|
·
|
2,166,667
shares of common stock and 1,666,667 shares of common stock issuable upon
exercise of warrants issued in our private offering completed on
April 16, 2007;
|
|
·
|
360,000
shares of common stock issuable upon exercise of warrants issued to the
placement agents with respect to the private offering completed on
April 16, 2007;
|
|
·
|
1,116,250
shares of common stock issuable upon exercise of warrants issued in our
private offering in December 2004 and January 2005;
and
|
|
·
|
3,046,365
shares of common stock and 1,300,000 shares of common stock issuable upon
exercise of warrants and options owned by our Chairman and Chief Executive
Officer and related parties.
|
| PAGE | |
|
PROSPECTUS
SUMMARY
|
1
|
|
RISK
FACTORS
|
5
|
|
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
11
|
|
PRICE
RANGE OF OUR COMMON STOCK
|
12
|
|
DIVIDEND
POLICY
|
12
|
|
EQUITY
COMPENSATION PLAN INFORMATION
|
13
|
|
BUSINESS
|
14
|
|
LEGAL
PROCEEDINGS
|
20
|
|
USE
OF PROCEEDS
|
22
|
|
SELLING
STOCKHOLDERS
|
22
|
|
PLAN
OF DISTRIBUTION
|
33
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
35
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
39
|
|
MANAGEMENT
|
40
|
|
EXECUTIVE
COMPENSATION
|
43
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
47
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
50
|
|
DESCRIPTION
OF SECURITIES
|
53
|
|
LEGAL
MATTERS
|
54
|
|
EXPERTS
|
54
|
|
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
|
55
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
55
|
|
FINANCIAL
INFORMATION
|
F-1-F-28
|
|
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this
prospectus. It does not contain all of the information that you
should consider before investing in our common stock. You
should read the entire prospectus carefully, including the section
entitled “Risk Factors” and our consolidated financial statements and the
related notes.
Unless
the context otherwise requires, all references to “we,” “us,” “our,” or
the “Company” in this prospectus refer to Network-1 Security Solutions,
Inc., a Delaware corporation.
The
Company
Our
principal business is the acquisition, development, licensing and
protection of our intellectual property. We presently own six
patents issued by the U.S. Patent Office that relate to various
telecommunications and data networking technologies (the “Patent
Portfolio”) and include, among other things, patents covering the delivery
of power over local area networks (“LANs”) for the purpose of remotely
powering certain devices, such as wireless access ports, IP phones and
network based cameras, over Ethernet (“PoE”) networks and systems and
methods for the transmission of audio, video and data (LANS) in order to
achieve higher quality of service (QoS). Our strategy is to
pursue licensing and strategic business alliances with companies in
industries that manufacture and sell products that make use of the
technologies underlying our Patent Portfolio as well as with other users
of the technologies who benefit directly from the technologies, including
corporate, educational and governmental entities.
To
date, our efforts with respect to our Patent Portfolio have focused on
licensing our patent (U.S. Patent No. 6,218,930) covering the control of
power delivery over Ethernet cables (the “Remote Power
Patent”). In August 2007, as part of a settlement agreement
relating to our litigation with D-Link, we entered into a license
agreement with D-Link pertaining to our Remote Power Patent (See “Legal
Proceedings - D-Link Litigation”). In February 2008, we
commenced patent infringement litigation against several major data
networking equipment manufacturers including Cisco Systems, Inc. and 7
other defendants (See “Legal Proceedings - Pending Litigation Against
Major Data Networking Equipment Manufacturers”). On August 13,
2008, as part of an agreement entered into in June 2008 with Microsemi
Corp-Analog Mixed Signal Group Ltd. (“Microsemi-Analog”), previously
PowerDsine Ltd., Microsemi Corporation, the parent company of
Microsemi-Analog, entered into a license agreement with us for our Remote
Power Patent with respect to certain of its Midspan PoE products as part
of our new Special Licensing Program. At least for the next
twelve months, we do not presently anticipate licensing efforts for our
other patents besides our Remote Power Patent. We may seek to
acquire additional patents in the future.
|
|
Our
Remote Power Patent (U.S. Patent No. 6,218,930) relates to several
technologies which describe a methodology for controlling the delivery of
power to certain devices over an Ethernet network. Ethernet is
the leading local area networking technology in use today. PoE
technology allows for the delivery of power over Ethernet cables rather
than by separate power cords. As a result, a variety of network
devices, including IP telephones, wireless LAN Access Points, web-based
network security cameras, data collection terminals and other network
devices, are able to receive power over existing data cables without the
need to modify the existing infrastructure to facilitate the provision of
power for such devices through traditional AC outlets. Advantages of PoE,
such as lower installation costs, remote management capabilities, lower
maintenance costs, centralized power backup, and flexibility of device
location as well as the advent of worldwide power compatibility, create
the possibility of PoE becoming widely adopted in networks throughout the
world.
|
|
Our
future success is largely dependent upon our proprietary technologies, our
ability to protect our intellectual property rights and to consummate
license agreements with respect to our Patent Portfolio. The
complexity of patent and common law, combined with our limited resources,
create risk that our efforts to protect our proprietary technologies may
not be successful. We cannot be assured that our patents will
be upheld or that third parties will not invalidate our
patents.
|
|
Besides our Remote Power Patent,
we also own five (5) additional patents covering various methodologies
that provide for allocating bandwidth and establishing Quality of Service
(QoS) for delay sensitive data, such as voice, on packet data
networks. Quality of Service issues become important when data
networks carry packets that contain audio and video which may require
priority over data packets traveling over the same
network. Covered within these patents are also technologies
that establish bi-directional communications control channels between
network-connected devices in order to support advanced applications on
traditional data networks. We believe that potential licensees
of the technologies contained in these patents would be vendors deploying
applications that require the low latency transport of delay sensitive
data such as video over data networks.
|
|
We
were incorporated under the laws of the State of Delaware in July
1990. Our executive offices are located at 445 Park Avenue,
Suite 1028, New York, New York 10022 and our telephone number is (212)
829-5700. Our web site can be found at http://www.network-1.com.
|
|
Pending
Litigation Against Major Data Networking Equipment
Manufacturers
In February 2008, we commenced
litigation against several major data networking equipment manufacturers
in the United States District Court for the Eastern District of Texas,
Tyler Division, for infringement of our Remote Power
Patent. The defendants in the lawsuit include Cisco Systems,
Inc., Cisco Linksys, LLC, Enterasys Networks, Inc., 3COM Corporation,
Inc., Extreme Networks, Inc., Foundry Networks, Inc., Netgear, Inc. and
Adtran, Inc. We seek injunctive relief and monetary damages for
infringement based upon reasonable royalties as well as treble damages for
the defendant’s continued willful infringement of our Remote Power
Patent. The defendants, in their answers to the Complaint,
asserted that they do not infringe any valid claim of our Remote Power
Patent, and further asserted that, based on several different theories,
the patent claims are invalid or unenforceable. In addition to
these defenses, the defendants also asserted counterclaims for, among
other things, non-infringement, invalidity, and unenforceability of our
Remote Power Patent. In the event that the Court determines
that our Remote Power Patent is not valid or enforceable, and/or that the
defendants do not infringe, any such determination would have a material
adverse effect on our company.
