U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
______________ TO ______________
COMMISSION FILE NUMBER: 0-30448
5G WIRELESS COMMUNICATIONS, INC.
(Exact Name of Company as Specified in Its Charter)
Nevada 20-0420885
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
4136 Del Rey Avenue, Marina del Rey, California 90292
(Address of Principal Executive Offices)
(310) 448-8022
(Company's Telephone Number)
______________________________________________________________
(Former Name, Former Address, and Former Fiscal Year, if Changed Since
Last Report)
Indicate by check mark whether the Company (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Company was required to file such reports),
and (2) been subject to such filing requirements for the past 90 days.
Yes X No .
Indicate by check mark whether the Company is a shell company (as
defined in Rule 12b-2 of the Exchange Act): Yes No X .
As of November 15, 2006, the Company had 13,942,826 shares of
common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2006 (UNAUDITED) 3
CONDENSED STATEMENTS OF
OPERATIONS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2006
AND SEPTEMBER 30, 2005 (UNAUDITED) 5
CONDENSED STATEMENTS OF
CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2006
AND SEPTEMBER 30, 2005 (UNAUDITED) 7
NOTES TO CONDENSED FINANCIAL
STATEMENTS (UNAUDITED) 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 39
ITEM 3. CONTROLS AND PROCEDURES 53
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 54
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS 55
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 55
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 55
ITEM 5. OTHER INFORMATION 55
ITEM 6. EXHIBITS 57
SIGNATURES 57
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCAL STATEMENTS.
5G WIRELESS COMMUNICATIONS, INC.
CONDENSED BALANCE SHEET
SEPTEMBER 30, 2006
(Unaudited)
ASSETS
Cash $ 45,799
Accounts receivable, net of allowance
for doubtful accounts of $37,038 50,566
Inventory 158,505
Deferred financing costs 118,020
Other current assets 174,360
Total current assets 547,250
Property and equipment, net of accumulated depreciation and
amortization of $290,591 39,469
Total assets $ 586,719
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities 823,468
Accrued interest 435,625
Other liabilities 3,458,146
Note payable 18,924
Related party notes and advances 45,031
Convertible notes payable, net of
discount of $1,617,452 2,254,046
Total current liabilities 7,035,240
Total liabilities 7,035,240
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; 540,000 shares issued and
outstanding 540
Common stock, $0.001 par value;
5,000,000,000 shares authorized;
and 9,366,369 shares issued and outstanding (1) (2) 24,580
Additional paid-in capital 21,337,910
Common stock held in escrow (16,229)
Unearned compensation (66,667)
Deferred consulting fees (27,994)
Accumulated deficit (27,703,661)
Total stockholders' deficit (6,448,521)
Total liabilities and stockholders' deficit $ 586,719
(1) Excludes 15,212,982 shares held in escrow in
connection with the Securities Purchase Agreement with Montgomery
Equity Partners, LP.
(2) 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 AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30 September 30
2006 2005 2006 2005
Revenues $ 274,233 $ -- $ 572,635 $ --
Cost of revenues 122,808 -- 269,601 --
Gross profit 151,425 -- 303,034 --
Operating expenses:
General and administrative 180,677 34,320 1,116,582 165,775
Salaries and related 349,257 34,064 1,022,170 371,117
Research and development 9,592 -- 64,759 --
Professional/consulting services 287,338 22,811 616,976 586,685
Depreciation 6,316 -- 27,117 --
Total operating expenses 833,180 91,195 2,847,604 1,123,577
Operating loss (681,755) (91,195) (2,544,570) (1,123,577)
Interest expense (including
amortization of financing
costs and debt discount) (694,903) (245,343) (1,931,936) (1,136,729)
Change in fair value of
derivative liabilities 1,510,555 -- (442,488) --
Net income (loss) $ 133,897 $(353,208) $(4,918,994) $(2,260,306)
Cumulative undeclared
dividends and deemed
dividends on preferred stock (13,611) -- (1,359,938) --
Net loss applicable to common
Stockholders $ 120,286 $(353,208) $(6,278,932) $(2,260,306)
Loss per common share applicable
to common stockholders:
Basic and diluted (1) $ 0.02 $ (0.12) $ (0.95) $ (0.84)
Basic and diluted weighted
average common shares
outstanding (1) 7,783,513 2,836,155 6,187,780 2,686,797
(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 NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Unaudited)
Nine Nine
Months Ended Months Ended
September 30, 2006 September 30, 2005
Cash flows from operating activities:
Net loss $(4,918,994) $(2,260,306)
Adjustments to reconcile net loss
to net cash used in operating activities:
Amortization of unearned compensation 49,999 16,667
Amortization of debt discount on
convertible notes 1,088,050 948,433
Amortization of deferred financing costs 21,158 --
Depreciation 27,114 --
Fair value of common stock and
warrants issued for services 701,607 --
Common stock issued for financing fees 32,800 --
Bad debt expense 195,444 --
Change in fair value of derivative liabilities 442,488 --
Changes in operating assets and liabilities:
Accounts receivable 82,887 --
Inventory (38,024) --
Other current assets (157,735) 2,520
Accounts payable and accrued liabilities 206,915 397,658
Accrued interest 291,011 --
Other liabilities 209,319 --
Net cash used in operating activities (1,765,961) (895,028)
Cash flows from investing activities:
Transfer of cash to portfolio company -- (1,001,344)
Purchases of property and equipment (4,420) --
Disposition of property and equipment 18,635 --
Net cash provided by (used in)
investing activities 14,215 (1,001,344)
Cash flows from financing activities:
Related party notes and advances 55,697 --
Repayments on notes payable (3,500) (40,148)
Payment of deferred financing costs (139,178) --
Proceeds from issuance of convertible notes 969,000 1,300,000
Net proceeds from issuance of preferred Series B stock 475,328 --
Net proceeds from issuance of common stock 341,012 --
Net proceeds from exercise of warrants 13,829 --
Net cash flows provided by financing activities 1,712,188 1,259,852
Net increase (decrease) in cash (39,558) (636,520)
Cash, beginning of period 85,357 636,904
Cash, end of period $ 45,799 $ 384
Supplemental disclosure of non-
cash investing and financing activities:
Conversion of convertible notes
and accrued interest into common stock $ 418,843 $ 777,977
Debt discounts on convertible notes $ 969,000 $ 1,300,000
Imputed dividend on Series B
Preferred shares $(1,331,389) $ --
Cumulative preferred Series B undeclared dividends $ 28,549 $ --
Common stock issued and held in escrow $ 15,213 $ --
The accompanying notes are an integral part of these condensed
financial statements
5G WIRELESS COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
5G Wireless Communications, Inc. ("Company"), is a developer and
manufacturer of wireless telecommunications equipment.
The Company was incorporated as Tesmark, Inc. in September 1979. In
November 1998, it changed its state of incorporation from Idaho to
Nevada and in January 2001 changed the name to 5G Wireless
Communications, Inc. In March 2001, the Company acquired 5G Partners,
a Canadian partnership, and changed its business to provide wireless
technology systems through high speed Internet access and data
transport systems. In April 2002, it acquired Wireless Think Tank,
Inc., a developer of high-speed long distance wireless technologies.
In July 2003, it shifted its strategy from that of a service provider
to an equipment manufacturer, or OEM. 5G Partners and Wireless Think
Tank, Inc. are inactive.
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 stockholders' 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 September 30, 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 and
nine months ended September 30, 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 nine months ended September 30, 2006, the Company incurred
net losses totaling $4,918,994, had net cash used in operating
activities totaling $1,765,961 and had an accumulated deficit of
$27,703,661 as of September 30, 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 2007, 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 the Company's operations. Regardless of whether the
Company's cash assets prove to be inadequate to meet its operational
needs, the Company may seek to compensate providers of services by
issuing stock in lieu of cash, which will also result in dilution to
existing shareholders.
The accompanying financial statements do not include any adjustments which
may impact the realization of assets or the settlement of liabilities should
the Company be unable to continue as a going concern.
Restatement
The June 30, 2006 financial statements have been restated to reflect
revisions in the carrying amount of other liabilities. Such change was made to
reflect a change in the value of a conversion feature derivative liability
associated with convertible debentures owed to Montgomery Equity Partners,
at June 30, 2006, which previously did not reflect the effect of
Montgomery's ownership limitation cap. Such change resulted in a decrease of
$702,487 in the derivative liability as of June 30, 2006 and a corresponding
decrease to change in fair value of derivative liabilities expense of $702,487
in the statement of operations for the three months ended June 30,
2006. Loss per share changed from a previously reported $0.71 to a
currently reported loss of $0.60. The effect of the change in the
Company's financial statements can be summarized as follows:
Changes to Unaudited Statement of Operations for the three months ended
June 30, 2006.
As Reported As Restated
Other income (expense)
Change in fair value of
derivative liabilities $(1,951,810) $(1,249,323)
Net loss $(3,636,408) $(2,933,921)
Net loss applicable to common
Shareholders $(4,646,879) $(3,944,392)
Net loss per share - basic
and diluted $ (0.71) $ (0.60)
Changes to Unaudited Condensed Balance Sheet as of June 30, 2006
As Reported As Restated
Current liabilities
Other liabilities $ 5,267,348 $ 4,564,861
Total current liabilities $ 7,091,716 $ 6,389,229
Total liabilities $ 8,338,044 $ 7,635,557
Accumulated deficit $(28,540,045) $(27,846,558)
Stockholders' deficit $ (7,685,178) $ (6,982,691)
There was no effect to our prior year financial statements.
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, the fair value of equity
instruments and derivative liabilities and the deferred tax valuation
allowance. 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 September 30, 2006, the Company had no cash equivalents.
Inventory.
Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost is determined on a standard cost basis that approximates
the first-in, first-out method. Market is determined by comparison
with recent sales or net realizable value.
Such net realizable value is based on management's forecasts for sales
of the Company's products or services in the ensuing years. The
industry in which the Company operates is characterized by
technological advancement, change and certain regulations. Should the
demand for the Company's products prove to be significantly less than
anticipated, the ultimate realizable value of the Company's
inventories could be substantially less than amounts shown in the
accompanying 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 5-7
years for furniture and fixtures and 2-3 years for computers and
software. 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 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 ("FDIC") insurance limit.
At September 30, 2006, there were no funds in excess of the FDIC limits.
The Company's customers are located in the United States and other
countries. 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 an allowance for doubtful accounts against
outstanding balances over 60 days. In the event collection efforts
are unsuccessful for a customer, the receivable is written off and the
related allowance is removed. At September 30, 2006, the Company
carried an allowance for doubtful accounts of $37,038. In addition,
during the three and nine months ended September 30, 2006, the Company
recorded bad debt expense totaling $3,180 and $195,444, respectively.
For the nine months ended September 30, 2006, there were two customers
that accounted for 38% and 12% of the Company's revenues.
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.
Convertible instruments are evaluated to determine if they are within
the scope of Emerging Issues Task Force ("EITF") No. 00-19 and
Statement of Financial Accounting Standards ("SFAS") No. 133. In the
event that they are not, discounts on convertible notes are
attributable to the relative fair value of the beneficial conversion
feature that allows holders of the debenture to convert into shares of
the Company's common stock at prices lower than the market value and
the discount associated with detachable warrants. These discounts are
accounted for in accordance with 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 Ratios."
Derivative Liabilities.
The Company evaluates the conversion feature of convertible notes and
free-standing instruments such as warrants (or other 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 SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended.
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 results of operations.
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."
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 47,516,112 potential common shares, such as
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 totals
$3,365,084, based on the Company's incremental borrowing rate. The
carrying value of the embedded derivative liabilities associated with
the convertible notes and related warrants, and convertible preferred
stock approximate their fair value based on assumptions using the
Black-Scholes option pricing models.
