UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
MARK ONE
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2007
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 June 20,
2007, is 30,759,747 shares.
Transitional Small Business Disclosure Format (Check one) Yes |_| No |X|
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A Development Stage Company)
INDEX
Page
----
Forward Looking Statements (ii)
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheet as of
March 31, 2007 (unaudited) 1
Condensed Consolidated Statements of Operations For
the three months ended March 31, 2007 and 2006 and
from Inception (July 14, 1994) to March 31, 2007 (unaudited) 2
Condensed Consolidated Statements of Cash Flows For
the three months ended March 31, 2007 and 2006 and
from Inception (July 14, 1994) to March 31, 2007 (unaudited) 3
Notes to the Condensed Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operation 14
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 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
Signatures 20
(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)
March 31, 2007
ASSETS
Current assets
Cash and cash equivalents $ 11,289
Accounts receivable 2,000
Inventories 103,003
Due from Motorola 242,000
Prepaid expenses 21,782
------------
Total current assets 380,074
------------
Property and equipment - net 673,861
------------
Other assets
Capitalized software costs 708,542
Deferred financing costs 1,244,506
Security deposit 46,750
------------
Total other assets 1,999,798
------------
Total assets $ 3,053,733
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
LIABILITIES
Current liabilities
Accounts payable $ 1,559,850
Accrued expenses 331,411
Accrued penalties 2,383,613
Accrued interest 765,971
Dividends payable 83,669
Notes payable, net of unamortized discounts of $40,095 2,704,334
Capital leases 10,969
------------
Total current liabilities 7,839,817
------------
Long-term liabilities
8% Convertible debentures, net of unamortized discount of $4,277,081 5,722,919
------------
Total liabilities 13,562,736
------------
Commitments and contingencies
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.001 par value;
5,000,000 shares authorized;
Series A convertible preferred stock,
52,500 shares authorized; 10,418 issued and outstanding
($1,041,800 liquidation preference) 10
Series B convertible preferred stock,
85,000 shares authorized; 33,000 issued and outstanding
($3,300,000 liquidation preference) 33
Common stock, $.001 par value;
100,000,000 shares authorized; 30,259,747
issued and outstanding 30,260
Additional paid-in capital 72,213,296
Deficit accumulated during the development stage (82,737,824)
Deferred compensation (14,778)
------------
Total stockholders' deficiency (10,509,003)
------------
Total liabilities and stockholders' deficiency $ 3,053,733
============
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
Three Months (July 14,
Ended 1994) to
March 31, March 31,
2007 2006 2007
------------ ------------ ------------
Sales $ 234,400 $ 25,379 $ 272,671
------------ ------------ ------------
Cost of goods sold 219,642 19,747 252,348
------------ ------------ ------------
Gross profit 14,758 5,632 20,323
------------ ------------ ------------
Expenses
Research and development (1) 1,094,058 1,267,114 19,319,826
Sales and marketing (1) 75,666 427,479 14,148,026
General and administrative (1) 577,304 1,245,958 27,036,348
Inventory write off - - 898,802
Impairment of capitalized software - - 880,021
Bad debt expense - - 161,000
------------ ------------ ------------
Total expenses 1,747,028 2,940,551 62,444,023
------------ ------------ ------------
Operating loss (1,732,270) (2,934,919) (62,423,700)
------------ ------------ ------------
Other expense (income)
Legal settlement - - 565,833
Late filing penalty on stock registration rights 226,666 - 2,416,926
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 - - 30,874
Amortization of deferred financing costs 295,144 - 5,233,444
Impaired offering costs - - 267,404
Interest income - (753) (1,027,844)
Interest expense 1,441,165 412,231 8,309,497
------------ ------------ ------------
Total other expense 1,962,975 411,478 11,728,422
------------ ------------ ------------
Net loss $ (3,695,245) $ (3,346,397) $(74,152,122)
============ ============ ============
Deemed dividend on convertible preferred stock - - 7,162,382
Dividend on convertible preferred stock 83,669 176,912 1,423,320
------------ ------------ ------------
Net loss applicable to common stockholders $ (3,778,914) $ (3,523,309) $(82,737,824)
============ ============ ============
Per share data:
Basic and diluted $ (0.12) $ (0.16)
============ ============
Weighted average number
of common shares used in
basic and diluted loss per share 30,259,747 22,559,205
============ ============
(1) Includes non-cash, stock-based compensation expense as follows:
Research and development $ 55,321 $ 258,884 $ 783,964
Sales and marketing 15,862 40,396 5,507,010
General and administrative 87,893 294,949 7,095,438
------------ ------------ ------------
$ 159,076 $ 594,229 $ 13,386,412
============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
-2-
AMEDIA NETWORKS, INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
From
Three Months Inception
Ended (July 14, 1994)
March 31, to March 31,
2007 2006 2007
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,695,245) $ (3,346,397) $(74,152,122)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 56,863 43,995 2,139,858
Forgiveness of note receivable, officer - - 100,000
Loss from disposition of fixed assets - - 197,065
Bad debt expense - - 161,000
Amortization of note discount and finance costs 790,083 411,624 8,187,279
Impaired offering costs - - 267,404
Foreign currency translation adjustment and realized gain - - (82,535)
Beneficial conversion feature of convertible debt 702,435 - 3,148,101
Stock-based compensation 159,076 594,229 13,559,373
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)
Inventory write off - - 898,802
Impairment of intangibles - - 880,021
Increase (decrease) in cash attributable
to changes in assets and liabilities
Accounts receivable 4,224 (25,379) (1,446)
Inventories - 16,052 (1,001,805)
Prepaid expenses 159,433 (9,411) (270,245)
Due from Motorola (23,195) - (23,195)
Other assets - - (46,750)
Accounts payable 95,114 189,216 1,012,654
Accrued expenses 19,909 53,849 1,690,433
Accrued penalties 226,667 - 1,998,002
Accrued interest 234,218 - 1,016,990
------------ ------------ ------------
Net cash used by operating activities (1,270,418) (2,072,222) (44,279,440)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed assets - - 68,594
Purchases of property and equipment - (20,893) (2,048,583)
Intangible asset - (216,145) (2,382,178)
Proceeds from sale of Copy Protection Business - - 5,050,000
Proceeds from sale of investment in affiliate - - 40,000
Investment in ComSign, Ltd. - - (2,000,000)
Increase in note receivable, officer - - (100,000)
Increase in note receivable - - (130,000)
Increase in organization costs - - (7,680)
------------ ------------ ------------
Net cash used by investing activities - (237,038) (1,509,847)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of convertible preferred stock - - 11,726,600
Proceeds from exercise of warrants - 162,006 189,230
Proceeds from issuance of common stock - - 21,436,972
Stock offering costs - - (475,664)
Deferred financing costs (120,480) (176,620) (2,400,100)
Proceeds from note payable 1,216,000 2,000,000 6,213,097
Proceeds from short-term borrowings - - 1,356,155
Payments on capital lease obligations (1,295) (1,209) (9,189)
Proceeds from long-term debt - - 2,751,825
Proceeds from convertible debentures - - 11,150,000
Repayment of short-term borrowings (180,812) - (4,349,394)
Repayments of long-term debt - - (1,615,825)
Dividends paid to preferred stockholders - - (167,719)
------------ ------------ ------------
Net cash provided by financing activities 913,413 1,984,177 45,805,988
------------ ------------ ------------
Effect of exchange rate changes on cash - - (5,412)
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (357,005) (325,083) 11,289
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 368,294 333,787 -
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,289 $ 8,704 $ 11,289
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ - $ - $ 512,492
============ ============ ============
Non-cash investing and financing activities:
Deemed dividend in connection with sale
of convertible preferred stock $ - $ - $ 7,162,382
============ ============ ============
Beneficial conversion feature in connection with sale
of convertible debentures $ - $ - $ 5,658,503
============ ============ ============
Issuance of common stock warrants in connection
with note payable $ - $ - $ 108,660
============ ============ ============
Original issue discount on notes payable $ 75,480 $ 115,000 $ 373,643
============ ============ ============
Issuance of common stock warrants in connection
with bridge loan $ - $ 245,316 $ 443,940
============ ============ ============
Capital leases $ - $ - $ 20,158
============ ============ ============
Late filing penalty on preferred stock registration
paid in common stock $ - $ - $ 14,136
============ ============ ============
Repayments of notes payable by issuance
of convertible debentures $ - $ - $ 850,000
============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
-3-
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - THE COMPANY DESCRIPTION OF BUSINESS AND DEVELOPMENT STAGE OPERATIONS
Amedia Networks, Inc. (hereinafter, the "Company" or "Amedia"), is a development
stage company that designs, develops and markets technology-based broadband
access solutions for voice, video and data services. The Company's products are
designed to provide key functionality that enables service providers to deliver
"triple play" (voice, video and data) broadband communication to their
subscribers. These products are designed for placement at various points in the
network infrastructure layout and can be deployed with optical fibers as well as
with copper wires. The Company is marketing its initial products to
communications carriers, municipal authorities and communication equipment
companies.
