U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
5G WIRELESS COMMUNICATIONS, INC.
(Name of Company in Its Charter)
Nevada 5063 54-1838089
(State or other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification No.)
Incorporation or
Organization)
4136 Del Rey Avenue, Marina del Rey, California 90292; (310) 448-8022
(Address and Telephone Number of Company's Principal Executive
Offices and Principal Place of Business)
Jerry Dix
Chief Executive Officer
5G Wireless Communications, Inc.
4136 Del Rey Avenue
Marina del Rey, California 90292
(310) 448-8022
(Name, Address, and Telephone Number of Agent for Service)
With a copy to:
Brian F. Faulkner, A Professional Law Corporation
27127 Calle Arroyo, Suite 1923
San Juan Capistrano, California 92675
(949) 240-1361
Approximate date of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. ________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier
effective registration statement for the same offering. _________
If any securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in
connection with dividend or interest reinvestment plans, check the
following box: [X]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. _________
CALCULATION OF REGISTRATION FEE
Title of each Amount to be Proposed Proposed Amount of
Class of Registered(1) Maximum Maximum Registration
Securities to Offering Price Aggregate Fee
Be Registered Per Share Offering
Price
Common Stock
Issuable Upon
Conversion of
Longview Notes 12,655,344 $0.25 (2) $3,163,836 $338.53
Common Stock
Issuable Upon
Exercise of
Longview Warrants
(Class A and B) 1,505,422 $0.15 (3) $ 225,813 $ 24.16
Common Stock
Issuable Upon
Conversion
of Series B
Preferred
Stock 2,400,000 $0.25 (4) $ 600,000 $ 64.20
Common Stock
Issuable Upon
Conversion of
Montgomery
Debentures 19,017,433 $0.25 (5) $4,754,358 $508.72
Common Stock
Issuable Upon
Exercise of
Montgomery
Class A Warrant 800,000 $0.15 (6) $ 120,000 $ 12.84
Common Stock
Issuable Upon
Exercise of
Montgomery
Class B Warrant 800,000 $0.35 (7) $ 280,000 $ 29.96
Common Stock
Issuable Upon
Exercise of
Montgomery
Class C Warrant 800,000 $0.25 (8) $ 200,000 $ 21.40
Common Stock 503,217 $0.25 (9) $ 125,804 $ 13.46
Total 38,481,416 $9,469,811 $1,013.27
(1) Includes a good faith estimate of the shares issuable upon
conversion of the convertible notes, debentures and Series B
preferred stock, and exercise of warrants, based on the closing
market price of $0.30 as of July 20, 2006. Because the number of
shares of common stock issuable upon conversion of the convertible
notes, debentures, and Series B preferred stock is dependent upon the
market price of the common stock prior to a conversion, the actual
number of shares of common stock that will be issued upon conversion
will vary. The actual number of shares of common stock offered in
this prospectus, and included in the registration statement of which
this prospectus is a part, includes such additional number of shares
of common stock as may be issued or issuable upon conversion of the
convertible notes and debentures, and exercise of the related
warrants, by reason of any stock split, stock dividend or similar
transaction involving the common stock, in accordance with Rule 416
under the Securities Act of 1933. Should the conversion ratio of our
convertible securities result in our having insufficient shares, we
will not rely upon Rule 416, but will file a new registration
statement to cover the resale of such additional shares should that
become necessary.
(2) Estimated solely for purposes of calculating the registration fee
in accordance with Rule 457(c) under the Securities Act of 1933,
using the average of the bid and ask prices as of August 4, 2006
(within 5 business days prior to the date of filing this registration
statement) of $0.25 per share.
(3) Estimated solely for purposes of calculating the registration fee
in accordance with Rule 457(g) under the Securities Act of 1933,
using the exercise price of $0.15 per share.
(4) Estimated solely for purposes of calculating the registration fee
in accordance with Rule 457(c) under the Securities Act of 1933,
using the average of the bid and ask prices as of August 4, 2006
(within 5 business days prior to the date of filing this registration
statement) of $0.25 per share.
(5) Estimated solely for purposes of calculating the registration fee
in accordance with Rule 457(c) under the Securities Act of 1933,
using the average of the bid and ask prices as of August 4, 2006
(within 5 business days prior to the date of filing this registration
statement) of $0.25 per share.
(6) Estimated solely for purposes of calculating the registration fee
in accordance with Rule 457(g) under the Securities Act of 1933,
using the exercise price of $0.15 per share.
(7) Estimated solely for purposes of calculating the registration fee
in accordance with Rule 457(g) under the Securities Act of 1933,
using the exercise price of $0.35 per share.
(8) Estimated solely for purposes of calculating the registration fee
in accordance with Rule 457(c) under the Securities Act of 1933,
using the average of the bid and ask prices as of August 4, 2006
(within 5 business days prior to the date of filing this registration
statement) of $0.25 per share.
(9) Estimated solely for purposes of calculating the registration fee
in accordance with Rule 457(c) under the Securities Act of 1933,
using the average of the bid and ask prices as of August 4, 2006
(within 5 business days prior to the date of filing this registration
statement) of $0.25 per share.
5G Wireless hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until 5G
Wireless shall file a further amendment which specifically states
that this registration statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until
the registration statement shall become effective on such date as the
Commission, acting under Section 8(a), may determine.
PRELIMINARY PROSPECTUS
5G WIRELESS COMMUNICATIONS, INC.
38,481,416 SHARES OF
COMMON STOCK
This prospectus relates to the resale by selling stockholders of
up to 38,481,416 shares of 5G Wireless Communications, Inc. common
stock, including up to 12,655,344 shares of common stock underlying
convertible notes, up to 2,400,000 shares of common stock underlying
convertible Series B preferred stock, up to 19,017,433 shares of
common stock underlying convertible debentures, up to 3,905,422
issuable upon the exercise of common stock purchase warrants, and
503,217 shares of common stock held by selling stockholders. The
conversion price per share for the $3,300,000 original principal
convertible notes, which is subject to a floor price of $0.001 per
share, is the lesser of 75% of the average of the five lowest closing
bid prices of our common stock as reported by the Over the Counter
Bulletin Board for the 90 trading days preceding the conversion date,
or $17.50 (post reverse split) or $3.50 (post reverse split),
depending on the note. The conversion price per share for the
$69,000 original principal convertible notes is the lesser of $0.50
or 50% of the lowest five day weighted average volume price of the
common stock using the volume weighted average price as reported by
Bloomberg L.P. for our principal market for the 20 trading days
preceding a conversion date. The Series B preferred stock is
convertible at a per share equal to the lesser of: if converted
without benefit of a registration statement, 75% of the lowest close
bid of the common stock as reported by the Over-the-Counter Bulletin
Board for the 20 trading days preceding the conversion date for each
full share of Series B held; if converted with the benefit of a
registration statement; 85% of the lowest close bid of the common
stock as reported by the Over the Counter Bulletin Board for the 20
trading days preceding the conversion date for each full share of
Series B held; or $1.00. The conversion price per share for the
convertible debentures is, at the option of the holder, either
$0.3155 or 80% of the lowest closing bid price of our common stock,
for the 5 trading days immediately preceding the conversion date.
The selling stockholders may sell common stock from time to time in
the principal market on which the stock is traded at the prevailing
market price or in negotiated transactions. The selling stockholders
may be deemed underwriters of the shares of common stock, which they
are offering. We will pay the expenses of registering these shares.
Our common stock is registered under Section 12(g) of the
Securities Exchange Act of 1934 and is listed on the Over the Counter
Bulletin Board under the symbol "FGWI". The last reported sales
price per share of our common stock as reported by the Over The
Counter Bulletin Board on August 4, 2006, was $0.25.
Investing in these securities involves significant risks. See
"Risk Factors" beginning on page 13.
These securities have not been approved or disapproved by the
Securities and Exchange Commission or any state securities commission
nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
Information contained in this document is subject to completion
or amendment. The registration statement relating to the securities
has been filed with the Securities and Exchange Commission. The
securities may not be sold nor may offers to buy be accepted prior to
the time the registration statement becomes effective. This
prospectus shall not constitute an offer to sell or the solicitation
of an offer to buy nor shall there be any sale of these securities in
any State in which such offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of
any such State.
The date of this prospectus is _____________, 2006
Table Of Contents
Prospectus Summary 7
Risk Factors 13
Use of Proceeds 29
Selling Stockholders 29
Plan of Distribution 44
Legal Proceedings 46
Directors, Executive Officers, Promoters and Control Persons 47
Security Ownership of Certain Beneficial Owners and Management 53
Description of Securities 55
Interest of Named Experts and Counsel 58
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities 58
Description of Business 61
Management's Discussion and Analysis of Financial Condition
and Results of Operations 68
Description of Property 81
Certain Relationships and Related Transactions 82
Market for Common Equity and Related Stockholder Matters 83
Executive Compensation 87
Financial Statements 88
Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 88
Legal Matters 88
Experts 88
Available Information 88
PROSPECTUS SUMMARY
The following summary highlights selected information contained
in this prospectus. This summary does not contain all the information
you should consider before investing in the securities. Before making
an investment decision, you should read the entire prospectus
carefully, including the "Risk Factors" section, the financial
statements and the notes to the financial statements.
5G Wireless Communications, Inc.
5G Wireless Communications, Inc. markets and sells both outdoor
and indoor wireless radio systems including Wi-Fi 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. We believe that the antenna design and wireless access
points allows the systems to more effectively penetrate buildings and
trees than competitors while improving overall performance for end
users. The indoor product shares many of the same characteristics as
outdoor products, including user capacity and penetration of objects,
but is designed to maximize local coverage at lower costs, for indoor
distances up to 2,500 feet.
Both the 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. We believe that these products enable customers
to combine wireless networks with fewer components that cost less,
perform better and provide a faster return on invested capital.
We are a Nevada corporation with our principal offices located
at 4136 Del Rey Avenue Marina del Rey, California 90292. Our
telephone number is (310) 448-8022. We maintain a website at
www.5gwireless.com which contains descriptions of the products that
we offer.
On November 3, 2005, our board of directors approved a 1 for 350
reverse stock split of our 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 disclosure in this
prospectus. Unless otherwise indicated, all references to outstanding
common shares, including common shares to be issued upon the exercise
of warrants and convertible notes payable, and their value per shares
refer to post-split amounts.
The Offering
Common stock offered by selling stockholders Up to 38,481,416 shares,
including up to 12,655,344
shares of common stock
underlying convertible notes,
up to 2,400,000 shares of
common stock underlying
convertible Series B preferred
stock, up to 19,017,433 shares
of common stock underlying
convertible debentures, up to
3,905,422 issuable upon the
exercise of common stock
purchase warrants, and 503,217
shares of common stock held by
selling stockholders, assuming
full conversion of the
convertible notes, debentures,
and preferred stock, and the
full exercise of the warrants
(includes a good faith estimate
of the shares underlying
convertible notes, debentures,
and preferred stock, and shares
underlying warrants to account
for market fluctuations, and
antidilution and price
protection adjustments,
respectively). This number
represents 84.43% of the then
current outstanding common
stock.
Common stock to be outstanding Up to 45,739,989 shares,
after the offering assuming the full conversion of
the convertible notes,
debentures, and preferred
stock, and full exercise of the
warrants.
Use of proceeds We will not receive proceeds
from the sale of shares of
common stock in this offering.
However, we will receive the
sale price of any common stock
5G Wireless sells to the
selling stockholders upon
exercise of the warrants in the
amount of up to $825,813 (based
up the closing price of $0.30
as of July 20, 2006), and have
already received an aggregate
$4,500,000 in connection with
the issuance of the convertible
notes, debentures, and
preferred stock to the selling
stockholders. We expect to use
the proceeds to be received
from the exercise of the
warrants, if any, and from
these notes, debentures and
preferred stock for general
working capital purposes.
The above information regarding common stock to be outstanding
after the offering is based on 7,258,573 shares of common stock
outstanding as of July 26, 2006 and assumes the subsequent conversion
of issued convertible notes, debentures and preferred stock, and
exercise of the warrants, by the selling stockholders.
Terms of Longview Convertible Notes and Warrants.
$2,000,000 Convertible Notes.
On September 22, 2004, we entered into a subscription agreement
with Longview Fund, LP, Longview Equity Fund, LP, and Longview
International Equity Fund, LP whereby these investors purchased up to
$2,000,000 of principal amount of promissory notes, bearing interest
at 5% per annum (payable upon each conversion, January 1, 2005 and
semi-annually thereafter, and on the maturity date), convertible into
shares of our common stock. The conversion price per share is the
lesser of:
- 75% of the average of the five lowest closing bid prices of our
common stock as reported by the Over the Counter Bulletin Board
for the 90 trading days preceding the conversion date; or
- $17.50 (post reverse split).
The conversion formula is subject to a floor of $0.001 per share.
The note holders received Class A and Class B share warrants to
purchase shares of common stock based on the following formulas:
- 30 Class A warrants were issued for each 100 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
$4.72 and is exercisable until five years after the issue date of
the Class A warrants.
- 125 Class B warrants 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 and
is exercisable until three years after the issue date of the
Class B warrant.
$1,000,000 Convertible Notes.
On March 22, 2005, we entered into a subscription agreement with
Longview Fund, LP, Longview Equity Fund, LP, and Longview
International Equity Fund, LP whereby these investors purchased up to
$1,000,000 of principal amount of promissory notes, bearing interest
at prime (as published in The Wall Street Journal) plus 4% per annum
(payable on each conversion commencing on August 1, 2005 and semi-
annually thereafter and on the maturity date), convertible into
shares of our common stock. The conversion price per share is the
lesser of:
- 75% of the average of the five lowest closing bid prices of our
common stock as reported by the Over the Counter Bulletin Board
for the 90 trading days preceding the conversion date; or
- $3.50.
The conversion formula is subject to a floor of $0.001 per share.
The note holders received Class A share warrants to purchase
shares of common stock based on the following formula:
- 30 Class A warrants were issued for each 100 shares 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
$3.50 and is exercisable until 5 years after the issue date of
the Class A warrants.
$300,000 Convertible Notes.
On July 22, 2005, we entered into a subscription agreement with
Longview Fund, LP, Longview Equity Fund, LP, and Longview
International Equity Fund, LP whereby these investors purchased up to
$300,000 of principal amount of promissory notes, bearing interest at
prime (as published in The Wall Street Journal) plus 4% per annum
(payable on each conversion commencing on January 1, 2006 and semi-
annually thereafter and on the maturity date), convertible into
shares of our common stock. The conversion price per share is the
lesser of:
- 75% of the average of the five lowest closing bid prices of our
common stock as reported by the Over the Counter Bulletin Board
for the 90 trading days preceding the conversion date; or
- $3.50.
The conversion formula is subject to a floor of $0.001 per share.
The note holders received Class A share warrants to purchase
shares of common stock based on the following formula:
- 30 Class A warrants were issued for each 100 shares 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.
$69,000 Convertible Notes.
On April 5, 2006, we entered into a subscription agreement with
Longview Fund, LP under which this investor will purchase up to $69,000
in convertible notes bearing interest at 12% per annum, convertible
into our shares of common stock (the total amount of the notes was
changed upon signing from $60,000 to $69,000). The terms of these
notes are two years. The conversion price is equal to the lower of:
- $0.50; or
- 50% of the lowest five day weighted average volume price of the
common stock using the volume weighted average price as reported
by Bloomberg L.P. for our principal market for the 20 trading
days preceding a conversion date.
In addition, the note holder received Class A share warrants to
purchase shares of common stock based on the following formula:
- 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 and is exercisable until five years after the issue date of
the Class A warrants.
Longview Ownership Limitation.
Under the terms of each of the Longview subscription agreements,
the notes and warrants 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 our common stock on
the conversion date.
Price Adjustment for Longview Warrants.
Under the provisions of the Longview warrants, the exercise
price under each of the warrants was adjusted to $0.15 per share,
effective on June 13, 2006.
Terms of Convertible Preferred Stock.
On February 17, 2006, we consummated a private placement
financing transaction pursuant to a Securities Purchase Agreement
with 7 accredited investors obtained by our placement agent, Divine
Capital Markets, LLC, whereby these investors purchased an aggregate
amount of $250,000 of our Series B 10% convertible preferred stock.
On May 30, 2006, we consummated a private placement financing
transaction pursuant to a Securities Purchase Agreement with
Castellum Investments, S.A. whereby this investor purchased $290,000
of our Series B 10% convertible preferred stock.
Each share of the Series B preferred stock is convertible at a
per share equal to the lesser of:
- 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;
- 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; or
- the face amount per share, which is $1.00.
Terms of Montgomery Convertible Debentures and Warrants.
On June 13, 2006, we entered into and closed on a Securities
Purchase Agreement with Montgomery Equity Partners, LP. Under this
agreement, Montgomery agreed to purchase from us 12% convertible
debentures in the aggregate principal amount of $1,200,000; they will
mature on June 13, 2008. The debentures will be convertible into our
common stock by Montgomery, at its sole option, into a price per
shares of either:
- $0.3155; or
- 80% of the lowest closing bid price of our common stock, for the
5 trading days immediately preceding the conversion date.
In this transaction, Montgomery also received three five-year
warrants, all dated June 13, 2006, to purchase:
- Class A warrant for 800,000 shares of common stock at an
exercise price of $0.15;
- Class B warrant for 800,000 shares at an exercise price of $0.35
per share; and
- Class C warrant for 800,000 shares at an exercise price the
lesser of $0.35 or 80% of the lowest closing bid price of our
common stock per share as reported by Bloomberg L.P. for the 5 trading
days prior to an exercise of the warrant.
These warrants are exercisable on a cash basis provided we are not in
default and the shares underlying the warrants are subject to an
effective registration statement.
Montgomery will not be able to convert the debentures and/or
exercise the warrants into an amount that would result in the
investor beneficially owning in excess of 4.99% of the outstanding
shares of our common stock.
See the "Selling Stockholders" section for a complete description
of the convertible notes, convertible Series B preferred stock, and
convertible debentures. This prospectus relates to the resale of the
common stock underlying the convertible notes, convertible Series B
preferred stock, convertible debentures, and related warrants.
RISK FACTORS
This investment has a high degree of risk. Before you invest you
should carefully consider the risks and uncertainties described below
and the other information in this prospectus. If any of the following
risks actually occur, our business, operating results and financial
condition could be harmed and the value of our stock could go down.
This means you could lose all or a part of your investment.
Risks Relating to Our Business.
We Have a History of Losses That is Likely to Continue, Requiring
Additional Sources of Capital, Which May Result in Curtailing of
Operations and Dilution to Existing Stockholders.
We incurred net losses of $2,118,970 for the three months ended
March 31, 2006, $4,025,012 for the year ended December 31, 2005, and
$4,989,200 for the year ended December 31, 2004. We cannot assure you
that we can achieve or sustain profitability or even generate positive
cash flow in the future. If revenues grow more slowly than
anticipated, or if operating expenses exceed expectations or cannot be
adjusted accordingly, we will continue to incur losses. Our possible
success is dependent upon the successful development and marketing of
our products, as to which there is no assurance. Any future success
that we might enjoy will depend upon many factors, including factors
out of our control or which cannot be predicted at this time. These
factors may include changes in or increased levels of competition,
including the entry of additional competitors and increased success by
existing competitors, changes in general economic conditions,
increases in operating costs, including costs of supplies, personnel
and equipment, reduced margins caused by competitive pressures and
other factors. These conditions may have a materially adverse effect
upon us or may force us to reduce or curtail operations. In addition,
we will require additional funds to sustain and expand our sales and
marketing activities, particularly if a well-financed competitor
emerges. We anticipate that we will require additional funds to
continue operations for the next twelve months. There can be no
assurance that financing will be available in amounts or on terms
acceptable to us, if at all. The inability to obtain sufficient funds
from operations or external sources would require us to curtail or
cease operations. Any additional equity financing may involve
substantial dilution to then existing stockholders.
Our Independent Auditors Have Expressed Substantial Doubt Regarding
Our Ability to Continue as a Going Concern.
In their report dated March 13, 2006, our independent auditors
stated that the financial statements for the years ended December 31,
2005 and 2004 were prepared assuming that we would continue as a
going concern, but the auditor's report raised substantial doubt
about our ability to continue as a business. This is an issue raised
as a result of recurring losses from operations and an accumulated
deficit of $22,784,667 at December 31, 2005 and $24,903,637 at March
31, 2006. Our ability to continue as a going concern is subject to
the ability to generate positive cash flows from operations and/or
obtain necessary financing from outside sources to meet working
capital requirements, including obtaining additional funding from the
sale of our securities, increasing sales or obtaining loans from
various financial institutions where possible. The continued net
losses and stockholders' deficit increases the difficulty in meeting
such goals and there can be no assurances that such methods will
prove successful.
We May Not Be Able to Accommodate Rapid Growth Which Could Decrease
Revenues and Result in a Loss of Customers.
We are currently selling and installing Wi-Fi equipment in
universities and municipalities. To manage anticipated growth, we
must continue to implement and improve our operational, financial and
management information systems. We must also hire, train and retain
additional qualified personnel, continue to expand and upgrade core
technologies, and effectively manage our relationships with end users,
suppliers and other third parties. Our expansion could place a
significant strain on our current services and support operations,
sales and administrative personnel, capital and other resources. We
could also experience difficulties meeting demand for our products.
We cannot guaranty that our systems, procedures or controls will be
adequate to support operations, or that management will be capable of
fully exploiting the market. Our failure to effectively manage growth
could adversely affect our business, financial condition and results
of operations.
Our Customers Require a High Degree of Reliability in Equipment and If
5G Wireless Cannot Meet Their Expectations, Demand for Our Products
May Decline.
Any failure to provide reliable equipment for our customers,
whether or not caused by the failure of our equipment or by
deficiencies in the customers' operation of the equipment, could
reduce demand for our products. Because we have only recently begun
to place customers on our Wi-Fi systems, we do not have sufficient
experience to be able to effectively gauging, predict and manage
negative customer response.
Our Dependence on Outside Suppliers May Affect Our Ability to Conduct
Business.
We depend on a number of outside suppliers for components of our
products. There is an inherent risk that certain components of our
products will be unavailable for prompt delivery or, in some cases,
discontinued or only available at substantially higher costs. Due to
the current political crisis in the Middle East and corresponding
predicted continued increase in energy costs, the price of production
and transportation of goods is likely to dramatically increase, thus
increasing supply price. If such supply price increases occur, we
will either suffer from decrease in margins or be required to raise
our prices, which could compromise demand. We have only 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 us to develop alternative designs using other components, which
could add to the cost of goods sold and compromise delivery
commitments. If we are 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 our
devices. In such an instance, we would not be able to manufacture any
devices for a period of time, which could materially adversely affect
our business, results from operations, and financial condition.
We Face Strong Competition in Our Market, Which Could Make It
Difficult for Us to Generate Income.
The market for wireless products is highly competitive. Our
future success will depend on our ability to adapt to rapidly
changing technologies, evolving industry standards, product offerings
and evolving demands of the marketplace. We compete for customers
primarily with facilities-based carriers, as well as with other non-
facilities-based network operators. Some of our competitors have
substantially greater resources, larger customer bases, longer
operating histories and greater name recognition than we have:
- Some of our competitors provide functionalities that 5G Wireless
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.
- Our products face competitors with greater amounts of financing
than we have. We may not be able to compete effectively with all
of these competitors due to lack of resources for effective
production and ancillary activities such as marketing and
management.
In addition, our competitors may also be better positioned to
address technological and market developments or may react more
favorably to technological changes. We compete 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 us. If we fail to gain market
share or loses existing market share, our financial condition,
operating results and business could be adversely affected and the
value of an investment in us could be reduced significantly. We may
not have the financial resources, technical expertise, marketing, and
distribution or support capabilities to compete successfully.
Uncertain Demand for Our Equipment May Cause Revenues to Fall Short of
Expectations and Expenses to Be Higher Than Forecast If We Need to
Incur More Marketing Costs.
We are unable to forecast revenues with reliability because of
the unknown demand from consumers for our equipment and the emerging
nature of the Wi-Fi industry. We are in the process of refining our
marketing plans 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 our 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 we need to achieve a profitable level of operations.
We Could Fail to Develop New Products to Compete In an Industry of
Rapidly Changing Technology, Resulting In Decreased Revenue.
We operate in an industry with rapidly changing technology, and
our 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. Our technology or systems may become
obsolete upon the introduction of alternative technologies. If we do
not develop and introduce new products in a timely manner, we may lose
opportunities to competing service providers, which would adversely
affect our business and results of operations.
There is a risk to us 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 our new product
introductions, and the desire by customers to evaluate new products
for longer periods of time. Also, we do 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.
Our Ability to Grow Is Directly Tied to Our Ability to Attract and
Retain Customers, Which Could Result In Reduced Income.
We have no way of predicting whether our 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 our marketing
efforts fail, it may fail to attract new customers and fail to retain
existing ones, which would adversely affect business and financial results.
Government Regulation May Affect Our Ability to Conduct Business.
Internet-based communication equipment makers generally are not
subject to federal fees or taxes imposed to support programs such as
universal telephone service. Changes in the rules or regulations of
the Federal Communications Commission or in applicable federal
communications laws relating to the imposition of these fees or taxes
could result in significant new operating expenses for us, and could
negatively impact our business. Any new law or regulation, U.S. or
foreign, pertaining to Internet-based communications products, or
changes to the application or interpretation of existing laws, could
decrease the demand for our products, increase our cost of doing
business or otherwise harm our business. There are an increasing
number of laws and regulations pertaining to the Internet. These laws
or regulations may relate to taxation and the quality of products.
Furthermore, the applicability to the Internet of existing laws
governing intellectual property ownership and infringement, taxation,
encryption, obscenity, libel, employment, personal privacy, export or
import matters and other issues is uncertain and developing and we are
not certain how the possible application of these laws may affect us.
Some of these laws may not contemplate or address the unique issues of
the Internet and related technologies. Changes in laws intended to
address these issues could create uncertainty in the Internet market,
which could reduce demand for our products, increase our operating
expenses or increase our litigation costs.
Our 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 we are not aware of any policy changes planned or
expected, there can be no assurances that government policy will not
change. The manner in which legislation may be enacted and enforced
cannot be precisely determined and may subject either us or our
customers to potential liability, which in turn could have an adverse
effect on our business, results of operations and financial condition.
Interference on License Free Bands May Affect Our Equipment and Sales.
License-free operation of our products in the 2.4 GHz and 5 GHz
bands are subordinate to certain licensed and unlicensed uses of the
bands and our products must not cause harmful interference to other
equipment operating in the bands and must accept interference from
any of them. If we are unable to eliminate any such harmful
interference, or should our products be unable to accept interference
caused by others, we and our customers could be required to cease
operations in the bands in the locations affected by the harmful
interference.
Protection of Proprietary Rights May Affect Our Success and Ability
to Compete.
Our intellectual property combines hardware design and
modifications to the radio frequency software that enables us to
extend range and throughputs. We plan to maintain this intellectual
by limiting individuals within the organization from having access to
these codes and will not allow any third party to have access to the
base codes or hardware configurations.
Our success and ability to compete will be dependent in part on
the protection of our trade name (WiFi Hot Zone), and other
proprietary rights. We intend to rely on trade secret and copyright
laws to protect the intellectual property that we have developed, but
there can be no assurance that such laws will provide sufficient
protection to us, that others will not develop products that are
similar or superior to ours, or that third parties will not copy or
otherwise obtain and use our proprietary information without
authorization.
We may rely on certain intellectual property licensed from third
parties, and may be required to license additional products or
services in the future, for use in the general operations of our
business plan. There can be no assurance that these third party
licenses will be available or will continue to be available to us on
acceptable terms or at all. The inability to enter into and maintain
any of these licenses could have a material adverse effect on our
business, financial condition or operating results.
There is a risk that some of our products may infringe the
proprietary rights of third parties. In addition, whether or not our
products infringe on proprietary rights of third parties, infringement
or invalidity claims may be asserted or prosecuted against it and it
could incur significant expense in defending them. If any claims or
actions are asserted against us, we may be required to modify our
products or seek licenses for these intellectual property rights. We
may not be able to modify our products or obtain licenses on
commercially reasonable terms, in a timely manner or at all. Our
failure to do so could have a negative affect on its business and revenues.
Selling in the International Market May Affect Our Ability to Conduct Business.
During fiscal 2006 to date, approximately 28% of our sales have
come from the international market. We intend to expand sales
internationally in the future. Because of the our involvement in
foreign markets, we are subject to the risks inherent in conducting
business across international borders, including, but not limited to,
currency exchange rate fluctuations, international incidents,
military outbreaks, economic downturns, government instability,
nationalization of foreign assets, government protectionism and
changes in governmental policy, any of which could have a material
adverse effect on our business, operations and prospects for the future.
