U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
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: 0-30448
5G WIRELESS COMMUNICATIONS, INC.
(Exact Name of Company as Specified in Its Charter)
Nevada 20-0420885
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
4136 Del Rey Avenue, Marina del Rey, California 90292
(Address of Principal Executive Offices)
(310) 448-8022
(Company's Telephone Number)
______________________________________________________________
(Former Name, Former Address, and Former Fiscal Year, if Changed Since
Last Report)
Indicate by check mark whether the Company (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 Company was required to file such reports),
and (2) been subject to such filing requirements for the past 90 days.
Yes X No .
Indicate by check mark whether the Company is a shell company (as
defined in Rule 12b-2 of the Exchange Act): Yes No X .
As of May 15, 2006, the Company had 4,609,974 shares of common
stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X .
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
AS OF MARCH 31, 2006 (UNAUDITED) 3
CONDENSED STATEMENTS OF
OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 2006
AND MARCH 31, 2005 (UNAUDITED) 5
CONDENSED STATEMENTS OF
CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 2006
AND MARCH 31, 2005 (UNAUDITED) 7
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 27
ITEM 3. CONTROLS AND PROCEDURES 41
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 42
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS 43
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 43
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 43
ITEM 5. OTHER INFORMATION 43
ITEM 6. EXHIBITS 44
SIGNATURES 45
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCAL STATEMENTS.
5G WIRELESS COMMUNICATIONS, INC.
CONDENSED BALANCE SHEET
MARCH 31, 2006
(Unaudited)
ASSETS
Cash $ 984
Accounts receivable, net of allowance for
doubtful accounts of $98,515 228,441
Inventory 118,216
Other current assets 2,000
Total current assets 349,641
Property and equipment, net of accumulated
depreciation and amortization of $274,903 50,734
Total assets $ 400,375
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Accounts payable and accrued liabilities $ 705,664
Accrued interest 236,417
Other liabilities 1,597,395
Note payable 22,424
Convertible notes payable, net of discount 1,816,915
Total liabilities 4,378,815
Stockholders' deficit:
Preferred Series A convertible stock,
$0.001 par value; 3,000,000 shares
authorized; 3,000,000 shares issued and
outstanding 3,000
Preferred Series B convertible stock,
$0.001 par value; 5,000,000 shares
authorized; 250,000 shares issued and
outstanding 250
Common stock, $0.001 par value;
5,000,000,000 shares authorized;
4,479,403 (1) shares issued and
outstanding 4,479
Additional paid-in capital 21,286,365
Common stock held in escrow (1,016)
Unearned compensation (99,999)
Deferred consulting fees (267,882)
Accumulated deficit (24,903,637)
Total stockholders' deficit (3,978,440)
Total liabilities and stockholders' deficit $ 400,375
(1) Adjusted for a 1 for 350 reverse split of the common stock
effective on November 23, 2005.
The accompanying notes are an integral part of these condensed
financial statements.
5G WIRELESS COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited)
Three Months Three Months
Ended Ended
March 31, 2006 March 31, 2005
Revenues $ 209,100 $ -
Cost of revenues 112,474 -
Gross profit 96,626 -
Operating expenses:
General and administrative 336,292 46,954
Salaries and related 323,014 98,260
Research and development 50,762 -
Professional/consulting services 212,305 391,139
Depreciation 11,429 -
Total operating expenses 933,802 536,353
Operating loss (837,176) (536,353)
Interest expense (including amortization of
financing costs and debt discount) (578,074) (440,353)
Derivative expense, net (703,720)
Net loss $ (2,118,970) $ (976,706)
Cumulative undeclared dividends and
imputed dividends on preferred stock (335,856) -
Net loss applicable to common stockholders $ (2,454,826) $ (976,706)
Loss per common share applicable to
common stockholders: Basic and diluted (1) $ (0.59) $ (0.39)
Basic and diluted weighted average
common shares outstanding (1) 4,170,309 2,490,964
(1) Adjusted for a 1 for 350 reverse split of the common stock
effective on November 23, 2005.
The accompanying notes are an integral part of these condensed
financial statements.
5G WIRELESS COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited)
Three Months Three Months
Ended Ended
March 31, 2006 March 31, 2005
Cash flows from operating activities:
Net loss $ (2,118,970) $ (976,706)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization (reverse) of unearned compensation 16,667 (16,667)
Amortization of BCF/discount on convertible notes 381,312 394,238
Depreciation 11,429 -
Fair value of common stock and warrants issued for
Services 317,459 -
Bad debt expense 64,608 -
Derivative expense 703,720 -
Changes in operating assets and liabilities:
Accounts receivable 35,848 -
Inventory 2,265 -
Other current assets 14,625 -
Accounts payable and accrued liabilities 101,535 169,305
Accrued interest 48,116 -
Other liabilities 133,050 -
Net cash used in operating activities (288,336) (429,830)
Cash flows from investing activities:
Transfer of cash to portfolio company - (378,441)
Disposition of property and equipment 18,635 -
Net cash provided by (used in) investing activities 18,635 (378,441)
Cash flows from financing activities:
Borrowings (repayments) on notes payable - (10,392)
Net proceeds from issuance of convertible notes payable - 1,000,000
Net proceeds from issuance of Preferred Series B stock 185,328 -
Net cash flows provided by financing activities 185,328 989,608
Net increase (decrease) in cash (84,373) 181,337
Cash, beginning of period 85,357 636,904
Cash, end of period 984 818,241
Supplemental disclosure of non-cash investing
and financing activities:
Conversion of convertible notes and
accrued interest into common stock 117,973 244,446
Beneficial conversion feature on convertible notes - 1,000,000
Imputed dividend on Preferred Series B 332,500 -
Cumulative Preferred Series B undeclared dividends 3,356 -
The accompanying notes are an integral part of these condensed
financial statements.
5G WIRELESS COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
5G Wireless Communications, Inc. ("Company"), is a developer and
manufacturer of wireless telecommunications equipment.
The Company was incorporated as Tesmark, Inc. in September 1979. In
November 1998, it changed its state of incorporation from Idaho to
Nevada and in January 2001 changed the name to 5G Wireless
Communications, Inc. In March 2001, the Company acquired 5G Partners,
a Canadian partnership, and changed its business to provide wireless
technology systems through high speed Internet access and data
transport systems. In April 2002, it acquired Wireless Think Tank,
Inc., a developer of high-speed long distance wireless technologies.
In July 2003, it shifted its strategy from that of a service provider
to an equipment manufacturer, or OEM.
On October 19, 2004, the Company elected, by the filing of a Form N-
54A with the Securities and Exchange Commission ("SEC") to be
regulated as a business development company ("BDC") under the
Investment Company Act of 1940 ("1940 Act"). On December 31, 2004,
certain assets and certain liabilities of the Company were transferred
into 5G Wireless Solutions, Inc., a newly formed subsidiary, in
exchange for 100% of its outstanding common shares.
On June 3, 2005, the Company' board of directors unanimously
determined that it would be in the best interests of the Company and
its stockholders to seek stockholder approval on certain matters.
Pursuant to a definitive Schedule 14A proxy statement filed with the
SEC on September 19, 2005, the Company sought approval from the
stockholders, at the annual stockholder's meeting on October 20, 2005,
for the following (among other things): (a) to terminate the Company'
status as a BDC under the 1940 Act and to file a Form N-54C with the
SEC to terminate this status, and (b) to file a new registration
statement with the SEC.
On October 20, 2005, the Company' stockholders approved (among other
things) (a) the termination of the Company' status as a BCD under
the 1940 Act and the filing of a Form N-54C with the SEC, and (b) the filing
of a new registration statement. Based on this approval, on October 21, 2005,
the Company filed a Form N-54C with the SEC terminating its status as a BDC.
On November 3, 2005, the Company's Board of Directors approved a 1 for
350 reverse stock split of the Company's common stock. Common shares
outstanding prior to and after the reverse stock split totaled
1,169,494,405 and 3,341,419 shares, respectively. The November 23,
2005 reverse stock split has been retroactively reflected in the
accompanying financial statements for all periods presented. Unless
otherwise indicated, all references to outstanding common shares,
including common shares to be issued upon the exercise of warrants and
convertible notes payable, refer to post-split shares.
On January 19, 2006, 5G Wireless Solutions, Inc. was merged with and
into the Company.
Basis of Presentation.
The accompanying unaudited interim condensed financial statements have
been prepared by the Company, pursuant to the rules and regulations of
the SEC. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America have been omitted pursuant to such SEC rules and regulations;
nevertheless, the Company believes that the disclosures are adequate
to make the information presented not misleading. These financial
statements and the notes hereto should be read in conjunction with the
financial statements, accounting policies and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, filed with the SEC. In the opinion of management,
all adjustments necessary to present fairly, in accordance with
accounting principles generally accepted in the United States of
America, the Company's financial position as of March 31, 2006, and
the results of operations and cash flows for the interim periods
presented, have been made. Such adjustments consist only of normal
recurring adjustments. The results of operations for the three months
ended March 31, 2006 are not necessarily indicative of the results for
the full year.
Going Concern Basis
The accompanying financial statements have been prepared assuming that
the Company continues as a going concern that contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. However, the ability of the Company to
continue as a going concern on a longer-term basis will be dependent
upon its ability to generate sufficient cash flow from operations to
meet its obligations on a timely basis, to retain its current
financing, to obtain additional financing, and ultimately attain
profitability.
During the quarter ended March 31, 2006, the Company incurred net
losses totaling $2,118,970 had net cash used in operating activities
totaling $288,336 and had an accumulated deficit of $24,903,637 as of
March 31, 2006. These factors raise substantial doubt as to the
Company's ability to continue as a going concern. If the Company is
unable to generate sufficient cash flow from operations and/or
continue to obtain financing to meet its working capital requirements,
it may have to curtail its business sharply or cease business
altogether.
Management plans to continue raising additional capital through a
variety of fund raising methods during 2006 and to pursue all
available fundraising alternatives in this regard. Management may also
consider a variety of potential partnership or strategic alliances to
strengthen its financial position. In addition, the Company will
continue to seek additional funds to ensure its successful growth
strategy and to allow for potential investments into a diverse
portfolio of companies with strategic information and communications
technologies or applications. Whereas the Company has been successful
in the past in raising capital, no assurance can be given that these
sources of financing will continue to be available to the Company
and/or that demand for the Company's equity/debt instruments will be
sufficient to meet its capital needs. The financial statements do not
include any adjustments relating to the recoverability and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
If funding is insufficient at any time in the future, the Company may
not be able to take advantage of business opportunities or respond to
competitive pressures, or may be required to reduce the scope of its
planned product development and marketing efforts, any of which could
have a negative impact on its business and operating results. In
addition, insufficient funding may have a material adverse effect on
the Company's financial condition, which could require the Company to:
- curtail operations significantly;
- sell significant assets;
- seek arrangements with strategic partners or other parties that
may require us to relinquish significant rights to products,
technologies or markets or;
- explore other strategic alternatives including a merger or sale
of the Company.
To the extent that the Company raises additional capital through the
sale of equity or convertible debt securities, the issuance of such
securities will result in dilution to existing stockholders. If
additional funds are raised through the issuance of debt securities,
these securities may have rights, preferences and privileges senior to
holders of common stock and the terms of such debt could impose
restrictions on our operations. Regardless of whether our cash assets
prove to be inadequate to meet the Company's operational needs, we may
seek to compensate providers of services by issuing stock in lieu of
cash, which will also result in dilution to existing shareholders.
Use of Estimates.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Significant estimates include valuation of deferred tax
assets, revenue recognition, estimating the fair value of equity
instruments and derivative liabilities, and concentrations of credit
risk. Actual results could differ from those estimates.
Cash and Cash Equivalents.
The Company considers all highly liquid fixed income investments with
maturities of three months or less at the time of acquisition, to be
cash equivalents. At March 31, 2006, the Company had no cash
equivalents.
Concentrations of Credit Risk.
Financial instruments that potentially subject the Company to
concentrations of credit risk include cash and accounts receivable.
The Company maintains its cash funds in bank deposits in highly rated
financial institutions. At times, such investments may be in excess of
the Federal Deposit Insurance Corporation insurance limit. At March
31, 2006, there were no uninsured funds.