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 Note 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 Payments." 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 issued no options during the nine months
ended September 30, 2006. At September 30, 2006, there are no stock
options outstanding.
The Company incurred zero and $155,940, respectively, in stock-based
compensation during the three and nine months ended September
30, 2006. There was no unvested portion of previous grants for which
the requisite service had not been rendered as of December 31, 2004.
Accordingly, there is no pro-forma compensation expense for the
interim periods presented.
The Company adopted SFAS No. 123(R) using the modified prospective
transition method, which requires the application of the accounting
standard as of January 1, 2006, the first day of the Company's fiscal
year 2006. The Company's consolidated financial statements as of and
for the three and nine months ended September 30, 2006 reflect the
impact of SFAS No. 123(R). In accordance with the modified
prospective transition method, the Company's consolidated financial
statements for prior periods have not been restated to reflect, and do
not include, the impact of SFAS No. 123(R).
The fair value of each stock-based award is estimated on the grant
date using the Black Scholes option-pricing model. Expected
volatilities are based on the historical volatility of the Company's
stock price. The expected term of options granted subsequent to the
adoption of SFAS No. 123(R) is derived using the simplified method as
defined in SAB No. 107.
Equity Instruments Issued to Other Than Employees for Services.
The Company follows SFAS No. 123, as amended, (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 as amended, 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 in transactions with
third parties during the three and nine months ended September 30,
2006. Such transactions related to deferred consulting arrangements
valued at $59,875 and $692,316, respectively, and were accounted for
under the methodology in (c) above. The unamortized portion of the
total fair value of such contracts was $27,994 as of September 30,
2006 and is presented as deferred consulting fees, contra equity, in
the accompanying condensed balance sheet. Amortization expense of
such deferred consulting fees totaled $112,230 for the three months
ended September 30, 2006. In addition, mark to market adjustments of
$12,068 were charged to expense during the three months ended
September 30, 2006.
Reclassifications.
Certain reclassifications have been made to the prior period financial
statements to conform to the current year presentation.
Segment Disclosures.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," changed the way public companies report information
about segments of their business in their annual financial statements
and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity-
wide disclosures about the products and services an entity provides,
the foreign countries in which it holds significant assets and its
major customers. At September 30, 2006, the Company operated in one segment.
2. BALANCE SHEET CAPTIONS
Inventory.
Inventory consisted of the following at September 30, 2006:
Raw materials $118,139
Work in process 26,150
Finished goods 14,216
Total $158,505
Property and Equipment.
Property and equipment consisted of the following at September 30,
2006:
Building Improvements $ 4,747
Computers 279,250
Furniture and fixtures 21,264
Software 24,799
Total property and equipment 330,060
Less: accumulated depreciation 290,591
Total $ 39,469
Accounts Payable and Accrued Liabilities.
Accounts payable and accrued liabilities consisted of the following at
September 30, 2006:
Accounts payable $470,158
Accrued salaries and payroll related costs 228,814
Deferred income 48,433
Other accrued liabilities 76,063
Total $823,468
Other Liabilities.
Other liabilities consisted of the following at September 30, 2006:
Accrued liquidated damages - Longview $ 546,447
Series B preferred stock - conversion
feature derivative liabilities 910,980
$805,000 convertible notes - conversion
feature derivative liabilities 377,289
Longview convertible notes - conversion
feature derivative liabilities 531,292
Longview convertible notes - warrants
derivative liabilities 268,150
Montgomery convertible debentures -
conversion feature derivative liabilities 202,456
Montgomery convertible debentures -
warrants derivative liabilities 545,680
Montgomery notes - redemption premium 44,422
$135,000 convertible notes - warrants
derivative liabilities 2,881
Series B preferred stock - accrued dividends 28,549
Total $3,458,146
See Notes 3 and 4 for a description of the Company's derivative liabilities.
3. NOTES PAYABLE AND CONVERTIBLE NOTES
Note payable consist of the following at September 30, 2006:
Note payable, interest bearing at 10% per
annum with principal and interest payment of
$2,500 monthly, matured in July 2006 $ 18,924
Total note payable 18,924
Convertible notes payable consist of the following
at September 30, 2006:
$805,000 convertible notes, bearing interest
at 9% per annum, principal converted of
$472,000, matured in April 2006, extended to
March 2008 333,000
$2,000,000 convertible notes, bearing interest
at 5%, net of discount of $418,012,
of principal converted 717,460, maturing in
September 2007 864,526
$1,000,000 convertible notes, bearing interest
at prime plus 4%, net of discount of $235,774
of principal converted of $13,040, maturing in
March 2007 751,186
$300,000 convertible note, bearing interest at
prime plus 4%, net of discount of $120,833,
maturing in July 2007 179,167
$69,000 convertible note, bearing interest at
12%, net of discount of $52,224, maturing in
April 2007 16,776
$600,000 convertible note, bearing interest at
12%, net of discount of $510,989, maturing in
June 2008 89,011
$300,000 convertible note, bearing interest at
12%, net of discount of $279,620, maturing in
August 2008 20,380
Total convertible notes payable 2,254,046
Total $2,272,970
Note Payable.
On March 21, 2003, the Company signed a $50,000 promissory note that
as of September 30, 2006 had a balance of $18,924 and is scheduled to
be repaid in monthly installments of $2,500 per month. $3,500 was
paid on the note during the three months ended September 30, 2006. The
note matures in July 2006 and is currently in default. The default
interest rate is 10% and at September 30, 2006 approximately $2,424 of
accrued interest was payable. The Company is in the process of
restructuring the note with the note holder.
$135,000 Convertible Notes.
The Company agreed to terms with four investors, in the third quarter
of 2003, one of which was the then president of the Company, Peter
Trepp, to loan the Company a total of $135,000 under subordinated
promissory notes. The subordinated notes, bearing 8% simple interest
payable at maturity or conversion, automatically convert into shares
of the security issued in connection with the receipt of a new
$2,500,000 equity financing, or into shares of common stock in case of
a change in control of the Company. The notes are subordinated to all
of our indebtedness to banks, commercial finance lenders, insurance
companies or other financial institutions regularly engaged in the
business of lending money, but are senior to all other debt on our
balance sheet. As of September 30, 2006, the notes are paid in full.
Each investor was issued warrants to purchase shares of our common
stock equal to 40% of the amount invested in the notes. As of
September 30, 2006, 13,716 warrants are outstanding.
Upon completion of the June 13, 2006 Montgomery financing, the
warrants do not satisfy all of the conditions of EITF No. 00-19 and
therefore do not meet the scope exception of paragraph 11(a) of SFAS
No. 133. Accordingly, at June 30, 2006, after considering all other
commitments that may require the issuance of common stock during the
maximum period the warrants could remain outstanding, the Company determined
that it may not have sufficient authorized and unissued shares available to
settle such warrants. Accordingly, the warrants were reclassified to
derivative liabilities (included in other liabilities- See Note 2).
The amount reclassified from additional paid-in capital related to the
warrants was $4,800.
The estimated fair value of the warrants at June 13, 2006, the date
of reclassification resulting from the issuance of the Montgomery
debt, was $4,800. At September 30, 2006, the estimated fair value of
such warrants was $2,880. Consequently, during the three months ended
September 30, 2006, the Company recorded to results of operations a
reduction in the change in the estimated fair value of derivative
liabilities of $1,920 and carries a derivative liability of $2,880
related to these warrants, which is included in other liabilities in
the accompanying balance sheet at September 30, 2006.
$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 were 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. As
of September 30, 2006, there is no outstanding balance on the $250,000
Convertible Notes.
In connection with the $250,000 Convertible Notes, the Company issued
warrants to purchase 8,659 (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 expired
in June 2006.
$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. Therefore,
the notes and warrant instruments met the scope exception of paragraph
11(a) of SFAS No. 133 at inception through March 31, 2006.
During the quarter ended June 30, 2006, the Company issued two
convertible note instruments with variable conversion features and not
subject to a floor. Consequently, due to these terms, the number of
shares required for settlement is indeterminate. Accordingly, at June
30, 2006, after considering all other commitments that may require the
issuance of stock during the maximum period the convertible notes
could remain outstanding, the Company determined that it may not have
sufficient authorized and unissued shares available to settle the convertible
notes. Accordingly, the conversion feature associated with the
$715,000 Convertible Notes was reclassified to derivative liabilities
(included in other liabilities-See Note 2).
The change in estimated fair value of the conversion feature between
the reclassification date and June 30, 2006 was $325,341. At
September 30, 2006, the estimated fair value of such conversion
feature was $377,289. Consequently, during the three months ended
September 30, 2006, the Company recorded to results of operations an
increase in the change in the estimated fair value of derivative
liabilities of $51,948 and carries a derivative liability of $377,289
related to the conversion feature, which is included in other
liabilities in the accompanying balance sheet at September 30, 2006.
The Company issued warrants with the $715,000 Convertible Notes. The
warrants expired February 28, 2006 and thus none are outstanding as of
September 30, 2006.
In connection with the issuance of the $715,000 Convertible Notes, the
Company paid issuance costs of $74,500, which had been recorded as a
debt discount and was amortized to interest expense over the life of
notes. The debt discount is fully amortized.
During the three months ended September 30, 2006, there were no
conversions into common stock.
In April 2006, the notes expired and were in default. During the
three months ended September 30, 2006, the parties agreed to extend
the due date to March 31, 2008.
$2,000,000 Longview 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 days
preceding the conversion date, of (ii) $17.50 (post reverse split). The
notes mature in September 2007. 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. The $2,000,000 Convertible Notes and related warrant
agreements require registration of the shares underlying the
conversion feature and warrants. See "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 and the second $1,000,000 of the purchase price was received on
November 9, 2004.
The convertible 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 issuable
assuming conversion at inception. The per warrant share exercise
price to acquire a share upon exercise of a Class A Warrant is
$0.15, as adjusted June 13, 2006. The original exercise price
was $7.14 (post reverse split). Each Class A warrant is
exercisable until five years after the issue date .
125 Class B warrants were issued 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
$0.15, as adjusted June 13, 2006. The original exercise price
was $7.00 (post reverse split). Each warrant is exercisable
until three years after the issue date of the Class B warrant.
At the inception of the $2,000,000 Convertible Notes, the convertible
feature and the warrants could be settled in unregistered shares and
was outside the scope of EITF No. 00-19. Consequently, pursuant to
EITF No. 98-5 and EITF No. 00-27, the Company estimated the fair value
of such BCF to be approximately $2,000,000 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 of the
discount on the $2,000,000 Convertible Notes during the three and nine
months ended September 30, 2006 approximated $106,878 and $342,531,
respectively.
During the three months ended September 30, 2006, there were no
conversions into common stock. To date, the Company has issued
1,019,860 shares (post-reverse split) upon conversion of $717,460
aggregate principal and $108,472 of related accrued interest.
On October 22, 2005, upon the de-election as a BDC, the shares
underlying the conversion feature and the warrants were required to be
registered. As a result, the Company reclassified the fair value of
the conversion feature and the warrants to other liabilities from
additional paid in capital. The balance of the derivative liability
related to the $2,000,000 Convertible Notes at December 31, 2005 was $26,193.
The estimated fair value of the conversion feature and warrants
associated with the Longview $2,000,000 convertible notes between
June 30, 2006 and September 30, 2006 decreased by $145,561. Such reduction
reduction has been recorded to results of operations and included within the
change in estimated fair value of derivative liabilities for the three months
and nine months ended September 30, 2006.
