UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO
COMMISSION FILE NUMBER 0-21785
RIM SEMICONDUCTOR COMPANY
(Exact name of small business issuer as specified in its charter)
UTAH 95-4545704
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
305 NE 102ND AVENUE, SUITE 105
PORTLAND, OREGON 97220 (503) 257-6700
(Address of principal executive offices, (Issuer's telephone number,
including zip code) including area code)
Check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[_]
Indicate by check mark whether the registrant is a shell company (as defined in
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 July 5, 2006, was 324,973,732.
EXPLANATORY NOTE
This Quarterly Report on Form 10-QSB/A (the "Report") is being filed by Rim
Semiconductor Company (formerly New Visual Corporation) (the "Company") to amend
the Company's Quarterly Report on Form 10-QSB for the period ended July 31, 2005
that was initially filed with the Securities and Exchange Commission (the "SEC")
on September 14, 2005 (the "Original Report") and amended on February 10, 2006
(the "First Amended Report"). The Company is also filing amendments to its
Annual Report on Form 10-KSB for the fiscal year ended October 31, 2005 (the
"2005 Form 10-KSB") and its Quarterly Reports on Form 10-QSB for the periods
ended January 31, 2006 and April 30, 2006.
This Report reflects the restatement of the Company's previously issued
condensed consolidated financial statements at and for the period ended July 31,
2005, and the notes related thereto, as discussed in Note 2 to the condensed
consolidated financial statements included herein.
This Report only amends and restates Items 1, 2 and 3 of Part I of the Original
Report And First Amended Report to reflect the restatement. The foregoing items
have not been updated to reflect other events occurring after the date of the
Original Report, or to modify or update those disclosures affected by subsequent
events. Other events occurring after the filing of the Original Report and other
disclosures necessary to reflect subsequent events have been addressed in the
Company's periodic reports filed with the SEC subsequent to the filing of the
Original Report, including the First Amended Report, the Company's Annual Report
on Form 10-KSB for the fiscal year ended October 31, 2005, as amended, Quarterly
Reports on Form 10-QSB for the periods ended January 31, 2006 and April 30,
2006, as amended, and Current Reports on Form 8-K filed on October 3, 2005,
December 23, 2005, January 30, 2006, February 1, 2006, February 10, 2006, March
9, 2006, March 13, 2006, and March 15, 2006 (collectively, the "Subsequent
Reports"). The information in the Subsequent Reports updates and supersedes the
information contained in the Original Report, the First Amended Report and this
Report. In addition, the exhibit list in Item 6 of Part II has not been updated
except that currently-dated certifications from the Company's Chief Executive
Officer and Chief Financial Officer, as required by Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002, are filed with this Form 10-QSB/A as Exhibits 31 and
32.
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
FORM 10-QSB/A
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
JULY 31, 2005
TABLE OF CONTENTS
PART ITEM
PAGE
I FINANCIAL INFORMATION:
1. FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
At July 31, 2005 (Restated) 2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Nine and Three Months Ended July 31, 2005 (Restated)
and 2004 3-4
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Nine Months Ended July 31, 2005 (Restated) 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended July 31, 2005 (Restated) and 2004 6-7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8-22
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 23-27
3. CONTROLS AND PROCEDURES 28
II OTHER INFORMATION:
1. LEGAL PROCEEDINGS 29
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 29
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29
6. EXHIBITS 30
1
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(RESTATED)
ASSETS
------- July 31, 2005
-------------
Current Assets:
Cash $ 1,056,107
Other current assets 32,019
------------
TOTAL CURRENT ASSETS 1,088,126
Property and equipment (net of accumulated
depreciation of $164,146) 10,542
Technology license and capitalized software
development fee 5,751,000
Deferred financing costs (net of accumulated
amortization of $199,361) 807,555
Other assets 10,224
------------
TOTAL ASSETS $ 7,667,447
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Convertible notes payable (net of
debt discount of $21,167) $ 838,829
Notes payable 2,196,976
Conversion option liability 1,500,000
Derivative liabilities - warrants 519,963
Accounts payable and accrued expenses 1,178,439
------------
TOTAL CURRENT LIABILITIES 6,234,207
Long-term portion of convertible notes
payable (net of debt discount of $5,000) 25,375
Long-term portion of convertible debentures
(net of debt discount of $3,347,344) 277,656
Long-term portion of notes payable 432,537
------------
TOTAL LIABILITIES 6,969,775
------------
Commitments, Contingencies and Other Matters
Stockholders' Equity:
Preferred stock - $0.01 par value; 15,000,000 shares
authorized; Series A junior participating preferred
stock; -0- shares issued and outstanding --
Common stock - $0.001 par value; 500,000,000 shares
authorized; 118,031,737 issued and outstanding 118,032
Additional paid-in capital 58,986,985
Unearned compensation (155,682)
Accumulated deficit (58,251,663)
------------
TOTAL STOCKHOLDERS' EQUITY 697,672
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,667,447
============
See notes to condensed consolidated financial statements.
2
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Nine Months Ended
July 31,
----------------------------
2005 2004
(Restated)
------------ ------------
REVENUES $ 26,558 $ 231,292
------------ ------------
OPERATING EXPENSES:
Cost of sales 11,945 115,665
Impairment of film in distribution 1,009,777 --
Research and development expenses (including
stock based compensation of $296,667
and $0, respectively) 303,720 10,000
Selling, general and administrative expenses
(including stock based compensation of $998,963
and $1,241,146, respectively) 2,460,145 2,749,317
------------ ------------
TOTAL OPERATING EXPENSES 3,785,587 2,874,982
------------ ------------
OPERATING LOSS (3,759,029) (2,643,690)
------------ ------------
OTHER (INCOME) EXPENSES:
Interest expense 1,183,318 595,478
Derivative gain (1,799,103) --
Amortization of deferred financing costs 120,934 41,802
Amortization of unearned financing costs -- 99,933
Gain on sale of property and equipment (20,000) --
Gain on exchange of redeemable series B
preferred stock into common stock (55,814) --
Gain on conversion of accrued expenses
into convertible notes payable (33,514) --
Gain on forgiveness of liabilities (99,369) --
Other 5,008 (905)
------------ ------------
TOTAL OTHER (INCOME) EXPENSES (698,540) 736,308
------------ ------------
NET LOSS $ (3,060,489) $ (3,379,998)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.03) $ (0.04)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 99,459,187 76,689,939
============ ============
See notes to condensed consolidated financial statements.
3
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
July 31,
------------------------------
2005 2004
(Restated)
------------- -------------
REVENUES $ 10,360 $ 60,449
------------- -------------
OPERATING EXPENSES:
Cost of sales -- 29,451
Impairment of film in distribution 1,009,777 --
Research and development expenses (including
stock based compensation of $296,667 and
$0, respectively) 296,667 --
Selling, general and administrative
expenses (including stock based
compensation of $110,033 and $175,000,
respectively) 888,811 561,059
------------- -------------
TOTAL OPERATING EXPENSES 2,195,255 590,510
------------- -------------
OPERATING LOSS (2,184,895) (530,061)
------------- -------------
OTHER (INCOME) EXPENSES:
Interest expense 543,672 411,075
Derivative gain (1,799,103) --
Amortization of deferred financing costs 67,825 18,930
Amortization of unearned financing costs -- 5,224
Gain on forgiveness of liabilities (99,369) --
------------- -------------
TOTAL OTHER (INCOME) EXPENSES (1,286,975) 435,229
------------- -------------
NET LOSS $ (897,920) $ (965,290)
============= =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) $ (0.01)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 111,616,151 78,719,909
============= =============
See notes to condensed consolidated financial statements.
4
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JULY 31, 2005
(UNAUDITED)
(RESTATED)
Common Stock Additional Total
-------------------------------- Paid-In Unearned Accumulated Stockholders'
Shares Amount Capital Compensation Deficit Equity
-----------------------------------------------------------------------------------------------
Balance at November 1,
2004 84,781,959 $ 84,782 $ 55,031,976 $ (164,500) $(55,191,174) $ (238,916)
Issuance of common
stock for cash 10,289,026 10,289 824,811 -- -- 835,100
Issuance of common
stock under consulting
agreements 2,837,500 2,838 339,162 (342,000) -- --
Issuance of common
stock for services 5,073,015 5,073 309,594 (314,667) -- --
Issuance of common
stock to key employees
and directors 2,750,000 2,750 449,750 (452,500) -- --
Issuance of common
stock for conversion
of notes payable and
convertible debentures 6,556,836 6,557 981,790 -- -- 988,347
Issuance of common
stock for liquidated
damages 639,998 640 95,360 -- -- 96,000
Issuance of common
stock for below market
issuance 29,457 29 4,979 -- -- 5,008
Issuance of common
stock in payment of
accounts payable and
accrued expenses 422,783 423 71,488 -- -- 71,911
Issuance of common
stock in exchange for
surrender of convertible
preferred stock 4,651,163 4,651 739,535 -- -- 744,186
Stock Options issued
for professional
services -- -- 165,869 (165,869) -- --
Warrants issued for
professional services -- -- 11,776 (11,776) -- --
Stock offering costs -- -- (39,105) -- -- (39,105)
Amortization of
unearned compensation
expense -- -- -- 1,295,630 -- 1,295,630
Net loss -- -- -- -- (3,060,489) (3,060,489)
-----------------------------------------------------------------------------------------------
Balance at July 31,
2005 118,031,737 $ 118,032 $ 58,986,985 $ (155,682) $(58,251,663) $ 697,672
===============================================================================================
See notes to condensed consolidated financial statements.