The Company's customers are located in many parts of the world. The
Company provides an allowance for losses on trade receivables based on
a review of the current status of existing receivables and
management's evaluation of periodic aging of accounts. The Company
charges off accounts receivable against the allowance for losses when
an account is deemed to be uncollectible. It is not the Company's
policy to accrue interest on past due receivables.
In determining the allowance for doubtful accounts, management
evaluated the future collectibility of customer receivable balances,
on a customer by customer basis, including an individual assessment of
the customer's credit quality, financial standing, and the customer's
ability to meet current or future commitments and the industry and
general economic outlook. Based on the severity of the likely loss,
the Company provides a reserve against outstanding balances over 60
days. In the event collection efforts are unsuccessful for a
customer, the receivable is written off and charged to expense. At
March 31, 2006, the Company carried an allowance for doubtful accounts
of $98,515. In addition, during the quarter ended March 31, 2006, the
Company recorded bad debt expense totaling $64,608.
The Company operates in a highly competitive industry that is subject
to intense competition, government regulation and rapid technological
change. The Company's operations are subject to significant risks and
uncertainties including financial, operational, technological,
regulatory and other business risks associated with such a company.
Discount on Convertible Notes.
Discounts on convertible notes are principally attributable to the
value of the beneficial conversion feature of the notes due to the
provision that allows for the exercise of the debenture prices
materially lower than the market value. These discounts are accounted
for in accordance with Emerging Issues Task Force ("EITF") No. 00-27,
"Application of EITF No. 98-5 To Certain Convertible Instruments" and
EITF No. 98-5, "Accounting For Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratio" and
EITF No. 00-27, "Application of EITF No. 98-5 To Certain Convertible
Instruments."
Derivative Liabilities.
The Company evaluates free-standing instruments (or embedded
derivatives) indexed to its common stock to properly classify such
instruments within equity or as liabilities in its financial
statements, pursuant to the requirements of the EITF No. 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock," EITF No. 01-06, "The
Meaning of Indexed to a Company's Own Stock," EITF No. 05-04, "The
Effect of a Liquidated Damages Clause on a Freestanding Financial
Instrument Subject to EITF No. 00-19," and Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. The Company's policy
is to settle instruments indexed to its common shares on a first-in-
first-out basis.
The Company accounts for the effects of registration rights and
related liquidated damages pursuant to EITF No. 05-04, View C, subject
to EITF No. 00-19. Pursuant to EITF No. 05-04, View C, liquidated
damages payable in cash or stock are accounted for as a separate
derivative, which requires a periodical valuation of its fair value
and a corresponding recognition of liabilities associated with such
derivative. The Company accounts for certain embedded conversion
features and free-standing warrants pursuant to SFAS No. 133 and EITF
No. 00-19, which require corresponding recognition of liabilities
associated with such derivatives at their fair values and changes in
fair values to be charged to earnings.
Revenue Recognition.
Revenues result principally from the sale and installation of wireless
radio equipment to customers. Equipment sales are recognized when
products are shipped. The Company recognizes revenues in accordance
with SEC Staff Accounting Bulleting ("SAB") No. 104, "Revenue
Recognition," when all of the following conditions exist: (a)
persuasive evidence of an arrangement exists in the form of an
accepted purchase order; (b) delivery has occurred, based on shipping
terms, or services have been rendered; (c) the Company's price to the
buyer is fixed or determinable, as documented on the accepted purchase
order; and (d) collectibility is reasonably assured.
Orders delivered to the Company by phone, fax, mail or email are
considered valid purchase orders and once accepted by the Company are
deemed to be the final understanding between the Company and its
customer as to the specific nature and terms of the agreed-upon sale
transaction. Products are shipped and are considered delivered when
(a) for FOB factory orders, they leave the Company's shipping dock or
(b) for FOB customer dock orders upon confirmation of delivery. The
creditworthiness of customers is generally assessed prior to the
Company accepting a customer's first order.
The Company offers installation services to customers and charges
separately when such services are purchased. Installation by the
Company is not required for the functionality of the equipment.
Consequently, installation services are considered a separate unit of
accounting under EITF No. 00-21,"Revenue Arrangements with Multiple
Deliverables."
The Company recognizes revenue from maintenance and support contracts
ratably over the service period. The Company uses the residual method
for multiple-element arrangements.
Basic and Diluted Loss Per Common Share.
Under SFAS No. 128, "Earnings Per Share," basic earnings per common
share is computed by dividing income available to common stockholders
by the weighted-average number of common shares assumed to be
outstanding during the period of computation. Diluted earnings per
share is computed similar to basic earnings per share except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive.
Because the Company has incurred net losses, basic and diluted loss
per share are the same since additional potential common shares would
be anti-dilutive. The calculated diluted loss per share does not take
into account the effect of 8,945,778 potential common shares, such as
restricted shares, convertible securities and warrants, considered to
be potentially dilutive.
Fair Value of Financial Instruments.
The carrying value of cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair value due to their short-
term maturities. The fair value of the convertible notes amount to
$1,816,915, based on the Company's incremental borrowing rate. The
carrying value of the embedded derivative liabilities associated with
the convertible notes and convertible preferred stock approximate
their fair value based on assumptions using the Black-Scholes model
and an embedded option pricing model, respectively
Management has concluded that it is not practical to determine the
estimated fair value of amounts due to related parties. SFAS No. 107
requires that for instruments for which it is not practicable to
estimate their fair value, information pertinent to those instruments
be disclosed, such as the carrying amount, interest rate, and
maturity, as well as the reasons why it is not practicable to estimate
fair value. Information related to these related party instruments is
included in Notes 6. Management believes it is not practical to
estimate the fair value of these related-party instruments because the
transactions cannot be assumed to have been consummated at arm's
length, the terms are not deemed to be market terms, there are no
quoted values available for these instruments, and an independent
valuation would not be practicable due to the lack of data regarding
similar instruments, if any, and the associated potential costs.
Stock-Based Compensation Arrangements.
Effective January 1, 2006, the Company adopted the provisions of SFAS
No. 123(R), "Share-Based Payment." SFAS No. 123(R) requires employee
stock options and rights to purchase shares under stock participation
plans to be accounted for under the fair value method and requires the
use of an option pricing model for estimating fair value.
Accordingly, share-based compensation is measured at grant date, based
on the fair value of the award. The Company previously accounted for
awards granted under its equity incentive plans under the intrinsic
value method prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, and provided the required pro forma disclosures
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation,"
as amended.
The Company incurred approximately $156,000 in stock-based employee
compensation during the three months ended March 31, 2006 related
primarily to current period employee common stock bonuses. There was
no unvested portion of previous grants for which the requisite service
had not been rendered as of January 1, 2006. Accordingly, there was
no employee stock-based compensation cost recognized in net loss for
the three months ended March 31, 2006 related to providing grants.
The Company follows SFAS No. 123(R) (as interpreted by EITF No. 96-18,
"Accounting for Equity Instruments That Are Issued To Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services") to account for transactions involving services provided by
third parties where the Company issues equity instruments as part of
the total consideration.
Pursuant to paragraph 7 of SFAS No. 123(R), the Company accounts for
such transactions using the fair value of the consideration received
(i.e. the value of the goods or services) or the fair value of the
equity instruments issued, whichever is more reliably measurable. The
Company applies EITF No. 96-18, in transactions, when the value of the
goods and/or services are not readily determinable and (1) the fair
value of the equity instruments is more reliably measurable and (2)
the counterparty receives equity instruments in full or partial
settlement of the transactions, using the following methodology:
(a) For transactions where goods have already been delivered or
services rendered, the equity instruments are issued on or about
the date the performance is complete (and valued on the date of
issuance).
(b) For transactions where the instruments are issued on a fully
vested, non-forfeitable basis, the equity instruments are valued on
or about the date of the contract.
(c) For any transactions not meeting the criteria in (a) or (b)
above, the Company re-measures the consideration at each reporting
date based on its then current stock value.
The Company incurred stock-based compensation involving transactions
with third parties in the first quarter of 2006 under transactions
falling under the guidance of methodology (c) above. The unamortized
portion of the total fair value of such contracts were valued at
approximately $268,000 as of March 31, 2006, presented as deferred
financing fees, contra equity, in the accompanying condensed balance
sheet. Amortization expense of such deferred financing costs totaled
approximately $86,000 for the quarter ended March 31, 2006, which is
included in fair value of common stock and warrants issued for
services in the accompanying condensed statement of cash flows.
Reclassifications.
Certain reclassifications have been made to the prior period financial
statements to conform to the current year presentation.
Segment Disclosures.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," changed the way public companies report information
about segments of their business in their annual financial statements
and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity-
wide disclosures about the products and services an entity provides,
the foreign countries in which it holds significant assets and its
major customers. At March 31, 2006, the Company operated in one segment.
2. NOTES PAYABLE AND CONVERTIBLE NOTES
Note payable and convertible notes payable consist of the following at
March 31, 2006:
Note payable, interest bearing at 10% per annum with
principal and interest payment of $2,500 monthly,
maturing in July 2006 $ 22,424
Total note payable 22,424
$250,000 convertible notes, bearing interest at 9% per
annum, net of discount of $0 and $175,000 of principal
converted, matured in March 2006 75,000
$805,000 convertible notes, bearing interest at 9% per
annum, principal converted of $368,900, matured in
April 2006 436,100
$2,000,000 convertible notes, bearing interest at 5%,
net of discount of $676,845 and $625,953 of principal
converted, maturing in September 2007 697,202
$1,000,000 convertible notes, bearing interest at 5%,
net of discount of $482,514 and $13,040 of principal
converted maturing in March 2007 504,446
$300,000 convertible note, bearing interest at prime
plus 4%, net of discount of $195,833, maturing in
July, 2007 104,167
Total convertible notes payable 1,816,915
Total $ 1,839,339
Note Payable.
On March 21, 2003, the Company signed a $50,000 promissory note that
as of March 31, 2006 had a balance of $22,424 and is scheduled to be
repaid in monthly installments of $2,500 per month. No payments were
made on this note during the quarter ended March 31, 2006, but the
Company reclassified $12,426 from accrued interest payable to the
principal balance.
$250,000 Convertible Notes.
In March 2004, the Company borrowed $250,000 under convertible notes
payable ("$250,000 Convertible Notes"), of which $100,000 came from
management or individuals related to certain management personnel.
All borrowings are due in March 2006, with monthly interest payments
on the outstanding balance; interest accrues at 9% per annum. The
$250,000 Convertible Notes may be converted into common stock of the
Company based on a formula subject to a floor of $0.001 per share.
In connection with the $250,000 Convertible Notes, the Company issued
warrants to purchase 1,904 (post reverse split) shares of the
Company's restricted common stock based on a formula subject to a
floor of $0.001 per share. The warrants vested upon grant and expire
in March 2006. The conversion feature embedded in the notes and the
warrants can be settled in unregistered shares pursuant to EITF No. 00-19.
The convertible feature of the $250,000 Convertible Notes provides for
a rate of conversion that is below market value. Such feature is
normally characterized as a "beneficial conversion feature" ("BCF").
Pursuant to EITF No. 98-5, "Accounting For Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratio" and EITF No. 00-27, "Application of EITF No. 98-5 To Certain
Convertible Instruments," the Company has estimated the fair value of
such BCF to be approximately $0 related to these notes and recorded
such amount as a debt discount. Such discount was fully amortized to
interest expense prior to January 1, 2006. Of the $250,000 in
proceeds, $100,000 came from related parties, including officers. The
note holders are eligible to receive a warrant for 40% of the vested
amount for two years.
$805,000 Convertible Notes.
In March 2004, the Company borrowed $715,000 under convertible notes
payable ("$715,000 Convertible Notes"). All borrowings are due in
March 2006, with monthly interest payments on the outstanding balance;
interest accrues at 9% per annum. The $715,000 Convertible Notes may
be converted into common stock of the Company based on a formula
subject to a floor of $0.001 per share. In July 2004, the Company
borrowed an additional $90,000 under terms identical to those of the
$715,000 Convertible Notes.
