BURST.COM
FINANCIAL STATEMENTS
AND SUPPLEMENTARY INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2003 AND
2002
BURST.COM AND SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Table of Contents
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Accountants’ Compilation
Report |
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Financial Statements: |
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Balance Sheets |
2 |
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Statements of Operations |
3 |
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Statements of Changes in Stockholders’ Equity |
4 – 5 |
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Statements of Cash Flows |
6 |
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Notes to Financial Statements |
7 – 24 |
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Of Burst.com, Inc. and
Subsidiaries
We
have audited the accompanying consolidated balance sheet of Burst.Com,
Inc. ( a Delaware corporation) and Subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related
consolidated Statements of Operations, Changes in Stockholder's Deficit, and
Cash Flows for the year then ended.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on that
consolidated financial statements based on our audit.
We
conducted our audit in accordance with auditing standards generally accepted in
the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in consolidated financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The
accompanying consolidated financial statements for December 31, 2003 and 2002
have been prepared assuming the Company will continue as a going concern. As discussed in Note 2, the Company has
suffered recurring losses from operations and has a net capital deficit that
raises doubt about its ability to continue as a going concern. Management's plans in regard to these
matters are also discussed in Note 2.
The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
In
our opinion, the 2003 and 2002 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Burst.com, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the
results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States
of America.
_______________________________________
San Francisco, California
March 16, 2004
BURST.COM, INC. AND SUBSIDIARIES
Assets
2003 2002
Current assets
depreciation of $125,624 and $84,979
respectively 18,331 57,545
Other assets 968,283 2,700
Liabilities
and Stockholders' Equity
Current liabilities
Convertible preferred
stock, $.00001 par value,
20,000,000 shares authorized; none issued
outstanding - -
Common
stock, $.00001 par value; 100,000,000 shares
authorized; 25,433,036 and 22,681,771 shares
issued
and outstanding during 2003 and 2002
respectively 254 227
Additional
paid-in-capital 60,247,699 59,084,955
Accumulated
deficit (62,107,734) (61,531,409)
Total stockholders' deficiency (1,859,781) (2,446,227)
Total Liabilities and
Stockholders' Deficiency $ 1,290,636 $ 706,777
BURST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
Revenue $ 163,182 $ 191,950
Cost of revenues - -
Gross profit 163,182 191,950
Costs and expenses:
Research and development 53,837 13,540
General and administrative 348,799 576,646
Total costs and expenses 402,636 590,186
Loss from operations (239,454) (398,236)
Other income (expenses):
Gains on sale of assets - 17,550
Interest income 8,973 1,931
Interest expense (344,197) (524,036)
Total other income (expenses) (335,224) (504,555)
Income tax benefit (expense) (1,646) (5,419)
Net loss before extraordinary item (576,324) (908,210)
Net loss $ (576,324) $ (908,210)
Net loss per share, basic and diluted,
before extraordinary item $ (0.03) $ (0.03)
Net loss per share, basic and diluted $ (0.03) $ (0.04)
Weighted average number of common
shares outstanding 23,207,526 21,414,948
BURST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Common Stock
Shares Amount
Balance, December 31, 2001 18,734,958 187
Year ended December 31, 2002:
Common Stock issued in settlement with
prior officers 595,757 6
Common Stock issued in return for services 25,000 -
Common Stock issued to investors 2,537,535 26
Additional Common Stock issued during 2002 788,521 8
Balance,
December 31, 2002 22,681,771 227
Year ended December 31, 2003:
Stock options exercised 2,401,265 24
Common Stock issued in return for services 100,000 1
Common Stock issued to investors 250,000 2
Additional Common Stock issued during 2003 - -
Balance, December 31, 2003 25,433,036 254
BURST.COM, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER
31, 2003 AND 2002 (CONTINUED)
Additional
Paid-In
Capital Deficit Total
Balance, December 31, 2001 57,823,883 (60,623,200) (2,799,130)
Year ended December 31, 2002:
Compensation related to sale of common stock
to investors 839,974 - 839,974
Compensation related to issuance of common stock
For services 3,500 - 3,500
Stock issued in exchange for extension of notes 214,472 - 214,472
Stock issued in exchange for settlement
Of debt 17,268 - 17,268
Warrants and options issued with debt 160,859 - 160,859
Warrants exercised 24,999 - 24,999
Net loss - (908,210) (908,210)
Balance, December 31, 2002 $ 59,084,955 $ (61,531,410) $ (2,446,455)
Year ended December 31, 2003:
Stock issued in exchange for notes 965,583 - 965,583
Stock issued in exchange for settlement
Of debt 33,000 - 33,000
Warrants and options issued for debt 5,000 - 5,000
Warrants and options exercised 159,161 - 159,161
