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 JULY 31, 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
|
|
95-4545704
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
identification
no.)
|
305
NE 102ND AVENUE, SUITE 105
PORTLAND,
OREGON 97220
|
|
(503)
257-6700
|
(Address
of principal executive offices)
|
|
(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¨
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined
by
Rule 12b-2 of the Exchange Act)
|
Yes
¨
No x
|
|
|
The
number of shares of the issuer’s Common Stock, par value $.001 per share,
outstanding as of September 11, 2006, was 346,396,890.
|
|
|
|
Transitional
Small Business Disclosure Format (Check one)
|
Yes
¨
No x
|
FORM
10-QSB
RIM
SEMICONDUCTOR COMPANY
JULY
31, 2006
TABLE
OF CONTENTS
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PAGE |
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3
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3
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3
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4
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6
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7
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9
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30
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40
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41
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41
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42
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(Unaudited)
ASSETS
|
|
July
31, 2006
|
|
Current
Assets:
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,969,894
|
|
Other
current assets
|
|
|
130,646
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
3,100,540
|
|
|
|
|
|
|
Property
and equipment (net of accumulated depreciation of $3,545)
|
|
|
14,155
|
|
Technology
license and capitalized software development fees (net of accumulated
amortization
of $531,692)
|
|
|
6,052,369
|
|
Deferred
financing costs (net of accumulated amortization of
$1,698,268)
|
|
|
1,843,550
|
|
Other
assets
|
|
|
7,738
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
11,018,352
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
Convertible
notes payable
|
|
$
|
500,000
|
|
Convertible
debentures (net of debt discount of $3,881)
|
|
|
71,119
|
|
Derivative
liabilities - warrants and options
|
|
|
24,450,714
|
|
Account
payable and accrued expenses
|
|
|
1,057,025
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
26,078,858
|
|
|
|
|
|
|
Long-term
portion of convertible debentures (net of debt discount of
$4,507,897)
|
|
|
1,097,667
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
27,176,525
|
|
|
|
|
|
|
Commitments,
Contingencies and Other Matters
|
|
|
|
|
|
|
|
|
|
Stockholders’
Deficiency:
|
|
|
|
|
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; 332,484,557
shares issued and 331,984,703 outstanding
|
|
|
332,485
|
|
Treasury
stock - 499,854 shares at cost
|
|
|
(7,498
|
)
|
Additional
paid-in capital
|
|
|
71,019,709
|
|
Unearned
compensation
|
|
|
(1,497,171
|
)
|
Accumulated
deficit
|
|
|
(86,005,698
|
)
|
|
|
|
|
|
TOTAL
STOCKHOLDERS’ DEFICIENCY
|
|
|
(16,158,173
|
)
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
|
$
|
11,018,352
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(Unaudited)
|
|
For
the Nine Months Ended
July
31,
|
|
|
|
2006
|
|
2005
|
|
REVENUES
|
|
$
|
59,899
|
|
$
|
26,558
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
—
|
|
|
11,945
|
|
Impairment
of film in distribution
|
|
|
—
|
|
|
1,009,777
|
|
Amortization
of technology license and capitalized software development
fees
|
|
|
531,692
|
|
|
—
|
|
Research
and development expenses (including stock based compensation
of $26,860
and $296,667, respectively)
|
|
|
255,821
|
|
|
303,720
|
|
Selling,
general and administrative expenses(including stock based compensation
of
$1,501,569 and $998,963, respectively)
|
|
|
3,700,983
|
|
|
2,460,145
|
|
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
4,488,496
|
|
|
3,785,587
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(4,428,597
|
)
|
|
(3,759,029
|
)
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES (INCOME):
|
|
|
|
|
|
|
|
Interest
expense - net
|
|
|
9,275,907
|
|
|
1,183,318
|
|
Derivative
loss (gain)
|
|
|
12,128,413
|
|
|
(1,799,103
|
)
|
Amortization
of deferred financing costs
|
|
|
1,017,659
|
|
|
120,934
|
|
Gain
on forgiveness of liabilities
|
|
|
—
|
|
|
(99,369
|
)
|
Gain
on forgiveness of principal and interest on Zaiq Note
|
|
|
(1,169,820
|
)
|
|
—
|
|
Gain
on conversion of accrued expenses into convertible notes
payable
|
|
|
—
|
|
|
(33,514
|
)
|
Loss
on exchange of notes payable into common stock
|
|
|
446,386
|
|
|
—
|
|
Gain
on sale of property and equipment
|
|
|
—
|
|
|
(20,000
|
)
|
Gain
on exchange of Redeemable Series B Preferred
|
|
|
|
|
|
|
|
Stock
into common stock
|
|
|
—
|
|
|
(55,814
|
)
|
Other
|
|
|
(3,000
|
)
|
|
5,008
|
|
|
|
|
|
|
|
|
|
TOTAL
OTHER EXPENSES (INCOME)
|
|
|
21,695,545
|
|
|
(698,540
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(26,124,142
|
)
|
$
|
(3,060,489
|
)
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED NET LOSS PER COMMON SHARE
|
|
$
|
(0.09
|
)
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
286,694,814
|
|
|
99,459,187
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For
the Three Months Ended
July
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
1,025
|
|
$
|
10,360
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
Impairment
of film in distribution
|
|
|
—
|
|
|
1,009,777
|
|
Amortization
of technology license and capitalized software development
fees
|
|
|
216,460
|
|
|
—
|
|
Research
and development expenses (including stock based compensation
of $0 and
$296,667, respectively)
|
|
|
119,888
|
|
|
296,667
|
|
Selling,
general and administrative expenses (including stock based
compensation of
$517,859 and $110,033, respectively)
|
|
|
1,343,244
|
|
|
888,811
|
|
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
1,679,592
|
|
|
2,195,255
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(1,678,567
|
)
|
|
(2,184,895
|
)
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES (INCOME):
|
|
|
|
|
|
|
|
Interest
expense - net
|
|
|
1,378,138
|
|
|
543,672
|
|
Derivative
loss (gain)
|
|
|
11,643,875
|
|
|
(1,799,103
|
)
|
Amortization
of deferred financing costs
|
|
|
448,840
|
|
|
67,825
|
|
Gain
on forgiveness of liabilities
|
|
|
—
|
|
|
(99,369
|
)
|
|
|
|
|
|
|
|
|
TOTAL
OTHER EXPENSES (INCOME)
|
|
|
13,470,853
|
|
|
(1,286,975