We May Not Have Been in Compliance with Certain Provisions of the
Investment Company Act of 1940 When We Operated as a Business
Development Company.
On October 20, 2005, our stockholders approved the termination
of our status as a business development company under the Investment
Company Act of 1940 and the filing of a Form N-54C with the
Securities and Exchange Commission, and the filing of a new
registration statement. Based on this approval, on October 21, 2005,
5G Wireless filed a Form N-54C with the Securities and Exchange Commission.
We previously operated as a business development company,
starting on October 19, 2004. Our management has conducted a review
of our compliance with the Investment Company Act of 1940 and the
following are areas that we believes we may not have been in
compliance with while it was operating as a business development company:
- Section 61 of the Investment Company Act of 1940 requires that
a business development company maintain a ratio of assets to
senior securities of at least 200%.
- Prior to the election to become a business development company,
we entered certain convertible notes and warrants agreements,
dated September 22, 2004. These agreements and those signed on
March 22, 2005, which increased the total convertible notes by
$1,000,000 (to a total of $2,000,000), and on July 19, 2005 by
an additional $300,000, contained provisions for conversion into
our common stock based on 75% of the average of the five lowest
closing bid prices of the common stock as reported by Bloomberg
L.P. for the principal market for the 90 trading days preceding
a conversion date. We believe that the existence of the
convertible notes on October 19, 2004 may not be in compliance
with the capital structure rules set forth in Section 61(a) of
the Investment Company Act of 1940 since it allowed for
conversion at below market prices. We also believe that the
convertible notes entered into after the business development
company election date may not have been in compliance with
Section 61(a) for the same reason.
- We filed a Form 1-E (Notification Under Regulation E) with the
Securities and Exchange Commission for the shares issuable to
the Longview funds pursuant to the conversion rights under debt
agreements. In this Form 1-E, it estimated that legal costs in
connection with the offering would be $30,000. As disclosed in
a Form 2-E (Report of Sales Pursuant to Rule 609 Under
Regulation E) filed with the Securities and Exchange Commission,
we had incurred legal and other expenses of approximately
$625,000 in cash in connection with this offering, of which a
total of $145,000 was direct legal cost associated with the
offering and approximately $480,000 in associated legal cost
relating to the organizational costs associated with becoming a
business development company. Since we may not have been in
compliance with certain provisions of the Investment Company Act
of 1940 from October 19, 2004 to October 21, 2005, then the
shares issued to the Longview funds under the Form 1-E may not
have been issued pursuant to a valid exemption from the
registration requirements of Section 5 of the Securities Act of 1933.
- It is a requirement of Section 56 of the Investment Company Act
of 1940 to have a majority of board members be non-interested
persons. From October 19, 2004 until June 27, 2005 (when two of
our directors relinquished their interest in Redwood Grove
Capital Management, LLC, the management company for the Longview
Equity Fund, L.P. and the Longview International Equity Fund,
L.P.), we may not have had the requisite majority of non-
interested persons as directors and therefore we may not have
complied with this section. Therefore, the actions taken by our
board of directors for such period may not be valid under the
Investment Company Act of 1940 .
- 5G Wireless believes that as of October 19, 2004, the Series A
preferred stock issued on October 6, 2004 may not have been in
compliance with Section 61(a) of the Investment Company Act of
1940. In addition, we believe that we may not be in compliance
with Section 63 of the Investment Company Act of 1940 since it
was issued for services.
- On December 31, 2004, we transferred the assets, employees, and
all related contracts and agreements from 5G Wireless
Communications, Inc. to 5G Wireless Solutions, Inc., a portfolio
company. As part of our obligations, we issued restricted
common shares to two executive officers for the accrued portion
of salaries for the fourth quarter of fiscal 2004. 5G Wireless
has since received the shares, totaling 20,244, issued to Jerry
Dix and Don Boudewyn, our chief executive officer and executive
vice president, respectively, which have been cancelled (the
value of the shares has been reflected as a liability so as to
comply with the Investment Company Act of 1940).
There is a risk that the Securities and Exchange Commission could
take enforcement action against us if the Securities and Exchange
Commission determines that we have not been in compliance with the
Investment Company Act of 1940.
Our Success Is Largely Dependent on the Abilities of Our Management.
Our success is largely dependent on the personal efforts
and abilities of our senior management, none of which currently have
an employment agreement with us. The loss of certain members of our
senior management, including our chief executive officer, could have
a material adverse effect on our business and prospects.
We intend to recruit in fiscal year 2006 employees who are
skilled in our industry. The failure to retain senior management or
to recruit new key personnel could have a material adverse effect on
our business. As a result, we may experience increased compensation
costs that may not be offset through either improved productivity or
higher revenue. There can be no assurances that we will be
successful in retaining existing personnel or in attracting and
recruiting experienced qualified personnel.
Any Required Expenditures by Us as a Result of Indemnification Will
Result in an Increase in Our Expenses.
Our bylaws include provisions to the effect that we 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 our 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 us in covering any
liability of such persons or in indemnifying them.
Our Internal Controls Over Financial Reporting Have Inherent
Limitations.
We maintain internal controls over financial reporting. 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 our
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.
Risks Relating to the Financing Arrangements.
Conversion Price Feature of Notes, Preferred Stock, and Debentures
May Encourage Short Sales in Our Common Stock.
The total of $3,300,000 in convertible notes issued to Longview
Fund, LP, Longview Equity Fund, LP, and Longview International Equity
Fund, LP are convertible into shares of our common stock. The
conversion formula is at the lesser of:
- 75% of the average of the five lowest closing bid prices of our
common stock as reported by the Over the Counter Bulletin Board
for the 90 trading days preceding the conversion date; or
- $17.50 or $3.50 (depending on the particular note).
The $69,000 convertible notes issued to Longview Fund, LP are
convertible into shares of our common stock. The conversion formula
is at the lesser of:
- $0.50; or
- 50% of the lowest five day weighted average volume price of the
common stock using the volume weighted average price as reported
by Bloomberg L.P. for our principal market for the 20 trading
days preceding a conversion date.
The Series B preferred stock sold in February 2006 and May 2006
is convertible into shares of our common stock at a conversion price
equal to the lesser of:
- 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;
- 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; or
- the face amount per share, which is $1.00.
The convertible debentures issued to Montgomery Equity Partners,
LP are convertible into our common stock by Montgomery, at its sole
option, into a price per shares of either:
- $0.3155; or
- 80% of the lowest closing bid price of our common stock, for the
5 trading days immediately preceding the conversion date.
The downward pressure on the price of the common stock as the
selling stockholders under both these financings convert and sell
amounts of common stock could encourage short sales by investors.
This could place further downward pressure on the price of the common
stock. The selling stockholders could sell common stock into the
market in anticipation of covering the short sale by converting their
securities, which could cause the further downward pressure on the
stock price. In addition, not only the sale of shares issued upon
conversion or exercise of notes and warrants, and Series B preferred
stock, but also the mere perception that these sales could occur, may
adversely affect the market price of the common stock.
Issuance of Shares upon Conversion of Notes, Series B Preferred
Stock, and Debentures May Cause Substantial Dilution to Existing
Stockholders.
Longview Convertible Notes.
Our obligation to issue shares to Longview upon conversion of the
convertible notes is essentially limitless. At 75% of the closing
price of $0.30 as of July 20, 2006 ($0.225), the $2,515,381 in
principal amount of notes outstanding (except for the last $69,000 in
notes) would be convertible into 11,179,471 shares of common stock.
The following is an example of the amount of shares of our common
stock that would be issuable upon conversion of the convertible notes
(excluding accrued interest), based on market prices 25%, 50% and 75%
below the closing price as of July 20, 2006 of $0.30 per share:
Price Per With Discount at Issuable % of Outstanding
% Below Market Share 25% Shares Stock (1)
25% $0.225 0.169 14,905,961 67.25%
50% $0.150 0.113 22,358,942 75.49%
75% $0.075 0.056 44,717,884 86.03%
(1) After the outstanding shares of 7,258,573 as of July 26, 2006 are
added to the shares issued.
Our obligation to issue shares to Longview Fund, LP upon
conversion of the $69,000 in convertible notes is essentially
limitless. At 50% of the closing price of $0.30 as of July 20, 2006
($0.15), the $69,000 in principal amount of notes outstanding would be
convertible into 460,000 shares of common stock. The following is an
example of the amount of shares of our common stock that would be
issuable upon conversion of the convertible debentures (excluding
accrued interest), based on market prices 25%, 50% and 75% below the
closing price as of July 20, 2006 of $0.30 per share:
Price Per With Discount at Issuable % of Outstanding
% Below Market Share 50% Shares Stock (1)
25% $0.225 0.113 613,333 7.79%
50% $0.150 0.075 920,000 11.25%
75% $0.075 0.038 1,840,000 20.22%
(1) After the outstanding shares of 7,258,573 as of July 26, 2006 are
added to the shares issued.
As illustrated, the number of shares of common stock issuable upon
conversion of the convertible notes will increase if the market price
of the stock declines, which may cause dilution to the existing
stockholders.
Series B Convertible Preferred Stock.
Our obligation to issue shares to the Divine investors upon
conversion of the Series B preferred stock is essentially limitless.
At 75% of the closing price of $0.30 as of July 20, 2006 ($0.225), the
$250,000 in principal amount Series B preferred stock would be
convertible into an aggregate 1,111,111 shares of common stock. The
following is an example of the amount of shares of our common stock
that would be issuable upon conversion of the Series B preferred stock
(excluding accrued interest), based on market prices 25%, 50% and 75%
below the closing price as of July 20, 2006 of $0.30 per share:
Price Per With Discount at Issuable % of Outstanding
% Below Market Share 25% Shares Stock (1)
25% $0.225 0.169 1,481,481 16.95%
50% $0.150 0.113 2,222,222 23.44%
75% $0.075 0.056 4,444,444 37.98%
(1) After the outstanding shares of 7,258,573 as of July 26, 2006 are
added to the shares issued.
Our obligation to issue shares to Castellum upon conversion of
the Series B preferred stock is essentially limitless. At 75% of the
closing price of $0.30 as of July 20, 2006 ($0.225), the $290,000 in
principal amount Series B preferred stock would be convertible into
1,288,889 shares of common stock. The following is an example of the
amount of shares of our common stock that would be issuable upon
conversion of the Series B preferred stock (excluding accrued
interest), based on market prices 25%, 50% and 75% below the closing
price as of July 20, 2006 of $0.30 per share:
Price Per With Discount at Issuable % of Outstanding
% Below Market Share 25% Shares Stock (1)
25% $0.225 0.169 1,718,519 19.14%
50% $0.150 0.113 2,577,778 26.21%
75% $0.075 0.056 5,155,556 41.53%
(1) After the outstanding shares of 7,258,573 as of July 26, 2006 are
added to the shares issued.
As illustrated, the number of shares of common stock issuable upon
conversion of the Series B preferred stock will increase if the
market price of the stock declines, which may cause dilution to the
existing stockholders.
Montgomery Convertible Debentures.
Our obligation to issue shares to Montgomery upon conversion of
the convertible debentures is essentially limitless. At 80% of the
closing price of $0.30 as of July 20, 2006 ($0.24), the $1,200,000 in
principal amount of debentures that will be outstanding would be
convertible into 5,000,000 shares of common stock. The following is
an example of the amount of shares of our common stock that would be
issuable upon conversion of the convertible debentures (excluding
accrued interest), based on market prices 25%, 50% and 75% below the
closing price as of July 20, 2006 of $0.30 per share:
Price Per With Discount at Issuable % of Outstanding
% Below Market Share 20% Shares Stock (1)
25% $0.225 0.180 6,666,667 47.87%
50% $0.150 0.120 10,000,000 57.94%
75% $0.075 0.060 20,000,000 73.37%
(1) After the outstanding shares of 7,258,573 as of July 26, 2006 are
added to the shares issued.
As illustrated, the number of shares of common stock issuable upon
conversion of the convertible debentures will increase if the market
price of the stock declines, which may cause dilution to the existing
stockholders.
Repayment of Notes and Debentures, If Required, Would Deplete
Available Capital, or Could Result in Legal Action if Not Repaid.
We anticipate that over time the full amount of the convertible
notes and debentures, together with accrued interest, will be
converted into shares of our common stock, in accordance with the
terms of the convertible notes and debentures. If we are required to
repay the convertible notes or debentures, we would be required to
use our limited working capital and/or raise additional funds. If we
were unable to repay the notes and/or debentures when required, the
note or debenture holders could commence legal action against us and
foreclose on assets to recover the amounts due. Any such action may
require us to curtail or cease operations.
We are in Technical Default Under the Longview Convertible Notes.
If we are unable to issue shares of common stock upon conversion
of the Longview convertible notes as a result of any reason, we are
required to (under provisions of the subscription agreements):
- Pay late payment fees (as liquidated damages and not as a
penalty) to the subscriber in the amount of $100 per business
day after the delivery date for each $10,000 of purchase price
of the unlegended shares subject to the delivery default. If
during any 360 day period, we fail to deliver unlegended shares
for an aggregate of 30 days, then each subscriber may, at its
option, require us to redeem all or any portion of the shares
and warrant shares subject to such default at a price per share
equal to 120% of the purchase price of such common stock and
warrant shares.
- If we fail to deliver to a subscriber unlegended shares as
required, within 7 business days after the unlegended shares
delivery date and the subscriber purchases (in an open market
transaction or otherwise) shares of common stock to deliver in
satisfaction of a sale by such subscriber of the shares of
common stock which the subscriber was entitled to receive from
us (a "Buy-In"), then we will pay in cash to the subscriber the
amount by which the subscriber's total purchase price (including
brokerage commissions, if any) for the shares of common stock so
purchased exceeds the aggregate purchase price of the shares of
common stock delivered to us for reissuance as unlegended
shares, together with interest thereon at a rate of 15% per
annum, accruing until such amount and any accrued interest
thereon is paid in full (which amount shall be paid as
liquidated damages and not as a penalty).
Pursuant to the terms of the $3,300,000 in convertible notes
entered into between us and the Longview fund, the shares that serve
as collateral for the notes must be registered. The filing of the
Form N-54C that de-elected our status as a business development
company also terminated the Regulation E exemption from registration
that covered the shares serving as collateral for the notes. Under
the terms of the notes, we are in technical default on the notes. We
have been in discussions with the Longview funds and have obtained
their verbal commitments that they we not be declared in default.
We are, however, 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 unconverted notes
aggregated to $2,661,004. The subject registration statement, when
it becomes effective, will provide such coverage for the securities
in question. Until such time as the registration statement has been
made effective, 5G Wireless will incur $53,220 in liquidated damage
penalties per month. We have accrued $264,601 in liquidated damages,
which is included in other liabilities in the accompanying condensed
balance sheet at March 31, 2006.
Risks Relating to Our Common Stock.
Our Common Stock Price May Be Volatile.
The trading price of our common stock may fluctuate
substantially. The price of the common stock may be higher or lower
than the price you pay for your shares, depending on many factors,
some of which are beyond our control and may not be directly related
to our operating performance. These factors include the following:
- price and volume fluctuations in the overall stock market from
time to time;
- significant volatility in the market price and trading volume of
securities of companies in the same business as us;
- changes in regulatory policies with respect to our business;
- actual or anticipated changes in earnings or fluctuations in
operating results;
- general economic conditions and trends;
- loss of a major funding source; or
- departures of key personnel.
Due to the continued potential volatility of our common stock
price, we may be the target of securities litigation in the future.
Securities litigation could result in substantial costs and divert
management's attention and resources from our business.
Absence of Cash Dividends May Affect Investment Value of Our Common
Stock.
Our board of directors does not anticipate paying cash dividends
on our common stock for the foreseeable future and intend to retain
any future earnings to finance the growth of our business. Payment
of dividends, if any, will depend, among other factors, on earnings,
capital requirements and our general operating and financial
condition, as well as legal limitations on the payment of dividends
out of paid-in capital.
No Assurance of Public Trading Market and Risk of Low Priced
Securities May Affect the Value of Our Common Stock.
The Securities and Exchange Commission has adopted a number of
rules to regulate "penny stocks." Such rules include Rule 3a51-1 and
Rules 15g-1 through 15g-9 under the Securities Exchange Act of 1934.
Because our securities may constitute "penny stocks" within the
meaning of the rules (as any equity security that has a market price
of less than $5.00 per share or with an exercise price of less than
$5.00 per share, largely traded in the Over the Counter Bulletin Board
or the Pink Sheets), the rules would apply to us and to our securities.
The Securities and Exchange Commission has adopted Rule 15g-
9 which established sales practice requirements for certain low price
securities. Unless the transaction is exempt, it shall be unlawful
for a broker or dealer to sell a penny stock to, or to effect the
purchase of a penny stock by, any person unless prior to the transaction:
- the broker or dealer has approved the person's account for
transactions in penny stock pursuant to this rule; and
- the broker or dealer has received from the person a written
agreement to the transaction setting forth the identity and
quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny
stock, the broker or dealer must:
- obtain from the person information concerning the person's
financial situation, investment experience, and investment
objectives;
- reasonably determine that transactions in penny stock are
suitable for that person, and that the person has sufficient
knowledge and experience in financial matters that the person
reasonably may be expected to be capable of evaluating the risks
of transactions in penny stock;
- deliver to the person a written statement setting forth the basis
on which the broker or dealer made the determination stating in a
highlighted format that it is unlawful for the broker or dealer
to affect a transaction in penny stock unless the broker or
dealer has received, prior to the transaction, a written
agreement to the transaction from the person, stating in a
highlighted format immediately preceding the customer signature
line that the broker or dealer is required to provide the person
with the written statement, and the person should not sign and
return the written statement to the broker or dealer if it does
not accurately reflect the person's financial situation,
investment experience, and investment objectives; and
- receive from the person a manually signed and dated copy of the
written statement.
It is also required that disclosure be made as to the risks of
investing in penny stock and the commissions payable to the broker-
dealer, as well as current price quotations and the remedies and
rights available in cases of fraud in penny stock transactions.
Statements, on a monthly basis, must be sent to the investor listing
recent prices for the penny stock and information on the limited market.
There has been only a limited public market for our common
stock. Our common stock is currently traded on the Over the Counter
Bulletin Board. As a result, an investor may find it difficult to
dispose of, or to obtain accurate quotations as to the market value
of our securities. The regulations governing penny stocks, as set
forth above, sometimes limit the ability of broker-dealers to sell
our common stock and thus, ultimately, the ability of the investors
to sell their securities in the secondary market.
Potential stockholders of us should also be aware that, according
to Securities and Exchange Commission Release No. 34-29093, the market
for penny stocks has suffered in recent years from patterns of fraud
and abuse. Such patterns include:
- control of the market for the security by one or a few broker-
dealers that are often related to the promoter or issuer;
- manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases;
- "boiler room" practices involving high-pressure sales tactics and
unrealistic price projections by inexperienced sales persons;
- excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and
- the wholesale dumping of the same securities by promoters and
broker dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those
prices and with consequent investor losses.
Failure to Remain Current in Reporting Requirements Could Result in
Our Delisting from the Over The Counter Bulletin Board.
Companies trading on the Over the Counter Bulletin Board, such as
us, must be reporting issuers under Section 12 of the Exchange Act,
and must be current in their reports under Section 13, in order to
maintain price quotation privileges on the Over the Counter Bulletin
Board. If we fail to remain current in our reporting requirements, 5G
Wireless could be delisted from the Over the Counter Bulletin Board.
In addition, the National Association of Securities Dealers,
Inc., which operates the Over the Counter Bulletin Board, has adopted
a change to its Eligibility Rule. This change makes those Over the
Counter Bulletin Board issuers that are cited for filing delinquency
in their Form 10-K or Form 10-Q three times in a 24-month period and
those Over the Counter Bulletin Board issuers removed for failure to
file such reports two times in a 24-month period ineligible for
quotation on the Over the Counter Bulletin Board for a period of one
year. Under this proposed rule, a company filing with the extension
time set forth in a Notice of Late Filing (Form 12b-25) is not
considered late. This rule does not apply to a company's Current
Reports on Form 8-K (but failure to timely file a Form 8-K can have
other ramifications for us).
As a result of these rules, the market liquidity for our
securities could be severely adversely affected by limiting the
ability of broker-dealers to sell our securities and the ability of
stockholders to sell their securities in the secondary market.
Failure to Maintain Market Makers May Affect Value of Our Common Stock.
If we are unable to maintain a National Association of
Securities Dealers, Inc. member broker/dealers as market makers, the
liquidity of our common stock could be impaired, not only in the
number of shares of common stock which could be bought and sold, but
also through possible delays in the timing of transactions, and lower
prices for the common stock than might otherwise prevail.
Furthermore, the lack of market makers could result in persons being
unable to buy or sell shares of the common stock on any secondary
market. There can be no assurance we will be able to maintain such
market makers.
Shares Eligible For Future Sale May Affect Market Price of Our Common
Stock.
All of the shares currently held by management have been issued
in reliance on the private placement exemption under the Securities
Act of 1933. Such shares will not be available for sale in the open
market without separate registration except in reliance upon Rule 144
under the Securities Act of 1933. In general, under Rule 144 a
person (or persons whose shares are aggregated) who has beneficially
owned shares acquired in a non-public transaction for at least one
year, including persons who may be deemed affiliates of us (as that
term is defined under that rule) would be entitled to sell within any
three-month period a number of shares that does not exceed 1% of the
then outstanding shares of common stock, provided that certain
current public information is then available. If a substantial
number of the shares owned by these stockholders were sold pursuant
to Rule 144 or a registered offering, the market price of the common
stock at that time could be adversely affected.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may
be offered and sold from time to time by the selling stockholders.
We will not receive proceeds from the sale of shares of common stock
in this offering. However, we will receive the sale price of any
common stock that we sell to the selling stockholders upon exercise
of the warrants in an amount of up to $825,813 (based up the closing
price of $0.30 as of July 20, 2006), and have already received an
aggregate $4,500,000 in connection with the issuance of the
convertible notes, debentures, and preferred stock to the selling
stockholders. We expect to use the proceeds to be received from the
exercise of the warrants and from these notes, if any, for general
working capital purposes.
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of
the shares of common stock by the selling stockholders. To our
knowledge, the selling stockholders do not own any shares of our
common stock, except as set forth below. Therefore, assuming all the
shares registered below are sold by the selling stockholders, the
selling stockholders will not own any shares of our common stock.
The following table also sets forth the name of each person who
is offering the resale of shares of common stock by this prospectus,
the number of shares of common stock beneficially owned by each
person, the number of shares of common stock that may be sold in this
offering and the number of shares of common stock each person will
own after the offering, assuming they sell all of the shares offered:
Name (4) Total Total Shares of Beneficial Percentage Beneficial Percentage
Shares of Percentage Common Ownership of Ownership of
Common of Common Stock Before the Common After the Common
Stock Stock Included Offering (2) Stock Offering (3) Stock
Issuable Assuming in Ownership Owned
Upon Full Prospectus Before the After the
Conversion Conversion (1) Offering (2) Offering (3)
of Notes,
Debentures,
Warrants
and
Preferred
Stock (1)
Longview
Fund, LP 4,697,153 (5) 39.29% 5,052,709 (5) 588,553 4.99% - 0.00%
Longview Equity
Fund, LP 6,019,445 (6) 45.33% 6,514,683 (6) 775,707 4.99% - 0.00%
Longview
International
Equity
Fund, LP 2,428,295 (7) 25.07% 2,593,374 (7) - 0.00%
Kenneth E.
Rogers 155,555 (8) 2.10% 155,555 155,555 2.10% - 0.00%
Irwin L.
Rogers 444,444 (9) 5.77% 444,444 444,444 5.77% - 0.00%
Jon
Cummings
and
Nancy
Cummings 88,889 (10) 1.21% 88,889 88,889 1.21% - 0.00%
Ralph
Glasgal 88,889 (11) 1.21% 88,889 88,889 1.21% - 0.00%
Richard
Blue 66,667 (12) 0.91% 66,667 66,667 0.91% - 0.00%
Robert B.
Sauter 222,222 (13) 2.97% 222,222 222,222 2.97% - 0.00%
Raymond
E. Fink 44,444 (14) 0.61% 44,444 44,444 0.61% - 0.00%
Castellum
Investments,
S.A. 1,288,889 (15) 15.08% 1,288,889 1,288,889 15.08% - 0.00%
Montgomery
Equity
Partners, LP 7,460,852 (16) 50.69% 21,478,285 (10) 726,461 4.99% - 0.00%
Thomas Janes 21,333 21,333 0.29% - 0.00%
Russell Janes 21,333 21,333 0.29% - 0.00%
Production
Partners,
Ltd. (17) 35,200 35,200 0.48% - 0.00%
Jason Meyers 125,000 125,000 1.72% - 0.00%
Al Lang 239,499 239,499 3.30% - 0.00%
(1) Includes a good faith estimate of the shares issuable upon
conversion of the convertible notes, debentures and Series B
preferred stock, and exercise of warrants, based on the closing
market price of $0.30 as of July 20, 2006. Because the number of
shares of common stock issuable upon conversion of the convertible
notes, debentures, and Series B preferred stock is dependent upon the
market price of the common stock prior to a conversion, the actual
number of shares of common stock that will be issued upon conversion
will fluctuate daily and cannot be determined at this time. The
actual number of shares of common stock offered in this prospectus,
and included in the registration statement of which this prospectus
is a part, includes such additional number of shares of common stock
as may be issued or issuable upon conversion of the convertible notes
and debentures, and exercise of the related warrants, by reason of
any stock split, stock dividend or similar transaction involving the
common stock, in accordance with Rule 416 under the Securities Act of
1933. The percentages in the second column are calculated on an
individual basis for each of the selling stockholders and not a
collective basis.
(2) The number and percentage of shares beneficially owned is
determined in accordance with Rule 13d-3 of the Securities Exchange
Act of 1934, and the Instructions to Item 403 of Regulation S-B, and
the information is not necessarily indicative of beneficial ownership
for any other purpose. Under such rule, beneficial ownership
includes any shares as to which the selling stockholders have sole or
shared voting power or investment power and also any shares, and
which the selling stockholders have the right to acquire within 60
days. The actual number of shares of common stock issuable upon the
conversion of the convertible notes is subject to adjustment
depending on, among other factors, the future market price of the
common stock, and could be materially less or more than the number
estimated in the table. The percentage amounts are based on our
issued and outstanding shares of 7,258,573 as of July 26, 2006.
Longview Fund, LP, Longview Equity Fund, LP, Longview International
Equity Fund, LP, and Montgomery Equity Partners, LP have
contractually agreed to restrict their ability to convert their
convertible notes or debentures, or exercise their warrants, and
receive shares of common stock such that the number of shares of
common stock held by it in the aggregate and its affiliates after
such conversion or exercise does not exceed 4.99% of the then issued
and outstanding shares of common stock as determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934.
Accordingly, the number of shares of common stock set forth in the
table for these selling stockholders exceeds the number of shares of
common stock that these selling stockholders could own beneficially
at any given time through their ownership of the convertible notes,
debentures and warrants. Since Longview Equity Fund, LP and Longview
International Equity Fund, LP may be deemed to be under common
control (see Notes (6) and (7) below), the 4.99% limit applies to
their combined holdings.
(3) Assumes all of the shares offered under this offering are sold.
(4) The selling stockholders are unaffiliated third parties (except
for Thomas Janes, and Russell Janes, who are the father-in-law and
brother-in-law, respectively, of Don Boudewyn, our executive vice
president).
(5) Includes 4,043,251 shares of common stock underlying convertible
notes (remaining principal amount of $875,232), and 653,902 shares of
common stock remaining to be issued upon the exercise of common stock
purchase warrants (exercisable at $0.15 per share). The total amount
of shares to be registered includes an additional amount of 355,556
shares as required under the Subscription Agreement as coverage for
the notes. In accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, Viking Asset Management, LLC may be deemed a
control person of the shares owned by this selling stockholder.
(6) Includes 5,381,222 shares of common stock underlying convertible
notes (remaining principal amount of $1,210,775, and 638,223 shares of
common stock remaining to be issued upon the exercise of common stock
purchase warrants (exercisable at $0.15 per share). The total amount
of shares to be registered includes an additional amount of 495,238
shares as required under the Subscription Agreement as coverage for
the notes. In accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, Redwood Grove Management LLC may be deemed a
control person of the shares owned by this selling stockholder.
