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 September 30, 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)
541 INDUSTRIAL WAY WEST SUITE B 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
12b-2 of the Exchange Act) Yes [ ] No[X]
The number of shares outstanding of the registrant's Common Stock as of November
19, 2007, is 377,209,812 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
September 30, 2007 (unaudited) 1
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 2007
and 2006 and from Inception (July 14, 1994)
to September 30, 2007 (unaudited) 2
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2007 and 2006
and from Inception (July 14, 1994) to September 30,
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. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits 19
Signatures 21
(i)
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-QSB ARE
"FORWARD-LOOKING STATEMENTS". FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY
TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS",
"ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE
NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT
LIMITATION, STATEMENTS BELOW REGARDING: THE COMPANY'S EXPECTATIONS AS TO SOURCES
OF REVENUES; THE PROSPECTS FOR THE COMPANY'S NEW BUSINESS IN THE
TELECOMMUNICATIONS FIELD; THE COMPANY'S INTENDED BUSINESS PLANS; THE COMPANY'S
INTENTIONS TO ACQUIRE OR DEVELOP OTHER TECHNOLOGIES; BELIEF AS TO THE
SUFFICIENCY OF ITS CASH RESERVES; AND THE COMPANY'S PROSPECTS FOR RAISING
ADDITIONAL CAPITAL. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING
STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE COMPETITIVE
ENVIRONMENT GENERALLY AND IN THE TELECOMMUNICATIONS FIELD PARTICULARLY, THE
COMPANY'S DIFFICULTY IN RAISING CAPITAL, THE COMPANY'S NET OPERATING LOSS
CARRYFORWARDS, SUFFICIENCY OF CASH RESERVES, THE AVAILABILITY OF AND THE TERMS
OF FINANCING, DILUTION OF THE COMPANY'S STOCKHOLDERS, INFLATION, CHANGES IN
COSTS AND AVAILABILITY OF GOODS AND SERVICES, ECONOMIC CONDITIONS IN GENERAL AND
IN THE COMPANY'S SPECIFIC MARKET AREAS, DEMOGRAPHIC CHANGES, CHANGES IN FEDERAL,
STATE AND/OR LOCAL GOVERNMENT LAW AND REGULATIONS, CHANGES IN OPERATING STRATEGY
OR DEVELOPMENT PLANS, AND CHANGES IN THE COMPANY'S ACQUISITIONS AND CAPITAL
EXPENDITURE PLANS. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS REFLECTED IN
THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR ANY
OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THESE
FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY
FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH
STATEMENTS TO ACTUAL RESULTS.
(ii)
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, 2007
ASSETS
Current assets
Cash $ 11,078
Inventories 2,247
Prepaid expenses and other current assets 45,069
------------
Total current assets 58,394
------------
Property and equipment - net 278,558
------------
Other assets
Capitalized software costs 708,542
Deferred financing costs 623,131
------------
Total other assets 1,331,673
------------
Total assets $ 1,668,625
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
LIABILITIES
Current liabilities
Accounts payable $ 1,483,003
Accrued expenses 693,325
Accrued penalties 2,383,612
Accrued interest 588,134
Dividends payable 85,529
Deferred revenue 200,000
Notes payable 2,821,083
Current portion of capital leases 8,040
8% Convertible debentures, net of unamortized discount of $2,286,571 7,588,429
------------
Total current liabilities 15,851,155
------------
Total liabilities 15,851,155
------------
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;
3,000,000,000 shares authorized; 369,409,812
issued and outstanding (See Note 8 - Capital Transaction) 36,941
Additional paid-in capital 75,800,761
Deficit accumulated during the development stage (90,020,275)
------------
Total stockholders' deficiency (14,182,530)
------------
Total liabilities and stockholders' deficiency $ 1,668,625
============
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
Nine Months (July 14, Three Months
Ended 1994) to Ended
September 30, September 30, September 30,
2007 2006 2007 2007 2006
------------- ------------- ------------- ------------- -------------
Sales $ 234,500 $ 29,603 $ 272,771 $ 100 $ 4,224
------------- ------------- ------------- ------------- -------------
Cost of goods sold 220,365 23,628 253,071 723 3,881
------------- ------------- ------------- ------------- -------------
Gross income (loss) 14,135 5,975 19,700 (623) 343
------------- ------------- ------------- ------------- -------------
Expenses
Research and development (1) 1,773,432 3,904,069 19,999,200 186,666 1,485,052
Sales and marketing (1) 368,532 1,071,413 14,440,892 176,947 231,918
General and administrative (1) 1,308,521 2,697,390 27,767,565 403,135 741,417
Inventory write off (See footnote for
additional disclosure) 114,290 - 1,013,092 114,290 -
Impairment of capitalized software - - 880,021 - -
Bad debt expense - - 161,000 - -
------------- ------------- ------------- ------------- -------------
Total expenses 3,564,775 7,672,872 64,261,771 881,038 2,458,387
------------- ------------- ------------- ------------- -------------
Operating loss (3,550,640) (7,666,897) (64,242,070) (881,661) (2,458,044)
------------- ------------- ------------- ------------- -------------
Other expense (income)
Legal settlement - - 565,833 - -
Late filing penalty on stock
registration rights 226,666 1,301,071 2,416,926 - 659,333
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 (gain) on disposition of fixed assets 194,395 - 225,269 216,327 -
Amortization of deferred
financing costs 639,763 221,346 5,578,063 141,531 137,623
Impaired offering costs - - 267,404 - -
Interest income - (42,023) (1,027,844) - (15,040)
Warrant repricing (see Note 5) 1,723,645 1,723,645 1,723,645
Interest expense 4,473,390 3,237,635 11,341,722 1,534,479 1,329,583
------------- ------------- ------------- ------------- -------------
Total other expense 7,257,859 4,718,029 17,023,305 3,615,982 2,111,499
------------- ------------- ------------- ------------- -------------
Net loss $ (10,808,499) $ (12,384,926) $ (81,265,375) $ (4,497,643) $ (4,569,543)
============= ============= ============= ============= =============
Deemed dividend on convertible