5
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
July 31,
2005 2004
(RESTATED)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,060,489) $(3,379,998)
Adjustments to reconcile net loss to net cash used in
operating activities:
Consulting fees and other compensatory elements of
stock issuances 1,295,630 1,241,146
Derivative gain (1,799,103) --
Issuance of common stock for below market issuance 5,008 --
Impairment of film in distribution 1,009,777 --
Amortization of unearned financing costs -- 99,933
Amortization of deferred financing costs 120,934 41,802
Amortization of film in production costs 11,945 115,665
Amortization on debt discount on notes 941,531 316,669
Depreciation 24,492 13,105
Gain on sale of property and equipment (20,000) --
Gain on exchange of redeemable series B
preferred stock into common stock (55,814) --
Gain on conversion of accrued expenses
into convertible notes payable (33,514) --
Gain on forgiveness of liabilities (99,369) --
Change in Assets (Increase) Decrease:
Other current assets (24,035) 1,673
Other assets (2,790) (399)
Change in Liabilities Increase(Decrease):
Accounts payable and accrued expenses (66,248) 219,951
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,752,045) (1,330,453)
----------- -----------
CASH USED IN INVESTING ACTIVITIES
Acquisition of license -- (95,000)
Acquisition of property and equipment (11,161) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (11,161) (95,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft -- 45,636
Proceeds from issuance of common stock 835,100 379,500
Offering costs related to stock issuances -- (14,075)
Proceeds from convertible debentures 3,500,000 1,350,000
Proceeds from note payable -- 12,000
Proceeds from convertible notes payable 300,000 --
Capitalized financing costs (422,010) (112,500)
Repayments of convertible debentures -- (300,000)
Repayments of notes payable (1,120,048) --
Repayments of convertible notes payable (401,540) (250,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,691,502 1,110,561
----------- -----------
INCREASE (DECREASE) IN CASH 928,296 (314,892)
CASH - BEGINNING 127,811 319,786
----------- -----------
CASH - ENDING $ 1,056,107 $ 4,894
=========== ===========
See notes to condensed consolidated financial statements.
6
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
July 31,
2005 2004
(RESTATED)
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 203,539 $ 8,940
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for conversion of convertible
debentures, notes payable and accrued interest $ 988,347 $ 171,806
============ ============
Common stock issued for extension of convertible
notes payable $ -- $ 15,992
============ ============
Accounts payable and accrued expenses satisfied by
issuance of common stock $ 71,911 $ 130,011
============ ============
Common stock issued for accrued liquidated damages $ 96,000 $ --
============ ============
Accounts payable and accrued expenses converted
to notes payable $ 55,251 $ --
============ ============
Value assigned to beneficial conversion in
connection with issuance of convertible debentures $ -- $ 772,104
============ ============
Value assigned to warrants issued to purchasers
of convertible debentures $ 2,000,000 $ 577,896
============ ============
Value assigned to conversion option liability in
connection with issuance of convertible debentures $ 1,500,000 $ --
============ ============
Value assigned to warrants issued to placement
agent $ 319,066 $ 138,713
============ ============
Redeemable Series B Preferred Stock exchanged
into notes payable $ 2,392,000 $ --
============ ============
Redeemable Series B Preferred Stock (recorded at
$800,000) exchanged into common stock $ 744,186 $ --
============ ============
Deferred compensation converted to convertible note
payable (see note 7) $ 383,911 $ --
============ ============
See notes to condensed consolidated financial statements.
7
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1- PRINCIPLES OF CONSOLIDATION AND BUSINESS AND CONTINUED OPERATIONS
The condensed consolidated financial statements include the accounts of Rim
Semiconductor Company (formerly New Visual Corporation) ("Rim Semi" or the
"Company")and its wholly owned operating subsidiaries, NV Entertainment, Inc.
("NV Entertainment") (including its 50% owned subsidiary Top Secret Productions,
LLC), and NV Technology, Inc. ("NV Technology") (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.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
Unites 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 of the Company for the year ended October
31, 2004.
These results for the three months and nine months ended July 31, 2005 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 of 1999, the Company began to focus its
business activities on the development of new semiconductor technologies.
Pursuant to such plan, in February of 2000, the Company acquired NV Technology.
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
(the "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.
GOING CONCERN
-------------
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. For the three months and
nine months ended July 31, 2005, the Company incurred net losses of
approximately $900,000 and $3,060,000, respectively, and as of July 31, 2005
had a working capital deficiency of approximately $5.1 million. In addition,
management believes that the Company will continue to incur net losses and cash
outflows from operating activities through at least the first half of 2006.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern.
The Company's ability to continue operating as a going concern is substantially
dependent on its ability to generate operating cash flow through the execution
of its business plan or secure funding sufficient to provide for the working
capital needs of its business. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence. There can be no assurance
that management will be successful in implementing its business plan or that the
successful implementation of such business plan will actually improve the
Company's operating results. During the nine months ended July 31, 2005, the
Company raised approximately $4,213,000 in net proceeds from the sale of its
debt and equity securities.
8
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - RESTATEMENT
On July 6, 2006, the Company's Board of Directors, after consultations by
management and the Audit Committee with the Company's independent registered
public accounting firm, concluded that the classification of warrants issued in
connection with the 2005 convertible debentures was not in accordance with
interpretations of 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." Accordingly the condensed consolidated
financial statements included in the Company's Quarterly Report on Form 10-QSB
for the period ended July 31, 2005, as filed on September 14, 2005 and as
amended on February 10, 2006 (the "July 2005 10-QSB") have been restated to
correct the accounting for the warrants as derivative liabilities. The
previously issued condensed consolidated financial statements included in the
July 2005 10-QSB should not be relied upon. As a result of this restatement,
$2,019,963 included in stockholders' equity at July 31, 2005 should have been
recorded as a derivative liability and the Company should have recorded a gain
of $1,799,103 on the change in fair value of derivative liabilities for the
three months and nine months ended July 31, 2005. The treatment of this non-cash
accounting item results in a decrease in the Company's net loss for the three
months and nine months ended July 31, 2005 as follows:
For the For the
Three Months Nine Months
Ended July 31, 2005 Ended July 31, 2005
--------------------------- ---------------------------
(As Previously (As Currently (As Previously (As Currently
Restated) Restated) Restated) Restated)
------------- ------------- ------------- -------------
Net loss $(2,697,023) $(897,920) $(4,859,592) $(3,060,489)
Basic and diluted
net loss per share
of common stock $ (0.02) $ (0.01) $ (0.05) $ (0.03)
The correction of the above also results in the following changes to the
Company's stockholders' equity and liabilities at July 31, 2005:
(As Previously (As Currently
Restated) Restated)
------------- -------------
Total liabilities $ 6,449,812 $ 6,969,775
Stockholders' equity $ 1,217,635 $ 697,672
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FILM IN DISTRIBUTION
--------------------
Statement of Position 00-2, "Accounting by Producers or Distributors of Films"
("SOP-00-2") requires that film costs be capitalized and reported as a separate
asset on the balance sheet. Film costs include all direct negative costs
incurred in the production of a film, as well as allocations of production
overhead and capitalized interest. Direct negative costs include cost of
scenario, story, compensation of cast, directors, producers, writers, extras and
staff, cost of set construction, wardrobe, accessories, sound synchronization,
rental of facilities on location and post production costs. SOP-00-2 also
requires that film costs be amortized and participation costs accrued, using the
individual-film-forecast-method-computation method, which amortizes or accrues
such costs in the same ratio that the current period actual revenue (numerator)
bears to the estimated remaining unrecognized ultimate revenue as of the
beginning of the fiscal year (denominator). The Company makes certain estimates
and judgments of its future gross revenue to be received for each film based on
information received by its distributors, historical results and management's
knowledge of the industry. Revenue and cost forecasts are continually reviewed
by management and revised when warranted by changing conditions. A change to the
estimate of gross revenues for an individual film may result in an increase or
decrease to the percentage of amortization of capitalized film costs relative to
a previous period.