(7) Includes 2,214,998 shares of common stock underlying convertible
notes (remaining principal amount of $498,375), and 213,297 shares of
common stock remaining to be issued upon the exercise of common stock
purchase warrants (exercisable at $0.15 per share). The total amount
of shares to be registered includes an additional amount of 165,079
shares as required under the Subscription Agreement as coverage for
the notes. In accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, Redwood Grove Management LLC may be deemed a
control person of the shares owned by this selling stockholder.
(8) Represents shares underlying convertible Series B preferred
stock, principal amount of $35,000.
(9) Represents shares underlying convertible Series B preferred
stock, principal amount of $100,000.
(10) Represents shares underlying convertible Series B preferred
stock, principal amount of $20,000.
(11) Represents shares underlying convertible Series B preferred
stock, principal amount of $20,000.
(12) Represents shares underlying convertible Series B preferred
stock, principal amount of $15,000.
(13) Represents shares underlying convertible Series B preferred
stock, principal amount of $50,000.
(14) Represents shares underlying convertible Series B preferred
stock, principal amount of $10,000.
(15) Represents shares underlying convertible Series B preferred
stock, principal amount of $290,000. In accordance with Rule 13d-3
under the Securities Exchange Act of 1934, Thomas Doering may be
deemed a control person of the shares owned by this selling
stockholder.
(16) Includes 5,000,000 shares of common stock underlying convertible
debentures (principal amount of $1,200,000), 2,400,000 shares of
common stock issuable upon the exercise of common stock purchase
warrants (exercisable at either $0.15, $0.35 per share, or the lesser
of $0.35 or 80% of the lowest closing bid price of our common stock
for the 5 trading days prior to exercise of the warrants), and 60,852
shares of restricted common stock paid as fees under the Securities
Purchase Agreement with this selling stockholder. The total amount of
shares to be registered includes an additional amount of 14,017,433
shares as required under the Registration Rights Agreement as coverage
for the debentures. In accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, Yorkville Advisors, LLC, the general
partner of Montgomery, may be deemed a control person of the shares
owned by this selling stockholder.
(17) In accordance with Rule 13d-3 under the Securities Exchange Act
of 1934, Al Lang may be deemed a control person of the shares owned by
this selling stockholder.
Terms of Longview Convertible Notes and Warrants.
$2,000,000 Convertible Notes.
On September 22, 2004, we entered into a subscription agreement
with Longview Fund, LP, Longview Equity Fund, LP, and Longview
International Equity Fund, LP whereby these investors purchased up to
$2,000,000 of principal amount of promissory notes, bearing interest
at 5% per annum (payable upon each conversion, January 1, 2005 and
semi-annually thereafter, and on the maturity date), convertible into
shares of our common stock. The conversion price per share is the
lesser of:
- 75% of the average of the five lowest closing bid prices of our
common stock as reported by the Over the Counter Bulletin Board
for the 90 trading days preceding the conversion date; or
- $17.50.
The conversion formula is subject to a floor of $0.001 per share.
$1,000,000 of promissory notes was purchased on the initial
closing date and the second $1,000,000 of the purchase price was paid
within five business days after the date upon which we were was able
to issue to the subscribers 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, we received the $1,000,000 that was the balance of
the $2,000,000 convertible notes.
The note holders received Class A and Class B share warrants to
purchase shares of common stock based on the following formulas:
- 30 Class A warrants were issued for each 100 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
$4.72 and is exercisable until five years after the issue date of
the Class A warrants.
- 125 Class B warrants 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 and
is exercisable until three years after the issue date of the
Class B warrant.
Warrants were issued in this financing as follows:
Longview
Longview Equity International
Longview Fund, LP Fund, LP Equity Fund Total
Class A Warrants 53,333 74,286 24,762 152,381
Class B Warrants 250,000 348,214 116,071 714,285
Total 303,333 422,500 140,833 866,666
The convertible feature of the $2,000,000 convertible notes
provides for a rate of conversion that is below market value.
Pursuant to Emerging Issues Task Force No. 98-5 and Emerging Issues
Task Force No. 00-27, we have estimated the fair value of such
beneficial conversion feature 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 these notes during the year
ended December 31, 2005 and 2004 approximated $1,300,000 and $404,000,
respectively. Amortization expense during the quarter ended March 31,
2006 approximated $110,000.
$1,000,000 Convertible Notes.
On March 22, 2005, we entered into a subscription agreement with
Longview Fund, LP, Longview Equity Fund, LP, and Longview
International Equity Fund, LP whereby these investors purchased up to
$1,000,000 of principal amount of promissory notes, bearing interest
at prime (as published in The Wall Street Journal) plus 4% per annum
(payable on each conversion commencing on August 1, 2005 and semi-
annually thereafter and on the maturity date), convertible into
shares of our common stock. The conversion price per share is the
lesser of:
- 75% of the average of the five lowest closing bid prices of our
common stock as reported by the Over the Counter Bulletin Board
for the 90 trading days preceding the conversion date; or
- $3.50.
The conversion formula is subject to a floor of $0.001 per share.
The $1,000,000 investment was received by us on March 22, 2005.
The note holders received Class A share warrants to purchase
shares of common stock based on the following formula:
- 30 Class A warrants were issued for each 100 shares 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
$3.50 and is exercisable until 5 years after the issue date of
the Class A warrants.
Warrants were issued in this financing as follows:
Longview
Longview Equity International
Longview Fund, LP Fund, LP Equity Fund Total
Class A Warrants 100,000 139,286 46,429 285,714
The convertible feature of the $1,000,000 convertible notes
provides for a rate of conversion that is below market value.
Pursuant to Emerging Issues Task Force No. 98-5 and Emerging Issues
Task Force No. 00-27, we have estimated the fair value of such
beneficial conversion feature 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 notes. Amortization expense on this note during the year ended
December 31, 2005 approximated $378,000. Amortization expense on
these notes during the quarter ended March 31, 2006 approximated $139,000.
$300,000 Convertible Notes.
On July 22, 2005, we entered into a subscription agreement with
Longview Fund, LP, Longview Equity Fund, LP, and Longview
International Equity Fund, LP whereby these investors purchased up to
$300,000 of principal amount of promissory notes, bearing interest at
prime (as published in The Wall Street Journal) plus 4% per annum
(payable on each conversion commencing on January 1, 2006 and semi-
annually thereafter and on the maturity date), convertible into
shares of our common stock. The conversion price per share is the
lesser of:
- 75% of the average of the five lowest closing bid prices of our
common stock as reported by the Over the Counter Bulletin Board
for the 90 trading days preceding the conversion date; or
- $3.50.
The conversion formula is subject to a floor of $0.001 per share.
The $300,000 investment was received by us on July 22, 2005.
The note holders received Class A share warrants to purchase
shares of common stock based on the following formula:
- 30 Class A warrants were issued for each 100 shares 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.
Warrants were issued in this financing as follows:
Longview
Longview Equity International
Longview Fund, LP Fund, LP Equity Fund Total
Class A Warrants 80,000 111,429 37,143 228,571
The convertible feature of the $300,000 convertible notes
provides for a rate of conversion that is below market value.
Pursuant to Emerging Issues Task Force No. 98-5 and Emerging Issues
Task Force No. 00-27, 5G Wireless has estimated the fair value of
such beneficial conversion feature 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
year ended December 31, 2005 approximated $66,000. Amortization
expense on this note during the quarter ended March 31, 2006
approximated $38,000.
$69,000 Convertible Notes.
On April 5, 2006, we entered into a subscription agreement with
Longview Fund, LP under which this investor will purchase up to
$69,000 in convertible notes bearing interest at 12% per annum,
convertible into our shares of common stock (the total amount of the
notes was changed upon signing from $60,000 to $69,000). The terms of
these notes are two years. The conversion price is equal to the lower of:
- $0.50; or
- 50% of the lowest five day weighted average volume price of the
common stock using the volume weighted average price as reported
by Bloomberg L.P. for our principal market for the 20 trading
days preceding a conversion date.
The note holder received Class A share warrants to purchase
shares of common stock based on the following formula:
- 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 and is exercisable until five years after the issue date of
the Class A warrants.
On this basis, we issued warrants to purchase 216,668 shares of
common stock on April 5, 2006.
The Company has received a total of $69,000 under two promissory
notes under a first and second closing under the terms of the
subscription agreement.
Ownership Limitation in Connection with Longview Notes and Warrants.
Under the terms of each of the subscription agreement, the notes
and the warrants 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 our common stock on the
conversion date.
Registration Rights in Connection with Longview Notes and Warrants.
The Longview notes and warrant agreements contain provisions
whereby the holders of notes and warrants are entitled to demand
registration rights in the event our Regulation E exemption from
registration ceases to be effective. This exemption (evidenced by a
Form 1-E filed when we operated as a business development company),
ceased to be effective on October 22, 2005. Specifically, we must
register with the Securities and Exchange Commission 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, we must file a registration
statement with the Securities and Exchange Commission and within 90
days, it must have such registration statement be effective.
Under the registration rights provisions of each of the
subscription agreements, we provided each of the Longview funds at
least 15 days' prior written notice of our intention to register the
shares underlying the Series B preferred stock and the Montgomery
debentures and warrants.
Delivery of Unlegened Shares to Longview Funds.
If we are unable to issue shares of common stock upon
conversion of the convertible notes as a result of any reason, we are
required to (under provisions of the subscription agreements):
- Pay late payment fees (as liquidated damages and not as a
penalty) to the subscriber in the amount of $100 per business
day after the delivery date for each $10,000 of purchase price
of the unlegended shares subject to the delivery default. If
during any 360 day period, we fail to deliver unlegended shares
for an aggregate of 30 days, then each subscriber may, at its
option, require us to redeem all or any portion of the shares
and warrant shares subject to such default at a price per share
equal to 120% of the purchase price of such common stock and
warrant shares.
- If we fail to deliver to a subscriber unlegended shares as
required, within 7 business days after the unlegended shares
delivery date and the subscriber purchases (in an open market
transaction or otherwise) shares of common stock to deliver in
satisfaction of a sale by such subscriber of the shares of
common stock which the subscriber was entitled to receive from
us (a "Buy-In"), then we will pay in cash to the subscriber the
amount by which the subscriber's total purchase price (including
brokerage commissions, if any) for the shares of common stock so
purchased exceeds the aggregate purchase price of the shares of
common stock delivered to us for reissuance as unlegended
shares, together with interest thereon at a rate of 15% per
annum, accruing until such amount and any accrued interest
thereon is paid in full (which amount shall be paid as
liquidated damages and not as a penalty).
Since we did not comply with the provisions of the registration
rights, as discussed above, we are required to pay liquidated damages
at the rate of 2% per month (based on the Longview notes' principal
balance) until such time as a registration statement is effective.
We have accrued a total of $264,601 in liquidated damages, which is
included in other liabilities in the condensed balance sheet, at
March 31, 2006.
Standstill Agreement in Connection with Longview Notes and Warrants.
As part of the Longview funding arrangement, Jerry Dix and Don
Boudewyn, our chief executive officer and our executive vice
president, respectively, have agreed that for the period of 180 days
after the Second Closing Date during which such registration statement
shall have been current and available for use in connection with the
public resale of the shares and warrant shares, they will not sell or
otherwise dispose of any shares of common stock or any options,
warrants or other rights to purchase shares of common stock or any
other security of us which they own or have a right to acquire, other
than in connection with an offer made to all our stockholders or any
merger, consolidation or similar transaction involving us, or with the
prior written consent of the investors and us, which shall not be
unreasonably withheld.
Price Adjustment of Longview Warrants.
Under the terms of each of the Longview warrants, if we issue
any common stock except for the Excepted Issuances (as defined in the
Subscription Agreement), prior to the complete exercise of each
warrant for a consideration less than the purchase price that would
be in effect at the time of such issue, then, and thereafter
successively upon each such issue, the purchase price is to be
reduced to such other lower issue price. Under this provision in the
warrants, based on the financing transaction with Montgomery Equity
Partners, LP the exercise price under each of the warrants has been
adjusted to $0.15 per share, effective on June 13, 2006.
Right of First Refusal by Longview Funds.
Under provisions in each of the subscription agreements, until
the Longview notes have been fully converted and for so long as
warrants issued remain outstanding the Longview funds are to be given
not less than 5 business days prior written notice of any proposed
sale by us of our common stock or other securities or debt
obligations, except in connection with certain issuances (defined as
"Excepted Issuances" in the subscription agreements). The Longview
funds Subscribers who exercise their rights pursuant to this section
have the right during the 5 business days following receipt of the
notice to purchase such offered common stock, debt or other
securities in accordance with the terms and conditions set forth in
the notice of sale in the same proportion to each other as their
purchase of notes in the offering, but not in excess of each such
funds' portion of the purchase price. Under these provisions, each
of the Longview funds were given notice of the impending sale of the
Series B preferred stock and the Montgomery debenture and warrants.
Classification of Longview Notes Conversion Feature and Warrants.
Pursuant to Emerging Issues Task Force No. 00-19, we evaluated
the Longview conversion feature and warrants at October 22, 2005.
Management determined that due to the nature of the liquidated
damages we must pay (with no maximum prescribed in the agreements),
we must pursue registration as our 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
Emerging Issues Task Force No. 05-04, we account for the liquidated
damages separately from these two other derivative liabilities.
Management estimated the value of the warrants using a Black-
Scholes valuation model. Because the warrants have an exercise price
greater than the trading price of our 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 our outstanding
shares at any time), estimated conversions during the term of the
notes and discounting the cash flows using discount rates of 75%.
Management has established a liability and has estimated the change
in the fair value of the conversion feature between October 2005 and
December 31, 2005 to be $43,218, which is reflected as derivative expense.
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
condensed statements of operations for the three months ended March
31, 2006. 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
our 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 condensed statements of
operations. The fair value of the derivative liability with respect
to the conversion feature totaling $15,330 is included in other
liabilities in the condensed balance sheet at March 31, 2006.
Terms of Convertible Preferred Stock.
On February 17, 2006, we consummated a private placement
financing transaction pursuant to a Securities Purchase Agreement
with 7 accredited investors obtained by our placement agent, Divine
Capital Markets, LLC, whereby these investors purchased an aggregate
amount of $250,000 of our Series B 10% convertible preferred stock.
In connection with the Securities Purchase Agreement, we 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.
On May 30, 2006, we consummated a private placement financing
transaction pursuant to a Securities Purchase Agreement with
Castellum Investments, S.A. whereby this investor purchased $290,000
of our Series B 10% convertible preferred stock of 5G Wireless.
In connection with the Securities Purchase Agreement, we granted
to the investor certain "piggyback" registration rights under a
Registration Rights Agreement, dated May 30, 2006, to the shares to
be issued upon conversion of the preferred stock.
Each share of the Series B preferred stock is convertible at a
per share equal to the lesser of:
- 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;
- 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; or
- the face amount per share, which is $1.00 (subject to adjustment
as appropriate in the event of recapitalizations,
reclassifications stock splits, stock dividends, divisions of
shares and similar events).
The Series B preferred stock does not have a mandatory
redemption date, rather mandatory redemption is based on a contingent
event. Therefore, the Series B preferred stock meets the requirements
for equity classification under Statement of Financial Accounting
Standards No. 150. However, the embedded conversion option contains
a variable conversion rate with no cap. Additionally, all of the
three criteria pursuant to Statement of Financial Accounting
Standards 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 Statement of Financial Accounting Standards
No. 133, with changes in fair value between reporting periods
included in earnings. Accordingly, we 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 we have no retained earnings) for the
offsetting deemed dividend. We then revalued the conversion option
at March 31, 2006 totaling $530,000, which is included in other
liabilities in the 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 condensed statements of operations.
Terms of Montgomery Convertible Debentures and Warrants.
On June 13, 2006, we entered into and closed on a Securities
Purchase Agreement with Montgomery Equity Partners, LP. Under this
agreement, Montgomery agreed to purchase from us 12% convertible
debentures in the aggregate principal amount of $1,200,000; they will
mature on June 13, 2008. The debentures will be convertible from
time to time into our common stock by Montgomery, at its sole option,
into a price per shares of either:
- $0.3155; or
- 80% of the lowest closing bid price of our common stock, for the
5 trading days immediately preceding the conversion date.
Beginning January 15, 2007, we are required to redeem the
debentures at a rate of no less than $69,000 per month of any then
outstanding principal balance plus a redemption premium equal to 20%
of the principal amount being redeemed.
We have an option to redeem a portion or all of the outstanding
principle of the debentures prior to the maturity, upon 3 days
advance written notice, provided that the closing bid price of our
common stock is less than the fixed conversion price at the time of
the redemption notice. In such circumstance, we would be required to
pay an amount equal to the principal amount being redeemed plus a
redemption premium equal to 20% of the principal amount being
redeemed, and accrued interest.
We granted Montgomery a subordinate priority security interest
in certain of our assets pursuant to a Security Agreement, dated June
13, 2006.
We received $600,000 upon closing, will receive another $300,000
one business day prior to the date a registration statement is filed,
and will receive the final $300,000 one business day prior to the
date a registration statement is declared effective by the Securities
and Exchange Commission.
Montgomery will not be able to convert the debentures and/or
exercise the warrants into an amount that would result in the
investor beneficially owning in excess of 4.99% of the outstanding
shares of our common stock. Further, Montgomery agreed to limit its
weekly debenture conversions to no more than $50,000 per week, unless
this provision is waived by us. That limitation becomes void when our
traded weighted dollar volume exceeds $400,000 for the previous week
or the closing bid price of our common stock exceeds $0.4259.
In this transaction, Montgomery also received three five-year
warrants, all dated June 13, 2006, to purchase:
- Class A warrant for 800,000 shares of common stock at an
exercise price of $0.15;
- Class B warrant for 800,000 shares at an exercise price of $0.35
per share; and
- Class C warrant for 800,000 shares at an exercise price the
lesser of $0.35 or 80% of the lowest closing bid price of our
common stock per share as reported by Bloomberg L.P. for the 5
trading days prior to exercise of the warrant.
These warrants are exercisable on a cash basis provided we are not in
default and the shares underlying the warrants are subject to an
effective registration statement.
We have paid to Montgomery 60,852 shares of our common stock as
a loan commitment fee. In addition, we will pay the following under
the Securities Purchase Agreement to Yorkville Advisors LLC (an
affiliate of Montgomery):
- commissions of 10% of the principal amount of the debenture,
which is to be paid proportionally upon each disbursement;
- a structuring fee of $10,000 directly from the initial proceeds;
and
- a non-refundable due diligence fee of $5,000.
In connection with this transaction, we granted to Montgomery
certain demand rights under a registration rights agreement, dated
June 13, 2006, to the shares to be issued upon conversion of the
debentures and the warrants.
The parties also entered into a Pledge and Escrow Agreement,
dated June 13, 2006, under which we agreed to irrevocably pledge to
Montgomery 15,212,982 shares of the our common stock as security.
This stock is to be held by an escrow agent (counsel for Montgomery)
until the payment of all amounts due under the convertible debentures
by repayment in accordance with their terms.
Sample Conversion Calculations.
Longview Convertible Notes.
Our obligation to issue shares to Longview upon conversion of the
convertible notes is essentially limitless. At 75% of the closing
price of $0.30 as of July 20, 2006 ($0.225), the $2,515,381 in
principal amount of notes outstanding (except for the last $69,000 in
notes) would be convertible into 11,179,471 shares of common stock.
The following is an example of the amount of shares of our common
stock that would be issuable upon conversion of the convertible notes
(excluding accrued interest), based on market prices 25%, 50% and 75%
below the closing price as of July 20, 2006 of $0.30 per share:
Price Per With Discount at Issuable % of Outstanding
% Below Market Share 25% Shares Stock (1)
25% $0.225 0.169 14,905,961 67.25%
50% $0.150 0.113 22,358,942 75.49%
75% $0.075 0.056 44,717,884 86.03%
(1) After the outstanding shares of 7,258,573 as of July 26, 2006 are
added to the shares issued.
Our obligation to issue shares to Longview Fund, LP upon
conversion of the $69,000 in convertible notes is essentially
limitless. At 50% of the closing price of $0.30 as of July 20, 2006
($0.15), the $69,000 in principal amount of notes outstanding would be
convertible into 460,000 shares of common stock. The following is an
example of the amount of shares of our common stock that would be
issuable upon conversion of the convertible debentures (excluding
accrued interest), based on market prices 25%, 50% and 75% below the
closing price as of July 20, 2006 of $0.30 per share:
Price Per With Discount at Issuable % of Outstanding
% Below Market Share 50% Shares Stock (1)
25% $0.225 0.113 613,333 7.79%
50% $0.150 0.075 920,000 11.25%
75% $0.075 0.038 1,840,000 20.22%
(1) After the outstanding shares of 7,258,573 as of July 26, 2006 are
added to the shares issued.
As illustrated, the number of shares of common stock issuable upon
conversion of the convertible notes will increase if the market price
of the stock declines, which may cause dilution to the existing
stockholders.
Series B Convertible Preferred Stock.
Our obligation to issue shares to the Divine investors upon
conversion of the Series B preferred stock is essentially limitless.
At 75% of the closing price of $0.30 as of July 20, 2006 ($0.225), the
$250,000 in principal amount Series B preferred stock would be
convertible into an aggregate 1,111,111 shares of common stock. The
following is an example of the amount of shares of our common stock
that would be issuable upon conversion of the Series B preferred stock
(excluding accrued interest), based on market prices 25%, 50% and 75%
below the closing price as of July 20, 2006 of $0.30 per share:
Price Per With Discount at Issuable % of Outstanding
% Below Market Share 25% Shares Stock (1)
25% $0.225 0.169 1,481,481 16.95%
50% $0.150 0.113 2,222,222 23.44%
75% $0.075 0.056 4,444,444 37.98%
(1) After the outstanding shares of 7,258,573 as of July 26, 2006 are
added to the shares issued.
Our obligation to issue shares to Castellum upon conversion of
the Series B preferred stock is essentially limitless. At 75% of the
closing price of $0.30 as of July 20, 2006 ($0.225), the $290,000 in
principal amount Series B preferred stock would be convertible into
1,288,889 shares of common stock. The following is an example of the
amount of shares of our common stock that would be issuable upon
conversion of the Series B preferred stock (excluding accrued
interest), based on market prices 25%, 50% and 75% below the closing
price as of July 20, 2006 of $0.30 per share:
Price Per With Discount at Issuable % of Outstanding
% Below Market Share 25% Shares Stock (1)
25% $0.225 0.169 1,718,519 19.14%
50% $0.150 0.113 2,577,778 26.21%
75% $0.075 0.056 5,155,556 41.53%
(1) After the outstanding shares of 7,258,573 as of July 26, 2006 are
added to the shares issued.
As illustrated, the number of shares of common stock issuable upon
conversion of the Series B preferred stock will increase if the
market price of the stock declines, which may cause dilution to the
existing stockholders.
Montgomery Convertible Debentures.
Our obligation to issue shares to Montgomery upon conversion of
the convertible debentures is essentially limitless. At 80% of the
closing price of $0.30 as of July 20, 2006 ($0.24), the $1,200,000 in
principal amount of debentures that will be outstanding would be
convertible into 5,000,000 shares of common stock. The following is
an example of the amount of shares of our common stock that would be
issuable upon conversion of the convertible debentures (excluding
accrued interest), based on market prices 25%, 50% and 75% below the
closing price as of July 20, 2006 of $0.30 per share:
Price Per With Discount at Issuable % of Outstanding
% Below Market Share 20% Shares Stock (1)
25% $0.225 0.180 6,666,667 47.87%
50% $0.150 0.120 10,000,000 57.94%
75% $0.075 0.060 20,000,000 73.37%
(1) After the outstanding shares of 7,258,573 as of July 26, 2006 are
added to the shares issued.
As illustrated, the number of shares of common stock issuable upon
conversion of the convertible debentures will increase if the market
price of the stock declines, which may cause dilution to the existing
stockholders.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, donees,
assignees and other successors-in-interest may, from time to time,
sell any or all of their shares of common stock on any stock
exchange, market or trading facility on which the shares are traded
or in private transactions. These sales may be at fixed or negotiated
prices. The selling stockholders may use any one or more of the
following methods when selling shares:
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
- block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
- an exchange distribution in accordance with the rules of the
applicable exchange;
- privately negotiated transactions;
- broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
- through the writing of options on the shares;
- a combination of any such methods of sale; and
- any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144
under the Securities Act of 1933, as amended, if available, rather
than under this prospectus. The selling stockholders have the sole
and absolute discretion not to accept any purchase offer or make any
sale of shares if they deem the purchase price to be unsatisfactory
at any particular time.
The selling stockholders or their pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to
market makers acting as principals and/or broker-dealers acting as
agents for themselves or their customers. Such broker-dealers may
receive compensation in the form of discounts, concessions or
commissions from the selling stockholders and/or the purchasers of
shares for whom such broker-dealers may act as agents or to whom they
sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market
makers and block purchasers purchasing the shares will do so for
their own account and at their own risk. It is possible that selling
stockholders will attempt to sell shares of common stock in block
transactions to market makers or other purchasers at a price per
share which may be below the then market price. The selling
stockholders cannot assure that all or any of the shares offered in
this prospectus will be issued to, or sold by, the selling
stockholders. The selling stockholders and any brokers, dealers or
agents, upon effecting the sale of any of the shares offered in this
prospectus, may be deemed to be "underwriters" as that term is
defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and
regulations under such acts. In such event, any commissions received
by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions
or discounts under the Securities Act of 1933, as amended.
We are required to pay all fees and expenses incident to the
registration of the shares, but excluding brokerage commissions or
underwriter discounts.
The selling stockholders, alternatively, may sell all or any
part of the shares offered in this prospectus through an underwriter.
No selling shareholder has entered into any agreement with a
prospective underwriter and there is no assurance that any such
agreement will be entered into.
The selling stockholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a
selling shareholder defaults on a margin loan, the broker may, from
time to time, offer and sell the pledged shares. The selling
stockholders and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions
of the Securities Exchange Act of 1934, as amended, and the rules and
regulations under such act, including, without limitation, Regulation
M. These provisions may restrict certain activities of, and limit
the timing of purchases and sales of any of the shares by, the
selling stockholders or any other such person. In the event that the
selling stockholders is deemed affiliated purchasers or distribution
participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common
stock. Furthermore, under Regulation M, persons engaged in a
distribution of securities are prohibited from simultaneously
engaging in market making and certain other activities with respect
to such securities for a specified period of time prior to the
commencement of such distributions, subject to specified exceptions
or exemptions. In regards to short sells, the selling stockholders
are contractually restricted from engaging in short sells. In
addition, if such a short sale is deemed to be a stabilizing
activity, then the selling stockholders will not be permitted to
engage in a short sale of our common stock. All of these limitations
may affect the marketability of the shares.
We have agreed to indemnify the selling stockholders, or their
transferees or assignees, against certain liabilities, including
liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the selling stockholders or their pledgees,
donees, transferees or other successors in interest, may be required
to make in respect of such liabilities.
If a selling shareholder notifies us that it has a material
arrangement with a broker-dealer for the resale of the common stock,
then we would be required to amend the registration statement of
which this prospectus is a part, and file a prospectus supplement to
describe the agreements between the selling stockholders and the
broker-dealer.
LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings,
claims or assessments and, to the best of our knowledge, no such
action by or against us has been threatened, except as follows:
(a) On June 15, 2005, we were 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
us for breach of a residential lease and damage to a residential
property in 2001. The claim against us alleges that the former
employee was a principal in Wireless ThinkTank (a wholly owned
subsidiary of us) and conducted business from such residence.
Management believes we have 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 our
financial condition, results of operations, or liquidity of the
period in which the ruling occurs, or future periods.
(b) On May 8, 2006 we were 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 for approximately $9,000 who claims
that they were unable to generate fees for use and for advertising revenues.
Management believes we have 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 our
financial condition, results of operations, or liquidity of the
period in which the ruling occurs, or future periods.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS
Directors and Executive Officers.
The names, ages, and respective positions of our directors and
executive officers are set forth below. The directors named below
will serve until the next annual meeting of stockholders or until
their successors are duly elected and have qualified. Directors are
elected for a term until the next annual stockholders' meeting.
Officers hold their positions at the will of our board of directors,
absent any employment agreement, of which none currently exist or are
contemplated.
There are no family relationships between any two or more of the
directors or executive officers. There are no arrangements or
understandings between any two or more of the directors or executive
officers. There is no arrangement or understanding between any of the
directors or executive officers and any other person pursuant to
which any director or officer was or is to be selected as a director
or officer, and there is no arrangement, plan or understanding as to
whether non-management stockholders will exercise their voting rights
to continue to elect the current Board of Directors. There are also
no arrangements, agreements or understandings between non-management
stockholders that may directly or indirectly participate in or
influence the management of our affairs. There are no other
promoters or control persons of us. There are no legal proceedings
involving our executive officers or directors. On March 27, 2006,
our chief financial officer, Lawrence C. Early, accepted an offer of
employment from another company and resigned this position, effective
April 7, 2006.