$1,000,000 Longview 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) $17.50 (post reverse split). The notes mature in March 2007. 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. The $1,000,000 Convertible
Notes and related warrant agreements require registration of the
shares underlying the conversion feature and warrants. See
"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 issuable
assuming conversion at inception. The per warrant share exercise
price to acquire a share upon exercise of a Class A Warrant is
$0.15, as adjusted June 13, 2006. The original exercise price
was $3.50 (post reverse split). Each Class A warrant is
exercisable until five years after the issue date.
At the inception of the $1,000,000 Convertible Notes, the convertible
feature and the warrants could be settled in unregistered shares and
was outside the scope of EITF No. 00-19. Consequently, pursuant to
EITF No. 98-5 and EITF No. 00-27, the Company estimated the fair value
of such BCF to be approximately $1,000,000 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 three and nine months ended September 30, 2006
approximated $123,370 and $386,026, respectively. To date, the
Company has issued 68,088 shares (post-reverse split) upon conversion
of $13,040 aggregate principal and $53,081 of related accrued interest.
On October 22, 2005, upon the de-election as a BDC, the shares
underlying the conversion feature and the warrants were required to be
registered. As a result, the Company reclassified the fair value of
the conversion feature and the warrants to other liabilities from
additional paid in capital. The balance of derivative liability
related to the $1,000,000 Convertible Notes at December 31, 2005 was $13,096.
The estimated fair value of the conversion feature and warrants
associated with the Longview $1,000,000 convertible notes between
June 30, 2006 and September 30, 2006 decreased by
$72,781. Such reduction has been recorded to results of
operations and included within the change in estimated fair value of
derivative liabilities for the three months and nine months ended
September 30, 2006.
$300,000 Longview Convertible Notes.
On July 20, 2005, July 28, 2005, and August 17, 2005, the Company
entered into subscription agreements 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). The notes mature in July 2007.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. The $300,000 Convertible Notes and related warrant
agreements require registration of the shares underlying the
conversion feature and warrants. See "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 issuable
assuming conversion at inception. The per warrant share exercise
price to acquire a share upon exercise of a Class A Warrant is
$0.15, as adjusted June 13, 2006. The original exercise price
was 120% of the closing bid price of the common stock on the
trading day immediately preceding the Initial Closing Date. Each
Class A warrant is exercisable until five years after the issue date.
At the inception of the $300,000 Convertible Notes, the convertible
feature and the warrants could be settled in unregistered shares and
was outside the scope of EITF No. 00-19. Consequently, pursuant to
EITF No. 98-5 and EITF No. 00-27, the Company estimated the fair value
of such BCF to be approximately $300,000 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 three and nine months ended September 30, 2006 was
$37,500 and $113,039, respectively.
To date, none of the $300,000 Convertible Notes or its related accrued
interest have been converted into common stock.
On October 22, 2005, upon the de-election as a BDC, the shares
underlying the conversion feature and the warrants were required to be
registered. As a result, the Company reclassified the fair value of
the conversion feature and the warrants to derivative liability from
additional paid in capital. The balance of derivative liability
related to the $300,000 Convertible Notes at December 31, 2005 was $3,929.
The estimated fair value of the conversion feature and warrants
associated with the Longview $300,000 convertible notes between June
30, 2006 and September 30, 2006 decreased by $21,834
such reduction has been recorded to results of operations and
included within the change in estimated fair value of derivative
liabilities for the three months and nine months ended September 30, 2006.
$69,000 Longview Convertible Notes.
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,
convertible into shares of the Company's common stock (the total amount
of the notes was changed upon signing from $60,000 to $69,000)
("$69,000 Convertible Notes"). 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 volume weighted average price as reported by Bloomberg
L.P. for our principal market for the 20 trading days preceding a
conversion date. The conversion feature is not subject to a floor.
The note holder received Class A share warrants to purchase shares of
common stock based on the following formula:
1 Class A warrant was issued for each 1 share of common stock
issuable assuming conversion at inception. The per warrant share
exercise price to acquire a share upon exercise of a Class A
Warrant is $0.15, as adjusted June 13, 2006. The original
exercise price was $0.50 (post reverse split). Each warrant 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.
The conversion feature of the notes and warrants do not satisfy all of
the conditions of EITF No. 00-19 and therefore do not meet the scope
exception of paragraph 11(a) of SFAS No. 133. As a result, the
conversion feature must be bifurcated from the host note and together
with the warrants must be reflected as derivative liabilities.
The estimated fair value of the warrants was $132,167 at inception and
$69,000 was allocated as discount against the note and $63,167 of
excess discount was charged to change in fair value of derivative
liabilities in the statement of operations.
The estimated fair value of the conversion feature was $120,681 at
inception and none was allocated as discount against the note and
$120,681 and such amount was charged as an increase to change in fair
value of derivative liabilities in the accompanying statements of
operations for the nine months ended September 30, 2006. The estimated fair
value of the conversion feature and warrants associated with the Longview
$69,000 convertible notes between June 30, 2006 and September 30, 2006
decreased by $1,512. Such reduction has been recorded to results of operations
and included within the change in estimated fair value of derivative
liabilities for the three months and nine months ended September 30, 2006.
During the three months ended September 30, 2006, there were no
conversions of the $69,000 Convertible Notes into common stock.
Registration Rights - Longview.
The Longview notes (see above) along with related warrant agreements
contain provisions whereby the holders of notes and warrants were
entitled to registration rights in the event the Company's Regulation
E exemption from registration ceases to be effective. This exemption
from registration (evidence by a Form 1-E filed when the Company
operated as a BDC), ceased to be effective on October 22, 2005.
Specifically, subsequent to October 22, 2005, the Company was required
to register with the SEC the shares issuable pursuant to the Longview
notes' conversion feature and warrants. From the date that
Regulation E exemption ceased to be effective, , the Company must file
a registration statement with the SEC within 60 days and, it must have
such registration statement be effective within 90 days.
The Company is required to pay liquidated damages at the rate of 2%
per month (based on the notes' outstanding principal balance) until a
registration statement is effective. The Company filed Form SB-2 with
the SEC on August 8, 2006.
Classification of Longview 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
valuation model. The fair value of the Longview warrant derivative
liability at September 30, 2006 totaled $268,150 and is included in
other liabilities in the accompanying condensed balance sheet.
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 a
discount rate of 79%.
Liquidated Damages - Longview.
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 a Form SB-2 registration statement is effective. The Company has
accrued $546,447 in liquidated damages, which is included in other
liabilities in the accompanying condensed balance sheet at September
30, 2006. The Company estimates the registration statement to become
effective in December 2006 and damages were accrued through that date.
Montgomery Convertible Debentures.
On June 13, 2006, the Company entered into and closed on a Securities
Purchase Agreement with Montgomery Equity Partners, LP ("Montgomery").
Under this agreement, Montgomery agreed to purchase from us 12%
convertible debentures in the aggregate principal amount of
$1,200,000; that will mature on June 13, 2008 ("Montgomery Convertible
Debentures"). 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: (i) $0.3155, or (ii) 80% of the lowest closing
bid price of our common stock, for the five trading days immediately
preceding the conversion date. The conversion feature is not subject
to a floor.
Beginning January 15, 2007, the Company is required to redeem the
debentures at a rate of no less than $60,000 per month of any then
outstanding principal balance plus a redemption premium equal to 20%
of the principal amount being redeemed. The Company is accreting the
redemption premium as interest expense as over the period from
inception through each required monthly redemption date. During the
three months ended September 30, 2006, the Company included $38,838 of
redemption premium accretion in interest expense in the statement of
operations. At September 30, 2006, the redemption premium liability
totals $44,422 and is included in other liabilities in the accompanying
condensed balance sheet.
The Company granted Montgomery a subordinate priority security
interest in certain of our assets pursuant to a Security Agreement,
dated June 13, 2006.
The Company received $600,000 upon closing June 13, 2006, received
$300,000 on August 11 after a registration statement (Form SB-2) was
filed with the Securities and Exchange Commission, and will receive
the final $300,000 one business day after 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
the Company's 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 the Company. 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 received three five-year warrants, all
dated June 13, 2006, to purchase as follows:
- 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 the Company is
not in default and the shares underlying the warrants are subject to
an effective registration statement.
The Company paid to Montgomery 60,852 shares of common stock as a loan
commitment fee. In addition, the Company paid or 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.
All fees above have been paid except for the 10% commission related to
$300,000 which will remain unfunded until the day subsequent to a
registration statement being declared effective by the SEC.
These costs have been accounted for as deferred financing costs. In
connection with this transaction, the Company 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
Montgomery debentures and the warrants.
The parties also entered into a Pledge and Escrow Agreement, dated
June 13, 2006, under which the Company 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 full payment of all amounts due under the Montgomery
convertible debentures
The convertible feature of the Montgomery Convertible Debentures
provides for a rate of conversion that is below the market value of
the Company's common stock. The conversion feature of the notes and
warrants do not meet all of the criteria of EITF No. 00-19 as the
number of shares is not fixed and therefore the scope exception of
paragraph 11(a) of SFAS No. 133 is not met. As a result, the
conversion feature must be bifurcated from the host note and together
with the warrants reflected as derivative liabilities. The estimated
fair value of the conversion feature was $744,000 at inception and
$600,000 was allocated as discount against the notes with the
remaining $144,000 charged to change in fair value of derivative
liabilities in the statement of operations.
On August 11, 2006, an additional $300,000 of the Montgomery
Convertible Debentures were funded. The conversion feature of the
notes does not meet all of the criteria of EITF No. 00-19 as the
number of shares is not fixed and therefore the scope exception of
paragraph 11(a) of SFAS No. 133 is not met. As a result, the
conversion feature must be bifurcated from the host note and reflected
as a derivative liability. The estimated fair value of the conversion
feature was $450,000 at inception and $300,000 was allocated as
discount against the notes with the remaining $150,000 charged to
change in fair value of derivative liabilities in the statement of operations.
During the three months ended September 30, 2006, the Company charged
$94,943 related to the Montgomery conversion feature derivative
liabilities as an increase to change in fair value of derivative
liabilities in the accompanying statement of operations.
At September 30, 2006, $202,456 related to Montgomery convertible
debentures conversion feature derivative liabilities is included in
other liabilities in the accompanying condensed balance sheet.
The estimated fair value of the warrants was $840,000 at inception and
such amount was charged to results of operations within the line item
in value of derivative liabilities in the statement of operations. During the
three months ended September 30, 2006, the Company recorded a decrease
of $294,320 conversion feature and warrants to results of operations within the
line item change in fair value of derivative liabilities in the accompanying
statement of operations. At September 30, 2006, $545,680 of Montgomery warrant
derivative liability is included in other liabilities in the accompanying
condensed balance sheet.
The discount of $900,000 is being amortized to interest expense over
the two-year term of the notes. Amortization expense on this note for
the three and nine months ended September 30, 2006 was $95,380 and
109,391, respectively.
During three months ended September 30, 2006, there were no
conversions of the Montgomery Convertible Debentures into common stock.
4. STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock.
Series A.
The Company has 3,000,000 shares of Series A preferred stock
authorized. On October 6, 2004 the Company's Compensation Committee
granted and the Company issued Series "A" convertible preferred shares
("Series A") to Mr. Dix and Mr. Boudewyn totaling 3,000,000. Each
share of Series A is convertible at the rate of 800 shares of common
stock for each full share of Series A).
Each share of outstanding Series A entitles the holder thereof to vote
on each matter submitted to a vote of the stockholders of the Company
and to have the number of votes equal to the number (including any
fraction) of shares of common stock into which such share of Series A
is then convertible pursuant to the provisions hereof at the record
date for the determination of shareholders entitled to vote on such
matters or, if no such record date is established, at the date such
vote is taken or any written consent of stockholders becomes
effective. The Series A are convertible after three years from issuance.
