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, 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
August 18, 2006, is 27,360,754 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 June 30, 2006 (unaudited) 1
Condensed Consolidated Statements of Operations For the
six and three months ended June 30, 2006 and 2005 and
from Inception (July 14, 1994) to June 30, 2006 (unaudited) 2
Condensed Consolidated Statements of Cash Flows For the
six months ended June 30, 2006 and 2005 and from
Inception (July 14, 1994) to June 30, 2006 (unaudited) 3
Notes to the Condensed Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operation 15
Item 3. Controls and Procedures 18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits 19
Signatures 21
(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
(Unaudited)
June 30, 2006
ASSETS
Current assets
Cash and cash equivalents $ 3,079,772
Inventories 917,165
Prepaid expenses 66,415
------------
Total current assets 4,063,352
------------
Property and equipment, net of accumulated depreciation of $223,962 718,048
------------
Other assets
Capitalized software costs, net of accumulated amortization of $204,584 1,583,843
Deferred financing costs, net of accumulated amortization of $167,906 2,007,046
Security deposit 46,749
------------
Total other assets 3,637,638
------------
Total assets $ 8,419,038
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities
Accounts payable $ 994,374
Accrued expenses 297,358
Accrued penalties 894,667
Accrued interest expense 131,803
Advances under R&D arrangement, net of costs incurred 178,769
Current portion of capital leases 5,141
------------
Total current liabilities 2,502,112
Long-term liabilities
8% Convertible debentures, net of unamortized discount of $7,243,968 2,756,032
Capital leases, less current maturities 9,650
------------
Total liabilities 5,267,794
------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value;
5,000,000 shares authorized;
Series A convertible preferred stock,
52,500 shares authorized; 11,928 issued and outstanding
($1,192,800 liquidation preference) 12
Series B convertible preferred stock,
85,000 shares authorized; 46,000 issued and outstanding
($4,600,000 liquidation preference) 46
Common stock, $.001 par value;
100,000,000 shares authorized; 27,321,978
issued and outstanding 27,322
Additional paid-in capital 71,914,189
Deficit accumulated during the development stage (67,891,957)
Deferred compensation (898,368)
------------
Total stockholders' equity 3,151,244
------------
Total liabilities and stockholders' equity $ 8,419,038
============
See Notes to Condensed Consolidated Financial Statements.
-1-
AMEDIA NETWORKS, INC. AND 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,
2006 2005 2006 2006 2005
------------ ------------ ------------ ------------ ------------
Sales $ 25,379 $ 5,248 $ 30,927 $ - $ 2,598
------------ ------------ ------------ ------------ ------------
Cost of goods sold 19,747 5,846 25,825 - 2,705
------------ ------------ ------------ ------------ ------------
Gross profit (loss) 5,632 (598) 5,102 - (107)
------------ ------------ ------------ ------------ ------------
Expenses
Research and development (1) 2,419,017 2,063,462 15,777,934 1,151,903 1,001,085
Sales and marketing (1) 839,495 1,078,540 13,561,822 412,016 637,060
General and administrative (1) 1,955,973 935,575 24,647,056 710,015 496,506
Bad debt expense - - 161,000 - -
------------ ------------ ------------ ------------ ------------
Total expenses 5,214,485 4,077,577 54,147,812 2,273,934 2,134,651
------------ ------------ ------------ ------------ ------------
Operating loss (5,208,853) (4,078,175) (54,142,710) (2,273,934) (2,134,758)
------------ ------------ ------------ ------------ ------------
Other (income) expense
Legal settlement - - 565,833 - -
Late filing penalty on stock registration rights 641,738 - 927,980 641,738 -
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 83,723 - 4,600,498 83,723 -
Impaired offering costs - - 267,404 - -
Interest income (26,983) (19,354) (1,011,718) (26,230) (14,921)
Interest expense 1,908,052 260,315 4,161,088 1,495,821 260,315
------------ ------------ ------------ ------------ ------------
Total other (income) expense 2,606,530 242,653 5,474,245 2,195,052 245,394
------------ ------------ ------------ ------------ ------------
Net loss $ (7,815,383) $ (4,320,828) $(59,616,955) $ (4,468,986) $ (2,380,152)
============ ============ ============ ============ ============
Deemed dividend on convertible preferred stock 1,591,525 2,943,272 7,162,382 1,591,525 2,943,272
Dividend on convertible preferred stock 317,729 233,098 1,112,620 140,817 161,910
------------ ------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (9,724,637) $ (7,497,198) $ (67,891,957 $ (6,201,328) $ (5,485,334)
============ ============ ============= ============ =============
Per share data:
Basic and diluted $ (0.40) $ (0.39) $ (0.23) $ (0.26)
============ ============ ============ ============
Weighted average number
of common shares used in
basic and diluted loss per share 24,609,848 19,386,647 26,635,279 20,758,670
============ ============ ============ ============
(1) Includes non-cash, stock-based compensation expense as follows:
Research and development $ 129,170 $ 9,287 $ 603,982 $ 54,220 $ 4,644
Sales and marketing 85,246 - 5,421,804 44,850 -
General and administrative 679,278 32,268 6,451,633 200,394 11,385