Jerry Dix, President/Chief Executive Officer/Director.
Mr. Dix, age 60, has been in the wireless industry since 1994
and was a pioneer in the pre-paid cellular industry with Globalwise
Communications and Prepaid Technologies. In 1995, Dix and his
partner launched PrePay Technologies, a wholly owned subsidiary of
Globalwise Communications. PrePay Technologies was developed with
proprietary technology that enabled PrePay Technology to deliver a
prepaid wireless platform as a re-seller for AirTouch in San Diego,
California. In 1996, Mr. Dix helped found Satellite Control
Technologies, a publicly traded company with patented one and two-way
paging technologies, where he worked until being named our president
and chief executive officer in January 2002. Mr. Dix helped develop
and launch the AlphaTrak locating and control system that utilizes
this patented technology combined with GPS technology to locate
assets in North America.
Don Boudewyn, Executive Vice President/Secretary/Treasurer/Director.
Mr. Boudewyn, age 42, has been with us since January 2002,
holding various positions including president and vice president of
international sales. From October 1998 to October 2000, Mr. Boudewyn
served as a major account executive and business development manager
for Celterra Vancouver Ltd., where he was responsible for sales,
marketing and business development strategies for a national fiber
optic network. Prior to his experience in the communications arena,
Mr. Boudewyn worked in real estate from July 1986 to October 1998.
He graduated from the British Columbia Institute of Technology with a
Bachelor of Arts degree in sales and marketing management. He is
also a graduate of the UCLA Director Training & Certification Program.
Phil E. Pearce, Director.
Mr. Pearce, age 76, has been an independent business consultant
with Phil E. Pearce & Associates and Chairman of Financial Express
Corporation since 1990. Prior to this, Mr. Pearce was senior vice
president and a director of E.F. Hutton (a public company), and was
chairman of the board of governors of the National Association of
Securities Dealers, where he was closely involved in the formation of
the NASDAQ Stock Market. He had also been a governor of the New York
Stock Exchange and a member of the Advisory Council to the Securities
and Exchange Commission on the Institutional Study of the Stock
Markets.
Mr. Pearce also serves as an independent director of the
following public companies:
- April 1997 to present: Bravo Foods International Corporation, a
beverage licensing and branding company.
- December 2003 to present: Barrington Science, an in-vitro
diagnostic company (chairman of the board).
- December 2003 to September 2005: 360 Global Wine Company, a wine
producing and distribution company.
- October 2004 to October 2005: GoldSpring, Inc., a gold mining
company.
- February 2005 to present: Bronco Energy Fund, an energy
investments company (primarily coal).
Mr. Pearce is a graduate of the University of South Carolina and
the Wharton School of Investment Banking at the University of
Pennsylvania. He was appointed to our Board of Directors on October
4, 2004. Mr. Pearce formerly owned a 0.5% interest in Redwood Grove
Capital Management, LLC that is the management company for the two of
the Longview funds (which provided financing to us); he relinquished
this interest on June 27, 2005.
Stanley A. Hirschman, Director.
Mr. Hirschman, age 58, is president of CPointe Associates, Inc.
(a private company), an executive management consulting firm that
specializes in solutions for companies with emerging technology-based
products and is well-versed in the challenges of regulated corporate
governance. During the past five years, he has also served the
following public companies: former chairman of Mustang Software and a
former director of Imaging Diagnostic Systems, Inc. and ObjectSoft
Corporation. While at Mustang Software, Mr. Hirschman took a hands-
on role in the planning and execution of the strategic initiative
resulting in the acquisition of this company by Quintus Corporation.
Prior to establishing CPointe Associates in 1996, he was vice
president of operations, Software Etc., Inc. (a public company), a
396-retail store software chain. He also held senior executive
management positions with the following public companies: T.J. Maxx,
Gap Stores and Banana Republic.
Mr. Hirschman also serves as an independent director of the
following public companies:
- September 2000 to present: Bravo Foods International Corporation
(chairman of the board).
- October 2004 to present: GoldSpring, Inc.
- February 2005 to present: Bronco Energy Fund.
- May 2005 to present: Energy & Engine Technology, Inc., an
auxiliary power unit manufacturer.
- February 2006 to present: Oxford Media, Inc., a developer of
digital entertainment systems.
- March 2006 to present: Dalrada Financial Corp, an employer
business solutions provider.
Mr. Hirschman was appointed to our Board of Directors on
September 23, 2004. He formerly owned a 0.5% interest in Redwood
Grove Capital Management, LLC, but relinquished this interest on June
27, 2005.
Murray H. Williams, Director.
Mr. Williams, age 35, is the chief financial officer of
Interactive Television Networks, Inc. ("ITVN"). ITVN was incorporated
in April 2002 and became a publicly traded entity in June of 2003.
Mr. Williams began his employment at ITVN on June 3, 2005. ITVN is
engaged in an Internet Protocol Television subscription based business
that sells an Internet appliance that enables subscribers to view
movies and television programs on their television that are delivered
via the Internet using proprietary hardware and software. Prior to
ITVN, Mr. Williams was a consultant and investor in numerous companies
from September 2003 through June 2005. Prior to that, Mr. Williams
was the co-founder of Brand Shopping Network, Inc., a shopping service
that incorporated in 2001. Prior to Brands Shopping Network, Mr.
Williams was one of the founding members of Buy.com, Inc. Between
1998 and 2001, he developed the finance, legal, business development
and HR departments. Prior to joining Buy.com, he was employed with
KPMG Peat Marwick, LLP from 1993 through 1998, and last served as a
manager in their assurance practice. Mr. Williams managed a team of
over 20 professionals specializing in financial services with an
emphasis on public offerings, private financings and
mergers/acquisitions. He was appointed to our Board of Directors on
November 8, 2004.
Kirk Haney, Director.
Mr. Haney, age 34, is the founder and chief executive officer of
Cloud Break Ventures, LLC, a private investment firm focused on early
stage private company and real estate investments. Prior to founding
Cloud Break Ventures, Mr. Haney worked in Global Business Development
for Cisco Systems, Inc. where he was instrumental in creating Cisco's
global security sales strategy. In addition to leading several of
Cisco's enterprise and advanced technology sales and engineering
teams, he has also been an advisor to Cisco's Corporate Business
Development team on various investment and acquisition candidates.
Prior to his Cisco experience, which began in 1999, Mr. Haney held
senior management positions in sales, marketing and business
development for 3Com Corporation and ArrowPoint Communications
(acquired by Cisco). He holds a Bachelor of Arts degree in political
science from California State University, Long Beach, and an MBA
degree from Pepperdine University. Mr. Haney was appointed to our
Board of Directors on October 27, 2004.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Exchange Act requires executive officers
and directors, and persons who beneficially own more than 10% of any
class of our equity securities to file initial reports of ownership
and reports of changes in ownership with the Securities and Exchange
Commission. Executive officers, directors and beneficial owners of
more than 10% of any class of our equity securities are required by
Securities and Exchange Commission regulations to furnish us with
copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3 and 4 and amendments
thereto furnished to us under Rule 16a-3(d) during fiscal 2005, and
certain written representations from executive officers and
directors, we are unaware of any required reports that were not
timely filed.
Code of Ethics.
We have adopted a code of ethics that applies to our board of
directors, principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions. The code of ethics in general prohibits any
officer, director or advisory person from acquiring any interest in
any security which: we are considering a purchase or sale thereof, is
being purchased or sold by us, or is being sold short by us. These
persons are required to advise us in writing of his or her
acquisition or sale of any such security.
Committees of our board of directors.
Audit Committee.
Our audit committee consists of Messrs. Williams, Pearce,
Hirschman, and Haney, all being independent directors. The audit
committee has adopted a written charter. Mr. Williams has been
designated the Audit Committee's "financial expert" in compliance
with Item 401(h) of Regulation S-K.
The primary responsibility of the Audit Committee is to oversee
our financial reporting process on behalf of our board of directors
and report the result of their activities to the board. Such
responsibilities include, but are limited to, the selection, and if
necessary the replacement, of our independent auditors, review and
discuss with such independent auditors (i) the overall scope and
plans for the audit, (ii) the adequacy and effectiveness of the
accounting and financial controls, including our system to monitor
and manage business risks, and legal and ethical programs, and (iii)
the results of the annual audit, including the financial statements
to be included in our annual report on Form 10-KSB.
Our policy is to pre-approve all audit and permissible non-audit
services provided by the independent auditors. These services may
include audit services, audit-related services, tax services and
other services. Pre-approval is generally provided for up to one
year and any pre-approval is detailed as to the particular service or
category of services and is generally subject to a specific budget.
The independent auditors and management are required to periodically
report to the audit committee regarding the extent of services
provided by the independent auditors in accordance with this pre-
approval, and the fees for the services performed to date. The audit
committee may also pre-approve particular services on a case-by-case basis.
Nominating Committee.
The members of our Nominating Committee are Messrs. Pearce and
Hirschman, both independent directors. The Nominating Committee has
responsibility to: (a) actively seek individuals qualified to become
members of our board of directors; (b) from time to time recommend
individuals for appointment as directors by our board of directors;
(c) set the number of directors that shall constitute the whole board
of directors; (d) nominate directors for approval by stockholders at
an annual meeting of stockholders or special meeting of stockholders;
(e) recommend to the full board of directors the establishment,
charter and membership of the various committees of our board of
directors; (f) annually evaluate the performance and function of this
Nominating Committee; (g) acting with sole authority, retain and
terminate any consulting or search firm to be used to identify
director candidates, including the sole authority to approve the
firm's fees and other retention terms; and (h) annually, review and
update its own charter for consideration by our board of directors.
The Nominating Committee does not have any policy with regard to
the consideration of any director candidates recommended by security
holders. Our board of directors feels that it is appropriate for us
not to have such a policy since we will consider director candidates
recommended by security holders anyway and will treat them the same
as other recommendations for the board. Security holders wishing to
submit such recommendation must put them in writing, addressed to our
Secretary, Don Boudewyn.
The Nominating Committee's process for identifying and
evaluating nominees for director, including any recommended by
security holders, involves reviewing recommendations among the
members and interviewing certain prospective candidates. There are
no differences between in the manner in which the committee evaluates
nominees based on whether it is recommended by security holders or not.
Compensation Committee.
Our Compensation Committee consists of Messrs. Williams, Pearce,
Hirschman, and Haney, all independent directors. The Compensation
Committee has responsibility with respect to reviewing and overseeing
our compensation to our directors and officers, including the
issuance of any stock to these individuals, reports the results of
its activities to the full board of directors.
Governance Committee.
The members of our Governance Committee are Messrs. Dix,
Boudewyn, Pearce, and Hirschman, two of which are independent. The
Governance Committee provides guidance and direction regarding our
governance and operation, and assistance to our board of directors in
fulfilling the board of director's responsibilities relating to good
governance and management.
Investment Committee.
The members of our Investment Committee are Messrs. Williams,
Pearce, Hirschman, and Haney, all being independent directors of us.
The Investment Committee has responsibility with respect to reviewing
and overseeing our contemplated investments on behalf of our board of
directors and reports the results of its activities to the full board
of directors. The Investment Committee has the ultimate authority
for and responsibility to evaluate and recommend investments.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information regarding the
beneficial ownership of our common stock as of July 26, 2006
(7,258,573 shares issued and outstanding (1)) (there is also
outstanding as of that date: (a) 3,000,000 shares of Series A
preferred stock, none of which is convertible before October 7, 2007;
and (b) 540,000 shares of Series B preferred stock, all of which is
currently convertible into shares of common stock) by: all
stockholders known to us to be owners of more than 5% of our
outstanding common stock; and all our officers and directors,
individually and as a group:
Title of Class Name and Address Amount and Nature Percent of
of Beneficial Owner of Beneficial Class (3)
Owner (2)
Common Stock Castellum Investments S.A., 1,288,889 (4) 15.08%
2 Belles Fontaines
Cornaux, Switzerland
Common Stock Irwin L. Rogers 444,444 (5) 5.77%
7207 Swift Lane
Boise, Idaho 83704
Common Stock Jerry Dix 185,857 (6) 2.56%
4136 Del Rey Avenue
Marina del Rey, California
90292
Common Stock Don Boudewyn 119,132 (7) 1.64%
4136 Del Rey Avenue
Marina del Rey, California
90292
Common Stock Phil E. Pearce 0 0.00%
4136 Del Rey Avenue
Marina del Rey, California
90292
Common Stock Stanley A. Hirschman 0 0.00%
4136 Del Rey Avenue
Marina del Rey, California
90292
Common Stock Murray H. Williams 0 0.00%
4136 Del Rey Avenue
Marina del Rey, California
90292
Common Stock Kirk Haney 0 0.00%
4136 Del Rey Avenue
Marina del Rey, California
90292
Common Stock All Directors and Executive 304,989 4.20%
Officers as a Group
(6 persons)
Series A
Preferred
Stock Jerry Dix 1,800,000 60.00%
4136 Del Rey Avenue
Marina del Rey, California
90292
Series A
Preferred
Stock Don Boudewyn 1,200,000 40.00%
4136 Del Rey Avenue
Marina del Rey, California
90292
Series A
Preferred
Stock All Directors and 3,000,000 (7) 100.00%
Executive Officers
as a Group (2 persons)
(1) Reflects the 1 for 350 reverse split of our common stock that
was effective on November 23, 2005.
(2) None of these security holders has the right to acquire any
amount of the shares within sixty days from options, warrants,
rights, conversion privilege, or similar obligations. Each person
has sole voting power and sole dispositive power as to all of the
shares shown as beneficially owned by them.
(3) Applicable percentage ownership of common stock is based on
7,258,573 shares issued and outstanding as of July 26, 2006.
Beneficial ownership is determined in accordance with Rule 13d-3 of
the Securities Exchange Act of 1934, and the Instructions to Item 403
of Regulation S-B, and the information is not necessarily indicative
of beneficial ownership for any other purpose. In computing the
number of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock subject to options
or convertible or exchangeable into such shares of common stock held
by that person that are currently exercisable, or exercisable within
60 days, are included.
(4) Represents the shares underlying $290,000 in principal amount
convertible Series B preferred stock based on a conversion price of
$0.225 as of July 20, 2006. In accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, Thomas Doering may be deemed a
control person of the shares owned by this stockholder.
(5) Represents the shares underlying $100,000 in principal amount
convertible Series B preferred stock based on a conversion price of
$0.225 as of July 20, 2006. When this Series B preferred stock was
issued in February 2006, based on the then higher conversion price,
the percentage ownership was under 5%.
The Series B preferred stock is convertible into shares of our 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.
(6) All shares held by Jerry and Karen Dix, joint tenants with right
of survivorship, except for 305 shares held by Market Force, Inc. of
which Mr. Dix and Steven Lipman have shared voting and investment
control. We previously issued 10,270 restricted shares of common
stock to Mr. Dix for the accrued portion of salaries for the fourth
quarter of fiscal 2004; these shares were returned to us on June 30,
2005 and cancelled due to rules that governed our then current status
as a business development company.
(7) Of the total, 3,384 shares are held by Wireless Xstream
Technologies Ltd., which is controlled by Mr. Boudewyn. We
previously issued 5,530 restricted shares of common stock to Mr.
Boudewyn for the accrued portion of salaries for the fourth quarter
of fiscal 2004; these shares were returned to us on June 30, 2005 and
cancelled due to rules that governed our then current status as a
business development company.
(7) The Series A preferred stock, issued on October 7, 2004, is
convertible after three years following its issuance, providing the
holder is still employed by us. Each share of Series A Preferred
Stock is convertible at the rate of 800 shares of common stock for
each full share of convertible preferred stock. Under the terms of
the certificate of designation governing these shares, the conversion
ratio was not changed upon the reverse split of our common stock on
November 23, 2005. There are no other plans or arrangements to issue
any additional Series A Preferred Stock at this time.
DESCRIPTION OF SECURITIES
Common Stock.
The securities being offered are shares of common stock. Our
authorized capital includes 5,000,000,000 shares of common stock,
$0.001 par value per share. The holders of common stock:
- have equal ratable rights to dividends from funds legally
available therefore, when, as, and if declared by our board of
directors;
- are entitled to share ratably in all of our assets available for
distribution upon winding up of our affairs; and
- are entitled to one cumulative vote per share on all matters on
which stockholders may vote at all meetings of stockholders.
The shares of common stock do not have any of the following rights:
- special voting rights;
- preference as to dividends or interest;
- preemptive rights to purchase in new issues of Shares;
- preference upon liquidation; or
- any other special rights or preferences.
In addition, the Shares are not convertible into any other
security. There are no restrictions on dividends under any loan
other financing arrangements or otherwise.
Preferred Stock.
Our authorized capital stock also includes preferred stock.
Common stock underlying Series B preferred stock is being registered
in this offering.
Series A.
We have 3,000,000 shares of Series A preferred stock authorized.
On October 6, 2004 our Compensation Committee granted and we issued
Series convertible preferred stock 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).
Under the terms of the certificate of designation governing these
shares, the conversion ratio was not changed upon the reverse split
of our common stock on November 23, 2005.
Each share of outstanding Series A entitles the holder thereof
to vote on each matter submitted to a vote of our stockholders 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.
Therefore, each shares of Series A has 800 votes on any matter put
forth to our common stockholders. 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 preferred shares was $200,000,
$33,334 and $50,000 of which was expensed for the years ended
December 31, 2005 and 2004. The difference of $116,666 is carried as
unearned compensation in the consolidated statement of stockholders' deficit.
Series B.
We are authorized to issue up to 5,000,000 shares of Series B
convertible preferred stock. This stock is convertible into common
stock upon various events including, change of control of us.
Each share of the Series B is convertible at a per share
conversion price equal to the lesser of: 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; 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 $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 our stockholders 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.
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, payable upon
any conversion for each share, and within 30 days following
March 31, June 30, September 30 and December 31 of each year.
- Provided that, and only to the extent that, we have 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 we are prohibited from issuing shares of common
stock upon conversion of the Series B, then at the holder's
election, we must pay to the holder, an amount in cash
determined by multiplying the unconverted face amount, together
with accrued but unpaid dividends thereon, of the amount of
shares of convertible preferred stock designated by the holder
for mandatory redemption by 110%.
- In the event we are prohibited from issuing shares of common
stock upon conversion of the Series B, then at the holder's
election, we must pay to the holder within 10 business days
after request by the holder, that sum of money determined by
multiplying the unconverted face amount, together with accrued
but unpaid dividends thereon, of the amount of shares of Series
B designated by the holder for mandatory redemption by 110%.
Dividends.
We do currently intend to pay cash dividends. Because we do not
intend to make cash distributions, potential stockholders would need
to sell their shares to realize a return on their investment. There
can be no assurances of the projected values of the shares, or can
there be any guarantees of our success.
A distribution of revenues will be made only when, in the
judgment of our board of directors, it is in the best interest of our
stockholders to do so. The board of directors will review, among
other things, our financial status and any future cash needs in
making its decision.
Transfer Agent.
We have engaged the services of Worldwide Stock Transfer, LLC,
885 Queen Anne Road, Teaneck, New Jersey 07666, to act as transfer
agent and registrar.
INTEREST OF NAMED EXPERTS AND COUNSEL
Other than as set forth below, no named expert or counsel was
hired on a contingent basis, will receive a direct or indirect
interest in the small business issuer, or was a promoter, underwriter,
voting trustee, director, officer, or employee of us.
Brian F. Faulkner, A Professional Law Corporation, counsel for
us as giving an opinion on the validity of the securities being
registered, has previously received shares of common stock pursuant
to our Non-Employee Directors and Consultants Retainer Stock Plan, as
amended, under Form S-8's in exchange for legal services previously
rendered to us under attorney-client contracts. These legal services
consist of advice and preparation work in connection with our reports
filed under the Securities Exchange Act of 1934, and other general
corporate and securities work for us. No such shares were issued in
connection with the work performed in connection with this
registration statement.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
The following is a summary of the relevant provisions in the
articles of incorporation, bylaws, and Nevada law with regard to
limitation of liability and indemnification of our officers,
directors and employees. The full provisions are contained in such
documents.
Limitation of Liability.
Articles of Incorporation and Bylaws.
There are no provisions in our bylaws with regard to liability
of a director. Our articles of incorporation provide that to the
fullest extent permitted by the Nevada laws, our officers and
directors will not be personally liable to us or our stockholders for
monetary damages for any action taken or any failure to take any
action, as an officer or director.
Nevada Revised Statutes.
Nevada Revised Statutes provide that a director or officer is not
individually liable to the corporation or its stockholders for any
damages as a result of any act or failure to act in his capacity as a
director or officer unless it is proven that his act or failure to act
constituted a breach of his fiduciary duties as a director or officer,
and his breach of those duties involved intentional misconduct, fraud
or a knowing violation of law.
Indemnification.
Articles of Incorporation and Bylaws.
There are no provisions in the articles of incorporation with
regard to indemnification. Our bylaws provide that we will indemnify
to the fullest extent permitted by law each person that such law
grants us the power to indemnify. The amount of indemnity to which
any officer or any director may be entitled is to be fixed by board
of directors, except that in any case in which there is no
disinterested majority of the board of directors available, the
amount shall be fixed by arbitration pursuant to the then existing
rules of the American Arbitration Association.
Nevada Revised Statutes.
Nevada laws also provide that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, except an
action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against
expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection
with the action, suit or proceeding if he:
- has exercised his powers in good faith and with a view to the
interests of the corporation; or
- acted in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its
equivalent, does not, of itself, create a presumption that the person
is liable or did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of
the corporation, or that, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful.
To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense
of any action, suit or proceeding, or in defense of any claim, issue
or matter therein, the corporation shall indemnify him against
expenses, including attorneys' fees, actually and reasonably incurred
by him in connection with the defense.
Any discretionary indemnification, unless ordered by a court or
advanced, may be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances.
The determination must be made:
- by the stockholders;
- by the board of directors by majority vote of a quorum
consisting of directors who were not parties to the action, suit
or proceeding;
- if a majority vote of a quorum consisting of directors who were
not parties to the action, suit or proceeding so orders, by
independent legal counsel in a written opinion; or
- if a quorum consisting of directors who were not parties to the
action, suit or proceeding cannot be obtained, by independent
legal counsel in a written opinion.
A corporation may purchase and maintain insurance or make other
financial arrangements on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise for any liability asserted against him and
liability and expenses incurred by him in his capacity as a director,
officer, employee or agent, or arising out of his status as such,
whether or not the corporation has the authority to indemnify him
against such liability and expenses.
Undertaking.
We undertakes the following:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the small business issuer under the foregoing
provisions, or otherwise, the small business issuer has been advised
that in the opinion of the U.S. Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
us of expenses incurred or paid by a director, officer or controlling
person of us in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
DESCRIPTION OF BUSINESS
Corporate History.
We were incorporated as Tesmark, Inc. in September 1979. In
November 1998, we changed our state of incorporation from Idaho to
Nevada and in January 2001 changed our name to 5G Wireless
Communications, Inc. In March 2001, we acquired 5G Partners, a
Canadian partnership, and changed our business to provide wireless
technology systems through high speed Internet access and data
transport systems. In April 2002, we acquired Wireless Think Tank,
Inc., a developer of high-speed long distance wireless technologies.
In July 2003, we shifted our strategy from that of a service provider
to an equipment manufacturer.
On January 21, 2003, our articles of incorporation were amended
to do the following: (a) increase our authorized shares of common
stock to 800,000,000; (b) in the future, an increase in our
authorized capital stock can be approved by our board of directors
without stockholder consent; and (c) in the future, a decrease in our
issued and outstanding common stock (a reverse split) can be approved
by our board of directors without stockholder consent. Effective on
September 16, 2004, we further amended our articles of incorporation
to increase the number of authorized shares of common stock from
800,000,000 to 5,000,000,000.
On October 19, 2004, we elected, by the filing of a Form N-54A
with the U.S. Securities and Exchange Commission, to be regulated as
a business development company under the Investment Company Act of
1940. On December 31, 2004, we transferred certain assets and
certain liabilities of 5G Wireless Communications, Inc. into 5G
Wireless Solutions, Inc. in exchange for 100% of the outstanding
shares of this company's common stock.
On June 3, 2005, our board of directors unanimously determined
that it would be in our best interests and our stockholders to seek
stockholder approval on certain matters. Pursuant to a definitive
Schedule 14A proxy statement filed with the Securities and Exchange
Commission on September 19, 2005, we sought approval from the
stockholders, at the annual stockholder's meeting scheduled for
October 20, 2005, for the following (among other things): to
terminate our status as a business development company under the
Investment Company Act of 1940 and to file a Form N-54C with the
Securities and Exchange Commission to terminate this status; and to
file a new registration statement with the Securities and Exchange
Commission. On October 20, 2005, our stockholders approved those
items, among other things.
On November 3, 2005, our board of directors approved a 1 for 350
reverse stock split of our 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 5G Wireless Communications, Inc.
Our Business.
Technology.
We are a developer and manufacturer of wireless broadband
communications equipment operating on the 802.11a/b/g protocols. The
term "Wi-Fi" is a commonly used term that has come to stand for
'Wireless Fidelity' and is based on the Institute of Electrical and
Electronics Engineers ("IEEE") 802.11 standard. Wi-Fi is an radio
frequency signal based on the IEEE 802.11 standard and is capable of
transmitting and receiving signals to most Wi-Fi enabled laptops and
other Wi-Fi enabled devices up to 800 meters. It uses spread
spectrum multiple access that supports high data rates with very low
latency, over a distributed all-IP wireless network that can
penetrate walls and associated structures. Wi-Fi shares the
unregulated, 2.4 GHz radio spectrum along with other common wireless
devices including cordless phones and baby monitors. Wi-Fi is
primarily meant for use in a local area wireless network and for
Internet access. As an alternative to current wire line broadband,
Wi-Fi offers the opportunity of relatively inexpensive, mobile
Internet access.
Our products (base stations) are used to transmit and receive
wireless signals to and from other wireless devices, typically laptop
computers or personal digital assistants. The base stations conform
to the predominant industry standard for wireless networks: IEEE
802.11. The 802.11 standard, and all its associated standards (e.g.,
802.11a, 802.11b, etc.), form the "rules" by which compliant wireless
devices can communicate. In this manner, all devices that follow
these rules can communicate with each other, without the need for
interoperability testing.
There are several merchant suppliers of 802.11 compliant
semiconductor chips that form the basis of our finished products. We
combine these semiconductor chips with off-the-shelf electronic
hardware (including amplifiers, antennas, cables, filters and power
supplies) and in-house customized software to produce the finished
products.
Products.
Our family of indoor and outdoor wireless base stations is built
on two basic building block products: a 120 degree outdoor sector
base station and an 18 degree indoor base station.
By combining the outdoor sector base stations, three separate
products emerge: a 120 degree sector base station, a 240 degree
sector base station and a 360 degree sector base station. Multiples
of these base stations in some combination are deployed from towers
or the roofs of tall buildings to provide outdoor wireless coverage
to large areas like campuses and municipalities.
By combining indoor base stations, two separate products emerge:
an 18 degree indoor base station and a 36 degree indoor base station.
These 18 degree and 36 degree indoor base stations are combined to
provide indoor wireless coverage to large buildings, as is typically
found on a college campus.
Competitive Advantage.
The 802.11 standards, along with FCC rules (like Title 47 of the
Code of Federal Regulations, Part 15) that specify maximum transmit
power imply a limit as to the effective wireless range of a compliant
base station. Since it is expensive to wirelessly cover a large
outdoor area like a campus or municipality, there is a strong
incentive to maximize the wireless range of a base station.
Through a proprietary combination of the industry-standard
802.11 chips, off-the-shelf electronic hardware and in-house
customized software, we have developed what we believe is the optimal
system design for maximizing the range of wireless networking
equipment. With this trade-secret system design, we believe we have
positioned ourselves at the forefront of the emerging wireless wide
area network marketplace for the following reasons:
- We believe we are the first to market this "optimal" design for
maximum range, and while others may, through extensive research
and development, ultimately develop a similarly performing
design.
- Total cost of ownership is or will be the driving factor in
rolling out new campus and municipal wireless networks.
- Total cost of ownership depends more on operating expense
than the cost of the base stations.
- Operating expense is a direct function of the number of
base stations.
