Exhibit 99.2
XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003
IN U.S. DOLLARS
INDEX
Page | ||
Report of Independent Registered Public Accounting Firm | 2 | |
Consolidated Balance Sheets | 3 | |
Consolidated Statements of Operations | 4 | |
Statements of Changes in Shareholders’ Equity | 5 | |
Consolidated Statements of Cash Flows | 6 | |
Notes to Consolidated Financial Statements | 7 -18 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
XTEND NETWORKS LTD.
(A Development Stage Company)
We have audited the accompanying consolidated balance sheet of Xtend Networks Ltd. (a development stage company) (“the Company”) and its subsidiary as of December 31, 2003, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the year then ended and for the period from August 16, 2000 (inception date) through December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiary as of December 31, 2003, and the consolidated results of their operations and their cash flows for the year then ended and for the period from August 16, 2000 (inception date) through December 31, 2003, in conformity with accounting principles generally accepted in the United States.
Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER | |
April 29, 2004 | A Member of Ernst & Young Global |
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
In U.S. dollars (except per share data)
Note | December 31, 2003 | |||||
ASSETS | ||||||
CURRENT ASSETS: | ||||||
Cash and cash equivalents | 3 | $ | 4,789,979 | |||
Accounts receivable | 4 | 229,568 | ||||
Total current assets | 5,019,547 | |||||
PROPERTY AND EQUIPMENT, NET | 5 | 317,124 | ||||
SEVERANCE PAY FUNDS | 159,517 | |||||
Total assets | $ | 5,496,188 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
CURRENT LIABILITIES: | ||||||
Accounts payable | 6 | 438,822 | ||||
Total current liabilities | 438,822 | |||||
ACCRUED SEVERANCE PAY | 174,425 | |||||
COMMITMENTS AND CONTINGENT LIABILITIES | 7 | |||||
SHAREHOLDERS’ EQUITY: | 8 | |||||
Series A Convertible Preferred shares of NIS 0.01 par value: | ||||||
Authorized - 6,000,000 shares as of December 31, 2003; Issued and outstanding - 2,400,000 shares as of December 31, 2003 | 5,849 | |||||
Series B Convertible Preferred shares of NIS 0.01 par value: | ||||||
Authorized - 8,704,277 shares as of December 31, 2003; Issued and outstanding - 5,132,896 and 3,795,015 shares as of December 31, 2003; | �� | |||||
Aggregate liquidation preference (Series A and B) of $14,076,547 at December 31, 2003 | 11,555 | |||||
Ordinary shares of NIS 0.01 par value: | ||||||
Authorized - 23,295,723 shares as of December 31, 2003; Issued and outstanding - 5,000,000 shares as of December 31, 2003 | 12,207 | |||||
Additional paid-in capital | 12,393,741 | |||||
Deficit accumulated during the development stage | (7,540,411 | ) | ||||
Total shareholders’ equity | 4,882,941 | |||||
Total liabilities and shareholders’ equity | $ | 5,496,188 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
In U.S. dollars
Note | Year ended December 31, 2003 | Period from 2003 | ||||||||
Research and development costs | $ | 1,834,027 | $ | 5,242,859 | ||||||
Less - participation by the Office of the Chief Scientist | 329,698 | 578,324 | ||||||||
Research and development costs, net | 9 | 1,504,329 | 4,664,535 | |||||||
Marketing expenses | 683,993 | 1,343,240 | ||||||||
General and administrative expenses | 493,411 | 1,542,177 | ||||||||
Operating loss | (2,681,733 | ) | (7,549,952 | ) | ||||||
Financial income, net | (54,252 | ) | (25,757 | ) | ||||||
Net loss | $ | (2,627,481 | ) | $ | (7,524,195 | ) | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
In U.S. dollars (except share data)
Series A convertible Preferred shares | Series B convertible Preferred shares | Ordinary shares | Additional capital | Deferred stock compensation | Deficit accumulated during the development stage | Total shareholders’ Equity | |||||||||||||||||||||||||
Number | Amount | Number | Amount | Number | Amount | ||||||||||||||||||||||||||
Issuance of Ordinary shares in August 2000 | — | $ | — | — | $ | — | 5,000,000 | $ | 12,207 | $ | — | $ | — | $ | (10,957 | ) | $ | 1,250 | |||||||||||||
Issuance of Series A Convertible Preferred shares, in August 2000, net of issuance costs of $68,000 | 2,400,000 | 5,849 | — | — | — | — | 1,931,835 | — | (5,259 | ) | 1,932,425 | ||||||||||||||||||||