Net loss - (576,324) (576,324)
Balance, December 31, 2003 $ 60,247,699 $ (62,107,734) $ (1,860,035)
BURST.COM, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CASH FLOWS
FOR THE YEARS ENDED DECEMBER
31, 2003 AND 2002
2003 2002
Cash flows from operating activities:
Net loss $ (576,324) $ (908,210)
Adjustments to reconcile net loss
to net cash used by operations activities:
Depreciation and amortization 40,644 46,084
Change in operating assets and liabilities:
Notes receivable (965,583) 17,460
Prepaid and other current assets (2,471) 9,967
Other assets - -
Accounts Payable (118,200) (280,135)
Accrued expenses 2,615 (106,892)
Accrued interest 169,362 165,347
Deferred revenue (161,200) (161,200)
Net cash used by operating activities (1,611,157) (1,217,579)
Cash flows from investing activities:
Purchase of property and equipment (1,432) (644)
Net cash used by investing activities (1,432) (644)
Cash flows from financing activities:
Proceeds from sale of stock, net of costs 550,502
Exercise of warrants and stock options 1,162,771 710,611
Payment of costs in connection with conversion
of preferred stock to common -
Proceeds from debt financing 104,836 595,199
Net cash provided by financing activities 1,267,607 1,856,312
Increase (Decrease) in cash and cash equivalents (344,982) 638,090
Cash and cash equivalents, beginning of year 644,202 6,111
Cash and cash equivalents, end of year $ 299,220 $ 644,201
NOTE 1 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Burst.com, Inc. and subsidiaries
(“The Company”) was incorporated in the State of Delaware as Instant Video
Technologies, Inc. On January 27, 2000, the Certificate of Incorporations was
amended to change the Company’s name to Burst.com, Inc.
The Company’s authorized capital stock
consists of 100,000,000 shares of common stock, $0.00001 par value per share,
and 20,000,000 shares of preferred stock, $0.00001 per share.
The board of directors has the authority, without action by the Company’s stockholders, to provide for the issuance of preferred stock in one or more classes or series and to designate the rights, preferences and privileges of each class or series, which may be greater than the rights of the common stock. The Company had no preferred stock outstanding as of December 31, 2003 and 2002.
The Company licenses burst
transmission software and intellectual property for use within commercial,
multimedia and interactive environments.
The burst technology allows for time compression and burst transmission
of video/audio programming that results in time-savings, network efficiency and
superior quality products.
The consolidated financial
statements include the accounts of Burst.com, Inc and its wholly-owned
subsidiaries, Explore Technology, Inc. and Timeshift-TV. All significant intercompany balances and
transactions have been eliminated.
The accompanying consolidated financial statements have been prepared in conformity with U.S generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and operations for the period. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. The Company’s most significant estimates are those related to the valuation of stock, stock options, and warrants in connection with equity and financing transactions.
Cash and cash
equivalents consist of money market accounts and other short-term investments
with an original or remaining term of three months or less.
NOTE 1 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF
CREDIT RISK
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash.
The Company
maintains cash balances at several banks. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation up to $100,000. From time
to time, the Company had cash in financial institutions in excess of federally
insured limits.
INVESTMENTS
In accordance with
Statement of Financial Accounting Standards (SFAS No. 115) “Accounting for
Certain Investments in Debt and Equity Securities”, securities are classified
into three categories: held-to maturity, available-for-sale and trading. The Company’s investments consisted of
equity securities classified as available-for-sale. Accordingly, they were carried at fair value in accordance with
SFAS No. 115. Further, SFAS No. 115
requires that unrealized gains and losses for available-for-sales securities be
excluded from earnings and reported, net of deferred income taxes, as other
comprehensive income. As of December 31, 2003 and 2002, the Company had
disposed of all of its available for sale securities.
COMPREHENSIVE
INCOME
The Company had no
component of comprehensive income other than its reported amounts of net loss
applicable to holders of common stock.
LONG-LIVED
ASSETS
The Company periodically evaluates whether events and
circumstances have occurred that may warrant revision of the estimated life of
intangible and other long-lived assets, or whether the remaining balance of
intangible and other long-lived assets should be evaluated for possible
impairment. If and when such factors, events or circumstances indicate that
intangible or other long-lived assets should be evaluated for possible impairment,
the Company would make an estimate of undiscounted cash flows over the
remaining lives of the respective assets in measuring recoverability.
During the years ended December 31, 2001, the Company recognized
approximately $385,000 of impairment in
leasehold improvements, computers and equipment assets; Further description in
Note 4.
