UTAH
|
95-4545704
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
identification
no.)
|
305
NE 102ND AVENUE, SUITE 105
PORTLAND,
OREGON 97220
|
(503)
257-6700
|
|
(Address
of principal executive offices)
|
(Issuer’s
telephone number,
including
area code)
|
Check
whether the issuer (1) has filed all reports required to be filed
by
Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for
such period that the registrant was required to file such reports),
and
(2) has been subject to such filing requirements for the past
90
days.
|
Yes
x
No¨
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined
by
Rule 12b-2 of the Exchange Act)
|
Yes
¨
No x
|
|
|
The
number of shares of the issuer’s Common Stock, par value $.001 per share,
outstanding as of September 11, 2006, was 346,396,890.
|
|
|
|
Transitional
Small Business Disclosure Format (Check one)
|
Yes
¨
No x
|
PAGE | ||
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|
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|
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4
|
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6
|
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40
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41
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41
|
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41
|
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|
|
|
42
|
July
31, 2006
|
||||
Current
Assets:
|
||||
Cash
and cash equivalents
|
$
|
2,969,894
|
||
Other
current assets
|
130,646
|
|||
TOTAL
CURRENT ASSETS
|
3,100,540
|
|||
Property
and equipment (net of accumulated depreciation of $3,545)
|
14,155
|
|||
Technology
license and capitalized software development fees (net of accumulated
amortization
of $531,692)
|
6,052,369
|
|||
Deferred
financing costs (net of accumulated amortization of
$1,698,268)
|
1,843,550
|
|||
Other
assets
|
7,738
|
|||
TOTAL
ASSETS
|
$
|
11,018,352
|
||
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
||||
Current
Liabilities:
|
||||
Convertible
notes payable
|
$
|
500,000
|
||
Convertible
debentures (net of debt discount of $3,881)
|
71,119
|
|||
Derivative
liabilities - warrants and options
|
24,450,714
|
|||
Account
payable and accrued expenses
|
1,057,025
|
|||
TOTAL
CURRENT LIABILITIES
|
26,078,858
|
|||
Long-term
portion of convertible debentures (net of debt discount of
$4,507,897)
|
1,097,667
|
|||
TOTAL
LIABILITIES
|
27,176,525
|
|||
Commitments,
Contingencies and Other Matters
|
||||
Stockholders’
Deficiency:
|
||||
Preferred
stock - $0.01 par value; 15,000,000 shares authorized; -0- shares
issued
and outstanding
|
—
|
|||
Common
stock - $0.001 par value; 900,000,000 shares authorized; 332,484,557
shares issued and 331,984,703 outstanding
|
332,485
|
|||
Treasury
stock - 499,854 shares at cost
|
(7,498
|
)
|
||
Additional
paid-in capital
|
71,019,709
|
|||
Unearned
compensation
|
(1,497,171
|
)
|
||
Accumulated
deficit
|
(86,005,698
|
)
|
||
TOTAL
STOCKHOLDERS’ DEFICIENCY
|
(16,158,173
|
)
|
||
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
$
|
11,018,352
|
For
the Nine Months Ended
July
31,
|
|||||||
2006
|
2005
|
||||||
REVENUES
|
$
|
59,899
|
$
|
26,558
|
|||
OPERATING
EXPENSES:
|
|||||||
Cost
of sales
|
—
|
11,945
|
|||||
Impairment
of film in distribution
|
—
|
1,009,777
|
|||||
Amortization
of technology license and capitalized software development
fees
|
531,692
|
—
|
