UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended March 31, 2004.
or
| ¨ | 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 000-30928
PATH 1 NETWORK TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
| DELAWARE | 13-3989885 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
6215 FERRIS SQUARE, SUITE 140, SAN DIEGO, CALIFORNIA 92121
(858) 450-4220
(Address, including zip code, and telephone number, including area code, of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
As of April 30, 2004, 6,692,317 shares of the registrant’s common stock were outstanding.
PATH 1 NETWORK TECHNOLOGIES INC.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended March 31, 2004
TABLE OF CONTENTS
| Page | ||||
| PART I – FINANCIAL INFORMATION |
3 | |||
| ITEM 1. |
3 | |||
| 3 | ||||
| 4 | ||||
| 5 | ||||
| 6 | ||||
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
12 | ||
| ITEM 3. |
22 | |||
| ITEM 4. |
23 | |||
| PART II – OTHER INFORMATION |
23 | |||
| ITEM 1. |
23 | |||
| ITEM 2. |
CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES |
23 | ||
| ITEM 3. |
23 | |||
| ITEM 4. |
23 | |||
| ITEM 5. |
23 | |||
| ITEM 6. |
24 | |||
| 25 | ||||
2
PART I – FINANCIAL INFORMATION
Path 1 Network Technologies Inc.
Condensed Consolidated Balance Sheets
(in thousands, except shares data)
| March 31, 2004 (unaudited) |
December 31, 2003 (audited) |
|||||||
| ASSETS | ||||||||
| Current assets |
||||||||
| Cash and cash equivalents |
$ | 5,542 | $ | 7,807 | ||||
| Accounts receivable, net |
429 | 510 | ||||||
| Inventory, net |
857 | 393 | ||||||
| Other current assets |
277 | 74 | ||||||
| Total current assets |
7,105 | 8,784 | ||||||
| Property and equipment, net |
443 | 382 | ||||||
| Debt issuance costs, net |
13 | 62 | ||||||
| Other assets |
48 | 49 | ||||||
| Total Assets |
$ | 7,609 | $ | 9,277 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities |
||||||||
| Accounts payable and accrued liabilities |
1,184 | $ | 699 | |||||
| Accrued compensation and benefits |
375 | 119 | ||||||
| Current portion of notes payable |
— | 289 | ||||||
| Current portion of leases payable |
19 | 15 | ||||||
| Deferred revenue |
113 | — | ||||||
| Total current liabilities |
1,691 | 1,122 | ||||||
| Notes payable |
125 | 113 | ||||||
| Long-term leases payable |
15 | 14 | ||||||
| Total liabilities |
1,831 | 1,249 | ||||||
| Stockholders’ equity |
||||||||
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding |
— | — | ||||||
| Common stock, $0.001 par value; 40,000,000 shares authorized; 6,692,317 and 6,578,324 shares issued and outstanding at March 31, 2004, and December 31, 2003, respectively; 2,777 shares held in treasury at March 31, 2004 and December 31, 2003 |
7 | 7 | ||||||
| Additional paid-in capital |
48,284 | 47,699 | ||||||
| Deferred compensation |
(1,300 | ) | (1,300 | ) | ||||
| Accumulated deficit |
(41,213 | ) | (38,378 | ) | ||||
| Total stockholders’ equity |
5,778 | 8,028 | ||||||
| Total Liabilities and Stockholders’ Equity |
$ | 7,609 | $ | 9,277 | ||||
See accompanying notes to these condensed consolidated financial statements.
3
Path 1 Network Technologies Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| (restated) | ||||||||
| Revenues |
||||||||
| Product sales |
$ | 351 | $ | 598 | ||||
| License revenue |
20 | — | ||||||
| Contract services |
— | 63 | ||||||
| Other revenue |
18 | — | ||||||
| Total revenues |
389 | 661 | ||||||
| Cost of revenues |
||||||||
| Cost of product sales |
374 | 338 | ||||||
| Cost of contract services |
— | 18 | ||||||
| Total cost of revenues |
374 | 356 | ||||||
| Gross profit |
15 | 305 | ||||||
| Operating expenses |
||||||||
| Engineering, research and development |
480 | 404 | ||||||
| Sales and marketing |
1,198 | 291 | ||||||
| General and administrative |
1,139 | 666 | ||||||
| Stock-based compensation |
— | 25 | ||||||
| Total operating expense |
2,817 | 1,386 | ||||||
| Operating loss |
(2,802 | ) | (1,081 | ) | ||||
| Other expense |
||||||||
| Interest expense, net |
(30 | ) | (245 | ) | ||||
| Other expense |
(3 | ) | (1 | ) | ||||
| Total other expense |
(33 | ) | (246 | ) | ||||
| Net loss |
$ | (2,835 | ) | $ | (1,327 | ) | ||
| Loss per common share - basic and diluted |
$ | (0.42 | ) | $ | (0.83 | ) | ||
| Weighted average common shares outstanding - basic and diluted |
6,676 | 1,593 | ||||||
See accompanying notes to these condensed consolidated financial statements.