There were no impairments recognized in the year ended December 31,
2003 and 2002.
NOTE 1 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue in
accordance with Statement of Position (SOP) No. 97-2, “Software Revenue
Recognition”. Under the guidance of SOP
No. 97.2, no revenue is recognized until evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and collection is
probable. License fees and services are generally recognized as revenue ratably
over the license period.
Property and equipment are stated at
cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets that range
from three to five years. Replacements,
maintenance and repairs, which do not extend the lives of the respective assets
are charged to expense as incurred.
FAIR VALUE OF FINANCIAL
INSTRUMENTS
The Company’s financial instruments
consist primarily of cash and cash equivalents, accounts receivable, accounts
payable, and debt. The carrying amounts of such financial instruments
approximate their respective estimated fair value due to the short-term
maturities and approximate market interest rates of these instruments.
Earnings (loss) per share is computed in accordance with SFAS
No. 128, “Earnings per Share”. Basic
earnings per share is computed by dividing net income, after deducting
preferred stock dividends accumulated during the period, by the
weighted-average number of shares of common stock outstanding during each
period. Diluted earnings per share is computed by dividing net income by the
weighted-average number of shares of common stock, common stock equivalents and
other potentially dilutive securities outstanding during the period.
The following is a summary of the
securities that could potentially dilute basic loss per share in the future
that were not included in the computation of diluted loss per share because to
do so would be anti-dilutive.
NOTE 1 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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2003 |
2002 |
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Options |
3,013,332 |
5,907,497 |
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Warrants |
17,346,678 |
17,396,678 |
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Total |
20,360,010 |
23,304,175 |
The
Company accounts for income taxes using SFAS No. 109, “Accounting for Income
Taxes,” which requires recognition of deferred tax liabilities and
assets for expected future tax consequences of events that have been included
in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A
valuation allowance is recorded for deferred tax assets if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
There were no
advertising costs expensed or incurred in 2003 and 2002.
RESEARCH AND
DEVELOPMENT
Research and
development costs are charged to operations as incurred until such time as both
technological feasibility is established and future economic benefit is
assured. To date, such conditions have
not been satisfied, and, accordingly, all software engineering and development
costs have been expensed as incurred.
STOCK-BASED
COMPENSATION
The Company has
elected to follow Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees” and related interpretations, in accounting for its
employee stock options rather than the alternative fair value accounting
followed by SFAS No. 123 “Accounting for Stock-Based Compensation.” APB No. 25 provides that the compensation
expense relative to the Company’s employee stock options is measured based on
the intrinsic value of the stock option. SFAS No. 123 requires companies that
continue to
NOTE 1 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
follow APB No. 25
to provide a pro-forma disclosure of the impact of applying the fair value
method of SFAS No. 123.
Equity instruments
issued to non-employees are accounted for at fair value. The fair value of the equity instrument is
determined using either the fair value of the underlying stock or the
Black-Scholes option pricing model.
RECLASSIFICATIONS
Certain items have
been reclassified to conform to current year presentation.
OTHER APPLICABLE ACCOUNTING PRONOUNCEMENTS
In June
1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of the
gain or loss recognition on the hedging derivative with the recognition of (i)
the changes in the fair value of the hedge asset or liability that are
attributable to the hedge risk or (ii) the earnings effect of the hedge
forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.
On June 30, 1999, the FASB issued SFAS No. 137, “Accounting for
Derivative Instruments and Hedging Activities – Deferral of the
Effective Date of FASB Statement No. 133”.
SFAS No. 133 as amended by SFAS No. 137 is effective for all fiscal
years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No.
138, “Accounting for Certain Derivatives Instruments and Certain Hedging
Activities”. SFAS No. 133 as
amended by SFAS No. 137 and 138 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000.
The Company has not entered into
derivatives contracts to hedge existing risks or for speculative purposes. Accordingly, SFAS 133, 137 and 138 do not
affect the Company’s financial statements.
In March 2000, the FASB issued
Interpretation No. 44 (FIN 44), “Accounting for Certain Transactions Involving
Stock Compensation”, an interpretation of APB No. 25. FIN No. 44 clarifies the application of APB No. 25 for (a) the
definition of an employee for purposes of applying APB No. 25, (b) the criteria
for determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
FIN No. 44 became effective in July 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or
NOTE 1 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
January 12, 2000. FIN 44 did not have a material impact on the
Company’s financial position, results of operations, or cash flows.
In June 2001, the FASB issued Statement No. 142 “Goodwill and
Other Intangible Assets”. This
Statement addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, Intangible
Assets. It provides guidance on how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon
their acquisition. This Statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements.