Issuance of Series B Convertible Preferred shares in July 2001, net of issuance costs of $129,000 | — | — | 2,164,474 | 5,165 | — | — | 4,240,597 | — | — | 4,245,762 | |||||||||||||||||||||
Issuance of Series B Convertible preferred shares, in May 2002, net of issuance costs of $60,000 | — | — | 1,630,541 | 3,346 | — | — | 5,937,363 | — | — | 5,940,709 | |||||||||||||||||||||
Deferred stock compensation to employees | — | — | — | — | — | — | 43,030 | (43,030 | ) | — | — | ||||||||||||||||||||
Amortization of deferred stock compensation | — | — | — | — | — | — | — | 43,030 | — | 43,030 | |||||||||||||||||||||
Stock-based compensation related to warrants granted to consultants | — | — | — | — | — | — | 243,960 | — | — | 243,960 | |||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (4,896,714 | ) | (4,896,714 | ) | |||||||||||||||||||
Balance as of December 31, 2002 | 2,400,000 | 5,849 | 3,795,015 | 8,511 | 5,000,000 | 12,207 | 12,396,785 | — | (4,912,930 | ) | 7,510,422 | ||||||||||||||||||||
Issuance of Series B Convertible preferred shares in May 2003 | — | — | 1,337,881 | 3,044 | — | — | (3,044 | ) | — | — | — | ||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (2,627,481 | ) | (2,627,481 | ) | |||||||||||||||||||
Balance as of December 31, 2003 | 2,400,000 | $ | 5,849 | 5,132,896 | $ | 11,555 | 5,000,000 | $ | 12,207 | $ | 12,393,741 | $ | — | $ | (7,540,411 | ) | $ | 4,882,941 | |||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
In U.S. dollars
Year ended December 31, 2003 | Period from August 16, 2000 | |||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (2,627,481 | ) | $ | (7,524,195 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 116,833 | 264,418 | ||||||
Accrued severance pay, net | 9,198 | 14,908 | ||||||
Exchange rate differences of long-term loans | — | (7,734 | ) | |||||
Decrease (increase) in accounts receivable | 84,604 | (229,568 | ) | |||||
Increase (decrease) in accounts payable | (60,777 | ) | 438,822 | |||||
Amortization of deferred stock compensation | — | 43,030 | ||||||
Compensation related to non-employees | — | 243,960 | ||||||
Net cash used in operating activities | (2,477,623 | ) | (6,756,359 | ) | ||||
Cash flows from investing activities | ||||||||
Purchase of property and equipment | (67,171 | ) | (581,542 | ) | ||||
Net cash used in investing activities | (67,171 | ) | (581,542 | ) | ||||
Cash flows from financing activities | ||||||||
Net proceeds from issuance of shares | — | 12,120,146 | ||||||
Long-term loans received | — | 163,034 | ||||||
Repayment of long-term loans | (60,613 | ) | (155,300 | ) | ||||
Net cash provided by (used in) financing activities | (60,613 | ) | 12,127,880 | |||||
Increase (decrease) in cash and cash equivalents | (2,605,407 | ) | 4,789,979 | |||||
Cash and cash equivalents at the beginning of the year | 7,395,386 | — | ||||||
Cash and cash equivalents at the end of the year | $ | 4,789,979 | $ | 4,789,979 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 1:- GENERAL
Xtend Networks Ltd. (“the Company”), an Israeli corporation, commenced operations at the beginning of August 16, 2000. The Company is engaged in developing technology related to the extension of the frequency spectrum of CATV coaxial networks.
In June 2002, the Company established a wholly-owned subsidiary, Xtend Networks Inc. (“the subsidiary”) in the State of Delaware in the United States. The principal activity of the subsidiary is marketing and future sales and support to the Company’s product.
The Company is devoting substantially all of its efforts toward conducting research, development and marketing of an innovative infrastructure. The Company’s activities also include raising capital, recruiting personnel and building infrastructure. In the course of such activities, the Company has sustained operating losses and expects such losses to continue for the foreseeable future. The Company has not generated any revenues or product sales and has not achieved profitable operations or positive cash flow from operations. The Company’s deficit accumulated during the development stage aggregated approximately $ 7.5 Million through December 31, 2003. There is no assurance that profitable operations, if ever achieved, could be sustained on a continuing basis.
