RIM SEMICONDUCTOR COMPANY
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-QSB
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31, 2007
¨
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
(Exact
name of small business issuer as specified in its charter)
UTAH
|
|
95-4545704
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
identification
no.)
|
305
NE 102ND AVENUE, SUITE 350
PORTLAND,
OREGON 97220
|
|
(503)
257-6700
|
(Address
of principal executive offices)
|
|
(Issuer’s
telephone number,
including
area code)
|
Check
whether the issuer (1) has filed all reports required to be filed
by
Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for
such period that the registrant was required to file such reports),
and
(2) has been subject to such filing requirements for the past 90
days.
|
Yes
x
No¨
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined
by
Rule 12b-2 of the Exchange Act)
|
Yes
¨
No x
|
|
|
The
number of shares of the issuer’s Common Stock, par value $.001 per share,
outstanding as of September 12, 2007, was 463,234,190.
|
|
|
|
Transitional
Small Business Disclosure Format (Check one)
|
Yes
¨
No x
|
FORM
10-QSB
RIM
SEMICONDUCTOR COMPANY
JULY
31, 2007
TABLE
OF CONTENTS
|
PAGE
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
ITEM
1. FINANCIAL STATEMENTS
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEET (Unaudited) At July 31,
2007
|
1
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Nine and
Three
Months Ended July 31, 2007 and 2006
|
2
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY (Unaudited) For
the Nine Months Ended July 31, 2007
|
4
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months
Ended July 31, 2007 and 2006
|
5
|
|
|
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
7
|
|
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
|
26
|
|
|
|
ITEM
3. CONTROLS AND PROCEDURES
|
35
|
|
|
|
PART
II - OTHER INFORMATION
|
35
|
|
|
|
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
35
|
|
|
|
ITEM
5. OTHER INFORMATION
|
36
|
|
|
|
ITEM
6. EXHIBITS
|
37
|
|
|
SIGNATURES
|
38
|
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(Unaudited)
|
|
July
31,
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
241,930
|
|
Other
current assets
|
|
|
152,877
|
|
TOTAL
CURRENT ASSETS
|
|
|
394,807
|
|
|
|
|
|
|
Property
and equipment - net
|
|
|
187,413
|
|
Technology
licenses and capitalized software development costs - net
|
|
|
1,764,435
|
|
Deferred
financing costs - net
|
|
|
183,736
|
|
Other
assets
|
|
|
22,144
|
|
TOTAL
ASSETS
|
|
$
|
2,552,535
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
Convertible
notes payable
|
|
$
|
478,000
|
|
Notes
payable (net of debt discount of $784,000)
|
|
|
716,000
|
|
Convertible
debentures (net of debt discount of $200,080)
|
|
|
531,200
|
|
Derivative
liabilities - warrants, options and embedded conversion
option
|
|
|
3,688,060
|
|
Accounts
payable and accrued expenses
|
|
|
1,205,433
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
6,618,693
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
6,618,693
|
|
|
|
|
|
|
Commitments,
Contingencies and Other Matters
|
|
|
|
|
|
|
|
|
|
Stockholders’
Deficiency:
|
|
|
|
|
|
|
|
|
|
Preferred
stock - $0.01 par value; Authorized - 15,000,000 shares; Issued -
0
shares; Outstanding - 0 shares
|
|
|
--
|
|
Common
stock - $0.001 par value; Authorized - 900,000,000 shares; Issued
-
459,524,043 shares; Outstanding - 459,024,189 shares
|
|
|
459,524
|
|
Treasury
stock, at cost - 499,854 shares
|
|
|
(7,498
|
)
|
Additional
paid-in capital
|
|
|
84,990,747
|
|
Unearned
compensation
|
|
|
(1,578,025
|
)
|
Accumulated
deficit
|
|
|
(87,930,906
|
)
|
TOTAL
STOCKHOLDERS’ DEFICIENCY
|
|
|
(4,066,158
|
)
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
|
$
|
2,552,535
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For
the Nine Months Ended
July
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
14,757
|
|
$
|
59,899
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
Impairment
of technology licenses and capitalized software development
costs
|
|
|
4,415,943
|
|
|
--
|
|
Amortization
of technology licenses and capitalized software development
costs
|
|
|
809,821
|
|
|
531,692
|
|
Research
and development expenses (including stock based compensation of $466,170
and $26,860, respectively)
|
|
|
1,041,884
|
|
|
255,821
|
|
Selling,
general and administrative expenses (including stock based compensation
of
$1,764,331 and $1,501,569, respectively)
|
|
|
4,390,257
|
|
|
3,700,983
|
|
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
10,657,905
|
|
|
4,488,496
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(10,643,148
|
)
|
|
(4,428,597
|
)
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES (INCOME):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
3,255,762
|
|
|
9,275,907
|
|
Change
in fair value of derivative liabilities
|
|
|
(3,016,018
|
)
|
|
12,128,413
|
|
Amortization
of deferred financing costs
|
|
|
1,230,087
|
|
|
1,017,659
|
|
Gain
on forgiveness of principal and interest on Zaiq Note
|
|
|
--
|
|
|
(1,169,820
|
)
|
Loss
on exchange of notes payable into common stock
|
|
|
--
|
|
|
446,386
|
|
Other
|
|
|
(29,250
|
)
|
|
(3,000
|
)
|
TOTAL
OTHER EXPENSES
|
|
|
1,440,581
|
|
|
21,695,545
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(12,083,729
|
)
|
$
|
(26,124,142
|
)
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED NET LOSS PER COMMON SHARE
|
|
$
|
(0.03
|
)
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
420,534,014
|
|
|
286,694,814
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For
the Three Months Ended
July
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
14,757
|
|
$
|
1,025
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
Impairment
of technology licenses and capitalized software development
costs
|
|
|
4,415,943
|
|
|
--
|
|
Amortization
of technology licenses and capitalized software development
costs
|
|
|
279,155
|
|
|
216,460
|
|
Research
and development expenses (including stock based compensation of $22,738
and $0, respectively)
|
|
|
232,264
|
|
|
119,888
|
|
Selling,
general and administrative expenses (including stock based compensation
of
$705,540 and $517,859, respectively)
|
|
|
1,534,962
|
|
|
1,343,244
|
|
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
6,462,324
|
|
|
1,679,592
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(6,447,567
|
)
|
|
(1,678,567
|
)
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES (INCOME):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
315,245
|
|
|
1,378,138
|
|
Change
in fair value of derivative liabilities
|
|
|
(2,654,271
|
)
|
|
11,643,875
|
|
Amortization
of deferred financing costs
|
|
|
64,240
|
|
|
448,840
|
|
Other
|
|
|
(1,355
|
)
|
|
--
|
|
TOTAL
OTHER EXPENSES (INCOME)
|
|
|
(2,276,141
|
)
|
|
13,470,853
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(4,171,426
|
)
|
$
|
(15,149,420
|
)
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED NET LOSS PER COMMON SHARE
|
|
$
|
(0.01
|
)
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
440,632,466
|
|
|
324,964,555
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
For
The Nine Months Ended July 31, 2007
(Unaudited)
|
|
Common
Stock
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional
Paid-in
Capital
|
|
Unearned
Compensation
|
|
Accumulated
Deficit
|
|
Total
Stockholders’
Deficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at November 1, 2006
|
|
|
356,399,782
|
|
$
|
356,400
|
|
|
(499,854
|
)
|
$
|
(7,498
|
)
|
$
|
75,215,263
|
|
$
|
(1,197,034
|
)
|
$
|
(75,847,177
|
)
|
$
|
(1,480,046
|
)
|
Issuance
of common stock for cash
|
|
|
11,740,000
|
|
|
11,740
|
|
|
--
|
|
|
--
|
|
|
575,260
|
|
|
--
|
|
|
--
|
|
|
587,000
|
|
Issuance
of common stock under service and consulting agreements
|
|
|
23,284,938
|
|
|
23,285
|
|
|
--
|
|
|
--
|
|
|
2,276,339
|
|
|
(2,299,624
|
)
|
|
--
|
|
|
--
|
|
Issuance
of common stock in connection with notes payable
|
|
|
10,000,000
|
|
|
10,000
|
|
|
--
|
|
|
--
|
|
|
690,000
|
|
|
--
|
|
|
--
|
|
|
700,000
|
|
Issuance
of common stock for conversion of convertible debentures and accrued
interest
|
|
|
57,034,788
|
|
|
57,034
|
|
|
--
|
|
|
--
|
|
|
4,044,799
|
|
|
--
|
|
|
--
|
|
|
4,101,833
|
|
Issuance
of common stock in satisfaction of liquidated damages
|
|
|
464,535
|
|
|
465
|
|
|
--
|
|
|
--
|
|
|
68,082
|
|
|
--
|
|
|
--
|
|
|
68,547
|
|
Issuance
of common stock upon exercise of stock options for the settlement
of
vendor payables
|
|
|
600,000
|
|
|
600
|
|
|
--
|
|
|
--
|
|
|
18,540
|
|
|
--
|
|
|
--
|
|
|
19,140
|
|
Stock
based compensation expense recognized for the granting and vesting
of
options to employees and advisory board members
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
341,392
|
|
|
--
|
|
|
--
|
|
|
341,392
|
|
Reclassification
of derivative liability upon exercise of options
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
71,521
|
|
|
--
|
|
|
--
|
|
|
71,521
|
|
Reclassification
of conversion option liability
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,689,551
|
|
|
--
|
|
|
--
|
|
|
1,689,551
|
|
Amortization
of unearned compensation expense
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,918,633
|
|
|
--
|
|
|
1,918,633
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(12,083,729
|
)
|
|
(12,083,729
|
)
|
Balance
at July 31, 2007
|
|
|
459,524,043
|
|
$
|
459,524
|
|
|
(499,854
|
)
|
$
|
(7,498
|
)
|
$
|
84,990,747
|
|
$
|
(1,578,025
|
)
|
$
|
(87,930,906
|
)
|
$
|
(4,066,158
|
)
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(Unaudited)
|
|
For
the Nine Months Ended
July
31,
|
|
|
|
2007
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
loss
|
|
$
|
(12,083,729
|
)
|
$
|
(26,124,142
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Consulting
fees and other compensatory elements of stock issuances
|
|
|
2,230,501
|
|
|
1,528,429
|
|
Change
in fair value of derivative liabilities
|
|
|
(3,016,018
|
)
|
|
12,128,413
|
|
(Gain)/Loss
on disposal of property and equipment
|
|
|
614
|
|
|
--
|
|
Loss
on impairment of technology licenses and capitalized
software
development costs
|
|
|
4,415,943
|
|
|
--
|
|
Fair
value of Investors’ warrants in excess of debt discount
|
|
|
--
|
|
|
5,608,156
|
|
Loss
on exchange of notes payable into common stock
|
|
|
--
|
|
|
446,386
|
|
Gain
on forgiveness of principal and interest on Zaiq Note
|
|
|
--
|
|
|
(1,169,820
|
)
|
Amortization
of deferred financing costs
|
|
|
1,230,087
|
|
|
1,017,659
|
|
Amortization
of debt discount on notes
|
|
|
3,187,404
|
|
|
3,290,683
|
|
Amortization
of technology licenses and capitalized software development
fees