4
Path 1 Network Technologies Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| (restated) | ||||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (2,835 | ) | $ | (1,327 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
108 | 68 | ||||||
| Amortization of deferred compensation |
— | 43 | ||||||
| Accretion of debt discount & debt conversion expense |
54 | 273 | ||||||
| Changes in assets and liabilities |
||||||||
| Accounts receivable |
81 | 100 | ||||||
| Inventory |
(464 | ) | 108 | |||||
| Other current assets |
(203 | ) | (181 | ) | ||||
| Other assets |
1 | (128 | ) | |||||
| Accounts payable and accrued liabilities |
500 | 228 | ||||||
| Accrued compensation and benefits |
256 | (16 | ) | |||||
| Deferred revenue |
113 | (45 | ) | |||||
| Cash used in operations |
(2,389 | ) | (877 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Purchase of property and equipment |
(111 | ) | (5 | ) | ||||
| Cash used in investing activities |
(111 | ) | (5 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Issuance of common stock |
239 | 108 | ||||||
| Issuance of notes |
— | 802 | ||||||
| Repayments of notes |
(4 | ) | — | |||||
| Cash provided by financing activities |
235 | 910 | ||||||
| Increase (decrease) in cash |
(2,265 | ) | 28 | |||||
| Cash and cash equivalents, beginning of period |
7,807 | 396 | ||||||
| Cash and cash equivalents, end of period |
$ | 5,542 | $ | 424 | ||||
| Supplemental cash flow disclosures: |
||||||||
| Capitalized debt issuance costs in connection with beneficial conversion charges and warrants |
$ | — | $ | 76 | ||||
| Conversion of notes and accrued interest to common stock |
$ | 331 | $ | — | ||||
| Acquisition of equipment |
$ | 9 | $ | — | ||||
See accompanying notes to these condensed consolidated financial statements.
5
Path 1 Network Technologies Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 1 – Basis of Presentation
The accompanying condensed consolidated balance sheet at March 31, 2004, the condensed consolidated statements of operations for the three-month periods ended March 31, 2004 and 2003, and the condensed consolidated statements of cash flows for the three-month periods ended March 31, 2004 and 2003, have been prepared by Path 1 Network Technologies Inc. (the “Company”) and have not been audited. The condensed consolidated balance sheet at December 31, 2003 has been audited. These condensed consolidated quarterly financial statements, in the opinion of management, include all adjustments, consisting only of normal and recurring adjustments, necessary to state fairly the financial information set forth therein, in accordance with accounting principles generally accepted in the United States. These condensed quarterly condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2003 included in the Company’s Form 10-K/A filed May 4, 2004. The interim consolidated financial information contained in this filing is not necessarily indicative of the results to be expected for any other interim period or for the full year ending December 31, 2004.
The Annual Report on Form 10-K/A for the year ended December 31, 2003, includes restated consolidated financial information for the first three quarters of 2003 from our previously reported unaudited financial results. Financial statement information and related disclosures included in the Form 10-K/A reflect, as noted, changes as a result of the restatement.
This restatement related to the recording of the embedded beneficial conversion feature related to convertible promissory notes we issued in 2002 and 2003. The related debt discount resulted from the conversion price of the notes being less than the fair value of our common stock on the date the notes were issued, which resulted in the embedded beneficial conversion feature. We had initially determined fair value based on a discount to the market price of the underlying common stock which was then trading on the over-the-counter market. This discount was determined based on independent valuations of our common stock. This accounting treatment was formulated in 2000 in connection with the filing of our Form 10 and had been consistently applied.
This restatement resulted from our revision of this accounting methodology in favor of determining fair value of our common stock by reference primarily to the market trading price. This is in line with the terms of EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Rates.” EITF 98-5 states generally that the trading price on an active market is the best evidence of fair value. Our previous accounting methodology was based on the view that an active trading market for our common stock did not exist at the time the promissory notes were issued and that reliance solely on the over-the-counter trading price would not yield fair value. The financial restatement described in the Form 10-K/A resulted from a change in our accounting methodology towards reliance on the market trading prices as quoted on the OTC Bulletin Board to determine fair value.
The effects of this restatement were non-cash and non-operating, and only required adjustments to interest expense, notes payable and stockholders’ equity. The significant effects of the restatement on the quarter ended March 31, 2003, were as follows (in thousands):
| As Previously Reported |
As Restated |
|||||||
| At March 31, 2003: |
||||||||
| Current portion of notes payable |
$ | 1,316 | $ | 939 | ||||
| Total liabilities |
$ | 3,172 | $ | 2,795 | ||||
| Additional paid-in capital |
$ | 30,393 | $ | 31,166 | ||||
| Total stockholders’ equity (deficit) |
$ | (1,473 | ) | $ | (1,096 | ) | ||
| For the three months ended March 31, 2003: |
||||||||
| Interest expense |
$ | (144 | ) | $ | (245 | ) | ||
| Net loss |
$ | (1,226 | ) | $ | (1,327 | ) | ||
| Net loss per share |
$ | (0.78 | ) | $ | (0.83 | ) | ||
On July 23, 2003, the Company effected a one-for-six reverse stock split in anticipation of its public offering and listing on the American Stock Exchange. All per share figures herein reflect such reverse stock split.
6
Reclassifications
Certain reclassifications have been made to prior periods financial statements to conform to current year presentation.
Recently Issued Accounting Standards
In April 2002, the FASB issued SFAS No. 145 (“SFAS No. 145”) Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, and SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 requires, among other things, (i) that the modification of a lease that results in a change of the classification of the lease from capital to operating under the provisions of SFAS No. 13 be accounted for as a sale-leaseback transaction, and (ii) the reporting of gains or losses from the early extinguishment of debt as extraordinary items only if they met the criteria of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations. The amendment of SFAS No. 13 is effective for transactions occurring on or after May 15, 2002. Although the rescission of SFAS No. 4 is effective January 1, 2003, the FASB has encouraged early application of the provisions of SFAS No. 145. On August 6, 2003, the Company repurchased $1,180,000 principal amount, plus accrued unpaid interest totaling $25,427, of its 7% convertible notes payable for an aggregate amount of $1,382,427. The Company recognized a $262,000 ordinary loss on the early extinguishment of these notes. See Note 10.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. 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 addition, the statement 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.
The following table summarizes the impact on the Company’s net loss had compensation cost been determined based upon the fair value at the grant date for awards under the stock option plans consistent with the methodology prescribed under SFAS No. 123 (in thousands, except per share data):