As filed with the Securities and Exchange Commission on December 16, 2005
Registration Statement No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NAYNA NETWORKS, INC.
--------------------
(Name of small business issuer in its charter)
NEVADA 3576 83-0210455
------ ---- ----------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code)
4699 Old Ironsides Drive, Suite 420, Santa Clara, California 95054
(408) 956-8000
--------------
(Address and telephone number of principal executive offices)
Same as above
-------------
(Address and telephone number of principal executive offices and principal place
of business)
Naveen S. Bisht,
President and Chief Executive Officer
Nayna Networks, Inc.
4699 Old Ironsides Drive, Suite 420
Santa Clara, California 95054
(408) 956-8000
--------------
(Name, address and telephone number of agent for service)
Copy to:
John M. Fogg, Esq.
Hutchison + Mason, PLLC
5410 Trinity Road, Suite 400
Raleigh, North Carolina 27607
(919) 829-9600
Telecopier: (919) 829-9696
---------------------------------------
Approximate date of proposed sale to public: As soon as practicable after this
Nite Capital, LP
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Proposed maximum Proposed maximum
Title of each class of offering price per aggregate offering
securities to be Amount to be unit price Amount of
registered registered (2) (2) registration fee
Common stock,
$0.001 par value
underlying convertible
notes 29,752,066 shares (1) $0.64 $19,041,322 $2,893.86
Common stock,
$0.001 par value 5,880,000 shares (1) $1.00 $5,880,000 $629.16
underlying warrants
Common stock, 2,438,785 shares $0.64 $1,560,822 $167.01
$0.001 par value
Common stock,
$0.001 par value 750,990 shares $0.75 $563,243 $60.77
underlying warrants
TOTAL 38,821,841 shares $27,045,387 $2,893.86
(1) Includes shares of our common stock, par value $0.001 per share, which may
be offered pursuant to this registration statement, which shares are
issuable upon conversion of Callable Secured Convertible Notes and upon
exercise of related warrants. For purposes of estimating the number of
shares of common stock to be included in this registration statement, we
calculated 200% of the number of shares of our common stock issuable upon
conversion of the callable secured convertible notes and the number of
shares of our common stock issuable upon exercise of the warrants. In
accordance with Rule 416 under the Securities Act, there are also being
registered hereby such indeterminate number of additional shares of common
stock as may become issuable pursuant to adjustment provisions of the
Callable Secured Convertible Notes.
(2) Estimated solely for the purpose of computing the amount of the
registration fee. The calculation of the registration fee is calculated in
accordance with Rule 457(c) of the Securities Act of 1933, as amended,
based on $0.64, which is the last sale price of our common stock reported
on the OTC Bulletin Board on December 14, 2005.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHODLERS NAMED IN THIS PROSPECTUS MAY NOT SELL THESE SECURITIES
UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES, AND THE SELLING STOCKHODLERS ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to completion, dated December 16, 2005
PROSPECTUS
[NAYNA LOGO]
38,821,841 Shares of Common Stock
This prospectus relates to the resale of up to 38,821,841 shares of our
common stock, $0.001 par value per share, by certain institutional investors set
forth in this prospectus under the section entitled "Selling Stockholders."
Of the 38,821,841 shares of common stock, 5,880,000 shares are issuable
to such investors upon the exercise of warrants having an exercise price of
$1.00 per share and 750,990 shares are issuable to such investors upon the
exercise of warrants having an average exercise price of $0.75 per share and
29,752,066 shares are issuable to such investors upon the conversion of certain
Callable Secured Convertible Notes, which currently have a conversion price of
$0.322667 per share.
We will not receive any proceeds from the sale of the shares of common
stock hereunder, except the warrants whereby we may receive proceeds.
The Selling Stockholders identified in this prospectus, or their
pledges, assignees and successors-in-interest, may offer the shares from time to
time through public or private transactions at prevailing market prices, at
prices related to prevailing market prices or at privately negotiated prices.
The Selling Stockholders will sell their shares of common stock in
accordance with the terms described in the section of this prospectus titled
"Plan of Distribution."
Our common stock is listed on the Over-The-Counter Bulletin Board under
the trading symbol "NAYN." On December 14, 2005, the closing price of our common
stock was $0.64.
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
PURCHASE OUR COMMON STOCK ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR
INVESTMENT. YOU SHOULD READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE 4
BEFORE YOU DECIDE TO PURCHASE ANY OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is December ___, 2005.
TABLE OF CONTENTS
Page
---
Prospectus Summary 1
Summary Financial Data 3
Risk Factors 4
Forward Looking Statements 13
Use of Proceeds 13
Market for Common Equity and Related Stockholder Matters 14
Dividend Policy 14
Selected Financial Data 15
Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Business 22
Management 27
Certain Relationships and Related Transactions 32
Principal Stockholders 33
Selling Stockholders 36
Description of Securities 40
Plan of Distribution 41
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 43
Legal Matters 43
Experts 43
Where You Can Find Additional Information 43
Financial Statements F-1 - F-30
We have not authorized anyone to provide you with information different
from that contained or incorporated by reference in this prospectus. The Selling
Stockholders are offering to sell, and seeking offers to buy, shares of our
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of common stock.
PROSPECTUS SUMMARY
You should rely only on the information contained in this prospectus. We have
not authorized any person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. The selling stockholders are not making an offer to sell these securities in
any jurisdiction where the offer or sale is not permitted. You should assume
that the information appearing in this prospectus is accurate as of the date on
the front cover of this prospectus only. Our business, financial condition,
results of operations and prospects may have changed since that date.
The following summary highlights selected information from this prospectus and
may not contain all the information that is important to you. To understand our
business and this offering fully, you should read this entire prospectus
carefully, including the financial statements and the related notes beginning on
page F-1. When we refer in this prospectus to the "Nayna", "Company," "we,"
"us," and "our," we mean Nayna Networks, Inc., a Nevada corporation. This
prospectus contains forward-looking statements and information relating to Nayna
Networks, Inc. See Forward Looking Statements on page 13.
OUR COMPANY
Nayna Networks, Inc., a Nevada corporation, is a hardware and software
development company that designs, develops and markets next generation broadband
access solutions, also known as Ethernet in the First Mile for the secure
communications market. Typical Nayna customers include carriers, Cable TV
service providers and corporations. Nayna's flagship platform, ExpressSTREAM,
removes the performance bottlenecks typically found in access networks. The high
quality and rich feature set of Nayna's solutions enables the gigabit class
ExpressSTREAM platform to address a wide variety of applications from the
transport level up to and through the application layer. Nayna, together with
the companies which it has acquired, has raised more than $65 million in venture
capital investment over the past five years, substantially all of which has been
spent on product development. Nayna's solutions are based on proprietary
hardware and software implementations that are largely based on standard
components.
This approach makes Nayna's solutions more flexible and less costly and enables
Nayna to address its customers' needs swiftly without the cost or time required
to make custom silicon chips. These high-performance, cost- effective solutions
are enhanced by intelligent enforcement of quality of service which positions
Nayna to compete effectively in its target markets. Throughout 2004, Nayna
introduced a series of products under its flagship ExpressSTREAM platform.
ExpressSTREAM is certified for a wide variety of applications including handling
of advanced real time applications such as streaming content. Previous
generations of products were limited to average bandwidths of just a few hundred
kilobits per second and a total of just 2.5 gigabits per second per system.
Nayna's ExpressSTREAM solutions range up to 32 gigabits per second of
non-blocking system capacity and 10/100/1000 megabigs per second per subscriber
site. This high capacity is supported by high performance switching capacity of
up to 48 million packets per second, compared to just 2 million packets per
second in most gigabit local area network, or LAN, switches. Nayna's high
performance switching fabric is the key to its excellent carrier class quality
of service and in turn, provides Nayna the ability to mix and match voice, data
and video on the same links. While typical LAN products can only handle large
data packets efficiently, ExpressSTREAM has sufficient additional capacity to
enable it to mix small high priority voice packets in the same stream as the
larger packets without being lost or delayed.
Our principal executive offices are located at 4699 Old Ironsides Drive, Suite
420, Santa Clara, California, 95054. Our telephone number is (408) 956-8000. The
address of our website is www.Nayna.com. Information on our website is not part
of this prospectus.
Nayna and our logo are trademarks of Nayna Networks, Inc. All other
trademarks, servicemarks or tradenames referred to in this prospectus are the
property of their respective owners.
1
THE OFFERING
Common Stock offered by the selling stockholders 38,821,841 shares, includes 200% of the shares
issuable upon conversion at the time of
registration of the common stock underlying the (i)
$4,800,000 of Callable Secured Convertible Notes
based on a current conversion price of $0.68 per
share of our common stock, assuming full conversion
of the Callable Secured Convertible Notes and (ii)
warrants to purchase 2,940,000 shares of our common
stock, assuming full exercise of the warrants;
$2,438,785 shares of our common stock; and warrants
to purchase 750,990 shares of our common stock,
assuming full exercise of the warrants.
Common Stock to be outstanding after this Offering 75,354,845 shares including shares of
common stock issuable upon exercise of
convertible notes, warrants and debt held by the
selling stockholders.
OTC Bulletin Board Trading Symbol NAYN
Use of Proceeds We will receive no proceeds from the sale of shares
of common stock in this offering. However, we may
receive proceeds from any exercise of warrants by
the selling stockholders. We expect to use the
proceeds received from the exercise of the
warrants, if any, for working capital and other
general purposes.
Risk Factors
An investment in our common stock involves a high degree
of risk. See "Risk Factors" beginning on page 4 of this
prospectus.
The number of shares that will be outstanding after the offering is based on the
number of shares outstanding as of December 15, 2005, on a proforma basis, and
excludes 4,553,478 shares of common stock issuable upon exercise of outstanding
stock options and 74,278 shares of common stock issuable upon exercise of
warrants to purchase common stock outstanding as of December 15, 2005.
2
SUMMARY FINANCIAL DATA
Three months ended September 30
STATEMENT OF OPERATIONS DATA: 2005 2004
------------ ------------
Total operating expenses $ 1,204 $ 1,049
Loss from operations (1,204) (1,049)
Net loss (1,235) (1,048)
Net loss per share - basic and diluted $ (0.03) $ (0.04)
Nine Months Ended September 30,
2005 2004
------------ ------------
Total operating expenses $ 3,962 $ 4,275
Loss from operations (3,962) (4,275)
Net loss (3,874) (4,299)
Net loss per share - basic and diluted $ (0.12) $ (0.19)
September 30,
BALANCE SHEET DATA: 2005
------------
Cash and cash equivalents $ 91
Working capital/(deficit) (3,215)
Total assets 576
Total current liabilities 3,448
Total shareholders' equity/(deficit) $(5,244)
Year Ended Year Ended
STATEMENT OF OPERATIONS DATA: December 31, December 31,
2004 2003
------------ ------------
Total operating expenses $ 5,051 $ 7,447
Loss from operations (5,051) (7,447)
Net loss (5,098) (13,288)
Net loss per share - basic and diluted $ (0.19) $ (0.80)
December 31,
BALANCE SHEET DATA: 2004 2003
------------ ------------
Cash and cash equivalents $ 710 $ 1,663
Working Capital (deficit) (821) (337)
Total assets 2,184 3,292
Total liabilities 3,142 3,238
Shareholders' equity (deficit) $ (958) $ 54
3
RISK FACTORS
Investing in our common stock entails substantial risk, including the potential
loss of your entire investment. You should carefully consider the following
factors as well as other information contained in this prospectus and any
prospectus supplement before deciding to invest in our common stock.
WE ARE A DEVELOPMENT STAGE COMPANY AND HAVE ONLY A LIMITED OPERATING HISTORY ON
WHICH TO EVALUATE OUR POTENTIAL FOR FUTURE SUCCESS.
We have only recently launched many of our products and services and therefore
have a limited operating history upon which you can evaluate our business and
future prospects. In addition, since we are a development stage company, we have
yet to develop sufficient experience in forecasting the actual revenues to be
received from the sale of our products and services. If we are unsuccessful in
addressing the risks and uncertainties commonly faced by development stage
companies, our business, results of operations and financial condition will be
materially and adversely affected.
WE EXPECT TO INCUR OPERATING LOSSES FOR THE FORESEEABLE FUTURE.
We continue to incur operating losses due primarily to product development costs
and increasing sales and marketing expenses. In addition, we plan to invest
heavily in marketing and promotion, the hiring of additional employees and to
enhance our network content and management technologies through both internal
development efforts and strategic acquisitions. As a result of these
expenditures, we expect to incur net losses for a significant period of time. We
believe these expenditures are necessary to build and maintain hardware and
software technology and to penetrate our target product markets. If our revenue
growth is slower than we anticipate or our operating expenses exceed our
expectations, our losses will be significantly greater than they are at the
present time and we may never achieve profitability.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL IN THE IMMEDIATE FUTURE.
We anticipate that our currently available funds, including the proceeds from
our most recent financing, are sufficient to meet our needs for working capital,
capital expenditures and business expansion for the next seven months.
Thereafter, we will need to raise additional funds. If any of our assumptions
are incorrect, we may need to raise capital before the end of seven months. We
cannot assure you that additional capital will be available on terms acceptable
to us, or at all. Failure to raise sufficient additional capital would have a
material adverse effect on our ability to operate as a going concern or to
achieve our business objectives.
ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS.
We may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. Growth through acquisitions has
been a successful strategy used by other network control and management
technology companies. We plan to use this as a strategy to grow our business and
are in discussions with a number of parties relating to any such acquisition or
investment. If we buy a company, then we could have difficulty in assimilating
that company's personnel and operations. In addition, the key personnel of the
acquired company may decide not to work for us. An acquisition could distract
our management and employees and increase our expenses. Furthermore, we may have
to incur debt or issue equity securities to pay for any future acquisitions, the
issuance of which could be dilutive to our existing stockholders.
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND THE CURRENT MARKET
FOR OUR COMMON STOCK IS LIMITED.
The market price of our common stock will likely be highly volatile as the stock
market in general, and the market for small cap and micro cap technology
companies in particular, has been highly volatile. You may not be able to resell
your shares of our common stock following periods of volatility because of the
market's adverse reaction to volatility. We cannot assure you that our stock
will trade at the same levels of other stocks in our industry or that our
industry stocks in general will sustain their current market prices.
4
Factors that could cause such volatility may include, among other things:
|X| actual or anticipated fluctuations in our quarterly operating
results;
|X| announcements of technological innovations; |X| changes in financial
estimates by securities analysts;
|X| conditions or trends in the network control and management industry;
|X| changes in the market valuations of other such industry related
companies; and
|X| the acceptance of market makers and institutional investors of the
Company and our stock.
In addition, our stock is currently traded on the NASD O-T-C Bulletin Board and
it is uncertain that we will be able to successfully apply for listing on the
American Stock Exchange or the NASDAQ National or Small Cap Markets in the
foreseeable future due to our inability to satisfy their respective listing
criteria. Failure to list our shares on any of the American Stock Exchange or
the NASDAQ National or Small Cap Markets will impair the liquidity of our common
stock.
YOUR HOLDINGS MAY BE DILUTED IN THE FUTURE.
We are authorized to issue up to 1,000,000,000 shares of common stock. Our board
of directors has the ability to issue additional shares of our common stock,
without stockholder approval and in exchange for the consideration that the
board of directors may deem adequate, up to such authorized amount. The issuance
of additional common stock will reduce the proportionate ownership and voting
power of our existing common stockholders. In addition, we currently have
outstanding options and warrants to purchase approximately 5,000,000 shares of
common stock whose exercise could also have a substantial dilutive effect on the
ownership of our common stockholders at such time. In addition, the future
designation and issuance of one or more series of preferred stock would create
additional securities that would have, among other things, dividend and
liquidation preferences senior to our common stock.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE.
Sales of substantial amounts of common stock, including shares issued upon the
exercise of outstanding options and warrants, under Securities and Exchange
Commission Rule 144, or otherwise, could adversely affect the prevailing market
price of our common stock and could impair our ability to raise capital at that
time through the sale of our securities. In addition, we are obligated to
register the shares and additional securities for immediate resale under the
Securities Act of 1933, as amended, and, upon completion of such registration a
substantial number of additional securities will be placed into the public
market with the potential adverse consequences described above.
IF WE LOSE THE SERVICES OF OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, NAVEEN
BISHT, OR OTHER KEY PERSONNEL, WE MAY NOT BE ABLE TO EXECUTE OUR BUSINESS
STRATEGY EFFECTIVELY.
Our future success depends in large part upon the continued services of our key
technical, sales, marketing and senior management personnel. In particular,
Naveen Bisht, our President and Chief Executive Officer is very important to our
business. The loss of any of our senior management or other key research,
development, sales or marketing personnel, particularly if lost to competitors,
could harm our ability to implement our business strategy and respond to the
rapidly changing needs of our customers. In addition, we believe we will need to
attract, retain and motivate talented management and other highly skilled
employees to be successful. We may be unable to retain our key employees or
attract, assimilate and retain other highly qualified employees in the future.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
We are engaged in new, rapidly evolving and intensely competitive markets, and
we expect competition to intensify further in the future. We currently or
potentially compete with a number of other companies, such as Alcatel, Alloptic,
Inc., Salira Networks, Inc., Tellabs and TeraWave Communications. A number of
our competitors, such as Alcatel, are large and well funded. Competitive
pressures created by any one of these companies, or by our competitors
collectively, could have a material adverse effect on our business, results of
operations and financial condition.
5
THE MARKET IN WHICH WE COMPETE IS SUBJECT TO RAPID TECHNOLOGICAL PROGRESS AND TO
COMPETE SUCCESSFULLY WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE
BROAD MARKET ACCEPTANCE.
The network equipment market is characterized by rapid technological progress,
frequent new product introductions, changes in customer requirements and
evolving industry standards. If we do not regularly introduce new products in
this dynamic environment, our product lines will become obsolete. Developments
in routers and routing software could also significantly reduce demand for our
products. Alternative technologies could achieve widespread market acceptance
and displace the technology on which we have based our product architecture. We
cannot assure you that our technological approach will achieve broad market
acceptance or that other technologies or devices will not supplant our own
products and technology.
OUR PRODUCTS MUST COMPLY WITH EVOLVING INDUSTRY STANDARDS AND COMPLEX GOVERNMENT
REGULATIONS OR ELSE OUR PRODUCTS MAY NOT BE WIDELY ACCEPTED, WHICH MAY PREVENT
US FROM GROWING OUR NET REVENUE OR ACHIEVING PROFITABILITY.
The market for network equipment is characterized by the need to support
industry standards as different standards emerge, evolve and achieve acceptance.
We will not be competitive unless we continually introduce new products and
product enhancements that meet these emerging standards. Our products must
comply with various United States federal government regulations and standards
defined by agencies such as the Federal Communications Commission, as well as
standards established by various foreign governmental authorities and
recommendations of the International Telecommunication Union. If we do not
comply with existing or evolving industry standards or if we fail to obtain
timely domestic or foreign regulatory approvals or certificates, we will not be
able to sell our products where these standards or regulations apply, which may
prevent us from sustaining our net revenue or achieving profitability.
OUR FUTURE PERFORMANCE WILL DEPEND ON THE SUCCESSFUL DEVELOPMENT, INTRODUCTION
AND MARKET ACCEPTANCE OF NEW AND ENHANCED PRODUCTS.
Our new and enhanced products must address customer requirements in a timely and
cost-effective manner. In the past, we have experienced delays in product
development and such delays may occur in the future. The introduction of new and
enhanced products may cause our customers to defer or cancel orders for existing
products. Therefore, to the extent customers defer or cancel orders in the
expectation of new product releases, any delay in the development or
introduction of new products could cause our operating results to suffer. The
inability to achieve and maintain widespread levels of market acceptance for our
current and future products may significantly impair our revenue growth.
OUR LIMITED ABILITY TO PROTECT OUR PROPRIETARY INTELLECTUAL PROPERTY RIGHTS MAY
ADVERSELY AFFECT OUR ABILITY TO COMPETE.
We rely on a combination of patent, copyright, trademark and trade secret laws
and restrictions on disclosure to protect our proprietary intellectual property
rights. We cannot assure you that we have adequately protected our proprietary
intellectual property or that other parties will not independently develop
similar or competing products that do not infringe on our patents. We also enter
into confidentiality or license agreements with our employees, consultants and
corporate partners to protect our intellectual property. In addition, we control
access to and limit the distribution of our software, documentation and other
proprietary information. Despite our efforts to protect our proprietary
intellectual property rights, unauthorized parties may attempt to copy or
otherwise misappropriate or use our products or technology. If we are
unsuccessful in protecting our proprietary intellectual property rights, our
business, results of operations and financial condition may be harmed.
6
OUR LIMITED ABILITY TO DEFEND OURSELVES AGAINST INTELLECTUAL PROPERTY
INFRINGEMENT CLAIMS MADE BY OTHERS MAY ADVERSELY AFFECT OUR ABILITY TO COMPETE.
Our industry is characterized by the existence of a large number of patents and
frequent claims and related litigation regarding patent and other intellectual
property rights. If we are found to infringe the proprietary rights of others,
or if we otherwise settle such claims, we could be compelled to pay damages or
royalties and either obtain a license to those intellectual property rights or
alter our products so that they no longer infringe upon such proprietary rights.
Such a license could be very expensive to obtain or may not be available at all.
Similarly, changing our products or processes to avoid infringing the rights of
others may be costly or impractical. Litigation resulting from claims that we
are infringing the proprietary rights of others could result in substantial
costs and a diversion of resources, and could have a material adverse effect on
our business, financial condition and operating results.
OUR DEPENDENCE ON CONTRACT MANUFACTURERS FOR SUBSTANTIALLY ALL OF OUR
MANUFACTURING REQUIREMENTS COULD HARM OUR OPERATING RESULTS.
We rely on independent contractors to manufacture our products. We do not have
long-term contracts with any of these manufacturers. Delays in product shipments
from contract manufacturers are not unusual. Similar or other problems may arise
in the future, such as inferior quality, insufficient quantity of products or
the interruption or discontinuance of operations of a manufacturer, any of which
could have a material adverse effect on our business, financial condition and
operating results.
We do not know whether we will effectively manage our contract manufacturers or
that these manufacturers will meet our future requirements for timely delivery
of products of sufficient quality and quantity. We will continue to monitor the
performance of our current contract manufacturers and if they are unable to meet
our future requirements, we will need to transition to other manufacturers. We
also intend to regularly introduce new products and product enhancements, which
will require that we rapidly achieve volume production by coordinating our
efforts with those of our suppliers and contract manufacturers. The inability of
our contract manufacturers to provide us with adequate supplies of high-quality
products or a reduction in the number of contract manufacturers may cause a
delay in our ability to fulfill orders and may have a material adverse effect on
our business, financial condition and operating results.
IF OUR PRODUCTS CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS, WE COULD INCUR
SIGNIFICANT UNEXPECTED EXPENSES AND LOSE SALES.
Network equipment products frequently contain undetected software or hardware
errors when new products, versions or updates of existing products are first
released to the marketplace. We have experienced such errors in connection with
prior product releases. We expect that such errors or component failures will be
found from time to time in the future in new or existing products, including the
components incorporated therein, after the commencement of commercial shipments.
These errors may have a material adverse effect on our business and may result
in the following, among other things:
|X| significant warranty and repair costs;
|X| diverting the attention of our engineering personnel from new
product development efforts;
|X| delaying the recognition of revenue; and
|X| significant customer relations problems.
In addition, if our product is not accepted by customers due to defects, and
such returns exceed the amount we accrued for defect returns based on our
historical experience, our operating results would be adversely affected.
IF PROBLEMS OCCUR IN A COMPUTER OR COMMUNICATIONS NETWORK, EVEN IF UNRELATED TO
OUR PRODUCTS, WE COULD INCUR UNEXPECTED EXPENSES AND LOSE SALES.
7
Our products must successfully interoperate with products from other vendors. As
a result, when problems occur in a computer or communications network, it may be
difficult to identify the sources of these problems. The occurrence of hardware
and software errors, whether or not caused by our products, could result in the
delay or loss of market acceptance of our products and any necessary revisions
may cause us to incur significant expenses. The occurrence of any such problems
would likely have a material adverse effect on our business, financial condition
and operating results.
WE EXPECT THE AVERAGE SELLING PRICES OF OUR PRODUCTS TO DECREASE, WHICH MAY
REDUCE OUR GROSS MARGIN OR REVENUE.
The network equipment industry has experienced a rapid erosion of average
selling prices due to a number of factors, including competitive pricing
pressures, promotional pricing, technological progress and lower selling prices
as companies attempt to liquidate excess inventory resulting from the industry
slowdown that began in the later part of 2000.
We anticipate that the average selling prices of our products will decrease in
the future in response to the following, among other things:
|X| competitive pricing pressures;
|X| excess inventories;
|X| increased sales discounts; and
|X| new product introductions by us or our competitors.
We may experience substantial decreases in future operating results due to the
erosion of our average selling prices. We expect competitive pressures to
increase as a result of the industry slowdown that began in the later part of
2000, coupled with the slow recovery and still uncertainty of the broader
economy.
SOME OF OUR CUSTOMERS MAY NOT HAVE THE RESOURCES TO PAY FOR OUR PRODUCTS AS A
RESULT OF THE CURRENT ECONOMIC ENVIRONMENT.
Some of our customers are experiencing cash flow problems as a result of the
current economic environment and are finding it increasingly difficult to obtain
financing. As a result, we may be unable to collect the payments owed to us, or
such payments may be significantly delayed, if our customers are unsuccessful in
generating sufficient revenue or securing alternate financing arrangements. In
addition, our customers may not order as many products from us as we had
originally forecast or they may cancel their orders with us entirely. The
inability of some of our potential customers to pay us for our products may
adversely affect our cash flow, the timing of our revenue recognition and the
amount of revenue we generate, which may cause our stock price to decline.
FAILURE TO SUCCESSFULLY EXPAND OUR SALES AND SUPPORT TEAMS OR EDUCATE THEM IN
REGARD TO TECHNOLOGIES AND OUR PRODUCT FAMILIES MAY HARM OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS.
The sale of our products and services requires a sophisticated sales effort that
frequently involves several levels within a prospective customer's organization.
We may not be able to increase net revenue unless we expand our sales and
support teams in order to address all of the customer requirements necessary to
sell our products.
We cannot assure you that we will be able to successfully integrate new
employees into our company or to educate current and future employees in regard
to rapidly evolving technologies and our product families. A failure to do so
may hurt our business, financial condition and operating results.
WE MUST CONTINUE TO DEVELOP AND INCREASE THE PRODUCTIVITY OF OUR SALES AND
DISTRIBUTION CHANNELS TO INCREASE NET REVENUE AND IMPROVE OUR OPERATING RESULTS.
8
Our sales channel includes our own direct sales people, large original equipment
manufacturer, system integrators, agents, resellers and distributors. Outside
sales channels require us to develop and cultivate strategic relationships and
allocate substantial internal resources for the maintenance of such
relationships. We may not be able to increase gross revenues unless we expand
our sales channel and support teams to handle all of our customer requirements
in a professional manner. If we are unable to expand our sales channel and
support teams in a timely manner, and/or manage them in all cases, our business,
financial condition and operating results may be hurt.
In addition, many of our sales channel partners also carry products they make
themselves or that are made by our competitors. We cannot assure you that our
sales channel partners will continue to market or sell our products effectively
or continue to devote the resources necessary to provide us with effective
sales, marketing and technical support. Their failure to do so may hurt our
revenue growth and operating results.
LEGISLATIVE ACTIONS, HIGHER INSURANCE COSTS AND POTENTIAL NEW ACCOUNTING
PRONOUNCEMENTS ARE LIKELY TO IMPACT OUR FUTURE FINANCIAL POSITION AND RESULTS OF
OPERATIONS.
