Attached files
| file | filename |
|---|---|
| 8-K - Rosca, Inc. | form8k.htm |
| EX-99.2 - Rosca, Inc. | proformafinancials.htm |
SECURE
PATH TECHNOLOGY, LLC.
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
SECURE
PATH TECHNOLOGY LLC
TABLE
OF CONTENTS
PAGE #
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM F-2
CONSOLIDATED
BALANCE
SHEETS F-3
CONSOLIDATED
STATEMENTS OF OPERATIONS F-4
CONSOLIDATED
STATEMENT OF MEMBERS’ EQUITY (DEFICIT) F-5
CONSOLIDATED
STATEMENTS OF CASH FLOWS
F-6
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS F-7
F-1
SECURE
PATH TECHNOLOGY, LLC.
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Members
Secure
Path Technology LLC
We have
audited the accompanying consolidated balance sheets of Secure Path Technology
LLC and subsidiary (collectively the “Company”) as of June 30, 2009 and 2008,
and the related consolidated statements of operations, member’ equity (deficit),
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
was not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Secure Path Technology LLC
and subsidiary as of June 30, 2009 and 2008, 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 consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 2 of the
consolidated financial statements, the Company has incurred losses since
inception, and has significant working capital and accumulated
deficits. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with
respect to these matters are also discussed in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
|
Newport
Beach, California
|
|
|
January
6, 2010
|
F-2
SECURE
PATH TECHNOLOGY LLC
CONSOLIDATED
BALANCE SHEETS
See notes
to accompanying consolidated financial statements
F-3
SECURE
PATH TECHNOLOGY LLC
CONSOLIDATED
STATEMENTS OF OPERATIONS
See notes
to accompanying consolidated financial statements
F-4
SECURE
PATH TECHNOLOGY LLC
CONSOLIDATED
STATEMENT OF MEMBERS’ EQUITY (DEFICIT)
YEARS
ENDED JUNE 30, 2008 AND 2009 AND QUARTER ENDED SEPTEMBER 30, 2009
See notes
to accompanying consolidated financial statements
F-5
SECURE
PATH TECHNOLOGY LLC
CONSOLIDATED
STATEMENTS OF CASH FLOWS
See notes
to accompanying consolidated financial statements
F-6
SECURE
PATH TECHNOLOGY LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Nature of the Business
Secure
Path Technology LLC (formerly known as Secure Path Media LLC) is a California
limited liability company which was formed on November 29, 2005. The
Company conducts its operations primarily from facilities located in Los
Angeles, California.
Secure
Path Technology LLC and its 95% owned subsidiary, Media Metro LLC, a California
limited liability company (collectively the “Company”), is the primary
registration agency for the International Standard Audiovisual Number (“ISAN”)
in North America and is the exclusive global licensing agency providing
commercial access to the ISAN database.
ISAN is
an ISO (International Standards Organization) standard which provides a unique,
permanent and internationally recognized reference number for the identification
of every audiovisual work, including film, television, online and mobile
content, regardless of the format in which the work is distributed. The ISAN
code was developed to be the identifier for the audiovisual (“AV”) industry’s
supply chain, just as the International Standard Book Number (“ISBN”) code is
the unique identifier for publications and the foundation for all tracking for
the global publishing industry.
MediaDNS™
is the Company’s flagship technology offering that empowers content providers,
resource providers, and metadata consumers by supplying them with a synchronized
relationship to their metadata. This powerful tool can aggregate media data from
many sources, transform data into Master Data Records, and syndicate data to and
from many distribution points while reporting back critical metadata consumer
information. It is through this platform that the Company also provides
all ISAN related products and services.
The
Company commenced its intended operations providing audiovisual asset
registrations during the year ended June 30, 2008.
Note
2 – Summary of Significant Accounting Policies
Basis of
Presentation
The
Company has sustained significant losses since inception and has an accumulated
deficit of $12,303,285 and a working capital deficit of $1,963,228 as of
September 30, 2009. The Company’s ability to continue as a going
concern is dependent upon obtaining additional capital and financing, and
generating positive cash flows from operations. These factors raise substantial
doubt about the Company's ability to continue as a going
concern. Management intends to seek additional capital either through
debt or equity offerings and is attempting to increase sales
volume. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
F-7
Unaudited Interim Financial
Information
The
accompanying consolidated balance sheet as of September 30, 2009, the
consolidated statements of operations and cash flows for the quarters ended
September 30, 2008 and 2009, and the consolidated statement of members'
equity (deficit) for the quarter ended September 30, 2009 are unaudited.