|||||
Research
and development expenses (including stock based compensation
of $26,860
and $296,667, respectively)
|
255,821
|
303,720
|
|||||
Selling,
general and administrative expenses(including stock based compensation
of
$1,501,569 and $998,963, respectively)
|
3,700,983
|
2,460,145
|
|||||
|
|||||||
TOTAL
OPERATING EXPENSES
|
4,488,496
|
3,785,587
|
|||||
|
|||||||
OPERATING
LOSS
|
(4,428,597
|
)
|
(3,759,029
|
)
|
|||
|
|||||||
OTHER
EXPENSES (INCOME):
|
|||||||
Interest
expense - net
|
9,275,907
|
1,183,318
|
|||||
Derivative
loss (gain)
|
12,128,413
|
(1,799,103
|
)
|
||||
Amortization
of deferred financing costs
|
1,017,659
|
120,934
|
|||||
Gain
on forgiveness of liabilities
|
—
|
(99,369
|
)
|
||||
Gain
on forgiveness of principal and interest on Zaiq Note
|
(1,169,820
|
)
|
—
|
||||
Gain
on conversion of accrued expenses into convertible notes
payable
|
—
|
(33,514
|
)
|
||||
Loss
on exchange of notes payable into common stock
|
446,386
|
—
|
|||||
Gain
on sale of property and equipment
|
—
|
(20,000
|
)
|
||||
Gain
on exchange of Redeemable Series B Preferred
|
|||||||
Stock
into common stock
|
—
|
(55,814
|
)
|
||||
Other
|
(3,000
|
)
|
5,008
|
||||
|
|||||||
TOTAL
OTHER EXPENSES (INCOME)
|
21,695,545
|
(698,540
|
)
|
||||
|
|||||||
NET
LOSS
|
$
|
(26,124,142
|
)
|
$
|
(3,060,489
|
)
|
|
|
|||||||
BASIC
AND DILUTED NET LOSS PER COMMON SHARE
|
$
|
(0.09
|
)
|
$
|
(0.03
|
)
|
|
|
|||||||
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
286,694,814
|
99,459,187
|
|
For
the Three Months Ended
July
31,
|
||||||
|
2006
|
2005
|
|||||
|
|
|
|||||
REVENUES
|
$
|
1,025
|
$
|
10,360
|
|||
|
|||||||
OPERATING
EXPENSES:
|
|||||||
Impairment
of film in distribution
|
—
|
1,009,777
|
|||||
Amortization
of technology license and capitalized software development
fees
|
216,460
|
—
|
|||||
Research
and development expenses (including stock based compensation
of $0 and
$296,667, respectively)
|
119,888
|
296,667
|
|||||
Selling,
general and administrative expenses (including stock based
compensation of
$517,859 and $110,033, respectively)
|
1,343,244
|
888,811
|
|||||
|
|||||||
TOTAL
OPERATING EXPENSES
|
1,679,592
|
2,195,255
|
|||||
|
|||||||
OPERATING
LOSS
|
(1,678,567
|
)
|
(2,184,895
|
)
|
|||
|
|||||||
OTHER
EXPENSES (INCOME):
|
|||||||
Interest
expense - net
|
1,378,138
|
543,672
|
|||||
Derivative
loss (gain)
|
11,643,875
|
(1,799,103
|
)
|
||||
Amortization
of deferred financing costs
|
448,840
|
67,825
|
|||||
Gain
on forgiveness of liabilities
|
—
|
(99,369
|
)
|
||||
|
|||||||
TOTAL
OTHER EXPENSES (INCOME)
|
13,470,853
|
(1,286,975
|
)
|
||||
|
|||||||
NET
LOSS
|
$
|
(15,149,420
|
)
|
$
|
(897,920
|
)
|
|
|
|||||||
BASIC
AND DILUTED NET LOSS PER COMMON SHARE
|
$
|
(0.05
|
)
|
$
|
(0.01
|
)
|
|
|
|||||||
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
324,964,555
|
111,616,151
|
Common
Stock
|
Treasury
Stock
|
Additional
Paid-in
|
Unearned
|
Accumulated
|
Total
Stockholders'
|
||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Compensation
|
Deficit
|
Deficiency
|
||||||||||||||||||
Balance
at October 31, 2005
|
184,901,320
|
$
|
184,902
|
—
|
—
|
$
|
61,359,999
|
$
|
(22,771
|
)
|
$
|
(59,881,556
|
)
|
$
|
1,640,574
|
||||||||||
Repurchase
of common stock for cash
|
—
|
—
|
(499,854
|
)
|
$
|
(7,498
|
)
|
—
|
—
|
—
|
(7,498
|
)
|
|||||||||||||
Issuance
of common stock under service and consulting agreements
|
12,624,752