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(15,149,420
|
)
|
$
|
(897,920
|
)
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED NET LOSS PER COMMON SHARE
|
|
$
|
(0.05
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
324,964,555
|
|
|
111,616,151
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
For
The Nine Months Ended July 31, 2006
(Unaudited)
|
|
Common
Stock
|
|
Treasury
Stock
|
|
Additional
Paid-in
|
|
Unearned
|
|
Accumulated
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Compensation
|
|
Deficit
|
|
Deficiency
|
|
Balance
at October 31, 2005
|
|
|
184,901,320
|
|
$
|
184,902
|
|
|
—
|
|
|
—
|
|
$
|
61,359,999
|
|
$
|
(22,771
|
)
|
$
|
(59,881,556
|
)
|
$
|
1,640,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of common stock for cash
|
|
|
—
|
|
|
—
|
|
|
(499,854
|
)
|
$
|
(7,498
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,498
|
)
|
Issuance
of common stock under service and consulting agreements
|
|
|
12,624,752
|
|
|
12,625
|
|
|
—
|
|
|
—
|
|
|
2,219,592
|
|
|
(2,232,217
|
)
|
|
—
|
|
|
—
|
|
Issuance
of common stock for conversion of convertible debentures and accrued
interest
|
|
|
110,654,584
|
|
|
110,654
|
|
|
—
|
|
|
—
|
|
|
2,361,299
|
|
|
—
|
|
|
—
|
|
|
2,471,953
|
|
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
|
|
|
12,203,693
|
|
|
12,204
|
|
|
—
|
|
|
—
|
|
|
685,203
|
|
|
—
|
|
|
—
|
|
|
697,407
|
|
Stock
options granted to key employees and advisory board member
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,010,835
|
|
|
(1,010,835
|
)
|
|
—
|
|
|
—
|
|
Reclassification
of derivative liability upon exercise of warrants
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,141,769
|
|
|
—
|
|
|
—
|
|
|
1,141,769
|
|
Reclassification
of conversion option liability
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
947,211
|
|
|
—
|
|
|
—
|
|
|
947,211
|
|
Amortization
of unearned compensation expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,768,652
|
|
|
—
|
|
|
1,768,652
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(26,124,142
|
)
|
|
(26,124,142
|
)
|
Balance
at July 31, 2006
|
|
|
332,484,557
|
|
$
|
332,485
|
|
|
(499,854
|
)
|
$
|
(7,498
|
)
|
$
|
71,019,709
|
|
$
|
(1,497,171
|
)
|
$
|
(86,005,698
|
)
|
$
|
(16,158,173
|
)
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(Unaudited)
|
|
For
the Nine Months Ended
July
31,
|
|
|
|
2006
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(26,124,142
|
)
|
$
|
(3,060,489
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Consulting
fees and other compensatory elements of stock issuances
|
|
|
1,528,429
|
|
|
1,295,630
|
|
Derivative
loss (gain)
|
|
|
12,128,413
|
|
|
(1,799,103
|
)
|
Issuance
of common stock for below market issuance
|
|
|
—
|
|
|
5,008
|
|
Fair
value of Investors’ warrants in excess of debt discount
|
|
|
5,608,156
|
|
|
—
|
|
Loss
on exchange of notes payable into common stock
|
|
|
446,386
|
|
|
—
|
|
Gain
on forgiveness of liabilities
|
|
|
—
|
|
|
(99,369
|
)
|
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
|
)
|
Gain
on conversion of accrued expenses into convertible notes
payable
|
|
|
—
|
|
|
(33,514
|
)
|
Amortization
of deferred financing costs
|
|
|
1,017,659
|
|
|
120,934
|
|
Amortization
of film in production costs
|
|
|
—
|
|
|
11,945
|
|
Amortization
of debt discount on notes
|
|
|
3,290,683
|
|
|
941,531
|
|
Amortization
of technology license and capitalized software development
fees
|
|
|
531,692
|
|
|
—
|
|
Impairment
of film in distribution
|
|
|
—
|
|
|
1,009,777
|
|
Depreciation
|
|
|
2,306
|
|
|
24,492
|
|
Change
in Assets (Increase) Decrease:
|
|
|
|
|
|
|
|
Other
current assets
|
|
|
(96,615
|
)
|
|
(24,035
|
)
|
Other
assets
|
|
|
2,486
|
|
|
(2,790
|
)
|
Change
in Liabilities Increase (Decrease):
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
519,473
|
|
|
(66,248
|
)
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(2,314,894
|
)
|
|
(1,752,045
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Acquisition
of capitalized software and development fees
|
|
|
(375,000
|
)
|
|
—
|
|
Acquisition
of property and equipment
|
|
|
(6,539
|
)
|
|
(11,161
|
)
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(381,539
|
)
|
|
(11,161
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
—
|
|
|
835,100
|
|
Proceeds
from exercise of warrants
|
|
|
697,407
|
|
|
—
|
|
Purchase
of treasury stock
|
|
|
(7,498
|
)
|
|
—
|
|
Proceeds
from convertible debentures
|
|
|
6,000,000
|
|
|
3,500,000
|
|
Proceeds
from notes payable
|
|
|
750,000
|
|
|
300,000
|
|
Capitalized
financing costs
|
|
|
(742,450
|
)
|
|
(422,010
|
)
|
Repayments
of notes payable
|
|
|
(944,291
|
)
|
|
(1,120,048
|
)
|
Repayments
of convertible notes payable
|
|
|
(460,322
|
)
|
|
(401,540
|
)
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
5,292,846
|
|
|
2,691,502
|
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
2,596,413
|
|
|
928,296
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
373,481
|
|
|
127,811
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - ENDING OF PERIOD
|
|
$
|
2,969,894
|
|
$
|
1,056,107
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Nine Months Ended
July
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3,350
|
|
$
|
203,539
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued and for conversion of convertible debentures, convertible
notes payable, notes payable and accrued interest
|
|
$
|
3,777,854
|
|
$
|
988,347
|
|
|
|
|
|
|
|
|
|
Common
stock issued and issuable for consulting services (includes $458,061
of
capitalized software development fees)
|
|
$
|
2,423,611
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Value
assigned to warrants issued to holders of convertible debentures
on the
issuance date
|
|
$
|
9,036,727
|
|
$
|
2,000,000
|
|
|
|
|
|
|
|
|
|
Value
assigned to warrants issued to placement agents on the issuance
date
|
|
$
|
1,792,452
|
|
$
|
319,066
|
|
|
|
|
|
|
|
|
|
Value
assigned to conversion option liability in connection with issuance
of
convertible debentures
|
|
$
|
2,571,429
|
|
$
|
1,500,000
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
212,450
|
|
$
|
383,911
|
|
|
|
|
|
|
|
|
|
Reclassification
of conversion option liability to equity
|
|
$
|
947,211
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
Stock
options granted to key employees and advisory board member
|
|
$
|
1,010,835
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Reclassification
of derivative liability upon exercise of
warrants
|
|
$
|
1,141,769
|
|
$
|
—
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 (Amendment No. 2) for the fiscal year
ended
October 31, 2005.