The unaudited interim consolidated financial statements have been prepared on
the same basis as the annual consolidated financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's consolidated
financial position, results of operations and cash flows for the quarters ended
September 30, 2008 and 2009. The financial data and other information
disclosed in these notes to the consolidated financial statements related to the
quarterly periods are unaudited. The results of the quarter ended
September 30, 2009 are not necessarily indicative of the results to be
expected for the year ending June 30, 2010 or for any other interim period or
for any other future year.
Principles of
Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its majority-owned subsidiary, which is currently
inactive. All intercompany balances and transactions have been
eliminated in consolidation.
Estimates
The
preparation of consolidated 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 dates of the consolidated financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Assets and liabilities which are
subject to significant judgment and use of estimates include valuation
allowances with respect to recoverability of long-lived assets, useful lives
associated with property and equipment, and assumptions underlying an embedded
derivative liability. On an ongoing basis, Management evaluates its estimates
compared to historical experience and trends, which form the basis for making
judgments about the carrying value of assets and liabilities.
Fair Value of Financial
Instruments
The
carrying amounts (or in the case of notes payable, the face value) of cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities,
and notes payable approximate fair value because of the short-term maturity of
these items. Also see Recent Accounting Pronouncements
below.
Concentrations of Credit
Risk
Cash
and Cash Equivalents
Financial
instruments that potentially subject the Company to credit risk consist
principally of cash and cash equivalents and accounts receivable. The Company,
at times, maintains cash balances at financial institutions in excess of amounts
insured by United States government agencies or payable by the United States
government directly. The Company places its cash and cash equivalents with high
credit quality financial institutions.
F-8
Concentrations,
Credit and Allowances for Doubtful Accounts
The
Company provides credit in limited circumstances to customers throughout the
United States. In these instances, the Company performs limited credit
evaluations of its customers and does not obtain collateral with which to secure
its accounts receivable. Accounts receivable, if any, are reported net of an
allowance for doubtful accounts, which is management’s best estimate of
potential credit losses. The Company’s allowance for doubtful accounts is based
on historical experience, but management also takes into consideration customer
concentrations, creditworthiness, and current economic trends when evaluating
the adequacy of the allowance for doubtful accounts. Historically, Management
has not recorded an allowance.
Two
customers made up 52% of the Company’s accounts receivable as of June 30, 2008
and four customers made up 75% of the Company’s total revenue for the year ended
June 30, 2008. Three customers made up 40% of the Company’s accounts receivable
as of June 30, 2009 and one customer made up 20% of the Company’s total revenue
for the year ended June 30, 2009.
Three
customers made up 71% of the Company’s total revenue for the quarter ended
September 30, 2008. Four customers made up 65% of the Company’s
accounts receivable as of September 30, 2009 and three customers made up 62% of
the Company’s total revenue for the quarter ended September 30,
2009.
The
Company does not believe the loss or cancelation of business from these
customers would materially or adversely affect the Company’s consolidated
financial position, results of operations, or cash flows due to the minimal
amount of revenue and related receivables that have been earned to
date.
Risks and
Uncertainties
The
Company's operations are subject to new innovations in product and service
design and function. Significant technical changes can have an adverse effect on
the Company’s business model. Design, development, and adaptation of products
and services are important elements to achieve and maintain profitability in the
Company's business model.
Cash and Cash
Equivalents
The
Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. The Company had no cash
equivalents as of June 30, 2008 and 2009 and September 30, 2009.
Property and
Equipment
Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, which is three years for computer
equipment and five years for furniture, fixtures, and internal use
software. Maintenance and repairs are expensed as incurred.
Significant renewals and betterments are capitalized. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is reflected in the
Company’s consolidated results of operations.