------------ ------------ ------------ ------------ ------------
$ 893,694 $ 41,555 $ 12,477,419 $ 299,464 $ 16,029
============ ============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
-2-
AMEDIA NETWORKS, INC. AND 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,
2006 2005 2006
------------ ------------ --------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $ (7,815,383) $ (4,320,828) $(59,616,955)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 296,317 41,829 1,382,699
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 1,391,558 104,985 6,188,690
Impaired offering costs 267,404
Foreign currency translation adjustment and realized gain - - (82,535)
Beneficial conversion feature of convertible debt 437,071 - 1,009,576
Stock, warrants and options issued for services and legal settlement 893,694 41,555 12,650,380
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 11,852 (206,812) (917,165)
Prepaid expenses and other current assets 12,779 (215,616) (96,072)
Other assets - (26,099) (46,750)
Accounts payable (462,203) 350,743 447,181
Accrued expenses (1,208) 93,935 1,656,383
Accrued penalties 631,419 - 631,419
Accrued severance pay - - (122,363)
Advances under R&D arrangement 178,769 - 178,769
Accrued interest expense 131,803 - 382,822
------------ ------------ ------------
Net cash used by operating activities (4,293,532) (4,134,616) (39,586,224)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed assets - - 68,594
Purchases of property and equipment (118,897) (460,684) (1,924,642)
Capitalized software costs (528,045) (436,010) (1,788,427)
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 investing activities (646,942) (896,694) (792,155)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of convertible preferred stock - 7,084,170 11,726,600
Proceeds from exercise of warrants and options 210,018 189,230 399,248
Proceeds from issuance of common stock - - 21,177,354
Stock offering costs - - (475,664)
Deferred financing costs (1,309,620) - (2,114,462)
Proceeds from notes payable 2,450,000 3,450,000
Proceeds from short-term borrowings - - 1,356,155
Payments on capital lease obligations (2,439) - (5,367)
Proceeds from long-term debt - - 2,751,825
Proceeds from convertible debentures 10,000,000 - 12,000,000
Repayment of notes payable (3,661,500) - (3,661,500)
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 7,686,459 7,105,681 43,463,563
------------ ------------ ------------
Effect of exchange rate changes on cash - - (5,412)
------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 2,745,985 2,074,371 3,079,772
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 333,787 2,275,377 -
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,079,772 $ 4,349,748 $ 3,079,772
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 30,000 $ 5,178 $ 482,492
============ ============ ============
Non-cash investing and financing activities:
Issuance of common stock warrants in connection
with bridge loans $ 338,955 $ - $ 447,615
============ ============ ============
Original issue discount on notes payable $ 131,500 $ - $ 211,500
============ ============ ============
Deemed dividend in connection with sale
of convertible preferred stock $ 1,591,525 $ 2,943,272 $ 7,162,382
============ ============ ============
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 $67,891,957 since its inception, and as of June 30, 2006, has
working capital of $1,561,240 and stockholders' equity of $3,151,244. 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 Note 5 (Private Placement) and Note 6 (Notes
Payable), the Company funded its operations during the past six months from the
proceeds of the sale of its short-term notes issued from December 2005 through
April 2006 and from the proceeds of the Private Placement in May 2006.
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, 2006, and its results of operations and cash
flows for the six months ended June 30, 2006 not misleading. Operating results
for the six months ended June 30, 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.
-4-
RECLASSIFICATIONS
Certain amounts in the financial statements for the six and three months ended
June 30, 2005 have been reclassified for comparative purposes to conform to the
presentation in the financial statements for the six and three months ended June
30, 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 six months ended June 30, 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 June 30, 2006 any items relieved from
inventory have been determined under the specific identification method. The
balance at June 30, 2006 of inventories amounted to $917,165, which included raw
materials of $168,658 and finished goods of $748,507.
CAPITALIZED SOFTWARE COSTS
During the six months ended June 30, 2006 the Company capitalized $528,045 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. During the six months ended June 30,
2006 the Company recorded amortization expense of $204,584.
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, 2006 and 2005 were $2,419,017 and $2,063,462,
respectively.
STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payment" (SFAS 123R) that amends SFAS 123, and SFAS 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, SFAS 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. SFAS 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 SFAS 123 no
longer will be an alternative to financial statement recognition.