The conversion feature embedded in the notes and the warrants can be
settled in unregistered shares pursuant to EITF No. 00-19 and meets
the scope exception of paragraph 1(a) of SFAS No. 133.
In connection with the issuance of the $715,000 Convertible Notes, the
Company paid issuance costs of $74,500, which has been recorded as a
debt discount and is being amortized to interest expense over the life
of notes. Amortization expense on the debt discount during the
quarter ended March 31, 2006 approximated $9,000.
During the quarter ended March 31, 2006, approximately $114,500 of
principal balance of the $715,000 Convertible Notes was converted into
common stock.
As of March 31, 2006, there are certain of these note holders whose
notes have expired and as such are due and payable. However, the
parties have agreed in principal to extend these notes for an
additional two years, but as of March 31, 2006 agreements in this
regard had not yet been signed.
$2,000,000 Convertible Notes.
On September 22, 2004, the Company entered into a subscription
agreement with Longview Fund, LP, Longview Equity Fund, LP, and
Longview International Equity Fund, LP whereby these investors
purchased $2,000,000 of principal amount of promissory notes
("$2,000,000 Convertible Notes"), bearing interest at 5% per annum, of
the Company that are convertible into shares of the Company's common
stock. The conversion formula is subject to a floor of $0.001 per
share. The conversion price is equal to the lesser of (i) 75% of the
average of the five lowest closing bid prices of the Company's common
stock as reported by the OTC Bulletin Board for the ninety trading das
preceding the conversion date, of (ii) $17.50 (post reverse split).
Under the terms of the notes, they cannot be converted if such
conversion would result in beneficial ownership by the subscriber and
its affiliates of more than 4.99% of the outstanding shares of the
Company's common stock on the conversion date. In addition, the
convertible note holders received Class A and Class B share warrants
to purchase shares of common stock, as described below.
$1,000,000 of promissory notes was purchased on the initial closing
date ("Initial Closing Purchase Price") and the second $1,000,000 of
the purchase price ("Second Closing Purchase Price") was paid within
five business days after the date upon which the Company was able to
issue to the subscribers free trading unrestricted common stock as a
"business development company" as defined in Rule 602(a) of Regulation
E under the Securities Act of 1933 which took effect on November 6,
2004. On November 9, 2004, the Company received the $1,000,000 that
was the balance of the $2,000,000 convertible note.
The convertible note holders will receive Class A and Class B share
warrants to purchase shares of common stock based on the following
formulas:
(1) Class A Warrants
30 Class A Warrants were issued for each 100 shares which would
be issued on each closing, assuming the complete conversion of
the notes issued on each such closing date at the conversion
price in effect on each such closing date. The per warrant share
exercise price to acquire a share upon exercise of a Class A
Warrant is$7.14 (post reverse split) and is exercisable until
five years after the issue date of the Class A Warrants.
(2) Class B Warrants
The Company issued and delivered 125 Class B Warrants to the
subscribers for each $1.00 of purchase price invested on each
closing date. The per warrant share exercise price to acquire a
share upon exercise of a Class B Warrant is $7.00 (post reverse
split) and is exercisable until three years after the issue date
of the Class B Warrant.
The convertible feature of the $2,000,000 Convertible Notes provides
for a rate of conversion that is below market value. Pursuant to EITF
No. 98-5 and EITF No. 00-27, the Company has estimated the fair value
of such BCF to be approximately $2,000,000 related to these notes and
recorded such amount as a debt discount. Such discount is being
amortized to interest expense over the two-year term of the notes.
Amortization expense on the $2,000,000 Convertible Notes during the
quarter ended March 31, 2006 approximated $110,000.
During the first quarter of 2006, there were no conversions of the
$2,000,000 Convertible Notes into common stock.
$1,000,000 Convertible Notes.
On March 22, 2005, the Company entered into a subscription agreement
with Longview Fund, LP, Longview Equity Fund, LP, and Longview
International Equity Fund, LP whereby these investors purchased
$1,000,000 in convertible notes ("$1,000,000 Convertible Notes"),
bearing interest at prime plus 4% per annum of the Company convertible
into shares of the Company's common stock. The conversion formula is
subject to a floor of $0.001 per share. The conversion price is equal
to the lesser of (i) 75% of the average of the five lowest closing bid
prices of the Company's common stock as reported by the OTC Bulletin
Board for the ninety trading das preceding the conversion date, of (ii)
$17.50 (post reverse split). Under the terms of the notes, they
cannot be converted if such conversion would result in beneficial
ownership by the subscriber and its affiliates of more than 4.99% of
the outstanding shares of the Company's common stock on the conversion
date. In addition, the convertible note holders received Class A and
Class B share warrants to purchase shares of common stock, as
described below. See also "Registration Rights," "Classification of
Conversion Feature and Warrants" and "Liquidated Damages," below. The
Class A Warrants are exercisable until five years after the Closing
Date. The $1,000,000 investment was received by the Company on March
22, 2005. On that date, the Company issued a warrant to each of the
investors covering a total of 100,000,000 shares.
The convertible note holders received Class A share warrants to
purchase shares of common stock based on the following formulas:
30 Class A Warrants were issued for each 100 shares which would be
issued on each closing, assuming the complete conversion of the
notes issued on each such closing date at the conversion price in
effect on each such closing date. The per warrant share exercise
price to acquire a share upon exercise of a Class A Warrant is
$3.50 (post reverse split) and is exercisable until five years
after the issue date of the Class A Warrants.
The convertible feature of the $1,000,000 Convertible Notes provides
for a rate of conversion that is below market value. Pursuant to EITF
No. 98-5 and EITF No. 00-27, the Company has estimated the fair value
of such BCF to be approximately $1,000,000 related to these notes and
recorded such amount as a debt discount. Such discount is being
amortized to interest expense over the two-year term of the note.
Amortization expense on these notes during the quarter ended March 31,
2006 approximated $139,000.
$300,000 Convertible Notes.
On July 22, 2005, the Company entered into a subscription agreement
with Longview Fund, LP, Longview Equity Fund, LP, and Longview
International Equity Fund, LP whereby these investors purchased
$300,000 of principal amount of promissory notes ("$300,000
Convertible Notes"), bearing interest at prime plus 4% per annum, of
the Company convertible into shares of the Company's common stock. The
conversion formula is subject to a floor of $0.001 per share. The
conversion price is equal to the lesser of (i) 75% of the average of
the five lowest closing bid prices of the Company's common stock as
reported by the OTC Bulletin Board for the ninety trading days
preceding the conversion date, or (ii) $17.50 (post reverse split).
Under the terms of the notes, they cannot be converted if such
conversion would result in beneficial ownership by the subscriber and
its affiliates of more than 4.99% of the outstanding shares of the
Company's common stock on the conversion date. In addition, the
convertible note holders received Class A share warrants to purchase
shares of common stock, as described below. See also "Registration
Rights," "Classification of Conversion Feature and Warrants" and
"Liquidated Damages," below.
The convertible note holders received Class A share warrants to
purchase shares of common stock based on the following formulas:
30 Class A Warrants were issued for each 100 shares which would
be issued on each closing, assuming the complete conversion of
the notes issued on each such closing sate at the conversion
price in effect on each such closing date. The per warrant share
exercise price to acquire a share upon exercise of a Class A
Warrant is 120% of the closing bid price of the common stock on
the trading day immediately preceding the Initial Closing Date
and is exercisable until five years after the issue date of the
Class A Warrants.
The convertible feature of the $300,000 Convertible Notes provides for
a rate of conversion that is below market value. Pursuant to EITF No.
98-5 and EITF No. 00-27, the Company has estimated the fair value of
such BCF to be approximately $300,000 related to these notes and
recorded such amount as a debt discount. Such discount is being
amortized to interest expense over the two-year term of the notes.
Amortization expense on this note during the quarter ended March 31,
2006 approximated $38,000.
During the quarter ended March 31, 2006, there were no conversions of
the $300,000 Convertible Notes into common stock.
Registration Rights.
The Longview notes and related warrant agreements contain provisions
whereby the holders of notes and warrants are entitled to registration
rights in the event the Company's Regulation E exemption from
registration ceases to be effective. This exemption (evidence by a
Form 1-E filed when the Company operated as a BDC), ceased to be
effective on October 22, 2005. Specifically, the Company must
register with the SEC the shares issuable pursuant to the notes'
conversion feature and warrants. In the event the Regulation E
exemption ceases to be effective, within 60 days of ceasing
effectiveness, the Company must file a registration statement with the
SEC and within 90 days, it must have such registration statement be
effective.
The Company is required to pay liquidated damages at the rate of 2%
per month (based on the notes' principal balance) until such time as a
registration statement is effective.
Classification of Conversion Feature and Warrants.
Pursuant to EITF No. 00-19, the Company evaluated the Longview
conversion feature and warrants at October 22, 2005. Management
determined that due to the nature of the liquidated damages the
Company must pay (with no maximum prescribed in the agreements), the
Company must pursue registration as its most "economic alternative"
and settle the Longview conversion feature and warrants with
registered shares; and as a result, it must treat the conversion
feature and warrants as derivative liabilities. In addition, under
View C of EITF No. 05-04, the Company accounts for the liquidated
damages separately from these two other derivative liabilities.
Management estimated the value of the warrants using a Black-Scholes
model. Because the warrants had an exercise price greater than the
trading price of the Company's stock on October 22, 2005 and December
31, 2005, the warrants were calculated to have no value at such dates.
However, at March 31, 2006, management has established a liability and
has estimated the increase in the fair value of the warrants between
March 31, 2006 and December 31, 2005 to be $534,108, which is
reflected in other liabilities and derivative expense in the
accompanying condensed statements of operations. Management estimated
the value of the conversion feature, after consultation with a
valuation expert, taking into consideration limitations on ownership
(Longview cannot own in excess of 4.99% of the Company's outstanding
shares at any time "cap") and, estimated conversions during the term
of the notes, subject to the cap, using discount rates of 75%.
Management has established a liability and has estimated the decrease
in the fair value of the conversion feature between December 31, 2005
and March 31, 2006 to be $27,888, which is reflected net of derivative
expense in the accompanying condensed statements of operations. The
fair value of the derivative liability with respect to the conversion
feature at March 31, 2006 totaling $15,330 is included in other
liabilities in the accompanying condensed balance sheet.
Liquidated Damages.
The Company is required to pay liquidated damages at the rate of 2%
per month (based on the Longview notes' principal balance) until such
time as a Form SB-2 registration statement is effective. The Company
has accrued $264,601 in liquidated damages, which is included in other
liabilities in the accompanying condensed balance sheet at March 31, 2006.
3. STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock.
Series A.
The Company has 3,000,000 shares of Series A preferred stock
authorized. On October 6, 2004 the Company's Compensation Committee
granted and the Company issued Series "A" convertible preferred shares
("Series A") to Mr. Dix and Mr. Boudewyn totaling 3,000,000. Each
share of Series A is convertible at the rate of 800 shares of common
stock for each full share of Series A).
Each share of outstanding Series A entitles the holder thereof to vote
on each matter submitted to a vote of the stockholders of the Company
and to have the number of votes equal to the number (including any
fraction) of shares of common stock into which such share of Series A
is then convertible pursuant to the provisions hereof at the record
date for the determination of shareholders entitled to vote on such
matters or, if no such record date is established, at the date such
vote is taken or any written consent of stockholders becomes
effective. The Series A are convertible after three years from issuance.
A third party conducted an evaluation prior to the issuance and
concluded that the value of the Series A was $200,000, which is being
amortized over the three year vesting period. The remaining balance
of $99,999 is carried as unearned compensation, contra equity, in the
accompanying condensed balance sheet at March 31, 2006.
Series B.
The Company is authorized to issue up to 5,000,000 shares of Series B
convertible preferred stock ("Series B"). This stock is convertible
into common stock upon various events including, change of control of
the Company.
