Rim 10-QSB
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-QSB
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2006
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO
__________
COMMISSION
FILE NUMBER 0-21785
RIM
SEMICONDUCTOR COMPANY
(Exact
name of small business issuer as specified in its charter)
UTAH
(State
or other jurisdiction of
incorporation
or organization)
|
95-4545704
(I.R.S.
Employer
identification
no.)
|
305
NE 102ND AVENUE, SUITE 105
PORTLAND,
OREGON 97220
(Address
of principal executive offices)
|
(503)
257-6700
(Issuer’s
telephone number,
including
area code)
|
Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Exchange Act during the past 12 months (or for such period
that
the registrant was required to file such reports), and (2) has been subject
to
such filing requirements for the past 90 days.
Yes
x
No
¨
The
number of shares of the issuer’s Common Stock, par value $.001 per share,
outstanding as of June 12, 2006, was 323,042,763.
Transitional
Small Business Disclosure Format (Check one) Yes ¨
No
x
FORM
10-QSB
RIM
SEMICONDUCTOR COMPANY
APRIL
30, 2006
TABLE
OF CONTENTS
PAGE
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2
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3
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5
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6
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8
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28
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36
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38
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39
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39
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41 |
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(Unaudited)
ASSETS
|
|
April
30,
2006
|
|
Current
Assets:
|
|
|
|
|
Cash
|
|
$
|
4,007,470
|
|
Other
current assets
|
|
|
43,872
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
4,051,342
|
|
|
|
|
|
|
Property
and equipment (net of accumulated depreciation of $2,477)
|
|
|
13,182
|
|
Technology
license and capitalized software development fee
(net
of accumulated amortization of $315,232)
|
|
|
5,735,768
|
|
Deferred
financing costs (net of accumulated amortization of
$1,249,428)
|
|
|
2,292,390
|
|
Other
assets
|
|
|
9,854
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
12,102,536
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
Current
Liabilities:
|
|
|
|
|
Convertible
notes payable
|
|
$
|
525,000
|
|
Convertible
debentures (net of debt discount of $24,136)
|
|
|
100,864
|
|
Conversion
option liability
|
|
|
2,588,813 |
|
Account
payable and accrued expenses
|
|
|
785,473
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
4,000,150
|
|
|
|
|
|
|
Long-term
portion of convertible debentures (net of debt discount of
$4,732,137)
|
|
|
1,308,427
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
5,308,577
|
|
|
|
|
|
|
Commitments,
Contingencies and Other Matters
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
Preferred
stock - $0.01 par value; 15,000,000 shares authorized;
-0-
shares issued and outstanding
|
|
|
|
|
Common
stock - $0.001 par value; 900,000,000 shares authorized;
323,542,617
shares issued and 323,042,763 shares outstanding
|
|
|
323,543
|
|
Treasury
stock - 499,854 shares at cost
|
|
|
(7,498
|
)
|
Additional
paid-in capital
|
|
|
75,096,501
|
|
Unearned
compensation
|
|
|
(1,687,796
|
)
|
Accumulated
deficit
|
|
|
(66,930,791
|
)
|
|
|
|
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
6,793,959
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
12,102,536
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(Unaudited)
|
|
For
the Six Months Ended
April
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
58,874
|
|
$
|
16,198
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
|
|
|
11,945
|
|
Amortization
of technology license and capitalized
|
|
|
|
|
|
|
|
software
development fee
|
|
|
315,232
|
|
|
|
|
Research
and development expenses (including
|
|
|
|
|
|
|
|
stock
based compensation of $26,860 and
|
|
|
|
|
|
|
|
$0,
respectively)
|
|
|
137,600
|
|
|
7,053
|
|
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
(including
stock based compensation of $983,710
|
|
|
|
|
|
|
|
and
$888,930, respectively)
|
|
|
2,356,072
|
|
|
1,571,334
|
|
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
2,808,904
|
|
|
1,590,332
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(2,750,030
|
)
|
|
(1,574,134
|
)
|
|
|
|
|
|
|
|
|
OTHER
(INCOME) EXPENSES:
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
2,223,816
|
|
|
639,646
|
|
Amortization
of deferred financing costs
|
|
|
568,819
|
|
|
53,109
|
|
Gain
on forgiveness of principal and interest
|
|
|
|
|
|
|
|
on
Zaiq Note
|
|
|
(1,169,820
|
)
|
|
|
|
Gain
on sale of property and equipment
|
|
|
|
|
|
(20,000
|
)
|
Gain
on exchange of Redeemable Series B Preferred
|
|
|
|
|
|
|
|
Stock
into common stock
|
|
|
|
|
|
(55,814
|
)
|
Loss
on exchange of notes payable into common stock
|
|
|
446,386
|
|
|
|
|
Other
|
|
|
(3,000
|
)
|
|
(28,506
|
)
|
|
|
|
|
|
|
|
|
TOTAL
OTHER (INCOME) EXPENSES
|
|
|
2,066,201
|
|
|
588,435
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(4,816,231
|
)
|
$
|
(2,162,569
|
)
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED NET LOSS PER COMMON SHARE
|
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
267,242,791
|
|
|
93,198,867
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For
the Three Months Ended
April
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
18,698
|
|
$
|
7,397
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
|
|
|
5,320
|
|
Amortization
of technology license and capitalized
|
|
|
|
|
|
|
|
software
development fee
|
|
|
212,536
|
|
|
|
|
Research
and development expenses (including
|
|
|
|
|
|
|
|
stock
based compensation of $5,044 and
|
|
|
|
|
|
|
|
$0,
respectively)
|
|
|
52,556
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
(including
stock based compensation of $333,958
|
|
|
|
|
|
|
|
and
$609,381, respectively)
|
|
|
1,549,001
|
|
|
974,388
|
|
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
1,814,093
|
|
|
979,708
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(1,795,395
|
)
|
|
(972,311
|
)
|
|
|
|
|
|
|
|
|
OTHER
(INCOME) EXPENSES:
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
978,860
|
|
|
360,864
|
|
Amortization
of deferred financing costs
|
|
|
324,852
|
|
|
28,490
|
|
Gain
on sale of property and equipment
|
|
|
|
|
|
(20,000
|
)
|
Gain
on exchange of Redeemable Series B Preferred
|
|
|
|
|
|
|
|
Stock
into common stock
|
|
|
|
|
|
(55,814
|
)
|
Loss
on exchange of notes payable into common stock
|
|
|
446,386
|
|
|
|
|
Other
|
|
|
(3,000
|
)
|
|
(28,506
|
)
|
|
|
|
|
|
|
|
|
TOTAL
OTHER (INCOME) EXPENSES
|
|
|
1,747,098
|
|
|
285,034
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(3,542,493
|
)
|
$
|
(1,257,345
|
)
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED NET LOSS PER COMMON SHARE
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
306,633,326
|
|
|
99,061,445
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
FOR
THE SIX MONTHS ENDED APRIL 30, 2006
(Unaudited)
|
|
Common
Stock
|
|
Treasury
Stock
|
|
Additional
Paid-in
Capital
|
|
Unearned
Compensation
|
|
Accumulated
Deficit
|
|
Total
Stockholders’
Equity
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Balance
at October 31, 2005
|
|
|
184,901,320
|
|
$
|
184,902
|
|
|
|
|
|
|
|
$
|
63,679,065
|
|
$
|
(22,771
|
)
|
$
|
(62,114,560
|
)
|
$
|
1,726,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of common
stock
for cash
|
|
|
—
|
|
|
|
|
|
(499,854
|
)
|
$
|
(7,498
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,498
|
)
|
Issuance
of common stock
under
consulting
agreements
|
|
|
11,000,000
|
|
|
11,000
|
|
|
|
|
|
|
|
|
1,859,000
|
|
|
(1,870,000
|
)
|
|
|
|
|
|
|
Issuance
of common stock
for
conversion of
convertible
deben-
tures
and accrued
interest
|
|
|
104,170,465
|
|
|
104,170
|
|
|
|
|
|
|
|
|
1,743,155
|
|
|
|
|
|
|
|
|
1,847,325
|
|
Issuance
of common stock
for
convertible notes
payable
and accrued
interest
|
|
|
35,714
|
|
|
36
|
|
|
|
|
|
|
|
|
14,964
|
|
|
|
|
|
|
|
|
15,000
|
|
Issuance
of common stock
for
notes payable
and
accrued interest
|
|
|
12,064,494
|
|
|
12,064
|
|
|
|
|
|
|
|
|
1,278,837
|
|
|
|
|
|
|
|
|
1,290,901
|
|
Issuance
of common stock
upon
exercise of
warrants
|
|
|
11,370,624
|
|
|
11,371
|
|
|
|
|
|
|
|
|
557,160
|
|
|
|
|
|
|
|
|
568,531
|
|
Stock
options issued to
key
employees and
advisory
board
member
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
805,595
|
|
|
(805,595
|
)
|
|
|
|
|
|
|
Warrants
issued with
notes
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,000
|
|
|
|
|
|
|
|
|
120,000
|
|
Warrants
issued with
convertible
debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,485,490
|
|
|
|
|
|
|
|
|
2,485,490
|
|
Warrants
issued to
placement
agent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,792,452
|
|
|
|
|
|
|
|
|
1,792,452
|
|
Reclassification
of
conversion
option
liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
760,783
|
|
|
|
|
|
|
|
|
760,783
|
|
Amortization
of unearned
compensation
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,010,570
|
|
|
|
|
|
1,010,570
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,816,231
|
)
|
|
(4,816,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at April 30, 2006
|
|
|
323,542,617
|
|
$
|
323,543
|
|
|
(499,854
|
)
|
$
|
(7,498
|
)
|
$
|
75,096,501
|
|
$
|
(1,687,796
|
)
|
$
|
(66,930,791
|
)
|
$
|
6,793,959
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(Unaudited)
|
|
For
the Six Months Ended
April
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(4,816,231
|
)
|
$
|
(2,162,569
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Consulting
fees and other compensatory elements of stock
issuances
|
|
|
1,010,570
|
|
|
888,930
|
|
Loss
on exchange of notes payable into common stock
|
|
|
446,386
|
|
|
|
|
Gain
on forgiveness of principal and interest on Zaiq
Note
|
|
|
(1,169,820
|
)
|
|
|
|
Gain
on sale of property and equipment
|
|
|
|
|
|
(20,000
|
)
|
Gain
on exchange of Redeemable Series B Preferred Stock
into common stock
|
|
|
|
|
|
(55,814
|
)
|
Other
non-cash income
|
|
|
|
|
|
(33,514
|
)
|
Amortization
of deferred financing costs
|
|
|
568,819
|
|
|
53,109
|
|
Amortization
of film in production costs
|
|
|
|
|
|
11,945
|
|
Amortization
of debt discount on notes
|
|
|
2,103,107
|
|
|
520,169
|
|
Amortization
of technology license and capitalized software
development fee
|
|
|
315,232
|
|
|
|
|
Depreciation
|
|
|
1,239
|
|
|
7,095
|
|
Change
in Assets (Increase) Decrease:
|
|
|
|
|
|
|
|
Other
current assets
|
|
|
(9,841
|
)
|
|
(898
|
)
|
Other
assets
|
|
|
370
|
|
|
(2,990
|
)
|
Change
in Liabilities Increase (Decrease):
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
199,687
|
|
|
(22,329
|
)
|
|
|
|
|
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(1,350,482
|
)
|
|
(816,866
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Acquisition
of technology license and development fee
|
|
|
(200,000
|
)
|
|
|
|
Acquisition
of property and equipment
|
|
|
(4,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(204,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
|
|
|
800,100
|
|
Proceeds
from exercise of warrants
|
|
|
568,531
|
|
|
|
|
Purchase
of treasury stock
|
|
|
(7,498
|
)
|
|
|
|
Proceeds
from convertible debentures
|
|
|
6,000,000
|
|
|
|
|
Proceeds
from notes payable
|
|
|
750,000
|
|
|
300,000
|
|
Capitalized
financing costs
|
|
|
(742,450
|
)
|
|
(33,029
|
)
|
Repayments
of notes payable
|
|
|
(944,291
|
)
|
|
|
|
Repayments
of convertible notes payable
|
|
|
(435,322
|
)
|
|
(25,625
|
)
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
5,188,970
|
|
|
1,041,446
|
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH
|
|
|
3,633,989
|
|
|
224,580
|
|
|
|
|
|
|
|
|
|
CASH
- BEGINNING OF PERIOD
|
|
|
373,481
|
|
|
127,811
|
|
|
|
|
|
|
|
|
|
CASH
- ENDING OF PERIOD
|
|
$
|
4,007,470
|
|
$
|
352,391
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Six Months Ended
April
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3,158
|
|
$
|
5,400
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for conversion of convertible debentures,
convertible
notes payable, notes payable and accrued interest
|
|
$
|
3,153,226
|
|
$
|
630,476
|
|
|
|
|
|
|
|
|
|
Common
stock issued for consulting services
|
|
$
|
1,870,000
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Value
assigned to warrants issued in connection with
notes payable
|
|
$
|
120,000
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Value
assigned to warrants issued to holders of 2006
Debentures
|
|
$
|
2,485,490
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Value
assigned to warrants issued to placement agents
|
|
$
|
1,792,452
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses satisfied by issuance of
common stock
|
|
$
|
|
|
$
|
71,911
|
|
|
|
|
|
|
|
|
|
Common
stock issued for accrued liquidated damages
|
|
$
|
|
|
$
|
96,000
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses converted to note payable
|
|
$
|
|
|
$
|
55,251
|
|
|
|
|
|
|
|
|
|
Deferred
compensation converted to convertible note payable (See
footnote 6(4))
|
|
$
|
212,450
|
|
$
|
383,911
|
|
|
|
|
|
|
|
|
|
Reclassification
of conversion option liability to equity
|
|
$
|
760,783
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Redeemable
Series B Preferred Stock exchanged into notes payable
|
|
$
|
|
|
$
|
2,392,000
|
|
|
|
|
|
|
|
|
|
Redeemable
Series B Preferred Stock (recorded at $800,000) exchanged
into
common stock
|
|
$
|
|
|
$
|
744,186
|
|
See
notes
to condensed consolidated financial statements.
