SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
MARK ONE
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2005; or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to
COMMISSION FILE NUMBER 0-22055
AMEDIA NETWORKS, INC.
(Exact Name of Small Business issuer as Specified in its Charter)
Delaware 11-3223672
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2 CORBETT WAY, EATONTOWN, NEW JERSEY 07724
(Address of principal executive offices) (Zip Code)
732-440-1992
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
The number of shares outstanding of the registrant's Common Stock as of
August 12, 2005, is 20,953,698 shares.
Transitional Small Business Disclosure Format (Check one) Yes |_| No |X|
AMEDIA NETWORKS, INC. AND ITS SUBSIDIARY
(A Development Stage Company)
Index
Forward Looking Statements (ii)
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet as of
June 30, 2005 (unaudited) 1
Condensed Consolidated Statements of Operations
for the six and three months ended June 30, 2005 and 2004
and from Inception (July 14, 1994) to June 30, 2005
(unaudited) 2
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2005 and 2004
and from Inception (July 14, 1994) to June 30, 2005
(unaudited) 3
Notes to the Condensed Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operation 13
Item 3. Controls and Procedures 17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
Exhibits 22
-(i)-
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-QSB ARE
"FORWARD-LOOKING STATEMENTS". FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY
TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS",
"ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE
NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT
LIMITATION, STATEMENTS BELOW REGARDING: THE COMPANY'S EXPECTATIONS AS TO SOURCES
OF REVENUES; THE PROSPECTS FOR THE COMPANY'S NEW BUSINESS IN THE
TELECOMMUNICATIONS FIELD; THE COMPANY'S INTENDED BUSINESS PLANS; THE COMPANY'S
INTENTIONS TO ACQUIRE OR DEVELOP OTHER TECHNOLOGIES; BELIEF AS TO THE
SUFFICIENCY OF ITS CASH RESERVES; AND THE COMPANY'S PROSPECTS FOR RAISING
ADDITIONAL CAPITAL. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING
STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE COMPETITIVE
ENVIRONMENT GENERALLY AND IN THE TELECOMMUNICATIONS FIELD PARTICULARLY, THE
COMPANY'S DIFFICULTY IN RAISING CAPITAL, THE COMPANY'S NET OPERATING LOSS
CARRYFORWARDS, SUFFICIENCY OF CASH RESERVES, THE AVAILABILITY OF AND THE TERMS
OF FINANCING, DILUTION OF THE COMPANY'S STOCKHOLDERS, INFLATION, CHANGES IN
COSTS AND AVAILABILITY OF GOODS AND SERVICES, ECONOMIC CONDITIONS IN GENERAL AND
IN THE COMPANY'S SPECIFIC MARKET AREAS, DEMOGRAPHIC CHANGES, CHANGES IN FEDERAL,
STATE AND/OR LOCAL GOVERNMENT LAW AND REGULATIONS, CHANGES IN OPERATING STRATEGY
OR DEVELOPMENT PLANS, AND CHANGES IN THE COMPANY'S ACQUISITIONS AND CAPITAL
EXPENDITURE PLANS. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS REFLECTED IN
THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR ANY
OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THESE
FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY
FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH
STATEMENTS TO ACTUAL RESULTS.
(ii)
AMEDIA NETWORKS, INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 2005
ASSETS
Current assets
Cash and cash equivalents $ 4,349,748
Inventories 206,812
Prepaid expenses and other current assets 345,817
----------------
Total current assets 4,902,377
----------------
Property and equipment - net 588,925
----------------
Other assets
Intangible asset 436,010
Security deposit 26,099
----------------
Total other assets 462,109
----------------
Total assets $ 5,953,411
================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities
Accounts payable $ 617,615
Accrued expenses 352,918
Dividends payable 108,771
Current portion of capital leases 4,795
----------------
Total current liabilities 1,084,099
----------------
Long-term liabilities
Capital leases, less current maturities 14,791
----------------
Total liabilites 1,098,890
----------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value;
5,000,000 shares authorized;
Series A convertible preferred stock,
52,500 shares authorized; 21,403 issued and outstanding
($2,140,300 liquidation preference) 21
Series B convertible preferred stock,
85,000 shares authorized; 77,650 issued and outstanding
($7,765,000 liquidation preference) 78
Common stock, $.001 par value;
75,000,000 shares authorized; 20,949,709
issued and outstanding 20,950
Additional paid-in capital 57,918,997
Deficit accumulated during the development stage (52,723,236)
Deferred offering costs (267,404)
Deferred compensation (94,885)
----------------
Total stockholders' equity 4,854,521
----------------
Total liabilities and stockholders' equity $ 5,953,411
================
See Notes to Condensed Consolidated Financial Statements.