Microsemi
Agreement and License
In June 2008 we entered into a
new agreement with Microsemi Corp-Analog Mixed Signal Group Ltd
(previously PowerDsine Ltd), a subsidiary of Microsemi Corporation
(Nasdaq: MSCC), a leading manufacturer of high performance analog
mixed-signal integrated circuits and high reliability semiconductors,
which, among other things, amended the prior settlement agreement entered
into between the parties in November 2005. Under the new
agreement, on June 25, 2008 we announced the commencement of an
industry-wide Special Licensing Program for our “Remote Power Patent to
vendors of PoE equipment. The Special Licensing Program
is of limited duration (through December 31, 2008) and is being
implemented on an industry-wide basis to offer discounted running royalty
rates and exceptions to our standard licensing terms and conditions for
the 930 Patent to PoE vendors who are “early adopters” and enter into
license agreements without delay to avoid litigation and higher
|
|
royalties. The
new agreement enables Microsemi to assist in its customers’ evaluation of
the Remote Power Patent and the terms being made available to vendors of
PoE equipment pursuant to our new Special Licensing Program, an activity
that was previously prohibited by the 2005 Settlement Agreement with
PowerDsine. In accordance with the terms of the new agreement,
on August 13, 2008, Microsemi Corporation, the parent company of
Microsemi-Analog, entered into a license agreement with us for our Remote
Power Patent under the Special Licensing Program. The license
agreement provides that Microsemi is obligated to pay us a quarterly
royalty payment of 2% of the sales price for certain of its Midspan PoE
products (See “Business-Licensing”).
D-Link
Settlement
In August 2005, we commenced
patent litigation against D-Link Corporation and D-Link Systems,
Incorporated (collectively “D-Link”) in the United States District Court
for the Eastern District of Texas, Tyler division, for infringement of our
Remote Power Patent. Our complaint sought, among other things,
a judgment that our Remote Power Patent is enforceable and has been
infringed by the defendants. We also sought a permanent
injunction restraining the defendants from continued infringement, or
active inducement of infringement by others, of our Remote Power
Patent.
In August 2007, we finalized the
settlement of our patent infringement litigation against
D-Link. Under the terms of the settlement, D-Link entered into
a license agreement for our Remote Power Patent the terms of which include
monthly royalty payments of 3.25% of the net sales of D-Link Power over
Ethernet products, including those products which comply with The
Institute of Electrical and Electronic Engineers (“IEEE”) 802.3af and
802.3at Standards, for the full term of our Remote Power Patent, which
expires in March 2020. The royalty rate is subject to
adjustment to a rate consistent with other similarly situated licensees of
our Remote Power Patent based on units of shipments of licensed
products. In addition, D-Link paid us $100,000 upon signing of
the settlement agreement.
Shares
Being Offered
This prospectus relates to the
offering by the selling stockholders of an aggregate of 9,655,949 shares
of our common stock, consisting of (i) 2,166,667 shares of common stock
and 1,666,667 shares of common stock issuable upon exercise of warrants
issued in our private offering completed on April 16, 2007, (ii)
360,000 shares issuable upon exercise of warrants issued to the placement
agents with respect to the private offering completed on April 16,
2007, (iii) 1,116,250 shares of our common stock issuable upon exercise of
warrants issued in our private offering in December 2004 and January 2005,
and (iv) 3,046,365 shares of common stock and 1,300,000 shares of common
stock issuable upon exercise of warrants and options owned by our Chairman
and Chief Executive Officer and related parties.
|
|
Summary
Financial Data
The following tables summarize
the consolidated statements of operations and balance sheet data for our
business and should be read together with the section of this prospectus
captioned “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our financial statements and related notes
included elsewhere in this prospectus.
|
||||||||||||
|
Six
Months Ended
June 30,
2008
|
Year
Ended
December
31,
|
|||||||||||
|
(Unaudited)
|
2007
|
2006
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS DATA:
|
||||||||||||
|
Royalty
Revenue
|
$ | 134,000 | $ | 232,000 | — | |||||||
|
Operating
expenses(1)
|
$ | 916,000 | $ | 3,395,000 | $ | 2,027,000 | ||||||
|
Net
loss
|
$ | (721,000 | ) | $ | (2,998,000 | ) | $ | (1,958,000 | ) | |||
|
Basic
and diluted loss per share
|
$ | (0.03 | ) | $ | (0.13 | ) | $ | (0.10 | ) | |||
|
Weighted-average
common shares outstanding
|
$ | 24,135,557 | $ | 22,250,144 | $ | 18,952,137 | ||||||
|
CONSOLIDATED
BALANCE SHEET DATA:
|
||||||||||||
|
Cash
and cash equivalents
|
$ | 5,140,000 | $ | 5,928,000 | $ | 1,797,000 | ||||||
|
Working
capital
|
$ | 5,083,000 | $ | 5,655,000 | $ | 1,306,000 | ||||||
|
Total
assets
|
$ | 5,284,000 | $ | 6,100,000 | $ | 1,971,000 | ||||||
|
Total
shareholders’ equity (deficit)
|
$ | 5,158,000 | $ | 5,733,000 | $ | 1,402,000 | ||||||
|
__________________________
(1) Includes
non-cash compensation expense of $146,000, $1,403,000 and $479,000 for the
six months ended June 30, 2008 and the years ended December
31, 2007 and 2006, respectively.
|
||||||||||||
|
We have incurred substantial
operating losses since our inception, which have resulted in an
accumulated deficit of $(49,998,000) as of June 30, 2008. For the
years ended December 31, 2007 and 2006, we incurred net losses of
$(2,998,000) and $(1,958,000), respectively. For the six months ended
June 30, 2008, we incurred a net loss of $(721,000). We have financed
our operations primarily by sales of equity securities. We had
royalty revenue of $134,000, $232,000 and -0- for the six months ended
June 30, 2008, the year ended December 31, 2007 and December 31, 2006,
respectively. Our ability to achieve revenue and generate positive
cash flow from operations is dependent upon consummating additional
material licensing agreements with respect to our patented
technologies. We may not be successful in achieving licensing
agreements with third parties and our failure to do so would have a
material adverse effect on our business, financial condition and results
of operations. We believe that we will have enough funding to meet
our cash needs and continue our operations until at least
December 31, 2009.
|
||||||||||||
|
●
|
our
ability to successfully enforce and/or defend our Remote Power
Patent;
|
|
●
|
our
ability to enter into favorable license agreements with third parties
withrespect to our Remote Power
Patent;
|
|
●
|
our
ability to achieve material revenue and
profits;
|
|
●
|
our
ability to raise capital when
needed;
|
|
●
|
sales
of our common stock;
|
|
●
|
our
ability to execute our business
plan;
|
|
●
|
technology
changes;
|
|
●
|
legislative,
regulatory and competitive developments;
and
|
|
●
|
economic
and other external factors.