Management valued the Series A at $200,000, which is being amortized over
the three year vesting period. During the three months ended September 30,
2006, the Company recorded $16,666 of amortization as general and
administrative expense in the statements of operations. At September 30, 2006,
the balance of $66,667 is carried as unearned compensation, contra equity, in
the accompanying condensed balance sheet. When determining value, management
considered various valuation techniques, such as discounted cash flow, publicly
traded stock value and intrinsic value analysis. Ultimately, the intrinsic
value analysis provided the most reasonable value of $200,000.
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.
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.
- Provided that, and only to the extent that, the Company has a
sufficient number of shares of authorized but unissued and
unreserved common stock available to issue upon conversion, each
share of Series B shall be convertible at the option of the
holder.
- In the event the Company is prohibited from issuing shares of
common stock upon conversion of the Series B, then at the
holder's election, the Company must pay to the holder, an amount
in cash determined by multiplying the unconverted face amount,
together with accrued but unpaid dividends theron, of the amount
of shares of convertible preferred stock designated by the Holder
for mandatory redemption by 110%.
The Series B embedded conversion feature 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 to be
bifurcated 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 results of operations.
Accordingly, the Company recorded the commitment date fair value as
derivative liabilities ($332,500 for 250,000 shares issued during the
three months ended March 31, 2006 and $998,889 for 290,000 shares
issued during the three months ended June 30, 2006), with a
corresponding decrease to additional paid-in capital (since the
Company has no retained earnings) for the offsetting deemed dividend.
During the three months ended September 30, 2006, there were no
additional investment in Series B.
During the three months ended September 30, 2006, the Company recorded a
decrease of $606,163 to results of operations within the line item
change in fair value of derivative liabilities in the
accompanying condensed statement of operations.
Common Stock.
During the three months ended September 30, 2006, in accordance with
the terms of the applicable convertible notes payable agreements, the
Company issued no shares of common stock in connection with the
conversion of notes payable plus accrued interest.
There was no stock based employee compensation during the three months
ended September 30, 2006. The Company recorded $124,298 of non-
employee stock-based compensation included in general and
administrative expense in the statement of operations during the three
months ended September 30, 2006, of which $120,321 was related to
common stock and $3,977 was related to warrants (see Note 1).
(a) On July 11, 2006 the Company issued a total of 239,499
(post reverse split) restricted shares of common stock to an individual
who provided guaranty on a lease for the Company. The shares had an
aggregate value of $8,800 (average of $0.19 (post reverse split) per
share).
(b) On July 11, 2006, the Company issued a total of 35,200 (post
reverse split) restricted shares of common stock to individuals for interest
on loans provided to the Company. The shares had an aggregate value of $8,800
(average of $0.19 (post reverse split) per share).
(c) On August 8, 2006, the Company filed a Form SB-2 with the
SEC for the purpose of registering shares underlying the Longview
transactions, the Series B preferred stock, and the shares
underlying the Montgomery transaction.
(d) On August 11, 2006, the Company received the second
installment of the Montgomery Convertible Debentures in the
amount of $300,000 less fee to Yorkville Advisors of $30,000 and
$6,000 equaling 2 months' prepaid interest to Montgomery Equity
Partners, LP. Such amounts are being amortized over the life of
the loan. The Company issued 90,852 shares of common stock based
on services valued at $24,000.
(e) During the three months ended September 30, 2006, the
Company sold 2,107,796 restricted shares of common stock under
Regulation S to various individuals for cash proceeds of $228,789
(average of $0.1085 per share).
Warrants.
During the three months ended September 30, 2006 Longview Equity Fund,
LP, Longview Equity Fund, LP and Longview International Equity Fund,
LP exercised 11,666, 4,166 and 833 warrants, respectively to purchase
a total of 11,666, 4,166 and 833 shares of the Company's common stock
at an exercise price of $0.15 pursuant to the $2 million Longview
Subscription Agreement.
5. COMMITMENTS AND CONTINGENCIES
Lease Commitments.
Since October, 2003, the Company's has operated 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 three months
September 30, 2006 and the same period in 2005.
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 complaint
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 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. The
Company has tentatively agreed to settle this litigation for $7,500,
however as of September 30, 2006 the action was still open.
Litigation is subject to inherent uncertainties, and unfavorable
rulings could occur with neither party admitting guilt. 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 complaint 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 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.
(c) On November 3, 2006 the Company was served with a Notice of
Motion for Summary Judgment in Lieu of Complaint filed by Longview
Fund, L.P., Longview Equity Fund, L.P., and Longview International
Equity Fund, L.P. ("Longview Funds"). In this Motion, filed in New
York State Supreme Court on November 2, 2006, the Longview Funds
allege that the Company has failed to make payments of interest due on
a series of notes issued by the Company, and failed to make payments
of interest due on these notes. The Longview Funds ask the court to
enter judgment in their favor in the total amount of $2,644,987
allegedly due under the notes, plus accrued interest
Management believes the Company has meritorious claims and defenses to
the claims of the Longview Funds. The Company is attempting
to resolve this matter with the Longview Funds. This matter remains
in the early stages of litigation and there can be no assurance as to
the outcome of the action. 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.
Upon advice of counsel, Management believes that the request for
conversion made by Longview, could have resulted in a violation of
Section 5 of the Securities Act of 1933 potentially causing undue
hardship for the Company and its investors.
6. RELATED PARTY TRANSACTIONS
During the three months ended September 30, 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. The amount owed to
Service Group at September 30, 2006 was $2,787.
Mr. Dix advanced $2,500 to the Company during the three months ended
September 30, 2006. There is no interest applicable to this advance.
As of September 30, 2006 $775 is outstanding and remains payable to
Jerry Dix which is included in Related Party notes and advances in the
accompanying condensed balance sheet.
Thomas Janes, a family relative of Don Boudewyn, executive vice
president, lent $20,000 to the Company pursuant to a loan agreement
dated June 1, 2006. The loan provides for simple interest at ten
percent (10%) per annum. In addition, there was an administration fee
of $4,000 paid in 21,333 restricted shares of the Company's common
stock issued at a 25% discount to the lowest closing bid price in the
20 trading days prior to the date of the agreement. During the three
and nine months ended September 30, 2006, the Company incurred $504
and $734, respectively of interest expense and it was recorded as
interest expense in the statement of operations.
Russell Janes, a family relative of Mr. Boudewyn lent $20,000 to the
Company pursuant to a loan agreement dated June 1, 2006. The loan
provides for simple interest at ten percent (10%) per annum. In
addition, there was an administration fee of $4,000 paid in 21,333
restricted shares of the Company's common stock issued at a 25%
discount to the lowest closing bad price in the 20 trading days prior
to the date of the agreement. During the three and nine months ended
September 30, 2006, the Company incurred $504 and $734, respectively,
of interest expense and it was recorded as interest expense in the
statement of operations.
7. SUBSEQUENT EVENTS
Stock Issuances.
(a) On October 12, 2006, the Company issued 135,135 free trading
shares of common stock to each of four consultants who were former
employees of Global Connect, Inc. These shares were valued at a total
of $200,000 ($0.37 per share).
(b) Between October 20, 2006 and October 26, 2006, the Company sold
1,230,793 restricted shares of common stock under Regulation S to a
total of 14 accredited investors for a total consideration of $97,249
(average of $0.079 per share).
(c) On October 24, 2006, the Company issued 76,667 free trading
shares of common stock to a consultant for strategic planning and
corporate development services. These shares were valued at $11,500
($0.15 per share).
(d) On October 24, 2006, the Company issued 146,340 restricted shares
of common stock in settlement of outstanding legal fees. These shares
were valued at $25,756 ($0.176 per share).
(e) On October 25, 2006, the Company issued 109,375 restricted shares
of common stock to an employee pursuant to the employees hire in April
2006. These shares were valued at $70,000 ($0.64 per share).
Other Matters.
(a) On October 4, 2006, the company acquired certain assets of Global
Connect, Inc. doing business as Ivado, which included wireless
equipment deployed at 13 hospitality properties and contracts to
related to the properties. The Company issued 492,841 restricted
shares of common stock to Global Connect, Inc. in connection with this
acquisition. These shares were valued at $182,351 ($0.37 per share).
The aggregate purchase can result in up to $935,000 provided certain
future conditions are met.
(b) On October 16, 2006, Andrew D. McCormac was appointed to the
position of chief financial officer and principal accounting officer
of the Company.
(c) On October 25, 2006, Phil E. Pearce resigned as a member of the
Company's board of directors. To the knowledge of the executive
officers of the Company, this resignation was not the result of any
disagreement with the Company on any matter relating to the Company's
operations, policies or practices.
(d) On November 3, 2006 the Company was served with a Notice of
Motion for Summary Judgment in Lieu of Complaint filed by Longview
Fund, L.P., Longview Equity Fund, L.P., and Longview International
Equity Fund, L.P. ("Longview Funds"). In this Motion, filed in New
York State Supreme Court on November 2, 2006, the Longview Funds
allege that the Company has failed to make payments of interest due on
a series of notes issued by the Company, and failed to make payments
of interest due on these notes. The Longview Funds ask the court to
enter judgment in their favor in the total amount of $2,644,987
allegedly due under the notes, plus accrued interest.
Management believes the Company has meritorious claims and defenses to
the claims of the Longview Funds; however, the Company is attempting
to resolve this matter with the Longview Funds. This matter remains
in the early stages of litigation and there can be no assurance as to
the outcome of the action. 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.
(e) On November 7, 2006, Murray Williams and Kirk Haney resigned as
members of the Company's board of directors. To the knowledge of the
executive officers of the Company, these resignations were not the
result of any disagreement with the Company on any matter relating to
the Company's operations, policies or practices.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition and
results of operations is based upon, and should be read in conjunction
with, the audited financial statements and related notes included
elsewhere in this Form 10-QSB, which have been prepared in accordance
with accounting principles generally accepted in the United States.
Overview.
The Company is a developer and manufacturer of wireless broadband
communications equipment operating on the 802.11a/b/g frequency. The
Company's principal markets are universities and hospitality properties.
The Company has focused on the marketing and sales of its
innovative wireless solutions to large campus and enterprise wide-
area-networks ("WAN"). In addition to manufacturing the existing
product line, the Company has focused on developing new solutions that
create larger and more efficient wireless networks.
The Company markets and sells both outdoor and indoor Wi-Fi
wireless radio systems that, because of their distance and user
capacity, can be used in both wireless LAN and WAN applications. The
outdoor products can be configured in point-to-point or point-to-
multipoint networks that can reach distances of eight miles or more in
fixed wireless configurations or up to one mile in roaming scenarios
using laptops with off-the-shelf Wi-Fi cards. The Company believes
its antenna design and wireless packet switching allows its systems to
more readily penetrate buildings and trees than competitors, and to
accommodate up to 1,000 user associations. The indoor product shares
many of the same characteristics and strengths as the outdoor product,
including user capacity and penetration of objects, but is designed to
utilize less power, at a lower cost and for indoor distances up to
1,000 feet depending upon the structure.
Both the Company's outdoor and indoor products provide strong
security at both the hardware and software levels, can transmit voice,
data, and video at multi-megabit speeds, and can work together
seamlessly in wireless networks with each other or with other common
wireless network equipment. Because of these advantages, the Company
believes its products enable customers to combine wireless networks
with fewer components that cost less, perform better and potentially
provide a faster return on invested capital. The Company has devoted
substantial resources to the build out of its networks and product
research and development with limited resources applied to its
marketing programs.
