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 March 31, 2006
or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _____ to
COMMISSION FILE NUMBER 0-22055
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[ ]
Indicate by check mark whether registrant is a shell company (as defined
in Rule 12-2 of the Exchange Act) Yes [ ] No[X]
The number of shares outstanding of the registrant's Common Stock as of
May 11, 2006, is 26,815,939 shares.
Transitional Small Business Disclosure Format (Check one) Yes |_| No |X|
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A Development Stage Company)
Index
Page
----
Forward Looking Statements (ii)
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheet as of
March 31, 2006 (unaudited) 1
Condensed Consolidated Statements of Operations For the three months
ended March 31, 2006 and 2005 and from Inception (July 14, 1994) to
March 31, 2006 (unaudited) 2
Condensed Consolidated Statements of Cash Flows For the three months
ended March 31, 2006 and 2005 and from Inception (July 14, 1994) to
March 31, 2006 (unaudited) 3
Notes to the Condensed Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operation 17
Item 3. Controls and Procedures 21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 23
Signatures 24
(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 SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2006
ASSETS
Current assets
Cash and cash equivalents $ 8,704
Accounts receivable 25,379
Inventories 912,965
Prepaid expenses 88,604
------------
Total current assets 1,035,652
------------
Property and equipment - net 667,782
------------
Other assets
Capitalized software costs 1,476,527
Deferred financing costs 148,887
Security deposit 46,750
------------
Total other assets 1,672,164
------------
Total assets $ 3,375,598
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
LIABILITIES
Current liabilities
Accounts payable $ 1,645,793
Accrued expenses 615,666
Dividends payable 136,983
Notes payable, net of unamortized discounts of $261,693 2,933,307
Current portion of capital leases 5,053
------------
Total current liabilities 5,336,802
------------
Long-term liabilities
Capital leases, less current maturities 10,968
------------
Total liabilities 5,347,770
------------
Commitments and contingencies
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.001 par value;
5,000,000 shares authorized;
Series A convertible preferred stock,
52,500 shares authorized; 19,403 issued and outstanding
($1,940,300 liquidation preference) 19
Series B convertible preferred stock,
85,000 shares authorized; 51,500 issued and outstanding
($5,150,000 liquidation preference) 52
Common stock, $.001 par value;
75,000,000 shares authorized; 25,059,750
issued and outstanding 25,060
Additional paid-in capital 60,816,887
Deficit accumulated during the development stage (61,690,629)
Deferred compensation (1,123,561)
------------
Total stockholders' deficiency (1,972,172)
------------
Total liabilities and stockholders' deficiency $ 3,375,598
============
See Notes to Condensed Consolidated Financial Statements.
-1-
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
From
Inception
Three Months (July 14,
Ended 1994) to
March 31, March 31,
2006 2005 2006
------------ ------------ ------------
Sales $ 25,379 $ 2,650 $ 30,927
------------ ------------ ------------
Cost of goods sold 19,747 3,141 25,825
------------ ------------ ------------
Gross profit (loss) 5,632 (491) 5,102
------------ ------------ ------------
Expenses
Research and development (1) 1,267,114 1,062,377 14,626,031
Sales and marketing (1) 427,479 441,480 13,149,806
General and administrative (1) 1,245,958 439,069 23,937,041
Bad debt expense -- -- 161,000
------------ ------------ ------------
Total expenses 2,940,551 1,942,926 51,873,878
------------ ------------ ------------
Operating loss (2,934,919) (1,943,417) (51,868,776)
------------ ------------ ------------
Other (income) expense
Legal settlement -- -- 565,833
Late filing penalty on preferred stock registration -- -- 286,242
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
Impaired offering costs -- -- 267,404
Interest income (753) (4,433) (985,488)
Interest expense 412,231 -- 2,665,267
------------ ------------ ------------
Total other (income) expense 411,478 (2,741) 3,279,193
------------ ------------ ------------
Net loss $ (3,346,397) $ (1,940,676) $(55,147,969)
============ ============ ============
Deemed dividend on convertible preferred stock -- -- 5,570,857
Dividend on convertible preferred stock 176,912 71,188 971,803
------------ ------------ ------------
Net loss applicable to common stockholders $ (3,523,309) $ (2,011,864) $(61,690,629)
============ ============ ============
Per share data:
Basic and diluted $ (0.16) $ (0.11)
============ ============
Weighted average number
of common shares used in
basic and diluted loss per share 22,559,205 17,999,379
============ ============
(1) Includes non-cash, stock-based compensation expense as follows:
Research and development $ 258,884 $ 4,643 $ 733,696
Sales and marketing 40,396 -- 5,376,954
General and administrative 294,949 20,883 6,067,304
------------ ------------ ------------
$ 594,229 $ 25,526 $ 12,177,954
============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
-2-
AMEDIA NETWORKS, INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
From
Three Months Inception
Ended (July 14, 1994)
March 31, to March 31,
2006 2005 2006
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,346,397) $ (1,940,676) $(55,147,969)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 43,995 17,304 1,130,377
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 411,624 -- 5,208,756
Impaired offering costs -- -- 267,404
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 settlement 594,229 25,526 12,350,915
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 (25,379) (2,400) (24,825)
Inventories 16,052 -- (912,965)
Prepaid expenses (9,411) 16,951 (118,262)
Other assets -- (26,099) (46,750)
Accounts payable 189,216 447,111 1,098,600
Accrued expenses 53,849 105,978 1,711,440
Accrued severance pay -- -- (122,363)
Interest payable -- -- 251,019
------------ ------------ ------------
Net cash used by operating activities (2,072,222) (1,354,613) (37,364,914)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed assets -- -- 68,594
Purchases of property and equipment (20,893) (165,132) (1,826,638)
Capitalized software costs (216,145) (130,988) (1,476,527)
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 by investing activities (237,038) (296,120) (382,251)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of convertible preferred stock -- -- 11,726,600
Proceeds from exercise of warrants and options 162,006 189,230 351,236
Proceeds from issuance of common stock -- -- 21,177,354
Stock offering costs -- -- (475,664)
Deferred financing costs (176,620) -- (981,462)
Proceeds from note payable 2,000,000 -- 3,000,000
Proceeds from short-term borrowings -- -- 1,356,155
Payments on capital lease obligations (1,209) -- (4,137)
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 -- (166,051) (167,719)
------------ ------------ ------------
Net cash provided by financing activities 1,984,177 23,179 37,761,281
------------ ------------ ------------
Effect of exchange rate changes on cash -- -- (5,412)
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (325,083) (1,627,554) 8,704
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 333,787 2,275,377 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,704 $ 647,823 $ 8,704
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ -- $ -- $ 482,492
============ ============ ============
Non-cash investing and financing activities:
Issuance of common stock warrants in connection
with bridge loans $ 245,316 $ -- $ 353,976
============ ============ ============
Original issue discount on notes payable $ 115,000 $ -- $ 195,000
============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
-3-
AMEDIA NETWORKS, INC. AND 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. The Company's products are
designed to provide key functionality that enables service providers to deliver
"triple play" (voice, video and data) broadband communication to their
subscribers. These products are designed for placement at various points in the
network infrastructure layout and can be deployed with optical fibers as well as
with copper wires. The Company is marketing its initial products to
communications carriers, municipal authorities and communication equipment
companies.
