brunswick, NJ 08901
732.828.1614
fax 732.828.5156
www.withum.com
Additional
Offices in New Jersey, New York,
Pennsylvania,
Maryland, Colorado and Florida
Independent
Auditors’ Report
To the
Board of Directors and Stockholders, The FeedRoom, Inc.:
We have
audited the accompanying balance sheets of The FeedRoom, Inc. as of December 31,
2008 and 2007, and the related statements of operations, stockholders’ equity
(deficit), and cash flows for the years then ended. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of The FeedRoom, Inc. as of December
31, 2008 and 2007, and the results of its operations and its 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 Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company’s significant operating losses raise substantial doubt
about its ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
July 14,
2009
1
The
FeedRoom, Inc.
Balance
Sheets
December
31, 2008 and 2007
|
2008
|
2007
|
||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 5,479,182 | $ | 1,412,007 | ||||
Accounts
receivable
|
1,030,244 | 2,134,880 | ||||||
Unbilled
receivables
|
4,825 | 76,958 | ||||||
Current
portion of loan receivable - related party
|
— | 29,827 | ||||||
Prepaid
expenses and other current assets
|
440,832 | 378,706 | ||||||
Total
current assets
|
6,955,083 | 4,032,378 | ||||||
Property
and equipment, net
|
1,907,199 | 1,452,655 | ||||||
Intangible
assets, net
|
427,319 | — | ||||||
$ | 9,289,601 | $ | 5,485,033 | |||||
Liabilities
and Stockholders' Equity (Deficit)
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable and accrued expenses
|
$ | 1,332,543 | $ | 1,329,436 | ||||
Current
portion of loans payable
|
1,823,251 | 905,464 | ||||||
Current
portion of obligations under capital lease
|
223,754 | 183,414 | ||||||
Deferred
revenue
|
489,833 | 315,581 | ||||||
Total
current liabilities
|
3,869,381 | 2,733,895 | ||||||
Loans
payable, net of current portion and debt discount in the amounts of $4,686
in 2008 and $15,008 in 2007
|
1,217,124 | 4,001,315 | ||||||
Obligations
under capital lease, net of current portion
|
— | 137,775 | ||||||
Stockholders'
equity (deficit)
|
||||||||
Series
F convertible preferred stock; $0.001 par value; 7,778,374 shares
authorized, issued and outstanding (liquidation preference of
$35,446,400)
|
7,778 | — | ||||||
Series
E convertible preferred stock; $0.001 par value; 3,454,522 shares
authorized; 3,279,522 shares issued and outstanding (liquidation
preference of $7,356,283)
|
3,280 | 3,280 | ||||||
Series
D convertible preferred stock; $0.001 par value; 3,997,545 shares
authorized, issued and outstanding (liquidation preference of
$5,246,640)
|
3,998 | 3,998 | ||||||
Series
C convertible preferred stock; $0.001 par value; 1,391,826 shares
authorized, issued and outstanding (liquidation preference of
$1,929,743)
|
1,392 | 1,392 | ||||||
Common
stock; $1.00 par value; 25,000,000 shares authorized; 64,215
and
|
||||||||
9,772
shares issued and outstanding for 2008 and 2007
|
64,215 | 9,772 | ||||||
Additional
paid-in capital
|
62,141,532 | 50,429,374 | ||||||
Accumulated
deficit
|
(58,019,099 | ) | (51,835,768 | ) | ||||
Total
stockholders' equity (deficit)
|
4,203,096 | (1,387,952 | ) | |||||
$ | 9,289,601 | $ | 5,485,033 |
The
Notes to Financial Statements are an integral part of these
statements.
|
2
The
FeedRoom, Inc.
Statements
of Operations
Years
Ended December 31, 2008 and 2007
2008
|
2007
|
|||||||
Sales | ||||||||
Application
and hosting
|
$ | 5,850,575 | $ | 5,448,812 | ||||
Broadcasting
|
3,070,850 | 2,027,638 | ||||||
Website
builds and professional services
|
1,153,932 | 1,845,465 | ||||||
Subscriptions
|
42,571 | 211,681 | ||||||
10,117,928 | 9,533,596 | |||||||
Cost
of sales
|
5,294,379 | 4,018,864 | ||||||
Gross
profit
|
4,823,549 | 5,514,732 | ||||||
Selling,
general and administrative
|
10,649,330 | 9,877,226 | ||||||
Loss
from operations
|
(5,825,781 | ) | (4,362,494 | ) | ||||
Other income (expense) | ||||||||
Currency
exchange
|
40,781 | (13,050 | ) | |||||
Interest
expense
|
(410,952 | ) | (215,213 | ) | ||||
Interest
income
|
27,771 | 13,377 | ||||||
(342,400 | ) | (214,886 | ) | |||||
Loss
before income taxes
|
(6,168,181 | ) | (4,577,380 | ) | ||||
Provision
for state income taxes
|
15,150 | 9,937 | ||||||
Net
loss
|
$ | (6,183,331 | ) | $ | (4,587,317 | ) |
The Notes
to Financial Statements are an integral part of these statements.
3
The
FeedRoom, Inc.
