UNITED STATES 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 quarter ended
September 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period to
Commission file number: 000-30448
5G WIRELESS COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
Nevada 20-0420885
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
4136 Del Rey Avenue 90292
Marina Del Rey, California (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (310) 448-8022
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the Company was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Number of shares of Common Stock outstanding as of November 15, 2004:
827,695,760
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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5G Wireless Communications, Inc. and SubSidiary
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Table of Contents
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Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet as of September 30, 2004............................3
Condensed Consolidated Statements of Operations for the three and nine month
periods ended September 30, 2004 and September 30, 2003..................................4
Condensed Consolidated Statements of Cash Flows for the nine months periods
ended September 30, 2004 and September 30, 2003..........................................5
Notes to Condensed Consolidated Financial Statements.....................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..............................................................................13
Item 3. Controls and Procedures.................................................................24
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................25
Item 2. Unregistered Sales of Equity Securities and use of proceeds.............................25
Item 3. Defaults Upon Senior Securities.........................................................26
Item 4. Submission of Matters to a Vote of Security Holders.....................................26
Item 5. Other Information.......................................................................26
Item 6. Exhibits................................................................................30
Page 2
5G WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2004
(Unaudited)
ASSETS
Current assets:
Cash $ 715,599
Accounts receivable, net of $56,550 of allowance for doubtful accounts 19,992
Inventory 40,530
Prepaid expenses and other current assets 58,535
------------------
Total current assets 834,656
Property and equipment 268,246
Accumulated depreciation (206,504)
------------------
Net property and equipment 61,742
------------------
Total assets $ 896,398
==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 356,530
Accrued expenses 15,675
Related party payables 51,648
Notes payable 79,589
Convertible notes payable, net of discount 1,095,287
------------------
Total current liabilities 1,598,729
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued or outstanding as
of September 30, 2004 -
Common stock, $0.001 par value; 5,000,000,000 shares authorized; 641,637,979 outstanding as of
September 30, 2004 641,637
Common stock, held in escrow (177,778)
Additional paid-in capital 16,104,866
Accumulated deficit (17,271,056)
------------------
Total stockholders deficit (702,331)
------------------
Total liabilities and stockholders' deficit $ 896,398
==================
See accompanying notes to condensed consolidated financial statements
Page 3
5G Wireless Communications, Inc. and SubSidiary
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three & Nine Month Periods Ended September 30, 2004 and 2003
(Unaudited)
Nine Months Ended Three Months Ended
-------------------------------- ------------------------------------
2004 2003 2004 2003
---------------- --------------- ----------------- ------------------
Revenues $ 397,239 $ 122,444 $ 213,444 $ 69,264
Cost of revenues 100,549 - 45,820 -
---------------- --------------- ----------------- ------------------
Gross profit 296,690 122,444 167,624 69,264
---------------- --------------- ----------------- ------------------
Operating expenses:
General and administrative 437,870 1,365,263 176,543 882,144
Professional/consulting services 2,080,613 - 1,214,806 -
Salaries and related 1,051,454 - 285,664 -
Depreciation 64,720 49,254 22,530 16,427
---------------- --------------- ----------------- ------------------
Total operating expenses 3,634,657 1,414,517 1,699,543 898,571
---------------- --------------- ----------------- ------------------
Operating loss (3,337,967) (1,292,073) (1,531,919) (829,307)
---------------- --------------- ----------------- ------------------
Gain on disposal of equipment - 2,235 - -
Interest income - 74 - 31
Interest expense (162,634) (13,548) (84,324) (8,802)
---------------- --------------- ----------------- ------------------
Loss from continuing operations (3,500,601) (1,303,312) (1,616,243) (838,078)
---------------- --------------- ----------------- ------------------
Discontinued operations - (62,000) - (62,000)
---------------- --------------- ----------------- ------------------
Net loss $ (3,500,601) $ (1,365,312) $ (1,616,243) $ (900,078)
================ =============== ================= ==================
Loss per common share:
Basic and diluted $ (0.01) $ (0.01) $ (0.00) $ (0.00)
================ =============== ================= ==================
Weighted average shares outstanding: 384,624,567 229,710,079 534,596,339 265,580,199
================ =============== ================= ==================
See accompanying notes to condensed consolidated financial statements
Page 4
5G Wireless Communications, Inc. and SubSidiary
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Periods Ended September 30, 2004 and 2003
(Unaudited)
2004 2003
-------------------- -------------------
Cash flows from operating activities:
Net loss $ (3,500,601) $ (1,461,912)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation 64,720 32,854
Issuance of stock for services 2,324,002 814,636
Amortization of discount on convertible notes payable 77,600
Changes in operating assets and liabilities:
Increase in accounts receivable (12,887) (7,299)
Increase in inventory (36,030) (4,500)
Decrease in other assets 19,656 (87,660)
Increase in accounts payable 121,106 201,062
Decrease in accrued expenses (704,218) 270,640
-------------------- -------------------
Net cash used in operating activities (1,646,652) (242,179)
-------------------- -------------------
Cash flows from investing activities:
Disposition of property and equipment - 3,143
Purchase of property and equipment (32,356) -
-------------------- -------------------
Net cash used in investing activities (32,356) 3,143
-------------------- -------------------
Cash flows from financing activities:
(Payments on) proceeds from notes payable (9,779) 96,222
Proceeds from convertible debentures issuances 2,192,716 150,000
-------------------- -------------------
Net cash provided by financing activities 2,182,937 246,222
-------------------- -------------------
Net increase in cash 503,929 7,186
Cash, beginning of period 211,670 5,463
-------------------- -------------------
Cash, end of period $ 715,599 $ 12,649
==================== ===================
Supplemental disclosure of non cash investing and financing activities:
Conversion of debt to common stock $ 213,000
====================
Conversion of accounts payable to common stock $ 40,194
====================
Beneficial conversion feature on convertible debt $ 1,176,000
====================
See accompanying notes to condensed consolidated financial statements
Page 5
5G Wireless communications, inc. and subsidiary
Notes for condensed consolidated Financial statements
September 30, 2004
(Unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
5G Wireless Communications, Inc., a Nevada corporation ("Company"), was
incorporated in September 1979. In March 2001, the Company merged with 5G
Partners, a private Canadian partnership, resulting in a name change to the
current name. In April 2002, the Company acquired 100% of Wireless Think Tank, a
privately held entity. The accompanying consolidated statements include results
of Wireless Think Tank operations from the date of acquisition.