|
|
SIX
MONTHS ENDED JUNE 30, 2008
|
HIGH
|
LOW
|
|
|
Second
Quarter
|
$1.29
|
$0.85
|
|
|
First
Quarter
|
$1.50
|
$1.14
|
|
|
YEAR
ENDED DECEMBER 31, 2007
|
HIGH
|
LOW
|
|
|
Fourth
Quarter
|
$2.05
|
$1.33
|
|
|
Third
Quarter
|
$1.60
|
$1.44
|
|
|
Second
Quarter
|
$2.04
|
$1.55
|
|
|
First
Quarter
|
$1.75
|
$1.35
|
|
|
YEAR
ENDED DECEMBER 31, 2006
|
HIGH
|
LOW
|
|
|
Fourth
Quarter
|
$1.65
|
$1.06
|
|
|
Third
Quarter
|
$1.37
|
$1.00
|
|
|
Second
Quarter
|
$1.42
|
$1.02
|
|
|
First
Quarter
|
$1.48
|
$0.93
|
|
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(1)
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(1))
|
|
|
Equity
compensation plans approved by security holders
|
3,902,370
|
$.95
|
0(1)
|
|
Equity
compensation plans not approved by security holders
|
0
|
—
|
—
|
|
Total
|
3,902,370
|
$.95
|
0(1)
|
|
______________
(1) Our
1996 Amended and Restated Stock Option Plan provides for the issuance of
options to purchase up to 4,000,000 shares of our common
stock. As of March 2006, no additional options could be issued
under the plan in accordance with its terms.
|
|||
|
·
|
2,166,667
shares of common stock and 1,666,667 shares of common stock issuable upon
exercise of warrants issued to investors in our private offering completed
on April 16, 2007;
|
|
·
|
360,000
shares of common stock issuable upon exercise of warrants issued to the
placement agents with respect to the private offering completed on
April 16, 2007;
|
|
·
|
1,116,250
shares of our common stock issuable upon exercise of warrants issued in
our private offering completed in December 2004 and January 2005;
and
|
|
·
|
3,046,365
shares of our common stock and 1,300,000 shares of our common stock
issuable upon exercise of warrants and options owned by our Chairman and
Chief Executive Officer and related
parties.
|
|
Name
|
Number
of Shares Beneficially Owned Prior to
Offering(1)
|
Number
of Shares Being
Offered
|
Number
of Shares Beneficially Owned After
Offering(1)(2)
|
Percentage
of Outstanding Common Stock After
Offering(1)
|
||||||||||||
|
Corey
M. Horowitz
|
10,073,185 | (3) | 4,346,365 | (4) | 5,726,820 | 19.2% | ||||||||||
|
CMH
Capital Management Corp.
|
3,767,800 | (5) | 3,767,800 | (5) | 0 | 0% | ||||||||||
|
Donna
Slavitt
|
67,471 | 67,471 | 0 | 0% | ||||||||||||
|
Logan
Zev Horowitz 1999 Trust
|
55,000 | (6) | 55,000 | (6) | 0 | 0% | ||||||||||
|
Dylan
Max Horowitz 1999 Trust
|
55,000 | (6) | 55,000 | (6) | 0 | 0% | ||||||||||
|
Corey
M. Horowitz Custodian for Zachary Jordon Horowitz
|
55,000 | (6) | 55,000 | (6) | 0 | 0% | ||||||||||
|
Horowitz
Partners
|
2,291 | (7) | 2,291 | (7) | 0 | 0% | ||||||||||
|
Hound
Partners, LLC
|
3,279,916 | (8) | 3,250,500 | (9) | 29,916 | * | ||||||||||
|
Hound
Partners Offshore Fund, L.P.
|
1,737,802 | (10) | 1,707,886 | (11) | 29,916 | * | ||||||||||
|
Hound
Partners, L.P.
|
1,542,114 | (12) | 1,542,114 | (12) | 0 | 0% | ||||||||||
|
Graham
Partners, L.P.
|
500,000 | (13) | 166,667 | (14) | 333,333 | 1.0% | ||||||||||
|
Aurelian
Partners, L.P.
|
611,300 | (15) | 166,667 | (16) | 444,633 | 1.8% | ||||||||||
|
Name
|
Number
of Shares Beneficially Owned Prior to
Offering(1)
|
Number
of Shares Being
Offered
|
Number
of Shares Beneficially Owned After
Offering(1)(2)
|
Percentage
of Outstanding Common Stock After
Offering(1)
|
||||||||||||
|
Brian
T. Horey SEP-IRA,
Charles
Schwab & Co. Custodian
|
100,000 | (17) | 33,333 | (18) | 66,667 | * | ||||||||||
|
Zaykowski
Limited Partners, L.P.
|
33,333 | (19) | 33,333 | (19) | 0 | 0% | ||||||||||
|
Zaykowski
Qualified Partners, L.P.
|
33,333 | (20) | 33,333 | (20) | 0 | 0% | ||||||||||
|
Lewis
Opportunity Fund, L.P.
|
70,833 | (21) | 70,833 | (21) | 0 | 0% | ||||||||||
|
LAM
Opportunity Fund, LTD
|
12,500 | (22) | 12,500 | (22) | 0 | 0% | ||||||||||
|
Theodore
J. Marolda
|
83,578 | (23) | 54,000 | (24) | 29,578 | * | ||||||||||
|
Jack
Brimberg
|
37,500 | (25) | 37,500 | (25) | 0 | 0% | ||||||||||
|
Jay
Tomlinson
|
16,500 | (26) | 16,500 | (26) | 0 | 0% | ||||||||||
|
Matthew
Pilkington
|
17,560 | (27) | 7,560 | (28) | 10,000 | * | ||||||||||
|
Emigrant
Capital Corporation
|
1,312,500 | (29) | 187,500 | (30) | 1,125,000 | 4.7% | ||||||||||
|
Eric
Singer
|
1,184,840 | (31) | 543,840 | (32) | 641,000 | 2.7% | ||||||||||
|
Singer
Opportunity Fund, L.P.
|
720,225 | (33) | 268,125 | (34) | 425,100 | 1.9% | ||||||||||
|
Singer
Fund, L.P.
|
249,775 | (35) | 106,875 | (36) | 142,900 | * | ||||||||||
|
David
M. Seldin
|
474,000 | (37) | 65,000 | (38) | 409,000 | 2.1% | ||||||||||
|
Robert
Graifman
|
382,277 | (39) | 75,000 | (40) | 307,277 | 1.6% | ||||||||||
|
Gilbert
S. Stein
|
175,000 | (41) | 25,000 | (42) | 150,000 | * | ||||||||||
|
John
R. Hart
|
75,000 | (43) | 25,000 | (44) | 50,000 | * | ||||||||||
|
Granite
Bridge Fund, L.P.
|
131,250 | (45) | 56,250 | (46) | 75,000 | * | ||||||||||
|
CGA
Resources, LLC
|
87,500 | (47) | 12,500 | (48) | 75,000 | * | ||||||||||
|
Barry
S. Friedberg
|
87,500 | (49) | 12,500 | (50) | 75,000 | * | ||||||||||
|
Dasa
Sada, LLC
|
87,500 | (51) | 12,500 | (52) | 75,000 | * | ||||||||||
|
Steven
Ackerman
|
165,500 | (53) | 12,500 | (54) | 153,000 | * | ||||||||||
|
Francis
May
|
43,750 | (55) | 6,250 | (56) | 37,500 | * | ||||||||||
|
Matthew
Balk
|
7,500 | (57) | 7,500 | (57) | 0 | 0% | ||||||||||
|
Kenneth
L. Walters
|
17,500 | (58) | 2,500 | (59) | 15,000 | * | ||||||||||
|
Name
|
Number
of Shares Beneficially Owned Prior to
Offering(1)
|
Number
of Shares Being
Offered
|
Number
of Shares Beneficially Owned After
Offering(1)(2)
|
Percentage
of Outstanding Common Stock After
Offering(1)
|
||||||||||||
|
Jeb
Investment Ltd.