In addition, SOP-00-2 also requires that if an event or change in circumstances
indicates that an entity should assess whether the fair value of a film is less
than its unamortized film costs, then an entity should determine the fair value
of the film and write-off to the statement of operations the amount by which the
unamortized capital costs exceeds the Film's fair value. During July 2005, the
Company performed its review, and it was determined that the unamortized film
9
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
costs exceeded the Film's fair value. The conclusion was based upon information
the Company received from the Film's distributor relating to lower than expected
sales. As a result of this review, the Company wrote-down the remaining carrying
value attributed to its Film In Distribution to $0. This resulted in an
impairment of $1,009,777 which is included in the condensed consolidated
statement of operations for the three months ended July 31, 2005.
The Company commenced amortization of capitalized Film costs and accrued
(expensed) participation costs when its film was released and it began to
recognize revenue from the film.
REVENUE RECOGNITION
-------------------
The Company recognizes film revenue from the distribution of its feature film
and related products when earned and reasonably estimable in accordance with SOP
00-2 -- "Accounting by Producers or Distributors of Films." 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.
RESEARCH AND DEVELOPMENT
------------------------
Research and development costs are charged to expense as incurred. Amounts
allocated to acquired-in-process research and development costs from business
combinations are charged to earnings at the consummation of the acquisition.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
--------------------------------------
Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Technological feasibility for the
Company's computer software is generally based upon achievement of a detail
program design free of high-risk development issues and the completion of
research and development on the product hardware in which it is to be used. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized computer software development costs require
considerable judgment by management with respect to certain external factors,
including, but not limited to, technological feasibility, anticipated future
gross revenue, estimated economic life and changes in software and hardware
technology.
Amortization of capitalized computer software development costs commences when
the related products become available for general release to customers.
Amortization is provided on a product-by-product basis. The annual amortization
is the greater of the amount computed using (a) the ratio that current gross
10
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Company periodically performs reviews of the recoverability of such
capitalized software costs. At the time a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be generated
from the applicable software, the capitalized costs of each software product is
then valued at the lower of its remaining unamortized costs or net realizable
value.
No assurance can be given that such technology will receive market acceptance.
Accordingly it is possible that the carrying amount of the technology license
may be reduced materially in the near future.
The Company has no amortization expense for the three months and nine months
ended July 31, 2005 and 2004 for its capitalized software development costs.
REDEEMABLE SERIES B PREFERRED STOCK
-----------------------------------
Redeemable Series B Preferred Stock, which includes characteristics of both
liabilities and equity, is classified as a long-term liability in accordance
with the provisions of Statement of Financial Accounting Standards No. 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." In April 2005, the Redeemable Series B Preferred Stock
was cancelled in exchange for the issuance of common stock and a promissory
note. See Note 6 for further discussion.
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, 2005 and 2004, no effect has been given to outstanding options, warrants or
convertible debentures in the diluted computation, as their effect would be
anti-dilutive.
STOCK-BASED COMPENSATION
------------------------
The Company follows Statement of Financial Accounting Standards("SFAS No. 123"),
"Accounting for Stock-Based Compensation." SFAS No. 123 establishes accounting
and reporting standards for stock-based employee compensation plans. This
statement allows companies to choose between the fair value-based method of
accounting as defined in this statement and the intrinsic value-based method of
accounting as prescribed by Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees."
The Company has elected to continue to follow the accounting guidance provided
by APB 25, as permitted for stock-based compensation relative to the Company's
employees. Stock and options granted to other parties in connection with
providing goods and services to the Company are accounted for under the fair
value method as prescribed by SFAS 123.
In December 2002, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation -Transition and Disclosure -
an Amendment of FASB Statement No. 123". This statement amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
11
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
addition, SFAS No.148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 also requires that
those effects be disclosed more prominently by specifying the form, content, and
location of those disclosures.
For the Nine For the Three
Months Ended Months Ended
July 31, July 31,
-------------------------- --------------------------
2005 2004 2005 2004
(Restated) (Restated)
----------- ----------- ----------- -----------
Net loss, as reported $(3,060,489) $(3,379,998) $ (897,920) $ (965,290)
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) (80,000) (604,031) --
----------- ----------- ----------- -----------
Net loss, pro-forma $(3,855,308) $(3,459,998) $(1,522,866) $ (965,290)
=========== =========== =========== ===========
Basic and Diluted Net Loss per Common Share:
As reported $ (0.03) $ (0.04) $ (0.01) $ (0.01)
=========== =========== =========== ===========
Pro-forma $ (0.04) $ (0.04) $ (0.01) $ (0.01)
=========== =========== =========== ===========
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2005, the Securities and Exchange Commission issued release number
33-8568, AMENDMENT TO RULE 4-01(A) OF REGULATION S-X REGARDING THE COMPLIANCE
DATE FOR STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (REVISED 2004),
SHARE BASED PAYMENT. This release delays the date for compliance with Statement
of Financial Accounting Standards No. 123 (Revised 2004), SHARE BASED PAYMENT
("Statement 123R") to the registrant's first interim or annual reporting period
beginning on or after December 15, 2005. Statement 123R requires public entities
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award, and no
longer allows companies to apply the intrinsic value based method of accounting
for stock compensation described in Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. In accordance with this amendment, the
Company will adopt SFAS No. 123R as of the beginning of the Company's interim
reporting period that begins on February 1, 2006. The transitional provisions of
SFAS 123R are not expected to have a material effect on the Company's
consolidated financial position or results of operations as substantially all
outstanding equity instruments are expected to vest on or prior to January 31,
2006. The Company will utilize the fair value method for any future instruments
after the implementation date.
In June 2005, the Financial Accounting Standards Board published Statement of
Financial Accounting Standards No. 154, ACCOUNTING CHANGES AND ERROR
CORRECTIONS. SFAS 154 establishes new standards on accounting for changes in
accounting principles. Pursuant to the new rules, all such changes must be
accounted for by retrospective application to the financial statements of prior
periods unless it is impracticable to do so. SFAS 154 completely replaces
Accounting Principles Bulletin No. 20 and SFAS 3, though it carries forward the
guidance in those pronouncements with respect to accounting for changes in
estimates, changes in the reporting entity, and the correction of errors. The
requirements in SFAS 154 are effective for accounting changes made in fiscal
years beginning after December 15, 2005. The Company will apply these
requirements to any accounting changes after the implementation date.
NOTE 4 - FILM IN DISTRIBUTION
In April 2000, the Company entered into a joint venture production agreement to
produce a feature length film ("Step Into Liquid") for theatrical distribution.
The Company agreed to provide the funding for the production in the amount of up
to $2,250,000 and, in exchange, received a 50% share in all net profits from
worldwide distribution and merchandising, after receiving funds equal to its
initial investment of up to $2,250,000. As of July 31, 2005 the Company has
funded a net of $2,335,101 for completion of the film. The film is currently in
foreign and DVD distribution. Based upon information received from the Company's
film distributor in January 2005, the Company recorded an impairment charge of
$977,799 during the three months ended October 31, 2004 which reduced the
12
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - FILM IN DISTRIBUTION (CONTINUED)
carrying value of its film in distribution to $1,021,722. The impairment charge
was due to higher than expected distribution costs and lower than expected
average retail selling price for the DVD. In addition, based upon information
received from the Company's film distributor in July 2005, which indicated that
sales were lower than expected, the Company recorded an impairment charge of
$1,009,777 during the three months ended July 31, 2005 which reduced the
carrying value of its film in distribution to $0.
The Company recognized revenues of $10,360 and $26,558 for the three months and
nine months ended July 31, 2005, respectively. The Company recognized revenues
of $60,449 and $231,292 for the three months and nine months ended July 31,
2004, respectively. The Company had amortization expense of zero and $11,945 for
the three months and nine months ended July 31, 2005, respectively. The Company
had amortization expense of $29,451 and $115,665 for the three months and nine
months ended July 31, 2004, respectively.
NOTE 5 - DEFERRED FINANCING COST
At July 31, 2005, deferred financing cost consists of costs incurred and
warrants issued in connection with the sale of $3,500,000 of 2005 Debentures,
$1,350,000 of 7% convertible debentures and a promissory note.
Deferred financing cost $1,006,916
Less: Accumulated amortization (199,361)
----------
Deferred Financing Cost, net $807,555
==========
Amortization of deferred financing cost for the three months and nine months
ended July 31, 2005 was $67,825 and $120,934, respectively. Amortization of
deferred financing cost for the three months and nine months ended July 31, 2004
was $18,930 and $41,802, respectively.
NOTE 6 - EXCHANGE AGREEMENT
In April 2005, the Company entered into an Exchange Agreement (the "Exchange
Agreement") with Zaiq Technologies, Inc., ("Zaiq"), pursuant to which the
Company issued 4,651,163 shares of common stock and a promissory note in the
principal amount of $2,392,000 in exchange for the surrender by Zaiq of 3,192
shares of Redeemable Series B Preferred Stock. The Company issued the Redeemable
Series B Preferred Stock to Zaiq pursuant to a Receivables Purchase and Stock
Transfer Restriction Agreement dated as of April 17, 2002. These shares had an
aggregate liquidation preference of $3,192,000, constituted all of the
Redeemable Series B Preferred Stock issued and outstanding as of the date of the
Exchange Agreement, and were cancelled upon the closing of the Exchange
Agreement. The fair value of the common stock and promissory note on the closing
date was determined to be less than the aggregate liquidation preference of the
Redeemable Series B Preferred Stock and accordingly a gain of $55,814 was
recognized during the three months ended April 30, 2005.