The Company provides patent pending, innovative wireless technology. It designs,
builds, markets and services Wi-Fi compatible wireless broadband systems. The
Company had built a Wireless Internet Service network in the New York State area
for research and development. In July 2003, the Company discontinued serving
this area and has moved all research and development to its facilities in Marina
Del Rey, California. In conjunction with this move, it changed its focus from a
service provider to a manufacturer of integrated wireless solutions to create
large and efficient wireless local area networks and wide area networks with far
less equipment and expense than competitors. The revenues in 2004 result
principally from sale and installation of wireless devices to customers in
Southern California. Revenues in 2003 principally the first quarter, are the
result of the delivery of broadband access to residential and business
subscribers, web hosting and design, and engineering consulting services.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of 5G
Wireless Communications, Inc. and its wholly owned subsidiary (collectively, the
"Company"). All significant inter-company accounts and transactions have been
eliminated in consolidation.
Condensed Financial Statements
The accompanying condensed consolidated financial statements have been prepared
by the Company without audit. In the opinion of management, all adjustments
(which include normal recurring adjustments) necessary to present fairly the
financial position as of September 30, 2004, and the consolidated results of
operations and cash flows for all periods presented have been made.
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 condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in conjunction
with the consolidated financial statements and footnotes thereto included in the
Company's December 31, 2003, audited financial statements on Form 10-KSB/A. The
results of operations for the periods ended September 30, 2004 and 2003 are not
necessarily indicative of operating results for the full year.
Page 6
5G Wireless communications, inc. and subsidiary
Notes for condensed consolidated Financial statements
September 30, 2004
(Unaudited)
Going Concern
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As of September 30, 2004,
the Company has completed its initial funding which will allow the Company to
sustain itself for the remainder of 2004 and for fiscal year 2005. However, the
ability of the Company to continue as a going concern on a longer-term basis
will be dependent upon its ability to raise additional capital from the sale of
common stock and, ultimately, the achievement of significant operating results.
The accompanying financial statements do not include any adjustments that might
be required should the Company be unable to recover the value of its assets or
satisfy its liabilities. As of September 30, 2004, the Company had an
accumulated deficit of approximately $17,271,000. These factors, among others,
raise substantial doubt about the Company's ability to continue as a going
concern.
The Company will continue to seek additional funds to ensure its successful
growth strategy and to allow for potential investments into early stage
company's in the telecommunications sector.
The condensed consolidated financial statements do not include any adjustments
related to recoverability and classification of assets carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
Inventory
Inventory is valued at the lower of cost or market value. It is comprised solely
of parts used in the assembly of wireless radio systems. Cost is determined
using the FIFO method. At September 30, 2004, no reserve for losses is deemed
necessary.
Revenue Recognition
Equipment sales are recognized when products are delivered without any further
services required. Subscription Internet revenues in 2003 were partially
received as an up front activation fee and monthly recurring revenues that vary.
Revenues were recognized as earned over the term of the contract on a straight
line basis.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition," as updated by SAB 104, which
outlines the basic criteria that must be met to recognize revenue and provides
guidance for presentation of revenue and for disclosure related to revenue
recognition policies in financial statements filed with the Securities and
Exchange Commission. Management believes that the Company's revenue recognition
policy for services and product sales conforms to SAB 101.
Basic and Diluted Loss Per Common Share
Under Statement of Financial Standards ("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 is the same as additional potential common shares
would be anti-dilutive.
Page 7
5G Wireless communications, inc. and subsidiary
Notes for condensed consolidated Financial statements
September 30, 2004
(Unaudited)
Stock Based Compensation
At September 30, 2004, the Company does not have a stock-based employee
compensation plan, and has one stock-based non-employee compensation plan (the
"2004 Plan"). In September 2004, the Company increased the number of shares
issuable under the 2004 Plan from 75,000,000 options to 150,000,000 shares.
The Company has granted the independent board member unvested options to
purchase up to 1,000,000 restricted shares of the Company's Common Stock per
year based on the closing price the day prior to their appointment. Options to
non-employees are expensed in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation", as amended by SFAS no 148.
Research and Development
In accordance with SFAS No. 2, "Accounting for Research and Development Costs,"
all research and development costs must be charged to expense as incurred.
Accordingly, internal research and development costs are expensed as incurred.
Third-party research and developments costs are expensed when the contracted
work has been performed or as milestone results have been achieved.
Company-sponsored research and development costs related to both present and
future products are expensed in the period incurred. Research and development
costs for the nine months ended September 2003 and 2004 were minor and are
included in general and administrative expenses.
Recent Accounting Pronouncements
Recent accounting pronouncements discussed in the notes to the December 31, 2003
financial statements filed previously with the Securities and Exchange
Commission in Form 10-KSB that were required to be adopted during the year ended
December 31, 2004 did not have a significant impact on the Company's financial
statements.
Reclassifications
Certain reclassifications have been made to the 2003 condensed consolidated
financial statements to conform to the 2004 presentation.
2. CONVERTIBLE NOTES PAYABLE
$250,000 Convertible Notes
In March 2004, the Company borrowed $250,000 under convertible notes payable
("$250,000 Convertible Notes"), of which $100,000 came from management or
individuals related to certain management personnel. All borrowings are due in
March 2006, with monthly interest payments on the outstanding balance Interest
Accrues at 9% per annum. The $250,000 Convertible Notes may be converted into
common stock of the Company at the lesser of: (a) in accordance with the terms
of a subsequent financing, at the option of the holder, (b) 125% of the closing
bid price on the closing date, as defined, or (c) 60% of the average of the
three (3) lowest closing bid prices during the twenty (20) trading days
immediately prior to the conversion date.
Page 8
5G Wireless communications, inc. and subsidiary
Notes for condensed consolidated Financial statements
September 30, 2004
(Unaudited)
In connection with the $250,000 Convertible Notes, the Company granted warrants
to purchase 666,667 shares of the Company's restricted common stock at an
exercise price of the lesser of: (a) the 5 day average closing bid price prior
to closing or (b) the 15 day average closing bid price prior to exercise. The
warrants vested upon grant and expire in March 2006.
The convertible feature of the $250,000 Convertible Notes provides for a rate of
conversion that is below market value. Such feature is normally characterized as
a "beneficial conversion feature" ("BCF"). Pursuant to Emerging Issues Task
Force Issue No. 98-5 ("EITF 98-5"), "Accounting For Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratio" and
Emerging Issues Task Force Issue No. 00-27,"Application of EITF Issue No. 98-5
To Certain Convertible Instruments," the Company has estimated the fair value of
such BCF to be approximately $176,000 related to these notes and recorded such
amount as a debt discount. Such discount will be amortized to interest expense
over the term of the notes. Amortization expense during the nine months ended
September 30, 2004 approximated $73,900.
$715,000 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 and accrue interest at 9%
per annum. The $715,000 Convertible Notes may be converted into common stock of
the Company at the lesser of: (a) in accordance with the terms of a subsequent
financing, at the option of the holder, (b) 125% of the closing bid price on the
closing date, as defined, or (c) 100% of the closing bid price during the ninety
(60) trading days immediately prior to the conversion date.