1
AMEDIA NETWORKS, INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
From
Inception
Six Months (July 14, Three Months
Ended 1994) to Ended
June 30, June 30, June 30,
2005 2004 2005 2005 2004
---- ---- ---- ---- ----
Sales $ 5,248 $ - $ 5,248 $ 2,598 $ -
-------------- -------------- ---------------- ------------- --------------
Cost of goods sold 5,846 - 5,846 2,705 -
-------------- -------------- ---------------- ------------- --------------
Gross loss (598) - (598) (107) -
-------------- -------------- ---------------- ------------- --------------
Expenses
Research and development (1) 2,054,175 1,561,411 10,981,001 996,441 311,411
Sales and marketing (1) 1,078,540 108,617 6,041,310 637,060 108,617
General and administrative (1) 903,307 795,556 15,686,456 485,121 410,433
Stock-based compensation 41,555 65,010 11,533,115 16,029 65,010
Bad debt expense - - 161,000 - -
-------------- -------------- ---------------- ------------- --------------
Total expenses 4,077,577 2,530,594 44,402,882 2,134,651 895,471
-------------- -------------- ---------------- ------------- --------------
Operating loss (4,078,175) (2,530,594) (44,403,480) (2,134,758) (895,471)
-------------- -------------- ---------------- ------------- --------------
Other (income) expense
Legal settlement - - 565,833 - -
Late filing penalty on preferred stock registration - - 199,500 - -
Realized gain of foreign currency translation - - (81,007) - -
Loss on investment - - 17,000 - -
Other income - - (75,000) - -
Net losses of affiliate - - 1,196,656 - -
Impairment loss on investment in affiliate - - 748,690 - -
Revenue from copy protection business - - (125,724) - -
Gain on sale of copy protection business - - (5,708,328) - -
Gain on sale of investment in affiliate - - (40,000) - -
Loss on disposition of fixed assets 1,692 - 30,873 - -
Amortization of deferred financing costs - - 4,516,775 - -
Interest income (19,354) (8,766) (968,083) (14,921) (3,159)
Interest expense 260,315 - 2,226,462 260,315 -
-------------- -------------- ---------------- ------------- --------------
Total other (income) expense 242,653 (8,766) 2,503,647 245,394 (3,159)
-------------- -------------- ---------------- ------------- --------------
Net loss $ (4,320,828) $ (2,521,828) $ (46,907,127) $ (2,380,152) $ (892,312)
============== ============== ================ ============= ==============
Deemed dividend on convertible preferred stock 2,943,272 - 5,438,025 2,943,272 -
Dividend on convertible preferred stock 233,098 - 378,084 161,910 -
-------------- -------------- ---------------- ------------- --------------
Net loss applicable to common stockholders $ (7,497,198) $ (2,521,828) $ (52,723,236) $ (5,485,334) $ (892,312)
============== ============== ================ ============= ==============
Per share data:
Basic and diluted $ (0.39) $ (0.15) $ (0.26) $ (0.05)
============== ============== ============= ==============
Weighted average number
of common shares used in
basic and diluted loss per share 19,386,647 16,440,630 20,758,670 16,440,630
============== ============== ============= ==============
(1) Excludes non-cash, stock-based compensation expense as follows:
Research and development $ 9,287 $ - $ 465,526 $ 4,644 $ -
Sales and marketing - - 5,336,558 - -
General and administrative 32,268 65,010 5,731,031 11,385 65,010
-------------- -------------- ---------------- ------------- --------------
$ 41,555 $ 65,010 $ 11,533,115 $ 16,029 $ 65,010
============== ============== ================ ============= ==============
See Notes to Condensed Consolidated Financial Statements.
2
AMEDIA NETWORKS, INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
From
Six Months Inception
Ended (July 14, 1994)
June 30, to June 30,
2005 2004 2005
---- ---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,320,828) $ (2,521,828) $ (46,907,127)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 41,829 1,488 1,005,094
Forgiveness of note receivable, officer - - 100,000
Loss from disposition of fixed assets 1,692 - 197,065
Bad debt expense - - 161,000
Amortization of note discount and finance costs 104,985 - 4,771,210
Foreign currency translation adjustment and realized gain - - (82,535)
Beneficial conversion feature of convertible debt - - 572,505
Stock, warrants and options issued for services and legal settlement 41,555 65,010 11,706,076
Payment of common stock issued with guaranteed selling price - - (155,344)
Net losses of affiliate - - 1,196,656
Impairment loss on investment in affiliate - - 748,690
Gain on sale of Copy Protection Business - - (5,708,328)
Gain on sale of investment in affiliate - - (40,000)
Increase (decrease) in cash attributable
to changes in assets and liabilities
Accounts receivable - - 554
Inventories (206,812) - (206,812)
Prepaid expenses and other current assets (215,616) 58,651 (375,475)
Other assets (26,099) - (26,099)
Accounts payable 350,743 59,808 70,421
Accrued expenses 93,935 5,571 1,434,556
Accrued severance pay - (64,734) (122,363)
Interest payable - - 251,019
--------------- --------------- ----------------
Net cash used by operating activities (4,134,616) (2,396,034) (31,409,237)
--------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed assets - - 68,594
Purchases of property and equipment (480,270) (22,153) (1,642,655)
Intangible asset (436,010) - (436,010)
Proceeds from sale of Copy Protection Business - - 5,050,000
Proceeds from sale of investment in affiliate - - 40,000
Investment in ComSign, Ltd. - - (2,000,000)
Increase in note receivable, officer - - (100,000)
Increase in note receivable - - (130,000)
Increase in organization costs - - (7,680)
--------------- --------------- ----------------
Net cash (used in) provided by investing activities (916,280) (22,153) 842,249
--------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of convertible preferred stock 7,084,170 - 11,726,600
Proceeds from exercise of warrants 189,230 - 189,230
Proceeds from issuance of common stock - - 21,177,354
Stock offering costs - - (475,664)
Deferred financing costs - - (682,312)
Proceeds from short-term borrowings - - 1,356,155
Proceeds from capital lease obligations 19,586 - 19,586
Proceeds from long-term debt - - 2,751,825
Proceeds from convertible debentures - - 2,000,000
Repayment of short-term borrowings - - (1,357,082)
Repayments of long-term debt - - (1,615,825)
Dividends paid to preferred stockholders (167,719) - (167,719)
--------------- --------------- ----------------
Net cash provided by financing activities 7,125,267 - 34,922,148
--------------- --------------- ----------------
Effect of exchange rate changes on cash - - (5,412)
--------------- --------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,074,371 (2,418,187) 4,349,748
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,275,377 3,031,090 -
--------------- --------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,349,748 $ 612,903 $ 4,349,748
=============== =============== ================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 5,178 $ - $ 5,178
=============== =============== ================
Non-cash investing and financing activities:
Deemed dividend in connection with sale
of convertible preferred stock $ 2,943,272 $ - $ 5,438,025
=============== =============== ================
Common stock dividend on Series A convertible preferred stock $ 101,593 $ - $ 101,593
=============== =============== ================
See Notes to Condensed Consolidated Financial Statements.
3
AMEDIA NETWORKS, INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - THE COMPANY DESCRIPTION OF BUSINESS AND DEVELOPMENT STAGE OPERATIONS
Amedia Networks, Inc. (hereinafter, the "Company" or "Amedia"), is a development
stage company that designs, develops and markets technology-based broadband
access solutions for voice, video and data services, focusing on fiber-based and
Ethernet-based solutions. The Company's products are designed to deliver "triple
play" (voice, video and data) broadband communication. These products are
designed for placement at various points in the network infrastructure layout.
The Company is marketing its initial products to communications carriers,
municipal authorities and communication equipment companies.
The core technologies underlying the Company's initial Fiber-to-the-Premises
(FTTP) products have been co-developed with Lucent Technologies, Inc.