NOTE
1 - PRINCIPLES OF CONSOLIDATION, BUSINESS AND CONTINUED
OPERATIONS
The
condensed consolidated financial statements include the accounts of Rim
Semiconductor Company (formerly New Visual Corporation) and its wholly owned
operating subsidiary, NV Entertainment, Inc. (“NV Entertainment” and
collectively, the “Company”). Top Secret Productions, LLC is a 50% - owned
subsidiary of NV Entertainment. All significant intercompany balances and
transactions have been eliminated. The Company consolidates its 50% - owned
subsidiary Top Secret Productions, LLC due to the Company’s control of
management and financial matters of such entity.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“US GAAP”). In the opinion of management, the
accompanying unaudited financial statements contain all adjustments, consisting
only of those of a normal recurring nature, necessary for a fair presentation
of
the Company’s financial position, results of operations and cash flows at the
dates and for the periods indicated. These financial statements should be read
in conjunction with the financial statements and notes related thereto included
in the Annual Report on Form 10-KSB for the fiscal year ended October 31,
2005.
These
results for the three months and six months ended April 30, 2006 are not
necessarily indicative of the results to be expected for the full fiscal year.
The preparation of the consolidated financial statements in conformity with
US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Rim
Semiconductor Company was incorporated under the laws of the State of Utah
on
December 5, 1985. The Company operates in two business segments, the production
of motion pictures, films and videos (“Entertainment Segment”) and the
development of new semiconductor technologies (“Semiconductor Segment”). The
Company’s Entertainment Segment is dependent on future revenues from the
Company’s film “Step Into Liquid” (“Film”). The Semiconductor Segment is
dependent on the Company’s ability to successfully commercialize its developed
technology, and has generated no revenues to date. The Company’s first chipset
was first made available to prospective customers for evaluation and testing
during the three months ended January 31, 2006.
Through
its subsidiary NV Entertainment the Company has operating revenues for its
Entertainment Segment, but may continue to report operating losses for this
segment. The Semiconductor Segment will have no operating revenues until
successful commercialization of its developed technology, but will continue
to
incur substantial operating expenses, capitalized costs and operating
losses.
Historically,
the Company has experienced significant recurring net operating losses as well
as negative cash flows from operations. The Company’s main source of liquidity
has been equity and debt financing, which was used to fund historical losses
from operating activities. Based on the Company’s current cash position, the
Company believes it has sufficient cash to meet its funding needs through at
least September 2007.
The
Company plans to increase its expenses above the current level in order to
realize its business plans.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Film
In Distribution
Statement
of Position 00-2, Accounting by Producers or Distributors of Films (“SOP-00-2”)
requires that film costs be capitalized and reported as a separate asset on
the
balance sheet. Film costs include all direct negative costs incurred in the
production of a film, as well as allocations of production overhead and
capitalized interest. Direct negative costs include cost of scenario, story,
compensation of cast, directors, producers, writers, extras and staff, cost
of
set construction, wardrobe, accessories, sound synchronization, rental of
facilities on location and post production costs. SOP-00-2 also requires that
film costs be amortized and participation costs accrued, using the
individual-film-forecast-computation method, which amortizes or accrues such
costs in the same ratio that the current period actual revenue (numerator)
bears
to the estimated remaining unrecognized ultimate revenue as of the beginning
of
the fiscal year (denominator). The Company makes certain estimates and judgments
of its future gross revenue to be received for the Film based on information
received by its distributor, historical results and management’s knowledge of
the industry. Revenue and cost forecasts are continually reviewed by management
and revised when warranted by changing conditions. A change to the estimate
of
gross revenues for the Film may result in an increase or decrease to the
percentage of amortization of capitalized film costs relative to a previous
period.
In
addition, SOP-00-2 also requires that if an event or change in circumstances
indicates that an entity should assess whether the fair value of a film is
less
than its unamortized film costs, then an entity should determine the fair value
of the film and write-off to the statement of operations the amount by which
the
unamortized film costs exceeds the film’s fair value.
As
a
result of impairment reviews during the years ended October 31, 2005 and 2004,
the Company wrote down the carrying value attributed to the Film to
$0.
Revenue
Recognition
The
Company recognizes revenue from the sale of its semiconductor products when
evidence of an arrangement exists, the sales price is determinable or fixed,
legal title and risk of loss has passed to the customer, which is generally
upon
shipment of our products to our customers, and collection of the resulting
receivable is probable. To date the Company has not recognized any revenues
related to the sale of its semiconductor products.
The
Company recognizes film revenue from the distribution of its feature film and
related products when earned and reasonably estimable in accordance with SOP
00-2. The following conditions must be met in order to recognize revenue in
accordance with SOP 00-2:
|
·
|
persuasive
evidence of a sale or licensing arrangement with a customer exists;
|
|
·
|
the
film is complete and, in accordance with the terms of the arrangement,
has
been delivered or is available for immediate and unconditional delivery;
|
|
·
|
the
license period of the arrangement has begun and the customer can
begin its
exploitation, exhibition or sale;
|
|
·
|
the
arrangement fee is fixed or determinable; and
|
|
·
|
collection
of the arrangement fee is reasonably assured.
|
Under
a
rights agreement with Lions Gate Entertainment (“LGE”), the domestic distributor
for its Film entitled “Step Into Liquid,” the Company shares with LGE in the
profits of the Film after LGE recovers its marketing, distribution and other
predefined costs and fees. The agreement provides for the payment of minimum
guaranteed license fees, usually payable on delivery of the respective completed
film, that are subject to further increase based on the actual distribution
results in the respective territory.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research
and Development
Research
and development costs are charged to expense as incurred. Amounts allocated
to
acquired-in-process research and development costs from business combinations
are charged to earnings at the consummation of the acquisition.
Capitalized
Software Development Costs
Capitalization
of computer software development costs begins upon the establishment of
technological feasibility. Technological feasibility for the Company’s computer
software is generally based upon achievement of a detail program design free
of
high-risk development issues and the completion of research and development
on
the product hardware in which it is to be used. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs 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 computer software development costs commences when the related
products become available for general release to customers. Amortization is
provided on a product-by-product basis. The annual amortization is the greater
of the amount computed using (a) the ratio that current gross revenue for a
product bears to the total of current and anticipated future gross revenue
for
that product, or (b) the straight-line method over the remaining estimated
economic life of the product. The estimated useful life of the Company’s
existing product is seven years.
The
Company periodically performs reviews of the recoverability of such capitalized
software development costs. At the time a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be generated
from the applicable software, the capitalized cost of each software product
is
then valued at the lower of its remaining unamortized costs or net realizable
value.
No
assurance can be given that such technology will receive market acceptance.
Accordingly, it is possible that the carrying amount of the technology license
may be reduced materially in the near future.
The
Company had amortization expense of $212,536 and $315,232 for the three months
and six months ended April 30, 2006, respectively, related to its
capitalized software development costs. There was no amortization expense for
the three months and six months ended April 30, 2005.
Loss
Per Common Share
Basic
loss per common share is computed based on weighted average shares outstanding
and excludes any potential dilution. Diluted loss per share reflects the
potential dilution from the exercise or conversion of all dilutive securities
into common stock based on the average market price of common shares outstanding
during the period. For the three months and six months ended April 30, 2006
and
2005, respectively, no effect has been given to outstanding options, warrants,
convertible notes payable, or convertible debentures in the diluted computation,
as their effect would be anti-dilutive.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based
Compensation
On
November 1, 2005, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors, including stock
options, based on estimated fair values. SFAS 123(R) supersedes the Company’s
previous accounting under Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning on
November 1, 2005. In March 2005, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The
Company has applied the provisions of SAB 107 in its adoption of SFAS
123(R).
The
Company early adopted SFAS 123(R) using the modified prospective transition
method, as of November 1, 2005, the first day of the Company’s fiscal year 2006.
The Company’s condensed consolidated financial statements as of and for the six
months ended April 30, 2006 reflect the impact of SFAS 123(R). In accordance
with the modified prospective transition method, the Company’s condensed
consolidated financial statements for prior periods have not been restated
to
reflect, and do not include, the impact of SFAS 123(R).
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company’s condensed
consolidated statement of operations. Prior to the adoption of SFAS 123(R),
the
Company accounted for stock-based awards to employees and directors using the
intrinsic value method in accordance with APB 25 as allowed under Statement
of
Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based
compensation expense for employee stock options had been recognized in the
Company’s condensed consolidated statement of operations because the exercise
price of the Company’s stock options granted to employees and directors equaled
the fair market value of the underlying stock at the date of grant.
Stock-based
compensation expense recognized in the Company’s condensed consolidated
statement of operations for the six months ended April 30, 2006 included
compensation expense for share-based payment awards granted prior
to, but
not
yet vested as of October 31, 2005 based on the grant date fair value estimated
in accordance with the pro-forma provisions of SFAS 123 and compensation
expense for the share-based payment awards granted subsequent to October 31,
2005 based on the grant date fair value estimated in accordance with the
provisions of SFAS 123(R). The Company has continued to attribute the value
of
stock-based compensation to expense on the straight-line single option
method.
Stock-based
compensation expense recognized under SFAS 123(R) related to employee stock
options was $378,802 and $447,839 for the three months and six months ended
April 30, 2006, respectively. Stock based-compensation expense for share-based
payment awards granted prior to, but not yet vested as of October 31, 2005
based
on the grant date fair value estimated in accordance with the pro-forma
provisions of SFAS 123 was $0 and $247,057 for the three months and six months
ended April 30, 2006, respectively. Stock based-compensation expense recognized
for non-employees under other accounting standards was $292,766 and $315,674
for
the three months and six months ended April 30, 2006, respectively.
Stock-based
compensation expense related to employee stock options under other accounting
standards for the three months and six months ended April 30, 2005 was $20,915
and $20,915, respectively. Stock based-compensation expense recognized for
non-employees under other accounting standards was $135,967 and $415,515 for
the
three months and six months ended April 30, 2005, respectively.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based
Compensation (Continued)
As
stock-based compensation expense recognized in the condensed consolidated
statement of operations for the three months and six months ended April 30,
2006
is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In the Company’s pro-forma information
required under SFAS 123(R) for the periods prior to fiscal 2006, the Company
accounted for forfeitures as they occurred.
Pro-Forma
Information Under SFAS 123 for Periods Prior to Fiscal 2006
|
|
For
the Six
Months
Ended
April
30, 2005
|
|
For
the Three
Months
Ended
April
30, 2005
|
|
Net
loss, as reported
|
|
$
|
(2,162,569
|
)
|
$
|
(1,257,345
|
)
|
|
|
|
|
|
|
|
|
Add:
Stock-based employee compensation expense
included
in reported net loss
|
|
|
20,915
|
|
|
20,915
|
|
|
|
|
|
|
|
|
|
Less:
Total stock-based employee compensation expense
determined
under the fair value-based method of all awards
|
|
|
(190,788
|
)
|
|
(190,788
|
)
|
|
|
|
|
|
|
|
|
Net
loss, pro-forma
|
|
$
|
(2,332,442
|
)
|
$
|
(1,427,218
|
)
|
|
|
|
|
|
|
|
|
Basic
and Diluted Net Loss per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
Pro-forma
|
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
Impact
of Recently Issued Accounting Standards
In
June
2005, the FASB published Statement of Financial Accounting Standards No. 154,
“Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 establishes
new standards on accounting for changes in accounting principles. Pursuant
to
the new rules, all such changes must be accounted for by retrospective
application to the financial statements of prior periods unless it is
impracticable to do so. SFAS 154 completely replaces Accounting Principles
Bulletin No. 20 and SFAS 3, though it carries forward the guidance in those
pronouncements with respect to accounting for changes in estimates, changes
in
the reporting entity, and the correction of errors. The requirements in SFAS
154
are effective for accounting changes made in fiscal years beginning after
December 15, 2005. The Company will apply these requirements to any accounting
changes after the implementation date.
The
Emerging Issues Task Force (“EITF”) reached a tentative conclusion on EITF Issue
No. 05-1, “Accounting for the Conversion of an Instrument That Becomes
Convertible upon the Issuer’s Exercise of a Call Option” that no gain or loss
should be recognized upon the conversion of an instrument that becomes
convertible as a result of an issuer’s exercise of a call option pursuant to the
original terms of the instrument. The application of this pronouncement is
not
expected to have an impact on the Company’s consolidated financial position,
results of operations, or cash flows.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impact
of Recently Issued Accounting Standards (Continued)
In
June
2005, the FASB ratified EITF Issue No. 05-2, “The Meaning of ‘Conventional
Convertible Debt Instrument’ in EITF Issue No. 00-19, ‘Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock’” (“EITF No. 05-2”), which addresses when a convertible debt instrument
should be considered “conventional” for the purpose of applying the guidance in
EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF No. 00-19
for conventional convertible debt instruments and indicated that convertible
preferred stock having a mandatory redemption date may qualify for the exemption
provided under EITF No. 00-19 for conventional convertible debt if the
instrument’s economic characteristics are more similar to debt than equity. EITF
No. 05-2 is effective for new instruments entered into and instruments modified
in periods beginning after June 29, 2005. The Company has applied the
requirements of EITF No. 05-2 since the required implementation date. The
adoption of this pronouncement did not have an impact on the Company’s
consolidated financial position, results of operations, or cash
flows.
EITF
Issue No. 05-4 “The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF Issue No. 00-19, ‘Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock’” (“EITF No. 05-4”) addresses financial instruments, such as stock
purchase warrants, which are accounted for under EITF 00-19 that may be issued
at the same time and in contemplation of a registration rights agreement that
includes a liquidated damages clause. The consensus of EITF No. 05-4 has not
been finalized. In March 2006 and May 2005, the Company entered into private
placement agreements for convertible debentures, a registration rights agreement
and warrants in connection with a private placement (see Note
7).