The Company has been engaged in the broadband access communications business
since March 2004. From its inception in July 1994 through May 2003, Amedia was
primarily engaged in the business of designing and developing technologies that
provide copy protection for electronic content distributed on optical media and
the Internet under the name of "TTR Technologies, Inc." In May 2003, the Company
sold its copy protection business. With the commencement of operations in the
broadband communications business, in May 2004, the Company changed its name to
"Amedia Networks, Inc."
NOTE 2 - GOING CONCERN AND MANAGEMENT'S PLAN
The accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has incurred significant operating losses
resulting in cash flow deficiencies from operations and a working capital
deficiency of $7,459,743 at March 31, 2007. As indicated in the accompanying
condensed consolidated financial statements, as of and for the quarter ended
March 31, 2007, the Company had cash balances of $11,289 and incurred a net loss
applicable to common stockholders of $ 3,778,914. The Company expects to incur
additional losses for the foreseeable future and will need to raise additional
funds in order to meet its operating requirements and realize its business plan.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. These financial statements do not include any adjustments
relating to the recovery of the recorded assets or the classification of the
liabilities that might be necessary should the Company be unable to continue as
a going concern.
The Company's future operations are dependent upon management's ability to find
sources of additional capital. The Company needs to raise additional funds on an
immediate basis to continue to meet its liquidity needs, repay short-term loans
that matured in March 2007 and have not been repaid and additional short-term
loans scheduled to mature in May 2007, realize its current business plan and
maintain operations. Management of the Company is continuing its efforts to
secure funds for its operations.
As more fully described in Note 6 (Notes Payable), the Company raised net
proceeds of $914,707 during the first quarter of 2007 in working capital loans.
As of June 17, 2007, the Company has not repaid principal and accrued interest
that became due as of such date in the aggregate amount of $2,626,843. In
addition, the Company did not make interest payments in the aggregate amount of
$725,479 due and owing as of March 31, 2007 and certain other payments in the
aggregate amount of approximately $1.7 million owing as of March 31, 2007 to the
holders of the convertible debentures that the Company issued in the May 2006
private placement (Note 5). The delivery of notice to the Company by any one of
these holders demanding immediate payment will trigger an Event of Default under
the agreements with the debenture holders and entitle these holders to foreclose
on our property. The Company and the holders of these debts are in discussions
in an attempt to address these and resolve these issues but no assurance can be
provided that the Company will be able to reach a mutually acceptable resolution
of these issues. See Note 12 (Subsequent Events). An Event of Default will
materially adversely affect the Company's business and may result in the
cessation of operations. In April 2007, the Company received $408,666 and in
June 2007, an additional $250,000 from a strategic collaborator. Under the
agreements with such strategic collaborator, the Company is to receive an
additional $283,000 by June 25, 2007. See Note 12 (Subsequent Events).
NOTE 3 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements contained herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial statements, the
instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, these
financial statements do not include all the information and footnotes required
by accounting principles generally accepted in the United States of America for
annual financial statements. In the opinion of management, the accompanying
condensed consolidated financial statements contain all the adjustments
necessary (consisting only of normal recurring accruals) to make the financial
position of the Company at March 31, 2007, and its results of operations and
cash flows for the three months ended March 31, 2007 not misleading. Operating
results for the three months ended March 31, 2007 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2007. For
further information, refer to the condensed consolidated financial statements
and footnotes thereto
-4-
included in the Company's Annual Report on Form 10-KSB/A for the year ended
December 31, 2006 as filed with the Securities and Exchange Commission.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, TTR LTD., which has been inactive since
December 2002. All significant inter-company accounts and transactions have been
eliminated in consolidation.
REVENUE RECOGNITION
The Company receives revenue from the sale of products developed under the
Motorola agreement that 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.
Utilizing these criteria, product revenue is generally recognized upon delivery
of the product at the end-customer's location when the risks and rewards of
ownership have passed to the customer. During the three months ended March 31,
2007 the Company recorded $234,400 from sales of units of products and related
hardware.
INVENTORY
Inventory includes costs for materials and finished products which are stated at
the lower of cost or market. As of March 31, 2007 any items relieved from
inventory have been determined under the specific identification method. The
balance at March 31, 2007 of inventories amounted to $103,003, which included
raw materials of $15,775 and finished goods of $87,228.
CAPITALIZED SOFTWARE COSTS
During the three months ended March 31, 2007, the Company did not capitalize any
internally developed software product costs, and for the three months ended
March 31, 2006, the company capitalized $216,145. 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 Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or otherwise Marketed". 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 three months ended March 31, 2007 and March
31, 2006, the Company did not record any amortization expense, as the products
under development were not generally available.
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
three months ended March 31, 2007 and 2006 were $1,094,058 net of $438,000
invoiced pursuant to the Company's agreement with Motorola (see Note 9) and
$1,267,114, respectively.