|
|
|
809,821
|
|
|
531,692
|
|
Depreciation
|
|
|
17,281
|
|
|
2,306
|
|
Change
in assets
|
|
|
|
|
|
|
|
Other
current assets
|
|
|
(42,611
|
)
|
|
(96,615
|
)
|
Other
assets
|
|
|
--
|
|
|
2,486
|
|
Change
in liabilities
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
229,459
|
|
|
519,473
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(3,021,248
|
)
|
|
(2,314,894
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from sale of trademark rights
|
|
|
200,000
|
|
|
--
|
|
Proceeds
from maturity of short-term investments
|
|
|
1,000,000
|
|
|
--
|
|
Acquisition
and costs of capitalized software and development fees
|
|
|
(710,179
|
)
|
|
(375,000
|
)
|
Acquisition
of property and equipment
|
|
|
(140,762
|
)
|
|
(6,539
|
)
|
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
349,059
|
|
|
(381,539
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
587,000
|
|
|
--
|
|
Proceeds
from exercise of warrants
|
|
|
--
|
|
|
697,407
|
|
Purchase
of treasury stock
|
|
|
--
|
|
|
(7,498
|
)
|
Proceeds
from notes payable
|
|
|
1,700,000
|
|
|
750,000
|
|
Proceeds
from convertible debentures
|
|
|
--
|
|
|
6,000,000
|
|
Capitalized
financing costs
|
|
|
(139,000
|
)
|
|
(742,450
|
)
|
Repayments
of notes payable
|
|
|
(324,000
|
)
|
|
(944,291
|
)
|
Repayments
of convertible notes payable
|
|
|
--
|
|
|
(460,322
|
)
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
1,824,000
|
|
|
5,292,846
|
|
|
|
|
|
|
|
|
|
(DECREASE)
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(848,189
|
)
|
|
2,596,413
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
1,090,119
|
|
|
373,481
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - END OF PERIOD
|
|
$
|
241,930
|
|
$
|
2,969,894
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Nine Months Ended
July
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
76,025
|
|
$
|
3,350
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of
Non-Cash
Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for conversion of convertible debentures, notes payable
and
accrued interest
|
|
$
|
4,101,833
|
|
$
|
3,777,854
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock upon exercise of stock options for the settlement
of
vendor payables
|
|
$
|
19,140
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
Value
assigned to warrants granted in connection with notes
payable
|
|
$
|
226,567
|
|
$
|
120,000
|
|
|
|
|
|
|
|
|
|
Value
assigned to common stock issued in connection with notes
payable
|
|
$
|
700,000
|
|
$
|
--
|
|
Value
recorded as debt discount relating to warrants issued to purchasers
of
convertible debentures
|
|
$
|
--
|
|
$
|
3,428,571
|
|
|
|
|
|
|
|
|
|
Value
assigned on issuance date to warrants issued to placement
agent
|
|
$
|
--
|
|
$
|
1,792,452
|
|
|
|
|
|
|
|
|
|
Value
assigned to conversion option liability in connection with issuance
of
convertible debentures
|
|
$
|
--
|
|
$
|
2,571,429
|
|
|
|
|
|
|
|
|
|
Common
stock issued for the settlement of accrued liquidated
damages
|
|
$
|
68,547
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
Deferred
compensation converted to convertible note payable
|
|
$
|
--
|
|
$
|
212,450
|
|
|
|
|
|
|
|
|
|
Reclassification
of conversion option liability to equity
|
|
$
|
1,689,551
|
|
$
|
947,211
|
|
|
|
|
|
|
|
|
|
Reclassification
of derivative liability upon exercise of options and
warrants
|
|
$
|
71,521
|
|
$
|
1,141,769
|
|
|
|
|
|
|
|
|
|
See
notes
to condensed consolidated financial statements.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 - PRINCIPLES OF CONSOLIDATION AND BUSINESS OPERATIONS
The
condensed consolidated financial statements include the accounts of Rim
Semiconductor Company (“Rim Semi”) and its wholly-owned operating subsidiary, NV
Entertainment, Inc. (“NV Entertainment”) (collectively, the “Company”). 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. Top Secret Productions, LLC is a 50% owned
subsidiary of NV Entertainment.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“US GAAP”). In the opinion of management, the
accompanying unaudited financial statements contain all adjustments, consisting
only of those of a normal recurring nature, necessary for a fair presentation
of
the Company’s financial position, results of operations and cash flows at the
dates and for the periods indicated. These financial statements should be read
in conjunction with the financial statements and notes related thereto included
in the Annual Report on Form 10-KSB for the fiscal year ended October 31,
2006.
These
results for the three months and nine months ended July 31, 2007 are not
necessarily indicative of the results to be expected for the full fiscal year.
The preparation of the consolidated financial statements in conformity with
US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Rim
Semiconductor Company was incorporated under the laws of the State of Utah
on
December 5, 1985. In November 1999, the Company began to focus its business
activities on the development of new semiconductor technologies. Pursuant to
such plan, in February 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 condensed 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 significant recurring operating losses, used substantial funds
in
its operations, and needs to raise additional funds to accomplish its business
plan. For the three months ended July 31, 2007 and 2006, the Company incurred
net losses of approximately $4.2 million and $15.1 million, respectively, and
approximately $12.1 million and $26.1 million for the nine months ended July
31,
2007 and 2006, respectively. As of July 31, 2007, the Company has a working
capital deficiency of approximately $6.2 million. In addition, management
believes that the Company will continue to incur net losses and cash flow
deficiencies from operating activities through at least July 31,
2008.
In
September 2007, an institutional investor that had previously invested in the
Company committed to purchase $6 million of convertible debentures upon the
Company’s request at any time through January 1, 2008. Management believes that
the net proceeds from this financing, together with $241,930 in cash as of
July
31, 2007, is sufficient to fund the planned expenditures through at least July
31, 2008.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 - PRINCIPLES OF CONSOLIDATION AND BUSINESS OPERATIONS
(CONTINUED)
Liquidity
Discussion
(Continued)
Management
of the Company is continuing its efforts to secure additional funds through
equity and/or debt instruments to fund ongoing operations. After July 31, 2008,
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.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting
Estimates
The
preparation of the condensed 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 condensed 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.
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
Statement of Position 00-2, “Accounting by Producers or Distributors of Films”
(“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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research
and Development
Research
and development costs are charged to expense as incurred. Amounts allocated
to
acquired-in-process research and development costs, from business combinations,
are charged to operations at the consummation of the acquisition.
Research
and development expenses relate to the design and development of advanced
transmission technology products. In the past, the Company has outsourced its
design and development activities to independent third parties, although it
is
not currently doing so. Internal development costs and 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, development costs and payments made are expensed to
research and development costs. 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 (See Note 4).
Derivative
Financial Instruments
In
connection with the issuance of certain convertible debentures (see Note 8),
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.”
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative
Financial Instruments
(Continued)
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 is reclassified as of the date of the event that caused the
reclassification.
The
fair
value of derivative financial instruments was estimated during the nine months
ended July 31, 2007 and 2006 using the Black-Scholes model and the following
range of assumptions:
|
|
Three
Months Ended July 31,
|
|
Nine
Months Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Expected
dividends
|
|
None
|
|
None
|
|
None
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
57.9
- 125.9%
|
|
|
90.0
- 123.5%
|
|
|
47.9
- 136.9%
|
|
|
95.3
- 308.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
4.6
- 5.0%
|
|
|
4.9%
|
|
|
4.5
- 5.2%
|
|
|
4.3
- 4.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
term (years)
|
|
|
0.2
- 9.0
|
|
|
0.1
- 9.9
|
|
|
0.2
- 9.5
|
|
|
0.1
- 9.9
|
|
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.
For
the
three months and nine months ended July 31, 2007 and 2006, no effect has been
given to outstanding options, warrants, convertible notes payable, or
convertible debentures in the diluted computation, as their effect would be
anti-dilutive.
Stock-Based
Compensation
The
Company reports stock based compensation under accounting guidance provided
by
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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based
Compensation
(Continued)
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.
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 nine months ended July 31,
2007.
The
Company has continued to attribute the value of stock-based compensation to
expense on the straight-line single option method.
Stock-based
compensation expense recognized under SFAS 123(R) related to employee stock
options was $113,444 and $341,392 for the three months and nine months ended
July 31, 2007, respectively, and $205,240 and $653,079 for the three months
and
nine months ended July 31, 2006, respectively. Stock-based-compensation expense
for share-based payment awards granted prior to, but not yet vested as of
October 31, 2005 based on the grant date fair value estimated in accordance
with
the provisions of SFAS 123 was $0 and $247,057 for the three months and nine
months ended July 31, 2006, respectively.
Stock-based
compensation expense recognized for non-employees under other accounting
standards was $614,834 and $1,889,109 for the three months and nine months
ended
July 31, 2007, respectively, and $312,619 and $628,293 for the three months
and
nine months ended July 31, 2006, respectively.
