UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

T
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2009

or

*
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 For the transition period from __________ to __________

Commission file Number 000-17288

aVINCI MEDIA CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
75-2193593
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
11781 South Lone Peak Parkway, Suite 270, Draper, UT
84020
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: (801) 495-5700

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.  Yes   x No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o    No o

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

Large accelerated filer o
 
Accelerated filer    o
Non-accelerated filer    o
(Do not check if a smaller reporting company)
Smaller reporting company   x

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

The number of shares of common stock outstanding as of the close of business on October 30, 2009 was 51,462,227
 
1
 
aVINCI MEDIA CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 
Page
   
PART I. FINANCIAL INFORMATION
 
3
4
5
6
8
15
23
23
 
PART II.  OTHER INFORMATION
24
24
24
24
24
24
24

2

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 aVINCI MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

   
September 30,
 2009
   
December 31,
2008
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
 
$
6,136
   
$
1,071,053
 
Accounts receivable
   
375,423
     
261,592
 
Marketable securities available-for-sale
   
87,091
     
131,754
 
Inventory
   
163,413
     
187,184
 
Prepaid expenses
   
80,305
     
233,045
 
Deferred costs
   
16,844
     
143,944
 
Deposits and other current assets
   
5,987
     
5,987
 
Total current assets
   
735,199
     
2,034,559
 
                 
Property and equipment, net
   
313,509
     
622,685
 
Intangible assets, net
   
88,543
     
91,043
 
Other assets
   
164,787
     
160,212
 
Total assets
 
$
1,302,038
   
$
2,908,499
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
Accounts payable
 
$
145,905
   
$
129,874
 
Accrued liabilities
   
213,492
     
239,809
 
Current portion of capital leases
   
120,981
     
143,199
 
Deferred revenue
   
517,044
     
344,574
 
Total current liabilities
   
997,422
     
857,456
 
                 
Capital lease obligations, net of current portion
   
4,981
     
92,423
 
Deferred rent, net of current portion
   
99,734
     
27,151
 
Total liabilities
   
1,102,137
     
977,030
 
                 
Commitments and contingencies
               
                 
Stockholders’ Equity:
               
Preferred stock, $0.01 par value, authorized 50,000,000 shares:
               
  Series A convertible preferred stock, 1,500,000 designated; shares issued and outstanding: 1,202,627 at September 30, 2009 and no shares at December 31, 2008 (Aggregate liquidation preference of $1,234,983 at September 30, 2009)
   
12,026
     
—
 
Common stock, $0.01 par value, authorized 250,000,000 shares; shares issued and outstanding: 51,462,227 shares at September 30, 2009 and 48,738,545 shares at December 31, 2008
   
514,622
     
487,385
 
Additional paid-in capital
   
25,069,397
     
22,635,430
 
Accumulated deficit
   
(25,361,907
)
   
(21,191,346
)
Accumulated other comprehensive loss
   
(34,237
)
   
—
 
Total stockholders’ equity
   
199,901
     
1,931,469
 
Total liabilities and stockholders’ equity
 
$
1,302,038
   
$
2,908,499
 

See accompanying Notes to Condensed Consolidated Financial Statements

 
3
 
aVINCI MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
   
2009
   
2008
   
2009
   
2008
Revenues
 
$
313,784
   
$
112,652
   
$
673,728
   
$
302,351
 
                                 
Operating expense:
                               
Cost of sales
   
184,327
     
233,300
     
586,770
     
666,933
 
Research and development
   
172,663
     
456,992
     
614,117
     
1,447,522
 
Selling and marketing
   
215,284
     
398,854
     
756,463
     
1,365,650
 
General and administrative
   
1,176,016
     
1,086,927
     
2,868,792
     
3,670,029
 
Total operating expense
   
1,748,290
     
2,176,073
     
4,826,142
     
7,150,134
 
                                 
Loss from operations
   
(1,434,506
)
   
(2,063,421
)
   
(4,152,414
)
   
(6,847,783
)
                                 
Other income (expense):
                               
Loss on marketable securities
   
(2,659
)
   
—
     
(2,659
)
   
—
 
Interest income
   
191
     
22,771
     
2,174
     
49,304
 
Interest expense
   
(5,209
)
   
(10,353
)
   
(17,662
)
   
(136,465
)
Total other income (expense)
   
(7,677
)
   
12,418
     
(18,147
)
   
(87,161
)
Loss before income taxes
   
(1,442,183
)
   
(2,051,003
)
   
(4,170,561
)
   
(6,934,944
)
Income tax benefit
   
—
     
—
     
—
     
—
 
Net loss
   
(1,442,183
)
   
(2,051,003
)
   
(4,170,561
)
   
(6,934,944
)
                                 
Deemed dividend on Series A convertible preferred stock
   
(105,928
)
   
—
     
(688,131
)
   
—
 
                                 
Deemed distribution on Series B redeemable convertible preferred units
   
—
     
—
     
—
     
(976,000
)
                                 
Distributions on Series B redeemable convertible preferred units
   
—
     
—
     
—
     
(225,773
)
                                 
Net loss applicable to common stockholders
 
$
(1,548,111
)
 
$
(2,051,003
)
 
$
(4,858,692
)
 
$
(8,136,717
)
                                 
Basic and diluted loss per common share
 
$
(0.03
)
 
$
(0.04
)
 
$
(0.10
)
 
$
(0.19
)
                                 
Weighted-average common and common equivalent shares used to calculate loss per share:
                               
Basic and diluted
   
50,843,926
     
48,738,122
     
49,488,578
     
43,114,327
 
                                 
Comprehensive Loss
                               
Net loss applicable to common stockholders
 
$
(1,548,111
)
 
$
(2,051,003
)
 
$
(4,858,692
)
 
$
(8,136,717
)
Unrealized gain (loss) on marketable securities available-for-sale
   
(19,395
)
   
(10,596
)
   
(34,237
)
   
(91,981
)
Comprehensive loss
 
$
(1,567,506
)
 
$
(2,061,599
)
 
$
(4,892,929
)
 
$
(8,228,698
)

See accompanying Notes to Condensed Consolidated Financial Statements

 
4

aVINCI MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE LOSS
(UNAUDITED)

         
Series A Convertible
   
Additional
         
Accumulated
Other
       
   
Common Stock
   
Preferred Stock
   
Paid-in
   
Accumulated
   
Comprehensive
   
Stockholders’
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Loss
   
Equity
 
                                                 
Balance, January 1, 2009
    48,738,545     $ 487,385       —     $ —     $ 22,635,430     $ (21,191,346 )   $ —     $ 1,931,469  
                                                                 
Series A convertible preferred stock issuance
    —       —       1,202,627       12,026       1,190,601       —       —       1,202,627  
                                                                 
Common stock issued for services
    2,723,682       27,237       —       —       334,592       —       —       361,829  
                                                                 
Equity-based compensation
    —       —       —       —       908,774       —       —       908,774  
                                                                 
Unrealized loss on marketable securities available for sale
    —       —       —       —       —       —       (34,237 )     (34,237 )
                                                                 
Net loss
    —       —       —       —       —       (4,170,561 )     —       (4,170,561 )
                                                                 
Balance, September 30, 2009
    51,462,227     $ 514,622       1,202,627     $ 12,026     $ 25,069,397     $ (25,361,907 )   $ (34,237 )   $ 199,901  
 
See accompanying Notes to Condensed Consolidated Financial Statements

5

aVINCI MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
Nine Months Ended
September 30,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
    Net loss
 
$
(4,170,561
)
 
$
(6,934,944
)
    Adjustments to reconcile net loss to net
               
        cash used in operating activities
               
        Depreciation and amortization
   
310,326
     
333,176
 
        Common stock issued for services
   
361,829
     
—
 
        Equity-based compensation
   
908,774
     
 376,071
 
        (Gain) loss on disposal of equipment
   
(200
)
   
(38
)
        Loss on marketable securities
   
2,659
     
—
 
        Decrease (increase) in:
               
            Accounts receivable
   
(113,831
)
   
177,959
 
            Inventory
   
23,771
     
(21,010
)
            Prepaid expenses and other assets
   
148,165
     
(117,572
)
            Deferred costs
   
127,100
     
105,468
 
            Deposits and other current assets
   
—
     
37,278
 
        Increase (decrease) in:
               
            Accounts payable
   
16,031
     
(30,053
)
            Accrued liabilities
   
15,078
     
(187,851
)
            Deferred rent
   
31,188
     
(24,552
) 
            Deferred revenue
   
172,470
     
(86,001
)
Net cash used in operating activities
   
(2,167,201
)
   
(6,372,069
)
                 
Cash flows from investing activities:
               
Proceeds from sale of property and equipment
   
1,550
     
1,000
 
Proceeds from sale of marketable securities
   
7,767
     
—
 
Purchase of property and equipment
   
—
     
(45,887
)
Purchase of intangible assets
   
—
     
(26,354
) 
Net cash provided by (used in) investing activities
   
9,317
     
(71,241
)
                 
Cash flows from financing activities:
               
Net cash received in reverse merger
   
—
     
7,091,062
 
Proceeds from notes payable
   
—
     
1,500,000
 
Proceeds from exercise of warrants to common units
   
—
     
460,625
 
Proceeds from exercise of stock options
   
—
     
4,050
 
Proceeds from sale of Series A convertible preferred stock
   
1,202,627
     
—
 
Payment of accrued dividends
   
—
     
(534,024
)
Principal payments under capital lease obligations
   
(109,660
)
   
(91,879
)
Net cash provided by financing activities
   
1,092,967
     
8,429,834
 
Net change in cash and cash equivalents
   
(1,064,917
)
   
1,986,524
 
                 
Cash and cash equivalents at beginning of period
   
1,071,053
     
859,069
 
Cash and cash equivalents at end of period
 
$
6,136
   
$
2,845,593
 
                 
                 
Cash paid for income taxes
 
$
—
   
$
—
 
                 
Cash paid for interest
 
$
17,662
   
$
32,630
 
 
See accompanying Notes to Condensed Consolidated Financial Statements
 
6
 
aVINCI MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(UNAUDITED)


Supplemental schedule of non-cash investing and financing activities:

During the nine months ended September 30, 2009:

●   
We incurred an unrealized loss on marketable securities available-for-sale of $34,237.