REGISTRATION RIGHTS AGREEMENTS
The Company adopted the provisions of Financial Accounting Standards Board
("FASB") FSP EITF 00-19-2 "Accounting for Registration Payment Agreements". FSP
EITF 00-19-2 addresses an issuer's accounting for registration payment
arrangements. This pronouncement specifies that the contingent obligation to
make future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument, should be separately recognized and
accounted for as a contingency in accordance with SFAS 5 "Accounting for
Contingencies". FSP EITF 00-19-2 amending previous standards relating to
registration rights agreements became effective on December 21, 2006 with
respect to those arrangements entered into prior to December 21, 2006. The
Company's adoption of FSP EITF 00-19-2 did not have a material affect on its
consolidated financial position, results of operations and financial condition.
As of March 31, 2007, the Company recorded a total of $2,383,613 in penalties
associated with delays in the filing/effectiveness of registration statements. A
total of $1,926,665 is for liquidated damages through May 5, 2007 in connection
with the delay in filing and the non-effectiveness of the resale registration
statement covering the shares of Common Stock underlying the Company's two-year
8% Senior Secured Convertible Debentures (the "Convertible Debentures") that
were issued in May 2006. The Company filed the registration statement in January
2007 and, in May 2007 following consultation with the investors, it withdrew
such registration statement. Certain of the holders of the Convertible
Debentures have agreed to, among other things, terminate the accrual of
liquidated damages beyond May 5, 2007 and to accept payment of the liquidated
damages then accrued in shares of the Company's Common Stock. See Note 12
(Subsequent Events). A total of $287,475 is for a delay in the filing of a
post-effective amendment to the original registration statement for the Series A
convertible preferred stock and $169,473 is for a delay in filing of a post
effective amendment to the registration statement for the Series B convertible
preferred stock, both of which have subsequently been filed and are currently
effective.
-5-
For the quarter ending March 31, 2007, the Company recorded $226,666 in
liquidated damages through May 5, 2007 in connection with the delay in filing
and the non-effectiveness of the resale registration statement covering the
shares of Common Stock underlying the Company's two-year 8% Senior Secured
Convertible Debentures that were issued in May 2006. No penalties were accrued
in the quarter ending March 31, 2006. The Company does not currently plan to
file a registration statement for the shares of Common Stock underlying the
Company's Convertible Debentures
STOCK BASED COMPENSATION
Effective January 1, 2006, the Company adopted 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).
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 Company adopted 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.
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 quarter ending March 31, 2007 is summarized as follows:
Weighted Weighted
Average Average Aggregate
Options Exercise Remaining Intrinsic
Plan Nonplan Total Price Years Value
--------- --------- --------- --------- --------- ---------
Options outstanding, December 31, 2006 8,186,364 164,406 8,350,770 1.47 6.73
Granted 0 0 0 NA
Exercised 0 0 0 NA
Forfeited (125,666) 0 (125,666) 1.20
Options outstanding, March 31, 2007 8,060,698 164,406 8,225,104 1.47 5.81 54,076
Options Exercisable, March 31, 2007 7,100,832 164,406 7,265,238 1.56 5.40 34,720
Shares of common stock available for future 3,538,824
grant under the plan
The total fair value of shares vested during the three months ended March 31,
2007 was $354,683.
No options were granted or exercised during the quarter ended March 31, 2007.
During the periods ended March 31, 2007 and March 31, 2006, the company recorded
$159,076 and $594,229 in stock based compensation, respectively.
The weighted average remaining period over which the options vest is 1.66 years.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires the
recognition of deferred tax assets and liabilities for both the expected impact
of differences between the financial statements and tax basis of assets and
liabilities and for the expected future tax benefit to be derived from tax loss
and tax credit carry forwards. SFAS No. 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets.
-6-
The Company has not recognized any income tax expense (benefit) in the
accompanying financial statements for the three months ended March 31, 2007 and
2006. Deferred tax assets, which principally arise from net operating losses,
are fully reserved due to management's assessment that it is more likely than
not that the benefit of these assets will not be realized in future periods.
The Company adopted FASB Interpretation No. 48 - "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"),
effective January 1, 2007. FIN 48 requires companies to recognize in the
financial statements, the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods and disclosure. The Company's policy is to classify penalties
and interest associated with uncertain tax positions, if required as a component
of its income tax provision.
The Company has filed federal and various state income tax returns for the years
ended 2005, 2004 and 2003. These income tax returns have not been examined by
the applicable Federal and State tax authorities. The Company has not yet filed
its income tax returns for the year ended December 31, 2006. The income tax
returns are on extension until September 15, 2007.
Management does not believe that the Company has any material uncertain tax
position requiring recognition or measurement in accordance with the provision
of FIN 48. At December 31, 2006, the Company had approximately $20 million of
net deferred tax assets, of which $18 million relates to the tax effects of net
operating losses.
The utilization of the remaining net operating losses may be subject to
substantial limitations in future periods due to the change in ownership
provisions under Section 382 of the Internal Revenue Code and separate return
loss year limitations under Section 1502 of the Internal Revenue Code and
similar state provisions. The Company, as a result of having evaluated all
available evidence as required under SFAS 109, fully reserved for its net
deferred tax assets since it is more likely than not that the benefits of these
deferred tax assets will not be realized in future periods.
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RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2007, the Company adopted 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 adoption of
SFAS No. 155 did not have a material effect on the financial position or results
of operations of the Company.
Effective January 1, 2007, the Company adopted 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 adoption of SFAS 156 did not have a material impact on the
Company's financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 provides guidance for using fair value to measure assets and
liabilities. In addition, this statement defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. Where applicable, this statement simplifies and codifies related
guidance within generally accepted accounting principles. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company's
adoption of SFAS No. 157 is not expected to have a material effect on its
financial statements.
In November 2006, the Emerging Issues Task Force ("EITF") of the FASB reached a
final consensus in EITF issue 06-6 "Debtors Accounting for a Modification (or
Exchange) of Convertible Debt Instruments" ("EITF 06-6"). EITF 06-6 addresses
the modification of a convertible debt instrument that changes the fair value of
an embedded conversion option and the subsequent recognition of interest expense
for the associated debt instrument when the modification does not result in a
debt extinguishment pursuant to EITF 96-19, "Debtors Accounting for a
Modification or Exchange of Debt Instruments". The consensus should be applied
to modifications or exchanges of debt instruments occurring in interim or annual
periods beginning November 29, 2006. The adoption of EITF 06-6 did not have a
material effect on the Company's consolidated financial position, results of
operations and financial condition.