preferred stock - 1,591,525 7,162,382 - -
Dividend on convertible preferred stock 252,867 431,531 1,592,518 85,529 113,802
------------- ------------- ------------- ------------- -------------
Net loss applicable to common stockholders $ (11,061,366) $ (14,407,982) $ (90,020,275) $ (4,583,172) $ (4,683,345)
============= ============= ============= ============= =============
Per share data:
Basic and diluted $ (0.03) $ (0.06)* $ (0.01) $ (0.02)*
============= ============= ============= =============
Weighted average number
of common shares used in
basic and diluted loss per share 320,700,770 256,458,960* 351,982,000 276,842,070*
============= ============= ============= =============
(1) Includes non-cash, stock-based compensation expense as follows:
Research and development $ 370,579 $ 193,710 $ 1,099,222 $ 74,800 $ 64,540
Sales and marketing 104,444 126,765 5,595,592 23,144 41,519
General and administrative 194,228 906,401 7,201,773 36,920 227,123
------------- ------------- ------------- ------------- -------------
$ 669,251 $ 1,226,876 $ 13,896,587 $ 134,864 $ 333,182
============= ============= ============= ============= =============
* The 10-1 stock split completed on August 29, 2007 (see Note 8 - Capital Transaction) has been retroactively reflected in
Share and Per Share Amounts
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
Nine Months Inception
Ended (July 14, 1994)
September 30, to September 30,
2007 2006 2007
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (10,808,499) $ (12,384,926) (81,265,375)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 159,721 675,659 2,242,716
Forgiveness of note receivable, officer - - 100,000
Loss from disposition of fixed assets 194,395 - 391,460
Bad debt expense - - 161,000
Amortization of note discount and finance costs 2,034,171 1,945,695 9,431,367
Impaired offering costs - - 267,404
Forfeiture of security deposit 46,750 46,750
Warrant repricing 1,723,645 1,723,645
Foreign currency translation adjustment and realized gain - - (82,535)
Beneficial conversion feature of convertible debt 2,139,696 1,155,116 4,585,362
Stock based compensation 669,251 1,226,876 14,069,548
Stock based settlement 148,748 148,748
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 114,290 - 1,013,092
Impairment of intangibles - - 880,021
Increase (decrease) in cash attributable
to changes in assets and liabilities
Accounts receivable 6,224 (4,224) 554
Inventories (13,534) (92,259) (1,015,339)
Prepaid expenses 154,049 (127,122) (322,379)
Due from Motorola 218,805 - 218,805
Accounts payable 93,354 (573,355) 1,010,894
Accrued expenses 402,990 (70,543) 2,073,515
Accrued penalties 226,666 1,290,752 1,998,001
Accrued dividends - - -
Deferred revenue 200,000 - 200,000
Accrued interest 916,431 326,575 1,699,203
------------- ------------- -------------
Net cash used by operating activities (1,372,848) (6,631,756) (44,381,870)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed assets 56,926 - 125,520
Proceeds from sales of obsolete inventory 23,221 - 23,221
Purchases of property and equipment - (232,389) (2,048,583)
Intangible asset - (796,416) (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 80,147 (1,028,805) (1,429,700)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of convertible preferred stock - - 11,726,600
Proceeds from exercise of warrants - 210,018 189,230
Proceeds from issuance of common stock 0 - 21,436,972
Stock offering costs - - (475,664)
Deferred financing costs (120,480) (1,309,620) (2,400,100)
Proceeds from note payable 1,246,000 2,450,000 6,243,097
Proceeds from short-term borrowings - - 1,356,155
Payments on capital lease obligations (4,224) (3,691) (12,118)
Proceeds from long-term debt - - 2,751,825
Proceeds from convertible debentures - 9,150,000 11,150,000
Repayment of notes payable (2,811,500) -
Repayment of short-term borrowings (185,812) - (4,354,394)
Repayments of long-term debt - - (1,615,825)
Dividends paid to preferred stockholders - - (167,719)
------------- ------------- -------------
Net cash provided by financing activities 935,484 7,685,207 45,828,059
------------- ------------- -------------
Effect of exchange rate changes on cash - - (5,412)
------------- ------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (357,216) 24,646 11,078
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 368,294 333,787 -
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,078 $ 358,433 11,078
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 333 $ 30,000 512,825
============= ============= =============
Non-cash investing and financing activities:
Deemed dividend in connection with sale
of convertible preferred stock $ - $ 1,591,525 7,162,382
============= ============= =============
Repricing of warrants $ 1,723,645 1,723,645
============= ============= =============
Beneficial conversion feature in connection with
sale of convertible debentures $ - $ - 5,658,503
============= ============= =============
Issuance of common stock in connection with
payment of dividends on preferred stock $ 167,339 $ - 167,339
============= ============= =============
Issuance of common stock in connection with
payment of interest on convertible debentures $ 837,765 837,765
============= ============= =============
Issuance of common stock warrants in connection
with Convertible debentures $ - $ - 3,282,288
============= ============= =============
Issuance of common stock warrants in connection
with note payable $ - $ - 108,660
============= ============= =============
Original issue discount on notes payable $ 153,935 $ 131,500 452,098
============= ============= =============
Issuance of common stock warrants in connection
with bridge loan $ - $ 338,955 517,449
============= ============= =============
Accrual of dividend on preferred stock $ 85,529 $ - $ 85,529
============= ============= =============
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 $ - $ 850,000 850,000
============= ============= =============
Common stock issued for settlement $ 245,000 $ - 245,000
============= ============= =============
Common stock issued for consulting services $ - $ 252,892 -
============= ============= =============
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 intends to market 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."