The Company adopted SFAS 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 SFAS 123R for all share-based
payments granted after the effective date and (b) based on the requirements of
SFAS 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 six and three months ended June 30, 2006 is $673,694 and $374,230,
respectively, higher than if it had continued to account for the share based
payment under APB 25. In addition, there was $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.
Pro-forma net earnings for the six and three months ended June 30, 2005,
including effects of expensing stock options, follows.
-5-
Six Months Ended, Three Months Ended
June 30, June 30,
2005 2005
----------------- ------------------
Net loss applicable to
common stockholders, as reported $(7,497,198) $(5,485,334)
Net loss per share applicable to
common stockholders, basic and diluted
as reported $ (0.39) $ (0.26)
Stock option expense included
in net loss $ 41,555 $ 16,029
Total stock option expense $ 378,386 $ 143,351
PRO-FORMA EFFECTS
Pro-forma net loss applicable to
common stockholders, as reported $(7,834,029) $(5,612,656)
Pro-forma net loss per share,
basic and diluted $ (0. 40) $ (0.27)
The fair value of employee stock options at the date of grant was
estimated using the Black-Scholes option pricing method during the six
months ended June 30, 2005 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 during the six months ended June 30,
2005 was estimated at $0.56.
STOCK OPTION PLANS
In July 1996, the Board of Directors adopted the Company's Incentive and
Non-qualified Stock Option Plan (the "Plan") and has reserved up to 450,000
shares of Common Stock for issuance thereunder. In December 1999, the Plan was
amended to increase the total number of shares available for grant to 1.5
million. As of December 31, 2005 a total of 714,566 options were outstanding
under the 1996 Plan. Future grants under the 1996 Plan were discontinued in July
2000.
In July 1998, the Board of Directors adopted the Non-Executive Directors Stock
Option Plan (the "Directors' Plan") and has reserved up to 25,000 shares of
common stock for issuance thereunder. In May 2001, the Plan was amended to
increase the total number of shares available for grant to 75,000. In August
2002, the Company adopted the 2002 Non-Employee Directors' Plan (the "2002
Directors' Plan") which provides for 275,000 shares available for grant. Both
plans provide for the grant of options to directors who are not otherwise
employed by the Company. In May 2004, the 2002 Directors Plan was subsequently
amended to increase the total number of shares available for grant to 1,000,000
and in July 2006 such plan was further amended to increase the total number of
shares available for grant thereunder to 2,000,000 shares. As of December 31,
2005, options to purchase a total of 225,000 shares of Common Stock were
outstanding under the Directors' Plan and the 2002 Directors' Plan.
In July 2000, the Company adopted the 2000 Equity Incentive Plan (the "2000
Incentive Plan") and originally reserved a total of 1,500,000 shares of common
stock for issuance thereunder. Since its adoption, the 2000 Incentive Plan was
amended to increase the total number of shares of Common Stock available for
grant and, as of July 2006, the 2000 Incentive Plan was last amended to increase
to 10,000,000 the total number of shares of Common Stock available for issuance
thereunder. The 2000 Incentive Plan provides for the grant of incentive stock
options, nonqualified stock options, stock appreciation rights, restricted
stock, bonus stock, awards in lieu of cash obligations, other stock-based awards
and performance units. The 2000 Incentive Plan also permits cash payments under
certain conditions. As of December 31, 2005, there were options to purchase
5,569,858 shares of Common Stock issued and outstanding under the 2000 Incentive
Plan. The Compensation Committee of the Board of Directors is responsible for
determining the type of award, when and to whom awards are granted, the number
of shares and the terms of the awards and exercise prices. The options are
exercisable for a period not to exceed ten years from the date of grant. Vesting
periods range from immediately to four years.
-6-
OTHER OPTION GRANTS
In addition to the options granted under the Stock Option Plans, the Company has
issued options outside of the plans, pursuant to various agreements. Stock
option activity for the six months ended June 30, 2006 is summarized as follows:
A summary of Plan and options activity as of June 30, 2006. and changes during
the six months ended June 30, 2006 presented below:
Weighted Weighted
Average Average Aggregate
Options Exercise Remaining Intrinsic
Plan Nonplan Total Price Years Value
--------- -------- --------- -------- --------- ---------
Options outstanding, December 31, 2005 6,509,425 493,218 7,002,643 $ 1.60
Granted 1,470,400 0 1,470,400 $ 0.37
Exercised (160,044) (328,812) (488,856) $ 0.61
Forfeited (207,583) 0 (207,583) $ 0.27
--------- -------- ---------
Options outstanding, June 30, 2006 7,612,198 164,406 7,776,604 $ 1.53 7.52 $ 84,854
========= ======== ========= ====== ======= ========
Options exercisable, June 30, 2006 5,507,370 164,406 5,671,776 $ 1.75 6.96 $ 80,485
========= ======== ========= ====== ======= ========
A summary of Plan and options activity of nonvested options as of June 30, 2006.