During the nine months ended September 30, 2008:

●   
We issued 1,525,000 common units to Amerivon Holdings Inc. (Amerivon) to induce the conversion of preferred units to common units immediately prior to the closing of the transaction between Secure Alliance Holdings Corporation (SAH) and Sequoia Media Group (Sequoia). These inducements units were recorded as a preferential dividend, thus increasing the accumulated deficit and increasing the loss applicable to common stockholders by $976,000.

●   
We acquired $19,429 of office equipment through capital lease agreements.

●   
We incurred an unrealized loss on marketable securities available-for-sale of $91,981.

●   
We converted $474,229 of Series A preferred units to common units.

●   
We converted $6,603,182 of Series B preferred units to common units.

●   
We converted $12,850,874 of common units to common stock in connection with the reverse merger.

●   
We acquired the following balance sheet items as a result of the reverse merger transaction:

o  
Cash - $7,091,062
o  
Marketable securities available-for-sale - $303,300
o  
Prepaid expenses and other assets - $52,561
o  
Note receivable - $2,500,000 (eliminated against note payable owed to SAH)
o  
Interest receivable - $103,835 (eliminated against interest payable to SAH)
o  
Accounts payable - $30,899
o  
Accrued expenses - $209,465
 
See accompanying Notes to Condensed Consolidated Financial Statements
 
7
 
aVINCI MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.  Description of Organization and Summary of Significant Accounting Policies

Organization and Nature of Operations
aVinci Media Corporation (the “Company”, “we”, “us”, “our”) was formed as a result of a merger transaction between Sequoia Media Group, LC (Sequoia), a Utah limited liability company, and Secure Alliance Holdings Corporation (SAH), a publicly held company.  We are a Delaware corporation that develops and sells an engaging way for anyone to tell their “Story” with personal digital expressions. Our products simplify and automate the process of creating professional-quality multi-media productions using personal photos and videos.

Basis of Presentation
The accompanying condensed consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (US GAAP).

Unaudited Information
In the opinion of management, the accompanying unaudited condensed consolidated financial statements as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 reflect all adjustments (consisting only of normal recurring items) necessary to present fairly the financial information set forth therein. The consolidated balance sheet as of December 31, 2008, presented herein is derived from the audited consolidated balance sheet presented in our annual report on Form 10-K at that date. Certain amounts in the prior periods’ financial statements have been reclassified to conform to the current period presentation. Certain information and note disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the following disclosures, when read in conjunction with the annual financial statements and the notes included in our Form 10-K for the year ended December 31, 2008, are adequate to make the information presented not misleading. Results for the three and nine month periods ended September 30, 2009 are not necessarily indicative of the results to be expected for the year ending December 31, 2009.

Net Loss per Common Share
Basic earnings (loss) per share (EPS) is calculated by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period.  The weighted-average shares used in the computation of EPS for the three and nine month periods ended September 30, 2009 and 2008 include the shares issued in connection with the reverse merger on June 6, 2008.  In accordance with US GAAP, these shares are retroactively reflected as having been issued at the beginning of the periods presented.

Diluted EPS is similar to Basic EPS except that the weighted-average number of common shares outstanding is increased using the treasury stock method to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Such potentially dilutive common shares include stock options and warrants. Shares having an antidilutive effect on periods presented are not included in the computation of dilutive EPS.

The average number of shares of all stock options and warrants granted, all convertible preferred units, redeemable convertible preferred units and convertible debentures have been omitted from the computation of diluted net loss per common share because their inclusion would have been anti-dilutive for the three and nine month periods ended September 30, 2009 and 2008.

As of September 30, 2009 and 2008, we had 16,229,854 and 8,338,913 potentially dilutive shares of common stock, respectively, not included in the computation of diluted net loss per common share because it would have decreased the net loss per common share. Stock options and warrants could be dilutive in the future.

Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
 
8

Income Taxes
At September 30, 2009, management had recorded a full valuation allowance against the net deferred tax assets related to temporary differences and current operating losses because there is significant uncertainty as to the realizability of the deferred tax assets. Based on a number of factors, the currently available, objective evidence indicates that it is more-likely-than-not that the net deferred tax assets will not be realized.

Recently Adopted Accounting Standards
In March 2008, the Financial Accounting Standards Board (FASB) issued Topic 815, “Derivatives and Hedging.” Topic 815 amends and expands the disclosure requirements with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  Topic 815 was effective beginning in the first quarter of fiscal 2009. The adoption of this guidance had no effect on our consolidated financial position or results of operations.

In December 2007, the FASB issued Topic 805, “Business Combinations,” and Topic 810, “Consolidation.” Topic 805 changes how business acquisitions are accounted for and impacts financial statements both on the acquisition date and in subsequent periods. Topic 810 changes the accounting and reporting for minority interests, which is recharacterized as noncontrolling interests and classified as a component of equity. Topic 805 and Topic 810 were effective for us beginning in the first quarter of fiscal 2009. The adoption of Topic 805 and Topic 810 had no effect on our consolidated financial position or results of operations.

In April 2009, the FASB issued three new standards, to address concerns about (1) measuring the fair value of financial instruments when the markets become inactive and quoted prices may reflect distressed transactions and (2) recording impairment charges on investments in debt securities. The FASB also issued a third standard to require disclosures of fair values of certain financial instruments in interim financial statements.

Topic 820, “Fair Value Measurements and Disclosures,” provides additional guidance to highlight and expand on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset. This standard also requires new disclosures relating to fair value measurement inputs and valuation techniques (including changes in inputs and valuation techniques).

Topic 320, “Investments - Debt and Equity Securities,” will change (1) the trigger for determining whether an other-than-temporary impairment exists and (2) the amount of an impairment charge to be recorded in earnings. To determine whether an other-than-temporary impairment exists, an entity will be required to assess the likelihood of selling a security prior to recovering its cost basis. This is a change from the current requirement for an entity to assess whether it has the intent and ability to hold a security to recovery or maturity. This standard also expands and increases the frequency of existing disclosure about other-than-temporary impairments and requires new disclosures of the significant inputs used in determining a credit loss, as well as a rollforward of that amount each period.

Topic 825, “Financial Instruments,” increases the frequency of fair value disclosures from annual to quarterly to provide financial statement users with more timely information about the effects of current market conditions on their financial instruments.

The provisions of these three standards were effective for us beginning the second quarter of 2009. The adoption of these three standards did not have a material effect on our consolidated financial position or results of operations.

In May 2009, the FASB issued Topic 855, “Subsequent Events,” which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Topic 855 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. Topic 855 is effective for interim and annual periods ending after June 15, 2009, and accordingly, we adopted this standard during the second quarter of 2009. Topic 855 requires that public entities evaluate subsequent events through the date that the financial statements are issued. We evaluated subsequent events through the time of filing these financial statements with the SEC on November 10, 2009.

In June 2009, the FASB issued Topic 105, “Generally Accepted Accounting Principles.” This standard establishes the FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. The Codification is effective for us in the third quarter of 2009. The adoption of this guidance had no effect on our consolidated financial position or results of operations.
 
9

Recent Accounting Standards Not Yet Adopted
In June 2009, the FASB issued a new accounting standard which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The new guidance clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This standard requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. This standard also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. This standard is effective for fiscal years beginning after November 15, 2009. We believe that the future requirements of this standard will not have a material effect on our consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (FASB ASU 09-13), “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force).” FASB ASU 09-13 updates the existing multiple-element arrangement guidance currently in FASB Topic 605-25 (Revenue Recognition – Multiple-Element Arrangements). This new guidance eliminates the requirement that all undelivered elements have objective evidence of fair value before a company can recognize the portion of the overall arrangement fee that is attributable to the items that have already been delivered. Further, companies will be required to allocate revenue in arrangements involving multiple deliverables based on the estimated selling price of each deliverable, even though such deliverables are not sold separately by either company itself or other vendors. This new guidance also significantly expands the disclosures required for multiple-element revenue arrangements. The revised guidance will be effective for the first annual period beginning on or after June 15, 2010. We may elect to adopt the provisions prospectively to new or materially modified arrangements beginning on the effective date or retrospectively for all periods presented. We are currently evaluating the impact FASB ASU 09-13 will have on our consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-14 (FASB ASU 09-14), “Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force,” that reduces the types of transactions that fall within the current scope of software revenue recognition guidance. Existing software revenue recognition guidance requires that its provisions be applied to an entire arrangement when the sale of any products or services containing or utilizing software when the software is considered more than incidental to the product or service. As a result of the amendments included in FASB ASU No. 2009-14, many tangible products and services that rely on software will be accounted for under the multiple-element arrangements revenue recognition guidance rather than under the software revenue recognition guidance. Under this new guidance, the following components would be excluded from the scope of software revenue recognition guidance:  the tangible element of the product, software products bundled with tangible products where the software components and non-software components function together to deliver the product’s essential functionality, and undelivered components that relate to software that is essential to the tangible product’s functionality. FASB ASU 09-14 also provides guidance on how to allocate transaction consideration when an arrangement contains both deliverables within the scope of software revenue guidance (software deliverables) and deliverables not within the scope of that guidance (non-software deliverables). This guidance will be effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We may elect to adopt the provisions prospectively to new or materially modified arrangements beginning on the effective date or retrospectively for all periods presented. However, we must elect the same transition method for this guidance as that chosen for FASB ASU No. 2009-13. We are currently evaluating the impact FASB ASU 09-14 will have on our consolidated financial statements.

Reclassifications
Certain amounts in the 2008 financial statements have been reclassified to conform to the 2009 presentation.