F-9
Long-Lived
Assets
Long-lived
assets, which consist primarily of property and equipment, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable. An impairment loss is
recognized when estimated undiscounted future cash flows expected to result from
the use of the asset and its eventual disposition are less than its carrying
value. If an asset is determined to be impaired, the impairment is
measured by the amount that the carrying value of the asset exceeds its fair
value. The Company uses quoted market prices in active markets to
determine fair value whenever possible. When quoted market prices are
not available, Management estimates fair value based on the best alternative
information available, which may include prices charged for similar assets or
other valuation techniques such as using cash flow information and present value
accounting measurements. As of June 30, 2008 and 2009 and September
30, 2009, there were no impairment charges identified on the Company’s
long-lived assets.
Internal Use
Software
Computer
software development costs are expensed as incurred, except for internal use
software development costs that qualify for capitalization as described below,
and include compensation and related expenses, costs of computer hardware and
software, and costs incurred in developing features and
functionality.
The
Company accounts for the costs of computer software obtained or developed for
internal use in accordance with Accounting Standards Codification 350, Intangibles – Goodwill and
Other (formerly Statement of Position No.
98-1). Accordingly, the Company expenses costs incurred in the
preliminary project and post implementation stages of software development and
capitalizes costs incurred in the application development stage and costs
associated with significant enhancements to existing internal use software
applications. Costs incurred related to less significant
modifications and enhancements as well as maintenance are expensed as
incurred.
As of
June 30, 2008 and 2009, the Company had capitalized internal use software costs
of $558,678 and $945,160, respectively. As of June 30, 2008, there
was no accumulated amortization in connection with these costs as the software
had not been placed into service. As of June 30, 2009, there was
$145,316 in accumulated amortization in connection with these
costs. As of September 30, 2009, the Company had $1,006,286 and
$195,884 in capitalized internal use software costs and related accumulated
amortization, respectively.
Capitalization of
Interest
The
Company capitalizes interest incurred in connection with the development of
internal use software, during the application development
stage. Capitalized interest is recorded as an increase to internal
use software included in property and equipment. The Company
capitalized $66,443 and $22,180 of interest during the years ended June 30, 2008
and 2009, respectively. The Company did not capitalize any interest
during the quarter ended September 30, 2008, but did capitalize $4,461 during
the quarter ended September 30, 2009.
F-10
Revenue
Recognition
The
Company currently derives its revenue from fees charged to customers for the
registration of audiovisual works. These registration fees are due at
the time the registration is completed by the customer. The Company
recognizes revenue in accordance with Accounting Standards Codification 605,
Revenue Recognition
(formerly Staff Accounting Bulletin No. 104). Accordingly, the
Company recognizes revenue when (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or services have been rendered, (iii) the
fees are fixed or determinable, and (iv) collectability is reasonably
assured. In general, the revenue recognition criteria are met at the
time the registration is completed. Prepayments for registrations
will be deferred, and revenues will recorded based on actual registrations to
the total estimated registrations over the contract period. If the
number of registrations cannot be reasonably estimated, revenue deferrals will
be amortized to revenues over the contract period on a straight-line
basis.
Revenue
is recognized net of estimated sales returns and allowances. If
actual sales returns and allowances are greater than estimated by management,
additional expense may be incurred. In determining the estimate for
sales allowances, the Company relies upon historical experience and other
factors, which may produce results that vary from estimates. To date, the
estimated sales returns and allowances have varied within ranges consistent with
management's expectations and have not been significant.
Cost of
Revenue
Cost of
revenue primarily consists of expenses relating to licenses, royalties, and
depreciation on property and equipment.
Research and
Development
Research
and development costs on the accompanying consolidated statements of operations
were $650,049 and $44,000 for the years ended June 30, 2008 and 2009,
respectively, and $6,902 and $44,183 for the quarters ended September 30, 2008
and 2009, respectively.
Selling and
Marketing
Selling
and marketing consists of those costs which are related to personnel, marketing,
public relations, advertising, and other promotional activities. All
advertising costs are expensed as incurred. The Company had no
advertising costs for the years ended June 30, 2008 and 2009, or for the
quarters ended September 30, 2008 and 2009.
General and
Administrative
The
Company's general and administrative expenses relate primarily to the
compensation and associated costs for general and administrative personnel,
professional fees, and other general overhead and facility costs.