Each share of the Series B is convertible at a per share conversion
price equal to the lesser of: (i) if converted without benefit of a
registration statement, the conversion price will be equal to 75% of
the lowest close bid of the common stock as reported by the Over-the-
Counter Bulletin Board for the twenty trading days preceding the
conversion date for each full share of Series B held; (ii) if
converted with the benefit of a registration statement, the conversion
price will be equal to 85% of the lowest close bid of the common stock
as reported by the Over-the-Counter Bulletin Board for the twenty
trading days preceding the conversion date for each full share of
Series B held; or (iii) $1.00 (subject to adjustment as appropriate in
the event of recapitalizations, reclassifications stock splits, stock
dividends, divisions of shares and similar events).
Except as otherwise required by law, each share of outstanding Series
B entitles the holder thereof to vote on each matter submitted to a
vote of the stockholders of the Company and to have the number of
votes equal to the number (including any fraction) of shares of common
stock into which such share of Series B is then convertible pursuant
to the provisions hereof at the record date for the determination of
stockholders entitled to vote on such matters or, if no such record
date is established, at the date such vote is taken or any written
consent of stockholders becomes effective. Except as otherwise
required by law or by the Certificate of Designation for the Series B,
the holders of shares of common stock and Series B are to vote
together and not as separate classes.
Should the Company file with the SEC a Form SB-2 registration
statement in order to register the shares of common stock to be issued
upon conversion of the Series B and the shares which could be issued
upon payment of the dividends for resale and distribution under the
Securities Act of 1933, the registrable securities are to be reserved
and set aside exclusively for the benefit of each holder.
Additionally, the registration statement will immediately be amended
or additional registration statements will be immediately filed by the
Company as necessary to register additional shares of common stock to
allow the public resale of all common stock included in and issuable
by virtue of the registrable securities.
During the three months ended March 31, 2006, the Company received an
aggregate $250,000 in cash as an investment in Series B. At March 31,
2006, such amount is included in other liabilities in the accompanying
condensed balance sheet. Also, during the quarter ended March 31,
2006, the Company issued 250,000 shares of Series A for proceeds
collected during the quarter ended December 31, 2005. During the
quarter ended March 31, 2006, the Company paid approximately $65,000
in issuance costs related to Series B issuances.
Additionally, the Series B designation document includes the following
provisions:
- 10% cumulative preferred dividends shall accrue and accumulate on
a quarterly basis at $0.10 per share per annum.
- Provided that, and only to the extent that, the Company has a
sufficient number of shares of authorized but unissued and
unreserved common stock available to issue upon conversion, each
share of Series B shall be convertible at the option of the holder.
- In the event the Company is prohibited from issuing shares of
common stock upon conversion of the Series B, then at the
holder's election, the Company must pay to the holder, an amount
in cash determined by multiplying the unconverted face amount,
together with accrued but unpaid dividends theron, of the amount
of shares of convertible preferred stock designated by the Holder
for mandatory redemption by 110%.
The Series B does not have a mandatory redemption date, rather
mandatory redemption is based on a contingent event. Therefore, the
Series B meets the requirements for equity classification under SFAS No.
150. However, the embedded conversion option contains a variable conversion
rate with no cap. Additionally, all of the three criteria pursuant to SFAS
No. 133 paragraph 12 are met, therefore the embedded derivative
instrument (the conversion option) is required be separated from the
host contract and accounted for as a derivative instrument pursuant to
SFAS No. 133, with changes in fair value between reporting periods
included in earnings. Accordingly, the Company recorded the commitment
date fair value of such derivative liability totaling $332,500 as a
derivative liability, with a corresponding decrease to additional
paid-in capital (since the Company has no retained earnings) for the
offsetting deemed dividend. The Company then revalued the conversion
option at March 31, 2006 totaling $530,000, which is included in other
liabilities in the accompanying condensed balance sheet. The increase
in fair value between the commitment date of February 10, 2006 and
March 31, 2006 totaling $197,500 was recorded as derivative liability
expense in the accompanying condensed statements of operations.
Common Stock
During the quarter ended March 31, 2006, in accordance with the terms
of the applicable convertible notes payable agreements, the Company
issued 285,495 shares of common stock in connection with the
conversion of notes payable plus accrued interest totaling
approximately $118,000.
During the quarter ended March 31, 2006, the Company issued 301,386
shares of common stock to employees and non-employees under stock-
based compensation arrangements. The Company incurred approximately
$156,000 in stock based employee compensation during the quarter ended
March 31, 2006. Additionally, the Company incurred approximately
$162,000 of non-employee stock-based compensation during the quarter
ended March 31, 2006, of which approximately $122,000 was related to
common stock and $40,000 was related to warrants (see Note 1).
Warrants
During the quarter ending March 31, 2006 the Company entered a
consulting agreement which entitled a consultant to receive warrants
to purchase a total of 100,000 and 250,000 shares of the Company's
common stock at an exercise price of $1.00 and $0.40 per share for a
two year term and 90 day term, respectively. As noted above, the
Company recorded approximately $40,000 of consulting expense during
the quarter ended March 31, 2006 related to such warrants.
4. COMMITMENTS AND CONTINGENCIES
Lease Commitments.
In October, 2003, the Company's operates its business from its
corporate headquarters in Marina del Rey, California under an
operating lease agreement for its office and research and development
space of approximately 10,560 square feet, for a five-year term,
ending in October 2008.
Rent expense approximated $35,000 and $35,000 for the quarters ended
March 31, 2006 and 2005, respectively.
Litigation.
Other than as set forth below, the Company is not a party to any
material pending legal proceedings, claims or assessments and, to the
best of its knowledge, no such action by or against the Company has
been threatened.
(a) On June 15, 2005, the Company was served with a summons from a
third party in a matter entitled Leslie J. Bishop and Deborah J.
Bishop v. Brian K. Corty and Candy M. Corty, Wireless Think Tank,
Inc., and 5G Wireless Communications, Inc., New York Supreme Court
(Chenango County). This action seeks actual damages in excess of
$80,000 and punitive damages of $300,000 against a former employee of
the Company for breach of a residential lease and damage to a
residential property in 2001. The claim against the Company alleges
that the former employee was a principal in Wireless ThinkTank (a
wholly owned subsidiary of the Company) and conducted business from
such residence.
Management believes the Company has meritorious claims and defenses to
the plaintiffs' claims and ultimately will prevail on the merits.
However, this matter remains in the early stages of litigation and
there can be no assurance as to the outcome of the lawsuit.
Litigation is subject to inherent uncertainties, and unfavorable
rulings could occur. Were unfavorable rulings to occur, there exists
the possibility of a material adverse impact of money damages on the
Company's financial condition, results of operations, or liquidity of
the period in which the ruling occurs, or future periods.
(b) On May 8, 2006 the Company was served with a summons in a matter
entitled Brian Vallone and Anne Vallone v. 5G Wireless Communications,
Inc., California Superior Court (Orange County). This action, which
does not allege a damage amount, includes causes of action for breach
of contract, negligent misrepresentation, and fraud, and is concerning
equipment that was sold to a wireless internet provider in California
who claims that they were unable to generate fees for use and for
advertising revenues.
Management believes the Company has meritorious claims and defenses to
the plaintiffs' claims and ultimately will prevail on the merits.
However, this matter remains in the early stages of litigation and
there can be no assurance as to the outcome of the lawsuit.
Litigation is subject to inherent uncertainties, and unfavorable
rulings could occur. Were unfavorable rulings to occur, there exists
the possibility of a material adverse impact of money damages on the
Company's financial condition, results of operations, or liquidity of
the period in which the ruling occurs, or future periods.
5. RELATED PARTY TRANSACTIONS
During the quarters ended March 31, 2006 and 2005, the Company used
the credit lines of Service Group, which is a company controlled by
Jerry Dix, chief executive officer of the Company, to help the Company
purchase equipment, travel and related consumables throughout the year
as a means of managing cash flows.
6. SUBSEQUENT EVENTS
(a) On April 5, 2006, the Company entered into a subscription
agreement with Longview Fund, LP under which this investor will
purchase up to $60,000 in convertible notes bearing interest at 12% per
annum of the Company convertible into shares of the Company's common
stock (see Exhibit 4.25). The terms of these notes are two years. The
conversion price is equal to the lower of (i) $0.50, or (ii) 50% of
the lowest five day weighted average volume price of the common stock
using the AQR function ("VWAP") as reported by Bloomberg L.P. for the
Company's principal market for the twenty trading days preceding a
conversion date. Under the terms of the notes, they cannot be
converted if such conversion would result in beneficial ownership by
the subscriber and its affiliates of more than 4.99% of the
outstanding shares of the Company's common stock on the conversion date.
In addition, the convertible note holder received warrants to purchase
shares of common stock:
1 Class A warrants was issued for each 1 shares that would be
issued on each closing, assuming the complete conversion of the
notes issued on each such closing date at the conversion price in
effect on each such closing date. The per warrant share exercise
price to acquire a share upon exercise of a Class A Warrant is
$0.50 (post reverse split) and is exercisable until five years
after the issue date of the Class A Warrants.
On this basis, the Company issued warrants to purchase 216,668 shares
of common stock on April 5, 2006.
The Company has received a total of $60,000 under two promissory notes
under a first and second closing under the terms of the subscription
agreement.
(b) The Company's chief financial officer, Lawrence C. Early,
resigned on April 7, 2006. Effective April 8, 2006, Don Boudewyn,
executive vice president, assumed Mr. Early's responsibilities. Mr.
Boudewyn had previously directed the Company's financial reporting
process and maintained day-to-day involvement in the financial
reporting process during Mr. Early's tenure. The Company believes
that disclosure controls and procedures, and its internal controls
over financial reporting were not and will not be adversely impacted
by Mr. Early's departure.
(c) On May 16, 2006, the Company sold a total of 27,028 restricted
shares of common stock under a Regulation S offering to one investor
for a total consideration of $10,075 ($0.3728 per share).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition and
results of operations is based upon, and should be read in conjunction
with, the audited financial statements and related notes included
elsewhere in this Form 10-QSB, which have been prepared in accordance
with accounting principles generally accepted in the United States.
Overview.
The Company is a developer and manufacturer of wireless broadband
communications equipment operating on the 802.11a/b/g frequency. The
Company's principal markets are universities and municipalities.
The Company has focused on the marketing and sales of its
innovative wireless solutions to large campus & enterprise wide-area-
networks ("WAN") and citywide WAN. In addition to manufacturing the
existing product line, the Company has focused on developing new
solutions that create larger and more efficient wireless networks.
The Company markets and sells both outdoor and indoor Wi-Fi
wireless radio systems that, because of their distance and user
capacity, can be used in both wireless LAN and WAN applications. The
outdoor products can be configured in point-to-point or point-to-
multipoint networks that can reach distances of eight miles or more in
fixed wireless configurations or up to one mile in roaming scenarios
using laptops with off-the-shelf Wi-Fi cards. The Company believes
its antenna design and wireless packet switching allows its systems to
more readily penetrate buildings and trees than competitors, and to
accommodate up to 1,000 user associations. The indoor product shares
many of the same characteristics and strengths as the outdoor product,
including user capacity and penetration of objects, but is designed to
utilize less power, at a lower cost and for indoor distances up to
1,000 feet depending upon the structure.
Both the Company's outdoor and indoor products provide strong
security at both the hardware and software levels, can transmit voice,
data, and video at multi-megabit speeds, and can work together
seamlessly in wireless networks with each other or with other common
wireless network equipment. Because of these advantages, the Company
believes its products enable customers to combine wireless networks
with fewer components that cost less, perform better and potentially
provide a faster return on invested capital. The Company has devoted
substantial resources to the build out of its networks and product
research and development with limited resources applied to its
marketing programs.
The Company has historically experienced operating losses and
negative cash flow. The Company expects that these operating losses
and negative cash flows may continue through additional periods. In
addition, the Company only has a limited record of revenue-producing
operations and there is only a limited operating history upon which to
base an assumption that it will be able to achieve its business plans.
Results of Operations.
(a) Revenue.
Revenue from the sales of equipment and support services
increased by $209,100 or approximately 100% for the three months ended
March 31, 2006 to $209,100 as compared to $0 for the three months
ended March 31, 2005. The increase in revenue was primarily
attributable to sales of wireless equipment in the university campus
marketplace as opposed to the comparison period in which the Company
was a BDC and did not record any revenue. The Company expects to
continue the current strategy as more university campuses look to
upgrade their network infrastructure.