These
results for the three months and nine months ended July 31, 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 August 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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Film
In Distribution
(Continued)
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 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. This
resulted in an impairment of $1,009,777 being recognized during the three
months
and nine months ended July 31, 2005.
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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $216,460 and $531,692 for the three months
and nine months ended July 31, 2006, respectively, related to its capitalized
software development costs. There was no amortization expense for the three
months and nine months ended July 31, 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 nine months ended July 31, 2006
and
2005, 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.
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).
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Stock-Based
Compensation (Continued)
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 nine
months ended July 31, 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 nine months ended July 31, 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 $205,240 and $653,079 for the three months and nine months ended
July 31, 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 nine
months
ended July 31, 2006, respectively. Stock based-compensation expense recognized
for non-employees under other accounting standards was $312,619 and $628,293
for
the three months and nine months ended July 31, 2006,
respectively.
As
the
closing price of common stock at July 31, 2005 was below the exercise price
for
certain options, previously recorded expense of $20,915 was reversed during
the
three months ended July 31, 2005. Accordingly, stock-based compensation expense
related to employee stock options under other accounting standards for the
three
months and nine months ended July 31, 2005 was $(20,915) and $0, respectively.
Stock based-compensation expense recognized for non-employees under other
accounting standards was $130,948 and $546,463 for the three months and nine
months ended July 31, 2005, respectively.
As
stock-based compensation expense recognized in the condensed consolidated
statement of operations for the three months and nine months ended July 31,
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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Stock-Based
Compensation (Continued)
Pro-Forma
Information Under SFAS 123 for Periods Prior to Fiscal 2006
|
|
For
the Nine
Months
Ended
July
31, 2005
|
|
For
the Three
Months
Ended
July
31, 2005
|
|
Net
loss, as reported
|
|
$
|
(3,060,489
|
)
|
$
|
(897,920
|
)
|
Add:
Stock-based employee compensation expense included
in reported net loss
|
|
|
—
|
|
|
(20,915
|
)
|
Less:
Total stock-based employee compensation expense determined
under the fair value-based method of all awards
|
|
|
(794,819
|
)
|
|
(604,031
|
)
|
Net
loss, pro-forma
|
|
$
|
(3,855,308
|
)
|
$
|
(1,522,866
|
)
|
Basic
and Diluted Net Loss per Common Share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
Pro-forma
|
|
$
|
(0.04
|
)
|
$
|
(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.
In
June
2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 05-1,
“Accounting for the Conversion of an Instrument That Becomes Convertible upon
the Issuer’s Exercise of a Call Option” (“EITF No. 05-1”), which indicates 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. EITF No. 05-1 is effective
for
annual or interim periods beginning after June 28, 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.
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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Impact
of Recently Issued Accounting Standards
(Continued)
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 No. 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. 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.
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 the Company’s
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 adoption 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 $1,025 and $59,899 for the three months and
nine
months ended July 31, 2006, respectively. The Company recognized revenues
of
$10,360 and $26,558 for the three months and nine months ended July 31, 2005,
respectively. There was no amortization expense for the three months and
nine
months ended July 31, 2006. The Company had amortization expense of $0 and
$11,945 for the three months and nine months ended July 31, 2005,
respectively.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4 - DEFERRED FINANCING COSTS
As
of
July 31, 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
|
|
|
(1,698,268
|
)
|
|
|
|
|
|
Deferred
financing costs, net
|
|
$
|
1,843,550
|
|
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 nine months ended July 31, 2006, amortization of deferred
financing costs was $448,840 and $1,017,659, respectively. For the three
months
and nine months ended July 31, 2005, amortization of deferred financing costs
was $67,825 and $120,934, 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), 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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
6 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
The
outstanding convertible notes are summarized below:
|
|
At
July 31,
|
|
|
|
2006
|
|
Note
payable (1)
|
|
$
|
22,000
|
|
Notes
payable (nine notes) (2)
|
|
|
468,000
|
|
Notes
payable, 9% interest (3)
|
|
|
10,000
|
|
|
|
|
|
|
TOTAL
|
|
$
|
500,000
|
|
(1)
|
The
note was issued in October 2001 in the amount of $250,000, and
due only
when receipts received by the Company from its Top Secret Productions,
LLC
joint venture exceed $375,000. The note and any accrued and unpaid
interest may be converted at any time, in whole or in part, into
shares of
common stock at a conversion price per share of $0.40. The Company
made
payments of $25,000 and $75,000 during the three months and nine
months
ended July 31, 2006, respectively.
|
|
|
(2)
|
The
notes were issued during the period from March 2002 through July
2003 in
the aggregate amount of $478,000 and due only when receipts received
by
the Company from its Top Secret Productions, LLC joint venture
exceed
$2,250,000. The notes and any accrued and unpaid interest may be
converted
at any time, in whole or in part, into shares of common stock at
conversion prices per share ranging from $0.33 to $1.00. 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)
|
The
note was issued in July 2003 in the amount of $10,000, and due
only when
receipts received by the Company from its Top Secret Productions,
LLC
joint venture exceed $750,000. The note and any accrued and unpaid
interest may be converted at any time, in whole or in part, into
shares of
common stock at a conversion price per share of
$0.60.
|
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.
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 valued at $9,036,727 on the issuance
date (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 (August 31, 2009).
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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
7 - CONVERTIBLE DEBENTURES (CONTINUED)
2006
Debentures
(Continued)
The
2006
Debentures are convertible into shares of common stock at a 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 related securities purchase
agreement.
The
Company agreed to include the shares of common stock issuable upon conversion
of
the 2006 Debentures and exercise of the related warrants issued to investors
and
the placement agent in a registration statement filed by the Company with
the
Securities and Exchange Commission (the “SEC”). Since the registration statement
was not declared effective by the SEC by June 23, 2006, the Company is obligated
to pay liquidated damages to the holders of the 2006 Debentures. As of July
31,
2006, accrued liquidated damages totaled $152,000. A registration statement
covering the common stock issuable upon conversion of the 2006 Debentures
and
the related warrants issued to investors and the placement agent was declared
effective by the SEC on August 16, 2006. As of August 16, 2006, accrued
liquidated damages totaled $212,000. At their option, the holders of the
2006
Debentures are entitled to be paid such amount in cash or shares of common
stock
at a per share rate equal to the effective conversion price of the debentures.
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 on the issuance date, 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 on the issuance
date.
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
aggregate fair value of the placement agent’s warrants of $1,792,452 on the
issuance date was recorded as a deferred financing cost and is being charged
to
interest expense over the term of the 2006 Debentures.