("Lucent"). The Company and Lucent have entered into a Development and Licensing
Agreement dated as of January 6, 2004 (the "Development and Licensing
Agreement") relating to the development by Lucent and licensing to the Company
of specified core technologies. The Company's FTTP product line utilizes Lucent
owned technologies and solutions as well as technologies and solutions developed
jointly by the Company and Lucent. Under the Development and Licensing
Agreement, Lucent has granted to Amedia a worldwide and perpetual non-exclusive
license to manufacture, develop and sell products designed to deliver broadband
based access solutions utilizing the Lucent owned technologies and related
patents.
The Company has been engaged in the broadband access communications business
since March 2004. From its inception in 1994 through May 2003, Amedia was
primarily engaged in the business of designing and developing technologies that
provide copy protection for electronic content distributed on optical media and
the Internet under the name of "TTR Technologies, Inc." In May 2003, the Company
sold its copy protection business. In May 2004, the Company changed its name to
"Amedia Networks, Inc."
NOTE 2 - GOING CONCERN AND MANAGEMENT'S PLAN
The Company's condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has incurred
net losses of $52,723,236 since its inception, and as of June 30, 2005, has
working capital of $3,818,278 and stockholders' equity of $4,854,521. The
Company's ability to continue operating as a going concern is substantially
dependent on its ability to generate operating cash flow through the execution
of its business plan or to secure funding sufficient to provide for the working
capital needs of its business. There is no assurance that the Company will
generate revenue or raise the funds that it needs to realize its business plan
or maintain its operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty. There can be no assurance that management will
be successful in implementing its business plan or that the successful
implementation of such business plan will actually improve the Company's
operating results.
During April and May 2005, the Company raised net proceeds of approximately
$7.09 million through the private placement to individual and institutional
investors of the Company's equity securities. The Company's financing
transactions in April and May 2005 are discussed in further detail in Note 5
(Equity Raise).
4
NOTE 3 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements contained herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial statements, the
instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, these
financial statements do not include all the information and footnotes required
by accounting principles generally accepted in the United States of America for
annual financial statements. In the opinion of management, the accompanying
condensed consolidated financial statements contain all the adjustments
necessary (consisting only of normal recurring accruals) to make the financial
position of the Company at June 30, 2005, and its results of operations and cash
flows for the six months ended June 30, 2005 not misleading. Operating results
for the six months ended June 30, 2005 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005. For further
information, refer to the condensed consolidated financial statements and
footnotes thereto included in the Company's Form 10-KSB for the year ended
December 31, 2004 as filed with the Securities and Exchange Commission.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, TTR LTD., which has been inactive since
December 2002. All significant inter-company accounts and transactions have been
eliminated in consolidation.
REVENUE RECOGNITION
The Company receives revenue from the sale of its QoStream product line which is
comprised of hardware and software as well as related hardware. Revenue is
recognized on product sales when there exists persuasive evidence of an
arrangement pursuant to which units are shipped, the fee is fixed and
determinable and collectibilty is probable. During the six months ended June 30,
2005 the Company recorded $5,248 from unit sales and related hardware.
INVENTORY
Inventory includes costs for materials and finished product which is stated at
the lower of cost or market. As of June 30, 2005 any items relieved from
inventory have been determined under the specific identification method. During
the six months ended June 30, 2005 the Company had inventories of $206,812.
INTANGIBLE ASSET
During the six months ended June 30, 2005 the Company capitalized $436,010 of
internally developed software product costs based on reaching a high level
design stage and achieving technical feasibility with regards to a certain
product as defined in SFAS No. 86. Such software production costs are to be
amortized over the expected beneficial life once the general release stage of
the product is reached.
5
RESEARCH AND DEVELOPMENT
Research and development costs incurred in connection with product development
and testing are expensed as incurred. Research and development costs for the six
months ended June 30, 2005 and 2004 were $2,054,175 and $1,561,411,
respectively.
EMPLOYEE STOCK OPTIONS
As permitted under Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure," which
amended SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"),
the Company has elected to continue to follow the intrinsic value method in
accounting for its stock-based employee compensation arrangements, as defined by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations including Financial
Accounting Standards Board Interpretations No. 44, "Accounting for Certain
Transactions Involving Stock Compensation," an interpretation of APB No. 25.
The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation for the six and three months ended June 30,
2005 and 2004:
Six Months Ended, Three Months Ended,
June 30, June 30,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net loss applicable to
common stockholders as reported $ (7,497,198) $ (2,521,828) $ (5,485,334) $ (892,312)
Add: Stock-based employee compensation
expense included in reported
net loss, net of related
tax effects 7,000 4,261 3,500 4,261
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (356,360) (464,722) (143,351) (186,039)
------------- ------------- ------------- -------------
Pro forma net loss $ (7,846,558) $ (2,982,289) $ (5,625,185) $ (1,074,090)
============= ============= ============= =============
Net loss per share applicable to
common stockholders, basic and diluted
as reported $ (0.39) $ (0.15) $ (0.26) $ (0.05)
============= ============= ============= =============
Pro forma net loss per share,
basic and diluted $ (0.40) $ (0.18) $ (0.27) $ (0.07)
============= ============= ============= =============
The fair value of employee stock options at the date of grant was estimated
using the Black-Scholes option pricing method with the following
weighted-average assumptions:
Expected Life (Years) 3.43
Interest Rate 3.65%
Annual Rate of Dividends --%
Volatility 76%
The weighted average fair value of options at the date of grant using the fair
value-based method is estimated at $0.56 .
6
From January 1 through March 31, 2005, in conjunction with their employment
agreements, seven new Company employees received options to purchase a total of
up to 315,000 shares of the Company's common stock ("Common Stock") under the
Company's 2000 Equity Incentive Plan (the "2000 Equity Incentive Plan"). The
options vest over a two or three-year period from the date of grant and are
exercisable at exercise prices ranging from $0.89 to $1.24 per share (based on
the closing market price of the Common Stock on the employees respective dates
of hire).
On February 14, 2005 the Company granted to a consultant a non-qualified option
under the 2000 Equity Incentive Plan to purchase up to 25,000 shares of Common
Stock at an exercise price of $0.89 per share. The option was fully vested upon
the date of grant. The $0.89 exercise price equaled the closing market price of
the Common Stock on the date of grant. The fair value of the option on the date
of grant equaled $10,161. The Company recorded stock-based compensation expense
of $10,161 in the accompanying financial statements for the six months ended
June 30, 2005 for this transaction.