The Exchange Agreement provides that, subject to certain exceptions, if the
Company, at any time prior to the payment in full of the amount due under the
promissory note, issues common stock or securities convertible into or
exercisable for shares of common stock at a price below the fair market value of
the common stock or such securities (a "Below Market Issuance"), then the
Company will issue to Zaiq additional shares of common stock in an amount that
is determined in accordance with a formula that takes into consideration both
the number of shares of common stock or other securities issued and the total
consideration received by the Company in the Below Market Issuance. During the
three months ended July 31, 2005, the Company issued 29,457 additional shares
with a fair value of $5,008 to Zaiq as a result of a Below Market Issuance.
Under the terms of the agreements with Zaiq, a portion of the proceeds of any
new financing consummated by the Company through the first anniversary of the
agreement are to be applied to the prepayment of the note. See Note 9.
The conversion into common stock of the May 2005 debentures may require the
Company to issue additional shares to Zaiq Technologies in the future in
accordance with the anti-dilution provisions of the Exchange Agreement. Even if
the Company determined that all of the shares issuable upon conversion of the
debentures required anti-dilution adjustments, the resulting number of shares
that would be issuable to Zaiq Technologies would not be material in relation to
the number of shares that are outstanding as of July 31, 2005.
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 pay the principal and an additional amount equal to 50% of the
principal on all notes below except for one note for $10,000 which accrues
interest at the rate of 9% per annum and the March 2005 convertible promissory
note discussed below.
13
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
The outstanding notes are summarized in the table below:
July 31, 2005
-------------
Note payable (1) $ 122,000
Notes payable (ten notes) (2) 478,000
Note payable, 9% interest (3) 10,000
Note payable (4) 280,371
-----------
Total 890,371
Less: current portion of convertible notes payable (859,996)
-----------
Long term portion of convertible notes payable $ 30,375
===========
(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 $8,000 and $18,000 during the three months and nine months ended July
31, 2005, 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 $5,000 and
accrued interest of $2,500 was converted into 17,857 shares of common stock
during the nine months ended July 31, 2005.
(3) The note was issued in July 2003 in the amount of $10,000, and due only
when receipts received by the Company from its Top Secret Productions, LLC
joint venture exceed $750,000. The note and any accrued and unpaid interest
may be converted at any time, in whole or in part, into shares of common
stock at a conversion price per share of $0.60.
(4) In March 2005, the Company issued in favor of the Company's executive vice
president, a non-interest bearing convertible promissory note in the
principal amount of $383,911. The convertible promissory note was issued in
evidence of the Company's obligation for deferred compensation. In
accordance with APB 21, imputed interest (at an effective rate of 15%) was
calculated to arrive at the fair value of the convertible promissory note.
The difference between the face amount and the present value upon issuance
of the convertible promissory note is shown as a discount that is amortized
as interest expense over the life of the convertible promissory note.
Amortization of debt discount on this note was $5,292 and $7,347 for the
three months and nine months ended July 31, 2005, respectively. The
convertible promissory note is payable in monthly installments, on the
first day of each month, beginning on April 1, 2005. Each month, the
Company must pay to the executive vice president an amount not less than
the monthly base salary paid to the Company's chief executive officer.
However, if the Company determines in its sole discretion that it has the
financial resources available, it may pay up to $20,833 per month. The
Company made payments of $87,915 and $103,540 during the three months and
nine months ended July 31, 2005, respectively. The note may be converted
into shares of common stock at a conversion price per share equal to the
closing price of the common stock on the Over-the-Counter Bulletin Board on
the date of conversion.
NOTE 8 - CONVERTIBLE DEBENTURES
2005 DEBENTURES (Restated)
--------------------------
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.
14
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - CONVERTIBLE DEBENTURES (CONTINUED)
The Company received net proceeds of approximately $3.11 million, following
repayment of offering related expenses. These offering related expenses were
recorded as deferred financing costs and are being charged to interest expense
(See Note 5). The Company used a portion of the proceeds to repay the principal
and accrued interest on notes payable and convertible notes payable.
Interest on the 2005 Debentures accrues at the rate of 7% per annum and is
payable on a bi-annual basis, commencing December 31, 2005, or on conversion and
may be paid, at the option of the Company, either in cash or in shares of common
stock. The Company may prepay the amounts outstanding on the 2005 Debentures by
giving advance notice and paying an amount equal to 120% of the sum of (x) the
principal being prepaid plus (y) the accrued interest thereon.
In connection with the issuance of the 2005 Debentures, the Company issued to
the purchasers thereof warrants (the "Investor Warrants") to purchase 33,936,650
shares of common stock valued at $2,000,000 on the issuance date, with warrants
for 11,312,220 shares being exercisable through the last day of the month in
which the first anniversary of the effective date of the Registration Statement
occurs (August 31, 2006) at a per share exercise price of $0.1547 and warrants
for 22,624,430 shares being exercisable through the last day of the month in
which the third anniversary of the effective date of the Registration Statement
occurs (August 31, 2008) at a per share exercise price of $0.3094.
In connection with the issuance of the 2005 Debentures, the Company also issued
to a placement agent warrants to purchase up to 5,656,108 shares of Common Stock
(the "Compensation Warrants") valued at $319,066 on the issuance date. This
amount was recorded as a deferred financing cost and is being charged to
interest expense over the term of the 2005 Debentures. Warrants to purchase up
to 2,262,443 shares are exercisable through the last day of the month in which
the third anniversary of the effective date of the Registration Statement occurs
(August 31, 2008) at a per share exercise price of $0.3094. Warrants to purchase
up to 2,262,443 shares are exercisable through the last day of the month in
which the third anniversary of the closing occurs (May 31, 2008) at a per share
exercise price of $0.1547. Warrants to purchase up to 1,131,222 shares are
exercisable through the last day of the month in which the first anniversary of
the effective date of the Registration Statement occurs (August 31, 2006) at a
per share exercise price of $0.1547. The Compensation Warrants are otherwise
exercisable on substantially the same terms and conditions as the Investor
Warrants.
Holders of the Investor Warrants are entitled to exercise those warrants on a
cashless basis following the first anniversary of issuance if the Registration
Statement is not in effect at the time of exercise.
The gross proceeds of $3,500,000 were recorded net of a debt discount of
$3,500,000. The debt discount consisted of a $2,000,000 value related to the
Investor Warrants and a $1,500,000 value related to the embedded conversion
feature in accordance with EITF issue No. 00-19 "Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a Company's Own
Stock". Due to certain factors, including an uncapped liquidated damages
provision in the registration rights agreement and an indeterminate amount of
shares to be issued upon conversion of the debentures, the Company separately
values and accounts for the embedded conversion feature related to the 2005
Debentures, the Investor Warrants, the Compensation Warrants, and the
registration rights as derivative liabilities. Accordingly, these derivative
liabilities are measured at fair value with changes in fair value reported in
earnings as long as they remain classified as liabilities. The Company
reassesses the classification at each balance sheet date. If the classification
required under EITF No. 00-19 changes as a result of events during the period,
the contract should be reclassified as of the date of the event that caused the
reclassification. Due to various factors, including substantial conversions of
the 2005 Debentures and the registration statement becoming effective on August
1, 2005, the value of the registration rights was deemed to be de minimus at
July 31, 2005.
A gain on the change in fair value of the derivative liabilities of $1,799,103
was recognized during the three months and nine months ended July 31, 2005.
15
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - CONVERTIBLE DEBENTURES (CONTINUED)
To secure the Company's obligations under the 2005 Debentures, the Company
granted a security interest in substantially all of its assets, including
without limitation, its intellectual property, in favor of the investors under
the terms and conditions of a Security Interest Agreement dated as of the date
of the 2005 Debentures. The security interest terminates upon the earlier of (i)
the date on which less than one-third of the original principal amount of the
2005 Debentures issued on the closing date are outstanding or (ii) payment or
satisfaction of all of the Company's obligations under the loan agreement.
A registration statement (the "Registration Statement") covering the Common
Stock issuable upon conversion of the 2005 Debentures, the Investor Warrants and
the Compensation Warrants referred to above was declared effective on August 1,
2005.
As a result of obtaining the 2005 Debentures, 1,000,000 stock options granted to
each of the Company's chief executive officer and executive vice president in
April 2005 became fully vested and non-forfeitable, as discussed in Note 10.
Included in interest expense for the period ended July 31, 2005 is $210,766
related to the amortization of the debt discount related to these debentures.
The 2005 Debentures are summarized below at July 31, 2005:
Outstanding
Principal Unamortized Net Carrying
Amount Debt Discount Value
---------- ------------ ------------
Long-term portion $3,500,000 $3,289,234 $ 210,766
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"). All principal is due and payable three years from the issuance
date.