The Company plans to continue to finance its operations with a combination of stock issuance and private placements and, in the longer term, revenues from product sales. There are no assurances, however, that the Company will be successful in obtaining an adequate level of financing needed for the long-term development and commercialization of its planned products.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The significant accounting policies followed in the preparation of these consolidated financial statements, on a consistent basis, are:
a. | Use of estimates: |
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
b. | Financial statements in U.S. dollars: |
The functional currency of the Company is the U.S. dollars, as the U.S. dollar is the primary currency of the economic environment in which the Company has operated and expects to continue to operate in the foreseeable future. The majority of the Company’s operations are currently conducted in Israel and most of the Israeli expenses are currently paid in new Israeli shekels (“NIS”); However, the Company’s budget is prepared in U.S. dollars, the Company’s negotiations with potential customers are conducted in U.S. dollars and financing and investing activities including equity transactions and cash investments are made in U.S. dollars.
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with Statement No. 52 of the Financial Accounting standards Board (“FASB”) “Foreign Currency Translation”. All transactions gains and losses from the remeasurement of monetary balance sheet items are reflected in the statements of operations as financial income or expenses as appropriate.
c. | Principles of consolidation: |
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Xtend Networks Inc. Intercompany balances have been eliminated upon consolidation.
d. | Cash equivalents: |
Cash equivalents include short-term highly liquid investments that are readily convertible into cash with original maturities of three months or less.
e. | Property and equipment: |
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets, at the following annual rates:
% | ||
Office furniture | 7 - 15 | |
Computers | 33 | |
Electronic equipment | 15 | |
Motor vehicles | 15 | |
Leasehold improvement | Over the term of the lease |
The Company’s long-lived assets are reviewed for impairment in accordance with Statement of Financial Accounting Standard No. 144 “Accounting for the Impairment or Disposal of Long- Lived Assets” (“SFAS No. 144”) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Throughout December 31, 2003, no impairment losses have been identified.
f. | Research and development costs: |
Research and development costs, net of participations, are charged to the statement of operations as incurred.
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
g. | Royalty-bearing grants: |
Royalty-bearing grants from the Government of Israel for funding approved research and development projects are recognized at the time the Company is entitled to such grants, on the basis of the costs incurred and included as a deduction of research and development costs.
h. | Severance pay: |
The Company’s liability for severance pay for its employees in Israel is calculated pursuant to Israel’s Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date. Employees are entitled to one month’s salary for each year of employment or a portion thereof. The Company’s liability for all of its employees is fully provided by monthly deposits with insurance policies and by an accrual. The value of these policies is recorded as an asset in the Company’s balance sheet.
h. | Severance pay (cont.): |
The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel’s Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes immaterial profits.
Severance pay expenses for the year ended December 31, 2003, amounted to $ 80,470.
i. | Accounting for stock-based compensation: |
The Company has elected to follow Accounting Principles Board Statement No. 25, “Accounting for Stock Options Issued to Employees” (“APB No. 25”) and FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation” (“FIN No. 44”) in accounting for its employee stock option plans. Under APB No. 25, when the exercise price of an employee stock option is less than the market price of the underlying stock on the date of grant, compensation expense is recognized.
The Company adopted the disclosure provisions of Financial Accounting Standards Board Statement No. 148, “Accounting for Stock-Based Compensation - transition and disclosure” (“SFAS No. 148”), which amended certain provisions of SFAS 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation, effective as of the beginning of the fiscal year. The Company continues to apply the provisions of APB No. 25, in accounting for stock-based compensation.
Pro forma information regarding the Company’s net loss which is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123 is not provided as the fair value is nil. The fair value of these options was estimated at the date of grant using Minimum - Value Options Pricing Model with the following assumptions for 2003: risk-free interest rate of 1%; expected dividend yield of 0%; expected volatility of 0% and expected lives of the options of 2.5 years.
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company applies SFAS No. 123 and Emerging Issues Task Force No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”), with respect to warrants issued to non-employees. SFAS No. 123 requires the use of option valuation models to measure the fair value of the warrants at the date of grant.
j. | Income taxes: |
The Company and its subsidiary account for income taxes in accordance with Statement of Financial Accounting Standards No.109, “Accounting for Income Taxes”. This Statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiary provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
k. | Fair value of financial instruments: |
The carrying amount of cash and cash equivalents, accounts receivable and payables approximate their fair value, due to the short-term maturities of such instruments.
l. | Concentrations of credit risk |
Financial instruments that potentially subject the Company and its subsidiary to concentrations of credit risk consist principally of cash and cash equivalents. Cash and cash equivalents are invested in major banks in Israel and in the United States. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments.