On February 16, 2005 the Company granted to two consultants non-qualified
options under the 2000 Equity Incentive Plan to purchase an aggregate of up to
50,000 shares of Common Stock at an exercise price of $0.94 per share vesting
over 3 years. The $0.94 exercise price equaled the closing market price of the
Common Stock on the date of grant. The fair value of the options amounted to
$27,440 and is being amortized over the 3-year vesting period. The Company
recorded stock-based compensation expense of $4,573 in the accompanying
financial statements for the six months ended June 30, 2005 for this
transaction.
From April 1 through June 30, 2005, in conjunction with their employment
agreements, six new Company employees received options to purchase a total of up
to 285,000 shares of Common Stock under the Company's 2000 Equity Incentive
Plan. The options vest over a two or three-year period from the date of grant
and are exercisable at exercise prices ranging from $1.02 to $1.25 per share
(based on the closing market price of the Common Stock on the employees
respective dates of hire).
On May 23, 2005, pursuant to an employment agreement (See Note 9 Employment
Agreement) the Company's new Chief Financial Officer received options to
purchase a total of up to 300,000 shares of Common Stock under the Company's
2000 Equity Incentive Plan. The options vest over a three-year period from the
date of grant and are exercisable at an exercise price of $1.05 per share (based
on the closing market price of the Company's common stock on the respective date
of hire).
On May 25, 2005 the Company granted to a member of its advisory board, on the
one-year anniversary of service, a non-qualified option under the 2000 Equity
Incentive Plan to purchase up to 10,000 shares of Common Stock at an exercise
price of $0.98 per share. The option vests over a two-year period from the date
of grant. The $0.98 exercise price equaled the closing market price of the
Common Stock on the date of grant. The fair value of the option on the date of
grant equaled $5,310. The Company recorded stock-based compensation expense of
$664 in the accompanying financial statements for the six months ended June 30,
2005 for this transaction.
On June 9, 2005, the Company awarded six employees options to purchase a total
of up to 319,000 shares of Common Stock under the Company's 2000 Equity
Incentive Plan. The options vest over a three-year period from the date of grant
and are exercisable at an exercise price of $.92 per share (based on the closing
market price of the Common Stock on the date of grant).
7
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 123R "Share Based Payment". This statement is a revision of SFAS
Statement No. 123, "Accounting for Stock-Based Compensation" and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. SFAS 123R addresses all forms of share based payment
("SBP") awards including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. Under SFAS 123R,
SBP awards result in a cost that will be measured at fair value on the awards'
grant date, based on the estimated number of awards that are expected to vest
and will be reflected as compensation expense in the financial statements. This
statement is effective for public entities that file as small business issuers -
as of the beginning of the first annual reporting period that begins after
December 15, 2005. Upon the adoption of this pronouncement the Company expects
to record additional stock compensation expense.
EITF Issue 04-8, "The Effect of Contingently Convertible Instruments on Diluted
Earnings per Share." The EITF reached a consensus that contingently convertible
instruments, such as contingently convertible debt, contingently convertible
preferred stock, and other such securities should be included in diluted
earnings per share (if dilutive) regardless of whether the market price trigger
has been met. The consensus is effective for reporting periods ending after
December 15, 2004. The adoption of this pronouncement did not have material
effect on the Company's financial statements.
NOTE 4 - LOSS PER SHARE
Basic loss per share ("EPS") is computed by dividing net loss applicable to
common shares by the weighted-average of common shares outstanding during the
period.
Diluted loss per share adjusts basic loss per share for the effects of
convertible securities, stock options and other potentially dilutive
instruments, only in the periods in which such effect is dilutive. The shares
assumable upon exercise of stock options and warrants are excluded from the
calculation of net loss per share, as their inclusion would be anti-dilutive.
Common stock equivalents have been excluded from the weighted-average shares for
the six and three months ended June 30, 2005 and 2004 as their inclusion would
be anti-dilutive. Potentially dilutive options to purchase 6,302,642 and
4,393,642 shares of Common Stock were outstanding at June 30, 2005 and 2004,
respectively. Potentially dilutive warrants to purchase 13,728,786 and 2,265,000
shares of Common Stock were outstanding at June 30, 2005 and 2004, respectively.
In addition, there were 21,403 shares of the Company's Series A 7% Convertible
Preferred Stock, par value $0.001 per share ("Series A Preferred Stock"),
outstanding and potentially convertible into 2,853,733 shares of Common Stock at
June 30, 2005. In addition, 77,650 shares of the Company's Series B 8%
Convertible Preferred Stock, par value $0.001 per share, were outstanding and
potentially convertible into 7,688,119 shares of Common Stock at June 30, 2005.
NOTE 5 - EQUITY RAISE
On April 26, 2005 the Company completed a private placement to certain
individual and institutional investors of 60,000 shares of Series B 8%
Convertible Preferred Stock par value $0.001 per share (the "Series B Preferred
Stock") for gross proceeds of $6 million. Thereafter, on May 9, 2005, the
Company sold to institutional investors an additional 17,650 shares of Series B
Preferred Stock for aggregate gross proceeds of $1,765,000 (together with the
private placement in April 2005 the "2005 Private Placement"). Each share of
Series B Preferred Stock has a stated value of $100 and, commencing on the
earlier of (i) 65th day following the issuance thereof or (ii) the effective
date of the Registration Statement (as defined below), is convertible into
shares of Common Stock at an initial conversion rate of
8
$1.01 per share, subject to adjustment. The rights and preferences of the Series
B Preferred Stock are set forth in a Certificate of Designations of Rights and
Preferences that Company filed with the Secretary of State of the State of
Delaware on April 20, 2005. In connection with the issuance of the Series B
Preferred Stock, the Company issued to the investors five-year warrants (the
"Investor Warrants") to purchase, in the aggregate, up to approximately
3,844,062 shares of Common Stock at a per share exercise price of $1.50, subject
to adjustment.
The Company received aggregate net proceeds of approximately $5,590,000, after
payment of offering related expenses, repayment of the outstanding principal and
accrued interest on the Bridge Loan (See Note 7 - Note Payable). The 2005
Private Placement resulted in a beneficial conversion feature of $3,076,104 for
which the Company recorded a deemed dividend of $2,943,272 for the six months
ended June 30, 2005. The remaining unaccreted deemed dividend of $132,832 will
be recorded during the third quarter of 2005 when certain Series B Preferred
shares becomes convertible.