FASB Statement No. 142 does not affect the Company’s financial
statements.
NOTE 2 - GOING
CONCERN CONSIDERATIONS
The accompanying consolidated
financial statements have been presented in accordance with accounting
principles generally accepted in the United States of America, which assume the
continuity of the Company to continue as a going concern. However, the Company has incurred
substantial losses resulting in an accumulated deficit of $62,112,496 as of
December 31, 2003. The Company’s current liabilities exceed current assets by
$752,912 at December 31, 2003. These
conditions raise substantial doubt as the ability of the Company to continue as
a going concern.
Management’s
plans with regards to these issues are as follows:
·
Expanding revenues by focusing on existing customers that are
growing and whose needs for Burstware are increasing.
·
Expanding revenues by finding a limited number of new customers
that can benefit by utilizing either Burstware in its current form, or by
licensing a combination of the Company’s intellectual property and/or Burstware
source-code.
·
Continue and expand the enforcement of our intellectual property
rights.
Presently,
the Company cannot ascertain the eventual success of management’s plans with
any degree of certainty. No assurances can be given that the Company will
achieve profitability or positive cash flows. If the Company is unable to bring
the Company to profitability or positive cash flows, there can be no assurance
that the Company can continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might result from the
eventual outcome of the risks and uncertainty described above.
NOTE 3 - INVESTMENTS
The Company had no securities as of
December 31, 2003 or 2002.
NOTE 4 - PROPERTY
AND EQUIPMENT
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December 31 |
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2003 |
2002 |
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Computer equipment |
$ 63,311 |
$ 61,880 |
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Furniture |
15,000 |
15,000 |
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Office equipment |
5,000 |
5,000 |
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Software |
55,644 |
55,000 |
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Trade show booth |
5,000 |
5,000 |
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143,955 |
142,524 |
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Less accumulated depreciation |
(125,624) |
(84,979) |
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$ 18,331 |
$ 57,545 |
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Depreciation expense was $40,645 and
$46,083, for the years ended December 31, 2003 and 2002, respectively.
NOTE 5 - ACCRUED
LIABILITIES
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December
31 |
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2003 |
2002 |
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Accrued severance costs |
$ 186,600 |
$ 186,600 |
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Accrued wages and vacation |
195,242 |
192,626 |
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Other |
3,454 |
3,455 |
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$ 385,296 |
$ 382,681 |
NOTE 6 - NOTES AND OBLIGATIONS
PAYABLE
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December
31 |
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2003 |
2002 |
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Notes payable to Gordon Rock (net
of unamortized discount of $24,739 and
$184,248, respectively) |
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$1,465,259 |
$1,305,752 |
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Notes
payable to investors, (net of unamortized discount of $910 and $16,239,
respectively) |
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$ 199,090 |
$ 183,761 |
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Notes and obligations payable
issued in connection with debt settlements |
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$ 433,896 |
$ 433,896 |
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$2,098,245 |
$1,923,409 |
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Notes Payable to Gordon Rock
In February
and April 2001, the Company issued two notes payable to Gordon Rock in the
aggregate principal amount of $350,000 at 9% collateralized by a security
interest in the assets of the Company.
Mr. Rock was a member of the Board of Directors at that time, but has
since resigned his seat on the Board. Mr. Rock is also one of the Company’s
major stockholders and is deemed a related party.
In August and September 2001, the
Company issued a series of notes payable to Mr. Rock totaling an additional
$305,000. Each of these notes bear interest at 9% and is collateralized by a
security interest in all assets of the Company.
On
September 30, 2002, the maturities on notes payable to Mr. Rock, aggregating
$1,210,000, were extended to January 15, 2005. In connection with the
extensions, Mr. Rock received 1,000,000 additional warrants to buy shares of
the Company’s common stock at $.75 per share. Accordingly, the Company recorded
a discount on the notes for the fair value of the warrants issued using the Black-Scholes
model. The discount of $198,100 will be
amortized over the term of the notes.
NOTE 6 - NOTES
AND OBLIGATIONS PAYABLE (CONTINUED)
During
February 2002, the Company issued two additional notes to Mr. Rock for loans
totaling $60,000, with interest at prime plus 2%. The notes are collateralized
by a security interest in all assets of the Company. In connection with these
notes, Mr. Rock was issued 200,000 warrants to acquire common stock at $.30 per
share. Accordingly, the Company
recorded a discount on the notes for the fair value of the warrants issued
using the Black-Scholes model. The
discount of $6,700 is being amortized over the respective terms of the notes.