Other financial instruments consist of accounts receivable, due mainly from governmental authorities. Management believes that minimal credit risk exists with respect to these receivables.
The Company and its subsidiary have no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.
NOTE 3:- CASH AND CASH EQUIVALENTS
December 31, 2003 | |||
Cash in bank | $ | 14,559 | |
Bank deposits in U.S. dollars, bearing annual interest rate of approximately 1.0% | 4,634,052 | ||
Bank deposits in NIS, bearing annual interest rate of approximately 3.8% | 141,368 | ||
$ | 4,789,979 | ||
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 4:- ACCOUNTS RECEIVABLE
December 31, 2003 | |||
Government authorities | $ | 73,813 | |
Office of the Chief Scientist | 40,000 | ||
Related party (1) | 49,018 | ||
Others | 66,737 | ||
$ | 229,568 | ||
(1) | See Note 11. |
NOTE 5:- PROPERTY AND EQUIPMENT, NET
Cost: | |||
Office furniture | $ | 35,083 | |
Computers | 165,797 | ||
Electronic equipment | 258,666 | ||
Motor vehicles | 109,659 | ||
Leasehold improvements | 12,337 | ||
581,542 | |||
Accumulated depreciation: | |||
Office furniture | 9,431 | ||
Computers | 121,815 | ||
Electronic equipment | 82,368 | ||
Motor vehicles | 48,387 | ||
Leasehold improvements | 2,417 | ||
264,418 | |||
Depreciated cost | $ | 317,124 | |
For the year ended December 31, 2003, depreciation expenses amounted to $ 116,833 .
NOTE 6:- ACCOUNTS PAYABLE
Trade payables | $ | 97,220 | |
Employees and payroll accruals | 254,212 | ||
Accrued expenses and other payables | 87,390 | ||
$ | 438,822 | ||
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES
a. | The Company and its subsidiary rent their facilities and motor vehicles under operating lease agreements which expire on various dates the latest of which is in 2006. Minimum future rental payments due under non-cancelable operating leases are as follows: |
2004 | $ | 148,122 | |
2005 | 52,889 | ||
2006 | 40,976 | ||
$ | 241,987 | ||
Total rent expenses for the years ended December 31, 2003 were approximately $122,000.
b. | The Company participated in programs sponsored by the Israeli Government for the support of research and development activities. Through December 31, 2003, the Company had obtained grants from the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade (“the OCS”) aggregating to approximately $ 538,000 for certain of the Company’s research and development projects. The Company is obligated to pay royalties to the OCS, amounting to 3%-5% of the sales of the products and other related revenues generated from such projects, up to 100% of the grants received, linked to the U.S. dollar and bearing interest at the rate of LIBOR. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales no payment is required. |
NOTE 8:- SHAREHOLDERS’ EQUITY
a. | Share capital: |
The Ordinary shares confer upon the holders the right to receive notice to participate and vote in general meetings of the Company, and the right to receive dividends, if declared and to participate in the distribution of the surplus assets and funds of the Company in the event of liquidation, dissolution or winding up of the Company.
The Preferred shares entitle their holders to the following principal rights:
• | The voting rights of the Preferred shares are identical to those of the Ordinary shares. |
• | In the event of liquidation or other similar event, the holders of Preferred shares will be entitled to receive, prior to all holders of Ordinary shares, an amount equal to the purchase price of their shares, plus declared but unpaid dividends and 6% annual interest on the applicable purchase price for each Preferred share. |
• | Each Preferred share is convertible into one Ordinary share at any time for no additional consideration, subject to anti-dilution adjustments. |
• | In the event of an Initial Public Offering, the Preferred shares shall be automatically converted into Ordinary shares in accordance with the applicable conversion rate, as defined in the share purchase agreements. |
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 8:- SHAREHOLDERS’ EQUITY (Cont.)