|
165,450 | (60) | 23,750 | (61) | 141,700 | * | ||||||||||
|
Jeb
Partners, L.P.
|
155,050 | (62) | 23,750 | (63) | 131,300 | * | ||||||||||
|
Manchester
Explorer Limited Partnership
|
115,200 | (64) | 15,000 | (65) | 100,200 | * | ||||||||||
|
Steven
D. Heineman
|
1,699,252 | (66) | 91,667 | (67) | 1,607,585 | 6.6% | ||||||||||
|
Brian
Eng
|
112,500 | (68) | 12,500 | (69) | 100,000 | * | ||||||||||
|
Brad
Reifler
|
50,925 | (70) | 43,425 | (71) | 7,500 | * | ||||||||||
|
Steven
Goldfarb
|
8,750 | (72) | 3,750 | (73) | 5,000 | * | ||||||||||
|
Hilary
Bergman
|
50,925 | (74) | 43,425 | (75) | 7,500 | * | ||||||||||
|
Samuel
Solomon
|
15,000 | (76) | 2,500 | (77) | 12,500 | * | ||||||||||
|
Jeffrey
Finkle
|
45,000 | (78) | 45,000 | (78) | 0 | 0% | ||||||||||
|
Edward
Sussi
|
5,000 | (79) | 5,000 | (79) | 0 | 0% | ||||||||||
|
Alan
Friedman
|
5,000 | (80) | 5,000 | (80) | 0 | 0% | ||||||||||
|
Alan
Weiner
|
43,750 | (81) | 18,750 | (82) | 25,000 | * | ||||||||||
|
Laurent
Ohana
|
195,833 | (83) | 50,000 | (84) | 145,833 | * |
|
(1)
|
Except
as otherwise indicated, the address for each beneficial owner is c/o
Network-1 Security Solutions, Inc., 445 Park Avenue, Suite 1028, New York,
New York 10022.
|
|
(2)
|
Unless
otherwise indicated, we believe that all persons named in the above table
have sole voting and investment power with respect to all shares of common
stock beneficially owned by them. A person is deemed to be the beneficial
owner of securities that can be acquired by such person within 60 days
from the date hereof upon the exercise of options, warrants or convertible
securities. Each beneficial owner’s percentage ownership is determined by
assuming that options, warrants and convertible securities held by such
person (but not those held by any other person) and which are exercisable
or convertible within 60 days have been exercised and
converted. Assumes a base of 24,135,557 shares of common stock
outstanding.
|
|
(3)
|
Includes
(i) 343,803 shares of common stock held by Mr. Horowitz, (ii) 5,726,820
shares of common stock subject to currently exercisable stock options held
by Mr. Horowitz, (iii) 2,467,800 shares of common stock held by CMH
Capital Management Corp. (“CMH”), (iv) 550,000 shares of common stock
subject to currently exercisable warrants held by CMH, (v) 750,000 shares
of common stock subject to currently exercisable options held by CMH, (vi)
67,471 shares of common stock owned by Donna Slavitt, the wife of Mr.
Horowitz, (vii) an aggregate of 165,000 shares of common stock held by two
trusts and a custodian account for the benefit of Mr. Horowitz’s three
children and (viii) 2,291 shares of common stock held by Horowitz
Partners, a general partnership of which Mr. Horowitz is a partner. Does
not include options to purchase 104,375 shares of common stock which are
not currently exercisable. The address of CMH Capital
Management Corp. is 445 Park Avenue, New York, New York
10022.
|
|
(4)
|
Includes
(i) 343,803 shares of common stock held by Mr. Horowitz, (ii) 2,467,800
shares of common stock held by CMH, (iii) 550,000 shares of common stock
subject to currently exercisable warrants held by CMH, (iv) 750,000 shares
of common stock subject to currently exercisable options held by CMH, (v)
67,471 shares of common stock owned by Donna Slavitt, the wife of Mr.
Horowitz, (vi) an aggregate of 165,000 shares of common stock held by two
trusts and a custodian account for the benefit of Mr. Horowitz’s three
children and (vii) 2,291 shares of common stock held by Horowitz Partners,
a general partnership of which Mr. Horowitz is a
partner.
|
|
(5)
|
Includes
(i) 2,467,800 shares of common stock, (ii) 550,000 shares of common stock
subject to currently exercisable warrants and (iii) 750,000 shares of
common stock subject to currently exercisable options. Corey M.
Horowitz, by virtue of being the sole officer and shareholder of CMH
Capital Management Corp., has sole power to vote and dispose of the shares
of common stock owned by CMH.
|
|
(6)
|
Gary
Horowitz, by virtue of being the trustee of the Logan Zev Horowitz 1999
Trust and the Dylan Max Horowitz 1999 Trust, has sole power to vote and
dispose of the shares of common stock owned by each of the
trusts. Corey M. Horowitz, by virtue of being custodian for
Zachary Jordan Horowitz, has the sole power to vote and dispose of such
shares.
|
|
(7)
|
Corey
M. Horowitz, Gary Horowitz, Cindy Horowitz and Syd Horowitz, by virtue of
being a general partner of Horowitz Partners, may each be deemed to have
shared power to vote and dispose of the shares owned by Horowitz
Partners.
|
|
(8)
|
Includes
(i) 1,057,215 shares of common stock and 484,899 shares of common stock
subject to currently exercisable warrants held by Hound Partners, LP and
(ii) 1,139,368 shares of common stock and 598,434 shares of common stock
subject to currently exercisable warrants held by Hound Partners Offshore
Fund, LP. Jonathan Auerbach is the managing member of Hound
Performance, LLC and Hound Partners, LLC. Hound Performance,
LLC is the general partner of Hound Partners, LP and Hound Partners
Offshore Fund, L.P. Hound Partners, LLC is the investment
manager of Hound Partners, LP and Hound Partners Offshore Fund,
L.P. The securities may be deemed to be beneficially owned by
Hound Performance, LLC, Hound Partners LLC and
Jonathan
|
|
Auerbach. The
aforementioned beneficial ownership is based upon a Schedule 13G jointly
filed by Hound Partners, LLC, Hound Performance, LLC, Hound Partners, L.P.
and Hound Partners Offshore Fund, LP, with the Securities and Exchange
Commission on April 26, 2007, a Form 3 jointly filed by Hound Partners,
LLC, Hound Performance, LLC and Jonathan Auerbach with the Securities and
Exchange Commission on April 26, 2007 and a Form 4 jointly filed by Hound
Partners, LLC, Hound Performance LLC and Jonathan Auerbach with the
Securities and Exchange Commission on August 8, 2008. Jonathan Auerbach,
by virtue of being the managing member of Hound Performance, LLC and Hound
Partners, LLC, has the power to vote and dispose of the securities held by
Hound Partners, LP and Hound Partners Offshore Fund,
L.P.
|
|
(9)
|
Includes
(i) 1,057,215 shares of common stock and 484,899 shares of common stock
subject to currently exercisable warrants owned by Hound Partners, L.P.
and (ii) 1,109,452 shares of common stock and 598,434 shares of common
stock subject to currently exercisable warrants owned by Hound Partners
Offshore Fund, L.P.
|
|
(10)
|
Includes
(i) 1,139,368 shares of common stock and (ii) 598,434 shares of common
stock subject to currently exercisable warrants held by Hound Partners
Offshore Fund, L.P.
|
|
(11)
|
Includes
(i) 1,109,452 shares of common stock and (ii) 598,434 shares of common
stock subject to currently exercisable
warrants.
|
|
(12)
|
Includes
(i) 1,057,215 shares of common stock and (ii) 484,899 shares of common
stock subject to currently exercisable warrants owned by Hound Partners,
LP.
|
|
(13)
|
Includes
(i) 333,333 shares of common stock and (ii) 166,667 shares of common stock
subject to currently exercisable warrants owned by Graham Partners, L.P.