- Maximizing the range of the base station reduces the number
required thereby minimizing total cost of ownership.
- We believe our base station is better suited to wirelessly cover
campuses and municipalities compared to the other approaches
being utilized today.
- Mesh networks suffer from serious bandwidth degradation problems
that limits their use to only low-bandwidth applications.
- Mesh networks require many more base stations, which makes them
higher in Total cost of ownership.
Our intellectual property combines hardware design and
modifications to the radio frequency software that enables us to
extend range and throughputs. We plan to maintain this intellectual
by limiting individuals within the organization from having access to
these codes and will not allow any third party to have access to the
base codes or hardware configurations.
Our strategy is to secure a leadership position as a broadband
wireless equipment provider to the university campus and small to
midsize citywide markets, while maximizing profits based on superior
gross margins and low overhead costs. Critical to our success in this
market is our advantage over competitive Wi-Fi equipment providers
that require an excessive number of access points to provide wireless
coverage in any given area. It has been repeatedly demonstrated that
our "Access Not Excess" approach allows one of our rooftop base
stations to replace up to 25 standard access points, thus offering a
client considerable cost savings. These savings occur not only on the
front end, in terms of reduced capital hardware expenses, but
moreover, in terms of ongoing operating expenses as less equipment
requires less ongoing maintenance and network administration. This
formula: Total cost of ownership = capital expenses + operating
expenses is the basis of our value proposition: significantly
increased performance at the lowest possible total cost of ownership.
This is quickly becoming the key consideration in the strategic
deployment of the wireless experience.
Market Overview.
Estimated worldwide shipments of wireless local area network
equipment products increased 6% in 2005 to total $5.2 billion and are
expected to increase to $5.9 billion in 2006 despite a 23% average
drop in selling price.
Consumers and enterprises continue to redefine their levels of
connectivity and interactivity while elevating their expectations for
wireless Internet access. This demand is being met on university
campuses, where roughly 90% have experimented with some type of
fragmentary wireless hotspot. The campus market is now moving to a
"campus-wide" approach, and our equipment offers a superior, low-cost
solution. These campuses that have used competitive equipment usually
express dissatisfaction with the number of access points required and
the difficulty maintaining them, which provides a receptive audience
for our rooftop base station solution.
The municipal market is accelerating rapidly. Large cities such
as Philadelphia and San Francisco have announced plans for citywide
networks, which has driven awareness of the phenomenon nationwide, we
intend to focus on the small to mid-size city markets to avoid the
political complications, and long lead time, inherent in major metro
installations. This is also a logical fit with our technology
approach as large campuses resemble small cities, and small cities
resemble big campuses. Other growth industries for wireless broadband
include healthcare, recreation, shipping, and international, and we
have proven installations in each. The international market is
particularly lucrative as many third world nations are now rapidly
progressing toward the need for citywide network infrastructures, and
can dispense with both telephone and cable wire line networks and
advance directly to a wireless approach.
We intend to target the following markets:
Market Solution
Universities and
Corporate Campuses The solution can replace lines with
direct and secure wireless
connections, which can provide
always-on roaming capabilities
around the campus, with Internet
access-control managed at the
classroom or office level. In
addition, with our access points
the wireless connection can cover
multiple campuses in the same city
and allow individual end-users to
stay connected while off campus.
Municipalities The solution can provide a network
covering over six mile point-to-
point shots that meet the security
requirements critical for the
passage of government and police
documents between departments,
stations and substations.
Government & Military The solutions create a private
network designed to be able to
handle highly sensitive data
including surveillance camera, full
motion video, remote censoring, etc.
Wireless ISP The solution delivers one of the
fastest returns on investment for
the Internet Service Providers. The
solution virtually eliminates the
need for multiple towers and
connectivity by covering areas as
large as 10 square miles which can
support a large number of
concurrent users per access point,
while servicing clients with
greater throughputs and quality of
service than traditional wireless
solutions.
Distribution Channel Strategy.
Currently, we service clients through a two-tier distribution
model - both original equipment manufacturer and resale. In addition
to having an original equipment manufacturer, the majority of the
current sales have been through direct sales, which are mostly from
domestic sources. We anticipate that we will grow our sales through
our value added resellers and distribution channels.
Select international accounts will lead the way to greater
expansion overseas as it progresses. Additionally, we expect that we
will have a number of value added reseller relationships that will
continue to grow as more value added resellers learn about our
technology.
Sales and Marketing.
We currently sell our products through a team of salaried
employees, third party value added reseller, and the efforts of our
corporate officers. Our average sales cycle exceeds six months from
the time of initial contact to shipment of products. In an effort to
improve sales, we are looking to add independent sales
representatives and/or agencies that are compensated on a commission basis.
We market our products to colleges, universities, governmental
entities, commercial enterprises and systems integrators via direct
mail, telemarketing, direct sales, distributors and value added
resellers throughout the United States, Canada, Africa and several
other countries.
For fiscal 2005, campus environment, such as universities and
municipalities, represented 52% of our business, while 48% was
through value added resellers and wireless Internet service
providers. For fiscal 2006 to date, educational represented 34% of
total business, Internet service providers 41%, and the international
market 28%.
As we are developing our platform, our technology and field
services partners will be a part of our sales and marketing effort,
as the coordination of network design, field deployment and ongoing
service support requires appropriate teaming arrangements for high
quality design, installation and ongoing service support.
As many of our customers are established colleges and
universities, we expect our sales force to attend and participate in
industry associations and trade shows to support and supplement our
sales and marketing activity.
Major Customers.
During 2004, we had no material customers that accounted for more
than 10% of revenues. During 2005, there were two customers that
accounted for more than 10% of revenues: SRS (10%) and IAMA (30%).
These two customers closed operations unexpectedly in mid-2005. Major
customers in 2006 include Westchester Community College and Denison
University, which represents approximately 75% of sales year to date.
Research and Development.
We have defined a robust roadmap for the development of
additional products intended to enhance network performance, decrease
product costs, improve manufacturing, analyze outsource options, and
expand the range of customer applications. This includes refined and
completely new access point and client premise equipment designs that
complement current products. It also includes new antenna designs
that could open up new markets for us.
All developed products and projects must meet a minimum return
on investment in order to be considered for development. We believe
this will help to ensure that it is utilizing resources correctly,
that assets are being deployed properly, and that all projects
ultimately add stockholder value. Areas of positive return on
investment development include:
- A less expensive, yet high-performance client premise equipment
device designed for wireless Internet service provider
applications and other requirements for extending the range of a
PC laptop.
- Base stations that operate at various frequencies along the
spread spectrum within legal limits.
- IEEE 802.16 products that have a variety of applications
including backhauling and mobility, etc.
- Public safety and homeland security applications designed to
serve the needs of police, fire and other emergency vehicles and
field operators.
For the fiscal years 2005 and 2004, all internal research and
development costs were charged to expense as incurred. Research and
development costs for the years ended December 31, 2005 and 2004 were
$209,543 and $9,867, respectively. During the three months ended
March 31, 2006,
Competition.
We operate in the highly competitive communications equipment
market. We expect to compete primarily on the basis of our fixed
wireless equipment portfolio, experience and technical skills,
competitive pricing model, service quality, reliability and deployment speed.
Our principal competitors are other equipment manufacturers that
utilize fixed wireless technology, including Cisco Systems Inc. and
Tropos Networks, Inc. Cisco currently possesses approximately 60% of
the wireless equipment market for colleges and universities, while
Tropos Networks, Inc. has a lead in the municipal market with more
than 150 customers and 90 value added resellers throughout the world.
Cisco Systems, Inc. and Tropos Networks, Inc. both utilize a dense
access point deployment or mesh network architecture. There are
approximately 8 other major competitors; some of these include: Belair
and Strix offering mesh network solutions across a broad range of
vertical markets, Terrabeam and Aruba providing base station equipment
approaches similar to ours, Airespace (now Cisco), Meru and Colubris
all offering integrated dense access point deployment architecture
coupled with a variety of service to comprise an enterprise solution.
There is a relatively high cost of entry into this space given the
need for proof of reliability and the long lead-time associated with
establishing brand awareness through marketing communications. To
date, we have not encountered any barriers to competition imposed by
the practices of any of our competitors such as, for example,
exclusivity agreements with our potential customer base.
Many of our competitors have longer operating histories, long-
standing relationships with customers and suppliers, greater name
recognition and greater financial, technical and marketing resources
than we do and, as a result, may have substantial competitive
advantages over us. Additionally, market perceptions as to
reliability and security for the relatively early-stage fixed wireless
networks as compared to copper or fiber networks provide us with
additional marketing challenges. We may not be able to exploit new or
emerging technologies or adapt to changes in customer requirements
more quickly than these competitors, or devote the necessary resources
to the marketing and sale of our products.
We believe that the market for broadband communication equipment
is likely to remain highly competitive, and will continue to be
characterized by new and potentially disruptive technology
introduction, shrinking per-customer revenues, and fiercely
competitive pricing.
Regulation.
Internet-based communication equipment makers generally are not
subject to federal fees or taxes imposed to support programs such as
universal telephone service. Changes in the rules or regulations of
the U.S. Federal Communications Commission or in applicable federal
communications laws relating to the imposition of these fees or taxes
could result in significant new operating expenses for us, and could
negatively impact our business. Furthermore, the applicability to the
Internet of existing laws governing intellectual property ownership
and infringement, taxation, encryption, obscenity, libel, employment,
personal privacy, export or import matters and other issues is
uncertain and developing and we are not certain how the possible
application of these laws may affect us. Some of these laws may not
contemplate or address the unique issues of the Internet and related
technologies. Changes in laws intended to address these issues could
create uncertainty in the Internet market, which could reduce demand
for our products, increase our operating expenses or increase our
litigation costs.
Employees.
We have 15 full-time employees, and three contractors. We
believe that our relationship with employees is satisfactory. We
have not suffered any labor problems during the last two years.
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 prospectus, which have been prepared in
accordance with accounting principles generally accepted in the
United States.
Overview.
We are a developer and manufacturer of wireless broadband
communications equipment operating on the 802.11a/b/g protocol. Our
principal markets are universities and municipalities.
We have focused on the marketing and sales of our innovative
wireless solutions to large campus & enterprise wide-area-networks
and citywide wide-area-networks. In addition to manufacturing the
existing product line, we have focused on developing new solutions
that create larger and more efficient wireless networks.
We market and sell both outdoor and indoor Wi-Fi wireless radio
systems that, because of their distance and user capacity, can be
used in both wireless local area network and wide area network
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. We believe our antenna design and wireless packet switching
allows our 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 our 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, we believe our
products enable customers to combine wireless networks with fewer
components that cost less, perform better and potentially provide a
faster return on invested capital. We have devoted substantial
resources to the build out of our networks and product research and
development with limited resources applied to our marketing programs.
We have historically experienced operating losses and negative
cash flow. We expect that these operating losses and negative cash
flows may continue through additional periods. In addition, we have
only a limited record of revenue-producing operations and there is
only a limited operating history upon which to base an assumption
that we will be able to achieve our business plans.
Results of Operations.
Three Months Ended March 31, 2006 Compared to Three Months Ended
March 31, 2005.
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 we were a
business development company and did not record any revenue. We
expect to continue the current strategy as more university campuses
look to upgrade their network infrastructure.
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 our supply chain
and our ability to maintain pricing in the marketplace as opposed to
the comparison period in which we were a business development company
and did not record any revenue or related cost of revenues. We
expect we will continue the current strategy in the future.
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.
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 Securities
and Exchange Commission.
Costs recorded as interest expense primarily consist of the
amortization of the beneficial conversion feature of the convertible
notes issued by us 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.
Derivative Expense.
We evaluate freestanding instruments (or embedded derivatives)
indexed to our common stock to properly classify such instruments
within equity or as liabilities in our financial statements. Our
policy is to settle instruments indexed to its common shares on a
first-in-first-out basis. We account for the effects of registration
rights and related liquidated damages. 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. We
account for certain embedded conversion features and free-standing
warrants, which require corresponding recognition of liabilities
associated with such derivatives at their fair values and changes in
fair values to be charged to earnings. We incurred total derivative
expenses of $703,000 for the three months ended March 31, 2006 in
connection with the $3,300,000 in principal amount Longview notes and
associated warrants, and the Series B preferred stock issued in
February 2006. We did not account for such expenses in the same
period of the prior year.
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.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004.
Revenue.
Revenue from continuing operations increased by $967,482, or
approximately 148%, from $651,450 for the year ended December 31,
2004 to $1,618,932 for the year ended December 31, 2005. The
increase in revenue was primarily attributable to sales of wireless
equipment in the university campus market place. We expect these
trends to continue as more university campuses look to upgrade their
network infrastructure.
Cost of Revenue.
Total cost of revenue increased by $137,392, or approximately
69%, from $199,611 for the year ended December 31, 2004 to $337,003
for the year ended December 31, 2005. The increase was principally
due to the increase in sales partially offset by economies of scale
due to greater buying power in our supply chain and our ability to
maintain pricing in the marketplace. We believe this trend will
continue in the future
Operating Expenses.
Total operating expenses decreased by $1,136,203, or
approximately 24%, from $4,704,579 for the year ended December 31,
2004 to $3,568,376 for the year ended December 31, 2005. The
decrease is principally attributable to reduced headcount, lesser use
of outside consultants and reducing the number of outside law firms
from six to two. As management continues to focus on operations by
"doing more with less," operating expenses are expected to decrease
in 2006.
Recognized within operating expenses for the year ended December
31, 2005 is more than $775,000 of bad debt related the write-off
accounts receivable. This amount consists principally of
approximately $630,000 in uncollectible receivables from our two
largest customers, SRS and IAMA, both of which unexpectedly closed
operations in 2005. Overall, SRS and IAMA comprised approximately
40% of our total revenue for the year 2005. The sales complied with
our revenue recognition policy and at the time of sale collectibility
was highly probable.
Interest Expense.
Interest expense increased by $958,887, or approximately 130%,
from $736,460 at the year ended December 31, 2004 to $1,695,347 for
the year ended December 31, 2005. 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 $53,000 per month until such time as an effective
registration statement is on file with the Securities and Exchange
Commission.
Costs recorded as interest expense primarily consist of the
amortization of the beneficial conversion feature of the convertible
notes issued by us in the years 2003, 2004 and 2005. 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.
Net Loss.
Net loss decreased by $964,188, or approximately 19%, from a net
loss of $4,989,200 for the year ended December 31, 2004 to a net loss
of $4,025,012 for the year ended December 31, 2005. The decreased
net loss is attributable to higher sales and lower operating
expenses. The net loss for the year 2006 and beyond is anticipated
to continue to decline as sales increase without a corresponding
increase in operating expenses and a reduction in beneficial
conversion feature amortization expense.
Factors That May Affect Our Operating Results.
Our operating results can vary significantly depending upon a
number of factors, many of which are outside our control. General
factors that may affect our operating results include:
- market acceptance of and changes in demand for products;
- a small number of customers account for, and may in future
periods account for, substantial portions of our revenue, our
revenue could decline because of delays of customer orders or
the failure to retain customers;
- gain or loss of clients or strategic relationships;
- announcement or introduction of new products by us or by our
competitors;
- the ability to build brand recognition;
- timing of sales to customers;
- price competition;
- the ability to upgrade and develop systems and infrastructure to
accommodate growth;
- the ability to attract and integrate new personnel in a timely
and effective manner;
- the ability to introduce and market products in accordance with
market demand;
- changes in governmental regulation;
- reduction in or delay of capital spending by clients due to the
effects of terrorism, war and political instability; and
- general economic conditions.
We believe that our planned growth and profitability will depend
in large part on the ability to promote our products, gain clients
and expand our relationship with current clients. Accordingly, we
intend to invest in marketing, strategic partnerships, and
development of our customer base. If we are not successful in
promoting our products and expanding our customer base, this may have
a material adverse effect on our financial condition and our ability
to continue to operate our business.
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 decrease is attributed primarily to the increase in salaries and
related expense.
The net cash used in operating activities was $1,866,970 for the
year ended December 31, 2005 compared to $2,335,904 for the year
ended December 31, 2004, a decrease of $468,934 or approximately 20%.
This decrease is attributed primarily to the decrease in our net loss
of approximately $800,000 partially offset by an increase of
approximately $700,000 of amortization of beneficial conversion
feature (and other debt discount) and the increase in other liabilities.
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.
Net cash used in investing activities decreased to $45,844
during the year ended December 31, 2005 as compared to $100,356
during the year ended December 31, 2004, a decrease of $54,512, or
approximately 54%. This decrease 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.
General Discussion.
Our 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, our
assets consisted primarily of net accounts receivable of $228,441 and
inventory of $118,216. The cash balance was $984.
Our current liabilities totaled $2,793,199 and $1,760,936 at
December 31, 2005 and 2004, respectively, and current assets totaled
$551,360 and $1,020,731 as of those dates, respectively. This
resulted in working capital deficits of $2,241,839 and $740,205 at
December 31, 2005 and 2004, respectively. The increase in current
liabilities is primarily due to ongoing financing of us through the
issuance of convertible notes. The decrease in current assets is
primarily due to the use of cash to fund ongoing product development
and operations. At December 31, 2005, our assets consisted primarily
of net accounts receivable totaling $328,897, of inventory of
$120,481, and cash of $85,357.
We incurred a net loss of $2,118,970 for the three months ended
March 31, 2006. We had an accumulated deficit of $24,903,637 as of
that date.
During the years ended December 31, 2005 and 2004, we incurred
losses of $4,025,012 and $4,989,200, respectively. We had an
accumulated deficit of $22,784,667 as of December 31, 2005.
The above factors raise substantial doubt as to our ability to
continue as a going concern. Our current cash flow from operations
will not be sufficient to maintain our capital requirements for the
next twelve months. Accordingly, implementation of our business
plans will depend upon our ability to raise additional funds through
bank borrowings and equity or debt financing. We estimate that we
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 we continue as a going concern that contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business assuming we will continue as a going concern. However, our
ability to continue as a going concern on a longer-term basis will be
dependent upon our ability to generate sufficient cash flow from
operations to meet our obligations on a timely basis, to retain our
current financing, to obtain additional financing, and ultimately
attain profitability.
We have been successful in obtaining the required cash resources
through private placements, convertible notes and notes payable to
service our operations during 2005 and the first quarter of 2006.
Financing activities provided cash of $1,261,267 for the year ended
December 31, 2005 through the issuance of convertible notes. Our 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.
Management plans to continue raising additional capital through a
variety of fund raising methods during the remainder of 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 our financial position. Whereas we have 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 our equity/debt instruments will be sufficient
to meet our capital needs, or that financing will be available on
terms favorable to us. The financial statements do not include any
adjustments relating to the recoverability and classification of
liabilities that might be necessary should we be unable to continue as
a going concern.
If funding is insufficient at any time in the future, we may not
be able to take advantage of business opportunities or respond to
competitive pressures, or may be required to reduce the scope of our
planned product development and marketing efforts, any of which could
have a negative impact on our business and operating results. In
addition, insufficient funding may have a material adverse effect on
our financial condition, which could require it 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 us.
To the extent that we raise 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 our operations. Regardless of whether our cash assets
prove to be inadequate to meet our operational needs, we may seek to
compensate providers of services by issuing stock in lieu of cash,
which may also result in dilution to existing stockholders.
Montgomery Equity Partners.
On June 13, 2006, we entered into and closed on a Securities
Purchase Agreement with Montgomery Equity Partners, LP. Under this
agreement, Montgomery agreed to purchase from us 12% convertible
debentures in the aggregate principal amount of $1,200,000; they will
mature on June 13, 2008. The debentures will be convertible from
time to time into our common stock by Montgomery at the price per
share, in its option, of either $0.3155 or 80% of the lowest closing
bid price of our common stock, for the 5 trading days immediately
preceding the conversion date. We received $600,000 upon closing,
will receive another $300,000 one business day prior to the date a
registration statement is filed, and we will receive the final
$300,000 one business day prior to the date a registration statement
is declared effective by the Securities and Exchange Commission.
In this transaction, Montgomery also received three five-year
warrants, all dated June 13, 2006, to purchase:
- Class A warrant for 800,000 shares of common stock at an
exercise price of $0.15;
- Class B warrant for 800,000 shares at an exercise price of $0.35
per share; and
- Class C warrant for 800,000 shares at an exercise price the
lesser of $0.35 or 80% of the lowest closing bid price of our
common stock per share.
Series B Preferred Stock.
On February 17, 2006, we consummated a private placement
financing transaction pursuant to a Securities Purchase Agreement
with 7 accredited investors obtained by our placement agent, Divine
Capital Markets, LLC, whereby these investors purchased an aggregate
amount of $250,000 of our Series B 10% convertible preferred stock.
On May 30, 2006, we consummated a private placement financing
transaction pursuant to a Securities Purchase Agreement with
Castellum Investments, S.A. whereby this investor purchased $290,000
of our Series B 10% convertible preferred stock.
$805,000 Convertible Notes.
In March 2004, we borrowed $715,000 under convertible notes
payable. All borrowings are due in March 2006, with monthly interest
payments on the outstanding balance; interest accrues at 9% per
annum. These notes may be converted into our common stock based on a
formula subject to a floor of $0.001 per share. In July 2004, we
borrowed an additional $90,000 under terms identical to those of the
convertible notes. During the quarter ended March 31, 2006,
approximately $114,500 of principal balance of convertible notes
payable was converted into common stock.
As of March and April 2006, there are certain of these note
holders whose notes have expired and as such were due and payable.
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. In April 2006, the companies and the note
holders agreed to extend the term of the note until March 31, 2008.
Inflation.
The impact of inflation on our costs and the ability to pass on
cost increases to our customers over time is dependent upon market
conditions. We are not aware of any inflationary pressures that have
had any significant impact on our operations over the past quarter,
and we do not anticipate that inflationary factors will have a
significant impact on future operations.
Off Balance Sheet Arrangements.
We do not engage in any off balance sheet arrangements that,
individually or in the aggregate, are reasonably likely to have a
current or future effect on our financial condition, revenues, results
of operations, liquidity or capital expenditures.
Contractual Obligations.
We have contractual obligations to repay our notes payable and
to make payments under our operating lease agreement:
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 - -
We are required to pay liquidated damages at the rate of 2% per
month (based on the Longview notes' principal balance) until such
time as a registration statement is effective. We have accrued
$131,551 in liquidated damages, which is included in other
liabilities in the consolidated balance sheet at December 31, 2005.
We have accrued a total of $264,601 in liquidated damages, which is
included in other liabilities in the condensed balance sheet, at
March 31, 2006.
Critical Accounting Policies.
The Securities and Exchange Commission has issued Financial
Reporting Release No. 60, "Cautionary Advice Regarding Disclosure
About Critical Accounting Policies", suggesting companies provide
additional disclosure and commentary on their most critical
accounting policies. In this Release, the Securities and Exchange
Commission 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, our most critical accounting policies
include: the use of estimates; revenue recognition; stock based
compensation arrangements; warranty reserves; inventory reserves;
allowance for doubtful accounts; deferred tax valuation allowance;
and derivative liabilities. The methods, estimates and judgments we
use in applying these most critical accounting policies have a
significant impact on the results reported in our financial statements.
Use of Estimates.
The preparation of these financial statements requires us 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, we evaluate
these estimates, including those related to revenue recognition and
concentration of credit risk. We base our 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.
Revenue Recognition.
Revenues result principally from the sale and installation of
wireless radio equipment to customers. Equipment sales are
recognized when products are shipped. We recognize 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) our price to the buyer is
fixed or determinable, as documented on the accepted purchase order;
and (d) collectibility is reasonably assured.
Orders delivered to us by telephone, fax, mail or
email are considered valid purchase orders and once accepted by us
are deemed to be the final understanding between us and our customer
as to the specific nature and terms of the agreed-upon sale
transaction (unless amended by the parties). Products are shipped
and are considered delivered when (a) for FOB factory orders they
leave our shipping dock or (b) for FOB customer dock orders upon
confirmation of delivery. The creditworthiness of customers is
generally assessed prior to our accepting a customer's first order.
We offer installation services to our customers and charges
separately when such services are purchased. Installation by us 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."
Stock-Based Compensation Arrangements.
We issue shares of common stock to various individuals and
entities for certain management, legal, consulting and marketing
services. Effective January 1, 2006, we adopted the provisions of
Statement of Financial Accounting Standards No. 123(R), "Share-Based
Payment." Statement of Financial Accounting Standards 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. We previously
accounted for awards granted under our equity incentive plans under
the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations, and provided the required pro forma
disclosures prescribed by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," as amended.
Warranty Reserves.
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.
Inventory Reserves.
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.
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, we provide 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
December 31, 2005, we carried an allowance for doubtful accounts of
$33,857. In addition, during 2005, receivables totaling $775,547
were written off and charged to expense.
The write-offs in 2005 are associated with the unexpected
bankruptcy of two of our customers and are non-recurring.
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 we are
able to realize their benefit, or that future deductibility is
uncertain. In accordance with Statement of Financing Accounting
Standards No. 109, we records net deferred tax assets to the extent
we believe these assets will more likely than not be realized. In
making such determination, we consider all available positive and
negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning strategies
and recent financial performance.
Derivative Liabilities.
We evaluate free-standing instruments (or embedded derivatives)
indexed to our common stock to properly classify such instruments
within equity or as liabilities in our financial statements, pursuant
to the requirements of the Emerging Issues Task Force No. 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock," Emerging Issues Task
Force No. 01-06, "The Meaning of Indexed to a Company's Own Stock,"
Emerging Issues Task Force No. 05-04, "The Effect of a Liquidated
Damages Clause on a Freestanding Financial Instrument Subject to
Emerging Issues Task Force No. 00-19," and Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended. Our policy is to settle
instruments indexed to our common shares on a first-in-first-out basis.
We account for the effects of registration rights and related
liquidated damages pursuant to Emerging Issues Task Force No. 05-04,
View C, subject to Emerging Issues Task Force No. 00-19. Pursuant
to Emerging Issues Task Force 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. We account for certain embedded conversion features and
free-standing warrants pursuant to Statement of Financial Accounting
Standards No. 133 and Emerging Issues Task Force 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.
Pursuant to Emerging Issues Task Force No. 00-19, we evaluated
the Longview conversion feature and warrants at October 22, 2005.
Management determined that due to the nature of the liquidated
damages we must pay (with no maximum prescribed in the agreements),
We must pursue registration as our 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
Emerging Issues Task Force No. 05-04, we account for the liquidated
damages separately from these two other derivative liabilities.
Management estimated the value of the warrants using the Black-
Scholes valuation model. Because the warrants have an exercise price
greater than the trading price of our 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 our 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 as a reduction
in 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 SB-2 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 SB-2, 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 our adequacy of cash, expectations
regarding net losses and cash flow, statements regarding our growth,
the need for future financing, the dependence on personnel, and our
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. While made in good faith and
pursuant to current judgment as to our operations and financial
condition, these forward-looking statements speak only as of the date
hereof. We expressly disclaim any obligation or undertaking to
release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in our expectations
with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
DESCRIPTION OF PROPERTY
Our principal executive offices currently consists of
approximately 10,560 square feet of office space, which are located
at 4136 Del Rey Avenue in Marina del Rey, California. We leased this
property on October 30, 2003 for a 5-year term at the current monthly
rent of $11,420 as of December 31, 2005. The total rent payments for
2005 were approximately $146,000.
The cost of property and equipment as of December 31, 2005
consisted of the following:
2005
Machinery and equipment $ 275,873
Software and computers 75,019
Building improvements 4,747
355,639
Less accumulated depreciation and amortization (274,841)
$ 80,798
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two years there have not been any relationships,
transactions, or proposed transactions to which we are or were to be
a party, in which any of the directors, officers, or 5% or greater
stockholders (or any immediate family thereof) had or is to have a
direct or indirect material interest, other than as set forth below.
It has been represented to us that the Longview funds have made
investments into GoldSpring, Inc. and Energy & Engine Technology
Corporation. There are no transactions between us and GoldSpring,
Inc. (for which Mr. Hirschman serves on the Board of Directors, and
Mr. Pearce served on the Board of Directors from October 2004 to
October 2005). There are no transactions between us and Energy &
Engine Technology Corporation (for which Mr. Hirschman serves on the
Board of Directors).
In March 2004, we borrowed $250,000 under convertible notes
payable, of which $100,000 came from management or individuals
related to certain management personnel ($50,000 came from Mr. & Mrs.
Trepp, Peter Trepp being the former president, $25,000 from Paul
Zygielbaum, a former employee of us, and $25,000 from Thomas Janes,
who is the father in law of Donald Boudewyn, our executive vice president).