In November 2006, the FASB ratified EITF Issue No. 06-7 "Issuers Accounting for
a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When
the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities ("EITF
06-7"). At the time of issuance, an embedded conversion option in a convertible
debt instrument may be required to be bifurcated from the debt instrument and
accounted for separately by the issuer as a derivative under FAS 133, based on
the application of EITF 00-19. Subsequent to the issuance of the convertible
debt, facts may change and cause the embedded conversion option to no longer
meet the conditions for separate accounting as a derivative instrument, such as
when the bifurcated instrument meets the conditions of Issue 00-19 to be
classified in stockholders equity. Under EITF 06-7, when an embedded conversion
option previously accounted for as a derivative under FAS 133 no longer meets
the bifurcation criteria under that standard, an issuer shall disclose a
description of the principal change causing the embedded conversion option to no
longer require bifurcation under FAS 133 and the amount of the liability for the
conversion option reclassified to stockholder's equity. EITF 06-7 should be
applied to all previously bifurcated conversion options in convertible debt
instruments that no longer meet the bifurcation criteria in FAS 133 in interim
or annual periods beginning after December 15, 2006, regardless of whether the
debt instrument was entered into prior or subsequent to the effective date of
EITF 06-7. Earlier application of EITF 06-7 is permitted in periods for which
financial statements have not yet been issued. The adoption of EITF 06-7 did not
have a material effect on the Company's consolidated financial position, results
of operations and financial condition.
In February 2007, the FASB issued SFAS 159 "The Fair Value Option for Financial
Assets and Liabilities" ("SFAS 159"). SFAS 159 provides companies with an option
to report selected financial assets and liabilities at fair value and
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is in the process of evaluating
the adoption of this statement on the Company's results of operations and
financial condition.
NOTE 4 - LOSS PER SHARE
Basic loss per share, "EPS" is computed by dividing net loss applicable to
common shares by the weighted-average of common shares outstanding during the
period.
Diluted loss per share adjusts basic loss per share for the effects of
convertible securities, stock options and other potentially dilutive
instruments, only in the periods in which such effect is dilutive. The shares
assumable upon exercise of stock options and warrants are excluded from the
calculation of net loss per share, as their inclusion would be anti-dilutive.
Common stock equivalents have been excluded from the weighted-average shares for
the three months ended March 31, 2007 and 2006 as their inclusion would be
anti-dilutive. Potentially dilutive options to purchase 8,350,770 and 7,772,342
shares of Common Stock were outstanding at March 31, 2007 and 2006,
respectively. Potentially dilutive warrants to purchase 23,838,947 and
15,228,786 shares of Common Stock were outstanding at March 31, 2007 and 2006,
respectively. In addition, there were 10,418 and 19,403 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 1,389,067 and
2,587,066 shares of Common Stock at March 31, 2007 and 2006, respectively.
-8-
In addition, there were 33,000 and 51,500 shares of the Company's Series B 8%
Convertible Preferred Stock, par value $0.001 per share ("Series B Preferred
Stock"), outstanding and potentially convertible into 4,400,000 and 5,099,010
shares of Common Stock at March 31, 2007 and 2006, 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 March 31, 2007.
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 $3,691,500 (inclusive of $30,000 in
related fees). 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 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 $197,260 in the accompanying condensed consolidated financial
statements for the three months ended March 31, 2007 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 undertook 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 and to use reasonable best efforts to cause the Registration
Statement to be declared effective within 120 days of the closing. The
Registration Statement was filed on January 26, 2007. 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 and the registration statement
was not declared effective within 120 days of the Closing Date. Accordingly, the
Company recorded accrued estimated penalties of approximately $1,926,665 at
March 31, 2007 (estimated through May 5, 2007 pursuant to EITF FSP 00-19-2). The
Debenture holders have the right to have these liquidated damages paid in shares
of Common Stock (valued at the conversion price). Following consultation with
the investors, the Company withdrew the Registration Statement in May 2007.
Certain of the investors have agreed to terminate the accrual of the liquidated
damages beyond May 5, 2007 and to accept payment of such liquidated damages in
unregistered shares of the Company's Common Stock. See Note 12 (Subsequent
Events). The Company currently does not intend to refile the withdrawn
registration statement and the Company is examining the effect of the withdrawal
of such statement on the exercise period specified in the Investor Warrants.
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
three months ended March 31, 2007, $974,525 of these discounts was amortized and
is included in interest
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expense in the accompanying condensed consolidated financial statements. The
remaining unaccreted discount of $4,277,081 will be amortized over the remaining
term of the Debentures.
In connection with the placement of the Debentures, a placement agent has
received a cash 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 three months ended March 31, 2007 $138,378-
and $137,624 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 then outstanding and unconverted
46,000 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 for this transaction in the quarter ended June 30,
2006.
NOTE 6 - NOTES PAYABLE
A. BRIDGE LOANS
(i) On January 19, 2007, the Company received a short-term loan in the aggregate
gross amount of $356,000 from one of its institutional stockholder/investors.
The loan is evidenced by the Company's promissory note in the principal amount
of $384,480 and becomes due and payable on the earliest to occur of (i) the date
on which the Company consummates a subsequent financing that generates, on a
cumulative basis with all other financings, gross proceeds to the Company of at
least $2 million or (ii) May 19, 2007. Under the terms of the note, the holder
may declare the note immediately due and payable upon the occurrence of any of
the following events of default: (i) failure to pay principal or any other
amount due under the note when due, (ii) material breach of any of the
representations or warranties made in such note, (iii) failure to observe any
undertaking contained in such note or the other transaction documents in a
material respect if such failure continues for 30 calendar days after notice,
(iv) the Company's admission in writing as to its inability to pay its debts
generally as they mature, makes an assignment for the benefit of creditors or
commences proceedings for its dissolution, or apply for or consent to the
appointment of a trustee, liquidator or receiver for the Company's or for a
substantial part of the Company's property or business, (v) the Company's
insolvency or liquidation or a bankruptcy event, (vi) the entry of money
judgment or similar process in excess of $750,000 if such judgment remains
unvacated for 60 days. The Company did not repay the amounts due on this Note.
See Note 12 (Subsequent Events)
(ii) On January 31, 2007 the Company obtained an additional short-term working
capital loan in the gross amount of $200,000 from an institutional investor. The
loan is evidenced by the Company's promissory note in the principal amount of
$216,000 and becomes due and payable on the earliest to occur of (i) the date on
which the Company consummates a subsequent financing that generates, on a
cumulative basis with all other financings, gross proceeds to the Company of at
least $2 million or (ii) May 31, 2007. Under the terms of the Note, the holder
may declare the Note immediately due and payable upon the occurrence of any of
the following events of default: (i) failure to pay principal or any other
amount due under the Note when due, (ii) material breach of any of the
representations or warranties made in the Note, (iii) failure to observe any
undertaking contained in the Note or the other transaction documents in a
material respect if such failure continues for 30 calendar days after notice,
(iv) the Company admits in writing as to its inability to pay its debts
generally as they mature, makes an assignment for the benefit of creditors or
commences proceedings for its dissolution, or applies for or consents to the
appointment of a trustee, liquidator or receiver for the Company's or for a
substantial part of its property or business, (v) the Company's insolvency or
liquidation or a bankruptcy event, (vi) the entry of money judgment or similar
process in excess of $750,000 if such judgment remains unvacated for 60 days.