|
12,625
|
—
|
—
|
2,219,592
|
(2,232,217
|
)
|
—
|
—
|
||||||||||||||||
Issuance
of common stock for conversion of convertible debentures and accrued
interest
|
110,654,584
|
110,654
|
—
|
—
|
2,361,299
|
—
|
—
|
2,471,953
|
|||||||||||||||||
Issuance
of common stock for convertible notes payable and accrued
interest
|
35,714
|
36
|
—
|
—
|
14,964
|
—
|
—
|
15,000
|
|||||||||||||||||
Issuance
of common stock for notes payable and accrued interest
|
12,064,494
|
12,064
|
—
|
—
|
1,278,837
|
—
|
—
|
1,290,901
|
|||||||||||||||||
Issuance
of common stock upon exercise of warrants
|
12,203,693
|
12,204
|
—
|
—
|
685,203
|
—
|
—
|
697,407
|
|||||||||||||||||
Stock
options granted to key employees and advisory board member
|
—
|
—
|
—
|
—
|
1,010,835
|
(1,010,835
|
)
|
—
|
—
|
||||||||||||||||
Reclassification
of derivative liability upon exercise of warrants
|
—
|
—
|
—
|
—
|
1,141,769
|
—
|
—
|
1,141,769
|
|||||||||||||||||
Reclassification
of conversion option liability
|
—
|
—
|
—
|
—
|
947,211
|
—
|
—
|
947,211
|
|||||||||||||||||
Amortization
of unearned compensation expense
|
—
|
—
|
—
|
—
|
—
|
1,768,652
|
—
|
1,768,652
|
|||||||||||||||||
Net
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
(26,124,142
|
)
|
(26,124,142
|
)
|
|||||||||||||||
Balance
at July 31, 2006
|
332,484,557
|
$
|
332,485
|
(499,854
|
)
|
$
|
(7,498
|
)
|
$
|
71,019,709
|
$
|
(1,497,171
|
)
|
$
|
(86,005,698
|
)
|
$
|
(16,158,173
|
)
|
For
the Nine Months Ended
July
31,
|
|||||||
2006
|
2005
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|||||||
Net
loss
|
$
|
(26,124,142
|
)
|
$
|
(3,060,489
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
Consulting
fees and other compensatory elements of stock issuances
|
1,528,429
|
1,295,630
|
|||||
Derivative
loss (gain)
|
12,128,413
|
(1,799,103
|
)
|
||||
Issuance
of common stock for below market issuance
|
—
|
5,008
|
|||||
Fair
value of Investors’ warrants in excess of debt discount
|
5,608,156
|
—
|
|||||
Loss
on exchange of notes payable into common stock
|
446,386
|
—
|
|||||
Gain
on forgiveness of liabilities
|
—
|
(99,369
|
)
|
||||
Gain
on forgiveness of principal and interest on Zaiq Note
|
(1,169,820
|
)
|
—
|
||||
Gain
on sale of property and equipment
|
—
|
(20,000
|
)
|
||||
Gain
on exchange of Redeemable Series B Preferred Stock into common
stock
|
—
|
(55,814
|
)
|
||||
Gain
on conversion of accrued expenses into convertible notes
payable
|
—
|
(33,514
|
)
|
||||
Amortization
of deferred financing costs
|
1,017,659
|
120,934
|
|||||
Amortization
of film in production costs
|
—
|
11,945
|
|||||
Amortization
of debt discount on notes
|
3,290,683
|
941,531
|
|||||
Amortization
of technology license and capitalized software development
fees
|
531,692
|
—
|
|||||
Impairment
of film in distribution
|
—
|
1,009,777
|
|||||
Depreciation
|
2,306
|
24,492
|
|||||
Change
in Assets (Increase) Decrease:
|
|||||||
Other
current assets
|
(96,615
|
)
|
(24,035
|
)
|
|||
Other
assets
|
2,486
|
(2,790
|
)
|
||||
Change
in Liabilities Increase (Decrease):
|
|||||||
Accounts
payable and accrued expenses
|
519,473
|
(66,248
|
)
|
||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(2,314,894
|
)
|
(1,752,045
|
)
|
|||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|||||||
Acquisition
of capitalized software and development fees
|
(375,000
|
)
|
—
|
||||
Acquisition
of property and equipment
|
(6,539
