Rim Semiconductor Company
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB
x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT
OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2006
OR
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934 for the transition period from _____ to _____
COMMISSION
FILE NUMBER: 000-21785
Rim
Semiconductor Company
(Name
of
small business issuer in its charter)
UTAH
(State
or other jurisdiction of
incorporation
or organization)
|
95-4545704
(I.R.S.
employer
identification
no.)
|
305
NE 102ND AVENUE, SUITE 105
PORTLAND,
OREGON 97220
(Address
of principal executive offices,
including
zip code)
|
(503)
257-6700
(Issuer’s
telephone number,
including
area code)
|
SECURITIES
REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
None
SECURITIES
REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common
Stock, $.001 Par Value
___________________________________________________________________________
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. ¨
Check
whether the issuer (1) 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 shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x
No
¨
Check
if
there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B contained in this form, and no disclosure will be contained, to the best
of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB. ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨
No
x
Issuer’s
revenues for the fiscal year ended October 31, 2006: $61,699
The
aggregate market value of the registrant’s common stock, $0.001 par value per
share, held by non-affiliates of the registrant on January 24, 2007 was
approximately $50,275,000 (based on the closing sales price of the registrant’s
common stock on that date ($0.12)). Shares of the registrant’s common stock held
by each officer and director and each person known to the registrant to own
10%
or more of the outstanding voting power of the registrant have been excluded
in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not a determination for other purposes.
The
number of shares of the issuer’s common stock outstanding as of January 24, 2007
was 424,795,899.
DOCUMENTS
INCORPORATED BY REFERENCE: None
Transitional
Small Business Disclosure Format: Yes ¨
No
x
RIM
SEMICONDUCTOR COMPANY
2006
ANNUAL REPORT ON FORM 10-KSB
TABLE
OF CONTENTS
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PART
I
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PAGE
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ITEM
1.
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DESCRIPTION
OF BUSINESS
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1
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ITEM
2.
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DESCRIPTION
OF PROPERTY
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14
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ITEM
3.
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LEGAL
PROCEEDINGS
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14
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ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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14
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PART
II
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ITEM
5.
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MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
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14
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ITEM
6.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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17
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ITEM
7.
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FINANCIAL
STATEMENTS
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29
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ITEM
8.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
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29
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ITEM
8A.
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CONTROLS
AND PROCEDURES
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29
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ITEM
8B.
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OTHER
INFORMATION
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29
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PART
III
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ITEM
9.
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DIRECTORS
AND EXECUTIVE OFFICERS
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30
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ITEM
10.
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EXECUTIVE
COMPENSATION
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33
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ITEM
11.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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35
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ITEM
12.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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36
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ITEM
13.
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EXHIBITS
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37
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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41
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PART
I
ITEM
1. DESCRIPTION
OF BUSINESS.
Overview
Rim
Semiconductor Company (the “Company,” “we,” “our,” or “us”) is 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. In September 2005, the Company
changed its name from New Visual Corporation to Rim Semiconductor Company.
Our
common stock trades on the OTC Bulletin Board under the symbol RSMI. Our
corporate headquarters are located at 305 NE 102nd Avenue, Portland, Oregon
97220 and our telephone number is (503) 257-6700.
Our
initial chipset in a planned family of transport processors, the Cupria™
(formerly known as Embarq™)
Cu5001
digital signal processor, was first shown to several prospective customers
during the first fiscal quarter of 2006. In
the
third fiscal quarter of 2006, we initiated a technical cooperation program
with
Embarq Corporation of Overland Park, Kansas that will evaluate the potential
application of our integrated circuits in Embarq’s data network. As part of this
program, we and Embarq are working with suppliers to develop prototype network
elements like digital subscriber line access multiplexers and consumer modems
that utilize our chipset. If such prototypes are developed and subsequent lab
evaluations are deemed successful, Embarq has agreed to conduct a field trial
of
our Cupria™ family of semiconductors and to share its observations from the
trial with its suppliers. As part of our efforts to produce network
infrastructure equipment utilizing the Cu5001 that we believe will be suitable
for use in Embarq’s network, we secured a commitment from Extreme Copper, Inc.
of Newbury Park, California to incorporate the Cu5001 in its next generation
digital subscriber line access multiplexers (DSLAM) and customer premises
equipment (CPE).
While
our
technology is currently available for evaluation and testing in field
programmable gate array (“FPGA”) form, we do not believe that we will realize
substantial revenues until our technologies are mass-produced in
application-specific standard part (“ASSP”) form. We estimate that it will cost
approximately $400,000 of additional engineering and fabrication expense in
order to produce a mass market ASSP version. Subject to raising the needed
capital, we estimate that we will complete them during the second fiscal quarter
of 2007. To date, we have not recorded any revenues from the sale of products
based on our technology and have not secured any purchase orders to sell our
products.
We
estimate that we will need an additional $1 million to accelerate our sales,
marketing, manufacturing and customer service activities. We presently do not
have the capital resources to undertake any of these steps, although we do
have
a commitment from an institutional investor to purchase $6 million of 7% Senior
Secured Convertible Debentures upon our request at any time after March 1,
2007.
The complexity of our technology could result in unforeseen delays or expenses
in the commercialization process, and there can be no assurance that we will
be
able to successfully commercialize our semiconductor technology.
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
Telecommunications Business
The
Technology Underlying Our Proposed Solution
Since
the
inception of our technology development effort in 2000, we have endeavored
to
define, design and commercialize an entirely new set of technologies and
protocols for transmitting very high-speed data across telephone wires. This
set
of technologies is called Internet protocol subscriber line, or IPSL. IPSL
1.0
contains contributions from several sources in addition to our own research
and
development efforts. These sources are described below.
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 Powerstream™ technology, intellectual property, and patent portfolio
for use in products relating all applications in the field of the copper
telephone wire telecommunications network. Adaptive is engaged in the research,
development and sales of silicone embedded networking technology of use in
wiring environments. Powerstream™ technology refers to technologies that enable
data transmission across wiring infrastructures inside buildings. Under the
agreement with Adaptive, we have a license and/or co-own six issued patents
in
the United States pertaining to methodologies for modifying data in order to
transmit it more efficiently on metallic media.
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 five million dollars that would otherwise be payable to them under this
royalty arrangement.
In
February 2006, we obtained a license to include HelloSoft Inc.’s integrated
voice over Internet protocol (VoIP) software suite in the Cupria™ family of
transport processors. We believe that the inclusion of VoIP features in our
products will enable customers to eliminate components currently placed on
their
modems that are dedicated to VoIP. We expect this reduction in components will
lower their cost of production by more than 20% and eliminate significant design
complexity. In exchange for such rights, we have paid to HelloSoft a license
fee
and will pay certain royalties based on our sales of products including the
licensed technology.
In
September
2006, we purchased substantially all of the assets of 1021 Technologies,
Inc. and 1021 Technologies KK. The assets purchased include the rights
to nine patents, seven patent applications, a completed VDSL
semiconductor, VDSL2 software and hardware technology components, and various
computer equipment and related software. This asset acquisition consisted of
a
cash payment of $150,000 plus the issuance of 500,000 shares of restricted
common stock valued at $78,000, for a total of $228,000, and has been recorded
as an addition to technology license and capitalized software development
costs.
Our
Product Line
We
are
developing an advanced transmission technology to enable data to be transmitted
across copper telephone wire at faster speeds and over greater distances than
is
presently offered by leading digital subscriber line (DSL) technology providers.
We believe our technology, using the name Cupria™, offers
significant improvements over existing broadband technologies by
utilizing:
·
|
quality
of service approaches that are optimized for high definition
television;
|
·
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a
wideband, extremely high-speed transport protocol;
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·
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on-the-fly
rapid equalization;
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·
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a
low noise floor; and
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·
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flexible
upstream/downstream asymmetry.
|
We
believe that telephone companies will find that applications such as streaming
media, VoIP, and peer-to-peer file sharing work better as a result.
Broadband
Opportunities Over Metallic Media
We
believe the value of the existing copper-based telephone network is directly
related to the amount of data that it can deliver. We also believe there are
substantial business opportunities for companies that can develop technologies
that increase the data-bearing capability, or bandwidth of this network,
enabling telephone network operators to increase their offering of services
and
reduce the cost of network upgrades. Worldwide, this network contains over
1.3
billion copper lines, and currently delivers to end users most of the world’s
telephone traffic and much of its broadband access. Virtually every home,
business and governmental location in the United States, Europe and East Asia
is
served with an existing copper wire connection.
The
existing copper wire connections were not engineered by service providers to
support high-speed data. Originally buried in the ground or strung on aerial
cables to only carry voice calls, these wires are ill suited to carrying
high-speed data. The single most important technical limitation is that the
amount of data that a given piece of copper wire is capable of bearing reduces
as a function of its length. Thus, shorter wires can support higher data rates,
and longer wires must support lower data rates. This lack of suitability has
been the largest driving force behind the telephone companies’ recent capital
investments in new fiber optic and wireless “last mile” networks. When either of
these technologies is introduced into a previously copper-based network, the
copper wires are either shortened or eliminated entirely. While the introduction
of our technologies
is not likely to completely eliminate the need for fiber optics or for wireless
deployments, we believe that it could reduce or forestall them. Such reduction
or delay positively reduces the capital expenditures of the service providers.
Thus, we believe that the existing worldwide copper wire base offers significant
advantages over these alternative networks as a medium for providing broadband
access, and that telephone companies adopting our technologies will enjoy these
benefits:
Low
Cost Deployment. First,
these solutions enable the service provider to leverage a huge existing
infrastructure, avoiding the high costs associated with replacing the local
loop
with fiber, laying new cable or upgrading existing cable connections, or
deploying relatively new wireless or satellite communications technologies.
Because our technology uses the existing local loop, they can be less expensive
to deploy than other high-speed data transmission technologies.
Limited
Service Degradation and Improved Security Over Alternative
Technologies. In
contrast to cable delivery systems, our technology is a point-to-point
technology that connects the end user to the service provider’s central office
or to an intermediate hub over copper wire. Our technology therefore does not
encounter service degradation as other subscribers are added to the system,
and
also allows a higher level of security. Alternative technologies, such as cable,
are shared systems and may suffer degradation and increased security risk as
the
number of end users on the system increases.
Rapid
Deployment. Because
virtually every home and business in the United States, Europe and
East Asia have existing copper telephone wire connections, copper
wire-based broadband solutions can be rapidly deployed to a large number of
potential end users.
Competition
The
market for high-speed telecommunications products is highly competitive, and
we
expect that it will become increasingly competitive in the future. Our
competitors, including Centillium Communications, Inc., Conexant Systems, Inc.,
PMC-Sierra, Texas Instruments Incorporated, Ikanos Communications, ST
Microelectronics N.V., Metalink Ltd., Broadcom Corporation, Infineon
Technologies A.G. and others, have developed and are currently marketing
technologies that also address the existing technical impediments of using
existing copper networks as broadband options or are otherwise substantially
similar to our products. Our competitors include some of the largest, most
successful domestic and international telecommunications companies and other
companies with well-established reputations in the broadband telecommunications
industry. Our competitors possess substantially greater name recognition,
financial, sales and marketing, manufacturing, technical, personnel, and other
resources than we have. These competitors may also have pre-existing
relationships with our potential customers. These competitors may compete
effectively with us because in addition to the above-listed factors, they more
quickly introduce new technologies, more rapidly or effectively address customer
requirements or devote greater resources to the promotion and sale of their
products than we do. Further, in the event of a manufacturing capacity shortage,
these competitors may be able to manufacture products when we are unable to
do
so. In all of our target markets, we also may face competition from newly
established competitors, suppliers of products based on new or emerging
technologies, and customers who choose to develop wire based solutions that
are
functionally similar to our semiconductor technologies.
We
believe we will be able to compete with these companies because our products
are
designed to increase the data transfer rates of broadband transmission over
copper telephone wire at rates not yet achieved by competing wire based
technologies.
In
addition to facing competition from providers of DSL-based products, we will
compete with products using other broadband technologies, such as cable modems,
wireless, satellite, and fiber optic telecommunications technology. Commercial
acceptance of any one of these competing solutions could decrease demand for
our
products.
We
also
face competition from new technologies that are currently under development
that
may result in new competitors entering the market with products that may make
ours obsolete. We cannot predict the competitive impact of these new
technologies and competitors.
Proprietary
Rights
We
currently rely on a combination of trade secret, patent, copyright and trademark
law, as well as non-disclosure agreements and invention-assignment agreements,
to protect our proprietary information. However, such methods may not afford
complete protection and there can be no assurance that other competitors will
not independently develop similar processes, concepts, ideas and documentation.
Under our agreement with Adaptive, we have a license to and/or co-own six
issued patents and six pending patent application in the United States. As
a result of our purchase of the assets of 1021 Technologies, we own nine issued
patents and seven pending patent applications in the United States. All of
these
issued and pending patents pertaining to methodologies for modifying data in
order to transmit it more efficiently on metallic media. We also rely upon
trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop our competitive position. Our policy is to protect
our
technology by, among other things, filing, or requiring the applicable licensor
to file, patent applications for technology that we consider important to the
development of our business. We intend to file additional patent applications,
when appropriate, relating to our technology, improvements to the technology,
and to specific products we develop.
Our
policy is to require our employees, consultants, other advisors, as well as
software design collaborators, to execute confidentiality agreements upon the
commencement of employment, consulting or advisory relationships. These
agreements generally provide that all confidential information developed or
made
known to the individual by us during the course of the individual’s relationship
with us is to be kept confidential and not to be disclosed to third parties
except in specific circumstances. In the case of employees and consultants,
the
agreements provide that inventions conceived by the individual in the course
of
their employment or consulting relationship shall be our exclusive property.
There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for trade secrets in the event of
unauthorized use or disclosure of such information.
Government
Regulation
Our
products are likely to be subject to extensive regulation by each country and
in
the United States by federal and state agencies, including the Federal
Communications Commission (the “FCC”), and various state public utility and
service commissions. There are some regulations pertaining to the use of the
available bandwidth spectrum at present that have been interpreted by our target
customers as discouraging to the technical innovations that we are bringing
to
market, though we do not believe this to be the case. Further, regulations
affecting the availability of broadband access services generally, the terms
under which telecommunications service providers conduct their business, and
the
competitive environment among service providers, for example, could have a
negative impact on our business.
Our
Joint
Venture
In
April
2000, our NV Entertainment subsidiary entered into a joint venture production
agreement to produce a feature length film, “Step Into Liquid”. 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 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 years ended October 31, 2006 and 2005,
we recognized revenues of $61,699 and $39,866, respectively, from the film.
We
recorded amortization expense of $0 and $11,945 related to the film for the
years ended October 31, 2006 and 2005, respectively.
As
a
result of impairment reviews during the years ended October 31, 2006 and
2005, we reduced the carrying value of the film to $0 on our balance
sheet.
Research
and Development
We
outsourced all of the development activities with respect to our products to
independent third party developers until April 2006, when we hired our first
engineer. During the third and fourth fiscal quarters of 2006, we hired a Vice
President to oversee the development and marketing of our semiconductors as
well
as four other engineering employees to supervise the continued development
of
our products. Together, our outsourced and employed engineer head count on
October 31, 2006 totaled 18 full-time equivalent personnel. During fiscal years
2006 and 2005, we expended $325,124 and $366,306, respectively, for research
and
development of our semiconductor technology.
Manufacturing
and Suppliers
We
intend
to contract with third party manufacturers to produce our products and will
rely
on third party suppliers to obtain the raw materials essential to our products’
production. Manufacturing of products utilizing our semiconductor technologies
will be a complex process and we cannot assure you that we will not experience
production problems or delays. Any interruption in operations could materially
and adversely affect our business and operating results.
There
may
be a limited number of suppliers of some of the components necessary for the
manufacture of products utilizing our semiconductor technologies. The reliance
on a limited number of suppliers, particularly if such suppliers are foreign,
poses several risks, including a potential inability to obtain an adequate
supply of required components, low manufacturing yields and reduced control
over
pricing, quality and timely delivery of components. We cannot assure you that
we
will be able to obtain adequate supplies of raw materials. Certain key
components of our semiconductor technologies may involve long lead times, and
in
the event of an unanticipated increase in the demand for our products, we could
be unable to manufacture certain products in a quantity sufficient to satisfy
potential demand. If we cannot obtain adequate deliveries of key components,
we
may be unable to ship products on a timely basis. Low manufacturing yields
could
cause us to incur substantially higher costs of goods sold. Delays in shipment
could damage our relationships with customers and could harm our business and
operating results.
On
December 19, 2006, we announced a strategic partnership with eSilicon
Corporation of Sunnyvale, California, a leading supplier of custom integrated
circuits to the telecommunications industry. eSilicon is to manage the physical
implementation and manufacture of the ASSP version of the Cupria Cu5001 device,
including test program development, device test, packaging and shipment of
the
packaged, test parts. eSilicon’s manufacturing partner, Taiwan Semiconductor
Manufacturing Company (TSMC), will fabricate the Rim Semi chip. TSMC is the
world’s largest dedicated semiconductor foundry.
Our
Employees
We
currently have fourteen full-time employees and one part-time employee. We
anticipate that we will need to hire additional employees and other personnel.
We may, from time to time, supplement our regular work force as necessary with
temporary and contract personnel. None of our employees is represented by a
labor union.
Our
future performance depends highly upon the continued service of the senior
members of our management team. We believe that our future success will also
depend upon our continuing ability to identify, attract, motivate, train and
retain other highly skilled managerial, technical, sales and marketing
personnel. Hiring for such personnel is intensely competitive, and there can
be
no assurance that we will be able to retain our key employees or attract,
assimilate or retain the qualified personnel necessary for our business in
a
timely manner or at all.
Available
Information
Our
Internet website is located at http://www.rimsemi.com. This reference to our
Internet website does not constitute incorporation by reference in this report
of the information contained on or hyperlinked from our Internet website and
such information should not be considered part of this report.
We
are
required to file annual reports on Form 10-KSB and quarterly reports on Form
10-QSB with the Securities and Exchange Commission (“SEC”) on a regular basis,
and are required to disclose certain material events (e.g., changes in corporate
control; acquisitions or dispositions of a significant amount of assets other
than in the ordinary course of business and bankruptcy) in a current report
on
Form 8-K. The public may read and copy any materials we file with the SEC at
the
SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference
Room
by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. The SEC’s Internet
website is located at http://www.sec.gov.
RISK
FACTORS
We
are
subject to various risks that may materially harm our business, financial
condition and results of operations. You should carefully consider the risks
and
uncertainties described below and the other information in this filing before
deciding to purchase our common stock. If any of these risks or uncertainties
actually occurs, our business, financial condition or operating results could
be
materially harmed. In that case, the trading price of our common stock could
decline and you could lose all or part of your investment.
WE
HAVE A
HISTORY OF LOSSES AND WE EXPECT THESE LOSSES TO CONTINUE FOR THE FORESEEABLE
FUTURE.
Since
inception, we have incurred significant net losses. We incurred net losses
of
$15,965,621 and $4,690,382 for the years ended October 31, 2006 and 2005,
respectively. As of October 31, 2006, we had an accumulated deficit of
$75,847,177. We expect to continue to incur net losses for the foreseeable
future as we continue to develop and market our products and semiconductor
technology. We have been funding our operations through the sale of our
securities and expect to continue doing so for the foreseeable future. Our
ability to generate and sustain significant additional revenues or achieve
profitability will depend upon the factors discussed elsewhere in this “Risk
Factors” section. We cannot assure you that we will achieve or sustain
profitability or that our operating losses will not increase in the future.
If
we do achieve profitability, we cannot be certain that we can sustain or
increase profitability on a quarterly or annual basis in the future. We expect
to increase expense levels on research and development, engineering,
manufacturing, marketing, sales and administration as we continue to market
our
products, and to invest in new semiconductor technologies. These expenditures
will necessarily precede the realization of substantial revenues from the sale
of our semiconductor products, if any, which may result in future operating
losses.
WE
MAY
NEED TO RAISE ADDITIONAL FUNDS IN ORDER TO ACHIEVE OUR BUSINESS
OBJECTIVES.
As
of
January 24, 2007, we had cash and short-term investments of approximately
$848,000. An institutional investor that has been a prior investor in the
Company has committed to purchase $6 million of 7% Senior Secured Convertible
Debentures upon our request at any time after March 1, 2007. As a result,
management believes funds on hand or committed to us will enable us to meet
our
liquidity needs for the next twelve months. Nevertheless, circumstances
may arise that would require us to raise additional capital in order to meet
our
liquidity needs and satisfy our current business plan prior to the receipt
of
revenues from our semiconductor business.
Even
after we begin to sell our products, we do not yet know what payment terms
will
be required by our customers or if our products will be successful. At the
present time, other than the $6 million commitment referred to above, we have
no
commitments for any additional financing, and there can be no assurance that,
if
needed, additional capital will be available to us on commercially acceptable
terms or at all. We may have difficulty obtaining additional funds as and if
needed, and we may have to accept terms that would adversely affect our
stockholders. Additional equity financings are likely to be dilutive to holders
of our common stock and debt financing may involve significant payment
obligations and covenants that restrict how we operate our
business.
We
also
may be required to seek additional financing in the future to respond to
increased expenses or shortfalls in anticipated revenues, accelerate product
development and deployment, respond to competitive pressures, develop new or
enhanced products, or take advantage of unanticipated acquisition opportunities.
We cannot be certain we will be able to find such additional financing on
commercially reasonable terms, or at all. Covenants in our agreements with
certain holders of our 7% Senior Secured Convertible Debentures issued in March
2006 may impede our ability to obtain additional financing. If we are unable
to
obtain additional financing when needed, we could be required to modify our
business plan in accordance with the extent of available financing. We also
may
not be able to accelerate the development and deployment of our products,
respond to competitive pressures, develop new or enhanced products or take
advantage of unanticipated acquisition opportunities.
WE
HAVE
NOT SOLD ANY SEMICONDUCTOR PRODUCTS TO DATE AND NO ASSURANCE CAN BE PROVIDED
THAT WE WILL DO SO.
Although
we have entered into multi-year Supply Agreements with two prospective
customers, we have neither received nor accepted any purchase orders for our
semiconductor products. No assurance can be provided that we will be successful
in concluding any significant-revenue generating agreement on terms commercially
acceptable to us or at all.
OUR
OPERATING RESULTS MAY VARY SIGNIFICANTLY DUE TO THE CYCLICAL NATURE OF THE
SEMICONDUCTOR INDUSTRY AND ANY SUCH VARIATIONS COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK.
We
operate in the semiconductor industry, which is cyclical and subject to rapid
technological change. The semiconductor industry, from time to time, experiences
significant downturns characterized by diminished product demand, accelerated
erosion of prices and excess production capacity. These downturns in the
semiconductor industry may be severe and prolonged, and could delay or hinder
the market acceptance of our semiconductor technologies and seriously impact
our
revenues and harm our business, financial condition and results of operations.
This industry also periodically experiences increased demand and production
capacity constraints, which may affect our ability to ship products utilizing
the semiconductor technologies in future periods. Accordingly, our quarterly
results may vary significantly as a result of the general conditions in the
semiconductor industry, which could cause our stock price to
decline.
In
addition, the worldwide telecommunications industry from time to time has
experienced a significant downturn. In such an event, wireline
telecommunications carriers may reduce their capital expenditures, cancel or
delay new service introductions, and reduce their workforces and equipment
inventories. They may take a cautious approach to acquiring new equipment from
equipment manufacturers. Together or separately, these actions would have a
negative impact on our business. A downturn in the worldwide telecommunications
industry may cause our operating results to fluctuate from year to year, which
also may tend to increase the volatility of the price of our common stock and
harm our business.
WE
HAVE A
LIMITED OPERATING HISTORY IN THE TELECOMMUNICATIONS INDUSTRY AND, CONSEQUENTLY,
THERE IS LIMITED HISTORICAL FINANCIAL DATA UPON WHICH AN EVALUATION OF OUR
BUSINESS PROSPECTS COULD BE MADE.
We
have
only been engaged in the semiconductor business since February 2000. We have
not
begun commercial shipments of our semiconductors, and therefore have not
generated any revenues from our semiconductor business. As a result, we have
no
historical financial data that can be used in evaluating our business prospects
and in projecting future operating results. For example, we cannot forecast
operating expenses based on our historical results, and we are instead required
to forecast expenses based in part on future revenue projections. In addition,
our ability to accurately forecast our revenue going forward is
limited.