The Company has been engaged in the broadband access communications business
since March 2004. From its inception in July 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 $55,147,969 since its inception, and as of March 31, 2006, has
negative working capital of $4,301,150 and stockholders' deficiency of
$1,972,172. 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 in the amounts needed 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.
As more fully described in Notes 5 (Notes Payable) and Note 9 (Subsequent
Events), the Company funded its operations during the past six months from the
proceeds of the sale of its short-term notes. In May 2006 the Company raised $10
million in gross proceeds from the private placement to accredited institutional
and individual investors of its two-year 8% Senior Secured Convertible
Debentures. See Note 9 (Subsequent Events).
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
-4-
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 March 31, 2006, and
its results of operations and cash flows for the three months ended March 31,
2006 not misleading. Operating results for the three months ended March 31, 2006
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2006. 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, 2005 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.
RECLASSIFICATIONS
Certain amounts in the financial statements for the three months ended March 31,
2005 have been reclassified for comparative purposes to conform to the
presentation in the financial statements for the three months ended March 31,
2006. These reclassifications had no effect on the previously reported net loss.
REVENUE RECOGNITION
The Company receives revenue from the sale of its QoStream product line which is
comprised of hardware and software. 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 collection is probable. During
the three months ended March 31, 2006 the Company recorded $25,379 from sales of
units of its QoStream products and related hardware.
INVENTORY
Inventory includes costs for materials and finished product which is stated at
the lower of cost or market. As of March 31, 2006 any items relieved from
inventory have been determined under the specific identification method. The
balance at March 31, 2006 of inventories amounted to $912,965, which included
raw materials of $173,259 and finished goods of $739,706.
CAPITALIZED SOFTWARE COSTS
During the three months ended March 31, 2006 the Company capitalized $216,146 of
internally developed software product costs. Capitalization of software
development costs begins upon the establishment of technological feasibility.
Technological feasibility is based on reaching a high level design stage with
regards to a certain product as defined in SFAS No. 86. Such software product
costs are to be amortized over the expected beneficial life once the general
release stage of the product is reached, which as of March 31, 2006 had not been
achieved.
RESEARCH AND DEVELOPMENT
Research and development costs incurred in connection with product development
and testing
-5-
are expensed as incurred. Research and development costs for the three months
ended March 31, 2006 and 2005 were $1,267,114 and $1,062,377, respectively.
STOCK-BASED COMPENSATION
In December 2004, the FASB issued FAS No. 123R, "Share-Based Payment" (FAS 123R)
that amends FAS 123, and FAS No. 95, "Statement of Cash Flows" and supersedes
Accounting Principles Board (APB) Opinion No. 25, " Accounting for Stock Issued
to Employees," and related interpretations (APB 25). As of January 1, 2006, FAS
123R requires the Company to measure the cost of employee services received in
exchange for an award of equity instruments, such as stock options, based on the
grant-date fair value of the award and to recognize such cost over the requisite
period during which an employee provides service. The grant-date fair value will
be determined using option-pricing models adjusted for unique characteristics of
the equity instruments. FAS 123R also addresses the accounting for transactions
in which a company incurs liabilities in exchange for goods or services that are
based on the fair value of the Company's equity instruments or that may be
settled through the issuance of such equity instruments. The statement does not
change the accounting for transactions in which the Company issues equity
instruments for services to non-employees. The pro forma disclosures previously
permitted under FAS 123 no longer will be an alternative to financial statement
recognition.
The Company adopted FAS 123R on January 1, 2006 and uses the modified
prospective method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of FAS 123R for all share-based
payments granted after the effective date and (b) based on the requirements of
FAS 123R for all awards granted to employees prior to the effective date of FAS
123R that remain unvested on the effective date. As a result, the Company's net
loss for the three months ended March 31, 2006 is $350,447 higher than if it had
continued to account for the share based payment under APB 25. In addition,
there were $990,558 of unvested employee stock options as of January 1, 2006
that was recorded as deferred compensation and additional paid in capital.
Prior to January 1, 2006, the Company accounted for awards granted under those
plans following the recognition and measurement principles of APB 25.
A comparison of reported net earnings for the three months ended March 31, 2006
and 2005, and pro-forma net earnings for the three months ended March 31, 2005,
including effects of expensing stock options, follows.
Three Months Ended,
March 31,
2006 2005
------------- -------------
Net loss applicable to
common stockholders, as reported $(3,523,309) $(2,011,864)
Net loss per share applicable to
common stockholders, basic and diluted
as reported $ (0.16) $ (0.11)
Stock option expense included
in net loss $ 374,229 $ 25,526
Total stock option expense $ 374,229 $ 235,035*
-6-
PRO-FORMA EFFECTS
Pro-forma net loss applicable to
common stockholders, as reported $(2,221,373)
Pro-forma net loss per share,
basic and diluted $ (0.11)
* computed as if SFAS 123R had been applied to expense all stock options.
OPTION ISSUANCES AND EXERCISES
On February 2, 2006, the Company awarded an employee stock options to purchase
up to an aggregate of 10,000 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 $.65 per share (based on
the closing market price of the Common Stock on the date preceding the date of
grant). The fair value of the options amounted to $2,954 and is being amortized
over the three-year vesting period. The Company recorded stock-based
compensation expense of $164 in the accompanying condensed consolidated
financial statements for the three months ended March 31, 2006 for this
transaction.
On February 3, 2006 the Company granted to two consultants non-qualified stock
options under the 2000 Equity Incentive Plan to purchase up to an aggregate of
60,000 shares of Common Stock at an exercise price of $0.65 per share, with such
option vesting over 3 years. The $0.65 exercise price equaled the closing market
price of the Common Stock on the date of grant. The fair value of the options
amounted to $17,274 and is being amortized over the 3-year vesting period. The
Company recorded stock-based compensation expense of $960 in the accompanying
condensed consolidated financial statements for the three months ended March 31,
2006 for this transaction.