and changes during the six months ended June 30, 2006 presented below:
Weighted
Average
Grant Date
2006 Fair Value
----------- -----------
Nonvested at January 1, 2,719,159 $ 0.54
Granted 1,470,400 $ 0.37
Vested (1,877,148) $ 0.47
Forfeited (207,583) $ 0.27
-----------
Nonvested at June 30, 2,104,828 $ 0.49
=========== =========
The total fair value of shares vested during the six months ended June 30, 2006
was $673,694.
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The fair value of employee stock options at the date of grant was estimated
using the Black-Scholes option pricing method during the six months ended June
30, 2006 with the following weighted-average assumptions:
Expected Life (Years) 3.44
Interest Rate 4.67%
Annual Rate of Dividends --%
Volatility 57%
Weighted-average grant date fair value of options granted during the six months
ended June 30, 2006, under the Black-Scholes option pricing model, was $0.37 per
option. The total intrinsic value of options exercised during the six months
ended June 30, 2006 was $143,704.
DURING THE SIX MONTHS ENDED JUNE 30, 2006 THE COMPANY ISSUED THE FOLLOWING STOCK
OPTIONS:
On February 2, 2006, the Company granted to 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 were scheduled to 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 six months ended June 30, 2006 for
this transaction. As the employee subsequently forfeited these options, the
Company will not recognize any further expense 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 $2,399 in the accompanying
condensed consolidated financial statements for the six months ended June 30,
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 six months ended June
30, 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 $20,704 in the
accompanying financial statements for the six months ended June 30, 2006 for
this transaction.
On April 25, 2006 the Company granted to four non-employee directors, on the
one-year anniversary of service on the Company's board of directors,
non-qualified options under the 2002 Non Employee Directors Stock Option Plan to
purchase up to 327,500 shares of the Company's Common Stock at an exercise price
of $1.03 per share (based on the closing market price of the Common Stock on the
date of the grant). The options immediately vested on the grant date. The fair
value of the options on the date of grant equaled $149,075. The Company recorded
stock-based compensation expense of $149,075 in the accompanying condensed
consolidated financial statements for the six months ended June 30, 2006 for
this transaction.
On May 1, 2006, the Company granted to a new employee stock options to purchase
up to an aggregate of 50,000 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
-8-
and are exercisable at an exercise price of $1.07 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 $23,649 and is being amortized
over the three-year vesting period. The Company recorded stock-based
compensation expense of $1,314 in the accompanying condensed consolidated
financial statements for the six months ended June 30, 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 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.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets" ("SFAS 156"), which amends SFAS 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS 156 permits the choice of the amortization method or
the fair value measurement method, with changes in fair value recorded in
income, for the subsequent measurement for each class of separately recognized
servicing assets and servicing liabilities. The statement is effective for years
beginning after September 15, 2006, with earlier adoption permitted. The Company
does not expect SFAS 156 to have a material impact on the Company's financial
position or results of operations.
In July 2006, the FASB issued FASB Interpretation 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109" ("FIN
48"), which prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions taken or expected
to be taken in a tax return. Additionally, FIN 48 provides guidance on the
recognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The accounting provisions of FIN 48
will be effective for the Company beginning January 1, 2007. The Company is in
the process of determining the effect, if any, that the adoption of FIN 48 will
have on its 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 three months ended June 30, 2006 and 2005 as their inclusion would be
anti-dilutive. Potentially dilutive options to purchase 7,776,603 and 6,302,642
shares of Common Stock were outstanding at June 30, 2006 and 2005, respectively.
Potentially dilutive warrants to purchase 23,838,947 and 13,728,786 shares of
Common Stock were outstanding at June 30, 2006 and 2005, respectively. In
addition, there were 11,928 and 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 1,590,400 and 2,853,733
shares of Common Stock at June 30, 2006 and 2005, respectively. In addition,
there were 46,000 and 77,650 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 6,133,333 and 7,688,119 shares of
Common Stock at June 30, 2006 and 2005, respectively. The May 2006 Private
Placement referred to in Note 5 (Private Placement) resulted in an adjustment to
the conversion rate into Common Stock of the outstanding Series B Preferred
Stock. In addition, there was $10,000,000 of 8% convertible debentures
outstanding which are potentially convertible into 13,333,333 shares of Common
Stock at June 30, 2006
NOTE 5 - 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 warrants, exercisable
through the last day of the month in which the fifth anniversary of the
effective date of the Registration Statement (as defined below) occurs (the
"Investor Warrants"), to purchase up to 6,666,675 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") 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 mature on April 30, 2008 and are convertible into shares of
Common Stock at the holder's option at any time 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, with the first scheduled payment date being 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
-9-
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. The Company recorded accrued interest
of $131,803 in the accompanying condensed consolidated financial statements for
the six and three months ended June 30, 2006 for this transaction.