There have been regulatory changes, including the Sarbanes-Oxley Act of 2002,
which will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes and proposed
legislative initiatives are resulting in increased general and administrative
costs to us. The new rules could make it more difficult for us to obtain certain
types of insurance, including director and officer liability insurance, and we
may be forced to accept reduced policy limits and coverage and/or incur
substantially higher costs to obtain the same or similar coverage. The impact of
these events could also make it more difficult for us to attract and retain
qualified persons to serve on our board of directors, on committees of our board
of directors or as executive officers. We cannot predict or estimate the amount
of the additional costs we may incur or the timing of such costs as we implement
these new and proposed rules.
In addition, proposed initiatives could result in changes in accounting rules,
including legislative and other proposals to account for employee stock options
as an expense. These and other potential changes could materially increase the
expenses we report under generally accepted accounting principles, and adversely
affect our operating results.
WE MAY NEED TO EXPEND CONSIDERABLE RESOURCES IN ORDER TO COMPLY WITH RECENT SEC
RULEMAKING INCLUDING THE SARBANES-OXLEY ACT OF 2002.
The costs associated with being a public company have increased dramatically
over the last several years following the advent of the Sarbanes-Oxley Act of
2002. We expect to spend significant resources in order to comply with the new
legislation and rulemaking aimed at public companies. As a result, we expect our
general and administrative expenses will rise as a result of these compliance
efforts. In addition, our management team will need to devote a substantial
amount of time to these efforts which could distract them from their current
responsibilities.
OUR HEADQUARTERS ARE LOCATED IN NORTHERN CALIFORNIA WHERE NATURAL DISASTERS MAY
OCCUR THAT COULD DISRUPT OUR OPERATIONS AND HARM OUR BUSINESS.
Our corporate headquarters are located in Silicon Valley in Northern California.
Historically, this region has been vulnerable to natural disasters and other
risks, such as earthquakes, which at times have disrupted the local economy and
posed physical risks to our and our manufacturers' property.
In addition, terrorist acts or acts of war targeted at the United States, and
specifically Silicon Valley, could cause damage or disruption to us, our
employees, facilities, partners, suppliers, distributors and resellers, and
customers, which could have a material adverse effect on our operations and
financial results. We currently do not have redundant, multiple site capacity in
the event of a natural disaster or catastrophic event. In the event of such an
occurrence, our business would suffer.
SHARES OF OUR TOTAL OUTSTANDING SHARES THAT ARE RESTRICTED FROM IMMEDIATE RESALE
BUT MAY BE SOLD INTO THE MARKET IN THE FUTURE COULD CAUSE THE MARKET PRICE OF
OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
9
As of December 15, 2005, we had 36,533,004 shares of our common stock issued and
outstanding of which 32,350,947 shares are restricted shares. Rule 144 provides,
in essence, that a person holding "restricted securities" for a period of one
year may sell only an amount every three months equal to the greater of (a) one
percent of a company's issued and outstanding shares, or (b) the average weekly
volume of sales during the four calendar weeks preceding the sale.
The amount of "restricted securities" which a person who is not an affiliate of
our company may sell is not so limited, since non-affiliates may sell without
volume limitation their shares held for two years if there is adequate current
public information available concerning our company. In such an event,
"restricted securities" would be eligible for sale to the public at an earlier
date. The sale in the public market of such shares of Common Stock may adversely
affect prevailing market prices of our Common Stock.
THE APPLICATION OF THE "PENNY STOCK REGULATION" COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK
Our securities may be deemed a penny stock. Penny stocks generally are equity
securities with a price of less than $5.00 per share other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
Stock Market, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system. Our
securities may be subject to "penny stock rules" that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally those with
assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000
together with their spouse). For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase of
such securities and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a
penny stock, unless exempt, the "penny stock rules" require the delivery, prior
to the transaction, of a disclosure schedule prescribed by the Commission
relating to the penny stock market. The broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements must be
sent disclosing recent price information on the limited market in penny stocks.
Consequently, the "penny stock rules" may restrict the ability of broker-dealers
to sell our securities and may have the effect of reducing the level of trading
activity of our common stock in the secondary market. The foregoing required
penny stock restrictions will not apply to our securities if such securities
maintain a market price of $5.00 or greater. We can give no assurance that the
price of our securities will reach or maintain such a level.
SALES OF OUR COMMON STOCK BY THE HOLDERS OF THE CONVERTIBLE NOTES AND WARRANTS
MAY LOWER THE MARKET PRICE OF OUR COMMON STOCK AND PURCHASERS OF COMMON STOCK
MAY EXPERIENCE SUBSTANTIAL DILUTION.
As of December 15, 2005, $1,600,000 principal amount of callable secured
convertible notes were issued and outstanding. Within 5 days of the filing of
this registration statement, we will issue an additional $1,600,000 in
convertible notes to the investors and within 5 days of the effectiveness of
this registration statement, we will issue an additional $1,600,000 in
convertible notes to the investors for an aggregate total of $4,800,000 in
convertible notes. The notes are convertible into such number of shares of
common stock as is determined by dividing the principal amount thereof by the
then current conversion price. The notes conversion price is the lesser of $.68
and a discount equal to 45% of the average of the three lowest trading prices in
the 20 days preceding conversion. If converted on December 15, 2005, the notes
would have been convertible into approximately 14,876,033 shares of common
stock, but this number of shares could prove to be significantly greater in the
event of a decrease in the trading price of the common stock.
Purchasers of common stock will experience substantial dilution of their
investment upon conversion by the investors of a material portion of the notes.
The notes are not registered and may be sold only if registered under the
Securities Act of 1933, as amended, or sold in accordance with an applicable
exemption from registration, such as Rule 144. The shares of common stock into
which the notes may be converted are being registered pursuant to this
registration statement.
10
As of December 15, 2005, warrants to purchase 800,000 shares of common stock
issued to the purchasers of the notes were outstanding. Within 5 days of the
filing of this registration statement, we will issue warrants to purchase an
additional 800,000 shares to the investors and within 5 days of the
effectiveness of this registration statement, we will issue warrants to purchase
an additional 800,000 shares to the investors for an aggregate total of warrants
to purchase 2,400,000 shares. We have also issued warrants to purchase 540,000
to brokers involved with the financing. All of these warrants are exercisable at
$1.00 per share which price may be adjusted from time to time if we issue stock
at less than $1.00 in the future. Warrants to purchase 1,340,000 expire on
November 17, 2010 and the remaining warrants to purchase 1,600,000 shares will
expire five years from the date on which they are issued. The shares of common
stock issuable upon exercise of these warrants are being registered pursuant to
this registration statement.
As of December 15, 2005, 4,627,756 shares of common stock were reserved for
issuance upon exercise of our outstanding warrants and options other than those
issued in connection with the notes and debentures, and an additional 38,821,841
shares of common stock were reserved for issuance upon conversion of the notes
and debentures and exercise of the warrants issued in connection with the notes
and bridge loans. As of December 15, 2005, there were 36,533,004 shares of
common stock outstanding. Of these outstanding shares, 4,182,057 shares were
freely tradeable without restriction under the Securities Act of 1933, as
amended, unless held by affiliates.
Our 8% convertible notes are convertible into such number of shares of common
stock as is determined by dividing the principal amount thereof by the lesser of
the (a) then current variable conversion price and (b) $0.68 per share. If
converted on December 15, 2005, the $4,800,000 principal amount of notes would
have been convertible into 14,876,033 shares of our common stock (or 17,816,033
shares if the warrants to purchase 2,940,000 shares were also exercised in
full). Each holder of these notes has agreed not to own more than 4.99% of our
common stock at any one time; however, the number of shares into which the
convertible notes can convert could prove to be significantly greater in the
event of a decrease in the trading price of our common stock. The following
table presents the number of shares of our common stock that we would be
required to issue as of December 15, 2005 and the number of shares we would be
required to issue if our common stock declined by 50% or 75%:
As of 50% 75%
December 15, Decline Decline
----------- ----------- -----------
Conversion price per share: $0.322667 $0.161334 $0.080667
Total shares issuable upon 17,816,033 32,692,066 62,444,132
conversion of notes and
exercise of warrants
Percentage of total outstanding 4.99% 4.99% 4.99%
Shares
Percentage of total outstanding 32.78% 47.23% 63.09%
Shares (not taking into account
the 4.99% ownership limitation)
A DEFAULT BY US UNDER OUR 8% NOTES WOULD ENABLE THE HOLDERS OF OUR 8% NOTES TO
TAKE CONTROL OF SUBSTANTIALLY ALL OF OUR ASSETS.
Our 8% notes are secured by a security agreement under which we pledged
substantially all of our assets, including our goods, fixtures, equipment,
inventory, contract rights and receivables. A default by us under the 8% notes
would enable the holders to take control of substantially all of our assets. The
holders of our 8% notes have no operating experience in the industry that could
force us to substantially curtail or cease our operations.
11
OUR FAILURE TO COMPLY WITH THE TERMS OF THE CONVERTIBLE NOTES COULD LEAD TO AN
ASSESSMENT OF LIQUIDATED DAMAGES BY THE HOLDERS OF THE CONVERTIBLE NOTES AND
WARRANTS.
Under the registration rights agreement, if the registration statement relating
to the securities offered by this prospectus is not declared effective by the
Securities and Exchange Commission on or before March 17, 2006 or the investors
cannot make sales under the registration statement for any period of time after
the registration statement is declared effective, we are obligated to pay a
registration default fee to the 8% note holders equal to the principal of the
note outstanding multiplied by .02 multiplied by the sum of the number of
additional months required for the registration statement to become effective
(or on a pro rata basis). For example, if the registration statement becomes
effective one (1) month after March 17, 2006, we would pay $5,000 for each
$250,000 of outstanding note principal amount. If thereafter, sales could not be
made pursuant to the registration statement for an additional period of one (1)
month, we would pay an additional $5,000 for each $250,000 of outstanding note
principal amount. Accordingly, failure to have the registration statement
declared effective by March 17, 2006 could result in the assessment of
liquidated damages in the amount of $96,000 per month.
In addition, we have agreed to have authorized a sufficient number of shares of
our common stock to provide for the full conversion of the notes and exercise of
the warrants then outstanding and to register and have reserved at all times for
issuance at least two times the number of shares that is the actually issuable
upon full conversion of the notes and full exercise of the warrants.
Accordingly, the Company's failure to comply with this covenant could result in
the assessment of additional liquidated damages against the Company.
Moreover, we are required to pay a penalty of $1,000 per day to the investors if
we fail to deliver shares of our common stock upon conversion of the notes
within five business days upon receipt of the conversion notice.
OUR OFFICERS AND DIRECTORS HAVE LIMITED LIABILITY AND HAVE INDEMNITY RIGHTS.
Our certificate of incorporation and by-laws provide that we indemnify our
officers and directors against losses sustained or liabilities incurred which
arise from any transaction in such officer's or director's respective managerial
capacity unless such officer or director violates a duty of loyalty, did not act
in good faith, engaged in intentional misconduct or knowingly violated the law,
approved an improper dividend, or derived an improper benefit from the
transaction. Our certificate of incorporation and by-laws also provide for the
indemnification by us of our officers and directors against any losses or
liabilities incurred as a result of the manner in which such officers and
directors operate our business or conduct our internal affairs, provided that in
connection with these activities they act in good faith and in a manner which
they reasonably believe to be in, or not opposed to, our best interests, and
their conduct does not constitute gross negligence, misconduct or breach of
fiduciary obligations.
12
FORWARD LOOKING STATEMENTS
Information included in this Form SB-2 may contain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). This
information may involve known and unknown risks, uncertainties and other
factors, including, among other things:
- - general economic and business conditions, both nationally and in our markets,
- - our history of losses,
- - our expectations and estimates concerning future financial performance,
financing plans and the impact of competition, - our ability to implement our
growth strategy, - anticipated trends in our business, - advances in
technologies, and - other risk factors set forth under "Risk Factors" in this
prospectus.
These factors may cause our actual results, performance or achievements to be
materially different from future results, performance or achievements expressed
or implied by any forward-looking statements. Forward-looking statements, which
involve assumptions and describe our future plans, strategies and expectations,
are generally identifiable by use of the words "may," "will," "should,"
"expect," "anticipate," "estimate," "believe," "intend" or "project" or the
negative of these words or other variations on these words or comparable
terminology. These forward-looking statements are based on assumptions that may
be incorrect, and there can be no assurance that any projections included in
these forward-looking statements will come to pass. Our actual results could
differ materially from those expressed or implied by the forward-looking
statements as a result of various factors. Except as required by applicable
laws, we do not undertake any obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will receive no proceeds
from the sale of shares of common stock in this offering. However, we may
receive the proceeds from the exercise of the Warrants by the selling
stockholders. We expect to use the proceeds received from the exercise of the
Warrants, if any, for general working capital purposes.
13
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol "NAYN."
Our common stock has been traded on the OTC Bulletin Board since April 4, 2005.
Prior to that date, our common stock was not actively traded in the public
market. For the periods indicated, the following table sets forth the high and
low bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
Quarter ended High Bid Low Bid
2005
September 30 $0.918 $0.40
June 30 $ 2.10 $0.56
As of December 15, 2005, we had approximately 2,414 holders of our common stock.
The number of record holders was determined from the records of our transfer
agent and does not include beneficial owners of common stock whose shares are
held in the names of various security brokers, dealers, and registered clearing
agencies. The transfer agent of our common stock is Interwest Transfer Company,
Inc., 1981 East Murray Holladay Road, Suite 100, Salt Lake City, UT 84117
On December 15, 2005, the closing price of our common stock on the OTCBB was
$0.64
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock or other
securities and do not anticipate paying any cash dividends in the foreseeable
future. Any future determination to pay cash dividends will be at the discretion
of the Board of Directors and will be dependent upon our financial condition,
results of operations, capital requirements, and such other factors as the Board
of Directors deem relevant.
14
SELECTED FINANCIAL DATA
The statements of operations data for the fiscal years ended December 31, 2004
and December 31, 2003, respectively, and for the cumulative period from February
10, 2000 (date of inception) to December 31, 2004 and the balance sheet data as
of December 31, 2004 are derived from the audited financial statements, which
are included elsewhere in this prospectus. The statements of operations data for
the three months ended September 30, 2005 and September 30, 2004 and the
statements of operations data for the nine months ended September 30, 2005 and
September 30, 2004 and the balance sheet data as of September 30, 2005 are
derived from our unaudited financial statements included elsewhere in this
prospectus. In the opinion of management, the unaudited interim financial
statements include all adjustments consisting principally of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
the period. The historical results are not necessarily indicative of the
operating results to be expected in the future and the results of interim
periods are not necessarily indicative of the results for a full year. The data
set forth below should be read in conjunction with, and is qualified in its
entirety by reference to, our financial statements and notes thereto included
elsewhere in this prospectus and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Three months ended September 30
---------------------------------------
STATEMENT OF OPERATIONS DATA: 2005 2004
------------------- -------------------
Operating expenses:
Research and development $ 780 $ 693
Business development 110 304
General and administrative 314 52
------------------- -------------------
Total operating expenses 1,204 1,049
------------------- -------------------
Loss from operations (1,204) (1,049)
Interest income - 5
Interest expense (24) (4)
Gain on sale of assets - -
Merger related costs (7) -
Impairment of goodwill and other intangible assets - -
------------------- -------------------
Net loss $ (1,235) $ (1,048)
=================== ===================
Net loss per share - basic and diluted
basic (0.034) (0.040)
diluted
Shares used in computing net loss per share - basic and diluted
2004 adjusted for the 1:5.9 reverse split that occurred
immediately prior to the April 1, 2005 merger
basic 35,852,504 26,302,504
diluted
February 10,
2000 (date of
Nine Months Ended September 30, inception) to
--------------------------------------- September 30,
2005 2004 2005
------------------- ------------------- -------------------
Operating expenses:
Research and development $ 2,689 $ 3,012 $ 41,639
Business development 533 911 3,143
General and administrative 740 352 8,274
------------------- ------------------- -------------------
Total operating expenses 3,962 4,275 53,056
------------------- ------------------- -------------------
Loss from operations (3,962) (4,275) (53,056)
Interest income - 13 2,392
Interest expense (40) (37) (872)
Gain on sale of assets 370 - 358
Merger related costs (243) - (243)
Impairment of goodwill and other intangible assets - - (5,834)
------------------- ------------------- -------------------
Net loss $ (3,874) $ (4,299) $ (57,255)
=================== =================== ===================
Net loss per share - basic and diluted
basic (0.119) (0.186)
diluted
Shares used in computing net loss per share - basic and diluted
2004 adjusted for the 1:5.9 reverse split that occurred
immediately prior to the April 1, 2005 merger
basic 32,652,504 23,082,688
diluted
September 30,
BALANCE SHEET DATA: 2005
------------------
Cash and cash equivalents $ 91
Working capital/(deficit) (3,215)
Total assets 576
Total current liabilities 3,448
Total shareholders' equity/(deficit) (5,244)
Period from
February 10, 2000
(date of inception)
Year Ended Year Ended to
STATEMENT OF OPERATIONS DATA: December 31, 2004 December 31, 2003 December 31, 2004
------------------ ------------------ -------------------
Operating expenses:
Engineering $ 2,971 $ 3,051 $ 38,950
Sales and marketing 1,011 720 2,611
General and administrative 1,069 3,675 7,533
------------------ ------------------ -------------------
Total operating expenses 5,051 7,447 49,094
------------------ ------------------ -------------------
Loss from operations (5,051) (7,447) (49,094)
Other income (expense)
Interest Income 14 121 2,390
Interest expense (40) (137) (832)
Loss on Sale of Assets (12) (12)
Impairment of goodwill related to the (9) (5,825) (5,834)
acquisition of Xpeed, Inc.
------------------ ------------------ -------------------
Net loss $ (5,098) $ (13,288) $ (53,382)
================== ================== ===================
Net loss per share - basic and diluted
basic (0.194) (0.798)
diluted
Shares used in computing net loss per share - basic and diluted
2004 adjusted for the 1:5.9 reverse split that occurred
immediately prior to the April 1, 2005 merger
basic 26,302,504 16,643,057
diluted
December 31,
BALANCE SHEET DATA: 2004 2003
------------------ ------------------
Cash and cash equivalents $ 710 $ 1,663
Working Capital (deficit) (966) (337)
Total assets 1,767 3,292
Total liabilities 3,138 3,238
Shareholders' equity (deficit) (1,371) 54
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the condensed
financial statements and notes thereto included elsewhere in this report, as
well as, the financial statements and notes thereto included in the Company's
Transition Report on Form 10-KSB for the transition period from August 31, 2004
to December 31, 2004 filed with the Commission on August 16, 2005, the Company's
Current Report on Form 8-K filed with the Commission on April 8, 2005, as
amended on April 18, April 20, April 26 and July 29, 2005, the Company's
Quarterly Report on Form 10-QSB, for the period ending June 30, 2005, filed with
the Commission on August 19, 2005, and the Company's Quarterly Report on Form
10-QSB, for the period ending September 30, 2005, filed with the Commission on
November 21, 2005, and other reports and filings that the Company may make from
time to time with the Commission.
RESULTS OF OPERATIONS FOR THE 3 MONTHS ENDED SEPTEMBER 30, 2005 AND FOR THE 9
MONTHS ENDED SEPTEMBER 30, 2005
Revenues, Cost of Sales and Gross Profit
For the three and nine month periods ended September 30, 2005 and September 30,
2004, the Company did not have any material revenue, cost of sales or gross
profit. As a development stage company, any revenues generated by trial and
evaluation sales have been classified as a reduction of expenses.
Operating Expenses
Operating expenses include research and development, business development and
general and administrative expenses. Total operating expenses for the three
months ended September 30, 2005 and September 30, 2004 were $1.2 million and
$1.0 million, respectively. Such increase of $155,000 resulted primarily from
the following:
Increased research and development expenditures of $88,000 as a result of the
Company's recent completion of development of the its ExpressSTREAM product
line;
Decreased business development expenditures of $194,000 as a result of a
decrease in the number of sales and marketing employees and a focus on large
partners and channels; and
Increased general and administration expenditures of $262,000 as a result of
expenses related to the Company's increased obligations upon becoming a
reporting enterprise.
Operating expenses for the nine months ended September 30, 2005 and September
30, 2004 totaled $4.0 million and $4.3 million, respectively. Such decrease of
$313,000 resulted primarily from cost savings associated with a reduction in the
number of employees.
Other Expenses
Other expenses include interest expense and merger-related costs. Other expense
for the three months ended September 30, 2005 and September 30, 2004, was
$31,000 and $4,000, respectively. Such increase of $27,000 was primarily due to
ongoing costs related to the Company's recent merger with Rescon.
Other expenses for the nine months ended September 30, 2005 and September 30,
2004, were $283,000 and $37,000, respectively. Such increase was primarily due
to costs related to the Company's recent merger with Rescon.
Other Income
Other income includes interest income and gains on the sale of certain of the
Company's assets. There was no other income for the three months ended September
30, 2005, and other income for the three months ended September 30, 2004 was
$5,000. Such decrease was the result of the Company's no longer having interest
bearing deposits.
16
Other income for the nine months ended September 30, 2005 and September 30,
2004, was $370,000 and $13,000, respectively. Such increase was due primarily to
the Company's gain on the sale of certain fixed assets.
Net Loss
As a result of the foregoing factors, for the three months ended September 30,
2005 and September 30, 2004, the Company incurred a net loss of $1.2 million and
$1.0 million, respectively.
For the nine months ended September 30, 2005 and September 30, 2004, the Company
incurred a net loss of $3.9 million and 4.3 million, respectively.
During the Company's continuing development phase, it has consistently sustained
operating losses and expects such losses to continue through the rest of fiscal
2005 and for the foreseeable future.
Liquidity and Capital Resources
As of September 30, 2005, the Company had an accumulated deficit since inception
of $57.3 million and cash and cash equivalents of $91,000. The Company has
incurred losses since its inception and has current liabilities in excess of
current assets. In October and November of 2005, the Company received an
aggregate of approximately $180,000 in bridge loans from certain lenders. Such
notes are due within 120 days of the respective issuance dates and carry an
interest rate of 8% per annum. Notwithstanding the foregoing, the Company does
not have sufficient cash on hand to continue its operations in the manner they
have historically been conducted. These factors raise substantial doubt about
the ability of the Company to continue as a going concern.
In this regard, as the Company has limited working capital and limited cash on
hand, and as it is not currently realizing revenue from operations, management
is proposing to raise any necessary additional funds not provided by operations
through loans or through additional sales of its common stock. We anticipate
that our currently available funds, including the proceeds from our most recent
financing, are sufficient to meet our needs for working capital, capital
expenditures and business expansion for the next seven months. Thereafter, we
will need to raise additional funds. If any of our assumptions are incorrect, we
may need to raise capital before the end of seven months. There is no assurance
that the Company will be successful in raising this additional capital or in
achieving profitable operations. This funding may be sought by means of private
equity or debt financing. Other than the additional callable secured convertible
notes and warrants, the investors have committed to purchase, the Company
currently has no commitments from any party to provide funding and there is no
way to predict when, or if, any such funding could materialize. There is no
assurance that the Company will be successful in obtaining additional funding on
attractive terms, or at all.
Cash Flows
During the quarter ended September 30, 2005, cash was primarily used to fund
Company expenses. Cash and cash equivalents decreased by $618,000 during the
nine months ended September 30, 2005. The Company's summary cash flow
information for the nine month periods ended September 30, 2005 and 2004 is set
forth below:
For the Nine For the Nine
Months Ended Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Net cash used in operating activities $ (2,631) $ (3,680)
Net cash used in investing activities $ 260 $ (4)
Net cash used in financing activities $ 1,753 $ 2,826
Net Increase/(Decrease) in Cash $ (618) $ (858)
17
During the nine months ended September 30, 2005, net cash used in operations was
$2.6 million, as net loss and loss on the sale of fixed assets were only
partially offset by depreciation and increases in accounts payable and accrued
payroll liabilities. During the nine months ended September 30, 2005, the
Company realized loan proceeds of $1.8 million.
Recent Events
Abundance Networks, LLC.
On December 1, 2005, we entered into an Asset Purchase Agreement with Abundance
Networks, LLC, which provides for the acquisition of substantially all of the
assets and some liabilities of Abundance, including a wholly owned subsidiary,
Abundance Networks (India) Pvt. Ltd (ANII). Abundance is a privately held
company located in Shelton, Connecticut, that provides Ethernet over Sonet/SDH,
enterprise-class network solutions and services.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004 AND THE PERIOD FROM
FEBRUARY 10, 2000 (DATE OF INCEPTION) TO DECEMBER 31, 2004
From the date of inception on February 10, 2000 through December 31, 2004, Nayna
has operated, and will continue to operate through at least the first three
quarters of 2006, as a development stage company, devoting all of its efforts
and resources to developing and testing new products and marketing all of its
products.
All sales in 2004 and 2003 were for products sold for test and evaluation
purposes and, as such, have been classified and reported as expense reduction.
Initial revenues from sales of products to commercial customers are projected to
begin in the third quarter of 2006 and are expected to grow significantly during
the remainder of 2006.
Gross Profit
Since all sales and cost of goods sold were classified and reported as expense
reduction and expense, respectively, there were no gross profits for 2004 or
2003.
Operating Expenses
The Company incurred operating expenses of $5.1 million for the period ended
December 31, 2004, compared to $7.4 million for the period ended December 31,
2003. The significant decrease in operating expenses was due to the reduction in
General and Administrative and was the result of a reduction in rent and
employee related costs. General and Administrative expenses are expected to rise
due to the cost of being a public company.
The increase in Sales and Marketing reflects the Company's increased efforts to
market the EXPRESSStream family of products introduced in late 2004. Sales and
Marketing expenses are expected to continue to increase as more and more
opportunities arise.
Other (Income) and Expense
Net other income and expenses of $38,000 were minor for the period ended
December 31, 2004 compared to $5.8 million for the period ended December 31,
2003. The majority of the other expenses in 2003 were the result of reflecting
the impairment of goodwill related to the acquisition of Xpeed, Inc.
Net Loss
We incurred a net loss of $5.2 million for the period ended December 31, 2004,
compared to a net loss of $13.3 million for the period ended December 31, 2003.
In the course of its development activities, Nayna has sustained operating
losses and expects such losses to continue through 2005 and most of 2006. Based
on our forecasts of expected demand for our products, our acquisition of
Abundance Networks, LLC (as announced in our 8K filed December 6, 2005) and our
forecasts of future acquisitions, we expect revenues to grow significantly
during the last half of 2006.
18
Liquidity and Capital Resources
Our balance of cash and cash equivalents at December 6, 2005 was $497,878 as
compared to $708,959 at December 31, 2004. In November 2005 we completed a
private placement sale of 12,337,609 shares of common stock at an estimated
average price of $0.81 per share. In accordance with the terms of this
transaction $1,600,000, the gross proceeds, was paid to the Company when the
transaction closed on November 17, 2005.
We project that the cash and cash equivalents of $497,878 on hand at December 6,
2005, plus the gross proceeds of $3,200,000 to be received, in subsequent
months, from the private placement, will be sufficient to support our operations
through September 2006, without relying on the incoming revenue from sales and
acquisitions. We expect that no additional funds will be needed to sustain
operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Development Stage Enterprise
Since its inception, although the Company has commenced its principal
operations, it has not achieved a sufficient level of sales and market demand to
become an established operating enterprise. Therefore, the Company is currently
classified as a development stage enterprise under the Statement of Financial
Accounting Standards ("SFASB") No. 7, "Accounting and Reporting by Development
Stage Enterprises." Successful completion of the Company's development program
and the attainment of profitable operations is dependent on future events,
including, among other things, the receipt of adequate financing to continue its
operations and fulfill its development activities and the achievement of a level
of sales adequate to support the Company's cost structure. There can be no
assurance that the Company will successfully accomplish these events.