In February 2006 the Company received cash proceeds of $162,000 from the
exercise by certain Company officers and directors of stock options to purchase
a total of 268,200 shares of the Company's Common Stock. In consideration of
those stock option exercises, the Company issued to the exercising officers and
directors stock options to purchase up to 95,088 shares of the Company's Common
Stock from the 2000 Equity Incentive Plan and stock options to purchase up to
441,312 shares of the Company's Common Stock under the 2002 Directors Plan, in
each case at per share exercise prices ranging from $0.69 to $0.70. The exercise
price of each of these options is equal to the closing price of the Common Stock
on the date of issuance. The fair value of the options amounted to $169,484 and
is vested immediately The Company recorded stock-based compensation expense of
$169,484 in the accompanying financial statements for the three months ended
March 31, 2006 for this transaction.
On March 14, 2006, the Company issued to a total of 29 employees options to
purchase up to an aggregate of 486,500 shares of the Company's common stock, par
value $0.001 ("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 $0.86 per share (based on the closing market
price of the Common Stock on the date of the grant. The fair value of the
options amounted to $190,895 and is being amortized over the 3-year vesting
period. The Company recorded stock-based compensation expense of $5,303 in the
accompanying financial statements for the three months ended March 31, 2006 for
this transaction.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued SFAS No. 155 "Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140" ("SFAS
155"). SFAS 155 clarifies certain issues relating to embedded derivatives and
beneficial interests in securitized
-7-
financial assets. The provisions of SFAS 155 are effective for all financial
instruments acquired or issued after fiscal years beginning after September 15,
2006. The Company is currently assessing the impact that the adoption of SFAS
155 will have on its financial position and results of operations.
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 three months ended March 31, 2006 and 2005 as their inclusion would be
anti-dilutive. Potentially dilutive options to purchase 7,772,342 and 5,388,642
shares of Common Stock were outstanding at March 31, 2006 and 2005,
respectively. Potentially dilutive warrants to purchase 15,228,786 and 8,861,506
shares of Common Stock were outstanding at March 31, 2006 and 2005,
respectively. In addition, there were 19,403 and 23,854 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 2,587,066 and
3,180,533 shares of Common Stock at March 31, 2006 and 2005, respectively. In
addition, 51,500 shares of the Company's Series B 8% Convertible Preferred
Stock, par value $0.001 per share ("Series B Preferred Stock"), were outstanding
and potentially convertible into 5,099,010 shares of Common Stock at March 31,
2006. The May 2006 Private Placement referred to in Note 9D (Subsequent Events)
resulted in an adjustment to the conversion rate into Common Stock of the
outstanding Series B Preferred Stock.
In addition, see Note 9 for issuances of Common Stock subsequent to quarter-end.
NOTE 5- NOTES PAYABLE
(i) On December 22, 2005 the Company entered into a Bridge Loan Agreement
("December 2005 Bridge Loan Agreement") with two institutional investors
(collectively the " December 2005 Bridge Investors ") pursuant to which the
December 2005 Bridge Investors advanced a loan to the Company in the aggregate
amount of $1,000,000 (the " December 2005 Bridge Loan"). Pursuant to the
December 2005 Bridge Loan Agreement, the Company issued to the December 2005
Bridge Investors secured promissory notes in the aggregate principal amount of
$1,080,000 (collectively the " December 2005 Bridge Notes"), representing an
original issue discount of 8%. The Notes were scheduled to mature on the date
(the "Maturity Date") which is the earlier of (i) a subsequent financing that
generates, on a cumulative basis together with any other interim financings,
gross proceeds to the Company of at least $2 million or (ii) April 21, 2006. The
Company received net proceeds of $887,470 from the proceeds of these loans,
after payment of offering related fees and expenses. In connection with the
December 2005 Bridge Loan, the Company issued to the December 2005 Bridge
Investors a five-year warrant (the "December 2005 Bridge Warrants") to purchase
up to 500,000 shares of Common Stock at a per share exercise price of $1.50,
subject to adjustment in the event of certain capital adjustments or similar
transactions, such as a stock split or merger or, under certain circumstances,
if prior to the expiration of exercise period, the Company issues warrants
having a lower exercise price to investors in a subsequent financing
transaction.
-8-
In accordance with Accounting Principles Board Opinion No. 14 "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants," the Company
recorded a $108,660 discount on the note payable based upon the relative fair
values of the December 2005 Bridge Notes and the December 2005 Bridge warrants
that is amortizing over the 120 day term of the note. Amortization of the
discount on the December 2005 Bridge Notes for the three months ended March 31,
2006 was $80,594 and is included as interest expense in the accompanying
consolidated statement of operations. The Company is amortizing the $80,000
original issue discount over the 120 day term of the December 2005 Bridge Notes.
Amortization of the discount on the note payable for the three months ended
March 31, 2006 was $59,336 and is included as interest expense in the
accompanying condensed consolidated statements of operations.
The Company paid $122,530 of issue costs on the December 2005 Bridge Notes which
is being amortized over the original 120 day term of the notes. Amortization of
the issue costs on the December 2005 Bridge Notes for the three months ended
March 31, 2006 was $90,880 and is included as interest expense in the
accompanying condensed consolidated statements of operations.
On April 19, 2006, the maturity date of the December 2005 Bridge Notes was
extended to May 21, 2006 and, in connection with such extension, the Company
issued to the December 2005 Bridge Investors warrants to purchase an additional
100,000 shares of Common Stock on terms and conditions, including without
limitation, exercise price and period, identical to the December 2005 Bridge
Warrants and agreed to pay to them in the aggregate $20,000.
On May 5, 2006, the Company paid to the December 2005 Bridge Investors a total
of $750,000 from the proceeds of the May 2006 Private Placement referred to in
Note 9D (Subsequent Events) in satisfaction of the December 2005 Bridge Notes.
As one of the December 2005 Bridge Investors participated in the May 2006
Private Placement, $350,000 of the original principal amount of the December
2005 Bridge Note issued to such investor was offset against the purchase price
of the securities that the investor purchased in the May 2006 Private Placement.
(ii) On January 20, 2006, the Company entered into additional short term loan
agreements with three private investors (collectively the "January 2006 Bridge
Investors"), pursuant to which these investors loaned the Company the aggregate
amount of $500,000. The January 2006 Investors included Mr. Juan Mendez,
Chairman of the Company's board of directors, who loaned the Company $250,000.
Pursuant to the January 2006 Loan Agreement, the Company issued to the January
2006 Investors secured promissory notes (the "January 2006 Bridge Notes") in the
aggregate principal amount of $530,000, representing an original issue discount
of 6% with respect to the principal amount of $500,000 through the stated
maturity date of April 21, 2006. The Company received net proceeds of $495,000
from these loans, after payment of offering related fees and expenses. The
Company also issued to the January 2006 Investors warrants expiring December 31,
2010 (the "January 2006 Bridge Loan Warrants") to purchase in the aggregate up
to 250,000 shares of the Company's Common Stock, at a per share exercise price
of $1.50, subject to adjustment upon certain specified conditions.