In March 2004, we issued 2,857 restricted shares of common stock
to Brian Corty, a former director, for expenses incurred on behalf of
us in the amount of $23,950.
On June 30, 2004 and September 30, 2004, we issued a total of
6,443 shares of common stock to Mr. Corty for accrued salaries for
2002, 2003 and 2004.
On September 29, 2004, our board of directors appointed Stanley
A. Hirschman as an independent board member. Mr. Hirschman formerly
owned a 0.5% interest in Redwood Grove Capital Management, LLC that is
the management company for the Longview Equity Fund, L.P. and the
Longview International Equity Fund, L.P. (which provided funds to us
under convertible notes); he relinquished this interest on June 27, 2005.
On October 4, 2004, our board of directors appointed Phil E.
Pearce as an independent board member. Mr. Pearce formerly owned a
0.5% interest in Redwood Grove Capital Management, LLC; he
relinquished this interest on June 27, 2005.
On October 6, 2004, our Compensation Committee granted and we
issued Series A preferred stock to Mr. Dix and Mr. Boudewyn totaling
3,000,000 shares. Each share of Series A preferred stock is
convertible initially at the rate of 800 shares of common stock for
each full share of preferred stock (under the terms of the
certificate of designation governing these shares, the conversion
ratio was not changed upon the reverse split of our common stock on
November 23, 2005).
During the year ended December 31, 2004, we issued a total of
96,171 restricted shares of common stock to Mr. Dix for accrued
salaries for 2002, 2003 and 2004. During the year ended December 31,
2004, we issued a total of 80,670 restricted shares of common stock
to Mr. Boudewyn for accrued salaries for 2002, 2003 and 2004. We
since requested the return of the shares issued so as to comply with
the requirements of the Investment Company Act of 1940; these shares
have been returned and cancelled (the value of the shares has been
reflected as a liability so as to comply with the Investment Company
Act of 1940 ).
On December 31, 2004, we moved the assets, employees, and all
related contracts and agreements from 5G Wireless Communications, Inc.
to 5G Wireless Solutions, Inc.
During 2005 and 2004, we used the credit lines of Service Group,
which is a company controlled by Mr. Dix, to help us purchase
equipment, travel and related consumables throughout the year as a
means of managing cash flows.
On January 31, 2006, we issued a total of 128,818 shares of
common stock to fifteen employees, including the chief executive
officer and the executive vice president, as compensation. These
shares had an aggregate value of $103,054 (average of $0.80 per share).
During the quarter ended March 31, 2006, we issued 30,784 and
20,720 shares of common stock to the chief executive officer and the
executive vice president, respectively, and one employee for 6,907
shares of common stock, to settle accrued salaries for 2002, 2003,
and 2004. These shares had an aggregate value of $52,886 (average of
$0.82 per share).
For each of the transactions noted above, the transaction was
negotiated, on our part, on the basis of what is in the best interests
of our stockholders and us. In addition, in each case the interested
affiliate did vote in favor of the transaction; however, the full
board of directors did make the determination that the terms in each
case were as favorable as could have been obtained from non-affiliated parties.
Certain of our directors are engaged in other businesses, either
individually or through corporations in which they have an interest,
hold an office, or serve on a board of directors. As a result,
certain conflicts of interest may arise between such directors and
us. We will attempt to resolve such conflicts of interest in our favor.
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Information.
Our shares of common stock are traded on the Over the Counter
Bulletin Board under the symbol "FGWI." From February 12, 2001
through November 22, 2005, the stock traded under the symbol "FGWC;"
prior to February 12, 2001 the symbol was "TSMK". The range of
closing bid prices shown below is as reported by the Over the Counter
Bulletin Board. The quotations shown reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not
necessarily represent actual transactions, and are shown to reflect
the 1 for 350 reverse split of the common stock that occurred on
November 23, 2005.
Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ending on December 31, 2006
High ($) Low($)
Quarter Ended June 30, 2006 0.70 0.30
Quarter Ended March 31, 2006 1.09 0.63
Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ended on December 31, 2005
High ($) Low($)
Quarter Ended December 31, 2005 2.69 0.59
Quarter Ended September 30, 2005 2.45 1.05
Quarter Ended June 30, 2005 4.55 1.75
Quarter Ended March 31, 2005 4.20 2.45
Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ended on December 31, 2004
High ($) Low($)
Quarter Ended December 31, 2004 8.40 2.80
Quarter Ended September 30, 2004 10.50 3.15
Quarter Ended June 30, 2004 17.15 1.40
Quarter Ended March 31, 2004 30.10 2.80
Holders of Common Equity.
As of July 26, 2006, we had approximately 140 record holders of
our common stock. The number of record holders was determined from
the records of the transfer agent and does not include beneficial
owners of common stock whose shares are held in the names of various
security brokers, dealers, and registered clearing agencies.
Dividend Information.
We have not declared or paid any dividend to stockholders since
it was organized. Our board of directors presently intends to retain
any earnings to finance our operations and does not expect to
authorize cash dividends in the foreseeable future. Any payment of
cash dividends in the future will depend upon our earnings, capital
requirements and other factors.
Securities Authorized for Issuance under Equity Compensation Plans.
We have previously adopted three equity compensation plans (none
of which has been approved by our stockholders): the 2004 Non-Employee
Directors and Consultants Retainer Stock Plan, the Non-Employee
Directors and Consultants Retainer Stock Plan, and the Stock Incentive
Plan. Since we converted to a business development company in 2004,
and under the Investment Company Act of 1940 it was prohibited from
issuing stock or options for services, management made the decision
after such conversion not to issue any further shares under these
three plans and to deregister all of the remaining registered shares
under each of these plans by a Form S-8 POS (filed on March 28, 2006).
Stock and Option Plan.
On December 21, 2005, we adopted a 2006 Stock and Option Plan
(amended and restated in January 2006), since it is no longer subject
to the provisions of the Investment Company Act of 1940, and
registered shares under this plan with the filing of a Form S-8.
This plan replaces one adopted by us in December 2005. The purpose
of the plan is to promote our interests and those of our stockholders
by attracting and retaining employees capable of furthering our
future success and by aligning their economic interests more closely
with those of our stockholders. A total of 1,200,000 shares have
been registered under this plan under Form S-8's filed with the
Securities and Exchange Commission (1,000,000 as of December 31,
2005). As of December 31, 2005, no shares had been issued.
Equity Compensation Plan Information
December 31, 2005
Number of
Securities
Remaining
Number of Available for future
Securities to be Issuance under
Issued upon Weighted-average Equity
Exercise of Exercise Price Of Compensation
Outstanding Outstanding Plans (excluding
Options, Warrants Options, Warrants Securities reflected
And rights And rights in Column (a))
Plan category (a) (b) (c)
Equity compensation
plans approved by
security holders 0 0 0
Equity compensation
plans not approved by
security holders 0 0 Stock and Option Plan:
1,000,000
Total 0 0 Stock and Option Plan:
1,000,000
EXECUTIVE COMPENSATION
Summary Compensation Table.
Annual compensation Long-term Compensation
Awards Payouts
Name and Other Restricted Securities
principal annual stock underlying LTIP All other
position Year Salary Bonus compensation award(s) options/SARs payouts compensation
($) ($) ($) ($) (#)(4) ($) ($)
Jerry Dix, 2005 144,000 - - - - - -
CEO 2004 136,800 - 159,800(1) - - - -
2003 216,000 - - - - - -
Don 2005 96,000 - - - - - -
Boudewyn, 2004 91,700 - 88,200(2) - - - -
EVP 2003 144,000 - - - - - -
Brian 2005 - - 28,200(4) - - - -
Corty, 2004 63,700 - 59,200(3) - - - -
former CTO 2003 168,000 - - - - - - -
(1) During 2003 Mr. Dix was paid $47,300 and had an accrued balance
of $293,300 at December 31, 2003, which was paid by the
restricted shares issued for accrued salaries valued at this
amount.
(2) During 2003 Mr. Boudewyn was paid $19,350 and had an accrued
balance of $262,650 at December 31, 2003, which was paid by the
restricted shares issued for accrued salaries valued at this
amount.
(3) Mr. Corty joined us in January 2002 and resigned as chief
technology officer on September 23, 2004. During 2003 Mr. Corty
was paid $83,590 and had an accrued balance of $156,322 at
December 31, 2003, which was paid by the restricted shares
issued for accrued salaries valued at this amount.
(4) Pursuant to the terms of Mr. Corty's separation agreement, we
retained Mr. Corty as an independent consultant for the period
of January 1 - June 30, 2005. Mr. Corty was paid $4,000 per
month under the terms of that certain agreement.
No other current or former officers or directors has received
compensation exceeding $100,000 over the past three fiscal years.
Employment Agreements.
All prior employment agreements between Mr. Dix and Mr. Boudewyn
expired on February 1, 2005. We intend in the future to enter into
new employment agreements with these individuals.
Other Compensation.
There are no annuity, pension or retirement benefits proposed to
be paid to officers, directors, or employees of us in the event of
retirement at normal retirement date as there was no existing plan as
of December 31, 2005 provided for or contributed to by us.
With the exception of director compensation, no remuneration is
proposed to be paid in the future directly or indirectly by us to any
officer or director. Our independent directors, under their
agreements with us, receive $3,000 per month ($36,000 per year). All
directors may be reimbursed for their reasonable expenses incurred in
connection with attending meetings of our board of directors or
management committees.
FINANCIAL STATEMENTS
Audited financial statements for the years ended December 31,
2005 and 2004, and unaudited financial statement for the three months
ended March 31, 2006, are presented in a separate section at the end
of this prospectus.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
LEGAL MATTERS
Brian F. Faulkner, A Professional Corporation, has issued an
opinion with respect to the validity of the shares of common stock
being offered hereby.
EXPERTS
Our balance sheets as of December 31, 2005 and 2004, and the
related statements of operations, stockholders deficit, and cash
flows in each of the two years in the period ended December 31, 2005,
included in this prospectus, have been audited by Squar, Milner,
Reehl & Williamson, LLP, independent registered public accountants,
as stated in their report appearing herein and are so included herein
in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
AVAILABLE INFORMATION
We have has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a registration statement on Form SB-2 under
the Securities Act of 1933 with respect to the shares of common stock
offered by this prospectus. This prospectus does not contain all of
the information set forth in the registration statement and the
exhibits and schedules filed with the registration statement. Certain
items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to us and the
common stock offered by this prospectus, reference is made to the
registration statement and the exhibits and schedules filed with the
registration statement. Statements contained in this prospectus as
to the contents of any contract or any other document referred to are
not necessarily complete, and in each instance, reference is made to
the copy of such contract or other document filed as an exhibit to
the registration statement, each such statement being qualified in
all respects by such reference.
A copy of the registration statement, and the exhibits and
schedules filed with it, may be inspected without charge at the
public reference facilities maintained by the Commission at 100 F
Street, N.E., Washington, D.C. 20549, and copies of all or any part
of the registration statement may be obtained from such offices upon
the payment of the fees prescribed by the Commission. The public may
obtain information on the operation of the public reference room by
calling the Commission at 1 (800) SEC-0330. The Commission maintains
a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov. The registration statement, including all our
exhibits and any amendments, has been filed electronically with the
Commission.
FINANCIAL STATEMENTS
Condensed Financial Statements (Unuadited)
Three Months Ended March 31, 2006
Condensed Balance Sheet (Unuadited) F-2
Condensed Statements of Operations (Unuadited) F-4
Condensed Statements of Cash Flow (Unuadited) F-6
Notes to Condensed Financial Statements F-8
Consolidated Financial Statements
Years Ended December 31, 2005 and 2004
Report of Independent Registered Public Accounting Firm F-26
Consolidated Balance Sheets F-27
Consolidated Statements of Operations F-28
Consolidated Statements of Changes in Stockholders' Deficit F-29
Consolidated Statements of Cash Flow F-32
Notes to Consolidated Financial Statements F-34
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
F-2
(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
deemed 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
F-4
(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 liability 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
Fair value of Preferred Series B
embedded derivative liability at
commitment date $ 332,500 $ -
Cumulative Preferred Series B undeclared dividends $ 3,356 $ -
F-6
The accompanying notes are an integral part of these condensed
financial statements.
5G WIRELESS COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2006
(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 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
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 stockholders.
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.
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 business
development company), 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.
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 stockholders. 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 days preceding the conversion date, of
(ii) $3.50 (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.
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 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. 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 thereon, 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 $69,000 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 $69,000 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).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
5G Wireless Communications, Inc.
We have audited the accompanying consolidated balance sheets of 5G
Wireless Communications, Inc. (the "Company"), as of December 31,
2005 and 2004 and the related consolidated statements of operations,
stockholders' deficit, and cash flows for each of the two years in
the period ended December 31, 2005. These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of the Company as of December 31, 2005 and 2004, and the consolidated
results of its operations and its cash flows for each of the two
years in the period ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As disclosed in
Note 1, the Company incurred net losses of approximately $4,025,000
and $4,989,000 during the years ended December 31, 2005 and 2004,
respectively, and has an accumulated deficit of approximately
$22,785,000 as of December 31, 2005. 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's plans in regard to these
matters are also described in Note 1. 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.
/s/ Squar, Milner, Reehl & Williamson, LLP
Newport Beach, California
March 13, 2006
5G WIRELESS COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 and 2004
ASSETS
2005 2004
Cash $ 85,357 $ 736,904
Accounts receivable, net of allowance for
doubtful accounts of $33,857 and $29,794,
respectively 328,897 243,884
Inventory 120,481 33,809
Other current assets 16,625 6,134
Total current assets 551,360 1,020,731
Property and equipment, net of accumulated
depreciation and amortization of $274,841 and $203,216,
respectively 80,798 106,579
Total assets $ 632,158 $1,127,310
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Accounts payable and accrued liabilities $ 616,553 $ 427,919
Notes payable 10,000 48,733
Accrued interest on convertible notes and
notes payable 191,774 92,368
Other liabilities 424,769 -
Convertible notes, net of discounts (including
related party amounts totaling $75,000 and $100,000 at
December 31, 2005 and 2004, respectively) 1,550,103 1,191,916
Total current liabilities 2,793,199 1,760,936
Stockholders' deficit:
Preferred series "A" convertible stock,
$0.001 par value; 3,000,000 shares
authorized; 3,000,000 shares outstanding 3,000 3,000
Common stock, $0.001 par value;
5,000,000,000 shares authorized; 3,697,597
(1) and 2,488,678 (1) shares outstanding,
respectively. 3,698 2,489
Additional paid in capital 20,734,610 18,271,556
Common stock held in escrow (1,016) (1,016)
Unearned compensation (116,666) (150,000)
Accumulated deficit (22,784,667) (18,759,655)
Total stockholders' deficit (2,161,041) (633,626)
Total liabilities and stockholders' deficit $ 632,158 $ 1,127,310
F-27
(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 consolidated
financial statements
5G WIRELESS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
Revenues $1,618,932 $ 651,450
Cost of revenues 337,003 199,611
Gross profit 1,281,929 451,839
Operating expenses:
General and administrative 1,464,945 553,453
Salaries and related 627,385 835,999
Research and development 209,543 9,837
Professional/consulting services 1,194,878 3,217,407
Depreciation 71,625 87,883
Total operating expenses 3,568,376 4,704,579
Operating loss (2,286,447) (4,252,740)
Interest expense (including
amortization of financing
costs and debt discounts) (1,695,347) (736,460)
Derivative expense (43,218) -
Net loss $(4,025,012) $(4,989,200)
Loss per common share:
Basic and diluted (1) $ (1.38) $ (3.80)
Weighted average shares outstanding (1): 2,910,748 1,313,272
F-28
(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 consolidated
financial statements
5G WIRELESS COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Series A Common
Preferred Stock Common Stock(1) Stock Held
($0.001 Par) ($0.001 Par) Additional in Unearned Accumulated
Paid-In Escrow Compensation Deficit Total
Shares Amount Shares Amount Total
>
Balance,
December 31,
2003 - - 847,118 847 12,738,978 - - (13,770,455) (1,030,630)
Shares
issued for:
Services - - 440,585 441 2,428,505 - - - 2,428,946
Debt
conversion - - 181,287 181 587,207 - - - 587,388
Cash for
common - - 3,815 4 21,624 - - - 21,628
Shares held
In escrow 1,015,873 1,016 - (1,016) - - -
Services for
preferred
stock 3,000,000 3,000 - - 197,000 - (200,000) - -
Debt
discount
related to
beneficial
conversion
features - - - - 2,298,242 - - - 2,298,242
Amortization
of preferred
stock unearned
compensation - - - - - - 50,000 - 50,000
Net Loss - - - - - - - (4,989,200) (4,989,200)
Balance,
December 31
2004 3,000,000 3,000 2,488,678 2,489 18,271,556 (1,016) (150,000) (18,759,655) (633,626)
Shares
issued for:
Services - - 147,325 147 130,098 - - - 130,245
Debt
conversion - - 1,081,838 1,082 1,110,936 - - - 1,112,018
Amortization
of preferred
stock
unearned
compensation - - - - - - 33,334 - 33,334
Shares
returned by
stockholders - - (20,244) (20) (77,980) - - - (78,000)
Debt discount
related to
beneficial
conversion
features - - - - 1,300,000 - - - 1,300,000
Net Loss - - - - - - - (4,025,012) (4,025,012)
Balance,
December 31
2005 3,000,000 $ 3,000 3,697,597 $3,698 $20,734,610 $ (1,016) $ (116,666) $(22,784,667) $(2,161,041)
F-29
(1) Number of shares 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 consolidated
financial statements
5G WIRELESS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
Cash flows from operating activities:
Net loss $(4,025,012) $(4,989,200)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 71,625 87,883
Bad debt expense 775,547 -
Common stock for services 130,245 2,428,946
Amortization of unearned compensation 33,334 50,000
Derivative liability expense 43,218 -
Amortization of BCF/discount on
convertible notes 1,309,171 627,067
Changes in operating assets/liabilities:
Accounts receivable (860,560) (236,779)
Inventories (86,672) (29,309)
Other current assets (10,491) -
Prepaid expenses - 72,056
Other assets - -
Accounts payable and accrued liabilities 110,634 (579,046)
Accrued interest 260,440 232,478
Other liabilities 381,551 -
Net cash flows used in operating activities (1,866,970) (2,335,904)
Cash flows from investing activities:
Purchase of property and equipment (45,844) (100,356)
Net cash flows used in investing activities (45,844) (100,356)
Net cash flows from financing activities:
Proceeds from notes payable - 85,000
Repayments on notes payable (38,733) (125,634)
Net proceeds from convertible notes payable 1,300,000 2,980,500
Net cash received for common stock - 21,628
Net cash flows provided by financing activities 1,261,267 2,961,494
Net increase (decrease) in cash (651,547) 525,234
Cash, beginning of year 736,904 211,670
Cash, end of year $ 85,357 $ 736,904
Supplemental disclosure of cash flow information:
Cash paid for income taxes: $ 1,723 $ 800
Cash paid for interest $ - $ -
Supplemental disclosure of noncash investing and
financing activities:
Conversion of debt to common stock $1,112,018 $ 587,388
Common stock issued and held in escrow $ - $ 355,556
Preferred stock issued for unearned
Compensation $ - $ 200,000
BCF/discount on convertible
notes payable $1,300,000 $ 2,298,242
F-30
See accompanying notes to consolidated financial statements for
additional disclosures of non-cash investing and financing activities
The accompanying notes are an integral part of these consolidated
financial statements
5G WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business.
5G Wireless Communications, Inc. ("5G Wireless"), through its wholly-
owned subsidiary, 5G Wireless Solutions, is a developer and
manufacturer of wireless telecommunications equipment operating on
the 802.11a/b/g frequency. 5G Wireless and its wholly owned
subsidiary are collectively referred to as the "Company".
5G Wireless 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, 5G Wireless 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, 5G Wireless 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 5G Wireless were
transferred into 5G Wireless Solutions, Inc. in exchange for 100% of
its outstanding common shares.
On June 3, 2005, 5G Wireless' Board of Directors unanimously
determined that it would be in the best interests of 5G Wireless and
its stockholders to seek stockholder approval on certain matters.
Pursuant to a definitive Schedule 14A proxy statement filed with the
Securities and Exchange Commission on September 19, 2005, 5G Wireless
sought approval from the stockholders, at the annual stockholder's
meeting on October 20, 2005, for the following (among other things):
(a) to terminate 5G Wireless' 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, 5G Wireless' stockholders approved (among other
things) (a) the termination of 5G Wireless' status as a business
development company 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, 5G Wireless filed a Form
N-54C with the SEC terminating its status as a BDC. Accordingly, the
accompanying balance sheets as of December 31, 2005 and 2004 have
been presented on a consolidate basis. The balance sheet included in
5G Wireless's financial statements for the year ended December 31,
2004, previously included in its annual report on Form 10-KSB for the
year ended December 31, 2004, was presented on a non-consolidated
basis in accordance with Regulation S-X, Rule 6-03.
On November 3, 2005, 5G Wireless's Board of Directors approved a 1
for 350 reverse stock split of 5G Wireless'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 5G Wireless Communications, Inc.
Going Concern Basis of Presentation.
The accompanying consolidated financial statements have been prepared
assuming that 5G Wireless 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 5G Wireless 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 years ended December 31, 2005 and 2004, 5G Wireless
incurred losses of approximately $4,025,000 and $4,989,000,
respectively, and 5G Wireless has an accumulated deficit of
approximately $22,785,000 as of December 31, 2005. These factors
raise substantial doubt as to 5G Wireless's ability to continue as a
going concern. If 5G Wireless 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, 5G
Wireless will continue to seek additional funds to ensure its
successful growth strategy and to, when appropriate, allow for
potential investments into a diverse portfolio of companies with
strategic information and communications technologies or
applications. Whereas 5G Wireless 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 5G Wireless and/or that
demand for 5G Wireless'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 5G Wireless be unable to
continue as a going concern.
If funding is insufficient at any time in the future, 5G Wireless 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
5G Wireless'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 it to relinquish significant rights to products,
technologies or markets; or
- explore other strategic alternatives including a merger or sale
of 5G Wireless.
To the extent that 5G Wireless 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 5G Wireless's operations. Regardless of whether 5G
Wireless's cash assets prove to be inadequate to meet its operational
needs, 5G Wireless may seek to compensate providers of services by
issuing stock in lieu of cash, which will help it manage its liquidity
but may also result in dilution to existing stockholders.
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 the allowance
for doubtful accounts, inventory and warranty reserves, realization
of long-lived assets and deferred tax asset valuation allowance.
Actual results could differ from those estimates.
Principles of Consolidation.
The consolidated financial statements as of and for the years ended
December 31, 2005 and 2004 include the accounts of 5G Wireless and
its wholly owned subsidiary, 5G Wireless Solutions, Inc. All
significant intercompany transactions and balances have been
eliminated in consolidation.
Cash and Cash Equivalents.
5G Wireless considers all highly liquid fixed income investments with
maturities of three months or less at the time of acquisition, to be
cash equivalents. At December 31, 2005, 5G Wireless had cash of $85,357.
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 5G Wireless's products or services in the ensuing years.
The industry in which 5G Wireless operates is characterized by
technological advancement, change and certain regulations. Should
the demand for 5G Wireless's products prove to be significantly less
than anticipated, the ultimate realizable value of 5G Wireless's
inventories could be substantially less than amounts shown in the
accompanying consolidated balance sheets.
Property and Equipment.
Property and equipment are stated at cost and are depreciated using
the straight-line method over their estimated useful lives of 5-10
years for machinery and equipment and 3-5 years for office furniture
and equipment. Leasehold improvements are amortized over the shorter
of their estimated useful lives or the term of the lease.
Concentrations of Credit Risk.
Financial instruments that potentially subject 5G Wireless to
concentrations of credit risk include cash and accounts receivable.
5G Wireless 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
December 31, 2005, there were no uninsured funds.
5G Wireless's customers are located in many parts of the world. 5G
Wireless 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. 5G Wireless
charges off accounts receivable against the allowance for losses when
an account is deemed to be uncollectible. It is not 5G Wireless's
policy to accrue interest on past due receivables. At December 31,
2005, an allowance for doubtful accounts of $33,857 is maintained to
address such losses, if any.
In 2004, 5G Wireless had no material customers due to a lack of
product sales. For the year ended December 31, 2005, there were two
customers that accounted for more than 10% of 5G Wireless's revenues:
SRS (10%) and IAMA (30%). Both major customers closed operations in
the year 2005, and 5G Wireless recognized approximately $630,500 in
bad debt related to these uncollectible 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, 5G Wireless 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 December 31, 2005, 5G Wireless carries an
allowance for doubtful accounts of $33,857. In addition, during 2005,
receivables totaling $775,547 were written off and charged to expense.
5G Wireless operates in a highly competitive industry that is subject
to intense competition, government regulation and rapid technological
change. 5G Wireless's operations are subject to significant risks
and uncertainties including financial, operational, technological,
regulatory and other business risks associated with such a company.
Income Taxes.
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.
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, 5G Wireless records net deferred tax assets to the
extent 5G Wireless believes these assets will more likely than not be
realized. In making such determination, 5G Wireless 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.
Revenue Recognition.
Revenues result principally from the sale and installation of
wireless radio equipment to customers. Equipment sales are
recognized when products are shipped. 5G Wireless recognizes revenues
in accordance with 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) 5G Wireless'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 5G Wireless by phone, fax, mail or
email are considered valid purchase orders and once accepted by 5G
Wireless are deemed to be the final understanding between 5G Wireless
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 5G Wireless's
shipping dock or (b) for FOB customer dock orders upon confirmation
of delivery. The creditworthiness of customers is generally assessed
prior to 5G Wireless accepting a customer's first order.
5G Wireless offers installation services to customers and charges
separately when such services are purchased. Installation by 5G
Wireless 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 ("FASB")
Emerging Issues Task Force ("EITF") No. 00-21,"Revenue Arrangements
with Multiple Deliverables."
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 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 5G
Wireless 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 1,191,095 and 880,381 for 2005 and 2004,
respectively aggregate shares such as restricted shares, convertible
securities and warrants, which could be considered to be potentially
dilutive.
Fair Value of Financial Instruments.
The carrying value of cash and cash equivalents, accounts receivables,
accounts payable and accrued expenses approximate their fair value due
to their short-term maturities. The fair value of the convertible
notes amounts to $1,608,097, based on 5G Wireless's incremental
borrowing rate. The carrying value of the derivative liability
associated with the convertible notes approximates its fair value
based on assumptions using the Black-Scholes model.
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 4 and 8. 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.
5G Wireless accounts for stock issued to non-employees for services
under SFAS No. 123, "Accounting for Stock Based Compensation. Under
SFAS No. 123, stock compensation expense is recorded based on the fair
value of equity instruments, or the fair value of the services,
whichever is more clearly determinable. Accordingly, 5G Wireless
incurred total stock based compensation expense of $130,245 in 2005
and $2,478,946 in 2004. Of this amount $1,100,587 related to employees
and directors and $1,378,359 related to third parties in 2004. As of
December 31, 2005, there were no options outstanding to employees,
directors or others.
Warranty.
5G Wireless provides a warranty on all electronics sold for a period
of two years 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 5G
Wireless's 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 December 31, 2005, warranty reserve approximated
$26,161, which is recorded under other current liabilities on the
consolidated balance sheet.
Shipping and Handling Costs.
Shipping and handling costs are included in cost of goods sold in the
accompanying statements of operations in accordance with EITF No. 00-
10, "Accounting for Shipping and Handling Fees and Costs."
Research and Development.
In accordance with SFAS No. 2, "Accounting for Research and
Development Costs," all research and development costs must be charged
to expense as incurred. Accordingly, internal research and
development costs are expensed as incurred. Third-party research and
developments costs are expensed when the contracted work has been
performed or as milestone results have been achieved. Company-
sponsored research and development costs related to both present and
future products are expensed in the period incurred. Research and
development costs for the years ended December 31, 2005 and 2004 were
$209,543 and $9,837, respectively.
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 stockholders. 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 December 31, 2005 and 2004, 5G Wireless operates in one
segment.
5G Wireless's chief operating decision-maker evaluates the performance
of 5G Wireless based upon revenues and expenses by functional areas as
disclosed in 5G Wireless's consolidated statements of operations.
Geographical information follows:
Years Ended December 31,
2005 2004
Sales to external customers:
United States $1,529,686 $ 636,950
Asia 14,246 -
Africa 75,000 14,500
Total sales to external customers $1,618,932 $ 651,450
Tangible assets by area:
United States $ 80,797 $ 66,495
All other geographic regions - -
Total tangible assets $ 80,797 $ 66,495
Reclassifications.