As
stock-based compensation expense recognized in the consolidated statement of
operations for the three months and nine months ended July 31, 2007 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.
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 (See Note 4).
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation. The reclassification did not have any effect on reported net
(losses) income for any periods presented.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impact
of Recently Issued Accounting Standards
In
July
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement No. 109” (the
“Interpretation”). The Interpretation establishes for all entities a minimum
threshold for financial statement recognition of the benefit of tax positions,
and requires certain expanded disclosures. The Interpretation is effective
for
fiscal years beginning after December 31, 2006, and is to be applied to all
open
tax years as of the date of effectiveness. The Company is in the process of
evaluating the impact of the application of the Interpretation to its financial
statements.
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 year 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
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159
provides companies with an option to report selected financial assets and
liabilities at fair value. The objective of SFAS 159 is to reduce
both complexity in accounting for financial instruments and the volatility
in
earnings caused by measuring related assets and liabilities differently.
Generally accepted accounting principles have required different measurement
attributes for different assets and liabilities that can create artificial
volatility in earnings. The FASB has indicated it believes that
SFAS 159 helps to mitigate this type of accounting-induced volatility by
enabling companies to report related assets and liabilities at fair value,
which
would likely reduce the need for companies to comply with detailed rules for
hedge accounting. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities.
SFAS 159
does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements
included in SFAS 157 and SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments.” SFAS 159 is effective for the Company as of the
beginning of fiscal year 2009. The Company has not yet determined the impact
SFAS 159 may have on its consolidated financial position, results of operations,
or cash flows.
In
December 2006, the FASB approved FASB Staff Position (FSP) No. EITF
00-19-2, “Accounting for Registration Payment Arrangements” (“FSP EITF
00-19-2”), which specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision
of a financial instrument or other agreement, should be separately recognized
and measured in accordance with SFAS No. 5, “Accounting for
Contingencies”. FSP EITF 00-19-2 also requires additional disclosure
regarding the nature of any registration payment arrangements, alternative
settlement methods, the maximum potential amount of consideration and the
current carrying amount of the liability, if any. The guidance in
FSP EITF 00-19-2 amends FASB Statements No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, and No. 150, “Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity”, and FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of
Others”, to include scope exceptions for registration payment
arrangements.
FSP EITF 00-19-2
is effective immediately for registration payment arrangements and the financial
instruments subject to those arrangements that are entered into or modified
subsequent to the issuance date of this FSP, or for financial statements issued
for fiscal years beginning after December 15, 2006, and interim periods within
those fiscal years, for registration payment arrangements entered into prior
to
the issuance date of this FSP. The Company is evaluating the impact of this
pronouncement on the Company’s consolidated financial position, results of
operations and cash flows.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
At
July 31,
2007
|
|
Leasehold
improvements
|
|
$
|
127,032
|
|
Furniture
and fixtures
|
|
|
19,554
|
|
Office
equipment
|
|
|
63,163
|
|
|
|
|
209,749
|
|
Accumulated
depreciation and amortization
|
|
|
(22,336
|
)
|
Total
|
|
$
|
187,413
|
|
For
the
three months and nine months ended July 31, 2007, depreciation and amortization
expense was $7,843 and $17,281, respectively. For the three months and nine
months ended July 31, 2006, depreciation and amortization expense was $1,067
and
$2,306, respectively.
NOTE
4 - TECHNOLOGY LICENSES AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
|
|
At
July 31,
2007
|
|
Technology
licenses
|
|
$
|
5,751,000
|
|
Purchased
technology
|
|
|
228,000
|
|
Capitalized
software development cost
|
|
|
1,788,225
|
|
|
|
|
7,767,225
|
|
Loss
on impairment
|
|
|
(4,415,943
|
)
|
|
|
|
(1,586,847
|
)
|
Total
|
|
$
|
1,764,435
|
|
The
weighted average useful life of the Company’s capitalized
software was approximately 6 years as of July 31, 2007. The Company commenced
amortization of technology licenses and capitalized software development costs
during December 2005 when the Company made available to the market the Cupria
Cu5001 semiconductor and has recorded amortization expense of $279,155 and
$809,821 during the three months and nine months ended July 31, 2007,
respectively, and $216,460 and $531,692 during the three months and nine months
ended July 31, 2006, respectively.
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.
As
of
July 31, 2007, the Company reassessed the underlying value of its technology
due
to the development of a new improvement to the Company’s existing data transport
technologies. This development, which was completed in August 2007, replaces
all
of the original design elements that resulted from the Company’s strategic
partnership with Adaptive Networks, Inc. (“Adaptive”) and improves certain
design elements developed with Hellosoft. In June 2007, the Company filed
a provisional patent application protecting technology that replaces certain
aspects of prior versions of its CupriaTM
semiconductor platform. The Company’s current technology does not utilize
previously capitalized licenses and software that were incorporated into prior
versions of the Company’s CupriaTM
semiconductor platform. As a result of this new technology , the Company
reviewed the recoverability of its capitalized technology licenses and software
development costs and determined that as of July 31, 2007 the remaining book
value of approximately $4.4 million was not recoverable based on estimated
future cash flows to be generated from the licenses. Accordingly, the
Company has recognized a loss on impairment of approximately $4.4 million in
the
condensed consolidated statements of operations for the three months and nine
months ended July 31, 2007.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4 - TECHNOLOGY LICENSES AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
(CONT’D)
The
technology licensed from or jointly developed with Adaptive may find use in
future products but no estimation of this future value is currently
determinable.
NOTE
5 - FILM IN DISTRIBUTION
The
Company recognized of revenues $14,757 for each of the three months and nine
months ended July 31, 2007. The Company recognized revenues of $1,025 and
$59,899 for the three months and nine months ended July 31, 2006, respectively.
NOTE
6 - DEFERRED FINANCING COSTS
As
of
July 31, 2007, the deferred financing costs consist of costs incurred in
connection with the sale of the Company’s outstanding debt:
Deferred
financing costs
|
|
$
|
3,680,818
|
|
Less:
accumulated amortization
|
|
|
(3,497,082
|
)
|
|
|
|
|
|
Deferred
financing costs, net
|
|
$
|
183,736
|
|
Costs
incurred in connection with debt financings are capitalized as deferred
financing costs and amortized over the term of the related debt. If any or
all
of the related debt is converted or repaid prior to its maturity date, a
pro-rata share of the related deferred financing costs are written off and
recorded as amortization expense in the period of the conversion or repayment
in
the consolidated statement of operations. For the three months and nine months
ended July 31, 2007, amortization of deferred financing costs was $64,240 and
$1,230,087, respectively. For the three months and nine months ended July 31,
2006, amortization of deferred financing costs was $448,840 and $1,017,659,
respectively.
NOTE
7 - 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 repay the principal and an additional amount equal to 50% of the principal
on
all notes in (1) below.
As
of
July 31, 2007, the Company has accrued in the aggregate approximately $284,000
of interest which is included as part of accounts payable and accrued expenses.
Approximately $237,000 of the accrued interest relates to the Company’s current
outstanding convertible promissory notes and $47,000 relates to a previously
repaid promissory note.
The
outstanding convertible notes are summarized in the table below:
|
|
At
July 31,
2007
|
|
Notes
payable (nine notes) (1)
|
|
$
|
468,000
|
|
Notes
payable, 9% interest, related party (2)
|
|
|
10,000
|
|
|
|
|
|
|
Total
|
|
$
|
478,000
|
|
(1)
|
The
notes were issued during the period from March 2002 through July
2003, and
are 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.
|
(2)
|
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.
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
7 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
For
all
the above convertible notes, the fair values of the conversion options as of
July 31, 2007 were nominal due to the conversion price being substantially
out-of-the money.
NOTE
8 - 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
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 granted a
security interest in substantially all of its assets, including without
limitation, its intellectual property, in favor of the Investors. The security
interest terminated 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. During
the three months ended January 31, 2007, condition (i) was met and 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 was
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. These liquidated
damages aggregated $212,000. At their option, the holders of the 2006 Debentures
were 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 at the time the liquidated damages became due. During the three
months ended January 31, 2007, 464,535 shares of common stock valued at $68,547
were issued as payment for liquidated damages. There were no such payments
made
during the three months ended April 30, 2007 or the three months ended July
31,
2007. Accrued liquidated damages as of July 31, 2007 was $143,453.
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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
8 - CONVERTIBLE DEBENTURES (CONTINUED)
2006
Debentures
(Continued)
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 was 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 charged to interest expense during the three months ended April 30,
2006.
In
accordance with SFAS No. 133 and EITF Issue No. 00-19, due to the possibility
that an indeterminate number of shares could 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 and
the placement agent’s warrants.
As
of
July 31, 2007, the conversion option liability of $2,571,429 had been reduced
to
$279,429 as a result of conversions of the 2006 Debentures. During the nine
months ended July 31, 2007, $1,689,000 was recorded as a reclassification to
stockholders’ equity. Since the issuance of the 2006 Debentures, an aggregate of
$2,292,000 has been recorded as a reclassification to stockholders’ equity.
A
gain on
the change in fair value of the derivative liabilities of $1,697,490 and
$1,834,393 was recognized as part of other income during the three months and
nine months ended July 31, 2007, respectively. A loss on the change in fair
value of the derivative liabilities of $9,315,408 and $6,666,740 was recognized
as part of other expense during the three months and nine months ended July
31,
2006, respectively.
During
the three months ended January 31, 2007, $3,931,000 of principal amount of
2006
Debentures plus accrued interest of $136,911 were converted into 56,376,123
shares of common stock. During the three months ended April 30, 2007, no
principal or accrued interest was converted into shares of common stock. During
the three months ended July 31, 2007, $10,000 of principal amount of 2006
Debentures plus accrued interest of $22,601 were converted into 640,344 shares
of common stock.
During
the three months ended April 30, 2006, no principal or accrued interest was
converted into shares of common stock. During the three months ended July 31,
2006, $400,000 of principal amount of 2006 Debentures plus accrued interest
of
$129,567 were converted into 5,647,147 shares of common stock.