b. | During 2000, the Company effected a one to ten stock split effected as stock dividend on its Ordinary shares and Series A Preferred shares. All Ordinary shares, Series A Preferred shares, options and per share amounts have been adjusted to give retroactively effect to this stock split for all periods presented. |
c. | On July 24, 2001, the Company signed an agreement according to which the Company issued 2,164,474 Series B Preferred Shares in consideration for $4.2 million. According to the agreement nine months after closing of the first part of the investment, as described above, in the event that the Company would meet certain milestones, as defined in the agreement, the Company shall have the right to demand the investors in this round to invest up to additional $ 6 million in the Company at a Company pre-money valuation of approximately $44 million (the “High Call Option”), otherwise the Company shall have the right to demand the investors in the round to invest up to additional $ 6 million in the Company at a Company pre-money valuation of approximately $24 million (the “Low Call Option”). |
In May 2002, since the parties were not conclusive as to whether the criteria for High or Low call option were met they signed an amendment to the agreement, according to which, the Company issued 1,630,541 Series B Preferred shares in consideration for $ 6 million, according to the valuation determined in the original High Call Option. However, in the event that certain criteria regarding additional rounds of financing in the Company would not occur, the Company will issue to the investors an additional 1,337,881 Series B Preferred shares, no later than April 15, 2003, for no consideration, to reflect the valuation determined in the Low Call Option.
In May 2003, the Company issued the abovementioned Series B Preferred shares, as the criteria were not met.
d. | Stock-option plans: |
In October 2000 and July 2003, the Board of Directors of the Company adopted stock option plans (“the Plans”), according to which options may be granted to employees, directors and consultants.
Pursuant to the Plans, the Company reserved for issuance 2,000,000 Ordinary shares. As of December 31, 2003, an aggregate of 1,092,000 Ordinary shares of the Company are still available for future grant.
Each option granted under the Plans is exercisable until the earlier of eight years from the date of the grant of the option or the expiration dates of the respective option plans. The 2000 and 2003 option plans will expire on December 31, 2009 and 2011, respectively. The exercise price of the options granted under the plans may not be less than the nominal value of the shares into which such options are exercisable. The options vest primarily over four years of employment. Any options, that are cancelled or forfeited before expiration, become available for future grant.
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 8:- SHAREHOLDERS’ EQUITY (Cont.)
e. | A summary of the Company’s stock option activity (except warrants to consultants) under the Plans is as follows: |
Year ended December 31, 2003 | ||||||
Number of options | Weighted average | |||||
Outstanding-beginning of the year | 328,000 | $ | 0.30 | |||
Granted | 525,000 | $ | 1.00 | |||
Forfeited | (50,000 | ) | $ | 1.00 | ||
Outstanding - end of the year | 803,000 | $ | 0.71 | |||
Options exercisable at the end of the year | 306,000 | $ | 0.36 | |||
The options outstanding as of December 31, 2003, have been separated into ranges of exercise price, as follows:
Exercise price | Options outstanding as of December 31, 2003 | Weighted average remaining contractual life (Years) | Weighted Average exercise price | Options exercisable at December 31, 2003 | Weighted Average | |||||||
$0.002 | 200,000 | 5.00 | $ | 0.002 | 162,500 | $ | 0.002 | |||||
$0.42 | 68,000 | 5.00 | $ | 0.42 | 51,000 | $ | 0.42 | |||||
$1.00 | 535,000 | 7.50 | $ | 1.00 | 92,500 | $ | 1.00 | |||||
803,000 | 6.50 | $ | 0.73 | 306,000 | $ | 0.36 | ||||||
No compensation expense was recognized, as the exercise price was greater than the fair value of the ordinary shares on the date of grant.
The weighted average fair value of options granted during the year ended December 31, 2003 was:
Exercise price on the grant date that exceeds market price | |||
Weighted average exercise price | $ | 1.00 | |
Weighted average fair value on grant date | $ | 0.00 |
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 8:- SHAREHOLDERS’ EQUITY (Cont.)
f. | Warrants issued to consultants: |
The Company’s outstanding warrants to consultants as of December 31, 2003 are as follows:
Issuance date | Warrants for Ordinary shares | Exercise price per share | Warrants exercisable | Exercisable through | |||||
August 2000 | 50,000 | $ | 0.42 | 50,000 | August 2008 | ||||
August 2000 *) | 494,737 | $ | 0.125 | 494,737 | August 2008 | ||||
July 2003 | 55,000 | $ | 1.00 | — | July 2011 | ||||
599,737 | 544,737 | ||||||||
*) | In March 2001, an agreement with Znook Ltd. (“Znook”) was signed, effective as of August 2000, whereby Znook was granted 494,737 options to purchase Ordinary shares in consideration for venture development services for 12 month period. The exercise price is $ 0.125 per share. The fair value for these options was estimated using Black-Scholes options pricing model with the following assumptions: risk-free interest rate of 5%, dividend yield of 0%, volatility - 50% and contractual life of the options of 7 years. Total compensation expense related to these options amounted to $ 221,160. |
The Company had accounted for its warrants to consultants under the fair value method as SFAS No. 123 and EITF 96-18. Warrants granted in 2003 vest primarily over 4 years. The fair value for these options was estimated using Black-Scholes, option-pricing model with the following weighted-average assumptions for 2003 and 2001: risk-free interest rates of 3.0% and 5%, respectively; dividend yields of 0% for each year; volatility factors of the expected market price of the Company’s Ordinary shares of 50% for each year; and a weighted-average contractual life of the warrants of 8 years.