In connection with the issuance of the $715,000 Convertible Notes, the Company
paid issuance costs of $74,500, which has been recorded as a debt discount and
is being amortized, into interest expense over the life of notes. During the
nine months ended September 30, 2004, the Company amortized approximately
$18,600 of such amount. In July 2004, the Company borrowed an additional $90,000
under terms identical to those of the $715,000 Convertible Notes.
$2,000,000 Convertible Note
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 shall purchase up to $2,000,000 of principal
amount of promissory notes, bearing interest at 5% per annum, of the Company
convertible into shares of the Company's common stock at a conversion price
equal to the lesser of (i) 75% of the average of the five lowest closing bid
prices of the Company's common stock as reported by the OTC Bulletin Board for
the ninety trading days preceding the conversion date, or (ii) $0.05. In
addition the convertible note holders will receive Class A and Class B share
warrants to purchase shares of common stock.
$1,000,000 of promissory notes was purchased on the initial closing date
("Initial Closing Purchase Price"). $1,000,000 of the purchase price ("Second
Closing Purchase Price") will be payable within five business days after the
earlier of (i) the actual effectiveness of a Form SB-2 registration statement to
be filed with the SEC, or (ii) the date upon which the Company is able to issue
to the subscribers free trading unrestricted common stock as a "business
development company" as defined in Rule 602(a) of Regulation E under the
Securities Act of 1933.
Page 9
5G Wireless communications, inc. and subsidiary
Notes for condensed consolidated Financial statements
September 30, 2004
(Unaudited)
The convertible feature of the $1,000,000 Convertible Notes provides for a rate
of conversion that is below market value. Such feature is normally characterized
as a "beneficial conversion feature" ("BCF"). Pursuant to EITF 98-5 and EITF
00-27, the Company has estimated the fair value of such BCF to be approximately
$1,000,000 related to these notes and recorded such amount as a debt discount.
Such discount will be amortized to interest expense over the two year term of
the notes. Amortization expense on these notes during the nine months ended
September 30, 2004 approximated $30,000.
3. EQUITY TRANSACTIONS
Common Stock
During the nine months ended September 30, 2004, the Company issued 141,423,550
shares of common stock for services, which were valued at approximately
$2,324,000. Value is based on the terms of an agreement or if no value is given
for the shares, the closing market price on the dates of granting will be used.
Included in such issuances, were approximately 79,866,000 shares issued to
certain consultants, employees and directors of the Company in accordance with
the related employment agreements valued at approximately $1,005,000 (based on
the closing market price on the dates of grant). Approximately 68,908,000 shares
(valued at approximately $661,000) of the shares issued to certain officers,
directors and employees during the nine month period ended September 30, 2004
were earned and expensed in prior years. During the three months ended September
30, 2004, the following shares were issued: 7,741,922 for services and 5,652,439
as compensation to Company employees.
During the nine months ended September 30, 2004, in accordance with the terms of
the applicable convertible notes payable agreements, the Company issued
approximately 23,433,000 shares of common stock in connection with the
conversion of notes payable approximating $213,000.
On September 16, 2004, the Company filed a Certificate of Amendment to Articles
of Incorporation. This document amended Article III of the Articles of
Incorporation to increase the number of authorized shares of common stock from
800,000,000 to 5,000,000,000. Under the provisions of the Company's Articles of
Incorporation, as amended, this action does not require a vote of shareholders.
4. DISCONTINUED OPERATIONS
In March 2003, the Company's board of directors approved the discontinuation of
our subsidiary, Wireless Thinktank, Inc., which was located in New York State.
The Company maintained a liability for charges against future cost totaling
approximately $23,000 as of September 30, 2004. There were no revenues for
Wireless ThinkTank, Inc. in 2003 and 2004. Loss from discontinued operations per
share was $0.00 and $0.00 for the nine months ended September 30, 2004 and 2003.
Page 10
5G Wireless communications, inc. and subsidiary
Notes for condensed consolidated Financial statements
September 30, 2004
(Unaudited)
5. INCOME TAXES
The provision for income taxes for fiscal 2004 and 2003 was $800 and differs
from the amount computed by applying the U.S. Federal income tax rate of 34% to
loss before income taxes, primarily due to net operating loss carryforwards. As
of September 30, 2004, the Company had tax net operating loss carryforwards of
approximately $17,271,000 and $ 1,715,000 for federal and state income tax
reporting purposes.
Effective September 11, 2002, pursuant to California revenue and tax code
section 24416.3, no net operating loss deduction would be allowed for any
taxable year beginning on or after January 1, 2002, and before January 1, 2004.
For any suspended losses, the carryover period would be extended by one year for
losses incurred in tax years beginning on or after January 1, 2002, and before
January 1, 2003; and by two years for losses incurred in taxable years beginning
before January 1, 2002. In the event the Company were to experience a greater
than 50% change in ownership as defined in Section 382 of the Internal Revenue
Code, the utilization of the Company's net operating loss carryforwards could be
severely restricted.
6. OTHER EVENTS
On September 29, 2004, Brian Corty resigned as a director and corporate
secretary of the Company. Mr. Corty will be devoting more time to wireless
research and development activities for the Company. Company corporate assistant
secretary and executive vice president, Don Boudewyn, has assumed
responsibilities of corporate secretary from Mr. Corty.
On September 29, 2004, the Company's board of directors appointed Stanley A.
Hirschman as an independent board member. Mr. Hirschman owns a 1/2% interest in
Redwood Capital Management, which is the management company for the investors in
the $2,000,000 convertible notes described above.
7. SUBSEQUENT EVENTS
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 are to purchase up to $2,000,000 of principal
amount of 5% promissory notes of the company convertible into shares of the
Company's common stock at a conversion price equal to the lesser of (i) 75% of
the average of the five lowest closing bid prices of the Company's common stock
for the ninety trading days preceding the conversion date, or (ii) $0.05. During
the quarter, the Company received the initial $1,000,000 in funding (see note 2)
and then on November 09, 2004 the Company received the balance of the $2,000,000
convertible note. In addition the convertible note holders will receive
additional Class A and Class B share warrants to purchase shares of common
stock.
On October 4, 2004, the Company's board of directors appointed Phil E. Pearce as
an independent board member. Mr. Pearce owns a 1/2% interest in Redwood Capital
Management, which is the management company for the investors in the $2,000,000
convertible notes described above.
On October 4, 2004 the Company Board of Director's established the following; an
Audit Committee and Charter, a Nominating Committee, a Corporate Governance
Committee and Guidelines, and a Compensations Committee.