The Company did not repay the amounts due on this Note. See Note 12 (Subsequent
Events)
(iii) On February 27, 2007, the Company obtained an additional short-term
working capital loan in the gross amount of $500,000 from an institutional
stockholder and a previous investor. The loan is evidenced by the Company's
promissory note in the principal amount of $531,000 and becomes due and payable
on the earliest to occur of (i) the date on which the Company consummates a
subsequent financing that generates, on a cumulative basis with all other
financings, gross proceeds to the Company of at least $2 million or (ii) May 31,
2007. Under the terms of the Note, the holder may declare the Note immediately
due and payable upon the occurrence of any of the following events of default:
(i) failure to pay principal or any other amount due under the Note when due,
(ii) material breach of any of the representations or warranties made in the
Note, (iii) failure to observe any undertaking contained in the Note or the
other transaction documents in a material respect if such failure continues for
30 calendar days after notice, (iv) the Company admits in writing as to its
inability to pay its debts generally as they mature, makes an assignment for the
benefit of creditors or commences proceedings for its dissolution, or applies
for or consents to the appointment of a trustee, liquidator or receiver for the
Company or for a substantial part of its property or business, (v) the Company's
insolvency or liquidation or a bankruptcy event, (vi) the entry of money
judgment or similar process in excess of $750,000 if such judgment remains
unvacated for 60 days. The Company did not repay the amounts due on this Note.
See Note 12 (Subsequent Events)
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NOTE 7 - RELATED PARTY TRANSACTION
In January 2006 the Company entered into additional Short Term Loans with three
private investors (collectively the "January 2006 Investors"), pursuant to which
these investors loaned to 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. In addition, on November 13,
2006, the Company obtained a $100,000 loan from Mr. Juan Mendez, the Chairman of
its board of directors, for purpose of meeting its operating requirements. The
loan was made pursuant to the Company's demand promissory note issued to Mr.
Mendez in the principal amount of $100,000. Interest on the loan accrues at the
rate of 24% per annum. In February 2007, Mr. Mendez advanced an additional
$150,000 to the Company on identical terms.
NOTE 8 - STOCKHOLDERS' EQUITY
COMMON STOCK
The Company did not issue any common stock during the three months ended March
31, 2007.
NOTE 9 - 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 June 18, 2007 approximately $1.8 million has
been paid. Motorola is entitled to terminate the development program at any time
prior to the completion of the development of the Gateway Products and, in the
event that it does so, the Company will be entitled to retain any of the
engineering costs paid or due and owing by Motorola as of the date of
termination. Upon successful completion of all necessary testing, the Gateway
Products will be manufactured by the Company for exclusive sale to Motorola.
Under the Strategic Alliance Agreement, the Company has granted Motorola the
exclusive right to resell the Company's PG1000 and the HG-V100 gateway products,
and all derivative or substantially similar products (the "Exclusive Products")
to certain specified leading telecommunications carriers and their affiliates
(the "Exclusive Customers") for a period of 24 months from the effective date of
the agreement as part of Motorola's portfolio of broadband wireline solutions.
The exclusivity may be terminated by the Company unless, among other things, at
least one of the Exclusive Customers shall have accepted one of the Exclusive
Products for lab testing within one year of the effective date of the Strategic
Alliance Agreement and signed a contract to purchase Exclusive Products (which
is reasonably expected to result in revenue to the Company in a specified
minimum amount) within 18 months of the effective date of the agreement;
provided, however, that if these conditions are satisfied with respect to an
Exclusive Customer, then Motorola's exclusivity period for such Exclusive
Customer will be extended for an additional 24 months. At all times the Company
retains the right to sell the Exclusive Products to customers other than the
Exclusive Customers. In addition, the Company also granted Motorola the
non-exclusive right to resell all of its other existing products worldwide.
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 three months ended
March 31, 2007 the Company spent $271,347 net of amounts received from Motorola
on development projects related to the strategic alliance. In May 2007, Motorola
and the Company have terminated this agreement. See Note 12 (Subsequent Events).
NOTE 10 - 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. 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
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concerning the non-accepted deliverables in the accompanying consolidated
financial statements.
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.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
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
investor in August 2004 will be reduced to $1.50, subject to further adjustment
as therein provided.
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 that it claims
are due in connection with certain of the bridge loans referred to in Note 6.
The Company 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 September 30, 2006 in the accompanying condensed
consolidated financial statements. See Note 12 (Subsequent Events)
NOTE 12 - SUBSEQUENT EVENTS
(i) On April 23, 2007, the Company and Stifel entered into a settlement
agreement pursuant to which the issues surrounding the disputed payable referred
to in Note 11 above were resolved. Pursuant to such agreement, the parties
granted each other mutual releases and the Company issued to Stifel 500,000
shares under the Company's 2000 Equity Incentive Plan.
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(ii) On May 30, 2007, the Company and Motorola Wireline Networks, Inc.
("Motorola"), a subsidiary of Motorola, Inc. entered into a (i) Transition
Agreement (the "Transition Agreement") and (ii) License Agreement (the "License
Agreement"), pursuant to which the Strategic Alliance Agreement entered into by
the parties on April 5, 2006 (the "Original Strategic Alliance Agreement") was
terminated (except for certain specified provisions).
Pursuant to the License Agreement, the Company transferred to Motorola all
duties relating to the engineering, manufacturing, and support of the IP Home
gateways that the Company and Motorola have been jointly developing. Under the
Original Strategic Alliance Agreement, the Company and Motorola have been
working to jointly develop a family of three IP Home gateways (the "Gateway
Products") that are being designed to provide expanded support for data, IPTV,
High Definition TV, and Digital Video Recorders using Motorola's existing
Multi-Service Access Platform. Pursuant to the License Agreement, all further
development, engineering and manufacture of the Gateway Products will become the
sole responsibility of Motorola. Motorola will pay to the Company $5.00 for each
unit of the Gateway Product (the "Production Fee") manufactured by Motorola
under the License Agreement. The Production Fee is payable on a calendar
quarterly basis, by the 45th day following each calendar quarter. Motorola will
be paying to the Company an advance of $200,000 in respect of the Production Fee
with respect to the first 40,000 Gateway Product units to be manufactured under
the License Agreement. The advance on the Production Fee is due to be paid June
18, 2007.
The Transition Agreement was intended to govern the transition period in which
the Gateway Product engineering, manufacturing, and support responsibilities are
being transferred to Motorola. Under the Transition Agreement, the Company was
required to deliver to Motorola certain agreed upon deliverables (the
"Transition Deliverables") on or before June 15, 2007. The License Agreement
became effective on the date (the "License Agreement Effective Date") on which
the delivery of the Transition Deliverables was completed. Upon the License
Agreement Effective Date, the Original Strategic Alliance Agreement was
terminated and of no further effect, except for certain specified provisions.
Upon receipt of invoices from the Company, Motorola agreed to pay to the
Company, in respect of the Transition Deliverables and the remaining
deliverables under the Original Strategic Alliance Agreement, $250,000 within
seven days of the effective date of the Transition Agreement and $83,333 within
seven days of the acceptance by Motorola of the Transition Deliverables. On June
8, 2007, the Company received from Motorola the $250,000 payment and on June 11,
2007, Motorola accepted the Transition Deliverables.