You
must
consider our prospects in light of the risks, expenses and difficulties we
might
encounter because we are at an early stage of product introduction in a new
and
rapidly evolving market. Many of these risks are described under the
sub-headings below. We may not successfully address any or all of these risks
and our business strategy may not be successful.
OUR
SUCCESS IS CONTINGENT UPON THE INCORPORATION OF OUR PRODUCTS INTO SUCCESSFUL
PRODUCTS OFFERED BY LEADING EQUIPMENT MANUFACTURERS AND THE NON-INCORPORATION
OF
OUR PRODUCTS INTO SUCH EQUIPMENT COULD ADVERSELY AFFECT OUR BUSINESS
PROSPECTS.
Our
products will not be sold directly to the end-user of broadband services;
rather, they will be components of other products. As a result, we must rely
upon equipment manufacturers to design our products into their equipment. If
equipment that incorporates our products is not accepted in the marketplace,
we
may not achieve adequate sales volume, which would have a negative effect on
our
results of operations. Accordingly, we must correctly anticipate the price,
performance and functionality requirements of these data equipment
manufacturers. We must also successfully develop products containing our
semiconductor technology that meet these requirements and make such products
available on a timely basis and in sufficient quantities. Further, if there
is
consolidation in the data equipment manufacturing industry, or if a small number
of data equipment manufacturers otherwise dominate the market for data
equipment, then our success will depend upon our ability to establish and
maintain relationships with these market leaders. If we do not anticipate trends
in the market for products enabling the digital transmission of data, voice
and
video to homes and business enterprises over existing copper wire telephone
lines and meet the requirements of equipment manufacturers, or if we do not
successfully establish and maintain relationships with leading data equipment
manufacturers, then our business, financial condition and results of operations
will be seriously harmed.
BECAUSE
WE WILL DEPEND ON THIRD PARTIES TO MANUFACTURE, PACKAGE AND TEST OUR
SEMICONDUCTORS, WE MAY EXPERIENCE DELAYS IN RECEIVING SEMICONDUCTOR DEVICES.
We
do not
own or operate a semiconductor fabrication facility. Rather, semiconductor
devices that will contain our technology will be manufactured at independent
foundries. We intend to rely solely on third-party foundries and other
specialist suppliers for all of our manufacturing, packaging and testing
requirements. However, these parties may not be obligated to supply products
to
us for any specific period, in any specific quantity or at any specific price,
except as may be provided in a particular forecast or purchase order that has
been accepted by one of them. As a result, we will not directly control
semiconductor delivery schedules, which could lead to product shortages, poor
quality and increases in the costs of our products. Because the semiconductor
industry is currently experiencing high demand, we may experience delays in
receiving semiconductor devices from foundries due to foundry scheduling and
process problems. We cannot be sure that we will be able to obtain
semiconductors within the time frames and in the volumes required by us. Any
disruption in the availability of semiconductors or any problems associated
with
the delivery, quality or cost of the fabrication packaging and testing of our
products could significantly hinder our ability to deliver products to our
customers.
In
order
to secure sufficient manufacturing capacity, we may enter into various
arrangements that could be costly, including:
o
|
option
payments or other prepayments to a subcontractor;
|
|
|
o
|
nonrefundable
deposits in exchange for capacity commitments;
|
|
|
o
|
contracts
that commit us to purchase specified quantities of products over
extended
periods;
|
|
|
o
|
issuance
of our equity securities to a subcontractor; and
|
|
|
o
|
other
contractual relationships with
subcontractors.
|
We
may
not be able to make any such arrangements in a timely fashion or at all, and
any
arrangements may be costly, reduce our financial flexibility and not be on
terms
favorable to us. Moreover, if we are able to secure facility capacity, we may
be
obligated to use all of that capacity or incur penalties. These penalties and
obligations may be expensive and require significant capital and could harm
our
business.
WE
MAY
INCUR SUBSTANTIAL EXPENSES DEVELOPING NEW PRODUCTS BEFORE WE EARN ASSOCIATED
NET
REVENUES AND MAY NOT ULTIMATELY SELL A LARGE VOLUME OF OUR
PRODUCTS.
We
are
currently working on new products and we anticipate that we will incur
substantial development expenditures prior to generating associated net revenues
from a commercially deployable version (if any). We anticipate receiving limited
orders for our products during the period that potential customers test and
evaluate them. This test and evaluation period typically lasts from three to
six
months or longer, and volume production of an equipment manufacturer’s product
incorporating our products typically would not begin until this test and
evaluation period has been completed. As a result, a significant period of
time
may lapse between product development and sales efforts and the realization
of
revenues from volume ordering by customers of our products. In addition,
achieving a design win with a customer does not necessarily mean that this
customer will order our products. A design win is not a binding commitment
by a
customer to purchase products. Rather, it is a decision by a customer to use
our
products in the design process of that customer’s equipment. A customer can
choose at any time to discontinue using our products in that customer’s designs
or product development efforts. Even if our products are chosen to be
incorporated into a customer’s equipment, we may still not realize significant
net revenues from that customer if that customer’s products are not commercially
successful.
WE
MAY BE
UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS OR MAY BE SUED BY THIRD
PARTIES FOR INFRINGEMENT OF THEIR PROPRIETARY RIGHTS.
We
outsource to independent third parties a significant portion of the design,
development and testing activities relating to our products. Our success depends
significantly on our ability to obtain and maintain patent, trademark and
copyright protection for our intellectual property, to preserve our trade
secrets and to operate without infringing the proprietary rights of third
parties. If we are not adequately protected, our competitors could use the
intellectual property that we have developed to enhance their products and
services, which could harm our business.
We
rely
on patent protection, as well as a combination of copyright and trademark laws,
trade secrets, confidentiality provisions and other contractual provisions,
to
protect our proprietary rights, but these legal means afford only limited
protection. Despite any measures taken to protect our intellectual property,
unauthorized parties may copy aspects of our semiconductor technology or obtain
and use information that we regard as proprietary. In addition, the laws of
some
foreign countries may not protect our proprietary rights as fully as do the
laws
of the United States. If we litigated to enforce our rights, it would be
expensive, divert management resources and may not be adequate to protect our
intellectual property rights.
The
telecommunications industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of trade secret,
copyright or patent infringement. We may inadvertently infringe a patent of
which we are unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware that will cause us to be infringing when it is issued in the future.
Although we are not currently involved in any intellectual property litigation,
we may be a party to litigation in the future to protect our intellectual
property or as a result of our alleged infringement of another’s intellectual
property, forcing us to do one or more of the following:
o
|
Cease
selling, incorporating or using products or services that incorporate
the
challenged intellectual property;
|
|
|
o
|
Obtain
from the holder of the infringed intellectual property right a
license to
sell or use the relevant technology, which license may not be available
on
reasonable terms; or
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o
|
Redesign
those products or services that incorporate such
technology.
|
A
successful claim of infringement against us, and our failure to license the
same
or similar technology, could adversely affect our business, asset value or
stock
value. Infringement claims, with or without merit, would be expensive to
litigate or settle, and would divert management resources.
OUR
MARKET IS HIGHLY COMPETITIVE AND OUR PRODUCTS OR TECHNOLOGY MAY NOT BE ABLE
TO
COMPETE EFFECTIVELY WITH OTHER PRODUCTS OR TECHNOLOGIES.
The
market for high-speed telecommunications products is highly competitive, and
we
expect that it will become increasingly competitive in the future. Our
competitors, including Centillium Communications, Inc., Conexant Systems, Inc.,
PMC-Sierra, Texas Instruments Incorporated, Ikanos Communications, ST
Microelectronics N.V., Metalink Ltd., Broadcom Corporation, Infineon
Technologies A.G. and others, have developed and are currently marketing
technologies that also address the existing technical impediments of using
existing copper networks as broadband options or are otherwise substantially
similar to our products. Our competitors include some of the largest, most
successful domestic and international telecommunications companies and other
companies with well-established reputations in the broadband telecommunications
industry. Some of our competitors operate their own fabrication facilities.
Our
competitors have longer operating histories and possess substantially greater
name recognition, financial, sales and marketing, manufacturing, technical,
personnel, and other resources than we have. As a result, these competitors
may
be able to adapt more quickly to new or emerging technologies and changes in
customer requirements. They may also be able to devote greater resources to
the
promotion and sale of their products. These competitors may also have
pre-existing relationships with our potential customers. Further, in the event
of a manufacturing capacity shortage, these competitors may be able to
manufacture products when we are unable to do so. In all of our target markets,
we also may face competition from newly established competitors, suppliers
of
products based on new or emerging technologies, and customers who choose to
develop wire based solutions that are functionally similar to our products.
Although we believe we will be able to compete based on the special features
of
our products, they will incorporate new concepts and may not be successful
even
if they are superior to those of our competitors.
In
addition to facing competition from the above-mentioned suppliers, our
semiconductors will compete with products using other broadband access
technologies, such as cable modems, wireless, satellite and fiber optic
telecommunications technology. Commercial acceptance of any one of these
competing solutions, or new technologies, could decrease demand for our proposed
products. We cannot assure you that we will be able to compete successfully
or
that competitive pressures will not materially and adversely affect our
business, financial condition and results of operations.
WE
MUST
KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE SEMICONDUCTOR INDUSTRY AND
BROADBAND COMMUNICATIONS MARKET IN ORDER TO BE COMPETITIVE.
Our
success will depend on our ability to anticipate and adapt to changes in
technology and industry standards. We will also need to develop and introduce
new and enhanced products to meet our customers’ changing demands. The
semiconductor industry and broadband communications market are characterized
by
rapidly changing technology, evolving industry standards, frequent new product
introductions and short product life cycles. In addition, this industry and
market continues to undergo rapid growth and consolidation. A cyclical slowdown
in the semiconductor industry or other broadband communications markets could
materially and adversely affect our business, financial condition and results
of
operations. Our success will also depend on the ability of our potential
telecommunications equipment customers to develop new products and enhance
existing products for the broadband communications markets and to introduce
and
promote those products successfully. The broadband communications markets may
not continue to develop to the extent or in the timeframes that we anticipate.
If new markets do not develop as we anticipate, or if upon their deployment
our
products do not gain widespread acceptance in these markets, our business,
financial condition and results of operations could be materially and adversely
affected.
BECAUSE
OUR SUCCESS IS DEPENDENT UPON THE BROAD DEPLOYMENT OF DATA SERVICES BY
TELECOMMUNICATIONS SERVICE PROVIDERS, WE MAY NOT BE ABLE TO GENERATE SUBSTANTIAL
REVENUES IF SUCH DEPLOYMENT DOES NOT OCCUR.
Our
products are designed to be incorporated in equipment that is targeted at
end-users of data services offered by wire-line telecommunications carriers.
Consequently, the success of our products depends upon the decision by
telecommunications service providers to broadly deploy data technologies and
the
timing of such deployment. If service providers do not offer data services
on a
timely basis, or if there are technical difficulties with the deployment of
these services, sales of our products would be adversely affected, which would
have a negative effect on our results of operations. Factors that may impact
data deployment include:
o
|
A
prolonged approval process, including laboratory tests, technical
trials,
marketing trials, initial commercial deployment and full commercial
deployment;
|
|
|
o
|
The
development of a viable business model for data services, including
the
capability to market, sell, install and maintain data
services;
|
|
|
o
|
Cost
constraints, such as installation costs and space and power requirements
at the telecommunications service provider’s central
office;
|
|
|
o
|
Evolving
industry standards; and
|
|
|
o
|
Government
regulation.
|
THE
COMPLEXITY OF OUR PRODUCTS COULD RESULT IN UNFORESEEN DELAYS OR EXPENSE AND
IN
UNDETECTED DEFECTS, WHICH COULD ADVERSELY AFFECT THE MARKET ACCEPTANCE OF NEW
PRODUCTS AND DAMAGE OUR REPUTATION WITH PROSPECTIVE CUSTOMERS.
Highly
complex products such as the semiconductors that we expect to offer frequently
contain defects and bugs when they are first introduced or as new versions
are
released. If our products contain defects, or have reliability, quality or
compatibility problems, our reputation may be damaged and customers may be
reluctant to buy our semiconductors, which could materially and adversely affect
our ability to retain existing customers or attract new customers. In addition,
these defects could interrupt or delay sales to our potential customers. In
order to alleviate these problems, we may have to invest significant capital
and
other resources. Although our suppliers and potential customers will test our
products it is possible that these tests will fail to uncover defects. If any
of
these problems are not found until after we have commenced commercial production
of products, we may be required to incur additional development costs and
product recall, repair or replacement costs. These problems may also result
in
claims against us by our customers or others. In addition, these problems may
divert our technical and other resources from other development efforts.
Moreover, we would likely lose, or experience a delay in, market acceptance
of
the affected product, and we could lose credibility with our prospective
customers.
GOVERNMENTAL
REGULATION CONCERNING THE TECHNICAL SPECIFICATIONS OF SEMICONDUCTOR TECHNOLOGIES
THAT ARE DEPLOYED IN THE TELEPHONE NETWORKS COULD ADVERSELY AFFECT THE MARKET
ACCEPTANCE OF OUR SEMICONDUCTORS.
The
jurisdiction of the Federal Communication Commission (“FCC”) extends to the
entire US communications industry, including potential customers for our
semiconductors. Future FCC regulations affecting the broadband access industry
may adversely affect our business. In addition, international regulatory bodies
such as The American National Standards Institute (ANSI) and The Committee
T1E1.4 in North America, European Telecommunications Standards Institute (ETSI)
in Europe and ITU-T and the Institute of Electrical and Electronics Engineers,
Inc. (IEEE) worldwide are beginning to adopt standards and regulations for
the
broadband access industry. These domestic and foreign standards, laws and
regulations address various aspects of Internet, telephony and broadband use,
including issues relating to liability for information retrieved from or
transmitted over the Internet, online context regulation, user privacy,
taxation, consumer protection, security of data, access by law enforcement,
tariffs, as well as intellectual property ownership, obscenity and libel.
Changes in laws, standards and/or regulations, or judgments in favor of
plaintiffs in lawsuits against service providers, e-commerce and other Internet
companies, could adversely affect the development of e-commerce and other uses
of the Internet. This, in turn, could directly or indirectly materially
adversely impact the broadband telecommunications and data industry in which
our
customers operate. To the extent our customers are adversely affected by laws
or
regulations regarding their business, products or service offerings, this could
result in a material and adverse effect on our business, financial condition
and
results of operations.
In
addition, highly complex products such as the semiconductors that we expect
to
offer are subject to rules, limitations and requirements as set forth by
international standards bodies such as ANSI and The Committee T1E1.4 in North
America, ETSI in Europe and ITU-T and IEEE worldwide, and as adopted by the
governments of each of the countries that we intend to market in. There are
some
FCC regulations in the United States pertaining to the use of the available
bandwidth spectrum that at present have been interpreted by some of our target
customers as discouraging to the technical innovations that we are bringing
to
market. Further, regulations affecting the availability of broadband access
services generally, the terms under which telecommunications service providers
conduct their business, and the competitive environment among service providers,
for example, could have a negative impact on our business.
WE
DEPEND
ON ATTRACTING, MOTIVATING AND RETAINING KEY PERSONNEL AND THE FAILURE TO
ATTRACT, MOTIVATE OR RETAIN NEEDED PERSONNEL COULD ADVERSELY AFFECT OUR
BUSINESS.
We
are
highly dependent on the principal members of our management and on our
technology advisors and the technology staff of our development partners. The
loss of their services might significantly delay or prevent the achievement
of
development or strategic objectives. Our success depends on our ability to
retain certain key employees and our partner relationships, and to attract
additional qualified employees. Competition for these employees is intense.
We
cannot assure you that we will be able to retain existing personnel and partners
or attract and retain highly qualified employees in the future.
FUTURE
SALES OF COMMON STOCK OR OTHER DILUTIVE EVENTS MAY ADVERSELY AFFECT PREVAILING
MARKET PRICES FOR OUR COMMON STOCK.
As
of
January 24, 2007, we had 424,795,899 shares of our common stock outstanding.
As
of January 24, 2007, an additional 154,031,354 shares of common stock were
reserved for issuance upon the exercise of outstanding options and warrants
exercisable at exercise prices ranging from $0.027 to $3.92 per share. In
addition, as of January 24, 2007, we had outstanding $662,000 principal amount
of convertible debentures we issued in March 2006, and approximately $4,300
principal amount of convertible debentures we issued in May 2005, all of which
are convertible into an undeterminable number of shares of our common stock.
The
exercise price of the March 2006 debentures is variable, and is based upon
a 30%
discount to the volume weighted average closing price of our common stock for
the 20 days preceding the applicable conversion date. The exercise price of
the
May 2005 debentures is variable, and is based upon an initial conversion price
equal to 30% of the volume-weighted closing price per share of our common stock
for the five days preceding the applicable conversion date. We also have
outstanding $75,000 principal amount of convertible debentures we issued in
May
2004. These debentures are convertible into our common stock at an exercise
price of $0.15 per share. Many of the above options, warrants and convertible
debentures contain provisions that require the issuance of increased numbers
of
shares of common stock upon exercise or conversion in the event of stock splits,
redemptions, mergers or other transactions.
The
occurrence of any such event or the exercise or conversion of any of the
options, warrants or convertible debentures described above would dilute
the
interest in the Company represented by each share of common stock and may
adversely affect the prevailing market price of our common stock. Finally,
we
may need to raise additional capital through the sale of shares of common
stock
or other securities exercisable for or convertible into common stock. The
occurrence of any such sale would dilute the interest in the Company represented
by each share of common stock and may adversely affect the prevailing market
price of our common stock.
OUR
BOARD
OF DIRECTORS’ RIGHT TO AUTHORIZE THE ISSUANCE OF SHARES OF PREFERRED STOCK COULD
ADVERSELY IMPACT THE RIGHTS OF HOLDERS OF OUR COMMON
STOCK.
Our
Articles of Incorporation authorize our board of directors to issue up to
15,000,000 shares of preferred stock in one or more series, and to fix the
rights, preferences, privileges and restrictions granted to or imposed upon
any
such series, without further vote or action by shareholders. The terms of any
series of preferred stock, which may include priority claims to assets and
dividends and special voting rights, could adversely affect the rights of the
holders of our common stock and thereby reduce the value of our common stock.
The issuance of preferred stock could discourage certain types of transactions
involving an actual or potential change in control of our company, including
transactions in which the holders of common stock might otherwise receive a
premium for their shares over then current prices, otherwise dilute the rights
of holders of common stock, and may limit the ability of such shareholders
to
cause or approve transactions which they may deem to be in their best interests,
all of which could have a material adverse effect on the market price of our
common stock.
OUR
STOCK
PRICE MAY BE VOLATILE
The
market price of our common stock will likely fluctuate significantly in response
to the following factors, some of which are beyond our control:
o
|
Variations
in our quarterly operating results due to a number of factors, including
but not limited to those identified in this “Risk Factors”
section;
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o
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Changes
in financial estimates of our revenues and operating results by securities
analysts or investors;
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|
o
|
Changes
in market valuations of telecommunications equipment
companies;
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|
o
|
Announcements
by us of commencement to, changes to, or cancellation of significant
contracts, acquisitions, strategic partnerships, joint ventures or capital
commitments;
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o
|
Additions
or departures of key personnel;
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|
o
|
Future
sales of our common stock;
|
|
|
o
|
Stock
market price and volume fluctuations attributable to inconsistent
trading
volume levels of our stock;
|
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o
|
Commencement
of or involvement in litigation; and
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|
o
|
Announcements
by us or our competitors of technological innovations or new
products.
|
In
addition, the equity markets have experienced volatility that has particularly
affected the market prices of equity securities issued by high technology
companies and that often has been unrelated or disproportionate to the operating
results of those companies. These broad market fluctuations may adversely affect
the market price of our common stock.
WE
DO NOT
ANTICIPATE PAYING ANY DIVIDENDS ON OUR COMMON STOCK.
We
have
not paid any dividends on our common stock since our inception and do not
anticipate paying any dividends on our common stock in the foreseeable future.
Instead, we intend to retain any future earnings for use in the operation
and
expansion of our business.
ADDITIONAL
BURDENS IMPOSED UPON BROKER-DEALERS BY THE APPLICATION OF THE “PENNY STOCK”
RULES TO OUR COMMON STOCK MAY LIMIT THE MARKET FOR OUR COMMON
STOCK.
The
SEC
has adopted regulations concerning low-priced (or “penny”) stocks. The
regulations generally define “penny stock” to be any equity security that has a
market price less than $5.00 per share, subject to certain exceptions. If our
shares continue to be offered at a market price less than $5.00 per share,
and
do not qualify for any exemption from the penny stock regulations, our shares
will continue to be subject to these additional regulations relating to
low-priced stocks.
The
penny
stock regulations require that broker-dealers who recommend penny stocks to
persons other than institutional accredited investors, make a special
suitability determination for the purchaser, receive the purchaser’s written
agreement to the transaction prior to the sale and provide the purchaser with
risk disclosure documents that identify risks associated with investing in
penny
stocks. Furthermore, the broker-dealer must obtain a signed and dated
acknowledgment from the purchaser demonstrating that the purchaser has actually
received the required risk disclosure document before effecting a transaction
in
penny stock. These requirements have historically resulted in reducing the
level
of trading activity in securities that become subject to the penny stock
rules.
The
additional burdens imposed upon broker-dealers by these penny stock requirements
may discourage broker-dealers from effecting transactions in the common stock,
which could severely limit the market liquidity of our Common Stock and our
shareholders’ ability to sell our common stock in the secondary
market.
ITEM
2. DESCRIPTION
OF PROPERTY
We
do not
own any real property. Our corporate headquarters are located at 305 NE 102nd
Avenue, Suite 105, Portland, Oregon 97220. The original premises are occupied
under a three-year lease that commenced on April 1, 2005. In March 2006, we
expanded our original space to include part of another floor in the same
facility. In October 2006, we entered into another lease in the same building
for an additional 6,967 square feet, bringing the total in the Portland location
to 9,561 square feet. After amending the lease terms in March and leasing the
additional space in October, the current monthly rental under the leases is
$14,730. The lease on our corporate headquarters expires in March 2009. We
also
lease approximately 200 square feet of space in La Jolla, California that we
use
for administrative offices under a lease that expires in February 2008. Our
monthly rental payment under this lease is $1,100. We believe our properties
are
generally in good condition and suitable to carry on our business. We also
believe that, if required, suitable alternative or additional space will be
available to us on commercially reasonable terms.
ITEM
3. LEGAL
PROCEEDINGS
There
are
no material pending legal proceedings to which we are a party or to which any
of
our properties are subject. There are no material proceedings known to us to
be
contemplated by any governmental authority.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
During
the three months ended October 31, 2006, the Company did not submit any matters
to a vote of its security holders.
PART
II
ITEM
5. MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES
Our
common stock is currently traded on the Nasdaq Stock Market’s over-the-counter
bulletin board (the “OTC Bulletin Board”) under the trading symbol
“RSMI.”
The
following table sets forth the high and low bid prices for our common stock
on
the OTC Bulletin Board for the periods indicated. These prices represent
inter-dealer quotations without retail markup, markdown or commission and may
not necessarily represent actual transactions. Investors should not rely on
historical stock price performance as an indication of future price performance.
The closing price of our common stock on January 24, 2007 was $0.12 per
share.
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HIGH
|
|
LOW
|
|
November
2005 through October 2006
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
.27
|
|
$
|
.02
|
|
Second
Quarter
|
|
|
.27
|
|
|
.03
|
|
Third
Quarter
|
|
|
.24
|
|
|
.08
|
|
Fourth
Quarter
|
|
|
.24
|
|
|
.08
|
|
|
|
|
|
|
|
|
|
November
2004 through October 2005
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
.19
|
|
$
|
.10
|
|
Second
Quarter
|
|
|
.19
|
|
|
.14
|
|
Third
Quarter
|
|
|
.18
|
|
|
.05
|
|
Fourth
Quarter
|
|
|
.07
|
|
|
.03
|
|
Shareholders
As
of
January 24, 2007, there were 1,332 holders of record of our common stock. A
significant number of shares of our common stock are held in either nominee
name
or street name brokerage accounts. The actual number of beneficial owners of
such shares is not included in the foregoing number of holders of
record.
Dividends
We
have
not declared or paid any cash dividends on our capital stock and do not
anticipate paying any cash dividends on our capital stock in the foreseeable
future. Payment of dividends on the common stock is within the discretion of
our
Board of Directors. The Board currently intends to retain future earnings,
if
any, to finance our business operations and fund the development and growth
of
our business. The declaration of dividends in the future will depend upon our
earnings, capital requirements, financial condition, and other factors deemed
relevant by the Board of Directors.