Based
on
the interpretive guidance in EITF Issue No. 05-4, view C, due to certain
factors, including an uncapped liquidated damages provision in the registration
rights agreement, the Company determined that the embedded conversion option
related to these convertible debentures and the registration rights are
derivative liabilities. Accordingly, the fair value of the embedded conversion
options was recorded as a liability as of the closing of the sale of these
convertible debentures. Due to various factors, including substantial
conversions of these convertible debentures and the registration statement
becoming effective on August 1, 2005, the value of the registration rights
was
deemed to be de minimus.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impact
of Recently Issued Accounting Standards (Continued)
In
September 2005, the FASB ratified EITF Issue No. 05-7, “Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues” (“EITF No. 05-7”), which addresses whether a modification to a
conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification
and
whether a borrower should recognize a beneficial conversion feature, not a
debt
extinguishment, if a debt modification increases the intrinsic value of the
debt
(for example, the modification reduces the conversion price of the debt). EITF
No. 05-7 is effective for the first interim or annual reporting period beginning
after December 15, 2005. The Company adopted EITF No. 05-7 as of the beginning
of the Company’s interim reporting period that began on February 1, 2006. The
adoption of this pronouncement did not have an impact on our consolidated
financial position, results of operations, or cash flows.
In
September 2005, the FASB ratified EITF Issue No. 05-8, “Income Tax Consequences
of Issuing Convertible Debt with a Beneficial Conversion Feature” (“EITF No.
05-8”), which addresses the treatment of convertible debt issued with a
beneficial conversion feature as a temporary difference under the guidance
in
SFAS 109. In addition, deferred taxes recognized for a temporary difference
of
debt with a beneficial conversion feature should be recognized as an adjustment
of additional paid-in capital. Entities should apply the guidance in EITF No.
05-8 in the first interim or annual reporting period that begins after December
15, 2005. Its provisions should be applied retrospectively under the guidance
in
SFAS 154 to all convertible debt instruments with a beneficial conversion
feature accounted for under the guidance in EITF No. 00-27 “Application of EITF
Issue No. 98-5 ‘Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios.’” The Company has applied
the requirements of EITF No. 05-8 to all previously existing convertible debt
instruments with a beneficial conversion feature and will apply the requirements
of EITF No. 05-8 for all new convertible debt instruments with a beneficial
conversion feature. The application of this pronouncement for new convertible
debt instruments with a beneficial conversion feature is not expected to have
an
impact on the Company’s consolidated financial position, results of operations
or cash flows.
In
February 2006, the FASB published Statement of Financial Accounting Standards
No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of
FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 resolves issues
addressed in SFAS 133 Implementation Issue No. D1, “Application of Statement 133
to Beneficial Interests in Securitized Financial Assets.” The requirements in
SFAS 155 are effective for all financial instruments acquired or issued after
the beginning of an entity’s first fiscal year that begins after September 15,
2006. The adoption of this pronouncement is not expected to have an impact
on
the Company’s consolidated financial position, results of operations, or cash
flows.
NOTE
3 - FILM IN DISTRIBUTION
The
Company recognized revenues of $18,698 and $58,874 for the three months and
six
months ended April 30, 2006, respectively. The Company recognized revenues
of
$7,397 and $16,198 for the three months and six months ended April 30, 2005,
respectively. There was no amortization expense for the three months and six
months ended April 30, 2006. The Company had amortization expense of $5,320
and
$11,945 for the three months and six months ended April 30, 2005,
respectively.
NOTE
4 - DEFERRED FINANCING COSTS
As
of
April 30, 2006, deferred financing costs consisted of costs incurred and
warrants issued in connection with the sale of $6,000,000 of 2006 Debentures,
$3,500,000 of 2005 Debentures, $1,350,000 of 7% convertible debentures, and
promissory notes:
Deferred
financing costs
|
|
$
|
3,541,818
|
|
Less:
accumulated amortization
|
|
|
(1,249,428
|
)
|
|
|
|
|
|
Deferred
financing costs, net
|
|
$
|
2,292,390
|
|
Costs
incurred in connection with debt financings are capitalized as deferred
financing costs and amortized over the term of the related debt. If any or
all
of the related debt is converted or repaid prior to its maturity date, a
pro-rata share of the related deferred financing costs are written off and
recorded as amortization expense in the period of the conversion or repayment
in
the consolidated statement of operations.
For
the
three months and six months ended April 30, 2006, amortization of deferred
financing costs was $324,852 and $568,819, respectively. For the three months
and six months ended April 30, 2005, amortization of deferred financing costs
was $28,490 and $53,109, respectively.
NOTE
5 - EXCHANGE AGREEMENT
In
April
2005, the Company entered into an Exchange Agreement (the “Exchange Agreement”)
with Zaiq Technologies, Inc. (“Zaiq”), pursuant to which the Company issued
4,651,163 shares of common stock with a value of $744,186 and a promissory
note
in the principal amount of $2,392,000 (the “Zaiq Note”) in exchange for the
surrender by Zaiq of 3,192 shares of Redeemable Series B Preferred Stock. The
fair value of the common stock and promissory note on the closing date was
determined to be less than the aggregate liquidation preference of the
Redeemable Series B Preferred Stock and accordingly, a gain of $55,814 was
recognized during the year ended October 31, 2005.
On
December 19, 2005, the Company entered into a letter agreement with Zaiq,
pursuant to which the Company agreed to repurchase from Zaiq for total
consideration of $200,000 the following Zaiq assets: (i) 5,180,474 shares (the
“Zaiq Shares”) of the Company’s common stock held of record by Zaiq, and (ii)
the remaining principal balance of the Zaiq Note.
The
Company had the right under the letter agreement to assign any or all of its
purchase commitment, and assigned its right to purchase 4,680,620 of the Zaiq
Shares to an unaffiliated third party that previously invested in the
Company.
On
December 20, 2005, the Company paid Zaiq an aggregate of $129,789, out of an
advance on the note payable that was subsequently signed in January 2006 (see
Note 8(5)), to purchase the Zaiq Note and 499,854 Zaiq Shares. The Zaiq Shares
repurchased by the Company have been accounted for as treasury stock, carried
at
cost, and reflected as a reduction to stockholders’ equity. The remaining
principal and accrued interest of $1,292,111 on the Zaiq Note has been canceled
resulting in a gain of $1,169,820.
NOTE
6 - CONVERTIBLE NOTES PAYABLE
The
Company entered into several convertible promissory note agreements with various
trusts and individuals to fund the operations of the Company. The Company agreed
to pay the principal and an additional amount equal to 50% of the principal
on
all notes below except for one note for $10,000 which accrues interest at the
rate of 9% per annum and the convertible promissory note discussed in foot
note
(4) below. Except for these two notes, the notes are due when the Company
reaches certain milestones from the distribution of its motion picture. The
notes may be converted at any time, in whole or in part, into that number of
fully paid and non-assessable shares of common stock at conversion prices
ranging from $0.33 to $1.00.
NOTE
6 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
The
outstanding convertible notes are summarized below:
|
|
At
April 30, 2006
|
|
Note
payable (1)
|
|
$
|
47,000
|
|
Notes
payable (ten notes) (2)
|
|
|
468,000
|
|
Note
payable, 9% interest (3)
|
|
|
10,000
|
|
|
|
|
|
|
TOTAL
|
|
$
|
525,000
|
|
(1)
|
Due
when receipts received by the Company from its Top Secret Productions,
LLC
joint venture exceed $375,000. The Company made payments of $25,000
and
$50,000 during the three months and six months ended April 30, 2006,
respectively.
|
(2)
|
Due
when receipts received by the Company from its Top Secret Productions,
LLC
joint venture exceed $2,250,000. Principal of $10,000 and accrued
interest
of $5,000 was converted into 35,714 shares of common stock during
the
three months ended April 30, 2006.
|
(3)
|
Due
when receipts received by the Company from its Top Secret Productions,
LLC
joint venture exceed $750,000.
|
In
March
2005, the Company issued in favor of the Company’s executive vice president, a
non-interest bearing convertible promissory note in the principal amount of
$383,911. The convertible promissory note was issued in evidence of the
Company’s obligation for deferred compensation. In accordance with APB 21,
imputed interest (at an effective rate of 15%) was calculated to arrive at
the
fair value of the convertible promissory note. The difference between the face
amount and the present value upon issuance of the convertible promissory note
is
shown as a discount that is amortized as interest expense over the life of
the
convertible promissory note. The Company made payments of $20,833 and $84,125
during the three months and six months ended April 30, 2006, respectively.
In
March 2006, the remaining principal amount of this note and additional deferred
compensation payable to the note holder of $212,450 were converted into a
convertible promissory note with an aggregate principal amount of $301,197.
The
principal and accrued interest on this note was repaid in April 2006. The
remaining amortized debt discount on the March 2005 convertible promissory
note
of $15,583 was recorded as interest expense during the three months ended April
30, 2006. For the three months and six months ended April 30, 2006, amortization
of debt discount on the March 2005 convertible promissory note was $15,583
and
$5,292, respectively.
NOTE
7 - CONVERTIBLE DEBENTURES
2006
Debentures
On
March
10, 2006, the Company raised gross proceeds of $6.0 million from a private
placement to 17 institutional and individual investors (the “Investors”) of its
two-year 7% Senior Secured Convertible Debentures (the “2006 Debentures”). Of
this amount, $3.0 million was delivered by the Company to a security agent,
acting on behalf of the Investors (the “Security Deposit”), to secure certain
obligations of the Company to the Investors if the Company failed to file an
amendment, with the approval of the Company’s shareholders, to its charter
documents to reflect the increase in the Company’s authorized common stock from
500 million to 900 million shares (the “Authorized Share Increase”). The
Company’s shareholders approved the Authorized Share Increase on April 18, 2006
and the $3.0 million Security Deposit was released to the Company.
NOTE
7 - CONVERTIBLE DEBENTURES (CONTINUED)
2006
Debentures
(Continued)
In
connection with the issuance of the 2006 Debentures, the Company issued to
the
Investors warrants to purchase 70,955,548 shares of the Company’s common stock
at an exercise price of $0.15 per share (subject to adjustments for stock
splits, stock dividends, recapitalizations, mergers, spin-offs, and certain
other transactions). The warrants are exercisable until the last day of the
month in which the third anniversary of the effective date of the registration
statement registering the shares underlying the warrants occurs.
The
Company received net proceeds of approximately $4.5 million from the proceeds
of
the 2006 Debentures, after the payment of offering related fees and expenses
and
after the repayment in full of bridge loans made in December 2005 and January
2006, in the aggregate amount of $810,000.
The
2006
Debentures are convertible into shares of common stock at the holder’s option at
any time on or after the earlier of (i) the 65th day following issuance or
(ii)
the effective date of the registration statement, with the conversion price
for
any such conversion equal to the lower of (x) 70% of the volume weighted average
price (“VWAP”) of the common stock for the 20 days ending on the trading day
immediately preceding the conversion date or (y) if the Company enters into
certain financing transactions, the lowest purchase price or conversion price
applicable to that transaction. The conversion price is subject to
adjustment.
Interest
on the 2006 Debentures accrues at the rate of 7% per annum, payable upon
conversion or semi-annually (June 30 and December 31 of each year) or upon
maturity, whichever occurs first, and will continue to accrue until the 2006
Debentures are fully converted and/or paid in full. Interest is payable, at
the
option of the Company, either (i) in cash, or (ii) in shares of common stock
at
the then applicable conversion price.
To
secure
the Company’s obligations under the 2006 Debentures, the Company has granted a
security interest in substantially all of its assets, including without
limitation, its intellectual property, in favor of the Investors. The security
interest terminates upon the earlier of (i) the date on which less than
one-fourth of the original principal amount of the 2006 Debentures issued on
the
Closing Date are outstanding or (ii) payment or satisfaction of all of the
Company’s obligations under the Securities Purchase Agreement.
On
April
24, 2006, the Company filed a registration statement covering the common stock
underlying the 2006 Debentures and the warrants. This registration statement
has
not yet been declared effective by the Securities and Exchange
Commission.
In
connection with the placement of the 2006 Debentures, a placement agent received
a placement agent fee equal to (i) 10% of the aggregate purchase price (i.e.,
$600,000), (ii) 10% of the proceeds realized in the future from exercise of
warrants issued to the Investors, (iii) warrants to purchase an aggregate of
7,095,556 shares of common stock having an initial exercise price equal to
$0.1693 per share valued at $888,779, and (iv) warrants to purchase an aggregate
of 7,095,556 shares of common stock having an initial exercise price equal
to
$0.15 per share valued at $903,673. The exercise price of the placement agent
warrants is subject to adjustments for stock splits, stock dividends,
recapitalizations, mergers, spin-offs, and certain other
transactions.
The
gross
proceeds of $6,000,000 are recorded as a liability net of a debt discount of
$5,056,919 consisting of an allocation of the fair values attributed to the
Investors’ warrants and to the embedded conversion option in accordance with
EITF issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to
and Potentially Settled in a Company’s Own Stock” and EITF issue No. 05-04, view
C “The Effect of a Liquidated Damages Clause on a Freestanding Financial
Instrument.” The
debt
discount consisted of a $2,485,490 value related to the Investors' warrants
and a value attributed to the embedded conversion feature of $2,571,429.
The debt discount was first allocated to the embedded conversion feature based
on its fair value. After reducing the gross proceeds by the value allocated
to
the embedded conversion feature, the remaining unallocated debt discount of
$3,428,571 was allocated to the Investors' warrants on a pro rata
basis.
NOTE
7 - CONVERTIBLE DEBENTURES (CONTINUED)
2006
Debentures
(Continued)
Due
to
certain factors, including an uncapped liquidated damages provision in the
registration rights agreement and an indeterminate amount of shares to be issued
upon conversion of the debentures, the Company separately values and accounts
for the embedded conversion option related to the 2006 Debentures and the
registration rights as derivative liabilities. The Company classified the fair
value of the Investors’ warrants as equity.