On October 5, 2004 the Company approved the creation of a number of new
Committee's, Charters, policies and guidelines which include the following;
Investment Committee & Charter, Adoption of Investment Procedures and Investment
Analysis Guidelines, Due Diligence Checklist for Investments, Due Diligence
Checklist, Managerial Guidelines, Adoption of Code of Ethics and Guidelines,
Safety of Investments, Continuous Disclosure Policy, Establishing a Subsidiary,
Valuation of Investments, Issuance of Private Placement, Continuation of Special
Counsel. In addition the company board approved the creation of a Series "A"
Convertible Preferred Shares.
On October 6, 2004 the Company's Compensation Committee issued granted Series
"A" Convertible Preferred Shares to Mr. Dix and Mr. Boudewyn, totaling 3,000,000
shares. Each share of Convertible Preferred Stock is convertible initially at
the rate of 800 shares of common stock for each full share of convertible
preferred stock.
Page 11
5G Wireless communications, inc. and subsidiary
Notes for condensed consolidated Financial statements
September 30, 2004
(Unaudited)
On October 19, 2004, the Company filed notice of its intention to become a
Business Development Corporation ("BDC") by filing a N-54A (Notification of
Election to Be Subject to Sections 55 Through 65 of the Investment Company Act
of 1940 Filed Pursuant to Section 54(a) of the Act), and filed a Form 1-E
(Notification Under Regulation E) on October 20, 2004.
On October 27, 2004, the Company's board appointed Kirk L. Haney as an
independent board member.
On November 1, 2004, the Company agreed to sell restricted shares of common
stock valued at $10,000 ($0.01015 per share) to an investor. In addition, the
investor will receive four warrants to purchase a minimum of $10,000, but not
greater than $250,000, in shares of common stock during each quarterly period
during the 2005 calendar year. This purchase of shares is in connection with a
license agreement entered into by the parties, dated February 19, 2004. The date
of sale, and the issuance of the warrants, actually occurred on November 8,
2004.
On November 3, 2004, the Company placed 177,777,778 shares in an escrow account
pursuant to terms of $2,000,000 convertible notes, described above.
On November 8, 2004, the Company's board of directors appointed Murray Williams
as an independent board member who will chair the Company's audit committee. The
Company also appointed Kirk L. Haney as the chair for its investment committee.
On November 9, 2004, the Company received the $1,000,000 which was the balance
of the $2,000,000 convertible note.
Page 12
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of
operations should be read with the condensed consolidated financial statements
and related notes included elsewhere in this Report.
When used in this Report, the words "expects," "anticipates," "believes,"
"plans," "will" and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods and include, but
are not limited to, statements regarding our critical accounting policies,
adequacy of cash, expectations regarding net losses and cash flow, statements
regarding our growth and profitability, our need for future financing, our
dependence on personnel, our operating expenses, our ability to respond to rapid
technological change and statements regarding the issuance of common stock to
our executive officers. 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 below, as well as risks related to our ability to develop and
timely introduce products that address market demand, the impact of alternative
technological advances and competitive products, market fluctuations, our
ability to obtain future financing, and the risks set forth below under "Factors
That May Affect Our Results." These forward-looking statements speak only as of
the date hereof. 5G Wireless 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 the our expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
Overview
The Company designs builds markets and services innovative Wi-Fi compatible
wireless broadband systems. The company believes its integrated hardware and
software solutions offer significant improvements in distance, performance,
throughputs and security while servicing both line of sight and non-line of
sight applications. The Company is focused on manufacturing products and
developing solutions to create large and efficient wireless LAN and WAN with far
less equipment and expense than its competitors. Our customers include
universities, businesses, governments, municipalities and wireless Internet
service provider.
We market and sell, 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. We believe its antenna design and
wireless packet switching allows its systems to more readily penetrate buildings
and trees than competitors, and to accommodate up to 1000 user associations. Our
indoor product shares many of the same strengths as its 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.
Our outdoor and indoor products provide strong security at both the
hardware and software levels, can transmit voice, data, and video at
multi-megabit speeds, and can work together seamlessly in wireless networks with
each other or with other common wireless network equipment. Because of these
advantages, we believe 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.
Page 13
We have devoted substantial resources to the build out of its networks and
product research and development with limited resources applied to our marketing
programs. As a result, the company has historically experienced operating losses
and negative cash flow. We expect that these operating losses and negative cash
flows may continue through additional periods. In addition, 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 - Nine Months Ended September 30, 2003 and 2004
a) Revenues.
The Company reported $397,239 in revenues for nine months ended September
30, 2004 compared to $122,444 for the nine months ended September 30, 2003, an
increase of $274,795 or approximately 224%. These increases in revenue were
primarily due to an increased penetration into the campus and reseller markets
that is expected to continue for the following period.
b) General, Administrative and Salary Expenses.
General, administrative, salary and professional expenses totaling
$3,569,937 were incurred in the nine months ended September 30, 2004 compared to
$1,365,263 for the nine months ended September 30, 2003, an increase of
$2,204,674 or approximately 161%. Professional and consulting services costs
represented 58% of this total, $2,080,613 for the nine-months ended September
30, 2004. These expenses are expected to decrease in the coming quarter.
Salaries and related increases were primarily attributable to additional staff
to support the overall increase in operational and support activities. These
general and administration expenses are expected to increase during the next
quarter.
c) Depreciation.
Depreciation was $64,720 for the nine months ended September 30, 2004
compared to $49,254 for the nine months ended September 30, 2003, an increase of
$15,466 or approximately 31%. These increases are the result of depreciation of
certain items for a full quarter compared to the previous period.
d) Interest Expense.
Interest expense was $162,634 for the nine months period ended September
30, 2004 compared to $13,548 for the nine months ended September 30, 2003, an
increase of $149,086 or approximately 1,100%. The increase was attributable to
the issuance of additional convertible debentures and other interest bearing
notes payable.
e) Net Loss.
The Company reported a net loss of $3,500,601 for the nine months ended
September 30, 2004 compared to a net loss of $1,365,312 for the nine months
ended September 30, 2003, an increase of $2,135,289 or approximately 156%. The
increased loss during the periods was due primarily to increased general and
administrative expenses and salaries.
Page 14
Results of Operations - Three Months Ended September 30, 2003 and 2004
a) Revenues.
The Company reported revenues of $213,444 for the three months ended
September 30, 2004 compared to $69,264 for the three months ended September 30,
2003, an increase of $144,180 or approximately 208%. These increases in revenue
were primarily due to an increased penetration into the campus and reseller
markets that is expected to continue for the following period.
b) General, Administrative and Salary Expenses.
General, administrative and salary expenses and professional expenses
totaled $1,667,013 for the three months ended September 30, 2004 compared to
$882,144 for the three months ended September 30, 2003, an increase of $784,869
or approximately 89%. Professional and consulting services costs represented 72%
of this total, $ 1,214,806 for the three-months ended September 30, 2004. These
expenses are expected to decrease in the coming quarter. Salaries and related
increases were primarily attributable to additional staff to support the overall
increase in operational and support activities. These general and administration
expenses are expected to increase during the next quarter. These general and
administration expenses are expected to increase during the next quarter as
demand for our products is expected to increase.
c) Depreciation.