Recent
Sales of Unregistered Securities
During
the three months ended October 31, 2006, we issued:
(i)
|
500,000
shares of common stock to purchase the assets of 1021 Technologies,
valued
at $78,000;
|
|
|
(ii)
|
1,087,470
shares of common stock to HelloSoft, valued at $164,208, and recorded
as
capitalized software; and
|
|
|
(iii)
|
5,725,000
stock options at exercise prices of $0.131 per share with respect
to
1,825,000 stock options, $0.158 per share with respect to 3,500,000
stock
options, and $0.224 per share with respect to 400,000 stock options,
to a
total of six employees of the Company valued at
$825,429.
|
From
November 2006 through January 24, 2007, subsequent to the fiscal year ended
October 31, 2006, we issued:
(i)
|
4,250,000
stock options at an exercise price of $0.096 per share to one director
and
three executive employees valued at $386,427;
|
|
|
(ii)
|
3,736,991
shares of common stock to a corporation valued at $395,000 in payment
of
non-recurring engineering services;
|
|
|
(iii)
|
100,000
stock options at an exercise price of $0.12 per share to one employee
valued at $11,344;
|
|
|
(iv)
|
464,535
shares of common stock to 2006 Debenture holders in satisfaction
of
$68,547 in liquidated damages accrued at October 31,
2006;
|
|
|
(v)
|
8,000,000
shares of common stock valued at $1,007,000 to three consultants;
and
|
|
|
(vi)
|
300,000
shares of common stock valued at $9,570 to a law firm upon exercise
of
stock options.
|
These
securities were issued without registration under the Securities Act in reliance
upon the exemption provided in Section 4(2) of the Securities Act. Appropriate
legends were affixed to the share certificates issued in all of the above
transactions. The Company believes that each of the recipients was an
“accredited investor” within the meaning of Rule 501(a) of Regulation D under
the Securities Act, or had such knowledge and experience in financial and
business matters as to be able to evaluate the merits and risks of an investment
in our common stock. All recipients had adequate access, through their
relationships with the Company and its officers and directors, to information
about the Company. None of the transactions described above involved general
solicitation or advertising.
Equity
Compensation Plan Information
We
have
four compensation plans (excluding individual stock option grants outside of
such plans) under which our equity securities are authorized for issuance to
employees, directors and consultants in exchange for services - the 2000 Omnibus
Securities Plan (the “2000 Plan”), the 2001 Stock Incentive Plan (the “2001
Plan”), the 2006 Stock Incentive Plan (the “2006 Plan”) and the 2003 Consultant
Stock Plan (the “Consultant Plan”) (collectively, the “Plans”). Our shareholders
approved the 2000 Plan and 2001 Plan, and the 2006 Plan and the Consultant
Plan
have not yet been submitted to the shareholders for approval.
The
following table presents information as of October 31, 2006 with respect to
compensation plans under which equity securities were authorized for issuance,
including the 2000 Plan, the 2001 Plan, the Consultant Stock Plan and agreements
granting options or warrants outside of these plans. The 2006 Plan was adopted
after the end of the 2006 fiscal year.
|
|
Number
of Securities
to
be Issued Upon
Exercise
of
Outstanding
Options,
Warrants
and Rights
|
|
Weighted-Average
Exercise
Price of
Outstanding
Options, Warrants and Rights
|
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans
|
|
Equity
compensation plans approved
by security holders
|
|
|
3,193,750
|
|
|
0.23
|
|
1,806,250
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved
by security holders
|
|
|
32,550,000
|
|
|
0.06
|
|
2,100,000
|
Total
|
|
|
35,743,750
|
|
$
|
0.08
|
|
3,906,250
|
Non-Shareholder
Approved Plans
The
following is a description of options and warrants granted to employees,
directors, advisory directors, and consultants outside of the Plans that were
outstanding as of October 31, 2006.
As
of
October 31, 2006, we had outstanding compensatory options and warrants to
purchase an aggregate of 35,743,750 shares of our common stock that were
granted outside of the Plans. Of this amount, outstanding options to purchase
100,000 shares of common stock were granted during fiscal 2001 outside of
the Plans to two advisory directors. These options expire 10 years from their
grant date and have exercise prices ranging from $1.07 to $2.30. All of these
options have vested.
We
have
outstanding options to purchase an aggregate of 500,000 shares of common
stock that were granted during fiscal 2002 outside of the Plans to a director.
These options expire ten years from their grant date and have an exercise price
of $0.39. All of these options have vested.
There
are
outstanding warrants to purchase an aggregate of 100,000 shares of common
stock that were granted during fiscal 2004 to a consultant. These warrants
have
a five-year term and an exercise price of $0.15.
We
have
outstanding options to purchase 1,000,000 shares of common stock that were
granted during fiscal 2005 outside of the Plans to a consultant. These options
expire four years from their grant date and have an exercise price of $0.15.
All
of these options have vested.
There
are
outstanding warrants to purchase 200,000 shares of common stock that we
granted during fiscal 2005 to a consultant. These warrants have a term of three
years and an exercise price of $0.12.
In
fiscal
2006, a total of 30,800,000 stock options had been granted outside of
shareholder-approved plans. During the first quarter of fiscal 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 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 second quarter of fiscal 2006, options to purchase 2,000,000 shares of
common stock were granted to directors outside of the Plans. These options
have
a 10-year term, an exercise price of $0.0319 per share, and vested on May 1,
2006. In addition, options to purchase 2,000,000 shares of common stock were
granted outside of the Plans in connection with legal services performed for
the
Company. These options have a 10-year term, an exercise price of $0.0319 per
share, and vested on March 1, 2006.
During
the third quarter of fiscal 2006, options to purchase 200,000 shares of common
stock were granted to a director outside the Plans. These options have a 10-year
term, an exercise price of $0.18 per share, and vest over a three year period.
In addition, options to purchase 500,000 shares of common stock were granted
to
a consultant under the Consultant Plan, which has not been approved by the
shareholders. These options have a 10-year term, an exercise price of $0.18
per
share, and vest over a two-year period.
During
the fourth quarter of fiscal 2006, Options to purchase 200,000 shares of common
stock were granted to a consultant under the Consultant Plan. These options
have
a 10-year term, an exercise price of $0.224 per share, and vest over a
three-year period. In addition, options to purchase 3,500,000 shares of common
stock were granted to the Senior Executive Vice President outside of the Plans.
These options have a 10-year term, an exercise price of $0.158 per share, and
vest over a three-year period.
The
Consultant Plan was adopted in January 2003 and authorizes the issuance of
up to
6,000,000 non-qualified stock options or stock awards to consultants to the
Company. Directors, officers and employees are not eligible to participate
in
the Consultant Plan. As of October 31, 2006, 3,200,000 shares of common stock
and options to purchase 700,000 shares of common stock have been issued under
the Consultant Plan.
The
2006
Plan was adopted in November 2006 and authorizes the issuance of up to
30,000,000 incentive stock options, non-qualified stock options or stock awards
to directors, officers, employees and certain consultants to the Company. To
date, we have issued a total of 4,250,000 shares of common stock under the
2006
Plan to four directors, officers and employees of the Company. The 2006 Plan
was
adopted subsequent to the 2006 fiscal year and as a result, is not included
in
the tables above.
Issuer
Purchases of Equity Securities
The
Company did not repurchase any of its equity securities during the three months
ended October 31, 2006.
ITEM
6. MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
We
urge
you to read the following discussion in conjunction with our consolidated
financial statements and the notes thereto included elsewhere in this Annual
Report on Form 10-KSB.
Caution
Regarding Forward-Looking Statements
Our
prospects are subject to uncertainties and risks. In this Annual Report on
Form
10-KSB, we make forward-looking statements under the headings “Item 1.
Description of Business,” “Item 6. Management’s Discussion and Analysis or Plan
of Operation,” and elsewhere, that also involve substantial uncertainties and
risks. These forward-looking statements are based upon our current expectations,
estimates and projections about our business and our industry, and that reflect
our beliefs and assumptions based upon information available to us at the date
of this report. In some cases, you can identify these statements by words such
as “if,” “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,”
“believes,” “estimates,” “predicts,” “potential,” “continue,” and other similar
terms. These forward-looking statements include, among other things, projections
of our future financial performance and our anticipated growth, descriptions
of
our strategies, our product and market development plans, the trends we
anticipate in our business and the markets in which we operate, and the
competitive nature and anticipated growth of those markets.
We
caution readers that forward-looking statements are predictions based on our
current expectations about future events. These forward-looking statements
are
not guarantees of future performance and are subject to risks, uncertainties
and
assumptions that are difficult to predict. Our actual results, performance
or
achievements could differ materially from those expressed or implied by the
forward-looking statements as a result of a number of factors, including but
not
limited to the risks and uncertainties discussed under the heading “RISK
FACTORS” in Item 1 of this Annual Report and 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 Cu5001 digital signal processor,
was
first made available in FPGA form to prospective customers for evaluation and
testing in the first fiscal quarter of 2006. We are presently working on Release
2.0 of the Cu5001, which is also the ASSP version of the semiconductor. We
market this technology to leading equipment makers in the telecommunications
industry. 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, over longer distances and at a higher quality. 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 Cu5001. No assurance can be provided that our target
customers will purchase these products in large volumes, or at all. See “RISK
FACTORS.”
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 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 years ended October 31, 2006 and
2005, we received revenues of $61,699 and $39,866, respectively, from the Film.
In July 2005, we recorded an impairment charge of $1,009,777 and 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.
Derivative
Financial Instruments
In
connection with the issuance of certain convertible debentures (see Note 9),
the
terms of the debentures included an embedded conversion feature that provided
for a conversion of the debentures into shares of our common stock at a rate
that was determined to be variable. We determined that the conversion feature
was an embedded derivative instrument and that the conversion option was an
embedded put option pursuant to Statement of Financial Accounting Standards
(“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended, and Emerging Issues Task Force (“EITF”) Issue No.
00-19, “Accounting for Derivative Financial Instruments Indexed To, and
Potentially Settled In, a Company's Own Stock.”
The
accounting treatment of derivative financial instruments requires that we record
the debentures and related warrants at their fair values as of the inception
date of the convertible debenture agreements and at fair value as of each
subsequent balance sheet date. In addition, under the provisions of EITF
Issue No. 00-19, as a result of entering into the convertible debenture
agreements, we were required to classify all other non-employee warrants and
options as derivative liabilities and record them at their fair values at each
balance sheet date. Any change in fair value was recorded as non-operating,
non-cash income or expense at each balance sheet date. If the fair value of
the
derivatives was higher at the subsequent balance sheet date, we recorded a
non-operating, non-cash charge. If the fair value of the derivatives was
lower at the subsequent balance sheet date, we recorded non-operating, non-cash
income. We reassess the classification at each balance sheet date. If the
classification required under EITF Issue No. 00-19 changes as a result of events
during the period, the contract should be 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 consolidated
financial statements as of and for the year ended October 31, 2006 reflect
the
impact of SFAS 123(R). In accordance with the modified prospective transition
method, our 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 our consolidated statement of
operations. Prior to the adoption of SFAS 123(R), we 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 our consolidated statement of operations because the exercise
price of our stock options granted to employees and directors equaled the fair
market value of the underlying stock at the date of grant.
The
effect of the adoption of SFAS 123(R) on our fiscal year 2006 results was to
increase our net loss by $919,251. There was no impact on our basic and diluted
net loss per common share.
SFAS
123(R) also requires that the cash retained as a result of the tax deductibility
of the increase in the value of share-based arrangements be presented as a
component of cash flows from financing activities in the consolidated statement
of cash flows. Prior to the adoption of SFAS 123(R), such amounts were required
to be presented as a component of cash flows from operating activities. Due
to
our tax net operating loss position, we do not realize cash savings as a result
of the tax deduction for stock-based compensation. Accordingly, the adoption
SFAS 123(R) had no effect on our cash flows from operating or financing
activities for the year ended October 31, 2006.
Stock-based
compensation expense recognized in our consolidated statement of operations
for
the year ended October 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 granted during the year ended October 31, 2006 was $672,194. 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 $247,057
for the year ended October 31, 2006. Stock-based compensation expense recognized
upon issuance of common stock to key employees and directors was $452,500 for
the year ended October 31, 2005. Stock-based compensation expense recognized
for
non-employees under other accounting standards was $984,935 and $976,041 for
the
years ended October 31, 2006 and 2005, respectively.
As
stock-based compensation expense recognized in the consolidated statement of
operations for the year ended October 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 our pro-forma information required under SFAS 123(R) for the
periods prior to fiscal 2006, we accounted for forfeitures as they
occurred.
Revenue
Recognition
We
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 its
future gross revenue to be received for each film based on information received
by its distributors, 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 an individual 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 statements of operations the amount by which
the unamortized film costs exceeds the Film’s fair value.
During
July 2005, we performed our review and it was determined that the unamortized
film costs exceeded the Film’s fair value. The conclusion was based upon
information we received from the film’s distributor relating to lower than
expected sales. As a result of this review, we wrote-down the remaining carrying
value attributed to the Film to $0. This resulted in an impairment of
$1,009,777, which is included in the consolidated statement of operations for
the year ended October 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.
In
connection with our assessment of our intellectual property, we retained the
services of an independent valuation firm to value our intangible assets as
of
October 31, 2006. As a result of the valuation, no impairment was deemed
necessary. The valuation does not provide any assurance that the intangible
assets could be sold for their stated fair value. The valuation provides that
the market will accept this technology and it assumes that we will be able
to
obtain sales or sales contacts related to these intangible assets. Due
to
the early stage of the marketability of this technology, there is no assurance
that we can achieve the assumptions outlined in the valuation. 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 may
be material.
We
commenced amortization of capitalized software development costs during December
2005 and have recorded amortization expense of $777,026 during the year ended
October 31, 2006. We recorded no amortization during the year ended October
31,
2005.
Research
and Development
Research
and development expenses relate to the design and development of advanced
transmission technology products. 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.
We
outsourced all of the development activities with respect to our products to
independent third party developers until April 2006, when we hired our first
engineer. During the fourth fiscal quarter of 2006, we hired a Vice President
to
oversee the development and marketing of our semiconductors as well as three
other engineering employees to supervise the continued development of our
products. During fiscal years 2006 and 2005, we expended $325,124 and $366,306,
respectively, for research and development of our semiconductor
technology.
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 $5,751,000 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 Cupria™
family
of transport processors. 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 YEAR ENDED OCTOBER 31, 2006 (the “2006 period”) AND THE YEAR ENDED
OCTOBER 31, 2005 (the “2005 period”)
REVENUES.
Revenues for the 2006 period were $61,699, an increase of $21,833 over 2005
revenues of $39,866. For the 2006 period, $9,757 was in the form of guarantee
and/or license payments relating to the U.S. distribution of the Film and the
remainder of $51,942 were fees relating to foreign distribution of the
Film.
For
the
2005 period, $29,066 was in the form of guarantee and/or license payments
relating to the U.S. distribution of the Film and the remainder was fees
relating to foreign distribution of the Film. This increase in the 2006 period
from the 2005 period was due 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 for the
2006 and 2005 periods.
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 increased 50% to $6,530,880 for the 2006 period from
$4,339,953 for the 2005 period, a $2,190,927 increase. This increase was
primarily due to the addition of seven new
employees during the 2006 period, causing salaries and related taxes to increase
by 49% over 2005. During 2006, we hired a Controller, a Director of Marketing,
an Executive Vice President in charge of Sales and Business Development, an
Engineering Vice President, and three engineers. Additionally, the Company
began
amortizing the technology license and capitalized software in 2006, resulting
in
an expense of $777,026 for 2006, where there was none for 2005. However, in
2005
the Company recognized an impairment charge of $1,009,777 when it wrote down
the
Film in Distribution to zero. Research and development expenses decreased
$41,182 to $325,124 for the 2006 period, principally as the result of our
capitalizing $135,461 of salaries and consulting expenses associated with
developing the capitalized software for production. Also, in 2006 we capitalized
payments to HelloSoft, Inc. (“HelloSoft”) totaling $455,000, whereas in 2005, we
paid $155,000 and recorded it as research and development expense.
There
were no cost of sales for 2006 and cost of sales for 2005 of $11,945 represents
the amortization of film cost for the Film.
Amortization
of technology license and capitalized software development fees was $777,026
for
the 2006 period, due to the commencement of amortization related to the market
release of the Cu5001 digital signal processor to prospective customers for
evaluation and testing during December 2005. No amortization was recorded prior
to this period.
Research
and development expenses decreased by $41,182 to $325,124 or 11% for the 2006
period from $366,306 for the 2005 period. The decrease is principally the result
of capitalizing costs associated with multiple releases of and enhancements
to
the Cupria product, represented by additional payments made to 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 year ended October 31, 2005, the projects had not reached
technological feasibility, and therefore costs incurred were expensed as
research and development.
Selling,
general and administrative expenses increased 84% or $2,476,805 to $5,428,730
primarily as a result of an increase in employees from four to seven. Payroll
and related expenses increased by 40%, from approximately $685,000 in 2005
to
approximately $956,000 in 2006. Also, consultant fees increased by 234% from
$84,000 in 2005 to $281,000 in 2006. Professional fees also increased by
$711,626 from $367,247 in 2005 to $1,078,873 in 2006. Stock-based compensation
expense increased by 65%, from $1,131,874 in 2005 to $1,862,547 for
2006.
In
July
2005, we performed a review to determine if the fair value of the Film was
less
than its unamortized film costs. As a result of this review, the Company
wrote-down the carrying value of the Film to $0, recognizing an impairment
charge of $1,009,777, which is included in our consolidated statement of
operations for the year ended October 31, 2005.
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 2,333% or $9,106,145 to $9,496,440 for the year ended
October 31, 2006 from total other expenses of $390,295 for the year ended
October 31, 2005. The increases are primarily for the reasons noted
below.
Interest
expense increased 257% or $7,776,343 to $10,803,490 in 2006 from $3,027,147
in
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 gain of $1,958,907 on the change in fair value of derivative
liabilities for the year ended October 31, 2006, a decrease of $274,097 from
$2,233,004 for the year ended October 31, 2005. This decrease in the gain from
the 2005 period to the 2006 period was due primarily to a smaller decrease
in
the market price of our common stock during the 2006 period. The closing market
price of our common stock was $0.095 and $0.027 per share as of October 31,
2006
and 2005, respectively. In general, decreases in the market price of our common
stock as compared to the exercise price of our warrants or options result in
decreases in the fair value of the warrant or option as estimated using the
Black-Scholes model.
The
amortization of deferred financing costs increased 163% or $984,204 to
$1,586,386 for the year ended October 31, 2006 from $602,182 for the year ended
October 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 year ended October 31, 2006 due to the loss
recognized on exchange of notes payable into common stock of
$446,386.
Other
income in the year ended October 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.
Also,
during the year ended October 31, 2006, we recognized income of $200,000 from
the sale to an unrelated third party of our rights to the “Embarq” trademark in
the United States, Puerto Rico and U.S. possessions and
territories.
Other
income in the year ended October 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
$930,216, arising from the forgiveness of liabilities and the conversion of
liabilities into notes payable.
NET
LOSS.
For the year ended October 31, 2006 our net loss increased 240% or
$11,275,239 to $15,965,621 from $4,690,382 primarily as the result of higher
selling, general and administrative costs, interest costs, higher amortization
of deferred financing costs, and higher amortization of technology license
and
capitalized software development fees, partially offset by lower derivative
gains, lower research and development expense, a gain on the forgiveness of
the
Zaiq note, income from the sale of the Embarq trademark, and no loss on the
write down of the carrying value of the Film in Distribution to $0, which
occurred during the year ended October 31, 2005.
Liquidity
and Capital Resources
Cash
and
short-term investments balances totaled approximately $848,000 at January 24,
2007, $2,090,119 at October 31, 2006, and $373,481 at October 31,
2005.
Net
cash
used in operating activities was $3,447,918 in the 2006 period, compared to
$2,412,199 in the 2005 period. The increase in cash used in operations was
principally the result of the following items:
o
|
An
increase in the net loss, which was $15,965,621 in the 2006 period,
compared with $4,690,382 in the 2005 period;
|
|
|
o
|
an
increase in the 2006 period of other current assets and other assets,
together with an increase in accounts payable and accrued liabilities
for
a net of $610,895, compared to an increase in other current assets
and
other assets and a decrease of accounts payable and accrued liabilities
in
the 2005 period for a net of $252,921, resulting in a net increase
in cash
used of $863,816.
|
impacted
by the following non-cash items:
o
|
interest
expense related to fair value of Investors’ warrants at issuance in excess
of debt discount of $5,608,156 for the year ended October 31, 2006,
compared to $0 for the 2005 period;
|
|
|
o
|
a
decrease in the gain on the change in fair value of derivative liabilities
of $1,958,907 for the year ended October 31, 2006, compared to a
gain of
$2,233,004 for the 2005 period;
|
|
|
o
|
increased
amortization of deferred financing costs, which were $1,586,386 in
the
2006 period, compared to $602,182 for the 2005 period, 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;
|
|
|
o
|
increased
amortization of debt discount on notes, which was $4,681,544 for
the 2006
period, compared to $2,692,581 for the 2005 period, 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;
|
|
|
o
|
increased
amortization of technology license and capitalized software development
fees, which was $777,026 for the 2006 period, compared to $0 for
the 2005
period, due to the commencement of amortization related to the market
release of the Cu5001 to prospective customers for evaluation and
testing;
|
|
|
o
|
gain
on forgiveness of principal and interest on the promissory note to
Zaiq
Technologies, Inc. of $1,169,820 for the 2006 period, compared to
a gain
on the forgiveness of liabilities of $896,702 for the 2005
period;
|
|
|
o
|
increased
stock-based compensation expense, which was $1,923,276 for the 2006
period, compared to $1,428,541 for the 2005 period;
|
|
|
o
|
loss
on exchange of notes payable into common stock of $446,386 for the
2006
period; and
|
|
|
o
|
impairment
of Film in Distribution of $1,009,777 for the 2005 period but not
in the
2006 period.
|
Net
cash
used in investing activities in the 2006 period was $1,800,327 compared to
$11,161 in the 2005 period. Net cash used in investing activities for the 2006
period was the result of the acquisition of technology and software from 1021
Technologies of $150,000, acquisition of capitalized software and development
fees of $590,461, the purchase of short-term investments of $1,000,000, and
acquisition of property and equipment of $59,866. For the 2005 period, cash
used
in investing activities was for the acquisition of $11,161 in property and
equipment.
Net
cash
provided by financing activities was $5,964,883 in the 2006 period compared
to
$2,669,030 in 2005 period. Net cash provided by financing activities in the
2006
period was the result of proceeds from the exercise of warrants totaling
$1,391,444, proceeds from convertible debentures of $6,000,000, and proceeds
from notes payable of $750,000, offset by capitalized financing costs of
$742,450, repayments of notes payable of $944,291, repayments of convertible
notes payable of $482,322, and the purchase of treasury stock for
$7,498.
For
the
2005 period, net cash provided by financing activities resulted from the
issuance of common stock for $835,100, proceeds from convertible debentures
of
$3,500,000, proceeds from notes payable of $300,000, offset by capitalized
financing costs of $422,010, repayments of notes payable of $1,010,021, and
repayments of convertible notes payable of $534,039.
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 sold $6,000,000 in aggregate principal amount of our Senior Secured
7%
convertible debentures and warrants, receiving net proceeds of approximately
$4.5 million after the payment of offering related costs (the “2006
Debentures”). As of January 24, 2007, approximately $5.6 million of principal
amount and interest of the 2006 Debentures had been converted into approximately
73.4 million shares of our common stock and there was $662,000 of principal
amount of the 2006 Debentures outstanding. The 2006 Debentures mature in March
2008.
In
January 2006, we entered into a loan agreement with an institutional investor
pursuant to which we borrowed $750,000. The outstanding principal and accrued
interest on this loan was repaid in March 2006 from the proceeds of the 2006
Debentures.
In
May
2005, we sold $3.5 million in aggregate principal amount of our Senior Secured
7% convertible debentures and warrants (the “2005 Debentures”) in a private
placement to certain private and institutional investors. As of January 24,
2007, approximately $3.6 million of principal amount and interest of the 2005
Debentures had been converted into approximately 170.1 million shares of our
common stock and there was approximately $4,300 of principal amount of the
2005
Debentures outstanding. The 2005 Debentures mature in May 2008.
In
December 2004, we entered into a loan agreement with an institutional investor
pursuant to which we borrowed $300,000. The outstanding principal and accrued
interest on this loan was repaid in May 2005 from the proceeds of the 2005
Debentures.