In accordance with Accounting Principles Board Opinion No. 14 "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants," the Company
recorded a $40,134 discount on the short term loan based upon the relative fair
values of the January 20, 2006 Bridge Notes and the January 20, 2006 Bridge
warrants that is amortizing over the 91day term of the note. Amortization of the
discount on the January 20, 2006 short term loan for the three months ended
March 31, 2006 was $30,871 and is included as interest expense in the
accompanying condensed consolidated statement of operations. The Company is
amortizing the $30,000 original issue discount over the 91day term of the
January 20, 2006 short term
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loan. Amortization of the discount on the note payable for the three months
ended March 31, 2006 was $23,076 and is included as interest expense in the
accompanying condensed consolidated statements of operations.
The Company paid $5,000 of issue costs on the January 20, 2006 short term loan
which is being amortized over the original 91 day term of the notes.
Amortization of the issue costs on the January 20, 2006 short term loan for the
three months ended March 31, 2006 was $3,869 and is included as interest expense
in the accompanying condensed consolidated statements of operations.
On April 19, 2006, the maturity date of these loans was extended to May 21, 2006
and, in connection with such extension, the Company issued to the January 2006
Bridge Investors warrants to purchase an additional 50,000 shares of Common
Stock on terms and conditions, including without limitation, exercise price and
period, identical to the December 2005 Bridge Warrants and agreed to pay to them
in the aggregate $10,000.
On May 5, 2006, the Company paid to the January 2006 Bridge Investors a total of
$290,000 from the proceeds of the May 2006 Private Placement referred to in Note
9D (Subsequent Events) in satisfaction of the January 2006 Bridge Notes. As two
of the January 2006 Bridge Investors participated in the May 2006 Private
Placement, $250,000 of the original principal amount of the January 2006 Bridge
Notes issued to these investors was offset against the purchase price of the
securities these investors purchased in the May 2006 Private Placement.
(iii) From February 27 through March 13, 2006, the Company entered into
additional short term loan agreements under which it borrowed the aggregate
amount of $1,500,000 (the "March 2006 Short-Term Loans") from one of the
institutional investors who participated in the Bridge Loan Agreement that
closed in December 2005. These loans were originally scheduled to mature on the
date which is the earlier of (i) a subsequent financing that generates, on a
cumulative basis together with any other interim financings, gross proceeds to
the Company of at least $3.5 million or (ii) June 1, 2006. The Company issued to
the investor secured promissory notes in the aggregate principal amount of
$1,585,000, representing an original issue discount of approximately 6% with
respect to the principal amount loaned through the stated maturity date of June
1, 2006. The Company received net proceeds of $1,328,410 from the proceeds of
these loans, after payment of offering related fees and expenses. In addition,
the Company issued to the investor five year bridge loan warrants to purchase in
the aggregate up to 750,000 shares of the Company's Common Stock, at a per share
exercise price of $1.50, subject to adjustment upon certain specified
conditions. The additional loan was on terms and conditions substantially
similar to the December 2005 Bridge Loan.
In accordance with Accounting Principles Board Opinion No. 14 "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants," the Company
recorded a $205,182 discount on the notes payable based upon the relative fair
values of the note and the Common Stock purchase warrants that is amortizing
over the term of the note. Amortization of the discount on the note payable for
the three months ended March 31, 2006 was $54,691 and is included as interest
expense in the accompanying condensed consolidated statement of operations. The
Company amortized the $85,000 original issue discount over the term of the
Notes. Amortization of the discount on the notes payable for the three months
ended March 31, 2006 was $23,000 and is included as interest expense in the
accompanying condensed consolidated statements of operations. The Company paid
$171,590 of issue costs on the notes payable which are being amortized over the
term of the Notes which vary from 79 to 92 days. Amortization of the issue costs
on the note payable for the three months ended March 31, 2006 was $45,307 and is
included as interest expense in the accompanying condensed consolidated
statements of operations.
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On May 5, 2006, the Company paid to this investor $1,585,000 from the proceeds
of the May 2006 Private Placement referred to in Note 9D (Subsequent Events) in
satisfaction of the March 2006 Short-Term Loans.
NOTE 6 - STOCKHOLDERS' DEFICIT
COMMON STOCK
During the three months ended March 31, 2006:
The Company issued 236,667 shares of Common Stock upon the conversion of 1,775
shares of Series A Preferred Stock representing $177,500 in stated value at a
per share conversion price of $0.75.
The Company issued 1,945,545 shares of Common Stock upon the conversion of
19,650 shares of Series B Preferred Stock representing $1,965,000 in stated
value at a per share conversion price of $1.01.
The Company issued 268,200 shares of Common Stock upon the exercise of stock
options resulting in proceeds of approximately $162,000.
The Company issued 250,000 shares of Common Stock with a total fair market value
of $220,000 to a consultant.
The Company issued 43,486 shares of Common Stock valued at a total fair market
value of $39,972 to Series B Preferred Stockholders as stock dividends. The
shares were issued at prices between $0.91 and $0.99 per share which was a
discount to the fair market value on the date of issuance.
NOTE 7 - 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 QoStream 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 March 31, 2006, 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
QoStream product line for agreed upon consideration of approximately $1,100,000.
Under the agreement, payment is due upon delivery and acceptance of the
deliverables by the Company. Certain of the deliverables received by the Company
under such agreement have not been completed in accordance with design and
development criteria specified in the agreement and the Company has not accepted
delivery of these items. The Company is currently pursuing a number of options,
including completing in-house certain of these product features/enhancements,
out-sourcing the completion of certain of the other features and working with
Lucent to complete the design of such deliverables. Accordingly, the Company has
not recorded the expense and the related amount payable to Lucent concerning the
non-accepted deliverables in the accompanying consolidated financial statements.
As of March 31, 2006, $170,000 of internally developed software product costs
was capitalized in connection with this supplementary agreement.
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NOTE 8 - COMMITMENTS AND CONTINGENCIES
INVESTOR RELATIONS AGREEMENT
On March 2, 2006 the Company entered into an agreement with a consultant to
provide investor relations services to increase awareness of the Company and its
products. In consideration of services provided, the Company paid to the
consultant approximately $432,000 and issued to the consultant's designee
250,000 restricted shares of the Company's Common Stock under the Company's 2000
Incentive Plan. The Company recorded stock based compensation expense of
$220,000 for the fair market value of the stock issued to the consultant in the
accompanying condensed consolidated statements of operations.