During the three months ended January 31, 2005, $199,450 of principal of 7%
Debentures plus accrued interest of $12,264 were converted into 1,411,428 shares
of the Common Stock. During the three months ended April 30, 2005, $383,050 of
principal of 7% Debentures plus accrued interest of $28,212 were converted into
2,741,747 shares of Common Stock. During the three months ended July 31, 2005,
$325,000 of principal of 7% Debentures plus accrued interest of $32,860 were
converted into 2,385,804 shares of the Common Stock leaving a principal balance
of $125,000.
16
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - CONVERTIBLE DEBENTURES (CONTINUED)
The 7% Debentures are summarized below:
Principal Unamortized Net carrying
Amount Debt Discount Value
---------- ------------ -----------
Long term portion $ 125,000 $ 58,110 $ 66,890
The remaining 7% Debentures outstanding at July 31, 2005 were originally issued
in December 2003 and are due and payable in December 2006.
NOTE 9 - NOTES PAYABLE
The Company has the following notes payable outstanding at July 31, 2005:
Note payable (five individual notes with identical terms),
unsecured, 6% interest, due on demand with three days notice $ 256,886
Note payable, 10% interest, unsecured, due on demand with
three days notice (1) 333,424
Note payable (2) 12,000
Note payable (3) 2,027,203
-----------
Total $ 2,629,513
Less: current portion of notes payable (2,196,976)
-----------
Long term portion of notes payable $ 432,537
===========
(1) Outstanding principal of $150,000 was paid in June 2005 from the proceeds
of the private placement of the 2005 Debentures further discussed in Note
8.
(2) In March 2004, the Company entered into a loan agreement, pursuant to which
the Company borrowed $12,000 from the lender. The loan is evidenced by an
installment note issued by the Company to such lender. The principal amount
of the loan and any accrued and unpaid interest at a rate of 5% were due
and payable on July 26, 2004. On July 26, 2004, the lender agreed to extend
payment and unpaid accrued interest until November 15, 2004. The lender has
agreed to extend payment and unpaid interest until November 15, 2005.
(3) In April 2005, the Company issued its promissory note in connection with
the cancellation of the Redeemable Series B Preferred Stock (see Note 6)
which bears interest at the rate of 7% per annum compounded quarterly. The
principal amount of the promissory note and interest accrued thereon is due
and payable in four equal quarterly installments beginning on the first
anniversary of the date of the promissory note. Unless an event of default
has occurred and is continuing, the principal amount of the promissory note
is forgiven in the amount of $797,333 on each of the six-month and
twelve-month anniversaries of the date of the promissory note. The Company
is required to pay to the holder 10% of the proceeds of any new financing
consummated within 90 days of the date of the promissory note and 20% of
the proceeds of any new financing consummated thereafter through the first
anniversary of the promissory note in prepayment of the amount due under
the promissory note. The Company has the right to prepay the outstanding
principal amount of the promissory note and any accrued interest thereon in
whole or in part without penalty or premium at any time. During the three
months ended July 31, 2005, principal of $364,797 and interest of $27,983
were repaid from the proceeds of new financings to comply with the
mandatory payment provisions of the promissory note.
In May and June 2005, three notes with outstanding principal of $605,251 and
accrued interest of $43,931 were repaid from the proceeds of the private
placement of the 2005 Debentures further discussed in Note 8.
17
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - STOCKHOLDERS' EQUITY
COMMON STOCK ISSUANCES DURING THE NINE MONTHS ENDED JULY 31, 2005:
------------------------------------------------------------------
During the nine months ended July 31, 2005, the Company issued:
o 10,829,026 shares Common Stock to various investors for cash proceeds
of $835,100;
o 5,073,015 shares of Common Stock for various services valued at
$314,667;
o 422,783 shares of Common Stock in payment of accounts payable and
accrued expenses in the amount of $71,911;
o 2,837,500 shares of Common Stock for consulting services valued at
$342,000;
o 6,556,836 shares of Common Stock for converted promissory notes and
accrued interest valued at $988,347;
o 639,998 shares of Common Stock as penalty for delayed
filing/effectiveness of a registration statement valued at $96,000;
o 2,750,000 shares of Common Stock to various employees and directors
valued at $452,500;
o 4,651,163 shares of Common Stock with a fair value of $744,186 in
exchange for the surrender of Series B Redeemable Preferred Stock
valued at $800,000. The Company recognized a gain of $55,814 on the
transaction (See Note 6).
o 29,457 shares of Common Stock in connection with a Below Market
Issuance valued at $5,008 (See Note 6).
OPTIONS GRANTED
---------------
In April 2005, the Company issued to each of its Chief Executive Officer and
Executive Vice President, 1,000,000 shares of Common Stock, and performance
based options to purchase 7,000,000 shares of restricted Common Stock at an
exercise price of $0.17, which was equal to the closing price of the Common
Stock on the Over-the-Counter Bulletin Board on the date of grant. Options to
purchase 1,000,000 shares of restricted Common Stock vested upon the Company's
consummation of the sales of the 2005 Debentures and options to purchase
6,000,000 shares of restricted Common Stock vest upon the Company's release of a
beta version of its semiconductor technologies.
As the closing price of Common Stock at July 31, 2005 was below the exercise
price of these options and therefore the intrinsic value was $0, previously
recorded expense of $20,915 was reversed during the three months ended July 31,
2005.
OPTIONS EXPIRED, CANCELLED AND FORFEITED
----------------------------------------
During the nine months ended July 31, 2005, options to purchase 1,026,250 shares
of Common Stock expired.
During the nine months ended July 31, 2005, options to purchase 2,325,000 shares
of Common Stock were cancelled.
During the nine months ended July 31, 2005, options to purchase 925,000 shares
of Common Stock were forfeited due to employee terminations.
WARRANTS EXPIRED
----------------
During the nine months ended July 31, 2005, warrants to purchase 800,000 shares
of the Company's Common stock expired.
18
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11 - AMENDMENT TO DEVELOPMENT AND LICENSING AGREEMENT
The Company and Adaptive Networks, Inc. ("ANI") have, as of November 26, 2004,
amended and restated their Development and License Agreement, dated as of April
17, 2002 (as so amended and restated the "Amended Agreement"). Under the Amended
Agreement, the Company has accepted from ANI final delivery of the source code,
the intellectual property rights related thereto and other materials related to
certain technologies that were to be developed by ANI. Under the original
Development and License Agreement entered into by the Company and ANI as of
April 17, 2002, the Company acquired a worldwide, perpetual license to ANI's
Powerstream technology, which provides the core technology for the Company's
semiconductor technologies. The Company contemplates that HelloSoft, Inc.
("HelloSoft"), an independent software developer based in California, will
provide certain development work necessary to the completion of the
semiconductor chipset. The Company and HelloSoft are parties to a Services
Agreement, dated as of March 31, 2004, under which HelloSoft provides continuing
development services relating to the Company's semiconductor chipset.
Under the Amended Agreement, the Company and ANI's joint ownership rights will
continue with respect to any improvements, developments, discoveries or other
inventions that are developed under the agreement with HelloSoft.
In addition, under the Amended Agreement, ANI has agreed that the first $5
million of royalties otherwise payable by the Company to ANI thereunder from
proceeds of the sale or license of the semiconductor technologies are to be
offset by a credit in the same amount.
On July 26, 2005, the Company signed an amendment to its development agreement
with HelloSoft that defines and prices the next two phases of the technology
development. The Company will expend $445,000 on Phase II and $350,000 on Phase
III. Half of Phase II, or $222,500, was paid to HelloSoft on July 26, 2005, in
the form of restricted common stock issued at a discount of 25% to the closing
price of common stock on that date, and the other $222,500 will be paid to them
in cash when they complete Phase II. The restricted common stock issued to
HelloSoft was valued at $296,667 and recorded as research and development
expense. When HelloSoft commences Phase III, the Company will issue to them
$175,000 worth of restricted common stock, and the other $175,000 will be paid
to them in cash when they complete Phase III. Phase III will be deemed complete
when HelloSoft releases the completed product in its beta form to the Company.
The Company projects that this will occur in the fourth quarter of 2005.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
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:
2005 Debentures and accrued interest 74,569,774
Warrants to purchase common stock 50,812,757
Options to purchase common stock 16,893,750
Convertible notes payable and accrued interest 5,984,803
7% convertible debentures and accrued interest 931,690
-----------
Total as of July 31, 2005 149,192,774
Substantial issuance after July 31, 2005 through September 12, 2005:
Issuance of common stock for converted debentures
and accrued interest 43,061,419
Issuance of common stock for liquidated damages 163,333
19
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL DISPUTES
--------------
During the quarter ended July 31, 2004, the Company was served with the
following three summonses and complaints, each filed on July 30, 2004 in the
Superior Court of California (San Diego County):
Each complaint relates to a convertible promissory note issued by us in December
2001 and payable, according to its terms, out of film distributions that we
receive. Each complaint alleges, among other things: that we have failed to pay
the amount due and owing under the convertible promissory note issued to the
plaintiff despite demands for payment; that our management has acted to
forestall payments to our creditors, including the plaintiff; and that we
fraudulently induced the plaintiff to enter into the convertible promissory
note.