Dividends on the Series B Preferred Stock accrue at the rate of 8% per annum and
are payable bi-annually, with the first scheduled dividend payment date being
December 31, 2005, and on conversion. When due, dividends may be paid, at the
option of the Company, either in cash or in shares of Common Stock at a
specified rate. If not converted earlier, the Series B Preferred Stock will
automatically convert on the fifth anniversary of issuance into shares of Common
Stock at the conversion price then in effect. The Company recorded an accrual
for the preferred stock dividend payable of $105,209 and a corresponding charge
to net loss applicable to common stockholders for the six months ended June 30,
2005.
Holders of the Investor Warrants are entitled to exercise those warrants on a
cashless basis following the first anniversary of issuance if the Registration
Statement is not in effect at the time of exercise.
In connection with the 2005 Private Placement, the Company agreed to file within
60 days of the first closing of the 2005 Private Placement a registration
statement covering the Common Stock issuable upon conversion of the Series B
Preferred Stock, the Investor Warrants and the Placement Agent Warrants referred
to below. In satisfaction of such obligation, on July 1, 2005 the Company filed
a registration statement on Form S-2 covering the Common Stock issuable upon
conversion of the Series B Preferred Stock, the Investor Warrants and the
Placement Agent Warrants.
In connection with the placement of the Series B Preferred Stock, the Company
issued to a placement agent warrants (the "Placement Agent Warrants") to
purchase up to 1,153,220 shares of Common Stock, pursuant to which (i) 768,814
shares are issuable at a per share exercise price of $1.01 and (ii) 384,406
shares are issuable at a per share exercise price of $1.50. The Placement Agent
Warrants have an expiration date of approximately five years from the closing
and are exercisable on substantially the same terms and conditions as the
Investor Warrants, including without limitation, expiration date, potential
adjustments and cashless exercise rights. In addition, at the closing the
Company also paid to the placement agent fees totaling 8% of the gross proceeds.
NOTE 6 - STOCKHOLDERS EQUITY
COMMON STOCK
During the six months ended June 30, 2005:
The Company's stockholders voted to increase the authorized number of shares of
Common Stock from 50 million to 75 million shares.
9
The Company issued approximately 4.15 million shares of Common Stock upon the
conversion of 31,097 shares of Series A Preferred Stock representing
approximately $3.1 million in stated value at a per share conversion price of
$0.75.
The Company issued 251,827 shares of Common Stock upon the exercise of stock
warrants resulting in proceeds of approximately $189,000.
The Company issued 110,990 shares of Common Stock valued at $101,593 to Series A
Preferred Stockholders as dividends. The shares were issued at $0.75 per share
which was a discount to the fair market value on the date of issuance.
NOTE 7- NOTE PAYABLE
On April 5, 2005 the Company entered into a Bridge Loan Agreement ("Loan
Agreement") with a private investor (the "Lender") pursuant to which the Lender
advanced a loan to the Company in the principal amount of $1,500,000 (the
"Bridge Loan"). Interest on the Bridge Loan accrued at the rate of 7% per annum.
Pursuant to the Loan Agreement, the Company issued to the Lender a convertible
promissory note in the principal amount of $1,500,000. To secure the Company's
obligations under the Loan Agreement, the Company granted to the Lender a
security interest in substantially all of its assets, including without
limitation, its intellectual property, under the terms and conditions of a
Security Agreement dated as of the date of the Loan Agreement, which security
interest, by its terms, is released upon payment or other satisfaction of the
outstanding amounts. The Company received net proceeds of $1,350,000 from the
proceeds of the loan, after the payment of transaction related fees and
expenses. On April 26, 2005 the Company repaid to the Lender $1,505,178 from the
proceeds of the 2005 Private Placement, representing the outstanding principal
amount of the Bridge Loan and interest accrued thereon.
In connection with the Bridge Loan, the Company also issued to the Lender a
five-year warrant (the "Bridge Warrant") to purchase up to 150,000 shares of
Common Stock at a per share exercise price of $2.50. Upon the closing of the
2005 Private Placement, the per share exercise price of the Bridge Warrant was
adjusted to $1.50, in accordance with the terms of the Loan Agreement. The
Company recorded as interest expense $104,985 of amortization note discount in
the accompanying financial statements for the six months ended June 30, 2005 for
this transaction.
NOTE 8 - PRODUCT ENHANCEMENT
The Company and Lucent Technologies, Inc. ("Lucent") are parties to a
Development and Licensing Agreement effective as of January 2004. In April 2004
and in September 2004, the Company and Lucent entered into supplementary
development agreements to add to the Company's product line additional product
features and upgrades intended to enhance product competitiveness in respect of
which the Company agreed to pay to Lucent an additional $868,000 upon receipt of
deliverables. As of June 30, 2005, the Company has remitted the entire $868,000
to Lucent for this development work.
During May 2005, the Company and Lucent entered into a supplementary development
agreement to add additional product features and developments to the Company's
product line in consideration of total payments by the Company of approximately
$1,100,000. Payment is due upon delivery of the features at specified times. The
development work is currently contemplated to continue through fiscal year 2005.
As of June 30, 2005, research and development costs incurred in connection with
this supplementary development work were $277,000. Amounts are payable upon the
satisfaction of milestones specified in the agreement.
10
NOTE 9 - EMPLOYMENT AGREEMENT
On May 25, 2005, the Company entered into an employment agreement with James D.
Gardner pursuant to which Mr. Gardner will serve as the Company's Chief
Financial Officer. The agreement has an initial term of one year, provided, that
within the first 90 days the Company is entitled to terminate the agreement.
After the initial term of one year, the agreement is automatically renewable for
two additional one year terms unless either party notifies the other in writing
upon at least 45 days prior to the scheduled termination of the initial term or
any renewal term that it does not intend to renew the agreement. Mr. Gardner
will be paid a monthly salary of $14,583 and was granted options under the
Company's 2000 Equity Incentive Plan to purchase 300,000 shares of Common Stock
at a per share purchase price of $1.05. The options are to vest over three years
on a quarterly basis, provided that if within the first 6 months of employment
Mr. Gardner resigns or the agreement is terminated by the Company for cause (as
defined in the employment agreement), none of the options vest. The agreement
may be terminated by Mr. Gardner for any reason on 60 days written notice to the
Company or by the Company immediately for cause. In the event of a termination
by the Company for any reason other than cause, the Company shall pay Mr.