EQUITY LINE In August 2004, the Company secured a $6 million equity line
commitment from an institutional investor 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 (i.e., December 1, 2005), but no
later than the 120th day after such date (i.e. December 31, 2005) discussed in
Note 4 (Financing). The investor may terminate the equity line commitment if the
Company does not timely file the registration statement relating to the equity
line or if such registration statement is not declared effective within 180 days
following the filing thereof. No such registration statement has been filed as
of the filing of this Quarterly Report on Form 10-QSB.
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.
The Company subsequently amended this equity line. See Note 9C (Subsequent
Events).
DISPUTED PAYABLE
Stifel Nicolaus & Company ("Stifel"), the successor-in-interest to Legg Mason
Walker Wood LLC, an investment banking firm, has made a demand on the Company
for payment of $700,000 as fees for financial advisory services due in
connection with the Bridge Loan referred to in Note 5. Management believes that
Stifel's position, which is based on Stifel's interpretation of a placement
agency agreement entered into by the Company and the investment bank in
September 2005 and terminated by the Company in December 2005, is without merit.
It is the Company's intention to defend itself against any claim for payment
asserted by Stifel vigorously. The Company also reserves the right to dispute
the balance due on the initial retainer payable under the agreement as well as
related out-of-pocket expenses claimed by Stifel, which together total
approximately $96,000, which are recorded and included in accounts payable as of
March 31, 2006 in the accompanying condensed consolidated financial statements.
NOTE 9 - SUBSEQUENT EVENTS
A. BRIDGE LOANS
On April 7, 2006 the Company entered into a Bridge Loan Agreement ("April 2006
Bridge Loan Agreement") with two institutional investors (the "April 2006 Bridge
Investors") pursuant to which the April 2006 Bridge Investors loaned to the
Company the aggregate amount of $450,000 (the "April 2006 Bridge Loan").
Pursuant to the April 2006 Bridge Loan Agreement, the Company issued to the
April 2006 Bridge Investor secured promissory notes
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in the aggregate principal amount of $466,500 (the "April 2006 Bridge Note"),
representing an original issue discount of 3.667%. The Note was originally
scheduled to mature on the date (the "Maturity Date") which is the earlier of
(i) a subsequent financing that generates, on a cumulative basis together with
any other interim financings, gross proceeds to the Company of at least $3.5
million or (ii) June 1, 2006. The Company received net proceeds of $401,500 from
the proceeds of the loan, after the payment of transaction related fees and
expenses. In connection with the April 2006 Bridge Loan, the Company issued to
the April 2006 Bridge Investors five-year warrants to purchase up to 225,000
shares of Common Stock at a per share exercise price of $1.50, subject to
adjustment in the event of certain capital adjustments or similar transactions,
such as a stock split or merger or, under certain circumstances (including
obtaining appropriate consent of certain other parties), if prior to the
expiration of exercise period, the Company issues warrants having a lower
exercise price to investors in a subsequent financing transaction.
On May 5, 2006, the Company paid to the April 2006 Bridge Investors a total of
$216,500 from the proceeds of the May 2006 Private Placement referred to in Note
9D (Subsequent Events) in satisfaction of the April 2006 Bridge Notes. As these
investors elected to participate in the May 2006 Private Placement, $250,000 of
the original principal amount of the April 2006 Bridge Notes was offset against
the purchase price of the securities that these investors purchased in the May
2006 Private Placement.
B. MOTOROLA STRATEGIC ALLIANCE AGREEMENT
On April 5, 2006, the Company entered into a Strategic Alliance Agreement (the
"Strategic Alliance Agreement") with Motorola Wireline Networks, Inc.
("Motorola"), a subsidiary of Motorola, Inc., pursuant to which the Company and
Motorola will jointly develop a family of three IP Home gateways (the "Gateway
Products") that will provide expanded support for data, IPTV, High Definition
TV, and Digital Video Recorders using Motorola's existing Multi-Service Access
Platform for exclusive distribution by Motorola under the Motorola brand. Under
the Strategic Alliance Agreement, the Company has also granted Motorola certain
rights with respect to the resale of the Company's products as described below.
The Strategic Alliance Agreement provides that Motorola will pay to the Company
$1.9 million for engineering costs associated with the development of the
Gateway Products, of which as of the date of the filing of this quarterly report
on Form 10-QSB approximately $600,000 has been received and the remainder of
which is payable in installments on the achievement of certain agreed upon
project milestones. Motorola is entitled to terminate the development program at
any time prior to the completion of the development of the Gateway Products and,
in the event that it does so, the Company will be entitled to retain any of the
engineering costs paid or due and owing by Motorola as of the date of
termination. Upon successful completion of all necessary testing, the Gateway
Products will be manufactured by the Company for exclusive sale to Motorola.
Under the Strategic Alliance Agreement, the Company has granted Motorola the
exclusive right to resell the Company's PG1000 and the HG-V100 gateway products,
and all derivative or substantially similar products (the "Exclusive Products")
to certain specified leading telecommunications carriers and their affiliates
(the "Exclusive Customers") for a period of 24 months from the effective date of
the agreement as part of Motorola's portfolio of broadband wireline solutions.
The exclusivity may be terminated by the Company unless, among other things, at
least one of the Exclusive Customers shall have accepted one of the Exclusive
Products for lab testing within one year of the effective date of the Strategic
Alliance Agreement and signed a contract to purchase Exclusive Products (which
is reasonably expected to result in revenue to the Company in a specified
minimum amount) within 18 months of the effective date of the agreement;
provided, however, that if these conditions are satisfied with respect to an
Exclusive Customer, then Motorola's exclusivity period for such
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Exclusive Customer will be extended for an additional 24 months. At all times
the Company retains the right to sell the Exclusive Products to customers other
than the Exclusive Customers. In addition, the Company also granted Motorola the
non-exclusive right to resell all of the Company's other existing products
worldwide.
The Strategic Alliance Agreement also provides that the Company will not, during
the term of the agreement and for a period of two years thereafter, directly or
indirectly sell to or solicit or accept any order for any of its products from
any customer to which Motorola has resold a Company product during the term of
the agreement. These provisions will not apply to customers to whom the Company
made sales of products in the twelve months preceding the effective date of the
Strategic Alliance Agreement or in the event of termination of the agreement by
the Company for cause or by Motorola for convenience. Notwithstanding the
foregoing, if Motorola sources, manufactures or resells a gateway which has
substantially the same functionality as the Company's PG1000 or HG-V100
products, the exclusivity and the non-solicitation provisions contained in the
Strategic Alliance Agreement shall immediately terminate. The Company has also
agreed that the prices for its products that it charges Motorola will be no
higher than the prices that the Company charges any other reseller, customer or
entity.