Under certain conditions, the Company is entitled to require the holders of the
Debentures to convert all or a part of the outstanding principal amount of the
Debentures. If the closing sale price of the Company's Common Stock as quoted on
the OTC Bulletin Board equals to or exceeds 200% of the conversion price then in
effect (i.e., $1.50 with respect to the initial conversion price of $0.75)
(which amount may be adjusted for certain capital events, such as stock splits)
on each of twenty consecutive trading days, then, subject to certain specified
conditions, within five trading days after the last day in such period, the
Company may, at its option (exercised by written notice to the holders of the
Convertible Debentures), require the holders thereof to convert all or any part
of their Debentures on or before a specified date, which date shall not be less
than 20 and not more than 60 trading days after the date of such notice.
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. As of the date of the filing of this quarterly report
on Form 10-QSB, the Company has not filed such registration statement. Under the
agreements with the holders of the Debentures, the Company is obligated to pay
liquidated damages to the holders of the Debentures because the Registration
Statement was not filed within the time frame provided therein. Similar payments
will be required if the Registration Statement is not declared effective by the
Securities and Exchange Commission within 120 days of the closing or
subsequently suspended beyond certain agreed upon periods. Accordingly, the
Company recorded accrued estimated penalties of $486,666 at June 30, 2006
(estimated through September 30, 2006). Liquidated damages in respect of late
filing/effectiveness are first payable at the earlier of (i) the effective date
of the Registration Statement or (ii) 180 days after closing. The Debenture
holders have the right to have these liquidated damages paid in shares of Common
Stock (valued at the conversion price). In addition, if the effective date of
the Registration Statement is on or before 180 days after the closing date, the
Company is entitled to pay these liquidated damages in shares of Common Stock.
The Private Placement resulted in a beneficial conversion feature of $5,658,503
which the Company recorded as a discount to the face value of the Debentures.
The Company also recorded a $2,191,836 discount on the Debentures based upon the
relative fair values of the Debentures and the Investor Warrants. During the six
and three months ended June 30, 2006, $606,371 of these discounts was amortized
and is included in interest expense in the accompanying condensed consolidated
financial statements. The remaining unaccreted discount of $7,243,968 will be
amortized over the remaining term of the Debentures.
In connection with the placement of the Debentures, a placement agent has
received a fee of $1,000,000 and warrants, with a grant date value of
$1,090,452, 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 resale of the Common Stock underlying the
Placement Agent's Warrants will also be included in the Registration Statement.
The Company paid an additional $84,500 in other costs associated with the
placement of the Debentures. Accordingly, a total of $2,174,952 was recorded as
deferred financing costs. During the six and three months ended June 30, 2006
$84,183 and $83,723 were amortized and are included in interest expense and
amortization of deferred financing costs respectively.
The placement of the Debentures resulted in the reduction to $0.75 from $1.01 of
the conversion rate into Common Stock of the outstanding shares of the Company's
Series B 8% Convertible Preferred Stock issued in April and May of 2005. The
reduction in the conversion price resulted in an additional beneficial
conversion feature of $1,591,525 which the Company recorded as a deemed dividend
in the accompanying condensed consolidated financial statements for the six and
three months ended June 30, 2006 for this transaction.
NOTE 6 - NOTES PAYABLE
(i) On January 20, 2006, the Company entered into 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 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. 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
-10-
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
5 (Private Placement) above in satisfaction of the January 2006 Bridge Notes.
Two of the January 2006 Bridge Investors participated in the May 2006 Private
Placement and, accordingly, $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.
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 six
months ended June 30, 2006 was $40,134 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 loan. Amortization of the discount on the note
payable for the six months ended June 30, 2006 was $30,000 and is included as
interest expense in the accompanying condensed consolidated statements of
operations.
(ii) 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 advanced to the Company a short-term loan in
December 2005. 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. The Company issued to the investor five year 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 March 2006 Short Term Loans were on terms and
conditions substantially similar to the December 2005 Bridge Loan. 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 5 (Private Placement) in satisfaction
of the March 2006 Short-Term Loans.