The Company was served with the following additional summons and complaint,
filed on July 30, 2004 in the Superior Court of California (San Diego County):
Gerald Handler, Trustee of the Gerald and Judith Handler Trust and Trustee of
the Handler Children Trust, and Wayne Lill Jr., Trustee of the Wayne Lill Trust
dated 12-22-99 v. New Visual Corporation, New Visual Entertainment, Inc., Top
Secret Productions, LLC and Does 1 through 20. The plaintiffs sought money
damages in the aggregate of amount of $375,000, plus interest; an order avoiding
alleged fraudulent transfers; an injunction against disposition of allegedly
fraudulently transferred monies; the appointment of a receiver; a writ of
attachment and imposition of a constructive trust.
According to their terms, each of the convertible promissory notes underlying
these claims becomes due and payable upon our receipt of a specified amount of
distributions from our Film and is payable out of those distributions that we
have actually received. The convertible promissory notes underlying these claims
were converted by the plaintiffs into shares of our common stock in March 2002.
The Company filed an answer to the complaints denying all allegations.
In July 2005 the legal proceedings were dismissed with prejudice upon the
issuance in favor of the plaintiffs of an irrevocable letter of credit in the
maximum amount of $300,000 by a non-related third party. The Company has no
reimbursement obligation with respect to the letter of credit.
20
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 13 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
For the nine months ended July 31, 2005:
Telecommunications Entertainment
Business Business Unallocable Totals
-----------------------------------------------------------------
Net Sales- domestic $ -- $ 20,258 $ -- $ 20,258
=================================================================
Net Sales - foreign $ -- $ 6,300 $ -- $ 6,300
=================================================================
Operating (Loss) Income $ (5,999) $(1,026,843) $(2,726,187) $(3,759,029)
=================================================================
Depreciation $ 5,999 $ 18,493 $ -- $ 24,492
=================================================================
Total Identifiable
Assets at
July 31, 2005 $ 6,569,097 $ -- $ 1,098,350 $ 7,667,447
=================================================================
For the nine months ended July 31, 2004:
Telecommunications Entertainment
Business Business Unallocable Totals
-----------------------------------------------------------------
Net Sales - domestic $ -- $ 74,382 $ -- $ 74,382
=================================================================
Net Sales - foreign $ -- $ 156,910 $ -- $ 156,910
=================================================================
Operating (Loss) Income $ (326,500) $ 8,990 $(2,326,180) $(2,643,690)
=================================================================
Depreciation $ 2,829 $ 10,276 $ -- $ 13,105
=================================================================
Total Identifiable
Assets at
July 31, 2004 $ 5,923,761 $ 2,071,579 $ 23,788 $ 8,019,128
=================================================================
For the three months ended July 31, 2005:
Telecommunications Entertainment
Business 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 $ 4,100 $ 13,297 $ -- $ 17,397
=================================================================
Total Identifiable
Assets at
July 31, 2005 $ 6,569,097 $ -- $ 1,098,350 $ 7,667,447
=================================================================
21
RIM SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 13 - SEGMENT INFORMATION (CONTINUED)
For the three months ended July 31, 2004:
Telecommunications Entertainment
Business Business Unallocable Totals
-----------------------------------------------------------------
Net Sales - domestic $ -- $ -- $ -- $ --
=================================================================
Net Sales - foreign $ -- $ 60,449 $ -- $ 60,449
=================================================================
Operating Income (Loss) $ (153,939) $ 4,558 $ (380,680) $ (530,061)
=================================================================
Depreciation $ 835 $ 3,487 $ -- $ 4,322
=================================================================
Total Identifiable
Assets $ 5,923,761 $ 2,071,579 $ 23,788 $ 8,019,128
=================================================================
NOTE 14 - SUBSEQUENT EVENTS
STOCK ISSUANCES
From August 1, 2005 to September 12, 2005 we issued securities as follows:
In August 2005, we issued:
(i) 163,333 shares of Common Stock for liquidated damages valued at
$2,450.
(ii) 36,095,935 shares of Common Stock for converted debentures and
interest valued at $1,036,625.
In September 2005, we issued 6,965,484 shares of Common Stock for converted
debentures and interest valued at $179,613.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis in conjunction with our
condensed consolidated financial statements and the notes thereto included
elsewhere herein, together with the consolidated financial statements, notes
thereto, and management's discussion and analysis contained in our Annual Report
on Form 10-KSB for the fiscal year ended October 31, 2005.
This Quarterly Report on Form 10-QSB/A reflects a restatement of the Company's
previously issued condensed consolidated financial statements included in our
Quarterly Report on Form 10-QSB for the period ended July 31, 2005 (the
"Original Report"), as discussed below and in Note 2 to the condensed
consolidated financial statements included herein. In the preparation of this
report, we have revised language within Management's Discussion and Analysis of
Financial Condition and Results of Operations from the Original Report to
reflect the restatement. No other information has been amended or updated to
reflect other events occurring after the date of the Original Report or to
modify or update those disclosures affected by subsequent events. Information
contained herein continues to speak as of the date of the Original Report, and
we have not updated the disclosures contained herein to reflect subsequent
events.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Throughout this quarterly report on Form 10-QSB/A, we make forward-looking
statements that are based upon our current expectations, estimates and
projections about our business and our industry, and that reflect our beliefs
and assumptions based upon information available to us at the date of this
report. In some cases, you can identify these statements by words such as "if,"
"may," "might," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "continue," and other similar terms. These
forward-looking statements include, among other things, projections of our
future financial performance and our anticipated growth, descriptions of our
strategies, our product and market development plans, the trends we anticipate
in our business and the markets in which we operate, and the competitive nature
and anticipated growth of those markets.
We caution readers that forward-looking statements are only 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. We caution readers not to rely on
those forward-looking statements, which reflect management's analysis only as of
the date of this quarterly report. We undertake no obligation to revise or
update any forward-looking statement for any reason.
RESTATEMENT
On July 6, 2006, the Company's Board of Directors, after consultations by
management and the Audit Committee with The Company's independent registered
public accounting firm, concluded that the classification of warrants issued in
connection with the 2005 convertible debentures was not in accordance with
interpretations of 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." Accordingly the condensed consolidated
financial statements included in the Company's Quarterly Report on Form 10-QSB
for the period ended July 31, 2005, as filed on September 14, 2005 and as
amended on February 10, 2006 (the "July 2005 10-QSB") have been restated to
correct the accounting for the warrants as derivative liabilities. The
previously issued condensed consolidated financial statements included in the
July 2005 10-KSB should not be relied upon. As a result of this restatement,
$2,019,963 included in stockholders' equity at July 31, 2005 should have been
recorded as a derivative liability and the Company should have recorded a gain
of $1,799,103 on the change in fair value of derivative liabilities for the
three months and nine months ended July 31, 2005. The treatment of this non-cash
accounting item results in a decrease in the Company's net loss for the three
months and nine months ended July 31, 2005 as follows:
For the For the
Three Months Nine Months
Ended July 31, 2005 Ended July 31, 2005
--------------------------- ---------------------------
(As Previously (As Currently (As Previously (As Currently
Restated) Restated) Restated) Restated)
------------- ------------- ------------- -------------
Net loss $(2,697,023) $(897,920) $(4,859,592) $(3,060,489)
Basic and diluted
net loss per share
of common stock $ (0.02) $ (0.01) $ (0.05) $ (0.03)
23
The correction of the above results in the following changes to the
Company's stockholders' equity and liabilities at July 31, 2005:
(As Previously (As Currently
Restated) Restated)
------------- -------------
Total liabilities $ 6,449,812 $ 6,969,775
Stockholders' equity $ 1,217,635 $ 697,672
OVERVIEW
We are developing advanced transmission technology to enable data to be
transmitted across copper telephone wire at speeds and over distances that
exceed those offered by leading digital subscriber line (DSL) technology
providers. We intend to market this novel technology to leading equipment makers
in the telecommunications industry. Our technology is being designed to
substantially increase the capacity of existing copper telephone networks,
allowing telephone companies to provide enhanced video, data and voice services
over the existing copper telecommunications infrastructure. The proprietary
equipment, components and related technologies and semiconductor hardware and
software products that we are designing, developing and testing will be referred
to throughout this quarterly report as the "Semiconductor Technologies."
We intend to design, develop, manufacture and license semiconductor hardware and
software products based upon our Semiconductor Technologies. We believe that
system-level products that use this set of technologies will have a significant
advantage over existing system-level products that use existing broadband
technologies, such as DSL, by providing faster transmission speed capability and
by increasing the transmission distance capability. We are currently in the
process of completing the development of a commercial beta version of the
chipset containing our Semiconductor Technologies for use and evaluation by
prospective customers.