Statements
of Stockholder Equity (Deficit)
Years
Ended December 31, 2008 and 2007
Series C
|
Series D
|
Series E
|
Series F
|
|||||||||||||||||||||||||||||||||||||||||||||||||
Convertible
|
Convertible
|
Convertible
|
Convertible
|
Additional
|
Total
|
|||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock
|
Preferred Stock
|
Preferred Stock
|
Preferred Stock
|
Common Stock
|
Paid-In
|
Accumulated
|
Stockholders'
|
|||||||||||||||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity (Deficit)
|
||||||||||||||||||||||||||||||||||||||||
December
31, 2006
|
1,391,826 | $ | 1,392 | 3,997,545 | $ | 3,998 | 3,279,522 | $ | 3,280 | — | $ | — | 4,643 | $ | 4,643 | $ | 50,284,599 | $ | (47,248,451 | ) | $ | 3,049,461 | ||||||||||||||||||||||||||||||
Repurchase
of shares
|
— | — | — | — | — | — | — | — | (1,514 | ) | (1,514 | ) | 1,514 | — | — | |||||||||||||||||||||||||||||||||||||
Exercise
of stock option
|
— | — | — | — | — | — | — | — | 6,643 | 6,643 | (5,647 | ) | — | 996 | ||||||||||||||||||||||||||||||||||||||
Issuance
of stock options to employees
|
— | — | — | — | — | — | — | — | — | — | 133,900 | — | 133,900 | |||||||||||||||||||||||||||||||||||||||
Issuance
of warrants
in connection
with debt
financing
|
— | — | — | — | — | — | — | — | — | — | 15,008 | — | 15,008 | |||||||||||||||||||||||||||||||||||||||
Net
loss
|
— | — | — | — | — | — | — | — | — | — | — | (4,587,317 | ) | (4,587,317 | ) | |||||||||||||||||||||||||||||||||||||
1,391,826 | $ | 1,392 | 3,997,545 | $ | 3,998 | 3,279,522 | $ | 3,280 | — | — | 9,772 | $ | 9,772 | $ | 50,429,374 | $ | (51,835,768 | ) | $ | (1,387,952 | ) | |||||||||||||||||||||||||||||||
December
31, 2007
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise
of stock option
|
— | — | — | — | — | — | — | 54,443 | 54,443 | (46,289 | ) | — | 8,154 | |||||||||||||||||||||||||||||||||||||||
Issuance
of stock options to employees
|
— | — | — | — | — | — | — | — | — | — | 264,465 | — | 264,465 | |||||||||||||||||||||||||||||||||||||||
Issuance
of Series F Convertible
|
(158,240 | ) | — | (158,240 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Preferred
Stock (less $158,240 issuance
costs)
|
— | — | — | — | — | — | 7,778,374 | 7,778 | — | — | 11,652,222 | — | 11,660,000 | |||||||||||||||||||||||||||||||||||||||
Net
loss
|
— | — | — | — | — | — | — | — | — | — | — | (6,183,331 | ) | (6,183,331 | ) | |||||||||||||||||||||||||||||||||||||
December 31, 2008 | 1,391,826 | $ | 1,392 | 3,997,545 | $ | 3,998 | 3,279,522 | $ | 3,280 | 7,778,374 | $ | 7,778 | 64,215 | $ | 64,215 | $ | 62,141,532 | $ | (58,019,099 | ) | $ | 4,203,096 |
The Notes
to Financial Statements are an integral part of these
statements.
4
The
FeedRoom, Inc.
Statements
of Cash Flows
Years
Ended December 31, 2008 and 2007
2008
|
2007
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$ | (6,183,331 | ) | $ | (4,587,317 | ) | ||
Adjustments
to reconcile net loss to net cash used by operating
activities
|
||||||||
Depreciation
and amortization
|
574,151 | 448,761 | ||||||
Noncash
expense for issuance of stock options
|
264,465 | 133,900 | ||||||
Forgiveness
of related party loan for services rendered
|
29,827 | 33,811 | ||||||
Bad
debt expense
|
19,244 | 27,200 | ||||||
Amortization
of debt discount
|
10,322 | — | ||||||
Changes
in operating assets and liabilities
|
||||||||
Accounts
receivable
|
1,159,253 | (345,075 | ) | |||||
Unbilled
receivables
|
72,133 | (59,852 | ) | |||||
Prepaid
expenses and other current assets
|
55,385 | (230,601 | ) | |||||
Accounts
payable and accrued expenses
|
(238,632 | ) | 556,519 | |||||
Deferred
revenue
|
(312,083 | ) | 135,289 | |||||
Net
cash used by operating activities
|
(4,549,266 | ) | (3,887,365 | ) | ||||
Cash
flows from investing activities
|
||||||||
Purchases
of property and equipment
|
(436,929 | ) | (498,531 | ) | ||||
Cash
paid for the acquisition of Company
|
(200,000 | ) | — | |||||
Net
cash used by investing activities
|
(636,929 | ) | (498,531 | ) | ||||
Cash
flows from financing activities
|
||||||||
Repayments
of loans payable
|
(1,876,726 | ) | (63,205 | ) | ||||
Repayments
of capital lease obligations
|
(379,818 | ) | (181,350 | ) | ||||
Proceeds
from the issuance of Series F preferred stock, net
|
11,501,760 | — | ||||||
Proceeds
from debt financing
|
— | 4,984,992 | ||||||
Proceeds
from the issuance of common stock
|
8,154 | 996 | ||||||
Net
cash provided by financing activities
|
9,253,370 | 4,741,433 | ||||||
Net
increase in cash and cash equivalents
|
4,067,175 | 355,537 | ||||||
Cash
and cash equivalents
|
||||||||
Beginning
of year
|
1,412,007 | 1,056,470 | ||||||
End
of year
|
$ | 5,479,182 | $ | 1,412,007 | ||||
Supplemental
disclosure of cash flow information
|
||||||||
Cash
paid during the year for
|
||||||||
Interest
|
$ | 400,630 | $ | 215,213 | ||||
State
income taxes
|
$ | — | $ | — | ||||
Supplemental
schedule of noncash investing and financing activities
|
||||||||
Equipment
acquired through capital lease obligation
|
$ | 282,283 | $ | 88,486 | ||||
Warrants
issued in connection with debt financing
|
$ | — | $ | 15,008 | ||||
Acquisition
of Company, assets and liabilities acquired (see Note 11 for details),
net
|
$ | 200,000 | $ | — |
The Notes
to Financial Statements are an integral part of these
statements.