Depreciation totaled $22,530 for the three months ended September 30, 2004
compared to $16,427 for the three months ended September 30, 2003, an increase
of or $6,103 or approximately 37%. These increases are the result of
depreciation of certain equipment for a full quarter compared to the previous
period.
d) Interest Expense.
This expense was $84,324 for the three months ended September 30, 2004
compared to $8,802 for the three months ended September 30, 2003, an increase of
$75,522 or approximately 858%. The increase was attributable to the issuance of
additional convertible debentures and other interest bearing note payable.
e) Net Loss.
The Company reported a net loss of $1,616,243 for the three months ended
September 30, 2004 2003 compared to a net loss of $900,096 for the three months
ended September 30, 2003, an increase of $716,147 or approximately 80%. The
increased loss during the periods was due primarily to increased general and
administrative expenses and salaries.
Page 15
Factors That May Affect Operating Results.
Our operating results of the Company and its subsidiaries 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:
o market acceptance of and changes in demand for products and services;
o a small number of customers account for, and may in future periods
account for, substantial portions of our revenue, our revenue could
decline because of delays of customer orders or the failure to retain
customers;
o gain or loss of clients or strategic relationships;
o announcement or introduction of new services and products by the
company or by its competitors;
o the ability to build brand recognition;
o timing of sales to customers;
o price competition;
o the ability to upgrade and develop systems and infrastructure to
accommodate growth;
o the ability to attract and integrate new personnel in a timely and
effective manner;
o the ability to introduce and market products and services in
accordance with market demand;
o changes in governmental regulation;
o reduction in or delay of capital spending by clients due to the
effects of terrorism, war and political instability; and
o general economic conditions.
We believe that its planned growth and profitability will depend in large
part on the ability to promote its services, 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 services 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.
Page 16
We are also subject to the following specific factors that may affect its
operating results:
a) Competition.
The market for wireless products and services 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.
Some of Company's competitors have:
o longer operating histories;
o larger customer bases;
o greater name recognition and longer relationships with clients; and
o significantly greater financial, technical, marketing, public
relations and managerial resources than the company.
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:
o range
o non-line of sight capabilities
o data rate
o security scheme
o simultaneous users
o implementation cost
Competitors may develop or offer services that provide significant
(technological, creative, performance, price) or other advantages over the
services offered by the Company. If the company fails to gain market share or
lose existing market share, our 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 or marketing, distribution or support
capabilities to compete successfully.
Page 17
b) Protection of Proprietary Rights.
The Company's success and ability to compete will be dependent in part on
the protection of its potential patents, trademarks, trade names, service marks
and other proprietary rights. The Company intends to rely on trade secret and
copyright laws to protect the intellectual property that it plans to develop,
but there can be no assurance that such laws will provide sufficient protection
to the Company, that others will not develop a service that are similar or
superior to the Company's, or that third parties will not copy or otherwise
obtain and use the Company's proprietary information without authorization. In
addition, certain of the Company's know-how and proprietary technology may not
be patentable.
The Company may rely on certain intellectual property licensed from third
parties, and may be required to license additional products or services in the
future, for use in the general operations of its business plan. There can be no
assurance that these third party licenses will be available or will continue to
be available to the Company on acceptable terms or at all. The inability to
enter into and maintain any of these licenses could have a material adverse
effect on the Company's business, financial condition or operating results.
There is a risk that some of the Company's products may infringe the
proprietary rights of third parties. In addition, whether or not the Company's
products infringe on proprietary rights of third parties, infringement or
invalidity claims may be asserted or prosecuted against it and it could incur
significant expense in defending them. If any claims or actions are asserted
against the Company, it may be required to modify its products or seek licenses
for these intellectual property rights. The Company may not be able to modify
its products or obtain licenses on commercially reasonable terms, in a timely
manner or at all. The Company's failure to do so could have a negative effect on
its business and revenues.
c) Dependence on Suppliers.
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, the company 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) Technological and Market Changes.
The markets in which the Company competes are characterized by new service
introductions, evolving industry standards, and changing needs of customers.
There can be no assurance that the Company's existing services will continue to
be properly positioned in the market or that it will be able to introduce new or
enhanced products into the market on a timely basis, or at all. Currently, the
Company is focusing on upgrading and introducing new services. There can be no
assurance that enhancements to existing products or new products will receive
customer acceptance.
There is a risk to the Company that there may be delays in initial
implementation of new services. Further risks inherent in new service
introductions include the uncertainty of price-performance relative to services
of competitors, competitors' responses to its new service introductions, and the
desire by customers to evaluate new services for longer periods of time.
Page 18
e) Government Regulation.
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 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. Additionally, in the event the
2.4 GHz band becomes unacceptably crowded, and no additional frequencies are
allocated, the Company's our business could be adversely affected.
f) Key Personnel.
The Company's success is largely dependent on the personal efforts and
abilities of its senior management. The loss of certain members of the Company's
senior management, including the company's chief executive officer, chief
financial officer and chief technical officer, could have a material adverse
effect on the company's business and prospects.
The Company intends to recruit in fiscal year 2005 employees who are
skilled in its industry. The failure to recruit these key personnel could have a
material adverse effect on the Company's business. As a result, the Company may
experience increased compensation costs that may not be offset through either
improved productivity or higher revenue. There can be no assurances that the
Company will be successful in retaining existing personnel or in attracting and
recruiting experienced qualified personnel.
g) Operation as a Business Development Company.
Although the Company is limited by the Investment Company Act of 1940 with
respect to the percentage of its assets that must be invested in qualified
investment companies, the company is not limited with respect to the minimum
standard that any investment company must meet, or the industries in which those
investment companies must operate. The Company may make investments without
shareholder approval and such investments may deviate significantly from our
historic operations. Any change in our investment policy or selection of
investments could adversely affect our stock price, liquidity, and the ability
of our shareholders to sell their stock.
The Company intends to make investments into qualified companies that will
provide the greatest overall return on its investment. However, certain of those
investments may fail, in which case the company will not receive any return on
its investment. In addition, the Company's investments may not generate income,
either in the immediate future, or at all. As a result, the company may have to
sell additional stock, or borrow money, to cover its operating expenses. The
effect of such actions could cause its stock price to decline or, if the company
is not successful in raising additional capital, it could cease to continue as a
going concern.
Page 19
Liquidity and Capital Resources.