The Company has historically experienced operating losses and
negative cash flow. The Company expects that these operating losses
and negative cash flows may continue through additional periods. In
addition, the Company only has a limited record of revenue-producing
operations and there is only a limited operating history upon which to
base an assumption that it will be able to achieve its business plans.
Results of Operations.
(a) Revenue.
Revenue from the sales of equipment and support services was
$274,233 for the three months ended September 30, 2006, compared to $0
for the three months ended September 30, 2005. Revenue from the sales
of equipment and support services was $572,635 for the nine months
ended September 30, 2006, respectively, compared to $0 for the nine
months ended September 30, 2005. The revenue was primarily
attributable to sales of wireless equipment in the university campus
marketplace as opposed to the comparison period in which the Company
as a BDC and did not record any revenue. The Company expects to
continue the current strategy as more university campuses look to
upgrade their network infrastructure.
(b) Cost of Revenues.
Total cost of revenues was $122,808 and $269,601 for the three
and nine months ended September 30, 2006, respectively, compared to $0
and $0 for the three and nine months ended September 30, 2005. The
cost of revenues was principally due to sales of wireless equipment in
the University Market place. The Company expects to continue the
current strategy in the future.
(c) Operating Expenses.
Total operating expenses were $833,180 for the three months ended
September 30, 2006 compared to $91,195 for the three months ended
September 30, 2005, an increase of $741,985 or approximately 814%.
Total operating expenses for the nine months ended September 30, 2006
were $2,847,604 compared to $1,123,577 for the nine months ended
September 30, 2005, an increase of $1,724,027 or approximately 154%.
The increase is principally attributable to increased professional
fees and operating expenses now incurred by the Company that
previously were recorded as expenses of the portfolio company during
the period the Company was a BDC. Whereas Management continues to focus on
reducing operating costs, operating expenses are expected to increase in
the next 12 months.
(d) Interest Expense.
Interest expense was $694,903 for the three months ended
September 30, 2006 compared to $245,343 for the three months ended
September 30, 2005, an increase of $449,560 or approximately 183%.
Interest expense was $1,931,936 for the nine months ended September
30, 2006 compared to $1,136,729 for the nine months ended September
30, 2005, an increase of $795,207 or approximately 70%.
Ongoing amortization of beneficial conversion features and other
debt discounts on the notes will decline in 2006 and 2007 and beyond
as the notes reach maturity. Nonetheless, 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 $51,390 per month until
such time as an effective registration statement is on file with the SEC.
Costs recorded as interest expense primarily consist of the
amortization of the beneficial conversion feature of the convertible
notes issued by the Company in the years 2003, 2004, 2005 and 2006.
Due to the short-term nature of the convertible notes entered into
with the Longview Funds, a portion of the expense associated with the
beneficial conversion feature and other debt discount attributed to
their notes was recognized in the year 2005 and substantially all of
the remaining unamortized discounts on such notes are expected to be
fully expensed during 2006.
(e) Net Income (Loss).
Net income was $133,897 for the three months ended September 30,
2006 compared to a net loss of $353,208 for the three months ended
September 30, 2005, an increase of $487,105 or approximately 138%.
The change is primarily related to reduction in the value of derivative
liabilities during the quarter ended September 30, 2006.
Net loss was $4,918,994 for the nine months ended September 30, 2006
compared to $2,260,306 for the nine months ended September 30, 2005,
an increase of $2,658,688 or approximately 118%. The increased net
loss is attributable to higher salaries and related cost along with
increased interest expense. The net loss for the year 2006 and beyond
is anticipated to decline as sales increase without a corresponding
increase in operating expenses and a reduction in interest expense.
Factors That May Affect the Company's Operating Results.
The operating results of the Company can vary significantly
depending upon a number of factors, many of which are outside its
control. General factors that may affect the Company's operating
results include:
- gain or loss of clients or strategic relationships;
- announcement or introduction of new products by the Company or by
its competitors;
- the ability to build brand recognition;
- timing of sales to customers;
- price competition;
- the ability to attract and integrate new personnel in a timely
and effective manner;
- reduction in or delay of capital spending by clients due to the
effects of terrorism, war and political instability; and
- general economic conditions.
The Company believes that its planned growth and profitability
will depend in large part on the ability to promote its products, gain
clients and expand its relationship with current clients.
Accordingly, the Company intends to invest in marketing, strategic
partnerships, and development of its customer base. If the Company is
not successful in promoting its products and expanding its customer
base, this may have a material adverse effect on its financial
condition and its ability to continue to operate its business.
The Company is also subject to the following specific factors
that may affect its operating results:
(a) The Company May Not Be Able to Accommodate Rapid Growth Which
Could Decrease Revenues and Result in a Loss of Customers.
The Company is currently selling and installing Wi-Fi equipment
in universities and municipalities. To manage anticipated growth, the
Company must continue to implement and improve its operational,
financial and management information systems. The Company must also
hire, train and retain additional qualified personnel, continue to
expand and upgrade core technologies, and effectively manage its
relationships with end users, suppliers and other third parties. The
Company's expansion could place a significant strain on its current
services and support operations, sales and administrative personnel,
capital and other resources. The Company could also experience
difficulties meeting demand for its products. The Company cannot
guaranty that its systems, procedures or controls will be adequate to
support operations, or that management will be capable of fully
exploiting the market. The Company's failure to effectively manage
growth could adversely affect its business and financial results.
(b) The Company's Customers Require a High Degree of Reliability in
Equipment and If the Company Cannot Meet Their Expectations, Demand
for Its Products May Decline.
Any failure to provide reliable equipment for the Company's
customers, whether or not caused by their own failure, could reduce
demand for the Company's products. Because the Company has only
recently begun to place customers on its Wi-Fi system, the Company
does not have substantial experience in gauging negative customer response.
(c) Dependence on Suppliers May Affect the Ability of the Company to
Conduct Business.
The Company depends upon a number of suppliers for components of
its products. There is an inherent risk that certain components of
the Company's products will be unavailable for prompt delivery or, in
some cases, discontinued. The Company only has limited control over
any third-party manufacturer as to quality controls, timeliness of
production, deliveries and various other factors. Should the
availability of certain components be compromised, it could force the
Company to develop alternative designs using other components, which
could add to the cost of goods sold and compromise delivery
commitments. If the Company is unable to obtain components in a
timely manner, at an acceptable cost, or at all, it may need to select
new suppliers, redesign or reconstruct processes used to build its
devices. In such an instance, the Company would not be able to
manufacture any devices for a period of time, which could materially
adversely affect its business, results from operations, and financial
condition.
(d) The Company Faces Strong Competition in Its Market, Which Could
Make It Difficult for the Company to Generate Income
The market for wireless products is highly competitive. The
Company's future success will depend on its ability to adapt to
rapidly changing technologies, evolving industry standards, product
offerings and evolving demands of the marketplace. The Company
competes for customers primarily with facilities-based carriers, as
well as with other non-facilities-based network operators. Some of
the Company's competitors have substantially greater resources, larger
customer bases, longer operating histories and greater name
recognition than the Company has.
- Some of our competitors provide functionalities that the Company
does not. Potential customers who desire these functions may
choose to obtain their equipment from the competitor that
provides these additional functions.
- Potential customers may be motivated to purchase their wireless
Internet equipment from a competitor in order to maintain or
enhance their respective business relationships with that
competitor.
In addition, the Company's competitors may also be better
positioned to address technological and market developments or may
react more favorably to technological changes. The Company competes
on the basis of a number of factors, including:
- range
- non-line of sight capabilities
- data rate
- security scheme
- simultaneous users
- implementation cost
Competitors may develop or offer products that provide
significant (technological, creative, performance, price) or other
advantages over the products offered by the Company. If the Company
fails to gain market share or loses existing market share, its
financial condition, operating results and business could be adversely
affected and the value of the investment in the Company could be
reduced significantly. The Company may not have the financial
resources, technical expertise, marketing, and distribution or support
capabilities to compete successfully.
(e) Uncertain Demand for Equipment May Cause Revenues to Fall Short
of Expectations and Expenses to Be Higher Than Forecast If the Company
Needs to Incur More Marketing Costs.
The Company is unable to forecast revenues with certainty because
of the unknown demand from consumers for its equipment and the
emerging nature of the Wi-Fi industry. The Company is in the process
of refining its marketing plan for colleges, universities and
municipalities in order to achieve the desired level of revenue, which
could result in increased marketing costs. In the event demand for
the Company's wireless equipment does not prove to be as great as
anticipated, revenues may be lower than expected and/or marketing
expenses higher than anticipated, either of which may increase the
amount of time and capital that the Company needs to achieve a
profitable level of operations.
(f) The Company Could Fail to Develop New Products to Compete In an
Industry of Rapidly Changing Technology, Resulting In Decreased Revenue.
The Company operates in an industry with rapidly changing
technology, and its success will depend on the ability to deploy new
products that keep pace with technological advances. The market for
broadband communications equipment is characterized by rapidly
changing technology and evolving industry standards in both the Wi-Fi
and Internet access industries. The Company's technology or systems
may become obsolete upon the introduction of alternative technologies.
If the Company does not develop and introduce new products in a timely
manner, it may lose opportunities to competing service providers,
which would adversely affect business and results of operations.
There is a risk to the Company that there may be delays in
initial implementation of new products. Further risks inherent in new
product introductions include the uncertainty of price-performance
relative to products of competitors, competitors' responses to its new
product introductions, and the desire by customers to evaluate new
products for longer periods of time. Also, the Company does not have
any control over the pace of technology development. There is a
significant risk that rights to a technology could be acquired or be
developed that is currently or is subsequently made obsolete by other
technological developments. There can be no assurance that any new
technology will be successfully acquired, developed, or transferred.
(g) The Company's Ability to Grow Is Directly Tied to Its Ability to
Attract and Retain Customers, Which Could Result In Reduced Income.
The Company has no way of predicting whether its marketing
efforts will be successful in attracting new locations and acquiring
substantial market share. Past efforts have been directed toward a
limited target market of colleges, universities and municipalities. If
the Company's marketing efforts fail, it may fail to attract new
customers and fail to retain existing ones, which would adversely
affect business and financial results.
(h) Government Regulation May Affect the Ability of the Company to
Conduct Business.
The Company's technology is deployed in license-free frequency
bands and is not subject to any wireless or transmission licensing in
most jurisdictions, including the United States. Continued license-
free operation is dependent upon the continuation of existing
government policy. While the Company is not aware of any policy
changes planned or expected, there can be no assurances that
government policy will not change. License-free operation of the
Company's products in the 2.4 GHz and 5 GHz bands are subordinate to
certain licensed and unlicensed uses of the bands and its products
must not cause harmful interference to other equipment operating in
the bands and must accept interference from any of them. If the
Company is unable to eliminate any such harmful interference, or
should its products be unable to accept interference caused by others,
the Company and its customers could be required to cease operations in
the bands in the locations affected by the harmful interference.
(i) Any Required Expenditures as a Result of Indemnification Will
Result in a Decrease in the Company's Net Income.
The Company's bylaws include provisions to the effect that the
Company may indemnify any director, officer, or employee. In
addition, provisions of Nevada law provide for such indemnification,
as well as for a limitation of liability of the Company's directors
and officers for monetary damages arising from a breach of their
fiduciary duties. Any limitation on the liability of any director or
officer, or indemnification of any director, officer, or employee,
could result in substantial expenditures being made by the Company in
covering any liability of such persons or in indemnifying them.
Operating Activities.
Net cash used in operating activities was $1,765,961 for the nine
months ended September 30, 2006 compared to $895,028 for the nine
months ended September 30, 2005, an increase of $870,933 or
approximately 97%. This increase is attributed primarily to the
increase in salaries and related expense.