The
gross
proceeds of $6,000,000 are recorded as a liability net of a debt discount
of
$6,000,000 consisting of an allocation of the fair values attributed to the
Investors’ warrants and to the embedded conversion feature in accordance with
EITF issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to
and Potentially Settled in a Company’s Own Stock.” The debt discount consisted
of a $3,428,571 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. The excess of the fair
value of the Investors’ warrants above the debt discount allocated to the
Investors’ warrants was $5,608,156 and was recorded as interest
expense.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
7 - CONVERTIBLE DEBENTURES (CONTINUED)
2006
Debentures
(Continued)
In
accordance with EITF No. 00-19, 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 feature
related to the 2006 Debentures, the Investors’ warrants, the placement agent’s
warrants, and the registration rights as derivative liabilities. Accordingly,
these derivative liabilities are measured at fair value with changes in fair
value reported in earnings as long as they remain classified as liabilities.
The
Company reassesses the classification at each balance sheet date. If the
classification required under EITF No. 00-19 changes as a result of events
during the period, the contract is reclassified as of the date of the event
that
caused the reclassification.
During
the three months ended July 31, 2006, $400,000 of principal amount of 2006
Debentures plus accrued interest of $129,567 were converted into 5,647,147
shares of common stock.
As
of
July 31, 2006, the conversion option liability of $2,571,429 had been reduced
to
$2,400,000 as a result of conversions of the 2006 Debentures. Since the issuance
of the 2006 Debentures, an aggregate of $171,429 has been reflected as a
reclassification to stockholders’ equity.
A
loss on
the change in fair value of these derivative liabilities of $9,315,408 and
$6,666,740 was recognized during the three months and nine months ended July
31,
2006, respectively.
Included
in interest expense for the three months and nine months ended July 31, 2006
is
$1,076,881 and $1,495,486, respectively, related to the amortization of the
debt
discount on these debentures.
The
2006
Debentures are summarized below as of July 31, 2006:
|
|
|
Outstanding
Principal
Amount
|
|
|
Unamortized
Debt
Discount
|
|
|
Net
Carrying
Value
|
|
Long-term
portion
|
|
$
|
5,600,000
|
|
$
|
4,504,514
|
|
$
|
1,095,486
|
|
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 valued at $2,000,000 on the issuance date, with warrants
for 11,312,220 shares being exercisable through August 31, 2006 at a per
share
exercise price of $0.1547 and warrants for 22,624,430 shares being exercisable
through August 31, 2008 at a per share exercise price of $0.3094.
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 on the issuance date. 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 were exercisable through August 31, 2008 at a per share
exercise price of $0.3094. Warrants to purchase up to 2,262,443 shares were
exercisable through May 31, 2008 at a per share exercise price of $0.1547.
Warrants to purchase up to 1,131,222 shares were exercisable through August
31,
2006 at a per share exercise price of $0.1547. All of the Compensation Warrants
were exercised during the nine months ended July 31, 2006.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
7 - CONVERTIBLE DEBENTURES (CONTINUED)
2005
Debentures
(Continued)
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
feature in accordance with EITF issue No. 00-19 “Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a Company’s Own
Stock.” 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 feature related to the 2005
Debentures, the Investors’ Warrants, the Compensation Warrants, and the
registration rights as derivative liabilities. Accordingly, these derivative
liabilities are measured at fair value with changes in fair value reported
in
earnings as long as they remain classified as liabilities. The Company
reassesses the classification at each balance sheet date. If the classification
required under EITF No. 00-19 changes as a result of events during the period,
the contract is reclassified as of the date of the event that caused the
reclassification. Due to various factors, including substantial conversions
of
the 2005 Debentures and the registration statement registering the 2005
Debentures becoming effective on August 1, 2005, the value of the registration
rights was deemed to be de minimus.
As
of
July 31, 2006, the conversion option liability of $1,500,000 had been reduced
to
$2,385 as a result of conversions of the 2005 Debentures. Since the issuance
of
the 2005 Debentures, an aggregate of $1,497,615 has been reclassified from
conversion option liability to stockholders’ equity.
During
the nine months ended July 31, 2006, upon the exercise by holders of the
Investor and Compensation Warrants, of warrants to purchase an aggregate
of
12,203,693 shares, the Company reassessed the classification of the exercised
warrants and reclassified the fair value of the exercised warrants of $1,141,769
from current liabilities to stockholders’ equity.
A
loss on
the change in fair value of these derivative liabilities of $1,058,056 and
$4,191,262 was recognized during the three months and nine months ended July
31,
2006, respectively.
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. 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 June 23, 2006.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
7 - CONVERTIBLE DEBENTURES (CONTINUED)
2005
Debentures
(Continued)
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 SEC. The common stock underlying the Investor and Compensation Warrants
were included in the registration statement declared effective by the SEC
on
August 16, 2006.
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.
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 2005 Debentures plus accrued interest of $2,401 were
converted into 22,908,266 shares of common stock. During the three months
ended
July 31, 2006, $35,000 of principal amount of 2005 Debentures plus accrued
interest of $1,087 were converted into 443,814 shares of common
stock.
Included
in interest expense for the three months and nine months ended July 31, 2006
is
$24,643 and $1,550,586, respectively, related to the amortization of the
debt
discount on these debentures.
The
2005
Debentures are summarized below as of July 31, 2006:
|
|
Outstanding
Principal
Amount
|
|
Unamortized
Debt
Discount
|
|
Net
Carrying
Value
|
|
Long-term
portion
|
|
$
|
5,564
|
|
$
|
3,383
|
|
$
|
2,181
|
|
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 three months ended July 31, 2006, $50,000 of principal amount plus accrued
interest of $8,974 were converted into 393,158 shares of common stock at
a
conversion price of $0.15.
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 plus accrued interest of $28,212 were converted into
2,741,747 shares of common stock at a conversion price of $0.15. During the
three months ended July 31, 2005, $325,000 of principal amount plus accrued
interest of $32,860 were converted into 2,385,804 shares of common stock
at a
conversion price of $0.15.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
7 - CONVERTIBLE DEBENTURES (CONTINUED)
7%
Debentures
(continued)
Included
in interest expense for the three months and nine months ended July 31, 2006,
is
$20,255 and $43,736, respectively, related to the amortization of the debt
discount on these debentures.