The Strategic Alliance Agreement has an initial term of three years which will
automatically extend for successive additional one-year terms unless either
party gives notice of termination no less than 30 days prior to the expiration
date of the then-current term. The agreement may be terminated by Motorola at
any time on 30 days notice and by either party if the other ceases to do
business in the ordinary course or defaults on its material obligations,
representations or warranties under or otherwise materially breaches the
Agreement subject, except in the case of payment failures, to a 30-day cure
period.
C. AMENDMENT TO EQUITY LINE AGREEMENT
On April 12, 2006, the Company and the equity investor entered in to an
amendment of the $6 million equity line commitment the Company obtained in
August 2004. Under the amendment, the price at which Company has the right to
sell Common Stock to the investor under the equity line was reduced to 89% of
the then-current market price but in no event at less than $1.50 per share. In
addition, under the terms of the amendment the Company agreed to file such
registration statement between 90 and 120 days after the effective date of the
resale registration statement that the Company intends to file in connection
with the May 2006 Private Placement. The amendment also provides that the
exercise price of common stock purchase warrant issued to the equity line
investor in August 2004 will be reduced to $1.50, subject to further adjustment
as therein provided. The equity line investor also agreed to waive the
requirement under the equity line that the Company reserve at all times a
sufficient number of shares of its Common Stock to satisfy its obligations under
the equity line and the warrant, pending the amendment of the Company's
certificate of incorporation to increase the number of shares of Common Stock
authorized for issuance.
D. MAY 2006 PRIVATE PLACEMENT
On May 5, 2006, the Company raised gross proceeds of $10 million from the
private placement (the "May 2006 Private Placement") to accredited institutional
and individual investors (the "Investors") of its two-year 8% Senior Secured
Convertible Debentures (the "Debentures"). In connection with the issuance of
the Debentures, the Company issued to the investors five-year warrants (the
"Investor Warrants") to purchase up to 6,666,667 shares of the Company's Common
Stock at a per share exercise price of $1.50. At closing, the Company received
net proceeds of approximately $5.2 million from the proceeds of the Debentures,
after the payment of offering related fees and expenses and after the repayment
in full of the bridge loans made between December 2005 and April 2006 (the
"Bridge Loans")
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in the aggregate amount of $2,841,500. Certain of the investors in the Bridge
Loans elected to participate in the May 2006 Private Placement and, accordingly,
approximately $850,000 in principal amount of Bridge Loans was offset against
these investors' purchases of the Debentures
The Debentures have a term of two years and are convertible into shares of
Common Stock at the holder's option at any time on or after the earlier of (i)
the 65th day following issuance or (ii) the effective date of the Registration
Statement (as defined below), at an initial conversion price of $0.75 per share,
subject to adjustment in the event of certain capital adjustments or similar
transactions, such as a stock split or merger and as further described below.
Interest on the Debentures accrues at the rate of 8% per annum, payable upon
conversion or semi-annually (June 30 and December 31 of each year, commencing
December 31, 2006) or upon maturity, whichever occurs first, and will continue
to accrue until the Debentures are fully converted and/or paid in full. Interest
is payable, at the option of the Company, either (i) in cash, or (2) in shares
of Common Stock at a rate equal to 90% of the volume weighted average price of
the Common Stock for the five trading days ending on the trading day immediately
preceding the relevant interest payment date; provided that interest payments
may be made in shares of Common Stock only if on the relevant interest payment
date the Registration Statement (as defined below) is then effective. In
addition, provided the Registration Statement is effective, the Company may
prepay the amounts outstanding on the Debentures by giving advance notice and
paying an amount equal to 120% of the sum of (x) the principal being prepaid
plus (y) the accrued interest thereon. Holders will continue to have the right
to convert their Debentures prior to the actual prepayment.
To secure the Company's obligations under the Debentures, the Company has
granted a security interest in substantially all of its assets, including
without limitation, its intellectual property, in favor of the Investors. The
security interest terminates upon the earlier of (i) the date on which less than
one-fourth of the original principal amount of the Debentures originally issued
at closing are outstanding or (ii) payment or satisfaction of all of the
Company's obligations in respect of these advances.
The Company has undertaken to file, within 75 days after the closing, a
registration statement (the "Registration Statement") covering the Common Stock
underlying the Debentures and the Warrants, as well as certain other securities
agreed to by the parties.
In connection with the placement of the Debentures, a placement agent has
received a fee of $1,000,000 and warrants to purchase up to 2,000,000 shares of
the Company's Common Stock, of which warrants for 1,333,333 shares have an
initial exercise price equal to $0.75 per share and warrants for 666,667 shares
have an initial exercise price equal to $1.50. These warrants become first
exercisable on the earlier of (i) the sixth month following the effective date
of the Registration Statement or (ii) one year after issuance and continue to be
exercisable through the last day of the month in which the fifth anniversary of
the effective date of the Registration Statement occurs. The Common Stock
underlying the Placement Agent's Warrants will also be included in the
Registration Statement.
The placement of the Debentures resulted in the reduction to $0.75 of the
conversion rate into Common Stock of the outstanding shares of the Series B
Preferred Stock.
E. ISSUANCES OF COMMON STOCK
From April 1, 2006 through May 11, 2006, the Company has issued 949,372
shares of the Company's Common Stock upon the conversion of $697,500 in stated
value of shares of the Company's Series A Preferred Stock and accrued dividends
thereon. The stated value and accrued dividends were converted at a rate equal
to $0.75 per share of Common Stock. As of May 11, 2006, $ 1,242,800 in stated
value of Series A Preferred Stock remain outstanding.
From April 1, 2006 through May 11, 2006, the Company has issued 455,227
shares of the Company's Common Stock upon the conversion of $450,000 in stated
value of shares of the Company's Series B Preferred Stock and accrued dividends
thereon. The stated value was converted at a rate equal to $1.01 per share of
Common Stock and dividends were paid at a rate equal to 90% of the volume
weighted average market price of the Common Stock for the five trading days
preceding payment. As of May 11, 2006, $4,700,000 in stated value of Series B
Preferred Stock remain outstanding. The placement of the Company's Debentures in
May 2006 resulted in the reduction to $0.75 of the conversion rate into Common
Stock of the outstanding shares of the Series B Preferred Stock.
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From April 26 through April 28, the Company issued 145,499 shares of
the Company's Common Stock in connection with the exercise of options by three
option holders at prices ranging from $0.56 to $0.91.
On April 28, the Company issued 206,094 shares of the Company's Common
Stock in connection with the exercise of warrants by an investor.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND THE NOTES RELATED TO THOSE STATEMENTS SOME OF OUR DISCUSSION IS
FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR INFORMATION REGARDING
RISK FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, REFER TO
THE RISK FACTORS SECTION OF THE ANNUAL REPORT ONFORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 2005. THE COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE SUCH FORWARD
LOOKING STATEMENTS.