FILM. We have recognized revenues of approximately $694,000 from the
feature-length documentary, STEP INTO LIQUID (the "Film") from its release
through July 31, 2005. The Film has completed its domestic theater run grossing
approximately $3.7 million in box office revenues, according to the Film's
distributor. For the nine months ended July 31, 2005, the Company received
revenue distributions in the aggregate amount of approximately $26,558. The Film
is currently being distributed to foreign markets. The DVD was released
domestically in April 2004 and the cable TV release occurred in October 2004.
The broadcast television release is presently scheduled for summer 2005. The
Film's foreign theatrical run began in Australia and New Zealand in January 2004
and will continue throughout 2005 in Japan, Brazil, Norway and Sweden.
References to our business relating to the Film will sometimes be referred to in
this quarterly report as our "Entertainment Business."
SEMICONDUCTOR TECHNOLOGIES. In December 2002, we completed the demonstration of
the Semiconductor Technologies with a leading telephone company and a select
target customer. In the demonstration, equipment enhanced by our Semiconductor
Technologies achieved data speeds of 100 megabits per second. We believe that
these results demonstrate the viability of delivering data intensive
applications over existing telephone copper wiring infrastructure enhanced by
our Semiconductor Technologies with limited significant service degradation and
improved security and at a substantial savings from broadband solutions
currently commercially available. No assurance can be provided that the results
achieved in this demonstration can be reproduced or surpassed in the beta or
commercial versions of our chipset or that, even if such results are reproduced
or surpassed, that telephone equipment providers will include our chipset in
their product offerings or ultimately deploy any product containing our chipset.
At the present time, we are working to complete a commercially deployable
version of the chipset containing the Semiconductor Technologies. This process
involves several steps. Initially, we will need to complete a beta version of
the chipset of the Semiconductor Technologies for evaluation by potential
customers and industry partners. We estimate we will complete this step in
24
December 2005. We plan to present this beta version to a select base of
potential customers and equipment providers for use in limited deployments. Once
this stage is completed, we intend to complete a version that is more suitable
to high volume, low cost production. We believe that the process of
commercialization will entail extensive field testing and pilot deployments with
selected telecommunications equipment providers to arrive at a commercially
deployable version. The complexity of the Semiconductor Technologies could
result in unforeseen delays or expense.
TECHNOLOGY LICENSE
We have entered into a technology license agreement that may impact our future
results of operations. Royalty payments, if any, under this 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 PowerstreamTM technology, intellectual property and patent
portfolio. The licensed PowerstreamTM technology provides the core technology
for our semiconductor products. We have also jointly developed technology with
Adaptive that enhances the licensed technology.
In consideration of the development services provided and the licenses granted
to us by Adaptive, we paid Adaptive an aggregate of $5,571,000 between 2002 and
2004 consisting of cash and our assumption of certain Adaptive liabilities. In
addition to the above payments, Adaptive is entitled to a percentage of any net
sales of products sold by us and any license revenue we receive from the
licensed and co-owned technologies less the first $5,000,000 that would
otherwise be payable to them under this royalty arrangement
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS AND NINE MONTHS ENDED JULY 31, 2005 AND THE THREE
MONTHS AND NINE MONTHS ENDED JULY 31, 2004
REVENUES. Revenues for the three months and nine months ended July 31, 2005 were
$10,360 and $26,558, respectively, and were attributable to our Entertainment
Business. Revenues for the corresponding periods in 2004 were $60,449 and
$231,292, respectively, from our Entertainment Business.
COST OF SALES. Cost of sales for the three months and nine months ended July 31,
2005 were $0 and $11,945, respectively, and represent the amortization of film
cost for the Film. Cost of sales for the corresponding periods in 2004 were
$29,451 and $115,665, respectively. The decrease for the three months and nine
months ended July 31, 2005 when compared with corresponding periods in 2004 was
a result of lower revenues generated from the Film as cost of sales are directly
related to the revenues recognized under SOP-00-2.
OPERATING EXPENSES. Operating expenses included research and development
expenses in connection with the Semiconductor business, compensatory element of
stock issuances, selling, general and administrative expenses, the costs of
settlement of litigation, and the impairment of Film in Distribution. Total
operating expenses increased by 272% to $2,195,255 for the three months ended
July 31, 2005 from $590,510 for the three months ended July 31, 2004. This
increase is primarily due to the impairment recorded on the Film in Distribution
($1,009,777), higher research and development expenses ($296,667), and higher
selling, general and administrative expenses ($327,752). Selling, general and
administrative expenses increased by 58% during the same period primarily as a
result of commission payments for services in connection with the placement of
the 2005 Debentures. Research and development expenses increased to $296,667 for
the three months ended July 31, 2005 as we continue to use stock for
compensation purposes in connection with our development agreement with
HelloSoft.
Total operating expenses increased by 32% to $3,785,587 for the nine months
ended July 31, 2005 from $2,874,982 for the nine months ended July 31, 2004.
This increase is primarily due to the impairment recorded on the Film in
Distribution ($1,009,777) and stock issued in connection with our development
agreement with HelloSoft ($296,667), offset by reductions in selling, general
and administrative expenses ($289,172). Selling, general and administrative
expenses decreased 11% to $2,460,145 during the same period primarily due to a
decrease in headcount in administrative personnel, including the elimination of
executive level positions and lower compensation expense related to issuing
stock for services.
OTHER (INCOME) EXPENSES. Other income for the three months and the nine months
ended July 31, 2005 was attributable primarily to the gain on the change in fair
value of derivative liabilities, gain on sale of property and equipment, gain
on forgiveness of liabilities, and gain on exchange, including conversion of
certain Company liabilities into the Company's Common Stock. There were no
significant gains recorded during the three months and nine months ended
25
July 31, 2004. Other expenses included primarily interest expense and
amortization of deferred financing costs. Interest expense increased $132,597
and $587,840, or 32% and 99%, for the three months and the nine months ended
July 31, 2005, respectively, when compared with the same period in 2004,
primarily as a result of the issuance of $3,500,000 principal amount of the 2005
Debentures in May 2005 and additional short-term financing obtained during
fiscal year 2004, which remained outstanding during 2005. The increase in
amortization of deferred financing costs by 258% and 189% for the three months
and nine months ended July 31, 2005, when compared with the same period in 2004,
was a result of higher amortization of the Compensation Warrants and other
financing costs primarily related to the 2005 Debentures.
NET LOSS. For the three months ended July 31, 2005, the net loss decreased
$67,370 or 7% from $965,290 to $897,920 primarily due to the impairment recorded
on the Film in Distribution ($1,009,777), higher research and development
expenses related to stock issuances ($296,667), higher selling, general and
administrative expenses ($327,752), and higher interest costs, including
amortization expenses ($181,492), offset by a gain on the change in fair value
of derivative liabilities ($1,799,103) and a gain on the forgiveness of
liabilities ($99,369). For the nine months ended July 31, 2005, the net loss
decreased $319,509, or 9%, from $3,379,998 to $3,060,489, primarily due to the
impairment recorded on the Film in Distribution ($1,009,777), an increase in
research and development expenses ($293,720), and higher interest costs,
including amortization expenses ($666,972), offset by reductions in selling,
general and administrative expenses ($289,172), cost of sales ($103,720), a gain
on the change in fair value of derivative liabilities ($1,799,103) and other
gains.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances totaled $1,056,107 as of July 31, 2005 compared to $127,811 at
October 31, 2004. As discussed below, in May 2005, the Company raised net
proceeds of approximately $3.11 million from the private placement of certain of
its securities.
Net cash used in operating activities was $1,752,045 for the nine months ended
July 31, 2005 compared to $1,330,453 for the same period in 2004. The increase
in cash used by operations is primarily attributable to a decrease in the net
loss during the nine months ended July 31, 2005 as compared to the nine months
ended July 31, 2004, offset by a gain on the change in fair value of derivative
liabilities of $1,799,103 as well as changes in the outstanding balance of
accounts payable and accrued expenses.
Net cash used in investing activities for the nine months ended July 31, 2005
was $11,161 compared to $95,000 for the nine months ended July 31, 2004. Net
cash used in investing activities was primarily the result of the acquisition of
property and equipment of $11,161 in 2005 and the acquisition of license of
$95,000 in 2004.
Net cash provided by financing activities was $2,691,502 for the nine months
ended July 31, 2005. This compares to $1,110,561 for the nine months ended July
31, 2004. Cash provided by financing activities during the first nine months of
2005 and 2004 primarily consisted of proceeds from issuance of Common Stock,
proceeds from issuance of notes payable, convertible notes payable, and
convertible debentures. The increase in cash provided by financing activities
during the nine months ended July 31, 2005 as compared to the nine months ended
July 31, 2004 is primarily due to the proceeds from the 2005 Debentures as
discussed below, offset by the subsequent repayments of notes payable.