In
September 2004, we entered into a loan agreement with an institutional
investor/stockholder pursuant to which we borrowed $250,000. The outstanding
principal and accrued interest on this loan was repaid in May 2005 from the
proceeds of the 2005 Debentures.
In
December 2003, April 2004 and May 2004,we sold $1,350,000 in aggregate principal
amount and received net proceeds of approximately $1,024,000 from the private
placement to certain private and institutional investors of our three year
7%
convertible debentures and warrants (the “7% Debentures”). As of January 24,
2007, approximately $1.4 million of principal amount and interest of the 7%
Debentures had been converted into approximately 9.1 million shares of our
common stock and there was $75,000 of principal amount of the 7% Debentures
outstanding. The 7% Debentures mature in May 2007.
As
of
January 24, 2007, we had cash and short-term investments of approximately
$848,000. An institutional investor that has been a prior investor in the
Company has committed to purchase $6 million of 7% Senior Secured Convertible
Debentures upon our request at any time after March 1, 2007. As a result,
management believes funds on hand or committed to us will enable us to meet
our
liquidity needs for the next twelve months. Nevertheless, circumstances
may arise that would require us to raise additional capital in order to meet
our
liquidity needs and satisfy our current business plan prior to the receipt
of
revenues from our semiconductor business.
We
may
not be successful in our efforts to raise additional funds. Even if we are
able
to raise additional funds through the issuance of debt or other means, our
cash
needs could be heavier than anticipated in which case we could be forced to
raise additional capital. Even after we receive orders for our products, we
do
not yet know what payment terms will be required by our customers or if our
products will be successful. At the present time, other than the $6 million
commitment described above, we have no commitments for any additional financing,
and there can be no assurance that, if needed, additional capital will be
available to us on commercially acceptable terms or at all.
Additional
equity financings are likely to be dilutive to holders of our Common Stock
and
debt financing, if available, may involve significant payment obligations and
covenants that restrict how we operate our business.
Impact
of Recently Issued Accounting Standards
In
June
2005, the FASB published Statement of Financial Accounting Standards No. 154,
“Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 establishes
new standards on accounting for changes in accounting principles. Pursuant
to
the new rules, all such changes must be accounted for by retrospective
application to the financial statements of prior periods unless it is
impracticable to do so. SFAS 154 completely replaces Accounting Principles
Bulletin No. 20 and SFAS 3, though it carries forward the guidance in those
pronouncements with respect to accounting for changes in estimates, changes
in
the reporting entity, and the correction of errors. The requirements in SFAS
154
are effective for accounting changes made in fiscal years beginning after
December 15, 2005. We will apply these requirements to any accounting changes
after the implementation date. The adoption of this pronouncement is not
expected to have an impact on our consolidated financial position, results
of
operations, or cash flows.
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 did not have an impact on our consolidated financial position,
results of operations, or cash flows.
In
June
2005, the FASB ratified EITF Issue No. 05-2, “The Meaning of ‘Conventional
Convertible Debt Instrument’ in EITF Issue No. 00-19, ‘Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock’” (“EITF No. 05-2”), which addresses when a convertible debt instrument
should be considered “conventional” for the purpose of applying the guidance in
EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF No. 00-19
for conventional convertible debt instruments and indicated that convertible
preferred stock having a mandatory redemption date may qualify for the exemption
provided under EITF No. 00-19 for conventional convertible debt if the
instrument’s economic characteristics are more similar to debt than equity. EITF
No. 05-2 is effective for new instruments entered into and instruments modified
in periods beginning after June 29, 2005. We have applied the requirements
of
EITF No. 05-2 since the required implementation date. The adoption of this
pronouncement did not have an impact on our consolidated financial position,
results of operations, or cash flows.
EITF
Issue No. 05-4 “The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF Issue No. 00-19, ‘Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock’” (“EITF No. 05-4”) addresses financial instruments, such as stock
purchase warrants, which are accounted for under EITF 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 our 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. We adopted EITF No. 05-7 as of the beginning of our
interim reporting period that began on February 1, 2006. The adoption of this
pronouncement did not have an impact on our consolidated financial position,
results of operations, or cash flows.
In
September 2005, the FASB ratified EITF Issue No. 05-8, “Income Tax Consequences
of Issuing Convertible Debt with a Beneficial Conversion Feature” (“EITF No.
05-8”), which addresses the treatment of convertible debt issued with a
beneficial conversion feature as a temporary difference under the guidance
in
SFAS 109. In addition, deferred taxes recognized for a temporary difference
of
debt with a beneficial conversion feature should be recognized as an adjustment
of additional paid-in capital. Entities should apply the guidance in EITF No.
05-8 in the first interim or annual reporting period that begins after December
15, 2005. Its provisions should be applied retrospectively under the guidance
in
SFAS 154 to all convertible debt instruments with a beneficial conversion
feature accounted for under the guidance in EITF No. 00-27 “Application of EITF
Issue No. 98-5 ‘Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios.’” We have applied the
requirements of EITF No. 05-8 to all previously existing convertible debt
instruments with a beneficial conversion feature and will apply the requirements
of EITF No. 05-8 for all new convertible debt instruments with a beneficial
conversion feature. The adoption of this pronouncement for new convertible
debt
instruments with a beneficial conversion feature did not have an impact on
our
consolidated financial position, results of operations or cash
flows.
In
February 2006, the FASB published Statement of Financial Accounting Standards
No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of
FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 resolves issues
addressed in SFAS 133 Implementation Issue No. D1, “Application of Statement 133
to Beneficial Interests in Securitized Financial Assets.” The requirements in
SFAS 155 are effective for all financial instruments acquired or issued after
the beginning of an entity’s first fiscal year that begins after September 15,
2006. The adoption of this pronouncement is not expected to have an impact
on
our consolidated financial position, results of operations, or cash
flows.
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which
clarifies the accounting for uncertainty in tax positions. This Interpretation
requires an entity to recognize the impact of a tax position in its financial
statements if that position is more likely than not to be sustained on audit
based on the technical merits of the position. The provisions of FIN 48 are
effective for us as of the beginning of fiscal 2008, with earlier application
encouraged. Any cumulative effect of the change in accounting principle will
be
recorded as an adjustment to the opening accumulated deficit balance. The
adoption of this pronouncement is not expected to have an impact on our
consolidated financial position, results of operations, or cash
flows.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with accounting principles generally accepted in the U.S.,
and expands disclosures about fair value measurements. SFAS 157 is effective
for
us as of the beginning of fiscal 2009, with earlier application encouraged.
Any
cumulative effect will be recorded as an adjustment to the opening accumulated
deficit balance, or other appropriate component of equity. The adoption of
this
pronouncement is not expected to have an impact on our consolidated financial
position, results of operations, or cash flows.
In
September 2006, the SEC staff issued Staff Accounting Bulleting (“SAB”) No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 was
issued in order to reduce the diversity in practice in how public companies
quantify misstatements of financial statements, including misstatements that
were not material to prior years’ financial statements. SAB 108 is effective for
fiscal year 2007. The adoption of this pronouncement is not expected to have
an
impact on our consolidated financial position, results of operations, or cash
flows.
In
October 2005, the FASB issued FSP FAS 123(R)-2, “Practical Accommodation to the
Application of Grant Date as Defined in FASB Statement No. 123(R)”, which
provides clarification of the concept of mutual understanding between employer
and employee with respect to the grant date of a share-based payment award.
This
FSP provides that a mutual understanding of the key terms and conditions of
an
award shall be presumed to exist on the date the award is approved by management
if the recipient does not have the ability to negotiate the key terms and
conditions of the award and those key terms and conditions will be communicated
to the individual recipient within a relatively short time period after the
date
of approval. This guidance was applicable upon the initial adoption of SFAS
123(R). The adoption of this pronouncement did not have an impact on our
consolidated financial position, results of operations, or cash
flows.
ITEM
7. FINANCIAL
STATEMENTS
The
information called for by this Item 7 is included following the “Index to
Financial Statements” contained in this Annual Report on Form
10-KSB.
ITEM
8. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
8A. CONTROLS
AND PROCEDURES
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES. The Company, under the supervision and
with the participation of the Company’s management, including the Company’s
Chief Executive Officer and Principal Financial Officer, has evaluated the
effectiveness of the design and operation of the Company’s “disclosure controls
and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the
Exchange Act as of this report. The Company’s Chief Executive Officer and
Principal Financial Officer has concluded based upon his evaluation that the
Company’s disclosure controls and procedures were effective as of the end of the
period covered by this report to provide reasonable assurance that material
information required to be disclosed by the Company in reports that it files
or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms.
A
control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Such limitations include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or the intentional circumvention of the established process.
CHANGES
IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There have been no changes in
our
internal controls over financial reporting that have materially affected, or
are
reasonably likely to affect these controls during the year ended October 31,
2006.
ITEM
8B. OTHER
INFORMATION
None
PART
III
ITEM
9. DIRECTORS
AND EXECUTIVE OFFICERS
Management
Our
executive officers and directors and their respective ages and positions are
as
follows:
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Brad
Ketch
|
|
44
|
|
President,
Chief Executive Officer, Secretary, Principal Financial Officer and
Director
|
Ray
Willenberg, Jr.
|
|
55
|
|
Chairman
of the Board and Executive Vice President
|
David
Wojcik
|
|
40
|
|
Senior
Vice President
|
Jack
L. Peckham
|
|
65
|
|
Director
(1)
|
Thomas
J. Cooper
|
|
57
|
|
Director
(2)
|
“David”
Boon Tiong Tan
|
|
50
|
|
Director
|
____________________
(1)
|
Audit
Committee and Compensation Committee Member
|
(2)
|
Compensation
Committee Member
|
The
business experience, principal occupations and employment, as well as the
periods of service, of each of our directors and executive officers during
at
least the last five years are set forth below.
Brad
Ketch
has
served the Company in various roles since March 2002. In March 2002, Mr. Ketch
became a consultant with us on our broadband technology and served in that
capacity until July 2002, when he became our Chief Marketing Officer. He has
served as our President and Chief Executive Officer, as well as a director,
since December 2002. With over 19 years experience creating shareholder value
through broadband telecommunications products and services, Mr. Ketch, from
October 2001 to March 2002, served as CEO of Kentrox LLC, a manufacturer and
marketer of data networking equipment. At Kentrox, Mr. Ketch was responsible
for
a company with 260 employees and $90 million in annual revenues. From January
2001 to October 2001 Mr. Ketch implemented strategic plans for telecom service
providers and equipment manufacturers through his telecommunications consulting
company, Brad Ketch & Associates, of which he was founder and President.
From February 1999 to January 2001 he was Senior Vice President of Sales and
Marketing for HyperEdge Corporation, a company he co-founded. HyperEdge acquired
and integrated broadband access equipment manufacturers to further enable
service providers to deliver broadband access to the “Last Mile.” From August
1997 through February 1999, Mr. Ketch implemented strategic business and
technical plans for competitive local exchange carrier network access and
created products targeted at the incumbent local exchange carrier market as
a
consultant to various telecommunications companies as a consultant with Brad
Ketch & Associates. Prior to August 1997 he served in various capacities at
Nortel, Advanced Fibre Communications and Cincinnati Bell. Mr. Ketch has a
Bachelor of Arts degree in Economics from Wheaton College and an MBA from
Northwestern University.
Ray
Willenberg, Jr.
served
as our President, Chief Executive Officer and Chairman of the Board from April
1997 to March 2002, and was elected a director in October 1996. Mr. Willenberg
joined us as Vice President and corporate Secretary in 1996. He currently serves
as our Executive Vice President and Chairman of the Board of Directors. From
1972 to 1995, Mr. Willenberg was Chief Executive Officer of Mesa Mortgage
Company in San Diego, California.
David
Wojcik
has been
a member of the Company’s advisory board since March 2005, when he also joined
the Company as a consultant. In September 2006, Mr. Wojcik joined the Company
as
our Vice President Sales and Business Development. He was hired to lead Rim
Semi’s sales, marketing and business development activities on a global basis.
With over seventeen years’ experience, including more than ten years in sales
with telecommunications equipment leader Alcatel, Mr. Wojcik brings strong
leadership and success in broadband communications equipment sales, business
development and engineering.
An
accomplished executive with broad expertise in sophisticated data technology,
Mr. Wojcik achieved significant success leading large organizations as well
as
building and developing startup teams. His efforts have resulted in the
implementation of hundreds of millions of dollars in network solutions equipment
and services during his career. Mr. Wojcik has held many leadership
positions including serving as vice president of sales for Alcatel from 2001
through early 2005, co-founder and executive of Neutral Tandem Inc. in 2000
until joining Alcatel, and as a member of the research and development staff
at
Tellabs. Most recently, from the second quarter or 2005 until joining us
in March 2006, he was Area Vice President of Sales at Telmar Network Technology
(formerly Somera Communications). Mr. Wojcik holds a BS in Electrical
Engineering from Southern Illinois University.
Jack
L. Peckham
is a
founder and director of Heritage Bank of Commerce in San Jose, California,
and
serves on its audit and compensation committees. He is currently the Chairman
and CEO of Broadband Graphics, a company which owns and licenses intellectual
property in the areas of video and desktop computing. From 1985 through 1998,
Mr. Peckham held various positions at ATMEL Corporation (www.atmel.com),
retiring as its General Manager. He received an MA and a BA in Finance and
marketing from Burdette College, Boston.
Thomas
J. Cooper
has
served as a member of our Board of Directors since March 2002. From June 1
to
December 2, 2002, Mr. Cooper served as our President and Chief Executive
Officer. Mr. Cooper has been engaged in the development, creation and management
of global sales and marketing platforms for businesses operating in the areas
of
high technology, real estate, office automation, and telecommunications for
the
past 30 years. Mr. Cooper is currently the Senior Vice President of Sales and
Marketing of Artimi, Inc. (www.artimi.com) a fabless semiconductor firm based
in
Santa Clara, California serving new markets with Ultra Wideband wireless
technology and products. From 1994 to 2002, Mr. Cooper served in various
high-ranking positions at Conexant (formerly Virata), most recently as Senior
Vice President, Corporate Development (from July 1999 to February 2002), where
he was responsible for the development and implementation of long range growth
strategies, including defining global partnership initiatives; identifying
potential acquisition and joint venture candidates; and directing strategic
investment of corporate capital into select ventures in which the company
acquired minority stakes. From 1994 until 1999, Mr. Cooper served as Virata's
Senior Vice President, Worldwide Sales and Marketing, where he oversaw all
aspects of the company's product sales and marketing, corporate
marketing/communications and public relations. Mr. Cooper has a Bachelor of
Arts
degree in English Literature from Hamilton College and an MBA from the
University of Toledo, Ohio.
”David”
Boon Tiong Tan
has
served as a member of the Board of Directors since September 2006. From 1996
until 2000, Dr. Tan served as the head of the Technology Development Department
of SingTel, Asia’s leading telecommunications group, where he was responsible
for the development of the DSL and ATM infrastructure. In 2000, he joined
Mediacorp Singapore, where he managed its technology fund until 2002. From
2002
to 2004, he was an independent technology consultant. Since 2004, Dr. Tan headed
the NUS Venture Support unit where he is responsible for the funding and
incubation of over 30 technology start-ups from the National University of
Singapore (NUS). Dr. Tan holds a Ph.D. from Cambridge University.
Committees
of the Board of Directors
Our
Board
of Directors operates with the assistance of the Audit Committee and the
Compensation Committee. Due to the small size of our Board, we do not presently
maintain a formal nominating committee. The entire Board participates in the
process of nominating candidates for the Board of Directors.
The
function of the Audit Committee is to (i) make recommendations to the full
Board
of Directors with respect to appointment of the Company’s independent public
accountants, and (ii) meet periodically with our independent public accountants
to review the general scope of audit coverage, including consideration of
internal accounting controls and financial reporting.
The
Audit
Committee held four meetings during the fiscal year ended October 31, 2006.
Jack
L. Peckham was appointed to the Audit Committee in 2005, and is presently the
sole member of the committee. The Board of Directors has determined that Mr.
Peckham is an “Audit Committee Financial Expert” for purposes of the SEC’s
rules. The Board believes that Mr. Peckham meets the independence criteria
set
out in Rule 4200(a)(14) of the Marketplace Rules of the National Association
of
Securities Dealers and the rules and other requirements of the SEC.
The
Compensation Committee sets compensation policy and administers the Company’s
cash and equity incentive programs for the purpose of attracting and retaining
skilled executives who will promote the Company’s business goals and build
shareholder value. The committee is also responsible for reviewing and making
recommendations to the Board regarding all forms of compensation to be provided
to the Company’s named executive officers, including stock compensation and
bonuses. The Compensation Committee met three times during the fiscal year
ended
October 31, 2006.
There
are
no compensation committee interlocks between the members of our Compensation
Committee and any other entity. Jack L. Peckham and Thomas J. Cooper are the
members of the Compensation Committee. Neither of the current members of the
Compensation Committee is an officer or employee of ours, nor of any of our
subsidiaries. Mr. Cooper served as our Chief Executive Officer from June to
December 2002.
Board
of Directors; Election of Officers
All
directors are elected by a plurality vote at the annual meeting of the
shareholders, and shall hold office until his successor is duly elected and
qualified. Any vacancy occurring in the Board of Directors may be filled by
the
shareholders, the Board of Directors, or if the Directors remaining in office
constitute less than a quorum of the Board of Directors, they may fill the
vacancy by the affirmative vote of a majority of the Directors remaining in
office. A director elected to fill a vacancy is elected for the unexpired term
of his predecessor in office. Any directorship filled by reason of an increase
in the number of directors shall expire at the next shareholders' meeting in
which directors are elected, unless the vacancy is filled by the shareholders,
in which case the term shall expire on the later of (i) the next meeting of
the
shareholders or (ii) the term designated for the director at the time of
creation of the position being filled.
Our
executive officers are elected by our board of directors. Each officer shall
hold office until the earlier of: his death; resignation or removal from office;
or the election and qualification of his successor.
Compensation
of Directors
It
is our
policy to pay each outside director $2,000 for each meeting of our Board of
Directors attended and for each committee meeting attended. We also reimburse
our directors for reasonable expenses incurred in traveling to and from board
or
committee meetings.
In
addition, we have granted stock options to the directors to compensate them
for
their services. During the fiscal year ended October 31, 2006, we issued options
to purchase 1,200,000 and 1,000,000 shares of common stock valued at
approximately $73,879 and $42,139 to Mr. Peckham and Mr. Cooper, respectively,
to compensate them for their services as directors. Our directors are eligible
to receive stock option grants under our 2000 Omnibus Securities Plan, our
2001
Stock Incentive Plan and our 2006 Stock Incentive Plan.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires each of
our
officers and directors and each person who owns more than 10% of a registered
class of our equity securities to file with the SEC an initial report of
ownership and subsequent reports of changes in such ownership. Such persons
are
further required by SEC regulation to furnish us with copies of all Section
16(a) forms (including Forms 3, 4 and 5) that they file. Based solely on
our
review of the copies of such forms received by us with respect to fiscal
year
2006, or written representations from certain reporting persons, we believe
all
of our directors and executive officers met all applicable filing requirements,
except as described in this paragraph. Brad Ketch and Ray Willenberg, Jr.
each
filed a late Form 4, both reporting three transactions during fiscal 2006.
Jack
Peckham filed a late Form 4 reporting one transaction. Dave Tan and David
Wojcik
each filed a late Form 3 that occurred during fiscal 2006. Dr. Tan’s late Form 3
did not report any transactions; Mr. Wojcik’s late Form 3 reported three
transactions. Lastly, the Company’s Controller, Ms. Jan Rautio-Beyer, filed a
late Form 3 and a late Form 4. Mr. Rautio-Beyer’s Form 3 did not report any
transactions and her late Form 4 reported one transaction during fiscal
2006.
Code
of Ethics
We
have
adopted a code of ethics that applies to our chief executive officer, president,
chief financial officer, controller and others performing similar executive
and
financial functions at the Company. This code of ethics is posted on our Website
located at www.rimsemi.com. The code of ethics may be found as follows: From
our
main Web page, first click on “About Us” at the top of the page and then on
“Investors”. Next, click on “Governance”. Finally, click on “Code of Ethics”. We
intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding
an amendment to, or waiver from, a provision of this code of ethics by posting
such information on our Website, at the address and location specified
above.
ITEM
10. EXECUTIVE
COMPENSATION
The
following table sets forth all compensation for each of the last three fiscal
years awarded to, or earned by, our Chief Executive Officer and all other
executive officers serving as such at the end of 2006 whose salary and bonus
exceeded $100,000.00 for the year ended October 31, 2006, or who, as of October
31, 2006, was being paid a salary at a rate of at least $100,000.00 per
year.
Summary
Compensation Table
Name
and Principal
Position(s)
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Other
Annual
Compensation
|
|
Securities
Underlying
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brad
Ketch
|
|
|
2006
|
|
$
|
250,000
|
|
$
|
150,000
|
|
|
-
|
|
|
10,700,000
|
|
President
and Chief Executive Officer
|
|
|
2005
|
|
$
|
250,000
|
|
$
|
70,000
|
|
$
|
170,000(1
|
)
|
|
7,000,000
|
|
(and
Principal Financial Officer)
|
|
|
2004
|
|
$
|
250,000(2
|
)
|
|
-
|
|
$
|
86,667(3
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ray
Willenberg, Jr.
|
|
|
2006
|
|
$
|
188,000
|
|
$
|
75,000
|
|
|
-
|
|
|
10,700,000
|
|
Chairman
of the Board, Executive
|
|
|
2005
|
|
$
|
84,896
|
|
$
|
212,450(4
|
)
|
$
|
170,000(5
|
)
|
|
7,000,000
|
|
Vice
President
|
|
|
2004
|
|
$
|
175,000(6
|
)
|
$
|
152,176
|
|
$
|
176,667(7
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Wojcik
|
|
|
2006
|
|
$
|
149,625(8
|
)
|
$
|
40,000(9
|
)
|
|
-
|
|
|
4,000,000(10
|
)
|
Senior
Vice President
|
|
|
2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
2004
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
____________________
(1)
|
Represents
the issuance to Mr. Ketch in April 2005 of 1,000,000 shares of common
stock.
|
(2)
|
Includes
$45,380 paid in 2005
|
(3)
|
Represents
the issuance to Mr. Ketch in December 2003 of 40,000 shares of common
stock in lieu of $10,000 of deferred payroll, and the issuance to
Mr.
Ketch in March 2004 of 333,333 shares of common stock valued at
$76,333.
|
(4)
|
These
amounts are accrued but unpaid.
|
(5)
|
Represents
the issuance to Mr. Willenberg in April 2005 of 1,000,000 shares
of common
stock.
|
(6)
|
Includes
$46,250 paid in 2005.
|
(7)
|
Represents
the issuance to Mr. Willenberg in December 2003 of 400,000 shares
of
common stock in lieu of $100,000 of unpaid bonuses, and the issuance
to
Mr. Willenberg in March 2004 of 333,333 shares of common stock valued
at
$76,667.
|
(8)
|
Represents
$37,500 of Mr. Wojcik’s salary from September 1, 2006 through October 31,
2006, as well as $112,125 in compensation paid from March 2006 through
August 2006 when Mr. Wojcik served as a consultant to the
Company.
|
(9)
|
This
amount was accrued at October 31, 2006 and paid during fiscal year
2007.
|
(10)
|
Includes
3,500,000 stock options granted to Mr. Wojcik in connection with
his
employment agreement in September 2006 and 500,000 stock options
granted
to Mr. Wojcik in July 2006 while Mr. Wojcik was a consultant to the
Company.
|
In
accordance with the rules of the SEC, other compensation in the form of
perquisites and other personal benefits has been omitted for the named executive
officers because the aggregate amount of these perquisites and other personal
benefits was less than the lesser of $50,000 or 10% of annual salary and bonuses
for the named executive officers
Option
Grants in the Last Fiscal Year
The
following table sets forth information concerning individual grants of stock
options made during the year ended October 31, 2006, to each of the named
executive officers:
Name
|
|
Number
of
Securities
Underlying
Options
Granted
|
|
%
of Total Options
Granted
to
Employees
in
Fiscal
Year
|
|
Exercise
Price
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
Brad
Ketch
|
|
|
10,700,000
|
|
|
38.0
|
%
|
$
|
0.027
|
|
|
1/10/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ray
Willenberg, Jr.
|
|
|
10,700,000
|
|
|
38.0
|
%
|
$
|
0.027
|
|
|
1/10/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Wojcik
|
|
|
500,000
|
|
|
1.8
|
%
|
$
|
0.18
|
|
|
7/6/2016
|
|
|
|
|
3,500,000
|
|
|
12.4
|
%
|
$
|
0.158
|
|
|
9/1/2016
|
|
Aggregate
Options Exercised in 2006 and Year-End Option Values
The
named
executive officers did not exercise any stock options during the year ended
October 31, 2006. The following table sets forth information as of October
31,
2006, concerning options held by the named executive officers.
|
Shares
Acquired
on
Exercise
|
|
Value
Realized
|
|
Number
of Securities
Underlying
Unexercised
Options
at Fiscal Year End
|
|
Value
of Unexercised
In-The-Money
Options
at Fiscal Year End
|
|
(#)
|
|
($)
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
Brad
Ketch
|
-
|
|
-
|
|
10,700,000
|
|
-
|
|
$727,600
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Ray
Willenberg, Jr.
|
-
|
|
-
|
|
10,700,000
|
|
-
|
|
$727,600
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Wojcik
|
-
|
|
-
|
|
500,000
|
|
3,500,000
|
|
-
|
|
-
|
Employment
Agreements with Executive Officers
Brad
Ketch.