OVERVIEW
Amedia Networks, Inc. is engaged in the design, development and
marketing of next-generation technology-based broadband access solutions for
voice, video and data services. Our 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. We are marketing our initial products to communications carriers,
municipal authorities and communication equipment companies.
Our initial triple play broadband products are marketed under the brand
name "QoStreamm(TM)" and are ready for Fiber-to-the Premises (FTTP) deployment
and are inter-operable with most installed FTTP communications networks and
equipment. Our products are designed and generally positioned in the market as a
comprehensive and integrated solution for network operators for the parts of
their networks that connect to a served premises. In October 2005, we introduced
a new product, our HG-V100 Home Gateway, that was designed and is being
positioned in the market as a stand-alone device that is interoperable with
other vendors' network access equipment.
We continue to upgrade and improve our Qostream product line to
encompass sophisticated network interfaces, expanded feature sets and increased
inter-operability with in-house wiring, including copper based facilities. For
example, in December 2005, we unveiled new features on our QoStream 500
Aggregator Switch and QoStream PG1000 Premises Gateway products that are
designed to enable a network operator to connect to a home or office and provide
sufficient bandwidth to enable voice, data, and video services over the existing
copper wires already in the ground. Additional feature upgrades that we are
working on include the ability for our gateways to distribute services within a
served premise over existing copper coaxial cables and possibly over telephone
wires.
INITIAL COMMERCIALIZATION OF QOSTREAM PRODUCT LINE
Our business involves the development of new broadband access products
with no significant market penetration. We cannot predict when or to what extent
our QoStream product line or future extended applications will begin to produce
significant revenues, or whether we will ever reach profitability.
In December 2005, Salsgiver Inc., an ISP, agreed to purchase our PG1000
Premises Gateways and AS5000 Aggregation Switches to support their service
build-out in the Allegheny Valley Region of Western Pennsylvania. We shipped our
first units under this purchase order in March 2006. This was our first
significant sale in the U.S. market.
In April 2006, we entered into an agreement with Motorola Wireline
Networks, Inc. ("Motorola"), a subsidiary of Motorola, Inc., pursuant to which
Motorola will distribute under the Motorola brand a family of up to three IP
Home Gateway products to be jointly developed by us and Motorola. Additionally,
we have granted Motorola the exclusive right to distribute our PG 1000 and
HG-V100 products to certain specified major telecommunications carriers in the
United States and Canada.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires we make estimates, judgments
and assumptions that affect the
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reported amounts of assets, liabilities, revenues and expenses. Management
continually evaluates the accounting policies and estimates it uses to prepare
the consolidated financial statements. We base our 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.
We do not participate in, nor has it created, any off-balance sheet
special purpose entities or other off-balance sheet financing. In addition, we
do 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
In December 2004, the FASB issued FAS No. 123R, "Share-Based Payment"
(FAS 123R) that amends FAS 123, and FAS No. 95, "Statement of Cash Flows" and
supersedes Accounting Principles Board (APB) Opinion No. 25, " Accounting for
Stock Issued to Employees," and related interpretations (APB 25). As of January
1, 2006, FAS 123R requires us to measure the cost of employee services received
in exchange for an award of equity instruments, such as stock options, based on
the grant-date fair value of the award and to recognize such cost over the
requisite period during which an employee provides service. The grant-date fair
value will be determined using option-pricing models adjusted for unique
characteristics of the equity instruments. FAS 123R also addresses the
accounting for transactions in which a company incurs liabilities in exchange
for goods or services that are based on the fair value of our equity instruments
or that may be settled through the issuance of such equity instruments. The
statement does not change the accounting for transactions in which we issue
equity instruments for services to non-employees. The pro forma disclosures
previously permitted under FAS 123 no longer will be an alternative to financial
statement recognition.
We adopted FAS 123R on January 1, 2006 and use the modified prospective
method in which compensation cost is recognized beginning with the effective
date (a) based on the requirements of FAS 123R for all share-based payments
granted after the effective date and (b) based on the requirements of FAS 123R
for all awards granted to employees prior to the effective date of FAS 123R that
remain unvested on the effective date. As a result, our net loss for the three
months ended March 31, 2006 is $350,447 higher than if we had continued to
account for the share based payment under APB 25. In addition, there were
$990,558 of unvested employee options as of January 1, 2006 that was recorded as
deferred compensation and additional paid in capital.
Prior to January 1, 2006, we accounted for awards granted under those
plans following the recognition and measurement principles of APB 25.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalization of software development costs in accordance with SFAS
No. 86 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
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products become available for general release to customers.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2006 TO THE THREE MONTHS ENDED
MARCH 31, 2005
SALES AND COSTS OF GOODS SOLD. Revenues for the three months ended
March 31, 2006 and 2005 were $25,379 and $2,650, respectively. We recorded unit
sales from our QoStream product line for the first time during the quarter ended
March 31, 2005. Cost of goods sold were $19,747 and $3,141 during the three
months ended March 31, 2006 and 2005, respectively. During the three-month
period ended March 31, 2005 cost of goods sold exceeded revenues and resulted in
negative gross profit. The units in respect of which revenues were recorded
during the 2005 period were sold at a discount to the anticipated market price
due to the necessity of further testing and evaluation.
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 quarters ended March 31, 2006
and 2005, our research and development expenses were $1,267,114 and $1,062,377,
respectively. The increase in research and development expenses during the 2006
period is primarily attributable to additional stock based compensation recorded
in respect of stock options granted to employees and the implementation of SFAS
123R effective January 1, 2006.
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
three-month period ended March 31, 2006 and 2005 were $427,479 and $441,480,
respectively.
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 costs include professional fees for
legal, accounting, investor relations and other services. General and
administrative expenses for the three-months ended March 31, 2006 and 2005 were
$1,245,958 and $439,069, respectively. The increase in general and
administrative expenses during the 2006 period is attributable to stock based
compensation recorded for stock options granted to employees and the
implementation of SFAS 123R effective January 1, 2006 and, an increase in
personnel costs and outside services.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances totaled approximately $5.6 million at May 9, 2006, $8,704
at March 31, 2006 and $333,787 at December 31, 2005. The increase in cash
balances at May 9, 2006 is primarily attributable to the May 2006 Private
Placement discussed below.
Net cash used during the three months ended March 31, 2006 consisted of
operating activities of approximately $2 million, the purchase of property and
equipment and the costs associated with internally developed software of
approximately $237,000. Net cash used during the three months ended March 31,
2005 consisted of operating activities of approximately $1.4 million, the
purchase of property and equipment and the costs associated with internally
developed software of approximately $300,000.