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
Discount on Convertible Notes and Preferred Stock.
Discounts on convertible notes and preferred stock 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 EITF No. 00-27 issued
by the American Institute of Certified Public Accountants.
Derivative Liabilities.
5G Wireless evaluates free-standing instruments 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 Issue No. 00-
19", and SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities," as amended. 5G Wireless's policy is to settle
instruments indexed to its common shares on a first-in-first-out basis.
5G Wireless accounts for the effects of registration rights and
related liquidated damages pursuant to EITF No. 05-04, View C, "The
Effect of a Liquidated Damages Clause on a Freestanding Financial
Instrument," 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. 5G Wireless accounts for its 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.
Significant Recent Accounting Pronouncements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4," which clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. In Chapter 4 of Accounting Resources
Board ("ARB") No. 43, paragraph 5 previously stated that ".under some
circumstances, items such as idle facility expense, excessive
spoilage, double freight, and re-handling costs may be so abnormal as
to require treatment as current period charges." SFAS No. 151
requires that such items be recognized as current-period charges,
regardless of whether they meet the criterion of so abnormal (an
undefined term). This pronouncement also requires that allocation of
fixed production overhead to the costs of conversion be based on the
normal capacity of the production facilities. SFAS No. 151 is
effective for inventory costs incurred in years beginning after June
15, 2005. Management does not believe this pronouncement will have a
significant impact on its future financial statements.
In December 2004, the FASB issued SFAS No. 123-R, "Share-Based
Payment," which requires that the compensation cost relating to
share-based payment transactions (including the cost of all employee
stock options) be recognized in the financial statements. That cost
will be measured based on the estimated fair value of the equity or
liability instruments issued. SFAS No. 123-R covers a wide range of
share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. SFAS No. 123-R replaces
SFAS No. 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." As originally issued, SFAS No. 123 established as
preferable a fair-value-based method of accounting for share-based
payment transactions with employees. However, that pronouncement
permitted entities to continue applying the intrinsic-value model of
APB Opinion No. 25, provided that the financial statements disclosed
the pro forma net income or loss based on the preferable fair-value
method. Small business issuers, as defined in Item 10 of Regulation
S-B are required to apply SFAS No. 123-R in the first interim or
annual reporting period that begins after December 15, 2005 (5G
Wireless became a small business issuer upon its de-election as a
BDC, but must complete the fiscal year as a regular filer under Form
10-K). Thus, 5G Wireless's financial statements will reflect an
expense for (a) all share-based compensation arrangements granted
after December 31, 2005 and for any such arrangements that are
modified, cancelled, or repurchased after that date, and (b) the
portion of previous share-based awards for which the requisite
service has not been rendered as of that date, based on the grant-
date estimated fair value. Management has not determined the future
effect of this pronouncement on its future financial statements.
The FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an
amendment of APB Opinion 29, Accounting for Nonmonetary
Transactions." The amendments made by SFAS No. 153 are based on the
principle that exchanges of nonmonetary assets should be measured
using the estimated fair value of the assets exchanged. SFAS No. 153
eliminates the narrow exception for nonmonetary exchanges of similar
productive assets, and replaces it with a broader exception for
exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has "commercial substance" if the
future cash flows of the entity are expected to change significantly
as a result of the transaction. This pronouncement is effective for
nonmonetary exchanges in fiscal periods beginning after June 15,
2005. Management does not believe that this pronouncement will have
a significant effect on its future financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections," which replaces APB Opinion No. 20 and FASB
Statement No. 3. This pronouncement applies to all voluntary changes
in accounting principle, and revises the requirements for accounting
for and reporting a change in accounting principle. SFAS No. 154
requires retrospective application to prior periods' financial
statements of a voluntary change in accounting principle, unless it is
impracticable to do so. This pronouncement also requires that a change
in the method of depreciation, amortization, or depletion for long-
lived, non-financial assets be accounted for as a change in accounting
estimate that is effected by a change in accounting principle. SFAS
No. 154 retains many provisions of APB Opinion 20 without change,
including those related to reporting a change in accounting estimate,
a change in the reporting entity, and correction of an error. The
pronouncement also carries forward the provisions of SFAS No. 3 which
govern reporting accounting changes in interim financial statements.
SFAS No. 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The
Statement does not change the transition provisions of any existing
accounting pronouncements, including those that are in a transition
phase as of the effective date of SFAS No. 154.
In February 2006, the FASB issued SFAS No. 155, "Accounting for
Certain Hybrid Financial Instruments," an amendment of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities"), and
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". In this context, a
hybrid financial instrument refers to certain derivatives embedded in
other financial instruments. Among other things, SFAS No. 155
permits fair value re-measurement of any hybrid financial instrument
that contains an embedded derivative that otherwise would require
bifurcation under SFAS No. 133. In addition, SFAS No. 155
establishes a requirement to evaluate interests in securitized
financial assets in order to identify interests that are either
freestanding derivatives or "hybrids" which contain an embedded
derivative requiring bifurcation. SFAS No. 155 also clarifies which
interest/principal strips are subject to SFAS No. 133, and provides
that concentrations of credit risk in the form of subordination are
not embedded derivatives. Lastly, SFAS No. 155 amends SFAS No. 140
to eliminate the prohibition on a qualifying special-purpose entity
from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative. When SFAS No. 155
is adopted, any difference between the total carrying amount of the
components of a bifurcated hybrid financial instrument and the fair
value of the combined "hybrid" must be recognized as a cumulative-
effect adjustment of beginning deficit/retained earnings. SFAS No.
155 is effective for all financial instruments acquired or issued
after the beginning of an entity's first fiscal year that begins
after September 15, 2006. Earlier adoption is permitted only as of
the beginning of a fiscal year, provided that the entity has not yet
issued any annual or interim financial statements for such year.
Restatement of prior periods is prohibited. Management does not
believe this pronouncement will have a significant impact on its
future financial statements.
Other recent accounting pronouncements issued by the FASB (including
its EITF), the American Institute of Certified Public Accountants,
and the SEC did not or are not believed by management to have a
material impact on 5G Wireless's present or future consolidated
financial statements.
2. INVENTORY
Inventory at December 31, 2005 and 2004 consisted entirely of raw
materials.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2005 and 2004 consisted of the
following:
2005 2004
Machinery and equipment $ 275,873 $ 37,280
Software and computers 75,019 267,768
Building improvements 4,747 4,747
355,639 309,795
Less accumulated depreciation and
amortization (274,841) (203,216)
$ 80,798 $ 106,579
4. NOTES PAYABLE
Notes payable and convertible notes payable consist of the following
at December 31, 2005 and 2004:
2005 2004
Note payable, interest bearing at 10%
per annum with principal and interest
payment of $2,500 monthly, maturing
in July, 2006 $ 10,000 $ 48,733
$135,000 convertible note, bearing
interest at 8% per annum, repaid in
July, 2005 - 50,000
$250,000 convertible note, bearing
interest at 9% per annum, net of
discounts of $4,411 and $103,458
respectively, maturing in March, 2006 75,000 146,542
$805,000 convertible note, bearing
interest at 9% per annum, net of
discounts of $9,310 and $46,562
respectively due through April, 2006 541,290 758,438
$2,000,000 convertible note, bearing
interest 5%, net of discount of
$871,520 and $625,953 of principal
converted, maturing in September, 2007 502,525 236,936
$1,000,000 convertible note, bearing
interest at prime plus 4%, net of
discount of $621,800 and $13,040 of
principal converted, maturing in March, 2007 365,160 -
$300,000 convertible note, bearing
interest at prime plus 4%, net of
discount of $233,872, maturing in July, 2007 66,128 -
Total $1,560,103 $1,240,649
$250,000 Convertible Notes.
In March 2004, 5G Wireless 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 5G
Wireless based on a formula subject to a floor of $0.001 per share.
In connection with the $250,000 Convertible Notes, 5G Wireless
granted warrants to purchase 1,904 (post reverse split) shares of 5G
Wireless'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," 5G Wireless has estimated the
fair value of such BCF to be approximately $176,000 related to these
notes and recorded such amount as a debt discount. Such discount is
being amortized to interest expense over the term of the notes.
Amortization expense during the years ended December 31, 2005 and
2004 approximated $100,000 and $73,000, respectively. 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, 5G Wireless 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 5G Wireless based on a
formula subject to a floor of $0.001 per share.
The conversion feature embedded in the notes 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, 5G
Wireless 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. During the years ended December 31, 2005 and 2004, 5G
Wireless amortized approximately $37,190 and $28,000 of such amount,
respectively. In July 2004, 5G Wireless borrowed an additional
$90,000 under terms identical to those of the $715,000 Convertible Notes.
$2,000,000 Convertible Notes.
On September 22, 2004, 5G Wireless entered into a subscription
agreement with Longview Fund, LP, Longview Equity Fund, LP, and
Longview International Equity Fund, LP whereby these investors
purchased up to $2,000,000 of principal amount of promissory notes,
bearing interest at 5% per annum, of 5G Wireless convertible into
shares of 5G Wireless's common stock. The conversion formula is
subject to a floor of $0.001 per share. The conversion prices is
equal to the lesser of (i) 75% of the average of the five lowest
closing bid prices of 5G Wireless'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 5G Wireless'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.
$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 5G Wireless 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, 5G Wireless received the $1,000,000 that
was the balance of the $2,000,000 convertible note.
The convertible note holders received 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 will be 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
5G Wireless will issue and deliver 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.
As part of this funding arrangement, Jerry Dix and Don Boudewyn, 5G
Wireless's chief executive officer and executive vice president,
respectively, have agreed that for the period of 180 days after the
Second Closing Date during which such registration statement shall
have been current and available for use in connection with the public
resale of the shares and warrant shares, they will not sell or
otherwise dispose of any shares of common stock or any options,
warrants or other rights to purchase shares of common stock or any
other security of 5G Wireless which they own or have a right to
acquire, other than (i) in connection with an offer made to all
stockholders of 5G Wireless or any merger, consolidation or similar
transaction involving 5G Wireless, or (ii) with the prior written
consent of the investors and 5G Wireless, which shall not be
unreasonably withheld.
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, 5G Wireless 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 these notes during the year ended
December 31, 2005 and 2004 approximated $1,300,000 and $404,000,
respectively.
$1,000,000 Convertible Notes.
On March 22, 2005, 5G Wireless entered into a subscription agreement
with Longview Fund, LP, Longview Equity Fund, LP, and Longview
International Equity Fund, LP whereby these investors purchased up to
$1,000,000 of principal amount of promissory notes, bearing interest
at prime plus 4% per annum, of 5G Wireless convertible into shares of
5G Wireless'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 5G Wireless's common stock as reported by the OTC Bulletin
Board for the ninety trading days preceding the conversion date, or
(ii) $3.50 (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 5G Wireless'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 will receive Class A share warrants to
purchase shares of common stock based on the following formulas:
30 Class A Warrants will be 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 $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, 5G Wireless 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
notes. Amortization expense on this note during the year ended
December 31, 2005 approximated $378,200.
$300,000 Convertible Notes.
On July 22, 2005, 5G Wireless entered into a subscription agreement
with Longview Fund, LP, Longview Equity Fund, LP, and Longview
International Equity Fund, LP whereby these investors purchased up to
$300,000 of principal amount of promissory notes, bearing interest at
prime plus 4% per annum, of 5G Wireless convertible into shares of 5G
Wireless'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 5G Wireless'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 5G Wireless'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 will receive Class A share warrants to
purchase shares of common stock based on the following formulas:
30 Class A Warrants will be 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 98-5 and EITF 00-27, 5G Wireless 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 year ended December 31,
2005 approximated $66,128.
During 2005 and 2004, approximately $1,100,000 and $407,000,
respectively, of principal balance of convertible notes payable were
converted into common stock (see Note 4), including $75,000 and
$100,000, respectively, from debt agreements entered into during 2003.
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 5G Wireless's Regulation E exemption
from registration ceases to be effective. This exemption (evidence
by a Form 1-E filed when 5G Wireless operated as a BDC), ceased to be
effective on October 22, 2005. Specifically, 5G Wireless 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, 5G Wireless must file a registration statement with
the SEC and within 90 days, it must have such registration statement
be effective.
5G Wireless 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, 5G Wireless evaluated the Longview
conversion feature and warrants at October 22, 2005. Management
determined that due to the nature of the liquidated damages 5G
Wireless must pay (with no maximum prescribed in the agreements), 5G
Wireless 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, 5G Wireless 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 5G Wireless'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 5G Wireless's
outstanding shares at any time), estimated conversions during the
term of the notes and discounting the cash flows using discount rates
of 75%. Management has established a liability and has estimated the
change in the fair value of the conversion feature between October
2005 and December 31, 2005 to be $43,218, which is reflected as
derivative expense.
Liquidated Damages.
5G Wireless 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. 5G Wireless
has accrued $131,551 in liquidated damages, which is included in
Other Liabilities in the accompanying consolidated balance sheet at
December 31, 2005.
Maturities
Principal maturities of notes and convertible notes (assuming no
conversion) are as follows for the years ending December 31:
2006 $2,009,647
2007 1,286,960
2008 -
2008 -
2009 -
thereafter -
$3,296,607
5. STOCKHOLDERS EQUITY (DEFICIT)
Preferred Stock.
Series A.
5G Wireless has 3,000,000 shares of Series A preferred stock
authorized. On October 6, 2004, 5G Wireless's Compensation Committee
granted and 5G Wireless issued Series A preferred stock to Mr. Dix
and Mr. Boudewyn totaling 3,000,000 shares. Each share of Series A
preferred stock is convertible at the rate of 800 shares of common
stock for each full share of preferred stock (under the terms of the
certificate of designation governing these shares, the conversion
ratio was not changed upon the reverse split of 5G Wireless's common
stock on November 23, 2005).
Each share of outstanding Series A preferred stock entitles the
holder thereof to vote on each matter submitted to a vote of the
stockholders of 5G Wireless 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 preferred stock 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. The preferred
shares are convertible after three years from issuance.
A third party conducted an evaluation prior to the issuance and
concluded that the value of the preferred shares was $200,000,
$33,334 of which was expensed for the year ended December 31, 2005.
The difference of $116,666 is carried as unearned compensation in the
Consolidated Statement of Stockholders' Deficit.
Series B.
During November and December 2005 , 5G Wireless received an
aggregate $250,000 in cash as an investment in Series B preferred
stock, which was approved by 5G Wireless's Board of Directors and
designated in January 2006. At December 31, 2005, such amount is
included in Other Liabilities in the accompanying consolidated
balance sheet. See Note 9 for a description of the Series B
preferred stock.
Common Stock
During the year ended December 31, 2005, 5G Wireless issued 147,325
(post reverse split) shares of common stock on exchange for services
valued at approximately $130,000. Additionally, during the year
2005, 5G Wireless issued a total of 1,081,838 (post reverse split)
shares of common stock due to the conversion of notes and accrued
interest having a total value of $1,112,018. Value was based on the
terms of an agreement or if no value is given for the shares, the
closing market price on the dates of grant.
On November 16, 2004, 5G Wireless issued 2,815 (post reverse split)
restricted shares of common stock valued at approximately $10,000
($3.55 (post reverse split) per share) to an investor. In addition,
the investor received four warrants to purchase a minimum of $10,000,
but not greater than $250,000, in shares of common stock during each
quarterly period during the 2005 calendar year. This purchase of
shares is in connection with a license agreement entered into by the
parties, dated February 19, 2004.
On September 16, 2004, 5G Wireless filed a Certificate of Amendment to
Articles of Incorporation. This document amended Article III of the
Articles of Incorporation to increase the number of authorized shares
of common stock from 800,000,000 to 5,000,000,000. Under the
provisions of 5G Wireless's Articles of Incorporation, as amended,
this action does not require a vote of stockholders.
During the year ended December 31, 2004, 5G Wireless issued 440,585
(post reverse split) shares of common stock for services, which were
valued at approximately $2,429,000. Value is based on the terms of an
agreement or if no value is given for the shares, the closing market
price on the dates of granting will be used. Included in such
issuances, were approximately 255,036 (post reverse split) shares
issued to certain consultants, employees and directors of 5G Wireless
in accordance with the related employment agreements valued at
approximately $1,100,587 (based on the closing market price on the
dates of grant). Approximately 196,880 (post reverse split) shares
(valued at approximately $661,000) of the shares issued to certain
officers, directors and employees during the year ended December 31,
2004 were issued to settle prior years obligations.
During the year ended December 31, 2004, in accordance with the terms
of the applicable convertible notes payable agreements, 5G Wireless
issued approximately 181,287 (post reverse split) shares of common
stock in connection with the conversion of notes payable and accrued
expenses totaling approximately $587,000.
On November 3, 2004, 5G Wireless placed 1,015,873 (post reverse split)
shares in an escrow account pursuant to terms of $2,000,000
convertible notes, described above.
Warrants
From time to time, 5G Wireless may grant warrants in conjunction with
the issuance of certain financial instruments.
During the years ended December 31, 2005 and 2004, 5G Wireless
granted warrants to certain convertible note holders to purchase a
total of 310,714 (post reverse split) and 866,667 (post reverse
split) shares, respectively, of 5G Wireless's common stock at
exercise prices ranging from $3.50 per share to $11.55 per share
(post reverse split).
Weighted-
Number of Average
Shares Exercise Price
(post reverse (post reverse
split) split)
Warrants outstanding and exercisable at
December 31, 2003 13,714 $3.94
Granted 866,667 $7.02
Exercised - -
Expired - -
Warrants outstanding and exercisable at
December 31, 2004 880,381 $6.97
Granted 310,714 $3.50
Exercised - -
Expired - -
Warrants outstanding and exercisable at
December 31, 2005 1,191,095 $6.07
The number of outstanding and exercisable warrants as of December 31,
2005 is provided below:
Outstanding and Exercisable
Number of Weighted- Weighted-
Shares Average Average
Range of Exercise Prices (post reverse Exercise Remaining
(post reverse split) split) Price Life (Years)
(post reverse)
split)
$3.50 310,714 $3.50 4.25
$3.94 13,714 $3.94 2.5
$ 7.00-7.14 858,008 $7.02 3.25
$11.55 8,659 $11.55 4.25
1,191,095
Fair Value Disclosure.
The fair value of warrants was estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
Years Ended December 31,
2005 2004
Weighted-average expected life (years) 1.94 0.083
Annual dividend per share - -
Risk-free interest rate 4.5% 4.5%
Volatility 450% 225%
Weighted-average fair value of
options and warrants granted (post
reverse split) $6.07 $7.02
Because the determination of the fair value of all warrants and
options granted includes the factors described in the preceding
paragraph, and because additional warrants and option grants are
expected to be made each year, the pro forma disclosures included in
Note 1 are not likely to be representative of the pro forma effect on
reported net income for future years.
6. INCOME TAXES
The components of income tax benefits consist of the following:
2005 2004
Current:
Federal $ - $ -
State - -
Total current - -
Deferred:
Federal - -
State - -
Total deferred - -
$ - $ -
At December 31, 2005, 5G Wireless has federal net operating loss
carryforwards of approximately $19.6 million and state tax net
operating loss carryforwards of approximately $9.1 million,
respectively. The carryforwards begin to expire in 2011 and 2013,
respectively.
The benefit for income tax differs from the amounts computed by
applying the statutory federal income tax rate of 34% as follows:
2005 2004
Computed tax (benefit) expense $(1,368,504) $(1,696,328)
State taxes, net of federal benefit (241,501) (299,352)
Non-Deductible Expenses 59,636 -
Valuation allowance 1,550,369 1,995,680
$ - $ -
The tax effects of temporary differences that gave rise to
significant portions of deferred tax assets at December 31, 2005 and
2004 are as follows:
2005 2004
Federal and state net operating losses $ 7,224,388 $ 5,236,874
Accruals for financial statement purposes
not currently deductible 69,042 506,187
Total deferred tax assets $ 7,293,430 $ 5,743,061
Valuation allowance (7,293,430) (5,743,061)
$ - $ -
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which temporary
differences become deductible. Management considers projected future
taxable income and tax planning strategies in making this assessment.
Based upon the history of operating losses, management believes it is
more likely than not 5G Wireless will not realize the benefits of
these deductible differences. A full reduction allowance has been
recorded to offset 100% of the deferred tax asset.
7. COMMITMENTS AND CONTINGENCIES
Lease Commitments.
In October 2003, 5G Wireless negotiated an operating lease agreement
for its office and research and development space of approximately
10,560 square feet in Marina Del Rey, California for a five-year
term, ending in 2008.
5G Wireless is committed to make future aggregate rental payments
under the terms of the lease agreement as noted below.
Year Ending
December 31,
2006 $ 153,368
2007 152,814
2008 124,770
Total commitments
$
430,952
Rent expense approximated $146,000 and $148,000 for the years ended
December 31, 2005 and 2004, 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 5G
Wireless has been threatened.
On June 15, 2005, 5G Wireless received a summons from third parties
seeking damages against a former employee of 5G Wireless for breach
of a residential lease and damage to a residential property in 2001.
The claim against 5G Wireless filed in New York Supreme Court
(Chenango County) alleges that the former employee was a principal in
Wireless ThinkTank (a wholly owned subsidiary of Company
Communications, Inc.) and conducted business from such residence.
Management believes 5G Wireless 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. Consequently, No accrual has been made in the
accompanying financial statements.
Consulting Agreements.
In connection with the Longview subscription agreement, 5G Wireless
entered into a consulting agreement with Ghillie Fanaz AG. Under
this agreement, the consultant was paid a "commencement bonus" of
$100,000. Under this agreement, this consultant helped in:
- developing and implementing appropriate plans and means for
presenting 5G Wireless and its business plans, strategy and
personnel to the financial community, establishing an image
for the company in the financial community, and creating
the foundation for subsequent financial public relations
efforts;
- maintain an awareness of 5G Wireless's plans, strategy and
personnel, as they may evolve, and consult with 5G Wireless
regarding communicating appropriate information regarding such
plans, strategy and personnel to the financial community;
- introduce to 5G Wireless investors who the consultant reasonably
believes to be "accredited investors" with whom the consultant
has a pre-existing substantive relationship; and
- at 5G Wireless's request, review business plans, strategies,
mission statements, budgets, proposed transactions and other
plans for the purpose of advising 5G Wireless of the economic
implications thereof.
8. RELATED PARTY TRANSACTIONS
In March 2004, 5G Wireless borrowed $250,000 under convertible notes
payable, of which $100,000 came from management or individuals
related to certain management personnel ($50,000 came from Mr. & Mrs.
Trepp, Mr. Trepp being the former president, $25,000 from Paul
Zygielbaum, a former employee of 5G Wireless, and $25,000 from Thomas
Janes, who is the father in law of Donald Boudewyn, 5G Wireless's
executive vice president). For further details on these loans,
please see Note 4, $250,000 Convertible Notes.
In 2004, 5G Wireless issued 9,300 restricted shares of common stock
to Mr. Corty, a former director, for expenses and accrued salaries
for 2002, 2003 and 2004.
On September 29, 2004, 5G Wireless's Board of Directors appointed
Stanley A. Hirschman as an independent board member. Mr. Hirschman
formerly owned a 0.5% interest in Redwood Grove Capital Management,
which is the management company for the Longview funds (which provided
$2,000,000 convertible notes described below); he relinquished this
interest on June 27, 2005.
On October 4, 2004, 5G Wireless's Board of Directors appointed Phil E.
Pearce as an independent board member. Mr. Pearce formerly owned a
0.5% interest in Redwood Grove Capital Management; he relinquished
this interest on June 27, 2005.
On October 6, 2004 5G Wireless's Compensation Committee granted and
5G Wireless issued 3,000,000 shares of Series A preferred stock to
Mr. Dix and Mr. Boudewyn totaling 3,000,000 (prior to the election to
be a BDC). See Note 5 for a further discussion.
During the year ended December 31, 2004, 5G Wireless issued a total
of 96,171 (post reverse split) restricted shares of common stock to
Mr. Dix for accrued salaries for 2002, 2003 and 2004. During the
year ended December 31, 2004, 5G Wireless issued a total of 80,670
(post reverse split) restricted shares of common stock to Mr.
Boudewyn for accrued salaries for 2002, 2003 and 2004. 5G Wireless
has since requested the return of the shares issued so as to comply
with the requirements of the 1940 Act. 5G Wireless has since
received the shares issued to Mr. Dix and Mr. Boudewyn, which have
been cancelled.
On December 31, 2004, 5G Wireless moved the assets, employees, and
all related contracts and agreements from 5G Wireless to 5G Wireless
Solutions, Inc. As part of its obligations, 5G Wireless issued
restricted common shares for the accrued portion of salaries for the
fourth quarter of fiscal 2004.
During 2005 and 2004, 5G Wireless used the credit lines of Service
Group, which is a company controlled by Mr. Dix, chief executive
officer of 5G Wireless, to help 5G Wireless purchase equipment,
travel and related consumables throughout the year as a means of
managing cash flows.
9. SUBSEQUENT EVENTS
On January 18, 2006, 5G Wireless adopted the 2006 Stock and Option
Plan (which amended and replaced a 2006 Non-Employee Directors and
Consultants Retainer Stock Plan adopted on December 21, 2006). The
purpose of the plan is to promote the interests of 5G Wireless and
its stockholders by attracting and retaining employees and
consultants capable of furthering the future success of 5G Wireless
and by aligning their economic interests more closely with those of
5G Wireless's stockholders; the services are to be compensated for
with stock option and stock grants. Options granted under this plan
are to be exercisable for a period of ten years from the grant date at
whatever price is established by the Board of Directors, in its sole
discretion, on the date of the grant. A total of 1,200,000 shares of
common stock have been registered under this plan as a result of a
Form S-8's filed with the SEC.
On January 19, 2006, 5G Wireless Solutions, Inc., a wholly owned
subsidiary, was merged with and into 5G Wireless.
On February 17, 2006, 5G Wireless consummated a private placement
financing transaction pursuant to a Securities Purchase Agreement
with seven accredited investors obtained by 5G Wireless's placement
agent, Divine Capital Markets, LLC, whereby these investors purchased
an aggregate amount of $250,000 Series B 10% convertible preferred
stock of 5G Wireless, which equated to 250,000 shares of this stock.
5G Wireless paid a commission of $25,000 (10% of the amount of funds
raised) to Divine Capital in connection with this offering. Each
share of Series B preferred stock is convertible into shares of 5G
Wireless'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.
There are 5,000,000 shares of Series B preferred stock authorized.
Each share of Series B preferred stock entitles the holder thereof to
vote on each matter submitted to a vote of the stockholders of 5G
Wireless 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 preferred stock 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.
Effective on March 4, 2006, the outstanding balance and accrued
interest on certain notes was converted into 145,558 restricted
shares of common stock. On March 4, 2004, 5G Wireless borrowed
$250,000 under these convertible notes payable, of which $100,000
came from management or individuals related to certain management
personnel. All notes were due on March 4, 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 5G Wireless at the lesser of: (a) in accordance with
the terms of a subsequent financing, at the option of the holder, (b)
125% of the closing bid price on the closing date, as defined, or (c)
60% of the average of the three lowest closing bid prices during the
twenty trading days immediately prior to the conversion date. The
warrants issued in connection with these notes have not been
exercised to date.
Effective on March 31, 2006, the outstanding balance and accrued
interest on certain was converted into restricted shares of common
stock. On March 31, 2004, 5G Wireless borrowed $715,000 under these
convertible notes payable. All notes were due on March 31, 2006,
with monthly interest payments on the outstanding balance; interest
accrues at 9% per annum. These notes may be converted into common
stock of 5G Wireless at the lesser of: (a) in accordance with the
terms of a subsequent financing, at the option of the holder, (b)
125% of the closing bid price on the closing date, as defined, or (c)
100% of the closing bid price during the sixty trading days
immediately prior to the conversion date.
On March 27, 2006, 5G Wireless's Chief Financial Officer, Lawrence C.
Early, accepted an offer of employment from another company and
resigned this position effective April 7, 2006.
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Information on this item is set forth in the prospectus under
the heading "Disclosure of Commission Position on Indemnification for
Securities Act Liabilities."
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in
connection with the issuance and distribution of the securities being
registered, all of which are being paid by 5G Wireless*:
Securities and Exchange Commission registration fee $ 1,013
Legal fees and expenses 25,000
Accounting fees and expenses 10,000
Miscellaneous offering costs 5,000
Total $ 41,013*
* All fees, except the Securities and Exchange Commission
registration fee, are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On November 3, 2005, the board of directors approved a 1 for 350
reverse stock split of our common stock. The November 23, 2005
reverse stock split has been retroactively reflected in the following
disclosure. Unless otherwise indicated, all references to outstanding
common shares, including common shares to be issued upon the exercise
of warrants and convertible notes payable, and their value per shares
refer to post-split amounts.