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 six months ended June 30, 2006 was $205,182 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 six
months ended June 30, 2006 was $85,000 and is included as interest expense in
the accompanying condensed consolidated statements of operations. The Company
paid $171,590 of financing 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 six months ended June 30, 2006 was
$171,590 and is included as interest expense in the accompanying condensed
consolidated statements of operations.
(iii) 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 in the aggregate principal
amount of $466,500 (the "April 2006 Bridge Note"), representing an original
issue discount of approximately 3.5% with respect to the principal amount of
$450,000 through the stated maturity date of 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 under certain specified conditions.
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
5 (Private Placement)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.
The Company recorded a $93,639 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 six months ended June 30, 2006 was $93,639 and is included as
interest expense in the accompanying condensed consolidated statement of
operations. The Company amortized the $16,500 original issue discount over the
term of the Notes. Amortization of the discount on the notes payable for the six
months ended June 30, 2006 was $16,500 and is included as interest expense in
the accompanying condensed consolidated statements of operations. The Company
paid $48,500 of issue costs on the notes payable which are being amortized over
the term of the Notes. Amortization of the issue costs on the note payable
for the six months
-11-
ended June 30, 2006 was $48,500 and is included as interest expense in the
accompanying condensed consolidated statements of operations.
(iv) On April 19, 2006 the Company issued warrants to purchase up to an
additional 150,000 shares of Common Stock, on terms and conditions identical to
the January 2006 Bridge Loan Warrants, as consideration for the extension from
April 21, 2006 to May 21, 2006 of the scheduled maturity date of the December
2005 and January 2006 Bridge Notes, with an aggregate principal amount of
$1,610, 000. In addition the Company agreed to pay these same investors $30,000.
In connection with the extension of the maturity date, the Company recorded a
$73,509 discount to the face values of the bridge notes which was amortized over
the extended term of the notes and is included in interest expense in the
accompanying condensed consolidated statement of operations for the six and
three months ended June 30, 2006.
NOTE 7 - STOCKHOLDERS' EQUITY
COMMON STOCK
During the six months ended June 30, 2006:
The Company issued 1,233,333 shares of Common Stock upon the conversion of 9,250
shares of Series A Preferred Stock representing $925,000 in stated value at a
per share conversion price of $0.75.
The Company issued 2,524,423 shares of Common Stock upon the conversion of
25,150 shares of Series B Preferred Stock representing $2,515,000 in stated
value at per share conversion prices of $1.01 and $0.75.
The Company issued 413,699 shares of Common Stock upon the exercise of stock
options resulting in proceeds of approximately $210,000.
The Company issued 167,319 shares of Common Stock upon the exercise of 431,506
stock warrants. The Company did not receive any proceeds from this cashless
exercise.
The Company issued 250,000 shares of Common Stock with a total fair market value
of $220,000 to a consultant.
The Company issued 76,676 shares of Common Stock valued at a total fair market
value of $61,953 to Series A Preferred Stockholders as payment for accrued stock
dividends. The shares were issued at prices between $0.71 and $1.13 per share
which depending on the fair market price when issued may have been a discount to
the fair market value on the date of issuance.
The Company issued 340,677 shares of Common Stock valued at a total fair market
value of $255,819 to Series B Preferred Stockholders as payment for accrued
stock dividends. The shares were issued at prices between $0.71 and $1.16 per
share which was a discount to the fair market value on the date of issuance.
The Company is obligated to pay liquidated damages to the holders of the Series
A Preferred Stock as the registration statement relating to the resale of the
Common Stock underlying such preferred stock was not updated to maintain
effectiveness. The Company recorded accrued penalties of $294,534.
The Company is obligated to pay liquidated damages to the holders of the Series
B Preferred Stock as the registration statement relating to the resale of the
Common Stock underlying such preferred stock was not updated to maintain
effectiveness. The Company recorded accrued estimated penalties of $113,467
(estimated through September 30, 2006).
NOTE 8 - 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 are jointly developing 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
-12-
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
The Company accounts for the strategic alliance with Motorola under SFAS No. 68
(Research and Development Arrangements). As such, amounts received from Motorola
are netted against costs incurred by the Company. During the six months ended
June 30, 2006 the Company spent $421,231 on development projects related to the
strategic alliance. This resulted in a net advance of $178,769 under the
research and development arrangement and is recorded as a liability on the
balance sheet at June 30, 2006 in the accompanying condensed consolidated
financial statements.
NOTE 9 - 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 June 30, 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. 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 June
30, 2006, $170,000 of internally developed software product costs was
capitalized in connection with this supplementary agreement. See Note 11
(Subsequent Event).
NOTE 10 - 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 to the
resale of the shares of Common Stock underlying the securities issued pursuant
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.
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
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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.
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 certain of the bridge loans referred to in Note 6.
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 June 30, 2006 in the accompanying condensed consolidated
financial statements.