Included
in interest expense for the three months and nine months ended July 31, 2007
is
$86,367 and $2,917,554, respectively, related to the amortization of the debt
discount on these debentures. Included in interest expense for the three months
and nine months ended July 31, 2006 is $1,076,881 and $1,495,486, respectively,
related to the amortization of the debt discount on these
debentures.
The
2006
Debentures are summarized below as of July 31, 2007:
|
|
Outstanding
Principal
Amount
|
|
Unamortized
Debt
Discount
|
|
Net
Carrying
Value
|
|
Current
|
|
$
|
652,000
|
|
$
|
198,900
|
|
$
|
453,100
|
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
8 - 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. 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. Except as expressly
provided in the Warrant Amendment, the terms and conditions of the Investor
and
Compensation Warrants and any related registration rights agreement were
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.
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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
8 - CONVERTIBLE DEBENTURES (CONTINUED)
2005
Debentures
(Continued)
The
gross
proceeds of $3,500,000 are 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 the possibility that an
indeterminate number of shares could be issued upon conversion of the 2005
Debentures, the Company separately values and accounts for the embedded
conversion feature related to the 2005 Debentures and the Investor Warrants
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.
As
of
July 31, 2007, the conversion option liability of $1,500,000 had been reduced
to
$1,834 as a result of conversions of the 2005 Debentures. During the nine months
ended July 31, 2007, $551 was recorded as a reclassification to stockholders’
equity. Since the issuance of the 2005 Debentures, an aggregate of $1,498,166
has been recorded as a reclassification to stockholders’ equity.
A
gain on
the change in fair value of the derivative liabilities of $565,459 and $671,878
was recognized as part of other income during the three months and nine months
ended July 31, 2007, respectively. A loss on the change in fair value of the
derivative liabilities of $1,058,056 and $4,191,262 was recognized during the
three months and nine months ended July 31, 2006, respectively.
During
the three months ended January 31, 2007, $1,284 of principal amount of 2005
Debentures plus accrued interest of $37 were converted into 18,321 shares of
common stock. During the three months ended April 30, 2007, no principal or
accrued interest was converted into shares of common stock. During the three
months ended July 31, 2007, no principal or accrued interest was converted
into
shares of common stock.
During
the three months ended January 31, 2006, $1,310,724 of principal amount of
2005
Debentures plus accrued interest of $69,777 were converted into 81,262,199
shares of common stock. During the three months ended April 30, 2006, 464,423
of
principal amount of the 2005 Debentures plus accrued interest of $2,401 were
converted into 22,908,266 shares of common stock. During the three months ended
July 31, 2006, $35,000 of principal amount of the 2005 Debentures plus accrued
interest of $1,087 were converted into 443,814 shares of common stock.
Included
in interest expense for the three months and nine months ended July 31, 2007
is
$360 and $1,735, respectively, related to the amortization of the debt discount
related to these debentures. Included in interest expense for the three months
and nine months ended July 31, 2006 is $24,643 and $1,550,586, respectively,
related to the amortization of the debt discount related to these
debentures.
The
2005
Debentures are summarized below as of July 31, 2007:
|
|
Outstanding
Principal
Amount
|
|
Unamortized
Debt
Discount
|
|
Net
Carrying
Value
|
|
Current
|
|
$
|
4,280
|
|
$
|
1,180
|
|
$
|
3,100
|
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
8 - 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. 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. Accrued liquidated damages as of July
31,
2007 was $37,550.
During
the three months and nine months ended July 31, 2007, no principal or accrued
interest was converted into shares of common stock. During the three months
and
nine months ended July 31, 2006, $50,000 of principal amount plus accrued
interest of $8,974 were converted into 393,158 shares of common
stock.
Included
in interest expense for the three months and nine months ended July 31, 2007
is
$57 and $1,548, respectively, related to the amortization of the debt discount
related to these debentures. Included in interest expense for the three months
and nine months ended July 31, 2006 is $20,255 and $43,736, respectively,
related to the amortization of the debt discount related to these
debentures.
The
7%
Debentures are summarized below as of July 31, 2007:
|
|
Outstanding
Principal
Amount
|
|
Unamortized
Debt
Discount
|
|
Net
Carrying
Value
|
|
Current
|
|
$
|
75,000
|
|
$
|
--
|
|
$
|
75,000
|
|
The
remaining 7% Debentures outstanding at July 31, 2007, originally issued in
May
2004, were due and payable in May 2007. As of this date, the 7% Debentures
remain outstanding.
NOTE
9 - NOTES PAYABLE
In
July
2007, the Company entered into a bridge loan agreement with two institutional
investors pursuant to which the institutional investors loaned the Company
a
total of $1,000,000. After
the
payment of transaction related fees and expenses of $105,000, and repayment
of
the April 2007 loan (discussed below), the Company received net proceeds of
$571,000.
The
transaction related fees were recorded as deferred financing costs.
Pursuant
to the bridge loan agreement, the Company issued to each institutional investor
a secured promissory note in the principal amount of $550,000, for an aggregate
of $1,100,000 (each, a “Note”), representing an original issue discount of 10%.
The difference of $100,000 between the gross proceeds and amount due at maturity
is shown as a debt discount that is amortized as interest expense over the
life
of the loan. In connection with the bridge loan agreement, the Company also
issued to the institutional investors an aggregate of 10,000,000 unregistered
shares of the Company’s common stock with a fair value at the issuance date of
$700,000. The fair value of the unregistered shares of common stock is shown
as
a debt discount that is amortized as interest expense over the life of the loan.
For both the three months and nine months ended July 31, 2007, amortization
of
debt discount on the Notes was $16,000.
Each
Note
will mature on the date which is the earlier of (i) December 24, 2007, or (ii)
the date the Company effects a subsequent financing that, individually or when
combined with other financings completed by the Company after July 26, 2007,
results in gross proceeds to the Company of at least $3 million.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
9 - NOTES PAYABLE (CONTINUED)
In
the
event the Notes, or other amounts due under the Notes, is not repaid by the
maturity date, or is otherwise in default, the Notes become convertible into
shares of the Company’s common stock, subject to certain conditions provided in
the loan agreement, at a conversion price equal to the greater of: (i) 75%
of
the average closing price of the common stock for the five trading days
preceding the applicable conversion date, or (ii) $0.01 (subject to adjustment
as provided in the Notes), and the Company incurs the share registration
obligations set forth in the Notes.
To
secure
the Company’s obligations under the bridge loan agreement, the Company granted a
security interest in substantially all of its assets, including without
limitation, its intellectual property, in favor of the institutional investors
under the terms and conditions of a security agreement dated as of the date
of
the bridge loan agreement. The security interest terminates upon payment or
satisfaction of all of the Company’s obligations under the Notes.
In
May
2007, the Company entered into a promissory note resulting in gross proceeds
of
$400,000. The promissory note was due and payable on August 22, 2007 and bears
interest at the rate of 10% per annum. In the event the promissory note is
not
repaid by the maturity date, or is otherwise in default, the unpaid portion
of
the promissory note will become convertible, in whole or in part, into shares
of
the Company's common stock at a conversion price of $0.08 per share. In August,
2007, the maturity date of this promissory note was extended to October 1,
2007.
In
April
2007, the Company entered into a loan agreement with a third party pursuant
to
which the Company borrowed $300,000 from the lender. An amount equal to 108%
of
the principal amount ($324,000) of the loan was due and payable on the earlier
of July 31, 2007 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 Company received net proceeds of $265,970 at the issue date
following the payment of due diligence fees and transaction related fees and
expenses. Transaction related fees in the amount of $34,000 were recorded as
deferred financing costs. The loan was repaid out of the proceeds of the note
payable entered into by the Company in July 2007. The
difference of $24,000 between the gross proceeds and amount due at maturity
was
shown as a debt discount that was amortized as interest expense over the life
of
the loan.
The
Company issued to the lender warrants to purchase 3,333,333 shares of common
stock at an exercise price of $0.10 per share. The fair value of the warrants
of
$226,567 at the issuance date was shown as a debt discount that was amortized
as
interest expense over the life of the loan. For the three months and nine months
ended July 31, 2007, amortization of debt discount on this loan was $191,110
and
$250,567, respectively.
A
provision in the agreement required repricing of the warrants to the same price
as any subsequent stock sales. This event occurred on April 30, 2007 and the
exercise price was lowered to $0.05 per share. The reduction of the warrant
exercise price resulted in revaluing the warrants to $143,311. To secure the
Company’s obligations under the loan agreement, the Company granted a security
interest in substantially all of its assets, including without limitation,
its
intellectual property. The security interest terminated upon payment or
satisfaction of all of the Company’s obligations under the loan agreement.
In
February 2006, the Company issued 5,304,253 shares of restricted common stock
in
exchange for the return and cancellation of the outstanding principal of
$256,886 and interest of $114,412 on five, unsecured individual notes payable,
each with identical terms and bearing 6% interest. As the conversion rate of
$0.07 was below the closing price of the common stock on the conversion date,
a
loss of $196,257 was recognized during the three months ended April 30,
2006.