5
The
FeedRoom, Inc.
Notes
to Financial Statements
December
31, 2008 and 2007
1.
|
Summary
of Significant Accounting
Policies
|
Organization
The
FeedRoom, Inc. (the “Company”) was incorporated as a Delaware corporation in
September 1999 and is based in New York, New York. The Company also conducts
operations in California, Massachusetts and Washington. The Company provides
video and digital asset management services, technology and professional
services on an outsourced and hosted basis to a variety of customers in the
corporate, government and media sectors throughout the United States and other
countries.
Going
Concern
The
Company has sustained recurring losses and negative cash flows from operations.
Over the past year, the Company’s growth has been funded through a combination
of private equity and debt financing. As of December 31, 2008, the Company had
cash on hand of $5,479,182. The Company raised approximately $11 million dollars
during 2008 in private equity to continue to fund operations through 2009.
However, the Company has experienced and continues to experience negative
operating margins and negative cash flow from operations, as well as an ongoing
requirement for substantial additional capital to accomplish its business plan
over the next several years for which, management continues to search for
ongoing financing. There can be no assurance as to the availability or terms
upon which financing or additional private equity might be
available.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Revenue
Recognition
Website
Builds and Professional Services
Revenue
derived from website build and professional services are recognized in the month
the services are performed.
Application
and Hosting
Application
and hosting fees are billed in accordance with the terms of the customer
contract. Revenues are recognized in the month the services are
provided.
Broadcasting
Revenue
generated from broadcasting is recognized in the month the services are
provided.
Subscriptions
Subscription
revenues are recognized in the month the fees are earned.
Accounts
Receivable
Accounts
receivable represent unsecured, non-interest bearing obligations from customers.
Credit is extended to customers based on an evaluation of a customer’s financial
condition. Accounts receivable are due within 30 days. The Company evaluates its
accounts receivable for collectability and establishes an allowance for doubtful
accounts as needed when accounts receivable becomes uncollectible. Management
has determined that an allowance for doubtful accounts would be
insignificant.
6
The
FeedRoom, Inc.
Notes
to Financial Statements
December
31, 2008 and 2007
Advertising
The
Company expenses advertising costs as they are incurred. Advertising expenses
amounted to $132,206
and $111,468 in 2008 and 2007, respectively.
Property
and Equipment
Property
and equipment are recorded at cost and are depreciated using the straight-line
method over their estimated useful lives, generally three to five years for
computer equipment, three years for computer software, three years for office
equipment, five years for furniture and fixtures and five years for other
property. Leasehold improvements are amortized over the shorter of the term of
lease or useful life. Expenditures for maintenance and repairs, which do not
improve or extend the useful lives of the respective assets, are expensed as
incurred.
Intangibles
with Finite Lives
The
Company is amortizing software costs on the straight-line basis as
follows:
Amortization
Period
|
|
Description
|
(Life)
Years
|
Software
costs
|
3
|
Long-Lived
Assets
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the Company’s policy is to review long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Management does not believe
that there has been any impairment of the carrying value of any long-lived
assets as of December 31, 2008 and 2007.
Stock-Based
Compensation
Effective
January 1, 2006, the Company adopted the requirements of Statement of Financial
Accounting Standards (“SFAS”) No. 123(R), “Share -Based Payment”, for
employees and directors. Under SFAS No. 123(R), each option granted is fair
valued on the date of grant using a Black-Scholes option pricing model. The
Company estimates expected forfeiture rates at the grant date and recognizes
compensation cost only for those awards expected to vest.
The fair
value of each option grant to employees was estimated on the date of grant using
the black scholes method with the following weighted average
assumptions:
Risk
free interest rate
|
5.0%
|
Expected
dividend yield
|
0%
|
Expected
life
|
10
Years
|
Volatility
percentage
|
85%
|
Income
Taxes
The
Company utilizes the liability method of accounting for deferred income taxes,
as set forth in Statement of Financial Accounting Standards No. 109 “Accounting
for Income Taxes” (“SFAS 109”). Under this method, deferred tax liabilities and
assets are recognized for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of assets and
liabilities. A valuation allowance is established against net deferred tax
assets if, based on the weight of available evidence, it is more likely than not
that some or all of the net deferred tax assets will not be realized. Deferred
income taxes result primarily from net operating losses and have been offset by
a valuation allowance for the same amount.
The
Company, in accordance with Financial Accounting Standards Board (“FASB”)
Financial Staff Position FIN 48-3, had deferred the application of FIN 48,
“Accounting for Uncertainty in Income Taxes” until its first fiscal year
beginning after December 31, 2008. The Company’s accounting policy is to
evaluate uncertain tax positions in accordance with FASB No. 5 “Accounting for
Contingencies”.
7
The
FeedRoom, Inc.
Notes
to Financial Statements
December
31, 2008 and 2007
Concentration
of Credit Risk
The
Company’s two largest customers accounted for 53 percent of accounts receivable
at December 31, 2008. The Company’s largest customer accounted for 50 percent of
accounts receivable at December 31, 2007. A loss of the revenue from these
customers or the failure of them to pay their balances could have a significant
impact on the financial position, results of operations and cash flows of the
Company.
For the
years ended December 31, 2008 and 2007, sales to one major customer amounted to
approximately 30 and 22 percent of total sales, respectively. A loss of this
customer could adversely affect the operating results of the
Company.