F-11
Stock-Based
Compensation
The
Company recognizes stock-based compensation expense related to employee option
and restricted stock grants in accordance with Accounting Standards
Codification 718 Compensation – Stock
Compensation (“ASC 718”), (formerly Statement of Financial Accounting
Standards (“SFAS”) No. 123(R)). This standard requires the
Company to record compensation expense equal to the fair value of awards granted
to employees.
The
Company determines the fair value of share-based payment awards on the
grant-date using the Black-Scholes option pricing model.
Compensation
expense for non-employee stock-based awards will also be recognized in
accordance with ASC 718 (formerly Emerging Issues Task Force
No. 96-18). Stock option awards issued to non-employees will be
accounted for at fair value using the Black-Scholes option-pricing
model. The Company will record compensation expense based on the
then-current fair values of the stock options at each financial reporting
date. Compensation recorded during the service period will be
adjusted in subsequent periods for changes in the stock options’ fair value
until the earlier of the date at which the non-employee’s performance is
complete or a performance commitment is reached, which is generally when the
stock vests.
Income
Taxes
The
Company’s members are taxed on their proportional share of the Company’s taxable
income or loss. For state tax purposes, in addition to taxation at the
member level, the Company is taxed at 1.5% of net income or the minimum tax of
$800, whichever is greater. Accordingly, the accompanying consolidated
financial statements do not include a provision for income taxes.
Recent Accounting
Pronouncements
Accounting
Standards Codification
In June
2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, which has been codified into Accounting Standards
Codification 105. This guidance establishes the FASB Accounting Standards
Codification (the “Codification”) as the single source of authoritative,
nongovernmental generally accepted accounting principles in the United States of
America (“U.S. GAAP”). The Codification did not change U.S. GAAP. All existing
accounting standards were superseded and all other accounting literature not
included in the Codification is considered non-authoritative. This guidance is
effective for interim and annual periods ending after September 15, 2009.
Accordingly the Company has adopted this guidance during the quarter ended
September 30, 2009. The adoption did not have a significant impact on the
Company’s consolidated results of operations, cash flows, or financial
position.
F-12
Accounting
for Uncertainty in Income Taxes
In
July 2006, the FASB issued Interpretation No.48, Accounting for Uncertainty in Income
Taxes, which has been codified into Accounting Standards Codification
740. This pronouncement clarifies the accounting for uncertainty in
income taxes recognized in the financial statements. This
pronouncement also provides a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions taken or expected
to be taken in the Company’s tax return. This standard further provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods and disclosure requirements for uncertain tax
positions. These new accounting standards were to become effective
for the Company beginning July 1, 2008; however, the FASB deferred the
effective date until July 1, 2009. The adoption did not have a
significant impact on the Company’s consolidated results of operations, cash
flows, or financial position.
Embedded
Derivatives
In April
2008, the Emerging Issues Task Force reached a consensus on Issue No. 07-5,
Determining whether an
Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock,
which has been codified into Accounting Standards Codification
815. This pronouncement applies to any freestanding financial
instruments or embedded features that have the characteristics of a derivative,
as defined by SFAS No. 133, and to any freestanding financial instruments that
are potentially settled in an entity's own common stock. The new
accounting standard is effective for financial statements issued for fiscal
years beginning after December 15, 2008. The adoption did not have
significant impact on the Company’s consolidated results of operations, cash
flows, or financial position.
Fair
Value Measurements
Effective
July 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, which has been
codified into Accounting Standards Codification 820 (“ASC 820”). This
standard defines fair value, establishes a framework for measuring fair value,
establishes a fair value hierarchy based on the quality of inputs used to
measure fair value and enhances disclosure requirements for fair value
measurements. The implementation of this guidance did not change the method
of calculating the fair value of assets or liabilities. The primary impact
from adoption was additional disclosures. The portion of this guida nce
that defers the effective date for one year for certain non-financial assets and
non-financial liabilities measured at fair value, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis, was implemented July 1, 2009, and did not have an impact on the
Company’s consolidated results of operations, cash flows, or financial
position.