NOTE 11 - SUBSEQUENT EVENTS
A. INCREASE IN AUTHORIZED COMMON STOCK
On July 19, 2006, the Company's stockholders approved an increase in the
authorized shares of Common Stock that the Company is authorized to issue from
time to time to 100,000,000 shares. Such amount has been reflected retroactively
in the accompanying condensed consolidated balance sheet at June 30, 2006.
B. PRODUCT ENHANCEMENT
On July 14, 2006, the Company and Lucent entered into the Amendment to Prior
Agreements, dated as of July 10, 2006 (the "Amendment"), pursuant to which they
have amended the terms of a number of prior agreements entered into by them,
including, without limitation, the (i) Development and Licensing Agreement of
January 6, 2004 and (ii) the Supplementary Development Agreement between the
Company and Lucent effective as of May 5, 2005 as well as various supplementary
agreements and amendments thereto entered into by them (collectively the
"Agreements").
Under the terms of the Amendment, in lieu of the current royalties of 3.2% of
certain revenues payable (under certain circumstances) to Lucent under the
Agreements, the Company will be required to pay to Lucent royalties in the
amount of 1.5% of specified revenue sources from the Company's Gateway and
Switch products that include Lucent owned technologies, provided, that, no
royalties accrue or become payable until July 10, 2008. In addition, Lucent
waived payments aggregating $835,000 that were outstanding under the Agreements
in respect of deliverables received by the Company from Lucent under the
Agreements upon the Company's remittal to Lucent of $200,000 in July of 2006. In
addition, the parties agreed to terminate the license that the Company was
granted to Lucent owned patents under the Agreements; accordingly, the Company
is no longer obligated to make any payments to Lucent, if any, owing under such
patent license. The termination of the patent license does not affect the
Company's rights under the Agreements to develop and sell products based upon or
incorporating Lucent owned technologies.
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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 ON FORM
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 QoStream product line is comprised of premises gateways,
aggregation switches and a network management systems. Our initial QoStream
products include technologies licensed from Lucent Technologies, Inc. ("Lucent")
as well as technologies developed jointly with Lucent. Lucent has granted us a
worldwide and perpetual non-exclusive license to manufacture, develop and sell
products designed to deliver broadband access solutions that use Lucent's
technologies and related patents. Recently, we developed a stand-alone triple
play home gateway product that is designed to inter-operate with other
standards-based devices deployed in the central offices of carriers or in the
field.
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 AS5000
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 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.
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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 six
months ended June 30, 2006 is $673,694 higher than if we had continued to
account for the share based payment under APB 25. In addition, there was
$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 products become available for general release to
customers.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX AND THREE MONTHS ENDED JUNE 30, 2006 AND THE SIX AND THREE
MONTHS ENDED JUNE 30, 2005
SALES AND COSTS OF GOODS SOLD. Revenues for the six months and three
months ended June 30, 2006 were $25,379 and $0, respectively. Revenues for the
six and three months ended June 30, 2005 were $5,248and $2,598, respectively We
recorded unit sales from our QoStream product line for the first time during the
three month period ended March 31, 2005. Cost of goods sold were $19,747 and $0
during the six and three months ended June 30, 2006, respectively, and $5,846
and $2,705 during the corresponding periods in 2005.
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. Research and development expenses for
the six and three months ended June 30, 2006 were $2,419,017 and $1,151,903,
respectively and $2,063,462 and $1,001,085 for the comparable periods in 2005.
The increase in research and development expenses during the 2006 periods 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 as well as increased development costs of our
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 and three months ended June 30, 2006 were $839,495 and $412,016,
respectively, and $1,078,540 and $637,060 for the corresponding periods in 2005.
The decrease is primarily attributable to a shift in personnel costs from
marketing to research and development of our products.
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,
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accounting, investor relations and other services. General and administrative
expenses for the six and three months ended June 30, 2006 were $1,955,973 and
$710,015, respectively, and $935,575 and $496,506 for the corresponding periods
in 2005. The increase in general and administrative expenses during the 2006
periods 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 $1.8 million at August 7, 2006, $3
million at June 30, 2006 and $333,787 at December 31, 2005. The increase in cash
balances at June 30, 2006 is primarily attributable to the placement of the May
2006 Debentures discussed below.
Net cash used during the six months ended June 30, 2006 consisted of
operating activities of approximately $4.3 million, the purchase of property and
equipment and the costs associated with internally developed software of
approximately $600,000. Net cash used during the corresponding period in 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.