The
7%
Debentures are summarized below as of July 31, 2006:
|
|
Outstanding
Principal
Amount
|
|
Unamortized
Debt
Discount
|
|
Net
Carrying
Value
|
|
Current
portion
|
|
$
|
75,000
|
|
$
|
3,881
|
|
$
|
71,119
|
|
The
remaining 7% Debentures outstanding at July 31, 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 nine months ended July 31, 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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
8 - NOTES PAYABLE (CONTINUED)
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 nine months ended July 31, 2006, the Company:
|
·
|
issued
110,654,584 shares of common stock for conversion of convertible
debentures with a principal amount of $2,260,147 and accrued interest
of
$211,806;
|
|
·
|
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
12,203,693 shares of common stock upon exercise of warrants resulting
in
gross proceeds of $697,407; and
|
|
·
|
issued
12,624,752 shares of restricted common stock to consultants for
services
valued at $2,232,217.
|
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
expected volatility is based on a blend of the Company’s industry peer group and
the Company’s historical volatility. 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 nine months ended July 31,
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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
9 - STOCKHOLDERS’ EQUITY (CONTINUED)
Stock
Option Plans (Continued)
The
weighted-average estimated fair value of stock options granted during the
nine
months ended July 31, 2006 was $0.03 per share using the Black-Scholes model
with the following assumptions:
Expected
volatility
|
145%
|
Risk-free
interest rate
|
4.4%
|
Expected
dividends
|
0.0%
|
Expected
life
|
10
years
|
A
summary
of option activity as of July 31, 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
|
|
|
1,000,000
|
|
$
|
0.17
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
Outside
the Plans
|
|
|
—
|
|
|
—
|
|
|
|
|
|
26,600,000
|
|
$
|
0.03
|
|
|
|
|
Options
expired/cancelled:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
the Plans
|
|
|
(325,000
|
)
|
$
|
1.86
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
Outside
the Plans
|
|
|
—
|
|
|
—
|
|
|
|
|
|
(14,300,000
|
)
|
$
|
0.24
|
|
|
|
|
Options
exercised:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
the Plans
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
Outside
the Plans
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at July 31, 2006
|
|
|
1,668,750
|
|
$
|
0.32
|
|
$
|
65,000
|
|
|
28,200,000
|
|
$
|
0.05
|
|
$
|
5,567,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at July 31, 2006
|
|
|
849,303
|
|
$
|
0.47
|
|
$
|
11,319
|
|
|
28,166,664
|
|
$
|
0.04
|
|
$
|
5,556,600
|
|
The
weighted-average remaining contractual term of stock options outstanding
under
the plans as of July 31, 2006 was 8.1 years. The weighted-average remaining
contractual term of stock options outstanding outside the plans as of July
31,
2006 was 9.1 years.
The
weighted-average remaining contractual term of stock options currently
exercisable under the plans as of July 31, 2006 was 6.5 years. The
weighted-average remaining contractual term of stock options currently
exercisable outside the plans as of July 31, 2006 was 9.1
years.
As
of
July 31, 2006, total compensation cost related to nonvested stock options
not
yet recognized was $162,630, which is expected to be recognized through July
2009 over a weighted-average period of approximately 2.6 years.
The
total
fair value of options vested during the three months and nine months ended
July
31, 2006 was $381,638 and $1,036,264, respectively. The weighted-average
estimated fair value of options vested during the three months and nine months
ended July 31, 2006 was $0.03 and $0.03 per share,
respectively.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 vested at various times between February 2006 and July 2006.
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 over a three year
period.
|
During
the three months ended July 31, 2006, the following options were
granted:
(i)
|
Options
to purchase 600,000 shares of common stock were granted to employees
and a
director. These options were valued at $95,200 and have a 10-year
term, an
exercise price of $0.18 per share, and vest over a three year period;
and
|
|
|
(ii)
|
Options
to purchase 500,000 shares of common stock were granted to a consultant.
These options were valued at $79,333 and have a 10-year term, an
exercise
price of $0.18 per share, and vest over a two year period.
|
Options
Expired, Cancelled and Forfeited
Options
to purchase 625,000 and 14,625,000 shares of common stock were canceled during
the three months and nine months ended July 31, 2006,
respectively.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
9 - STOCKHOLDERS’ EQUITY (CONTINUED)
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). 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. All of these warrants were exercised in August
2006.
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.
Warrants
Expired
Warrants
to purchase 100,000 and 300,000 shares of common stock expired during the
three
months and nine months ended July 31, 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
|
|
|
130,955,724
|
|
2006
Debentures and accrued interest (1)
|
|
|
43,760,531
|
|
Options
to purchase common stock
|
|
|
29,868,750
|
|
Convertible
notes payable and accrued interest
|
|
|
1,695,292
|
|
7%
debentures and accrued interest
|
|
|
595,369
|
|
2005
Debentures and accrued interest (2)
|
|
|
64,558
|
|
Total
as of July 31, 2006
|
|
|
206,940,224
|
|
(1)
|
Based
on a twenty day volume weighted average common stock price discounted
by
30% at July 31, 2006 of $0.1287.
|
(2)
|
Based
on a five day volume weighted average common stock price discounted
by 30%
at July 31, 2006 of $0.1415.
|
Substantial
issuances after July 31, 2006 through September 11, 2006
Options
granted to purchase shares of common stock
|
|
|
3,900,000
|
|
Common
stock issued to consultants
|
|
|
1,087,470
|
|
Common
stock issued in connection with the purchase of assets
|
|
|
500,000
|
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
10 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Research
and Development Agreement
The
Company and HelloSoft, Inc. (“HelloSoft”) entered into a Services Agreement
dated as of March 31, 2004 (the “Original Agreement”) pursuant to which
HelloSoft provides 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. 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 Original Agreement and its Amendments.
On
July
26, 2005, the Company signed an Amendment that defines and prices Phases
II and
III of the technology development program. The Company will expend $445,000
on
Phase II and $350,000 on Phase III. 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 a further $100,000 was paid in May
2006.
HelloSoft
commenced the Phase III development stage during the Company’s second fiscal
quarter 2006. On July 31, 2006, the Company paid HelloSoft $75,000 in cash
and
issued $175,000 of restricted common stock at a discount of 25% to the closing
price of the Company’s common stock on that date. The restricted common stock
issued to HelloSoft was valued at $233,333 and capitalized. The Company projects
that it will pay the remaining $100,000 cash payable in relation to Phase
III in
the fourth fiscal quarter 2006.