2.  Going Concern and Liquidity

Our financial statements have been prepared under the assumption that we will continue as a going concern.  The report of our independent registered public accounting firm included in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission, includes an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
10

We have operated at a loss since inception and are not currently generating sufficient revenues to cover our operating expenses.  We are continuing to work to obtain new customers and to increase revenues from existing customers. We contemplate raising additional outside capital within the next 12 months to help fund current growth plans (see Note 3 below).   We have reduced monthly expenses throughout 2009 and raised approximately $1.2 million of a planned $1.5 million capital raise from outside sources from April 2009 through November 10, 2009.  We intend to raise an additional $300,000 under our current capital raise, and an additional $500,000 round for next year. With the outside capital and with increased revenues from new and existing customers, we believe we will be able to fund operations through 2010 based on our current plans and projections.  In the event we are not able to meet our revenue projections through the end of 2009 and 2010, we may be required to raise additional capital and further reduce operating expenses.

If new sources of financing are insufficient or unavailable, we will modify our growth and operating plans to the extent of available funding, if any.  Any decision to modify our business plans would harm our ability to pursue our growth plans.  If we cease or stop operations, our shares could become valueless.  Historically, we have funded operating, administrative and development costs through the sale of equity capital or debt financing.  If our plans and/or assumptions change or prove inaccurate, or we are unable to obtain further financing, or such financing and other capital resources, in addition to projected cash flow, if any, prove to be insufficient to fund operations, our continued viability could be at risk.  To the extent that any such financing involves the sale of our common stock or common stock equivalents, our current stockholders could be substantially diluted.  There is no assurance that we will be successful in achieving any or all of these objectives in 2009 or 2010.

3.  Series A Convertible Preferred Stock

Offering
In March 2009, we initiated a private offering pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder to raise up to an additional $1.5 million in two phases, $750,000 from April to June 2009 and an additional $750,000 by the end of December 2009.  The investment is in the form of Series A convertible preferred shares, $0.01 per share par value with a stated value of $1.00 per share, convertible into common shares at the rate of $0.20 per common share.  For each Series A convertible preferred share, investors in the offering also receive a warrant to purchase 1.25 shares of common stock at $0.25 per share at any time within five years.  As of September 30, 2009, we had received proceeds of $1,202,627 from the sale of 1,202,627 Series A convertible preferred shares. The Series A shares also carry a cumulative dividend at an annual rate of 8%. Cumulative dividends not accrued or declared as of September 30, 2009 are $32,356.

Deemed Dividend
For the three and nine months ended September 30, 2009, deemed dividends of $105,928 and $688,138, respectively, were recorded as a result of a beneficial conversion feature on the Series A convertible preferred shares.  The beneficial conversions were calculated as the difference between the proceeds received from the sale of the Series A convertible preferred stock and the fair value of the underlying common stock into which the preferred shares are convertible.  These were recorded as preferential dividends, thus increasing the loss applicable to common stockholders.

4.  Equity-Based Compensation

We currently have a stock option plan that allows us to grant stock options, restricted stock and other equity based awards to employees, directors, and consultants. The plan is discussed in more detail in our Annual Report on Form 10-K.

Equity-based compensation expense, included in general and administrative expense in the consolidated statements of operations, totaled $539,807 and $214,001, respectively for the three months ended September 30, 2009 and 2008; and totaled $908,774 and $376,071, respectively for the nine months ended September 30, 2009 and 2008.

As reported on Form 8-K, filed with the Securities and Exchange Commission on July 15, 2009, Jerrell G. Clay and Stephen B. Griggs resigned from our Board of Directors effective as of July 15, 2009.  Consequently, we recognized the remaining expense on options held by Mr. Clay and Mr. Griggs in July 2009.

Our Board of Directors authorized on July 28, 2009, effective August 7, 2009, the repricing of certain stock options (the “Options”), previously issued to our employees, officers and members of the Board of Directors pursuant to the Company’s 2008 Incentive Stock Plan at the greater of $0.40 per share and the closing price of our stock on July 28, 2009.  As a result, the exercise price of the Options was lowered to $0.40, and we recognized expense of $57,020 for the three and nine months ended September 30, 2009. There was no change in the number of shares subject to each Option, vesting or other terms. The repricing was implemented to realign the value of the Options with their intended purpose, which is to retain and motivate company employees, officers and directors. Prior to the repricing, many of the Options had exercise prices well above the recent market prices of our common stock on the OTC Bulletin Board.

11
 
We granted 910,182 shares of common stock to employees on April 1, 2009, in lieu of cash compensation as a result of the employees taking a reduced salary beginning in November 2008 and continuing throughout 2009. The shares were valued at the closing price of our common stock on April 1, 2009 and resulted in compensation expense of $13,279 and $43,571, respectively, for the three and nine months ended September 30, 2009.

We granted 1,813,500 shares of common stock to consultants and others for services rendered during the nine months ended September 30, 2009, resulting in expense of $270,392. These shares were valued at the closing price of our common stock as the services were performed as required by FASB ASC 505-50, “Equity-Based Payments to Non-Employees.”

As of September 30, 2009, there was approximately $621,293 of unrecognized equity-based compensation expense related to option grants that will be recognized over a weighted average period of 1.3 years.

5.  Commitments and Contingencies

Litigation
On December 17, 2007, Robert L. Bishop, who worked with aVinci Media’s (AVI Media) predecessor, Sequoia Media Group, LC, in a limited capacity in 2004 and is a current member of a limited liability company, LifeCinema, LLC, that owns an equity interest in aVinci, filed a legal claim in the Third Judicial District Court for Salt Lake County, State of Utah, alleging a right to unpaid wages and/or commissions (with no amount specified) and company equity.  The Complaint was served on AVI Media on January 7, 2008.  AVI Media timely filed an answer denying Mr. Bishop’s claims and counterclaiming interference by Mr. Bishop with AVI Media’s capital raising efforts.  AVI Media is defending against Mr. Bishop’s claims and discovery is ongoing.  On April 30, 2009, defendants filed a motion for summary judgment based upon the fact Mr. Bishop did not file suit within the four year statute of limitations applicable to oral contracts (upon which plaintiff is suing), and upon the grounds that no agreement exists because there was no meeting of the minds.  The court deferred ruling on the motion pending Mr. Bishop conducting depositions of company executives.  On June 16, 2009 Mr. Bishop filed an amended complaint which alleges that defendant Chett B. Paulsen is responsible for a portion of the equity Bishop is claiming in the action.  On June 30, 2009 Bishop filed a motion for leave to file a second amended complaint to add claims for fraud and negligent misrepresentation.  Defendants objected to the motion on the ground of failing to state a claim, the “futility doctrine” under Utah law, and failing to timely file the claims.  Defendants filed a second motion for summary judgment on July 28, 2009 on the grounds that Bishop’s action is barred by Utah statute which requires “investment advisor” agreements to be in writing.  The matter has been submitted to the court for oral argument but no date has been set to hear the motion.
 
Operating Leases
We have operating leases for office space with terms expiring in 2012 and 2013. Future minimum lease payments are approximately as follows: 
 
Years Ending December 31,
 
Amount
 
       
2009
 
$
44,000
 
2010
   
257,000
 
2011
   
263,000
 
2012
   
267,000
 
2013
   
136,000
 
         
Total
 
$
967,000
 
 
On April 1, 2009, we signed an amendment to the operating lease for our primary office space in Draper, Utah. The amendment modified the monthly lease payments and extended the lease expiration date from June 30, 2010 to June 30, 2013.  As a cost saving measure, on or about October 30, 2009, we signed a non-binding letter of intent to sublease a portion of our space to a third party with an option for the third party to sublease the remaining space upon 60 days notice.  Upon execution of a sublease, we intend to move to a subdivided portion of our current facility. We expect costs associated with the sublease to be minimal.

Rental expense under operating leases for the nine months ended September 30, 2009 and 2008 totaled $168,935 and $157,481, respectively.
 
12

Purchase Obligations
Under the terms of a consumer products license agreement with ESPN Enterprises, Inc. (ESPN), we guaranteed ESPN minimum royalty amounts in 2009, 2010 and 2011. We began offering ESPN licensed products in June 2009, and we have accrued expenses and made payments towards the minimum amounts due by the end of each calendar year.

In June 2009 we agreed to purchase directors and officers’ liability insurance for a year’s period with the premium to be paid in equal monthly installments over the term of the insurance coverage.

6.  Fair Value

FASB Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. FASB Topic 820 describes three levels of inputs that aVinci uses to measure fair value:

·  
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

·  
Level 2: Level 1 inputs for assets or liabilities that are not actively traded. Also consists of an observable market price for a similar asset or liability. This includes the use of “matrix pricing” used to value debt securities absent the exclusive use of quoted prices.

·  
Level 3: Consists of unobservable inputs that are used to measure fair value when observable market inputs are not available. This could include the use of internally developed models, financial forecasting, etc.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants at the balance sheet date. When possible we look to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, we look to observable market data for similar assets and liabilities. However, when certain assets and liabilities are not traded in observable markets aVinci must use other valuation methods to develop a fair value.

The following table presents financial assets and liabilities measured on a recurring basis:

         
Fair Value Measurements at Reporting Date Using
 
 
 
 
Description
 
Balance at September 30, 2009
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Available-for-sale securities
  $ 87,091     $ 87,091       —       —  

7.  Related Party Transactions

Consulting Agreement
During the three and nine months ended September 30, 2008, pursuant to an agreement executed during the year ended December 31, 2007, we recorded expense of $0 and $725,000, respectively, for consulting services from Amerivon Holdings, Inc. (Amerivon), a significant shareholder of the Company. During the three and nine months ended September 30, 2008, we paid Amerivon $0 and $745,000, respectively, for this agreement.

On July 1, 2008 we entered into a new sales and consulting agreement with Amerivon that terminated the agreement referenced above that was executed during the year ended December 31, 2007. During the three and nine months ended September 30, 2009, we recorded expense of $3,115 and $6,436, respectively, for consulting services under this new agreement. No payments were made under this agreement during 2009. During the three and nine months ended September 30, 2008, we recorded expense of $683 for consulting services under this new agreement. During the three and nine months ended September 30, 2008, we paid Amerivon $485 for this agreement.

On April 15, 2009 we issued 500,000 shares of common stock to Amerivon for consulting services under a consulting agreement dated March 31, 2009. Under the terms of this agreement, John E. Tyson, a director for the Company, is to serve as aVinci’s Chairman of the Board and the Chairman of aVinci’s Executive Committee.  These shares had a fair value of $35,000 and were expensed immediately.