Gardner (i) if such termination occurs during the initial term of the agreement,
an amount equal to 3 months' salary and (ii) if such termination occurs after
the initial term, an amount equal to 6 months' salary.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Lease
- -----
On February 9, 2005, the Company entered into a lease for office facilities at 2
Corbett Way, Eatontown, New Jersey, 07724, to which it relocated in May 2005.
The new facilities are comprised of approximately 7,500 square feet. The lease
term began upon the Company's relocation to the new facilities and will be for a
term of approximately five years. Monthly payments under the lease will vary as
follows: for the first lease year, monthly payments of approximately $10,000
(after giving effect to agreed upon rent credits for such year); for the second
lease year, monthly payments of approximately $14,000; for the third lease year,
monthly payments of approximately $14,500; for the fourth lease year, monthly
payments of approximately $14,700; and for the fifth lease year, monthly
payments of approximately $14,900. In connection with the lease agreement the
Company paid a security deposit of approximately $26,000.
On June 1, 2005 the Company entered into a modification of the above referenced
lease agreement pursuant to which the Company agreed to lease an additional
1,900 square feet. The modified lease will begin when the Company receives
access to the additional space which is expected to be November 2005. At that
point total monthly payments under the modified lease will be as follows: for
the first lease year, monthly payments of approximately $12,000 (after giving
effect to agreed upon rent credits for such year); for the second lease year,
monthly payments of approximately $17,500; for the third lease year, monthly
payments of approximately $18,000; for the fourth lease year, monthly payments
of approximately $18,500; and for the fifth lease year, monthly payments of
approximately $18,700. In connection with the lease agreement the Company paid
in July 2005 an additional security deposit of approximately $6,650.
During the six months ended June 30, 2005 the Company incurred rent expense of
$81,741 for its previous and current facilities. The Company had no rent expense
for the six months ended June 30, 2004.
11
Equity Line
- -----------
In August 2004, the Company secured a $6 million equity line commitment on which
it can draw from time to time during a 24 month period following the
effectiveness of a registration statement relating thereto, subject to certain
conditions. The Company undertook to file a registration statement in respect of
such equity line no earlier than the 90th day following the effective date of
the registration statement for the Common Stock underlying the Series B
Preferred Stock (but no later than the 120th day after such date) discussed in
Note 5 (Equity Raise). The equity line allows the sale of up to $6 million of
Common Stock at 98 % of the then current market price, but in no event at less
than $2.00. The Company may not draw down more than $500,000 under the equity
line during any 30-day period. The investor is entitled to 5% of the cash
proceeds from the sale of the shares to it by the Company under the equity line.
No assurance can be provided that the equity line will in fact ever become
available for use by the Company.
12
ITEM 2. PLAN OF OPERATION
OVERVIEW
Amedia Networks, Inc. (the "Company") is a development stage company that
designs, develops and markets next generation technology-based broadband access
solutions for voice, video and data services, focusing on fiber-based and
Ethernet-based solutions. The Company's initial products are designed to deliver
"triple play" (voice, video and data) broadband communication. These products
are designed for placement at various points in the network infrastructure
layout. The Company is marketing its initial products to communications
carriers, municipal authorities and communication equipment companies.
The Company is a development stage company that has generated significant
operating losses since its inception in August 1994, which primarily relate to
copy protection business in which the Company was previously engaged. The
Company has been engaged in the broadband access communication business since
only March 2004. From its inception in August 1994 through October 2002, the
Company was engaged in the copy protection business under the name "TTR
Technologies, Inc." As a development stage company, the Company has a limited
operating history upon which an evaluation of its prospects can be made. Its
prospects must therefore be evaluated in light of the problems, expenses, delays
and complications associated with a development stage company.
PLAN OF OPERATIONS
The Company's initial products are ready for FTTP deployment and are
inter-operable with many network elements that customers utilize in existing
ethernet based FTTP-FTTN networks. Over the next 12 months, the Company intends
to continue its product enhancement and commercialization activities. As of June
30, 2005, the Company had 26 employees.
The Company's initial products are being marketed under the name "QoStream(TM)"
and are comprised of the following:
o QOSTREAM(TM) PG1000: a premises gateway product that resides
with the subscriber and is designed to perform data, telephony,
video and local Ethernet switching functions (the "QoStream
PG1000"). The premises gateway can be situated indoors and
outdoors (in a hardened configuration), and is the device that
subscribers connect to for their voice, data, and video
services.
o QOSTREAM AS5000 AGGREGATOR SWITCH: a distributed Ethernet switch
designed to route data to and from the premises gateways at
distances of up to 40km away (the "QoStream AG5000"). This
switch is very compact, and can be located outside in a cabinet
or on a telephone pole (in a "hardened" configuration which does
not require any environmental conditioning) or can reside inside
a building.
o QOSTREAM(TM) DIRECTOR: a web-based Network Management System
that provides complete operations capability for remotely
managing the QoStream product line from a Network Operations
Center (NOC). The QoStream Director employs the industry
standard Simple Network Management Protocol (SNMP) for
communicating with the PG1000 and the AS5000 Network Elements
and utilizes standard Management Information Base (MIB) as well
as Enterprise-specific MIBs for managing
13
the various capabilities of the system. The QoStream Director
provides a complete suite of management capabilities that
consists of Fault, Configuration, Accounting, Performance and
Security (FCAPS) management as well as topology
The Company anticipates that it will be expanding products applications to
encompass sophisticated business applications and other in-house wiring,
including copper networks. Accordingly, the Company anticipates that it will be
significantly increasing its investment in research and development efforts and
marketing.
CRITICAL ACCOUNTING POLICIES
The Company's condensed consolidated financial statements and accompanying notes
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company's management to make estimates, judgments and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses.
The Company continually evaluates the accounting policies and estimates it uses
to prepare the condensed consolidated financial statements. The Company bases
its estimates on historical experience and assumptions believed to be reasonable
under current facts and circumstances. Actual amounts and results could differ
from these estimates made by management.
The Company does not participate in, nor has it created, any off-balance sheet
special purpose entities or other off-balance sheet financing. In addition, the
Company does not enter into any derivative financial instruments for speculative
purposes and uses derivative financial instruments primarily for managing its
exposure to changes in interest rates.
Stock-Based Compensation
As permitted under SFAS 123 the Company has elected to continue to follow the
intrinsic value method in accounting for its stock-based employee compensation
arrangements. Had the Company applied the fair value recognition provision of
SFAS 123 for the six months ended June 30, 2005 and 2004 the Company would have
recognized stock-based compensation expense of $356,360 and $464,722,
respectively.