In connection with the granting of warrants to consultants, the Company did not record stock compensation expenses in 2003.
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 9:- RESEARCH AND DEVELOPMENT COSTS, NET
Year ended December 31, 2003 | Period from August 16, 2000 (inception date) to December 31, 2003 | |||||
Salaries and related expenses | $ | 1,172,207 | $ | 3,267,548 | ||
Supplies and subcontractors | 457,114 | 1,350,523 | ||||
Rental fees | 96,324 | 284,296 | ||||
Depreciation | 80,973 | 194,740 | ||||
Others | 27,409 | 145,752 | ||||
1,834,027 | 5,242,859 | |||||
Less - participation of the Chief Scientist | 329,698 | 578,324 | ||||
$ | 1,504,329 | $ | 4,664,535 | |||
NOTE 10:- TAXES ON INCOME
a. | Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985: |
Results for tax purposes are measured and reflected in real terms in accordance with the change in the Israeli Consumer Price Index (“CPI”). As explained in Note 2b the consolidated financial statements are presented in U.S. dollars. The differences between the change in the Israeli CPI and in the NIS/U.S. dollar exchange rate causes a difference between taxable income or loss and the income or loss before taxes reflected in the consolidated financial statements. In accordance with paragraph 9(f) of Statement of Financial Accounting Standard No. 109 “Accounting for Income Taxes” (“SFAS No. 109”) the Company has not provided deferred income taxes on this difference between the reporting currency and the tax bases of assets and liabilities.
b. | Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (“the Law”): |
The Company’s production facilities in Israel have been granted an “Approved Enterprise” status under the above law. The main benefit arising from such status is the reduction in tax rates on income derived from “Approved Enterprises”. Consequently, the Company is entitled to two years of tax exemption and five years of reduced tax rate (25%).
The period of tax benefits, detailed above, is subject to limit of 12 years from the commencement of production, or 14 years from the approval date, whichever earlier. Given the aforementioned conditions, the period of benefits for the production facilities, which has not yet commenced, will terminate no later than 2017. If the Company will be “Foreign Investors’ Company”, as defined by that law and, as such, will be entitled to additional reduction of the tax to 15%-20% (based on the percentage of foreign ownership in each taxable year) and extension of three years of the benefit period.
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 10:- TAXES ON INCOME (Cont.)
The entitlement to the above benefits is conditional upon the Company’s fulfilling the conditions stipulated by the above law, regulations published thereunder and the instruments of approval for the specific investments in “approved enterprises”. In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. As of December 31, 2003, management believes that the Company is meeting all of the aforementioned conditions.
The tax-exempt income attributable to the “Approved Enterprise” can be distributed to shareholders without subjecting the Company to taxes only upon the complete liquidation of the Company. If these retained tax-exempt profits are distributed in a manner other than in the complete liquidation of the Company they would be taxed at the corporate tax rate applicable to such profits as if the Company had not elected the alternative system of benefits, currently 25% for an “Approved Enterprise”. As of December 31, 2003, the accumulated deficit of the Company during the development stage does not include tax-exempt profits earned by the Company’s “Approved Enterprise”. Income from sources other than the “Approved Enterprise” during the benefit period will be subject to tax at the regular corporate tax rate of 36%.
c. | Israeli tax reform: |
On January 1, 2003 a comprehensive tax reform took effect in Israel. Pursuant to the reform, resident companies are subject to Israeli tax on income accrued or derived in Israel or abroad. In addition, the concept of “controlled foreign corporation” was introduced according to which an Israeli company may become subject to Israeli taxes on certain income of a non-Israeli subsidiary if the subsidiary’s primary source of income is passive income (such as interest, dividends, royalties, rental income or capital gains). The tax reform also substantially changed the system of taxation of capital gains.
d. | The Company has accumulated losses for tax purposes as of December 31, 2003, in the amount of approximately $5.4 million, which may be carried forward and offset against taxable income in the future for an indefinite period. |
The Company’s subsidiary in the U.S. have estimated total available carryforward tax losses of $430,000 to offset against future taxable profits of 7-20 years.
e. | Deferred income taxes: |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
As of December 31, 2003, the Company and its subsidiary have provided full valuation allowances in respect of deferred tax assets resulting from tax loss carryforwards. Management currently believes that since the Company and its subsidiary have a history of losses it is more likely than not that the deferred tax regarding the loss carryforwards and other temporary differences will not be realized in the foreseeable future.