The Company has experienced net losses since its inception and had an
accumulated deficit of $57.3 million as of September 30, 2005. Such losses are
attributable to cash and non-cash expenses resulting from costs incurred in the
development of the Company's products and infrastructure. The Company expects
operating losses to continue for the foreseeable future as it continues to
develop and market its products. However, the Company's ability to continue its
operations as a going concern is in doubt. Regardless of when or if the Company
is able to commercialize its products, the Company may require additional
funding and may sell additional shares of its common stock or preferred stock
through private placement or public offerings. There can be no assurance that
the Company will be able to obtain additional debt or equity financing, if and
when needed, on terms acceptable to the Company or at all. Any additional equity
or convertible debt financing may involve substantial dilution to the Company's
stockholders, restrictive covenants, or high interest costs. The failure to
raise needed funds on sufficiently favorable terms could have a material adverse
effect on the Company's business, operating results, and financial condition.
The Company's long-term liquidity also depends upon its ability to increase
revenues from the sale of its products and achieve profitability. The failure to
achieve these goals could have a material adverse effect on the operating
results and financial condition of the Company.
The successful accomplishment of future activities and initiatives cannot be
determined at this time due to, among other things, current market conditions,
the volatility of the Company's business and the industry in which it competes
and other factors as are set forth herein under the caption "Risk Factors" and
in other filings made, from time to time, with the Commission. There can be no
assurance that the Company will have sufficient funds to execute its intended
business plan or generate positive operating results.
Basis of Presentation
The financial statements of the company have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make significant
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. We evaluate estimates, including those related to bad debts,
inventories and income taxes, on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
19
Inventory Valuation
As a development stage enterprise, the Company expenses all inventories to
research and development until such time as commercial revenues may commence.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets, including property and equipment,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When the sum of the present
value of future net cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying amount, an impairment loss
would be measured based on the discounted cash flows compared to the carrying
amount. No impairment charge has been recorded in any of the periods presented
herein.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
instruments with an original maturity of three months or less to be cash
equivalents.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation expense is determined using the straight-line method over the
estimated useful lives of the respective assets, which are generally three to
five years for computers, equipment and furniture. Depreciation on leasehold
improvements is provided using the straight-line method over the shorter of the
estimated useful lives of the improvements or the lease term. Expenditures for
maintenance and repairs are charged to operating expense as incurred. Upon
retirement or sale, the original cost and related accumulated depreciation are
removed from the respective accounts, and the gains and losses are included in
other income or expense.
Business and Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash, cash equivalents invested in deposits and
trade receivables. The Company has not experienced any losses on its deposits of
cash and cash equivalents. Management believes that the institutions are
financially sound and, accordingly, minimal credit risk exists. The carrying
values reported in the balance sheets for cash, cash equivalents and trade
receivables approximate their fair values.
Research and Development
The Company accounts for research and development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 2, "Accounting for
Research and development Costs," and, accordingly, the Company expenses research
and development costs when incurred.
Income Taxes
The Company recognizes deferred tax assets and liabilities for operating loss
carryforwards, tax credit carryforwards and the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which the temporary differences are expected to be
recovered or settled. A valuation allowance is recorded to reduce the carrying
amounts of net deferred tax assets if there is uncertainty regarding their
realization.
Stock-Based Compensation
20
The Company accounts for its stock-based employee compensation using the
intrinsic value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and Financial
Accounting Standards Board ("FASB") Interpretation ("FIN") No. 44, "Accounting
for Certain Transactions Involving Stock Compensation."
Stock and other equity instruments issued to non-employees are accounted for in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," and
EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services," and are valued using the Black-Scholes model.
No stock-based employee compensation cost related to stock options is reflected
in net income (loss), as all options granted under the Company's stock-based
compensation plans had an exercise price equal to fair value of the underlying
common stock on the applicable grant date.
Goodwill and Purchased Intangible Assets
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires
goodwill to be tested for impairment on an annual basis and between annual tests
in certain circumstances, and written down when impaired, rather than being
amortized as previous accounting standards required. Furthermore, SFAS 142
requires purchased intangible assets other than goodwill to be amortized over
their useful lives unless these lives are determined to be indefinite.
21
BUSINESS
Introduction
We were formed as a result of a merger and plan of reorganization between Rescon
Technology, Inc., a Nevada corporation and publicly traded company, and Nayna
Networks, Inc., a Delaware corporation and a private company. On April 1, 2005,
Nayna merged into Rescon in a stock-for-stock transaction. In the merger, Rescon
issued 32,249,935 shares of its restricted common stock and warrants to purchase
88,600 shares of its restricted common stock to the stockholders of Nayna and
assumed options to purchase 4,948,631 shares of common stock in exchange for
100% of Nayna's issued and outstanding shares of common stock, warrants and
options.
As a result of the merger, Rescon continued as the surviving corporation, Nayna
became a wholly-owned subsidiary of Rescon and the stockholders of Nayna became
stockholders of Rescon. The stockholders of Rescon prior to the merger owned
approximately 10% of the issued and outstanding shares of Rescon common stock
immediately following the merger. The stockholders of Nayna prior to the merger
owned approximately 90% of the issued and outstanding shares of Rescon common
stock immediately following the Merger.
As a result of the merger, Rescon assumed Nayna's operations and business plan
and changed its name to Nayna Networks, Inc.
Overview
We are a hardware and software development company that designs, develops and
markets next generation broadband access solutions, also known as ethernet in
the first mile, or EFM, solutions for the secure communications market. Typical
customers include carriers, cable television service providers and municipal,
defense and enterprise networks. Our multi-gigabit flagship platform,
ExpressSTREAM, removes the performance bottlenecks typically found in access
networks. The high quality and rich feature set of our solutions enables the
gigabit class ExpressSTREAM platform to address a wide variety of applications
from the transport level up to and through the application layer. Nayna,
together with the companies which it has acquired, has raised more than $65
million in venture capital investment over the past five years, substantially
all of which has been spent on product development. In addition to continued
internal development efforts, we plan to augment our product and service
offerings through the acquisitions of complementary companies in the secured
communications solutions field including infrastructure, software and services
companies.
Our solutions are based on proprietary hardware and software implementations
that are largely based on standard components. This methodology makes our
solutions more flexible and less costly and enables us to address our customers'
needs swiftly without the cost or time required to make custom silicon chips.
These high-performance, cost-effective solutions are enhanced by intelligent
enforcement of quality of service, which we believe positions us to compete
effectively in our target markets.
Features for quality level differentiation are critical for enabling service
providers to generate revenues by pricing and billing separately for multiple
voice, data and video applications. Service providers can create and operate
sophisticated subscriber contracts to optimize operating margins, by separating
traffic types, controlling ports and prioritizing traffic bandwidth. Using our
ExpressSTREAM platform a service provider can quickly and easily assign a
pay-per-view video high priority dedicated bandwidth while standard web surfing
traffic remains a low priority using only idle bandwidth. Application
prioritization ensures that the higher margin video traffic will be of high
quality and not be affected by the web traffic flowing in the background.
Industry Background
The demand for delivery of information at increasing speed with increasing
reliability continues to grow rapidly. Next generation secured communications
providing data, video and voice over internet protocol, are beginning to
displace the traditional public switched telephone networks, Web pages are
displacing newspaper pages, and high definition television, or HDTV, video on
demand is replacing older broadcast standard television. The traditional
publicly switched telephone network is much more costly than a voice over
internet protocol based network and standard television over an analog carrier
signal has an inferior image quality compared to a HDTV internet protocol
digital signal.
22
The demand for consumer entertainment in the form of streaming internet radio
stations and internet protocol video is driving the rapid change in technology.
These applications often require large amounts of bandwidth and higher quality
priority protocols as consumers will not tolerate music dropouts and video
freeze frames.
Present Market Growth
Both bandwidth consumption (measured in gigabits per second) and the number of
broadband content serving sites are growing at the grass roots level. As
described above, we are seeing significant new trends unfolding in the use and
delivery of communication application services, in particular of triple play
(voice, data, video) content. These trends include a shift, away from scheduled
content programming using analog, or radio frequency, transmission, toward
flexible on demand, any time, anywhere content using digital transmission
methods over Ethernet.
As the demand for bandwidth continues to increase, older technologies are
struggling to keep pace. Traditional access solutions cannot provide the amount
of bandwidth necessary to support streaming content and they lack the high level
of quality of service tracking demanded by service providers.
The Nayna Solution
Based on new and unique proprietary technology our multi-gigabit ExpressSTREAM
family of products and service provides:
1. High bandwidth to transport streaming entertainment and information
content that consumers are demanding;
2. A quality of service mechanism that allows service provider to
increase revenue by means of pricing & billing by content type,
optimizing margins and enforcing subscriber contracts;
3. Reduced equipment costs through implementation of end-to-end
Ethernet, thereby eliminating conversion equipment,
4. Topology flexibility that enables service providers to use one
platform to reach all potential customers over existing fiber and
copper or new fiber while at the same time reducing operational
costs.
Our solutions provide a wide range of benefits in a variety of customer
applications. We believe our initial focus on providing broadband access
leveraging our Ethernet In The First Mile technology offers near-term revenue
opportunity. From our strong Ethernet technology base, we expect to continue to
expand our range of addressable applications through strategic acquisitions and
incremental in-house development. For example, our recent voice over internet
protocol development efforts open up the voice transport and value added
voice-processing applications. Our high carrier class products and quality of
service provide a reliable platform for voice applications and related service
contracts.
The Nayna solution also includes planning and installation services up to the
application layer. The result of this mix of hardware, software and services is
a highly compatible and smoothly running infrastructure for the service
provider.
Our Products: ExpressSTREAM Platform
The ExpressSTREAM family of optical broadband access products and services are
certified for a wide variety of applications including handling of advanced real
time applications such as streaming content, and we believe the ExpressSTREAM
family of products and services was one of the first set of products in the
market to meet rigorous Ethernet Passive Optical Networking (EPON) industry
standards. Previous generations of products were limited to average bandwidths
of just a few hundred kilobits per second and a total of just 2.5gigabits per
second per system. Our ExpressSTREAM solutions range up to 32 gigabits per
second of non-blocking system capacity and 10/100/1000 megabits per second per
subscriber site.
23
ExpressSTREAM solutions are supported by high performance switching capacity of
up to 48 million packets per second, compared to just 2 million packets per
second in many gigabit LAN data switches. Our high performance switching fabric
is the key to its excellent carrier class quality of service and in turn,
provides us with the ability to mix and match voice, data and video on the same
links. While typical LAN products can only handle large data packets
efficiently, ExpressSTREAM has sufficient additional capacity to enable it to
mix small high priority voice packets in the same stream as the larger packets
without packets being lost or delayed.
We believe that our ExpressSTREAM platform's ability to move traffic at gigabit
speeds while maintaining the integrity and superior quality provides us with a
sustainable advantage and is an excellent base for adding revenue enhancing
advanced information processing at higher application layers.
Research and Development
We focus our development activities on addressing the evolving needs of our
customers within the secure communications and broadband access markets. We work
closely with our partners and customers to monitor changes in the marketplace.
We design our products around current industry standards and will continue to
support emerging standards.
Our development process also includes manufacturability, predicted reliability,
expected lifetime, manufacturing costs, design reviews and testing. We
continuously undertake development efforts with emphasis on increasing
reliability, integrity and performance as well as value-added features and
functions. We believe our development team and process are keys to our ability
to maintain technical competitiveness and deliver innovative products that
address the needs of the market. However, there can be no assurance that our
product development efforts will result in commercially successful products, or
that our products will not be rendered obsolete by changing technology or new
product announcement by other companies.
Successful Complementary Customer Solutions Increase Our Addressable Market
Our flexible platform offers services on fiber, copper and wireless
infrastructure. Our solutions leverage a mix of topologies and technologies such
as ring, PON, TDM, VDSL and others to meet customer requirements. Our very high
speed digital subscriber loop, or VDSL, concentrators and modems expand our
addressable market into locations that have copper infrastructure rated below
CAT5 standards.
Our success with systems integrators such as Air2Data and HITS Entertainment Inc
demonstrates our ability to provide products and services over different media.
Air2Data selected our ExpressSTREAM platform to serve as the backbone of its
project to provide wireless broadband access to all 376 rooms of the Red Lion
Inn in Sacramento, California (covering more people than some luxury
communities). Air2Data chose our ExpressSTREAM platform due to its ability to
offer better distance reach resulting in the elimination of WiFi signal fade and
interference which reduced deployment costs and significantly simplified
on-going operations for Air2Data.
We partnered with HITS Entertainment Inc. to provide broadband access to a
Canadian historic site project over existing copper wiring. The owners of the
historic site needed broadband service, but did not want to turn the site into a
heavy construction zone. To meet these requirements, our engineers were able to
design an ExpressSTREAM broadband solution that re-used existing copper wiring,
thus eliminating the labor, expense and time of installing new wiring at a
historic site.
Strategic Acquisitions and Partnerships
Strategic acquisitions and corporate partnerships are an important component of
our growth strategy. We believe that we can develop a comprehensive integrated
platform of related product and service offerings through acquisitions of and
partnerships with companies in the secure network field, and that, if
successful, these acquisitions and partnerships can accelerate revenue growth
and reduce operating costs through economies of scale. We intend to actively
pursue acquisition and partnership opportunities with companies that we believe
will provide us with short and long term potential for revenue growth.
24
Sales and Marketing
We sell our products and services globally to meet a wide range of needs.
Typical customers include: traditional large scale telephony service providers,
smaller independents and rural service providers, Cable TV service providers,
cyber villages, corporations and call centers etc. Our sales channel includes:
direct sales to key strategic accounts, system integrators, distributors, and
large original equipment manufacturers, or OEM, accounts.
Our sales and marketing strategy involves a combination of direct and indirect
sales channels. We are in discussions with a number of large original equipment
vendors for possible partnerships and OEM agreements to deliver our solutions to
customers. We intend to further strengthen our competitive advantage with the
strategic addition of solution integration and support. We believe that we can
generate revenue growth through both our direct and indirect sales channels,
using our solutions approach.
Our direct sales force maintains close contact with our customers and provides
technical support to our channel partners. We have recently expanded efforts
with our partners in Asia and Europe. Both our products and services are
frequently sold to the same customers. By increasing our product and service
offering we are increasingly able to capitalize on our customers' satisfaction
with one of our solutions to gain introductions that can lead to sales of our
other solutions. We anticipate that we will continue to benefit from these
trends in the future.
Our marketing group also provides marketing support services for our executive
staff, our direct sales force and our channel partners. Through our marketing
activities, we provide technical and strategic sales support to our direct sales
personnel and channel partners, including inn-depth product presentations,
technical manuals, sales tools, pricing, marketing communications, marketing
research and other support functions.
A high standard of continuing service and support is critical to our objectives
of developing long-term customer relationship. Our support services utilizes a
technical team of field and factory engineers, technical marketing personnel and
when required product design engineers. We provide extensive customer support
throughout the qualifications and sales process. We intend to continue to
provide a high standard of service and we believe it is a key factor to being
competitive in the market.
Competition
We believe the principal competitive factors in our markets are:
o Product speed and throughput performance
o Quality of service features with traffic management functionality
o Price & reliability
o Timeliness of new product introduction
o Support of industry standards
o Size and scope of the sales channel
o Size of the installed customers base
We believe that we compete favorably with respect to most of the foregoing
factors; however, the markets for secure communications and services are highly
competitive. Our current competitors include a number of domestic and
international companies, some of who have substantially greater financial,
technical, marketing and sales channel resources. We expect that more companies
will enter the market. We may not be able to compete successfully against either
current or future competitors. Increased competition could result in significant
price erosion, reduced revenue, lower margins or loss of market, which could
significantly harm our business.
For Passive Optical Networking (PON) systems, we compete primarily with: Salira
Networks, Inc., Alloptic Inc., TeraWave Communications, Tellabs and Alcatel.
25
Our competitors continue to introduce improved products with lower prices, and
we will have to do the same to remain competitive. In addition, our current and
potential customers may attempt to integrate their operations by producing their
own solutions or acquiring one of our competitors, thereby eliminating the need
to purchase our products. Furthermore, larger companies in other related
industries may develop or acquire technologies and apply their significant
resources, including their distribution channels and brand name recognition to
capture significant market share.
Manufacturing
We outsource to local and international contract manufacturers to procure our
product. This approach enables us to focus on our design strengths, reduce fixed
costs and capital expenditures and provide flexibility in meeting market demand.
Any rise in volume will provide the opportunity for further cost reductions. We
use inspection, testing, and process controls to assure the quality and
reliability of our products.
Any interruption or delay in the manufacturing process or delay in the supply of
any components or the inability to procure components from alternate sources at
acceptable prices and within a reasonable time, would substantially harm our
business. Lead times for materials and components vary significantly and depend
on factors such as the specific supplier, contract terms and demand for a
component at any given time. In addition, qualifying additional suppliers can be
time-consuming and expensive and may increase the likelihood of errors.
Intellectual Property
We have obtained 17 patents in the area of networking and optical networking and
filed several other patent applications. Our trade secret intellectual property
includes valuable software/firmware combinations that ensure billable quality
traffic enforcement known in the industry as quality of service. Quality of
service software provides extra revenue opportunities for both our products and
our synergistic services. Quality of service is of vital importance in the Video
on Demand market segment where consumers pay to view a movie or special sporting
event. Quality of service is also of critical importance to the leased line
market segment where, for example, mission critical corporate PBX traffic is
carried to the central office.
Facilities
Our headquarters are located in Santa Clara, California, where we lease
approximately 5,000 square feet, which includes research and development, sales
and marketing and general and administrative operations. The lease is on a month
to month basis, and we believe our current facilities will be adequate to meet
our needs for the foreseeable future.
Employees
As of November 20, 2005, we employed a total of 17 full time employees. We also
from time to time employ part-time employees and hire contractors. Our employees
are not represented by any collective bargaining agreement, and we have never
experienced a work stoppage.
Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising
out of our operations. As of the date of this Prospectus, we are not engaged in
any legal proceedings that are expected, individually or in the aggregate, to
have a material adverse effect on our business, financial condition or results
of operations.
26
MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth certain information regarding our directors,
executive officers and certain key employees as of November 30, 2005:
NAME AGE POSITION
Naveen S. Bisht 41 Founder, President, Chief Executive
Officer, and Director
Tsuyoshi Taira 65 Chairman of the Board of Directors
Richard Berman (1)(2) 63 Director
William Boller (1)(2)(3) 58 Director
William E. O'Connor (1)(3) 66 Director
Rahul Vaid 30 Director
Gautam Chanda 47 Vice President Business Development &
Vertical Markets
Hari Hirani 49 Vice President Engineering
Dr. Raj Jain 53 Co-Founder and Chief Technology Officer
Michael Meyer 54 Chief Financial Officer
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating and Governance Committee
The following sets forth biographical information concerning the newly elected
directors and principal officers:
Naveen S. Bisht founded Nayna in February 2000 and has served as a member of our
Board of Directors and as our Chief Executive Officer since that time. From 1995
to 1997 Mr. Bisht was the Founder, President and CEO of Ukiah Software, Inc., a
security management software company that was sold to Novell, Inc. in 1999. He
is also Founder/Partner of Luxmi Ventures LLC, a seed stage venture fund focused
on the network infrastructure market. Mr. Bisht attended the Ph.D. Program at
University of California, Santa Barbara; holds a MS from Texas Tech University;
and earned a MS and BSME from the Birla Institute of Technology & Science,
Pilani, Incia. Mr. Bisht is not a nominee or director of any other reporting
company.
Tsuyoshi Taira has served as Chairman of our Board of Directors since April 2005
and has served on the Board of Directors of our predecessor, Nayna Networks,
Inc. a Delaware corporation, since February 2000. Since January, 1996, Mr. Taira
has been the CEO of Tazan International Inc, a venture capital and management
consultancy firm. Currently he serves on the board of Silicon Storage Technology
Inc. (NASDAQ: SSTI), a flash memory company) and the boards of several private
technology companies. Mr. Taira also has worked at Sanyo Semiconductor, most
recently as Chairman and at Fairchild Semiconductor. Mr. Taira graduated from
Tokyo Metropolitan University with a BSEE. He also received an Honorary Doctor
of Humanities from Newport Asia Pacific University in March 2000.
27
Richard Berman has served as a member of our Board of Directors since April
2005. Mr. Berman currently serves as a director for Internet Commerce
Corporation (Nasdaq: ICCA), GVI Security Solutions, Inc. (OTC: GVIS.OB), Dyadic
International, Inc. (OTCV: DYAD), MediaBay, Inc. (Nasdaq: MBAY), NexMed, Inc.
(Nasdaq: NEXM), National Investment Managers (OTC: NIVM.OB) and International
Microcomputer Software, Inc. (OTC: IMSI). From 1975 to 1982 Mr. Berman worked at
Bankers Trust Company as the Senior Vice President, Head of Merger and
Acquisition and Leverage Buyout Departments. Previous to that, Mr. Berman worked
at Norton Simon, Inc. from 1970 to 1974 as the Director of Mergers and
Acquisitions. Mr. Berman earned a B.S. and M.B.A. from NYU, where he is a past
director of the Stern School of Business. He also has US and foreign law degrees
from Boston College and The Hague Academy of International Law, respectively.
William Boller has served as a member of our Board of Directors since April
2005. From 2000 to the present, Mr. Boller has worked at Agilent Technologies as
the Vice President & GM, World-Wide Order Fulfillment & Manufacturing,
Communications Solutions Group. From 1971 to 1994 Mr. Boller worked at Hewlett
Packard, most recently as the Senior Managing Director, Global Supply Chain
Operations. Mr. Boller currently serves as a director for Westt Inc., elnnovate
Inc. and the Military Vehicle Technology Foundation. Mr. Boller received a B.S.
in Mechanical Engineering from Stanford University, a M.S. in Mechanical
Engineering from the University of Southern California and an MBA from Stanford
University.
William E. O'Connor has served as a member of our Board of Directors since April
2005. From November 2003 to the present, Mr. O'Connor has served as the
President and Chief Executive Officer of MicroBarrier Technologies, a developer
and marketer of patented systems and products that control the flow of fluids.
From February, 2001 to October, 2003, Mr. O'Connor served as the Executive Vice
President, Chief Financial Officer of and Consultant to Arcsoft, Inc., a digital
imaging technology software company. From 1997 to 2001, Mr. O'Connor served as
the Executive Vice President and Chief Financial Officer of iLogistix (Software
Logistics Corporation), a global supply chain management and e-fulfillment
company. Mr. O'Connor received a BBA in Accounting and Management from St.
Francis College, an MBA from the Rochester Institute of Technology and is a
certified public accountant in the State of New York.
Rahul Vaid has served as a member of our Board of Directors since April 2005 and
has served on the Board of Directors of our predecessor, Nayna Networks, Inc. a
Delaware corporation. Mr. Vaid is a general partner with Pacesetter Capital
Group, which he joined in January 2001. He has previously been Vice President of
Investments at Doublespace LLC, an early stage investment firm that invested in
media and telecommunications ventures in the U.S. and Europe. Mr. Vaid was a
founding member of Wit Capital's (now Soundview Technology Group - Nasdaq: SNDV)
investment banking group where he served as Vice President of Investment
Banking. Mr. Vaid holds an MEM (a joint business degree) and an MS from
Dartmouth College, a BS degree from Government College of Engineering Pune,
India, and an Advanced Diploma in Enterprise Systems from N-IIT, India. Mr. Vaid
is not a nominee or director of any other reporting company.
Gautam Chanda has served as our Vice President, Business Development since May
2004. From August, 1999 to February, 2004, Mr. Chanda was co-founder, President,
and CEO of Accordion Networks, a computer networking company. He was also the
principal founder and VP of Engineering at Mayan Networks, a computer networking
company. Mr. Chanda holds a BSEE from the Birla Institute of Technology and
Science in Pilani, India and an MSEE from the Polytechnic Institute of NY at
Brooklyn.
Hari Hirani has served as our Vice President, Engineering since May 2003. From
August 2000 to January 2003, Mr. Hirani was Vice President, Engineering for
NtechRA, Inc. From 1999 to 2000, he was the Director of Engineering for HAL
Computers (a division of Fujitsu); from 1997 to 1998, he was the Director of
Engineering for ADC Telecommunications; and prior to 1997 he was the Director of
Engineering for Telco Systems. Mr. Hirani holds an MSEE (Computer and
Information Engineering) from the University of Florida and BSEE from MS
University, India.
Dr. Raj Jain founded Nayna in Nayna in February 2000 and has served as our Chief
Technical Officer since that time. In August 2005, Dr. Jain accepted a
professorship at Washington University in St. Louis, Missouri, and since that
time has been devoting one day a week to his duties as Chief Technical Officer.
Dr. Jain had previously been a Professor of Computer Science at Ohio State
University and a Senior Consulting Engineer at Digital Equipment Corporation.
Dr. Jain received his Ph.D. in Computer Science from Harvard University.
28
Michael Meyer has served as our Chief Financial Officer since January 2005. From
April 2000 to March 2004, Mr. Meyer was the Chief Executive Officer of AirLink
Communications, a wireless data solutions company. In 1999, he was at LuxN, a
fiber optic equipment startup. From 1996 to 1998 he was the VP Finance and
Operations for Sierra Wireless, a wireless modem manufacturer. Mr. Meyer
attended the MBA program at Simon Fraser University and holds a CMA from the
Society of Management Accountants.
Each director will serve until his successor is elected at the annual meeting of
shareholders or until his earlier death, resignation or removal and, subject to
the terms of any employment agreement with us, each executive officer serves at
the pleasure of the Board of Directors. None of the our directors and officers
has been convicted in a criminal proceeding, excluding traffic violations or
similar misdemeanors, or has been a party to any judicial or administrative
proceeding (except for matters that were dismissed without sanction or
settlement) during the past five years, that resulted in a judgment, decree or
final order enjoining the person from future violations of, or prohibiting
activities subject to, federal or state securities laws, or a finding of any
violation of federal or state securities laws.
Board Committees
We currently have three committees of our Board of Directors: the Audit
Committee, the Compensation Committee and the Nominating and Corporate
Governance Committee.
The Audit Committee reviews, acts on and reports to the Board of Directors
regarding various auditing and accounting matters, including the selection of
our independent auditors, the monitoring of the rotation of the partners of the
independent auditors, the review of our financial statements, the scope of the
annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices. There are currently three
members of the Audit Committee, Messrs. Berman, Boller and O'Connor. Mr.
O'Connor serves as the chairperson of the Audit Committee.
The Compensation Committee determines the salaries and incentive compensation of
our officers and provides recommendations for the salaries and incentive
compensation of our other employees. There are currently two members of the
Compensation Committee, Messrs. Berman and Boller. Mr. Berman serves as the
chairperson of the Compensation Committee.
The Nominating and Governance Committee ensures that our Board of Directors is
properly constituted to meet its fiduciary obligations to our shareholders and
that we have and follow appropriate corporate governance standards. There are
currently two members of the Nominating and Governance Committee, Messrs. Boller
and O'Connor. Mr. Boller serves as the chairperson of the Nominating and
Governance Committee.
CODE OF ETHICS
The Board of Directors adopted a code of ethics on May 17, 2005. A copy may be
obtained by sending a written request to the Company.
DIRECTORS' COMPENSATION
Directors who are also our employees receive no additional compensation for
serving on the Board. Upon election to our Board of Directors, each Non-employee
Director receives an option exercisable for the purchase of 150,000 shares of
our Common Stock, pursuant to the terms and conditions of our Stock Option Plan.