Management believes the Company currently has adequate cash to fund
anticipated cash needs till the end of 2005 with current financing. However, our
continued operations, as well as the implementation of our business plan, will
depend upon its ability to raise additional funds through bank borrowings,
equity or debt financing. However, adequate funds may not be available when
needed or may not be available on terms favorable to the Company. The ability of
the Company to continue as a going concern is dependent on additional sources of
capital and the success of the our business plan. The Company's independent
accountants audit reports included in the Form 10-KSB for the fiscal year ended
December 31, 2003 includes a substantial doubt paragraph regarding the its
ability 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:
o curtail operations significantly;
o sell significant assets;
o seek arrangements with strategic partners or other parties that may
require the company to relinquish significant rights to products,
technologies or markets; or
o 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 the company's
operational needs, the Company may seek to compensate providers of services by
issuance of stock in lieu of cash, which will also result in dilution to
existing shareholders.
Capital Raised in 2004
a) $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 those related to certain management personnel. All of these borrowings are
due in March 2006, with monthly interest payments on the outstanding balance.
The $250,000 Convertible Notes may be converted into common stock of the Company
at the lesser of: (a) in accordance with the terms of a subsequent financing, at
the option of the holder, (b) 125% of the closing bid price on the closing date,
or (c) 60% of the average of the three (3) lowest closing bid prices during the
twenty (20) trading days immediately prior to the conversion date. In connection
with the $250,000 Convertible Notes, the Company granted warrants to purchase
666,667 shares of the Company's restricted common stock at an exercise price of
the lesser of: (a) the 5 day average closing bid price prior to closing or (b)
the 15 day average closing bid price prior to exercise. The warrants vested upon
grant and expire in March 2006. See Exhibits 4.11 to 4.13 to this Form 10-QSB.
Page 20
b) $715,000 Convertible Notes.
In March 2004, the Company borrowed $715,000 under convertible notes
payable ("$715,000 Convertible Notes"). All of these borrowings are due in March
2006, with monthly interest payments on the outstanding balance and accrue
interest at 9% per annum. The $715,000 Convertible Notes may be converted into
common stock of the Company at the lesser of: (a) in accordance with the terms
of a subsequent financing, at the option of the holder, (b) 125% of the closing
bid price on the closing date, or (c) 100% of the closing bid price during the
ninety (60) trading days immediately prior to the conversion date. See Exhibits
4.11 to 4.13 to this Form 10-QSB.
c) $2,000,000 Subscription Agreement.
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 are to purchase up to $2,000,000 of
principal amount of 5% promissory notes of the company convertible into shares
of the Company's common stock at a conversion price equal to the lesser of (i)
75% of the average of the five lowest closing bid prices of the Company's common
stock as reported by the OTC Bulletin Board for the ninety trading days
preceding the conversion date, or (ii) $0.05. See Exhibit 4.15 to this Form
10-QSB.
$1,000,000 of the purchase price was paid on the initial closing date
("Initial Closing Purchase Price"). $1,000,000 of the purchase price ("Second
Closing Purchase Price") will be payable within five business days after the
sooner of (i) the actual effectiveness of a registration statement to be filed
with the SEC, or (ii) the date upon which the Company is able to issue to the
subscribers free trading unrestricted common stock as a business development
company as defined in Rule 602(a) of Regulation E under the Securities Act of
1933.
In addition the convertible note holders will receive Class A and Class B
share warrants to purchase shares of common stock based on the following
formulas:
(1) Class A Warrants
30 Class A Warrants will be issued for each 100 shares which would be
issued on each closing sate assuming the complete conversion of the notes
issued on each such closing sate at the conversion price in effect on each
such closing date. The per warrant share exercise price to acquire a share
upon exercise of a Class A Warrant is 120% of the closing bid price of the
common stock on the trading day immediately preceding the Initial Closing
Date and is exercisable until five years after the issue date of the Class
A Warrants.
(2) Class B Warrants
The Company will issue and deliver 125 Class B Warrants to the subscribers
for each $1.00 of purchase price invested on each closing date. The per
warrant share exercise price to acquire a share upon exercise of a Class B
Warrant is $0.02 and is exercisable until three years after the issue date
of the Class B Warrant.
As part of this funding arrangement, Jerry Dix and Don Boudewyn, the Company's
chief executive officer and executive vice president, respectively, have agreed
that for the period of 180 days after the Second Closing Date during which such
registration statement shall have been current and available for use in
connection with the public resale of the shares and warrant shares, they will
not sell or otherwise dispose of any shares of common stock or any options,
warrants or other rights to purchase shares of common stock or any other
security of the Company which they own or have a right to acquire, other than
(i) in connection with an offer made to all shareholders of the company or any
merger, consolidation or similar transaction involving the Company, or (ii) with
the prior written consent of the investors and the Company, which shall not be
unreasonably withheld.
Page 21
Inflation.
The impact of inflation on the costs of the Company, 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 the Company's operations over the past quarter, and
the company does not anticipate that inflationary factors will have a
significant impact on future operations.
Critical Accounting Policies.
The Securities and Exchange Commission 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 Commission has 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) use of estimates in the preparation of
financial statements; (b) non-cash compensation valuation; (c) revenue
recognition; and (d) inventory valuation. The methods, estimates and judgments
the Company uses in applying these most critical accounting policies have a
significant impact on the results the Company reports in its financial
statements.
a) Use of Estimates in the Preparation of Financial Statements.
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 is believes 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.
Page 22
b) Stock-Based Compensation Valuation.
We issue shares of common stock to various individuals and entities for
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 open market closing price of common stock as of
the date of each respective transaction. These transactions are reflected as a
component of selling, general and administrative expenses in the accompanying
statement of operations.
c) Revenue Recognition.
Equipment sales are recognized when products are delivered without any
further services required. Subscription Internet revenues are partially received
as an up front activation fee and monthly recurring revenues that vary. Revenues
are recognized as earned on a pro rata basis.
d) Inventory Valuation.
Inventory is valued at the lower of cost or market value. It is comprised
solely of parts used in the assembly of wireless radio systems. Cost is
determined using the FIFO method.
Forward Looking Statements.
The foregoing management's discussion and analysis of financial condition
and results of operations 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. The words "believe," "expect,"
"anticipate," "intends," "forecast," "project," and similar expressions identify
forward-looking statements. These are statements that relate to future periods
and include, but are not limited to, statements as to the Company's estimates as
to the adequacy of its capital resources, its need and ability to obtain
additional financing, the features and benefits of its services, its growth
strategy, the need for additional sales and support staff, its operating losses
and negative cash flow, its critical accounting policies, and factors
contributing to its future growth. 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 risks related to the Company's
ability to develop and introduce new services and its ability to protect its
intellectual property. 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.
Page 23
ITEM 3. CONTROLS AND PROCEEDURES.
Evaluation of Disclosure Controls and Procedures.