13
 
Series A Convertible Preferred Stock
On April 3, 2009 Amerivon purchased 350,000 shares of Series A convertible preferred stock for $350,000.

On May 22, 2009 John Tyson, our Chairman of the Board, purchased 10,000 shares of Series A convertible preferred stock for $10,000.

Board Compensation
On July 23, 2009, our Board of Directors approved the issuance of 50,000 shares of the Company’s common stock to each non-management director serving on the board for the period June 6, 2008 through June 5, 2009. Consequently Tod M. Turley, John E. Tyson, Stephen P. Griggs, and Jerrell G. Clay each received 50,000 shares of the Company’s common stock. These shares had a total fair value of $68,000 and were expensed immediately.
 
Option Re-pricing
On July 23, 2009, our Board of Directors authorized, effective August 7, 2009, the re-pricing of certain stock options, previously issued to company employees, officers and members of the Board of Directors pursuant to the Company’s 2008 Incentive Stock Plan at the greater of $0.40 per share and the closing price of our stock on July 28, 2009 (the “Options”). As a result, the exercise price of the Options was lowered to $0.40. There was no change in the number of shares subject to each Option, vesting or other terms. The re-pricing was implemented to realign the value of the Options with their intended purpose, which is to retain and motivate company employees, officers and directors. Prior to the re-pricing, many of the Options had exercise prices well above the recent market prices of our common stock on the OTC Bulletin Board.

As a result of the option re-pricing Stephen P. Griggs and Jerrell G. Clay, former directors, each had 475,000 options re-priced. We recorded a total expense of $46,000 related to the re-pricing of these options.

Distributions
The former Series B redeemable convertible preferred unit holders were entitled to a cumulative annual distribution of $0.06 per unit. During the nine months ended September 30, 2008 we accrued $225,773 for distributions due on the Series B redeemable convertible preferred units held by Amerivon. We paid Amerivon $447,783 for the accrued distributions in June 2008.

Warrants
On January 30, 2008, Amerivon exercised 1,504,680 warrants to purchase common units of Sequoia for cash received of $414,625; and on June 5, 2008, Amerivon exercised 87,096 warrants to purchase common units of Sequoia for a total price of $46,000. These exercises, along with Amerivon’s conversion of convertible preferred units, increased Amerivon’s ownership percentage to 45.4% of all common units prior to the merger on June 6, 2008.
 
On July 15, 2009, Stephen P. Griggs and Jerrell G. Clay, former directors, each received warrants to purchase up to 200,000 shares of common stock of the Company for $0.30 a share at anytime on or before 10 years from the date of issuance. We recorded a total expense of $77,000 for the issuance of these warrants.
 
8.  Subsequent Events

As discussed in Note 3 above, we are continuing to raise capital through the offering of Series A convertible preferred stock.  From October 1, 2009 through November 10, 2009, we sold 230,627 shares of Series A convertible preferred stock for cash proceeds of $230,627.

On October 2, 2009 we entered into a $100,000 Promissory Note with John E. Tyson, the Company’s chairman.  The terms of the note are 30 days, bearing simple interest at 24% per annum with a $500 origination fee.  On November 1, 2009, Mr. Tyson agreed to extend the terms of the Promissory Note an additional 30 days.
 
14

ITEM 2.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Some of the information in this filing contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. You should read statements that contain these words carefully because they:
 
·
discuss our future expectations;
 
·
contain projections of our future results of operations or of our financial condition; and
 
·
state other “forward-looking” information.
 
We believe it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors,” “Business” and elsewhere in this prospectus.

Overview

Through our subsidiary, aVinci Media, LC, we deploy a software technology that employs “Automated Multimedia Object Models,” a patent-pending way of turning consumer captured images, video, and audio into complete digital files in the form of full-motion movies, DVD’s, photo books, posters and streaming media files.  We make software technology and package the software in various forms available to mass retailers, specialty retailers, Internet portals and web sites that allow end consumers to use an automated process to create products such as DVD productions, photo books, posters, calendars, and other print media products from consumer photographs, digital pictures, video, and other media. Under our business model, our customers are retailers, online vendors and end customers.  We enable our retail and online customers to sell our products to the end consumer who remain customers of the vendor.  Through 2007, aVinci Media, LC generated revenues through the sales of DVD products created using its technology. During 2008, new photo book and poster product offerings were made available. Currently on websites www.avincistudio.com and www.myESPNhighlights.com , we sell products directly to end customers.  During 2009 we launched myESPN Highlights which gives retailers, photographers, and photo labs the ability to showcase youth sports images in an authentic SportsCenter™ "highlight reel," complete with commentary by ESPN's Karl Ravech. Products include "customizable" SportsCenter branded digital photo products including personalized DVD movies, photo books and posters.  In November 2009 we introduced additional personalized myESPN Highlights trading cards,  8 x 10 memory mates (a print photo product featuring an athlete and team) and fleece blankets.

Currently our products are available at the following retailers: Meijer (approximately 179 stores), Walmart (approximately 3,300 domestic stores), Walgreens (approximately 6,500 stores), and Costco (online at Costco.com). Walgreens officially launched the product line in its stores on June 28, 2009. Our products are also available to other customers and online at www.avincistudio.com .

During June 2009, we launched our newest product offering, myESPN Highlights pursuant to the licensing agreement we entered into with ESPN at the end of 2008.  We made limited myESPN Highlights products available through Walmart stores in June 2009 and also launched a direct to consumer website at www.myESPNhighlights.com .  To distribute and market the product, we created a distribution program to allow sports photographers and other interested parties to register with aVinci as sales associates to carry the myESPN Highlights product line.  Photographers who are currently actively working with sports programs and athletic events provide an opportunity for us to utilize an established industry as a direct sales force.  Sales associates make a commission on any sales they make to end customers.  We continue to actively recruit and register sales associates to sell myESPN Highlight products.

On or about the last week of September, we reached a verbal agreement with Fujicolor to deploy our new archival software that allows customers to save digital files on CD, SD cards or other electronic media to DVD, in Walmart stores. As an advance against site license fees associated with deployment of our archive software, Fujicolor paid us approximately $247,500 in October 2009.  The parties to the agreement intend to memorialize the verbal agreement in a written document that will provide for a three-year term with license fees of approximately $1 million per year starting in 2010.

During October 2009, we memorialized in a written contract our agreement with Walgreens to provide our DVD products for in-store fulfillment in approximately 6,500 domestic Walgreens stores.  Our DVD products have been available in Walgreens stores since June 2009 and Walgreens has produced over 140,000 DVDs from June through October.   
 

Subsequent to the end of the quarter, in November 2009 we introduced a new product offering to commercial photo labs servicing the youth sports market that allows the labs to offer, sell and create print products including trading cards, 8 x 10 prints and posters.  Upon the creation of products, lab customers pay a royalty for products produced.  We have engaged several labs and are in negotiations with several more at the present time.

Because of the success we have had working with ESPN to create personalized products associated with a leading brand, we are engaged in discussions with other leading brands, including ESPN’s parent company Disney, to create similar product lines to leverage personalized association with the brands using our technology.

We currently manufacture DVDs for all end customers in our Draper, Utah facility with the exception of products sold at Meijer and Walgreens where DVDs are created on site at the store where the product is purchased by the end customer. We use the services of local third-party vendors to print DVD covers and inserts, photo books, and posters.  

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and disclosures. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Accordingly, actual results could differ from those estimates.
 
We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, and equity-based compensation have the greatest potential impact on our Condensed Consolidated Financial Statements. These areas are key components of our results of operations and are based on complex rules which require us to make judgments and estimates, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.
 
There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2009 as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Results of Operations

For the first nine months of 2009, revenues increased 123% and operating losses decreased by 40% over the same period in 2008.  For the nine months ended September 30, 2009, we had revenues of $673,728, an operating loss of $4,152,414, a net loss of $4,170,561, and a net loss applicable to common stockholders of $4,858,692. This compares to revenues of $302,351, an operating loss of $6,847,783, a net loss of $6,934,944, and a net loss applicable to common stockholders of $8,136,717 for the same period in 2008.

Revenues .

Total revenues increased $201,132, or 179%, to $313,784 for the three months ended September 30, 2009, as compared to $112,652 for the same period in 2008. The increase in revenue during the three months ended September 30, 2009 over the same period in 2008 is primarily due to sales in Walgreen’s stores as a result of significant marketing efforts surrounding the launch of aVinci products in Walgreen’s stores throughout the United States at the end of the second quarter and the start of the third quarter of 2009. For the nine months ended September 30, 2009, total revenues increased $371,377 or 123% to $673,728 as compared to $302,351 for the same period in 2008. The increase in revenue for the nine months ended is also due to the launch of aVinci products in Walgreen’s stores throughout the United States during the second and third quarters of 2009.

Two customers accounted for a total of 88% of aVinci’s revenues for the three months ended September 30, 2009 (individually 75%, and 13%) compared to four customers accounting for 94% of the revenue for the same period in 2008 (individually 47%, 19%, 15 percent, and 13%). Two customers accounted for a total of 79% of aVinci’s revenues for the nine months ended September 30, 2009 (individually 58%, and 21%) compared to four customers accounting for 93% of aVinci’s revenue for the same period in 2008 (individually 47%, 20%, 15%, and 11%). No other single customer accounted for more than 10% of aVinci’s total revenues for the three and nine months ended September 30, 2009 or the same period in 2008.

16


Operating Expenses .

Cost of Goods Sold . Our cost of goods sold decreased $48,973, or 21%, to $184,327 for the three months ended September 30, 2009, compared to $233,300 for the same period in 2008. The decrease in cost of goods sold is primarily due to $44,000 in cost related to the sale of equipment to a customer during 2008, and to increased sale of products produced in retail stores during 2009 for which our cost of goods sold are minimal. As we continue to replace product sales that we fulfill in our facility with sales of products fulfilled in store, we expect our costs of good sold to continue to decrease because our customers assume the cost of the raw materials and labor used to produce products from us.  For the nine months ended September 30, 2009, cost of goods sold decreased $80,163 or 12% to $586,770 as compared to $666,933 for the same period in 2008. The decrease in cost of goods sold is primarily due to $118,000 in cost related to the sales for equipment sold to a customer during 2008, and a reduction in labor costs of $45,000 associated with product production in our facility during 2009. These decreases were partially offset by increases recognized during the nine months ended September 30, 2009 of $45,000 in expiring license fees, $29,000 in increased retailer fees, and $24,000 in increased postage due to additional sales volume.