(iii) During May 2007, the Company requested in writing of the 26 holders of the
Company's two-year 8% Senior Secured Convertible Debentures (the "Convertible
Debentures") to waive (hereinafter the "Waiver") certain provisions of the
transaction documents governing the Convertible Debentures. To date, all but
five of these holders, representing, in the aggregate, 7.5% of the $10 million
in principal outstanding amount of the Convertible Debentures, have responded to
the Waiver. The material principal operative terms of the Waiver and the
responses of the 21 holders representing 92.5% of the $10 million of the
outstanding principal amount of the Convertible Debentures are summarized below.
The holders of $9,050,000 of the outstanding principal amount of the Convertible
Debentures have agreed to defer to June 30, 2007, the next scheduled interest
payment date, interest payments with respect to the Convertible Debentures
currently due and owing and to accept, at such time, payment of interest in
shares of the Company's Common Stock. Additionally these holders of $9,050,000
of the outstanding principal amount of the Convertible Debentures have agreed
that the liquidated damages payable to holders of the Convertible Debentures in
connection with the late filing/effectiveness of the registration statement
relating to the Common Stock underlying the Convertible Debentures, which
registration statement the Company filed in January 2007 and, following
consultation with the investors, withdrew in May 2007, will cease to accrue as
of May 5, 2007. These holders have further agreed to accept payment of the
liquidated damages in shares of Common Stock.
The holders of $9,250,000 of the outstanding principal amount of the Convertible
Debenture holders have agreed (i) that the Company may enter into a "New
Transaction", as defined in the transaction documents governing the Convertible
Debentures (collectively, the "Debenture Transaction Agreements"), including,
without limitation, a New Transaction for the purpose of raising working capital
(hereinafter a "Financing Transaction"), (ii) to waive certain provisions in the
Debenture Transaction Agreements relating to the effective per share purchase
price in any new financing agreement where no minimum per share price is
specified and (iii) to subordinate their lien with respect to the Company's
assets securing the amounts owed to them in connection with the Convertible
Debentures in favor of any new Financing Transaction that the Company completes
on or before August 31, 2007 (whether in one or more transactions). In
connection with their consent to a New Transaction, 2 holders representing 27%
of the principal outstanding amount of the Convertible Debentures have included
certain additional provisions relating to the structure and amount of the New
Financing. Company management is in the process of clarifying certain of the
provisions inserted by these holders. The holders' subordination agreement above
is subject to the Company filing its quarterly report on Form 10-QSB for the
three month period ended March 31, 2007 on or before the date required to avoid
the delisting of the Company's Common Stock from the over-the counter Bulleting
Board.
In consideration of the waivers granted hereunder, the Company undertook to
reprice from $1.50 per share to $0.20 per share the Investor Warrants held by
the consenting investors.
(iv) In May and June 2007, the Company defaulted on the repayment obligation of
$1,131,480 in principal amount of bridge loans discussed in Note 6.
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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, 2006. THE COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE SUCH FORWARD
LOOKING STATEMENTS.
OVERVIEW
Amedia is involved in the development and manufacture of Triple-play Broadband
to the home Ethernet based equipment. Amedia has developed multiple versions of
indoor and hardened outdoor home gateway products with VoIP voice, IPTV video
and high bandwidth data capabilities with various network interfaces such as
Fast Ethernet fiber, VDSL2 long/short reach as well as other customized
variations of VDSL and ADSL2+ protocols, home wiring protocols such as MoCA and
HPNA as well as 802.11 and UWB wireless capabilities. In addition, Amedia has
developed and deployed hardened Ethernet-based aggregation switches for outside
and inside plant installations. Amedia's product line includes the AS5000
Aggregation Switch, PG1000 home gateways based on fiber, Ethernet and VDSL2
interfaces and the more advanced modular HGV-100 gateway product line with
multiple WAN and LAN interfaces and TR069 management interface. Amedia has also
developed a highly modular hardware and software architecture to customize these
various product implementations that satisfy differing market requirements. In
order to manage this product line, Amedia has also developed and deployed a
comprehensive network management system with graphical user interface and SNMP
management protocol.
We also continue to upgrade and improve our gateway product line to encompass
home networking features. For example, the company has begun focusing on
software for a home gateway that will transform the home gateway into a
Broadband Entertainment Center. This will allow users to store, organize, and
search all types of multimedia content -- from movies, to home videos, to music,
to games -- within a personal media library storage device connected to their
residential gateway, and then play that content on virtually any television,
monitor, or networked device.
In addition to offering a home media portal, the Broadband Entertainment Center
also streamlines home networks, combining the collective functionality of a
modem, router, wireless access point, VoIP adapter, and more within a lone,
compact device. More unique features include wireless HDTV transmission via
ultra wideband (UWB) to various home entertainment and media devices throughout
the home, as well as a Quality-of-Service (QoS) console, allowing subscribers to
prioritize their entertainment and communications services to avoid disruption
of quality or speed.
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 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 that are intended to 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. In October 2006, we
successfully passed the IPTV Gateway System Verification Testing Acceptance
Test, the second major engineering milestone test specified in the agreement
with Motorola. This test is the culmination of our system integration testing
and is designed to demonstrate the functionality and the stability of the
hardware and software of the IPTV Gateway. Following the test, we delivered the
IPTV Gateway to Motorola so that it can perform its final System Verification
Testing, the success of which is necessary to the commencement of Alpha or Beta
trials and commercial release. In May 2007, we and Motorola entered into a new
license agreement terminating the April 2006 and transferring to Motorola all
duties relating to the engineering, manufacturing, and support of the IP Home
gateways. Under the new license agreement, Motorola will pay to us $5.00 for
each unit of the gateway product (the "Production Fee") manufactured by Motorola
under the license agreement. The Production Fee is payable on a calendar
quarterly basis, by the 45th day following each calendar quarter. Motorola will
be paying to the Company an advance of $200,000 in respect of the Production Fee
with respect to the first 40,000 Gateway Product units to be manufactured under
the License Agreement. The advance on the Production Fee is due to be paid by
June 18, 2007. Motorola also agreed to pay to us, in respect of the of the
remaining deliverables under the Original Strategic Alliance Agreement and
certain transition related deliverables, $250,000 within seven days of the
effective date of the Transition Agreement and $83,333 within seven days of the
acceptance by Motorola of the Transition Deliverables. On June 7, 2007, the
Company received from Motorola the $250,000 payment and on June 11, 2007,
Motorola accepted the Transition Deliverables.
CRITICAL ACCOUNTING POLICIES
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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 have we 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 nor do
we use derivative financial instruments primarily for managing our exposure to
changes in interest rates.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted 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).
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 Company adopted 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.
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 THREE MONTHS ENDED MARCH 31, 2007 AND THE THREE MONTHS ENDED
MARCH 31, 2006
SALES AND COST OF GOODS SOLD. Revenues for the three months ended March 31, 2007
and March 31, 2006 were $234,400 and $25,379, respectively. Revenues for the
three months ended March 31, 2007 were attributable to units shipped to Motorola
for customer trials. Cost of goods sold were $219,642 and $19,747 during the
three months ended March 31, 2007 and 2006, respectively.