Within the 90 days prior to the end of the period covered by this report,
the Company carried out an evaluation of the effectiveness of the design and
operation of its disclosure controls and procedures pursuant to Rule 13a-15
under the Securities Exchange Act of 1934, as amended ("Exchange Act"). This
evaluation was done under the supervision and with the participation of the
Company's chief executive office president and its treasurer. Based upon that
evaluation, they concluded that the Company's disclosure controls and procedures
are effective, at the reasonable assurance level, in gathering, analyzing and
disclosing information needed to satisfy the Company's disclosure obligations
under the Exchange Act.
Changes in Disclosure Controls and Procedures.
There were no significant changes in the Company's disclosure controls and
procedures, or in factors that could significantly affect those controls and
procedures since their most recent evaluation.
Page 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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.
On July 26, 2004, John P. Kelly, a former employee of the Company, filed a
Complaint against the Company in the Los Angeles Superior Court, West District
which was assigned case no. SC 082373. The Complaint alleges certain statutory
and common law claims against the Company based upon the non-payment of certain
amounts allegedly due to Mr. Kelly following his voluntary resignation from the
Company. In his Complaint, Mr. Kelly seeks general damages in an amount
according to proof, pre-judgment interest, attorneys' fees, costs, injunctive
relief and civil penalties. 5G Wireless Communications, Inc. disputes the
validity of these claims and maintains that all amounts due and owing to Mr.
Kelly were properly paid. Pursuant to an arbitration clause in Mr. Kelly's
employment agreement and a stipulation by the parties, the Court issued an order
staying the action pending the completion of arbitration before the American
Arbitration Association on September 9, 2004. Following the issuance of this
order, the parties jointly submitted an arbitration request to the American
Arbitration Association.
Management believes the Company has meritorious claims and defenses to Mr.
Kelley's claims, including the fact that all amounts due and owing to Mr. Kelly
were properly paid, and ultimately will prevail on the merits. However, this
matter remains in the early stages of litigation and there can be no assurance
as to the outcome of the lawsuit. Litigation is subject to inherent
uncertainties, and unfavorable rulings could occur. Were unfavorable rulings to
occur, there exists the possibility of a material adverse impact of money
damages on the Company's financial condition, results of operations, or
liquidity of the period in which the ruling occurs, or future periods.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The Company made the following sales of unregistered (restricted)
securities during the quarter ended on September 30, 2004 and not reported in a
Form 8-K:
(a) On July 15, 2004, the Company issued 3,000,000 shares of common stock
to one company for consulting services rendered to the company. These shares had
an aggregate value of $75,000 ($0.025 per share).
Page 25
No commissions were paid in connection with any of these sales. These sales
were undertaken under Rule 506 of Regulation D under the Securities Act of 1933.
Each of the transactions did not involve a public offering and each of the
investors represented that he/she was a "sophisticated" or "accredited" investor
as defined in Rule 502 of Regulation D.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Current Quarter.
a) On September 16, 2004, the Company filed a Certificate of Amendment to
Articles of Incorporation. This document amended Article III of the
Articles of Incorporation to increase the number of authorized shares of
common stock from 800,000,000 to 5,000,000,000. Under the provisions of the
Company's Articles of Incorporation, as amended, this action does not
require a vote of shareholders.
b) In connection with the Longview subscription agreement, the Company entered
into a consulting agreement with Ghillie Fanaz AG. Under this agreement,
the consultant will be paid a "commencement bonus" of $50,000 payable
immediately, and an additional $50,000 immediately upon the next closing of
a funding to the Company of approximately $1,000,000 in gross proceeds on
similar terms as a the current funding. Under this agreement, this
consultant will help in:
a. developing and implementing appropriate plans and means for presenting
the Company and its business plans, strategy and personnel to the
financial community, establishing an image for the company in the
financial community, and creating the foundation for subsequent
financial public relations efforts;
b. maintain an awareness of the Company's plans, strategy and personnel,
as they may evolve, and consult with the company regarding
communicating appropriate information regarding such plans, strategy
and personnel to the financial community;
c. introduce to the Company investors who the consultant reasonably
believes to be "accredited investors" with whom the consultant has a
pre-existing substantive relationship; and
Page 26
d. at the Company's request, review business plans, strategies, mission
statements budgets, proposed transactions and other plans for the
purpose of advising the company of the economic implications thereof.
c) On October 27, 2004 the Company appointed Kirk Honey as an independent
board member.
d) On September 29, 2004, Brian Corty resigned as a director and corporate
secretary of the Company. Mr. Corty will be devoting more time to wireless
research and development activities for the Company. Current corporate
assistant secretary Don Boudewyn, the executive vice president, is assuming
the responsibilities of corporate secretary from Mr. Corty.
e) On September 29, 2004, the Company's board of directors appointed Stanley
A. Hirschman as an independent board member. Mr. Hirschman owns a 1/2%
interest in Redwood Capital Management, which is the management Company for
the investors in the subscription agreement described above. Mr. Hirschman
is president of CPointe Associates, Inc., an executive
management-consulting firm that specializes in solutions for companies with
emerging technology-based products and is well versed in the challenges of
regulated corporate governance. He is chairman of the board of Bravo Foods
International, former chairman of Mustang Software, and a former director
of Imaging Diagnostic Systems, Inc., Aqua-Wellington Funds and ObjectSoft
Corporation. While at Mustang Software, Mr. Hirschman took a hands-on role
in the planning and execution of the strategic initiative to increase
shareholder value resulting in the successful acquisition of the Company by
Quintus Corporation. Mr. Hirschman is a member of the National Association
of Corporate Directors and the KMPG Audit Committee Roundtable training
program. He is active in community affairs and serves on the Advisory Board
of the Salvation Army Adult Rehabilitation Centers.
Subsequent Events.
a) On October 4, 2004, the Company's board of directors appointed Phil E.
Pearce as an independent board member. Mr. Pearce owns a 1/2% interest in
Redwood Capital Management, which is the management Company for the
investors in the subscription agreement described above. Mr. Pearce has
been an independent business consultant with Phil E. Pearce & Associates
and Chairman of Financial Express Corporation since 1990. Prior to this,
Mr. Pearce was Senior Vice President and a director of E.F. Hutton, and was
Chairman of the Board of Governors of the National Association of
Securities Dealers, where he was closely involved in the formation of the
NASDAQ Stock Market. He had also been a Governor of the New York Stock
Exchange and a member of the Advisory Council to the United States
Securities and Exchange Commission on the Institutional Study of the Stock
Markets. He is a graduate of the University of South Carolina and the
Wharton School of Investment Banking at the University of Pennsylvania.
b) On October 4, 2004 the Company's board of directors approved the creation
of the following: Audit Committee and Charter, Nominating Committee,
Corporate Governance and Guidelines, Compensations Committee
c) On October 5, 2004 the Company approved the creation of a number of new
committee charters, policies and guidelines which include the following;
Investment Committee & Charter, Adoption of Investment Procedures and
Investment Analysis Guidelines, Due Diligence Checklist for Investments,
Due Diligence Checklist, Managerial Guidelines, Adoption of Code of Ethics
and Guidelines, Safety of Investments, Continuous Disclosure Policy,
Establishing a Subsidiary, Valuation of Investments, Issuance of Private
Placement, Continuation of Special Counsel. In addition the Company board
approved the creation of a Series "A" Convertible Preferred Shares.
d) On October 6, 2004 the Company's Compensation Committee issued granted
Series "A" Convertible Preferred Shares to Mr. Dix and Mr. Boudewyn
totaling 3,000,000. Each share of Convertible Preferred Stock is
convertible initially at the rate of 800 shares of common stock for each
full share of convertible preferred stock. Each share of outstanding Series
A Convertible Preferred Stock 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 Preferred Stock 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.