Pending the raise by the Company of additional working capital, since August 15,
2007 the Company has significantly curtailed its design, development and
marketing efforts and released all of its non-management employees. As of the
date of this report, the Company has on its staff only its Chief Executive
Officer and Chief Financial Officer. The Company has also been forced to delay
payments to most of its vendors, defer salaries for management and curtail
product development plans. If the Company is unable to raise capital on an
immediate basis, it will be forced to lay-off its remaining workforce and either
restructure or cease operations entirely. As of the date of this report, the
Company and the holders of its secured debt have reached an agreement whereby
the holders of this debt have agreed to subordinate their debt (and their lien
on the Company's assets that secures such debt) to providers of additional
financing in an aggregate amount to not exceed $5 million. At the present time,
the Company has no commitments for any financing, and there can be no assurance
that, if needed, capital will be available to the Company on commercially
acceptable terms (or at all).
On August 29, 2007, the Company effected a ten-for-one forward stock split of
its shares of common stock, par value $0.001 (the "Common Stock"). See Note 8
(Capital Transaction). All share and per share amounts have been retroactively
restated to reflect the stock split.
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 $15,792,761 at September 30, 2007. As indicated in the
accompanying consolidated financial statements, as of and for the nine months
ended September 30, 2007, the Company had cash balances of $11,078 and incurred
a net loss applicable to common stockholders of $11,061,366. 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 and May 2007 and have not been repaid and, realize its
current business plan and maintain operations. Management of the Company is
continuing its efforts to secure funds for its operations. No assurance can be
provided that the Company will be able to raise the needed funds on commercially
reasonable terms or at all.
As more fully described in Note 6 (Notes Payable), the Company raised net
proceeds of $1,246,000 during the nine months ended September 30, 2007 from the
issuance of short-term debt that has come due. As of September 30, 2007, the
Company has not repaid principal and accrued interest currently owing in the
aggregate amount of $2,817,071, including $1,380,097 of principal from bridge
loans obtained in 2006.
NOTE 3 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements contained herein
have been prepared in accordance with accounting principles
-4-
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 September 30, 2007, and its results of
operations and cash flows for the nine months ended September 30, 2007 not
misleading. Operating results for the nine months ended September 30, 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 consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-KSB 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 and licensing of software
developed under the Motorola agreement. 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.
Revenue is recognized on the licensing of software when the products
incorporating the licensed software are manufactured by the licensee.
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 nine months ended September
30, 2007 the Company recorded $234,500 from sales of units of products and
related hardware, and no revenue on the licensing of software.
INVENTORY
Inventory includes costs for materials and finished products which are stated at
the lower of cost or market. As of September 30, 2007 any items relieved from
inventory have been determined under the specific identification method. The
balance at September 30, 2007 of inventories amounted to $2,247, which included
raw materials of $1,672 and finished goods of $575. During the third quarter of
2007, the Company wrote off inventory totaling $114,290, consisting of $28,359
of raw materials and $85,931 of finished goods due to obsolescence. This
write-off is recorded as a charge to operations in the accompanying condensed
consolidated statement of operations.
FIXED ASSETS
During the nine and three months ended September 30, 2007, the Company sold or
disposed of equipment with a book value of $251,321 and 224,282, respectively
for gross proceeds of $56,926 and $7,955 respectively, which resulted in a loss
of $194,395 and $216,327, respectively. This loss is recorded as a charge to
operations in the accompanying condensed consolidated statement of operations.
CAPITALIZED SOFTWARE COSTS
During the nine months ended September 30, 2007, the Company did not capitalize
any internally developed software product costs, and for the nine months ended
September 30, 2006, the company capitalized $796,416. 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 nine months ended September 30, 2007, the
Company did not record any amortization expense, as the products under
development were not generally available. During the nine months ended September
30, 2006, the company recorded amortization expense of $529,077.