Harold W. Berry III, as the general partner of Graham Partners, L.P., has
the power to vote and dispose of the securities owned by Graham Partners,
L.P.
|
|
(14)
|
Includes
166,667 shares of common stock subject to currently exercisable warrants
owned by Graham Partners, L.P.
|
|
(15)
|
Includes
(i) 444,633 shares of common stock and (ii) 166,667 shares of common stock
subject to currently exercisable warrants owned by Aurelian Partners,
L.P. Brian Horey, as general partner of Aurelian Partners,
L.P., has sole power to vote and dispose of the securities owned by
Aurelian Partners, L.P.
|
|
(16)
|
Includes
166,667 shares of common stock subject to currently exercisable warrants
owned by Aurelian Partners, L.P.
|
|
(17)
|
Includes
(i) 66,667 shares of common stock and (ii) 33,333 shares of common stock
subject to currently exercisable warrants owned by Brian T. Horey SEP-IRA,
Charles Schwab & Co. Custodian.
|
|
(18)
|
Includes
33,333 shares of common stock subject to currently exercisable
warrants.
|
|
(19)
|
Includes
33,333 shares of common stock subject to currently exercisable warrants
owned by Zaykowski Limited Partners, L.P. Paul Zaykowski, as
the general partner of Zaykowski Limited Partners, L.P., has the sole
power to vote and dispose of the securities owned by Zaykowski Limited
Partners, L.P.
|
|
(20)
|
Includes
33,333 shares of common stock subject to currently exercisable warrants
owned by Zaykowski Qualified Partners, L.P. Paul Zaykowski, as the general
partner of Zaykowski Qualified Partners, L.P., has the sole power to vote
and dispose of the securities owned by Zaykowski Qualified Partners,
L.P.
|
|
(21)
|
Includes
70,833 shares of common stock subject to currently exercisable warrants
owned by Lewis Opportunity Fund, L.P. W. Austin Lewis IV as
general partner/portfolio manager has the sole power to vote and dispose
of the securities owned by Lewis Opportunity Fund,
L.P.
|
|
(22)
|
Includes
12,500 shares of common stock subject to currently exercisable warrants
owned by LAM Opportunity Fund, L.P. W. Austin Lewis IV, as
General Partner/Portfolio Manager, has the sole power to vote and dispose
of the securities owned by LAM Opportunity
Fund.
|
|
(23)
|
Includes
(i) 29,578 shares of common stock and (ii) 54,000 shares of common stock
subject to currently exercisable
warrants.
|
|
(24)
|
Includes
54,000 shares of common stock subject to currently exercisable
warrants.
|
|
(25)
|
Includes
37,500 shares of common stock subject to currently exercisable
warrants.
|
|
(26)
|
Includes
16,500 shares of common stock subject to currently exercisable
warrants.
|
|
(27)
|
Includes
(i) 10,000 shares of common stock and (ii) 7,560 shares of common stock,
subject to currently exercisable
warrants.
|
|
(28)
|
Includes
7,560 shares of common stock subject to currently exercisable
warrants.
|
|
(29)
|
Includes
(i) 1,125,000 shares of common stock and (ii) 187,500 shares of common
stock subject to currently exercisable warrants. Howard
Millstein, by virtue of being an officer of New York Private Bank and
Trust Corporation and trustee of the Paul Milstein Revocable 1998 Trust,
both indirect owners of Emigrant Capital Corporation, may be deemed to
have sole power to vote and dispose of the securities owned by Emigrant
Capital Corporation. The address of Emigrant Capital
Corporation is 6 East 43rd
Street, New York, New
York 10017.
|
|
(30)
|
Includes
187,500 shares of common stock subject to currently exercisable
warrants.
|
|
(31)
|
Includes
(i) 452,100 shares of common stock and 268,125 shares of common stock
subject to currently exercisable warrants owned by Singer Opportunity Fund, L.P., (ii)
142,900 shares of common stock and 106,875 shares of common stock subject
to currently exercisable warrants owned by Singer Fund, L.P., (iii) 38,000
shares of common stock and 168,840 shares of common stock subject to
currently exercisable warrants owned by
Mr. Singer and (iv) 8,000 shares of common stock owned by Singer
Congressional Fund, L.P. Singer Fund Management, LLC makes all investment
and
|
|
voting
decisions on behalf of Singer Opportunity Fund, L.P., Singer Fund, L.P.
and Singer Congressional Fund, L.P. The aforementioned
is based in part on a Schedule 13G filed jointly by Singer Fund
Management, LLC, Singer Opportunity Fund, L.P., Singer Fund, L.P. and
Singer Congressional Fund, L.P. with the Securities and Exchange
Commission on March 23, 2005.
|
|
(32)
|
Includes
(i) 268,125 shares of common stock subject to currently exercisable
warrants owned by Singer Opportunity Fund, L.P., (ii) 106,875 shares of
common stock subject to currently exercisable warrants owned by Singer
Fund, L.P., and (iii) 168,840 shares of common stock subject to currently
exercisable warrants owned by
Mr. Singer.
|
|
(33)
|
Includes
(i) 452,100 shares of common stock and (ii) 268,125 shares of common stock
subject to currently exercisable warrants owned by Singer Opportunity
Fund, L.P. Eric Singer, by virtue of being managing member of
Singer Opportunity Fund, L.P. and Singer Fund Management, LLC, has sole
power to vote and dispose of the shares owned by Singer Opportunity Fund,
L.P. The address of Singer Opportunity Fund, L.P. is 650 Fifth
Avenue, New York, New
York 10019.
|
|
(34)
|
Includes
268,125 shares of common stock subject to currently exercisable warrants
owned by Singer Opportunity Fund,
L.P.
|
|
(35)
|
Includes
(i) 142,900 shares of common stock and (ii) 106,875 shares of common stock
subject to currently exercisable warrants owned by Singer Fund,
L.P. Eric Singer, by virtue of being managing member of Singer
Fund, L.P. and Singer Fund Management, LLC, has sole power to vote and
dispose of the securities owned by Singer Fund, L.P. The
address of Singer Fund, L.P. is 650 Fifth Avenue, New York, New
York 10019.
|
|
(36)
|
Includes
106,875 shares of common stock subject to currently exercisable warrants
owned by Singer Fund, L.P.
|
|
(37)
|
Includes
(i) 409,000 shares of common stock and (ii) 65,000 shares of common stock
subject to currently exercisable
warrants.
|
|
(38)
|
Includes
65,000 shares of common stock subject to currently exercisable
warrants.
|
|
(39)
|
Includes
(i) 154,777 shares of common stock and (ii) 75,000 shares of common stock
subject to currently exercisable warrants and (iii) 152,500 shares subject
to currently exercisable stock
options.
|
|
(40)
|
Includes
75,000 shares of common stock subject to currently exercisable
warrants.