This initial option grant vests quarterly over a period of three years, provided
that the Non-employee Director continues to provide service to us at each such
date. At each Annual Meeting, each Non-Employee Director receives an option
exercisable for the purchase of 25,000 shares of our Common Stock, pursuant to
the terms and conditions of our Stock Option Plan. This annual option grant
vests in full on the one-year anniversary of the grant date, provided that the
Non-employee Director continues to provide service to us on such date.
Additionally, the chairperson of our Audit Committee receives an option
exercisable for the purchase of 10,000 shares of our Common Stock and the
chairpersons of our Compensation Committee and our Nominating and Governance
Committee each receive an option exercisable for the purchase of 5,000 shares of
our Common Stock, all pursuant to our Stock Option Plan.
29
Each of the chairperson grants vests in full on the one-year anniversary of the
grant date, provided that the Non-employee Director continues to provide service
to us on such date. Our Directors who are also employees may participate in our
Stock Option Plan as described under "Executive Compensation." The following
table sets forth the aggregate number of options granted to each non-employee
director as of November 30, 2005.
Non-employee director Shares Exercise Price
- --------------------- ------ --------------
Tsuyoshi Taira 59,674 $0.151
Richard Berman(1) 155,000 $1.69
William O'Connor(2) 160,000 $1.69
William Boller(3) 155,000 $1.69
In addition, on September 13, 2005, the Board of Directors agreed to issue, to
each non-employee director, a total of 100,000 shares of common stock in
quarterly increments over two years, with the first quarterly issuance to occur
in January 2006.
Executive Officers' Compensation
The following table sets forth information for the three most recently completed
fiscal years concerning the compensation of: (i) the Chief Executive Officer;
and (ii) all other executive officers of the Company who earned over $100,000 in
salary and bonus in the fiscal year ended December 31, 2004. We refer to these
individuals in this prospectus as the "Named Executive Officers."
- ----------------------------------------------------
(1) Mr. Berman became a director on May 17, 2005
(2) Mr. O'Connor became a director on May 17 2005
(3) Mr. Boller became a director on May 17, 2005
30
SUMMARY COMPENSATION TABLE
Long Term
Compensation
------------
Annual Compensation Awards
----------------------------------------- ------------
Shares
Other Annual Underlying All Other
Name and Principal Position Year Salary(1) Bonus(1) Compensation(2) Options Compensation(3)
- --------------------------------- ---- --------- --------- --------------- ------------- ---------------
Naveen S. Bisht 2004 $105,384 $ $ 1,400,978 $
President, Chief Executive 2003 $141,634 $ $ 5,967 $
Officer and Director 2002 $150,000 $ $ $
Gautam Chanda 2004 $35,030 $ $ 388,879 $
Vice President Business 2003 $ $ $ $
Development & Vertical Markets 2002 $ $ $ $
Hari Hirani 2004 $105,384 $ $ 304,951 $
Vice President Engineering 2003 $87,980 $ $ 105,425 $
2002 $ $ $ $
Dr. Raj Jain 2004 $105,384 $ $ 342,562 $
Chief Technology Officer 2003 $141,634 $ $ 5,967 $
2002 $150,000 $ $ $
Michael K. Meyer 2004 $0 $ $ $
Chief Financial Officer 2003 $0 $ $ $
2002 $0 $ $ $
Option Grants in Last Fiscal Year
The following table sets forth certain information for the Named Executive
Officers with respect to grants of options during the year ended December 31,
2004.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
----------------------------------------------------------
% of Total Potential Realized Value at
Number of Options Assumed Annual Rates of
Shares Granted to Stock Price Appreciation for
Underlying Employees Exercise Option Term(1)
Options in Fiscal Price Expiration -----------------------------
Name Granted(2) Year Per Share(3) Date 5% 10%
- ---------------------------- ------------------ ------------ ------------ ---------- ------------- -------------
Naveen S. Bisht 1,400,978 38.0 $0.151 June 2014 $ 132,880 $ 336,744
Gautam Chanda 388,879 10.6 $0.151 June 2014 $ 36,884 $ 93,472
Hari Hirani 304,951 8.3 $0.151 June 2014 $ 28,924 $ 73,299
Dr. Raj Jain 342,562 9.3 $0.151 June 2014 $ 32,491 $ 82,339
Michael K. Meyer
(1) Potential gains are net of exercise price, but before taxes
associated with the exercise. These amounts represent certain
hypothetical gains based on assumed rates of appreciation, based on
SEC rules, and do not represent our estimate or projection of future
prices of our common stock. Actual gains, if any, on stock option
exercises are dependent on our future performance, overall market
conditions and the optionees' continued employment through the
vesting period. Accordingly, the gains reflected in this table may
not be achieved.
31
(2) Generally options vest over four years, at a rate of 25% of the
shares subject to the option on the first anniversary of the date of
grant and then at a rate of 1/48th per month thereafter, subject to
the optionee continuing to be a service provider to the Company
during that time period. Options are exercisable at any time after
vesting has occurred, provided that if an optionee's status as a
service provider to the Company is terminated, for reasons other
than death or disability, such optionee must exercise the option
within the period of time specified in the applicable stock option
agreement, or in the absence of a specified time in the stock option
agreement, within three (3) months of such termination. If an
optionee's status as a service provider to the Company is terminated
as a result of death or disability, such optionee's options must be
exercised within the time period specified in the applicable stock
option agreement, or in the absence of a specified time period,
within twelve (12) months of such termination. Applicable exercise
prices for options are based on the closing sales price of our
common stock in trading on the day before the date of grant.
(3) All options were granted at an exercise price equal to the fair
market value of our common stock on the date of grant as determined
by our Board of Directors.
STOCK OPTION PLAN
In May of 2000, our board of directors and shareholders adopted the 2000 Stock
Option Plan (the "Plan"). The following description of our Plan is a summary and
qualified in its entirety by the text of the Plan. The purpose of the Plan is to
enhance our profitability and stockholder value by enabling us to offer stock
based incentives to employees, directors and consultants. The Plan authorizes
the grant of options to purchase shares of our common stock to employees,
directors and consultants. Under the Plan, we may grant incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986 and
non-qualified stock options. Incentive stock options may only be granted to our
employees.
The number of shares available for options under the Plan is 5,967,480. As of
December 31, 2004, 867,989 options were available for future grants. The options
under the Plan vest over varying lengths of time pursuant to various option
agreements that we have entered into with the grantees of such options.
The Plan is administered by the Board of Directors. Subject to the provisions of
the Plan, the Board of Directors has authority to determine the employees,
directors and consultant who are to be awarded options and the terms of such
awards, including the number of shares subject to such options, the fair market
value of the common stock subject to options, the exercise price per share and
other terms.
Incentive stock options must have an exercise price equal to at least 100% of
the fair market value of a share on the date of the award and generally cannot
have a duration of more than 10 years. If the grant is to a stockholder holding
more than 10% of our voting stock, the exercise price must be at least 110% of
the fair market value of a share on the date of grant. Terms and condition of
award are set forth in written agreements between the Company and the respective
option holders. Awards under the Plan may not be made after the tenth
anniversary of the date of its adoption but awards granted before that date may
extend beyond that date.
Optionees have no rights as stockholders with respect to shares subject to
option prior to the issuance of shares pursuant to the exercise thereof. An
option becomes exercisable at such time and for such amounts as determined by
the Board of Directors. An optionee may exercise a part of the option from the
date that part first becomes exercisable until the option expires. The purchase
price for shares to be issued to an employee upon his exercise of an option is
determined by the Board of Directors on the date the option is granted. The Plan
provides for adjustment as to the number and kinds of shares covered by the
outstanding option and the option price therefore to give effect to any stock
dividend, stock split, stock combination or other reorganization.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
32
During the last three fiscal years, Tsuyoshi Taira, Chairman of our board of
directors, has loaned us (including our predecessor Nayna Networks, Inc., a
Delaware corporation) an aggregate of $718,765. In connection with these
transactions, we have issued Mr. Taira warrants to purchase up to 19,996 shares
of our common stock. In connection with the filing of this registration
statement, $588,785 of such loans has been converted into common stock at a
price of $1.00 per share, and we have agreed to register the shares pursuant to
this registration statement.
Various companies, as set out below, beneficially controlled by Pacesetter
Capital have loaned us funds over the last three years. Power Equities loaned
our predecessor Nayna Networks, Inc., a Delaware corporation, $250,000, which
has been converted into common stock at a price of $1.00 per share, and we have
agreed to register the shares pursuant to this registration statement. In
addition, Alliance Enterprise Corporation loaned us $100,000 at 8% interest, per
annum, and received the rights to purchase 19,084 of common stock pursuant to a
warrant issued at the time of the loan. In addition, Mesbic Ventures loaned us
$100,000 at 8% interest, per annum, and also received the rights to purchase
105,258 of common stock pursuant to a warrant issued at the time of the loan.
Rahul Vaid, a principal of Pacesetter Capital, served on our Board of Directors
during these transactions.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us with respect to
the beneficial ownership of our common stock as of October 31, 2005 by (i) all
persons who are known to us to be beneficial owners of five percent or more of
the common shares, (ii) each of our Directors, (iii) the Named Executive
Officers named in the Executive Compensation section of this prospectus and (iv)
all current Directors and executive officers as a group.
Number of Shares
Beneficially
Beneficial Owner Owned Percent
- ----------------------------------------------------------------- ------------------------ ------------------
Pacestter/ MVHC, Inc. (1) 4,423,390 12.59%
2435 North Central Expressway, Suite 200
Richardson TX 75082
Ignite Ventures (2) 4,360,092 12.14%
225 Shoreline Drive #510
Redwood City, CA 94065
Apex Ventures (3) 4,119,982 11.47%
233 South Wacker Drive, Suite 9600
Chicago, Il 60606
Eric McAfee (4) 3,725,000 10.37%
10600 North DeAnza Blvd., # 250
Cupertino, CA 95014
Berg McAfee Companies, LLC (5) 3,000,000 8.35%
10600 North DeAnza Blvd. #250
Cupertino, CA 95014
MKS Ventures, LLC (6) 2,785,139 7.75%
3320 Baker Street
San Francisco, CA 94123
Naveen S. Bisht (7) 2,273,220 6.33%
Gautam Chanda (8) 388,879 1.08%
Hari Hirani (9) 410,377 1.14%
Dr. Raj Jain (10) 945,277 2.63%
Michael Meyer (11) 350,000 *
Tsuyoshi Taira (12) 1,174,475 3.55%
Richard Berman (13) 155,000 *
33
William O'Connor (14) 160,000 *
William Boller (15) 155,000 *
- ----------------------------------------------------------------- ------------------------ ------------------
Rahul Vaid (1) 4,523,390 12.59%
- ----------------------------------------------------------------- ------------------------ ------------------
Directors and executive officers as a group 10,435,616 30.44%
(10 persons)
- ----------------------------------------------------------------- ------------------------ ------------------
* Less than 1.0%
(1) - 3,647,590 shares held by Alliance Enterprise Corporation, and
- - 206,606 shares held by Mesbic Ventures, Inc.
each of which is an Small Business Investment Company and a wholly owned
affiliate of Pacesetter /MVHC, Inc. ("PMVHC"), and through an investment
committee, exercises sole voting and investment power with respect to all
shares of record held by these entities. Individually, no stockholder,
director or officer of PMVHC has or shares such voting or investment
power. Also, includes 565,614 shares held by Pacesetter Growth Fund, L.P.,
which shares common management with PMVHC and for which PMVHC is a limited
partner. Mr. Vaid, a Senior Vice President of PMVHC, disclaims beneficial
ownership of shares held by these entities except to the extent of his
pecuniary interest in these entities and the 3,580 shares Mr. Vaid
personally holds.
(2) Includes:
- 4,350,012 shares held by Ignite Ventures II, L.P.,
- 7,192 shares held by Ignite Ventures I, L.P., and
- 1,060 shares held by Ignite Entrepreneurs, L.P.
each of which is an affiliate of Ignite Associates LLC, which also holds
1,828 shares directly. Ignite Associates LLC is the general partner of
each of these entities, and through an executive committee, exercises sole
voting and investment power with respect to all shares of record held by
these entities. Individually, no stockholder, director or officer of
Ignite Associates LLC has or shares such voting or investment power.
(3) Includes:
- 2,744,148 shares held by Apex Investment Fund V, L.P.,
- 1,335,369 shares held by Apex Investment Fund IV, L.P., and
- 40,465 shares held by Apex Strategic Partners IV, LLC
Apex Management V, LLC is the general partner of Apex Investment Fund V,
L.P. and Apex Management IV, LLC is the general partner of Apex Investment
Fund IV, L.P. and Apex Strategic Partners IV, LLC. Apex Management V, LLC
and Apex Management IV, LLC, each through an executive committee,
exercises sole voting and investment power with respect to all shares of
record held by Apex Investment Fund V, L.P and Apex Investment Fund IV,
L.P. and Apex Strategic Partners IV, LLC, respectively. Individually, no
stockholder, director or officer of Apex Management V, LLC or Apex
Management IV, LLC has or shares such voting or investment power.
34
(4) Includes:
- 3,000,000 shares held by Berg McAfee Companies, LLC,
- 500,000 shares held by McAfee Capital, LLC
- 25,000 shares held by Cagen McAfee Capital Partners, and
- 200,000 shares held by P2 Capital, LLC
Mr. McAfee is a Managing Partner of Berg McAfee Companies, LLC and
Cagen McAfee Capital Partners, each of which exercises sole voting and
investment power with respect to all shares it holds of record through
an executive committee. Individually, no stockholder, director or
officer of Berg McAfee Companies, LLC or Cagen McAfee Capital Partners
has or shares such voting or investment power. Mr. McAfee disclaims
beneficial ownership of shares held by Berg McAfee Companies, LLC and
Cagen McAfee Capital Partners except to the extent of his pecuniary
interest in those entities. Mr. McAfee is the sole Managing Partner of
McAfee Capital, LLC. In this capacity, Mr. McAfee exercises sole voting
and investment power with respect to all shares of record held by
McAfee Capital, LLC. Mr. McAfee's spouse is the sole Managing Partner
of P2 Capital, LLC. In this capacity, she exercises sole voting and
investment power with respect to all shares of record held by P2
Capital, LLC. Mr. McAfee disclaims beneficial ownership of shares held
by P2 Capital, LLC.
(5) Berg McAfee Companies, LLC exercises sole voting and investment power
with respect to all shares it holds of record through an executive
committee. Individually, no stockholder, director or officer of Berg
McAfee Companies, LLC has or shares such voting or investment power.
(6) Includes 1,857,054 shares held by MKS Ventures, LLC and 198,916 shares
subject to immediately exercisable options, of which 87,026 shares will
be vested within 60 days after October 31, 2005 held by Nicholas
Mitsakos, the sole Managing Member of MKS Ventures, LLC. In his
capacity as sole managing member, Mr. Mitsakos exercises sole voting
and investment power with respect to all shares of record held by MKS
Ventures.
(7) Includes 1,208,030 shares subject to immediately exercisable options,
of which 739,902 shares will be vested within 60 days after October 31,
2005. Also includes 5,966 shares held in trust for the minor children
of Mr. Bisht, of which he disclaims beneficial ownership.
(8) Represents 388,879 shares subject to immediately exercisable options,
163,276 of which will be vested within 60 days after October 31, 2005.
(9) Represents 410,377 shares subject to immediately exercisable options, of
which 244,493 shares will be vested within 60 days after October 31, 2005.
(10) Includes 531,716 shares subject to immediately exercisable options, of
which 308,529 shares will be vested within 60 days after October 31, 2005.
(11) Includes 250,000 shares subject to the company's right to repurchase
unvested shares upon termination of employment or other service at a
price equal to the purchase price and 100,000 shares subject to
immediately exercisable options, of which 25,000 will be vested within
60 days after October 31, 2005.
(12) Includes 59,675 shares subject to immediately exercisable options.
(13) Includes 155,000 shares subject to immediately exercisable options, 25,000
of which will be vested within 60 days after October 31, 2005.
35
(14) Includes 160,000 immediately exercisable options, 25,000 of which will
be vested within 60 days after October 31, 2005.
(15) Includes 155,000 immediately exercisable options, 25,000 of which will be
vested within 60 days after October 31, 2005.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Common shares subject to options or warrants that are
currently exercisable or exercisable within 60 days of October 31, 2005, are
deemed to be outstanding and to be beneficially owned by the person or group
holding such options or warrants for the purpose of computing the percentage
ownership of such person or group but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person or group.
Unless otherwise indicated, the address for each of the individuals listed in
the table is care of Nayna Networks, Inc., 4699 Old Ironsides Drive, Suite 420,
Santa Clara, CA 95054. Unless otherwise indicated by footnote, the persons named
in the table have sole voting and sole investment power with respect to all
common shares shown as beneficially owned by them, subject to applicable
community property laws. Percentage of beneficial ownership is based on
35,927,504 shares of our common stock outstanding as of October 31, 2005.
SELLING STOCKHOLDERS
We have prepared this prospectus to allow the selling stockholders or their
pledges, donees, transferees or other successors in interest, to sell up to
38,821,841 shares of our common stock, 29,752,066 of which they may acquire
through conversion of convertible notes and 6,630,990 of which they may acquire
through the exercise of warrants. All of the common stock offered by this
prospectus is being offered by the selling stockholders for their own accounts.
The selling stockholders are investors from our November 2005 private placement,
placement agents who helped us identify those investors, investors who were
issued warrants in connections with loans made during 2005 and investors who
received shares of our stock upon conversion of their debt in connection with
the filing of this registration statement.
November Private Placement
In November, we entered into a securities purchase agreement which provides for
the purchase and sale of convertible notes and warrants. Under the securities
purchase agreement, we will receive up to $4,800,000 from the selling
stockholders, and they will receive in return a corresponding amount of our 8%
callable secured convertible notes and warrants to purchase up to an aggregate
of 2,400,000 shares of common stock. In addition, we also issued 100,000 shares
of our common stock and warrants to purchase 540,000 shares of common stock to
two selling stockholders, Laidlaw & Company and Stonegate Securities, LLC who
helped to find purchasers for our November 2005 private placement. The terms of
the notes provide for full payment on or before the third anniversary date of
issuance, with interest of 8% per annum, which may be converted at any time at
the lesser of
(i) $0.68 or (ii) the average of the lowest three inter-day trading prices
during the twenty trading days immediately prior to the date the conversion
notice is sent, discounted by forty-five percent. The terms of the warrants
entitle each selling stockholder to purchase shares of our common stock at a
price equal to $1.00 per share before the fifth anniversary date of the
issuance. Under the related registration rights agreement, we agreed to register
all of the shares underlying such convertible notes and warrants to allow the
selling stockholders to sell them in a public offering or other distribution.
On November 17, 2005, the investors purchased (i) $1,600,000 of the 8%
convertible notes, none of which have been converted, and (ii) warrants to
purchase up to 800,000 shares, none of which have been exercised. In addition,
we have issued 100,000 shares of common stock and warrants to purchase up to an
additional 540,000 shares of common stock to two selling stockholders, Laidlaw &
Company and Stonegate Securities, LLC, who helped to identify purchasers for our
this private placement. Under the terms of the securities purchase agreement,
the investors are obligated to purchase an additional $1,600,000 of our 8% notes
and warrants to purchase 800,000
36
shares of our common stock within five days following the date this registration
statement is filed with the Securities and Exchange Commission and an additional
$1,600,000 of our 8% notes and warrants to purchase 800,000 shares of our common
stock within five days following the date this registration statement is
declared effective by the Securities and Exchange Commission and in each case
upon satisfaction of additional conditions by the Company. The additional
conditions that must be satisfied by the Company prior to the purchase by the
investors of the remaining convertible notes and warrants consist of the
following: (i) the Company's representations and warranties contained in the
securities purchase agreement are true and correct in all material respects on
the date of purchase; (ii) there is no litigation, statute, rule, regulation,
executive order, decree, ruling or injunction that has been enacted, entered,
promulgated or endorsed by or in any court or government authority of competent
jurisdiction or any self-regulatory organization having requisite authority
which prohibits the transactions contemplated by the securities purchase
agreement; (iii) no event has occurred which could reasonably be expected to
have a material adverse effect on the Company; (iv) the shares of common stock
underlying the convertible notes and warrants have been authorized for quotation
on the Over-The-Counter Bulletin Board, or OTCBB, and trading in our common
stock on the OTCBB has not been suspended by the Securities and Exchange
Commission or the OTCBB; (v) the Company shall provide a legal opinion to the
investors; and (vi) the Company shall provide certain certificates of its
officers to the investors regarding the Company's capitalization and the truth
and correctness of its representations and warranties in the securities purchase
agreement. If the registration statement is not declared effective, the
investors have no obligation to purchase the remaining 8% convertible notes or
the related warrants.
If all $4,800,000 in notes were converted and all 2,940,000 warrants were
exercised on December 15, 2005, a total of 17,816,033 shares of common stock
would be required for issuance.
Debt Transactions
During 2005, we borrowed $1,209,981 from accredited investors. In connection
with these loans, we issued warrants to purchase 750,990 shares of our common
stock and agreed to register these with the Securities and Exchange Commission.
In addition to the $1.2 million, we had previously borrowed from accredited
investors $2,338, 785, which we had agreed to convert at $1.00 per share and
register with the Securities and Exchange Commission. In connection with the
filing of this registration statement, we have converted this debt into
2,338,785 shares of our common stock.
The following table sets forth information with respect to the shares of common
stock beneficially owned by the selling stockholders as of the date of this
prospectus. The selling stockholders provided us with the information included
in the table below. To our knowledge and except as described below, each of the
selling stockholders has sole voting and investment power over the common stock
listed in the table below. Except as described below, no selling stockholder has
been one of our officers or our directors or, to our knowledge, has had a
material relationship with us during the last three years, other than as an
owner of our common shares or other securities.
37
Number of Shares
Beneficially Number of Shares
Owned Prior to the Offered by this Shares Beneficially Owned
Beneficial Owner Offering Prospectus (1) after the Offering (2)
- ---------------------------------- ------------------------- ------------------------ --------------------------------
Number Percent
------------- --------------
AJW Partners, LLC (3) 2,569,810 (4) 2,569,810 0 0
AJW Qualified Partners, LLC (3) 7,039,983 (5) 7,039,983 0 0
AJW Offshore, Ltd. (3) 11,661,322 (6) 11,661,322 0 0
New Millennium Capital Partners 323,926 (7) 323,926 0 0
II, LLC (3)
Whalehaven Capital Fund Ltd. 4,319,008 (8) 4,319,008 0 0
Nite Capital, LP 2,159,504 (9) 2,159,504 0 0
Alpha Capital AG 2,159,504(10) 2,159,504 0 0
Bristol Investment Fund Ltd. 2,159,504(11) 2,159,504 0 0
Harborview Master Fund LP 2,159,504(12) 2,159,504 0 0
Laidlaw & Company 760,000 760,000 0 0
Robert R. Blakely Jr. 140,000 140,000 0 0
Jesse Shelmire IV 140,000 140,000 0 0
Scott R. Griffith 140,000 140,000 0 0
Alliance Enterprise Corporation 3,735,167 87,577 3,647,590 4.84%
Power Equities 250,000 250,000 0 0
Mesbic Ventures 243,371 36,765 206,606 *
Ignite Group 4,759,533 399,441 4,360,092 5.79%
Apex Investment Fund V 2,944,148 200,000 2,744,148 3.64%
Tsuyoshi Taira 1,783,256 608,781 1,174,475 1.56%
Investment Partnership Tsunami 2000-No 1 0 419,800 0 0
Mei Lin Huang 0 200,000 0 0
Ichiro Saji 0 300,000 0 0
Michael Brown 0 250,000 0 0
Manoj Goel 15,509 9,542 5,967 *
- -------------------------------------------------------------------------------------------------------------------------------
* less then 1%
The number of shares set forth in the table for the selling stockholders
represents an estimate of the number of shares of common stock to be offered by
the selling stockholders. The actual number of shares of common stock issuable
upon conversion of the notes and exercise of the related warrants is
indeterminate, is subject to adjustment and could be materially less or more
than such estimated number depending on factors which cannot be predicted by us
at this time including, among other factors, the future market price of the
common stock. Under the terms of the notes, if the notes had actually been
converted on December 15, 2005, the conversion price would have been $0.322667.
38
Under the terms of the notes and the related warrants, the notes are convertible
and the warrants are exercisable by any holder only to the extent that the
number of shares of common stock issuable pursuant to such securities, together
with the number of shares of common stock owned by such holder and its
affiliates (but not including shares of common stock underlying unconverted
shares of notes or unexercised portions of the warrants) would not exceed 4.99%
of the then outstanding common stock as determined in accordance with Section
13(d) of the Exchange Act. Accordingly, the number of shares of common stock set
forth in the table for the selling stockholders exceeds the number of shares of
common stock that the selling stockholders could own beneficially at any given
time through their ownership of the notes and the warrants. In that regard, the
beneficial ownership of the common stock by the selling stockholders set forth
in the table is not determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended.
(1) Please note that the numbers included in this column exceed both the number
of shares currently beneficially owned by each selling stockholder and the
number of shares each stockholder could acquire upon full conversion of the
notes and warrants each will hold following completion of the final investment.
The numbers included in this column equal 200% of the shares required to be
registered upon conversion of the investor's respective ownership of the
aggregate principal amount of $4,800,000 of convertible notes, based on a
conversion price of $0.322667 per share, and (ii) warrants to purchase an
aggregate of 2,940,000 shares of our common stock at a fixed exercise price of
$1.00 per share as of December 15, 2005. Based on a conversion price of
$0.322667 per share, 14,876,033 shares of our common stock would be issuable
upon the conversion of the $4,800,000 notes and 2,940,000 shares of our common
stock would be issuable upon the exercise of warrants for a total of 17,816,033
shares. Accordingly, 200% of the total amount of shares issuable upon conversion
of the notes and exercise of warrants would be 35,632,066 The number of shares
beneficially owned prior to the offering reflected above for each investor is
calculated as follows:
((amount of notes owned/$0.322667) x 200%) + (number of shares subject to the
warrants owned x 200%)
Because the number of shares of common stock issuable upon conversion of the
convertible notes is dependent in part upon the market price of the common stock
prior to a conversion, the actual number of shares of common stock that will be
issued upon conversion will fluctuate daily and cannot be determined at this
time. However the selling stockholders have contractually agreed to restrict
their ability to convert or exercise their warrants and receive shares of our
common stock such that the number of shares of common stock held by them and
their affiliates after such conversion or exercise does not exceed 4.99% of the
then issued and outstanding shares of common stock.
(2) Amounts assume the sale of all of the shares offered by the selling
stockholders.
(3) The selling stockholders are affiliates of each other because they are under
common control. AJW Partners, LLC is a private investment fund that is owned by
its investors and managed by SMS Group, LLC. SMS Group, LLC, of which Mr. Corey
S. Ribotsky is the fund manager, has voting and investment control over the
shares listed below owned by AJW Partners, LLC. AJW Offshore, Ltd., formerly
known as AJW/New Millennium Offshore, Ltd., is a private investment fund that is
owned by its investors and managed by First Street Manager II, LLC. First Street
Manager II, LLC, of which Mr. Cory S. Ribotsky is the fund manager, has voting
and investment control over the shares listed below owned by AJW Offshore, Ltd.