|
)
|
(11,161
|
)
|
|||
NET
CASH USED IN INVESTING ACTIVITIES
|
(381,539
|
)
|
(11,161
|
)
|
|||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||||||
Proceeds
from issuance of common stock
|
—
|
835,100
|
|||||
Proceeds
from exercise of warrants
|
697,407
|
—
|
|||||
Purchase
of treasury stock
|
(7,498
|
)
|
—
|
||||
Proceeds
from convertible debentures
|
6,000,000
|
3,500,000
|
|||||
Proceeds
from notes payable
|
750,000
|
300,000
|
|||||
Capitalized
financing costs
|
(742,450
|
)
|
(422,010
|
)
|
|||
Repayments
of notes payable
|
(944,291
|
)
|
(1,120,048
|
)
|
|||
Repayments
of convertible notes payable
|
(460,322
|
)
|
(401,540
|
)
|
|||
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
5,292,846
|
2,691,502
|
|||||
INCREASE
IN CASH AND CASH EQUIVALENTS
|
2,596,413
|
928,296
|
|||||
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
373,481
|
127,811
|
|||||
CASH
AND CASH EQUIVALENTS - ENDING OF PERIOD
|
$
|
2,969,894
|
$
|
1,056,107
|
|
For
the Nine Months Ended
July
31,
|
||||||
|
2006
|
2005
|
|||||
|
|
|
|||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|||||||
Cash
paid during the period for:
|
|||||||
Interest
|
$
|
3,350
|
$
|
203,539
|
|||
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|||||||
|
|||||||
Common
stock issued and for conversion of convertible debentures, convertible
notes payable, notes payable and accrued interest
|
$
|
3,777,854
|
$
|
988,347
|
|||
|
|||||||
Common
stock issued and issuable for consulting services (includes $458,061
of
capitalized software development fees)
|
$
|
2,423,611
|
$
|
—
|
|||
|
|||||||
Value
assigned to warrants issued to holders of convertible debentures
on the
issuance date
|
$
|
9,036,727
|
$
|
2,000,000
|
|||
|
|||||||
Value
assigned to warrants issued to placement agents on the issuance
date
|
$
|
1,792,452
|
$
|
319,066
|
|||
|
|||||||
Value
assigned to conversion option liability in connection with issuance
of
convertible debentures
|
$
|
2,571,429
|
$
|
1,500,000
|
|||
|
|||||||
Accounts
payable and accrued expenses satisfied by issuance of common
stock
|
$
|
—
|
$
|
71,911
|
|||
|
|||||||
Common
stock issued for accrued liquidated damages
|
$
|
—
|
$
|
96,000
|
|||
|
|||||||
Accounts
payable and accrued expenses converted to note payable
|
$
|
—
|
$
|
55,251
|
|||
|
|||||||
Deferred
compensation converted to convertible note payable
|
$
|
212,450
|
$
|
383,911
|
|||
|
|||||||
Reclassification
of conversion option liability to equity
|
$
|
947,211
|
$
|
—
|
|||
|
|||||||
Redeemable
Series B Preferred Stock exchanged into notes payable
|
$
|
—
|
$
|
2,392,000
|
|||
|
|||||||
Redeemable
Series B Preferred Stock (recorded at $800,000) exchanged into common
stock
|
$
|
—
|
$
|
744,186
|
|||
Stock
options granted to key employees and advisory board member
|
$
|
1,010,835
|
$
|
—
|
|||
Reclassification
of derivative liability upon exercise of
warrants
|
$
|
1,141,769
|
$
|
—
|
|
·
|
persuasive
evidence of a sale or licensing arrangement with a customer exists;
|
|
·
|
the
film is complete and, in accordance with the terms of the arrangement,
has
been delivered or is available for immediate and unconditional
delivery;
|
|
·
|
the
license period of the arrangement has begun and the customer can
begin its
exploitation, exhibition or sale;
|
|
·
|
the
arrangement fee is fixed or determinable; and
|
|
·
|
collection
of the arrangement fee is reasonably assured.