In
July
2006 and August 2006, the Company and HelloSoft, entered into further amendments
to the Original Agreement. Pursuant to these amendments, on July 31, 2006,
the
Company issued $25,000 of restricted common stock at a discount of 25% to
the
closing price of the Company’s common stock on that date. The restricted common
stock issued to HelloSoft was valued at $33,334, and capitalized. In addition,
the Company agreed to issue to HelloSoft additional shares of common stock
valued at $191,394 as of July 31, 2006 as compensation for past
development services. The value of these shares has been accrued as a liability
and capitalized as of July 31, 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
Concentration
of Credit Risk
The
Company maintains cash balances in two financial institutions. The balances
are
insured by the Federal Deposit Insurance Corporation up to $100,000 per
institution. At times throughout the year, the Company’s balances may exceed the
insured limits. At July 31, 2006, the uninsured cash balance was approximately
$2,877,000. The Company believes it is not exposed to any significant credit
risk for cash.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
11 - SEGMENT INFORMATION
Summarized
financial information concerning the Company’s reportable segments is shown in
the following table:
For
the nine months ended July 31, 2006
|
|
Telecommunications
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
Net
Sales - domestic
|
|
$
|
—
|
|
$
|
7,957
|
|
$
|
—
|
|
$
|
7,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - foreign
|
|
$
|
—
|
|
$
|
51,942
|
|
$
|
—
|
|
$
|
51,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(533,998
|
)
|
$
|
50,533
|
|
$
|
(3,945,132
|
)
|
$
|
(4,428,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
533,998
|
|
$
|
—
|
|
$
|
—
|
|
$
|
533,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Identifiable Assets at July 31, 2006
|
|
$
|
7,910,074
|
|
$
|
—
|
|
$
|
3,108,278
|
|
$
|
11,018,352
|
|
For
the nine months ended July 31, 2005
|
|
Telecommunications
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
Net
Sales - domestic
|
|
$
|
—
|
|
$
|
20,258
|
|
$
|
—
|
|
$
|
20,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - foreign
|
|
$
|
—
|
|
$
|
6,300
|
|
$
|
—
|
|
$
|
6,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(5,999
|
)
|
$
|
(1,026,843
|
)
|
$
|
(2,726,187
|
)
|
$
|
(3,759,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
5,999
|
|
$
|
18,493
|
|
$
|
—
|
|
$
|
24,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Identifiable Assets at July 31, 2005
|
|
$
|
6,569,097
|
|
$
|
—
|
|
$
|
1,098,350
|
|
$
|
7,667,447
|
|
For
the Three Months Ended July 31, 2006
|
|
Telecommunications
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
Net
Sales - domestic
|
|
$
|
—
|
|
$
|
1,025
|
|
$
|
—
|
|
$
|
1,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - foreign
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(217,527
|
)
|
$
|
(3,154
|
)
|
$
|
(1,457,886
|
)
|
$
|
(1,678,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
217,527
|
|
$
|
—
|
|
$
|
—
|
|
$
|
217,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Identifiable Assets at July 31, 2006
|
|
$
|
7,910,074
|
|
$
|
—
|
|
$
|
3,108,278
|
|
$
|
11,018,352
|
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
11 - SEGMENT INFORMATION (CONTINUED)
For
the Three Months Ended July 31, 2005
|
|
Telecommunications
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
Net
Sales - domestic
|
|
$
|
—
|
|
$
|
10,360
|
|
$
|
—
|
|
$
|
10,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - foreign
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(4,100
|
)
|
$
|
(1,014,300
|
)
|
$
|
(1,166,495
|
)
|
$
|
(2,184,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
4,100
|
|
$
|
13,297
|
|
$
|
—
|
|
$
|
17,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Identifiable Assets at July 31, 2005
|
|
$
|
6,569,097
|
|
$
|
—
|
|
$
|
1,098,350
|
|
$
|
7,667,447
|
|
NOTE
12 - RELATED PARTY TRANSACTIONS
During
the three months ended July 31, 2006, the Company deposited $2,500,000 with
a
financial institution. One of the Company’s Directors is also a Director of that
same financial institution.
NOTE
13 - SUBSEQUENT EVENTS
Asset
Acquisition
On
September 1, 2006, the Company purchased substantially all of the assets of
1021 Technologies, Inc. and 1021 Technologies KK, in exchange for the payment
of
$150,000 in cash and 500,000 shares of common stock valued at $78,000. The
assets purchased include the rights to eight patents, eight patent applications,
a completed VDSL semiconductor technology, VDSL2 software and hardware
technology components, and various computer equipment and related
software.
Equity
Transactions
In
August
2006:
(i)
|
1,660,559
shares of common stock were issued upon conversion of 2006 Debentures
with
a principal amount of $237,000 and interest of $2,225;
|
|
|
(ii)
|
10,756,879
shares of common stock were issued upon exercise of warrants resulting
in
gross proceeds of $694,037;
|
|
|
(iii)
|
1,087,470
shares of common stock were issued to consultants for services
valued at
$164,208;
|
|
|
(iv)
|
Options
to purchase 400,000 shares of common stock were granted. These
options
were valued at approximately $89,600 and have a ten year term,
an exercise
price of $0.224 per share, and vest over a period of approximately
three
years; and
|
|
|
(v)
|
Investor
Warrants to purchase 3,287,062 shares of common stock expired on
August
31, 2006.
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
13 - SUBSEQUENT EVENTS (CONTINUED)
Equity
Transactions (continued)
In
September 2006:
(i)
|
407,279
shares of common stock were issued upon conversion of 2006 Debentures
with
a principal amount of $50,000 and interest of $633;
|
|
|
(ii)
|
500,000
shares of common stock valued at $78,000 were issued in connection
with
the purchase of substantially all of the assets of 1021 Technologies,
Inc.
and 1021 Technologies KK (as discussed above); and
|
|
|
(iii)
|
Options
to purchase 3,500,000 shares of common stock were granted. These
options
were valued at approximately $520,000 and have a ten year term,
an
exercise price of $0.158 per share, and vest through December
2009.
|
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 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 digital signal
processor, was first made available as Release 1.3 to prospective customers
for
evaluation and testing in the first quarter of fiscal 2006. We are presently
working on Release 1.5 of the E30. 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. 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
nine
months ended July 31, 2006, we received revenues of $1,025 and $59,899,
respectively, from the Film. During the three months and nine months ended
July
31, 2005, we received revenues of $10,360 and $26,558, 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 related warrants
and to
the embedded conversion features. In accordance with EITF issue No. 00-19
“Accounting for Derivative Financial Instruments Indexed to and Potentially
Settled in a Company’s Own Stock,” 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,
we separately value and account for the embedded conversion features, related
warrants, and registration rights as derivative liabilities. Accordingly,
these
derivative liabilities are measured at fair value with changes in fair value
reported in earnings as long as they remain classified as liabilities. We
reassess the classification at each balance sheet date. If the classification
required under EITF No. 00-19 changes as a result of events during the period,
the contract is reclassified as of the date of the event that caused the
reclassification.
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 nine months ended July
31,
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 nine months ended July 31, 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 $205,240 and $653,079 for the three months and nine months ended
July 31, 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 nine
months
ended July 31, 2006, respectively. Stock based-compensation expense recognized
for non-employees under other accounting standards was $312,619 and $628,293
for
the three months and nine months ended July 31, 2006,
respectively.
As
the
closing price of common stock at July 31, 2005 was below the exercise price
for
certain options, previously recorded expense of $20,915 was reversed during
the
three months ended July 31, 2005. Accordingly, stock-based compensation expense
related to employee stock options under other accounting standards for the
three
months and nine months ended July 31, 2005 was $(20,915) and $0, respectively.
Stock-based compensation expense recognized for non-employees under other
accounting standards was $130,948 and $546,463 for the three months and nine
months ended July 31, 2005, respectively.