The
fair
value of the placement agent’s warrants of $1,792,452 was recorded as a deferred
financing cost and is being charged to interest expense over the term of the
2006 Debentures.
The
2006
Debentures are summarized below as of April 30, 2006:
|
|
Outstanding
Principal
Amount
|
|
Unamortized
Debt
Discount
|
|
Net
Carrying
Value
|
|
Long-term
portion
|
|
$
6,000,000
|
|
$
4,704,111
|
|
$
1,295,889
|
|
2005
Debentures
On
May
26, 2005, the Company completed a private placement to certain individual and
institutional investors of $3,500,000 in principal amount of its three-year
7%
Senior Secured Convertible Debentures (the “2005 Debentures”). All principal is
due and payable on May 26, 2008. The 2005 Debentures are convertible into shares
of common stock at a conversion price equal to the lower of (x) 70% of the
5 day
volume weighted average price of the Company’s common stock immediately prior to
conversion or (y) if the Company entered into certain financing transactions
subsequent to the closing date, the lowest purchase price or conversion price
applicable to that transaction.
In
connection with the issuance of the 2005 Debentures, the Company issued to
the
purchasers thereof warrants (the “Investor Warrants”) to purchase 33,936,650
shares of common stock, with warrants for 11,312,220 shares being exercisable
through the last day of the month in which the first anniversary of the
effective date of the Registration Statement occurs (August 31, 2006) at a
per
share exercise price of $0.1547 and warrants for 22,624,430 shares being
exercisable through the last day of the month in which the third anniversary
of
the effective date of the Registration Statement occurs (August 31, 2008) at
a
per share exercise price of $0.3094.
The
gross
proceeds of $3,500,000 are recorded as a liability net of a debt discount of
$3,500,000. The debt discount consisted of a $2,000,000 value related to the
Investor Warrants and a $1,500,000 value related to the embedded conversion
option in accordance with EITF issue No. 00-19 “Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a Company’s Own
Stock” and EITF issue No. 05-04, view C “The Effect of a Liquidated Damages
Clause on a Freestanding Financial Instrument.” Due to certain factors,
including an uncapped liquidated damages provision in the registration rights
agreement and an indeterminate amount of shares to be issued upon conversion
of
the debentures, the Company determined that the embedded conversion option
related to the 2005 Debentures and the registration rights are derivative
liabilities. Accordingly, the fair value of the embedded conversion option
of
$1,500,000 was recorded as a liability as of the closing of the sale of the
2005
Debentures. Due to various factors, including substantial conversions of the
2005 Debentures and the registration statement becoming effective on August
1,
2005, the value of the registration rights was deemed to be de
minimus.
As
of
April 30, 2006, the derivative liability of $1,500,000 had been reduced to
$17,384 as a result of conversions of the 2005 Debentures. An aggregate of
$1,482,616 has been reflected as a reclassification to stockholders’ equity
since the issuance of the 2005 Debentures.
The
Company followed the guidelines in EITF issue No. 05-04, view C and classified
the fair value of the Investor Warrants as equity and separately valued the
derivative liability related to the registration rights.
NOTE
7 - CONVERTIBLE DEBENTURES (CONTINUED)
2005
Debentures
(Continued)
No
gain
or loss was deemed necessary during the three months and six months ended April
30, 2006, as the fair value of the derivative liabilities did not fluctuate
in
value.
In
connection with the issuance of the 2005 Debentures, the Company also issued
to
a placement agent warrants to purchase up to 5,656,108 shares of Common Stock
(the “Compensation Warrants”) valued at $319,066. This amount was recorded as a
deferred financing cost and is being charged to interest expense over the term
of the 2005 Debentures. Warrants to purchase up to 2,262,443 shares are
exercisable through the last day of the month in which the third anniversary
of
the effective date of the Registration Statement occurs (August 31, 2008) at
a
per share exercise price of $0.3094. Warrants to purchase up to 2,262,443 shares
are exercisable through the last day of the month in which the third anniversary
of the closing occurs (May 31, 2008) at a per share exercise price of $0.1547.
Warrants to purchase up to 1,131,222 shares are exercisable through the last
day
of the month in which the first anniversary of the effective date of the
Registration Statement occurs (August 31, 2006) at a per share exercise price
of
$0.1547. The Compensation Warrants are otherwise exercisable on substantially
the same terms and conditions as the Investor Warrants.
On
February 21, 2006, the Company and certain holders of Investor and Compensation
Warrants entered into an amendment (the “Warrant Amendment”) to the terms of
their warrants.
Pursuant
to the Warrant Amendment, the Company and certain holders of the Investor and
Compensation Warrants agreed to temporarily reduce the exercise price of the
Investor and Compensation Warrants to $0.05 per share from February 21, 2006
until March 10, 2006 (the “New Price Exercise Period”). The warrant holders that
are parties to the Warrant Amendment were permitted, but not required to,
exercise all or any portion of their Investor and Compensation Warrants at
a per
share price of $0.05 at any time during the New Price Exercise Period, but
could
not do so by means of a cashless exercise. This reduction in the exercise price
of the Investor and Compensation Warrants expired on March 10, 2006. During
the
New Price Exercise Period, holders of the Investor and Compensation Warrants
exercised warrants to purchase 11,370,624 shares of common stock at the reduced
exercise price of $0.05 per share, resulting in gross proceeds to the Company
of
$568,531.
Any
shares of common stock issued with any exercise of an Investor or Compensation
Warrant to a holder of an Investor or Compensation Warrant who or which executed
the Warrant Amendment, whether during the New Price Exercise Period (on the
terms contemplated in the Warrant Amendment) or thereafter (on the original
terms provided in the Investor and Compensation Warrants) were or will be in
restricted common stock, but shall have the registration rights provided in
the
Warrant Amendment. Except as expressly provided in the Warrant Amendment, the
terms and conditions of the Investor and Compensation Warrants and any related
registration rights agreement shall be unchanged and remain in full force and
effect. In addition, the warrant holders agreed to waive any claims arising
out
of or relating to the failure, if any, to have available registered Warrant
Shares, as defined in the Investor and Compensation Warrants, prior to the
New
Required Effective Date (as defined below).
The
Company agreed to include the shares of common stock issuable upon the exercise
of each Investor or Compensation Warrant (whether or not pursuant to the terms
of the Warrant Amendment) in a registration statement to be filed by the Company
with the Securities and Exchange Commission (the “SEC”) no later than the
earlier of the date the Company files its next registration statement with
the
SEC (other than on Form S-8 or S-4) for the sale of shares by the Company or
other selling stockholders, or May 1, 2006. The term “New Required
Effective Date” means the date which is the later of 120 days from the
expiration of the New Price Exercise Period, or sixty days after the filing
of
such registration statement; provided, however, that in no event shall such
date
be later than the required effective date contemplated by the terms of any
new
transaction consummated by the Company after February
21, 2006,
where
the shares of common stock issued or issuable to the investors in such
transaction are included in a registration statement that is required to be
made
effective by a stated date. The common stock underlying the Investor and
Compensation Warrants were included in the registration statement filed on
April
24, 2006.
NOTE
7 - CONVERTIBLE DEBENTURES (CONTINUED)
2005
Debentures
(Continued)
To
secure
the Company’s obligations under the 2005 Debentures, the Company granted a
security interest in substantially all of its assets, including without
limitation, its intellectual property, in favor of the investors under the
terms
and conditions of a Security Interest Agreement dated as of the date of the
2005
Debentures. The security interest terminates upon the earlier of (i) the date
on
which less than one-third of the original principal amount of the 2005
Debentures issued on the closing date are outstanding or (ii) payment or
satisfaction of all of the Company’s obligations under the loan agreement.
In January
2006, condition (i) was met and the security interest terminated.
A
registration statement covering the common stock issuable upon conversion of
the
2005 Debentures, the Investor Warrants and the Compensation Warrants referred
to
above was declared effective by the SEC on August 1, 2005.
During
the three months ended January 31, 2006, $1,310,724 of principal amount of
2005
Debentures plus accrued interest of $69,777 were converted into 81,262,199
shares of common stock. During the three months ended April 30, 2006,
$464,423 of principal amount of the 2005 Debentures plus accrued interest of
$2,401 were converted into 22,908,266 shares of common stock.
Included
in interest expense for the three months and six months ended April 30, 2006
is
$361,783 and $1,525,943, respectively, related to the amortization of the debt
discount on these debentures.
The
2005
Debentures are summarized below as of April 30, 2006:
|
|
Outstanding
Principal
Amount
|
|
Unamortized
Debt
Discount
|
|
Net
Carrying
Value
|
|
Long-term
portion
|
|
$
40,564
|
|
$
28,026
|
|
$
12,538
|
|
7%
Debentures
In
December 2003, April 2004 and May 2004, the Company completed a private
placement to certain private and institutional investors of $1,350,000 in
principal amount of its three-year 7% Convertible Debentures (the “7%
Debentures”).
During
the six months ended April 30, 2006, no principal or accrued interest was
converted into shares of common stock. During the three months ended January
31,
2005, $199,450 of principal amount plus accrued interest of $12,264 were
converted into 1,411,428 shares of common stock at a conversion price of $0.15.
During the three months ended April 30, 2005, $383,050 of principal amount
plus
accrued interest of $28,212 were converted into 2,741,747 shares of common
stock
at a conversion price of $0.15.
The
7%
Debentures are summarized below as of April 30, 2006:
|
|
Outstanding
Principal
Amount
|
|
Unamortized
Debt
Discount
|
|
Net
Carrying
Value
|
|
Current
portion
|
|
$
125,000
|
|
$
24,136
|
|
$
100,864
|
|
The
remaining 7% Debentures outstanding at April 30, 2006 were originally issued
in
December 2003 and are due and payable in December 2006.
NOTE
8 - NOTES PAYABLE
The
Company does not currently have any outstanding notes payable. During
the six months ended April 30, 2006, the Company recognized
losses as a result of the conversion of several notes payable into common stock
and also repaid several notes payable, as further described below.
In
February 2006, the Company issued 5,304,253 shares of restricted common stock
in
exchange for the return and cancellation of the outstanding principal of
$256,886 and interest of $114,412 on five, unsecured individual notes
payable, each with identical terms and bearing 6% interest. As the
conversion rate of $0.07 was below the closing price of the common stock on
the
conversion date, a loss of $196,257 was recognized during the three months
ended
April 30, 2006.
Outstanding
principal of $39,973 and interest of $110,027 was paid in June 2005 on an
unsecured note payable bearing 10% interest from the proceeds of the
private placement of the 2005 Debentures. In February 2006, the Company issued
6,760,241 shares of restricted common stock in exchange for the return and
cancellation of the outstanding principal of $443,251 and interest of $29,766
on
this note. As the conversion rate of $0.07 was below the closing price of the
common stock on the conversion date, a loss of $250,129 was recognized during
the three months ended April 30, 2006.
On
March
26, 2004, the Company entered into a loan agreement, pursuant to which the
Company borrowed $12,000 from the lender. In April 2006, the outstanding
principal of $12,000 and interest of $1,217 were repaid.
In
April
2005, the Company issued a promissory note in connection with the cancellation
of the Redeemable Series B Preferred Stock which bears interest at the rate
of
7% per annum. In December 2005, the Company entered into an agreement to repay
a
portion of the outstanding principal and accrued interest on the promissory
note
with the remaining principal balance and accrued interest being forgiven. See
Note 5 for further details.
In
December 2005 and January 2006, the Company entered into loan agreements with
a
third party pursuant to which the Company borrowed $750,000 from the lender.
An
amount equal to 108% of the principal amount ($810,000) of the loans is due
and
payable on the earlier of May 25, 2006 or the date the Company effects a
financing transaction or series of transactions resulting in gross proceeds
to
the Company of at least $2,000,000. The difference between the gross proceeds
and amount due at maturity is shown as a discount that is amortized as interest
expense over the life of the loans. The Company issued to the lender warrants
to
purchase 7,500,000 shares of its Common Stock at an exercise price of $0.10
per
share. The fair value of the warrants was $120,000 and was shown as a debt
discount and amortized as interest expense over the life of the loans. In
connection with the loans, the Company granted a security interest in all of
its
assets. The Company received net proceeds of $672,470 following the payment
of
due diligence fees and transaction fees and transaction related fees and
expenses. These transaction related fees were recorded as deferred financing
costs. For the three months ended January 31, 2006, amortization of debt
discount on this loan was $10,413. In March 2006, 108% of the principal amount
($810,000) was repaid and the security interest was released. All unamortized
debt discount and deferred financing costs were written off during the three
months ended April 30, 2006 in connection with the repayment of the
loan.
NOTE
9 - STOCKHOLDERS’ EQUITY
Common
Stock
During
the six months ended April 30, 2006, the Company:
|
·
|
issued
104,170,465 shares of common stock for conversion of convertible
debentures with a principal amount of $1,775,947 and accrued interest
of
$72,178;
|
|
·
|
repurchased
499,854 shares of common stock for $7,498 from
Zaiq;
|
|
·
|
issued
35,714 shares of common stock for conversion of convertible notes
payable
with a principal amount of $10,000 and accrued interest of
$5,000;
|
|
·
|
issued
12,064,494 shares of common stock valued at $1,290,901 in exchange
for the
return and cancellation of notes payable with a principal amount
of
$700,337 and accrued interest of
$144,178;
|
|
·
|
issued
11,370,624 shares of common stock upon exercise of warrants resulting
in
gross proceeds of $568,531; and
|
|
·
|
issued
11,000,000 shares of restricted common stock to consultants for services
valued at $1,870,000.
|
Stock
Option Plans
On
November 1, 2005, the Company early adopted SFAS 123(R), which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to the Company’s employees and directors including employee stock
options based on estimated fair values.
Upon
adoption of SFAS 123(R), the Company continued to estimate the value of stock
options on the date of grant using the Black-Scholes model and the assumptions
noted in the table below. Prior to the adoption of SFAS 123(R), the value of
each stock option was also estimated on the date of grant using the
Black-Scholes model for the purpose of the pro-forma financial information
in
accordance with SFAS 123.
The
Company used its historical stock price volatility in accordance with SFAS
123(R) and SAB 107. The selection of the historical volatility approach was
based upon the lack of availability of actively traded options on the Company’s
stock and the Company’s assessment that historical volatility is representative
of future stock price trends.
The
risk-free interest rate assumption is based upon observed interest rates
appropriate for the term of the Company’s stock options. The dividend yield
assumption is based on the Company’s history and expectation of dividend
payouts. The expected life of stock options represents the Company’s historical
experience with regards to the exercise behavior of its option holders and
the
contractual term of the options.