During
April 2002, the Company issued two additional notes to Mr. Rock for loans
totaling $160,000, with interest at prime plus 2%. The notes are collateralized
by a security interest in all assets of the Company. In connection with these
notes, Mr. Rock was issued 300,000 warrants to acquire common stock at $.30 per
share. Accordingly, the Company
recorded a discount on the notes for the fair value of the warrants issued
using the Black-Scholes model. The
discount of $16,620 is being amortized over the respective terms of the notes.
Notes Issued to
Investors
On
September 30, 2002, the maturities on all loans payable to Draysec notes were
extended to January 15, 2005. In connection with the extensions, Draysec
received 82,645 warrants to buy shares of the Company’s common stock at $.75
per share. Accordingly, the Company recorded a discount on the notes for the
fair value of the warrants issued using the Black-Scholes model. The discount of $16,372 will be amortized
over the term of the notes.
In
addition during 2001, the Company issued a promissory note to an investor, in
the principal amount of $30,000. The note is collateralized by a security
interest in all assets of the Company. The note is due in March 2004 and bears
interest at prime plus 2%. In
connection with the note, the Company issued 100,000 warrants to the investor
to acquire common stock at $.30 per share. Accordingly, the Company recorded a
discount on the note for the fair value of the warrants issued using the
Black-Scholes model. The discount
totaling $4,280 is being amortized over the term of the note.
During
February 2002, the Company issued promissory notes to two investors, in the
aggregate principal amount of $70,000. The notes are due in December 2004 and
January 2005, respectively, and bear interest at prime plus 2%. In connection with the notes, the Company
issued 233,333 warrants to the investors to acquire common stock at $.30 per
share. Accordingly, the Company recorded a discount on the notes for the fair
value of the warrants issued using the Black-Scholes model. The discount totaling $8,437 is being
amortized over the respective terms of the notes.
NOTE 6 - NOTES
AND OBLIGATIONS PAYABLE (CONTINUED)
During
June 2002, the Company issued a promissory note to an investor, in the
principal amount of $60,000. The note is due in June 2005, and bears interest
at prime plus 2%. In connection with
the note, the Company issued 200,000 warrants to the investor to acquire common
stock at $.30 per share. Accordingly, the Company recorded a discount on the
note for the fair value of the warrants issued using the Black-Scholes
model. The discount totaling $30,629 is
being amortized over the term of the note.
Notes and
Obligations Issued in Connection with Debt Settlements
During 2002, the Company entered
into settlement agreements with two employees. In connection therewith, the
Company renegotiated its liabilities and reduced its obligations from $152,816
to $64,487. As part of these settlements, the Company issued an aggregate
amount of 103,361 shares of its common stock valued at $3,547. In addition, some of the settlement
agreements entered into by the Company with some of its former employees during
2001 were amended to include additional payments of $115,083. As a result of
these settlements and revised settlement agreements, the Company recognized
additional compensation expense of $32,841 during the year ended December 31,
2002.
Maturities of long-term debt at
December 31, 2003 are as follows:
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2004 |
$ 70,000 |
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2005 |
2,028,245 |
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2006 |
- |
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Total |
2,098,245 |
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Less: current portion |
( 70,000) |
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$ 2,028,245 |
NOTE 7 - EQUITY
COMMON
STOCK ISSUED FOR CONSULTING SERVICES
During
2002, the Company issued 138,750 shares of its common stock at fair market
value to independent consultants for services performed during the year. In connection with these agreements, the
Company recognized $4,114 in consulting fees.
During
January 2000, the Company issued a total of 3,474,625 shares of its common
stock and warrants to purchase 3,474,625 shares of its common stock for total
proceeds of $13,898,500 in transactions with various investors, including some
directors and employees of the Company. The price per share of common stock was
$4.00, which included the issuance of one warrant for each share of stock sold.
The gross proceeds were reduced by
NOTE 7 - EQUITY (CONTINUED)
approximately
$1,303,000 in transaction costs. Each
warrant was exercisable for one share of common stock at an exercise price of
$5.00 per share and expires 5 years from the date of issue. Those warrants contained anti-dilution
provisions that adjust the exercise price and the number of shares exercisable
thereunder if shares of the Company’s common stock were issued or deemed issued
at prices below the warrant exercise price. The issuance of new warrants
through December 31, 2002, as described in Note 7, resulted in a decrease in
the exercise price of these warrants to $3.60 per share and an increase of
1,877,685 warrant shares.