On
December 2, 2002, we entered into an employment agreement with Brad Ketch
pursuant to which Mr. Ketch was retained as our Chief Executive Officer. The
agreement had a three-year initial term and provided for Mr. Ketch to receive
an
initial base salary of $250,000, with an annual bonus to be paid at the
discretion of the Board of Directors in either cash or stock. In December 2005
and December 2006, this agreement was automatically renewed for an additional
one-year term. If Mr. Ketch is terminated without “cause” or leaves Rim
Semiconductor for “good reason,” each as defined in his agreement, he will
receive a severance payment equal to two years of his base salary on the date
of
termination. If he is terminated without cause or with good reason within one
year after a “change of control,” as defined in his agreement, he will receive a
severance payment equal to two years of his base salary and an amount equal
to
two times the amount of his last bonus received.
Ray
Willenberg, Jr.
We
entered into an employment agreement with Mr. Willenberg, dated as of
March 1, 2006, pursuant to which he continues to serve as our Executive
Vice President. The agreement terminates on March 3, 2008 and provides for
Mr. Willenberg to receive a base salary of $250,000 per year, subject to the
earlier of (i) Mr. Willenberg’s death or Disability (as defined in the
agreement); (ii) the termination of the agreement by either party without cause
on written notice; or (iii) termination of the agreement by us for Cause (as
defined in the agreement).
During
Mr. Willenberg’s employment, the agreement provides for his nomination to our
Board of Directors and, if elected, his appointment as chairman. Mr. Willenberg
would resign from the Board upon the termination of his employment.
Under
his
employment agreement, we also granted Mr. Willenberg a right of first refusal
to
purchase our equity interest in Top Secret Productions, LLC in the case of
a
bona fide third-party offer to purchase that interest or our determination
to
offer that interest for sale at a specified price.
David
Wojcik.
On
September 1, 2006, we entered into an employment agreement with David Wojcik
pursuant to which Mr. Wojcik was retained to serve as our Senior Vice President
- Sales and Business Development. The employment agreement provides for a base
annual salary of $225,000. Mr. Wojcik is also eligible to receive quarterly
bonuses of up to $40,000 per fiscal quarter, as determined by the Company’s
compensation committee.
Mr.
Wojcik is employed “at-will” by the Company, and accordingly may be terminated
with or without reason or notice at any time. If Mr. Wojcik is terminated other
than with good cause or leaves for good reason (each as defined in the
Employment Agreement), the Company will pay a severance equal to twelve months
base salary in effect on the date of Mr. Wojcik’s termination of employment. If
Mr. Wojcik relocates to the Company’s headquarters in Portland, Oregon, the
Company will provide him a relocation bonus of $100,000 and reimburse his
expenses up to $25,000. If Mr. Wojcik does relocate to Portland, Oregon, he
will
sign a separate Relocation Agreement which will provide that he will repay
the
Company a prorated amount of his reimbursed costs should he leave employment
with the Company within six months of his relocation.
In
accordance with his employment agreement, the Company also granted Mr. Wojcik
an
option to purchase 3,500,000 shares (the “Option”) of the Company’s common
stock, at an exercise price of $0.158 per share. The Option vests and becomes
exercisable in 32 installments. The first two installments shall vest the Option
with respect to 291,670 shares each on December 1, 2006 and March 1, 2007,
respectively, and the remainder of the Option shall vest in thirty equal
installments of 97,222 shares each on the first of each month commencing
April 1, 2007. Once vested, the Option is exercisable through August 31,
2016, unless earlier terminated in accordance with the Stock Option
Agreement.
Prior
to
accepting this position, Mr. Wojcik served as a consultant to the Company
pursuant to a Consulting Agreement dated March 4, 2005. While a consultant,
Mr.
Wojcik was granted 37,500 shares of the Company’s common stock and options to
purchase 500,000 shares of Company common stock at an exercise price of $0.18
per share.
ITEM
11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table sets forth information as of the close of business on January
24, 2007, concerning shares of our common stock beneficially owned by (i) each
director; (ii) each named executive officer; and (iii) by all directors and
executive officers as a group. We are not aware of any persons beneficially
owning more than 5% of our common stock.
In accordance
with the rules of the SEC, the table gives effect to the shares of common stock
that could be issued upon the exercise of outstanding options and warrants
within 60 days of January 24, 2007. Unless otherwise noted in the footnotes
to
the table and subject to community property laws where applicable, the following
individuals have sole voting and investment control with respect to the shares
beneficially owned by them. We have calculated the percentages of shares
beneficially owned based on 424,795,899
shares
of
common stock outstanding at January 24, 2007.
|
|
Shares
Beneficially Owned
|
|
Person
or Group
|
|
Number
|
|
Percent(1)
|
|
Brad
Ketch
|
|
|
12,411,283(2
|
)
|
|
2.85
|
%
|
Ray
Willenberg, Jr.
|
|
|
14,520,743(3
|
)
|
|
3.33
|
%
|
David
Wojcik
|
|
|
1,120,840(4
|
)
|
|
*
|
%
|
Jack
L. Peckham
|
|
|
1,344,432(5
|
)
|
|
*
|
%
|
Thomas
J. Cooper
|
|
|
1,882,258(6
|
)
|
|
*
|
%
|
David
Tan
|
|
|
139,130(7
|
)
|
|
*
|
%
|
|
|
|
|
|
|
|
|
All
executive officers and directors as a group
(6
persons)
|
|
|
31,418,686
|
|
|
6.98
|
%
|
___________________
*Less
than 1%.
(1)
|
Percentage
of beneficial ownership as to any person as of a particular date
is
calculated by dividing the number of shares beneficially owned by
such
person by the sum of the number of shares outstanding as of such
date and
the number of unissued shares as to which such person has the right
to
acquire voting and/or investment power within 60 days.
|
(2)
|
Includes
options to purchase 10,977,950 shares of common stock.
|
(3)
|
Includes
options to purchase 10,839,130 shares of common stock.
|
(4)
|
Includes
options to purchase 1,083,340 shares of common stock.
|
(5)
|
Includes
options to purchase 1,044,432 shares of common stock.
|
(6)
|
Includes
options to purchase 1,500,000 shares of common stock.
|
(7)
|
Includes
options to purchase 139,130 shares of common
stock.
|
ITEM
12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
On
March 7, 2006, we issued a convertible promissory note in the principal
amount of $301,196.55 (the “New Note”) to Mr. Willenberg. The New Note
replaced a promissory note in the principal amount of $383,910.72 dated
March 25, 2005 (the “Old Note”), between the Company and
Mr. Willenberg, which had a remaining balance due of $88,746.55. All of the
amounts represented by the Old Note and the New Note represented amounts owed
to
Mr. Willenberg for deferred compensation. The principal amount of the New
Note, with 8% interest, would have been due on the earlier of March 3, 2008
or the date on which Mr. Willenberg’s employment was terminated by the
Company. The Company had the ability, at its option, to prepay the New Note
without penalty. The New Note was convertible, at the option of
Mr. Willenberg, into shares of our common stock at a conversion price per
share equal to the closing price of the common stock on the Over-the-Counter
Bulletin Board on the date of conversion. The Old Note was
non-interest-bearing, convertible on the same terms as the New Note, and
provided for monthly payments equal to at least the monthly base salary paid
by
us to our chief executive officer. In April 2006, we paid the New Note in
full.
ITEM
13. EXHIBITS
3.1
|
Restated
Articles of Incorporation (incorporated by reference to Exhibit
3.1 of the
Company’s Registration Statement on Form SB-2 filed with the Commission
on
April 24, 2006).
|
|
|
3.2
|
Bylaws,
as amended (incorporated by reference to Exhibit 3.1 of the Company’s
Report on Form 10-Q for the period ended October 31, 2002, filed with
the Commission on January 29, 2002).
|
|
|
4.1
|
Specimen
Stock Certificate (incorporated by reference to Exhibit 4.1 of the
Company’s Annual Report on Form 10-KSB for the period ended
October 31, 2005, filed with the Commission on January 30, 2006 (the
“2005 10-KSB”)).
|
|
|
4.2
|
Warrant,
dated as of October 31, 2003 issued in favor of Melton Management
Ltd. (incorporated by reference to Exhibit 4.3 of the Company’s
Annual Report on Form 10-K for the period ended October 31, 2003,
filed
with the Commission on January 29, 2004).
|
|
|
4.3
|
Form
of Three Year Warrant issued to purchasers of the Company’s 7% Convertible
Debentures (incorporated by reference to Exhibit 4.5 of the Company’s
Registration Statement on Form SB-2 (No. 333-112643) filed with
the Commission on February 10, 2004).
|
|
|
4.5
|
Form
of Common Stock Purchase Warrant issued to certain investors (incorporated
by reference to Exhibit 4.2 of the June 1, 2005
8-K).
|
|
|
4.6
|
Form
of 7% Senior Secured Convertible Debenture, Series 06-01C, of
the Company (incorporated by reference to Exhibit 4.1 of the
Company’s Report on Form 8-K filed with the Commission on
March 13, 2006 (the “March 13, 2006 8-K”).
|
|
|
4.7
|
Amendment
to Class 2005-A, -B, and -C Common Stock Purchase Warrants, dated as
of February 21, 2006, among the Company and the Warrant holders that
are parties thereto (incorporated by reference to Exhibit 4.1 of the
Company’s Report on Form 8-K filed with the Commission on
March 9, 2006).
|
|
|
10.1
|
2000
Omnibus Securities Plan (incorporated by reference to Appendix A of
the Company’s Definitive Proxy Statement filed with the Commission on
May 2, 2000). (1)
|
|
|
10.2
|
2001
Stock Incentive Plan (incorporated by reference to Exhibit 4.1 of the
Company’s Registration Statement on Form S-8 (No. 333-68716),
filed with the Commission on August 30, 2001). (1)
|
|
|
10.3
|
Convertible
Promissory Note dated October 10, 2001 by the Company in favor of
Nellie Streeter Crane, Ltd. (incorporated by reference to
Exhibit 10.18 of the Company’s Report on Form 10-K for the
fiscal year ended October 31, 2001 (the “2001 10-K”), filed with the
Commission on January 29, 2002).
|
|
|
10.4
|
Stock
Option Agreement dated February 26, 2002, between the Company and
Thomas J. Cooper (incorporated by reference to Exhibit 10.14 of the
Company’s Report on Form 10-Q for the period ended January 31, 2002, filed
with the Commission on March 18, 2002).
|
|
|
10.5
|
Convertible
Promissory Note dated May 31, 2002, by the Company in favor of Robert
E. Casey, Jr. (incorporated by reference to Exhibit 10.9 of the
Company’s Report on Form 10-Q for the period ended July 31, 2002, filed
with the Commission on September 16, 2002 (the “July 2002
10-Q”)).
|
|
|
10.6
|
Convertible
Promissory Note dated June 12, 2002, by the Company in favor of
Bonnie Davis (incorporated by reference to Exhibit 10.10 of the July
2002 10-Q).
|
|
|
10.7
|
Employment
Agreement dated December 2, 2002, between the Company and Brad Ketch
(incorporated by reference to Exhibit 10.59 of the Company’s Annual
Report on Form 10-K for the period ended October 31, 2002, filed with
the Commission on January 29, 2003 (the “2002 10-K”)).
(1)
|
|
|
10.8
|
2003
Consultant Stock Plan (incorporated by reference to Exhibit 10.4 of
the Company’s Report on Form 10-Q for the period ended
January 31, 2003, filed with the Commission on March 17,
2003).
|
|
|
10.9
|
Convertible
Promissory Note dated February 10, 2003 by the Company in favor of
James Warren (incorporated by reference to Exhibit 10.1 of the
Company’s Report on Form 10-Q for the period ended April 30, 2003, filed
with the Commission on June 16,
2003).
|
10.10
|
Convertible
Promissory Note dated July 23, 2003 by the Company in favor of
Johnnie R. Keith (incorporated by reference to Exhibit 10.5 of the
Company’s Report on Form 10-Q for the period ended July 31, 2003, filed
with the Commission on September 15, 2003).
|
|
|
10.11
|
Services
Agreement dated as of March 31, 2004 between the Company and
HelloSoft, Inc. (incorporated by reference to Exhibit 10.18 of the
Company’s 2005 10-KSB).
|
|
|
10.12
|
First
Amendment to the Services Agreement dated as of March 31, 2004
between the Company and HelloSoft, Inc. (incorporated by reference
to
Exhibit 10.20 of the Company’s 2005 10-KSB).
|
|
|
10.13
|
Amendment
1.0 to the Services Agreement dated as of October 11, 2004 between
the Company and HelloSoft, Inc. (Confidential treatment has been
granted
with respect to certain portions of this exhibit. Omitted portions
have
been filed separately with the Commission) (incorporated by reference
to
Exhibit 10.21 of the Company’s 2005 10-KSB).
|
|
|
10.14
|
Amended
and Restated Development and License Agreement dated as of
November 29, 2004 between Adaptive Networks, Inc. and the Company.
(Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with
the Commission) (incorporated by reference to Exhibit 10.25 of the
Company’s 2005 10-KSB).
|
|
|
10.15
|
Amended
and Restated Right of First Refusal, Credit of Payments and Revenue
Sharing Agreement dated as of November 29, 2004, among the Company,
Adaptive Networks, Inc. and Certain Shareholders of Adaptive Networks,
Inc. (incorporated by reference to Exhibit 10.26 of the Company’s
2005 10-KSB).
|
|
|
10.16
|
Lease
Agreement dated as of March 2, 2005 between the Company and American
Property Management (incorporated by reference to Exhibit 10.3 of the
Company’s Report on Form 10-QSB for the period ended April 30, 2005,
filed with the Commission on June 14, 2005 (the “April 2005
10-QSB”)).
|
|
|
10.17
|
Letter
Agreement dated March 14, 2005 between Starburst Innovations, LLC and
the Company (incorporated by reference to Exhibit 10.30 of the
Company’s 2005 10-KSB).
|
|
|
10.18
|
Employment
Agreement between the Company and Ray Willenberg, Jr. dated as of
March 23, 2005 (incorporated by reference to Exhibit 10.1 of the
Company’s Report on Form 10-QSB for the period ended January 31, 2005,
filed with the Commission on March 17, 2005 (the “January 2005 10-QSB”)).
(1)
|
|
|
10.19
|
Convertible
Promissory Note dated March 23, 2005, by the Company in favor of Ray
Willenberg, Jr. (incorporated by reference to Exhibit 10.32 of
the Company’s 2005 10-KSB). (1)
|
|
|
10.20
|
Exchange
Agreement between the Company and Zaiq Technologies, Inc. dated
as of
April 6, 2005 (incorporated by reference to Exhibit 10.2 of the
April 2005 10-QSB).
|
|
|
10.21
|
Promissory
Note dated April 6, 2005, by the Company in favor of Zaiq
Technologies, Inc. (incorporated by reference to Exhibit 4.1 of the
April 2005 10-QSB).
|
|
|
10.22
|
Form
of Securities Purchase Agreement dated as of May 26, 2005, among the
Company and certain investors (incorporated by reference to
Exhibit 10.1 of the Company’s Report on Form 8-K filed with the
Commission on June 1, 2005 (the “June 2005 8-K”)).
|
|
|
10.23
|
Form
of Registration Rights Agreement dated as of May 26, 2005, among the
Company and certain investors (incorporated by reference to
Exhibit 10.2 of the June 2005 8-K).
|
|
|
10.24
|
Security
Interest Agreement dated as of May 26, 2005 among the Company,
certain specified investors, as secured parties, and Krieger and
Prager,
as agent for the secured parties (incorporated by reference to
Exhibit 10.3 of the June 2005
8-K).
|
10.25
|
Consulting
Agreement between the Company and Richard Hurn dated July 19, 2005
(incorporated by reference to Exhibit 10.38 of the Company’s 2005
10-KSB).
|
|
|
10.26
|
Amendment
2.0 to the Services Agreement dated as of July 26, 2005 between the
Company and HelloSoft, Inc. (Confidential treatment has been granted
with
respect to certain portions of this exhibit. Omitted portions have
been
filed separately with the Commission) (incorporated by reference
to
Exhibit 10.39 of the Company’s 2005 10-KSB).
|
|
|
10.27
|
Amendment
3.0 to the Services Agreement dated as of November 3, 2005 between
the Company and HelloSoft, Inc. (Confidential treatment has been
granted
with respect to certain portions of this exhibit. Omitted portions
have
been filed separately with the Commission) (incorporated by reference
to
Exhibit 10.40 of the Company’s 2005 10-KSB).
|
|
|
10.28
|
Letter
Agreement dated as of December 16, 2005 between the Company and Zaiq
Technologies, Inc. (incorporated by reference to Exhibit 10.41 of the
Company’s 2005 10-KSB).
|
|
|
10.29
|
Bridge
Loan Agreement between the Company and Double U Master Fund, L.P.
dated
January 24, 2006 (incorporated by reference to Exhibit 10.1 of
the Company’s Report on Form 8-K filed with the Commission on
January 30, 2006 (the “January 30, 2006
8-K”)).
|
|
|
10.30
|
Form
of Note issued in connection with the Bridge Loan Agreement (incorporated
by reference to Exhibit 10.2 of the Company’s January 30, 2006
8-K).
|
|
|
10.31
|
Form
of Warrant issued in connection with the Bridge Loan Agreement
(incorporated by reference to Exhibit 10.3 of the Company’s
January 30, 2006 8-K).
|
|
|
10.32
|
Security
Interest Agreement, dated as of January 24, 2006 among the Company,
Double U Master Fund, L.P. (the “Secured Party”) and Krieger &
Prager, LLP, as agent for the Secured Party (incorporated by reference
to
Exhibit 10.4 of the Company’s January 30, 2006
8-K).
|
|
|
10.33
|
Stock
Option Agreement dated January 26, 2006 between the Company and Brad
Ketch.* (1)
|
|
|
10.34
|
Stock
Option Agreement dated January 26, 2006 between the Company and Ray
Willenberg, Jr.* (1)
|
|
|
10.35
|
Stock
Option Agreement dated January 26, 2006 between the Company and
Walter Chen.*
|
|
|
10.36
|
License
Agreement dated as of February 6, 2006 between the Company and
HelloSoft, Inc. (incorporated by reference to Exhibit 10.10 of the
Company’s Quarterly Report on Form 10-QSB for the period ended
January 31, 2006, filed with the Commission on April 17, 2006 (the
“January 2006 10-QSB”) (Confidential treatment has been granted with
respect to certain portions of this exhibit. Omitted portions have
been
filed separately with the Commission).
|
|
|
10.37
|
Stock
Option Agreement dated February 16, 2006 between the Company and
Davis Munck Butrus, P.C. (incorporated by reference to
Exhibit 10.11 of the Company’s January 2006
10-QSB).
|
|
|
10.38
|
Stock
Option Agreement dated February 16, 2006 between the Company and Jack
Peckham (incorporated by reference to Exhibit 10.12 of the Company’s
January 2006 10-QSB).
|
|
|
10.39
|
Stock
Option Agreement dated February 16, 2006 between the Company and
Thomas Cooper (incorporated by reference to Exhibit 10.13 of the
Company’s January 2006 10-QSB).
|
|
|
10.40
|
Form
of Securities Purchase Agreement, dated as of March 6, 2006, between
the Company and the investors named therein (incorporated by reference
to
Exhibit 10.1 of the Company’s March 13, 2006
8-K).
|
|
|
10.41
|
Form
of Warrant issued in connection with the Securities Purchase Agreement
(incorporated by reference to Exhibit 10.2 of the Company’s
March 13, 2006 8-K).
|
10.42
|
Form
of Security Interest Agreement, dated as of March 6, 2006, among the
Company, the Secured Parties named therein, and Krieger & Prager, LLP,
as agent for the Secured Parties (incorporated by reference to
Exhibit 10.3 of the Company’s March 13, 2006
8-K).
|
|
|
10.43
|
Form
of Registration Rights Agreement, dated as of March 6, 2006, between
the Company and the investors named therein (incorporated by reference
to
Exhibit 10.4 of the Company’s March 13, 2006
8-K).
|
|
|
10.44
|
Placement
Agency Agreement, dated as of March 3, 2006, between the Company and
Pond Equities (incorporated by reference to Exhibit 10.5 of the
Company’s March 13, 2006 8-K).
|
|
|
10.45
|
Employment
Agreement between the Company and Ray Willenberg, Jr. dated as
of
March 1, 2006 (incorporated by reference to Exhibit 10.1 of the
Company’s Report on Form 8-K filed with the Commission on
March 15, 2006 (the “March 15, 2006 8-K”).
(1)
|
|
|
10.46
|
Convertible
Promissory Note dated March 7, 2006 in favor of Ray Willenberg, Jr.
(incorporated by reference to Exhibit 10.2 of the March 15, 2006
8-K). (1)
|
|
|
10.47
|
Consulting
Agreement between the Company and LF Technology Group, LLC dated
March 7, 2006 (incorporated by reference to Exhibit 10.3 of the
Company’s March 15, 2006 8-K).
|
|
|
10.48
|
Consulting
Agreement between the Company and Starburst Innovations, LLC dated
March 7, 2006 (incorporated by reference to Exhibit 10.4 of the
Company’s March 15, 2006 8-K).
|
|
|
10.49
|
Consulting
Agreement between the Company and Advisor Associates, Inc. dated
March 8, 2006 (incorporated by reference to Exhibit 10.5 of the
Company’s March 15, 2006 8-K).
|
|
|
10.50
|
First
Amendment to Lease between the Company and American Property Management
Corp. as agent for Weston Investment Co. LLC dated March 8, 2006
(incorporated by reference to Exhibit 10.15 of the Company’s Report
on Form 10-QSB for the period ended April 30, 2006 as filed with
the Commission on June 14, 2006).
|
|
|
10.51
|
Stock
Option Agreement between the Company and Jack Peckham dated July
6, 2006.*
(1)
|
|
|
10.52
|
Employment
Agreement between the Company and David Wojcik dated September
1, 2006
(incorporated by reference to Exhibit 10.1 of the Company’s Report on Form
10-QSB for the period ended July 31, 2006). (1)
|
|
|
10.53
|
Stock
Option Agreement between the Company and David Wojcik dated August
31,
2006.*(1)
|
|
|
10.54
|
2006
Stock Incentive Plan.*
|
|
|
10.55
|
Master
ASIC Services Agreement between the Company and eSilicon Corporation
dated
December 12, 2006.*
|
|
|
21.1
|
Subsidiaries
of the Registrant (incorporated by reference to Exhibit 21.1 of the
Company’s 2005 10-KSB).
|
|
|
23.1
|
Consent
of Marcum & Kliegman LLP.*
|
|
|
31.1
|
Rule
13A - 14(A)
/ 15D - 14 (A) Certification.* |
|
|
32.1
|
Section
1350
Certification.* |
____________________
|
(1)
|
Signifies
a management agreement or compensatory plan or
arrangement.
|
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Aggregate
fees for professional services rendered for the Company by Marcum &
Kliegman, LLP, the Company’s independent accountants, for the fiscal years ended
October 31, 2006 and 2005 are set forth below.
|
|
Fiscal
Year Ended October 31, 2006
|
|
Fiscal
Year Ended October 31, 2005
|
|
Audit
Fees
|
|
$
|
385,785
|
|
$
|
278,199
|
|
Audit
Related Fees
|
|
$
|
0
|
|
$
|
0
|
|
Tax
Fees
|
|
$
|
10,078
|
|
$
|
11,510
|
|
All
Other Fees
|
|
$
|
8,270
|
|
$
|
12,509
|
|
Total
|
|
$
|
404,133
|
|
$
|
302,218
|
|
Audit
Fees
were for
professional services rendered for the audits of the consolidated financial
statements of the Company, quarterly review of the financial statements included
in Quarterly Reports on Form 10-QSB, consents, and other assistance required
to
complete the year-end audit of the consolidated financial statements.