For the three and nine months ended September 30, 2009 the majority of cost of goods sold are for costs associated with fulfillment. For the three and nine months ended September 30, 2008, cost of goods sold includes $188,300 and $547,400, respectively, in costs associated with fulfillment; and $45,000 and $119,600, respectively, for the cost of hardware sold to a customer.

Research and Development . Our research and development expense decreased $284,329, or 62%, to $172,663 for the three months ended September 30, 2009, compared to $456,992 for the same period in 2008. The decrease is primarily due to a decrease in the average employee headcount during this period from year to year. Additional research and development resources were needed during the quarter ended September 30, 2008 in preparation for the launching of our products at Costco and Meijer. The decrease in employee headcount accounts for approximately $229,000 of the decrease. Reduced usage of outside resources reduced expenses by approximately $41,000. For the nine months ended September 30, 2009, research and development decreased $833,405, or 58% to $614,117 as compared to $1,447,522, for the same period in 2008. The decease in expenses for the nine month period is also primarily due to the decrease in the average employee headcount from 2008 to 2009 for the same reasons stated above. The decrease in employee headcount accounts for approximately $725,000 of the decrease. Reduced usage of outside resources reduced the nine month research and development expense by $87,000.

Selling and Marketing . Our selling and marketing expense decreased $183,570, or 46%, to $215,284 for the three months ended September 30, 2009 compared to $398,854 for the same period in 2008. For the nine months ended September 30, 2009, selling and marketing decreased $609,187, or 45% to $756,463 compared to $1,365,650, for the same period in 2008. The decreases are primarily due to a decrease in the average employee headcount during these periods from year to year as additional resources were needed in 2008 to help launch our products at various mass retailers. For the three and nine months ended September 30, 2009, the decrease in employee headcount accounts for approximately $114,000 and $384,000, respectively, of the decrease; and the decrease in the use of outside resources accounts for approximately $62,000 and $80,000, respectively, of the decrease from 2008. Finally, for the nine months ended September 30, 2009, marketing expenses decreased by approximately $138,000 as 2008 included increased marketing expense associated with the launch of our products at various mass retailers.

General and Administrative . Our general and administrative expense increased $89,089, or 8%, to $1,176,016 for the three months ended September 30, 2009, compared to $1,086,927 for the same period in 2008. The increase is primarily due to the increase in stock-based compensation expense of $269,000. The majority of this increase was due to the recognition of the remaining option expense for options granted to two former directors due to the acceleration of vesting upon their resignation in July 2009, and additional stock-based compensation resulting from the repricing of the majority of our options in August 2009 (see Note 4 above). General and administrative expenses also increased by approximately $218,000 due to the issuance of stock and warrants for outside services including stock granted to non-employee directors for their past year’s service. These increases were offset by decreases in salaries of $155,000 and benefits of $46,000 due to reduced overall headcount and reduced employee benefits. Other general and administrative expenses decreased including reductions in investor related expenses of $55,000 due to increased activity in 2008 following the reverse merger in June 2008, and reduced insurance expense of $49,000 due to the purchase of “run-off” directors and officers’ liability insurance after the reverse merger transaction. Finally, legal and accounting fees decreased by $29,000 from 2008 to 2009 due to higher fees in 2008 associated with the reverse merger transaction.

For the nine months ended September 30, 2009, general and administrative expenses decreased $801,237, or 22% to $2,868,792 compared to $3,670,029, for the same period in 2008. The decrease is primarily due to a decrease of $375,000 in consulting and outside services.  The revised consulting agreement with Amerivon resulted in a decrease to general and administrative expense of approximately $745,000.  This decrease was offset by an increase in 2009 of other consulting and outside services. Employee benefits decreased by $199,000 due to a decrease in overall headcount from year to year, and reduced employee benefits. Insurance expense decreased by $127,000 from 2008 to 2009, due to the payment of “run-off” directors and officers liability insurance as described above. Finally, travel expenses decreased by $72,000 from 2008 to 2009 due to the reduction in overall average employee headcount and travel related expenses.
 
 
17

Interest Expense. Our interest expense decreased $5,144, or 50%, to $5,209 for the three months ended September 30, 2009, compared to $10,353 for the same period in 2008. For the nine months ended September 30, 2009, interest expense decreased $118,803, or 87% to $17,662 compared to $136,465, for the same period in 2008. In connection with the Agreement and Plan of Merger, aVinci Media, LC entered into a Loan and Security Agreement and Secured Note with Secure Alliance Holdings (“SAH”) on December 6, 2007 in order to ensure adequate funds through the merger closing date. The agreement provided for SAH to loan a total of up to $2.5 million to aVinci Media, LC through the merger closing date. A total of $1 million was received under the Secured Note as of December 31, 2007. An additional $1,500,000 was advanced during the three months ended March 31, 2008. The amounts advanced under the Secured Note were secured by all assets of aVinci Media, LC, accrued interest at 10% per annum and principal and interest were due and payable on December 31, 2008. In connection with the merger on June 6, 2008, the balance of notes payable of $2.5 million and the related accrued interest of approximately $104,000 were eliminated. 

Income Tax Expense. For the three and nine months ended September 30, 2009 and 2008, no provisions for income taxes were required. Prior to June 6, 2008, aVinci Media LC was a flow-through entity for income tax purposes and did not incur income tax liabilities.

At September 30, 2009, management has recognized a valuation allowance for the net deferred tax assets related to temporary differences and current operating losses. The valuation allowance was recorded because there is significant uncertainty as the realizability of the deferred tax assets. Based on a number of factors, the currently available, objective evidence indicates that it is more-likely-than-not that the net deferred tax assets will not be realized.

Deemed Dividend on Series A Convertible Preferred Stock. Deemed dividends of $105,928 and $688,131 were recorded for the three and nine months ended September 30, 2009, respectively, as a result of a beneficial conversion feature on the Series A convertible preferred shares.  The beneficial conversions were calculated as the difference between the proceeds received from the sale of the Series A convertible preferred stock and the fair value of the underlying common stock into which the preferred shares are convertible. These were recorded as preferential dividends, thus increasing the loss applicable to common stockholders.

Deemed Distribution on Series B Redeemable Convertible Preferred Units . aVinci recorded a deemed distribution of $976,000 for the nine months ended September 30, 2008, to reflect the issuance of 1,525,000 common units that were issued in order to induce conversion of the Series B preferred units to common units immediately preceeding the reverse merger. The inducement units were recorded as a deemed distribution, thus increasing the loss applicable to common stockholders.

Distributions on Series B Redeemable Convertible Preferred Units . The Series B redeemable convertible preferred unit holders were entitled to an annual distribution of $0.06 per unit. The distributions on Series B redeemable convertible preferred units decreased $225,773, or 100%, to $0 for the nine months ended September 30, 2009, compared to $225,773 for the same period in 2008. The change is due to the distribution accrual beginning in May 2007, and ending (due to the reverse merger) in June 2008.

Balance Sheet Items.

The following were changes in our balance sheet accounts.

Cash . Cash decreased $1,064,917, or 99%, to $6,136 at September 30, 2009, from $1,071,053 at December 31, 2008. The decrease is due to continued cash operating deficits. We did receive $1,202,627 during the nine months ended September 30, 2009 as a result of the issuance of the Series A convertible preferred shares (see Note 3 above) to help cover the operating deficit.

Accounts receivable . Accounts receivable increased $113,831, or 44%, to $375,423 at September 30, 2009 from $261,592 at December 31, 2008. The increase is primarily due to invoicing Fujicolor $247,500 for an advance against site license fees associated with deployment of our archive software.
 
18

Prepaid Expenses . Prepaid expenses decreased $152,740, or 66%, to $80,305 at September 30, 2009 from $233,045 at December 31, 2008. The decrease is due to several factors including recognizing expiring and other music license fees of $66,000, recognizing prepaid directors and officers insurance of $37,000, recognizing prepaid conference fees of $24,000, recognizing prepaid medical benefits of $22,000, recognizing prepaid investor relations expenses of $17,000 and recognizing prepaid rent of $7,000.  These decreases were partially offset by an increase in prepaid legal fees of $18,000.

Deferred Costs . Deferred costs decreased $127,100, or 88%, to $16,844 at September 30, 2009, from $143,944 at December 31, 2008. The decrease is due to Qualex cancelling its contract with us in December 2008. As a result of the cancelled contract, Qualex returned equipment to us and we discontinued recognizing the related deferred costs and deferred revenue over the life of the original contract.

Property and Equipment, net . Property and equipment decreased $309,176, or 50%, to $313,509 at September 30, 2009, from $622,685 at December 31, 2008. The decrease is due to depreciation expense of $308,000.

Deferred Revenue . Deferred revenue increased $172,470, or 50%, to $517,044 at September 30, 2009, from $344,574 at December 31, 2008. The increase is a result of increased sales contracts for which all of the criteria for revenue recognition were not yet complete at September 30, 2009. The increase was partially offset due to Qualex cancelling its contract with us when they ceased all operations in December 2008. As a result of the cancelled contract, Qualex returned equipment to us and we discontinued recognizing the related deferred costs and deferred revenue over the life of the original contract.

Liquidity and Capital Resources

   
Unaudited
 
   
Nine Months Ended
 
   
September 30,
 
Statements of Cash Flows
 
2009
   
2008
 
             
Cash Flows from Operating Activities
  $ (2,167,201 )   $ (6,372,069 )
Cash Flows from Investing Activities
    9,317       (71,241 )
Cash Flows from Financing Activities
    1,092,967       8,429,834  
Increase (Decrease) in cash and cash equivalents
    (1,064,917 )     1,986,524  

Operating Activities . For the nine months ended September 30, 2009, net cash used in operating activities was $(2,167,201) compared to $(6,372,069) for the same period in 2008. The changes were due to higher operating expenses for the nine months ended September 30, 2008 for the pursuit of new customers and development of additional delivery methods for software technology which required substantial additional human, equipment and other resources.