(b) Cost of Revenues.
Total cost of revenues increased by $112,474 or approximately
100%, from $0 for the three months ended March 31, 2005 to $112,474
for the three months ended March 31, 2006. The increase was
principally due to the increase in sales partially offset by economies
of scale due to greater buying power in the Company's supply chain and
its ability to maintain pricing in the marketplace as opposed to the
comparison period in which the Company was a BDC and did not record
any revenue or related cost of revenues. The Company expects it will
continue the current strategy in the future.
(c) Operating Expenses.
Total operating expenses increased by $397,449, or approximately
74%, from $536,353 for the three months ended March 31, 2005 to
$933,802 for the three months ended March 31, 2006. The increase is
principally attributable to increased headcount, and increased use of
outside law firms and consultants during the financing process. As
management continues to focus on operations operating expenses are
expected to increase in 2006.
(d) Interest Expense.
Interest expense increased by $137,721, or approximately 31%,
from $440,353 for the three months ended March 31, 2005 to $578,074
for the three months ended March 31, 2006.
Ongoing amortization of beneficial conversion features and other
debt discounts on the notes will decline in the year 2006 and beyond
as the notes reach maturity. Interest expense for the year 2006 will
be significantly higher than in prior years as a result of the
liquidated damages provisions associated with the Longview notes that
accrue at the rate of approximately $53,220 per month until such time
as an effective registration statement is on file with the SEC.
Costs recorded as interest expense primarily consist of the
amortization of the beneficial conversion feature of the convertible
notes issued by the Company in the years 2003, 2004, 2005 and 2006.
Due to the short-term nature of the convertible notes entered into
with the Longview Funds, a portion of the expense associated with the
beneficial conversion feature and other debt discount attributed to
their notes was recognized in the year 2005 and substantially all of
the remaining unamortized discounts on such notes are expected to be
fully expensed during 2006.
(e) Net Loss.
Net loss increased by $1,142,264, or approximately 117%, from a
net loss of $976,706 for the three months ended March 31, 2005 to a
net loss of $2,118,970 for the three months ended March 31, 2006. The
increased net loss is attributable to higher salaries and related cost
along with increased interest expense. The net loss for the year 2006
and beyond is anticipated to decline as sales increase without a
corresponding increase in operating expenses and a reduction in
interest expense.
Factors That May Affect the Company's Operating Results.
The operating results of the Company can vary significantly
depending upon a number of factors, many of which are outside its
control. General factors that may affect the Company's operating
results include:
- gain or loss of clients or strategic relationships;
- announcement or introduction of new products by the Company or by
its competitors;
- the ability to build brand recognition;
- timing of sales to customers;
- price competition;
- the ability to attract and integrate new personnel in a timely
and effective manner;
- reduction in or delay of capital spending by clients due to the
effects of terrorism, war and political instability; and
- general economic conditions.
The Company believes that its planned growth and profitability
will depend in large part on the ability to promote its products, gain
clients and expand its relationship with current clients.
Accordingly, the Company intends to invest in marketing, strategic
partnerships, and development of its customer base. If the Company is
not successful in promoting its products and expanding its customer
base, this may have a material adverse effect on its financial
condition and its ability to continue to operate its business.
The Company is also subject to the following specific factors
that may affect its operating results:
(a) The Company May Not Be Able to Accommodate Rapid Growth Which
Could Decrease Revenues and Result in a Loss of Customers.
The Company is currently selling and installing Wi-Fi equipment
in universities and municipalities. To manage anticipated growth, the
Company must continue to implement and improve its operational,
financial and management information systems. The Company must also
hire, train and retain additional qualified personnel, continue to
expand and upgrade core technologies, and effectively manage its
relationships with end users, suppliers and other third parties. The
Company's expansion could place a significant strain on its current
services and support operations, sales and administrative personnel,
capital and other resources. The Company could also experience
difficulties meeting demand for its products. The Company cannot
guaranty that its systems, procedures or controls will be adequate to
support operations, or that management will be capable of fully
exploiting the market. The Company's failure to effectively manage
growth could adversely affect its business and financial results.
(b) The Company's Customers Require a High Degree of Reliability in
Equipment and If the Company Cannot Meet Their Expectations, Demand
for Its Products May Decline.
Any failure to provide reliable equipment for the Company's
customers, whether or not caused by their own failure, could reduce
demand for the Company's products. Because the Company has only
recently begun to place customers on its Wi-Fi system, the Company
does not have substantial experience in gauging negative customer
response.
(c) Dependence on Suppliers May Affect the Ability of the Company to
Conduct Business.
The Company depends upon a number of suppliers for components of
its products. There is an inherent risk that certain components of
the Company's products will be unavailable for prompt delivery or, in
some cases, discontinued. The Company only has limited control over
any third-party manufacturer as to quality controls, timeliness of
production, deliveries and various other factors. Should the
availability of certain components be compromised, it could force the
Company to develop alternative designs using other components, which
could add to the cost of goods sold and compromise delivery
commitments. If the Company is unable to obtain components in a
timely manner, at an acceptable cost, or at all, it may need to select
new suppliers, redesign or reconstruct processes used to build its
devices. In such an instance, the Company would not be able to
manufacture any devices for a period of time, which could materially
adversely affect its business, results from operations, and financial
condition.
(d) The Company Faces Strong Competition in Its Market, Which Could
Make It Difficult for the Company to Generate Income
The market for wireless products is highly competitive. The
Company's future success will depend on its ability to adapt to
rapidly changing technologies, evolving industry standards, product
offerings and evolving demands of the marketplace. The Company
competes for customers primarily with facilities-based carriers, as
well as with other non-facilities-based network operators. Some of
the Company's competitors have substantially greater resources, larger
customer bases, longer operating histories and greater name
recognition than the Company has.
- Some of our competitors provide functionalities that the Company
does not. Potential customers who desire these functions may
choose to obtain their equipment from the competitor that
provides these additional functions.
- Potential customers may be motivated to purchase their wireless
Internet equipment from a competitor in order to maintain or
enhance their respective business relationships with that
competitor.
In addition, the Company's competitors may also be better
positioned to address technological and market developments or may
react more favorably to technological changes. The Company competes
on the basis of a number of factors, including:
- range
- non-line of sight capabilities
- data rate
- security scheme
- simultaneous users
- implementation cost
Competitors may develop or offer products that provide
significant (technological, creative, performance, price) or other
advantages over the products offered by the Company. If the Company
fails to gain market share or loses existing market share, its
financial condition, operating results and business could be adversely
affected and the value of the investment in the Company could be
reduced significantly. The Company may not have the financial
resources, technical expertise, marketing, and distribution or support
capabilities to compete successfully.
(e) Uncertain Demand for Equipment May Cause Revenues to Fall Short
of Expectations and Expenses to Be Higher Than Forecast If the Company
Needs to Incur More Marketing Costs.
The Company is unable to forecast revenues with certainty because
of the unknown demand from consumers for its equipment and the
emerging nature of the Wi-Fi industry. The Company is in the process
of refining its marketing plan for colleges, universities and
municipalities in order to achieve the desired level of revenue, which
could result in increased marketing costs. In the event demand for
the Company's wireless equipment does not prove to be as great as
anticipated, revenues may be lower than expected and/or marketing
expenses higher than anticipated, either of which may increase the
amount of time and capital that the Company needs to achieve a
profitable level of operations.
(f) The Company Could Fail to Develop New Products to Compete In an
Industry of Rapidly Changing Technology, Resulting In Decreased Revenue.
The Company operates in an industry with rapidly changing
technology, and its success will depend on the ability to deploy new
products that keep pace with technological advances. The market for
broadband communications equipment is characterized by rapidly
changing technology and evolving industry standards in both the Wi-Fi
and Internet access industries. The Company's technology or systems
may become obsolete upon the introduction of alternative technologies.
If the Company does not develop and introduce new products in a timely
manner, it may lose opportunities to competing service providers,
which would adversely affect business and results of operations.
There is a risk to the Company that there may be delays in
initial implementation of new products. Further risks inherent in new
product introductions include the uncertainty of price-performance
relative to products of competitors, competitors' responses to its new
product introductions, and the desire by customers to evaluate new
products for longer periods of time. Also, the Company does not have
any control over the pace of technology development. There is a
significant risk that rights to a technology could be acquired or be
developed that is currently or is subsequently made obsolete by other
technological developments. There can be no assurance that any new
technology will be successfully acquired, developed, or transferred.
(g) The Company's Ability to Grow Is Directly Tied to Its Ability to
Attract and Retain Customers, Which Could Result In Reduced Income.
The Company has no way of predicting whether its marketing
efforts will be successful in attracting new locations and acquiring
substantial market share. Past efforts have been directed toward a
limited target market of colleges, universities and municipalities. If
the Company's marketing efforts fail, it may fail to attract new
customers and fail to retain existing ones, which would adversely
affect business and financial results.
(h) Government Regulation May Affect the Ability of the Company to
Conduct Business.
The Company's technology is deployed in license-free frequency
bands and is not subject to any wireless or transmission licensing in
most jurisdictions, including the United States. Continued license-
free operation is dependent upon the continuation of existing
government policy. While the Company is not aware of any policy
changes planned or expected, there can be no assurances that
government policy will not change. License-free operation of the
Company's products in the 2.4 GHz and 5 GHz bands are subordinate to
certain licensed and unlicensed uses of the bands and its products
must not cause harmful interference to other equipment operating in
the bands and must accept interference from any of them. If the
Company is unable to eliminate any such harmful interference, or
should its products be unable to accept interference caused by others,
the Company and its customers could be required to cease operations in
the bands in the locations affected by the harmful interference.
(i) Any Required Expenditures as a Result of Indemnification Will
Result in a Decrease in the Company's Net Income.
The Company's bylaws include provisions to the effect that the
Company may indemnify any director, officer, or employee. In
addition, provisions of Nevada law provide for such indemnification,
as well as for a limitation of liability of the Company's directors
and officers for monetary damages arising from a breach of their
fiduciary duties. Any limitation on the liability of any director or
officer, or indemnification of any director, officer, or employee,
could result in substantial expenditures being made by the Company in
covering any liability of such persons or in indemnifying them.
Operating Activities.
The net cash used in operating activities was $288,336 for the
quarter ended March 31, 2006 compared to $429,830 for the quarter
ended March 31, 2005, a decrease of $141,494 or approximately 33%.
This increase is attributed primarily to the increase in salaries and
related expense.
Investing Activities.
Net cash provided by investing activities was $18,635 during the
three months ended March 31, 2006 as compared to net cash used in
investing activities of $378,441 during the three months ended March
31, 2005, a change of $397,076, or approximately 105%. This change
was the result of lower testing equipment purchases related to
research and development activities partially offset by increased
spending on software license to support sales and finance activities.
Liquidity and Capital Resources.
(a) General Discussion.
The Company's current liabilities totaled $4,378,815 at March 31,
2006, and current assets totaled $349,641, resulting in a working
capital deficit of $4,029,174 at March 31, 2006. At March 31, 2006,
the Company's assets consisted primarily of net accounts receivable of
$228,441 and inventory of $118,216. The cash balance was $984.
The Company incurred a net loss of $2,118,970 for the three
months ended March 31, 2006. The Company has an accumulated deficit
of $24,903,637 as of that date.
The above factors raise doubt as to the Company's ability to
continue as a going concern. The Company's current cash flow from
operations will not be sufficient to maintain its capital requirements
for the next twelve months. Accordingly, the Company's implementation
of its business plan will depend upon its ability to raise additional
funds through bank borrowings and equity or debt financing. The
Company estimates that it will need to raise up to $5,000,000 over the
next twelve months for such purposes.
The accompanying financial statements have been prepared assuming
that the Company continues as a going concern that contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business assuming the Company will continue as a
going concern. However, the ability of the Company to continue as a
going concern on a longer-term basis will be dependent upon its
ability to generate sufficient cash flow from operations to meet its
obligations on a timely basis, to retain its current financing, to
obtain additional financing, and ultimately attain profitability.