As
stock-based compensation expense recognized in the condensed consolidated
statement of operations for the three months and six months ended April 30,
2006
is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In the Company’s pro-forma information
required under SFAS 123 for the periods prior to fiscal 2006, the Company
accounted for forfeitures as they occurred.
NOTE
9 - STOCKHOLDERS’ EQUITY (CONTINUED)
Stock
Option Plans
(Continued)
The
weighted-average estimated fair value of stock options granted during the six
months ended April 30, 2006 was $0.03 per share using the Black-Scholes model
with the following assumptions:
Expected
volatility
|
147%
|
Risk-free
interest rate
|
4.4%
|
Expected
dividends
|
0.0%
|
Expected
life
|
10
years
|
A
summary
of option activity as of April 30, 2006 and changes during the period then
ended
is as follows:
|
|
Under
the
Plans
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Outside
the
Plans
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at October 31, 2005
|
|
|
993,750
|
|
$
|
0.97
|
|
|
|
|
|
15,900,000
|
|
$
|
0.25
|
|
|
|
|
Options
granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
the Plans
|
|
|
100,000
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside
the Plans
|
|
|
|
|
|
|
|
|
|
|
|
26,400,000
|
|
$
|
0.03
|
|
|
|
|
Options
expired/cancelled:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
the Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside
the Plans
|
|
|
|
|
|
|
|
|
|
|
|
(14,000,000
|
)
|
$
|
0.17
|
|
|
|
|
Options
exercised:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
the Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside
the Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at April 30, 2006
|
|
|
1,093,750
|
|
$
|
0.89
|
|
$
|
4,500
|
|
|
28,300,000
|
|
$
|
0.08
|
|
$
|
2,567,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at April 30, 2006
|
|
|
999,306
|
|
$
|
0.97
|
|
$
|
250
|
|
|
16,100,000
|
|
$
|
0.13
|
|
$
|
1,381,800
|
|
The
weighted-average remaining contractual term of stock options outstanding under
the plans as of April 30, 2006 was 6.1 years. The weighted-average remaining
contractual term of stock options outstanding outside the plans as of April
30,
2006 was 9.3 years.
The
weighted-average remaining contractual term of stock options currently
exercisable under the plans as of April 30, 2006 was 5.7 years. The
weighted-average remaining contractual term of stock options currently
exercisable outside the plans as of April 30, 2006 was 9.0 years.
As
of
April 30, 2006, total compensation cost related to nonvested stock options
not
yet recognized was $369,735,
which is
expected to be recognized through February 2009 over a weighted-average period
of approximately two
months.
The
total
fair value of options vested during the three months and six months ended April
30, 2006 was $407,569 and $654,626, respectively.
NOTE
9 - STOCKHOLDERS’ EQUITY (CONTINUED)
Options
Granted
In
April
2005, the Company issued to each of its Chief Executive Officer and Executive
Vice President, 1,000,000 shares of common stock, and performance based options
to purchase 7,000,000 shares of restricted common stock at an exercise price
of
$0.17, which was equal to the closing price of the common stock on the
Over-the-Counter Bulletin Board on the date of grant. Options to purchase
2,000,000 shares of restricted common stock vested upon the Company’s
consummation of the sale of the 2005 Debentures in May 2005 and options to
purchase 12,000,000 shares of restricted common stock vested in December 2005
upon the Company’s release of a beta version of its semiconductor technologies.
In January 2006, all of these options were canceled. During the three months
and
six months ended April 30, 2006, the Company recognized $0 and $247,057,
respectively, of stock-based compensation expense related to these vested
options.
During
the three months ended January 31, 2006, options to purchase 22,400,000 shares
of common stock were granted to the Company’s Chief Executive Officer, the
Executive Vice President, and an advisory board member. These options were
valued at $591,863 and have a 10 year term, an exercise price of $0.027 per
share, and vest at various times between February 2006 and July 2006. During
the
three months and six months ended April 30, 2006, the Company recognized
$313,961 and $388,042, respectively, of stock-based compensation expense related
to these options.
During
the three months ended April 30, 2006, the following options were
granted:
(i)
|
Options
to purchase 2,000,000 shares of common stock were granted to directors.
These options were valued at $84,277 and have a 10-year term, an
exercise
price of $0.0319 per share, and vested on May 1, 2006;
|
|
|
(ii)
|
Options
to purchase 2,000,000 shares of common stock were granted in connection
with legal services performed for the Company. These options were
valued
at $84,277 and have a 10-year term, an exercise price of $0.0319
per
share, and vested on March 1, 2006; and
|
|
|
(iii)
|
Options
to purchase 100,000 shares of common stock were granted to an employee.
These options were valued at $16,887 and have a 10-year term, exercise
price of $0.08 per share, and vest equally over a three year
period.
|
Options
Expired, Cancelled and Forfeited
Options
to purchase 0 and 14,000,000 shares of common stock were canceled during the
three months and six months ended April 30, 2006, respectively.
Warrants
Granted
In
January 2006, the Company granted warrants to purchase 7,500,000 shares of
its
common stock at an exercise price of $0.10 per share to a lender in connection
with a loan agreement (see Note
8(5)).
The fair
value of the stock warrants estimated on the date of grant using the
Black-Scholes option pricing model is $0.016 per share or $120,000.
In
March
2006, the Company granted warrants to purchase 70,955,548 shares of its common
stock at an exercise price of $0.15 per share to the Investors in the 2006
Debentures (see Note 7). The fair value of the stock warrants estimated on
the
date of grant using the Black-Scholes option pricing model is $0.127 per share
or $9,036,727.
In
March
2006, the Company also granted warrants to purchase 7,095,556 shares of its
common stock at an exercise price of $0.1693 per share to the placement agent
in
connection with the 2006 Debentures (see Note 7). The fair value of the stock
warrants estimated on the date of grant using the Black-Scholes option pricing
model is $0.125 per share or $888,779.
NOTE
9 - STOCKHOLDERS’ EQUITY (CONTINUED)
Warrants
Granted (Continued)
In
March
2006, the Company granted additional warrants to purchase 7,095,556 shares
of
its common stock at an exercise price of $0.15 per share to the placement agent
in connection with the 2006 Debentures (see Note 7). The fair value of the
stock
warrants estimated on the date of grant using the Black-Scholes option pricing
model is $0.127 per share or $903,673.
Warrants
Expired
Warrants
to purchase 0 and 200,000 shares of common stock expired during the three months
and six months ended April 30, 2006, respectively.
Net
Loss Per Share
Securities
that could potentially dilute basic earnings per share (EPS), in the future,
that were not included in the computation of diluted EPS because to do so would
have been anti-dilutive for the periods presented, consist of the
following:
Warrants
to purchase common stock
|
|
|
131,888,793
|
|
2006
Debentures and accrued interest (1)
|
|
|
69,021,246
|
|
Options
to purchase common stock
|
|
|
29,393,750
|
|
Convertible
notes payable and accrued interest
|
|
|
1,757,414
|
|
7%
debentures and accrued interest
|
|
|
975,204
|
|
2005
Debentures and accrued interest (2)
|
|
|
500,247
|
|
|
|
|
|
|
Total
as of April 30, 2006
|
|
|
233,536,654
|
|
(1)
|
Based
on a twenty day volume weighted average common stock price discounted
by
30% at April 30, 2006 of $0.08778.
|
(2)
|
Based
on a five day volume weighted average common stock price discounted
by 30%
at April 30, 2006 of $0.09002.
|
NOTE
10 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Research
and Development Agreement
The
Company and HelloSoft entered into an amendment, effective as of October 11,
2004 (the “Amendment”), to their Services Agreement dated as of March 31, 2004
(the “Original Agreement”) pursuant to which HelloSoft will provide development
services relating to the Company’s semiconductor technologies. The Original
Agreement provides that, upon the Company’s request from time to time, HelloSoft
is to provide services to be specified pursuant to mutually agreed upon terms.
The Amendment represents the first project that HelloSoft is undertaking
pursuant to the Original Agreement.
In
consideration for the services being rendered under the Amendment, the Company
agreed to pay to HelloSoft $185,000, half of which was paid in the form of
restricted common stock issued at a discount of 25% to the closing price of
the
Company’s Common Stock on the day of the commencement of services. The other
half will be remitted in cash, periodically, upon completion by HelloSoft and
acceptance by the Company of specified milestones. HelloSoft has assigned to
the
Company the rights to any improvements, developments, discoveries or other
inventions that may be generated by HelloSoft in its performance of the services
to be provided under the Amendment.
On
July
26, 2005, the Company signed an amendment to the Original Agreement that defines
and prices the next two phases of the technology development. The Company will
expend $445,000 on Phase II and $350,000 on Phase III.
NOTE
10 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
(CONTINUED)
Research
and Development Agreement
(Continued)
Half
of
Phase II, or $222,500, was paid to HelloSoft on July 26, 2005, in the form
of
restricted common stock issued at a discount of 25% to the closing price of
the
Company’s common stock on that date, and the remaining $222,500 is payable in
cash upon completion of certain stages of Phase II. The restricted common stock
issued to HelloSoft was valued at $296,667 and recorded as research and
development expense. Of the remaining $222,500, $62,500 was accrued as of
October 31, 2005 and paid during the three months ended January 31, 2006 and
$100,000 was accrued as of April 30, 2006 and paid in May 2006.
When
HelloSoft commences Phase III, the Company will issue to them $175,000 worth
of
restricted common stock, and the other $175,000 will be paid to them in cash
when they complete Phase III. Phase III will be deemed complete when HelloSoft
releases the E30 Rel. 1.5 to the Company. The Company projects that this also
will occur in the third
calendar quarter of 2006.
On
November 3, 2005 and January 24, 2006, the Company and HelloSoft, Inc. entered
into further amendments to the Original Agreement. Pursuant to the amendments,
the Company agreed to pay HelloSoft an aggregate of $80,000 in cash, and the
parties agreed upon certain additions to the development services to be
performed by HelloSoft pursuant to the Original Agreement, as amended. $60,000
was paid to HelloSoft during the three months ended January 31, 2006 and $20,000
was paid to HelloSoft during the three months ended April 30, 2006.
On
February 6, 2006, the Company entered into a technology license agreement with
HelloSoft. Under the agreement, the Company has obtained a license to include
HelloSoft’s integrated VoIP software suite in the Company’s E30 semiconductor.
In exchange for this license, the Company has agreed to pay HelloSoft a license
fee and certain royalties based on its sales of products including the licensed
technology.
Unresolved
SEC Comment Letter
The
Company filed a registration statement on Form SB-2 on April 24, 2006 and
received a comment letter on May 22, 2006 from the staff of the Division
of
Corporation
Finance of the Securities and Exchange Commission. The staff's letter addressed
a number of issues relating to the registration statement, including
several
issues relating to the Company's audited and unaudited financial statements
that
were contained in the registration statement. Among other comments, the
staff's
letter inquired regarding the Company's accounting treatment for warrants
issued
in connection with the Company's 2005 debentures and their classification
as
equity
rather than derivative liabilities in the Company's financial statements
as of
and for the fiscal year ended October 31, 2005.
The
Company sent a letter to the staff on June 5, 2006 and has had two telephone
conferences with the staff regarding this comment, which remains unresolved
as
of the
date
of filing of this quarterly report. The Company is continuing to work with
the
SEC staff to provide additional information on this issue. If the Company
is
required
to classify the warrants as derivative liabilities, the Company would restate
the unaudited financial statements contained in this report on Form 10-QSB,
as
well
as
the unaudited financial statements contained in the Company's reports on
Form
10-QSB for the periods ended July 31, 2005 and January 31, 2006, and the
audited
financial statements contained in the Company's report on Form 10-KSB for
the
fiscal year ended October 31, 2005. The modifications to the Company's
financial
statements would involve only non-cash accounting items, but would materially
impact the Company's balance sheet and statements of operations, stockholders'
equity and cash flows for each period presented.
NOTE
11 -
SEGMENT
INFORMATION
Summarized
financial information concerning the Company’s reportable segments is shown in
the following table:
For
the Six Months Ended April 30, 2006
|
|
Telecommunications
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - domestic
|
|
$
|
|
|
$
|
6,932
|
|
$
|
|
|
$
|
6,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - foreign
|
|
$
|
|
|
$
|
51,942
|
|
$
|
|
|
$
|
51,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(316,471
|
)
|
$
|
53,688
|
|
$
|
(2,487,247
|
)
|
$
|
(2,750,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
316,471
|
|
$
|
|
|
$
|
|
|
$
|
316,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Identifiable Assets at April
30, 2006
|
|
$
|
8,041,340
|
|
$
|
|
|
$
|
4,061,196
|
|
$
|
12,102,536
|
|
NOTE
11 -
SEGMENT
INFORMATION (CONTINUED)
For
the Six Months Ended April 30, 2005
|
|
Telecommunications
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - domestic
|
|
$
|
|
|
$
|
9,898
|
|
$
|
|
|
$
|
9,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - foreign
|
|
$
|
|
|
$
|
6,300
|
|
$
|
|
|
$
|
6,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(1,899
|
)
|
$
|
(7,317
|
)
|
$
|
(1,564,918
|
)
|
$
|
(1,574,134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
1,899
|
|
$
|
5,196
|
|
$
|
|
|
$
|
7,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Identifiable Assets at April
30, 2005
|
|
$
|
5,935,110
|
|
$
|
1,009,777
|
|
$
|
371,967
|
|
$
|
7,316,854
|
|
For
the Three Months Ended April 30, 2006
|
|
Telecommunications
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - domestic
|
|
$
|
|
|
$
|
698
|
|
$
|
|
|
$
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - foreign
|
|
$
|
|
|
$
|
18,000
|
|
$
|
|
|
$
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(213,156
|
)
|
$
|
17,397
|
|
$
|
(1,599,636
|
)
|
$
|
(1,795,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
213,156
|
|
$
|
|
|
$
|
|
|
$
|
213,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Identifiable Assets at April
30, 2006
|
|
$
|
8,041,340
|
|
$
|
|
|
$
|
4,061,196
|
|
$
|
12,102,536
|
|
For
the Three Months Ended April 30, 2005
|
|
Telecommunications
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - domestic
|
|
$
|
|
|
$
|
7,397
|
|
$
|
|
|
$
|
7,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - foreign
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(740
|
)
|
$
|
(3,601
|
)
|
$
|
(967,970
|
)
|
$
|
(972,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
740
|
|
$
|
2,187
|
|
$
|
|
|
$
|
2,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Identifiable Assets at April
30, 2005
|
|
$
|
5,935,110
|
|
$
|
1,009,777
|
|
$
|
371,967
|
|
$
|
7,316,854
|
|
We
urge
you to read the following discussion in conjunction with our condensed
consolidated financial statements and the notes thereto included elsewhere
herein.
CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
Our
prospects are subject to uncertainties and risks. In this Quarterly Report
on
Form 10-QSB, we make forward-looking statements in this Item 2 and elsewhere
that also involve substantial uncertainties and risks. These forward-looking
statements are based upon our current expectations, estimates and projections
about our business and our industry, and that reflect our beliefs and
assumptions based upon information available to us at the date of this report.
In some cases, you can identify these statements by words such as “if,” “may,”
“might,” “will, “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” “continue,” and other similar terms. These
forward-looking statements include, among other things, projections of our
future financial performance and our anticipated growth, descriptions of our
strategies, our product and market development plans, the trends we anticipate
in our business and the markets in which we operate, and the competitive nature
and anticipated growth of those markets.
We
caution readers that forward-looking statements are predictions based on our
current expectations about future events. These forward-looking statements
are
not guarantees of future performance and are subject to risks, uncertainties
and
assumptions that are difficult to predict. Our actual results, performance
or
achievements could differ materially from those expressed or implied by the
forward-looking statements as a result of a number of factors, including but
not
limited to the risks and uncertainties discussed in our other filings with
the
SEC. We undertake no obligation to revise or update any forward-looking
statement for any reason.
OVERVIEW
We
are
developing advanced transmission technology products to enable data to be
transmitted across copper telephone wire at speeds and over distances that
exceed those offered by leading DSL technology providers. Our first chipset
in a
planned family of transport processors, the Embarq(TM) E30 (Release 1.3) digital
signal processor, was first made available to prospective customers for
evaluation and testing in the first quarter of fiscal 2006. We are presently
working on Release 1.4 of the E30 and Release 1.1 of the Embarq(TM) E20 analog
front end. Our products are designed to substantially increase the capacity
of existing copper telephone networks, allowing telephone companies, office
building managers, and enterprise network operators to provide enhanced and
secure video, data and voice services over the existing copper
telecommunications infrastructure.
We
expect
that system-level products that use our technology will have a significant
advantage over existing system-level products that use existing broadband
technologies, such as digital subscriber line (DSL), because such products
will
transmit data faster, and over longer distances. We expect products using our
technology will offer numerous advantages to the network operators that deploy
them, including the ability to support new services, the ability to offer
existing and new services to previously unreachable locations in their network,
reduction in total cost of ownership, security and reliability.
Our
semiconductor business segment is dependent upon our ability to generate future
revenues and positive cash flow from our advanced transmission technology
products, such as the E30 and E20. No assurance can be provided that our target
customers will purchase these products in large volumes, or at all.
In
April
2000, our NV Entertainment subsidiary entered into a joint venture production
agreement to produce a feature length film, “Step into Liquid” (the “Film”). We
own a 50% interest in the joint venture. The financial condition and results
of
operations of the joint venture are consolidated with our financial condition
and results of operations on the accompanying condensed consolidated financial
statements. The Film was released to theaters in the United States in 2003
and
is currently in foreign and DVD distribution. During the three months and six
months ended April 30, 2006, we received revenues of $18,698 and $58,874,
respectively, from the Film. During the three months and six months ended April
30, 2005, we received revenues of $7,397 and $16,198, respectively. As a result
of impairment reviews during the years ended October 31, 2005 and 2004, we
reduced the carrying value of the Film to $0 on our balance sheet. We do not
intend to make further investment in our entertainment business.
CRITICAL
ACCOUNTING POLICIES
The
preparation of our condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires us to make estimates and judgments that affect the reported amounts
of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. Our estimates are based on historical experience, other
information that is currently available to us and various other assumptions
that
we believe to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions and the variances
could be material.
Our
critical accounting policies are those that affect our condensed consolidated
financial statements materially and involve difficult, subjective or complex
judgments by management. We have identified the following critical accounting
policies that affect the more significant judgments and estimates used in the
preparation of our condensed consolidated financial statements.
Convertible
Debentures
Proceeds
of the 2006 and 2005 Debentures are recorded as a liability net of a debt
discount consisting of the fair values attributed to the Investors’ warrants and
to the embedded conversion option in accordance with EIFT issue No. 00-19
“Accounting for Derivative Financial Instruments Indexed to and Potentially
Settled in a Company’s Own Stock” and EITF issue No. 05-04, view C “The Effect
Of a Liquidated Damages Clause on a Freestanding Financial
Instrument.”
Stock-Based
Compensation
On
November 1, 2005, we adopted Statement of Financial Accounting Standards No.
123
(revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to employees and directors including stock options based on
estimated fair values. SFAS 123(R) supersedes our previous accounting under
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) for periods beginning on November 1, 2005. In March 2005,
the Securities and Exchange Commission issued Staff Accounting Bulletin No.
107
(“SAB 107”) relating to SFAS 123(R). We have applied the provisions of SAB 107
in our adoption of SFAS 123(R).
We
early
adopted SFAS 123(R) using the modified prospective transition method, as of
November 1, 2005, the first day of our fiscal year 2006. Our condensed
consolidated financial statements as of and for the six months ended April
30,
2006 reflect the impact of SFAS 123(R). In accordance with the modified
prospective transition method, our condensed consolidated financial statements
for prior periods have not been restated to reflect, and do not include, the
impact of SFAS 123(R).
Stock-based
compensation expense recognized in our condensed consolidated statement of
operations for the six months ended April 30, 2006 included compensation expense
for share-based payment awards granted prior to, but not yet vested as of
October 31, 2005 based on the grant date fair value estimated in accordance
with
the pro-forma provisions of SFAS 123 and compensation expense for the
share-based payment awards granted subsequent to October 31, 2005 based on
the
grant date fair value estimated in accordance with the provisions of SFAS
123(R). We have continued to attribute the value of stock-based compensation
to
expense on the straight-line single option method.
Stock-based
compensation expense recognized under SFAS 123(R) related to employee stock
options was $378,802 and $447,839 for the three months and six months ended
April 30, 2006, respectively. Stock based-compensation expense for share-based
payment awards granted prior to, but not yet vested as of October 31, 2005
based
on the grant date fair value estimated in accordance with the pro-forma
provisions of SFAS 123 was $0 and $247,057 for the three months and six months
ended April 30, 2006, respectively. Stock-based compensation expense recognized
for non-employees under other accounting standards was $292,766 and $315,674
for
the three months and six months ended April 30, 2006, respectively.
Stock-based
compensation expense related to employee stock options under other accounting
standards was $20,915 and $20,915 for the three months and six months ended
April 30, 2005, respectively. Stock based-compensation expense recognized for
non-employees under other accounting standards was $135,967 and $415,515 for
the
three months and six months ended April 30, 2005, respectively.
As
stock-based compensation expense recognized in the condensed consolidated
statement of operations for the six months ended April 30, 2006 is based on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. In our pro-forma information required under SFAS
123 for the periods prior to fiscal 2006, we accounted for forfeitures as they
occurred.
Revenue
Recognition
We
will
recognize revenue from the sale of our semiconductor products when evidence
of
an arrangement exists, the sales price is determinable or fixed, legal title
and
risk of loss has passed to the customer, which is generally upon shipment of
our
products to our customers, and collection of the resulting receivable is
probable. To date we have not recognized any revenues related to the sale of
our
semiconductor products.
We
recognize revenue from the distribution of our Film and related products when
earned and reasonably estimable in accordance with Statement of Position 00-2
--
“Accounting by Producers or Distributors of Films” (SOP 00-2). The following are
the conditions that must be met in order to recognize revenue in accordance
with
SOP 00-2:
(i)
|
persuasive
evidence of a sale or licensing arrangement with a customer
exists;
|
|
|
(ii)
|
the
film is complete and, in accordance with the terms of the arrangement,
has
been delivered or is available for immediate and unconditional
delivery;
|
|
|
(iii)
|
the
license period of the arrangement has begun and the customer can
begin its
exploitation, exhibition or sale;
|
|
|
(iv)
|
the
arrangement fee is fixed or determinable; and
|
|
|
(v)
|
collection
of the arrangement fee is reasonably
assured.
|
Under
a
rights agreement with our distributor for our Film, we share with the
distributor in the profits of the Film after the distributor recovers its
marketing, distribution and other predefined costs and fees. The agreement
provides for the payment of minimum guaranteed license fees, usually payable
on
delivery of the completed film, that are subject to further increase based
on
the actual distribution results.
In
accordance with the provisions of SOP 00-2, a film is classified as a library
title after three years from the film’s initial release. The term library title
is used solely for the purpose of classification and for identifying previously
released films in accordance with the provisions of SOP 00-2. Revenue
recognition for such titles is in accordance with our revenue recognition policy
for film revenue.
Film
in Distribution
SOP
00-2
requires that film costs be capitalized and reported as a separate asset on
the
balance sheet. Film costs include all direct negative costs incurred in the
production of a film, as well as allocations of production overhead and
capitalized interest. Direct negative costs include cost of scenario, story,
compensation of cast, directors, producers, writers, extras and staff, cost
of
set construction, wardrobe, accessories, sound synchronization, rental of
facilities on location and post production costs. SOP 00-2 also requires that
film costs be amortized and participation costs accrued, using the
individual-film-forecast-computation method, which amortizes or accrues such
costs in the same ratio that the current period actual revenue (numerator)
bears
to the estimated remaining unrecognized ultimate revenue as of the beginning
of
the fiscal year (denominator). We make certain estimates and judgments of future
gross revenue to be received for the Film based on information received by
its
distributor, historical results and management’s knowledge of the industry.
Revenue and cost forecasts are continually reviewed by management and revised
when warranted by changing conditions. A change to the estimate of gross
revenues for the Film may result in an increase or decrease to the percentage
of
amortization of capitalized film costs relative to a previous
period.
In
addition, SOP 00-2 also requires that if an event or change in circumstances
indicates that an entity should assess whether the fair value of a film is
less
than its unamortized film costs, then an entity should determine the fair value
of the film and write-off to the statement of operations the amount by which
the
unamortized film costs exceeds the film’s fair value. As a result of impairment
reviews during the years ended October 31, 2005 and 2004, we wrote down the
carrying value attributed to the Film to $0.
Capitalized
Software Development Costs
Capitalization
of computer software development costs begins upon the establishment of
technological feasibility. Technological feasibility for our 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 computer software development costs commences when the related
products become available for general release to customers. Amortization is
provided on a product-by-product basis. The annual amortization is the greater
of the amount computed using (a) the ratio that current gross revenue for a
product bears to the total of current and anticipated future gross revenue
for
that product, or (b) the straight-line method over the remaining estimated
economic life of the product. The estimated useful life of our existing product
is seven years.
We
periodically perform reviews of the recoverability of our capitalized software
development costs. At the time a determination is made that capitalized amounts
are not recoverable based on the estimated cash flows to be generated from
the
applicable software, the capitalized costs of each software product is then
valued at the lower of its remaining unamortized costs or net realizable
value.
No
assurance can be given that products we release based upon the licensed
technology will receive market acceptance. If we determine in the future that
our capitalized costs are not recoverable, the carrying amount of the technology
license would be reduced, and such reduction could be material.
We
commenced amortization of capitalized software development costs during December
2005 and have recorded amortization expense of $212,536 and $315,232 during
the
three months and six months ended April 30, 2006, respectively.
Research
and Development
Research
and development expenses relate to the design and development of advanced
transmission technology products. We outsource to independent third parties
all
of our design and development activities. Payments made to independent software
developers under development agreements are capitalized to software development
costs once technological feasibility is established or if the development costs
have an alternative future use. Prior to establishing technological feasibility,
software development costs are expensed to research and development costs and
to
cost of sales subsequent to confirmation of technological feasibility. Internal
development costs are capitalized to software development costs once
technological feasibility is established. Technological feasibility is evaluated
on a product-by-product basis.
Research
and development expenses generally consist of salaries, related expenses for
engineering personnel and third-party development costs incurred.
RESULTS
OF OPERATIONS
COMPARISON
OF THE THREE MONTHS AND SIX MONTHS ENDED APRIL 30, 2006 AND THE THREE MONTHS
AND
SIX MONTHS ENDED APRIL 30, 2005
REVENUES.
Revenues for the three months and six months ended April 30, 2006 were $18,698
and $58,874, respectively. Of this amount, $698 and $6,932 was in the form
of
guarantee and/or license payments related to the U.S. distribution of the Film
and $18,000 and $51,942 was related to foreign distribution of the Film during
the three months ended and six months ended April 30, 2006, respectively.
Revenues for the three months and six months ended April 30, 2005 were $7,397
and $16,198, respectively and were from our entertainment business. Revenues
increased 153% or $11,301 for the three months ended April 30, 2006 and 263%
or
$42,676 for the six months ended April 30, 2006 due primarily to an increase
in
the number and value of license agreements for distribution of the Film or
portions of the Film in foreign markets. No revenues were recorded in connection
with our semiconductor business during the three months and six months ended
April 30, 2006 and 2005.
OPERATING
EXPENSES.
Operating expenses included cost of sales, amortization of technology license
and capitalized software development fee, research and development expenses
in
connection with the semiconductor business, and selling, general and
administrative expenses.
Total
operating expenses increased 85% or $834,385 to $1,814,093 for the three months
ended April 30, 2006 from $979,708 for the three months ended April 30, 2005.
The increase in total operating expenses for the three months ended April 30,
2006 was due primarily to increases in amortization of technology license and
capitalized software development fee of $212,536, research and development
expenses of $52,556, and selling, general and administrative expenses of
$574,613, offset by a decrease in cost of sales of $5,320.