Net cash provided by financing activities during the six months ended
June 30, 2006 was approximately $7.7 million compared to approximately $7.1
million in the corresponding period in 2005. Net cash provided by financing
activities during the 2006 period was the result of proceeds from the issuance
of (i) short-term notes in the aggregate principal amount of $2,581,500 offset
by financing costs of $166,620 and original issue discount of $131,500 and (ii)
the issuance of our two year 8% secured convertible debenture in May 2006 in
connection with the private placement discussed below. Net cash provided by
financing activities during the corresponding period in 2005 was the result of
the exercise of stock warrants and proceeds from the placement in April and May
2006 of our Series B Preferred Stock.
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 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. Certain of the investors in these bridge loans elected to
participate in the Convertible Debenture transaction and, accordingly,
approximately $850,000 in principal amount of bridge loans was offset against
these investors' purchases of the Convertible Debentures. The investors in this
private placement have a lien on all of our assets, including our intellectual
property.
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 loans and payment of offering related expenses.
We issued to the purchasers of the Series B Preferred Stock five-year warrants
to purchase, in the aggregate, up to 3,844,062 shares of Common Stock at a per
share exercise price of $1.50, subject to adjustment in certain circumstances.
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 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.
Our liquidity has also improved because of a significant vendor
agreement that we entered into during the three months ended June 30, 2006. 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
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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.
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 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. These conditions raise substantial doubts as
to 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 June 30, 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.
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 June 30, 2006 without
registration under the Securities Act.
1. In April 2006, we issued to two institutional investors five-year
warrants to purchase in the aggregate 225,000 shares of our Common Stock at an
exercise price of $1.50. The warrants were issued pursuant to a bridge loan
agreement between us the investors, under which the investors loaned to us
466,500 (before the payment of offering related fees and expenses).
2. In April 2006, we issued to five institutional investors five year
warrants to purchase in the aggregate 150,000 shares of our Common Stock in
consideration of such investors' agreement to extend to May 21, 2006 the
maturity date of certain short term debts in the aggregate principal amount of
$1,500,000 scheduled to mature on April 21, 2006.
3. Between April 1 and June 30, 2006, we issued
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996,667 shares of Common Stock upon the conversion of 7,475 shares of Series A
Preferred Stock representing $747,500 in stated value and 76,676 shares of
Common Stock representing dividends due during such period.
4. Between April 1 and June 30, 2006, we issued 578,878 shares of
Common Stock upon the conversion of 5,500 shares of Series B Preferred Stock
representing $550,000 in stated value and 373,867 shares of Common Stock
representing dividends due during such period.
5. In May 2006, issued $10,000,000 in aggregate principal amount of our
8% Senior Secured Convertible Debentures schedule to mature on April 30, 2008.
In connection therewith, we issued to such investors warrants to purchase up to
6,666,675 shares of Common Stock at an exercise price of $, 1.50, subject to
certain adjustments, which warrants are exercisable through the fifth
anniversary of the effective date of the registration statement that we
undertook to file in respect of the resale of the Common Stock underlying these
debentures and warrants.
6. In May 2006, in connection with the sale of the convertible
debentures described above, we issued to a placement agent as compensation
warrants to purchase up to 2,000,000 shares of Common Stock, of which warrants
for1,333,333 are exercisable at a per share exercise price of $0.75 and 666,667
shares are exercisable at a per share exercise price of $1.50.
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. 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 and 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
ITEM 6. EXHIBITS
4.1 Form of Common Stock Purchase Warrant issued by Amedia Networks, Inc. on
May 5, 2006.*
4.2 Form of 8% Senior Secured Convertible Debenture issued by Networks, Inc.
on May 5, 2006.*
10.1 Strategic Alliance Agreement dated as of April 3, 2006, between Amedia
Networks, Inc. and Motorola Wireline Networks, Inc.**
10.2 Securities Purchase Agreement dated as of April 26, 2006 among Amedia
Networks, Inc. and certain investors.*
10.3 Registration Rights Agreement dated as of April 26, 2006 among
Amedia Networks, Inc. and certain investors.*
10.4 Security Interest Agreement dated as of April 26, 2006 among Amedia
Networks, Inc. and certain investors.*
10.5 Placement Agency Agreement dated as of May 4, 2006 between Amedia
Networks, Inc. and Pond Equities
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.
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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.
* Filed as an Exhibit to the Company's Current Report on Form 8-K that was filed
on May 11, 2006
** Portions of the Strategic Alliance Agreement that is filed as a copy hereto
have been omitted pursuant to a request for confidential treatment. The omitted
portions, marked "[***]", have been separately filed with the Commission.
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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 21, 2006 BY /S/ FRANK GALUPPO
---------------------------
FRANK GALUPPO,
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
DATE: AUGUST 21, 2006 BY /S/ JAMES D. GARDNER
----------------------------
JAMES D. GARDNER,
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
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