|
|
For
the Nine
Months
Ended
July
31, 2005
|
For
the Three
Months
Ended
July
31, 2005
|
|||||
Net
loss, as reported
|
$
|
(3,060,489
|
)
|
$
|
(897,920
|
)
|
|
Add:
Stock-based employee compensation expense included
in reported net loss
|
—
|
(20,915
|
)
|
||||
Less:
Total stock-based employee compensation expense determined
under the fair value-based method of all awards
|
(794,819
|
)
|
(604,031
|
)
|
|||
Net
loss, pro-forma
|
$
|
(3,855,308
|
)
|
$
|
(1,522,866
|
)
|
|
Basic
and Diluted Net Loss per Common Share:
|
|||||||
As
reported
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
|
Pro-forma
|
$
|
(0.04
|
)
|
$
|
(0.01
|
)
|
Deferred
financing costs
|
$
|
3,541,818
|
||
Less:
accumulated amortization
|
(1,698,268
|
)
|
||
Deferred
financing costs, net
|
$
|
1,843,550
|
|
At
July 31,
|
|||
|
2006
|
|||
Note
payable (1)
|
$
|
22,000
|
||
Notes
payable (nine notes) (2)
|
468,000
|
|||
Notes
payable, 9% interest (3)
|
10,000
|
|||
|
||||
TOTAL
|
$
|
500,000
|
(1)
|
The
note was issued in October 2001 in the amount of $250,000, and
due only
when receipts received by the Company from its Top Secret Productions,
LLC
joint venture exceed $375,000. The note and any accrued and unpaid
interest may be converted at any time, in whole or in part, into
shares of
common stock at a conversion price per share of $0.40. The Company
made
payments of $25,000 and $75,000 during the three months and nine
months
ended July 31, 2006, respectively.
|
|
|
(2)
|
The
notes were issued during the period from March 2002 through July
2003 in
the aggregate amount of $478,000 and due only when receipts received
by
the Company from its Top Secret Productions, LLC joint venture
exceed
$2,250,000. The notes and any accrued and unpaid interest may be
converted
at any time, in whole or in part, into shares of common stock at
conversion prices per share ranging from $0.33 to $1.00. Principal
of
$10,000 and accrued interest of $5,000 was converted into 35,714
shares of
common stock during the three months ended April 30, 2006.
|
|
|
(3)
|
The
note was issued in July 2003 in the amount of $10,000, and due
only when
receipts received by the Company from its Top Secret Productions,
LLC
joint venture exceed $750,000. The note and any accrued and unpaid
interest may be converted at any time, in whole or in part, into
shares of
common stock at a conversion price per share of
$0.60.
|
Outstanding
Principal
Amount
|
Unamortized
Debt
Discount
|
Net
Carrying
Value
|
||||||||
Long-term
portion
|
$
|
5,600,000
|
$
|
4,504,514
|
$
|
1,095,486
|
|
Outstanding
Principal
Amount
|
Unamortized
Debt
Discount
|
Net
Carrying
Value
|
|||||||
Long-term
portion
|
$
|
5,564
|
$
|
3,383
|
$
|
2,181
|
|
Outstanding
Principal
Amount
|
Unamortized
Debt
Discount
|
Net
Carrying
Value
|
|||||||
Current
portion
|
$
|
75,000
|
$
|
3,881
|
$
|
71,119
|
|
·
|
issued
110,654,584 shares of common stock for conversion of convertible
debentures with a principal amount of $2,260,147 and accrued interest
of
$211,806;
|
|
·
|
repurchased
499,854 shares of common stock for $7,498 from
Zaiq;
|
|
·
|
issued
35,714 shares of common stock for conversion of convertible notes
payable
with a principal amount of $10,000 and accrued interest of
$5,000;
|
|
·
|
issued
12,064,494 shares of common stock valued at $1,290,901 in exchange
for the
return and cancellation of notes payable with a principal amount
of
$700,337 and accrued interest of
$144,178;
|
|
·
|
issued
12,203,693 shares of common stock upon exercise of warrants resulting
in
gross proceeds of $697,407; and
|
|
·
|
issued
12,624,752 shares of restricted common stock to consultants for
services
valued at $2,232,217.