The Company has been successful in obtaining the required cash
resources through private placements, convertible notes and notes
payable to service the Company's operations during the three months
ended March 31, 2006. The Company's net cash provided by financing
activities for the three months ended March 31, 2006 was $185,328,
which resulted from the net proceeds from the sale of the Series B
preferred stock during that period (see Divine Capital Markets, below).
Management plans to continue raising additional capital through a
variety of fund raising methods during 2006 and to pursue all available
financing alternatives in this regard. Management may also consider a
variety of potential partnership or strategic alliances to strengthen
its financial position. Whereas the Company has been successful in the
past in raising capital, no assurance can be given that these sources
of financing will continue to be available to it and/or that demand for
its equity/debt instruments will be sufficient to meet its capital
needs, or that financing will be available on terms favorable to the
Company. The financial statements do not include any adjustments
relating to the recoverability and classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern.
If funding is insufficient at any time in the future, the Company
may not be able to take advantage of business opportunities or respond
to competitive pressures, or may be required to reduce the scope of
its planned product development and marketing efforts, any of which
could have a negative impact on its business and operating results.
In addition, insufficient funding may have a material adverse effect
on the Company's financial condition, which could require it to:
- curtail operations significantly;
- sell significant assets;
- seek arrangements with strategic partners or other parties that
may require the Company to relinquish significant rights to
products, technologies or markets; or
- explore other strategic alternatives including a merger or sale
of the Company.
To the extent that the Company raises additional capital through
the sale of equity or convertible debt securities, the issuance of such
securities may result in dilution to existing stockholders. If
additional funds are raised through the issuance of debt securities,
these securities may have rights, preferences and privileges senior to
holders of common stock and the terms of such debt could impose
restrictions on the Company's operations. Regardless of whether the
Company's cash assets prove to be inadequate to meet the Company's
operational needs, the Company may seek to compensate providers of
services by issuing stock in lieu of cash, which may also result in
dilution to existing stockholders.
(b) Divine Capital Markets.
On February 17, 2006, the Company consummated a private placement
financing transaction pursuant to a Securities Purchase Agreement with
certain accredited investors obtained by the Company's placement
agent, Divine Capital Markets, LLC, whereby these investors purchased
an aggregate amount of $250,000 Series B 10% convertible preferred
stock of the Company (see Exhibit 4.23).
Under the Certificate of Designation for the preferred stock, the
preferred stock is convertible into shares of the Company's common
stock at a conversion price equal to the lesser of: (i) if converted
without benefit of a registration statement, 75% of the lowest close
bid of the common stock as reported by the market or exchange on which
the common stock is listed or quoted for trading or quotation on the
date in question for the 20 trading days preceding the conversion date
for each full share of convertible preferred stock held; (ii) if
converted with the benefit of a registration statement, 85% of the
lowest close bid of the common stock as reported by the trading market
for the 20 trading days preceding the conversion date for each full
share of convertible preferred stock held; and (iii) the face amount
per share. See Exhibit 4.24.
In connection with the Securities Purchase Agreement, the Company
granted to the investors certain "piggyback" registration rights under
a Registration Rights Agreement, dated February 17, 2006, to the
shares to be issued upon conversion of the preferred stock.
(c) Longview Funds.
On October 20, 2005, the Company's stockholders approved (a) the
termination of the Company's status as a BDC under the 1940 Act and
the filing of a Form N-54C with the SEC, and (b) the filing of a new
registration statement. Based on this approval, on October 21, 2005,
the Company filed a Form N-54C with the SEC. Pursuant to the terms of
the convertible notes entered into between the Company and Longview
Fund, LP, Longview Equity Fund, LP, and Longview International Equity
Fund, LP (collectively, "Longview Funds"), the shares that serve as
collateral for the notes must be registered the Longview Funds, the
shares that serve as collateral for the notes must be registered or an
exemption from registration available. The filing of the Form N-54C
terminated the Regulation E exemption from registration that covered
the shares serving as collateral for the notes. Pursuant to the terms
of the notes, the Company remains in technical default on the notes
since that time.
The Company is still in negotiations with the Longview Funds and
has obtained verbal commitments from the lenders that it will not be
declared in default. The Company is liable for liquidated damages of
2% for each thirty days or part thereof of the purchase price of the
notes remaining unconverted that are subject to such non-registration
event. As of March 31, 2006, the remaining principal balance of
unconverted notes payable to the Longview Funds aggregated to
approximately $2,661,007. It is the Company's intention to file a
Form SB-2 registration statement in the near future. This
registration statement will provide such coverage for the securities
in question. Until such time as the registration statement has been
made effective, the Company will incur $53,220 in liquidated damage
penalties per month. $246,601 was accrued as of March 31, 2006.
(d) $805,000 Convertible Notes.
In March 2004, the Company borrowed $715,000 under convertible
notes payable ("$715,000 Convertible Notes"). All borrowings are due
in March 2006, with monthly interest payments on the outstanding
balance; interest accrues at 9% per annum. The $715,000 Convertible
Notes may be converted into common stock of the Company based on a
formula subject to a floor of $0.001 per share. In July 2004, the
Company borrowed an additional $90,000 under terms identical to those
of the $715,000 Convertible Notes. During the quarter ended March 31,
2006, approximately $114,500 of principal balance of convertible notes
payable were converted into common stock (see Note 4).
As of March and April 2006, there are certain of these note
holders whose notes have expired and as such are due and payable. The
Company has not paid these expired notes and is in technical default
under their provisions. However, the parties have agreed in principal
to extend these notes for an additional two years but currently
agreements in this regard have not yet been signed.
Inflation.
The impact of inflation on the Company's costs and the ability to
pass on cost increases to its customers over time is dependent upon
market conditions. The Company is not aware of any inflationary
pressures that have had any significant impact on its operations over
the past quarter, and the Company does not anticipate that
inflationary factors will have a significant impact on future
operations.
Off Balance Sheet Arrangements.
The Company does not engage in any off balance sheet arrangements
that are reasonably likely to have a current or future effect on its
financial condition, revenues, results of operations, liquidity or
capital expenditures.
Contractual Obligations.
The Company has contractual obligations to repay its notes
payable and to make payments under its operating lease agreement. See
Notes 2 and 4, respectively, to the accompanying condensed financial
statements.
Payments due by Period
Contractual Obligations Total 2006 2007-2008 2009-2010 Thereafter
Convertible debt $3,172,106 $1,885,147 $1,286,959 - -
Notes Payable 22,424 22,424 - - -
Operating leases 445,179 153,368 291,811 - -
Total contractual cash
obligations $3,639,709 $2,060,939 $1,578,770 - -
Critical Accounting Policies.
The SEC has issued Financial Reporting release No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting
Policies" ("FRR 60"); suggesting companies provide additional
disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC defined the most critical accounting policies as
the ones that are most important to the portrayal of a company's
financial condition and operating results, and require management to
make its most difficult and subjective judgments, often as a result of
the need to make estimates of matters that are inherently uncertain.
Based on this definition, the Company's most critical accounting
policies include: (a) the use of estimates in the preparation of
financial statements; (b) revenue recognition; (c) stock-based
compensation arrangements; (d) warranty reserves; (e) inventory
reserves; (f) allowance for doubtful accounts; and (g) the deferred
tax valuation allowance. The methods, estimates and judgments the
Company uses in applying these most critical accounting policies have
a significant impact on the results reported in its financial statements.
(a) Use of Estimates.
The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going
basis, the Company evaluates these estimates, including those related
to revenue recognition and concentration of credit risk. The Company
bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
(b) Revenue Recognition.
Revenues result principally from the sale and installation of
wireless radio equipment to customers. Equipment sales are recognized
when products are shipped. The Company recognizes revenues in
accordance with Staff Accounting Bulleting No. 104, "Revenue
Recognition," when all of the following conditions exist: (a)
persuasive evidence of an arrangement exists in the form of an
accepted purchase order; (b) delivery has occurred, based on shipping
terms, or services have been rendered; (c) the Company's price to the
buyer is fixed or determinable, as documented on the accepted purchase
order; and (d) collectibility is reasonably assured.
Orders delivered to the Company by phone, fax, mail or
email are considered valid purchase orders and once accepted by the
Company are deemed to be the final understanding between the Company
and its customer as to the specific nature and terms of the agreed-
upon sale transaction. Products are shipped and are considered
delivered when (a) for FOB factory orders they leave the Company's
shipping dock or (b) for FOB customer dock orders upon confirmation of
delivery. The creditworthiness of customers is generally assessed
prior to the Company accepting a customer's first order.
The Company offers installation services to customers and charges
separately when such services are purchased. Installation by the
Company is not required for the functionality of the equipment.
Consequently, installation services are considered a separate unit of
accounting under Financial Accounting Standards Board's Emerging
Issues Task Force No. 00-21,"Revenue Arrangements with Multiple
Deliverables."
(c) Stock-Based Compensation Arrangements.
The Company issues shares of common stock to various individuals
and entities for certain management, legal, consulting and marketing
services. These issuances are valued at the fair market value of the
service provided and the number of shares issued is determined, based
upon the closing price of the Company's common stock on the date of
each respective transaction after the period of service. These
transactions are reflected as the appropriate component of the
Company's condensed financial statements in conformity with generally
accepted accounting principles in the accompanying statement of
operations.
(d) Warranty.
The Company provides a warranty on all electronics sold for a
period of one year after the date of shipment. Warranty issues are
usually resolved with repair or replacement of the product. Trends of
sales returns, exchanges and warranty repairs are tracked by as a
management as a basis for the reserve that management records in the
Company's consolidated financial statements. Estimated future
warranty obligations related to certain products and services are
provided by charges to operations in the period in which the related
revenue is recognized. At March 31, 2006, warranty reserve
approximated $29,297, which is recorded under other current
liabilities on the balance sheet.
(e) Inventory.
Inventories are stated at the lower of cost (first-in, first-out)
or market. Cost is determined on a standard cost basis that
approximates the first-in, first-out method. Market is determined by
comparison with recent sales or net realizable value.
Such net realizable value is based on management's forecasts for
sales of the Company's products or services in the ensuing years. The
industry in which the Company operates is characterized by
technological advancement, change and certain regulations. Should the
demand for the Company's products prove to be significantly less than
anticipated, the ultimate realizable value of the Company's
inventories could be substantially less than amounts shown in the
accompanying balance sheet.
(f) Allowance for Doubtful Accounts.
In determining the allowance for doubtful accounts, management
evaluated the future collectibility of customer receivable balances,
on a customer by customer basis, including an individual assessment of
the customer's credit quality, financial standing, and the customer's
ability to meet current or future commitments and the industry and
general economic outlook. Based on the severity of the likely loss,
the Company provides a reserve against outstanding balances over 60
days. In the event collection efforts are unsuccessful for a
customer, the receivable is written off and charged to expense. At
March 31, 2006, the Company carried an allowance for doubtful accounts
of $98,515.
(g) Deferred Tax Valuation Allowance.
Deferred taxes are provided on the liability method whereby
deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carry forwards and
deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. A
deferred tax asset is reduced by a valuation allowance if, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized in the future.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
A valuation allowance is provided for deferred tax assets if it
is more likely than not these items will either expire before the
Company is able to realize their benefit, or that future deductibility
is uncertain. In accordance with Statement of Financing Accounting
Standards No 109, the Company records net deferred tax assets to the
extent the Company believes these assets will more likely than not be
realized. In making such determination, the Company considers all
available positive and negative evidence, including scheduled
reversals of deferred tax liabilities, projected future taxable
income, tax planning strategies and recent financial performance.
(h) Derivative Liabilities.
The Company evaluates free-standing instruments (or embedded
derivatives) indexed to its common stock to properly classify such
instruments within equity or as liabilities in its financial
statements, pursuant to the requirements of the EITF No. 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock," EITF No. 01-06, "The
Meaning of Indexed to a Company's Own Stock," EITF No. 05-04, "The
Effect of a Liquidated Damages Clause on a Freestanding Financial
Instrument Subject to EITF No. 00-19," and Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. The Company's policy
is to settle instruments indexed to its common shares on a first-in-
first-out basis.