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XTEND NETWORKS LTD. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 10:- TAXES ON INCOME (Cont.)
Significant components of the Company’s deferred tax assets are as follows:
December 31, 2003 | ||||
Reserves and allowances | $ | 46,200 | ||
Net operating loss carry forwards | 2,111,760 | |||
Net deferred tax assets before valuation allowance | 2,157,960 | |||
Valuation allowance | (2,157,960 | ) | ||
Net deferred tax assets | $ | — | ||
f. | The main reconciling items between the statutory tax rate of the Company (36%) and the effective tax rate are the non-recognition of tax benefits from accumulated net operating losses carry forward among due to the uncertainty of the realization of such tax benefits and the effect of approved enterprise. |
NOTE 11:- BALANCES WITH RELATED PARTIES
Accounts receivable include loan granted to founder in the original amount of $ 50,000. The loan bears annual interest of 4% and is linked to Israel’s Consumer Price Index. Principal and interest are paid in 11 installments monthly of NIS 2,000 ($ 450) each, and the remaining balance was due on April 1, 2003. As of the balance sheet date, the founder had not paid the remainder of the balance in the amount of $ 49,000. The loan is secured by a pledge of 120,000 Ordinary shares.
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XTEND NETWORKS LTD.
(A Development Stage Company)
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
(Unaudited)
XTEND NETWORKS LTD.
(A Development Stage Company)
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
(Unaudited)
TABLE OF CONTENTS
Condensed consolidated interim financial statements:
Page | ||
Balance Sheet | 2 | |
Statement of Operations | 3 | |
Statement of Cash Flows | 4 | |
Notes to Condensed Consolidated Financial Statements | 5-6 |
XTEND NETWORKS LTD.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2004 | ||||
(In Thousands) (Unaudited) | ||||
ASSETS | ||||
CURRENT ASSETS: | ||||
Cash and cash equivalents | $ | 3,191 | ||
Accounts receivable | 481 | |||
Total current assets | 3,672 | |||
PROPERTY AND EQUIPMENT, NET | 325 | |||
Total assets | $ | 3,997 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
CURRENT LIABILITIES: | ||||
Accounts payable | $ | 307 | ||
Accrued liabilities | 630 | |||
Total Current Liabilities | 937 | |||
STOCKHOLDERS’ EQUITY | ||||
Series A Convertible Preferred shares of NIS 0.01 par value: | ||||
Authorized - 6,000,000 shares Issued and outstanding - 2,400,000 shares | 6 | |||
Series B Convertible Preferred shares of NIS 0.01 par value: | ||||
Authorized - 8,704,277 shares Issued and outstanding - 5,132,896 shares | 12 | |||
Aggregate liquidation preference (Series A and B) of $14,492,000 | ||||
Ordinary shares of NIS 0.01 par value: | ||||
Authorized - 23,295,723 shares Issued and outstanding - 5,000,000 shares | 12 | |||
Additional paid-in capital | 12,674 | |||
Deficit accumulated during the development stage | (9,644 | ) | ||
Total Stockholders’ Equity | 3,060 | |||
Total Liabilities and Stockholders’ Equity | $ | 3,997 | ||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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XTEND NETWORKS LTD.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands)
Six Months ended June 30, 2004 | Period from August 2000 (inception date) to June 30, 2004 | |||||
(Unaudited) | (Unaudited) | |||||
OPERATING EXPENSES: | ||||||
Research and development expenses, net | $ | 1,092 | $ | 5,757 | ||
Marketing expenses | 515 | 1,858 | ||||
General and administrative expenses | 245 | 1,787 | ||||
Cash payments to option holders and employees, related to the acquisition of the Company | 269 | 269 | ||||
Total operating expenses | 2,121 | 9,671 | ||||
FINANCIAL INCOME, net | 17 | 43 | ||||
LOSS FOR THE PERIOD | $ | 2,104 | $ | 9,628 | ||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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XTEND NETWORKS LTD.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Six Months ended June 30, 2004 | Period from August 2000 (inception date) to June 30, 2004 | |||||||
(Unaudited) | (Unaudited) | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (2,104 | ) | $ | (9,628 | ) | ||
Adjustments required to reflect cash flows from operating activities: | ||||||||
Depreciation | 94 | 358 | ||||||
Exchange rate differences of long term loans | (8 | ) | ||||||
Increase in accounts receivable | (251 | ) | (481 | ) | ||||
Increase (decrease) in accounts payable | (132 | ) | 307 | |||||
Increase in accrued liabilities | 615 | 630 | ||||||
Compensation related to non-employees | 12 | 256 | ||||||
Amortization of deferred compensation | 43 | |||||||
Cash payments to option holders and employees, related to the acquisition of the Company | 269 | 269 | ||||||
Net cash used in operating activities | (1,497 | ) | (8,254 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES - | ||||||||