|
Expected
volatility
|
145%
|
Risk-free
interest rate
|
4.4%
|
Expected
dividends
|
0.0%
|
Expected
life
|
10
years
|
|
Under
the
Plans
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
Outside
the
Plans
|
Weighted
Average
Exercise Price
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Outstanding
at October 31, 2005
|
993,750
|
$
|
0.97
|
15,900,000
|
$
|
0.25
|
|||||||||||||
Options
granted:
|
|||||||||||||||||||
Under
the Plans
|
1,000,000
|
$
|
0.17
|
—
|
—
|
||||||||||||||
Outside
the Plans
|
—
|
—
|
26,600,000
|
$
|
0.03
|
||||||||||||||
Options
expired/cancelled:
|
|||||||||||||||||||
Under
the Plans
|
(325,000
|
)
|
$
|
1.86
|
—
|
—
|
|||||||||||||
Outside
the Plans
|
—
|
—
|
(14,300,000
|
)
|
$
|
0.24
|
|||||||||||||
Options
exercised:
|
|||||||||||||||||||
Under
the Plans
|
—
|
—
|
—
|
—
|
|||||||||||||||
Outside
the Plans
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
|||||||||||||||||||
Outstanding
at July 31, 2006
|
1,668,750
|
$
|
0.32
|
$
|
65,000
|
28,200,000
|
$
|
0.05
|
$
|
5,567,600
|
|||||||||
|
|||||||||||||||||||
Exercisable
at July 31, 2006
|
849,303
|
$
|
0.47
|
$
|
11,319
|
28,166,664
|
$
|
0.04
|
$
|
5,556,600
|
(i)
|
Options
to purchase 2,000,000 shares of common stock were granted to directors.
These options were valued at $84,277 and have a 10-year term, an
exercise
price of $0.0319 per share, and vested on May 1, 2006;
|
|
|
(ii)
|
Options
to purchase 2,000,000 shares of common stock were granted in connection
with legal services performed for the Company. These options were
valued
at $84,277 and have a 10-year term, an exercise price of $0.0319
per
share, and vested on March 1, 2006; and
|
|
|
(iii)
|
Options
to purchase 100,000 shares of common stock were granted to an employee.
These options were valued at $16,887 and have a 10-year term, exercise
price of $0.08 per share, and vest over a three year
period.
|
(i)
|
Options
to purchase 600,000 shares of common stock were granted to employees
and a
director. These options were valued at $95,200 and have a 10-year
term, an
exercise price of $0.18 per share, and vest over a three year period;
and
|
|
|
(ii)
|
Options
to purchase 500,000 shares of common stock were granted to a consultant.
These options were valued at $79,333 and have a 10-year term, an
exercise
price of $0.18 per share, and vest over a two year period.
|
Warrants
to purchase common stock
|
130,955,724
|
|||
2006
Debentures and accrued interest (1)
|
43,760,531
|
|||
Options
to purchase common stock
|
29,868,750
|
|||
Convertible
notes payable and accrued interest
|
1,695,292
|
|||
7%
debentures and accrued interest
|
595,369
|
|||
2005
Debentures and accrued interest (2)
|
64,558
|
|||
Total
as of July 31, 2006
|
206,940,224
|
(1)
|
Based
on a twenty day volume weighted average common stock price discounted
by
30% at July 31, 2006 of $0.1287.
|
(2)
|
Based
on a five day volume weighted average common stock price discounted
by 30%
at July 31, 2006 of $0.1415.