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
nine months ended September 30, 2007 and 2006 were $1,773,432 net of $700,000
invoiced pursuant to the Company's agreement with Motorola (see Note 9) and
$3,904,069, 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 No. 5 "Accounting for
Contingencies". FSP EITF 00-19-2 amending previous standards relating to
registration rights agreements became effective on December 21,
-5-
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 September 30, 2007, the Company has accrued a total of $2,383,612 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. 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 at the per share
rate of $0.01. 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.
For the nine months ending September 30, 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. For the nine months ending
September 30, 2006, the Company recorded $1,099,999 in liquidated damages
relating to the Convertible Debentures. 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 SFAS 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 nine months ending September 30, 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 81,863,640 1,644,060 83,507,700 0.15 6.73
Granted 0 0 0
Exercised 0 0 0
Forfeited (1,256,660) (1,256,660) 0.12
----------- ----------- -----------
Options outstanding, March 31, 2007 80,606,980 1,644,060 82,251,040 0.15 5.81
Granted 0 0 0 NA
Exercised 0 0 0 NA
Forfeited (4,045,830) 0 (4,045,830) 0.09
----------- ----------- -----------
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Options outstanding, June 30, 2007 76,561,150 1,644,060 78,205,210 0.15 4.98
Granted 0 0 0
Exercised 0 0 0
Forfeited (2,046,670) 0 (2,046,670)
----------- ----------- -----------
Options outstanding, September 30, 2007 74,514,480 1,644,060 76,158,540 0.15 4.44 0.00
=========== =========== ===========
Options Exercisable, September 30, 2007 73,206,147 1,644,060 74,850,207 0.15 4.37 0.00
Shares of common stock available for future
grant under the plan 156,480,750
Non-Vested at September 30, 2007 1,308,333 1,308,333
Fair value of shares vested for the nine months ending September 30, 2007 was
672,713
No options were granted or exercised during the nine months ended September 30,
2007.
During the nine month periods ended September 30, 2007 and September 30, 2006,
the company recorded 669,251 and 1,226,876 in stock based compensation expense,
respectively.
The weighted average remaining period over which the options vest is .96 years
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INCOME TAXES
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, which were due by September 15, 2007, have not been filed as of the
filing of this report on Form 10-QSB. The delinquency in filing the Company's
tax returns may adversely impact the Company's ability to utilize NOLs generated
from the current period in future years.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2007, the FASB ratified Emerging Issues Task Force No. 06-11 ("EITF
06-11"), "Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards." EITF 06-11 requires companies to recognize the income tax benefits
realized from dividends or dividend equivalents that are charged to retained
earnings and paid to employees for nonvested equity-classified employee
share-based payment awards as an increase to additional paid-in capital. EITF
06-11 is effective for fiscal years beginning after September 15, 2007. The
Company does not expect that the adoption of EITF 06-11 will have a material
impact on its consolidated financial position, results of operations or cash
flows.
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 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
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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 number 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 nine months ended September 30, 2007 and 2006 as their inclusion would be
anti-dilutive. Potentially dilutive options to purchase 76,158,540 and
82,141,040 shares of Common Stock were outstanding at September 30, 2007 and
2006, respectively. Potentially dilutive warrants to purchase 193,150,945 and
238,389,470 shares of Common Stock were outstanding at September 30, 2007 and
2006, respectively. In addition, there were 10,418 and 11,928 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
13,890,670 and 15,904,000 shares of Common Stock at September 30, 2007 and 2006,
respectively. In addition, there were 33,000 and 46,000 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 44,000,000 and
61,333,330 shares of Common Stock at September 30, 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 $9,875,000 of 8%
convertible debentures outstanding which are potentially convertible into
131,666,667 shares of Common Stock at September 30, 2007. See also Note 12
(Subsequent Events) All share and per share amounts have been retroactively
restated to reflect the 10:1 stock split effected on August 29, 2007 unless
otherwise noted.
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"), which mature on April 30, 2008. 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 (pre split) 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 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
September 30, 2007, which are included in accrued penalties in the accompanying
condensed consolidated balance sheet. 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. The holders 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 at a per share exercise price of $0.01 (post split). The Company
currently does not intend to re-file 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
nine months ended September 30, 2007, $2,956,059 of these discounts was
amortized and is included in
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interest expense in the accompanying condensed consolidated statement of
operations. The remaining unaccreted discount of $2,286,571 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 20,000,000 shares of the Company's Common Stock,
of which warrants for 13,333,330 shares had an initial exercise price equal to
$0.075 per share and warrants for 6,666,670 shares have an initial exercise
price equal to $0.15 (post split). 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 was to have been included
in the Registration Statement discussed above. 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. As
of September 30, 2007, the Company has recorded accrued and unpaid interest
totaling $200,011 for the three months ended September 30, 2007 which is
included in accrued interest in the condensed balance sheet. During the nine
months ended September 30, 2007 $415,134 and $412,869 were amortized and are
included in interest expense and amortization of deferred financing costs
respectively in the accompanying condensed consolidated statements of
operations, and $222,561 and $221,346 for the corresponding period in 2006.
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 accept payment of interest due as of June 30, 2007 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).
As of October 31, 2007, at the request of the Company all of the holders of the
Convertible Debentures agreed 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 up to an aggregate amount of $5,500,000. In addition, the
holders agreed to waive all existing events of default. In consideration
thereof, the Company reduced to $0.01 the conversion price of the Convertible
Debentures (on a post split basis). In connection therewith, the Company also
agreed to pay the liquidated damages in shares of Common Stock at the per share
rate of $0.01.