Financial
instruments which potentially expose the Company to concentration of credit risk
consist primarily of cash and cash equivalents. The Company places its cash and
cash equivalents in high quality financial institutions and at times during the
year, the amount on deposit may exceed the Federal Deposit Insurance
Corporation’s insured limit. The Company has not incurred any losses from credit
risk during the years ended December 31, 2008 and 2007.
In 2009,
the Company lost a customer that comprised 43 percent of 2008
revenue.
2.
|
Property
and Equipment, Net
|
Property
and equipment consisted of the following at December 31:
2008
|
2007
|
|||||||
Computer
equipment
|
$ | 4,703,521 | $ | 4,092,123 | ||||
Computer
software
|
1,663,011 | 1,511,472 | ||||||
Office
equipment
|
54,745 | 52,502 | ||||||
Furniture
and fixtures
|
106,325 | 94,073 | ||||||
Leasehold
improvements
|
1,248,179 | 1,022,178 | ||||||
Other
property
|
239,653 | 239,653 | ||||||
8,015,434 | 7,012,001 | |||||||
Less:
Accumulated depreciation and amortization
|
(6,108,235 | ) | (5,559,346 | ) | ||||
Property
and equipment - net
|
$ | 1,907,199 | $ | 1,452,655 |
Depreciation
and amortization expense charged to operations amounted to $549,015 and $448,761
in 2008 and 2007, respectively.
3.
|
Intangible
Assets, Net
|
Intangible assets
consist of the following at December 31:
2008
|
2007
|
|||||||
Intangible
assets subject to amortization
|
||||||||
Software
costs
|
$ | 452,455 | $ | — | ||||
Less:
Accumulated amortization
|
(25,136 | ) | — | |||||
Software
costs
|
$ | 427,319 | $ | — |
Amortization
expense amounted to $25,136 for the year ended December 31, 2008 and $-0- for
the year ended December 31, 2007.
8
The
FeedRoom, Inc.
Notes
to Financial Statements
December
31, 2008 and 2007
Aggregate
future amortization expense for the next four years relating to the above
amortizable intangible assets is estimated to be as follows:
Year
|
Amount
|
|||
2009
|
$ | 150,818 | ||
2010
|
150,818 | |||
2011
|
125,683 | |||
2012
and thereafter
|
— | |||
$ | 427,319 |
4.
|
Obligation
Under Capital Lease
|
The
Company is the lessee of computer equipment under capital leases expiring
through December 2009. The assets and liabilities under capital lease are
recorded at the lower of the present value of the minimum lease payments or the
fair value of the asset. The assets are amortized over the lower of their
related lease terms or their estimated productive lives.
Obligations
under capital lease consist of the following at December 31:
2008
|
2007
|
|||||||
Computer
equipment lease – interest ranging from 6.15 percent to 18.35 percent per
annum, payable monthly, secured by computer equipment, final payments due
from April 2009 through December 2009
|
$ | 223,754 | $ | 321,189 | ||||
Less:
Current portion
|
(223,754 | ) | (183,414 | ) | ||||
Obligations
under capital lease, net of current portion
|
$ | — | $ | 137,775 |
A summary
of property held under capital leases and included in Note 2, is as follows at
December 31:
2008
|
2007
|
|||||||
Computer
equipment
|
$ | 593,098 | $ | 1,193,780 | ||||
Less:
Accumulated amortization
|
(236,989 | ) | (636,236 | ) | ||||
|
||||||||
Property
held under capital lease, net
|
$ | 356,109 | $ | 557,544 |
Amortization
on assets held under capital leases charged to expense in 2008 and 2007 was
$74,923 and $129,645, respectively.
Minimum
future lease payments under capital lease as of December 31, 2008 for the year
and in the aggregate are:
Year
|
Amount
|
|||
2009
|
$ | 238,686 | ||
Less:
Imputed interest
|
(14,932 | ) | ||
Present
value of minimum lease payments
|
$ | 223,754 |
9
The
FeedRoom, Inc.
Notes
to Financial Statements
December
31, 2008 and 2007
5.
|
Loans
Payable
|
|
2008
|
2007
|
||||||
Term
loans – interest at 11.75 percent, payable monthly, secured by the assets
of the Company, final payment due June 2012. See Note 12 for refinancing
of debt in January 2009. (A)
|
$ | 2,045,061 | $ | 2,921,867 | ||||
Revolving
loans – interest at 8.0 percent, payable monthly, secured by the assets of
the Company, final payments due November 2008
|
— | 1,000,000 | ||||||
Revolving
loans – interest at prime plus 1.75 percent, payable monthly, secured by
the assets of the Company, final payments due December
2009.
|
||||||||
See
Note 12 for refinancing of debt in January
|
||||||||
2009(A)
|
1,000,000 | 1,000,000 | ||||||
.
|
3,045,061 | 4,921,867 | ||||||
Less:
Debt discount
|
4,686 | 15,088 | ||||||
Subtotal
|
3,040,375 | 4,906,779 | ||||||
Less:
Current portion
|
1,823,251 | 905,464 | ||||||
Loans
payable – net of current portion
|
$ | 1,217,124 | $ | 4,001,315 |
(A) See
Note 12 for refinancing of debt in January 2009.
In
connection with the promissory notes, the Company issued warrants to purchase
175,000 shares of Series E Preferred at an initial exercise price of $1.00 per
share in 2007. These warrants were exercisable upon issuance and have a ten-year
term expiring May 2017. The fair value of the warrants of $15,008, as determined
through the application of the Black-Scholes Model, was recorded as a debt
discount against the capital expenditure line and will be amortized over the
life of the note.