|
Options
granted to purchase shares of common stock
|
3,900,000
|
|||
Common
stock issued to consultants
|
1,087,470
|
|||
Common
stock issued in connection with the purchase of assets
|
500,000
|
|
Telecommunications
Business
|
Entertainment
Business
|
Unallocable
|
Totals
|
|||||||||
Net
Sales - domestic
|
$
|
—
|
$
|
7,957
|
$
|
—
|
$
|
7,957
|
|||||
|
|||||||||||||
Net
Sales - foreign
|
$
|
—
|
$
|
51,942
|
$
|
—
|
$
|
51,942
|
|||||
|
|||||||||||||
Operating
income (loss)
|
$
|
(533,998
|
)
|
$
|
50,533
|
$
|
(3,945,132
|
)
|
$
|
(4,428,597
|
)
|
||
|
|||||||||||||
Depreciation
and amortization
|
$
|
533,998
|
$
|
—
|
$
|
—
|
$
|
533,988
|
|||||
|
|||||||||||||
Total
Identifiable Assets at July 31, 2006
|
$
|
7,910,074
|
$
|
—
|
$
|
3,108,278
|
$
|
11,018,352
|
|
Telecommunications
Business
|
Entertainment
Business
|
Unallocable
|
Totals
|
|||||||||
Net
Sales - domestic
|
$
|
—
|
$
|
20,258
|
$
|
—
|
$
|
20,258
|
|||||
|
|||||||||||||
Net
Sales - foreign
|
$
|
—
|
$
|
6,300
|
$
|
—
|
$
|
6,300
|
|||||
|
|||||||||||||
Operating
income (loss)
|
$
|
(5,999
|
)
|
$
|
(1,026,843
|
)
|
$
|
(2,726,187
|
)
|
$
|
(3,759,029
|
)
|
|
|
|||||||||||||
Depreciation
and amortization
|
$
|
5,999
|
$
|
18,493
|
$
|
—
|
$
|
24,492
|
|||||
|
|||||||||||||
Total
Identifiable Assets at July 31, 2005
|
$
|
6,569,097
|
$
|
—
|
$
|
1,098,350
|
$
|
7,667,447
|
|
Telecommunications
Business
|
Entertainment
Business
|
Unallocable
|
Totals
|
|||||||||
Net
Sales - domestic
|
$
|
—
|
$
|
1,025
|
$
|
—
|
$
|
1,025
|
|||||
|
|||||||||||||
Net
Sales - foreign
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
|
|||||||||||||
Operating
income (loss)
|
$
|
(217,527
|
)
|
$
|
(3,154
|
)
|
$
|
(1,457,886
|
)
|
$
|
(1,678,567
|
)
|
|
|
|||||||||||||
Depreciation
and amortization
|
$
|
217,527
|
$
|
—
|
$
|
—
|
$
|
217,527
|
|||||
|
|||||||||||||
Total
Identifiable Assets at July 31, 2006
|
$
|
7,910,074
|
$
|
—
|
$
|
3,108,278
|
$
|
11,018,352
|
|
Telecommunications
Business
|
Entertainment
Business
|
Unallocable
|
Totals
|
|||||||||
Net
Sales - domestic
|
$
|
—
|
$
|
10,360
|
$
|
—
|
$
|
10,360
|
|||||
|
|||||||||||||
Net
Sales - foreign
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
|
|||||||||||||
Operating
income (loss)
|
$
|
(4,100
|
)
|
$
|
(1,014,300
|
)
|
$
|
(1,166,495
|
)
|
$
|
(2,184,895
|
)
|
|
|
|||||||||||||
Depreciation
and amortization
|
$
|
4,100
|
$
|
13,297
|
$
|
—
|
$
|
17,397
|
|||||
|
|||||||||||||
Total
Identifiable Assets at July 31, 2005
|
$
|
6,569,097
|
$
|
—
|
$
|
1,098,350
|
$
|
7,667,447
|
(i)
|
1,660,559
shares of common stock were issued upon conversion of 2006 Debentures
with
a principal amount of $237,000 and interest of $2,225;
|
(ii)
|
10,756,879
shares of common stock were issued upon exercise of warrants resulting
in
gross proceeds of $694,037;
|
(iii)
|
1,087,470
shares of common stock were issued to consultants for services
valued at
$164,208;
|
(iv)
|
Options
to purchase 400,000 shares of common stock were granted. These
options
were valued at approximately $89,600 and have a ten year term,
an exercise
price of $0.224 per share, and vest over a period of approximately
three
years; and
|
(v)
|
Investor
Warrants to purchase 3,287,062 shares of common stock expired on
August
31, 2006.