Audit-Related
Fees
were for
assurance and related services reasonably related to the performance of the
audit or review of financial statements and not reported under the caption
Audit
Fees. Tax
Fees
were for
professional services related to tax compliance, tax authority audit support
and
tax planning. All
Other Fees
include
any other fees charged by the Company’s auditors that are not otherwise
specified.
The
Audit
Committee preapproves all audit and permissible non-audit services to be
provided by the Company’s independent registered public accountants and the
estimated fees for these services. None of the services provided by the
independent registered public accountants that are described above were approved
by the Audit Committee pursuant to a waiver of the preapproval requirements
of
the SEC’s rules and regulations.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
DATE:
February 2, 2007 |
RIM
SEMICONDUCTOR
COMPANY |
|
|
|
|
By: |
/s/
Brad
Ketch |
|
Brad Ketch |
|
President
and
Chief Executive Officer
(Principal
Executive Officer and Principal Financial and Accounting
Officer)
|
In
accordance with Exchange Act, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/
Brad
Ketch
Brad
Ketch
|
|
President,
Chief Executive Officer and Director (PRINCIPAL EXECUTIVE OFFICER
and
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
|
|
February
2, 2007
|
|
|
|
|
|
/s/
Ray Willenberg, Jr.
Ray
Willenberg, Jr.
|
|
Chairman
of the Board and Executive Vice President
|
|
February
2, 2007
|
|
|
|
|
|
/s/
Jack
Peckham
Jack
Peckman
|
|
Director
|
|
February
2, 2007
|
|
|
|
|
|
/s/
Thomas J. Cooper
Thomas
J. Cooper
|
|
Director
|
|
February
2, 2007
|
|
|
|
|
|
/s/
Boon Tiong Tan
Boon
Tiong Tan
|
|
Director
|
|
February
2, 2007
|
INDEX
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated
Balance Sheets At October 31, 2006 and 2005
|
F-2
|
|
|
Consolidated
Statements of Operations for the Years Ended October 31, 2006 and
2005
|
F-3
|
|
|
Consolidated
Statements of Stockholders’ (Deficiency) Equity for the Years Ended
October 31, 2006 and 2005
|
F-4
to F-5
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended October 31, 2006 and
2005
|
F-6
to F-7
|
|
|
Notes
to the Consolidated Financial Statements
|
F-8
to F-37
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors
Rim
Semiconductor Company
We
have
audited the accompanying consolidated balance sheets of Rim Semiconductor
Company and Subsidiaries (the “Company”) as of October 31, 2006 and 2005 and the
related consolidated statements of operations, stockholders’ (deficiency)
equity, and cash flows for the years ended October 31, 2006 and 2005. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor are we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no opinion. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Rim Semiconductor Company
and Subsidiaries at October 31, 2006 and 2005 and the results of its operations
and its cash flows for the years ended October 31, 2006 and 2005, in conformity
with accounting principles generally accepted in the United States of
America.
/s/
MARCUM & KLIEGMAN LLP
New
York,
New York
February
1, 2007
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
October
31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,090,119
|
|
$
|
373,481
|
|
Short-term
investments
|
|
|
1,000,000
|
|
|
-
|
|
Other
current assets
|
|
|
310,266
|
|
|
34,031
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
2,400,385
|
|
|
407,512
|
|
|
|
|
|
|
|
|
|
Property
and equipment - net
|
|
|
64,546
|
|
|
9,922
|
|
Technology
licenses and capitalized softwaredevelopment costs -
net
|
|
|
6,250,496
|
|
|
5,751,000
|
|
Deferred
financing costs - net
|
|
|
1,274,823
|
|
|
326,307
|
|
Other
assets
|
|
|
22,144
|
|
|
10,224
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
10,012,394
|
|
$
|
6,504,965
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ (DEFICIENCY) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Convertible
notes payable (net of debt discount of $0 and $20,875,
respectively)
|
|
$
|
478,000
|
|
$
|
736,997
|
|
Convertible
debentures (net of debt discount of $1,548 and $0,
respectively)
|
|
|
73,452
|
|
|
-
|
|
Notes
payable
|
|
|
-
|
|
|
1,834,073
|
|
Derivative
liabilities - warrants and options
|
|
|
8,238,583
|
|
|
864,229
|
|
Accounts
payable and accrued expenses
|
|
|
1,223,210
|
|
|
981,833
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
10,013,245
|
|
|
4,417,132
|
|
|
|
|
|
|
|
|
|
Long-term
portion of convertible debentures (net of debt discount of
$3,119,369 and $1,601,586, respectively)
|
|
|
1,479,195
|
|
|
339,125
|
|
Long-term
portion of notes payable
|
|
|
-
|
|
|
108,134
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
11,492,440
|
|
|
4,864,391
|
|
|
|
|
|
|
|
|
|
Commitments,
Contingencies and Other matters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
(Deficiency) Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock - $0.01 par value; 15,000,000 shares authorized; -0- shares
issued and outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock - $0.001 par value; Authorized - 900,000,000 and
500,000,000 shares at October 31, 2006 and 2005, respectively;
Issued - 356,399,782 and 184,901,320 shares at
October 31, 2006 and 2005, respectively; Outstanding - 355,899,928
and 184,901,320 shares at October 31, 2006 and
2005, respectively
|
|
|
356,400
|
|
|
184,902
|
|
Treasury
Stock, at cost - 499,854 and -0- shares of common stock
at October 31, 2006 and 2005, respectively
|
|
|
(7,498
|
)
|
|
-
|
|
Additional
paid-in capital
|
|
|
75,215,263
|
|
|
61,359,999
|
|
Unearned
compensation
|
|
|
(1,197,034
|
)
|
|
(22,771
|
)
|
Accumulated
deficit
|
|
|
(75,847,177
|
)
|
|
(59,881,556
|
)
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS’ (DEFICIENCY) EQUITY
|
|
|
(1,480,046
|
)
|
|
1,640,574
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ (DEFICIENCY)
EQUITY
|
|
|
10,012,394
|
|
|
6,504,965
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For
the Years Ended October 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
61,699
|
|
$
|
39,866
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
-
|
|
|
11,945
|
|
Impairment
of film in distribution
|
|
|
-
|
|
|
1,009,777
|
|
Amortization
of technology licenses and capitalized software development
costs
|
|
|
777,026
|
|
|
-
|
|
Research
and development expenses (including stock based compensation of
$41,639 and $296,667, respectively)
|
|
|
325,124
|
|
|
366,306
|
|
Selling,
general and administrative expenses (including stock based
compensation of $1,862,547 and $1,131,874,
respectively)
|
|
|
5,428,730
|
|
|
2,951,925
|
|
|
|
|
|
|
|
|
|
TOTAL
OPERATING
EXPENSES
|
|
|
6,530,880
|
|
|
4,339,953
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(6,469,181
|
)
|
|
(4,300,087
|
)
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES (INCOME):
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(19,612
|
)
|
|
-
|
|
Interest
expense
|
|
|
10,823,102
|
|
|
3,027,147
|
|
Change
in fair value of derivative liabilities
|
|
|
(1,958,907
|
)
|
|
(2,233,004
|
)
|
Amortization
of deferred financing costs
|
|
|
1,586,386
|
|
|
602,182
|
|
Gain
on sale of property and equipment
|
|
|
-
|
|
|
(20,000
|
)
|
Gain
on forgiveness of principal and interest on Zaiq Note
|
|
|
(1,169,820
|
)
|
|
(797,333
|
)
|
Gain
on forgiveness of liabilities
|
|
|
-
|
|
|
(99,369
|
)
|
Loss
(gain) on extinguishment of debt
|
|
|
446,386
|
|
|
(55,814
|
)
|
Other
|
|
|
(211,095
|
)
|
|
(33,514
|
)
|
|
|
|
|
|
|
|
|
TOTAL
OTHER EXPENSES
|
|
|
9,496,440
|
|
|
390,295
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(15,965,621
|
)
|
$
|
(4,690,382
|
)
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED NET LOSS PER COMMON SHARE
|
|
$
|
(0.05
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
301,858,638
|
|
|
114,687,798
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ (DEFICIENCY) EQUITY
FOR
THE
YEARS ENDED OCTOBER 31, 2006 AND 2005
|
|
Common
Stock
|
|
Additional
Paid-in Capital
|
|
Unearned
Compensation
|
|
Accumulated
Deficit
|
|
Total
Stockholders’ (Deficiency)
Equity
|
|
|
|
Shares
|
|
Amount
|
|
Balance
at November 1, 2004
|
|
|
84,781,959
|
|
$
|
84,782
|
|
$
|
55,031,976
|
|
$
|
(164,500
|
)
|
$
|
(55,191,174
|
)
|
$
|
(238,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for
cash
|
|
|
10,289,026
|
|
|
10,289
|
|
|
824,811
|
|
|
—
|
|
|
—
|
|
|
835,100
|
|
Issuance
of common stock under
consulting agreements
|
|
|
2,837,500
|
|
|
2,838
|
|
|
339,162
|
|
|
(342,000
|
)
|
|
—
|
|
|
—
|
|
Issuance
of common stock for
services
|
|
|
5,073,015
|
|
|
5,073
|
|
|
309,594
|
|
|
(314,667
|
)
|
|
—
|
|
|
—
|
|
Issuance
of common stock to
key employees and
directors
|
|
|
2,750,000
|
|
|
2,750
|
|
|
449,750
|
|
|
(452,500
|
)
|
|
—
|
|
|
—
|
|
Issuance
of common stock for
conversion of notes
payable,
convertible debentures,
and accrued
interest
|
|
|
72,763,232
|
|
|
72,763
|
|
|
2,636,193
|
|
|
—
|
|
|
—
|
|
|
2,708,956
|
|
Issuance
of common stock for
liquidated damages
|
|
|
803,331
|
|
|
804
|
|
|
97,646
|
|
|
—
|
|
|
—
|
|
|
98,450
|
|
Issuance
of common stock for
Below Market
Issuance
|
|
|
529,311
|
|
|
529
|
|
|
(529
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance
of common stock in
payment of accounts
payable
and accrued expenses
|
|
|
422,783
|
|
|
423
|
|
|
71,488
|
|
|
—
|
|
|
—
|
|
|
71,911
|
|
Issuance
of common stock in
exchange for
surrender
of convertible preferred
stock
|
|
|
4,651,163
|
|
|
4,651
|
|
|
739,535
|
|
|
—
|
|
|
—
|
|
|
744,186
|
|
Stock
options issued for professional
services
|
|
|
—
|
|
|
—
|
|
|
165,869
|
|
|
(165,869
|
)
|
|
—
|
|
|
—
|
|
Stock
offering costs
|
|
|
—
|
|
|
—
|
|
|
(39,105
|
)
|
|
—
|
|
|
—
|
|
|
(39,105
|
)
|
Reclassification
of conversion option
liability
|
|
|
—
|
|
|
—
|
|
|
721,833
|
|
|
—
|
|
|
—
|
|
|
721,833
|
|
Warrants
issued for professional
services
|
|
|
—
|
|
|
—
|
|
|
11,776
|
|
|
(11,776
|
)
|
|
—
|
|
|
—
|
|
Amortization
of unearned compensation
expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,428,541
|
|
|
—
|
|
|
1,428,541
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,690,382
|
)
|
|
(4,690,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at October 31, 2005
|
|
|
184,901,320
|
|
$
|
184,902
|
|
$
|
61,359,999
|
|
$
|
(22,771
|
)
|
$
|
(59,881,556
|
)
|
$
|
1,640,574
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ (DEFICIENCY) EQUITY
FOR
THE
YEARS ENDED OCTOBER 31, 2006 AND 2005
|
|
Common
Stock
|
|
Treasury
Stock
|
|
Additional
Paid-in
|
|
Unearned
|
|
Accumulated
|
|
Total
Stockholders’
(Deficiency)
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Compensation
|
|
Deficit
|
|
Equity
|
|
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
|
|
|
13,712,222
|
|
|
13,712
|
|
|
-
|
|
|
-
|
|
|
2,382,713
|
|
|
(2,396,425
|
)
|
|
-
|
|
|
-
|
|
Issuance
of common stock in purchase of assets from 1021
Technologies
|
|
|
500,000
|
|
|
500
|
|
|
-
|
|
|
-
|
|
|
77,500
|
|
|
-
|
|
|
-
|
|
|
78,000
|
|
Issuance
of common stock for conversion of convertible debentures and accrued
interest
|
|
|
122,075,460
|
|
|
122,075
|
|
|
-
|
|
|
-
|
|
|
3,374,090
|
|
|
-
|
|
|
-
|
|
|
3,496,165
|
|
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 and options
|
|
|
21,915,985
|
|
|
21,916
|
|
|
-
|
|
|
-
|
|
|
1,374,312
|
|
|
-
|
|
|
-
|
|
|
1,396,228
|
|
Issuance
of common stock upon cashless exercise of warrants
|
|
|
1,194,587
|
|
|
1,195
|
|
|
-
|
|
|
-
|
|
|
183,608
|
|
|
-
|
|
|
-
|
|
|
184,803
|
|
Stock
options granted to key employees and advisory board member
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,032,412
|
|
|
-
|
|
|
-
|
|
|
1,032,412
|
|
Reclassification
of derivative liability upon exercise of warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,758,046
|
|
|
-
|
|
|
-
|
|
|
2,758,046
|
|
Reclassification
of conversion option liability
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,378,782
|
|
|
-
|
|
|
-
|
|
|
1,378,782
|
|
Amortization
of unearned compensation expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,222,162
|
|
|
-
|
|
|
1,222,162
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(15,965,621
|
)
|
|
(15,965,621
|
)
|
Balance
at October 31, 2006
|
|
|
356,399,782
|
|
$
|
356,400
|
|
|
(499,854
|
)
|
$
|
(7,498
|
)
|
$
|
75,215,263
|
|
$
|
(1,197,034
|
)
|
$
|
(75,847,177
|
)
|
$
|
(1,480,046
|
)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Years Ended October 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
Loss
|
|
$
|
(15,965,621
|
)
|
$
|
(4,690,382
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Consulting
fees and other compensatory elements of stock issuances
|
|
|
1,923,276
|
|
|
1,428,541
|
|
Change
in fair value of derivative liabilities
|
|
|
(1,958,907
|
)
|
|
(2,233,004
|
)
|
Fair
value of Investors’ warrants in excess of debt discount
|
|
|
5,608,156
|
|
|
—
|
|
Impairment
of film in distribution
|
|
|
—
|
|
|
1,009,777
|
|
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
|
)
|
Gain
on forgiveness of principal and interest on Zaiq note
|
|
|
(1,169,820
|
)
|
|
(896,702
|
)
|
Loss
on exchange of notes payable into common stock
|
|
|
446,386
|
|
|
—
|
|
Amortization
of deferred financing costs
|
|
|
1,586,386
|
|
|
602,182
|
|
Amortization
of film in production costs
|
|
|
—
|
|
|
11,945
|
|
Amortization
on debt discount on notes
|
|
|
4,681,544
|
|
|
2,692,581
|
|
Amortization
of technology licenses and capitalized software development
costs
|
|
|
777,026
|
|
|
—
|
|
Depreciation
and amortization
|
|
|
5,242
|
|
|
25,112
|
|
Other
non-cash expense (income)
|
|
|
7,519
|
|
|
—
|
|
Change
in assets:
|
|
|
|
|
|
|
|
Other
current assets
|
|
|
(276,234
|
)
|
|
(26,047
|
)
|
Other
assets
|
|
|
(11,920
|
)
|
|
(2,790
|
)
|
Change
in liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
899,049
|
|
|
(224,084
|
)
|
|
|
|
|
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(3,447,918
|
)
|
|
(2,412,199
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Acquisition
of assets from 1021 Technologies
|
|
|
(150,000
|
)
|
|
—
|
|
Acquisition
and costs of capitalized software and development fees
|
|
|
(590,461
|
)
|
|
—
|
|
Acquisition
of property and equipment
|
|
|
(59,866
|
)
|
|
(11,161
|
)
|
Purchase
of short-term investments
|
|
|
(1,000,000
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(1,800,327
|
)
|
|
(11,161
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
—
|
|
|
835,100
|
|
Proceeds
from exercise of warrants
|
|
|
1,391,444
|
|
|
—
|
|
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
|
)
|
|
(1,010,021
|
)
|
Repayments
of convertible notes payable
|
|
|
(482,322
|
)
|
|
(534,039
|
)
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
5,964,883
|
|
|
2,669,030
|
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
716,638
|
|
|
245,670
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF YEAR
|
|
|
373,481
|
|
|
127,811
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - END OF YEAR
|
|
$
|
1,090,119
|
|
$
|
373,481
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Years Ended October 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
6,650
|
|
$
|
203,539
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for conversion of convertible debentures, convertible
note
payable, notes payable and accrued interest
|
|
$
|
4,802,066
|
|
$
|
2,708,956
|
|
|
|
|
|
|
|
|
|
Common
stock issued upon cashless exercise of warrants
|
|
$
|
184,803
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses satisfied by issuance of common
stock
|
|
$
|
4,784
|
|
$
|
71,911
|
|
|
|
|
|
|
|
|
|
Common
stock issued for accrued liquidated damages
|
|
$
|
—
|
|
$
|
98,450
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses converted to notes payable
|
|
$
|
—
|
|
$
|
55,251
|
|
|
|
|
|
|
|
|
|
Value
recorded as debt discount relating to warrants issued to purchasers
of
convertible debentures
|
|
$
|
3,428,571
|
|
$
|
2,000,000
|
|
|
|
|
|
|
|
|
|
Value
assigned to conversion option liability in connection with issuance
of
convertible debentures
|
|
$
|
2,571,429
|
|
$
|
1,500,000
|
|
|
|
|
|
|
|
|
|
Reclassification
of conversion option liability to equity
|
|
$
|
1,378,782
|
|
$
|
721,833
|
|
|
|
|
|
|
|
|
|
Value
assigned on issuance date to warrants issued to placement
agent
|
|
$
|
1,792,452
|
|
$
|
319,066
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
Deferred
compensation converted to convertible note payable (see footnote
8
(4))
|
|
$
|
212,450
|
|
$
|
383,911
|
|
|
|
|
|
|
|
|
|
Common
stock issued for consulting services (includes $430,875 of capitalized
software development fees)
|
|
$
|
2,396,426
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to purchase assets from 1021 Technologies
|
|
$
|
78,000
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Reclassification
of derivative liability to equity upon exercise of
warrants
|
|
$
|
2,758,046
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Stock
options granted to key employees and advisory board member
|
|
$
|
1,032,412
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - PRINCIPLES OF CONSOLIDATION AND BUSINESS OPERATIONS
The
consolidated financial statements include the accounts of Rim Semiconductor
Company (formerly New Visual Corporation) (“Rim Semi”) and its wholly-owned
operating subsidiary, NV Entertainment, Inc. (“NV Entertainment”) (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, including all of the risk of loss.
Rim
Semiconductor Company was incorporated under the laws of the State of Utah
on
December 5, 1985. In November of 1999, the Company began to focus its
business activities on the development of new semiconductor technologies.
Pursuant to such plan, in February of 2000, the Company acquired NV Technology,
Inc. and commenced its technology business. The Company’s technology business
has generated no revenues to date.
The
Company operates in two business segments, the production of motion pictures,
films and videos (Entertainment Segment) and 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.
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.
Liquidity
Discussion
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate the realization of assets and the satisfaction of liabilities
in the normal course of business.
The
Company has suffered significant recurring operating losses, used substantial
funds in its operations, and needs to raise additional funds to accomplish
its
business plan. For the years ended October 31, 2006 and 2005 the Company
incurred net losses of approximately $16 million and $4.7 million, respectively,
and as of October 31, 2006 had a working capital deficiency of approximately
$7.6 million. In addition, management believes that the Company will continue
to
incur net losses and cash flow deficiencies from operating activities through
at
least October 31, 2007.
The
Company funded its operations during 2006 and 2005 through sales of its common
stock, proceeds from notes, convertible debentures and the exercise of warrants,
resulting in net proceeds to the Company of approximately $8,141,000 and
$4,635,000, respectively.
In
January 2007, an institutional investor that has been a prior investor in the
Company committed to purchase $6 million of convertible debentures upon the
Company’s request as discussed in Note 16. Management believes that the net
proceeds from this financing, together with the approximately $848,000 in cash
and short-term investments (unaudited) at January 24, 2007, is sufficient to
fund the planned expenditures for the fiscal year ended October 31,
2007.
Management
of the Company is continuing its efforts to secure additional funds through
equity and/or debt instruments for its operations. After October 31, 2007,
the
Company may require additional funds for its operations and to pay down its
liabilities, as well as finance its expansion plans consistent with its business
plan. However, there can be no assurance that the Company will be able to secure
additional funds and that if such funds are available, whether the terms or
conditions would be acceptable to the Company.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting
Estimates
The
preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures of contingent assets and
liabilities in the consolidated financial statements and the accompanying notes.
Significant estimates include impairment analysis for long-lived assets, the
individual-film-forecast computation method, income taxes, litigation and
valuation of derivative instruments. Actual results could differ from those
estimates.
Fair
Value of Financial Instruments
The
carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents, short-term investments, accounts payable, accrued expenses,
convertible notes payable, convertible debentures and notes payable approximate
fair value because of their immediate or short-term nature. The fair value
of
long-term notes payable and convertible debentures approximates their carrying
value because the stated rates of the debt either reflect recent market
conditions or are variable in nature.
Cash
and Cash Equivalents
Cash
and
cash equivalents are highly liquid investments with insignificant interest
rate
risk and maturities of three months or less at the time of acquisition. They
include demand deposits and bank time deposits.
Short-Term
Investments
Short-term
investments at October 31, 2006 consisted of certificates of deposit aggregating
$1,000,000, acquired June 2, 2006, and which matured on January 28, 2007. The
certificates of deposit earn interest at 3.54% per annum.
Property
and Equipment
Property
and equipment procured in the normal course of business are stated at cost.
Property and equipment purchased in connection with an acquisition is stated
at
its estimated fair value. Property and equipment is being depreciated on a
straight-line method over the estimated useful lives of the assets, which
generally range from two to seven years. Upon retirement or other disposition
of
these assets, the cost and related accumulated depreciation of these assets
are
removed from the accounts and the resulting gains or losses are reflected in
the
Results of Operations. Leasehold improvements are being amortized over the
shorter of the useful life or the remainder of the lease term. Maintenance and
repair expenses are charged to operations as incurred.
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 each film based on information
received by its distributors, 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 an individual film may result in an increase or decrease
to
the percentage of amortization of capitalized film costs relative to a previous
period.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Film
in Distribution
(Continued)
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 statements of operations the amount by which
the unamortized film costs exceeds the Film’s fair value.
During
July 2005, the Company performed its review, and it was determined that the
unamortized Film costs exceeded the Film’s fair value. The conclusion was based
upon information the Company received from the Film’s distributor relating to
lower than expected sales. As a result of this review, the Company wrote-down
the remaining carrying value attributed to the Film to $0. This resulted in
an
impairment of $1,009,777 which is included in the consolidated statement of
operations for the year ended October 31, 2005.
Income
Taxes
Income
taxes are accounted for in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). SFAS
No. 109 employs an asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are recognized
for
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to the difference between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
Under SFAS No. 109, the effect on deferred income taxes of a change in tax
rates
is recognized in operations in the period that includes the enactment
date.
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:
o
|
persuasive
evidence of a sale or licensing arrangement with a customer
exists;
|
o
|
the
film is complete and, in accordance with the terms of the arrangement,
has
been delivered or is available for immediate and unconditional
delivery;
|
o
|
the
license period of the arrangement has begun and the customer can
begin its
exploitation, exhibition or sale;
|
o
|
the
arrangement fee is fixed or determinable; and
|
o
|
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. Minimum guaranteed license fees totaled
approximately $4,800 and $27,000 during the years ended October 31, 2006 and
2005, respectively and were recorded as revenue.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
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 operations at the consummation of the acquisition.
Research
and development expenses relate to the design and development of advanced
transmission technology products. The Company outsources to independent third
parties all of its 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.
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.