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
three months ended March 31, 2007 and March 31, 2006 were $1,094,058 and
$1,267,114, respectively. The decrease in research and development expenses
during the 2007 period is primarily attributable to amounts received from
Motorola that offset research and development expenses, reduced employee wages
and reduced stock based compensation recorded for stock options granted to
employees.
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 three months
ended March 31, 2007 and March 31, 2006 were $75,666 and $427,479, respectively.
The decrease is primarily attributable to a shift in personnel costs from
marketing to research and development of our products and reduced costs for
trade shows, promotional materials and consulting fees.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses consist
primarily of salaries and other related costs for personnel in executive and
other functions. Other significant costs include professional fees for legal,
accounting, investor relations and other services. General and administrative
expenses for the three months ended March 31, 2007 and March 31, 2006 were
$577,304 and $1,245,958, respectively. The decrease in general and
administrative expenses during the 2007 period is attributable to reduced stock
based
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compensation recorded for stock options granted to employees and non-employee
directors and a decrease in personnel costs and outside services.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances were $11,289 March 31, 2007 and $368,294 at December 31, 2006.
Net cash used during the three months ended March 31, 2007 consisted of
operating activities of approximately $1.3 million. Net cash used during the
corresponding period in 2006 consisted of operating activities of approximately
$2.1 million, the purchase of property and equipment and the costs associated
with internally developed software of approximately $0.3 million.
Net cash provided by financing activities during the three months ended March
31, 2007 was approximately $913,413 compared to approximately $1,984,177 in the
corresponding period in 2006. Net cash provided by financing activities during
the 2007 period was the result of proceeds of $1,216,000 from the issuance of
short-term notes in the aggregate principal amount of $1,291,480 offset by
financing costs of $120,480 and the repayment of short term notes of $180,812.
Net cash provided by financing activities during the corresponding period in
2006 was the result of short term borrowings and proceeds from the exercise of
stock options.
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 January 19, 2007, we received a short-term loan in the aggregate gross amount
of $356,000 from one of our institutional stockholder/investors. The loan is
evidenced by a promissory note in the principal amount of $384,480 and becomes
due and payable on the earliest to occur of (i) the date on which we consummate
a subsequent financing that generates, on a cumulative basis with all other
financings, gross proceeds of at least $2 million or (ii) May 19, 2007. Under
the terms of the note, the holder may declare the note immediately due and
payable upon the occurrence of any of the following events of default: (i)
failure to pay principal or any other amount due under the note when due, (ii)
material breach of any of the representations or warranties made in such note,
(iii) failure to observe any undertaking contained in such note or the other
transaction documents in a material respect if such failure continues for 30
calendar days after notice, (iv) our admission in writing as to our inability to
pay our debts generally as they mature, make an assignment for the benefit of
creditors or commences proceedings for our dissolution, or apply for or consent
to the appointment of a trustee, liquidator or receiver for our or for a
substantial part of our property or business, (v) our insolvency or liquidation
or a bankruptcy event, (vi) the entry of money judgment or similar process in
excess of $750,000 if such judgment remains unvacated for 60 days. We are
currently in default on this loan.
On January 31, 2007 we obtained an additional short-term working capital loan in
the gross amount of $200,000 from an institutional investor. The loan is
evidenced by a promissory note in the principal amount of $216,000 and becomes
due and payable on the earliest to occur of (i) the date on which we consummate
a subsequent financing that generates, on a cumulative basis with all other
financings, gross proceeds of at least $2 million or (ii) May 31, 2007. Under
the terms of the Note, the holder may declare the Note immediately due and
payable upon the occurrence of any of the following events of default: (i)
failure to pay principal or any other amount due under the Note when due, (ii)
material breach of any of the representations or warranties made in the Note,
(iii) failure to observe any undertaking contained in the Note or the other
transaction documents in a material respect if such failure continues for 30
calendar days after notice, (iv) our admission in writing as to our inability to
pay debts generally as they mature, make an assignment for the benefit of
creditors or commences proceedings for its dissolution, or applies for or
consents to the appointment of a trustee, liquidator or receiver for our or for
a substantial part of its property or business, (v) our insolvency or
liquidation or a bankruptcy event, (vi) the entry of money judgment or similar
process in excess of $750,000 if such judgment remains unvacated for 60 days. We
are currently in default in this loan.
On February 27, 2007, we obtained an additional short-term working capital loan
in the gross amount of $500,000 from an institutional stockholder and a previous
investor. The loan is evidenced by a promissory note in the principal amount of
$531,000 and becomes due and payable on the earliest to occur of (i) the date on
which we consummate a subsequent financing that generates, on a cumulative basis
with all other financings, gross proceeds to the Company of at least $2 million
or (ii) May 31, 2007. Under the terms of the Note, the holder may declare the
Note immediately due and payable upon the occurrence of any of the following
events of default: (i) failure to pay principal or any other amount due under
the Note when due, (ii) material breach of any of the representations or
warranties made in the Note, (iii) failure to observe any undertaking contained
in the Note or the other transaction documents in a material respect if such
failure continues for 30 calendar days after notice, (iv) our admission in
writing as to our inability to pay debts generally as they mature, make an
assignment for the benefit of creditors or commences proceedings for its
dissolution, or applies for or consents to the appointment of a trustee,
liquidator or receiver for our or for a substantial part of its property or
business, (v) our insolvency or liquidation or a bankruptcy event, (vi) the
entry of money judgment or similar process in excess of $750,000 if such
judgment remains unvacated for 60 days. We are currently in default on this
loan.