The Company accounts for the effects of registration rights and
related liquidated damages pursuant to EITF No. 05-04, View C, subject
to EITF No. 00-19. Pursuant to EITF No. 05-04, View C, liquidated
damages payable in cash or stock are accounted for as a separate
derivative, which requires a periodical valuation of its fair value
and a corresponding recognition of liabilities associated with such
derivative. The Company accounts for certain embedded conversion
features and free-standing warrants pursuant to SFAS No. 133 and EITF
No. 00-19, which require corresponding recognition of liabilities
associated with such derivatives at their fair values and changes in
fair values to be charged to earnings.
(i) Classification of Conversion Feature and Warrants.
Pursuant to EITF No. 00-19, the Company evaluated the Longview
conversion feature and warrants at October 22, 2005. Management
determined that due to the nature of the liquidated damages the
Company must pay (with no maximum prescribed in the agreements), the
Company must pursue registration as its most "economic alternative"
and settle the Longview conversion feature and warrants with
registered shares; and as a result, it must treat the conversion
feature and warrants as derivative liabilities. In addition, under
View C of EITF No. 05-04, the Company accounts for the liquidated
damages separately from these two other derivative liabilities.
Management estimated the value of the warrants using a Black-Scholes
model. Because the warrants have an exercise price greater than the
trading price of the Company's stock on October 22, 2005, the warrants
value was calculated to be insignificant. Management estimated the
value of the conversion feature, after consultation with a valuation
expert, taking into consideration limitations on ownership (Longview
cannot own in excess of 4.99% of the Company's outstanding shares at
any time "cap") and, estimated conversions during the term of the
notes, subject to the cap, using discount rates of 75%. Management
has established a liability and has estimated the decrease in the fair
value of the conversion feature between December 31, 2005 and March
31, 2006 to be $27,888, which is reflected net of derivative expense
in the accompanying condensed statements of operations. The fair
value of such derivative liability at March 31, 2006 totaling $15,330
is included in other liabilities in the accompanying condensed balance sheet.
Forward Looking Statements.
Information in this Form 10-QSB contains "forward looking
statements" within the meaning of Rule 175 of the Securities Act of
1933, as amended, and Rule 3b-6 of the Securities Act of 1934, as
amended. When used in this Form 10-QSB, the words "expects,"
"anticipates," "believes," "plans," "will" and similar expressions are
intended to identify forward-looking statements. These are statements
that relate to future periods and include, but are not limited to,
statements regarding the adequacy of cash, expectations regarding net
losses and cash flow, statements regarding growth, the need for future
financing, dependence on personnel, and operating expenses.
Forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially
from those projected. These risks and uncertainties include, but are
not limited to, those discussed above as well as the risks set forth
above under "Factors That May Affect the Company's Operating Results."
These forward-looking statements speak only as of the date hereof.
The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in its expectations
with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
ITEM 3. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act
that are designed to ensure that information required to be disclosed
in its periodic reports filed under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated
and communicated to its management, including its principal executive
officer and principal financial officer, to allow timely decisions
regarding required disclosure.
As of the end of the period covered by this report, the Company's
management carried out an evaluation, under the supervision and with
the participation of its principal executive officer and principal
financial officer, of its disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act).
Based upon the evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's
disclosure controls and procedures were effective to ensure that
information required to be disclosed by it in the reports that the
Company files or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the
SEC's rules and forms. In addition, he concluded that the Company's
disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports that the Company
files or submits under the Exchange Act is accumulated and
communicated to the Company's management, including its principal
executive officer and principal financial officer, to allow timely
decisions regarding required disclosure.
Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, will be or have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can
occur because of simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, by collusion
of two or more people, and/or by management override of the control.
The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions,
and/or the degree of compliance with the policies and procedures may
deteriorate. Because of the inherent limitations in a cost-effective
internal control system, misstatements due to error or fraud may occur
and not be detected.
Changes in Controls and Procedures.
During the quarter ended March 31, 2006, there were no other
changes in the Company's disclosure controls and procedures, or its
internal controls over financial reporting (as defined in Rule 13a-
15(f) of the Exchange act), or in other factors that could affect
these controls during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, these
controls. The Company believes that disclosure controls and
procedures, and its internal controls over financial reporting, were
not and will not be adversely impacted by the departure of Lawrence
Early (see Item 5, below).
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not party to any material pending legal
proceedings, claims or assessments and, to the best of its knowledge,
no such action by or against the Company has been threatened, except
as follows:
(a) On June 15, 2005, the Company was served with a summons from
a third party in a matter entitled Leslie J. Bishop and Deborah J.
Bishop v. Brian K. Corty and Candy M. Corty, Wireless Think Tank,
Inc., and 5G Wireless Communications, Inc., New York Supreme Court
(Chenango County). This action seeks actual damages in excess of
$80,000 and punitive damages of $300,000 against a former employee of
the Company for breach of a residential lease and damage to a
residential property in 2001. The claim against the Company alleges
that the former employee was a principal in Wireless ThinkTank (a
wholly owned subsidiary of the Company) and conducted business from
such residence.
Management believes the Company has meritorious claims and
defenses to the plaintiffs' claims and ultimately will prevail on the
merits. However, this matter remains in the early stages of
litigation and there can be no assurance as to the outcome of the
lawsuit. Litigation is subject to inherent uncertainties, and
unfavorable rulings could occur. Were unfavorable rulings to occur,
there exists the possibility of a material adverse impact of money
damages on the Company's financial condition, results of operations,
or liquidity of the period in which the ruling occurs, or future periods.
(b) On May 8, 2006 the Company was served with a summons in a
matter entitled Brian Vallone and Anne Vallone v. 5G Wireless
Communications, Inc., California Superior Court (Orange County). This
action, which does not allege a damage amount, includes causes of
action for breach of contract, negligent misrepresentation, and fraud,
and is concerning equipment that was sold to a wireless internet
provider in California who claims that they were unable to generate
fees for use and for advertising revenues.
Management believes the Company has meritorious claims and
defenses to the plaintiffs' claims and ultimately will prevail on the
merits. However, this matter remains in the early stages of
litigation and there can be no assurance as to the outcome of the
lawsuit. Litigation is subject to inherent uncertainties, and
unfavorable rulings could occur. Were unfavorable rulings to occur,
there exists the possibility of a material adverse impact of money
damages on the Company's financial condition, results of operations,
or liquidity of the period in which the ruling occurs, or future periods.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
There were no unregistered sales of the Company's equity
securities during the three months ended on March 31, 2006 that were
not previously disclosed in a Form 8-K. There were no purchases of
common stock of the Company by the Company or its affiliates during
the three months ended March 31, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
(a) Please see Management's Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital Resources,
for a complete discussion of the technical default status of the
Longview Funds notes.
(b) Please see the noted section for a complete discussion of
the technical default status of certain of the $805,000 convertible notes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Subsequent Events.
(a) On April 5, 2006, the Company entered into a subscription
agreement with Longview Fund, LP under which this investor will
purchase up to $60,000 in convertible notes bearing interest at 12% per
annum of the Company convertible into shares of the Company's common
stock (see Exhibit 4.25). The terms of these notes are two years. The
conversion price is equal to the lower of (i) $0.50, or (ii) 50% of
the lowest five day weighted average volume price of the common stock
using the AQR function ("VWAP") as reported by Bloomberg L.P. for the
Company's principal market for the twenty trading days preceding a
conversion date. Under the terms of the notes, they cannot be
converted if such conversion would result in beneficial ownership by
the subscriber and its affiliates of more than 4.99% of the
outstanding shares of the Company's common stock on the conversion date.
In addition, the convertible note holder received warrants to
purchase shares of common stock:
1 Class A warrants was issued for each 1 shares that would be
issued on each closing, assuming the complete conversion of the
notes issued on each such closing date at the conversion price in
effect on each such closing date. The per warrant share exercise
price to acquire a share upon exercise of a Class A Warrant is
$0.50 (post reverse split) and is exercisable until five years
after the issue date of the Class A Warrants.
On this basis, the Company issued warrants to purchase 216,668 shares
of common stock on April 5, 2006.
The Company has received a total of $60,000 under two promissory
notes under a first and second closing under the terms of the
subscription agreement.
(b) The Company's chief financial officer, Lawrence C. Early,
resigned on April 7, 2006. Effective April 8, 2006, Don Boudewyn,
executive vice president, assumed Mr. Early's responsibilities. Mr.
Boudewyn had previously directed the Company's financial reporting
process and maintained day-to-day involvement in the financial
reporting process during Mr. Early's tenure.
(c) On May 16, 2006, the Company sold a total of 27,028
restricted shares of common stock under a Regulation S offering to one
investor for a total consideration of $10,075 ($0.3728 per share).
ITEM 6. EXHIBITS.
Exhibits included or incorporated by reference herein are set
forth in the Exhibit Index.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
5G Wireless Communications, Inc.
Dated: May 19, 2006 By: /s/ Jerry Dix
Jerry Dix
Chief Executive Officer
Dated: May 19, 2006 By: /s/ Don Boudewyn
Don Boudewyn,
Executive Vice President,
Secretary, Treasurer
(principal financial officer)
EXHIBIT INDEX
Number Description
1 Agency Agreement between the Company and May Davis Group,
Inc., dated April 1, 2003 (incorporated by reference to
Exhibit 1 of the Form 10-QSB/A filed on November 17, 2003).
2.1 Agreement and Plan of Reorganization and Merger between
Tesmark, Inc., an Idaho corporation, and the Company
(formerly know as Tesmark, Inc.), a Nevada corporation,
dated November 10, 1998 (incorporated by reference to
Exhibit 2 of the Form 10-SB filed on December 15, 1999).
2.2 Acquisition Agreement between the Company, and Richard
Lejeunesse, Curtis Mearns, and Don Boudewyn, a partnership
(known as 5G Partners), dated December 15, 2000, as amended
(incorporated by reference to Exhibit 10 of the Form 8-K
filed on February 14, 2001).
2.3 Share Purchase Agreement between the Company, and Sea Union
Industries Pte. Ltd., Richard Lajeunesse, Rita Chou, Peter
Chen, Yeo Lai Ann, Tan Lam Im, Choa So Chin, Tan Ching
Khoon, Tan Sek Toh, and the Company Communication Pte. Inc.
(formerly known as Peteson Investment Pte Ltd.), dated May
5, 2001 (incorporated by reference to Exhibit 2 of the Form
8-K filed on June 5, 2001).
2.4 Purchase Agreement between the Company and Skyhub Asia
Holdings Limited, eVision USA.com, and eBanker USA.com,
dated May 19, 2001 (incorporated by reference to Exhibit 2.4
of the Form 10-KSB filed on April 18, 2002).
2.5 Definitive Acquisition Agreement between the Company and
Wireless Think Tank, dated April 30, 2002 (incorporated by
reference to Exhibit 2 of the Form 8-K filed on August 13, 2002).
2.6 Agreement and Plan of Merger between the Company and 5G
Wireless Solutions, Inc., dated January 18, 2006 filed on April 7, 2006).
3.1 Articles of Incorporation, dated September 24, 1998
(incorporated by reference to Exhibit 3 of the Form 10-SB
filed on December 15, 1999).
3.2 Certificate of Amendment to Articles of Incorporation, dated
May 5, 2000 (incorporated by reference to Exhibit 3.3 of the
Form SB-2 filed on January 10, 2002).
3.3 Certificate of Amendment to Articles of Incorporation, dated
January 19, 2001 (incorporated by reference to Exhibit 3.1
of the Form 8-K filed on February 14, 2001).
3.4 Certificate of Amendment to Articles of Incorporation, dated
January 21, 2003 (incorporated by reference to Exhibit 3.4
of the Form 10-KSB filed on May 8, 2003).
3.5 Certificate of Amendment to Articles of Incorporation, dated
September 16, 2004 (incorporated by reference to Exhibit 3.1
of the Form 8-K filed on September 22, 2004).
3.6 Certificate of Correction, dated September 20, 2004
(incorporated by reference to Exhibit 3.2 of the Form 8-K
filed on September 22, 2004).
3.7 Bylaws, dated September 25, 2002 (incorporated by reference
to Exhibit 3.5 of the Form 10-KSB filed on May 8, 2003).