F-13
Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Valuation techniques used to
measure fair value must maximize the use of observable inputs and minimize the
use of unobservable inputs. ASC 820 describes a fair value hierarchy based on
three levels of inputs, of which the first two are considered observable and the
last unobservable, that may be used to measure fair value which are the
following:
· Level
1—Quoted prices in active markets for identical assets or
liabilities.
|
·
|
Level
2—Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
·
|
Level
3—Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
|
As of
June 30, 2009 and September 30, 2009, the Company had no Level 1, 2, or 3
financial assets, nor did it have any financial liabilities, except for an
embedded derivative liability which is reflected at fair value on the
accompanying consolidated balance sheets. The following table
summarizes the changes in Level 3 financial instruments measured at fair value
on a recurring basis for the year ended June 30, 2009 and the quarter ended
September 30, 2009:
[Missing Graphic Reference]
The
Company determined the fair value of the embedded derivative liability using a
discounted cash flow model, the assumptions for which are more thoroughly
described in Note 6.
Purchase
Method of Accounting for Business Combinations
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations, which
has been codified into Accounting Standards Codification 805. This guidance
retains the purchase method of accounting for acquisitions, but requires a
number of changes, including changes in the way assets and liabilities are
recognized in the purchase accounting as well as requiring the expensing of
acquisition-related costs as incurred. Additionally, it provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. Furthermore, this guidance requires any adjustments to acquired
deferred tax assets and liabilities occurring after the related allocation
period to be made through earnings for both acquisitions occurring prior and
subsequent to its effective date. This guidance is to be applied prospectively
by the Company to business combinations beginning July 1,
2009. The adoption did not have a significant impact on
the Company’s consolidated results of operations, cash flows, or financial
position.
F-14
Noncontrolling
Interests
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51,
which has been codified into Accounting Standards Codification 810. This
guidance establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The standard also clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest and
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. The gain or loss will be measured using the fair
value of the noncontrolling equity investment on the deconsolidation
date. Moreover, the standard includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling
interest. The new guidance is effective for the Company beginning
July 1, 2009. Early adoption is prohibited, but upon adoption,
the standard requires the retroactive presentation and disclosure related to
existing minority interests. The adoption did not have a
significant impact on the Company’s consolidated results of operations, cash
flows, or financial position.
Subsequent
Events
In May
2009, the FASB issued SFAS No. 165, Subsequent Events, which has
been codified into Accounting Standards Codification 855. The
guidance includes new terminology for considering subsequent events and has
required disclosure on the date through which an entity has evaluated subsequent
events. The standard is effective for interim or annual periods
ending after June 15, 2009. The adoption did not have a
significant impact on the Company’s consolidated results of operations, cash
flows, or financial position.
Note
3 – Note Receivable
As of
September 30, 2009, the Company had a note receivable from ISAN in the amount of
$125,337 (the “ISAN Note”). The ISAN Note is non-interest bearing and
is due no later than December 31, 2015. The terms of the ISAN Note
provide for interim principal payments from the excess profits of ISAN, as
defined, beginning with the year ending December 31, 2010.
Note
4 – Property and Equipment
Property
and equipment consists of the following:
[Missing Graphic Reference]
F-15
During
the years ended June 30, 2008 and 2009, the Company recorded depreciation and
amortization expense of $15,661 and $161,603, respectively. During
the quarters ended September 30, 2008 and 2009, the Company recorded
depreciation and amortization expense of $4,173 and $53,620,
respectively.
The
Company’s property and equipment are used as collateral to Bridge Loans, as
stated in Note 6.
Note
5 – Accrued Liabilities
Accrued
liabilities consists of the following:
[Missing Graphic Reference]
Note
6 – Notes Payable
Notes
Payable to Related Parties
On March
14, 2006, the Company recorded a liability for a loan in the amount of
$2,350,000 from a company that is considered a related party. The
loan included (i) certain Secure Path expenses which were paid by the related
party on behalf of the Company, and (ii) cash proceeds which were advanced to
the Company. This note was recorded as a current liability as it was
due on demand. This note bears interest at 17.5% per annum and no
interim principal or interest payments are required. As of June 30,
2008 and 2009, there was $194,438 and $97,096 outstanding under the loan,
respectively. As of September 30, 2009, there was $96,502 outstanding
under the loan. There are no scheduled future minimum annual
principal payments.