|
|
(41)
|
Includes
(i) 150,000 shares of common stock and (ii) 25,000 shares of common stock
subject to currently exercisable
warrants.
|
|
(42)
|
Includes
25,000 shares of common stock subject to currently exercisable
warrants.
|
|
(43)
|
Includes
50,000 shares of common stock and (ii) 25,000 shares of common stock
subject to currently exercisable
warrants.
|
|
(44)
|
Includes
25,000 shares of common stock subject to currently exercisable
warrants.
|
|
(45)
|
Includes
(i) 75,000 shares of common stock and (ii) 56,250 shares of common stock
subject to currently exercisable warrants. Clarke Adams, by
virtue of being managing partner of Granite Bridge Fund, L.P., may be
deemed to have sole power to vote and dispose of the securities owned by
Granite Bridge Fund, L.P.
|
|
(46)
|
Include
56,250 shares of common stock subject to currently exercisable
warrants.
|
|
(47)
|
Includes
(i) 75,000 shares of common stock and (ii) 12,500 shares of common stock
subject to currently exercisable warrants. Cass Gunther
Adelman, by virtue of being the sole member of CGA Resources, LLC, may be
deemed to have sole power to vote and dispose of the
securities.
|
|
(48)
|
Includes
12,500 shares of common stock subject to currently exercisable
warrants.
|
|
(49)
|
Includes
(i) 75,000 shares of common stock and (ii) 12,500 shares of common stock
subject to currently exercisable
warrants.
|
|
(50)
|
Includes
12,500 shares of common stock subject to currently exercisable
warrants.
|
|
(51)
|
Includes
(i) 75,000 shares of common stock and (ii) 12,500 shares of common stock
subject to currently exercisable warrants. Allysa Ackerman, by
virtue of being the sole member of Dasa Sada, LLC, may be deemed to have
sole power to vote and dispose of the
securities.
|
|
(52)
|
Includes
12,500 shares of common stock subject to currently exercisable
warrants.
|
|
(53)
|
Includes
(i) 75,000 shares of common stock and (ii) 12,500 shares of common stock
subject to currently exercisable
warrants.
|
|
(54)
|
Includes
12,500 shares of common stock subject to currently exercisable
warrants.
|
|
(55)
|
Includes
(i) 37,500 shares of common stock and (ii) 6,250 shares of common stock
subject to currently exercisable
warrants.
|
|
(56)
|
Includes
6,250 shares of common stock subject to currently exercisable
warrants.
|
|
(57)
|
Includes
7,500 shares of common stock subject to currently exercisable
warrants.
|
|
(58)
|
Includes
(i) 15,000 shares of common stock and (ii) 2,500 shares of common stock
subject to currently exercisable
warrants.
|
|
(59)
|
Includes
2,500 shares of common stock subject to currently exercisable
warrants.
|
|
(60)
|
Includes
(i) 141,700 shares of common stock and (ii) 23,750 shares of common stock
subject to currently exercisable warrants. James Bresser, by
virtue of being a partner of the investment advisor of Jeb Investment
Ltd., may be deemed to have sole power to vote and dispose of the
securities.
|
|
(61)
|
Includes
23,750 shares of common stock subject to currently exercisable
warrants.
|
|
(62)
|
Includes
(i) 131,300 shares of common stock and (ii) 23,750 shares of common stock
subject to currently exercisable warrants. James Bresser, by
virtue of being an officer of the general partner of Jeb Partners, L.P.,
may be deemed to have sole power to vote and dispose of the
securities.
|
|
(63)
|
Includes
23,750 shares of common stock to currently exercisable
warrants.
|
|
(64)
|
Includes
(i) 100,200 shares of common stock and (ii) 15,000 shares of common stock
subject to currently exercisable warrants. James Bresser, by virtue of
being an officer of Manchester Explorer Limited Partnership, may be deemed
to have sole power to vote and dispose of the
securities.
|
|
(65)
|
Includes
15,000 shares of common stock subject to currently exercisable
warrants.
|
|
(66)
|
Includes
(i) 1,607,585 shares of common stock and (ii) 91,667 shares of common
stock subject to currently exercisable
warrants.
|
|
(67)
|
Includes
91,667 shares of common stock subject to currently exercisable
warrants.
|
|
(68)
|
Includes
(i) 100,000 shares of common stock and (ii) 12,500 shares of common stock
subject to currently exercisable
warrants.
|
|
(69)
|
Includes
12,500 shares of common stock subject to currently exercisable
warrants.
|
|
(70)
|
Includes
(i) 7,500 shares of common stock and (ii) 43,425 shares of common stock
subject to currently exercisable
warrants.
|
|
(71)
|
Includes
43,425 shares of common stock subject to currently exercisable
warrants.
|
|
(72)
|
Includes
(i) 5,000 shares of common stock and (ii) 3,750 shares of common stock
subject to currently exercisable
warrants.
|
|
(73)
|
Includes
3,750 shares of common stock subject to currently exercisable
warrants.
|
|
(74)
|
Includes
(i) 7,500 shares of common stock and (ii) 43,425 shares of common stock
subject to currently exercisable
warrants.
|
|
(75)
|
Includes
43,425 shares of common stock subject to currently exercisable
warrants.
|
|
(76)
|
Includes
(i) 12,500 shares of common stock and (ii) 2,500 shares of common stock
subject to currently exercisable
warrants.
|
|
(77)
|
Includes
2,500 shares of common stock subject to currently exercisable
warrants.
|
|
(78)
|
Includes
45,000 shares of common stock subject to currently exercisable
warrants.
|
|
(79)
|
Includes
5,000 shares of common stock subject to currently exercisable
warrants.
|
|
(80)
|
Includes
5,000 shares of common stock subject to currently exercisable
warrants.
|
|
(81)
|
Includes
(i) 25,000 shares of common stock and (ii) 18,750 shares of common stock
subject to currently exercisable
warrants.
|
|
(82)
|
Includes
18,750 shares of common stock subject to currently exercisable
warrants.
|
|
(83)
|
Includes
195,833 shares of common stock subject to currently exercisable warrants
and options.
|
|
(84)
|
Includes
50,000 shares of common stock subject to currently exercisable
warrants.
|
|
·
|
ordinary
brokerage transactions in which the broker-dealer solicits
purchasers;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per
share;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
|
·
|
fixed
prices that may be changed;
|
|
·
|
market
prices prevailing at the time of
sale;
|
|
·
|
prices
related to such prevailing market prices;
and
|
|
·
|
at
negotiated prices.
|
|
NAME
|
AGE
|
POSITION
|
||
|
Corey
M. Horowitz
|
53
|
Chairman,
Chief Executive Officer and Secretary, Chairman of the Board of
Directors
|
||
|
David
C. Kahn
|
56
|
Chief
Financial Officer
|
||
|
Robert
M. Pons
|
51
|
Director
|
||
|
Laurent
Ohana
|
45
|
Director
|
|
Annual
Compensation
|
Long
Term Compensation Awards
|
|||||||||||
|
Name and Principal Position
|
Year
|
Salary ($)
|
Bonus ($)
|
Option Awards($)
|
All
Other Compensation($)(1)
|
Total($)
|
||||||
|
Corey
M. Horowitz
Chairman
and Chief
Executive
Officer
David
C. Kahn
Chief
Financial Officer
|
2007
2007
|
$286,458
$89,380(4)
|
$162,000
(2)
—
|
$655,000
(3)
—
|
—
—
|
$1,103,458
$ 89,380
|
||||||
|
(1)
|
We
have concluded that the aggregate amount of perquisites and other personal
benefits paid to either Mr. Horowitz or Mr. Kahn did not exceed
$10,000.
|
|
(2)
|
Mr.