AJW Qualified Investment Partners, LLC, formerly known as Pegasus Capital
Partners, LLC, is a private investment fund that is owned by its investors and
managed by AJW Manager, LLC. AJW Manger, LLC, of which Mr. Corey S. Ribotsky and
Mr. Lloyd A. Groveman are the fund managers, has voting and investment control
over the shares listed below owned by AJW Qualified Partners, LLC. New
Millennium Capital Partners II, LLC, is a private investment fund that is owned
by its investors and managed by First Street Manager II, LLC. First Street
Manager II, LLC, of which Mr. Corey S. Ribotsky is the fund manager, has voting
and investment control over the shares listed below owned by New Millennium
Capital Partners II, LLC. We have been notified by the selling stockholders that
they are not broker-dealers or affiliates of broker-dealers and that they
believe that they are not required to be broker-dealers.
(4) Includes (i) 2,212,810 shares of common stock issuable upon conversion of
secured convertible notes, and (ii) 357,000 shares of common stock issuable upon
exercise of common stock purchase warrants.
39
(5) Includes (i) 6,061,983 shares of common stock issuable upon conversion of
secured convertible notes, and (ii) 978,000 shares of common stock issuable upon
exercise of common stock purchase warrants.
(6) Includes (i) 10,041,322 shares of common stock issuable upon conversion of
secured convertible notes, and (ii) 1,620,000 shares of common stock issuable
upon exercise of common stock purchase warrants.
(7) Includes (i) 278,926 shares of common stock issuable upon conversion of
secured convertible notes, and (ii) 45,000 shares of common stock issuable upon
exercise of common stock purchase warrants.
(8) Includes (i) 3,719,008 shares of common stock issuable upon conversion of
secured convertible notes, and (ii) 600,000 shares of common stock issuable upon
exercise of common stock purchase warrants.
(9) Includes (i) 1,859,504 shares of common stock issuable upon conversion of
secured convertible notes, and (ii) 300,000 shares of common stock issuable upon
exercise of common stock purchase warrants.
(10) Includes (i) 1,859,504 shares of common stock issuable upon conversion of
secured convertible notes, and (ii) 300,000 shares of common stock issuable upon
exercise of common stock purchase warrants.
(11) Includes (i) 1,859,504 shares of common stock issuable upon conversion of
secured convertible notes, and (ii) 300,000 shares of common stock issuable upon
exercise of common stock purchase warrants.
(12) Includes (i) 1,859,504 shares of common stock issuable upon conversion of
secured convertible notes, and (ii) 300,000 shares of common stock issuable upon
exercise of common stock purchase warrants.
We will file a post-effective registration statement to reflect any changes in
the information regarding the selling stockholders furnished above or the
information regarding the Plan of Distribution furnished below.
DESCRIPTION OF SECURITIES
The descriptions in this section and in other sections of this prospectus of our
securities and various provisions of our articles of incorporation and our
bylaws are limited solely to descriptions of the material terms of our
securities, articles of incorporation and bylaws. Our articles of incorporation
and bylaws have been filed with the SEC as exhibits to this registration
statement of which this prospectus forms a part.
Our authorized capital stock consists of 1,000,000,000 shares of common stock,
par value $0.0001 per share. As of September 30, 2005, 35,852,504 shares of our
common stock were issued and outstanding. This excludes an aggregate of
4,987,443 shares of common stock reserved for issuance upon exercise of options
and 525,445 shares of common stock reserved for issuance upon exercise of
warrants.
Common Stock
The holders of our common stock are entitled to equal dividends and
distributions per share with respect to the common stock when, and if declared
by the Board of Directors from funds legally available therefore. No holder of
any shares of our common stock has a pre-emptive right to subscribe for any of
our securities, nor are any common stock subject to redemption or convertible
into other of our securities. Upon liquidation, dissolution or winding up of the
Company, and after payment of creditors and preferred stockholders the assets
will be divided pro-rata on a share-for-share basis among the holders of the
shares of common stock. All shares of common stock now outstanding are fully
paid, validly issued and non-assessable.
Each share of common stock is entitled to one vote with respect to the election
of any Director or any other matter upon which stockholders are required or
permitted to vote. Holders of the common stock do not have cumulative voting
rights, so the holders of more than 50% of the combined shares voting for the
election of Directors may elect all of the Directors if they choose to do so,
and, in that event, the holders of the remaining shares will not be able to
elect any members to the Board of Directors.
40
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is Interwest Transfer
Company, Inc. in Salt Lake City, Utah.
PLAN OF DISTRIBUTION
We are registering a total of 38,821,841 shares of our common stock that are
being offered by the selling stockholders. As used in this prospectus, "selling
stockholders" includes the pledgees, donees, transferees or others who may later
hold the selling stockholders' interests in the common stock. We will not
receive the proceeds from the sale of the shares by the selling stockholders.
However, some of the shares we are registering will be issued upon the exercise
of warrants held by the selling stockholders. Although the selling stockholders
are not required to exercise the warrants, if they do so we will receive the
proceeds from the exercise.
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
|X| ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
|X| block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
|X| purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
|X| an exchange distribution in accordance with the rules of the
applicable exchange;
|X| privately negotiated transactions;
|X| broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
|X| a combination of any such methods of sale; and
|X| any other method permitted pursuant to applicable law.
The shares may also be sold pursuant to Rule 144 or Regulation S. However, the
selling stockholders may not use this registration statement to cover the resale
of shares that are not issuable shortly after the effectiveness of this
registration statement. As described previously in this registration statement,
the investors are obligated to purchase to purchase an additional $1,600,000 of
our 8% notes and warrants to purchase 800,000 shares of our common stock within
five days following the date this registration statement is filed with the
Securities and Exchange Commission and an additional $1,600,000 of our 8% notes
and warrants to purchase 800,000 shares of our common stock within five days
following the date this registration statement is declared effective by the
Securities and Exchange Commission and in each case upon satisfaction of
additional conditions by the Company. Therefore, this registration statement
covers the shares of common stock underlying the notes and warrants purchased
after the effectiveness of this registration statement pursuant to the terms of
the securities purchase agreement. The selling stockholders shall have the sole
and absolute discretion not to accept any purchase offer or make any sale of
shares if they deem the purchase price to be unsatisfactory at any particular
time.
The selling stockholders may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker/dealer might be in excess of customary
commissions. Market makers and block purchasers purchasing the shares will do so
for their own account and at their own risk. It is possible that a selling
stockholder will attempt to sell shares of common stock in block transactions to
market makers or other purchasers at a price per share which
41
may be below the then market price. The selling stockholders cannot assure that
all or any of the shares offered in this prospectus will be issued to, or sold
by, the selling stockholders. The selling stockholders and any brokers, dealers
or agents, upon effecting the sale of any of the shares offered in this
prospectus may be deemed "underwriters" as that term is defined under the
Securities Act or the Exchange Act, or the rules and regulations under such
acts.
The selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Exchange Act and the rules and regulations under such act, including, without
limitation, Regulation M. These provisions may restrict certain activities of,
and limit the timing of purchases and sales of any of the shares by, the selling
stockholders or any other such person. Furthermore, under Regulation M, persons
engaged in a distribution of securities are prohibited from simultaneously
engaging in market making and certain other activities with respect to such
securities for a specified period of time prior to the commencement of such
distributions, subject to specified exceptions or exemptions. All of these
limitations may affect the marketability of the shares.
We have agreed to indemnify the selling stockholders against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the selling stockholders may be required to make in respect of such
liabilities.
POST-EFFECTIVE REGISTRATION STATEMENT NECESSITATED BY FUTURE SALES.
To the extent required, we will file a post-effective registration statement
from time to time to describe a specific plan of distribution. In connection
with distributions of such shares or otherwise, the selling stockholders may
enter into hedging transactions with broker-dealer or other financial
institutions. In connection with these transactions, broker-dealer or other
financial institutions may engage in short sales of our common stock in the
course of hedging the positions they assume with the selling stockholders. The
selling stockholders may also sell our common stock short and redeliver the
shares to close out such short positions. The selling stockholders may also
enter into option or other transactions with broker-dealers or other financial
institutions which require the delivery to the broker-dealer or other financial
institution of the shares offered in this prospectus, which shares the
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction). The selling
stockholders may also pledge their shares to a broker-dealer or other financial
institution, and, upon a default, the broker-dealer or other financial
institution may effect sales of the pledged shares pursuant to this prospectus
(as supplemented or amended to reflect such transaction). In addition, any
shares that qualify for sale pursuant to Rule 144 may be sold under Rule 144
rather than pursuant to this prospectus.
In effecting sales, brokers, dealers or agents engaged by the selling
stockholders may arrange for other brokers or dealers to participate. Brokers,
dealers or agents may receive commissions, discounts or concessions from the
selling stockholders in amounts to be negotiated prior to the sale. These
brokers or dealers, the selling stockholders, and any other participating
brokers or dealers may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales, and any such commissions,
discounts or concessions may be deemed to be underwriting discounts or
commissions under the Securities Act. The selling stockholders have advised us
that they have not entered into any agreements, understandings or arrangements
with any underwriters or broker-dealers regarding the sale of their securities,
nor is there an underwriter or coordinating broker acting in connection with the
proposed sale of shares by the selling stockholders.
If a selling stockholder enters into an underwriting agreement, the relevant
details will be set forth in a post-effective amendment to the registration
statement, rather than a prospectus supplement.
OTHER INFORMATION REGARDING FUTURE SALES
42
In order to comply with the securities laws of some states, if applicable, the
shares being offered in this prospectus must be sold in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in some states
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or a seller complies with an available exemption from the
registration or qualification requirement.
We will make copies of this prospectus available to the selling stockholders and
will inform them of the need for delivery of copies of this prospectus to
purchasers at or prior to the time of any sale of the shares offered hereby. The
selling shareholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against some liabilities,
including liabilities arising under the Securities Act.
PAYMENT OF EXPENSES
We will pay all the expenses related to the registration of the shares offered
by this prospectus, except for any underwriting, brokerage or related fees,
discounts, commissions or the fees or expenses of counsel or advisors to the
selling stockholders.
CHANGES IN ACCOUNTANTS
Effective on April 1, 2005, and as a result of the Merger, we ended the
engagement of Mantyla McReynolds, Certified Public Accountants of Salt Lake
City, Utah, as our independent certified public accountants. The decision was
approved by our Board of Directors.
The report of Mantyla McReynolds on our predecessor, Rescon Technology
Corporation's financial statements for the fiscal year ended December 31, 2003
did not contain an adverse opinion or disclaimer of opinion, other than a going
concern qualification. During Rescon's fiscal years ended December 31, 2004 and
2003 and the subsequent interim period preceding the termination, there were no
disagreements with Mantyla McReynolds on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Mantyla McReynolds, would
have caused Mantyla McReynolds to make reference to the subject matter of the
disagreements in connection with its report on the financial statements for such
years or subsequent interim periods.
The Company requested that Mantyla McReynolds furnish it with a letter addressed
to the Securities and Exchange Commission, or SEC, stating whether or not it
agrees with Rescon's statements in this Item 4.01(a). A copy of such letter,
dated April 7, 2005, has previously been filed with the SEC.
On April 1, 2005, Naresh Arora, CPA, Inc. was engaged as our new independent
certified accountant. During the two most recent fiscal years and the interim
period preceding the engagement of Naresh Arora, CPA, Inc., Rescon has not
consulted with Naresh Arora, CPA, Inc. regarding either: (i) the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on Rescon's financial
statements; or (ii) any matter that was either the subject of a disagreement or
event identified in paragraph (a)(1)(iv) of Item 304 of Regulation S-B.
LEGAL MATTERS
The validity of the issuance of the common shares offered hereby has been passed
upon for us by Hutchison & Mason PLLC, Raleigh, North Carolina.
EXPERTS
The financial statements as of December 31, 2004 and for the year ended December
31, 2004, and for the period from February 10, 2000 (date of inception) to
December 31, 2004, included in this Prospectus have been so included in reliance
on the report of Naresh Arora independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
43
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act, in connection with the offering of the common stock by the
selling stockholders. This prospectus, which is part of the registration
statement, does not contain all of the information included in the registration
statement. Some information is omitted and you should refer to the registration
statement and its exhibits. With respect to references made in this prospectus
to any contract, agreement or other document of ours, such references are not
necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract, agreement or other
document. You may review a copy of the registration statement, including
exhibits, at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the public reference room by calling the SEC at 1-800-SEC-0330.
We also file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information on file at the public reference rooms. You can also request copies
of these documents, for a copying fee, by writing to the SEC.
Our SEC filings and the registration statement can also be reviewed by accessing
the SEC's Web site at http://www.sec.gov, which contains reports, and
information statements and other information regarding registrants that file
electronically with the SEC.
44
NARESH
ARORA
certified public accountant
2350 Mission College Blvd., Suite #1160, Santa Clara, CA 95054
Phone: 408-988-2900 | Fax: 408-988-2907 | naresh@taxguru.com
To the Board of Directors
Nayna Networks, Inc.
(a company in the development stage)
We have reviewed the accompanying balance sheet of Nayna Networks, Inc., a
development stage enterprise, as of September 30, 2005 and the related
statements of operations, stock holder stockholder's (deficit) equity, and cash
flows for the quarter then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. All information included in these financial statements is
the representation of the management of Nayna Networks, Inc.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
examination in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
The accompanying financial statements for the quarter ended September 30, 2004
of Nayna Networks, Inc., were not audited or reviewed by us and accordingly, we
do not express an opinion or any other form of assurance on them.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company is in the development stage and has incurred
losses from operations that raise substantial doubt about its ability to
continue as a going concern. Management stockholder's plans in regard to these
matters are also described in Note A. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Santa Clara, California
November 14, 2005
F-1
NAYNA NETWORKS, INC.
(a development stage enterprise)
BALANCE SHEET
(in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Sept. 30,
ASSETS 2005
Current assets:
Cash and cash equivalents $ 91
Restricted cash --
Accounts receivable, net of allowance
for doubtfuls of $33 63
Prepaid expenses and other current assets 79
--------
Total current assets 234
Property and equipment, net 150
Other assets 193
Total assets $ 577
Total assets $ 577
========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Accounts payable
$ 1,294
Accrued liabilities 281
Accrued payroll liabilities 547
Notes payable 1,328
--------
Current portion of capital lease obligations
Total current liabilities 3,449
Notes payable
Bridge to common stock
Convertible debentures 2,372
--------
Total liabilities 5,821
--------
Stockholders' (deficit) equity Series D preferred stock, $0.001 par value:
Authorized shares - 52,500,000; issued and outstanding shares -
19,531,247 at December 31, 2004
(Liquidation preference $36,000) -- Common stock, $0.001 par value:
Authorized shares - 1,000,000,000; issued
and outstanding shares - 29,237,172
at September 30, 2005 30
Additional paid-in capital 51,981
Deficit accumulated during the development stage (57,255)
--------
Total stockholders' (deficit) equity (5,244)
--------
Total liabilities and stockholders' (deficit) equity $ 577
--------
See accompanied notes and acountant's review report.
F-2
NAYNA NETWORKS, INC.
(a development stage enterprise)
STATEMENTS OF OPERATIONS
(in thousands)
- --------------------------------------------------------------------------------
Cumulative
Period from
February 10,
2000 (date
of
inception)
Quarter Ended Sept. 30, to
---------------------------------- Sept. 30,
2005 2004 2005
--------------- --------------- -------------
Operating expenses:
Research and development $ 780 $ 692 $ 41,639
Business development 110 304 3,143
General and administrative 314 52 8,274
--------------- --------------- -------------
Total operating expenses 1,204 1,049 53,056
--------------- --------------- -------------
Loss from operations (1,204) (1,049) (53,056)
Interest income 0 5 2,390
Interest expense (24) (3) (872)
Gain on sale of assets - - 358
Merger related costs (8) - (243)
Impairment of goodwill and other intangible assets - - (5,834)
--------------- --------------- -------------
Net loss $ (1,235) $ (1,048) $(57,255)
=============== =============== =============
See accompanied notes and acountant's review report.
NAYNA NETWORKS, INC.
(a development stage enterprise)
Statements of Stockholders' (Deficit) Equity
For the Cumulative Period from February 10, 2000 (date of inception) to June 30, 2005
(in thousands, except share and per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Series A Redeemable Series B Redeemable
Convertible Convertible
Preferred Stock Preferred Stock
------------------------------ ----------------------------
Shares Amount Shares Amount
------------------------------------------------------------
Issuance of common stock to founders in March 2000 at
$0.001 per share for cash - $ - - $ -
Issuance of Series A redeemable convertible preferred stock
in March 2000 at $0.80 per share for cash 15,000,000 15 - -
Issuance of Series B redeemable convertible preferred stock
in December 2000 at $4.50 per share for cash,
net of $73 of issuance cost - - 7,999,997 8
Issuance of warrants to purchase Series B redeemable convertible
preferred stock in connection with an equipment lease in July 2000 - - - 180
Exercise of common stock options for cash - - - -
Repurchase of common stock issued to founders
in July 2000 at $0.001 per share for cash - - - -
Net loss and comprehensive loss - - - -
------------------------------------------------------------
Balances, December 31, 2000 15,000,000 15 7,999,997 188
------------------------------------------------------------
Issuance cost related to Series B preferred stock - - - (30)
Issuance of warrants to purchase Series B redeemable convertible
preferred stock to a lessor in July 2001 - - - 79
Compensation expense related to accelerated stock options
issued to terminated employees in september 2001 - - - -
Compensation expense related to stock option grants to
consultants in July and December 2001 - - - -
Adjustment to valuation of warrant issued to a lessor to
purchase Series B redeemable convertible preferred stock - - - (38)
Exercise of common stock options for cash - - - -
Repurchase of common stock issued to founders at
$0.10 per share for cash - - - -
Net loss and comprehensive loss - - - -
------------------------------------------------------------
Balances, December 31, 2001 15,000,000 15 7,999,997 199
------------------------------------------------------------
Repurchase of common stock for $0.10 to $0.90 per share - - - -
Exercise of common stock options for cash - - - -
Cancellation of previously issued common stock subject to restriction - - - -
Net loss - - - -
------------------------------------------------------------
Balances, December 31, 2002 15,000,000 15 7,999,997 199
------------------------------------------------------------
Issuance of Series C redeemable convertible preferred stock
for consideration other than cash in connection with
Xpeed acquisition - - - -
Issuance of common stock for consideraion other than cash
in connection with Xpeed acquisition - - - -
Exercise of common stock options for cash - - - -
Repurchase of common stock for $0.10 per share - - - -
Net loss - - - -
------------------------------------------------------------
Balances, December 31, 2003 15,000,000 15 7,999,997 199
------------------------------------------------------------
Conversion of Series A, B & C into common stock (15,000,000) (15) (7,999,997) (199)
Issuance of Series D redeemable convertible preferred stock
for cash
Issuance of Series D redeemable convertible preferred stock
for consideration other than cash in connection with note
payable to Siemens
Exercise of common stock options for cash
Issuance of common stock for consideration other than cash
on purchase of intangible assets
Net loss
------------------------------------------------------------
Balances, December 31, 2004 - - - -
------------------------------------------------------------
Adjustment for split in April 2005
Net loss for the quarter ended March 31, 2005
Net loss for the quarter ended June 30, 2005
Conversion of Series D into common stock
Repurchase of common stock for $0.10 per share
Net loss for the quarter ended September 30, 2005
------------------------------------------------------------
Balances, September 30, 2005 - - - -
------------------------------------------------------------
Series C Redeemable Series D Redeemable
Convertible Convertible
Preferred Stock Preferred Stock
---------------------------- ----------------------------
Shares Amount Shares Amount
------------------------------------------------------------
Issuance of common stock to founders in March 2000 at
$0.001 per share for cash - $ - - $ -
Issuance of Series A redeemable convertible preferred stock
in March 2000 at $0.80 per share for cash - - - -
Issuance of Series B redeemable convertible preferred stock
in December 2000 at $4.50 per share for cash,
net of $73 of issuance cost - - - -
Issuance of warrants to purchase Series B redeemable convertible
preferred stock in connection with an equipment lease in July 2000 - - - -
Exercise of common stock options for cash - - - -
Repurchase of common stock issued to founders
in July 2000 at $0.001 per share for cash - - - -
Net loss and comprehensive loss - - - -
------------------------------------------------------------
Balances, December 31, 2000 - - - -
------------------------------------------------------------
Issuance cost related to Series B preferred stock - - - -
Issuance of warrants to purchase Series B redeemable convertible
preferred stock to a lessor in July 2001 - - - -
Compensation expense related to accelerated stock options
issued to terminated employees in september 2001 - - - -
Compensation expense related to stock option grants to
consultants in July and December 2001 - - - -
Adjustment to valuation of warrant issued to a lessor to
purchase Series B redeemable convertible preferred stock - - - -
Exercise of common stock options for cash - - - -
Repurchase of common stock issued to founders at
$0.10 per share for cash - - - -
Net loss and comprehensive loss - - - -
------------------------------------------------------------
Balances, December 31, 2001 - - - -
------------------------------------------------------------
Repurchase of common stock for $0.10 to $0.90 per share - - - -
Exercise of common stock options for cash - - - -
Cancellation of previously issued common stock subject to restriction - - - -
Net loss - - - -
------------------------------------------------------------
Balances, December 31, 2002 - - - -
------------------------------------------------------------
Issuance of Series C redeemable convertible preferred stock
for consideration other than cash in connection with
Xpeed acquisition 4,680,647 - - -
Issuance of common stock for consideraion other than cash
in connection with Xpeed acquisition - - - -
Exercise of common stock options for cash - - - -
Repurchase of common stock for $0.10 per share - - - -
Net loss - - - -
------------------------------------------------------------
Balances, December 31, 2003 4,680,647 - - -
------------------------------------------------------------
Conversion of Series A, B & C into common stock (4,680,647) - - -
Issuance of Series D redeemable convertible preferred stock
for cash 18,220,425 18
Issuance of Series D redeemable convertible preferred stock
for consideration other than cash in connection with note
payable to Siemens 1,310,822 1
Exercise of common stock options for cash
Issuance of common stock for consideration other than cash
on purchase of intangible assets
Net loss
------------------------------------------------------------
Balances, December 31, 2004 - - 19,531,247 20
------------------------------------------------------------
Adjustment for split in April 2005
Net loss for the quarter ended March 31, 2005
Net loss for the quarter ended June 30, 2005
Conversion of Series D into common stock (19,531,247) (20)
Repurchase of common stock for $0.10 per share
Net loss for the quarter ended September 30, 2005
------------------------------------------------------------
Balances, September 30, 2005 - - - 0
------------------------------------------------------------
Additional
Common Stock Paid-In
--------------------------------
Shares Amount Capital
--------------------------------------------------
Issuance of common stock to founders in March 2000 at
$0.001 per share for cash 15,000,000 $ 15 $ -
Issuance of Series A redeemable convertible preferred stock
in March 2000 at $0.80 per share for cash - - 11,938
Issuance of Series B redeemable convertible preferred stock
in December 2000 at $4.50 per share for cash,
net of $73 of issuance cost - - 35,919
Issuance of warrants to purchase Series B redeemable convertible
preferred stock in connection with an equipment lease in July 2000 - - -
Exercise of common stock options for cash 4,069,000 4 403
Repurchase of common stock issued to founders
in July 2000 at $0.001 per share for cash (66,667) - -
Net loss and comprehensive loss - - -
--------------------------------------------------
Balances, December 31, 2000 19,002,333 19 48,260
--------------------------------------------------
Issuance cost related to Series B preferred stock - - -
Issuance of warrants to purchase Series B redeemable convertible
preferred stock to a lessor in July 2001 - - ## -
Compensation expense related to accelerated stock options
issued to terminated employees in september 2001 - 28 -
Compensation expense related to stock option grants to
consultants in July and December 2001 - 12 -
Adjustment to valuation of warrant issued to a lessor to
purchase Series B redeemable convertible preferred stock - - -
Exercise of common stock options for cash 93,374 0 10
Repurchase of common stock issued to founders at
$0.10 per share for cash (1,174,399) (1) (116)
Net loss and comprehensive loss - - -
--------------------------------------------------
Balances, December 31, 2001 17,921,308 58 48,154
--------------------------------------------------
Repurchase of common stock for $0.10 to $0.90 per share (997,195) (1) (100)
Exercise of common stock options for cash 100,750 0 10
Cancellation of previously issued common stock subject to restriction (1,472,500) (1) -
Net loss - - -
--------------------------------------------------
Balances, December 31, 2002 15,552,363 56 48,064
--------------------------------------------------
Issuance of Series C redeemable convertible preferred stock
for consideration other than cash in connection with
Xpeed acquisition - - -
Issuance of common stock for consideraion other than cash
in connection with Xpeed acquisition 5,348,572 - -
Exercise of common stock options for cash 25,000 0 6
Repurchase of common stock for $0.10 per share (413,646) (4) -
Net loss - - -
--------------------------------------------------
Balances, December 31, 2003 20,512,289 52 48,071
--------------------------------------------------
Conversion of Series A, B & C into common stock 27,680,644 28 186
Issuance of Series D redeemable convertible preferred stock
for cash 3,381
Issuance of Series D redeemable convertible preferred stock
for consideration other than cash in connection with note
payable to Siemens 249
Exercise of common stock options for cash 301,158 0 16
Issuance of common stock for consideration other than cash
on purchase of intangible assets 300,000 0 9
Net loss
--------------------------------------------------
Balances, December 31, 2004 48,794,091 80 51,911
--------------------------------------------------
Adjustment for split in April 2005 (39,088,166) (70) 70
Net loss for the quarter ended March 31, 2005
Net loss for the quarter ended June 30, 2005
Conversion of Series D into common stock 19,531,247 20
Repurchase of common stock for $0.10 per share
Net loss for the quarter ended September 30, 2005
--------------------------------------------------
Balances, September 30, 2005 29,237,172 30 51,981
--------------------------------------------------
Deficit
Accumulated Total
During the Stockholders'
Development (Deficit)
Stage Equity
-------------------------------------
Issuance of common stock to founders in March 2000 at
$0.001 per share for cash $ - $ 15
Issuance of Series A redeemable convertible preferred stock
in March 2000 at $0.80 per share for cash - 11,953
Issuance of Series B redeemable convertible preferred stock
in December 2000 at $4.50 per share for cash,
net of $73 of issuance cost - 35,927
Issuance of warrants to purchase Series B redeemable convertible
preferred stock in connection with an equipment lease in July 2000 - 180
Exercise of common stock options for cash - 407
Repurchase of common stock issued to founders
in July 2000 at $0.001 per share for cash -
Net loss and comprehensive loss (6,267) (6,267)
-------------------------------------
Balances, December 31, 2000 (6,267) 42,215
-------------------------------------
Issuance cost related to Series B preferred stock - (30)
Issuance of warrants to purchase Series B redeemable convertible
preferred stock to a lessor in July 2001 - 79
Compensation expense related to accelerated stock options
issued to terminated employees in september 2001 - 28
Compensation expense related to stock option grants to
consultants in July and December 2001 - 12
Adjustment to valuation of warrant issued to a lessor to
purchase Series B redeemable convertible preferred stock - (38)
Exercise of common stock options for cash - 10
Repurchase of common stock issued to founders at
$0.10 per share for cash - (117)
Net loss and comprehensive loss (20,117) (20,117)
-------------------------------------
Balances, December 31, 2001 (26,384) 22,042
-------------------------------------
Repurchase of common stock for $0.10 to $0.90 per share - (101)
Exercise of common stock options for cash - 10
Cancellation of previously issued common stock subject to restriction - (1)
Net loss (8,612) (8,612)
-------------------------------------
Balances, December 31, 2002 (34,996) 13,338
-------------------------------------
Issuance of Series C redeemable convertible preferred stock
for consideration other than cash in connection with
Xpeed acquisition - -
Issuance of common stock for consideraion other than cash
in connection with Xpeed acquisition - -
Exercise of common stock options for cash - 7
Repurchase of common stock for $0.10 per share - (4)
Net loss (13,288) (13,288)
-------------------------------------
Balances, December 31, 2003 (48,284) 53
-------------------------------------
Conversion of Series A, B & C into common stock - -
Issuance of Series D redeemable convertible preferred stock
for cash 3,399
Issuance of Series D redeemable convertible preferred stock
for consideration other than cash in connection with note
payable to Siemens 250
Exercise of common stock options for cash 16
Issuance of common stock for consideration other than cash
on purchase of intangible assets 9
Net loss (5,098) (5,098)
-------------------------------------
Balances, December 31, 2004 (53,382) (1,371)
-------------------------------------
Adjustment for split in April 2005 -
Net loss for the quarter ended March 31, 2005 (1,254) (1,254)
Net loss for the quarter ended June 30, 2005 (1,385) (1,385)
Conversion of Series D into common stock -
Repurchase of common stock for $0.10 per share -
Net loss for the quarter ended September 30, 2005 (1,235) (1,235)
-------------------------------------
Balances, September 30, 2005 (57,255) (5,244)
-------------------------------------
Accompanied notes are an integral part of these financial statements.