As
stock-based compensation expense recognized in the condensed consolidated
statement of operations for the three months and nine months ended July 31,
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.
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. This resulted in an impairment
of
$1,009,777 being recognized during the three months and nine months ended
July
31, 2005.
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 $216,460 and $531,692 during
the
three months and nine months ended July 31, 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.
Technology
Licenses
We
have
entered into two technology license agreements that may impact our future
results of operations. Royalty payments, if any, under each license would
be
reflected in our consolidated statements of operations as a component of
cost of
sales.
In
April
2002, we entered into a development and license agreement with Adaptive
Networks, Inc. (“Adaptive”), to acquire a worldwide, perpetual license to
Adaptive’s technology, intellectual property and patent portfolio. The licensed
technology provides the core technology for our semiconductor products. We
have
also jointly developed technology with Adaptive that enhances the licensed
technology.
In
consideration of the development services provided and the licenses granted
to
us by Adaptive, we paid Adaptive an aggregate of $5,571,000 between 2002
and
2004 consisting of cash and our assumption of certain Adaptive liabilities.
In
addition to the above payments, Adaptive is entitled to a percentage of any
net
sales of products sold by us and any license revenue we receive from the
licensed and co-owned technologies less the first $5,000,000 that would
otherwise be payable to them under this royalty arrangement.
In
February 2006, we obtained a license to include HelloSoft, Inc.’s integrated
VoIP software suite in the EmbarqTM
E30
semiconductor. We believe the inclusion of VoIP features in our products
will
eliminate VoIP dedicated components currently needed in modems and thereby
lower
their production costs by more than 20%. In consideration of this license,
we
have paid HelloSoft a license fee and will pay certain royalties based on
our
sale of products, including the licensed technology.
RESULTS
OF OPERATIONS
COMPARISON
OF THE THREE MONTHS AND NINE MONTHS ENDED JULY 31, 2006 AND THE THREE MONTHS
AND
NINE MONTHS ENDED JULY 31, 2005
REVENUES.
Revenues for the three months and nine months ended July 31, 2006 were $1,025
and $59,899, respectively. Of this amount, $1,025 and $7,957 was in the form
of
guarantee and/or license payments related to the U.S. distribution of the
Film
and $0 and $51,942 was related to foreign distribution of the Film during
the
three months ended and nine months ended July 31, 2006, respectively. Revenues
for the three months and nine months ended July 31, 2005 were $10,360 and
$26,558, respectively and were from our entertainment business. Revenues
decreased 90% or $9,355 for the three months ended July 31, 2006 due to a
decrease in the value of license payments and increased 126% or $33,341 for
the
nine months ended July 31, 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 nine months ended July
31,
2006 and 2005.
OPERATING
EXPENSES.
Operating expenses included cost of sales, impairment of film in distribution,
amortization of technology license and capitalized software development fees,
research and development expenses in connection with the semiconductor business,
and selling, general and administrative expenses.
Total
operating expenses decreased 23% or $515,663 to $1,679,592 for the three
months
ended July 31, 2006 from $2,195,255 for the three months ended July 31, 2005.
The decrease in total operating expenses for the three months ended July
31,
2006 was due primarily to the Company’s decision, during the three months ended
July 31, 2005, to write down the carrying value of the Film in Distribution
to
$0, and recognizing a resultant loss of $1,009,777. During the three
months ended July 31, 2006, there were also the following changes: amortization
of technology license and capitalized software development fees increased
from
$0 to $216,460, research and development expenses decreased by 60% or $176,779
to $119,888, and sales, general and administrative expenses increased by
51% or
$454,433 to $1,343,244. Total operating expenses increased 19% or $4,488,496
for
the nine months ended July 31, 2006 from $3,785,587 for the nine months ended
July 31, 2005. The increase in total operating expenses for the nine months
ended July 31, 2006 was due primarily to increases in amortization of technology
license and capitalized software development fees of $531,692, and selling,
general and administrative expenses of $1,240,838, offset by a decrease in
cost
of sales of $11,945, the Company’s decision, during the three months ended July
31, 2005, to write down the carrying value of the Film in Distribution to
$0,
and recognizing a resultant loss of $1,009,777, and a decrease of $47,899
in
research and development expenses.
Cost
of
sales for the three months and nine months ended July 31, 2005 were $0 and
$11,945, respectively. The cost of sales represents the amortization of film
cost for the Film. The decrease for the three months and nine months ended
July
31, 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 fees was $216,460
and
$531,692 for the three months and nine months ended July 31, 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 decreased by $176,779 to $119,888 or 60% for the
three
months ended July 31, 2006 from $296,667 for the three months ended July
31,
2005. Research and development expenses decreased 16% or $47,899, from $303,720
to $255,821 for the nine months ended July 31, 2006. The decrease is principally
the result of capitalizing costs associated with releases 1.4, 1.4.1 and
1.4.2
of the E30, all which reached technological feasibility during the three
months
ended July 31, 2006, represented by 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. During the three months and nine months ended July
31,
2005, the projects had not reached technological feasibility, and therefore
were
expensed as research and development.
Total
selling, general and administrative expenses increased 51% or $454,433 to
$1,343,244 for the three months ended July 31, 2006 from $888,811 for the
three
months ended July 31, 2005. Total selling, general and administrative expenses
increased 50% or $1,240,838 to $3,700,983 for the nine months ended July
31,
2006 from $2,460,145 for the nine months ended July 31, 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
and amended Form 10-QSBs and a Form 10-KSB, 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, a loss on the change in fair value
of
derivative liabilities, amortization of deferred financing costs, and a loss
on
exchange of notes payable into common stock.
Total
other expenses increased 1,147% or $14,757,828 to $13,470,853 for the three
months ended July 31, 2006 from total other income - net of $1,286,975 for
the
three months ended July 31, 2005. Total other expenses increased 3,206% or
$22,394,085 to $21,695,545 for the nine months ended July 31, 2006 from total
other income - net of $698,540 for the nine months ended July 31, 2005. The
increases are primarily for the reasons noted below.
Interest
expense increased 153% or $834,466 to $1,378,138 for the three months ended
July
31, 2006 from $543,672 for the three months ended July 31, 2005. Interest
expense increased 684% or $8,092,589 to $9,275,907 for the nine months ended
July 31, 2006 from $1,183,318 for the nine months ended July 31, 2005. The
increases are primarily due to the value allocated to the warrants 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.
We
recognized a loss on the change in fair value of derivative liabilities of
$11,643,875 and $12,128,413 for the three months and nine months ended July
31,
2006, respectively. This represented an increase of $13,442,978 and $13,927,516
for the three months and nine months ended July 31, 2006, respectively, from
the
gain on the change in fair value of derivative liabilities of $1,799,103
recognized for both the three months and nine months ended July 31, 2005,
respectively. This increase was due primarily to an increase in our closing
stock price as of July 31, 2006 as compared to July 31, 2005.