In connection with the waivers granted in May 2007, the Company repriced the per
share exercise price of the warrants to $0.20, which repricing became effective
prior to the effective date of the stock split. As a result of the repricing,
certain of the warrants from the Company's prior financings were also repriced
pursuant to price protection features. This included a total of 20,004,000
warrants associated with the Company's Preferred A stock issuance in 2004,
14,633,290 warrants associated with the Company's Preferred B stock issuance in
2005, 86,666,670 warrants associated with the Company's 8% Debenture in 2006,
and 18,750,000 warrants associated with certain of the Company's bridge loans.
As a result of this repricing, the Company recorded a financing cost of
$1,723,645 in the third quarter of 2007 which is included in the accompanying
condensed consolidated statements of operations.
NOTE 6 - NOTES PAYABLE
BRIDGE LOANS
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
-10-
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.
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.
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.
In May 2007, the Company defaulted on the repayment obligation of the bridge
loans discussed above. The Company has contacted these investors in an effort to
resolve these matters. The Company has accrued $299,358 of interest through
September 30, 2007 in connection with these loans.
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. In February, the Company repaid
approximately $27,150 of the principal amount of these loans and accrued
interest in the amount of $9,100. The additional loans by Mr. Mendez in the
principal amount of $222,850 are payable on demand.
In order to assist the Company in meeting its operating requirements pending the
raise of additional capital, if any, on August 9, 2007 Mr. Mendez, the Chairman
of the Company's board of directors advanced to the Company an additional
$30,000. In consideration of this advance of new funds, the outstanding
principal amount and accrued interest (at the rate of 24% per annum) in the
aggregate amount of $245,135 previously advanced by the Chairman and evidenced
by the Company's demand promissory note issued to him and the newly advanced
loan of $30,000 were consolidated into one unsecured Company promissory note in
the principal amount of 332,913.35, which note is due and payable at the earlier
to occur of (i) December 7, 2007 (the 120th day following the advance) or (ii)
the date on which the Company consummates one or more transactions after the
date hereof with aggregate gross proceeds to the Company of at least $2 million.
The new note reflects an original issue discount of 21% for the 120 day term. On
October 25, 2007 and November 15, 2007, the Chairman advanced additional loans
in the principal amount of $75,000 and $25,000 respectively, which loans are
evidenced by a demand promissory note bearing interest at a per annum rate of
24%.
NOTE 8 - CAPITAL TRANSACTION
On April 25, 2007, the Company's stockholders authorized a ten-for-one stock
split, structured in the form of a 900% stock dividend (the "Stock Split") of
its Common Stock. The Stock Split was effected following the approval, on August
14, 2007, by the Company's stockholders of an increase in the Company's
authorized Common Stock to 3,000,000,000 shares. Stockholders of record at the
close of business on August
-11-
24, 2007, received nine (9) additional shares of the Company's Common Stock for
each share of Common Stock held on that date. All share and per share amounts
have been retroactively restated to reflect the 10:1 stock split effected on
August 29, 2007.
NOTE 9 - STOCKHOLDERS' EQUITY
On August 14, 2007, the Company's stockholders approved an increase in the
Company's authorized Common Stock to 3,000,000,000 shares.
During the nine months ended September 30, 2007, the Company issued the
following Common Stock:
On April 23, 2007, the Company issued to Stifel Nicolaus & Company, the
successor-in-interest to Legg Mason Walker Wood LLC, an investment banking firm,
in resolution of certain issues, 5,000,000 shares of restricted stock from its
2000 Equity Incentive Plan.
On June 30, 2007, the Company issued 479,520 shares of Common Stock with a total
value of $35,964 to Series A Preferred Stockholders as stock dividends. The
shares were issued at $0.75 per share.
On June 30, 2007, the Company issued 4,776,610 shares of Common Stock with a
total value of $131,375.34 to Series B Preferred Stockholders as stock
dividends. The shares were issued at $0.2750 per share which was a discount to
the fair market value on the date of issuance.
On June 30, 2007, the Company issued 30,459,320 shares of Common Stock with a
total value of $837,753 to holders of the two-year 8% Senior Secured Convertible
Debentures for payment of interest due from May 2006 through June 30, 2007. The
shares were issued at $0.2750 per share which was a discount to the fair market
value on the date of issuance
In July and August 2007, the Company issued 1,667,070 shares of its Common Stock
upon conversion of $125,000 in principal amount of Debentures (and accrued
interest with respect to a portion of such principal amount).
In August and September 2007, the Company received cashless warrant exercise
notices for the issuance of 24,429,822 shares of the Company's Common Stock.
However, the Company could not effect the exercises as its account with its
transfer agent was on credit hold pending payment of an outstanding amount,
which hold has been removed. Under the agreements with the warrant holders, a
holder who delivers a notice of warrant exercise is deemed to be holder of the
shares issuable thereon on the date that such notice is delivered to the
Company. However, if the Company does not deliver the shares issuable thereon to
such holder within three trading days following delivery of the notice, then the
holder is entitled to revoke the notice. The Company is currently processing
these exercise notices. The holders of the Debentures issued in May 2006 have
waived any claims under the agreements in respect of the delay in processing
these conversion/exercises and the Company has not received any other claims for
late delivery of shares. The shares issuable pursuant to the cashless exercises
described above (24,429,822) have been included in the number of shares
outstanding as of September 30, 2007.