Redeemable
Series B Preferred Stock
Redeemable
Series B Preferred Stock, which includes characteristics of both liabilities
and
equity, was classified as a long-term liability in accordance with the
provisions of SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity.” In April 2005, the Redeemable
Series B Preferred Stock was cancelled in exchange for the issuance of common
stock and a promissory note. See Note 7 for further discussion.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative
Financial Instruments
In
connection with the issuance of certain convertible debentures (see Note 9),
the
terms of the debentures included an embedded conversion feature which provided
for a conversion of the debentures into shares of the Company’s common stock at
a rate which was determined to be variable. The Company determined that the
conversion feature was an embedded derivative instrument and that the conversion
option was an embedded put option pursuant to SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” as amended, and Emerging Issues
Task Force (“EITF”) Issue No. 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.”
The
accounting treatment of derivative financial instruments requires that the
Company record the conversion option and related warrants at their fair values
as of the inception date of the convertible debenture agreements and at fair
value as of each subsequent balance sheet date. In addition, under the
provisions of EITF Issue No. 00-19, as a result of entering into the convertible
debenture agreements, the Company was required to classify all other
non-employee warrants and options as derivative liabilities and record them
at
their fair values at each balance sheet date. Any change in fair value was
recorded as non-operating, non-cash income or expense at each balance sheet
date. If the fair value of the derivatives was higher at the subsequent balance
sheet date, the Company recorded a non-operating, non-cash charge. If the fair
value of the derivatives was lower at the subsequent balance sheet date, the
Company recorded non-operating, non-cash income. The Company reassesses the
classification at each balance sheet date. If the classification required under
EITF Issue No. 00-19 changes as a result of events during the period, the
contract should be reclassified as of the date of the event that caused the
reclassification.
The
fair
value of derivative financial instruments was estimated during the years ended
October 31, 2006 and 2005 using the Black-Scholes model and the following range
of assumptions:
|
|
October
31, 2006
|
|
October
31, 2005
|
|
Estimated
dividends
|
|
|
None
|
|
|
None
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
92.9
- 158.8
|
%
|
|
82.7
- 103.9
|
%
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
4.6
- 5.0
|
%
|
|
4.0
- 4.4
|
%
|
|
|
|
|
|
|
|
|
Contractual
term (years)
|
|
|
0.9
- 9.8
|
|
|
2.8
- 3.9
|
|
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 related
stock
options and warrants. The dividend yield assumption is based on the Company’s
history and expectation of dividend payouts. The expected life of stock options
and warrants represents the Company’s historical experience with regards to the
exercise behavior of its option and warrant holders and the contractual term
of
the options and warrants.
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.
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.
The
number of potentially dilutive securities excluded from computation of diluted
loss per share was approximately 220,194,580 and 172,755,614, for the years
ended October 31, 2006 and 2005, respectively (Note 12).
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based
Compensation
On
November 1, 2005, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123(R)”), which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors, including stock options, based on estimated fair values. SFAS 123(R)
supersedes the Company’s previous accounting under Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for
periods beginning on November 1, 2005. In March 2005, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”)
relating to SFAS 123(R). The Company has applied the provisions of SAB 107
in
its adoption of SFAS 123(R).
The
Company early adopted SFAS 123(R) using the modified prospective transition
method, as of November 1, 2005, the first day of the Company’s fiscal year 2006.
The Company’s consolidated financial statements as of and for the year ended
October 31, 2006 reflect the impact of SFAS 123(R). In accordance with the
modified prospective transition method, the Company’s 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 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 SFAS 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 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.
The
effect of the adoption of SFAS 123(R) on the Company’s fiscal year 2006 results
was to increase the net loss by $919,251. There was no impact on basic and
diluted net loss per common share.
SFAS
123(R) also requires that the cash retained as a result of the tax deductibility
of the increase in the value of share-based arrangements be presented as a
component of cash flows from financing activities in the consolidated statement
of cash flows. Prior to the adoption of SFAS 123(R), such amounts were required
to be presented as a component of cash flows from operating activities. Due
to
the Company’s tax net operating loss position, the Company does not realize cash
savings as a result of the tax deduction for stock-based compensation.
Accordingly, the adoption SFAS 123(R) had no effect on the Company’s cash flows
from operating or financing activities for the year ended October 31,
2006.
Stock-based
compensation expense recognized in the Company’s consolidated statement of
operations for the year ended October 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 granted during the year ended October 31, 2006 was $672,194.
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 provisions of SFAS 123 was $247,057 for the
year ended October 31, 2006. Stock-based compensation expense recognized upon
issuance of common stock to key employees and directors was $452,500 for the
year ended October 31, 2005. Stock-based-compensation expense recognized for
non-employees under other accounting standards was $984,935 and $976,041 for
the
years ended October 31, 2006 and 2005, respectively.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based
Compensation
(continued)
As
stock-based compensation expense recognized in the consolidated statement of
operations for the year ended October 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.
Pro-Forma
Information Under SFAS 123 for Periods Prior to Fiscal 2006
|
|
For
the Year Ended October 31,
|
|
|
|
2005
|
|
Net
loss, as reported
|
|
$
|
(4,690,382
|
)
|
Add:
Stock-based employee compensation expense included
in reported net loss
|
|
|
- |
|
Less:
Total stock-based employee compensation expense determined
under the fair value-based method for all
awards, net of income tax
|
|
|
(1,029,125 |
) |
|
|
|
|
|
Net
loss, pro-forma
|
|
$
|
(5,719,507
|
)
|
|
|
|
|
|
Basic
and Diluted Net Loss per Common Share:
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
Pro-forma
|
|
$
|
(0.05
|
)
|
The
weighted average fair value at date of grant for options granted during 2005
was
$0.09 per share.
The
fair
value of options at date of grant during the year ended October 31, 2005 was
estimated using the Black-Scholes model utilizing the following weighted average
assumptions:
Expected
volatility
|
79%
|
Risk-free
interest rate
|
3.8%
|
Expected
dividends
|
0.0%
|
Expected
life
|
3
years
|
Impairment
of Long-Lived Assets
The
Company evaluates its long-lived assets for financial impairment, and continues
to evaluate them as events or changes in circumstances indicate that the
carrying amount of such assets may not be fully recoverable.
The
Company evaluates the recoverability of long-lived assets by measuring the
carrying amount of the assets against the estimated undiscounted future cash
flows associated with them. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the carrying value of such assets, the assets are adjusted to their
fair values.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year
presentation. The reclassification did not have any effect on reported net
(losses) income for any periods presented.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impact
of Recently Issued Accounting Standards
In
June
2005, the Financial Accounting Standards Board (“FASB”) published SFAS No. 154,
“Accounting Changes and Error Corrections - a Replacement of APB Opinion No.
20
and FASB No. 3” (“SFAS 154”). SFAS 154 establishes new standards on accounting
for changes in accounting principles. Pursuant to the new rules, all such
changes must be accounted for by retrospective application to the financial
statements of prior periods unless it is impracticable to do so. SFAS 154
completely replaces Accounting Principles Bulletin No. 20 and SFAS 3, though
it
carries forward the guidance in those pronouncements with respect to accounting
for changes in estimates, changes in the reporting entity, and the correction
of
errors. The requirements in SFAS 154 are effective for accounting changes made
in fiscal years beginning after December 15, 2005. The Company will apply these
requirements to any accounting changes after the implementation date. The
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
2006, the FASB ratified 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 became effective for annual or interim periods
beginning after June 28, 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
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 became 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.
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 became 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
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impact
of Recently Issued Accounting Standards
(Continued)
instruments
with a beneficial conversion feature. The adoption of this pronouncement for
new
convertible debt instruments with a beneficial conversion feature did not have
an impact on the Company’s consolidated financial position, results of
operations or cash flows.
In
February 2006, the FASB issued SFAS 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.
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which
clarifies the accounting for uncertainty in tax positions. This Interpretation
requires an entity to recognize the impact of a tax position in its financial
statements if that position is more likely than not to be sustained on audit
based on the technical merits of the position. The provisions of FIN 48 are
effective for the Company as of the beginning of fiscal 2008, with earlier
application encouraged. Any cumulative effect of the change in accounting
principle will be recorded as an adjustment to the opening accumulated deficit
balance. 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 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with accounting principles generally accepted in the U.S.,
and expands disclosures about fair value measurements. SFAS 157 is effective
for
the Company as of the beginning of fiscal 2009, with earlier application
encouraged. Any cumulative effect will be recorded as an adjustment to the
opening accumulated deficit balance, or other appropriate component of equity.
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 2006, the SEC staff issued Staff Accounting Bulleting (“SAB”) No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 was
issued in order to reduce the diversity in practice in how public companies
quantify misstatements of financial statements, including misstatements that
were not material to prior years’ financial statements. SAB 108 is effective for
fiscal year 2007. 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
October 2005, the FASB issued FSP FAS 123(R)-2, “Practical Accommodation to the
Application of Grant Date as Defined in FASB Statement No. 123(R)”, which
provides clarification of the concept of mutual understanding between employer
and employee with respect to the grant date of a share-based payment award.
This
FSP provides that a mutual understanding of the key terms and conditions of
an
award shall be presumed to exist on the date the award is approved by management
if the recipient does not have the ability to negotiate the key terms and
conditions of the award and those key terms and conditions will be communicated
to the individual recipient within a relatively short time period after the
date
of approval. This guidance was applicable upon the initial adoption of SFAS
123(R). 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
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
At
October 31,
|
|
|
|
2006
|
|
2005
|
|
Leasehold
improvements
|
|
$
|
44,778
|
|
$
|
-
|
|
Furniture
and fixtures
|
|
|
8,565 |
|
|
6,525 |
|
Office
equipment
|
|
|
17,684 |
|
|
4,636 |
|
|
|
|
71,027 |
|
|
11,161 |
|
Less:
accumulated depreciation and amortization
|
|
|
6,481 |
|
|
1,239 |
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
64,546
|
|
$
|
9,922
|
|
For
the
years ended October 31, 2006 and 2005, depreciation and amortization expense
was
$5,242 and $25,112, respectively.
NOTE
4 - TECHNOLOGY LICENSES AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
|
|
October
31,
|
|
|
|
2006
|
|
2005
|
|
Balance
at beginning of year
|
|
$
|
5,751,000
|
|
$
|
5,751,000
|
|
Purchased
technology
|
|
|
228,000 |
|
|
- |
|
Capitalized
software development cost
|
|
|
1,048,522 |
|
|
- |
|
|
|
|
7,027,522 |
|
|
5,751,000 |
|
Accumulated
amortization
|
|
|
(777,026 |
) |
|
- |
|
Total
|
|
$
|
6,250,496
|
|
$
|
5,751,000
|
|
In
September 2006, the Company purchased substantially all of the assets of 1021
Technologies, Inc. and 1021 Technologies KK. The assets purchased include the
rights to nine patents, seven patent applications, a completed VDSL
semiconductor, VDSL2 software and hardware technology components, and various
computer equipment and related software. This asset acquisition consisted of
a
cash payment of $150,000 plus the issuance of 500,000 shares of restricted
common stock valued at $78,000, for a total of $228,000, and has been recorded
as an addition to technology license and capitalized software development
costs.
For
the year ending October 31,
|
|
Estimated
Amortization Expense
|
|
2007
|
|
$
|
1,063,892
|
|
2008
|
|
|
1,063,892 |
|
2009
|
|
|
1,063,892 |
|
2010
|
|
|
1,063,892 |
|
2011
|
|
|
1,063,892 |
|
Total
|
|
$
|
5,319,460
|
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 - TECHNOLOGY LICENSES AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
(CONTINUED)
No
assurance can be given that products the Company releases based upon the
licensed technology and capitalized software costs will receive market
acceptance. If the Company determines in the future that the capitalized costs
are not recoverable, the carrying amount of the technology license would be
reduced, and such reduction could be material.
Technology
Licenses
The
Company has entered into two technology license agreements. Royalty payments,
as
a percentage of sales after obtaining certain revenue levels, if any, under
each
license would be reflected in our consolidated statements of operations as
a
component of cost of sales.
In
April
2002, the Company 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. The
Company has also jointly developed technology with Adaptive that enhances the
licensed technology.
In
consideration of the development services provided and the licenses granted
to
the Company by Adaptive, the Company paid Adaptive an aggregate of $5,751,000
between 2002 and 2004 consisting of cash and the 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 the Company and any license
revenue received 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, the Company obtained a license to include HelloSoft, Inc.’s
integrated VoIP software suite in the Cupria™ (formerly known as Embarq™) family
of semiconductors (Note 14).
NOTE
5 - FILM IN DISTRIBUTION
In
April
2000, the Company entered into a joint venture production agreement to produce
a
feature length film (“Step Into Liquid”) for theatrical distribution. The
Company agreed to provide 100% of the funding for the production in the amount
of up to $2,250,000 and, in exchange, received a 50% share in all net profits
from worldwide distribution and merchandising, after receiving funds equal
to
its initial investment of up to $2,250,000. As of October 31, 2006 the Company
has funded a net of $2,335,101 for completion of the film. The film is currently
in foreign and DVD distribution.
Based
upon information received from the Company’s film distributor in January 2005,
the Company recorded an impairment charge of $977,799 during the year ended
October 31, 2004 which reduced the carrying value of its Film in distribution
to
$1,021,722. The impairment charge was due to higher than expected distribution
costs and lower than expected average retail selling price for the DVD. In
addition, based upon information received from the Company’s Film distributor in
July 2005, which indicated that sales were lower than expected, the Company
recorded an impairment charge of $1,009,777 during the year ended October 31,
2005 which reduced the carrying value of its Film in distribution to
$0.
The
Company recognized revenues of $61,699 and $39,866 for the years ended October
31, 2006 and 2005, respectively. The Company had no amortization costs for
the
year ended October 31, 2006, and $11,945 for the year ended October 31,
2005.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 - DEFERRED FINANCING COSTS
As
of
October 31, 2006, deferred financing costs consists 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
|
|
|
(2,266,995 |
) |
|
|
|
|
|
Deferred
financing costs, net
|
|
$
|
1,274,823
|
|
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 years ended October 31, 2006
and 2005, amortization of deferred financing costs was $1,586,386 and $602,182,
respectively.
NOTE
7 - 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.
The
Exchange Agreement provides that, subject to certain exceptions, if the Company,
at any time prior to the payment in full of the amount due under the promissory
note, issues common stock or securities convertible into or exercisable for
shares of common stock at a price below the fair market value of the common
stock or such securities (a “Below Market Issuance”), then the Company will
issue to Zaiq additional shares of common stock in an amount that is determined
in accordance with a formula that takes into consideration both the number
of
shares of common stock or other securities issued and the total consideration
received by the Company in the Below Market Issuance. During the year ended
October 31, 2005, the Company issued 529,311 additional shares of common stock
with an aggregate par value of $529 and a fair value of $18,504 to Zaiq as
a
result of Below Market Issuances.
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 10), 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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - 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 the two related party notes payable discussed below.
Interest of approximately $358,000 has been accrued and is recorded in accounts
payable and accrued expenses as of October 31, 2006.
The
outstanding convertible notes are summarized in the table below:
|
|
At
October 31,
|
|
|
|
2006
|
|
2005
|
|
Note
payable (1)
|
|
$
|
-
|
|
$
|
97,000
|
|
Notes
payable (nine notes) (2)
|
|
|
468,000 |
|
|
478,000 |
|
Notes
payable, 9% interest, related party (3)
|
|
|
10,000 |
|
|
10,000 |
|
Note
payable, related party (4)
|
|
|
- |
|
|
172,872 |
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
478,000 |
|
|
757,872 |
|
|
|
|
|
|
|
|
|
Less:
unamortized debt discount
|
|
|
- |
|
|
(20,875 |
) |
|
|
$
|
478,000
|
|
$
|
736,997
|
|
____________________
(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 Company made payments of $97,000
and
$43,000 during the years ended October 31, 2006 and 2005,
respectively. As of October 31, 2006 the note had been paid in
full.
|
|
|
(2)
|
The
notes were issued during the period from March 2002 through July
2003, 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 year
ended
October 31, 2006. Principal of $5,000 and accrued interest of $2,500
was
converted into 17,857 shares of common stock during the year ended
October 31, 2005.
|
|
|
(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.
|
|
|
(4)
|
In
March 2005, the Company issued in favor of the Company’s executive vice
president, a non-interest bearing convertible promissory note in
the
principal amount of $383,911. The convertible promissory note was
issued
in evidence of the Company’s obligation for deferred compensation. In
accordance with APB 21, imputed interest (at an effective rate of
15%) was
calculated to arrive at the fair value of the convertible promissory
note.
The difference between the face amount and the present value upon
issuance
of the convertible promissory note was shown as a discount that was
amortized as interest expense over the life of the convertible promissory
note. Amortization of debt discount on this note was $20,875 and
$12,639
for the years ended October 31, 2006 and 2005, respectively. The
Company
made payments of $84,125 and $211,039 during the years ended October
31,
2006 and 2005, respectively. In March 2006, the remaining principal
amount
of this note and additional deferred compensation payable to the
note
holder of $212,450 were converted into a convertible promissory note
with
an aggregate principal amount of $301,197. The aggregate principal
and
accrued interest of $385,322 on this note was repaid in April 2006.
The
remaining unamortized debt discount on the March 2005 convertible
promissory note of $15,583 was recorded as interest expense during
the
year ended October 31, 2006. The note had been paid in full as of
October
31, 2006.
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
For
all
the above convertible notes, the fair values of the conversion options as of
October 31, 2006 and 2005 were nominal due to the conversion price being
substantially out-of-the money.
NOTE
9 - 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”).
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 2006
Debentures, after the payment of offering related fees and expenses and after
the repayment in full of bridge loans made in December 2005 and January 2006,
in
the aggregate amount of $810,000.
The
2006
Debentures are convertible into shares of common stock at 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.
Subsequent to October 31, 2006, condition (i) was met and therefore the security
interest terminated.
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. 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 October 31, 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
restricted common stock at a per share rate equal to the effective conversion
price of the 2006 Debentures.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 - CONVERTIBLE DEBENTURES (CONTINUED)
2006
Debentures
(Continued)
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. 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.
In
accordance with SFAS No. 133 and EITF Issue 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 2006 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.
During
the year ended October 31, 2006, $1,407,000 of principal amount of 2006
Debentures plus accrued interest of $146,779 were converted into 17,068,023
shares of common stock.
As
of
October 31, 2006, the conversion option liability of $2,571,429 had been reduced
to $1,968,429 as a result of conversions of the 2006 Debentures. Since the
issuance of the 2006 Debentures, an aggregate of $603,000 has been recorded
as a
reclassification to stockholders’ equity.
A
gain on
the change in fair value of these derivative liabilities of $6,087,380 was
recognized during the year ended October 31, 2006.
Included
in interest expense for the year ended October 31, 2006 is $2,883,546 related
to
the amortization of the debt discount on these debentures.
The
2006
Debentures are summarized below as of October 31, 2006:
|
|
Outstanding
Principal
Amount
|
|
Unamortized
Debt
Discount
|
|
Net
Carrying
Value
|
|
Long-term
portion
|
|
$
|
4,593,000
|
|
$
|
3,116,454
|
|
$
|
1,476,546
|
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 - CONVERTIBLE DEBENTURES (CONTINUED)
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.
Interest
on the 2005 Debentures accrues at the rate of 7% per annum and is payable on
a
bi-annual basis, commencing December 31, 2005, or on conversion and may be
paid,
at the option of the Company, either in cash or in shares of common stock.
The
Company may prepay the amounts outstanding on the 2005 Debentures by giving
advance notice and paying an amount equal to 120% of the sum of (x) the
principal being prepaid plus (y) the accrued interest thereon.
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 the last day of the month in
which the first anniversary of the effective date of the Registration Statement
occurs (August 31, 2006) at a per share exercise price of $0.1547 and warrants
for 22,624,430 shares being exercisable through the last day of the month in
which the third anniversary of the effective date of the Registration Statement
occurs (August 31, 2008) at a per share exercise price of $0.3094.
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 in February 2006 in connection with the Warrant Amendment
discussed below.
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. The Company recorded
a
charge of $622,305 during the year ended October 31, 2006. 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.
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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 - CONVERTIBLE DEBENTURES (CONTINUED)
2005
Debentures (continued)
Holders
of the Investor Warrants are entitled to exercise those warrants on a cashless
basis following the first anniversary of issuance if the Registration Statement
is not in effect at the time of exercise.
The
gross
proceeds of $3,500,000 were recorded 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 SFAS No. 133 and EITF Issue 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 2005 Debentures, the Investor 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. Due to various factors, including substantial conversions of the
2005 Debentures and the registration statement becoming effective on August
1,
2005, the value of the registration rights was deemed to be de
minimus.
As
of
October 31, 2006, the conversion option liability of $1,500,000 was reduced
to
$2,385 as a result of conversions of the 2005 Debentures. $775,782 and $721,833
has been recorded as a reclassification to stockholders’ equity during the years
ended October 31, 2006 and 2005, respectively. A loss on the change in fair
value of the derivative liabilities of $1,980,345 was recognized during the
year
ended October 31, 2006. A gain on the change in fair value of the derivative
liabilities of $2,233,004 was recognized during the year ended October 31,
2005.
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 therefore the security interest
terminated.
As
a
result of obtaining the 2005 Debentures, 1,000,000 stock options granted to
each
of the Company’s chief executive officer and executive vice president in April
2005 became fully vested and non-forfeitable, as discussed in Note
12.
During
the year ended October 31, 2006, $1,810,147 of principal amount of 2005
Debentures plus accrued interest of $73,265 were converted into shares of common
stock.
During
the year ended October 31, 2005, $1,684,289 of principal amount of 2005
Debentures plus accrued interest of $36,331 were converted into shares of common
stock.
Included
in interest expense for the years ended October 31, 2006 and 2005 is $1,551,054
and $1,946,031, respectively, related to the amortization of the debt discount
related to these debentures.
The
2005
Debentures are summarized below as of October 31, 2006:
|
|
Outstanding
Principal
Amount
|
|
Unamortized
Debt
Discount
|
|
Net
Carrying
Value
|
|
Long-term
portion
|
|
$
|
5,564
|
|
$
|
2,915
|
|
$
|
2,649
|
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 - CONVERTIBLE DEBENTURES (CONTINUED)
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”).
Under
the
agreements with the purchasers of the 7% Debentures issued in December 2003,
the
Company is obligated to pay to the Debenture holders liquidated damages
associated with the late filing of the Registration Statement and the missed
Registration Statement required effective date of March 30, 2004. Liquidated
damages are equal to (x) 2% of the principal amount of all the Debentures during
the first 30-day period following late filing or effectiveness and (y) 3% of
the
principal amount of all Debentures for each subsequent 30-day period (or part
thereof). These liquidated damages aggregated to $160,000. Accrued liquidated
damages as of October 31, 2006 and 2005 was $37,550. At their option, the
Debenture holders 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, which is currently $0.15. 803,331 shares of common stock valued
at
$98,450 were issued during the year ended October 31, 2005 as payment for
liquidated damages.
During
the year ended October 31, 2006, $50,000 of principal amount plus accrued
interest of $8,974 were converted into shares of common stock.
During
the year ended October 31, 2005, $907,500 of principal amount plus accrued
interest of $73,336 were converted into shares of common stock.
Included
in interest expense for the years ended October 31, 2006 and 2005, is $46,069
and $736,750, respectively, related to the amortization of the debt discount
on
these debentures.
The
7%
Debentures are summarized below as of October 31, 2006:
|
|
Outstanding
Principal
Amount
|
|
Uamortized
Debt
Discount
|
|
Net
Carrying
Value
|
|
Current
|
|
$
|
75,000
|
|
$
|
1,548
|
|
$
|
73,452
|
|
The
remaining 7% Debentures outstanding at October 31, 2006 were originally issued
in May 2004 and are due and payable in May 2007.
NOTE
10 - NOTES PAYABLE
The
Company has the following notes payable outstanding at October 31:
|
|
2006
|
|
2005
|
|
Note
payable (1)
|
|
$
|
-
|
|
$
|
256,886
|
|
Note
payable, 10% interest, unsecured, due on demand with three
days notice (2)
|
|
|
- |
|
|
443,451 |
|
Note
payable (3)
|
|
|
- |
|
|
12,000 |
|
Note
payable (4)
|
|
|
- |
|
|
1,229,870 |
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
-
|
|
$
|
1,942,207
|
|
|
|
|
|
|
|
|
|
Less:
current portion of notes payable
|
|
|
- |
|
|
(1,834,073 |
) |
|
|
|
|
|
|
|
|
Long-term
portion of notes payable
|
|
$
|
-
|
|
$
|
108,134
|
|
____________________
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - NOTES PAYABLE (CONTINUED)
(1)
|
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 year ended October 31, 2006.
|
|
|
(2)
|
In
June 2005, principal amount of $39,973 and interest of $110,027 was
paid
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 $443,451
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 year ended October 31,
2006.
|
|
|
(3)
|
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.
|
|
|
(4)
|
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 7 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 was 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 was 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.