Horowitz received the following bonus payments for 2007: (i) a
discretionary annual bonus of $150,000 for 2007 which was paid in January
2008 and (ii) royalty bonus compensation of $12,000 pursuant to his
employment agreement.
|
|
(3)
|
In
determining the grant date fair value under SFAS No. 123R of (i) a five
(5) year option issued in February 2007 to Mr. Horowitz to purchase
375,000 shares of common stock and (ii) a five (5) year option issued in
April 2007 to Mr. Horowitz to purchase 732,709 shares of common stock, we
made the following assumptions: expected term of the options –
5 years, risk free interest rate for the expected term of the options –
4.52% and 4.67%; expected volatility of the underlying stock – 45.82%; no
expected dividends.
|
|
(4)
|
Consists
of consulting fees paid to Mr. Kahn for his services as Chief Financial
Officer.
|
|
Name
|
Option
Awards
($)
|
All
other
Compensation
|
Total
($)
|
|||
|
Robert
Graifman(1)
|
$14,000
(2)
|
$ —
|
$14,000
|
|||
|
Robert
Pons(1)
|
$14,000
(2)
|
—
|
$14,000
|
|||
|
Laurent
Ohana(1)
|
$14,000
(2)
|
—
|
$14,000
|
|||
|
Harry
Schessel
|
—
|
—
|
$ —
|
|||
|
|
(1)
|
In
December 2007, Robert Graifman, Robert Pons and Laurent Ohana were each
granted a five (5) year option to purchase 25,000 shares of our common
stock (which vested on grant), at an exercise price of $1.45 per share,
for services as a Board member during 2007. Mr. Graifman
resigned from the Board of Directors on June 23,
2008.
|
|
|
(2)
|
In
determining the grant date fair value of the option grants in December
2007 under SFAS No. 123R, we made the following
assumptions: expected term of the options – five years; risk
free interest rate for the expected term of the options – 3.28%; expected
volatility of the underlying stock - 37.32%; no expected
dividends.
|
|
Name
|
Number
of Securities Underlying Options Granted
|
Percent
of Total Options Granted to Employees in 2007
|
Exercise
Price
|
Expiration
Date
|
||||
|
Corey
M. Horowitz
Chairman
and
Chief
Executive Officer
|
375,000
732,709
|
33.9%
66.1%
|
$1.46
$1.67
|
2/28/2012
4/16/2012
|
|
Number
of Securities Underlying Unexercised Option
|
|||||||||||||
|
Name
|
Exercisable
|
Unexercisable
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
|||||||||
|
Corey
M. Horowitz
Chairman
and CEO
|
375,000 | (1) | — | $ | 1.46 |
02/28/12
|
|||||||
| 732,709 | (2) | — | $ | 1.67 |
04/16/12
|
||||||||
| 1,195,361 | (3) | — | $ | 1.18 |
03/06/12
|
||||||||
| 400,000 | (4) | — | $ | .68 |
11/26/09
|
||||||||
| 1,100,000 | (5) | — | $ | .25 |
11/26/14
|
||||||||
| 515,218 | (6) | — | $ | .13 |
12/22/11
|
||||||||
| 1,084,782 | (7) | — | $ | .23 |
12/22/11
|
||||||||
| 750,000 | (8)(20) | — | $ | 1.20 |
04/18/10
|
||||||||
| 250,000 | (9)(20) | — | $ | 1.48 |
10/08/10
|
||||||||
| 300,000 | (10)(20) | — | $ | .70 |
07/11/11
|
||||||||
| — | 10,625 | (18) | $ | 3.0625 |
01/19/11
|
||||||||
| 20,000 | (11) | $ | 6.00 |
10/20/11
|
|||||||||
| 10,000 | (12) | $ | 3.75 |
6/22/09
|
|||||||||
| 7,500 | (13) | $ | 4.25 |
10/25/09
|
|||||||||
| 5,000 | (14) | $ | 5.50 |
9/19/10
|
|||||||||
|
David
Kahn
Chief
Financial Officer
|
52,500 | (15) | 22,500 | (19) | $ | 1.50 |
12/20/11
|
||||||
| 75,000 | (16) | — | $ | .80 |
08/04/10
|
||||||||
| 35,000 | (17) | — | $ | .35 |
01/21/14
|
||||||||
|
NAME
OF
BENEFICIAL OWNER
|
NUMBER
OF SHARES
BENEFICIALLY OWNED
|
PERCENTAGE OF SHARES
BENEFICIALLY
OWNED(2)
|
||||||
|
Corey
M. Horowitz(3)
|
10,073,185 |
32.3%
|
||||||
|
CMH
Capital Management Corp(4)
|
3,767,800 |
14.8%
|
||||||
|
Jonathan
Auerbach(5)
|
3,279,916 |
12.9%
|
||||||
|
Hound
Partners, LLC(5)
|
3,279,916 |
12.9%
|
||||||
|
Hound
Performance, LLC(5)
|
3,279,916 |
12.9%
|
||||||
|
Barry
Rubenstein (6)
|
2,078,896 |
8.6%
|
||||||
|
Steven
D. Heineman
(7)
|
1,699,252 |
7.0%
|
||||||
|
Hound
Partners Offshore Fund, L.P.(8)
|
1,627,275 |
6.6%
|
||||||
|
Hound
Partners, L.P.
(9)
|
1,622,726 |
6.6%
|
||||||
|
Woodland
Services Corp. (10)
|
1,376,209 |
5.7%
|
||||||
|
Emigrant
Capital Corporation (11)
Paul
Milstein Revocable 1998 Trust
New
York Private Bank & Trust Corporation
Emigrant
Bancorp. Inc.
Emigrant
Savings Bank
|
1,312,500 |
5.4%
|
||||||
|
Eric
Singer(12)
|
1,184,840 |
4.8%
|
||||||
|
Laurent
Ohana(13)
|
195,833 |
*
|
||||||
|
David
C. Kahn(14)
|
144,375 |
*
|
||||||
|
Robert
Pons(15)
|
145,833 |
*
|
||||||
|
All
officers and directors as a group
(4
Persons)
|
10,559,226 |
33.4%
|
||||||
|
(1)
|
Unless
otherwise indicated, we believe that all persons named in the above table
have sole voting and investment power with respect to all shares of common
stock beneficially owned by them.
|
|
(2)
|
A
person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date hereof upon the
exercise of options, warrants or convertible securities. Each beneficial
owner’s percentage ownership is determined by assuming that options,
warrants and convertible securities held by such person (but not those
held by any other person) and which are exercisable or convertible within
60 days have been exercised and converted. Assumes a base of
24,135,557 shares of our common stock
outstanding.
|
|
(3)
|
Includes
(i) 343,803 shares of common stock held by Mr. Horowitz, (ii) 5,726,820
shares of common stock subject to currently exercisable stock options held
by Mr. Horowitz, (iii) 2,467,800 shares of common stock held by CMH
Capital Management Corp. (“CMH”), an entity solely owned by Mr. Horowitz,
(iv) 550,000 shares of common stock subject to currently exercisable
warrants held by CMH, (v) 750,000 shares of common stock subject to
currently exercisable options held by CMH, (vi) 67,471 shares of common
stock owned by Donna Slavitt, the wife of Mr. Horowitz, (vii) 165,000
shares of common stock held by two trusts and a custodian account for the
benefit of Mr. Horowitz’s three children and (viii) 2,291 shares of common
stock held by Horowitz Partners, a general partnership of which Mr.