Total
operating expenses increased 77% or $1,218,572 to $2,808,904 for the six months
ended April 30, 2006 from $1,590,332 for the six months ended April 30, 2005.
The increase in total operating expenses for the six months ended April 30,
2006
was due primarily to increases in amortization of technology license and
capitalized software development fee of $315,232, research and development
expenses of $130,547, and selling, general and administrative expenses of
$784,738, offset by a decrease in cost of sales of $11,945.
Cost
of
sales for the three months and six months ended April 30, 2005 were $5,320
and
$11,945, respectively. The cost of sales represents the amortization of film
cost for the Film. The decrease for the three months and six months ended April
30, 2006 was a result of the impairment of the Film costs in 2005 which reduced
the carrying value of the Film costs to $0.
Amortization
of technology license and capitalized software development fee was $212,536
and
$315,232 for the three months and six months ended April 30, 2006 due to the
commencement of amortization related to the market release of the E30 (Release
1.3) to prospective customers for evaluation and testing during December 2005.
No amortization was recorded prior to this period.
Research
and development expenses increased by $52,556 to for the three months ended
April 30, 2006 from $0 for the three months ended April 30, 2005. Research
and
development expenses increased 1,851% or $130,547 to $137,600 for the six months
ended April 30, 2006 from $7,053 for the six months ended April 30, 2005. The
increase is principally the result of additional payments made to HelloSoft,
Inc. (“HelloSoft”) in accordance with the terms of our services agreement, as
amended, and the issuance of stock options in connection with research and
development activities.
Total
selling, general and administrative expenses increased 59% or $574,613 to
$1,549,001 for the three months ended April 30, 2006 from $974,388 for the
three
months ended April 30, 2005. Total selling, general and administrative expenses
increased 50% or $784,738 to $2,356,072 for the six months
ended April 30, 2006 from $1,571,334 for the six months ended April 30, 2005.
The increases are primarily the result of an increase in salaries and wages
due
to an increase in employees, professional fees related to the filing of a
registration statement in April 2006, and stock-based compensation related
to
options and restricted common stock issued to key employees, directors,
consultants, and service providers.
OTHER
(INCOME) EXPENSES.
Other expenses included interest expense, amortization of deferred financing
costs, and a loss on exchange of notes payable into common stock.
Total
Other (Income) Expenses increased 513% or $1,462,064 to $1,747,098 for the
three
months ended April 30, 2006 from $285,034 for the three months ended April
30,
2005. Total Other (Income) Expenses increased 251% or $1,477,768 to $2,066,201
for the six months ended April 30, 2006 from $588,435 for the six months ended
April 30, 2005. The increases are primarily for the reasons noted
below.
Interest
expense increased 171% or $617,996 to $978,860 for the three months ended April
30, 2006 from $360,864 for the three months ended April 30, 2005. Interest
expense increased 248% or $1,584,170 to $2,223,816 for the six months ended
April 30, 2006 from $639,646 for the three months ended April 30, 2005. The
increases are primarily due to the value allocated to the warrants and
conversion option liability related to the 2006 Debentures, interest on the
2006
Debentures, and the amortization and write-off of debt discount due to
conversions of the convertible debentures and repayment of a note
payable.
The
amortization of deferred financing costs increased 1,040% or $296,362 to
$324,852 for the three months ended April 30, 2006 from $28,490 for the three
months ended April 30, 2005. The amortization of deferred financing costs
increased 971% or $515,710 to $568,819 for the six months ended April 30, 2006
from $53,109 for the six months ended April 30, 2005. The increase is primarily
a result of the conversions of the 2005 Debentures, repayment of a note payable,
and the amortization of additional deferred financing costs related to the
2006
Debentures. Upon conversion or repayment of debt prior to its maturity date,
a
pro-rata share of debt discount and deferred financing costs are written off
and
recorded as expense.
Other
expenses also increased in the three months and six months ended April 30,
2006
due to the loss recognized on exchange of notes payable into common stock of
$446,386.
Other
income in the six months ended April 30, 2006 consisted primarily of a gain
on
forgiveness of principal and interest on a promissory note to Zaiq Technologies,
Inc. of $1,169,820.
Other
income in the six months ended April 30, 2005 consisted primarily of a gain
on
sale of property and equipment of $20,000, a gain on exchange of Redeemable
Series B Preferred Stock into common stock of $55,814, and other miscellaneous
gains of $28,506.
NET
LOSS.
For the three months ended April 30, 2006 our net loss increased 182% or
$2,285,148 to $3,542,493 from $1,257,345 as the result of higher interest costs,
higher amortization of deferred financing costs, higher selling, general, and
administrative expense, and higher research and development expenses, partially
offset by an increase in revenues and the gain on the forgiveness of principal
and interest on the promissory note to Zaiq Technologies, Inc. discussed above.
For the six months ended April 30, 2006, the net loss increased 123% or
$2,653,662 to $4,816,231 from $2,162,569 for primarily the same reasons noted
above.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
balances totaled $3,406,914 at June 12, 2006 and $4,007,470 as of April 30,
2006
compared to $373,481 at October 31, 2005.
Net
cash
used in operating activities was $1,350,482 for the six months ended April
30,
2006, compared to $816,866 for the six months ended April 30, 2005. The increase
in cash used in operations was principally the result of the following
items:
·
|
an
increase in the net loss, which was $4,816,231, compared with $2,162,569
for the six months ended April 30, 2005; and
|
|
|
·
|
a
decrease for the six months ended April 30, 2006 of accounts payable
and
accrued liabilities of $199,687, compared to an increase of
accounts payable and accrued liabilities for the six months ended
April
30, 2005 of $22,329, resulting in a net decrease in cash used of
$177,358;
|
impacted
by the following non-cash items:
·
|
increased
amortization of deferred financing costs, which were $568,819 for
the six
months ended April 30, 2006, compared to $53,109 for the six months
ended
April 30, 2005, principally due to increased conversions of the May
2005
debentures, the repayment of a note payable, and the amortization
of
additional deferred financing costs related to the 2006
Debentures;
|
|
|
·
|
increased
amortization of debt discount on notes, which was $2,103,107 for
the six
months ended April 30, 2006, compared to $520,169 for the six months
ended
April 30, 2005, principally due to increased conversions of the May
2005
Debentures, the repayment of a note payable, and the amortization
of
additional debt discount related to the 2006
Debentures;
|
|
|
·
|
increased
amortization of technology license and capitalized software development
fee, which was $315,232 for the six months ended April 30, 2006,
compared
to $0 for the six months ended April 30, 2005, due to the commencement
of
amortization related to the market release of the E30 (Release 1.3)
to
prospective customers for evaluation and testing;
|
|
|
·
|
gain
on forgiveness of principal and interest on the promissory note to
Zaiq
Technologies, Inc. of $1,169,820 during the six months ended April
30,
2006;
|
|
|
·
|
increased
stock-based compensation expense, which was $1,010,570 for the six
months
ended April 30, 2006 compared to $888,930 for the six months ended
April
30, 2005; and
|
|
|
·
|
loss
on exchange of notes payable into common stock of $446,386 during
the six
months ended April 30, 2006.
|
|
|
Net
cash
used by investing activities was $204,499 for the six months ended April 30,
2006 compared to $0 in the six months ended April 30, 2005. The increase was
due
to the acquisition of property and equipment of $4,499 and a technology license
and development fee of $200,000.
Net
cash
provided by financing activities was $5,188,970 for the six months ended April
30, 2006 compared to $1,041,466 for the six months ended April 30, 2005. Net
cash provided by financing activities for the six months ended April 30, 2006
was the result of proceeds from the 2006 Debentures of $6,000,000, proceeds
from
the exercise of warrants of $568,531, and proceeds from the issuance of a note
payable of $750,000, offset by capitalized financing costs of $742,450, and
total payments of $1,379,613 in connection with the repayment of notes payable
of $944,291 and convertible notes payable of $435,322. Net cash provided by
financing activities for the six months ended April 30, 2005 was the result
of
proceeds from the issuance of common stock in the amount of $800,100 and
proceeds from notes payable of $300,000, offset by capitalized financing costs
of $33,029, and repayments of convertible notes payable of $25,625.
Our
liquidity improved significantly as a result of a series of transactions
completed during the six months ended April 30, 2006.
First,
as
described in Note
7
to
the
accompanying condensed consolidated financial statements, we raised gross
proceeds of $6.0 million in March 2006 from the private placement to 17
institutional and individual investors of our 2006 Debentures. We received
net
proceeds of approximately $4.5 million from the proceeds of the 2006 Debentures,
after the payment of offering related fees and expenses and after the repayment
in full of notes payable, made in December 2005 and January 2006, in the
aggregate amount of $810,000.
Second,
we received $568,531 from the exercise of warrants to purchase 11,370,624 shares
of our common stock.
Third,
we
reduced our current liabilities by $844,315 by issuing 12,064,494 shares of
common stock to several holders of notes payable.
These
transactions increased our working capital by over $5.9 million upon their
completion during the six months ended April 30, 2006.
Since
inception, we have funded our operations primarily through the issuance of
our
common stock and debt securities. Our recent financings are discussed
below.
In
December 2005 and January 2006, we entered into secured bridge loan agreements
with a third party pursuant to which we borrowed $750,000. After payment of
due
diligence fees and transaction related fees and expenses, we received net
proceeds of $672,470. An amount equal to 108% of the principal amount of the
loans was due and payable on the earlier of May 25, 2006 or the date we effect
a
financing transaction or series of transactions resulting in gross proceeds
to
us of at least $2,000,000. We repaid the loans in their entirety from the
proceeds of the 2006 Debentures.
In
May
2005, we sold $3,500,000 in aggregate principal amount of our 2005 Debentures,
receiving net proceeds of approximately $3.11 million after the payment of
offering related costs. As of April 30, 2006, $3,459,436
of
principal amount and $108,509
of
interest of the 2005 Debentures had been converted into 170,376,861
shares
of our
common stock and there was $40,564
of
principal amount of the 2005 Debentures outstanding. The 2005 Debentures mature
in May 2008.
In
December 2003, April 2004 and May 2004, we raised net proceeds of approximately
$1,024,000 from the private placement to certain private and institutional
investors of our three year 7% Convertible Debentures. $125,000
of
principal issued in December 2003 was outstanding as of June
12,
2006
and
matures in December 2006.
As
of
June 12, 2006,
we had
cash balances of approximately $3.4
million.
Although management believes funds on hand will enable us to meet our liquidity
needs for at least the
next
15 months,
we will
need to raise additional funds to fulfill our business plan and to meet our
future operating requirements, prior to the receipt of revenues from our
semiconductor business.
We
may
not be successful in our efforts to raise additional funds. Our cash needs
could
be heavier than anticipated in which case we could be forced to raise additional
capital. Even after we begin to sell our products, we do not yet know what
payment terms will be required by our customers or if our products will be
successful. At the present time, we have no commitments for any additional
financing, and there can be no assurance that, if needed, additional capital
will be available to us on commercially acceptable terms or at all.
Additional
equity financings are likely to be dilutive to existing holders of our Common
Stock and debt financing, if available, may involve significant payment
obligations and covenants that restrict how we operate our
business.
UNRESOLVED
SEC COMMENT LETTER
The
Company filed a registration statement on Form SB-2 on April 24, 2006 and
received a comment letter on May 22, 2006 from the staff of the Division of
Corporation Finance of the Securities and Exchange Commission. The staff’s
letter addressed a number of issues relating to the registration statement,
including several issues relating to the Company’s audited and unaudited
financial statements that were contained in the registration statement. Among
other comments, the staff’s letter inquired regarding the Company’s accounting
treatment for warrants issued in connection with the Company’s 2005 debentures
and their classification as equity rather than derivative liabilities in the
Company’s financial statements as of and for the fiscal year ended October 31,
2005.
The
Company sent a letter to the staff on June 5, 2006 and has had two telephone
conferences with the staff regarding this comment, which remains unresolved
as
of the date of filing of this quarterly report. The Company is continuing to
work with the SEC staff to provide additional information on this issue. If
the
Company is required to classify the warrants as derivative liabilities, the
Company would restate the unaudited financial statements contained in this
report on Form 10-QSB, as well as the unaudited financial statements contained
in the Company’s reports on Form 10-QSB for the periods ended July 31, 2005 and
January 31, 2006, and the audited financial statements contained in the
Company’s report on Form 10-KSB for the fiscal year ended October 31, 2005. The
modifications to the Company’s financial statements would involve only non-cash
accounting items, but would materially impact the Company’s balance sheet and
statements of operations, stockholders’ equity and cash flows for each period
presented.
IMPACT
OF RECENTLY ISSUED ACCOUNTING STANDARDS
In
June
2005, the FASB published Statement of Financial Accounting Standards No. 154,
“Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 establishes
new standards on accounting for changes in accounting principles. Pursuant
to
the new rules, all such changes must be accounted for by retrospective
application to the financial statements of prior periods unless it is
impracticable to do so. SFAS 154 completely replaces Accounting Principles
Bulletin No. 20 and SFAS 3, though it carries forward the guidance in those
pronouncements with respect to accounting for changes in estimates, changes
in
the reporting entity, and the correction of errors. The requirements in SFAS
154
are effective for accounting changes made in fiscal years beginning after
December 15, 2005. We will apply these requirements to any accounting changes
after the implementation date.
The
Emerging Issues Task Force (“EITF”) reached a tentative conclusion on EITF Issue
No. 05-1, “Accounting for the Conversion of an Instrument That Becomes
Convertible upon the Issuer’s Exercise of a Call Option” that no gain or loss
should be recognized upon the conversion of an instrument that becomes
convertible as a result of an issuer’s exercise of a call option pursuant to the
original terms of the instrument. The application of this pronouncement is
not
expected to have an impact on our consolidated financial position, results
of
operations, or cash flows.