Investing Activities . For the nine months ended September 30, 2009, aVinci’s cash flows provided by investing activities was $9,317 compared to cash used of $(71,241) for the same period in 2008. The change was due to purchasing less property and equipment in the nine months ended September 30, 2009 than in the same period in 2008, and due to proceeds received from the sale of marketable securities, at a realized loss, in 2009.

Financing Activities . For the nine months ended September 30, 2009, financing activities provided $1,092,967 of cash compared to providing $8,429,834 for the same period in 2008. During the nine months ended September 30, 2009, we received $1,202,627 from the sale of Series A convertible preferred stock and we used $109,660 for principal payments under capital lease obligations. During the nine months ended September 30, 2008, aVinci received approximately $7.1 million in cash as a result of the reverse merger; and $1.5 million from SAH in anticipation of closing the Merger Agreement. During this period, aVinci received $460,625 from Amerivon as they exercised a portion of their warrants to purchase additional common units, used $(534,024) for payment of accrued distributions, and used $(91,879) for principal payments under capital obligations.

As discussed in Note 3 above, in March 2009, we initiated a private offering pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder to raise up to an additional $1.5 million in two phases, $750,000 from April to June 2009 and an additional $750,000 by the end of December 2009.  The investment is in the form of Series A convertible preferred shares, $0.01 per share par value with a stated value of $1.00 per share, convertible into common shares at the rate of $0.20 per common share.  For each Series A convertible preferred share, investors in the offering also receive a warrant to purchase 1.25 shares of common stock at $0.25 per share at any time within five years.  As of September 30, 2009, we had received proceeds of $1,202,627 from the sale of 1,202,627 Series A convertible preferred shares. The Series A shares also carry a cumulative dividend at an annual rate of 8%. Cumulative dividends not accrued or declared as of September 30, 2009 are $32,356.
 
19

We have operated at a loss since inception and are not currently generating sufficient revenues to cover our operating expenses.  As of September 30, 2009, we have negative working capital of $262,233 compared with a working capital surplus of $1,177,103 at December 31, 2008. We are continuing to work to obtain new customers and to increase revenues from existing customers. We contemplate raising additional outside capital within the next 12 months to help fund current growth plans (see Note 3 above).   We have reduced monthly expenses throughout 2009 and raised approximately $1.2 million of a planned $1.5 million capital raise from outside sources from April 2009 through November 10, 2009.  We intend to raise an additional $300,000 under our current capital raise, and an additional $500,000 round for next year. With the outside capital and with increased revenues from new and existing customers, we believe we will be able to fund operations through 2010 based on our current plans and projections.  In the event we are not able to meet our revenue projections through the end of 2009 and 2010, we may be required to raise additional capital and further reduce operating expenses.

If new sources of financing are insufficient or unavailable, we will modify our growth and operating plans to the extent of available funding, if any. Any decision to modify our business plans would harm our ability to pursue our aggressive growth plans.  If we cease or stop operations, our shares could become valueless.  Historically, we have funded operating, administrative and development costs through the sale of equity capital or debt financing.  If our plans and/or assumptions change or prove inaccurate, or we are unable to obtain further financing, or such financing and other capital resources, in addition to projected cash flow, if any, prove to be insufficient to fund operations, our continued viability could be at risk.  To the extent that any such financing involves the sale of our common stock or common stock equivalents, our current stockholders could be substantially diluted.  There is no assurance that we will be successful in achieving any or all of these objectives in 2009.

New Accounting Standards

In March 2008, the Financial Accounting Standards Board (FASB) issued Topic 815, “Derivatives and Hedging.” Topic 815 amends and expands the disclosure requirements with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  Topic 815 was effective beginning in the first quarter of fiscal 2009. The adoption of this guidance had no effect on our consolidated financial position or results of operations.

In December 2007, the FASB issued Topic 805, “Business Combinations,” and Topic 810, “Consolidation.” Topic 805 changes how business acquisitions are accounted for and impacts financial statements both on the acquisition date and in subsequent periods. Topic 810 changes the accounting and reporting for minority interests, which is recharacterized as noncontrolling interests and classified as a component of equity. Topic 805 and Topic 810 were effective for us beginning in the first quarter of fiscal 2009. The adoption of Topic 805 and Topic 810 had no effect on our consolidated financial position or results of operations.

In April 2009, the FASB issued three new standards, to address concerns about (1) measuring the fair value of financial instruments when the markets become inactive and quoted prices may reflect distressed transactions and (2) recording impairment charges on investments in debt securities. The FASB also issued a third standard to require disclosures of fair values of certain financial instruments in interim financial statements.

Topic 820, “Fair Value Measurements and Disclosures,” provides additional guidance to highlight and expand on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset. This standard also requires new disclosures relating to fair value measurement inputs and valuation techniques (including changes in inputs and valuation techniques).

Topic 320, “Investments - Debt and Equity Securities,” will change (1) the trigger for determining whether an other-than-temporary impairment exists and (2) the amount of an impairment charge to be recorded in earnings. To determine whether an other-than-temporary impairment exists, an entity will be required to assess the likelihood of selling a security prior to recovering its cost basis. This is a change from the current requirement for an entity to assess whether it has the intent and ability to hold a security to recovery or maturity. This standard also expands and increases the frequency of existing disclosure about other-than-temporary impairments and requires new disclosures of the significant inputs used in determining a credit loss, as well as a rollforward of that amount each period.
 
20

Topic 825, “Financial Instruments,” increases the frequency of fair value disclosures from annual to quarterly to provide financial statement users with more timely information about the effects of current market conditions on their financial instruments.

The provisions of these three standards were effective for us beginning the second quarter of 2009. The adoption of these three standards did not have a material effect on our consolidated financial position or results of operations.

In May 2009, the FASB issued Topic 855, “Subsequent Events,” which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Topic 855 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. Topic 855 is effective for interim and annual periods ending after June 15, 2009, and accordingly, we adopted this standard during the second quarter of 2009. Topic 855 requires that public entities evaluate subsequent events through the date that the financial statements are issued. We have evaluated subsequent events through the time of filing these financial statements with the SEC on November 10, 2009.

In June 2009, the FASB issued Topic 105, “Generally Accepted Accounting Principles.” This standard establishes the FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. The Codification is effective for us in the third quarter of 2009. The adoption of this guidance had no effect on our consolidated financial position or results of operations.

In June 2009, the FASB issued a new accounting standard, which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The new guidance clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This standard requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. This standard also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. This standard is effective for fiscal years beginning after November 15, 2009. We believe that the future requirements of this standard will not have a material effect on our consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (FASB ASU 09-13), “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force).” FASB ASU 09-13 updates the existing multiple-element arrangement guidance currently in FASB Topic 605-25 (Revenue Recognition – Multiple-Element Arrangements). This new guidance eliminates the requirement that all undelivered elements have objective evidence of fair value before a company can recognize the portion of the overall arrangement fee that is attributable to the items that have already been delivered. Further, companies will be required to allocate revenue in arrangements involving multiple deliverables based on the estimated selling price of each deliverable, even though such deliverables are not sold separately by either company itself or other vendors. This new guidance also significantly expands the disclosures required for multiple-element revenue arrangements. The revised guidance will be effective for the first annual period beginning on or after June 15, 2010. We may elect to adopt the provisions prospectively to new or materially modified arrangements beginning on the effective date or retrospectively for all periods presented. We are currently evaluating the impact FASB ASU 09-13 will have on our consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-14 (FASB ASU 09-14), “Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force,” that reduces the types of transactions that fall within the current scope of software revenue recognition guidance. Existing software revenue recognition guidance requires that its provisions be applied to an entire arrangement when the sale of any products or services containing or utilizing software when the software is considered more than incidental to the product or service. As a result of the amendments included in FASB ASU No. 2009-14, many tangible products and services that rely on software will be accounted for under the multiple-element arrangements revenue recognition guidance rather than under the software revenue recognition guidance. Under this new guidance, the following components would be excluded from the scope of software revenue recognition guidance:  the tangible element of the product, software products bundled with tangible products where the software components and non-software components function together to deliver the product’s essential functionality, and undelivered components that relate to software that is essential to the tangible product’s functionality. FASB ASU 09-14 also provides guidance on how to allocate transaction consideration when an arrangement contains both deliverables within the scope of software revenue guidance (software deliverables) and deliverables not within the scope of that guidance (non-software deliverables). This guidance will be effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We may elect to adopt the provisions prospectively to new or materially modified arrangements beginning on the effective date or retrospectively for all periods presented. However, we must elect the same transition method for this guidance as that chosen for FASB ASU No. 2009-13. We are currently evaluating the impact FASB ASU 09-14 will have on our consolidated financial statements.
 
21

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital resources that is material to investors.

Contractual Obligations and Commitments
 
The following table sets forth certain contractual obligations as of September 30, 2009 in summary form:
 
         
Less
               
More
 
         
than 1
   
1-3
   
4-5
   
than 5
 
Description
 
Total
   
Year
   
years
   
years
   
years
 
Capital lease obligations
 
$
134,560
     
129,529
     
5,031
     
-
     
-
 
Operating lease obligations
   
967,456
     
236,780
     
528,158
     
202,518
     
-
 
Purchase obligations
   
139,454
     
74,454
     
65,000
     
-
     
-
 
Totals
 
$
1,241,470
     
440,763
     
598,189
     
202,518
     
-
 

As a cost saving measure, on or about October 30, 2009, we signed a non-binding letter of intent to sublease a portion of our space to a third party with an option for the third party to sublease the remaining space upon 60 days notice.  Upon execution of a sublease, we intend to move to a subdivided portion of our current facility. We expect costs associated with the sublease to be minimal.
 