In
February 2006, the Company issued 6,760,241 shares of restricted common stock
in
exchange for the return and cancellation of the outstanding principal of
$443,251 and interest of $29,766 on this note. As the conversion rate of $0.07
was below the closing price of the common stock on the conversion date, a loss
of $250,129 was recognized during the three months ended April 30,
2006.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
10 - STOCKHOLDERS’ DEFICIENCY
Common
Stock
During
the three months ended January 31, 2007, the Company:
·
|
issued
56,394,444 shares of common stock upon conversion of convertible
debentures with a principal amount of $3,932,284 and accrued interest
of
$136,948;
|
·
|
issued
11,736,991 shares of restricted common stock in exchange for services
valued at $1,402,000;
|
·
|
issued
464,535 shares of restricted common stock to 2006 Debenture holders
in
satisfaction of $68,547 in liquidated damages;
and
|
·
|
issued
600,000 shares of common stock upon exercise of stock options in
satisfaction of accrued expenses of
$19,140.
|
During
the three months ended April 30, 2007, the Company:
·
|
issued
6,000,000 shares of restricted common stock in exchange for cash
proceeds
of $300,000; and
|
·
|
issued
317,460 shares of restricted common stock in exchange for services
valued
at $29,524.
|
During
the three months ended July 31, 2007, the Company:
·
|
issued
640,344 shares of common stock upon conversion of convertible debentures
with a principal amount of $10,000 and accrued interest of $22,601;
|
·
|
issued
5,740,000 shares of restricted common stock in exchange for cash
proceeds
of $287,000;
|
·
|
issued
10,000,000 shares of restricted common stock valued at $700,000 in
connection with the issuance of the July 2007 bridge loan;
and
|
·
|
issued
11,230,487 shares of restricted common stock in exchange for services
valued at $868,100.
|
Stock
Option Plans
In
November 2006, the Company’s board of directors adopted the 2006 Stock Incentive
Plan (the “2006 Plan”). The 2006 Plan 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. The
2006 Plan was approved by the Company’s shareholders in May 2007 at the
Company’s 2007 Annual Meeting of Shareholders. The Company’s 2003 Consultant
Stock Plan (the “2003 Plan”) was also adopted by the shareholders at the 2007
Annual Meeting. During the nine months ended July 31, 2007, there were no
issuances made under the 2003 Plan.
Options
Granted
During
the three months ended January 31, 2007, the following options were
granted:
·
|
Options
to purchase 100,000 shares of common stock were granted to an employee
under the 2006 Plan. 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;
and
|
·
|
Options
to purchase 4,250,000 shares of common stock were granted to one
director
and three executive employees under the 2006 Plan. 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
November 2009.
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
10 - STOCKHOLDERS’ DEFICIENCY (CONTINUED)
Options
Granted (Continued)
During
the three months ended April 30, 2007, no options were granted.
During
the three months ended July 31, 2007, the following options were
granted:
·
|
Options
to purchase 450,000 shares of common stock were granted to two employees
under the 2006 Plan. These options were valued at $31,736 and have
a ten
year term, an exercise price of $0.075 per share, and vest over a
period
of approximately three years through July
2010.
|
The
estimated weighted-average fair value of stock options granted during the nine
months ended July 31, 2007 and 2006 was $0.09 and $0.03 per share, respectively,
using the Black-Scholes model with the following assumptions:
|
|
Three
Months Ended July 31,
|
|
Nine
Months Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Expected
dividends
|
|
|
None
|
|
|
None
|
|
|
None
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
112%
|
|
|
90%
|
|
|
112
- 116%
|
|
|
90
- 158%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
5.16%
|
|
|
5.19%
|
|
|
4.63
- 5.16%
|
|
|
4.34
- 5.19%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
life
|
|
|
10
years
|
|
|
10
years
|
|
|
10
years
|
|
|
10
years
|
|
Options
Exercised
During
the three months ended January 31, 2007, options to purchase 600,000 shares
of
common stock were exercised. Upon the exercise of these options, the Company
reclassified the fair value of $71,521 from derivative liabilities to
stockholders’ equity. During the three months ended January 31, 2007, the
Company recognized a loss of $16,441 resulting from the change in fair value
of
these options. During both the three months ended April 30, 2007 and the three
months ended July 31, 2007, no options were exercised.
Options
Cancelled
During
the three months ended January 31, 2007, no options were cancelled. During
the
three months ended April 30, 2007, 300,000 options granted to an employee were
cancelled under the terms of the plan. During the three months ended July 31,
2007, 100,000 options granted to an employee were cancelled under the terms
of
the plan.
Warrants
During
the three months ended April 30, 2007, 3,333,333 warrants to purchase common
stock were issued in connection with the April 2007 note payable (see Note
9).
These warrants are exercisable at a price of $0.05 per share beginning 65 days
from the issuance date (June 6, 2007) and expire April 2, 2012.
During
the three months ended July 31, 2007, no warrants to purchase common stock
were
issued or exercised.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
10 - STOCKHOLDERS’ DEFICIENCY (CONTINUED)
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:
|
|
July
31,
|
|
|
|
2007
|
|
2006
|
|
Warrants
to purchase common stock
|
|
|
117,870,937
|
|
|
130,955,724
|
|
2006
Debentures and accrued interest (1)
|
|
|
12,868,296
|
|
|
43,760,531
|
|
Options
to purchase common stock
|
|
|
39,243,750
|
|
|
29,868,750
|
|
Convertible
notes payable and accrued interest
|
|
|
1,446,805
|
|
|
1,695,292
|
|
7%
Debentures and accrued interest
|
|
|
630,369
|
|
|
595,369
|
|
2005
Debentures and accrued interest (2)
|
|
|
168,919
|
|
|
64,558
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
172,229,076
|
|
|
206,940,224
|
|
(1) Based
on
a twenty day volume weighted average common stock price discounted by 30% as
of
July 31, 2007 and 2006 of $0.0728 and $0.1287, respectively.
(2) Based
on
a five day volume weighted average common stock price discounted by 30% as
of
July 31, 2007 and 2006 of $0.0688 and $0.1415, respectively.
Substantial
issuances after July 31, 2007 through September 12, 2007:
|
|
|
|
Common
stock issued for cash
|
|
|
4,210,000
|
|
Options
and warrants granted to purchase common stock
|
|
|
3,050,000
|
|
NOTE
11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
HelloSoft
Agreements
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.
As
of
January 31, 2007, HelloSoft had completed all committed work under the Original
Agreement and its amendments, and been paid in full. As of January 31, 2007,
the
Company had paid an aggregate of approximately $998,000 in cash and has issued
8,047,618 shares of common stock valued at $820,042 to HelloSoft for the
services rendered under the Original Agreement and its amendments. Of this
amount, $62,500 in cash that had been accrued at October 31, 2005 was paid
during the three months ended January 31, 2006 and $225,000 in cash was paid
during the three months ended January 31, 2007. The Company issued another
317,460 shares of unregistered common stock valued at $29,524, on March 23,
2007
to satisfy its final obligation under the contract.
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.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
(CONTINUED)
eSilicon
Agreement
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. The
common stock issued to eSilicon was valued at the market price at the time
of
issuance and the $395,000 was recorded as research and development expense.
Additional cash payments will be made by the Company to eSilicon for other
services as such services are performed.
Concentration
of Credit Risk
The
Company maintains cash balances in one financial institution. The balance is
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 July 31, 2007, uninsured balances were approximately $142,000. The Company
believes it is not exposed to any significant credit risk for cash.
NOTE
12 - 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 Three Months Ended July 31, 2007:
|
|
|
|
|
|
|
|
|
|
Net
Sales - Domestic
|
|
$
|
--
|
|
$
|
14,757
|
|
$
|
--
|
|
$
|
14,757
|
|
Net
Sales - Foreign
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
Operating
Loss
|
|
$
|
(6,445,352
|
)
|
$
|
(2,215
|
)
|
$
|
--
|
|
$
|
(6,447,567
|
)
|
Depreciation
and amortization
|
|
$
|
286,998
|
|
$
|
--
|
|
$
|
--
|
|
$
|
286,998
|
|
|
|
Semiconductor
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
For
the Three Months Ended July 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - Domestic
|
|
$
|
--
|
|
$
|
1,025
|
|
$
|
--
|
|
$
|
1,025
|
|
Net
Sales - Foreign
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
Operating
Loss
|
|
$
|
(217,527
|
)
|
$
|
(3,154
|
)
|
$
|
(1,457,886
|
)
|
$
|
(1,678,567
|
)
|
Depreciation
and amortization
|
|
$
|
217,527
|
|
$
|
--
|
|
$
|
--
|
|
$
|
217,527
|
|
|
|
Semiconductor
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
For
the Nine Months Ended July 31, 2007:
|
|
|
|
|
|
|
|
|
|
Net
Sales - Domestic
|
|
$
|
--
|
|
$
|
14,757
|
|
$
|
--
|
|
$
|
14,757
|
|
Net
Sales - Foreign
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
Operating
Loss
|
|
$
|
(10,626,499
|
)
|
$
|
(16,649
|
)
|
$
|
--
|
|
$
|
(10,643,148
|
)
|
Depreciation
and amortization
|
|
$
|
827,102
|
|
$
|
--
|
|
$
|
--
|
|
$
|
827,102
|
|
Total
Identifiable Assets at July 31, 2007
|
|
$
|
2,288,461
|
|
$
|
255
|
|
$
|
263,819
|
|
$
|
2,552,535
|
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
12 - SEGMENT INFORMATION (CONTINUED)
|
|
Semiconductor
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
For
the Nine Months Ended July 31, 2006:
|
|
|
|
|
|
|
|
|
|
Net
Sales - Domestic
|
|
$
|
--
|
|
$
|
7,957
|
|
$
|
--
|
|
$
|
7,957
|
|
Net
Sales - Foreign
|
|
$
|
--
|
|
$
|
51,942
|
|
$
|
--
|
|
$
|
51,942
|
|
Operating
(Loss) Income
|
|
$
|
(533,998
|
)
|
$
|
50,533
|
|
$
|
(3,945,132
|
)
|
$
|
(4,428,597
|
)
|
Depreciation
and amortization
|
|
$
|
533,998
|
|
$
|
--
|
|
$
|
--
|
|
$
|
533,988
|
|
Total
Identifiable Assets at July 31, 2006
|
|
$
|
7,910,074
|
|
$
|
--
|
|
$
|
3,108,278
|
|
$
|
11,018,352
|
|
NOTE
13 - SUBSEQUENT EVENTS
Equity
Transactions
In
August
2007:
The
Company issued 860,000 unregistered shares of common stock in exchange for
cash proceeds of $43,000.
In
September 2007:
The
Company granted options to purchase 200,000 shares of common stock to an
employee under the Company’s 2006 Plan. These options were valued at $10,302 and
have a ten year term, an exercise price of $0.055, and vest over a period of
approximately three years through September 2010; and
The
Company issued 3,350,000 unregistered shares of common stock in exchange for
cash proceeds of $167,500. In connection with the issuances of common stock
the
Company also issued warrants to purchase 2,850,000 shares of common stock at
an
exercise price of $0.15 per share. The warrants have a five year term and are
immediately exercisable.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
We
urge
you to read the following discussion in conjunction with our condensed
consolidated financial statements and the notes thereto included elsewhere
herein.
CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
Our
prospects are subject to uncertainties and risks. In this Quarterly Report
on
Form 10-QSB, we make forward-looking statements in this Item 2 and elsewhere
that also involve substantial uncertainties and risks. These forward-looking
statements are based upon our current expectations, estimates and projections
about our business and our industry, and reflect our beliefs and assumptions
based upon information available to us at the date of this report. In some
cases, you can identify these statements by words such as “if,” “may,” “might,”
“will, “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continue,” and other similar terms. These
forward-looking statements include, among other things, projections of our
future financial performance and our anticipated growth, descriptions of our
strategies, our product and market development plans, the trends we anticipate
in our business and the markets in which we operate, and the competitive nature
and anticipated growth of those markets.
We
caution readers that forward-looking statements are predictions based on our
current expectations about future events. These forward-looking statements
are
not guarantees of future performance and are subject to risks, uncertainties
and
assumptions that are difficult to predict. Our actual results, performance
or
achievements could differ materially from those expressed or implied by the
forward-looking statements as a result of a number of factors, including but
not
limited to the risks and uncertainties discussed in our other filings with
the
SEC. We undertake no obligation to revise or update any forward-looking
statement for any reason.
OVERVIEW
Rim
Semiconductor Company (the “Company,” “we,” “our,” or “us”) has developed
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™ 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. The first such prototype has been developed. If 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 commitments from Extreme Copper, Inc. of
Newbury Park, California and Logic Research of Fukuoka, Japan 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 $500,000 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 first half of fiscal
2008. To date, we have not recorded any revenues from the sale of products
based
on our technology. During the three months ended April 30, 2007, we received
our
first purchase order for Cupria™ products. This order, for $114,000 is expected
to be fulfilled during our fourth fiscal quarter. However, because it is subject
to cancellation by the purchaser without penalty, there can be no assurance
that
this order will result in a completed sale.
We
will
need to raise approximately $1.5 million to repay short-term loans that will
become due and payable in September and December 2007. We presently do not
have
the capital resources to repay these debts, although we do have a commitment
from an institutional investor to purchase $6 million of 7% Senior Secured
Convertible Debentures upon our request. 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.
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 of our semiconductors. At July 31, 2007 we employed
nine
full-time employees and two full-time equivalent consultants to pursue the
continued development of our products. During the three months ended July 31,
2007 and 2006, we expended $232,264 and $119,888, respectively, for research
and
development of our semiconductor technology. During the nine months ended July
31, 2007 and 2006, we expended $1,041,884 and $255,821, 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. We also
jointly developed technology with Adaptive that enhanced the licensed
technology. From April 2002 until August 2007, the licensed technology and
enhancements provided the core technology for our semiconductor products. Our
CupriaTM
semiconductor platform no longer utilizes the technology licensed from Adaptive.
The board of directors believes that the Adaptive licenses and intellectual
property may be used in future products that we are planning.
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 (“HelloSoft”)
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.
As
of
July 31, 2007, we reassessed the underlying value of our technology due to
the
development of a new improvement to our existing data transport technologies,
which was completed in August 2007. This development replaces all of the
original design elements that resulted from our strategic partnership with
Adaptive and improves certain design elements developed with Hellosoft. In
June 2007, we filed a provisional patent application protecting technology
that
replaces certain aspects of prior versions of our CupriaTM
semiconductor platform. Our current technology does not utilize previously
capitalized licenses and software that were incorporated into prior versions
of
the CupriaTM
semiconductor platform. As a result of this new technology, on September
11, 2007, our Board of Directors reviewed the recoverability of our capitalized
technology licenses and software development costs and determined that as of
July 31, 2007 the remaining book value of approximately $4.4 million was not
recoverable based on estimated future cash flows to be generated from the
licenses. This conclusion was reached in connection with the Board’s review
and the Company’s preparation of this Report on Form 10-QSB. As a result, we
recognized a loss on impairment of approximately $4.4 million in our condensed
consolidated statements of operations for the three months and nine months
ended
July 31, 2007.
CRITICAL
ACCOUNTING POLICIES
The
preparation of our condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires us to make estimates and judgments that affect the reported amounts
of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. Our estimates are based on historical experience, other
information that is currently available to us and various other assumptions
that
we believe to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions and the variances
could be material.
Our
critical accounting policies are those that affect our condensed consolidated
financial statements materially and involve difficult, subjective or complex
judgments by management. We have identified the following critical accounting
policies that affect the more significant judgments and estimates used in the
preparation of our condensed consolidated financial statements.
Derivative
Financial Instruments
In
connection with the issuance of certain convertible debentures, 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 is reclassified as of the date of the event
that
caused the reclassification.
Stock-Based
Compensation
We
report
stock based compensation under accounting guidance provided by 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) 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.
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 nine months ended July 31, 2007.
We
have
continued to attribute the value of stock-based compensation to expense on
the
straight-line single option method.
Stock-based
compensation expense recognized under SFAS 123(R) related to employee stock
options was $113,444 and $341,392 for the three months and nine months ended
July 31, 2007, respectively, and $205,240 and $653,079 for the three months
and
nine months ended July 31, 2006, respectively. Stock-based-compensation expense
for share-based payment awards granted prior to, but not yet vested as of
October 31, 2005 based on the grant date fair value estimated in accordance
with
the provisions of SFAS 123 was $0 and $247,057 for the three months and nine
months ended July 31, 2006, respectively.
Stock-based
compensation expense recognized for non-employees under other accounting
standards was $614,834 and $1,889,109 for the three months and nine months
ended
July 31, 2007, respectively, and $312,619 and $628,293 for the three months
and
nine months ended July 31, 2006, respectively.
As
stock-based compensation expense recognized in the consolidated statement of
operations for the three months and nine months ended July 31, 2007 and 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.
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 the 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.
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 further reduced, and such reduction may be
material.
We
commenced amortization of capitalized software development costs during December
2005 and recorded amortization expense of $279,155 and $809,821 during the
three
months and nine months ended July 31, 2007, respectively, and $216,460 and
$531,692 during the three months and nine months ended July 31, 2006,
respectively.
RESULTS
OF OPERATIONS
COMPARISON
OF THE THREE MONTHS AND NINE MONTHS ENDED JULY 31, 2007 AND THE THREE MONTHS
AND
NINE MONTHS ENDED JULY 31, 2006
REVENUES.
Revenues for the three months and nine months ended July 31, 2007 were $14,757
and $14,757, respectively, and were entirely from our entertainment business.
The revenues were in the form of guarantee and/or license payments related
to
the U.S. distribution of the Film. Revenues for the three months and nine months
ended July 31, 2006 were $1,025 and $59,899, respectively, and were entirely
from our entertainment business. Of this amount, $1,025 and $7,957 were in
the
form of guarantee and/or license payments related to the U.S. distribution
of
the Film and $0 and $51,942 were related to foreign distribution of the Film
during the three months ended and nine months ended July 31, 2006, respectively.
No revenues were recorded in connection with our semiconductor business during
the three months or the nine months ended July 31, 2007 and 2006.
OPERATING
EXPENSES.
Operating expenses primarily include the impairment of technology licenses
and
capitalized software development costs, amortization of technology licenses
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 285% or $4,782,732 to $6,462,324 for the three
months ended July 31, 2007 from $1,679,592 for the three months ended July
31,
2006. Total operating expenses increased 137% or $6,169,409 to $10,657,905
for
the nine months ended July 31, 2007 from $4,488,496 for the nine months ended
July 31, 2006. This increase in total operating expenses is due primarily to
the
impairment of technology licenses and capitalized software development costs
of
$4,415,943 for the three months and nine months ended July 31, 2007. In
addition, there were increases in amortization of technology licenses and
capitalized software development fees, research and development expenses, and
selling, general and administrative expenses during the three months and nine
months ended July 31, 2007 as compared to the three months and nine months
ended
July 31, 2006.
Amortization
of technology licenses and capitalized software development fees was $279,155
for the three months ended July 31, 2007 as compared to $216,460 for the three
months ended July 31, 2006. This is due to the increase in capitalized research
and development costs during
the nine months ended July 31, 2007
and the
purchase of technology from 1021 Technologies, Inc. and 1021 Technologies KK
during the year ended October 31, 2006. Amortization of technology licenses
and
capitalized software development fees was $809,821 for the nine months ended
July 31, 2007 as compared to $531,692 for the nine months ended July 31, 2006.
This is also due to the increase in capitalized research and development costs
during the nine months ended July 31, 2007 and the purchase of technology from
1021 Technologies, Inc. and 1021 Technologies KK during the year ended October
31, 2006, plus the recognition of an additional 1.5 months of amortization
for
the nine months ended July 31, 2007 than for the nine months ended July 31,
2006
as amortization did not commence until December 2005.
Research
and development expenses increased by 94% or $112,376 to $232,264 for the three
months ended July 31, 2007 from $119,888 for the three months ended July 31,
2006. This increase is primarily attributable to the increase in consulting
related expenses and employees and related salaries, payroll taxes and benefits
for the three months ended July 31, 2007 as compared to the three months ended
July 31, 2006.
For
the
nine months ended July 31, 2007, the increase in research and development
expenses was 307% or $786,063 from $255,821 for the nine months ended July
31,
2006 to $1,041,884 for the nine months ended July 31, 2007. In addition to
salaries, payroll taxes and benefits associated with additional employees,
stock
based compensation recognized for research and development for the nine months
ended July 31, 2007 was $466,170, the majority of which is accounted for by
a
share-based payment valued at $395,000 to eSilicon. This initial payment was
required to commence pre-production work for Release 2.0 of the Cupria product
line. For the nine months ended July 31, 2006, stock based compensation
recognized for research and development was only $26,860. The remaining increase
is primarily due to consulting expenses for research and development activities
of $264,194 for the nine months ended July 31, 2007 as compared to $41,657
for
the nine months ended July 31, 2006. This is primarily because during the nine
months ended July 31, 2006, most of the technical and engineering work to
complete the new Cupria releases was being performed by Hellosoft, the costs
for
which were being capitalized to capitalized software.