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 in connection with the repayment of the
loan.
NOTE
11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following as of October
31:
|
|
2006
|
|
2005
|
|
Accrued
officers compensation, bonuses and payroll
|
|
$
|
259,945
|
|
$
|
215,450
|
|
Professional
fees
|
|
|
147,333 |
|
|
5,718 |
|
Interest
payable
|
|
|
486,141 |
|
|
611,863 |
|
Accrued
liquidated damages
|
|
|
249,550 |
|
|
37,550 |
|
Consulting
fees
|
|
|
9,394 |
|
|
63,414 |
|
Miscellaneous
|
|
|
70,847 |
|
|
47,838 |
|
|
|
$
|
1,223,210
|
|
$
|
981,833
|
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 - STOCKHOLDERS’ (DEFICIENCY) EQUITY
Common
Stock
In
April
2006, the Company amended its articles of incorporation and increased the
authorized number of shares of common stock from 500,000,000 to 900,000,000
shares.
During
the year ended October 31, 2006, the Company:
·
|
issued
122,075,460 shares of common stock for conversion of convertible
debentures with a principal amount of $3,267,147 and accrued interest
of
$229,018;
|
|
|
·
|
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
21,765,985 shares of common stock upon exercise of warrants resulting
in
gross proceeds of $1,391,444;
|
|
|
·
|
issued
1,194,587 shares of common stock upon cashless exercise of warrants
valued
at $184,803;
|
|
|
·
|
issued
150,000 shares of common stock upon exercise of stock options in
satisfaction of accrued expenses of $4,784;
|
|
|
·
|
issued
500,000 shares of common stock valued at $78,000 in connection with
the
purchase of substantially all of the assets of 1021 Technologies,
Inc.;
and
|
|
|
·
|
issued
13,712,222 shares of restricted common stock to consultants for services
valued at $2,396,425.
|
During
the year ended October 31, 2005, the Company:
·
|
issued
10,289,026 shares of common stock to various investors for cash
proceeds of $835,100;
|
|
|
·
|
issued
2,837,500 shares of common stock for consulting services valued at
$342,000;
|
|
|
·
|
issued
5,073,015 shares of common stock for various services valued at
$314,667;
|
|
|
·
|
issued
2,750,000 shares of common stock to key employees and directors
valued at $452,500;
|
|
|
·
|
issued
72,763,232 shares of common stock for converted promissory notes,
debentures and accrued interest valued at $2,708,956;
|
|
|
·
|
issued
803,331 shares of common stock as penalty for delayed
filing/effectiveness of a registration statement valued at $98,450;
|
|
|
·
|
issued
529,311 shares of common stock in connection with a Below Market
Issuance (See Note 7);
|
|
|
·
|
issued
422,783 shares of common stock in payment of accounts payable and
accrued expenses in the amount of $71,911; and
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 - STOCKHOLDERS’ (DEFICIENCY) EQUITY (CONTINUED)
Common
Stock
(continued)
·
|
issued
4,651,163 shares of common stock with a fair value of $744,186 in
exchange for the surrender of Redeemable Series B Preferred Stock
valued at $800,000. The Company recognized a gain of $55,814 on the
transaction (See Note 7).
|
Stock
Option Plans
During
2000, the Board of Directors and the stockholders of the Company approved the
2000 Omnibus Securities Plan (the “2000 Plan”), which provides for the granting
of incentive and non-statutory options and restricted stock for up to 2,500,000
shares of common stock to officers, employees, directors and consultants of
the
Company.
During
August 2001, the Board of Directors of the Company approved the 2001 Stock
Incentive Plan (the “2001 Plan” and together with the 2000 Plan, the “Plans”),
which provides for the granting of incentive and non-statutory options,
restricted stock, dividend equivalent rights and stock appreciation rights
for
up to 2,500,000 shares of common stock to officers, employees, directors and
consultants of the Company. The stockholders of the Company ratified the 2000
Plan in May 2000, and the 2001 Plan in July 2002.
In
January 2003, the Board of Directors of the Company approved the 2003 Consultant
Stock Plan (“Consultant Plan”), which provides for the issuance of up to
6,000,000 non-qualified stock options or stock awards to consultants to the
Company. Directors, officers and employees are not eligible to participate
in
the Consultant Plan. As of October 31, 2006, 3,200,000 shares of common stock
and options to purchase 700,000 shares of common stock have been issued under
the Consultant Plan.
The
weighted-average estimated fair value of stock options granted during the year
ended October 31, 2006 was $0.05 per share using the Black-Scholes model with
the following assumptions:
Expected
volatility
|
140%
|
Risk-free
interest rate
|
4.5%
|
Expected
dividends
|
0.0%
|
Expected
life
|
10
years
|
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 related
stock
options and warrants. The dividend yield assumption is based on the Company’s
history and expectation of dividend payouts. The expected life of stock options
and warrants represents the Company’s historical experience with regards to the
exercise behavior of its option and warrant holders and the contractual term
of
the options and warrants.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 - STOCKHOLDERS’ (DEFICIENCY) EQUITY (CONTINUED)
Stock
Option Plans
(Continued)
A
summary
of the Company’s stock option activity and related information is as
follows:
|
|
Under
the
Plans
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Outside
the
Plans
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
as of November 1, 2004
|
|
|
2,178,750
|
|
$
|
1.25
|
|
|
|
|
|
3,991,250
|
|
$
|
2.11
|
|
|
|
|
Options
granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
the Plans
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
Outside
the Plans
|
|
|
-
|
|
|
-
|
|
|
|
|
|
15,000,000
|
|
$
|
0.17
|
|
|
|
|
Options
expired/cancelled:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
the Plans
|
|
|
(1,185,000
|
)
|
$
|
1.48
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
Outside
the Plans
|
|
|
-
|
|
|
-
|
|
|
|
|
|
(3,091,250
|
)
|
$
|
1.92
|
|
|
|
|
Options
exercised:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
the Plans
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
Outside
the Plans
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of October 31, 2005
|
|
|
993,750
|
|
$
|
0.97
|
|
|
|
|
|
15,900,000
|
|
$
|
0.25
|
|
|
|
|
Options
granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
the Plans
|
|
|
3,225,000
|
|
$
|
0.15
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
Outside
the Plans
|
|
|
-
|
|
|
-
|
|
|
|
|
|
30,100,000
|
|
$
|
0.04
|
|
|
|
|
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
|
|
|
-
|
|
|
-
|
|
|
|
|
|
(150,000
|
)
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of October 31, 2006
|
|
|
3,893,750
|
|
|
0.22
|
|
|
1,500
|
|
|
31,550,000
|
|
|
0.06
|
|
|
1,766,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
as of October 31, 2006
|
|
|
1,325,091
|
|
|
0.36
|
|
|
333
|
|
|
27,866,667
|
|
|
0.04
|
|
|
1,766,135
|
|
The
intrinsic value of options exercised during the year ended October 31, 2006,
was
$10,365. During the year ended October 31, 2006, upon the exercise of options
to
purchase 150,000 shares of common stock, the Company reclassified the fair
value
of the exercised options of $14,670 from derivative liabilities to stockholders’
equity.
The
weighted-average remaining contractual term of stock options outstanding under
the plans as of October 31, 2006 was 9 years. The weighted-average remaining
contractual term of stock options outstanding outside the plans as of October
31, 2006 was 9 years.
The
weighted-average remaining contractual term of stock options currently
exercisable under the plans as of October 31, 2006 was 7.5 years. The
weighted-average remaining contractual term of stock options currently
exercisable outside the plans as of October 31, 2006 was 8.9 years.
As
of
October 31, 2006, total compensation cost related to nonvested stock options
not
yet recognized was $908,677, which is expected to be recognized through October
2009 over a weighted-average period of approximately 2.8 years.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 - STOCKHOLDERS’ (DEFICIENCY) EQUITY (CONTINUED)
Stock
Option Plans
(continued)
The
total
fair value of options vested during the years ended October 31, 2006 and 2005
was $1,115,645 and $241,018, respectively.
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 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 under the Plans 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, 400,000 of which were
under
the Plans, 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 under the Consultant Plan
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.
|
During
the three months ended October 31, 2006, the following options were
granted:
(i)
|
Options
to purchase 400,000 shares of common stock, 200,000 of which were
under
the Plans and 200,000 of which were under the Consultant Plan, were
granted to employees. These options were valued at $88,600 and have
a
10-year term, an exercise price of $0.224 per share, and vest over
a three
year period;
|
|
|
(ii)
|
Options
to purchase 3,500,000 shares of common stock were granted to the
Senior
Executive Vice President. These options were valued at $518,772 and
have a
10-year term, an exercise price of $0.158 per share, and vest over
a three
year period; and
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 - STOCKHOLDERS’ (DEFICIENCY) EQUITY (CONTINUED)
Options
Granted
(continued)
(iii) Options
to purchase 1,825,000 shares of common stock under the Plans were granted to
employees. These options were valued at $218,057 and have a 10-year term, an
exercise price of $0.131 per share, and vest over a three year
period.
Warrants
As
of
October 31, 2006, the Company had outstanding warrants to purchase shares of
common stock as follows:
GRANT
DATE
|
|
NUMBER
OF SHARES
|
|
EXERCISE
PRICE ($)
|
|
EXPIRATION
DATE
|
|
|
|
|
|
|
|
|
|
October
31, 2003
|
|
|
600,000
|
|
|
0.15
|
|
|
September
30, 2007(1
|
)
|
December
31, 2003
|
|
|
7,333,333
|
|
|
0.25
|
|
|
December
31, 2008
|
|
January
11, 2004
|
|
|
100,000
|
|
|
0.15
|
|
|
January
11, 2009
|
|
April
20, 2004
|
|
|
666,666
|
|
|
0.25
|
|
|
April
30, 2009(2
|
)
|
April
20, 2004
|
|
|
66,667
|
|
|
0.15
|
|
|
April
30, 2009(2
|
)
|
May
7, 2004
|
|
|
1,666,666
|
|
|
0.25
|
|
|
May
31, 2009(2
|
)
|
May
7, 2004
|
|
|
166,667
|
|
|
0.15
|
|
|
May
31, 2009(2
|
)
|
October
1, 2004
|
|
|
120,000
|
|
|
0.25
|
|
|
October
1, 2007
|
|
May
26, 2005
|
|
|
18,470,945
|
|
|
0.3094
|
|
|
August
31, 2008
|
|
June
23, 2005
|
|
|
200,000
|
|
|
0.12
|
|
|
June
23, 2008
|
|
March
10, 2006
|
|
|
78,051,104
|
|
|
0.15
|
|
|
August
31, 2009
|
|
March
10, 2006
|
|
|
7,095,556
|
|
|
0.1693
|
|
|
August
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
as of October 31, 2006
|
|
|
114,537,604
|
|
$
|
0.12
to $0.3094
|
|
|
September
30, 2007 to
August
31, 2009
|
|
(1) In
September 2006, the expiration date was extended until September 30, 2007,
which
resulted in an additional expense of $19,090 that was charged to operating
expenses.
(2) Under
certain conditions the Company may accelerate the expiration date.
Warrants
Granted
On
May
26, 2005, the Company issued warrants to purchase 22,624,430 shares of its
common stock at an exercise price of $0.3094 in connection with the placement
of
the 2005 Debentures. The fair value of the stock warrants estimated on the
date
of grant using the Black-Scholes model is approximately $0.06 per share or
$1,362,324.
On
May
26, 2005, the Company issued warrants to purchase 11,312,220 shares of its
common stock at an exercise price of $0.1547 in connection with the placement
of
the 2005 Debentures. The fair value of the stock warrants estimated on the
date
of grant using the Black-Scholes model is approximately $0.06 per share or
$637,676.
On
May
26, 2005, the Company granted warrants to purchase 2,262,443 shares of its
common stock at an exercise price of $0.3094 to the placement agent in
connection with the placement of the 2005 Debentures. The fair value of the
stock warrants estimated on the date of grant using the Black-Scholes model
is
$0.06 per share or $130,710. All of these warrants were exercised in February
2006.
On
May
26, 2005, the Company granted warrants to purchase 2,262,443 shares of its
common stock at an exercise price of $0.1547 to the placement agent in
connection with the placement of the 2005 Debentures. The fair value of the
stock warrants estimated on the date of grant using the Black-Scholes model
is
$0.06 per share or $130,710. All of these warrants were exercised in February
2006.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 - STOCKHOLDERS’ (DEFICIENCY) EQUITY (CONTINUED)
Warrants
Granted
(Continued)
On
May
26, 2005, the Company granted warrants to purchase 1,131,222 shares of its
common stock at an exercise price of $0.1547 to the placement agent in
connection with the placement of the 2005 Debentures. The fair value of the
stock warrants estimated on the date of grant using the Black-Scholes model
is
$0.05 per share or $57,646. All of these warrants were exercised in February
2006.
On
June
23, 2005, the Company granted warrants to purchase 200,000 shares of its common
stock at an exercise price of $0.12 in connection with consulting services
performed for the Company. The fair value of the stock warrants estimated on
the
date of grant using the Black-Scholes model is $0.06 per share or
$11,776.
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 10). The fair value of the stock warrants
estimated on the date of grant using the Black-Scholes 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 9). The fair value of the stock warrants estimated on
the
date of grant using the Black-Scholes 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 9). The fair value of the stock
warrants estimated on the date of grant using the Black-Scholes model is $0.125
per share or $888,779.
In
March
2006, the Company granted additional warrants to purchase 7,095,556 shares
of
its common stock at an exercise price of $0.15 per share to the placement agent
in connection with the 2006 Debentures (see Note 9).
The
fair value of the stock warrants estimated on the date of grant using the
Black-Scholes model is $0.127 per share or $903,673.
Warrants
Expired
Warrants
to purchase 3,587,062 and 800,000 shares of common stock expired during the
years ended October 31, 2006 and 2005, respectively.
Warrants
Exercised
Warrants
to purchase 25,334,751 shares of common stock were exercised during the year
ended October 31, 2006. 3,568,766 of these exercises were on a cashless basis.
No warrants were exercised during the year ended October 31, 2005.
During
the year ended October 31, 2006, upon the exercise of warrants to purchase
an
aggregate of 25,334,751 shares of common stock, the Company reclassified the
fair value of the exercised warrants of $2,758,046 from derivative liabilities
to stockholders’ equity.
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:
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 - STOCKHOLDERS’ (DEFICIENCY) EQUITY (CONTINUED)
Net
Loss Per Share
(Continued)
Warrants
to purchase common stock
|
|
|
114,537,604
|
|
2006
Debentures and accrued interest (1)
|
|
|
67,840,468
|
|
Options
to purchase common stock
|
|
|
35,443,750
|
|
Convertible
notes payable and accrued interest
|
|
|
1,633,170
|
|
7%
Debentures and accrued interest
|
|
|
604,191
|
|
2005
Debentures and accrued interest (2)
|
|
|
135,397
|
|
Total
as of October 31, 2006
|
|
|
220,194,580
|
|
____________________
(1) Based
on
a twenty day volume weighted average common stock price discounted by 30% at
October 31, 2006 of $0.0693.
(2) Based
on
a five day volume weighted average common stock price discounted by 30% at
October 31, 2006 of $0.0682.
Substantial
issuances after October 31, 2006 through January 24, 2007:
|
|
|
|
|
|
|
|
|
|
Options
granted to purchase common stock
|
|
|
4,350,000
|
|
|
|
|
|
|
Common
stock issued in connection with services agreement
|
|
|
3,736,991
|
|
|
|
|
|
|
Common
stock issued in connection with conversion of debentures
|
|
|
56,394,444
|
|
|
|
|
|
|
Common
stock issued in payment of liquidated damages
|
|
|
464,535
|
|
|
|
|
|
|
Common
stock issued in connection with exercise of stock options
|
|
|
300,000
|
|
|
|
|
|
|
Common
stock issued to consultants
|
|
|
8,000,000
|
|
NOTE
13 - INCOME TAXES
As
of
October 31, 2006, the Company had approximately $50,014,000 of net operating
loss carry forwards for income tax purposes, which expire as
follows:
Year
|
Net
OperatingLoss
|
|
2011
|
|
$
|
1,583,000
|
|
2012
|
|
|
4,714,000
|
|
2018
|
|
|
4,472,000
|
|
2019
|
|
|
1,698,000
|
|
2020
|
|
|
4,759,000
|
|
2021
|
|
|
9,503,000
|
|
2022
|
|
|
10,230,000
|
|
2023
|
|
|
4,143,000
|
|
2024
|
|
|
2,245,000
|
|
2025
|
|
|
2,621,000
|
|
2026
|
|
|
4,046,000
|
|
|
|
$
|
50,014,000
|
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
13 - INCOME TAXES (CONTINUED)
At
October 31, 2006 and 2005, the Company has a deferred tax asset of approximately
$20,590,000 and $19,877,000, respectively, representing the benefits of its
net
operating loss and certain expenses not currently deductible for tax purposes,
principally related to the granting of stock options and warrants and the
difference in tax basis of certain intangible assets. The Company’s deferred tax
asset has been fully reserved by a valuation allowance since realization of
its
benefit is uncertain. The difference between the Federal statutory tax rate
of
34% and the Company’s effective Federal tax rate of 0% is due to the increase
(decrease) in the valuation allowance of $713,000 (2006) and $(2,227,000)
(2005). The Company’s ability to utilize its carry forwards may be subject to
any annual limitation in future periods, pursuant to Section 382 of the Internal
Revenue Code of 1986, as amended.
A
reconciliation between the statutory federal income tax rate (34%) and the
Company’s effective rate for the years ended October 31, 2006 and 2005 is as
follows:
|
|
2006
|
|
2005
|
|
Federal
statutory rate
|
|
|
34.0 |
% |
|
34.0 |
% |
State
income tax rate, net of federal benefit
|
|
|
6.6 |
% |
|
6.6 |
% |
Permanent
differences
|
|
|
(29.3 |
)% |
|
- |
|
Valuation
allowance
|
|
|
(11.3 |
)% |
|
(40.6 |
)% |
Effective
rate
|
|
|
0.0 |
% |
|
0.0 |
% |
NOTE
14 - 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 defined and priced Phases II
and
III of the technology development program at $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. The Company paid the remaining
$100,000 cash payable in relation to Phase III in January 2007.
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 issued to HelloSoft 1,087,470 shares of common stock valued at
$164,208 as compensation for past development services. HelloSoft has completed
all committed work under the Original Agreement and all subsequent amendments
and has been fully paid.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
(CONTINUED)
Research
and Development Agreement
(Continued)
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 Cupria™ family of
semiconductors. In exchange for this license, the Company paid HelloSoft a
license fee and has agreed to pay certain royalties based on its sales of
products including the licensed technology.
Leases
The
Company’s future minimum lease payments required under operating leases with a
term greater than one year are as follows:
Years
ending October 31:
2007
|
|
$
|
182,844
|
|
2008
|
|
|
188,927
|
|
2009
|
|
|
143,575
|
|
2010
|
|
|
-
|
|
2011
|
|
|
-
|
|
Total
|
|
$
|
515,346
|
|
Rent
expense for the years ended October 31, 2006 and 2005 was $80,588 and $39,747,
respectively.
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. From time to time, the Company’s balances may exceed these limits.
As of October 31, 2006 and 2005, uninsured cash balances were approximately
$1,988,947 and $303,682, respectively. The Company believes it is not exposed
to
any significant credit risk for cash.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
15 - SEGMENT INFORMATION
Summarized
financial information concerning the Company’s reportable segments is shown in
the following table:
|
|
Semiconductor
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - Domestic
|
|
$
|
-
|
|
$
|
9,757
|
|
$
|
-
|
|
$
|
9,757
|
|
Net
Sales - Foreign
|
|
$
|
-
|
|
$
|
51,942
|
|
$
|
-
|
|
$
|
51,942
|
|
Operating
(Loss) Income
|
|
$
|
(6,506,583
|
)
|
$
|
37,402
|
|
$
|
-
|
|
$
|
(6,469,181
|
)
|
Depreciation
and amortization
|
|
$
|
782,268
|
|
$
|
-
|
|
$
|
-
|
|
$
|
782,268
|
|
Total
Identifiable Assets
|
|
$
|
7,900,131
|
|
$
|
-
|
|
$
|
2,112,263
|
|
$
|
10,012,394
|
|
For
the Year Ended October 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - Domestic
|
|
$
|
-
|
|
$
|
29,066
|
|
$
|
-
|
|
$
|
29,066
|
|
Net
Sales - Foreign
|
|
$
|
-
|
|
$
|
10,800
|
|
$
|
-
|
|
$
|
10,800
|
|
Operating
Loss
|
|
$
|
(7,032
|
)
|
$
|
(1,014,451
|
)
|
$
|
(3,278,604
|
)
|
$
|
(4,300,087
|
)
|
Depreciation
and amortization
|
|
$
|
7,032
|
|
$
|
18,080
|
|
$
|
-
|
|
$
|
25,112
|
|
Total
Identifiable Assets
|
|
$
|
6,087,229
|
|
$
|
-
|
|
$
|
417,736
|
|
$
|
6,504,965
|
|
NOTE
16 - SUBSEQUENT EVENTS
eSilicon
Transaction
On
December 12, 2006, the Company entered into a three-year Master ASIC Services
Agreement with eSilicon Corporation (“eSilicon”) (the “MSA”), pursuant to which
eSilicon agreed to provide physical design and manufacturing services to the
Company in exchange for cash and unregistered shares of the Company’s common
stock. In connection with the MSA and related orders by the Company and pursuant
to a Stock Purchase Agreement between the Company and eSilicon, the Company
issued to eSilicon 3,736,991 shares of restricted common stock for $395,000
of
non-recurring engineering services to be provided by eSilicon related to the
application-specific standard part (“ASSP”) version of the Cupria™ Cu5001.
Additional cash payments will be made by the Company to eSilicon for other
services as such services are performed.
Equity
Transactions
In
November 2006:
(i)
|
13,936,199
shares of common stock were issued upon conversion of 2006 Debentures
with
a principal amount of $932,750 and interest of $25,485;
and
|
|
|
(ii)
|
Options
to purchase 4,250,000 shares of common stock were granted to one
director
and three executive employees under the 2006 Stock Incentive Plan
discussed below. These options were valued at $386,427 and have a
ten year
term, an exercise price of $0.096 per share, and vest over a period
of
approximately three years through October
2009.
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
16 - SUBSEQUENT EVENTS (CONTINUED)
Equity
Transactions
(Continued)
In
December 2006:
(i)
|
42,212,058
shares of common stock were issued upon conversion of 2005 and 2006
Debentures with a principal amount of $2,999,534 and interest of
$90,266;
|
|
|
(ii)
|
3,736,991
shares of restricted common stock were issued for $395,000 of
non-recurring engineering services (as described above);
and
|
|
|
(iii)
|
300,000
shares of common stock were issued upon exercise of stock options
resulting in gross proceeds of
$9,570.
|
In
January 2007:
(i)
|
Options
to purchase 100,000 shares of common stock were granted to an employee.
These options were valued at $11,344 and have a ten year term, an
exercise
price of $0.12 per share, and vest over a period of approximately
three
years through January 2010;
|
|
|
(ii)
|
464,535
shares of restricted common stock were issued to 2006 Debenture holders
in
satisfaction of $68,547 in liquidated damages accrued at October
31,
2006;
|
|
|
(iii)
|
8,000,000
shares of restricted common stock valued at $1,007,000 were issued
to
three consultants; and
|
|
|
(iv)
|
246,187
shares of common stock valued at $21,197 were issued to four holders
of
2006 Debentures in payment of interest on the 2006
Debentures.
|
2006
Stock Incentive Plan
In
November 2006, the Company’s Board of Directors approved the Company’s 2006
Stock Incentive Plan, which authorizes the issuance of up to 30,000,000
incentive stock options, non-qualified stock options or stock awards to
directors, officers, employees and certain consultants to the
Company.
Financing
Commitment
In
January 2007, an institutional investor that has been a prior investor in the
Company committed to purchase $6 million of 7% Senior Secured Convertible
Debentures from the Company upon request at any time after March 1, 2007. As
of
the date of this report, the Company has not made such a request.