NOTE 10 - 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.
Under the Strategic Alliance Agreement Motorola paid to the Company $1.9 million
for engineering costs associated with the development of the Gateway Products.
On May 30, 2007, the Company and Motorola 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. 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. On June 18, 2007 Motorola paid 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 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
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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.
The Company accounted 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 nine months ended
September 30, 2007 the Company received $125,336 in excess of the $574,664 spent
on development projects related to the strategic alliance in accordance with the
Original Strategic Alliance Agreement.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
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 advanced to the Company
in prior years. 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. 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 (pre-split) of restricted Common Stock with a total
value of $245,000 under the Company's 2000 Equity Incentive Plan. As a result of
the settlement, the Company reversed provisions made previously of $75,086 in
accounts payable and $21,167 of accrued expenses.
On August 8, 2007, the Company executed an agreement with the landlord of its
principal offices settling claims made by the landlord in the summons which it
served the Company in June 2007 alleging non-payment of rent for the months of
February and March 2007. Under the terms of the settlement, the Company
surrendered possession of the second floor of its premises and continued to
lease the first floor in accordance with the terms of the original lease
agreement, provided, that the landlord is entitled to lease all or part of such
first floor in which event the Company will be required to vacate the newly
leased portion. Under the terms of the settlement, the Company agreed to pay
rent and related late charges in respect of April and May 2007 in the aggregate
amount of $85,667 through the issuance of shares of its restricted Common Stock.
The settlement fixed the base rent for the period of June through August 31,
2007 at $17,555, plus applicable charges under the original lease, which amounts
are to be paid in cash, and fixed the base rent for the retained premises
(assuming the Company will retain the first floor) for the following periods
(all payable in cash): September 2007 through August 2008, $18,129; September
2008 through August 2010, $18,714. Thereafter, the landlord indicated that it is
not executing the settlement. On August 29, 2007, the Company received from the
landlord a signed copy of the agreement as well as notice of default thereon and
a copy of request made to Superior Court of New Jersey Law Division - Special
Civil Part Landlord - Tenant, for a Warrant of Removal. On September 6, 2007,
the Company was served with a court order to vacate the premises by September
12, 2007. The Company complied with the order and vacated the premises.
On September 18, 2007, the Company completed the relocation of its principal
office premises to 541 Industrial Way West Suite B, Eatontown, New Jersey 07724.
The Company is not currently paying any rent for the new premises. Subject to
the Company raising additional working capital, the Company intends to enter
into a sublease with the lessee, who is an acquaintance of our chief executive
officer.
NOTE 12 - SUBSEQUENT EVENTS
(i) As of October 31, 2007, at the request of the Company all of the holders of
the Convertible Debentures agreed 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 up to an aggregate amount of $5,500,000. In addition, the
holders agreed to waive all existing events of default. In consideration
thereof, the Company reduced to $0.01 the conversion price of the Convertible
Debentures. In connection therewith, the Company also agreed to pay the
liquidated damages in shares of Common Stock at the per share rate of $0.01. See
additional disclosures at the end of Note 5 and in Note 8 regarding the timing
of the stock split and repricing.
(ii) On October 25, 2007, in order to assist the Company in meeting its
operating requirements pending the raise of additional capital, if any, Mr.
Mendez, the Chairman of the Company's board of directors advanced to the Company
an additional $75,000.. On November 15, 2007, in order to assist the Company in
meeting its operating requirements pending the raise of additional capital, if
any, Mr. Mendez advanced to the Company an additional $25,000. These advances
are evidenced by a demand promissory note dated November 16, 2007, in the amount
of $100,000 bearing interest at a per annum rate of 24%.
(iii) During November 2007, the Company issued 7,800,000 shares of Common Stock
upon conversion of $78,000 in principal amount (and accrued interest) of the
Debentures issued in May 2006.
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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 Networks Inc. (the "Company", "we" or "us") 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, we have 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, we have also developed and deployed a comprehensive network management
system with graphical user interface and SNMP management protocol.
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. Pending the raise
of additional capital, since August 15, 2007, we have significantly curtailed
our product design, development and marketing efforts and released all of our
non-management employees. As of the date of this report, we have on staff only
our Chief Executive Officer and Chief Financial Officer. We have been forced to
delay payments to most of our vendors, defer salaries for management and curtail
product development plans. If we are unable to raise capital on an immediate
basis, we will be forced to lay-off our remaining workforce and either
restructure or cease operations entirely. As of the date of this report, we and
the holders of our secured debt have reached an agreement whereby the holders of
this debt have agreed to subordinate their debt (and their lien on the company's
assets that secures such debt) to providers of additional financing in an
aggregate amount not to exceed $5 million. At the present time, we have no
commitments for any financing, and there can be no assurance that, if needed,
capital will be available to us on commercially acceptable terms (or at all).