The
amortization of deferred financing costs increased 562% or $381,015 to $448,840
for the three months ended July 31, 2006 from $67,825 for the three months
ended
July 31, 2005. The amortization of deferred financing costs increased 741%
or
$896,725 to $1,017,659 for the nine months ended July 31, 2006 from $120,934
for
the nine months ended July 31, 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 nine months ended July 31, 2006 due to the
loss recognized on exchange of notes payable into common stock of
$446,386.
Other
income in the nine months ended July 31, 2006 consisted primarily of a gain
on
forgiveness of principal and interest on a promissory note (the “Zaiq Note”) to
Zaiq Technologies, Inc. (“Zaiq”) of $1,169,820. The Zaiq Note was entered into
in April 2005, had an original principal amount of $2,392,000 and was originally
due and payable in April 2007. Pursuant to the terms of the note, the principal
amount of the note decreased by $797,333.33 on each of the nine and 12 month
anniversaries of the note. In December 2005, when we would not have otherwise
been required to make a payment under the Zaiq Note, we entered into a letter
agreement with Zaiq pursuant to which we agreed to repurchase from Zaiq for
$200,000 the remaining balance of the Zaiq Note and 5,180,474 shares of our
common stock held of record by Zaiq. We had the right to assign any or all
of
our purchase commitment under the letter agreement. We assigned to an
unaffiliated third party that had been a prior investor in the Company the
right
to purchase 4,680,620 of the Zaiq shares. On December 20, 2005, we purchased
the
Zaiq Note and 499,854 shares of our common stock held by Zaiq for an aggregate
purchase price of $129,789. The Zaiq shares we repurchased 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 was canceled resulting in a gain of
$1,169,820.
Other
income in the nine months ended July 31, 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 $132,883, arising from the forgiveness of liabilities and the
conversion of liabilities into notes payable.
NET
LOSS.
For the three months ended July 31, 2006 our net loss increased 1,587% or
$14,251,500 to $15,149,420 from $897,920 primarily as the result of higher
interest costs, a loss on the change in fair value of derivative liabilities,
higher amortization of deferred financing costs, higher selling, general,
and
administrative expense, and higher amortization of technology license and
capitalized software development fees, partially offset by lower research
and
development expenses and no loss on the write down of the carrying value
of the
Film in Distribution to $0, which occurred during the three months ended
July
31, 2005.
For
the
nine months ended July 31, 2006, the net loss increased 754% or $23,063,653
to
$26,124,142 from $3,060,489 primarily as the result of higher interest costs,
a
loss on the change in fair value of derivative liabilities, higher amortization
of deferred financing costs, higher selling, general, and administrative
expense, higher amortization of technology license and capitalized software
development fees, and miscellaneous gains which occurred during the nine
months
ended July 31, 2005, which did not reoccur during the nine months ended July
31,
2006; partially offset by lower research and development expenses, the gain
on
the forgiveness of principal and interest on the promissory note to Zaiq
Technologies, Inc., and no loss on the write down of the carrying value of
the
Film in Distribution to $0, which occurred during the three months ended
July
31, 2005.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
balances totaled $2,864,405 at September 11, 2006 and $2,969,894 at July
31,
2006 compared to $373,481 at October 31, 2005.
Net
cash
used in operating activities was $2,314,894 for the nine months ended July
31,
2006, compared to $1,752,045 for the nine months ended July 31, 2005. The
increase in cash used in operations was principally the result of the following
items:
|
·
|
an
increase in the net loss, which was $26,124,142, compared to $3,060,489
for the nine months ended July 31, 2005; and
|
|
|
|
|
·
|
an
increase for the nine months ended July 31, 2006 of accounts payable
and
accrued liabilities of $519,473, compared to a decrease of accounts
payable and accrued liabilities for the nine months ended July
31, 2005 of
$66,248, resulting in a net decrease in cash used of
$585,721;
|
impacted
primarily by the following non-cash items:
|
·
|
interest
expense related to fair value of Investors’ warrants at issuance in excess
of debt discount of $5,608,156 for the nine months ended July 31,
2006;
|
|
|
|
|
·
|
loss
on the change in fair value of derivative liabilities of $12,128,413
for
the nine months ended July 31, 2006, compared to a gain of $1,799,103
for
the nine months ended July 31, 2005;
|
|
|
|
|
·
|
increased
amortization of deferred financing costs, which were $1,017,659
for the
nine months ended July 31, 2006, compared to $120,934 for the nine
months
ended July 31, 2005, principally due to increased conversions of
the 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 $3,290,683 for
the nine
months ended July 31, 2006, compared to $941,531 for the nine months
ended
July 31, 2005, principally due to increased conversions of the
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
fees, which was $531,692 for the nine months ended July 31, 2006,
compared
to $0 for the nine months ended July 31, 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 for the nine months ended July
31, 2006,
compared to a gain on the forgiveness of liabilities of $99,369
for the
nine months ended July 31, 2005;
|
|
|
|
|
·
|
increased
stock-based compensation expense, which was $1,528,429 for the
nine months
ended July 31, 2006 compared to $1,295,630 for the nine months
ended July
31, 2005;
|
|
|
|
|
·
|
loss
on exchange of notes payable into common stock of $446,386 for
the nine
months ended July 31, 2006; and
|
|
|
|
|
·
|
impairment
of Film in Distribution of $1,009,777 for the nine months ended
July 31,
2005.
|
Net
cash
used by investing activities was $381,539 for the nine months ended July
31,
2006 compared to $11,161 for the nine months ended July 31, 2005. The increase
was due to the acquisition of property and equipment of $6,539 and technology
license and software development fees of $375,000.
Net
cash
provided by financing activities was $5,292,846 for the nine months ended
July
31, 2006 compared to $2,691,502 for the nine months ended July 31, 2005.
Net
cash provided by financing activities for the nine months ended July 31,
2006
was the result of proceeds from the 2006 Debentures of $6,000,000, proceeds
from
the exercise of warrants of $697,407, and proceeds from the issuance of a
note
payable of $750,000, offset by capitalized financing costs of $742,450, and
total payments of $1,404,613 in connection with the repayment of notes payable
of $944,291 and convertible notes payable of $460,322. Net cash provided
by
financing activities for the nine months ended July 31, 2005 was the result
of
proceeds from the issuance of common stock in the amount of $800,100, proceeds
from the 2005 Debentures of $3,500,000 and proceeds from notes payable of
$300,000, offset by capitalized financing costs of $422,010, and total payments
of $1,521,588 in connection with the repayment of notes payable of $1,120,048
and convertible notes payable of $401,540.
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
March
2006, we raised gross proceeds of $6.0 million 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. $5,600,000 of principal amount was outstanding
as
of July 31, 2006 and matures in March 2008.
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.