Capitalized Software Development Costs
Capitalization of software development costs begins upon the establishment of
technological feasibility. Technological feasibility for the Company's computer
software is generally based upon achievement of a detail program design free of
high risk development issues and the completion of research and development on
the product hardware in which it is to be used. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs requires considerable judgment
by management with respect to certain external factors, including, but not
limited to, technological feasibility, anticipated future gross revenue,
estimated economic life and changes in software and hardware technology.
Amortization of capitalized software development costs commences when the
related products become available for general release to customers.
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2005 TO SIX MONTHS ENDED JUNE 30, 2004
AND THREE MONTHS ENDED JUNE 30, 2005 TO THREE MONTHS ENDED JUNE 30, 2004.
14
SALES AND COSTS OF GOODS SOLD. Revenues for the six and three months ended June
30, 2005 were $5,248 and $2,598, respectively and were derived from unit sales
of the QoStream product line and related hardware. The Company recorded revenues
for the first time during the quarter ended March 31, 2005. Revenues recorded
during the six months ended June 30, 2005 were from the QoStream PG1000 product
and related hardware. Accordingly, cost of goods sold in the amount of $5,846
exceeded sales resulting in negative gross profit. No revenues or cost of goods
were recorded for the corresponding period in 2004.
The Company's business involves the development of new broadband access products
with no significant market penetration. The Company cannot predict when or to
what extent its initial product line or future extended applications will begin
to produce significant revenues, or whether the Company will ever reach
profitability. The Company expects to operate at a loss through at least
December 31, 2005.
The Company believes that it will eventually be able to generate significant
revenues from the sale or license of its broadband access products. The Company
presently has no significant revenue generating agreements for any of its
products.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses consist of
expenses incurred primarily in product designing, developing and testing. These
expenses consist primarily of salaries and related expenses for personnel,
contract design and testing services and supplies used and consulting and
license fees paid to third parties.
For the six months ended June 30, 2005 and 2004, the Company's research and
development expenses were $2,054,175 and $1,561,411, respectively. Research and
development expenses for the three months ended June 30, 2005 and 2004 were
$996,441 and $311,411, respectively. The increase in research and development
during the 2005 periods as compared to the corresponding periods in 2004 is
primarily attributable to an increase in salaries and associated expenses and in
consulting fees and payments to Lucent in respect of supplemental development
work on the Company's QoStream Products.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries
and related expenses for personnel, consulting fees, and trade show expenses
incurred in product distribution.
Sales and marketing expenses for the six months ended June 30, 2005 and 2004
were $1,078,540 and $108,617, respectively. Sales and marketing expenses for the
three months ended June 30, 2005 and 2004 were $637,060 and $108,617,
respectively. The increase in sales and marketing expenses during the 2005
period as compared to the corresponding periods in 2004 is primarily
attributable to the hiring of additional marketing and sales personnel during
2005.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses consist
primarily of salaries and other related costs for personnel in executive and
other functions. Other significant components of general and administrative
costs include professional fees for legal, accounting and other services.
General and administrative expenses for the six months ended June 30, 2005 and
2004 were $903,307 and $795,556, respectively. General and administrative
expenses for the three months ended June 30, 2005 and 2004 were $485,121 and
$410,333, respectively.
15
LIQUIDITY AND CAPITAL RESOURCES
From its inception, the Company has financed its operations through the issuance
of its securities and from the sale of its copy protection business in May 2003.
As of June 30, 2005, the Company had approximately $4.3 million in available
cash resources, representing an increase of approximately $2.0 million from the
cash resources available as of December 31, 2004. As discussed below, in April
and May of 2005, the Company raised net proceeds of $7.09 million from the
private placement of its securities.
Net cash used during the six months ended June 30, 2005 consisted of operating
activities of approximately $4.1 million, the purchase of property and equipment
and the costs associated with internally developed software of approximately
$900,000.
On April 5, 2005 the Company entered into a Bridge Loan Agreement with a private
investor pursuant to which the lender advanced a loan to the Company in the
principal amount of $1,500,000 at a per annum interest rate of 7%. The Company
received net proceeds of $1,350,000 from the proceeds of the loan, after the
payment of transaction related fees and expenses. On April 26, 2005 the Company
repaid to the Lender $1,505,178 from the proceeds of the 2005 Private Placement,
representing the outstanding principal amount of the Bridge Loan and interest
accrued thereon.
On April 26, 2005 the Company completed a Private Placement to certain
individual and institutional investors of 60,000 shares of its newly designated
Series B 8% Convertible Preferred Stock, par value $0.001 per share (the "Series
B Preferred Stock") for gross proceeds of $6 million. Thereafter, on May 9,
2005, the Company sold to institutional investors an additional 17,650 shares of
Series B Preferred Stock for aggregate gross proceeds of $1,765,000 (together
with the private placement in April 2005 the "2005 Private Placement"). The
Company has received aggregate net proceeds of approximately $5,590,000 from the
closings of the 2005 Private Placement, following repayment of the outstanding
principal and accrued interest on the bridge loan referred to above and payment
of offering related expenses.
In August 2004, the Company completed a private placement to certain private and
institutional investors of shares of its 7% Series A Convertible Preferred
Stock, par value $0.001 (the "Series A Preferred Stock"), as well as related
warrants, for aggregate gross proceeds of $5.25 million. The Company received
net proceeds of approximately $4.6 million from the placement of the Series A
Preferred Stock, following the repayment of offering related expenses. In March
2005, certain of the warrant holders exercised their warrants for aggregate net
cash proceeds to the Company of approximately $186,000.
In August 2004, the Company secured a $6 million equity line commitment on which
it can draw from time to time during a 24 month period following the
effectiveness of a registration statement relating thereto, subject to certain
conditions. The Company undertook to file a registration statement in respect of
such equity line no earlier than the 90th day following the effective date of
the registration statement for the Common Stock underlying the Series B
Preferred Stock (but no later than the 120th day after such date). The equity
line allows the sale of up to $6 million of Common Stock at 98 % of the then
current market price, but in no event at less than $2.00. The Company may not
draw down more than $500,000 during any 30-day period. The investor is entitled
to 5% of the cash proceeds from the sale of the shares to it by the Company
under the equity line. No assurance can be provided that the equity line will in
fact ever become available for use by the Company.