F-3
NAYNA NETWORKS, INC.
(a development stage enterprise)
STATEMENTS OF CASH FLOWS
(in thousands)
- --------------------------------------------------------------------------------
Cumulative
Period from
February 10,
2000
(date of
inception
Quarter Ended Sept. 30, to)
-------------------------- Sept. 30,
2005 2004 2005
---------- ----------- ----------
Cash flows from operating activities :
Net loss $ (1,235) $ (1,048) $ (57,256)
Adjustments to reconcile net loss to net cash used in operations:
Noncash charges related to stock options granted to
consultants and
accelerated vesting of employee stock options - - 40
Depreciation and amortization 102 150 4,138
Amortization of discount on warrants associated with
equipment financing - - 202
Impairment of goodwill related to acquisitions - - 5,834
Loss (gain) on sale of property and equipment - - 756
Changes in operating assets and liabilities:
Restricted cash - - -
Accounts receivable 74 (59) (63)
Prepaid expenses and other current assets 8 (22) (79)
Other assets 131 31 137
Accounts payable 153 25 1,294
Accrued liabilities (18) (0) 288
Accrued payroll liabilities 66 28 547
---------- ----------- ----------
Net cash used in operating activities (720) (893) (44,163)
---------- ----------- ----------
Cash flows from investing activities :
Purchase of property and equipment - (1) (1,239)
Proceeds from sale of property and equipment - - 746
Costs associated with acquisition of Xpeed, Inc. - - (3,685)
---------- ----------- ----------
Net cash used in investing activities - (1) (4,178)
---------- ----------- ----------
Cash flows from financing activities :
Proceeds from (repayments on) loan facility 681 (385) 632
Payments on capital lease obligations and loan facility (51) (5,598)
Proceeds from issuance of common stock, net of
repurchases - 13 243
Proceeds from issuance of Series A redeemable
convertible
preferred stock, net of issuance costs - 11,953
Proceeds from issuance of Series B redeemable
convertible
preferred stock, net of issuance costs - 35,897
Proceeds from issuance of Series D redeemable
convertible
preferred stock, net of issuance costs - 1,699 3,399
Issuance of convertible debt - 2,072
Restricted cash - (165)
---------- ----------- ----------
Net cash provided (used) by financing activities 681 1,276 48,431
---------- ----------- ----------
Net decrease in cash and cash equivalents (39) 382 91
Cash and cash equivalents at beginning of period 130 423 -
Cash and cash equivalents at end of period $ 91 $ 805 $ 91
========== =========== ==========
See accompanied notes and acountant's review report.
F-4
NAYNA NETWORKS, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
($ in thousands, except shares and per share data)
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) The Company
Nayna Networks, Inc., a development stage enterprise (the Company or Nayna), is
engaged in the development of next-generation broadband access networking
solutions. During 2003, the Company expanded its business development focus as a
result of an acquisition of another company, to develop and market passive
optical networks ("PON") equipment and digital subscriber line (("PON")DSL)
equipment. PON equipment delivers high performance broadband access over fiber
cable, linking business and residential subscribers to the local central office.
DSL technology provides high-speed data transmission using the local telephone
companystockholder'ss existing infrastructure. During 2004, the Company shifted
its focus in its development efforts in the Ethernet in the First Mile (EFM)
segment of the broadband access market. The Company has introduced a new
platform that builds upon the Companystockholder'ss PON expertise through its
support for the latest generation Gigabit Ethernet. The company is in the
development stage and since inception, has devoted substantially all of its
efforts to the development of its products, raising capital, and recruiting
personnel.
Nayna Networks, Inc. was incorporated in Delaware on February 10, 2000 and is
located in San Jose, California.
Nayna Networks, Inc. (the ("PON")company) merged into Rescon Technology
Corporation (("PON")Rescon), a publicly traded company, on April 4, 2005 and
became a wholly-owned subsidiary of Rescon. Following the merger, Rescon
Technology Corporation changed its name to Nayna Networks, Inc.
The Company has incurred losses since its inception, and management believes
that it will continue to do so for the foreseeable future because of additional
costs and expenses related to continued development and expansion of the Company
stockholder's product offerings. The Company currently plans to generate
revenues and reduce operating expenses to levels that will result in at least
neutral cash flows from operations. However, until that stage is reached, the
Company will continue to use its current cash on hand and require additional
financing to support its operations. Failure to generate sufficient cash flows
from operations, raise additional financing or reduce certain discretionary
spending could have a material adverse effect on the Company stockholder's
ability to continue as a going concern and to achieve its intended business
objectives. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
(b) Development Stage
Since its inception although the Company has commenced its principal operations,
it has not achieved a sufficient level of sales and market demand to become an
established operating enterprise. Therefore, as per the Statement of Financial
Accounting Standards (("PON") SFAS) No.7, ("PON")Accounting and Reporting by
Development Stage Enterprises, the Company is being classified as a development
stage enterprise. The Company is in the development stage and accordingly, its
financial statements are presented in accordance with Statement of Financial
Accounting Standards (SFAS) No. 7, ("PON") Accounting and Reporting by
Development Stage Enterprises. Successful completion of the Company
stockholder's developmental program and, ultimately, the attainment of
profitable operations are dependent upon future events, including future
financing, successfully completing product development, and achieving a
sufficient level of sales and market demand to
F-5
become an established operating enterprise. However, there can be no assurance
that the Company will be able to achieve profitable operations.
(c) Estimates and Assumptions
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. A change in the facts and circumstances
surrounding these estimates could result in a change to the estimates and could
impact future operating results.
(d) Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all
instruments with an original maturity of three months or less to be cash
equivalents.
(e) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation expense is determined using the straight-line method over the
estimated useful lives of the respective assets, which are generally three to
five years for computers, equipment and furniture. Depreciation on leasehold
improvements is provided using the straight-line method over the shorter of the
estimated useful lives of the improvements or the lease term. Expenditures for
maintenance and repairs are charged to operating expense as incurred. Upon
retirement or sale, the original cost and related accumulated depreciation are
removed from the respective accounts, and the gains and losses are included in
other income or expense.
(f) Impairment of long-lived assets
The Company evaluates its long-lived assets, including property and equipment,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When the sum of the present
value of future net cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying amount, an impairment loss
would be measured based on the discounted cash flows compared to the carrying
amount. No impairment charge has been recorded in any of the periods presented.
(g) Business and credit risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash, cash equivalents invested in deposits and
trade receivables. The Company has not experienced any losses on its deposits of
cash and cash equivalents. Management believes that the institutions are
financially sound and, accordingly, minimal credit risk exists. The carrying
values reported in the balance sheets for cash, cash equivalents and trade
receivables approximate their fair values.
(h) Research and development
The Company accounts for research and development costs in accordance with
Statement of Financial Accounting Standards (("PON")SFAS) No. 2,
("PON")Accounting for Research and development Costs, and, accordingly, the
Company expenses research and development costs when incurred.
(i) Income Taxes
The Company recognizes deferred tax assets and liabilities for operating loss
carryforwards, tax credit carryforwards and the estimated future tax
consequences attributable to differences
F-6
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates in effect for the year in which the
temporary differences are expected to be recovered or settled. A valuation
allowance is recorded to reduce the carrying amounts of net deferred tax assets
if there is uncertainty regarding their realization.
(j) Stock-Based Compensation
The Company accounts for its stock-based employee compensation using the
intrinsic-value method, which follows the recognition and measurement principles
of Accounting Principles Board (APB) Opinion No. 25, ("PON")Accounting for Stock
Issued to Employees, and Financial Accounting Standards Board (("PON")FASB)
Interpretation (("PON")FIN) No. 44, ("PON")Accounting for Certain Transactions
Involving Stock Compensation. Stock and other equity instruments issued to
non-employees are accounted for in accordance with SFAS No. 123,
("PON")Accounting for Stock-Based Compensation, and EITF Issue No. 96-18,
("PON")Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services, and are valued
using the Black-Scholes model.
No stock-based employee compensation cost related to stock options is reflected
in net income (loss), as all options granted under stock-based compensation
plans had an exercise price equal to fair value of the underlying common stock
on grant date.
(k) Goodwill and Purchased Intangible Assets
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires
goodwill to be tested for impairment on an annual basis and between annual tests
in certain circumstances, and written down when impaired, rather than being
amortized as previous accounting standards required. Furthermore, SFAS 142
requires purchased intangible assets other than goodwill to be amortized over
their useful lives unless these lives are determined to be indefinite.
NOTE B: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
September 30,
2005
Computer equipment $ 450
Computer software 1,354
Test equipment 173
Furniture and fixtures 2
------------
1,979
Less: Accumulated depreciation (1,829)
------------
Balances as at September 30, 2005 $ 150
============
F-7
NOTE D: DEBT
In April 2003, subsequent to the acquisition of Xpeed, Inc., the Company agreed
to pay off $5,904 towards liabilities of Xpeed, Inc. As at September 30, 2005,
the following amounts were outstanding:
Accrued liabilities for expenses $ 122
Notes payable 225
------------
Total $ 347
------------
Beginning in late 2004 and during this fiscal year the Company has continued to
fund operations through debt. As at September 30, 2005, the following amounts
are outstanding:
Notes payable (includes $23 interest accrued on Bridge loan) $ 1,103
Convertible debentures 2,372
----------
Total Notes Payable $ 3,475
----------
NOTE E: COMMON STOCK
During the quarter ended September 30, 2005, the Company converted all of its
Series D Preferred Stock to Common Stock. As of September 30, 2005 there were
29,237,172 common shares that were issued and outstanding.
NOTE F: STOCK OPTIONS AND WARRANTS
On May 17, 2005, the Board of Directors of the Company authorized and approved
the issuance to the Company stockholder's non-executive directors a total of
470,000 options to purchase shares of the Company stockholder's common stock at
an exercise price of $1.69 per share, which was the fair market value of the
Company stockholder's common stock on the date of this grant. The Options were
issued pursuant to the Company stockholder's 2000 Stock Incentive Plan.
On September 13, 2005, the Board of Directors of the Company authorized and
approved the issuance to the Company stockholder's non-executive directors a
total of 500,000 restricted shares of the Company stockholder's common stock and
such shares will be fully-paid and non-assessable. The shares will vest, in
equal installments, on a quarterly basis, with the first vesting on September
30, 2005, and the remaining shares vesting at the end of each calendar quarter
thereafter.
NOTE G: RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense for the quarter ended September 30, 2005,
includes the following:
Employee payroll and related expense $ 251
Cost of material 74
Outside services 90
Allocation of administrative overheads 392
Recovery of expenses from customers (27)
------
$ 780
======
Accompanied notes are an integral part of these financial statements.
F-8
NARESH
ARORA
certified public accountant
2350 Mission College Blvd., Suite #1160, Santa Clara, CA 95054
Phone: 408-988-2900 | Fax: 408-988-2907 | naresh@taxguru.com
To the Board of Directors
Nayna Networks, Inc.
(a company in the development stage)
We have reviewed the accompanying balance sheet of Nayna Networks, Inc., a
development stage enterprise, as of September 30, 2005 and the related
statements of operations, stockholder's (deficit) equity, and cash flows for the
nine months then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. All information included in these financial statements is
the representation of the management of Nayna Networks, Inc.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
examination in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
The accompanying financial statements for the nine months ended September 30,
2004 of Nayna Networks, Inc., were not audited or reviewed by us and
accordingly, we do not express an opinion or any other form of assurance on
them.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company is in the development stage and has incurred
losses from operations that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note A. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Santa Clara, California
November 14, 2005
F-9
NAYNA NETWORKS, INC.
(a development stage enterprise)
BALANCE SHEET
(in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Sept. 30,
ASSETS 2005
Current assets:
Cash and cash equivalents $ 91
Restricted cash --
Accounts receivable, net of allowance for doubtfuls of $33 63
Prepaid expenses and other current assets 79
--------
Total current assets 234
Property and equipment, net 150
Other assets 193
--------
Total assets $ 577
--------
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Accounts payable
$ 1,294
Accrued liabilities 281
Accrued payroll liabilities 547
Notes payable 1,328
--------
Current portion of capital lease obligations
Total current liabilities 3,449
Notes payable
Bridge to common stock
Convertible debentures 2,372
--------
Total liablities 5,821
--------
Stockholders' (deficit) equity Common stock, $0.001 par value:
Authorized shares - 1,000,000,000; issued and outstanding
shares - 29,237,172 at September 30, 2005 30
Additional paid-in capital 51,981
Deficit accumulated during the development stage (57,255)
--------
Total stockholders' (deficit) equity (5,244)
--------
Total liabilities and stockholders' (deficit) equity $ 577
========
Accompanied notes are an integral part of these financial statements.
NAYNA NETWORKS, INC.
(a development stage enterprise)
STATEMENTS OF OPERATIONS
(in thousands)
- --------------------------------------------------------------------------------
Cumulative
Period from
February 10,
2000 (date of
Nine Months Ended Sept. 30, inception) to
--------------------------- Sept. 30,
2005 2004 2005
----------- ------------ ------------
Operating expenses:
Research and development $ 2,689 $ 3,011 $ 41,639
Business development 532 911 3,143
General and administrative 740 352 8,274
----------- ------------ ------------
Total operating expenses 3,962 4,275 53,056
----------- ------------ ------------
Loss from operations (3,962) (4,275) (53,056)
Interest income - 13 2,390
Interest expense (40) (36) (872)
Gain on sale of assets 370 - 358
Merger related costs (243) - (243)
Impairment of goodwill and other intangible assets - - (5,834)
----------- ------------ ------------
Net loss $ (3,874) $ (4,299) $ (57,255)
=========== ============ ============
Accompanied notes are an integral part of these financial statements.
F-10
NAYNA NETWORKS, INC.
(a development stage enterprise)
Statements of Stockholders' (Deficit) Equity
For the Cumulative Period from February 10, 2000 (date of inception) to June 30, 2005
(in thousands, except share and per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Series A Redeemable Series B Redeemable
Convertible Convertible
Preferred Stock Preferred Stock
------------------------------ ----------------------------
Shares Amount Shares Amount
------------------------------------------------------------
Issuance of common stock to founders in March 2000 at
$0.001 per share for cash - $ - - $ -
Issuance of Series A redeemable convertible preferred stock
in March 2000 at $0.80 per share for cash 15,000,000 15 - -
Issuance of Series B redeemable convertible preferred stock
in December 2000 at $4.50 per share for cash,
net of $73 of issuance cost - - 7,999,997 8
Issuance of warrants to purchase Series B redeemable convertible
preferred stock in connection with an equipment lease in July 2000 - - - 180
Exercise of common stock options for cash - - - -
Repurchase of common stock issued to founders
in July 2000 at $0.001 per share for cash - - - -
Net loss and comprehensive loss - - - -
------------------------------------------------------------
Balances, December 31, 2000 15,000,000 15 7,999,997 188
------------------------------------------------------------
Issuance cost related to Series B preferred stock - - - (30)
Issuance of warrants to purchase Series B redeemable convertible
preferred stock to a lessor in July 2001 - - - 79
Compensation expense related to accelerated stock options
issued to terminated employees in september 2001 - - - -
Compensation expense related to stock option grants to
consultants in July and December 2001 - - - -
Adjustment to valuation of warrant issued to a lessor to
purchase Series B redeemable convertible preferred stock - - - (38)
Exercise of common stock options for cash - - - -
Repurchase of common stock issued to founders at
$0.10 per share for cash - - - -
Net loss and comprehensive loss - - - -
------------------------------------------------------------
Balances, December 31, 2001 15,000,000 15 7,999,997 199
------------------------------------------------------------
Repurchase of common stock for $0.10 to $0.90 per share - - - -
Exercise of common stock options for cash - - - -
Cancellation of previously issued common stock subject to restriction - - - -
Net loss - - - -
------------------------------------------------------------
Balances, December 31, 2002 15,000,000 15 7,999,997 199
------------------------------------------------------------
Issuance of Series C redeemable convertible preferred stock
for consideration other than cash in connection with
Xpeed acquisition - - - -
Issuance of common stock for consideraion other than cash
in connection with Xpeed acquisition - - - -
Exercise of common stock options for cash - - - -
Repurchase of common stock for $0.10 per share - - - -
Net loss - - - -
------------------------------------------------------------
Balances, December 31, 2003 15,000,000 15 7,999,997 199
------------------------------------------------------------
Conversion of Series A, B & C into common stock (15,000,000) (15) (7,999,997) (199)
Issuance of Series D redeemable convertible preferred stock
for cash
Issuance of Series D redeemable convertible preferred stock
for consideration other than cash in connection with note
payable to Siemens
Exercise of common stock options for cash
Issuance of common stock for consideration other than cash
on purchase of intangible assets
Net loss
------------------------------------------------------------
Balances, December 31, 2004 - - - -
------------------------------------------------------------
Adjustment for split in April 2005
Net loss for the quarter ended March 31, 2005
Net loss for the quarter ended June 30, 2005
Conversion of Series D into common stock
Repurchase of common stock for $0.10 per share
Net loss for the quarter ended September 30, 2005
------------------------------------------------------------
Balances, September 30, 2005 - - - -
------------------------------------------------------------
Series C Redeemable Series D Redeemable
Convertible Convertible
Preferred Stock Preferred Stock
---------------------------- ----------------------------
Shares Amount Shares Amount
------------------------------------------------------------
Issuance of common stock to founders in March 2000 at
$0.001 per share for cash - $ - - $ -
Issuance of Series A redeemable convertible preferred stock
in March 2000 at $0.80 per share for cash - - - -
Issuance of Series B redeemable convertible preferred stock
in December 2000 at $4.50 per share for cash,
net of $73 of issuance cost - - - -
Issuance of warrants to purchase Series B redeemable convertible
preferred stock in connection with an equipment lease in July 2000 - - - -
Exercise of common stock options for cash - - - -
Repurchase of common stock issued to founders
in July 2000 at $0.001 per share for cash - - - -
Net loss and comprehensive loss - - - -
------------------------------------------------------------
Balances, December 31, 2000 - - - -
------------------------------------------------------------
Issuance cost related to Series B preferred stock - - - -
Issuance of warrants to purchase Series B redeemable convertible
preferred stock to a lessor in July 2001 - - - -
Compensation expense related to accelerated stock options
issued to terminated employees in september 2001 - - - -
Compensation expense related to stock option grants to
consultants in July and December 2001 - - - -
Adjustment to valuation of warrant issued to a lessor to
purchase Series B redeemable convertible preferred stock - - - -
Exercise of common stock options for cash - - - -
Repurchase of common stock issued to founders at
$0.10 per share for cash - - - -
Net loss and comprehensive loss - - - -
------------------------------------------------------------
Balances, December 31, 2001 - - - -
------------------------------------------------------------
Repurchase of common stock for $0.10 to $0.90 per share - - - -
Exercise of common stock options for cash - - - -
Cancellation of previously issued common stock subject to restriction - - - -
Net loss - - - -
------------------------------------------------------------
Balances, December 31, 2002 - - - -
------------------------------------------------------------
Issuance of Series C redeemable convertible preferred stock
for consideration other than cash in connection with
Xpeed acquisition 4,680,647 - - -
Issuance of common stock for consideraion other than cash
in connection with Xpeed acquisition - - - -
Exercise of common stock options for cash - - - -
Repurchase of common stock for $0.10 per share - - - -
Net loss - - - -
------------------------------------------------------------
Balances, December 31, 2003 4,680,647 - - -
------------------------------------------------------------
Conversion of Series A, B & C into common stock (4,680,647) - - -
Issuance of Series D redeemable convertible preferred stock
for cash 18,220,425 18
Issuance of Series D redeemable convertible preferred stock
for consideration other than cash in connection with note
payable to Siemens 1,310,822 1
Exercise of common stock options for cash
Issuance of common stock for consideration other than cash
on purchase of intangible assets
Net loss
------------------------------------------------------------
Balances, December 31, 2004 - - 19,531,247 20
------------------------------------------------------------
Adjustment for split in April 2005
Net loss for the quarter ended March 31, 2005
Net loss for the quarter ended June 30, 2005
Conversion of Series D into common stock (19,531,247) (20)
Repurchase of common stock for $0.10 per share
Net loss for the quarter ended September 30, 2005
------------------------------------------------------------
Balances, September 30, 2005 - - - 0
------------------------------------------------------------
Additional
Common Stock Paid-In
--------------------------------
Shares Amount Capital
--------------------------------------------------
Issuance of common stock to founders in March 2000 at
$0.001 per share for cash 15,000,000 $ 15 $ -
Issuance of Series A redeemable convertible preferred stock
in March 2000 at $0.80 per share for cash - - 11,938
Issuance of Series B redeemable convertible preferred stock
in December 2000 at $4.50 per share for cash,
net of $73 of issuance cost - - 35,919
Issuance of warrants to purchase Series B redeemable convertible
preferred stock in connection with an equipment lease in July 2000 - - -
Exercise of common stock options for cash 4,069,000 4 403
Repurchase of common stock issued to founders
in July 2000 at $0.001 per share for cash (66,667) - -
Net loss and comprehensive loss - - -
--------------------------------------------------
Balances, December 31, 2000 19,002,333 19 48,260
--------------------------------------------------
Issuance cost related to Series B preferred stock - - -
Issuance of warrants to purchase Series B redeemable convertible
preferred stock to a lessor in July 2001 - - ## -
Compensation expense related to accelerated stock options
issued to terminated employees in september 2001 - 28 -
Compensation expense related to stock option grants to
consultants in July and December 2001 - 12 -
Adjustment to valuation of warrant issued to a lessor to
purchase Series B redeemable convertible preferred stock - - -
Exercise of common stock options for cash 93,374 0 10
Repurchase of common stock issued to founders at
$0.10 per share for cash (1,174,399) (1) (116)
Net loss and comprehensive loss - - -
--------------------------------------------------
Balances, December 31, 2001 17,921,308 58 48,154
--------------------------------------------------
Repurchase of common stock for $0.10 to $0.90 per share (997,195) (1) (100)
Exercise of common stock options for cash 100,750 0 10
Cancellation of previously issued common stock subject to restriction (1,472,500) (1) -
Net loss - - -
--------------------------------------------------
Balances, December 31, 2002 15,552,363 56 48,064
--------------------------------------------------
Issuance of Series C redeemable convertible preferred stock
for consideration other than cash in connection with
Xpeed acquisition - - -
Issuance of common stock for consideraion other than cash
in connection with Xpeed acquisition 5,348,572 - -
Exercise of common stock options for cash 25,000 0 6
Repurchase of common stock for $0.10 per share (413,646) (4) -
Net loss - - -
--------------------------------------------------
Balances, December 31, 2003 20,512,289 52 48,071
--------------------------------------------------
Conversion of Series A, B & C into common stock 27,680,644 28 186
Issuance of Series D redeemable convertible preferred stock
for cash 3,381
Issuance of Series D redeemable convertible preferred stock
for consideration other than cash in connection with note
payable to Siemens 249
Exercise of common stock options for cash 301,158 0 16
Issuance of common stock for consideration other than cash
on purchase of intangible assets 300,000 0 9
Net loss
--------------------------------------------------
Balances, December 31, 2004 48,794,091 80 51,911
--------------------------------------------------
Adjustment for split in April 2005 (39,088,166) (70) 70
Net loss for the quarter ended March 31, 2005
Net loss for the quarter ended June 30, 2005
Conversion of Series D into common stock 19,531,247 20
Repurchase of common stock for $0.10 per share
Net loss for the quarter ended September 30, 2005
--------------------------------------------------
Balances, September 30, 2005 29,237,172 30 51,981
--------------------------------------------------
Deficit
Accumulated Total
During the Stockholders'
Development (Deficit)
Stage Equity
-------------------------------------
Issuance of common stock to founders in March 2000 at
$0.001 per share for cash $ - $ 15
Issuance of Series A redeemable convertible preferred stock
in March 2000 at $0.80 per share for cash - 11,953
Issuance of Series B redeemable convertible preferred stock
in December 2000 at $4.50 per share for cash,
net of $73 of issuance cost - 35,927
Issuance of warrants to purchase Series B redeemable convertible
preferred stock in connection with an equipment lease in July 2000 - 180
Exercise of common stock options for cash - 407
Repurchase of common stock issued to founders
in July 2000 at $0.001 per share for cash -
Net loss and comprehensive loss (6,267) (6,267)
-------------------------------------
Balances, December 31, 2000 (6,267) 42,215
-------------------------------------
Issuance cost related to Series B preferred stock - (30)
Issuance of warrants to purchase Series B redeemable convertible
preferred stock to a lessor in July 2001 - 79
Compensation expense related to accelerated stock options
issued to terminated employees in september 2001 - 28
Compensation expense related to stock option grants to
consultants in July and December 2001 - 12
Adjustment to valuation of warrant issued to a lessor to
purchase Series B redeemable convertible preferred stock - (38)
Exercise of common stock options for cash - 10
Repurchase of common stock issued to founders at
$0.10 per share for cash - (117)
Net loss and comprehensive loss (20,117) (20,117)
-------------------------------------
Balances, December 31, 2001 (26,384) 22,042
-------------------------------------
Repurchase of common stock for $0.10 to $0.90 per share - (101)
Exercise of common stock options for cash - 10
Cancellation of previously issued common stock subject to restriction - (1)
Net loss (8,612) (8,612)
-------------------------------------
Balances, December 31, 2002 (34,996) 13,338
-------------------------------------
Issuance of Series C redeemable convertible preferred stock
for consideration other than cash in connection with
Xpeed acquisition - -
Issuance of common stock for consideraion other than cash
in connection with Xpeed acquisition - -
Exercise of common stock options for cash - 7
Repurchase of common stock for $0.10 per share - (4)
Net loss (13,288) (13,288)
-------------------------------------
Balances, December 31, 2003 (48,284) 53
-------------------------------------
Conversion of Series A, B & C into common stock - -
Issuance of Series D redeemable convertible preferred stock
for cash 3,399
Issuance of Series D redeemable convertible preferred stock
for consideration other than cash in connection with note
payable to Siemens 250
Exercise of common stock options for cash 16
Issuance of common stock for consideration other than cash
on purchase of intangible assets 9
Net loss (5,098) (5,098)
-------------------------------------
Balances, December 31, 2004 (53,382) (1,371)
-------------------------------------
Adjustment for split in April 2005 -
Net loss for the quarter ended March 31, 2005 (1,254) (1,254)
Net loss for the quarter ended June 30, 2005 (1,385) (1,385)
Conversion of Series D into common stock -
Repurchase of common stock for $0.10 per share -
Net loss for the quarter ended September 30, 2005 (1,235) (1,235)
-------------------------------------
Balances, September 30, 2005 (57,255) (5,244)
-------------------------------------
Accompanied notes are an integral part of these financial statements.