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Net cash provided by financing activities during the three months ended
March 31, 2006 was approximately $2 million compared to approximately $23,000 in
the corresponding period in 2005. Net cash provided by financing activities
during the three months ended March 31, 2006 was the result of proceeds from the
issuance of short-term notes in the aggregate principal amount of $2,115,000
offset by financing costs of $176,620 and original issue discount of $115,000.
Net cash provided by financing activities during the corresponding period in
2005 was the result of the exercise of stock warrants.
Our liquidity improved as a result of a private placement to accredited
investors that we completed and a significant vendor agreement that we entered
into, in each case subsequent to March 31, 2006.
On May 5, 2006, we raised gross proceeds of $10 million from the
private placement to certain institutional and individual investors of our
two-year 8% Senior Secured Convertible Debentures (the "May 2006 Debentures").
At closing, we received net proceeds of approximately $5.2 million, after
payment of offering related fees and expenses and after the repayment of bridge
loans made between December 2005 and April 2006 in the aggregate amount of
$2,841,500. The investors in this private placement have a lien on all of our
assets, including our intellectual property.
On April 5, 2006, we entered into a Strategic Alliance Agreement with
Motorola pursuant to which we and Motorola will jointly develop a family of
three IP Home gateways that will provide expanded support for data, IPTV, High
Definition TV, and Digital Video Recorders using Motorola's existing
Multi-Service Access Platform for exclusive distribution by Motorola under the
Motorola brand. The Agreement with Motorola provides, among other things, that
Motorola will pay to us $1.9 million for engineering costs associated with the
development of these products, of which amount we have received as of the filing
of this report on Form 10-QSB approximately $600,000 with the remainder to be
paid in installments upon the achievement of certain agreed upon project
milestones. Motorola is entitled to terminate the development program at any
time prior to the completion of the development of the gateway products and, in
the event that it does so, we will be entitled to retain any of the engineering
costs paid or due and owing by Motorola as of the date of termination.
From our inception in August 1994, we have financed our operations
through the sale of our securities. Set forth below is a summary of our recent
financings.
On April 26, 2005, we completed a private placement to certain
individual and institutional investors of 60,000 shares of our 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, we 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 completed in April 2005, the "2005 Private Placement"). We
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.
On December 22, 2005, we entered into a bridge loan agreement with two
institutional investors pursuant to which we borrowed $1.0 million from these
investors. On January 20, 2006, we entered into a bridge loan agreement on
identical terms with three private investors pursuant to which we borrowed an
additional $500,000. In February and March 2006, we entered into bridge loan
agreements with one of the institutional investors who participated in the
December 2005 bridge loan pursuant to which we borrowed $1.5 million in
aggregate principal amount. Additionally, in April 2006, we entered into a
bridge
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loan agreement with two institutional investors pursuant to which we borrowed
$450,000 in aggregate principal amount. On May 5, 2006, we repaid the amounts
owed on these short-term loans from the proceeds of the May 2006 Debentures.
Management believes that funds on hand as well as our near-term
anticipated cash payments under the agreement with Motorola will enable us to
meet our liquidity needs through the third quarter of 2006. We will need to
raise additional funds to fulfill our business plan and to meet our future
operating requirements prior to the receipt of revenues from operations. We may
not be successful in our efforts to raise additional funds. Our cash needs could
be heavier than anticipated in which case we could be forced to raise additional
capital. Even after we begin to sell our products, we do not yet know what
payment terms will be required by our customers or if our products will be
successful. At the present time, we have no commitments for any additional
financing, and there can be no assurance that, if needed, additional capital
will be available to us on commercially acceptable terms or at all. If we are
unable to raise funds as needed, we may need to curtail expenses, reduce planned
research and development and sales and marketing efforts, forego business
opportunities and cease operations. If the warrants issued to the purchasers of
the Series B Preferred Stock, which have a per share exercise prices $1.50, are
exercised by these holders for cash in a net amount sufficient for our needs, we
may be able to generate working capital to satisfy some of our operating needs.
No assurance can be provided, though, that these warrants will in fact be
exercised in amounts sufficient for our needs. If these warrants are not so
exercised, we will need to raise additional funds through public or private
sales of equity securities or borrowings. The notes to condensed consolidated
financial statements accompanying this report for the three months ended March
31, 2006, include an explanatory paragraph relating to the uncertainty of our
ability to continue as a going concern, which may make it more difficult for us
to raise additional capital when needed.
Additional equity financings are likely to 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. We maintain
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
our Chief Executive Officer and our 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, we carried out an
evaluation, under the supervision and with participation of management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the
quarter ended March 31, 2006, 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved in any legal proceedings the resolution of which
can be expected to have a material adverse effect on our business.
ITEM 2. CHANGE IN SECURITIES
The following paragraph sets forth certain information with respect to
all securities sold by us during the three months ended March 31, 2006 without
registration under the Securities Act.
1. In January 2006, we issued to three institutional investors
five-year warrants to purchase in the aggregate up to 250,000 shares of our
Common Stock at an exercise price of $1.50 per share. The warrants were issued
pursuant to a bridge loan agreement between us and the investors, under which
the investors loaned us the aggregate amount of $500,000 (before the payment of
offering related fees and expenses).
2. In March 2006, we issued to an institutional investor five-year
warrants to purchase in the aggregate up to 750,000 shares of our Common Stock
at an exercise price of $1.50 per share. The warrants were issued pursuant to a
bridge loan agreement between us and the investors, under which the investors
loaned us the aggregate amount of $1,500,000 (before the payment of offering
related fees and expenses).
3. Between January 1 and March 31, 2006, we issued 236,667 shares of
Common Stock upon the conversion of 1,775 shares of Series A Preferred Stock
representing $177,500 in stated value at a per share conversion price of $0.75.
4. Pursuant to a consulting agreement entered into between us and a
third party consultant, in March 2006, we issued to a designee of such
consultant 250,000 restricted shares of our Common Stock under our 2000 Equity
Incentive Plan in consideration of services rendered under such agreement.
All of the securities issued in the transaction described above were
issued without registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act or Regulation S under
such Securities Act. Except with respect to securities sold under Regulation S,
the recipients of securities in the transaction acquired the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof. Appropriate legends were affixed to the share certificates
issued in the above transaction. We believe the recipients were all "accredited
investors" within the meaning of Rule 501(a) of Regulation D under the
Securities Act, or had such knowledge and experience in financial and business
matters as to be able to evaluate the merits and risks of an investment in its
common stock. All recipients had adequate access to information about us. The
transaction described above did not involve general solicitation or advertising.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS
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: MAY 22, 2006 BY /S/ FRANK GALUPPO
-------------------------
FRANK GALUPPO,
CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
DATE: MAY 22, 2006 BY /S/ JAMES D. GARDNER
------------------------
JAMES D. GARDNER,
CHIEF FINANCIAL OFFICER
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