Future
maturities of loans payable based on outstanding debt at December 31, 2008 and
repayment terms included in the January 2009 refinance are as
follows:
Year
|
Amount
|
|||
2009
|
$ | 1,823,251 | ||
2010
|
1,221,810 | |||
2011
|
— | |||
Total
minimum lease payments
|
3,045,061 | |||
Less:
Debt discount
|
(4,686 | ) | ||
Present
value of minimum lease payments
|
$ | 3,040,375 |
At
December 31, 2008 and 2007, prime interest rate was 3.25 and 7.50 percent,
respectively.
6.
|
Common
Stock and Convertible Preferred
Stock
|
In July
2008, the Company executed the Seventh Amended and Restated Certificate of
Incorporation whereby the Company authorized the issuance of Series F
Convertible Preferred shares, amended its authorized shares of common stock to
25,000,000 shares and authorized the issuance of 16,622,267 of preferred stock
as detailed below.
10
The
FeedRoom, Inc.
Notes
to Financial Statements
December
31, 2008 and 2007
Common
Stock
The
Company is authorized to issue 25,000,000 shares of common stock having a par
value of $1.00.
Series
C Convertible Preferred
At
December 31, 2008 and 2007, the Company has issued and outstanding 1,391,826
shares of Series C Convertible Preferred Stock. The Company is authorized to
issue 1,391,826 shares of Series C Convertible Preferred Stock with the
following terms:
Voting Rights - Each holder of
shares of Series C Convertible Preferred Stock shall be entitled to the number
of votes equal to the number of whole shares of Common Stock into which such
shares of Convertible Preferred Stock are convertible.
Dividends - The holders of
Series C Convertible Preferred Stock shall be entitled to receive a cumulative
cash dividend equal to six percent (6%) per annum of the Series C Original Issue
Price, respectively (appropriately adjusted to reflect stock splits, stock
dividends, stock combinations and the like), compounded annually. Such dividends
shall accrue daily and shall be cumulative from the date of issuance of each
share Series C Convertible Preferred Stock, as applicable, whether or not
declared. Cumulative undeclared dividends at December 31, 2008 and 2007 were
$537,917 and $454,408, respectively.
Liquidation Preference – In
the event of liquidation, dissolution or winding up of the affairs of the
Company, the holders of outstanding Series C Convertible Preferred Stock, after
payment of the preferential amounts to Series F Convertible Preferred Stock,
Series E Convertible Preferred Stock and Series D Convertible Preferred Stock
(see below) has been made in full, or funds necessary for such payment shall
have been set aside by the Company in trust for the account of such holders so
as to be available for such payment, the holders of the Series C Convertible
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any available funds and assets of the Company to the holders of
the Common Stock or any other series or class of capital stock of the Company by
reason of their ownership thereof, an amount equal to the sum of the Series C
Convertible Original Issue Price per share (as adjusted for stock splits, stock
dividends, stock combinations and the like) plus any declared but unpaid
dividends thereon and any accrued but unpaid dividends.
Conversion – Each outstanding
shares of Series C Convertible Preferred Stock are convertible into a number of
fully paid shares of Common Stock at a rate of the effective times conversion
ratio as defined in the agreement. Conversion is automatic upon the closing of
an initial public offering, as defined.
Antidilution – Series C
Convertible Preferred Stock has weighted average antidilution provisions, as
defined.
Series
D Convertible Preferred
At
December 31, 2008 and 2007, the Company has issued and outstanding 3,997,545
shares of Series D Convertible Preferred Stock. The Company is authorized to
issue 3,997,545 shares of Series D Convertible Preferred Stock with the
following terms:
Voting Rights - Each holder of
shares of Series D Convertible Preferred Stock shall be entitled to the number
of votes equal to the number of whole shares of Common Stock into which such
shares of Convertible Preferred Stock are convertible.
Dividends - The holders of
Series D Preferred Stock shall be entitled to receive a cumulative cash dividend
equal to six percent (6%) per annum of the Series D Original Issue Price,
respectively (appropriately adjusted to reflect stock splits, stock dividends,
stock combinations and the like), compounded annually. Such dividends shall
accrue daily and shall be cumulative from the date of issuance of each share of
Series D Preferred Stock, as applicable, whether or not declared. Cumulative
undeclared dividends at December 31, 2008 and 2007 were $1,249,096 and
$1,009,243, respectively.
11
The
FeedRoom, Inc.
Notes
to Financial Statements
December
31, 2008 and 2007
Liquidation Preference - After
payment of the preferential amounts to Series F convertible preferred stock and
the Series E Preferred Stockholders has been made in full, or funds necessary
for such payment shall have been set aside by the Company in trust for the
account of such holders so as to be available for such payment, the holders of
the Series D Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any available funds and assets of the Company
to the holders of the common stock or the Series C Preferred Stock or any other
series or class of capital stock of the Company by reason of their ownership
thereof, an amount equal to the sum of the Series D Original Issue Price per
share (as adjusted for stock splits, stock dividends, stock combinations and the
like) plus any declared but unpaid dividends thereon and any accrued but unpaid
dividends.
Conversion – Each outstanding
shares of Series D Preferred Stock are convertible into a number of fully paid
shares of Common Stock at a rate of the effective times conversion ratio as
defined in the agreement. Conversion is automatic upon the closing of an initial
public offering, as defined.
Redemption – At any time after
the date upon which the last shares of Series F Preferred Stock and Series E
Preferred Stock have been redeemed by the Company, the Company shall redeem the
Series D Preferred Stock upon the request of the Requisite Series D Holders. On
the applicable Subsequent Redemption Date, the Company shall redeem from each
holder of Series D Preferred Stock all of the shares of Series D Preferred Stock
held by such holder at a price per share of Series D Preferred Stock equal to
(1) the Series D Preferred Stock Original Issue Price plus (2) any accrued
(whether or not declared), but unpaid, dividends on such share.