During
August 2000, the Company issued a total of 857,633 shares of its common stock
and warrants to purchase 857,633 shares of its common stock for total proceeds
of $5,000,000 to SBC Venture Capital Corp. The price per share of common stock
was $5.83 per share, which included the issuance of one warrant for each share
of stock sold. The gross proceeds were reduced by approximately $460,214 in
transaction costs. Each warrant is
exercisable for one share of common stock at an exercise price of $5.83 per
share and expires 5 years from the date of issue. Those warrants contained anti-dilution
provisions that adjust the exercise price and the number of shares exercisable
there-under if shares of the Company’s common stock were issued or deemed
issued at prices below these warrant exercise price. The issuance of new
warrants through December 31, 2002, as described in Note 7, resulted in a
decrease in the exercise price of these warrants to $4.19 per share and an
increase of 328,850 warrant shares.
During
2002, the Company issued 233,333 shares of its common stock to two investors,
for net proceeds of $70,000.
During
November 2002, the company raised $845,000 by issuing to accredited investors
2,537,535 shares of common stock at $.333/share. These investors also received
1,268,772 Warrants, exercisable at $.75.
Liability for
Stock to be Issued
In
connection with several settlement agreements, the Company agreed to issue
794,946 shares of its common stock valued at $31,796, see Note 6, during the
year ended December 31, 2002. There
were no settlement agreements during December 31, 2003.
Exercise of
Stock Options and Warrants
During
2002, warrants to purchase 138,888 shares of the Company common stock were
exercised for $25,000.
NOTE 7 - EQUITY (CONTINUED)
Settlement of
Prior Offering Costs
During the
year ended December 31, 2000, the Company had accrued approximately $630,000 of
costs in connection with various stock offerings. During 2000, disputes arose
between the Company and the investment banking firm over the meaning and the
interpretation of the respective parties’ obligations. During the year ended December 31, 2001, the
Company entered into a settlement agreement with the investment banking firm
whereby both parties dismissed each other of any further obligations. As a
result, the Company adjusted additional paid-in-capital and the related
liability, to reverse previously recorded stock issuance costs.
SHARES ISSUED IN CONNECTION WITH SETTLEMENT
AGREEMENTS
During 2001, the Company had agreed to issue
794,946 shares of is common stock valued at $31,796 in connection with various
settlement agreements. In addition, during 2002, the Company agreed to issue an
additional 103,361 shares of its common stock valued at $3,547 in connection
with new settlement agreements. All of these shares were issued during the year
ended December 31, 2002.
WARRANTS ISSUED IN DEBT SETTLEMENT
During 2002, the Company issued 30,000
warrants to acquire common stock at $0.75 to a vendor in connection with a debt
settlement. See Note 9. The warrants expire in October 2005.
NOTE 8 – STOCK
OPTIONS
On
November 6, 1992 and April 29, 1998, the Board of Directors adopted the 1992
Stock Incentive Plan and 1998 Stock Inventive Plan, respectively. Under the plans, the Board may grant options
to officers, key employees, directors and consultants. Incentive stock options may be granted at
not less than 100% of the fair market value of the stock on the date the option
is granted. The option price of stock
not intended to qualify as incentive stock options may not be less than 85% of
the fair market value on the date of grant.
NOTE 8 – STOCK
OPTIONS (CONTINUED)
The
maximum term of the options cannot exceed ten years. A total of 3,500,000 and 4,000,000 shares have been reserved for
issuance under the plans, respectively. Certain options are still outstanding
from prior to the 1992 and 1998 plans that carried similar terms.
On August
23, 1999, the Board of Directors adopted the 1999 Stock Incentive Plan. Under the plan, the Board may grant options
to officers, key employees, directors and consultants. Incentive stock options may be granted at
not less than 100% of the fair market value of the stock on the date the option
is granted. The option price of stock
not intended to qualify as incentive stock options may not be less than 85% of
the fair market value on the date of grant.
The maximum term of the options cannot exceed ten years. A total of 3,000,000 shares have been
reserved for issuance under the plan.
During
1999, the Company issued stock options in lieu of cash for services performed,
covering 120,621 shares of the Company’s common stock at exercise prices
ranging from $2.19 to $9.72 per share, expiring between February 2000 and
December 2004. $105,805 was recorded as
a general and administrative expense, $160,588 was recorded as a sales and
marketing expense, and $2,082 was recorded as a research and development
expense based on the fair value of the stock options issued.
During
2000, the Company repriced all options held by the 20 remaining employees and
Board members. The revised exercise
price was $0.2812 per share.
During
2000, the Company issued stock options in lieu of cash for services performed,
covering 8,621,242 shares of the Company’s common stock at exercise prices
ranging from $.2812 to $4.50 per share, expiring by December 2005. $332,563 was recorded as a general and
administrative expenses based on the fair value of the stock options issued.