5G Wireless has made the following sales of unregistered
securities of during the past three years:
(a) During the three months ended September 30, 2003, 5G
Wireless issued 1,234 shares of common stock to its then president,
Peter Trepp, in connection with his employment agreement with 5G
Wireless; these shares were valued at $12,530 ($10.15 per share).
(b) At various times during the three months ended
September 30, 2003, 5G Wireless issued a total of 33,979 shares of
common stock in connection with conversion of convertible debentures
issued by 5G Wireless on February 12, 2002. The shares issued were
valued at $95,141 ($2.80 per share).
(c) During the three months ended September 30, 2003, 5G
Wireless issued subordinated promissory notes in the principal amount
of $135,000 to four investors.
(d) In November 2003, 5G Wireless entered into an
agreement to sell 23,920 shares of our common stock at a price range
from $23.66 to $25.13 per share for an aggregate purchase price of
$430,000 in a private placement to accredited investors between
November 11, 2003 and February 16, 2004.
(e) In February 2004, 5G Wireless issued 1,957 shares of
common stock to one accredited investor for $31,500 ($16.09 per share).
(f) In March 2004, 5G Wireless borrowed $250,000 under
convertible notes payable, of which $100,000 came from management or
individuals related to certain management personnel. The $250,000
convertible notes may be converted into common stock of 5G Wireless
at the lesser of: (a) in accordance with the terms of a subsequent
financing, at the option of the holder, (b) 125% of the closing bid
price on the closing date, as defined, or (c) 60% of the average of
the three lowest closing bid prices during the twenty trading days
immediately prior to the conversion date. In connection with the
$250,000 convertible notes, 5G Wireless granted warrants to purchase
8,659 (post reverse split) shares of 5G Wireless's common stock at an
exercise price of the lesser of: (a) the five day average closing bid
price prior to closing or (b) the fifteen day average closing bid
price prior to exercise. The warrants issued in connection with
these notes have now expired. The company and the note holders have
subsequently agreed to extend the notes, which expired in March 2006,
for an additional two years.
(g) In March 2004, 5G Wireless borrowed $715,000 under
convertible notes payable. The $715,000 convertible notes may be
converted into common stock of 5G Wireless at the lesser of: (a) in
accordance with the terms of a subsequent financing, at the option of
the holder, (b) 125% of the closing bid price on the closing date, as
defined, or (c) 100% of the closing bid price during the sixty
trading days immediately prior to the conversion date. In July 2004,
5G Wireless borrowed an additional $90,000 under terms identical to
those of the $715,000 convertible notes.
(h) During May 2004, 5G Wireless issued 196,138 shares of
common stock to six employees for services valuing $640,567 ($3.26
per share).
(i) In May 2004, 5G Wireless converted promissory notes in
the aggregate of amount of $109,000 including accrued interest held
by five accredited investors into 53,202 shares of common stock
($2.04 per share).
(j) In May 2004, 5G Wireless converted a promissory note
in the amount of $98,855 including accrued interest and penalties
held by one accredited investor into 13,319 shares of common stock
($7.42 per share).
(k) During May 2004, 5G Wireless issued a total of 2,479
shares of common stock to consultants for services valuing $32,812
($13.23 per share).
(l) During May 2004, 5G Wireless issued a total of 2,742 shares
of common stock to two employees for services valuing $35,333 ($12.89
per share).
(m) During June 2004, 5G Wireless issued 28,064 shares of
common stock to fourteen employees for services valuing $301,649
($10.75 per share).
(n) On July 15, 2004, 5G Wireless issued 8,571 shares of
common stock to one company for consulting services rendered to 5G
Wireless. These shares had an aggregate value of $75,000 ($8.75 per share).
(o) On September 10, 2004, 5G Wireless issued 680 shares
of common stock to one company for consulting services rendered to 5G
Wireless. These shares had an aggregate value of $5,000 ($7.35 per share).
(p) On September 13, 2004, 5G Wireless issued 5,714 shares
of common stock to May Davis Group, Inc. as compensation under a
financing agreement between that firm and 5G Wireless. These shares
had an aggregate value of $34,000 ($5.95 per share).
(q) On September 22, 2004, 5G Wireless entered into
subscription agreements with Longview Fund, LP, Longview Equity Fund,
LP, and Longview International Equity Fund, LP whereby these
investors purchased $2,000,000 in convertible notes. These notes
bear interest at 5% per annum and are convertible into shares of 5G
Wireless's common stock at a conversion price equal to the lesser of
(i) 75% of the average of the five lowest closing bid prices of 5G
Wireless's common stock as reported by the OTC Bulletin Board for the
ninety trading days preceding the conversion date, or (ii) $17.50.
There is a floor of $0.001 to the conversion price. In addition to
the convertible note, 5G Wireless issued Class A and Class B share
warrants to purchase shares of common stock. 5G Wireless issued 20
Class A Warrants for each 100 shares issuable had the promissory note
been converted at the closing date. 5G Wireless also issued 125 Class
B Warrants for each $1.00 of principal amount under the notes.
(r) On September 30, 2004, 5G Wireless issued a total of
6,219 shares of common stock to three individuals for consulting
services rendered to 5G Wireless. These shares had an aggregate
value of $33,000 (average of $5.25 per share).
(s) On September 30, 2004, 5G Wireless also issued a total
of 16,150 shares of common stock to six employees of 5G Wireless,
including its chief executive officer and its executive vice
president, in lieu of accrued salaries (five employees) and as a
long-term bonus (one employee). These shares had an aggregate value
of $92,850 (average of $5.74 per share).
(t) On October 6, 2004, 5G Wireless's Compensation Committee
granted and 5G Wireless issued Series A preferred stock to Mr. Dix
and Mr. Boudewyn totaling 3,000,000 shares. Each share of Series A
preferred stock is convertible initially at the rate of 800 shares of
common stock for each full share of preferred stock (under the terms
of the certificate of designation governing these shares, the
conversion ratio was not changed upon the reverse split of 5G
Wireless's common stock on November 23, 2005).
(u) October 11, 2004 5G Wireless issued 15,086 shares of
common stock to a convertible note holder. These shares were valued
at $59,400 or $3.94 per share.
(v) On November 1, 2004, 5G Wireless agreed to sell 2,815
(post reverse split) shares of common at $3.55 (post reverse split)
per share ($10,000). In addition, the investor received four
warrants to purchase a minimum of $10,000, but not greater than
$250,000, in shares of common stock during each quarterly period
during the 2005 calendar year. This purchase of shares is in
connection with a license agreement entered into by the parties,
dated February 19, 2004. The date of sale, and the issuance of the
warrants, actually occurred on November 8, 2004.
(w) On November 1, 2004, 5G Wireless issued 8,571 shares
of common stock to one individual for consulting services to be
performed for 5G Wireless. These shares were valued at $39,000 or
$4.55 per share.
(x) On November 15, 2004, 5G Wireless issued a total of 2,540
shares of common stock as to two individuals and one law firm for
services rendered, valued at a total of $12,000 ($4.72 per share).
(y) On November 16, 2004, 5G Wireless issued a total of
8,819 shares of common stock as a partial conversion of $1,000,000 in
convertible notes (principal and accrued interest) under the Longview
subscription agreements, valued at a total of $25,000 ($2.83 per share).
(z) On November 30, 2004, 5G Wireless issued a total of
17,790 shares of common stock as a partial conversion of $1,000,000
in convertible notes (principal and accrued interest) under the
Longview subscription agreements, valued at a total of $50,000 ($2.81
per share).
(aa) On November 30, 2004, 5G Wireless issued 1,020 shares
of common stock to one individual for consulting services rendered to
5G Wireless. These shares had an aggregate value of $5,000 ($4.90
per share). These shares were returned to the company on June 30,
2005 and cancelled due to rules that governed its then current status
as a business development company.
(bb) On December 13, 2004, 5G Wireless issued a total of
42,907 shares of common stock as a partial conversion of $1,000,000
in convertible notes (principal and accrued interest) under the
Longview subscription agreements, valued at a total of $107,000
($2.49 per share).
(cc) On December 21 and December 31, 2004, 5G Wireless issued a
total of 17,204 shares of common stock as to a consultant for
services, valued at a total of $54,675 ($3.17 per share).
(dd) On December 31, 2004, 5G Wireless issued a total of 6,452
shares of common stock as to three consultants for services, valued
at a total of $24,500 ($3.80 per share).
(ee) On December 31, 2004, 5G Wireless issued a total of
19,223 shares of common stock to seven employees of 5G Wireless,
including the chief executive officer and executive vice president,
for accrued compensation for the fourth quarter of 2004. These
shares were valued at a total of $73,000 ($3.80 per share). 17,643
of these shares were returned to the company on June 30, 2005 and
cancelled due to rules that governed its then current status as a
business development company.
(ff) On March 17, 2005, 5G Wireless issued a total of
11,429 shares of common stock in partial conversion of the $1,000,000
convertible notes (principal and accrued interest) under the Longview
subscription agreements, valued at a total of $19,196 ($1.68 per share).
(gg) On March 22, 2005, 5G Wireless entered into
subscription agreements with Longview Fund, LP, Longview Equity Fund,
LP, and Longview International Equity Fund, LP whereby these
investors purchased an additional $1,000,000 in convertible notes,
with Class A Warrants to purchase up to 100 additional shares of
common stock for each 100 shares issued on the closing date assuming
the complete conversion of the notes issued on the Closing Date. The
exercise price of the warrant is $0.01 per share. The Class A
Warrants are exercisable until five years after the closing date.
Under the secured convertible notes, they are convertible into common
stock of 5G Wireless at a price per share equal to subject to the
lower of (i) $0.01, or (ii) 75% of the average of the five lowest
closing bid prices of the common stock as reported by Bloomberg L.P.
for the principal market for the 90 trading days preceding a
conversion date. The maximum conversion price is $0.01. There is a
floor of $0.001 to the conversion price.
(hh) On March 30, 2005, 5G Wireless issued a total of
37,143 shares of common stock as a partial conversion of $1,000,000
in convertible notes (September 2004) (principal and accrued
interest) under the Longview subscription agreements, valued at a
total of $61,750 ($1.66 per share).
(ii) On March 31, 2005, 5G Wireless issued a total of
93,429 shares of common stock in partial conversion of the $250,000
convertible notes (principal and accrued interest), valued at a total
of $163,500 ($1.75 per share).
(jj) On April 29, 2005, 5G Wireless issued a total of
17,143 shares of common stock as a partial conversion of $1,000,000
in convertible notes (September 2004) (principal and accrued
interest) under the Longview subscription agreements, valued at a
total of $28,500 ($1.66 per share).
(kk) On April 29, 2005, 5G Wireless issued a total of
24,026 shares of common stock as a partial conversion of $1,000,000
in convertible notes (September 2004) (principal and accrued
interest) under the Longview subscription agreements, valued at a
total of $41,892 ($1.74 per share).
(ll) On April 29, 2005, 5G Wireless issued a total of
62,367 shares of common stock as a partial conversion of the $715,000
convertible notes (principal and accrued interest), valued at a total
of $104,273 ($1.67 per share).
(mm) On June 9, 2005, 5G Wireless issued a total of 14,429
shares of common stock as a partial conversion of $1,000,000 in
convertible notes (September 2004) (principal and accrued interest)
under the Longview subscription agreements, valued at a total of
$23,987 ($1.66 per share).
(nn) On July 20, 2005, 5G Wireless entered into
subscription agreements with Longview Fund, LP, Longview Equity Fund,
LP, and Longview International Equity Fund, LP whereby these
investors purchased an additional $300,000 in convertible notes, with
Class A Warrants to purchase one additional share of common stock for
each one share issued on the closing date assuming the complete
conversion of the notes issued on the closing date. The exercise
price of the warrant is $0.01 per share. The Class A Warrants are
exercisable until five years after the closing date. Under the
convertible note, they are convertible into shares of common stock of
5G Wireless at a price per share equal to the lower of (i) $0.01, or
(ii) 75% of the average of the five lowest closing bid prices of the
common stock as reported by Bloomberg L.P. for the principal market
for the ninety trading days preceding a conversion date. The maximum
conversion price is $0.01 per share. There is a floor of $0.001 to
the conversion price.
(oo) On August 2, and August 3, 2005, 5G Wireless issued a
total of 57,166 shares of common stock as a partial conversion of
$1,000,000 in convertible notes (September 2004) (principal and
accrued interest) under the Longview subscription agreements, valued
at a total of $69,029 ($1.21 per share).
(pp) On August 4, 2005, 5G Wireless issued a total of 29,872
shares of common stock as a partial conversion of the $1,000,000 in
convertible notes (March 2005) (principal and accrued interest) under
the subscription agreements, valued at a total of $28,500 ($0.95 per share).
(qq) On August 19, 2005, 5G Wireless issued a total of
21,853 shares of common stock as a partial conversion of the
$1,000,000 in convertible notes (March 2005) (principal and accrued
interest) under the Longview subscription agreements, valued at a
total of $25,091 ($1.15 per share).
(rr) In September 2005, 5G Wireless issued a total of
68,063 shares of common stock as a partial conversion of the
$1,000,000 in convertible notes (September 2004 & March 2005)
(principal and accrued interest) under the Longview subscription
agreements, valued at a total of $54,172 ($0.80 per share).
(ss) On September 30, 2005, 5G Wireless issued a total of
190,602 shares of common stock as a partial conversion of the
$805,000 convertible notes (principal and accrued interest), valued
at a total of $151,400 ($0.79 per share).
(tt) In October 2005, 5G Wireless issued a total of 242,857
shares of common stock as a partial conversion of the $1,000,000 in
convertible notes (September 2004) (principal and accrued interest)
under the Longview subscription agreements, valued at a total of
$188,091 ($0.77 per share).
(uu) On November 11, 2005, 5G Wireless issued shares
totaling 2,600 shares of common stock to a consultant for services.
The shares had an aggregate value of $11,000 (average of $4.23 per share).
(vv) In November 21, 2005, 5G Wireless issued a total of
66,776 shares of common stock as a partial conversion of the
$1,000,000 in convertible notes (September 2004) (principal and
accrued interest) under the Longview subscription agreements, valued
at a total of $55,521 ($0.83 per share).
(ww) On December 22, 2005, 5G Wireless issued shares
totaling 143,301 shares of common stock as final conversion of the
$135,000 in convertible notes. The shares had an aggregate value of
$87,360 (average of $0.61 per share).
(xx) On January 31, 2006, 5G Wireless also issued a total
of 128,818 shares of common stock to fifteen employees, including
30,270 to its chief executive officer and 17,030 to its executive
vice president, as compensation. These shares had an aggregate value
of $103,054 (average of $0.80 per share).
(yy) On February 1, 2006 5G Wireless issued a total of 122,449
to Utek to find new wireless technology being developed by the
university research and development departments. The shares had an
aggregate value of $123,964 (average of $1.01 per share).
(zz) On February 6, 2006, 5G Wireless issued a total of 285,495
shares of common stock as a partial conversion of the $805,000
convertible notes (principal and accrued interest), valued at a total
of $117,974 (average of $0.41 per share).
(aaa) On February 6, 2006, 5G Wireless issued a total of
11,829 shares of common stock to a consultant for services rendered.
The shares had an aggregate value of $10,764 (average of $0.91 per share).
(bbb) On February 6, 2006, 5G Wireless issued a total of
66,667 shares of common stock to Boomerang Networks for the
acquisition of the assets of 5G Wireless. The shares had an aggregate
value of $50,000 ($0.75 per share).
(ccc) On February 13, 2006, 5G Wireless issued 38,480 and
20,720 shares of common stock to its chief executive officer and its
executive vice president, respectively, and one employee for 6,907
shares of common stock, to settle accrued salaries for 2002, 2003,
and 2004. These shares had an aggregate value of $52,886 (average of
$0.80 per share).
(ddd) On February 17, 2006, 5G Wireless consummated a
private placement financing transaction pursuant to a Securities
Purchase Agreement with certain accredited investors obtained by 5G
Wireless's placement agent, Divine Capital Markets, LLC, whereby
these investors purchased an aggregate amount of $250,000 Series B
10% convertible preferred stock of 5G Wireless. In anticipation of
the above financing, on February 1, 2006 5G Wireless issued a total
of 14,286 shares of common stock to Divine and a consultant as
finders' fees for this transaction; these shares were valued at
$14,672 (average of $1.03 per share).
(eee) On April 5, 2006, 5G Wireless entered into a
subscription agreement with Longview Fund, LP under which this
investor will purchase up to $69,000 in convertible notes bearing
interest at 12% per annum of 5G Wireless convertible into shares of
5G Wireless's common stock. The terms of these notes are two years.
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, 5G Wireless issued warrants to purchase 216,668 shares of
common stock on April 5, 2006. 5G Wireless has received a total of
$69,000 under two promissory notes under a first and second closing
under the terms of the subscription agreement.
(fff) On April 25, 2006 5G Wireless issued a total of 25,000
shares of common stock for professional services. These shares had an
aggregate value of $10,250 ($0.41 per share).
(ggg) In May 2006 5G Wireless issued shares totaling 674,749
restricted shares of common stock under a Regulation S offering to
eight investors for a total consideration of $224,629 (average of
$0.36 per share).
(hhh) On May 30, 2006, 5G Wireless issued a total of 460,000
shares of common stock as a partial conversion of the $1,000,000 in
convertible notes (March 2005) (principal and accrued interest) under
the Longview subscription agreements, valued at a total of $103,500
($0.22 per share).
(iii) On May 30, 2006, 5G Wireless consummated a private
placement financing transaction pursuant to a Securities Purchase
Agreement with Castellum Investment, S.A. whereby this investor
purchased an aggregate amount of $290,000 Series B 10% convertible
preferred stock of 5G Wireless.
(jjj) On June 13, 2006, 5G Wireless entered into and closed
on a Securities Purchase Agreement with Montgomery Equity Partners,
LP. Under this agreement, Montgomery agreed to purchase from 5G
Wireless 12% convertible debentures in the aggregate principal amount
of $1,200,000; they will mature on June 13, 2008. The debentures
will be convertible from time to time into the common stock of 5G
Wireless by Montgomery for at the price per share of an amount equal
to either $0.3155 or eighty percent (80%) of the lowest closing bid
price of 5G Wireless's common stock, for the 5 trading days
immediately preceding the conversion date.
In this transaction, Montgomery also received three five-year
warrants, all dated June 13, 2006, to purchase: (a) 800,000 shares of
common stock at an exercise price of $0.15; (b) 800,000 shares at an
exercise price of $0.35 per share; and (c) 800,000 shares at an
exercise price the lesser of $0.35 or 80% of the lowest closing bid
price of 5G Wireless's common stock per share as reported by Bloomberg
L.P. for the 5 trading days prior to an exercise of the warrant. These
warrants are exercisable on a cash basis provided 5G Wireless is not in default
and the shares underlying the warrants are subject to an effective
registration statement.
(kkk) On June 21, 2006 the company issued shares totaling
165,322 restricted shares of common stock under a Regulation S
offering to eight investors for a total consideration of $54,632
(average of $0.39 per share).
(lll) On June 26, 2006, the 5G Wireless issued a total of
511,124 shares of common stock as a partial conversion of the
$805,000 convertible notes (principal and accrued interest), valued
at a total of $108,870 ($0.21 per share).
(mmm) On June 27, 2006, the 5G Wireless issued a total of
160,908 shares of common stock as conversion of the $250,000
convertible notes (principal and accrued interest), which was to
convert into 145,558 shares of common stock on March 4, 2006 but had
not been issued until June 27, 2006, valued at a total of $88,500
($0.55 per share).
(nnn) On June 27, 2006, 5G Wireless issued 11,666, 4,166,
and 833 shares of common stock to Longview Fund, LP, Longview Equity
Fund, LP, and Longview International Equity Fund, LP, respectively,
in connection with the exercise of warrants issued by 5G Wireless on
March 22, 2005 (exercisable at $0.15 per share).
(ooo) On June 30, 2006, 5G Wireless issued a total of
125,000 shares of common stock to a consultant for services. The
shares had an aggregate value of $50,000 (average of $0.40 per share).
(ppp) On July 11, 2006, 5G Wireless issued a total of
239,499 shares of common stock to an individual who provided the
guarantee on lease for the company. The shares had an aggregate value
of $44,906 ($0.19 per share).
(qqq) On July 11, 2006, 5G Wireless issued a total of 77,866
shares of common stock to three individuals for interest on loans
provided to the company. The shares had an aggregate value of $14,600
($0.19 per share).
(rrr) On July 24, 2006, 5G Wireless issued 34,433, 30,825,
and 10,275 shares of common stock to Longview Fund, LP, Longview
Equity Fund, LP, and Longview International Equity Fund, LP,
respectively, in connection with the exercise of warrants issued by
5G Wireless on March 22, 2005 (exercisable at $0.15 per share).
(sss) On July 26, 2006, 5G Wireless issued 60,852 shares of
common stock to Montgomery Equity Partners, LP as fees under the
Securities Purchase Agreement with this firm, dated June 13, 2006.
These sales, except for the conversions in connection with the
Longview notes prior to October 21, 2005 and certain sales in May and
June 2006, were undertaken under Rule 506 of Regulation D under the
Securities Act of 1933. Each of the transactions did not involve a
public offering and each of the investors represented that he/she was
a "sophisticated" or "accredited" investor as defined in Rule 502 of
Regulation D. The sales under in connection with Longview were
undertaken under the exemption from registration as set forth in
Regulation E through 5G Wireless's then status as a business
development company.
The noted sales in May and June 2006 were undertaken in offshore
transactions in which no directed selling efforts were made in the
United States by the issuer, a distributor, any of their respective
affiliates, or any person acting on behalf of any of the foregoing.
In addition, the other provisions of Rule 903(b)(3)(i) and (iii) were
complied with.
ITEM 27. EXHIBITS
Exhibits included or incorporated by reference in this document
are set forth in the attached Exhibit Index.
ITEM 28. UNDERTAKINGS
The undersigned company hereby undertakes to:
(a) (1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
Notwithstanding the forgoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation From the low or high end of
the estimated maximum offering range may be reflected in
the form of prospects filed with the U.S. Securities and
Exchange Commission under Rule 424(b) if, in the aggregate,
the changes in the volume and price represent no more than
a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act of 1933,
treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the small business issuer under the foregoing
provisions, or otherwise, the small business issuer has been advised
that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling
person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(f) (1) For purposes of determining any liability under the
Securities Act, treat the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration
statement as of the time it was declared effective.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities
offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of
those securities.
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, 5G Wireless certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form SB-2 and
authorized this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorize, in the City of Marina del
Rey, State of California, on August 7, 2006.
5G Wireless Communications, Inc.
By: /s/ Jerry Dix
Jerry Dix Chief Executive Officer
Special Power of Attorney
The undersigned constitute and appoint Jerry Dix their true and
lawful attorney-in-fact and agent with full power of substitution,
for him and in his name, place, and stead, in any and all capacities,
to sign any and all amendments, including post-effective amendments,
to this Form SB-2 registration statement, and to file the same with
all exhibits thereto, and all documents in connection therewith, with
the U.S. Securities and Exchange Commission, granting such attorney-
in-fact the full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorney-in-fact may lawfully do or cause to be done by virtue hereof.
Under the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in
the capacities and on the date indicated:
Signature Title Date
/s/ Jerry Dix Chief Executive August 7, 2006
Jerry Dix Officer/President/Director
/s/ Don Boudewyn Executive Vice August 7, 2006
Don Boudewyn President/Secretary/Treasurer
(principal financial
officer)/Director
/s/ Phil E. Pearce Director August 7, 2006
Phil E. Pearce
/s/ Stanley A. Hirschman Director August 7, 2006
Stanley A. Hirschman
/s/ Murray H. Williams Director August 7, 2006
Murray H. Williams
/s/ Kirk Haney Director August 7, 2006
Kirk Haney
EXHIBIT INDEX
Number Description
1 Agency Agreement between 5G Wireless 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 5G Wireless
(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 5G Wireless, 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 5G Wireless, 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 5G Wireless 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 5G Wireless 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 5G Wireless 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 5G Wireless and 5G
Wireless Solutions, Inc., dated January 18, 2006
(incorporated by reference to Exhibit 2.6 of the Form 10-K
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 5G Wireless 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 5G Wireless, 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 5G Wireless, 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 5G Wireless 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 5G Wireless 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 5G Wireless 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 5G Wireless 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 5G Wireless 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 5G Wireless 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 5G Wireless, 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 5G Wireless
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 5G Wireless, 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 5G Wireless, 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 5G Wireless, 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).
4.24 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).
4.23 Form of Stock Purchase Agreement between 5G Wireless 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).
4.25 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
(incorporated by reference to Exhibit 4.25 of the Form 10-
QSB filed on May 22, 2006).
4.26 Stock Purchase Agreement between the Company and Castellum
Investments, S.A., dated May 30, 2006 (including the
following items: Exhibit A: Certificate of Designation, and
Exhibit C: 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 4.9 of the Form 8-K filed on July 14, 2006).
4.27 Securities Purchase Agreement between 5G Wireless and
Montgomery Equity Partners, LP, dated as of June 13, 2006
(not including a Disclosure Schedule) (incorporated by
reference to Exhibit 4.1 of the Form 8-K filed on June 23, 2006).
4.28 Secured Convertible Debenture between 5G Wireless and
Montgomery Equity Partners, LP, dated as of June 13, 2006
(incorporated by reference to Exhibit 4.2 of the Form 8-K
filed on June 23, 2006).
4.29 Security Agreement, dated as of June 13, 2006, between 5G
Wireless and Montgomery Equity Partners, LP (incorporated
by reference to Exhibit 4.3 of the Form 8-K filed on June 23, 2006).
4.30 Class A Warrant, dated as of June 13, 2006, between 5G
Wireless and Montgomery Equity Partners, LP (incorporated
by reference to Exhibit 4.4 of the Form 8-K filed on June 23, 2006).
4.31 Class B Warrant, dated as of June 13, 2006, between 5G
Wireless and Montgomery Equity Partners, LP (incorporated
by reference to Exhibit 4.5 of the Form 8-K filed on June 23, 2006).
4.32 Class C Warrant, dated as of June 13, 2006, between 5G
Wireless and Montgomery Equity Partners, LP (incorporated
by reference to Exhibit 4.6 of the Form 8-K filed on June 23, 2006).
4.33 Investor Registration Rights Agreement, dated as of June
13, 2006, between 5G Wireless and Montgomery Equity
Partners, LP (not including Form of Notice of Effectiveness
of Registration Statement) (incorporated by reference to
Exhibit 4.7 of the Form 8-K filed on June 23, 2006).
4.34 Pledge and Escrow Agreement, dated as of June 13, 2006,
between 5G Wireless and Montgomery Equity Partners, LP
(incorporated by reference to Exhibit 4.8 of the Form 8-K
filed on June 23, 2006).
5 Opinion of Brian F. Faulkner, A Professional Law
Corporation (filed herewith).
10.1 Employment Agreement between 5G Wireless 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 5G Wireless 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 5G Wireless 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 5G Wireless 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 5G Wireless 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 5G Wireless 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 5G Wireless and 5G Wireless
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).
10.8 Guarantor Agreement between 5G Wireless and Al Lang, dated
May 25, 2006 (incorporated by reference to Exhibit 10.1 of
the Form 8-K filed on July 14, 2006).
10.9 Loan Agreement between 5G Wireless and Production Partners,
Ltd., dated May 30, 2006 (incorporated by reference to
Exhibit 10.2 of the Form 8-K filed on July 14, 2006).
10.10 Consulting Agreement between 5G Wireless and Jason Meyers,
dated May 30, 2006 (incorporated by reference to Exhibit
10.3 of the Form 8-K filed on July 14, 2006).
10.11 Loan Agreement between 5G Wireless and Russell Janes, dated
June 1, 2006 (incorporated by reference to Exhibit 10.4 of
the Form 8-K filed on July 14, 2006).
10.12 Loan Agreement between 5G Wireless and Thomas Janes, dated
June 1, 2006 (incorporated by reference to Exhibit 10.5 of
the Form 8-K filed on July 14, 2006).
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 5G Wireless (incorporated by reference to
Exhibit 21 of the Form 10-QSB filed on August 27, 2002).
23.1 Consent of Squar, Milner, Reehl & Williamson, LLP (filed herewith).
23.2 Consent of Brian F. Faulkner, A Professional Law
Corporation (filed herewith).
24 Power of Attorney (see signature page).