Since inception, we have funded our operations primarily through the sale of our
Common Stock and debt securities. Our recent financings are discussed below.
In May 2005, we sold $3,500,000 aggregate principal amount of our senior secured
7% convertible debentures and warrants, receiving net proceeds of approximately
$3.11 million after the payment of offering related fees and expenses (the "2005
Debentures").
In December 2004, we entered into a loan agreement with an institutional
investor pursuant to which we borrowed $300,000. The outstanding principal and
accrued interest on this loan was repaid in May 2005 from the proceeds of the
2005 Debentures.
In September 2004, we entered into a loan agreement with an institutional
investor/stockholder pursuant to which we borrowed $250,000. The principal
amount of the loan and any accrued and unpaid interest was originally due and
payable on March 24, 2005 and was subsequently extended to May 31, 2005. The
outstanding principal and accrued interest on this loan was repaid in May 2005
from the proceeds of the 2005 Debentures.
26
In December 2003, April 2004 and May 2004, we raised net proceeds of
approximately $888,650 from the private placement to certain private and
institutional investors of our three year 7% Convertible Debentures.
As of July 31, 2005, we had cash of $1,056,107. Although management believes
funds on hand will enable us to meet our liquidity needs through December 31,
2005, we will require additional funds to continue to meet our Liquidity needs
and satisfy our current business plan. It is likely that we will need to raise
additional funds to pay existing current liabilities as they come due, as well
as to meet our operating requirements, prior to the receipt of revenues from our
Semiconductor Technologies. Certain provisions of the 2005 Debentures may impair
our ability to raise funds by selling our equity securities. For example, until
the dollar amount of outstanding 2005 Debentures is 1/3 or less of $3.5 million,
in most cases we cannot issue securities with a variable conversion or exercise
price. In addition, until February 1, 2006, in most cases we cannot issue
securities to an investor where the investor receives registration rights.
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 our product is ready to ship, we
do not yet know what payment terms will be required by our customers or if our
product will be successful. At the present time, we have no commitments for any
additional financing, and there can be no assurance that, if needed, additional
capital will be available to us on commercially acceptable terms or at all. Our
auditors have included a "going concern" qualification in their auditors' report
for the year ended October 31, 2004. Such a "going concern" qualification may
make it more difficult for us to raise funds when needed.
Additional equity financings may 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 April 2005, the Securities and Exchange Commission issued release number
33-8568, AMENDMENT TO RULE 4-01(A) OF REGULATION S-X REGARDING THE COMPLIANCE
DATE FOR STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (REVISED 2004),
SHARE BASED PAYMENT. This release delays the date for compliance with Statement
of Financial Accounting Standards No. 123 (Revised 2004), SHARE BASED PAYMENT
("Statement 123R") to the registrant's first interim or annual reporting period
beginning on or after December 15, 2005. Statement 123R requires public entities
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award, and no
longer allows companies to apply the intrinsic value based method of accounting
for stock compensation described in Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. In accordance with this amendment, the
Company will adopt SFAS No. 123R as of the beginning of the Company's interim
reporting period that begins on February 1, 2006. The transitional provisions of
SFAS 123R are not expected to have a material effect on the Company's
consolidated financial position or results of operations as substantially all
outstanding equity instruments are expected to vest on or prior to January 31,
2006. The Company will utilize the fair value method for any future instruments
after the implementation date.
In June 2005, the Financial Accounting Standards Board published Statement of
Financial Accounting Standards No. 154, ACCOUNTING CHANGES AND ERROR
CORRECTIONS. SFAS 154 establishes new standards on accounting for changes in
accounting principles. Pursuant to the new rules, all such changes must be
accounted for by retrospective application to the financial statements of prior
periods unless it is impracticable to do so. SFAS 154 completely replaces
Accounting Principles Bulletin No. 20 and SFAS 3, though it carries forward the
guidance in those pronouncements with respect to accounting for changes in
estimates, changes in the reporting entity, and the correction of errors. The
requirements in SFAS 154 are effective for accounting changes made in fiscal
years beginning after December 15, 2005. The Company will apply these
requirements to any accounting changes after the implementation date.
27
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 Chief 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. As described in Part I, Item 2 above
under the heading, "RESTATEMENT," the Company's Board concluded that the
classification of warrants issued by the Company in connection with the 2005
convertible debentures was not in accordance with the interpretations of
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." Accordingly, the Board authorized this restatement of the Company's
condensed consolidated financial statements at and for the period ended July 31,
2005, as well as its condensed consolidated financial statements at and for the
periods ended January 31, 2006 and April 30, 2006 and its consolidated financial
statements at and for the fiscal year ended October 31, 2005. Because the above
was not prevented by the Company's then-existing disclosure controls and
procedures, the Chief Executive Officer and Chief Financial Officer has
concluded based upon his evaluation that the Company's disclosure controls and
procedures were not 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. The Company believes that, as a result of its
consultations with counsel, the Company's outside auditors, and other accounting
professionals, it has improved its disclosure controls and procedures in the
area of financial reporting of complex equity transactions such as the
convertible debentures and accompanying warrants.
Management is aware that there is a lack of segregation of duties at the Company
due to the small number of employees dealing with general administrative and
financial matters. This constitutes a significant deficiency in the internal
controls. However, at this time management has decided that considering the
employees involved, the control procedures in place, and the outsourcing of
certain financial functions, the risks associated with such lack of segregation
are low and the potential benefits of adding additional employees to clearly
segregate duties do not justify the expenses associated with such increases.
Management will periodically reevaluate this situation. If the volume of the
business increases and sufficient capital is secured, it is the Company's
intention to increase staffing to mitigate the current lack of segregation of
duties within the general administrative and financial functions.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected. Such limitations include the fact
that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures, such as simple errors or
mistakes or intentional circumvention of the established process.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. Except as described
above, during the three months ended July 31, 2005, there have been no changes
in the Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, these controls.
28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During the period covered by this quarterly report, the Company was a defendant
in legal proceedings filed in July 2004 in the Superior Court of California, the
details of which were previously disclosed in the Company's quarterly report on
Form 10-QSB for the quarter ended April 30, 2005.
In May 2005, the Plaintiffs in the above proceeding withdrew with prejudice the
complaints that they filed upon the issuance in their favor by a commercial bank
of an irrevocable letter of credit in the maximum amount of $300,000. The letter
of credit was commissioned by a non-related third party. The Company has no
reimbursement obligation with respect to the letter of credit.
ITEM 2. UNREGISTERED SALES OF EQUITY IN SECURITIES AND USE OF PROCEEDS.
During the three months ended July 31, 2005, the Company issued unregistered
securities as follows:
o issued 437,500 shares of Common Stock to various investors for
aggregate cash proceeds of $35,000;
o issued 4,944,444 shares of Common Stock for services rendered that
were valued at $296,667; and
o issued 29,457 shares of Common Stock in connection with a Below Market
Issuance valued at $5,008.
All of the securities issued in the transactions described above were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act. Appropriate legends were affixed
to the share certificates issued in all of the above transactions. The Company
believes the recipients were all "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 July 27, 2005:
(a) The Company's shareholders were asked to vote for the election of Brad
Ketch, Ray Willenberg, Jr., Thomas J. Cooper and Jack L. Peckham to the Board of
Directors of the Company. The nominees were all elected pursuant to the
following votes:
FOR WITHHELD
--- --------
Election of Directors:
Brad Ketch 67,162,797 1,499,953
Ray Willenberg, Jr. 66,945,996 1,716,754
Thomas J. Cooper 67,350,306 1,312,444
Jack L. Peckham 67,359,082 1,303,668
(b) The Company's shareholders were asked to ratify the selection of Marcum and
Kliegman LLP as the Company's independent auditors for the fiscal year ending
October 31, 2005. The shareholders ratified the selection of the independent
auditors by the following votes:
FOR AGAINST ABSTAIN
--- ------- -------
68,005,736 511,264 145,750
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Form of Securities Purchase Agreement dated as of May 26, 2005, among
New Visual Corporation and certain investors (incorporated by reference
to Exhibit 10.1 of the Company's Current Report on Form 8-K dated June
1, 2005 (the "June 1, 2005 8-K").
10.2 Form of Registration Rights Agreement dated as of May 26, 2005, among
New Visual Corporation and certain investors (incorporated by reference
to Exhibit 10.2 of the June 1, 2005 8-K).
10.3 Security Interest Agreement dated as of May 26, 2005 among the Company,
certain specified investors, as secured parties, and Krieger and
Prager, as agent for the secured parties (incorporated by reference to
Exhibit 10.3 of the June 1, 2005 8-K).
31. Rule 13a-14(a) / 15d-14(a) Certification
32. Section 1350 Certification
30
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
DATED: July 10, 2006 BY: /S/ BRAD KETCH
-------------------------------
BRAD KETCH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE, FINANCIAL AND
ACCOUNTING OFFICER AND AUTHORIZED
SIGNATORY)
31