Purchase of property and equipment | (102 | ) | (683 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net proceeds from issuance of shares | 12,120 | |||||||
Long-term loans received | 163 | |||||||
Repayment of long-term loans | (155 | ) | ||||||
Net cash provided by financing activities | — | 12,128 | ||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (1,599 | ) | 3,191 | |||||
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 4,790 | — | ||||||
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 3,191 | $ | 3,191 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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XTEND NETWORKS LTD.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
NOTE 1-GENERAL:
a. | Xtend Networks Ltd. (“the Company”), an Israeli corporation, commenced operations at the beginning of August 2000. The Company is engaged in developing technology related to the extension of the frequency spectrum of CATV coaxial networks. |
In June 2002, the Company established a wholly-owned subsidiary, Xtend Networks Inc. (“the subsidiary”) in the State of Delaware in the United States. The principal activity of the subsidiary is marketing, sales and support to the Company’s product line.
b. | On June 30, 2004 the Company and its shareholders entered into a share exchange agreement with Vyyo Inc. (hereafter - Vyyo), according to which all of the outstanding shares of the Company were exchanged for shares of Vyyo and for certain cash payments, and the Company became a wholly-owned subsidiary of Vyyo. |
In connection with the acquisition, Vyyo agreed to make cash payments to certain other Company option holders and Company employees in connection with those parties’ outstanding options in the Company. These cash payments include a payment of approximately $269,000 paid in cash at the closing of the acquisition and a payment of approximately $255,000 which is expected to be paid over two years upon realization of certain conditions. In addition, Vyyo granted a certain employee of the Company 146,000 restricted shares of Vyyo, out of which 71,000 shares shall vest over a six month period and 75,000 shares are subject to performance criteria.
In connection with the acquisition, Vyyo committed to contribute to the Company up to $10 million, to be contributed in stages based on the operational needs of the Company.
c. | As of June 30, 2004, the Company is still in the development stage. The Company anticipates that it will continue to incur significant losses and generate negative cash flows from operations in connection with the development, initial production, marketing and sales of its products. |
d. | The accompanying unaudited interim consolidated financial statements have been prepared as of June 30, 2004 and for the six month period then ended in accordance with accounting principles generally accepted in the United States (U.S. GAAP) relating to the preparation of financial statements for interim periods. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States, but which are not required for interim reporting purposes, have been condensed or omitted. |
These financial statements should be read in conjunction with the Company’s annual financial statements and accompanying notes as of December 31, 2003.
The interim consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the period presented.
Results for the six month period ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.
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XTEND NETWORKS LTD.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-SEVERANCE LIABILITY
The amounts paid related to severance and severance expenses for the six month period ended June 30, 2004 were $76,000 and $99,000, respectively.
The Company is obligated to make a contribution, with respect to severance pay obligations, of $56,000 for the period beginning July 1, 2004 and ending December 31, 2004.
NOTE 3-EMPLOYEE STOCK-BASED COMPENSATION
Pro forma information regarding loss and loss per share required under SFAS No. 123 has been determined as if the Company had accounted for its stock options under the fair value method of SFAS No. 123. The pro forma loss per share reflects both (i) the charge for stock included in the historical loss and (ii) the expense allocation based on the SFAS No. 123 calculation. The fair value for stock options was estimated at the date of option grant using the Minimum - Value Options Pricing model with the following weighted-average assumptions for the six months ended June 30, 2004: risk-free interest of 1%, dividend yields of zero; expected life of the options of 2.5 and volatility of zero. For the six months ended June 30, 2004, the stock-based employee compensation determined under fair value method is not provided as the fair value is nil for all awards.
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