Antidilution – Series D
Preferred Stock has weighted average antidilution provisions, as
defined.
Series
E Convertible Preferred
At
December 31, 2008 and 2007, the Company has issued and outstanding 3,279,522
shares of Series E Convertible Preferred Stock. The Company is authorized to
issue 3,454,522 shares of Series E Convertible Preferred Stock with the
following terms:
Voting Rights - Each holder of
shares of Series E Convertible Preferred Stock shall be entitled to the number
of votes equal to the number of whole shares of Common Stock into which such
shares of Convertible Preferred Stock are convertible.
Dividends - The holders of
Series F convertible preferred stock and Series E Preferred Stock shall be
entitled to receive a cumulative cash dividend equal to eight percent (8%) per
annum of the Series E Original Issue Price (appropriately adjusted to reflect
stock splits, stock dividends, stock combinations and the like), compounded
annually. Such dividends shall accrue daily and shall be cumulative from the
date of issuance of each share of Series E Preferred Stock, as applicable,
whether or not declared. Cumulative undeclared dividends at December 31, 2008
and 2007 were $633,262 and $370,900, respectively.
Liquidation Preference – After
payment of the preferential amounts to the Series F preferred stockholders, the
holders of the Series E Preferred Stock shall be entitled to receive, prior and
in preference to any distribution of any available funds and assets of the
Company to the holders of the Series D Preferred Stock, Series C Preferred Stock
or the Common Stock an amount equal to the sum of (A) one and three-tenths
multiplied by the Series E Original Issue Price per share (as adjusted for stock
splits, stock dividends, stock combinations and the like), plus (B) any declared
but unpaid dividends thereon, plus (C) any accrued but unpaid dividends thereon;
provided that, if the Available Funds and Assets to be distributed among the
holders of the Series E Preferred Stock shall be insufficient to permit the
payment to the holders of Series E Preferred Stock of the full aforesaid
preferential amounts, then all of the Available Funds and Assets shall be
distributed among the holders of Series E Preferred Stock on a pro rata basis
according to the number of shares of Series E Preferred Stock held.
Conversion – Each outstanding
shares of Series E Preferred Stock are convertible into a number of fully paid
shares of Common Stock at a rate of the effective times conversion ratio as
defined in the agreement. Conversion is automatic upon the closing of an initial
public offering, as defined.
12
The
FeedRoom, Inc.
Notes
to Financial Statements
December
31, 2008 and 2007
Redemption – At any time after
the date upon which the last shares of Series F Preferred Stock has been
redeemed by the Company, the Company shall redeem the shares of Series E
Preferred Stock then outstanding upon the request of the Requisite Series E
Holders. On the applicable Subsequent Redemption Date, the Company shall redeem
from each holder of Series E Preferred Stock all of the shares of Series E
Preferred Stock held by such holder at a price per share of Series E Preferred
Stock equal to (1) the Series E Preferred Stock Original Issue Price plus (2)
any accrued (whether or not declared), but unpaid, dividends on such
share.
Antidilution – Series E
Preferred Stock has weighted average antidilution provisions, as
defined.
Series
F Convertible Preferred
In July
2008, the Company issued 7,778,374 shares in exchange for net proceeds in the
amount of $11,660,000 net of issuance costs of $158,240. As a result of the
above transactions, the Company had 7,778,374 shares of Series F Convertible
Preferred Stock issued and outstanding as of December 31, 2008.
Voting Rights - Each holder of
shares of Series F Convertible Preferred Stock shall be entitled to the number
of votes equal to the number of whole shares of Common Stock into which such
shares of Convertible Preferred Stock are convertible.
Dividends - The holders of
Series F Preferred Stock shall be entitled to receive a cumulative cash dividend
equal to eight percent (8%) per annum of the Series F Original Issue Price
(appropriately adjusted to reflect stock splits, stock dividends, stock
combinations and the like), compounded annually. Such dividends shall accrue
daily and shall be cumulative from the date of issuance of each share
of
Liquidation Preference – Each
shares of Series F Preferred Stock shall entitle the holder of such share to
receive, prior and in preference to any distribution of any Available Funds and
Assets in respect of any share of the Series E Preferred Stock, Series D
Preferred Stock, Series C Preferred Stock or the Common Stock or any other
series or class of capital stock of the Company, an amount equal to the sum of
(A) the Series F Original Issue Price, plus (B) any accrued (whether or not
declared), but unpaid dividends thereon; provided that, if the Available Funds
and Assets to be distributed amount the holders of the Series F Preferred Stock
shall be insufficient to permit the payment of the full aforesaid preferential
amount, then all of the Available Funds and Assets shall be distributed among
the holders of Series F Preferred Stock on a pro rata basis according to the
number of shares of Series F Preferred Stock held.
After
payments of preferential amounts of Series C Preferred Stockholders, Series E
Preferred Stockholders , Series D Preferred Stockholders and Series F Preferred
Stockholders have been made in full, or funds necessary for such payment shall
have been aside by the Company in trust for the account of such holders so as to
the available for such payment, the remaining Available Funds and Assets shall
be distributed amount the holders of Series F Preferred stock and Common Stock,
pro rate in accordance with their relative holdings of Common Stock, (treating
for this purpose all shares of Series F Preferred Stock as having been converted
to Common Stock), based on the number of then issued and outstanding Shares (not
including Shares issuable upon conversion of then outstanding Series E Preferred
Stock, Series D Preferred Stock or Series C Preferred Stock). Notwithstanding
the foregoing, shares of Series F Preferred Stock shall only entitle the holders
thereof to receive distributions of Available Funds and Assets until such time
as the Company has paid in respect of each such share an amount equal to the
product of 3 multiplied by the Series F Original Issue Price.