During
2001, the Company granted options to purchase 150,000 shares of common stock
exercisable at $0.2812 per share to an independent contractor. In addition, during 2001, existing options
granted to employees under variable plan accounting and unvested options being
earned by contractors were revalued, resulting in a net reduction in stock-based
compensation of $280,400. Furthermore, as a result of severance agreements with
certain senior officials, the lives of their options were extended to one year
after termination or the full contractual life instead of expiring within a
shorter time. These extensions resulted
in a stock-based compensation charge of approximately $127,947. These two
adjustments resulted in a net reduction in stock-based compensation of
approximately $152,453.
NOTE 8 – STOCK
OPTIONS (CONTINUED)
During
2001, the Company granted options to purchase 250,000 shares of common stock at
an exercise price of $0.18 to John Micek III, a member of the Board of
Directors. The Company also granted options to purchase 100,000 options of
common stock to an employee at an exercise price of $0.1875 per share. The
Company also granted a former employee options to purchase 50,000 shares of
common stock at an exercise price of $0.30 per share in connection with a
settlement agreement. See note 7.
During
2002 and 2003, the Company granted a
total of 955,000 options to purchase shares of common stock at an exercise
price of $.75 to the following individuals:
2002 2003
Richard Lang 500,000
Eric Walters 150,000
Ping Zhao 5,000
Barry Ritholtz 200,000 50,000
Brian Murphy 100,000 150,000
During
2003, Richard Lang and Eric Walters exercised all their vested options totaling
2,151,761 and 198,392 shares, respectively.
As part of this transaction, the company officers signed a note payable
to the company for $839,475 and $126,107, respectively. These notes are due December 31, 2005,
earlier upon any transfer of the shares or upon any declaration of a dividend
on the shares which all collateral on the notes. These notes bear interest at the rate 2.5% per annum.
The
Company applies APB opinion No. 25, “Accounting for Stock Issued to Employees”
and related interpretations in accounting for options issued to employees. Compensation cost for stock options is
measured at the intrinsic value, which is the excess of the market price of the
Company’s common stock at the date of grant over the amount the recipient must
pay to acquire the common stock.
Statement
of Financial Accounting Standards No. 123 (SFAS 123), “Accounting for
Stock-Based Compensation”, requires the Company to provide pro forma
information regarding net income (loss) and earnings (loss) per share as if
compensation cost for employee stock options has been determined in accordance
with the fair value based method prescribed by SFAS 123.
The per
share weighted average fair value of stock options granted during 2003 and 2002
was $0.21 and $0.21, respectively, on the date of grant using the Black-Scholes
pricing model with the following weighted average assumptions: volatility of
217% and 251%, respectively; expected dividend yield of 0% for all years; risk
free interest rate of approximately 4% and 6%,
respectively; and an expected life of 2.5 years for 2003 and 2002.
NOTE 8 – STOCK
OPTIONS (CONTINUED)
The option
valuation model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. In addition, valuation models require input
of highly subjective assumptions, including the expected price volatility. Since the Company’s stock options have
characteristics significantly different from those of traded options, and since
variations in the subjective input assumptions can materially affect the fair
value estimate, the actual results can vary significantly from estimated
results.