Investing Activities.
Net cash provided by investing activities was $14,215 during the
nine months ended September 30, 2006 as compared to net cash used in
investing activities of $1,001,344 during the nine months ended
September 30, 2005, a change of $1,015,559, or approximately 101%.
This change was the result of no equipment purchases in the current
period as opposed to equipment purchases related to research and
development activities and increased spending on software license to
support sales and finance activities.
Liquidity and Capital Resources.
(a) General Discussion.
The Company's current liabilities totaled $7,035,240 at September
30, 2006, and current assets totaled $547,250, resulting in a working
capital deficit of $6,487,990 at September 30, 2006. At September 30,
2006, the Company's assets consisted of net accounts receivable of
$50,566, inventory of $158,505, other current assets of $174,360,
deferred financing costs of $118,020 and cash of $45,799. The Company
incurred a net loss of $4,918,994 for the nine months ended September
30, 2006. The Company has an accumulated deficit of $27,703,661 as of
September 30, 2006.
The above factors raise doubt as to the Company's ability to
continue as a going concern. The Company's current cash flow from
operations will not be sufficient to maintain its capital requirements
for the next twelve months. Accordingly, the Company's implementation
of its business plan will depend upon its ability to raise additional
funds through bank borrowings and equity or debt financing. The
Company estimates that it will need to raise up to $5,000,000 over the
next twelve months for such purposes.
The accompanying financial statements have been prepared assuming
that the Company continues as a going concern that contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business assuming the Company will continue as a
going concern. However, the ability of the Company to continue as a
going concern on a longer-term basis will be dependent upon its
ability to generate sufficient cash flow from operations to meet its
obligations on a timely basis, to retain its current financing, to
obtain additional financing, and ultimately attain profitability.
The Company has been successful in obtaining the required cash
resources through private placements, convertible notes and notes
payable to service the Company's operations during the nine months
ended September 30, 2006. The Company's net cash provided by
financing activities for the nine months ended September 30, 2006 was
$1,712,188, which resulted from the net proceeds from the sale of the
Series B preferred stock during that period, $69,000 Longview
convertible notes, the Montgomery convertible debentures and common
stock issued under Regulation S.
Management plans to continue raising additional capital through a
variety of fund raising methods during the remainder of 2006 and 2007,
and to pursue all available financing alternatives in this regard.
Management may also consider a variety of potential partnership or
strategic alliances to strengthen its financial position. Whereas the
Company has been successful in the past in raising capital, no
assurance can be given that these sources of financing will continue to
be available to it and/or that demand for its equity/debt instruments
will be sufficient to meet its capital needs, or that financing will be
available on terms favorable to the Company. The financial statements
do not include any adjustments relating to the recoverability and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
If funding is insufficient at any time in the future, the Company
may not be able to take advantage of business opportunities or respond
to competitive pressures, or may be required to reduce the scope of
its planned product development and marketing efforts, any of which
could have a negative impact on its business and operating results.
In addition, insufficient funding may have a material adverse effect
on the Company's financial condition, which could require it to:
- curtail operations significantly;
- sell significant assets;
- seek arrangements with strategic partners or other parties that
may require the Company to relinquish significant rights to
products, technologies or markets; or
- explore other strategic alternatives including a merger or sale
of the Company.
To the extent that the Company raises additional capital through
the sale of equity or convertible debt securities, the issuance of such
securities may result in dilution to existing stockholders. If
additional funds are raised through the issuance of debt securities,
these securities may have rights, preferences and privileges senior to
holders of common stock and the terms of such debt could impose
restrictions on the Company's operations. Regardless of whether the
Company's cash assets prove to be inadequate to meet the Company's
operational needs, the Company may seek to compensate providers of
services by issuing stock in lieu of cash, which may also result in
dilution to existing stockholders.
(b) Longview Funds.
Pursuant to the terms of the convertible notes entered into
between the Company and Longview Fund, LP, Longview Equity Fund, LP,
and Longview International Equity Fund, LP, the shares that serve as
collateral for the notes must be registered the Longview Funds, the
shares that serve as collateral for the notes must be registered or an
exemption from registration available. The filing of the Form N-54C
on October 21, 2005 terminated the Regulation E exemption from
registration that covered the shares serving as collateral for the
notes. Pursuant to the terms of the notes, the Company remains in
technical default on the notes since that time. See Other
Information, Subsequent Events.
The Company is liable for liquidated damages of 2% for each
thirty days or part thereof of the purchase price of the notes
remaining unconverted that are subject to such non-registration event.
As of September 30, 2006, the remaining principal balance of
unconverted notes payable to the Longview Funds aggregated to
approximately $2,638,500. The Company's filed a Form SB-2 on August
8, 2006 that seeks to register the shares underlying the Longview
notes and warrants, among other things. Until such time as the
registration statement has been made effective, the Company will incur
$51,390 in liquidated damage penalties per month. $546,447 of
liquidated damages was accrued as of September 30, 2006.
(c) $805,000 Convertible Notes.
In March 2004, the Company borrowed $715,000 under convertible
notes payable ("$715,000 Convertible Notes"). All borrowings are due
in March 2006, with monthly interest payments on the outstanding
balance; interest accrues at 9% per annum. The $715,000 Convertible
Notes may be converted into common stock of the Company based on a
formula subject to a floor of $0.001 per share. In July 2004, the
Company borrowed an additional $90,000 under terms identical to those
of the $715,000 Convertible Notes. During the three months ended June
30, 2006, one of the convertible notes payable were converted into
common stock.
As of March and April 2006, certain of these notes expired; the
parties then agreed to extend these notes for an additional two years
to March 31, 2008.
Inflation.
The impact of inflation on the Company's costs and the ability to
pass on cost increases to its customers over time is dependent upon
market conditions. The Company is not aware of any inflationary
pressures that have had any significant impact on its operations over
the past quarter, and the Company does not anticipate that
inflationary factors will have a significant impact on future operations.
Off Balance Sheet Arrangements.
The Company does not engage in any off balance sheet arrangements
that are reasonably likely to have a current or future effect on its
financial condition, revenues, results of operations, liquidity or
capital expenditures.
Contractual Obligations.
The Company has contractual obligations to repay its notes
payable and to make payments under its operating lease agreement. See
Notes 2 and 4, respectively, to the accompanying condensed financial
statements.
Payments due by Period
Contractual Obligations Total 2006 2007-2008 2009-2010 Thereafter
Convertible debt $3,871,500 $3,871,500 -- $ -- $ --
Notes payable 18,924 18,924 -- -- --
Operating leases 314,235 37,371 276,864 -- --
Total contractual
cash obligations $4,204,659 $3,927,795 $276,864 $ -- $ --
Critical Accounting Policies.
The SEC has issued Financial Reporting release No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting
Policies" ("FRR 60"); suggesting companies provide additional
disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC defined the most critical accounting policies as
the ones that are most important to the portrayal of a company's
financial condition and operating results, and require management to
make its most difficult and subjective judgments, often as a result of
the need to make estimates of matters that are inherently uncertain.
Based on this definition, the Company's most critical accounting
policies include: (a) the use of estimates in the preparation of
financial statements; (b) revenue recognition; (c) stock-based
compensation arrangements; (d) warranty reserves; (e) inventory
reserves; (f) allowance for doubtful accounts; (g) the deferred tax
valuation allowance; (h) derivative liabilities; and (i)
classification of conversion feature and warrants. The methods,
estimates and judgments the Company uses in applying these most
critical accounting policies have a significant impact on the results
reported in its financial statements.
(a) Use of Estimates.
The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going
basis, the Company evaluates these estimates, including those related
to revenue recognition and concentration of credit risk. The Company
bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
(b) Revenue Recognition.
Revenues result principally from the sale and installation of
wireless radio equipment to customers. Equipment sales are recognized
when products are shipped. The Company recognizes revenues in
accordance with Staff Accounting Bulleting No. 104, "Revenue
Recognition," when all of the following conditions exist: (a)
persuasive evidence of an arrangement exists in the form of an
accepted purchase order; (b) delivery has occurred, based on shipping
terms, or services have been rendered; (c) the Company's price to the
buyer is fixed or determinable, as documented on the accepted purchase
order; and (d) collectibility is reasonably assured.
Orders delivered to the Company by phone, fax, mail or
email are considered valid purchase orders and once accepted by the
Company are deemed to be the final understanding between the Company
and its customer as to the specific nature and terms of the agreed-
upon sale transaction. Products are shipped and are considered
delivered when (a) for FOB factory orders they leave the Company's
shipping dock or (b) for FOB customer dock orders upon confirmation of
delivery. The creditworthiness of customers is generally assessed
prior to the Company accepting a customer's first order.
The Company offers installation services to customers and charges
separately when such services are purchased. Installation by the
Company is not required for the functionality of the equipment.
Consequently, installation services are considered a separate unit of
accounting under Financial Accounting Standards Board's Emerging
Issues Task Force No. 00-21,"Revenue Arrangements with Multiple
Deliverables."
(c) Stock-Based Compensation Arrangements.
The Company issues shares of common stock to various individuals
and entities for certain management, legal, consulting and marketing
services. These issuances are valued at the fair market value of the
service provided and the number of shares issued is determined, based
upon the closing price of the Company's common stock on the date of
each respective transaction after the period of service. These
transactions are reflected as the appropriate component of the
Company's condensed financial statements in conformity with generally
accepted accounting principles in the accompanying statement of operations.
On January 1, 2006, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment," which
establishes standards for the accounting of transactions in which an
entity exchanges its equity instruments for goods or services,
primarily focusing on accounting for transactions where an entity
obtains employee services in share-based payment transactions. SFAS
No. 123(R) requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments,
including stock options, based on the grant-date fair value of the
award and to recognize it as compensation expense over the period the
employee is required to provide service in exchange for the award,
usually the vesting period.
(d) Warranty.
The Company provides a warranty on all electronics sold for a
period of one year after the date of shipment. Warranty issues are
usually resolved with repair or replacement of the product. Trends of
sales returns, exchanges and warranty repairs are tracked by as a
management as a basis for the reserve that management records in the
Company's consolidated financial statements. Estimated future
warranty obligations related to certain products and services are
provided by charges to operations in the period in which the related
revenue is recognized. At September 30, 2006, warranty reserve
approximated $17,290, which is recorded under other current
liabilities on the balance sheet.
(e) Inventory.
Inventories are stated at the lower of cost (first-in, first-out)
or market. Cost is determined on a standard cost basis that
approximates the first-in, first-out method. Market is determined by
comparison with recent sales or net realizable value.
Such net realizable value is based on management's forecasts for
sales of the Company's products or services in the ensuing years. The
industry in which the Company operates is characterized by
technological advancement, change and certain regulations. Should the
demand for the Company's products prove to be significantly less than
anticipated, the ultimate realizable value of the Company's
inventories could be substantially less than amounts shown in the
accompanying balance sheet.
(f) Allowance for Doubtful Accounts.
In determining the allowance for doubtful accounts, management
evaluated the future collectibility of customer receivable balances,
on a customer by customer basis, including an individual assessment of
the customer's credit quality, financial standing, and the customer's
ability to meet current or future commitments and the industry and
general economic outlook. Based on the severity of the likely loss,
the Company provides a reserve against outstanding balances over 60
days. In the event collection efforts are unsuccessful for a
customer, the receivable is written off and charged to expense. At
September 30, 2006, the Company carried an allowance for doubtful
accounts of $37,038.
(g) Deferred Tax Valuation Allowance.