Conversion – Each outstanding
shares of Series F Preferred Stock are convertible into a number of fully paid
shares of Common Stock at a rate of the effective times conversion ratio as
defined in the agreement. Conversion is automatic upon the closing of an initial
public offering, as defined.
13
The
FeedRoom, Inc.
Notes
to Financial Statements
December
31, 2008 and 2007
Redemption – The Company shall
redeem the shares of Series F Preferred Stock then outstanding at any time on or
after the fifth anniversary upon the request of the Requisite Series F Holders.
On the Initial Redemption Date, the Company shall redeem from each holder of
Series F Preferred Stock all of the shares of Series F Preferred Stock held by
such holder at a price per share of Series F Preferred Stock equal to (1) the
Series F Preferred Stock Original Issue Price plus (2) any accrued (whether or
not declared), but unpaid, dividends on such share.
Antidilution – Series F
Preferred Stock has weighted average antidilution provisions, as
defined.
Warrants
In
October 2002, the Company issued warrants to purchase 2,468,400 shares of Series
C Preferred Stock at a then exercise price of $.06021813 per share. These
warrants were issued in connection with an ongoing business relationship of the
Company. Upon issuance of the Series D Preferred Stock, the effect of
anitdilution protection and a simultaneous 10,000-to-1 reverse split, the number
of shares exercisable in this warrant was modified to 127,470 with an exercise
price of $1 per share. These warrants expired on October 29, 2007.
In May
2003, the Company issued warrants to purchase 1,660,629 shares of Series C
Preferred Stock at a then exercise price of $.06021813 per share. Upon issuance
of the Series D Preferred Stock, the effect of antidilution protection and a
simultaneous 1,000-to-1 reverse split, the number of shares exercisable in this
warrant was modified to 85,756 with an exercise price of $1 per share. These
warrants were issued in connection with the conclusion of the Series C financing
and these warrants expired on May 30, 2008. These warrants were issued to a
related party, Sarett Consulting LLC (Note 8).
In
November 2003, the Company issued warrants to purchase 101 shares of Common
Stock at an exercise price of $1 per share. These warrants were issued in
connection with the conclusion of the Series D financing. These warrants expired
on November 13, 2008.
See Note
5 for other warrant issued.
Stock
Option Plan
In
February 2004, the Company created and adopted the 2004 Stock Option and Stock
Award Plan under which 1,659,772 shares of the Company’s Common Stock have been
reserved for issuance to employees, directors, consultants and advisors. Options
granted under this Plan may be incentive stock options, non-qualified stock
options or restricted stock options. Incentive stock options may only be granted
to employees. Options generally vest ratably over four years for new employees
or advisers. Certain options vested on the date of grant.
In 2006,
the Company’s investors consented to change the total number of shares available
under the stock option plan to 1,853,939. In 2007, the Company’s investors
consented to change the total number of shares available under the stock option
plan to 2,766,898. In 2008, the Company has reserved on aggregate of 4,769,655
shares of Common Stock for issuance under the 2004 Stock Option and Stock Award
Plan.
During
2008 and 2007, the Company issued 1,809,985 and 1,724,011 options to various
employees which resulted in compensation expense of $264,465 and $133,900,
respectively which is included in selling, general and administrative expenses.
These options granted are exercisable over a ten-year period, vest over a period
up to four years. 168,069 options have a strike price of $9.81 per share;
1,597,085 options have a strike price of $0.27 per share and the remaining
options having an exercise price of $0.15 per share with a weighted average
remaining life of nine and one half years.
14
The
FeedRoom, Inc.
Notes
to Financial Statements
December
31, 2008 and 2007
The
following table summarizes the Company’s stock option plan as of December
31:
Options
|
Weighted Average
Exercise Price
|
|||||||
Outstanding
at December 31, 2006
|
1,282,078 | $ | 0.15 | |||||
Granted
|
1,724,011 | 1.09 | ||||||
Exercised
|
(1,360 | ) | 0.15 | |||||
Cancelled
|
(482,957 | ) | 0.15 | |||||
Outstanding
at December 31, 2007
|
2,521,772 | $ | 0.77 | |||||
Granted
|
1,809,985 | 0.26 | ||||||
Exercised
|
(54,443 | ) | 0.15 | |||||
Cancelled
|
(645,641 | ) | 0.15 | |||||
Outstanding
at December 31, 2008
|
3,631,673 | $ | 0.65 | |||||
Options
exercisable at December 31, 2008
|
984,827 | $ | 0.70 | |||||
Options
exercisable at December 31, 2007
|
885,121 | $ | 0.30 | |||||
Weighted
average fair value of options granted during 2008 and 2007
|
$ | 0.18 |
The
remaining weighted average contractual life of options outstanding in 2008 and
2007 was 9.1 and 9.3 years, respectively.
The
following table summarizes the Company’s non-vested stock options outstanding as
of December 31:
Options
|
Weighted Average
Exercise Price
|
|||||||
Non-vested
at January 1, 2008
|
1,636,651 | $ | 1.14 | |||||
Granted
|
1,809,985 | $ | 0.26 | |||||
Vested
|
(99,606 | ) | $ | 0.15 | ||||
Exercised
|
(54,543 | ) | $ | 0.15 | ||||
Cancelled
|
(645,641 | ) | $ | 0.15 | ||||
Non-vested
at December 31, 2008
|
2,646,846 | $ | 0.83 |
At
December 31, 2008 approximately $301,000 and $168,000 of unrecognized
compensation costs related to stock options is expected to be recognized over
the next 3 and 4 years, respectively.