Between
July 1, 2009 and September 25, 2009, the Company raised cash proceeds of
$649,980 by securing demand loans from related parties. These demand
loans bear interest at 8% per annum and are due on demand at the close of a
contemplated merger (see Note 9). There are no provisions for interim
principal or interest payments.
Bridge
Note
The
Company entered into a loan agreement on April 27, 2009 to obtain $325,000 in
bridge financing from an unrelated party (the “Note”). The terms of
the loan provided for interest at 8% per annum for the first three months, after
which time the interest rate would increase to 24% per
annum. Interest is compounded monthly. The Note matures at the
earlier of (i) April 20, 2011 or (ii) the date of certain defined events such as
a sale of the Company or a qualified financing. All principal and
accrued interest are due at maturity; there are no provisions for interim
principal or interest payments. The Note is collateralized by
substantially all of the assets of the Company.
F-16
Under the
terms of the Note, there was a provision which would entitle the lender to
receive a cash payment of $975,000 if certain events occurred such as a sale of
the Company or a qualified financing, as defined (the “Payment”). The
Payment would include the original principal amount of $325,000, the accrued and
unpaid interest at the contractual rate, and an additional interest amount as a
result of the occurrence of the defined event. The Company determined
that the Note contained an embedded derivative under Accounting Standard
Codification 815 (“ASC 815”), Derivatives and Hedging
(formerly SFAS No. 133, as amended), primarily as a result of the potential for
a scenario where the interest rate would at least double the lenders initial
rate of return. Accordingly, Management determined the fair value of
the derivative feature and recorded an embedded derivative liability on the
accompanying consolidated balance sheet based on the relative fair values of the
Note and the embedded derivative. Management will record any
increases or decreases in the fair value of the embedded derivative liability at
each reporting date as other income (expense). The Company is
amortizing the difference between the $325,000 face value of the Note and its
$152,930 initial carrying value to interest expense under the effective interest
method through the contractual maturity date of April 20,
2011. During the year ended June 30, 2009 and the quarter ended
September 30, 2009, the Company recognized interest expense of $9,915 and
$16,091, respectively, due to the accretion of the note discount. To date, there
have been no principal or interest payments made under the Note
agreement.
The
Company determined the fair value of the embedded derivative liability using a
discounted cash flow model with the following significant
assumptions:
Note
7 – Commitments and Contingencies
Operating
Leases
The
Company leases its office space under a month-to-month operating lease agreement
which can be terminated at any time.
Rent
expense for the years ended June 30, 2008 and 2009 was $26,943 and $30,418,
respectively. Rent expense for the quarters ended September 30, 2008
and 2009 was $9,228 and $10,410, respectively.
ISAN
Licensing Agreement
The
Company has entered into various license agreements with ISAN whereby the
Company has rights to (i) execute registrations of audiovisual works with ISAN,
(ii) access the ISAN database, and (iii) distribute certain ISAN data, as
defined. Under the ISAN license agreement, the Company is required to
make license fee payments on a quarterly basis. These license fees
include (i) a fixed quarterly license fee and (ii) 5% of net
sales. In connection with the licensing agreement, the Company was
required to make certain license fee prepayments to which the 5% variable
license fee obligation could be applied. As of June 30, 2008 and 2009
and September 30, 2009, the Company had recorded prepaid license fees of
$194,191, $216,932, and $212,336 on the accompanying consolidated balance
sheets, respectively.
F-17
On July
1, 2009, the Company entered into an additional international license agreement
with ISAN to expand its license rights. As of July 1, 2009, the
license agreements collectively provide for (i) fixed quarterly license fees and
(ii) 10% of net sales under the international license agreement. As
of July 1, 2009, the following table reflects the minimum future license fee
payments which are required under the ISAN license agreements for each of the
fiscal years ending June 30:
[Missing Graphic Reference]
In
connection with the additional license entered into on July 1, 2009, the Company
capitalized $197,389 as of June 30, 2009, which is included in other assets in
the accompanying balance sheet. Costs are being amortized over 90
months. During the quarter ended September 30, 2009, company
recognized $6,580 in amortization expense. The remaining capitalized
legal costs as of September 30, 2009 are $190,809.