Pending the raise of such additional capital, we have received a non-binding
term sheet for a short term loan to us of $500,000, the terms of which are being
studied by us and discussed with various prospective lenders. Due to the limited
amount of authorized and unissued Common Stock available following the repricing
of the conversion price of these debentures, we will need to hold a special
meeting of stockholders to increase our pool of authorized and unissued shares
of Common Stock in order to conclude any long-term financing. No assurance can
be given that we will be able to obtain the required stockholder consent in the
time-frame needed for us to raise the capital to resume operations. These
conditions raise substantial doubt about our ability to continue as a going
concern.
Pending the raise of additional working capital by us, we plan to upgrade and
improve our gateway product line to encompass home networking features. For
example, we have 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.
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 May 2007, we and Motorola
entered into a new license agreement terminating the April 2006 agreement 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 paid to the Company in June 2007 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. Motorola has also paid to
us $333,333 in June 2007, in respect of the remaining deliverables under the
original agreement and certain transition related deliverables.
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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.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes have been prepared
in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires we make estimates, judgments
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Management continually evaluates the accounting policies
and estimates it uses to prepare the consolidated financial statements. We base
our estimates on historical experience and assumptions believed to be reasonable
under current facts and circumstances. Actual amounts and results could differ
from these estimates made by management.
We do not participate in, nor 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, we 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 we issue equity instruments for
services to non-employees.
We 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
require 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 NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2007 AND THE NINE
AND THREE MONTHS ENDED SEPTEMBER 30, 2006
SALES AND COST OF GOODS SOLD. Revenues for the nine months and three months
ended September 30, 2007 were $234,500 and $100, respectively, and $29,603 and
$4,224 for the corresponding periods in 2006. The increase in revenues for the
nine months ended September 30, 2007 is primarily attributable to units shipped
to Motorola for customer trials. Cost of goods sold were $220,365 and $723
during the nine months and three months ended September 30, 2007 and $23,628 and
$3,881 for the corresponding periods in 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
nine months and three months ended September 30, 2007 were $1,773,432 and
$186,666 respectively and $3,904,069 and $1,485,052 for the corresponding
periods in 2006 . The decrease in research and development expenses is primarily
attributable to amounts received from Motorola that offset research and
development expenses, and reduced employee salaries. We received $700,000 and $0
from Motorola for the nine and three month period ended September 30, 2007 that
offset research and development expenses during these periods.
-15-
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 nine months
and three months ended September 30, 2007 were $368,532 and $176,947,
respectively and $1,071,413 and $231,918 for the corresponding periods in 2006.
The decrease in sales and marketing expenses 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 nine months and three months ended September 30, 2007 were
$1,308,521 and $403,135 respectively and $2,697,390 and $741,417 for the
corresponding periods in 2006. The decrease in general and administrative
expenses is attributable to reduced stock based compensation recorded for stock
options granted to employees and non-employee directors and a decrease in
personnel costs and outside services.
INVENTORY. During the third quarter of 2007, we determined that $85,931 of
finished goods and $28,359 of components had become impaired due to obsolescence
and were written down accordingly.
FIXED ASSETS. During the nine and three months ended September 30, 2007, we sold
or disposed of equipment with a book value of $251,321 and 224,282, respectively
for gross proceeds of $56,926 and $7,955 respectively, which resulted in a loss
of $194,395 and 216,327, respectively, which is recorded as a charge to
operations in the accompanying condensed consolidated statement of operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances were $11,078 at September 30, 2007 and $368,294 at December 31,
2006.
Net cash used during the nine months ended September 30, 2007 consisted of
operating activities of approximately $1.4 million. Net cash used during the
corresponding period in 2006 consisted of operating activities of approximately
$6.6 million, the purchase of property and equipment and the costs associated
with internally developed software of approximately $1.0 million.
Net cash provided by financing activities during the nine months ended September
30, 2007 was $935,484 compared to $7,685,207 in the corresponding period in
2006. Net cash provided by financing activities during the 2007 period was the
result of proceeds of $1,246,000 from the issuance of short-term notes in the
aggregate principal amount of $1,401,543 offset by financing costs of $120,480,
and the repayment of short term notes of $185,812 . Net cash provided by
financing activities during the corresponding period in 2006 was the result of
proceeds from the issuance of our 8% convertible debenture, short term loans and
from the exercise of stock options offset by the repayment of short term
borrowings and financing costs.
From our inception in August 1994, we have financed our operations primarily
through the sale of our securities. Set forth below is a summary of our recent
financings.
Between January 19 and February 28, 2007, we received short-term loans in the
aggregate gross amount of $1,056,000 from certain institutional
stockholder/investors. These loans are evidenced by promissory notes in the
aggregate principal amount of $1,131,480 which became 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, with respect to $384,480 and May
31, 2007 with respect to $747,000. Under the terms of these notes, 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
these loans.
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 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
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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 from the proceeds of
short-term loans that were advanced to the Company on February 27, 2007
discussed above. We are currently in default on these notes.
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. In August 2007, our Chairman advanced
to us an additional $30,000 in order for us to meet pressing operating
requirements. In consideration of this extension, the outstanding principal
amount and accrued interest (at the rate of 24% per annum) in the aggregate
amount of $245,135 previously advanced by the Chairman and evidenced by the
Company's demand promissory note issued to him and the newly advanced loan of
$30,000 were consolidated into one unsecured Company promissory note in the
principal amount of 332,913.35, which note is due and payable at the earlier to
occur of (i) November 29, 2007 (the 120th day following the advance) or (ii) the
date on which the Company consummates one or more transactions after the date
hereof with aggregate gross proceeds to the Company of at least $2 million. The
new note reflects an original issue discount of 21% for the 120 day term.