4.1 2001 Stock Incentive Plan, dated November 1, 2001
(incorporated by reference to Exhibit 10 of the Form S-8
filed on December 10, 2001).
4.2 Non-Employee Directors and Consultants Retainer Stock Plan,
dated January 30, 2002 (incorporated by reference to Exhibit
4.1 of the Form S-8 filed on January 31, 2002).
4.3 Amended and Restated Stock Incentive Plan, dated January 30,
2002 (incorporated by reference to Exhibit 4.2 of the Form
S-8 filed on January 31, 2002).
4.4 Form of Subscription Agreement Between the Company and
investors, dated February 12, 2002 (including the following
exhibits: Exhibit A: Form of Notice of Conversion; Exhibit
B: Form of Registration Rights Agreement; Exhibit C: Form of
Debenture; and Exhibit D: Form of Opinion of Company's
Counsel) (the following to this agreement have been omitted:
Exhibit E: Board Resolution; Schedule 3(A): Subsidiaries;
Schedule 3(C): Capitalization; Schedule 3(E): Conflicts;
Schedule 3(G): Material Changes; Schedule 3(H): Litigation;
Schedule 3(L): Intellectual Property; Schedule 3(N): Liens;
and Schedule 3(T): Certain Transactions) (incorporated by
reference to Exhibit 4.4 of the Form 10-QSB filed on May 20, 2002).
4.5 Escrow Agreement between the Company, First Union Bank, and
May Davis Group, Inc., dated February 12, 2002 (incorporated
by reference to Exhibit 4.5 of the Form 10-QSB filed on May 20, 2002).
4.6 Form of Escrow Agreement between the Company, Joseph B.
LaRocco, Esq., and investors, dated February 12, 2002
(incorporated by reference to Exhibit 4.6 of the Form 10-QSB
filed on May 20, 2002).
4.7 Security Agreement (Stock Pledge) between the Company and
investors, dated February 12, 2002 (incorporated by
reference to Exhibit 4.7 of the Form 10-QSB filed on May 20, 2002).
4.8 Amended and Restated Non-Employee Directors and Consultants
Retainer Stock Plan, dated June 1, 2003 (incorporated by
reference to Exhibit 4 of the Form S-8 POS filed on June 26, 2003).
4.9 Form of Subscription Agreement Between the Company and
investors (including the following exhibits: Exhibit A: Form
of Debenture ; Exhibit B: Form of Notice of Conversion;
Exhibit C: Form of Opinion; and Exhibit D: Subscription
Procedures) (the following schedules have been omitted:
Schedule 3(a): Subsidiaries; Schedule 3(c): Capitalization;
Schedule 3(e): Conflicts; Schedule 3(g): Material Changes;
Schedule 3(h): Litigation; Schedule 3(l): Intellectual
Property; Schedule 3(n): Liens; and Schedule 3(t): Certain
Transactions) (incorporated by reference to Exhibit 4.9 of
the Form 10-QSB/A filed on November 17, 2003).
4.10 Form of Subordinated, Convertible Note and Warrants
Agreement between the Company and investors (including the
following exhibits: Exhibit A: Form of Convertible
Subordinated Promissory Note; and Exhibit B: Form of Warrant
Agreement) (incorporated by reference to Exhibit 4.10 of the
Form 10-QSB filed on November 24, 2003)
4.11 Form of Promissory Note issued by the Company to
investors, dated March 4, 2004 (incorporated by reference to
Exhibit 4.1 of the Form 10-QSB/A filed on May 28, 2004).
4.12 Form of Note Purchase Agreement between the Company and
investors, dated March 4, 2004 (incorporated by reference to
Exhibit 4.2 of the Form 10-QSB/A filed on May 28, 2004).
4.13 Form of Warrant issued by the Company to investors,
dated March 4, 2004 (incorporated by reference to Exhibit
4.3 of the Form 10-QSB/A filed on May 28, 2004).
4.14 2004 Non-Employee Directors and Consultants Retainer Stock
Plan, dated June 8, 2004 (incorporated by reference to
Exhibit 4 of the Form S-8 filed on June 21, 2004).
4.15 Subscription Agreement between the Company, on the one
hand, and Longview Fund, LP, Longview Equity Fund, LP, and
Longview International Equity Fund, LP, on the other hand,
dated September 22, 2004, and Form of Convertible Note
(including the following items: Exhibit A1: Form of Class A
Warrant; Exhibit A2: Form of Class B Warrant; Exhibit B:
Funds Escrow Agreement; Exhibit E: Shares Escrow Agreement;
Exhibit F: Form of Limited Standstill Agreement; Exhibit G:
Security Agreement; and Exhibit H: Collateral Agent
Agreement) (not including the following items: Attachment 1:
Disclosure Schedule; Exhibit C: Form of Legal Opinion;
Exhibit D: Form of Public Announcement on Form 8-K; Schedule
5(d): Additional Issuances; Schedule 5(q): Undisclosed
Liabilities; Schedule 5(s): Capitalization; Schedule 9(e)
Use of Proceeds; Schedule 9(q): Limited Standstill
Providers; and Schedule 11.1: Other Securities to be
Registered) (incorporated by reference to Exhibit 4 of the
Form 8-K filed on September 30, 2004).
4.16 Form of Common Stock Purchase Warrant issued by the Company
in favor of Pole Star Communications, Inc., dated November
1, 2004 (incorporated by reference to Exhibit 4 of the Form
8-K filed on November 12, 2004).
4.17 Certificate of Designation of Series A Convertible Preferred
Stock, dated October 5, 2004 (incorporated by reference to
Exhibit 4.17 of the Form 10-KSB filed on March 31, 2005).
4.18 Subscription Agreement between the Company, on the one hand,
and Longview Fund, LP, Longview Equity Fund, LP, and
Longview International Equity Fund, LP, on the other hand,
dated March 22, 2005 (including the following items: Exhibit
A: Form of Class A Warrant; Exhibit B: Funds Escrow
Agreement; Exhibit C: Security Agreement; Exhibit D:
Collateral Agent Agreement; and Exhibit G: Form of Limited
Standstill Agreement) (not including the following items:
Attachment 1: Disclosure Schedule; Exhibit E: Legal Opinion;
Exhibit F: Form of Public Announcement or Form 8-K; Schedule
5(d): Additional Issuances/Capitalization; Schedule 5(q):
Undisclosed Liabilities; Schedule 5(x): Subsidiaries;
Schedule 9(e) Use of Proceeds; and Schedule 9(p): Limited
Standstill Providers) (incorporated by reference to Exhibit
4.1 of the Form 8-K filed on March 31, 2005).
4.19 Form of Secured Convertible Note between the Company, on the
one hand, and Holders on the other hand, dated March 22,
2005 (incorporated by reference to Exhibit 4.3 of the Form
8-K filed on March 31, 2005).
4.20 Subscription Agreement between the Company, on the one hand,
and Longview Fund, LP, Longview Equity Fund, LP, and
Longview International Equity Fund, LP, on the other hand,
dated July 20, 2005 (including the following items: Exhibit
A1: Form of Note; Exhibit A2: Form of Class A Warrant;
Exhibit B: Funds Escrow Agreement; Exhibit D: Transfer Agent
Instructions; Exhibit F: Form of Limited Standstill
Agreement) (not including the following items: Exhibit C:
Form of Legal Opinion; Exhibit E Form of Public
Announcement; Schedule 4(a): Subsidiaries; Schedule 4(d):
Additional Issuances/Capitalization; Schedule 4(q):
Undisclosed Liabilities; Schedule 4(u): Disagreements of
Accountants and Lawyers; Schedule 8(e) Use of Proceeds; and
Schedule 8(q): Providers of Limited Standstill Agreements)
(incorporated by reference to Exhibit 4 of the Form 8-K
filed on July 25, 2005).
4.21 Modification and Amendment Agreement, dated July 26, 2005
(incorporated by reference to Exhibit 4.2 of the Form 8-K/A
filed on August 3, 2005).
4.22 2006 Stock and Option Plan, dated January 18, 2006
(incorporated by reference to Exhibit 4 of the Form S-8 POS
filed on January 25, 2006).
4.23 Form of Stock Purchase Agreement between the Company and
certain investors, dated February 17, 2006 (including the
following items: Exhibit A: Certificate of Designation, and
Exhibit C: Form of Registration Rights Agreement. Not
including the following items: Exhibit B: Investor
Questionnaire; Exhibit D: Form of Opinion of Counsel;
Schedule 3(c): outstanding shares; Schedule: 3(g): list of
untimely filed reports; and Schedule I: list of investors)
(incorporated by reference to Exhibit 4 of the Form 8-K
filed on February 21, 2006).
4.24 Certificate of Designation of Series B Convertible Preferred
Stock, dated January 25, 2006 (incorporated by reference to
Exhibit 4 of the Form 8-K filed on February 21, 2006).
4.25 Subscription Agreement between 5G Wireless Communications,
Inc. and Longview Fund, LP, dated April 5, 2006 (including
the following items: Exhibit A1: Convertible Note; Exhibit
A2: Class A Warrant; Exhibit B: Funds Escrow Agreement (not
including the following items: Exhibit C: Form of Legal
Opinion; Exhibit D: Transfer Agent Instructions; Exhibit E:
Form of Public Announcement; Exhibit F: Form of Limited
Standstill Agreement; Schedule 4(a): Subsidiaries; Schedule
4(d): Additional Issuances/Capitalization; Schedule 4(q):
Undisclosed Liabilities; Schedule 4(u): Disagreements with
Accountants and Lawyers; Schedule 8(e) Use of Proceeds; and
Schedule 8(q): Providers of Limited Standstill Agreements
(filed herewith).
10.1 Employment Agreement between the Company and Jerry Dix,
dated February 1, 2002 (incorporated by reference to Exhibit
10.12 of the Form 10-KSB filed on April 18, 2002).
10.2 Employment Agreement between the Company and Don Boudewyn,
dated February 1, 2002 (incorporated by reference to Exhibit
10.13 of the Form 10-KSB filed on April 18, 2002).
10.3 Employment Agreement Amendment between the Company and Don
Boudewyn, dated April 1, 2002 (incorporated by reference to
Exhibit 10.17 of the Form 10-KSB filed on April 18, 2002).
10.4 Executive Employment Agreement between the Company and Peter
Trepp, dated July 4, 2003 (including Exhibit A: Employee
Proprietary Information and Inventions Agreement) (the
following exhibits have been omitted: Exhibit A - Schedule
A: Employee's Disclosure; and Exhibit A - Schedule B:
Termination Certificate Concerning 5G Wireless
Communications, Inc. Proprietary Information (incorporated
by reference to Exhibit 10 of the Form 10-QSB filed on
November 24, 2003).
10.5 Independent Consulting Agreement between the Company and
Ghillie Finaz, AG, dated September 22, 2004 (incorporated by
reference to Exhibit 10 of the Form 8-K filed on September
30, 2004).
10.6 Form of agreement between the Company and its independent
directors (incorporated by reference to Exhibit 10.2 of the
Form 10-QSB filed on November 17, 2004).
10.7 Contribution Agreement between the Company and the Company
Solutions, Inc. (the following to this agreement have been
omitted: Schedule 1: List of Assets; and Schedule 2: List of
Liabilities), dated December 31, 2004 (incorporated by
reference to Exhibit 10 of the Form 8-K filed on January 7, 2005).
14 Code of Ethics, dated October 5, 2004 (incorporated by
reference to Exhibit 14 of the Form 10-KSB filed on March 31, 2005).
16.1 Letter on Change in Certifying Accountant (incorporated by
reference to Exhibit 16 of the Form 8-K/A filed on August 28, 2003).
16.2 Letter on Change in Certifying Accountant (incorporated by
reference to Exhibit 16 of the Form 8-K/A filed on September 30, 2004).
21 Subsidiaries of the Company (incorporated by reference to
Exhibit 21 of the Form 10-QSB filed on August 27, 2002).
23 Consent of Independent Registered Public Accounting Firm
(incorporated by reference to Exhibit 23 of the Form 10-K
filed on April 7, 2006).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Jerry Dix (filed herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification of Don Boudewyn
(filed herewith).
32 Section 1350 Certification of Jerry Dix and Don Boudewyn
(filed herewith).