Total
selling, general and administrative expenses increased 14% or $191,718 to
$1,534,962 for the three months ended July 31, 2007 from $1,343,244 for the
three months ended July 31, 2006. The increase is primarily related to
additional stock based compensation of $187,681 related to common stock issued
to consultants and options granted to employees and an increase in salaries
and
wages due to an increase in the number of employees during the three months
ended July 31, 2007 as compared to the three months ended July 31, 2006. This
increase was offset by a decrease in legal and accounting fees from the level
incurred during the three months ended July 31, 2006 related to the filing
of a
registration statement. The increase in selling, general and administrative
expenses of 19% or $689,274 to $4,390,257 for the nine months ended July 31,
2007 from $3,700,983 for the nine months ended July 31, 2006, was primarily
caused by the increase in headcount referred to above, including an increase
of
$262,762 in stock based compensation from $1,501,569 for the nine months ended
July 31, 2006 to $1,764,331 for the nine months ended July 31, 2007, offset
by a
decrease in legal and accounting fees from the level incurred during the nine
months ended July 31, 2006 related to the filing of a registration
statement.
OTHER
(INCOME) EXPENSES.
Other expenses-net included interest income, interest expense, a gain/loss
on
the change in fair value of derivative liabilities, amortization of deferred
financing costs, gain on forgiveness of principal and interest on a promissory
note, and a loss on exchange of notes payable into common stock. In total,
there
was income of $2,276,141 for the three months ended July 31, 2007 as compared
with a loss of $13,470,853 for the three months ended July 31, 2006. For the
nine months ended July 31, 2007, there was a loss of $1,440,581, a decrease
of
93% from the loss of $21,695,545 for the nine months ended July 31, 2006.
Explanations for the changes in individual line items are described further
below.
Interest
expense decreased 77% or $1,062,893 to $315,245 for the three months ended
July
31, 2007 from $1,378,138 for the three months ended July 31, 2006. The decrease
in interest expense for the three months ended July 31, 2007 as compared to
the
three months ended July 31, 2006 is primarily due to amortization and write-off
of debt discount due to conversions of 2006 Debentures during the three months
ended July 31, 2006. Interest expense decreased 65% or $6,020,145 to $3,255,762
for the nine months ended July 31, 2007 from $9,275,907 for the nine months
ended July 31, 2006. The decrease in interest expense is primarily due to the
value allocated to the warrants of $5,608,156 and liquidated damages of $152,000
related to the 2006 Debentures during the nine months ended July 31, 2006 that
did not occur during the nine months ended July 31, 2007.
We
recognized a gain of $2,654,271 on the change in fair value of derivative
liabilities for the three months ended July 31, 2007, a change of $14,298,146
or
123% from a loss of $11,643,875 for the three months ended July 31, 2006. The
gain was due primarily to a decrease in the market price of our common stock
during the three months ended July 31, 2007 as compared to three months ended
July 31, 2006. The closing market price of our common stock was $0.07 and $0.235
per share as of July 31, 2007 and 2006, respectively. In general, decreases
in
the market price of our common stock as compared to the exercise price of our
warrants or options results in decreases in the fair value of the warrant or
option as estimated using the Black-Scholes model. For the nine months ended
July 31, 2007, we recognized a gain of $3,016,018 as compared with a loss of
$12,128,413 for the nine months ended July 31, 2006, a difference of $15,144,431
or 125%. The gain was due primarily to a decrease in the market price of the
stock as compared with the exercise price of the derivatives, as described
above.
The
amortization of deferred financing costs decreased 86% or $384,600 to $64,240
for the three months ended July 31, 2007 from $448,840 for the three months
ended July 31, 2006 due primarily to conversions of the 2006 Debentures during
the three months ended July 31, 2006 that did not occur during the three months
ended July 31, 2007. The amortization of deferred financing costs increased
21%
or $212,428 to $1,230,087 for the nine months ended July 31 2007 from $1,017,659
for the nine months ended July 31, 2006 due primarily to the significant number
of conversions of the 2006 Debentures during the three months ended January
31,
2007. In addition, the 2006 Debentures and related deferred financing costs
were
only outstanding for a portion of the nine months ended July 31, 2006. 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 were also higher during the nine months ended July 31, 2006 due to
the
loss recognized on exchange of notes payable into common stock of
$446,386.
Other
income during the nine months ended July 31, 2006 consisted primarily of a
gain
on forgiveness of principal and interest on a promissory note (the “Zaiq Note”)
to Zaiq Technologies, Inc. (“Zaiq”) of $1,169,820. The Zaiq Note was entered
into in April 2005, had an original principal amount of $2,392,000 and was
originally due and payable in April 2007. Pursuant to the terms of the note,
the
principal amount of the note decreased by $797,333.33 on each of the nine and
12
month anniversaries of the note. In December 2005, when we would not have
otherwise been required to make a payment under the Zaiq Note, we entered into
a
letter agreement with Zaiq pursuant to which we agreed to repurchase from Zaiq
for $200,000 the remaining balance of the Zaiq Note and 5,180,474 shares of
our
common stock held of record by Zaiq. We had the right to assign any or all
of
our purchase commitment under the letter agreement. We assigned to an
unaffiliated third party that had been a prior investor in the Company the
right
to purchase 4,680,620 of the Zaiq shares. On December 20, 2005, we purchased
the
Zaiq Note and 499,854 shares of our common stock held by Zaiq for an aggregate
purchase price of $129,789. The Zaiq shares we repurchased have been accounted
for as treasury stock, carried at cost, and reflected as a reduction to
stockholders’ equity. The remaining principal and accrued interest of $1,292,111
on the Zaiq Note was canceled resulting in a gain of $1,169,820.
The
remaining items in other income primarily represent interest earned on
short-term investments and favorable cash management positions for the three
months and nine months ended July 31, 2007.
NET
LOSS.
For the three months ended July 31, 2007, our net loss decreased 72% or
$10,977,994 to $4,171,426 from $15,149,420 for the three months ended July
31,
2006, primarily as the result of decreases in interest expense and amortization
of deferred financing costs and the gain on the change in fair value of the
derivative liabilities, offset by increases in operating expenses.
For
the
nine months ended July 31, 2007, our net loss decreased 54% or $14,040,413
to
$12,083,729 from $26,124,142 for the nine months ended July 31, 2006, primarily
as the result of decreases in interest expense, the loss on exchange of notes
payable into common stock, and the gain on the change in fair value of the
derivative liabilities, offset by increases in amortization of deferred
financing costs, increases in operating expenses, and the gain on forgiveness
of
principal and interest on the Zaiq Note.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
and
short-term investments was $119,405 as of September 12, 2007, $241,930 as of
July 31, 2007, and $2,090,119 as of October 31, 2006.
Net
cash
used in operating activities was $3,021,248 for the nine months ended July
31,
2007, compared to $2,314,894 for the nine months ended July 31, 2006. The
increase in cash used in operations was principally the result of the following
items:
·
|
a
decrease in the net loss, which was $12,083,729 for the nine months
ended
July 31, 2007, compared to $26,124,142 for the nine months ended
July 31,
2006; and
|
·
|
a
net increase for the nine months ended July 31, 2007 in other current
assets, other assets, and accounts payable and accrued liabilities
of
$186,848, compared to a net increase of $425,344 for the nine months
ended
July 31, 2006;
|
impacted
primarily by the following non-cash items:
·
|
a
net increase of $702,072 in consulting fees and other compensatory
elements of stock issuances to $2,230,501 for the nine months ended
July
31, 2007, as compared with $1,528,429 for the nine months ended July
31,
2006;
|
·
|
a
gain on the change in fair value of derivative liabilities of $3,016,018
for the nine months ended July 31, 2007, as compared to a loss of
$12,128,413 for the nine months ended July 31,
2006;
|
·
|
a
loss on impairment of technology licenses and capitalized software
development costs of $4,415,943 for the nine months ended July 31,
2007
which did not occur during the nine months ended July 31,
2006;
|
·
|
interest
expense related to the fair value of Investors’ warrants at issuance in
excess of debt discount of $5,608,156 for the nine months ended July
31,
2006 which did not occur during the nine months ended July 31,
2007;
|
·
|
loss
on exchange of notes payable into common stock of $446,386 for the
nine
months ended July 31, 2006 which did not occur during the nine months
ended July 31, 2007;
|
·
|
a
gain on forgiveness of principal and interest on the promissory note
to
Zaiq Technologies, Inc. of $1,169,820 for the nine months ended July
31,
2006 which did not occur during the nine months ended July 31,
2007;
|
·
|
a
net increase of $212,428 in amortization of deferred financing costs
to
$1,230,087 for the nine months ended July 31, 2007, as compared with
$1,017,659 for the nine months ended July 31,
2006;
|
·
|
a
net decrease of $103,279 in amortization of debt discount on notes
to
$3,187,404 for the nine months ended July 31, 2007, as compared with
$3,290,683 for the nine months ended July 31, 2006;
and
|
·
|
a
net increase of $278,129 in amortization of technology licenses and
capitalized software development fees to $809,821 for the nine months
ended July 31, 2007, as compared with $531,692 for the nine months
ended
July 31, 2006.
|
Net
cash
provided by investing activities was $349,059 for the nine months ended July
31,
2007 compared to net cash used in investing activities of $381,539 for the
nine
months ended July 31, 2006. The net increase was due to proceeds from the
maturity of short-term investments and from the sale of certain trademark
rights, offset by capitalization of research and development costs and software
development fees, as well as the purchase of equipment and leasehold
improvements related to the buildout of our headquarters office
facility.