F-11
NAYNA NETWORKS, INC.
(a development stage enterprise)
STATEMENTS OF CASH FLOWS
(in thousands)
- --------------------------------------------------------------------------------
Cumulative
Period from
February 10,
2000 (date of
Nine Months Ended Sept. 30, inception) to
------------------------------ Sept. 30,
2005 2004 2005
------------- ------------- -------------
Cash flows from operating activities :
Net loss $ (3,874) $ (4,299) $ (57,256)
Adjustments to reconcile net loss to net cash used
in operations:
Noncash charges related to stock options granted to consultants and
accelerated vesting of employee stock options - - 40
Depreciation and amortization 388 458 4,138
Amortization of discount on warrants associated with equipment
financing - 17 202
Impairment of goodwill related to acquisitions - - 5,834
Loss (gain) on sale of property and equipment - - 756
Changes in operating assets and liabilities:
Restricted cash 49 - -
Accounts receivable 97 (41) (63)
Prepaid expenses and other current assets (44) (38) (79)
Other assets (177) 29 137
Accounts payable 639 204 1,294
Accrued liabilities 41 (76) 288
Accrued payroll liabilities 251 66 547
------------- ------------- -------------
Net cash used in operating activities (2,631) (3,680) (44,163)
------------- ------------- -------------
Cash flows from investing activities :
Purchase of property and equipment - (4) (1,239)
Proceeds from sale of property and equipment 260 - 746
Costs associated with acquisition of Xpeed, Inc. - - (3,685)
------------- ------------- -------------
Net cash used in investing activities 260 (4) (4,178)
------------- ------------- -------------
Cash flows from financing activities :
Proceeds from (repayments on) loan facility 609 (689) 632
Payments on capital lease obligations and loan facility (1,229) (148) (5,598)
Proceeds from issuance of common stock, net of repurchases - 13 243
Proceeds from issuance of Series A redeemable convertible
preferred stock, net of issuance costs - - 11,953
Proceeds from issuance of Series B redeemable convertible
preferred stock, net of issuance costs - - 35,897
Proceeds from issuance of Series D redeemable convertible
preferred stock, net of issuance costs - 3,651 3,399
Issuance of convertible debt 2,372 - 2,072
Restricted cash - - (165)
------------- ------------- -------------
Net cash provided (used) by financing activities 1,752 2,826 48,431
------------- ------------- -------------
Net decrease in cash and cash equivalents (618) (858) 91
Cash and cash equivalents at beginning of period 709 1,663 -
Cash and cash equivalents at end of period $ 91 $ 805 $ 91
============= ============= =============
Accompanied notes are an integral part of these financial statements.
F-12
NAYNA NETWORKS, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
($ in thousands, except shares and per share data)
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) The Company
Nayna Networks, Inc., a development stage enterprise (the Company or Nayna), is
engaged in the development of next-generation broadband access networking
solutions. During 2003, the Company expanded its business development focus as a
result of an acquisition of another company, to develop and market passive
optical networks (PON) equipment and digital subscriber line (DSL) equipment.
PON equipment delivers high performance broadband access over fiber cable,
linking business and residential subscribers to the local central office. DSL
technology provides high-speed data transmission using the local telephone
company's existing infrastructure. During 2004, the Company shifted its focus in
its development efforts in the Ethernet in the First Mile (EFM) segment of the
broadband access market. The Company has introduced a new platform that builds
upon the Company's PON expertise through its support for the latest generation
Gigabit Ethernet. The company is in the development stage and since inception,
has devoted substantially all of its efforts to the development of its products,
raising capital, and recruiting personnel.
Nayna Networks, Inc. was incorporated in Delaware on February 10, 2000 and is
located in San Jose, California.
Nayna Networks, Inc. (the company) merged into Rescon Technology Corporation
(Rescon), a publicly traded company, on April 4, 2005 and became a wholly-owned
subsidiary of Rescon. Following the merger, Rescon Technology Corporation
changed its name to Nayna Networks, Inc.
The Company has incurred losses since its inception, and management believes
that it will continue to do so for the foreseeable future because of additional
costs and expenses related to continued development and expansion of the
Company's product offerings. The Company currently plans to generate revenues
and reduce operating expenses to levels that will result in at least neutral
cash flows from operations. However, until that stage is reached, the Company
will continue to use its current cash on hand and require additional financing
to support its operations. Failure to generate sufficient cash flows from
operations, raise additional financing or reduce certain discretionary spending
could have a material adverse effect on the Company's ability to continue as a
going concern and to achieve its intended business objectives. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
(b) Development Stage
Since its inception although the Company has commenced its principal operations,
it has not achieved a sufficient level of sales and market demand to become an
established operating enterprise. Therefore, as per the Statement of Financial
Accounting Standards (SFAS) No.7, Accounting and Reporting by Development Stage
Enterprises, the Company is being classified as a development stage enterprise.
The Company is in the development stage and accordingly, its financial
statements are presented in accordance with Statement of Financial Accounting
Standards (SFAS) No. 7, Accounting and Reporting by Development Stage
Enterprises. Successful completion of the Company's developmental program and,
ultimately, the attainment of profitable operations are dependent upon future
events, including future financing, successfully
F-13
completing product development, and achieving a sufficient level of sales and
market demand to become an established operating enterprise. However, there can
be no assurance that the Company will be able to achieve profitable operations.
(c) Estimates and Assumptions
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. A change in the facts and circumstances
surrounding these estimates could result in a change to the estimates and could
impact future operating results.
(d) Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all
instruments with an original maturity of three months or less to be cash
equivalents.
(e) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation expense is determined using the straight-line method over the
estimated useful lives of the respective assets, which are generally three to
five years for computers, equipment and furniture. Depreciation on leasehold
improvements is provided using the straight-line method over the shorter of the
estimated useful lives of the improvements or the lease term. Expenditures for
maintenance and repairs are charged to operating expense as incurred. Upon
retirement or sale, the original cost and related accumulated depreciation are
removed from the respective accounts, and the gains and losses are included in
other income or expense.
(f) Impairment of long-lived assets
The Company evaluates its long-lived assets, including property and equipment,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When the sum of the present
value of future net cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying amount, an impairment loss
would be measured based on the discounted cash flows compared to the carrying
amount. No impairment charge has been recorded in any of the periods presented.
(g) Business and credit risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash, cash equivalents invested in deposits and
trade receivables. The Company has not experienced any losses on its deposits of
cash and cash equivalents. Management believes that the institutions are
financially sound and, accordingly, minimal credit risk exists. The carrying
values reported in the balance sheets for cash, cash equivalents and trade
receivables approximate their fair values.
(h) Research and development
The Company accounts for research and development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 2, Accounting for
Research and development Costs, and, accordingly, the Company expenses research
and development costs when incurred.
(i) Income Taxes
F-14
The Company recognizes deferred tax assets and liabilities for operating loss
carryforwards, tax credit carryforwards and the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which the temporary differences are expected to be
recovered or settled. A valuation allowance is recorded to reduce the carrying
amounts of net deferred tax assets if there is uncertainty regarding their
realization.
(j) Stock-Based Compensation
The Company accounts for its stock-based employee compensation using the
intrinsic-value method, which follows the recognition and measurement principles
of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and Financial Accounting Standards Board (FASB) Interpretation
(FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation.
Stock and other equity instruments issued to non-employees are accounted for in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation, and EITF
Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services, and
are valued using the Black-Scholes model.
No stock-based employee compensation cost related to stock options is reflected
in net income (loss), as all options granted under stock-based compensation
plans had an exercise price equal to fair value of the underlying common stock
on grant date.
(k) Goodwill and Purchased Intangible Assets
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires
goodwill to be tested for impairment on an annual basis and between annual tests
in certain circumstances, and written down when impaired, rather than being
amortized as previous accounting standards required. Furthermore, SFAS 142
requires purchased intangible assets other than goodwill to be amortized over
their useful lives unless these lives are determined to be indefinite.
NOTE B: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
September 30,
2005
Computer equipment $ 450
Computer software 1,354
Test equipment 173
Furniture and fixtures 2
----------
1,979
Less: Accumulated depreciation (1,829)
----------
Balances as at September 30, 2005 $ 150
==========
F-15
NOTE D: DEBT
In April 2003, subsequent to the acquisition of Xpeed, Inc., the Company agreed
to pay off $5,904 towards liabilities of Xpeed, Inc. As at September 30, 2005,
the following amounts were outstanding:
Accrued liabilities for expenses $ 122
Notes payable 225
--------
Total $ 347
--------
Beginning in late 2004 and during this fiscal year the Company has continued to
fund operations through debt. As at September 30, 2005, the following amounts
are outstanding:
Notes payable (includes $23 interest accrued on Bridge loan) $ 1,103
Convertible debentures 2,372
----------
Total Notes Payable $ 3,475
----------
NOTE E: COMMON STOCK
During the quarter ended September 30, 2005, the Company converted all of its
Series D Preferred Stock to Common Stock. As of September 30, 2005 there were
29,237,172 common shares that were issued and outstanding.
NOTE F: STOCK OPTIONS AND WARRANTS
On May 17, 2005, the Board of Directors of the Company authorized and approved
the issuance to the Company's non-executive directors a total of 470,000 options
to purchase shares of the Company's common stock at an exercise price of $1.69
per share, which was the fair market value of the Company's common stock on the
date of this grant. The Options were issued pursuant to the Company's 2000 Stock
Incentive Plan.
On September 13, 2005, the Board of Directors of the Company authorized and
approved the issuance to the Company's non-executive directors a total of
500,000 restricted shares of the Company's common stock and such shares will be
fully-paid and non-assessable. The shares will vest, in equal installments, on a
quarterly basis, with the first vesting on September 30, 2005, and the remaining
shares vesting at the end of each calendar quarter thereafter.
Accompanied notes are an integral part of these financial statements.
F-16
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NARESH
ARORA
certified public accountant
2350 Mission College Blvd., Suite #1160, Santa Clara, CA 95054
Phone: 408-988-2900 | Fax: 408-988-2907 | naresh@taxguru.com
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Nayna Networks, Inc.
(a company in the development stage)
We have audited the accompanying balance sheets of Nayna Networks, Inc., a
development stage enterprise as of December 31, 2004 and 2003 and the related
statements of operations, stockholders (deficit) equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As stated in our earlier report dated September 7, 2004 on financial statements
for the year 2003, we were unable to examine independent third party valuation
report on 100% acquisition of an entity during 2003, as explained in Note B to
the financial statements; nor were we able to satisfy ourselves as to the
aggregate cost of acquisition allocated to goodwill and the related charge to
results of operations for its impairment.
In our opinion, except for the effects of such adjustments in 2003, if any, as
might have been determined to be necessary had we been able to examine evidence
regarding cost of acquisition, the financial statements referred to above,
present fairly, in all material respects, the financial position of Nayna
Networks, Inc. as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for the year then ended in conformity with U.S.
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company is in the development stage and has incurred
losses from operations that raise substantial doubt about its ability to
continue as a going concern. Managements plans in regard to these matters are
also described in Note A. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Santa Clara, California
July 20, 2005
F-17
NAYNA NETWORKS, INC.
(a development stage enterprise)
BALANCE SHEETS
(in thousands, except share and per share data)
- --------------------------------------------------------------------------------
December 31,
----------------------
ASSETS 2004 2003
-------- --------
Current assets:
Cash and cash equivalents $ 709 $ 1,663
Restricted cash 49 48
Accounts receivable, net of allowance of $33 and $0 as of
December 31, 2004 and 2003, respectively 160 121
Prepaid expenses and other current assets 35 63
-------- --------
Total current assets 953 1,895
Property and equipment, net 798 1,388
Other assets 16 9
-------- --------
Total assets $ 1,767 $ 3,292
-------- --------
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Accounts payable $ 655 $ 682
Accrued liabilities 240 162
Accrued payroll liabilities 295 361
Notes payable 718 843
Current portion of capital lease obligations 9 184
-------- --------
Total current liabilities 1,919 2,232
Capital lease obligations, less current portion -- 9
Notes payable 298 997
Bridge to common stock 922 --
-------- --------
Total liablities 3,138 3,239
-------- --------
Stockholders' (deficit) equity Series A preferred stock, $0.001 par value:
Authorized shares - 15,000,000; issued and outstanding shares - 15,000,000
at December 31, 2003
(Liquidation preference $12,000) -- 15
Series B preferred stock, $0.001 par value:
Authorized shares - 11,111,112; issued and outstanding shares - 7,999,997
at December 31, 2003
(Liquidation preference $36,000) -- 199
Series C preferred stock, $0.001 par value:
Authorized shares - 13,840,000; issued and outstanding shares - 4,680,647
at December 31, 2003 (issued for consideration other than cash;
liquidation
preference $5,041) -- --
Series D preferred stock, $0.001 par value:
Authorized shares - 52,500,000; issued and outstanding shares - 19,531,247
at December 31, 2004
(Liquidation preference $36,000) 20 --
Common stock, $0.001 par value:
Authorized shares - 125,000,000; issued and outstanding shares -
48,794,091 at December 31, 2004
and 20,512,289 at December 31, 2003 80 52
Additional paid-in capital 51,911 48,071
Deficit accumulated during the development stage (53,382) (48,284)
-------- --------
Total stockholders' (deficit) equity (1,371) 53
-------- --------
Total liabilities and stockholders' (deficit) equity $ 1,767 $ 3,292
======== ========
Accompanied notes are an integral part of these financial statements.
F-18
NAYNA NETWORKS, INC.
(a development stage enterprise)
STATEMENTS OF OPERATIONS
(in thousands)
- --------------------------------------------------------------------------------
Cumulative
Period from
February 10,
2000
(date of
Year Ended December 31, inception to)
---------------------------- December 31,
2004 2003 2004
----------- ------------ -------------
Operating expenses:
Research and development $ 2,971 $ 3,051 $ 38,950
Business development 1,011 720 2,611
General and administrative 1,069 3,675 7,533
----------- ------------ -------------
Total operating expenses 5,051 7,447 49,094
----------- ------------ -------------
Loss from operations (5,051) (7,447) (49,094)
Interest income 14 121 2,390
Interest expense (40) (137) (832)
Loss on sale of assets (12) - (12)
Impairment of goodwill and other intangible assets (9) (5,825) (5,834)
----------- ------------ -------------
Net loss $ (5,098) $ (13,288) $ (53,382)
=========== ============ =============
Accompanied notes are an integral part of these financial statements.
F-19
NAYNA NETWORKS, INC.
(a development stage enterprise)
Statements of Stockholders' (Deficit) Equity
For the Cumulative Period from
February 10, 2000 (date of inception) to December 31, 2004
(in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NAYNA NETWORKS, INC.
(a development stage enterprise)
Statements of Stockholders' (Deficit) Equity
For the Cumulative Period from February 10, 2000 (date of inception) to December 31, 2004
(in thousands, except share and per share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Series A Redeemable Series B Redeemable
Convertible Convertible
Preferred Stock Preferred Stock
--------------------------- ---------------------------
Shares Amount Share Amount
---------------------------------------------------------
Issuance of common stock to founders in March 2000 at
$0.001 per share for cash - $ - - $ -
Issuance of Series A redeemable convertible preferred stock
in March 2000 at $0.80 per share for cash 15,000,000 15 - -
Issuance of Series B redeemable convertible preferred stock
in December 2000 at $4.50 per share for cash,
net of $73 of issuance cost - - 7,999,997 8
Issuance of warrants to purchase Series B redeemable convertible
preferred stock in connection with an equipment lease in July 2000 - - - 180
Exercise of common stock options for cash - - - -
Repurchase of common stock issued to founders
in July 2000 at $0.001 per share for cash - - - -
Net loss and comprehensive loss - - - -
---------------------------------------------------------
Balances, December 31, 2000 15,000,000 15 7,999,997 188
---------------------------------------------------------
Issuance cost related to Series B preferred stock - - - (30)
Issuance of warrants to purchase Series B redeemable convertible
preferred stock to a lessor in July 2001 - - - 79
Compensation expense related to accelerated stock options
issued to terminated employees in september 2001 - - - -
Compensation expense related to stock option grants to
consultants in July and December 2001 - - - -
Adjustment to valuation of warrant issued to a lessor to
purchase Series B redeemable convertible preferred stock - - - (38)
Exercise of common stock options for cash - - - -
Repurchase of common stock issued to founders at
$0.10 per share for cash - - - -
Net loss and comprehensive loss - - - -
---------------------------------------------------------
Balances, December 31, 2001 15,000,000 15 7,999,997 199
---------------------------------------------------------
Repurchase of common stock for $0.10 to $0.90 per share - - - -
Exercise of common stock options for cash - - - -
Cancellation of previously issued common stock subject to restriction - - - -
Net loss - - - -
---------------------------------------------------------
Balances, December 31, 2002 15,000,000 15 7,999,997 199
---------------------------------------------------------
Issuance of Series C redeemable convertible preferred stock
for consideration other than cash in connection with
Xpeed acquisition - - - -
Issuance of common stock for consideraion other than cash
in connection with Xpeed acquisition - - - -
Exercise of common stock options for cash - - - -
Repurchase of common stock for $0.10 per share - - - -
Net loss - - - -
---------------------------------------------------------
Balances, December 31, 2003 15,000,000 15 7,999,997 199
---------------------------------------------------------
Conversion of Series A, B & C into common stock (15,000,000) (15) (7,999,997) (199)
Issuance of Series D redeemable convertible preferred stock
for cash
Issuance of Series D redeemable convertible preferred stock
for consideration other than cash in connection with note
payable to Siemens
Exercise of common stock options for cash
Issuance of common stock for consideration other than cash
on purchase of intangible assets
Net loss
---------------------------------------------------------
Balances, December 31, 2004 - - - -
=========================================================
Series C Redeemable Series D Redeemable
Convertible Convertible
Preferred Stock Preferred Stock
-------------------------- ----------------------------
Shares Amount Shares Amount
---------------------------------------------------------
Issuance of common stock to founders in March 2000 at
$0.001 per share for cash - $ - - $ -
Issuance of Series A redeemable convertible preferred stock
in March 2000 at $0.80 per share for cash - - - -
Issuance of Series B redeemable convertible preferred stock
in December 2000 at $4.50 per share for cash,
net of $73 of issuance cost - - - -
Issuance of warrants to purchase Series B redeemable convertible
preferred stock in connection with an equipment lease in July 2000 - - - -
Exercise of common stock options for cash - - - -
Repurchase of common stock issued to founders
in July 2000 at $0.001 per share for cash - - - -
Net loss and comprehensive loss - - - -
---------------------------------------------------------
Balances, December 31, 2000 - - - -
---------------------------------------------------------
Issuance cost related to Series B preferred stock - - - -
Issuance of warrants to purchase Series B redeemable convertible
preferred stock to a lessor in July 2001 - - - -
Compensation expense related to accelerated stock options
issued to terminated employees in september 2001 - - - -
Compensation expense related to stock option grants to
consultants in July and December 2001 - - - -
Adjustment to valuation of warrant issued to a lessor to
purchase Series B redeemable convertible preferred stock - - - -
Exercise of common stock options for cash - - - -
Repurchase of common stock issued to founders at
$0.10 per share for cash - - - -
Net loss and comprehensive loss - - - -
---------------------------------------------------------
Balances, December 31, 2001 - - - -
---------------------------------------------------------
Repurchase of common stock for $0.10 to $0.90 per share - - - -
Exercise of common stock options for cash - - - -
Cancellation of previously issued common stock subject to restriction - - - -
Net loss - - - -
---------------------------------------------------------
Balances, December 31, 2002 - - - -
---------------------------------------------------------
Issuance of Series C redeemable convertible preferred stock
for consideration other than cash in connection with
Xpeed acquisition 4,680,647 - - -
Issuance of common stock for consideraion other than cash
in connection with Xpeed acquisition - - - -
Exercise of common stock options for cash - - - -
Repurchase of common stock for $0.10 per share - - - -
Net loss - - - -
---------------------------------------------------------
Balances, December 31, 2003 4,680,647 - - -
---------------------------------------------------------
Conversion of Series A, B & C into common stock (4,680,647) - - -
Issuance of Series D redeemable convertible preferred stock
for cash 18,220,425 18
Issuance of Series D redeemable convertible preferred stock
for consideration other than cash in connection with note
payable to Siemens 1,310,822 1
Exercise of common stock options for cash
Issuance of common stock for consideration other than cash
on purchase of intangible assets
Net loss
---------------------------------------------------------
Balances, December 31, 2004 - - 19,531,247 20
=========================================================
Additional
Common Stock Paid-In
-------------------------------
Shares Amount Capital
----------------------------------------------------
Issuance of common stock to founders in March 2000 at
$0.001 per share for cash 15,000,000 $ 15 $ -
Issuance of Series A redeemable convertible preferred stock
in March 2000 at $0.80 per share for cash - - 11,938
Issuance of Series B redeemable convertible preferred stock
in December 2000 at $4.50 per share for cash,
net of $73 of issuance cost - - 35,919
Issuance of warrants to purchase Series B redeemable convertible
preferred stock in connection with an equipment lease in July 2000 - - -
Exercise of common stock options for cash 4,069,000 4 403
Repurchase of common stock issued to founders
in July 2000 at $0.001 per share for cash (66,667) - -
Net loss and comprehensive loss - - -
----------------------------------------------------
Balances, December 31, 2000 19,002,333 19 48,260
----------------------------------------------------
Issuance cost related to Series B preferred stock - - -
Issuance of warrants to purchase Series B redeemable convertible
preferred stock to a lessor in July 2001 - - # -
Compensation expense related to accelerated stock options
issued to terminated employees in september 2001 - 28 -
Compensation expense related to stock option grants to
consultants in July and December 2001 - 12 -
Adjustment to valuation of warrant issued to a lessor to
purchase Series B redeemable convertible preferred stock - - -
Exercise of common stock options for cash 93,374 0 10
Repurchase of common stock issued to founders at
$0.10 per share for cash (1,174,399) (1) (116)
Net loss and comprehensive loss - - -
----------------------------------------------------
Balances, December 31, 2001 17,921,308 58 48,154
----------------------------------------------------
Repurchase of common stock for $0.10 to $0.90 per share (997,195) (1) (100)
Exercise of common stock options for cash 100,750 0 10
Cancellation of previously issued common stock subject to restriction (1,472,500) (1) -
Net loss - - -
----------------------------------------------------
Balances, December 31, 2002 15,552,363 56 48,064
----------------------------------------------------
Issuance of Series C redeemable convertible preferred stock
for consideration other than cash in connection with
Xpeed acquisition - - -
Issuance of common stock for consideraion other than cash
in connection with Xpeed acquisition 5,348,572 - -
Exercise of common stock options for cash 25,000 0 6
Repurchase of common stock for $0.10 per share (413,646) (4) -
Net loss - - -
----------------------------------------------------
Balances, December 31, 2003 20,512,289 52 48,071
----------------------------------------------------
Conversion of Series A, B & C into common stock 27,680,644 28 186
Issuance of Series D redeemable convertible preferred stock
for cash 3,381
Issuance of Series D redeemable convertible preferred stock
for consideration other than cash in connection with note
payable to Siemens 249
Exercise of common stock options for cash 301,158 0 16
Issuance of common stock for consideration other than cash
on purchase of intangible assets 300,000 0 9
Net loss
----------------------------------------------------
Balances, December 31, 2004 48,794,091 80 51,911
====================================================
Deficit
Accumulated Total
During the Stockholders'
Development (Deficit)
Stage Equity
-----------------------------------
Issuance of common stock to founders in March 2000 at
$0.001 per share for cash $ - $ 15
Issuance of Series A redeemable convertible preferred stock
in March 2000 at $0.80 per share for cash - 11,953
Issuance of Series B redeemable convertible preferred stock
in December 2000 at $4.50 per share for cash,
net of $73 of issuance cost - 35,927
Issuance of warrants to purchase Series B redeemable convertible
preferred stock in connection with an equipment lease in July 2000 - 180
Exercise of common stock options for cash - 407
Repurchase of common stock issued to founders
in July 2000 at $0.001 per share for cash -
Net loss and comprehensive loss (6,267) (6,267)
-----------------------------------
Balances, December 31, 2000 (6,267) - 42,215
-----------------------------------
Issuance cost related to Series B preferred stock - (30)
Issuance of warrants to purchase Series B redeemable convertible
preferred stock to a lessor in July 2001 - 79
Compensation expense related to accelerated stock options
issued to terminated employees in september 2001 - 28
Compensation expense related to stock option grants to
consultants in July and December 2001 - 12
Adjustment to valuation of warrant issued to a lessor to
purchase Series B redeemable convertible preferred stock - (38)
Exercise of common stock options for cash - 10
Repurchase of common stock issued to founders at
$0.10 per share for cash - (117)
Net loss and comprehensive loss (20,117) (20,117)
-----------------------------------
Balances, December 31, 2001 (26,384) 22,042
-----------------------------------
Repurchase of common stock for $0.10 to $0.90 per share - (101)
Exercise of common stock options for cash - 10
Cancellation of previously issued common stock subject to restriction - (1)
Net loss (8,612) (8,612)
-----------------------------------
Balances, December 31, 2002 (34,996) 13,338
-----------------------------------
Issuance of Series C redeemable convertible preferred stock
for consideration other than cash in connection with
Xpeed acquisition - -
Issuance of common stock for consideraion other than cash
in connection with Xpeed acquisition - -
Exercise of common stock options for cash - 7
Repurchase of common stock for $0.10 per share - (4)
Net loss (13,288) (13,288)
-----------------------------------
Balances, December 31, 2003 (48,284) 53
-----------------------------------
Conversion of Series A, B & C into common stock - -
Issuance of Series D redeemable convertible preferred stock
for cash 3,399
Issuance of Series D redeemable convertible preferred stock
for consideration other than cash in connection with note
payable to Siemens 250
Exercise of common stock options for cash 16
Issuance of common stock for consideration other than cash
on purchase of intangible assets 9
Net loss (5,098) (5,098)
-----------------------------------
Balances, December 31, 2004 (53,382) (1,371)
===================================
Accompanied notes are an integral part of these financial statements.
F-20
NAYNA NETWORKS, INC.
(a development stage enterprise)
STATEMENTS OF CASH FLOWS
(in thousands)
- --------------------------------------------------------------------------------
Cumulative
Period from
February 10,
2000
(date of
inception to)
Year Ended December 31, December 31,
2004 2003 2004
------------ ------------- -------------
Cash flows from operating activities :
Net loss $ (5,098) $ (13,288) $ (53,382)
Adjustments to reconcile net loss to net cash used
in operations:
Noncash charges related to stock options granted to
consultants and
accelerated vesting of employee stock options - - 40
Depreciation and amortization 615 930 3,751
Amortization of discount on warrants associated with
equipment financing - 67 202
Impairment of goodwill related to acquisitions 9 5,825 5,834
Loss on sale of property and equipment 12 364 1,126
Changes in operating assets and liabilities:
Restricted cash (1) 117 (49)
Accounts receivable (39) (121) (160)
Prepaid expenses and other current assets 28 13 (35)
Other assets (8) (9) (16)
Accounts payable (27) 306 655
Accrued liabilities 78 80 240
Accrued payroll liabilities (66) 215 295
------------ ------------- -------------
Net cash used in operating activities (4,496) (5,502) (41,499)
------------ ------------- -------------
Cash flows from investing activities :
Purchase of property and equipment (45) (108) (1,238)
Proceeds from sale of property and equipment 8 193 445
Costs associated with acquisition of Xpeed, Inc. - (3,685) (3,685)
------------ ------------- -------------
Net cash used in investing activities (37) (3,600) (4,478)
------------ ------------- -------------
Cash flows from financing activities :
Proceeds from loan facility - - 327
Payments on capital lease obligations and loan facility (758) (1,373) (5,589)
Proceeds from issuance of common stock, net of repurchases 16 4 243
Proceeds from issuance of Series A redeemable convertible
preferred stock, net of issuance costs - - 11,953
Proceeds from issuance of Series B redeemable convertible
preferred stock, net of issuance costs - - 35,897
Proceeds from issuance of Series D redeemable convertible
preferred stock, net of issuance costs 3,399 - 3,399
Issuance of convertible debt 922 - 622
Restricted cash - - (165)
------------ ------------- -------------
Net cash provided (used) by financing activities 3,579 (1,369) 46,686
------------ ------------- -------------
Net decrease in cash and cash equivalents (954) (10,471) 709
Cash and cash equivalents at beginning of period 1,663 12,134 -
Cash and cash equivalents at end of period
$ 709 $ 1,663 $ 709
============ ============= =============
Accompanied notes are an integral part of these financial statements.