Between October 23, 2006 and December 28, 2006, we consummated bridge loan
transactions pursuant to which we borrowed the approximate gross amount of $1.45
million (prior to the payment of offering related fees and expenses). The funds
were raised in response to an offer we made to the holders of the purchasers of
the of the Series B 8% Convertible Preferred Stock (the "Series B Preferred
Stock") and the Series A 7% Convertible Preferred Stock (the "Series A Preferred
Stock") to reinstate for a specified period certain price protection provisions
that were contained in the purchase agreements relating to these securities. An
initial loan in the gross amount of $600,000 was advanced on October 23, 2006
(the "Initial Closing Date") from institutional investors who purchased Series B
Preferred Stock and thereafter subsequent closings were
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held in November and December 2006 with investors who had purchased either or
both of our Series A or Series B Preferred Stock. The offer expired on December
31, 2006. The loans are evidenced by our promissory notes (each, a "Note" and
collectively, "Notes") in the aggregate principal amount equal to the amount
advanced by investors multiplied by the Applicable Percentage. The "Applicable
Percentage" is the percentage which is equal to (x) one hundred percent (100%),
plus (y) (1) the percent equal to twenty-four percent (24%), multiplied by (2)
the fraction, of which the numerator is the number of days from the closing date
of the Loan for the relevant investor until February 20, 2007 (the "Stated
Maturity Date"), which is 120 days after the Initial Closing Date, and the
denominator is 360. All loans, whether advanced on the Initial Closing Date or
thereafter, are scheduled to mature on the date (the "Maturity Date") which is
the earliest of (i) the Stated Maturity Date, (ii) the date on which we
consummate a subsequent financing that generates, on a cumulative basis with all
other financings (except for the proceeds of these loans and other limited
exceptions specified in the promissory notes evidencing the loans), gross
proceeds to us of at least $2 million or (iii) the date on which an investor
accelerates payment on the note evidencing a loan while there is existing an
Event of Default under that note. In February 2007, at our request, holders of
approximately $1.463 million in principal amount of the Notes agreed to extend
the maturity date of such notes until March 22, 2007 in consideration of our
payment of a portion of the principal of their respective Notes, and our
agreement that the interest on the unpaid balance of the outstanding principal
amount of these loans will accrue interest at a rate of 24% per annum. One of
the holders of the Notes did not agree to the extension and accordingly its note
in the principal amount of $71,020 was paid in full. Payments were made from the
proceeds of short-term loans that were advanced to the Company on February 27,
2007 discussed above. We and these lenders are in discussions regarding an
extension of the payment period and/or a restructuring of the amounts owed,
although there can be no assurance that we will be able to reach agreement with
the lenders on such issues.
On November 13, 2006, we received a short-term working capital loan from the
Chairman of our board of directors in the principal amount of $100,000. The
advance was made on a demand basis and accrues interest at the rate of 24% per
annum. In February 2007, we received an additional short-term capital loan in
the principal amount of $150,000, on the same terms and conditions. In February
we repaid approximately $27,150 of the principal amount of these loans and
accrued interest in the amount of $ 9,100.
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. 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 $3,691,500 (inclusive of $30,000 in related
fees). 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 holders of the Convertible
Debentures have a lien on all of our assets, including our intellectual
property. We owed to the holders of these debentures as of March 31, 2007
approximately $1.7 million in liquidated damages in respect of the delay in the
filing and effectiveness of the Registration Statement beyond the time frame
specified in the agreements with such holders as well as $725,479 in interest
owed and accruing. We have not made payments of interest and liquidated damages
(payable in connection with the late filing/effectiveness of the Registration
Statement) due as of March 31, 2007. Following consultation with these
investors, in May 2007, we withdrew the Registration Statement that we
originally filed in January 2007 covering the resale of shares of common stock
underlying the securities held by the Debenture holders. Certain of the
investors have agreed to the further deferral of payment of , the cessation of
liquidated damages, the facilitation of additional financing and the
subordination of the Debenture holders security interest to the providers of new
funds. We are in the process of clarifying certain issues in connection with
these waivers. See Note 12 Subsequent Events to the financial statements
accompanying this report.
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.
During the second fiscal quarter of 2007, we entered into a new licensing
agreement with Motorola pursuant to which we transferred to Motorola all duties
relating to the engineering, manufacturing, and support of the IP Home gateways
that we and Motorola have been jointly developing. Under the agreements with
Motorola, on June 7, 2007 we received $250,000 in respect of the amounts
outstanding under the Strategic Alliance Agreement, which as of the date of the
License Agreement, was terminated and no longer in force and effect. Under the
License Agreement, Motorola will pay to us $5.00 for each unit of the Gateway
Product manufactured by Motorola under the License Agreement. The Production
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Fee is payable on a calendar quarterly basis, by the 45th day following each
calendar quarter. Motorola will be paying to the Company an advance of $200,000
in respect of the Production Fee with respect to the first 40,000 Gateway
Product units to be manufactured under the License Agreement. The advance on the
Production Fee is due to be paid by June 18, 2007.
We need to raise additional funds on an immediate basis in order to meet our
operating requirements and to fulfill our business plan as well as satisfy the
working capital loans that have matured and not been repaid. As previously
disclosed in our periodic reports, we have been actively seeking additional
capital. We have laid-off most of our remaining employees and as of June 18,
2007, we have nine remaining employees on staff. Additionally, we have been
forced to delay payments to most of our vendors and defer salaries for
management. If we are unable to raise additional capital almost immediately, we
may be forced lay-off our remaining workforce and either restructure or cease
operations entirely. We may not be successful in our efforts to raise additional
funds. Even if we raise cash to meet our immediate working capital needs, our
cash needs could be heavier than anticipated in which case we could be forced to
raise additional capital. We have received a non-binding term sheet for an
equity financing, subject to due diligence and other conditions, which our board
is currently studying. 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 have determined that a material weakness existed in our
internal control over financial reporting related to the disclosure of stock
based compensation information, the disclosure of events related to bridge notes
and long term debt, and the implementation of and disclosure of the impact of
new accounting pronouncements, including Financial Accounting Standards Board
("FASB") FSP EITF 00-19-2, "Accounting for Registration Payment Agreements" and
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109," and, as a result, our disclosure
controls and procedures were not effective as of March 31, 2007 as it relates to
disclosure of stock based compensation information, the disclosure of events
related to bridge notes and long term debt, and the implementation of and
disclosure of the impact of new accounting pronouncements, including Financial
Accounting Standards Board ("FASB") FSP EITF 00-19-2, "Accounting for
Registration Payment Agreements" and FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,".
Specifically, the Company did not design and implement controls necessary to
provide reasonable assurance that the disclosure of stock based compensation
information, the disclosure of events related to bridge notes and long term
debt, and the implementation of and disclosure of the impact of new accounting
pronouncements, including Financial Accounting Standards Board ("FASB") FSP EITF
00-19-2, "Accounting for Registration Payment Agreements" and FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109 were disclosed in accordance with
generally accepted accounting principles. This control deficiency was determined
to be a material weakness due to the potential for material misstatements to
have occurred as a result of the deficiency, and the lack of other mitigating
controls. Based on this, there is more than a remote likelihood that a material
misstatement of the interim financial statements would not have been prevented
or detected.
Given this material weakness, management devoted additional resources to
resolving questions that arose during the three month period ended March 31,
2007. As a result, we are confident that our financial statements for the three
months ended March 31, 2007 fairly present, in all material respects, our
financial condition and results of operations. Management does not believe that
the material weakness affected the results for the three months ended March 31,
2007 or any prior period.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the quarter ended
March 31, 2007, 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
We did not issue any equity shares during the three months ended March 31, 2007
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of June 17, 2007, we have not repaid principal and accrued interest that
became due as of such date in the aggregate amount of $2,626,843. The delivery
of notice to us by any one of these holders demanding immediate payment will
trigger an Event of Default under the agreements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act
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31.2 Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMEDIA NETWORKS, INC.
DATE: JUNE 21, 2007 BY /S/ FRANK GALUPPO
-------------------------
FRANK GALUPPO,
CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
DATE: JUNE 21, 2007 BY /S/ JAMES D. GARDNER
------------------------
JAMES D. GARDNER,
CHIEF FINANCIAL OFFICER
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