22
 
ITEM 3.                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4.                      CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial and Accounting Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, Chett P. Paulsen, our Principal Executive Officer, and Edward B. Paulsen, our Principal Financial and Accounting Officer, concluded that these disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2009.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or Rule 15d-15(d) under the Exchange Act that occurred during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
23

PART II-OTHER INFORMATION

ITEM 1.                      LEGAL PROCEEDINGS

We are not aware of any material pending or threatened legal proceedings, other than the litigation referenced below.

On December 17, 2007, Robert L. Bishop, who worked with aVinci Media’s (AVI Media) predecessor, Sequoia Media Group, LC, in a limited capacity in 2004 and is a current member of a limited liability company, LifeCinema, LLC, that owns an equity interest in aVinci, filed a legal claim in the Third Judicial District Court for Salt Lake County, State of Utah, alleging a right to unpaid wages and/or commissions (with no amount specified) and company equity.  The Complaint was served on AVI Media on January 7, 2008.  AVI Media timely filed an answer denying Mr. Bishop’s claims and counterclaiming interference by Mr. Bishop with AVI Media’s capital raising efforts.  AVI Media is defending against Mr. Bishop’s claims and discovery is ongoing.  On April 30, 2009, defendants filed a motion for summary judgment based upon the fact Mr. Bishop did not file suit within the four year statute of limitations applicable to oral contracts (upon which plaintiff is suing), and upon the grounds that no agreement exists because there was no meeting of the minds.  The court deferred ruling on the motion pending Mr. Bishop conducting depositions of company executives.  On June 16, 2009 Mr. Bishop filed an amended complaint which alleges that defendant Chett B. Paulsen is responsible for a portion of the equity Bishop is claiming in the action.  On June 30, 2009 Bishop filed a motion for leave to file a second amended complaint to add claims for fraud and negligent misrepresentation.  Defendants objected to the motion on the ground of failing to state a claim, the “futility doctrine” under Utah law, and failing to timely file the claims.  Defendants filed a second motion for summary judgment on July 28, 2009 on the grounds that Bishop’s action is barred by Utah statute which requires “investment advisor” agreements to be in writing.  The matter has been submitted to the court for oral argument but no date has been set to hear the motion.

ITEM 1A.                      RISK FACTORS

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Form 10-K as filed with the SEC on March 31, 2009.

ITEM 2.                      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company issued and sold 1,202,627 shares of its Series A Convertible Preferred Stock, $0.01 per share par value, with a stated value of $1.00 per share with five-year warrants to purchase 1,503,283 shares of the Company’s common stock at an exercise price of $0.25 per share to accredited investors.  The Company received $1,202,627 as consideration for the Series A Convertible Preferred Stock and the accompanying warrants.  The Series A Convertible Preferred Stock will carry a cumulative dividend at an annual rate of 8%.  The issuance and sale of these securities took place in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.  The Series A Convertible Preferred Stock is convertible into the Company’s common stock at $0.20 per share or 6,013,135 shares.  The proceeds from the sale of the Series A Convertible Preferred Stock have been used to fund ongoing operations.
 
On July 15, 2009, Stephen P. Griggs and Jerrell G. Clay, former directors, each received warrants to purchase up to 200,000 shares of common stock of the Company for $0.30 a share at anytime on or before 10 years from the date of issuance. We recorded a total expense of $77,000 for the issuance of these warrants.
 
On July 23, 2009, our Board of Directors approved the issuance of 50,000 shares of the Company’s common stock to each non-management director serving on the board for the period June 6, 2008 through June 5, 2009. Consequently Tod M. Turley, John E. Tyson, Stephen P. Griggs, and Jerrell G. Clay each received 50,000 shares of the Company’s common stock. These shares had a total fair value of $68,000 and were expensed immediately.
 
ITEM 3.                      DEFAULTS UPON SENIOR SECURITIES

 
Not applicable.

ITEM 4.                      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 
Not applicable.
 
ITEM 5.                      OTHER INFORMATION

Not applicable.

ITEM 6.                      EXHIBITS

(a) Exhibits

Exhibit Number
Description of Exhibit
   
3.3
Certificate of Designation of Series A Convertible Preferred Stock
 
31.1
Certification of the Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)
 
31.2
Certification of the Principal Financial and Accounting Officer pursuant to Exchange Act Rule 13a-14(a)
 
32
Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
 


24
 
SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

     
 
aVinci Media Corporation
     
Date: November 10, 2009
By:  
/s/ Chett B. Paulsen
 
Chett B. Paulsen
 
Principal Executive Officer

Date: November 10, 2009
By:  
/s/ Edward B. Paulsen
 
Edward B. Paulsen
 
Principal Financial and Accounting Officer

 
 
 
 
 
25
Exhibit 3.3
CERTIFICATE OF DESIGNATION
OF SERIES A CONVERTIBLE PREFERRED STOCK
OF
aVinci Media Corporation

Pursuant to Section 151 of the General
Corporation Law of the State of Delaware

 
I, the undersigned, being the President of aVinci Media Corporation, a Delaware Corporation (the “ Corporation ”), hereby certify in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware that the Board of Directors of the Corporation (“ Board of Directors ”) duly adopted the following resolution on March 31, 2009:

RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors by the provisions of the Corporation’s Certificate of Incorporation, this Board of Directors hereby creates, from the 50,000,000 shares of preferred stock (the “ Preferred Stock ”), of the Corporation authorized to be issued pursuant to the Certificate of Incorporation, a series of the Preferred Stock having the following terms and designations:

Section 1.                       Designation and Amount . The shares of this series, having a par value of $0.01 per share, shall be designated as “Series A Convertible Preferred Stock” (the “ Series A Preferred Stock ”) and the number of shares constituting such series shall be 1,500,000. Each share of the Series A Preferred Stock shall have a stated value (“ Stated Value ”) of $1.00.  The relative rights, preferences and limitations of the Series A Preferred Stock shall be in all respects identical, share for share, to the Common Stock of the Corporation (“ Common Stock ”), except as otherwise   provided herein.

Section 2.                       Dividends .   The holders (“ Holders ”) of the then outstanding Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of any funds and assets of the Corporation legally available, dividends at an annual rate of 8% of the Stated Value. Dividends shall be cumulative and shall accrue on each share of the outstanding Series A Preferred Stock from the date of its issue.  Dividends shall be payable in cash or, at the discretion of the Corporation, in shares of Common Stock at the price of Twenty Cents ($0.20) per share of Common Stock; provided that the Corporation shall not pay any cash dividend until the Corporation reports positive net income for two consecutive quarters as reported in the Corporation’s public quarterly reports.  No dividend shall be paid on the Common Stock at a rate greater than the rate at which dividends are paid on Series A Preferred Stock (based on the number of shares of Common Stock into which the Series A Preferred Stock is convertible on the date the dividend is declared).  Dividends on Series A Preferred Stock shall be in preference to dividends paid on the Common Stock or hereinafter issued Preferred Stock.
 
1

Section 3.                       Voting Rights . Except as otherwise expressly provided herein or as required by applicable law, the Holder of each share of Series A Preferred Stock shall be entitled to vote on all matters submitted to a vote or consent of stockholders. Each share of Series A Preferred Stock shall entitle the Holder thereof to such a number of votes per share equal to the number of shares of Common Stock into which such share of Series A Convertible Preferred Stock is then convertible pursuant to Section 6 hereof as of the record date for the determination of stockholders entitled to vote on such matter, or if no record date is established, at the date such vote is taken or any written consent of stockholders is solicited.

Section 4.                       Reacquired Shares . Any shares of the Series A Preferred Stock redeemed or purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock, unless otherwise provided for in the Certificate of Incorporation of the Corporation, and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors; provided that such shares may not be reissued as shares of Series A Preferred Stock.

Section 5.                       Liquidation, Dissolution or Winding Up .

(a)           Upon any liquidation, dissolution or winding-up of the Corporation (“ Liquidation Event ”), the Holders of the Series A Preferred Stock shall be entitled to receive out of the assets of the Corporation, whether such assets are capital or surplus, for each share of Series A Preferred Stock an amount equal to the Stated Value per share plus any accrued and unpaid dividends thereon before any distribution or payment shall be made to the holders of any Common Stock or hereinafter issued Preferred Stock.  For the purposes of this Certificate, a Liquidation Event shall include (i) the effectuation by the Corporation or third-party acquirors of a transaction or series of transactions in which more than 50% of the voting power of the Corporation is disposed of to a single person or group of affiliated persons, (ii) the consolidation or merger of the Corporation with or into any other corporation or corporations or (iii) the sale of all or substantially all of the Corporation’s assets.

(b)            Upon any Liquidation Event, and after full payment as provided in Section 5(a) above, the remaining assets of the Corporation shall be available to be distributed to all holders of the Common Stock and other Preferred Stock of the Corporation.

Section 6.                       Conversion .

(a)           (i)           At the option of the Holder, subject to the provisions for adjustments hereinafter set forth, each share of the Series A Preferred Stock shall be convertible, at any time, in the manner hereinafter set forth, into a number of fully paid and nonassessable shares of Common Stock of the Corporation computed by multiplying the number of such shares of Series A Preferred Stock to be converted by the sum of the Stated Value (such amount to be adjusted proportionately in the event the shares of Series A Preferred Stock are adjusted into a lesser number or subdivided into a greater number) plus all accrued and unpaid dividends thereon, and dividing the result by the Conversion Price.  For the purposes of this Section 6(a)(i), the minimum amount of Series A Preferred Stock that may be converted in any conversion shall be the lower of 25,000 shares of the Series A Preferred Stock or the remaining shares of Series A Preferred Stock owned by the Holder.  The “ Conversion Price ” per share of Series A Preferred Stock shall initially be $0.20, which price shall be subject to adjustment as provided herein.
 
2

(ii)           The Series A Preferred Stock plus all accrued and unpaid dividends thereon shall be automatically converted into Common Stock, at the then applicable Conversion Price, in the event of (a) an underwritten public offering of shares of Common Stock at a public offering price per share that would value the Corporation at not less than $0.80 per share (subject to adjustment) of Common Stock in an offering of not less than $20,000,000.00 or (b) the vote of the Holders of two-thirds of the outstanding Series A Preferred Stock.