Legal
Proceedings
The
Company is aware of a former service provider that may claim it is due
consideration in connection with the merger. Management believes that if it must
enter into a settlement with such service provider, the maximum liability should
not exceed $40,000.
From time
to time, the Company may become subject to legal proceedings, claims and
litigation arising in the ordinary course of business. The Company is
not currently a party to any material legal proceedings, nor is the Company
aware of any pending or threatened litigation that would have a material adverse
effect on the Company’s business, consolidated operating results, cash flows or
financial position should such litigation be resolved unfavorably.
Indemnifications
In the
ordinary course of business, the Company may provide indemnifications of varying
scope and terms to customers, vendors, lessors, investors, directors, officers,
employees and other parties with respect to certain matters, including, but not
limited to, losses arising out of the Company’s breach of such agreements,
services to be provided by the Company, or from intellectual property
infringement claims made by third-parties. These indemnifications may
survive termination of the underlying agreement and the maximum potential amount
of future payments the Company could be required to make under these
indemnification provisions may not be subject to maximum loss
clauses. The maximum potential amount of future payments the Company
could be required to make under these indemnification provisions is
indeterminable. The Company has never paid a material claim, nor has
the Company been sued in connection with these indemnification
arrangements. As of June 30, 2008 and 2009 and September 30, 2009,
Management has not accrued a liability for these guarantees, because the
likelihood of incurring a payment obligation, if any, in connection with these
guarantees is not probable or reasonably estimable.
F-18
Note
8 – Members’ Equity
From
inception through June 30, 2007, the Company raised gross proceeds of $5,000,000
through the issuance of membership interests in Secure Path Technology
LLC. In addition, from inception through June 30, 2007, the Company
recorded stock-based compensation of approximately $1,490,000 related to
membership interests given to additional individuals for services
provided.
During
the years ended June 30, 2008 and 2009, the Company raised gross proceeds of
$5,025,000 and $200,000 through the issuance of additional membership interests,
respectively. As of June 30, 2008 and 2009 and September 30, 2009,
there were no limitations on the Company’s authorized capital.
Founder
Warrants
Pursuant
to the Company’s Amended and Restated Operating Agreement dated June 20, 2006,
the founders were authorized to receive rights to purchase membership interests
at a 20% discount from sales prices paid in the private placement discussed
above. The founder warrants were not acknowledged by the managing
members of the Company nor were the warrants issued upon completion of the
private placement of membership interests. The founder warrants were
never issued by the Company, and the founders waived all their rights to such
warrants.
Note
9 – Subsequent Events
Between
October 1, 2009 and December 11, 2009, the Company raised cash proceeds of
$210,533 by securing demand loans from related parties. These demand
loans bear interest at 8% per annum and are due on demand at the close of a
contemplated merger, more thoroughly described below. There are no
provisions for interim principal or interest payments.
On
December 17, 2009, the Company entered into an Agreement and Plan of Merger (the
“Merger Agreement”) with Rosca, Inc., a Nevada corporation
(“Rosca”). Under the Merger Agreement, the Company will be merged
with and into Rosca. The members of the Company will receive
4,650,000 shares of Rosca’s common stock in exchange for all of the outstanding
member interests in the Company. The merger will not be effective
until certain conditions have been met. These conditions, among other
things, include (i) Merger Agreement approval by the members of the Company,
(ii) approval by Rosca’s Board of Directors for issuance of Rosca’s common stock
as purchase consideration, and (iii) filing of Form 8-K with the United States
Securities and Exchange Commission, which, among other things, includes the
Company’s audited and unaudited consolidated financial
statements. The Merger Agreement may be terminated, among other
things, if certain conditions to closing have not been waived or met by January
31, 2010.
On
December 22, 2009, the Company received a $300,000 up-front payment in
connection with a three-year ISAN license agreement. The up-front
payment covers all ISAN and Version ISAN (“V-ISAN”) content and library content
registrations for the registrant, during the three-year period.
The
Company has evaluated subsequent events through January 6,
2010.
F-19