Deferred taxes are provided on the liability method whereby
deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carry forwards and
deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. A
deferred tax asset is reduced by a valuation allowance if, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized in the future.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
A valuation allowance is provided for deferred tax assets if it
is more likely than not these items will either expire before the
Company is able to realize their benefit, or that future deductibility
is uncertain. In accordance with Statement of Financing Accounting
Standards No 109, the Company records net deferred tax assets to the
extent the Company believes these assets will more likely than not be
realized. In making such determination, the Company considers all
available positive and negative evidence, including scheduled
reversals of deferred tax liabilities, projected future taxable
income, tax planning strategies and recent financial performance.
(h) Derivative Liabilities.
The Company evaluates free-standing instruments (or embedded
derivatives) indexed to its common stock to properly classify such
instruments within equity or as liabilities in its financial
statements, pursuant to the requirements of the Emerging Issues Task
Force ("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
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.
(Forward Looking Statements.
Information in this Form 10-QSB contains "forward looking
statements" within the meaning of Rule 175 of the Securities Act of
1933, as amended, and Rule 3b-6 of the Securities Act of 1934, as
amended. When used in this Form 10-QSB, the words "expects,"
"anticipates," "believes," "plans," "will" and similar expressions are
intended to identify forward-looking statements. These are statements
that relate to future periods and include, but are not limited to,
statements regarding the adequacy of cash, expectations regarding net
losses and cash flow, statements regarding growth, the need for future
financing, dependence on personnel, and operating expenses.
Forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially
from those projected. These risks and uncertainties include, but are
not limited to, those discussed above as well as the risks set forth
above under "Factors That May Affect the Company's Operating Results."
These forward-looking statements speak only as of the date hereof.
The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in its expectations
with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
ITEM 3. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934, as amended ("Exchange Act")) that are designed
to ensure that information required to be disclosed in its periodic
reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and forms, and that such information is accumulated and
communicated to its management, including its principal executive
officer and principal financial officer, to allow timely decisions
regarding required disclosure.
As of the end of the period covered by this report, the Company's
management carried out an evaluation, under the supervision and with
the participation of its principal executive officer and principal
financial officer, of its disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act).
Based upon the evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's
disclosure controls and procedures were effective to ensure that
information required to be disclosed by it in the reports that the
Company files or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the
SEC's rules and forms. In addition, they concluded that the Company's
disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports that the Company
files or submits under the Exchange Act is accumulated and
communicated to the Company's management, including its principal
executive officer and principal financial officer, to allow timely
decisions regarding required disclosure.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, will be or have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of
two or more people, and/or by management override of the control. The
design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become
inadequate because of changes in conditions, and/or the degree of
compliance with the policies and procedures may deteriorate. Because
of the inherent limitations in a cost-effective internal control
system, misstatements due to error or fraud may occur and not be detected.
Changes in Controls and Procedures.
During the three months ended September 30, 2006, there were no
changes in the Company's disclosure controls and procedures, or its
internal controls over financial reporting (as defined in Rule 13a-
15(f) of the Exchange Act), or in other factors that could affect
these controls during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, these controls.
The members of the Board of Directors of the Company who were members of
the Audit Committee resigned subsequent to September 30, 2006. The Company
is currently recruiting replacements but none have been elected to the Board
of Directors at this time. Chief Executive Officer Jerry Dix and Executive
Vice President Don Boudewyn are performing audit committee functions in the
interim.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not party to any material pending legal
proceedings, claims or assessments and, to the best of its knowledge,
no such action by or against the Company has been threatened, except
as follows:
(a) On June 15, 2005 the Company was served with a complaint
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 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. The Company has tentatively agreed to settle this litigation
for $7,500, however as of September 30, 2006 the action was still
open. Litigation is subject to inherent uncertainties, and
unfavorable rulings could occur with neither party admitting guilt.
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 complaint 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 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.
(c) On November 3, 2006 the Company was served with a Notice of
Motion for Summary Judgment in Lieu of Complaint filed by Longview
Fund, L.P., Longview Equity Fund, L.P., and Longview International
Equity Fund, L.P. ("Longview Funds"). In this Motion, filed in New
York State Supreme Court on November 2, 2006, the Longview Funds
allege that the Company has failed to make payments of interest due on
a series of notes issued by the Company, and failed to make payments
of interest due on these notes. The Longview Funds ask the court to
enter judgment in their favor in the total amount of $2,644,987
allegedly due under the notes, plus accrued interest
Management believes the Company has meritorious claims and defenses to
the claims of the Longview Funds. The Company is attempting
to resolve this matter with the Longview Funds. This matter remains
in the early stages of litigation and there can be no assurance as to
the outcome of the action. 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.
Upon advice of counsel, Management believes that the request for
conversion made by Longview, could have resulted in a violation of
Section 5 of the Securities Act of 1933 potentially causing undue
hardship for the Company and its investors.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Other than as set forth below, there were no unregistered sales
of the Company's equity securities during the three months ended on
September 30, 2006 that were not previously disclosed in a Form 8-K:
(a) On July 11, 2006, the Company issued a total of 239,499
(post reverse split) restricted shares of common stock to an
individual who provided the guaranty on a lease for the Company.
The shares had an aggregate value of $44,906 (average of $0.18
(post reverse split) per share).
(b) On July 11, 2006, the Company issued a total of 35,200 (post
reverse split) restricted shares of common stock to an
individuals for interest on loans provided to the company. The
shares had an aggregate value of $8,800 (average of $0.19 (post
reverse split) per share).
There were no purchases of common stock of the Company by the
Company or its affiliates during the three months ended September 30, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Please see Management's Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital Resources,
for a discussion of the technical default status of the Longview Funds
notes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
On September 21, 2006, Stanley A. Hirschman resigned as a member
of the Company's board of directors. To the knowledge of the
executive officers of the Company, this resignation was not the result
of any disagreement with the Company on any matter relating to the
Company's operations, policies or practices.
Subsequent Events.
Stock Issuances.
(a) On October 12, 2006, the Company issued 135,135 free trading
shares of common stock to each of four consultants who were former
employees of Global Connect, Inc. These shares were valued at a total
of $200,000 ($0.37 per share).
(b) Between October 20, 2006 and October 26, 2006, the Company sold
1,230,793 restricted shares of common stock under Regulation S to a
total of 14 accredited investors for a total consideration of $97,249
(average of $0.079 per share).
(c) On October 24, 2006, the Company issued 76,667 free trading
shares of common stock to a consultant for strategic planning and
corporate development services. These shares were valued at $11,500
($0.15 per share).
(d) On October 24, 2006, the Company issued 146,340 restricted shares
of common stock in settlement of outstanding legal fees. These shares
were valued at $25,756 ($0.176 per share).
(e) On October 25, 2006, the Company issued 109,375 restricted shares
of common stock to an employee pursuant to the employees hire in April
2006. These shares were valued at $70,000 ($0.64 per share).
Other Matters.
(a) On October 4, 2006, the company acquired certain assets of Global
Connect, Inc. doing business as Ivado, which included wireless
equipment deployed at 13 hospitality properties and contracts to
related to the properties. The Company issued 492,841 restricted
shares of common stock to Global Connect, Inc. in connection with this
acquisition. These shares were valued at $182,351 ($0.37 per share).
The aggregate purchase can result in up to $935,000 provided certain
future conditions are met.
(b) On October 16, 2006, Andrew D. McCormac was appointed to the
position of chief financial officer and principal accounting officer
of the Company.
(c) On October 25, 2006, Phil E. Pearce resigned as a member of the
Company's board of directors. To the knowledge of the executive
officers of the Company, this resignation was not the result of any
disagreement with the Company on any matter relating to the Company's
operations, policies or practices.
(d) On November 3, 2006 the Company was served with a Notice of
Motion for Summary Judgment in Lieu of Complaint filed by Longview
Fund, L.P., Longview Equity Fund, L.P., and Longview International
Equity Fund, L.P. ("Longview Funds"). In this Motion, filed in New
York State Supreme Court on November 2, 2006, the Longview Funds
allege that the Company has failed to make payments of interest due on
a series of notes issued by the Company, and failed to make payments
of interest due on these notes. The Longview Funds ask the court to
enter judgment in their favor in the total amount of $2,644,987
allegedly due under the notes, plus accrued interest.
Management believes the Company has meritorious claims and defenses to
the claims of the Longview Funds; however, the Company is attempting
to resolve this matter with the Longview Funds. This matter remains
in the early stages of litigation and there can be no assurance as to
the outcome of the action. 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.
(e) On November 7, 2006, Murray Williams and Kirk Haney resigned as
members of the Company's board of directors. To the knowledge of the
executive officers of the Company, these resignations were not the
result of any disagreement with the Company on any matter relating to
the Company's operations, policies or practices.
ITEM 6. EXHIBITS.
Exhibits included or incorporated by reference herein are set
forth in the Exhibit Index.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
5G Wireless Communications, Inc.
Dated: November 17, 2006 By: /s/ Jerry Dix
Jerry Dix
Chief Executive Officer
Dated: November 17, 2006 By: /s/ Andrew D. McCormac
Andrew D. McCormac,
Chief Financial Officer
EXHIBIT INDEX
Number Description
1 Agency Agreement between the Company and May Davis Group,
Inc., dated April 1, 2003 (incorporated by reference to
Exhibit 1 of the Form 10-QSB/A filed on November 17, 2003).
2.1 Agreement and Plan of Reorganization and Merger between
Tesmark, Inc., an Idaho corporation, and the Company
(formerly known as Tesmark, Inc.), a Nevada corporation,
dated November 10, 1998 (incorporated by reference to
Exhibit 2 of the Form 10-SB filed on December 15, 1999).
2.2 Acquisition Agreement between the Company, and Richard
Lejeunesse, Curtis Mearns, and Don Boudewyn, a partnership
(known as 5G Partners), dated December 15, 2000, as amended
(incorporated by reference to Exhibit 10 of the Form 8-K
filed on February 14, 2001).
2.3 Share Purchase Agreement between the Company, and Sea Union
Industries Pte. Ltd., Richard Lajeunesse, Rita Chou, Peter
Chen, Yeo Lai Ann, Tan Lam Im, Choa So Chin, Tan Ching
Khoon, Tan Sek Toh, and the Company Communication Pte. Inc.
(formerly known as Peteson Investment Pte Ltd.), dated May
5, 2001 (incorporated by reference to Exhibit 2 of the Form
8-K filed on June 5, 2001).
2.4 Purchase Agreement between the Company and Skyhub Asia
Holdings Limited, eVision USA.com, and eBanker USA.com,
dated May 19, 2001 (incorporated by reference to Exhibit 2.4
of the Form 10-KSB filed on April 18, 2002).
2.5 Definitive Acquisition Agreement between the Company and
Wireless Think Tank, dated April 30, 2002 (incorporated by
reference to Exhibit 2 of the Form 8-K filed on August 13, 2002).
2.6 Agreement and Plan of Merger between the Company and 5G
Wireless Solutions, Inc., dated January 18, 2006
(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 the Company and
investors, dated February 12, 2002 (including the following
exhibits: Exhibit A: Form of Notice of Conversion; Exhibit
B: Form of Registration Rights Agreement; Exhibit C: Form of
Debenture; and Exhibit D: Form of Opinion of Company's
Counsel) (the following to this agreement have been omitted:
Exhibit E: Board Resolution; Schedule 3(A): Subsidiaries;
Schedule 3(C): Capitalization; Schedule 3(E): Conflicts;
Schedule 3(G): Material Changes; Schedule 3(H): Litigation;
Schedule 3(L): Intellectual Property; Schedule 3(N): Liens;
and Schedule 3(T): Certain Transactions) (incorporated by
reference to Exhibit 4.4 of the Form 10-QSB filed on May 20, 2002).