|
|
Number of Shares |
Weighted Average Exercise Price |
|
|
|
|
|
Balance on December 31, 2001 |
7,697,880 |
$0.84 |
|
|
|
|
|
Options granted |
1,272,198 |
$0.63 |
|
Options exercised |
( 138,888) |
$0.18 |
|
Options cancelled |
( 2,923,693) |
$0.54 |
|
Options forfeited |
-0- |
$0.00 |
|
|
|
|
|
Balance on December 31, 2002 |
5,907,497 |
0.91 |
|
|
|
|
|
Options granted |
200,000 |
$0.75 |
|
Options exercised |
( 2,611,265) |
$0.28 |
|
Options expired |
( 482,900) |
$1.49 |
|
Options forfeited |
-0- |
$0.00 |
|
|
|
|
|
Balance on December 31, 2003 |
3,013,332 |
$0.45 |
|
|
|
|
NOTE
8 – STOCK OPTIONS (CONTINUED)
Stock
options outstanding and exercisable at December 31, 2003 are as follows:
|
|
Options Outstanding |
Options Exercisable |
|||
|
|
|
|
|
|
|
|
|
Shares Outstanding |
Weighted Average Exercise Price |
Weighted Average Remaining Life |
Shares Outstanding |
Weighted Average Exercise Price |
|
|
|
|
|
|
|
|
$0.18-$0.30 |
1,061,895 |
$0.28 |
2.37 |
1,029,938 |
$0.28 |
|
$0.50-$1.00 |
1,406,500 |
$0.91 |
2.52 |
1,369,462 |
$0.92 |
|
$1.37-$2.75 |
153,687 |
$2.43 |
1.12 |
153,687 |
$2.43 |
|
$3.50-$5.00 |
266,250 |
$3.97 |
1.75 |
265,625 |
$3.97 |
|
$5.75-$6.38 |
125,000 |
$6.15 |
1.10 |
125,000 |
$6.15 |
|
|
|
|
|
|
|
|
|
3,013,332 |
$1.25 |
2.27 |
2,943,712 |
$1.27 |
|
|
Warrants Outstanding |
Warrants Exercisable |
|||
|
|
|
|
|
|
|
|
|
Shares Outstanding |
Weighted Average Exercise Price |
Weighted Average Remaining Life |
Shares Outstanding |
Weighted Average Exercise Price |
|
|
|
|
|
|
|
|
$0.15-$0.20 |
2,666,666 |
$0.17 |
2.50 |
2,666,666 |
$0.17 |
|
$0.25-$0.30 |
4,239,999 |
$0.27 |
2.15 |
4,239,999 |
$0.27 |
|
$0.75-$1.00 |
2,535,281 |
$0.74 |
5.42 |
2,535,281 |
$0.74 |
|
$3.60 |
6,718,243 |
$3.60 |
1.08 |
6,418,243 |
$3.60 |
|
$4.19 |
1,186,483 |
$4.19 |
1.62 |
1,186,483 |
$4.19 |
|
|
|
|
|
|
|
|
|
17,346,678 |
$1.88 |
2.23 |
17,346,678 |
$1.88 |
NOTE 9 – LEASE
COMMITMENTS
The
Company leases its office space under a one year operating lease, which
provides for one-year extensions. The lease was extended to April 30, 2004.
NOTE 9 – LEASE
COMMITMENTS (CONTINUED)
Rent paid
in the years ended December 31, 2003 and 2002 was $10,635 and $12,150
respectively.
Future
minimum lease payments at December 31, 2003 is $3,780 and will be paid in 2004.
NOTE
10 – INCOME TAXES
At
December 31, 2002, the Company had net operating loss carry-forwards for
federal income tax purposes of approximately $44,740,200 which are subject to
annual limitations, and are available to offset future taxable income, if any,
through 2022 and net operating loss carry-forwards for state income tax
purposes of approximately $20,754,100, which are available to offset future
state taxable income through 2012.
The
temporary differences that give rise to deferred tax assets and liabilities at
December 31, 2003 and 2002 are as follows:
|
|
2003 |
2002 |
|
|
|
|
|
Deferred tax assets: |
|
|
|
Net operating losses |
17,222,100 |
17,001,300 |
|
Research and experimentation credit |
421,900 |
421,900 |
|
State income tax effect on federal |
(774,900) |
(765,600) |
|
|
|
|
|
Total deferred tax assets |
16,689,100 |
16,657,600 |
|
|
|
|
|
Less valuation allowance |
(16,689,100) |
(16,657,600) |
|
|
|
|
|
Net deferred tax assets |
$ - |
$ - |
|
|
|
|
|
|
|
|
In
assessing the amount of deferred tax assets to be recognized, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
It is not possible at this time to determine that the deferred tax
assets are more likely to be realized than not. Accordingly, a full valuation allowance has been established for
all periods presented.
NOTE
10 – INCOME TAXES (CONTINUED)
The Tax
Reform Act of 1986 imposed substantial restrictions on the utilization of net
operating losses and tax credits in the event of an “ownership change”, as
defined by the Internal Revenue Code.
All federal and state net operating loss carryforwards are subject to
limitations as a result of these restrictions.
If there should be a subsequent ownership change, as defined, the
Company’s ability to utilize its carryforwards could be reduced.
NOTE
11 – BUSINESS RISKS AND SEGMENT DISCLOSURES
The
Company’s primary source of revenue is the licensing of Burst technology, and
its success is largely dependent on this product. Changes in desirability of the product in the marketplace may
significantly affect the Company’s future operating results.
The
Company operates in one segment and accordingly has provided only the required
enterprise wide disclosure. The Company
recognized no foreign revenues in 2003 and 2002.
NOTE
12 – SETTLEMENTS AND EXTRAORDINARY GAINS
During 2003, the Company settled various long-standing account payable balances. These settlements resulted in a recovery of $166,000 and $113,000 in 2003 and 2002 respectively.