The Company believes that its existing cash resources will be sufficient to
maintain operations as presently conducted until December 2005. At the present
time, the Company has no commitments for any additional financing, and there can
be
16
no assurance that additional capital will be available to the Company on
commercially acceptable terms or at all. If the Company is unable to raise
funds, it may need to curtail expenses, reduce planned research and development,
forego business opportunities and perhaps cease operations. The Company has the
ability to adjust the level of research and development and selling, general and
administrative expenses to some extent based on the availability of resources.
However, reductions in expenditures could delay development and/or
commercialization and adversely affect the Company's ability to generate future
revenues. However, if the warrants issued to the purchasers of the Series A
Preferred Stock (which were sold in August 2004, have per share exercise prices
$1.50 and $2.50 per share and, in respect of which there is currently an
effective registration statement) are exercised for cash in net amounts
sufficient to support its needs, the Company may be able to satisfy its capital
requirements without raising additional capital. However, no assurance can be
provided, though, that these warrants will in fact be exercised in amounts
sufficient for the Company's needs (or at all).
The notes to condensed consolidated financial statements accompanying this
report for the six months ended June 30, 2005, include an explanatory paragraph
relating to the uncertainty of the Company's ability to continue as a going
concern, which may make it more difficult for the Company to raise additional
capital.
Additional equity financings may be dilutive to holders of our Common Stock and
debt financing, if available, may involve significant payment obligations and
covenants that restrict how we operate our business.
ITEM 3. CONTROLS AND PROCEDURES
CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES . The Company maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in its reports under the Exchange Act of 1934, as
amended is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission, and
that such information is accumulated and communicated to management, including
its Chief Executive Officer and its Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure based closely on the
definition of "disclosure controls and procedures" in Rule 13a-14(c).
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with participation of management,
including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on the foregoing, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING . During the quarter ended
June 30, 2005, there have been no changes in our internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, these controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings the resolution of which can
be expected to have a material adverse effect on the Company's business.
17
ITEM 2. CHANGE IN SECURITIES
(b) In April and May 2005, the Company issued a total of 77,650 shares of Series
B Preferred Stock, each with a stated value of $100. Holders of Series B
Preferred Stock are entitled to receive a dividend at the rate of 8% per annum
payable in preference to any dividends on shares of Common Stock and, upon the
liquidation, dissolution or winding up of the Company (including upon the sale
or transfer of all or substantially all of the Company's assets in one
transaction or in a series of related transactions), are entitled to a
liquidation preference equal the stated value plus any accrued and unpaid
dividends prior to any distribution to the holders of Common Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on June 9, 2005.
The following matters were voted on: (1) election of directors; (2) increase in
the number of authorized shares of Common Stock; (3) amendment to the Company's
2000 Equity Incentive Plan; (4) approval of grant of authority to the Company's
board of directors to effect, in its discretion, a reverse stock split in a
specified range for the purpose of qualifying for the Common Stock quotation of
certain specified exchanges; and (5) ratification of the appointment of
independent registered public accounting firm. The vote tally was as follows:
The vote tally was as follows:
(1) Each of the following individuals was elected to the board of directors to
hold office until the 2006 annual meeting of stockholders, or until a successor
is duly elected and qualified or the director's earlier death, resignation or
removal.
FOR WITHHELD
-------------- ------------
Frank Galuppo 16,385,706 311,600
Juan Mendez 16,387,504 309,800
Richard Rosenblum 16,385,306 312,000
Richard Butters 16,385,706 311,600
Bob Martin 16,384,906 312,400
(2) The proposal to ratify the amendment to the Company's certificate of
incorporation to increase the number of shares of Common Stock that the Company
is authorized to issue from time to time to 75 million shares was approved by
the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTE
----------- ----------- ----------- ---------------
67,115,213 6,390,341 312,141 --
(3) The proposal to increase the number of shares of Common Stock reserved for
issuance under the Company's 2000 Equity Incentive Plan to 5,000,000 shares was
approved by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTE
----------- ----------- ----------- ---------------
5,709,145 2,247,059 31,275 8,511,827
18
(4) The proposal to authorized the Company's board of directors to approve an
amendment to the Company's certificate of incorporation to effect a reverse
split of the Common Stock in the range of 1:3 to 1:6, as determined in the sole
discretion of the board of directors at any time before the 2006 annual
stockholders meeting, solely for the purpose of qualifying for quotation on the
Nasdaq National Market, the SmallCap Market or the American Stock Exchange
following satisfaction of all listing requirements but the minimum per share
price was approved by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTE
----------- ----------- ----------- ---------------
13,358,563 2,467,976 870,767 --
(5) The proposal to ratify the appointment of Marcum & Kliegman, PC as the
Company's independent registered public accounting firm for the year ending
December 31, 2005 was approved by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTE
----------- ----------- ----------- ---------------
16,249,181 163,625 284,500 --
Each proposal received the requisite majority and was carried.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
4.1 Certificate of Designations of Rights and Preferences of the Series B
Convertible Preferred Stock of Amedia Networks, Inc. (attached as an exhibit to
the current report on Form 8-K filed on April 28, 2005 and incorporated herein
by reference)
4.2 Form of Common Stock Purchase Warrant issued by Amedia Networks, Inc. to
certain investors as of April 26, 2005(attached as an exhibit to the current
report on Form 8-K filed on April 28, 2005 and incorporated herein by
reference).
10.1 Form of Securities Purchase Agreement dated as of April 22, 2005, among
Amedia Networks, Inc. and certain investors (attached as an exhibit to the
current report on Form 8-K filed on April 28, 2005 and incorporated herein by
reference).
10.2 Form of Registration Rights Agreement dated as of April 22, 2005, among
Amedia Networks, Inc. and certain investors(attached as an exhibit to the
current report on Form 8-K filed on April 28, 2005 and incorporated herein by
reference).
10.3 Employment Agreement dated May 12, 2005 between Amedia Networks, Inc. and
James D. Gardner (attached as an exhibit to the Registration Statement filed on
Form S-2 on July 1, 2005 and incorporated herein by reference)
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31.1 Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMEDIA NETWORKS, INC.
DATE: AUGUST 15, 2005 BY /s/ Frank Galuppo
------------------------
FRANK GALUPPO,
CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
DATE: AUGUST 15, 2005 BY /s/ James D. Gardner
------------------------
JAMES D. GARDNER,
CHIEF FINANCIAL OFFICER
21