(iii)           If after January 1, 2011, the volume weighted average price (“ VWAP ”) for 15 trading days out of any 20 consecutive trading days exceeds $0.80 (subject to adjustment to reflect stock dividends, stock splits and similar events as provided herein) and the average daily trading volume for such 20 trading day period exceeds 50,000 shares, the Corporation may, at its discretion, convert all or part of the then outstanding Series A Preferred Stock, including accrued but unpaid dividends, into Common at the then Conversion Price.  If the Corporation elects to convert less than all of the outstanding Series A Preferred Stock, then it shall convert the same percentage of the number of shares of Series A Preferred Stock held by each Holder.  For the purposes of this Section 6(a)(iii), VWAP is calculated by taking the weighted average of the price of each trade for each trading day during such 20 trading day period.
 
(iv)           For the purposes of paragraphs (ii) and (iii) of this Section 6(a), shares of Series A Preferred Stock shall not be converted into Common Stock without the prior written consent of the holder if the Corporation does not convert all accrued but unpaid dividends on such shares of Series A Preferred Stock at the time of conversion.
 
(b)           The Conversion Price shall be adjusted from time to time as follows:

(i)   If the Corporation at any time subdivides (by stock split, stock dividend, recapitalization or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased.

(ii)   If the Corporation at any time while Series A Preferred Stock is outstanding, shall sell or issue any Common Stock or securities convertible into Common Stock or entitling any person to acquire shares of Common Stock, at an effective price per share less than the then Conversion Price (such issuances individually and collectively, a “ Dilutive Issuance ”), as adjusted hereunder, then, the Conversion Price shall be reduced by multiplying the Conversion Price by a fraction, the numerator of which is the number of shares of Common Stock issued and outstanding immediately prior to the Dilutive Issuance plus the number of shares of Common Stock which the aggregate consideration received or receivable by the Corporation in connection with such Dilutive Issuance would purchase at the then effective Conversion Price, and the denominator of which shall be the sum of the number of shares of Common Stock issued and outstanding immediately prior to the Dilutive Issuance plus the number of shares of Common Stock so issued or issuable in connection with the Dilutive Issuance; provided, however, that if a Dilutive Issuance includes options, warrants, or rights exercisable to purchase shares of Common Stock at an exercise price that exceeds by more than twenty percent (20%) the purchase price on a per share basis of other securities issued in such Dilutive Issuance, then such options, warrants, and rights shall not be included in determining the amount of any adjustment to the exercise price in such Dilutive Issuance.  The consideration received by the Corporation for any Dilutive Issuance shall be the sum of all cash and the fair market value of all property other than cash, as determined by the Corporation’s Board of Directors in good faith, received or applied to the benefit of the Corporation plus, for options, warrants, and rights, the amount equal to the exercise price multiplied by the number of securities subject to such option, warrant, or right.  When equity securities are issued in connection with debt securities, the debt securities shall be valued at their full face value when allocating the consideration received by the Corporation between the equity and debt securities.
 
3

(iii)   Notwithstanding the foregoing, the adjustments provided in this Section 6(b) shall not be triggered by the grant of options to the Corporation’s employees and directors pursuant to an employee incentive plan adopted by the Corporation’s Board of Directors, or the sale of shares pursuant to the exercise of such options, that total less than an aggregate of 10% of the Corporation’s outstanding Common Stock, calculated at the time of the issuance of such options.

(c)           The Holder of any shares of the Series A Preferred Stock may exercise his or its option to convert such shares into shares of Common Stock by surrendering for such purpose to the Corporation, at its principal office, a certificate or certificates representing the shares of Series A Preferred Stock to be converted accompanied by a written notice, in the form of Exhibit I (a “ Notice of Conversion ”).  Such Notice of Conversion shall be accompanied by payment of all transfer taxes payable upon the issuance of shares of Common Stock.  As promptly as practicable, and in any event within five business days after the surrender of such certificates and the receipt of such Notice of Conversion relating thereto and, if applicable, payment of all transfer taxes, the Corporation shall deliver or cause to be delivered (x) certificates representing the number of validly issued, fully paid and nonassessable shares of Common Stock of the Corporation to which the Holder of the Series A Preferred Stock so converted shall be entitled and (y) if less than the full number of shares of the Series A Preferred Stock evidenced by the surrendered certificate or certificates is being converted, a certificate of the Series A Preferred Stock, for the number of shares evidenced by such surrendered certificate or certificates less the number of shares converted. Such conversions shall be deemed to have been made at the close of business on the date of giving of such Notice of Conversion and of such surrender of the certificate or certificates representing the shares of the Series A Preferred Stock to be converted so that the rights of the Holder thereof shall cease except for the right to receive Common Stock of the Corporation in accordance herewith.

(d)           Upon conversion of any Series A Preferred Stock, payment shall be made for unpaid dividends under Section 2 on each converted share of Series A Preferred Stock for the period from the date of issue to the date of conversion.

(e)           The Corporation shall at all times reserve and keep available out of its authorized Common Stock the full number of shares of Common Stock or other securities issuable upon the conversion of all outstanding shares of the Series A Preferred Stock.

(f)           In the event there is an adjustment to the Conversion Price pursuant to Section 6, the Corporation shall give the Holder written notice of the effectiveness of the adjustment within five (5) days after the effective date.
 
4

Section 7.                       Notices .  The Company shall give the Holder at least thirty (30) days prior written notice of each of the following:
 
(a)   Record Date .  A record date is set by the Corporation for the distribution of cash, securities, or any other property to its shareholders;
 
(b)   Distribution .  The Corporation’s Board of Directors approves a distribution of cash, securities, or any other property to its shareholders without setting a record date;
 
(c)   Dissolution .  The Corporation’s Board of Directors approves to enter a Liquida­tion Event;
 
(d)   Financial Statements .  So long as 25% of the Series A Preferred Stock remains outstanding, the Corporation shall deliver to all remaining Holders the Form 10-K by the earlier of the date filed with the Securities and Exchange Commission or 105 days of the fiscal year end and Forms 10-Q by the earlier of the date filed with the Securities and Exchange Commission or 50 days of the end of each interim fiscal quarter.
 
Section 8.                       Executive Committee .  So long as any Holder owns at least 25% of the capital stock of the Corporation on a fully diluted basis and remains a Holder of the Series A Preferred Stock (“ Significant Holder ”), the Corporation shall maintain (a) an “ Executive Committee ” comprised of three directors of the Corporation with the initial persons being John Tyson, Tod Turley and Jerrell Clay and (b) a Chairman of the Board position (“ Chairman ”) initially filled by John Tyson.  In the event that any of such individuals resign as a director or provide a written resignation from the Executive Committee, the individual shall be replaced by another director designated by the Significant Holder.
 
(a)           The Executive Committee shall be empowered by the Corporation’s Board of Directors to oversee the Corporation’s management in the following areas:
 
(i)           Sales and marketing including the hiring of a new senior sales marketing manager; and
 
(ii)           Finance, including establishing spending budgets, including financial forecasting and reporting.
 
(b)           The Chief Executive Officer of the Corporation shall report to the Executive Committee.  The Chairman shall be the primary liaison for the Executive Committee and shall be authorized to oversee such areas on a day-to-day basis and to work closely with the Chief Executive Officer to gain approvals from the Executive Committee for matters overseen by the Executive Committee.
 
Section 9.                       Miscellaneous .

(a)   Severability                       If any provision of this Certificate of Designation is invalid, illegal or unenforceable, the balance of this Certificate of Designation shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances.  If it shall be found that any interest or other amount deemed interest due hereunder violates applicable laws governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum permitted rate of interest.

(b)   Waiver .  No delay on the part of any Holder in exercising any right, power, or privilege hereunder shall operate as a waiver of any other right, power, or privilege hereunder, nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or privilege.
 
(c)   Effectiveness .  This Certificate of Designation shall not be effective until filed with the Secretary of State of the State of Delaware.
 
[SIGNATURE PAGE FOLLOWS]
 
5

IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly executed on its behalf, as of this 31st day of March 2009.

aVinci Media Corporation

By: /s/ Chett B. Paulsen                                                 
Chett B. Paulsen, President

ATTEST:
 
/s/Edward B. Paulsen                                                                            
Edward B. Paulsen, Secretary and Treasurer
 
6


ANNEX I

NOTICE OF CONVERSION


The undersigned hereby elects to convert shares of Series A Convertible Preferred Stock (the “ Series A Preferred Stock ”) of aVinci Media Corporation (the “Corporation”), into shares of the Corporation’s common stock (the “Common Stock”) according to the conditions indicated in the Certificate of Designation for the Series A Preferred Stock, as of the date written below.  If shares of Common Stock are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Corporation in accordance therewith.  No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.


Conversion calculations:                                            Date to Effect Conversion:___________________________________________________
                                                                                                
Shares of Series A Preferred Stock to be Converted:___________________________________
 
Number of shares of Common Stock to be issued:_____________________________________

 
Signature:_______________________________________                                                                          
 
Name:__________________________________                                                           
 
Address:________________________________                                                            
 

 
Exhibit 31.1
CERTIFICATION

I, Chett B. Paulsen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of aVinci Media Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

   
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

   
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

   
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

   
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

   
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
   
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
     
 
By:  
/s/ Chett B. Paulsen
 
Name: Chett B. Paulsen
 
Title: Principal Executive Officer
November 10, 2009

 
Exhibit 31.2
CERTIFICATION

I, Edward B. Paulsen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of aVinci Media Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

   
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

   
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

   
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

   
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

   
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
   
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
     
 
By:  
/s/ Edward B. Paulsen
 
Name: Edward B. Paulsen
 
Title: Principal Financial and Accounting Officer
November 10, 2009
 

 
 
 
Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of aVinci Media Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the date indicated below, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
       
/s/ Chett B. Paulsen
     
Name: Chett B. Paulsen
Title: Principal Executive Officer
November 10, 2009
     
       
/s/ Edward B. Paulsen
     
Name: Edward B. Paulsen
Title: Principal Financial and Accounting Officer
November 10, 2009