In
June
2005, the FASB ratified EITF Issue No. 05-2, “The Meaning of ‘Conventional
Convertible Debt Instrument’ in EITF Issue No. 00-19, ‘Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock’” (“EITF No. 05-2”), which addresses when a convertible debt instrument
should be considered ”conventional” for the purpose of applying the guidance in
EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF No. 00-19
for conventional convertible debt instruments and indicated that convertible
preferred stock having a mandatory redemption date may qualify for the exemption
provided under EITF No. 00-19 for conventional convertible debt if the
instrument’s economic characteristics are more similar to debt than equity. EITF
No. 05-2 is effective for new instruments entered into and instruments modified
in periods beginning after June 29, 2005. We have applied the requirements
of
EITF No. 05-2 since the required implementation date. The adoption of this
pronouncement did not have an impact on our consolidated financial position,
results of operations, or cash flows.
EITF
Issue No. 05-4 “The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF Issue No. 00-19, ”Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock“ (“EITF No. 05-4”) addresses financial instruments, such as stock purchase
warrants, which are accounted for under EITF 00-19 that may be issued at the
same time and in contemplation of a registration rights agreement that includes
a liquidated damages clause. The consensus of EITF No. 05-4 has not been
finalized. In March 2006 and May 2005, we entered into private placement
agreements for convertible debentures, a registration rights agreement and
warrants in connection with a private placement. Based on the interpretive
guidance in EITF Issue No. 05-4, view C, due to certain factors, including
an
uncapped liquidated damages provision in the registration rights agreement,
we
determined that the embedded conversion option related to these convertible
debentures and the registration rights are derivative liabilities. Accordingly,
the fair value of the embedded conversion options was recorded as a liability
as
of the closing of the sale of these convertible debentures. Due to various
factors, including substantial conversions of these convertible debentures
and
the registration statement becoming effective on August 1, 2005, the value
of
the registration rights was deemed to be de minimus.
In
September 2005, the FASB ratified EITF Issue No. 05-7, “Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues” (“EITF No. 05-7”), which addresses whether a modification to a
conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification
and
whether a borrower should recognize a beneficial conversion feature, not a
debt
extinguishment, if a debt modification increases the intrinsic value of the
debt
(for example, the modification reduces the conversion price of the debt). EITF
No. 05-7 is effective for the first interim or annual reporting period beginning
after December 15, 2005. We adopted EITF No. 05-7 as of the beginning of our
interim reporting period that began on February 1, 2006. The adoption of this
pronouncement did not have an impact on our consolidated financial position,
results of operations, or cash flows.
In
September 2005, the FASB ratified EITF Issue No. 05-8, “Income Tax Consequences
of Issuing Convertible Debt with a Beneficial Conversion Feature” (“EITF No.
05-8”), which addresses the treatment of convertible debt issued with a
beneficial conversion feature as a temporary difference under the guidance
in
SFAS 109. In addition, deferred taxes recognized for a temporary difference
of
debt with a beneficial conversion feature should be recognized as an adjustment
of additional paid-in capital. Entities should apply the guidance in EITF No.
05-8 in the first interim or annual reporting period that begins after December
15, 2005. Its provisions should be applied retrospectively under the guidance
in
SFAS 154 to all convertible debt instruments with a beneficial conversion
feature accounted for under the guidance in EITF No. 00-27 “Application of EITF
Issue No. 98-5 ‘Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios.’” We have applied the
requirements of EITF No. 05-8 to all previously existing convertible debt
instruments with a beneficial conversion feature and will apply the requirements
of EITF No. 05-8 for all new convertible debt instruments with a beneficial
conversion feature. The application of this pronouncement for new convertible
debt instruments with a beneficial conversion feature is not expected to have
an
impact on our consolidated financial position, results of operations or cash
flows.
In
February 2006, the FASB published Statement of Financial Accounting Standards
No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of
FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 resolves issues
addressed in SFAS 133 Implementation Issue No. D1, “Application of Statement 133
to Beneficial Interests in Securitized Financial Assets.” The requirements in
SFAS 155 are effective for all financial instruments acquired or issued after
the beginning of an entity’s first fiscal year that begins after September 15,
2006. The adoption of this pronouncement is not expected to have an impact
on
our consolidated financial position, results of operations, or cash
flows.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES.
The Company, under the supervision and with the participation of the Company’s
management, including the Company’s Chief Executive Officer and principal
financial officer, has evaluated the effectiveness of the design and operation
of the Company’s “disclosure controls and procedures,” as such term is defined
in Rule 13a-15(e) promulgated under the Exchange Act as of this report. The
Company’s Chief Executive Officer and principal financial officer has concluded
based upon his evaluation that the Company’s disclosure controls and procedures
were effective as of the end of the period covered by this report to provide
reasonable assurance that material information required to be disclosed by
the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms.
Management
is aware that there is a lack of segregation of duties at the Company due to
the
small number of employees dealing with general administrative and financial
matters. This constitutes a significant deficiency in the internal controls.
In
the past, management had decided that considering the employees involved, the
control procedures in place, and the outsourcing of certain financial functions,
the risks associated with such lack of segregation were low and the potential
benefits of adding additional employees to clearly segregate duties did not
justify the expenses associated with such increases. Management periodically
reevaluates this situation. In light of the Company’s receipt of additional
financing in March 2006, it is the Company’s intention over the next
six
months
to increase staffing to mitigate the current lack of segregation of duties
within the general administrative and financial functions.
A
control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Such limitations include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.
CHANGES
IN INTERNAL CONTROLS OVER FINANCIAL REPORTING.
During
the six months ended April 30, 2006, there have been no changes in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, these controls.
During
the three months ended April 30, 2006, the Company sold or issued unregistered
securities as follows:
In
February 2006, we issued
(i) options
to purchase 2,100,000 shares of Common Stock to members of our Board of
Directors, an advisory member and an employee;
(ii) 12,064,494
shares of Common Stock in exchange for the cancellation of notes payable by
the
Company with a principal amount of $700,337 and interest of $144,178;
(iii) 5,656,108
shares of Common Stock upon exercise of warrants resulting in gross proceeds
of
$282,805; and
(iv) options
to purchase 2,000,000 shares of Common Stock to our legal counsel for legal
services valued at $84,277.
During
the period between February 21, 2006 and March 10, 2006, we issued 11,370,624
shares of Common Stock upon exercise of warrants resulting in gross proceeds
of
$568,531.
(i) 5,714,516
shares of Common Stock upon exercise of warrants resulting in gross proceeds
of
$285,726;
(ii) 11,000,000
shares of restricted Common Stock to consultants for services valued at
$1,870,000; and
(iii) a
promissory note in the principal amount of $301,197 to our Executive Vice
President, which was convertible into shares of our Common Stock and has since
such date been paid in full and cancelled.
In
April
2006, we issued 35,714 shares of Common Stock upon conversion of a convertible
promissory note and interest valued at $15,000.
All
of
the securities issued in the transactions described above were issued without
registration under the Securities Act in reliance upon the exemptions provided
in Section 4(2) of the Securities Act or Regulation S under such Securities
Act.
Except with respect to securities sold under Regulation S, the recipients of
securities in each such 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 all of
the
above transactions. Each of the recipients represented that they were
"accredited investors" within the meaning of Rule 501(a) of Regulation D under
the Securities Act, or had such knowledge and experience in financial and
business matters as to be able to evaluate the merits and risks of an investment
in its common stock. All recipients had adequate access, through their
relationships with the Company and its officers and directors, to information
about the Company. None of the transactions described above involved general
solicitation or advertising.
The
Company submitted the following matters to a vote of its shareholders at its
annual meeting, which was held on April 18, 2006.
(a) The
Company shareholders were asked to vote for the election of Brad Ketch, Ray
Willenberg, Jr., Jack L. Peckham and Thomas J. Cooper to the Board of Directors
of the Company, to hold office until the 2007 Annual Meeting of Shareholders.
The nominees were all elected pursuant to the following votes:
Name
of Director
|
Votes
For
|
Votes
Withheld
|
Brad
Ketch
|
257,328,351
|
3,737,068
|
Ray
Willenberg, Jr.
|
257,955,892
|
3,109,527
|
Jack
L. Peckham
|
256,575,209
|
4,490,210
|
Thomas
J. Cooper
|
257,200,818
|
3,864,601
|
(b) The
Company’s shareholders were asked to ratify Marcum & Kliegman, LLP as
independent public accountants for the year ending October 31, 2006. The
shareholders ratified the selection of the independent public accountants with
258,517,733 votes cast for, 1,888,438 votes cast against and 734,247
abstentions.
(c) The
Company’s shareholders were asked to amend Article IV of the Articles of
Incorporation to increase the Company’s authorized common stock from 500 million
shares to 900 million shares. The shareholders approved the amendment to Article
IV with 95,131,548 votes cast for, 9,720,526 votes cast against, and 585,475
abstentions.
(d) The
Company’s shareholders were asked to amend Section B(2) of Article IV of the
Articles of Incorporation relating to the Company’s preferred stock. The
shareholders approved the amendment with 99,060,931 votes cast for, 5,316,324
votes cast against and 1,033,294 abstentions.
(e) The
Company’s shareholders were asked to amend Article IV of the Articles of
Incorporation to delete paragraph C (regarding the reverse stock split effected
by the Company in 2000). The shareholders approved the amendment with
100,880,963 votes cast for, 3,069,673 votes cast against and 1,486,913
abstentions.
(f) The
Company’s shareholders were asked to amend the Articles of Incorporation to
cancel the designations of the Company’s Series A through G preferred stock. The
shareholders approved the amendment with 101,143,690 votes cast for, 3,222,643
votes cast against and 1,071,216 abstentions.
3.1
|
Amended
and Restated Articles of Incorporation (incorporated by reference
to
Exhibit 3.1 of the Company’s Registration Statement on Form SB-2 filed
with the Commission on April 24, 2006).
|
|
|
4.1
|
Amendment
to Class 2005-A, -B and -C Common Stock Purchase Warrants dated as
of
February 21, 2006 (incorporated by reference to Exhibit 4.1 of the
Company’s Report on Form 8-K filed with the Commission on March 9,
2006).
|
|
|
4.2
|
Form
of 7% Senior Secured Convertible Debenture (incorporated by reference
to
Exhibit 4.1 of the Company’s Report on Form 8-K filed with the Commission
on March 13, 2006 (the “March 13, 2006 8-K”)).
|
|
|
10.1
|
License
Agreement dated as of February 6, 2006 between the Company and HelloSoft,
Inc. (Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with
the Commission)(incorporated by reference to Exhibit 10.10 of the
Company’s quarterly report on Form 10-QSB for the quarterly period ended
January 31, 2006 (the “January 2006 10-QSB”)).
|
|
|
10.2
|
Stock
Option Agreement dated February 16, 2006 between the Company and
Davis
Munck Butrus, P.C. (incorporated by reference to Exhibit 10.11 of
the
Company’s January 2006 10-QSB).
|
|
|
10.3
|
Stock
Option Agreement dated February 16, 2006 between the Company and
Jack
Peckham* (incorporated by reference to Exhibit 10.12 of the Company’s
January 2006 10-QSB)(1)
|
|
|
10.4
|
Stock
Option Agreement dated February 16, 2006 between the Company and
Thomas
Cooper (incorporated by reference to Exhibit 10.13 of the Company’s
January 2006 10-QSB)(1)
|
|
|
10.5
|
Form
of Securities Purchase Agreement, dated as of March 6, 2006, between
the
Company and the investors named therein (incorporated by reference
to
Exhibit 10.1 of the Company's March 13, 2006 8-K)
|
|
|
10.6
|
Form
of Warrant issued in connection with the Securities Purchase Agreement
(incorporated by reference to Exhibit 10.2 of the Company's March
13, 2006
8-K)
|
|
|
10.7
|
Form
of Security Interest Agreement, dated as of March 6, 2006, among
the
Company, the Secured Parties named therein, and Krieger & Prager, LLP,
as agent for the Secured Parties (incorporated by reference to Exhibit
10.3 of the Company's March 13, 2006 8-K)
|
|
|
10.8
|
Form
of Registration Rights Agreement, dated as of March 6, 2006, between
the
Company and the investors named therein (incorporated by reference
to
Exhibit 10.4 of the Company's March 13, 2006 8-K)
|
|
|
10.9
|
Placement
Agency Agreement, dated as of March 3, 2006, between the Company
and Pond
Equities (incorporated by reference to Exhibit 10.5 of the Company's
March
13, 2006 8-K)
|
|
|
10.10
|
Employment
Agreement between the Company and Ray Willenberg, Jr. dated as of
March 1,
2006 (incorporated by reference to Exhibit 10.1 of the Company's
Report on
Form 8-K filed with the Commission on March 15, 2006 (the "March
15, 2006
8-K")) (1)
|
|
|
10.11
|
Convertible
Promissory Note dated March 7, 2006 by the Company in favor of Ray
Willenberg, Jr. (incorporated by reference to Exhibit 10.2 of the
Company's March 15, 2006 8-K)
|
|
|
10.12
|
Consulting
Agreement between the Company and LF Technology Group, LLC dated
March 7,
2006 (incorporated by reference to Exhibit 10.3 of the Company's
March 15,
2006 8-K)
|
|
|
10.13
|
Consulting
Agreement between the Company and Starburst Innovations, LLC dated
March
7, 2006 (incorporated by reference to Exhibit 10.4 of the Company's
March
15, 2006 8-K)
|
|
|
10.14
|
Consulting
Agreement between the Company and Advisor Associates, Inc. dated
March 8,
2006 (incorporated by reference to Exhibit 10.5 of the Company's
March 15,
2006 8-K)
|
|
|
10.15
|
First
Amendment to Lease between the Company and American Property Management
Corp. as agent for Weston Investment Co. LLC dated March 8,
2006.*
|
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification*
|
|
|
32.1
|
Section
1350 Certification*
|
___________________________
*
Filed herewith.
(1)
Signifies a management agreement or compensatory plan or
arrangement.
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
RIM
SEMICONDUCTOR COMPANY |
|
|
|
DATE:
June
14, 2006 |
BY: |
/s/ Brad
Ketch
|
|
Brad Ketch |
|
President
and
Chief Executive Officer
(Principal
Executive Officer, Financial and
Accounting
Officer
and Authorized Signatory)
|
41