F-21
NAYNA NETWORKS, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
($ in thousands, except shares and per share data)
- --------------------------------------------------------------------------------
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) The Company
Nayna Networks, Inc., a development stage enterprise (the Company or Nayna), is
engaged in the development of next-generation broadband access networking
solutions. During 2003, the Company expanded its business development focus as a
result of an acquisition of another company, to develop and market passive
optical networks (PON) equipment and digital subscriber line (DSL) equipment.
PON equipment delivers high performance broadband access over fiber cable,
linking business and residential subscribers to the local central office. DSL
technology provides high-speed data transmission using the local telephone
companys existing infrastructure. During 2004, the Company shifted its focus in
its development efforts in the Ethernet in the First Mile (EFM) segment of the
broadband access market. The Company has introduced a new platform that builds
upon the Companys PON expertise through its support for the latest generation
Gigabit Ethernet. The company is in the development stage and since inception,
has devoted substantially all of its efforts to the development of its products,
raising capital, and recruiting personnel.
Nayna Networks, Inc. was incorporated in Delaware on February 10, 2000 and is
located in San Jose, California.
The Company has incurred losses since its inception, and management believes
that it will continue to do so for the foreseeable future because of additional
costs and expenses related to continued development and expansion of the
Companys product offerings. The Company currently plans to generate revenues and
reduce operating expenses to levels that will result in at least neutral cash
flows from operations. However, until that stage is reached, the Company will
continue to use its current cash on hand and require additional financing to
support its operations. Failure to generate sufficient cash flows from
operations, raise additional financing or reduce certain discretionary spending
could have a material adverse effect on the Companys ability to continue as a
going concern and to achieve its intended business objectives. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
(b) Development Stage
Since its inception although the Company has commenced its principal operations,
it has not achieved a sufficient level of sales and market demand to become an
established operating enterprise. Therefore, as per the Statement of Financial
Accounting Standards (SFAS) No.7, Accounting and Reporting by Development Stage
Enterprises, the Company is being classified as a development stage enterprise.
The Company is in the development stage and accordingly, its financial
statements are presented in accordance with Statement of Financial Accounting
Standards (SFAS) No. 7, Accounting and Reporting by Development Stage
Enterprises. Successful completion of the Companys developmental program and,
ultimately, the attainment of profitable operations are dependent upon future
events, including future financing, successfully completing product development,
and achieving a sufficient level of sales and market demand to become an
established operating enterprise. However, there can be no assurance that the
Company will be able to achieve profitable operations.
F-22
(c) Estimates and Assumptions
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. A change in the facts and circumstances
surrounding these estimates could result in a change to the estimates and could
impact future operating results.
(d) Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all
instruments with an original maturity of three months or less to be cash
equivalents.
(e) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation expense is determined using the straight-line method over the
estimated useful lives of the respective assets, which are generally three to
five years for computers, equipment and furniture. Depreciation on leasehold
improvements is provided using the straight-line method over the shorter of the
estimated useful lives of the improvements or the lease term. Expenditures for
maintenance and repairs are charged to operating expense as incurred. Upon
retirement or sale, the original cost and related accumulated depreciation are
removed from the respective accounts, and the gains and losses are included in
other income or expense.
(f) Impairment of long-lived assets
The Company evaluates its long-lived assets, including property and equipment,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When the sum of the present
value of future net cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying amount, an impairment loss
would be measured based on the discounted cash flows compared to the carrying
amount. No impairment charge has been recorded in any of the periods presented.
(g) Business and credit risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash, cash equivalents invested in deposits and
trade receivables. The Company has not experienced any losses on its deposits of
cash and cash equivalents. Management believes that the institutions are
financially sound and, accordingly, minimal credit risk exists. The carrying
values reported in the balance sheets for cash, cash equivalents and trade
receivables approximate their fair values.
(h) Research and development
The Company accounts for research and development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 2, Accounting for
Research and development Costs, and, accordingly, the Company expenses research
and development costs when incurred.
F-23
(i) Income Taxes
The Company recognizes deferred tax assets and liabilities for operating loss
carryforwards, tax credit carryforwards and the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which the temporary differences are expected to be
recovered or settled. A valuation allowance is recorded to reduce the carrying
amounts of net deferred tax assets if there is uncertainty regarding their
realization.
(j) Stock-Based Compensation
The Company accounts for its stock-based employee compensation using the
intrinsic-value method, which follows the recognition and measurement principles
of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and Financial Accounting Standards Board (FASB) Interpretation
(FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation.
Stock and other equity instruments issued to non-employees are accounted for in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation, and EITF
Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services, and
are valued using the Black-Scholes model.
No stock-based employee compensation cost related to stock options is reflected
in net income (loss), as all options granted under stock-based compensation
plans had an exercise price equal to fair value of the underlying common stock
on grant date.
(k) Goodwill and Purchased Intangible Assets
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires
goodwill to be tested for impairment on an annual basis and between annual tests
in certain circumstances, and written down when impaired, rather than being
amortized as previous accounting standards required. Furthermore, SFAS 142
requires purchased intangible assets other than goodwill to be amortized over
their useful lives unless these lives are determined to be indefinite.
(l) Recently Issued Accounting Pronouncements
In March 2004, the FASB approved the consensus reached on EITF Issue No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The objective of EITF Issue No. 03-1 is to provide guidance for
identifying other-than-temporarily impaired investments. EITF Issue No. 03-1
also provides new disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, the FASB issued a FASB Staff Position
(FSP) EITF 03-1 that delays the effective date of the measurement and
recognition guidance in EITF Issue No. 03-1 until further notice. The disclosure
requirements of EITF Issue No. 03-1 are effective for the year ended December
31, 2004. Once the FASB reaches a final decision on the measurement and
recognition provisions, the Company will evaluate the impact of the adoption of
the accounting provisions of EITF Issue No. 03-1.
In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment, which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123 (R)
requires that compensation cost relating to all share-based payment
transactions, including grants of employee stock options, be recognized in the
statement of operations based on their fair values. Pro forma disclosure is no
longer an alternative. SFAS No. 123 (R) is effective the first interim or annual
reporting period that begins after June 15, 2005. The company expects to adopt
SFAS No. 123 (R) on July 1, 2005 and expects to apply the modified prospective
method upon adoption. The modified prospective method requires companies to
record compensation cost beginning with the
F-24
effective date (a) based on the requirements of SFAS No. 123 (R) for all
share-based payments granted after the effective date and (b) based on the
requirements of SFAS No. 123 for all awards granted to employees prior to the
effective date of SFAS No. 123 (R) that remain unvested on the effective date.
As permitted by SFAS No. 123, the Company currently accounts for share-based
payments to employees using APB Opinion No. 25s intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS no. 123 (R)s fair value method may have a
significant impact on the Companys results of operations, although it will have
no impact on the Companys overall financial position. The impact of the adoption
of SFAS No. 123 (R) cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. However, had the Company
adopted SFAS No. 123 (R) in prior periods, the impact of that standard would
have approximated the impact of SFAS No. 123 as described in the disclosure of
pro forma net income (loss) in Note H. The company expects its earnings will be
adversely affected upon adoption of SFAS No. 123 (R).
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets
an amendment of APB Opinion No. 29, which amends APB Opinion No. 29, Accounting
of Nonmonetary Transactions, to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company does not expect the adoption of SFAS
No. 153 to have a material impact on its results of operations or financial
condition.
NOTE B: ACQUISITION
On April 1, 2003, the Company acquired 100 percent of the outstanding common and
preferred shares of Xpeed, Inc. The results of Xpeeds operations have been
included in the consolidated financial statements since that date. Xpeed, Inc
was engaged in development and marketing of affordable passive optical network
(PON) and digital subscriber line (DSL) products. As a result of the
acquisition, the Company has introduced a new platform that builds upon the
Companys PON expertise through its support for the latest generation Gigabit
Ethernet.
The acquisition involved issuance of 10,029,219 shares of the Companys common
and preferred stock, cancellation of $300 convertible note and assumption of
liabilities $5,604.
SFAS No. 141 requires that all business combinations be accounted for by the
purchase method and accordingly, it requires acquisition cost to be determined
and allocated to assets acquired and liabilities assumed. However, independent
third party valuation of Xpeed was not performed and therefore no value could be
assigned to the shares issued as part of purchase consideration. Based on the
information available, the cost of acquisition in this report is determined and
allocated as follows:
Cost of acquisition:
Cancellation of note $ 300
Liabilities assumed 5,604
---------
$ 5,904
=========
Allocation:
Current assets $ 79
Goodwill 5,825
---------
$ 5,904
=========
F-25
As discussed in Note A, the cost allocated to goodwill is written down entirely
in the current year, following testing for impairment as required by SFAS No.
142 on "Goodwill and Other Intangible Assets". However, for tax purpose Goodwill
is being amortized over 15 years.
NOTE C: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
December 31,
2004 2003
Computer equipment $ 417 $ 416
Computer software 1,354 1,354
Test equipment 1,608 1,629
Furniture and fixtures 2 2
---------- ----------
3,381 3,401
Less: Accumulated depreciation (2,583) (2,013)
---------- ----------
Balances as at December 31, 2004 and 2003 $ 798 $ 1,388
========== ==========
NOTE D: IMPAIRMENT OF PURCHASED INTANGIBLE ASSETS
In April 2004, the Company purchased intangible assets from Accordion Networks,
Inc. and as purchase consideration issued 300,000 shares (valued at $0.03 per
share) of the Companys common stock.
Based on the impairment tests performed using present value of future cash
flows, the value of intangible asset acquired in April 2004 was considered
impaired as of December 31, 2004. Accordingly, the Statement of Operations for
the year ended December 31, 2004, included a charge of $9 for impairment of
intangible asset.
NOTE E: DEBT
In July 2001, the Company entered into a $1,500 equipment line of credit.
Borrowings outstanding at December 31, 2004 were $9, bearing interest at a rate
of 13% to 15%, for each of the draw downs that comprise the total outstanding
balance. The borrowings are payable in 36 equal installments, the last of which
is due in January 2005.
In April 2003, subsequent to the acquisition of Xpeed, Inc., the Company agreed
to pay off $5,904 towards liabilities of Xpeed, Inc. As at December 31, 2004,
the following amounts are outstanding:
Notes payable Current $ 718
Notes payable Non-current 298
Accrued liabilities 122
--------
Total $ 1,138
--------
NOTE F: COMMITMENTS
The Company leases office space under non-cancelable operating lease agreement
which expires in July 2005. Rent expense was $206, $1,043, $842 and $2,924 for
the years ended December 31, 2004, 2003, 2002, and, cumulatively, for the period
from February 10, 2000 (date of inception) to December 31, 2004, respectively.
F-26
NOTE G: CONVERTIBLE PREFERRED STOCK
The holders of Series D redeemable convertible preferred stock have various
rights and preferences as follows:
Voting
The holders of Series D preferred stock are entitled to voting rights equal to
the number of shares of common stock into which each such share preferred stock
could be converted at the record date and have voting rights and powers equal to
the voting rights and powers of the shares of common stock.
Dividends
The holders of shares of Series D are entitled to receive dividends prior and in
preference to any declaration or payment of any dividend (payable other than in
common stock) to the holders of common stock of the Company at the rates of
$0.015 per year on each outstanding share (as adjusted for any stock dividends,
combination, or splits with respect to such shares). When, as, and to the extent
that any dividends are paid on common stock, the holders of shares of redeemable
convertible preferred stock will be entitled to receive, in addition to the
dividend specified above, dividends in an amount equal to the amount paid in
such year on the number of shares of common stock. Such dividends are payable
only when, as, and if declared by the Board of Directors, but only out of funds
that are legally available, and are non-cumulative. No dividends have been
declared as of December 31, 2004.
Liquidation
In the event of liquidation, dissolution, or winding up of the Company, as
further defined in the Companys certificate of incorporation, holders of Series
D are entitled to receive in preference over common stockholders an amount of
$0.38144 per share, plus any declared but unpaid dividends (Preferred
Liquidation Preference). After payment has been made to the holders of the
Series D of the full amounts to which they are entitled pursuant to above, all
remaining assets available for distribution, if any, will be distributed ratably
among the holders of common stock.
Conversion
Each share of Series D preferred stock, at the option of the holder, is
convertible into fully paid, non-assessable shares of common stock at an initial
one-to-one conversion rate, which is subject to subsequent adjustment for
antidilution as provided in the Companys articles of incorporation.
Additionally, conversion is automatic upon the closing of a qualified public
offering of common stock with net proceeds of at least $15,000 and a public
offering price of at least $5 per share.
Antidilution provisions
The conversion price of the Companys preferred stock is subject to adjustment,
as further defined by the Companys restated articles of incorporation, to
prevent dilution in the event that the Company issues additional shares of
preferred stock, common stock, or common stock equivalents at a purchase price
less than the then-effective conversion price, provided, however, that without
triggering antidilution adjustments, the Company may issue to directors,
officers, employees, or consultants, shares of common stock that are reserved
for issuance under the Companys stock option plan or in connection with
financings or other transactions which involve consideration and which are
approved by the Board of Directors.
NOTE H: COMMON STOCK
During 2004, the Company issued 27,680,644 shares of common stock upon
conversion of Series A, B and C redeemable convertible preferred stock. The
Company also issued 301,158 shares to employees upon exercise of stock options
and 300,000 shares to another company as consideration for purchase of
intellectual property (See Note D).
F-27
NOTE I: STOCK OPTION PLANS
In May 2000, the Companys Board of Directors and stockholders adopted the 2000
Stock Plan (the Plan). The Plan provides for incentive stock options, as defined
by the Internal Revenue Code, to be granted to employees at an exercise price
not less than 100% of the fair value at the grant date as determined by the
Board of Directors, unless the optionee is a 10% stockholder, in which case the
per share exercise price will not be less than 110% of such fair value. The plan
also provides for nonqualified, stock options and stock purchase rights to be
issued to service providers at an exercise price of not less than 85% of the
fair value at the grant date unless the service provider is a 10% stockholder,
in which case the per share exercise price will not be less than 110% of such
fair value. Options granted generally have a maximum term of ten years from the
grant date, are immediately exercisable, and generally vest over a four-year
period. The Plan provides that the unvested shares are subject to repurchase by
the Company upon termination of employment at the original price paid for the
shares.
Activity under the Plan since adoption through December 31, 2004 is as follows:
Weighted-
Average
Shares Exercise
Available Outstanding Price
For Grant Options Per Share
Authorized at inception of the plan 10,000,000
Options granted (6,450,250) 6,450,250 $ 0.100
Options exercised - (4,069,000) 0.100
Options canceled 346,000 (346,000) 0.100
----------- -----------
Balances at December 31, 2000 3,895,750 2,035,250 0.100
Options granted (2,747,000) 2,747,000 0.570
Options exercised - (93,374) 0.110
Options canceled 1,054,626 (1,054,626) 0.450
Shares related to previously exercised
options subject to repurchase, which
were repurchased 1,174,399 - 0.100
----------- -----------
Balances at December 31, 2001 3,377,775 3,634,250 0.470
Options granted (1,308,000) 1,308,000 0.250
Options exercised - (100,750) 0.100
Options canceled 3,848,335 (3,848,335) 0.001
Shares related to previously exercised
options subject to repurchase, which
were repurchased 997,195 - 0.001
----------- -----------
Balances at December 31, 2002 6,915,305 993,165 0.250
Options granted (3,739,586) 3,739,586 0.250
Options exercised - (25,000) 0.260
Options canceled 1,042,900 (1,042,900) 0.253
Shares related to previously exercised
options subject to repurchase, which
were repurchased 413,646 - 0.009
----------- -----------
Balances at December 31, 2003 4,632,265 3,664,851 0.250
Increase in authorized options 20,000,000
Options granted (22,379,561) 22,379,561 0.031
Options exercised - (788,833) 0.135
Options canceled 4,868,213 (4,868,213) 0.210
----------- -----------
Balances at December 31, 2004 7,120,917 20,387,366 0.024
F-28
The following table summarizes information about stock options outstanding as of
December 31, 2004:
Options
Options Outstanding Exercisable
---------------------------------- -----------
Weighted- Number
Number of average of
Range of exercise Options remaining life Options
prices Outstanding (years) Vested
$ 0.10 117,896 4.66 84,250
0.50 80,000 6.87 53,750
0.25 1,672,900 8.42 941,025
0.05 18,516,570 9.58 6,035,801
---------- ---------
20,387,366 7,114,826
========== =========
Stock-based compensation
The Company has adopted the disclosure on provisions of SFAS 123, Accounting for
Stock-based Compensation. Pro forma information regarding net loss is required
in SFAS 123. Under this method, the estimated fair value of the options is
amortized to expense over the vesting period of the options. The Companys pro
forma net loss for the years ended December 31, 2004, 2003, 2002, 2001 and
cumulatively from February 10, 2000 (date of inception) to December 31, 2004
would have been $5,153, $13,320, $8,621, $20,313 and $53,720, respectively.
However, this is not likely to be representative of the effects of net loss on a
pro forma basis for future years, due to the inclusion of additional grants and
years of vesting in subsequent years.
The Company calculated the fair value of each option grant on the date of grant
using the minimum value method for employees and the Black-Scholes option
pricing model for non-employees with the following assumptions: dividend yield
at 0%; weighted average expected option term of ten years; volatility of 0% for
employees and 80% for non-employees, and risk-free interest rates of 1.13% to
5.28%. The weighted average fair value of options granted during 2004 was
$0.031.
NOTE J: INCOME TAXES
The components of net deferred tax assets are as follows:
December 31,
2004 2003
Net operating loss carryforwards
$ 16,235 $ 14,626
Tax credit carryforwards 2,294 2,294
---------- ----------
Total deferred tax assets 18,529 16,920
Less: Valuation allowance (18,529) (16,920)
---------- ----------
$ - $ -
========== ==========
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
F-29
As of December 31, 2004, the Company has a net operating loss carryforward of
approximately $47 million for federal purposes. The carryforwards are available
to offset future taxable income. If not utilized, these carryforwards will
expire in varying amounts beginning in 2020.
Under the Tax Reform Act of 1986, the amounts of and benefits from net operating
loss carry-forwards may be impaired or limited in certain circumstances. Events
which cause limitations in the amount of net operating losses that the Company
may utilize in any one year include, but are not limited to, cumulative
ownership change of more than 50%, as defined, over a three year period.
NOTE K: RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses for the years ended December 31, 2004 and
2003, include the following:
Employee payroll expense $ 1,705 $ 2,248
Cost of material 890 1,099
Outside services 293 342
Allocation of administrative overheads 508 -
Recovery of expenses from customers (425) (638)
--------- ---------
$ 2,971 $ 3,051
========= =========
NOTE L: SUBSEQUENT EVENTS
Nayna Networks, Inc. (the company) merged into Rescon Technology Corporation
(Rescon), a publicly traded company, on April 4, 2005 and became a wholly-owned
subsidiary of Rescon. Following the merger, Rescon Technology Corporation
changed its name to Nayna Networks, Inc.
Accompanied notes are an integral part of these financial statements.
F-30
[BACK COVER PAGE OF PROSPECTUS]
NAYNA NETWORKS, INC.
38,821,841 Shares of
Common Stock
================================================================================
PROSPECTUS
================================================================================
_________, 2005
PART II
Information Not Required in Prospectus
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, that our directors and executive officers shall be
entitled to indemnification from us for acts and omissions taking place in
connection with their activities as directors or executive officers.
Furthermore, our Bylaws provide for that we may indemnify our directors,
officers, employees and agents in most cases for any liability suffered by them
or arising out of their activities as our directors, officers, employees or
agents if they were acting in good faith and in a manner that such individual
reasonably believed to be in our best interest.
We believe that the indemnification provisions contained in each of our Articles
of Incorporation, as amended, and our Bylaws, are necessary to attract and
retain qualified persons as directors and officers.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable in connection with the sale of the common
stock being registered hereby. All amounts are estimates. No portion of these
expenses will be paid by the selling shareholders.
Item Amount
--- -------
SEC Registration Fees $ 2,894
Legal fees and expenses $ 100,000
Accounting fees and expenses $ 1,000
Miscellaneous expenses $ 2,000
-------
Total $ 105,894
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of the transactions by Registrant during the last
three years involving sales of Registrant's securities that were not registered
under the Securities Act. Each sale was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof:
(1) In April 2005, we issued 32,249,947 shares of common stock to the
stockholders of Nayna Networks, Inc., a Delaware corporation, our predecessor in
connection with the reverse acquisition of Rescon Technologies Corporation, a
Nevada corporation, by Nayna Networks, Inc.
(2) In April 2005, we issued a warrant to purchase 75,000 shares of common stock
to an individual in connection with a settlement agreement.
(3) In both September and December, 2005, we issued 50,000 shares of common
stock to Stonegate Securities in consideration for investment banking services
rendered by Stonegate.
(4) In November, we entered into a Securities Purchase Agreement, whereby the
investors purchased $1,600,000 convertible notes and warrants to purchase up to
800,000 shares for an aggregate purchase price of $1,600,000.
(5) In November 2005, we issued a warrant to purchase 380,000 shares of common
stock to Laidlaw & Company and 160,000 shares of common stock to Stonegate
Securities in consideration for serving as placement agents for our convertible
note financing
(6) In November 2005, we issued 51,000 shares of common stock to an individual
in connection with a settlement agreement
(7) During 2005, we borrowed $1,209,981 from accredited investors. In connection
with these loans, we issued warrants to purchase 750,990 shares of our common
stock
(8) In December 2005, we converted $2,338,785 loaned by accredited investors
into 2,338,785 shares of our common stock at a price of $1.00 per share.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were attached to the share certificates issued in such transactions. All
recipients had adequate access to information about the Registrant.
ITEM 27. EXHIBITS.
The following Exhibits are attached hereto and incorporated herein by reference:
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Reorganization dated October 15, 2004, by
and among Rescon Technology Corporation, a Nevada corporation,
Nayna Acquisition Corp., Christian Nigohossian, and Nayna
Networks, Inc., a Delaware corporation (Incorporated by
reference to Exhibit 10.1 of the Registrant's Quarterly Report
on Form 10-QSB filed on January 26, 2005 with the Securities and
Exchange Commission)
2.2 Asset Purchase Agreement, dated December 1, 2005, by and among
the Registrant, Abundance Networks, Inc., a Delaware
corporation, and Abundance Networks, LLC, a Delaware limited
liability company, and Abundance Networks (India) Pvt. Ltd., an
India private limited company. (Incorporated by reference to
Exhibit 10.1 of the Registrant's Current Report on Form 8-K
filed on December 7, 2005 with the Securities and Exchange
Commission)
3.1 Articles of Incorporation of the Registrant*
3.2 Amendment to Articles of Incorporation of the Registrant
(Incorporated by reference to Exhibit 3.1 of the Registrant's
Quarterly Report on Form 10-QSB filed on January 26, 2005 with
the Securities and Exchange Commission)
3.3 Amendment to Articles of Incorporation of the Registrant*
3.4 Bylaws of the Registrant*
4.1 Securities Purchase Agreement dated November 17, 2005 by and
between the Registrant and the investors set forth therein.
(Incorporated by reference to Exhibit 10.1 of the Registrant's
Current Report on Form 8-K filed on November 23, 2005 with the
Securities and Exchange Commission)
4.2 Form of Callable Secured Convertible Note. (Incorporated by
reference to Exhibit 10.2 of the Registrant's Current Report
on Form 8-K filed on November 23, 2005 with the Securities and
Exchange Commission)
4.3 Form of Stock Purchase Warrant. (Incorporated by reference to
Exhibit 10.3 of the Registrant's Current Report on Form 8-K
filed on November 23, 2005 with the Securities and Exchange
Commission)
4.4 Registration Rights Agreement dated November 17, 2005 by and
between the Registrant and the investors set forth therein.
(Incorporated by reference to Exhibit 10.4 of the Registrant's
Current Report on Form 8-K filed on November 23, 2005 with the
Securities and Exchange Commission)
4.5 Intellectual Property Security Agreement dated November 17, 2005
by and between the Registrant and the investors set forth
therein. (Incorporated by reference to Exhibit 10.5 of the
Registrant's Current Report on Form 8-K filed on November 23,
2005 with the Securities and Exchange Commission)
4.6 Security Agreement dated November 17, 2005 by and between the
Registrant and the investors set forth therein. (Incorporated by
reference to Exhibit 10.6 of the Registrant's Current Report on
Form 8-K filed on November 23, 2005 with the Securities and
Exchange Commission)
5.1 Opinion of Hutchison + Mason PLLC*
10.1 2005 Consultant Stock Plan (Incorporated by reference to Exhibit
99.1 of the Registrant's Registration Statement on Form S-8
filed on December 1, 2005 with the Securities and Exchange
Commission)
21.1 Subsidiaries
23.1 Consent of Naresh Arora
23.2 Consent of Mantyla McReynolds
23.3 Consent of Hutchison + Mason PLLC (included as part of Exhibit
5.1)*
* to be filed by amendment
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the provisions described in Item 24, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer of controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue. The
undersigned Registrant hereby undertakes that:
(1) It will file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement; and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, Registrant will treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) It will file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of the filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Jose, California, on December 16, 2005.
NAYNA NETWORKS, INC.
By: /s/ Naveen S. Bisht
-------------------------------
Naveen S. Bisht
President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors of Nayna Networks, Inc., do hereby constitute and
appoint Naveen S. Bisht and Michael K. Meyer, or either of them, our true and
lawful attorneys and agents, to do any and all such acts and things in our name
and on our behalf in our capacities as directors and officers and to execute any
and all instruments for us and in our names in the capacities indicated below,
which said attorneys and agents, or either of them, may deem necessary or
advisable to enable said corporation to comply with the Securities Act of 1933,
as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with the Registration Statement, including
specifically, but without limitation, power and authority to sign for us or in
any of our names and in the capacities indicated below any and all amendments
(including post-effective amendments) to this Registration Statement, or any
related Registration Statement under the Securities Act of 1933, as amended; and
we do hereby ratify and confirm all that the said attorneys and agents, or
either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration Statement
on Form SB-2 has been signed by the following persons in the capacities and on
the dates indicated:
Signature Title Date
President, Chief Executive Officer and Director
/s/ Naveen S. Bisht (Principal Executive Officer) December 16, 2005
- -----------------------
Chief Financial Officer
/s/ Michael K. Meyer (Principal Financial Officer) December 16, 2005
- -----------------------
/s/ Tsuyoshi Taira Director, Chairman December 16, 2005
- -----------------------
/s/ Richard Berman Director December 16, 2005
- -----------------------
/s/ William Boller Director December 16, 2005
- -----------------------
/s/ William E. O'Connor Director December 16, 2005
- -----------------------
/s/ Rahul Vaid Director December 16, 2005
- -----------------------