Page 27
e) On October 19, 2004, the Company filed notice of its intention to become a
Business Development Corporation ("BDC") by filing a N-54A (Notification of
Election to Be Subject to Sections 55 Through 65 of the Investment Company
Act of 1940 Filed Pursuant to Section 54(a) of the Act), and filed a Form
1-E (Notification Under Regulation E) on October 20, 2004. As a BDC the
Company intends to make long-term debt and equity investments with
strategic technologies and/or applications in the wireless broadband space,
allowing the Company to expand into other information and communication
technologies sectors that offer the greatest potential for growth. The
Investment Committee has adopted a charter wherein these two criteria a
weighed against other criteria including strategic fit, investment amount,
management ability, etc. In principle, the Company will prefer to make
investments in companies where it can acquire at least a 51% ownership
interest in the outstanding capital of the portfolio Company.
As a BDC, the Company is required to have at least 70% of its assets in
"eligible portfolio companies." It is stated in the Investment Committee
Charter that the Company will endeavor to maintain this minimum asset
ratio.
f) On October 27, 2004 the Company's board appointed Kirk Haney as an
independent board member.
g) On November 1, 2004, Company issued 3,000,000 restricted shares of common
stock to one individual for consulting services to be performed for the
Company. These shares were valued at $39,000 or $0.013 per share.
h) On November 1, 2004, the Company agreed to sell restricted shares of common
stock valued at $10,000 ($0.01015 per share). In addition, the investor
will receive four warrants to purchase a minimum of $10,000, but not
greater than $250,000, in shares of common stock during each quarterly
period during the 2005 calendar year. This purchase of shares is in
connection with a license agreement entered into by the parties, dated
February 19, 2004. See Form of Common Stock Purchase Warrant at Exhibit
4.16 to this Form 10-QSB.
i) On November 3, 2004, the Company placed 177,777,778 shares in an escrow
account pursuant to the terms of the $2,000,000 convertible notes,
described above.
j) On November 8, 2004, the Company's board appointed Murray Williams as an
independent board member. and will chair the company's audit committee. Mr.
Williams was one of the founding members of Buy.com, Inc., the second
largest multi-category e-commerce company in the world. Between 1998 and
2001, he successfully developed the finance, legal, business development
and HR departments, and the company enjoyed its greatest success while he
was its highest-ranking financial officer, responsible for securing over
$225 million in private financing. The company also appointed Kirk L. Haney
as the chair for the investment committee.
k) On November 9, 2004, the Company sold an additional $1 million in principal
amount of promissory notes to certain investors. These note holders also
received Class A & B share warrants to purchase shares of common stock. The
Company issued 20 Class A Warrants for each 100 shares issuable had the
promissory note been converted at the closing date. The Company also issued
125 Class B Warrants for each $1.00 of principal amount under the notes.
l) The Company has adopted a standard form of agreement for use with
independent directors of the Company. See Exhibit 10.2 to this Form 10-QSB.
ITEM 6. EXHIBITS
Exhibits included or incorporated by reference herein are set forth in the
attached Exhibit Index.
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Company has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
5G WIRELESS COMMUNICATIONS, INC.
By: /s/ Jerry Dix
-------------------------------------
Jerry Dix, Chief Executive Officer
Date: November 15, 2004
By: /s/ Don Boudewyn
-------------------------------------
Don Boudewyn, Chief Financial Officer
Date: November 15, 2004
Page 28
EXHIBIT INDEX
Number Description
1 Agency Agreement between the Company and May Davis Group, Inc., dated
April 1, 2003 (incorporated by reference to Exhibit 1 of the Form
10-QSB/A filed on November 17, 2003).
2.1 Agreement and Plan of Reorganization and Merger between Tesmark, Inc.,
an Idaho corporation, and the Company (formerly know as Tesmark,
Inc.), a Nevada corporation, dated November 10, 1998 (incorporated by
reference to Exhibit 2 of the Form 10-SB filed on December 15, 1999).
2.2 Acquisition Agreement between the Company, and Richard Lejeunesse,
Curtis Mearns, and Don Boudewyn, a partnership (known as 5G Partners),
dated December 15, 2000, as amended (incorporated by reference to
Exhibit 10 of the Form 8-K filed on February 14, 2001).
2.3 Share Purchase Agreement between the Company, and Sea Union Industries
Pte. Ltd., Richard Lajeunesse, Rita Chou, Peter Chen, Yeo Lai Ann, Tan
Lam Im, Choa So Chin, Tan Ching Khoon, Tan Sek Toh, and 5G Wireless
Communication Pte. Inc. (formerly known as Peteson Investment Pte
Ltd.), dated May 5, 2001 (incorporated by reference to Exhibit 2 of
the Form 8-K filed on June 5, 2001).
2.4 Purchase Agreement between 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).
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).
Page 29
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).
Page 30
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 Communications, Inc., 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 (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).
10.1 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).
10.2 Form of agreement between the Company and its independent directors
(filed herewith).
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).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Jerry Dix (filed herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification of Don Boudewyn (filed
herewith).
32 Section 1350 Certification of Jerry Dix and Don Boudewyn (filed
herewith).
99.1 Patent Application, dated March 28, 2002 (incorporated by reference to
Exhibit 99.2 of the Form 10-KSB filed on May 8, 2003).
99.2 Text of Press Release Issued by the Company, dated September 29, 2004
(incorporated by reference to Exhibit 99.1 of the Form 8-K filed on
September 30, 2004).
99.3 Text of Press Release Issued by the Company, dated September 30, 2004
(incorporated by reference to Exhibit 99.2 of the Form 8-K filed on
September 30, 2004).
99.4 Text of Press Release Issued by the Company, dated October 5, 2004
(incorporated by reference to Exhibit 99 of the Form 8-K filed on
October 8, 2004).
Page 31
99.5 Text of Press Release Issued by the Company dated October 28, 2004
(incorporated by reference to Exhibit 99 of the Form 8-K filed on
November 3, 2004).
Page 32