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 September 30, 2007
approximately $1.9 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 $87,973 in interest
owed and accruing. 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. The investors have agreed to the cessation of liquidated
damages beyond May 5, 2007, the facilitation of additional financing and the
subordination of the Debenture holders' security interest to the providers of
new funds. The holders have also waived all existing defaults under the
agreements with them.
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 Fee
is payable on a calendar quarterly basis, by the 45th day following each
calendar quarter. Motorola has paid 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.
As noted above, 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. We may
not be successful in our efforts to raise additional funds. Even if we are able
to raise additional funds through the issuance of debt or other means, our cash
needs could be heavier than anticipated in which case we could be forced to
raise additional capital. Even after we receive orders for our products, we do
not yet know what payment terms will be required by our customers or if our
products will be successful. At the present time, we have no commitments for any
additional financing, and there can be no assurance that, if needed, additional
capital will be available to us on commercially acceptable terms or at all.
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.
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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 September 30, 2007 as they
relate 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 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, 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, would be 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. In addition, during the third quarter of 2007, due to limited
resources, our employees were reduced to solely the Chief Executive Officer and
Chief Financial Officer and we discontinued the services of a financial
consultant. Reliance on these limited resources to gather the required financial
information to complete the necessary financial information for our public
filings impairs our ability to provide for the segregation of duties and the
ability to ensure consistently complete and accurate financial reporting , as
well as disclosure controls and procedures. The Chief Executive Officer and
Chief Financial Officer have concluded that the disclosure controls and
procedures are not effective, given the foregoing material weakness. We believe
that subject to a raise of additional capital, if any, we will be able to engage
the necessary resources to address the material weaknesses identified above.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the quarter ended
September 30, 2007, due to a lack of resources, we were required to discontinue
utilizing the services of a consultant who assisted in ensuring a proper
segregation of duties. Except as described above, 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
During the three months ended September 30, 2007, we issued the following equity
securities without registration under the Securities Act.
In July and August 2007, we issued 166,707 shares of its Common Stock upon
conversion of $125,000 in principal amount of Debentures (and accrued interest
with respect to a portion of such principal amount).
In August and September of 2007, we issued 24,429,822 of common shares upon the
exercise of 45,238,525 warrants on a cashless basis. The shares will be
distributed to the holders of the warrants during November 2007.
All of the securities issued in the transaction described above were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act. The recipients of securities in
the transaction acquired the securities for investment only and not with a view
to or for sale in connection with any distribution thereof. Appropriate legends
were affixed to the share certificates issued in the above transaction. We
believe the recipients were all "accredited investors" within the meaning of
Rule 501(a) of Regulation D under the Securities Act and had such knowledge and
experience in financial and business matters as to be able to evaluate the
merits and risks
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of an investment in its common stock. All recipients had adequate access to
information about us. The transaction described above did not involve general
solicitation or advertising.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of September 30, 2007, we have not repaid principal and accrued interest that
became due as of such date in the aggregate amount of $2,817,071. 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
We held our annual meeting of stockholders on August 14, 2007. The following
matters were voted on: (1) election of directors; (2) increase in the number of
authorized shares of Common Stock; (3) amendment to the Company's 2000 Equity
Incentive Plan; (4) amendment to the Company's 2002 Non-Employee Directors Stock
Option Plan; and (5) ratification of the appointment of independent registered
public accounting firm.
The vote tally was as follows:
(1) Each of the following individuals was elected to the board of directors to
hold office until the 2007 annual meeting of stockholders, or until a successor
is duly elected and qualified or the director's earlier death, resignation or
removal.
FOR WITHHELD
Frank Galuppo 18,679,245 280,094
Juan Mendez 18,682,745 276,594
Richard Butters 18,683,045 276,294
Bob Martin 18,682,745 276,594
Ray Willenberg 18,682,045 277,294
(2) The proposal to ratify the amendment to the Company's certificate of
incorporation to increase the number of shares of Common Stock that the Company
is authorized to issue from time to time to 3 billion shares was approved by the
following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTE
17,835,144 1,072,700 51,495 0
(3) The proposal to increase the number of shares of Common Stock reserved for
issuance under the Company's 2000 Equity Incentive Plan to 20,000,000 shares was
approved by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTE
2,724,709 373,537 30,648 15,830,445
(4) The proposal to increase the number of shares of Common Stock reserved for
issuance under the Company's 2002 Non Employee Directors Plan to 4,000,000
shares was approved by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTE
2,573,259 524,637 30,998 15,830,445
(5) The proposal to ratify the appointment of Marcum & Kliegman, LLP as the
Company's independent registered public accounting firm for the year ending
December 31, 2007 was approved by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTE
18,745,430 160,530 53,379 0
Each proposal received the requisite majority and was carried.
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: November 19, 2007 BY /S/ FRANK GALUPPO
-------------------------
FRANK GALUPPO,
CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
DATE: November 19, 2007 BY /S/ JAMES D. GARDNER
------------------------
JAMES D. GARDNER,
CHIEF FINANCIAL OFFICER
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