Net
cash
provided by financing activities for the nine months ended July 31, 2007 was
$1,824,000, the result of proceeds from the issuance of notes payable of
$1,700,000 and from the issuance of common stock of $587,000; offset by the
repayment of a note payable of $324,000 and capitalized financing costs of
$139,000. This was a decrease of $3,468,846 from the nine months ended July
31,
2006 when there was the issuance of convertible debentures of $6,000,000,
proceeds from the exercise of warrants of $697,407, and $750,000 in proceeds
from a note payable, offset by repayments of notes payable and convertible
notes
payable, as well as the capitalization of financing costs associated with the
convertible debentures and the notes payable.
Since
inception, we have funded our operations primarily through the issuance of
our
common stock and debt securities. A description of recent financing transactions
and our repayment obligations with respect to our outstanding debt securities
is
discussed below.
In
July
2007, we received $1,000,000 in gross proceeds from the issuance of a note
payable, together with the issuance of 10,000,000 unregistered shares of common
stock. The note matures on the earlier of (i) December 24, 2007, or (ii) the
date we effect a subsequent financing that, individually or when combined with
other financings completed by us after July 26, 2007, results in gross proceeds
of at least $3 million. After the payment of transaction related fees and
expenses of $105,000, and repayment of the April 2007 note payable, we received
net proceeds of approximately $571,000.
In
May
2007, we received $400,000 in proceeds from the issuance of a note payable
which
originally matured on August 22, 2007. The maturity date on this note payable
has been extended to October 1, 2007.
In
April
2007, May 2007 and July 2007, we received an aggregate of $587,000 in proceeds
from the sale of unregistered securities.
In
April
2007, we received $300,000 in proceeds from the issuance of a note payable,
together with the issuance of 3,333,333 in warrants convertible into
unregistered shares of common stock. The outstanding principal and accrued
interest of $324,000 on this note was repaid in July 2007 from the proceeds
of
the July 2007 note payable.
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 July 31, 2007, approximately $5.6 million of principal
amount and interest of the 2006 Debentures had been converted into approximately
74 million shares of our common stock and there was $652,000 of principal amount
of the 2006 Debentures outstanding. The 2006 Debentures mature in March
2008.
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 July 31, 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 $4,280 of principal amount of the 2005 Debentures
outstanding. The 2005 Debentures mature in May 2008.
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 July
31, 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 matured in May 2007, however, they have not
yet
been repaid.
As
of
September 12, 2007, we had $119,405 in cash. 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 through
January 1, 2008. 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
July
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement No. 109” (the
“Interpretation”). The Interpretation establishes for all entities a minimum
threshold for financial statement recognition of the benefit of tax positions,
and requires certain expanded disclosures. The Interpretation is effective
for
fiscal years beginning after December 31, 2006, and is to be applied to all
open
tax years as of the date of effectiveness. We are in the process of evaluating
the impact of the application of the Interpretation to our financial
statements.
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 year 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.
SFAS 159
does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements
included in SFAS 157 and SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments.” SFAS 159 is effective for us as of the beginning of
fiscal year 2009. We have not yet determined the impact SFAS 159 may have on
our
consolidated financial position, results of operations, or cash
flows.
In
December 2006, the FASB approved FASB Staff Position (FSP) No. EITF
00-19-2, “Accounting for Registration Payment Arrangements” (“FSP EITF
00-19-2”), which specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision
of a financial instrument or other agreement, should be separately recognized
and measured in accordance with SFAS No. 5, “Accounting for
Contingencies”. FSP EITF 00-19-2 also requires additional disclosure
regarding the nature of any registration payment arrangements, alternative
settlement methods, the maximum potential amount of consideration and the
current carrying amount of the liability, if any. The guidance in
FSP EITF 00-19-2 amends FASB Statements No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, and No. 150, “Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity”, and FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of
Others”, to include scope exceptions for registration payment
arrangements.
FSP EITF 00-19-2
is effective immediately for registration payment arrangements and the financial
instruments subject to those arrangements that are entered into or modified
subsequent to the issuance date of this FSP, or for financial statements issued
for fiscal years beginning after December 15, 2006, and interim periods within
those fiscal years, for registration payment arrangements entered into prior
to
the issuance date of this FSP. The Company is evaluating the impact of this
pronouncement on the Company’s consolidated financial position, results of
operations and cash flows.
ITEM
3. 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 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 three months and nine months ended July 31, 2007.
PART
II - OTHER INFORMATION
During
the three months ended July 31, 2007, the Company sold or issued unregistered
securities as follows:
In
May
2007, we issued:
·
|
an
aggregate 2,500,000 shares of common stock to three investors for
total
cash proceeds of $125,000; and
|
·
|
30,487
shares of common stock to one individual in exchange for services
valued
at approximately $2,500.
|
In
June
2007, we issued:
·
|
1,200,000
shares of common stock to one individual in exchange for services
valued
at $75,600; and
|
·
|
10,000,000
shares of common stock to a partnership valued at $790,000, in
consideration of consulting services rendered in connection with
a bridge
loan.
|
In
July
2007, we issued:
·
|
3,240,000
shares of common stock to three investors for cash proceeds of
$162,000;
|
·
|
203,232
shares of common stock to six investors upon conversion of debentures
totaling approximately $10,357;
|
·
|
437,112
shares of common stock to five investors valued at $22,244 in payment
of
interest due on outstanding debentures;
and
|
·
|
10,000,000
shares of common stock to two investors valued at $700,000 in connection
with a bridge loan financing.
|
In
August
2007, subsequent to the three months ended July 31, 2007, we issued 860,000
shares of common stock to three investors for total cash proceeds of $43,000.
In
September 2007, subsequent to the three months ended July 31, 2007, we
issued:
·
|
options
to purchase 200,000 shares of common stock under the Company’s 2006 Stock
Plan to an employee of the Company. The options have an exercise
price of
$0.055 per share, vest over a three year period, and expire in September
2017; and
|
·
|
3,350,000
shares of common stock and warrants to purchase 2,850,000 shares
of common
stock to four investors for total cash proceeds of $167,500. The
warrants,
which are exercisable upon issuance, expire in September
2012,
|
All
of
the securities issued in the transactions described above were issued without
registration under the Securities Act in reliance upon the exemptions provided
in Section 4(2) of the Securities Act or Regulation S under such Securities
Act.
Except with respect to securities sold under Regulation S, the recipients of
securities in each such transaction acquired the securities for investment
only
and not with a view to or for sale in connection with any distribution thereof.
Appropriate legends were affixed to the share certificates issued in all of
the
above transactions. Each of the recipients represented that they were
“accredited investors” within the meaning of Rule 501(a) of Regulation D under
the Securities Act, or had such knowledge and experience in financial and
business matters as to be able to evaluate the merits and risks of an investment
in its common stock. All recipients had adequate access, through their
relationships with the Company and its officers and directors, to information
about the Company. None of the transactions described above involved general
solicitation or advertising.
ITEM
4. Submission of Matters to a Vote of Security Holders
The
Company submitted the following matters to a vote of its shareholders at its
annual meeting, which was held on May 2, 2007.
(a) The
Company shareholders were asked to vote for the election of Brad Ketch, Ray
Willenberg, Jr., Jack L. Peckham, Thomas J. Cooper and “David” Boon Tiong Tan to
the Board of Directors of the Company, to hold office until the 2008 Annual
Meeting of Shareholders. The nominees were all elected pursuant to the following
votes:
Name
of Director
|
|
Votes
For
|
|
Votes
Withheld
|
|
Brad
Ketch
|
|
|
347,940,060
|
|
|
2,411,344
|
|
Ray
Willenberg, Jr.
|
|
|
347,872,135
|
|
|
2,479,269
|
|
Jack
L. Peckham
|
|
|
348,117,278
|
|
|
2,234,126
|
|
Thomas
J. Cooper
|
|
|
348,757,040
|
|
|
1,594,364
|
|
“David”
Boon Tiong Tan
|
|
|
348,117,416
|
|
|
2,233,988
|
|
(b) The
Company’s shareholders were asked to ratify Marcum & Kliegman, LLP as
independent public accountants for the year ending October 31, 2007. The
shareholders ratified the selection of the independent public accountants with
348,653,885 votes cast for, 844,734 votes cast against and 852,784
abstentions.
(c) The
Company’s shareholders were asked to approve the Company’s 2003 Consultant Stock
Plan. The shareholders approved the 2003 Consultant Stock Plan with 93,337,671
votes cast for, 13,237,767 votes cast against, and 1,347,633
abstentions.
(d) The
Company’s shareholders were asked to approve the Company’s 2006 Stock Incentive
Plan. The shareholders approved the 2006 Stock Incentive Plan with 93,212,626
votes cast for, 13,473,852 votes cast against and 1,236,593
abstentions.
ITEM
6. Exhibits
Exhibit
|
|
Number
|
Description
|
|
|
10.1
|
Convertible
Promissory Note dated May 24, 2007 by Rim Semiconductor in favor
of The
Charles R. Cono Trust (incorporated by reference to Exhibit 10.5
of the
Company’s Report on Form 10-QSB for the period ended April 30,
2007).
|
10.2
|
Bridge
Loan Agreement dated as of July 26, 2007 by and between Rim Semiconductor
Company and the Lenders parties thereto (incorporated by reference
to
Exhibit 10.1 of the Company’s Report on Form 8-K dated August 1, 2007 (the
“August 1st 8-K”))
|
10.3
|
Form
of Senior Secured Promissory Note (incorporated by reference to Exhibit
10.2 of the August 1st 8-K)
|
10.4
|
Security
Interest Agreement dated as of July 26, 2007 by and among the Secured
Parties (as defined in the Agreement), Rim Semiconductor Company,
and
Krieger & Prager, LLP, as agent for the Secured Parties (incorporated
by reference to Exhibit 10.3 of the August 1st 8-K).
|
31.1
|
Rule
13a-14/15d-14(a) Certification*
|
31.2
|
Section
1350 Certification*
|
*
|
Filed
herewith
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
RIM
SEMICONDUCTOR COMPANY
|
|
|
|
DATE:
September 13, 2007
|
By: |
/s/ BradKetch |
|
Brad
Ketch
|
|
President
and Chief Executive Officer
(Principal
Executive Officer, Financial and
Accounting
Officer and Authorized Signatory)
|
38