The
following table summarizes the Company’s options outstanding at December 31,
2008 under the fixed share-based payment plan:
Exercise Price
Range
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual Life -
All Outstanding
Options
|
Weighted
Average
Exercise
Price
|
Number
Currently
Exercisable
|
Weighted
Average
Exercise Price
|
|||||||||||||||
$0.15-$9.81
|
3,631,673 | 9.07 | $ | 0.65 | 984,827 | $ | 0.70 |
At
December 31, 2008 and 2007, the intrinsic value of options outstanding and
currently exercisable amount to $0.
15
The
FeedRoom, Inc.
Notes
to Financial Statements
December
31, 2008 and 2007
7.
|
Income
Taxes
|
At
December 31, 2008, the Company had approximately $53.5 million of Federal and
State net operating loss carryforwards available to offset future taxable
income. The ability to fully utilize these losses in the future is dependent
upon the Company’s ability to generate taxable income and could be limited due
to ownership changes, as defined under the provisions of Section 382 of the
Internal Revenue Code. These net operating loss carryforwards expire 2019
through 2028. The Company has not made a determination as to whether an
ownership change has occurred for purposes of Section 382 that would limit the
usage of net operating loss carryforwards. If a Section 382 ownership change had
occurred, the utilization of the net operating losses would be limited and could
expire with the Company receiving no benefit from those losses.
As of
December 31, 2008 and 2007, the Company had gross deferred tax assets of
approximately $17 million and $14 million, respectively, related primarily to
net operating loss carryforwards and accrued expenses that are not currently
deductible for income tax purposes. A valuation allowance has been recognized to
fully offset the net deferred tax assets at December 31, 2008 and 2007 because
management has concluded it is currently more likely than not that the deferred
tax assets will not be realized.
8.
|
Commitments
|
The
Company leases office and certain equipment under noncancelable operating
leases. In addition to base rent, the facility leases generally provide for
additional rent based on increases in real estate taxes and other costs. Leases
expire at various dates through 2012, and some may be extended at the Company’s
option.
Future
minimum rental payments, excluding additional rent due for common area charges,
under noncancelable
operating leases are as follows:
Year
|
Amount
|
|||
2009
|
$ | 804,259 | ||
2010
|
453,756 | |||
2011
|
81,969 | |||
2012
|
2,585 | |||
2013
|
— | |||
Total
|
$ | 1,342,569 |
Rent
expense for the year ended December 31, 2008 and 2007 were $605,968 and
$463,377, respectively.
9.
|
Related
Party Transactions
|
During
the year ended December 31, 2007, the Company incurred fees of $190,623 in
connection with the consulting services rendered by Sarett Consulting LLC
(“Sarett”), a company owned by the former Senior Vice President and Chief
Financial Officer.
At
December 31, 2007, the Company had a note receivable of $29,827, which includes
interest in the amount of $4,827 due from the Company’s former Chief Executive
Officer, in connection with a loan granted by the Company in April 2002. The
original amount of the note was $100,000 and interest accrues at 5 percent per
annum. Interest accrued during 2007 amounted to $1,435. The principal amount of
the notes and interest were due through January 2008. During 2008 and 2007, the
Company forgave $29,827 and $33,811 of this note, respectively.
16
The
FeedRoom, Inc.
Notes
to Financial Statements
December
31, 2008 and 2007
10.
|
Employee
Benefit Plan
|
The
Company has a voluntary savings plan covering substantially all employees.
Eligible employees may elect to contribute up to 15 percent, on a pre-tax basis,
of their salaries to an investment trust. The Company does not make any
contributions on behalf of employees. During the years ended December 31, 2008
and 2007, the Company made no contributions to the plan.
11.
|
Acquisition
|
During
2008, the Company purchased certain assets and assumed liabilities of a business
for a purchase price of $200,000 paid in cash.
The
values of the major classes of assets and liabilities acquired were as
follows:
Assets
|
||||
Accounts
receivable
|
$ | 73,861 | ||
Prepaid
expenses and other current assets
|
117,511 | |||
Property
and equipment
|
284,247 | |||
Intangible
assets
|
452,455 | |||
Total
assets
|
928,074 | |||
Liabilities
|
||||
Accounts
payable and accrued expenses
|
$ | 241,739 | ||
Deferred
revenue
|
486,335 | |||
Total
liabilities
|
728,074 | |||
Total
purchase price
|
$ | 200,000 |
12.
|
Subsequent
Event
|
In
January 2009, the Company refinanced its loans payable. The maximum borrowings
on the term loans went from $3,000,000 to $4,500,000 and the revolving loan went
from $1,000,000 to $500,000. The repayments will be interest only for the first
3 months commencing on March 1, 2009 and on June 1, 2009 the remaining 33
payments of principal and interest. All other terms will remain the same. Also
in connection with this agreement, the lender received a warrant to purchase
66,709 shares of preferred series F stock at a purchase price of $1 .499 per
share.
13.
|
Contingencies
|
During
2008 and prior, the Company has received notice from various parties on patent
and technology matters, which could potentially result in litigation against the
Company. As of the date of these financial statements no actual litigation has
been commenced against the Company related to these matters.
In
addition, in January 2002, one of the Company’s customers filed for bankruptcy.
It is possible that the Company could potentially be required to repay
collections from the customer, although, no communication has been received
since 2004.
14.
|
Acquisition
(unaudited)
|
Effective
October 1, 2009, the Company was acquired by KIT Digital, Inc. for consideration
of $13,645,000.
17