4.5 Escrow Agreement between the Company, First Union Bank, and
May Davis Group, Inc., dated February 12, 2002 (incorporated
by reference to Exhibit 4.5 of the Form 10-QSB filed on May 20, 2002).
4.6 Form of Escrow Agreement between the Company, Joseph B.
LaRocco, Esq., and investors, dated February 12, 2002
(incorporated by reference to Exhibit 4.6 of the Form 10-QSB
filed on May 20, 2002).
4.7 Security Agreement (Stock Pledge) between the Company and
investors, dated February 12, 2002 (incorporated by
reference to Exhibit 4.7 of the Form 10-QSB filed on May 20, 2002).
4.8 Amended and Restated Non-Employee Directors and Consultants
Retainer Stock Plan, dated June 1, 2003 (incorporated by
reference to Exhibit 4 of the Form S-8 POS filed on June 26, 2003).
4.9 Form of Subscription Agreement Between the Company and
investors (including the following exhibits: Exhibit A: Form
of Debenture ; Exhibit B: Form of Notice of Conversion;
Exhibit C: Form of Opinion; and Exhibit D: Subscription
Procedures) (the following schedules have been omitted:
Schedule 3(a): Subsidiaries; Schedule 3(c): Capitalization;
Schedule 3(e): Conflicts; Schedule 3(g): Material Changes;
Schedule 3(h): Litigation; Schedule 3(l): Intellectual
Property; Schedule 3(n): Liens; and Schedule 3(t): Certain
Transactions) (incorporated by reference to Exhibit 4.9 of
the Form 10-QSB/A filed on November 17, 2003).
4.10 Form of Subordinated, Convertible Note and Warrants
Agreement between the Company and investors (including the
following exhibits: Exhibit A: Form of Convertible
Subordinated Promissory Note; and Exhibit B: Form of Warrant
Agreement) (incorporated by reference to Exhibit 4.10 of the
Form 10-QSB filed on November 24, 2003)
4.11 Form of Promissory Note issued by the Company to
investors, dated March 4, 2004 (incorporated by reference to
Exhibit 4.1 of the Form 10-QSB/A filed on May 28, 2004).
4.12 Form of Note Purchase Agreement between the Company and
investors, dated March 4, 2004 (incorporated by reference to
Exhibit 4.2 of the Form 10-QSB/A filed on May 28, 2004).
4.13 Form of Warrant issued by the Company to investors,
dated March 4, 2004 (incorporated by reference to Exhibit
4.3 of the Form 10-QSB/A filed on May 28, 2004).
4.14 2004 Non-Employee Directors and Consultants Retainer Stock
Plan, dated June 8, 2004 (incorporated by reference to
Exhibit 4 of the Form S-8 filed on June 21, 2004).
4.15 Subscription Agreement between the Company, on the one
hand, and Longview Fund, LP, Longview Equity Fund, LP, and
Longview International Equity Fund, LP, on the other hand,
dated September 22, 2004, and Form of Convertible Note
(including the following items: Exhibit A1: Form of Class A
Warrant; Exhibit A2: Form of Class B Warrant; Exhibit B:
Funds Escrow Agreement; Exhibit E: Shares Escrow Agreement;
Exhibit F: Form of Limited Standstill Agreement; Exhibit G:
Security Agreement; and Exhibit H: Collateral Agent
Agreement) (not including the following items: Attachment 1:
Disclosure Schedule; Exhibit C: Form of Legal Opinion;
Exhibit D: Form of Public Announcement on Form 8-K; Schedule
5(d): Additional Issuances; Schedule 5(q): Undisclosed
Liabilities; Schedule 5(s): Capitalization; Schedule 9(e)
Use of Proceeds; Schedule 9(q): Limited Standstill
Providers; and Schedule 11.1: Other Securities to be
Registered) (incorporated by reference to Exhibit 4 of the
Form 8-K filed on September 30, 2004).
4.16 Form of Common Stock Purchase Warrant issued by the Company
in favor of Pole Star Communications, Inc., dated November
1, 2004 (incorporated by reference to Exhibit 4 of the Form
8-K filed on November 12, 2004).
4.17 Certificate of Designation of Series A Convertible Preferred
Stock, dated October 5, 2004 (incorporated by reference to
Exhibit 4.17 of the Form 10-KSB filed on March 31, 2005).
4.18 Subscription Agreement between the Company, on the one hand,
and Longview Fund, LP, Longview Equity Fund, LP, and
Longview International Equity Fund, LP, on the other hand,
dated March 22, 2005 (including the following items: Exhibit
A: Form of Class A Warrant; Exhibit B: Funds Escrow
Agreement; Exhibit C: Security Agreement; Exhibit D:
Collateral Agent Agreement; and Exhibit G: Form of Limited
Standstill Agreement) (not including the following items:
Attachment 1: Disclosure Schedule; Exhibit E: Legal Opinion;
Exhibit F: Form of Public Announcement or Form 8-K; Schedule
5(d): Additional Issuances/Capitalization; Schedule 5(q):
Undisclosed Liabilities; Schedule 5(x): Subsidiaries;
Schedule 9(e) Use of Proceeds; and Schedule 9(p): Limited
Standstill Providers) (incorporated by reference to Exhibit
4.1 of the Form 8-K filed on March 31, 2005).
4.19 Form of Secured Convertible Note between the Company, on the
one hand, and Holders on the other hand, dated March 22,
2005 (incorporated by reference to Exhibit 4.3 of the Form
8-K filed on March 31, 2005).
4.20 Subscription Agreements between the Company, on the one
hand, and Longview Fund, LP, Longview Equity Fund, LP, and
Longview International Equity Fund, LP, on the other hand,
dated July 20, 2005, July 28, 2005, and August 17, 2005
(including the following items: Exhibit A1: Form of Note;
Exhibit A2: Form of Class A Warrant; Exhibit B: Funds Escrow
Agreement; Exhibit D: Transfer Agent Instructions; Exhibit
F: Form of Limited Standstill Agreement) (not including the
following items: Exhibit C: Form of Legal Opinion; Exhibit E
Form of Public Announcement; Schedule 4(a): Subsidiaries;
Schedule 4(d): Additional Issuances/Capitalization; Schedule
4(q): Undisclosed Liabilities; Schedule 4(u): Disagreements
of Accountants and Lawyers; Schedule 8(e) Use of Proceeds;
and Schedule 8(q): Providers of Limited Standstill
Agreements) (incorporated by reference to Exhibit 4 of the
Form 8-K filed on July 25, 2005).
4.21 Modification and Amendment Agreement, dated July 26, 2005
(incorporated by reference to Exhibit 4.2 of the Form 8-K/A
filed on August 3, 2005).
4.22 2006 Stock and Option Plan, dated January 18, 2006
(incorporated by reference to Exhibit 4 of the Form S-8 POS
filed on January 25, 2006).
4.23 Form of Stock Purchase Agreement between the Company and
certain investors, dated February 17, 2006 (including the
following items: Exhibit A: Certificate of Designation, and
Exhibit C: Form of Registration Rights Agreement. Not
including the following items: Exhibit B: Investor
Questionnaire; Exhibit D: Form of Opinion of Counsel;
Schedule 3(c): outstanding shares; Schedule: 3(g): list of
untimely filed reports; and Schedule I: list of investors)
(incorporated by reference to Exhibit 4 of the Form 8-K
filed on February 21, 2006).
4.24 Certificate of Designation of Series B Convertible Preferred
Stock, dated January 25, 2006 (incorporated by reference to
Exhibit 4 of the Form 8-K filed on February 21, 2006).
4.25 Subscription Agreement between the Company 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 fled 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: 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 Investor)
(incorporated by reference to Exhibit 4.9 of the Form 8-K
filed on July 14, 2006)
4.27 Securities Purchase Agreement between the Company 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 July 14, 2006).
4.28 Secured Convertible Debenture between the Company 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 July 14, 2006).
4.29 Security Agreement, dated as of June 13, 2006, between the
Company and Montgomery Equity Partners, LP (incorporated by
reference to Exhibit 4.3 of the Form 8-K filed on July 14, 2006).
4.30 Class A Warrant, dated as of June 13, 2006, between the
Company and Montgomery Equity Partners, LP (incorporated by
reference to Exhibit 4.4 of the Form 8-K filed on July 14, 2006).
4.31 Class B Warrant, dated as of June 13, 2006, between the
Company and Montgomery Equity Partners, LP (incorporated by
reference to Exhibit 4.5 of the Form 8-K filed on July 14, 2006).
4.32 Class C Warrant, dated as of June 13, 2006, between the
Company and Montgomery Equity Partners, LP (incorporated by
reference to Exhibit 4.6 of the Form 8-K filed on July 14, 2006).
4.33 Investor Registration Rights Agreement, dated as of June 13,
2006, between the Company 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 July 14, 2006).
4.34 Pledge and Escrow Agreement, dated as of June 13, 2006,
between the Company and Montgomery Equity Partners, LP
(incorporated by reference to Exhibit 4.8 of the Form 8-K
filed on July 14, 2006).
10.1 Employment Agreement between the Company and Jerry Dix,
dated February 1, 2002 (incorporated by reference to Exhibit
10.12 of the Form 10-KSB filed on April 18, 2002).
10.2 Employment Agreement between the Company and Don Boudewyn,
dated February 1, 2002 (incorporated by reference to Exhibit
10.13 of the Form 10-KSB filed on April 18, 2002).
10.3 Employment Agreement Amendment between the Company and Don
Boudewyn, dated April 1, 2002 (incorporated by reference to
Exhibit 10.17 of the Form 10-KSB filed on April 18, 2002).
10.4 Executive Employment Agreement between the Company and Peter
Trepp, dated July 4, 2003 (including Exhibit A: Employee
Proprietary Information and Inventions Agreement) (the
following exhibits have been omitted: Exhibit A - Schedule
A: Employee's Disclosure; and Exhibit A - Schedule B:
Termination Certificate Concerning 5G Wireless
Communications, Inc. Proprietary Information (incorporated
by reference to Exhibit 10 of the Form 10-QSB filed on
November 24, 2003).
10.5 Independent Consulting Agreement between the Company and
Ghillie Finaz, AG, dated September 22, 2004 (incorporated by
reference to Exhibit 10 of the Form 8-K filed on September
30, 2004).
10.6 Form of agreement between the Company and its independent
directors (incorporated by reference to Exhibit 10.2 of the
Form 10-QSB filed on November 17, 2004).
10.7 Contribution Agreement between the Company and the Company
Solutions, Inc. (the following to this agreement have been
omitted: Schedule 1: List of Assets; and Schedule 2: List of
Liabilities), dated December 31, 2004 (incorporated by
reference to Exhibit 10 of the Form 8-K filed on January 7, 2005).
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).
10.13 Asset Purchase Agreement between the Company and Global
Connect, Inc., dated as of September 12, 2006 (not including
Schedule 1, Schedule 2, Schedule 3 and Schedule 4)
(incorporated by reference to Exhibit 10 of the Form 8-K
filed on October 11, 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 the Company (incorporated by reference to
Exhibit 21 of the Form 10-QSB filed on August 27, 2002).
23 Consent of Independent Registered Public Accounting Firm
(incorporated by reference to Exhibit 23 of the Form 10-K
filed on April 7, 2006).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Jerry Dix (filed
herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification of Andrew D. McCormac
(filed herewith).
32 Section 1350 Certification of Jerry Dix and Andrew D.
McCormac (filed herewith).
99 Press release issued by the Company, dated October 4, 2006
(incorporated by reference to Exhibit 99 of the Form 8-K
filed on October 11, 2006).