|
(i)
|
407,279
shares of common stock were issued upon conversion of 2006 Debentures
with
a principal amount of $50,000 and interest of $633;
|
(ii)
|
500,000
shares of common stock valued at $78,000 were issued in connection
with
the purchase of substantially all of the assets of 1021 Technologies,
Inc.
and 1021 Technologies KK (as discussed above); and
|
(iii)
|
Options
to purchase 3,500,000 shares of common stock were granted. These
options
were valued at approximately $520,000 and have a ten year term,
an
exercise price of $0.158 per share, and vest through December
2009.
|
(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.
|
|
·
|
an
increase in the net loss, which was $26,124,142, compared to $3,060,489
for the nine months ended July 31, 2005; and
|
|
|
|
|
·
|
an
increase for the nine months ended July 31, 2006 of accounts payable
and
accrued liabilities of $519,473, compared to a decrease of accounts
payable and accrued liabilities for the nine months ended July
31, 2005 of
$66,248, resulting in a net decrease in cash used of
$585,721;
|
|
·
|
interest
expense related to fair value of Investors’ warrants at issuance in excess
of debt discount of $5,608,156 for the nine months ended July 31,
2006;
|
|
|
|
|
·
|
loss
on the change in fair value of derivative liabilities of $12,128,413
for
the nine months ended July 31, 2006, compared to a gain of $1,799,103
for
the nine months ended July 31, 2005;
|
|
|
|
|
·
|
increased
amortization of deferred financing costs, which were $1,017,659
for the
nine months ended July 31, 2006, compared to $120,934 for the nine
months
ended July 31, 2005, principally due to increased conversions of
the 2005
Debentures, the repayment of a note payable, and the amortization
of
additional deferred financing costs related to the 2006
Debentures;
|
|
|
|
|
·
|
increased
amortization of debt discount on notes, which was $3,290,683 for
the nine
months ended July 31, 2006, compared to $941,531 for the nine months
ended
July 31, 2005, principally due to increased conversions of the
2005
Debentures, the repayment of a note payable, and the amortization
of
additional debt discount related to the 2006
Debentures;
|
|
|
|
|
·
|
increased
amortization of technology license and capitalized software development
fees, which was $531,692 for the nine months ended July 31, 2006,
compared
to $0 for the nine months ended July 31, 2005, due to the commencement
of
amortization related to the market release of the E30 (Release
1.3) to
prospective customers for evaluation and testing;
|
|
|
|
|
·
|
gain
on forgiveness of principal and interest on the promissory note
to Zaiq
Technologies, Inc. of $1,169,820 for the nine months ended July
31, 2006,
compared to a gain on the forgiveness of liabilities of $99,369
for the
nine months ended July 31, 2005;
|
|
|
|
|
·
|
increased
stock-based compensation expense, which was $1,528,429 for the
nine months
ended July 31, 2006 compared to $1,295,630 for the nine months
ended July
31, 2005;
|
|
|
|
|
·
|
loss
on exchange of notes payable into common stock of $446,386 for
the nine
months ended July 31, 2006; and
|
|
·
|
impairment
of Film in Distribution of $1,009,777 for the nine months ended
July 31,
2005.
|
10.1
|
Employment
Agreement dated September 1, 2006 by and between David Wojcik and
the
Company(1)*
|
31.1
|
Rule
13a-14/15d-14(a) Certification*
|
31.2
|
Section
1350 Certification*
|
|
|
|
|
RIM
SEMICONDUCTOR COMPANY
|
|
|
|
|
DATE:
September 14, 2006
|
BY:
|
/s/ Brad
Ketch
|
|
Brad
Ketch
|
|
|
President
and Chief Executive Officer (Principal
Executive Officer, Financial and Accounting
Officer and Authorized Signatory)
|