Horowitz is a partner. Does not include options to purchase 104,375 shares
of common stock which are not currently
exercisable.
|
|
(4)
|
Includes
(i) 2,467,800 shares of common stock, (ii) 550,000 shares of common
stock subject to currently exercisable warrants and (iii) 750,000 shares
of common stock subject to currently exercisable stock
options. Corey M. Horowitz, by virtue of being the sole
officer, director and shareholder of CMH, has the sole power to vote and
dispose of the shares of common stock owned by
CMH.
|
|
(5)
|
Includes
(i) 1,057,215 shares of common stock and 484,899 shares of common stock
subject to currently exercisable warrants held by Hound Partners, LP and
(ii) 1,139,368 shares of common stock and 598,434 shares of common stock
subject to currently exercisable warrants held by Hound Partners Offshore
Fund, LP. Jonathan Auerbach is the managing member of Hound
Performance, LLC and Hound Partners, LLC. Hound Performance,
LLC is the general partner of Hound Partners, LP and Hound Partners
Offshore Fund, L.P. Hound Partners, LLC is the investment
manager of Hound Partners, LP and Hound Partners Offshore Fund,
L.P. The securities may be deemed to be beneficially owned by
Hound Performance, LLC, Hound Partners LLC and Jonathan
Auerbach. The aforementioned beneficial ownership is based upon
a Schedule 13G jointly filed by Hound Partners, LLC, Hound Performance,
LLC, Hound Partners, L.P. and Hound Partners Offshore Fund, LP, with the
Securities and Exchange Commission on April 26, 2007 and a Form 4 jointly
filed by Hound Partners, LLC and Hound Performance, LLC and Jonathan
Auerbach with the Securities and Exchange Commission on August 8, 2008 and
a Form 3 jointly filed by Hound Partners, LLC, Hound Performance, LLC and
Jonathan Auerbach with the Securities and Exchange Commission on April 26,
2007. Jonathan Auerbach, by virtue of being the managing member
of Hound Performance, LLC and Hound Partners, LLC, has the power to vote
and dispose of the securities held by Hound Partners, LP and Hound
Partners Offshore Fund, L.P.
|
|
(6)
|
Includes
(i) 150,012 shares of common stock held by Mr. Rubenstein, (ii) 47,500
shares of common stock subject to currently exercisable stock options held
by Mr. Rubenstein, and (iii) 792,726, 583,483, 309,316, 194,810 and 1,049
shares of common stock held by Woodland Venture Fund, Seneca Ventures,
Woodland Partners, Brookwood Partners, L.P. and Marilyn Rubenstein,
respectively. Does not include options to purchase 11,875
shares of common stock held by Mr. Rubenstein which are not currently
exercisable. The
|
|
aforementioned
beneficial ownership by Mr. Rubenstein is based upon Amendment No. 7 to
Schedule 13D jointly filed by Mr. Rubenstein and related parties with the
Securities and Exchange Commission on November 14, 2007 and a Form 4 filed
by Mr. Rubenstein with the Securities and Exchange Commission on October
26, 2007. Barry Rubenstein and Woodland Services Corp. are the
general partners of Woodland Venture Fund and Seneca Ventures. Barry
Rubenstein is the President and sole director of Woodland Services Corp.
Marilyn Rubenstein is the wife of Barry
Rubenstein.
|
|
(7)
|
Includes
(i) 1,607,585 shares of common stock and (ii) 91,667 shares of common
stock subject to currently exercisable warrants owned by
Mr. Heinemann. The aforementioned beneficial ownership is
based upon a Schedule 13G filed by Mr. Heinemann with the Securities
and Exchange Commission on April 10,
2008.
|
|
(8)
|
Includes
(i) 1,084,850 shares of common stock and (ii) 542,425 shares of common
stock subject to currently exercisable warrants held by Hound Partners
Offshore Fund, L.P. Jonathan Auerbach, by virtue of being the
managing member of Howard Performance, LLC and Howard Partners, LLC, has
the power to vote and dispose of securities held by Howard Partners
Offshore Fund, L.P.
|
|
(9)
|
Includes
(i) 1,081,817 shares of common stock and (ii) 540,909 shares of common
stock subject to currently exercisable warrants owned by Hound Partners,
LP. Jonathan Auerbach, by virtue of being the managing member
of Howard Performance, LLC and Howard Partners, LLC, has the power to vote
and dispose of the securities held by Howard Partners,
L.P.
|
|
(10)
|
Includes
(i) 792,726 shares of common stock owned by Woodland Venture Fund and (ii)
583,483 shares of common stock owned by Seneca
Ventures. Woodland Services Corp. is a general partner of
Woodland Venture Fund and Seneca Ventures. The aforementioned
beneficial ownership of Woodland Services Corp. is based upon Amendment
No. 7 to Schedule 13D jointly filed by Woodland Services Corp. and related
parties with the Securities and Exchange Commission on November 14,
2007. Barry Rubenstein, by virtue of being President and the
sole director of Woodland Services Corp., has the sole power to vote and
dispose of the shares owned by Woodland Services
Corp.
|
|
(11)
|
Includes
(i) 1,125,000 shares of common stock and (ii) 187,500 shares of common
stock subject to currently exercisable warrants held by Emigrant Capital
Corporation (“Emigrant Capital”). Emigrant Capital is a wholly
owned subsidiary of Emigrant Savings Bank (“ESB”), which is a wholly-owned
subsidiary of Emigrant Bancorp, Inc. (“EBI”). EBI is a
wholly-owned subsidiary of New York Private Bank & Trust Corporation
(“NYPBTC”). The Paul Milstein Revocable 1998 Trust (the
“Trust”) owns 100% of the voting stock of NYPBTC. ESB, EBI,
NYPBTC and the Trust each may be deemed to be the beneficial owner of the
shares of common stock and warrants held by Emigrant
Capital. The aforementioned is based upon a Schedule 13G/A
filed jointly by Emigrant Capital, ESB, EBI, NYPBTC, the Trust and others
with the Securities and Exchange Commission on January 12,
2005. Howard Milstein, by virtue of being an officer of New
York Private Bank and Trust Corporation and trustee of the Paul Milstein
Revocable 1998 Trust, both indirect owners of Emigrant Capital
Corporation, may be deemed to have sole power to vote and dispose of the
securities owned by Emigrant Capital
Corporation.
|
|
(12)
|
Includes
(i) 452,100 shares of common stock and 268,125 shares of common stock
subject to currently exercisable warrants owned by Singer Opportunity Fund, L.P., (ii)
142,900 shares of common stock and 106,875 shares of common stock subject
to currently exercisable warrants owned by Singer Fund, L.P., (iii) 38,000
shares of common stock and 168,840 shares of common stock subject to
currently exercisable warrants owned by
Mr. Singer and (iv) 8,000 shares of common stock owned by Singer
Congressional Fund, L.P. Singer Fund Management, LLC makes all investment
and voting decisions on behalf of Singer Opportunity Fund, L.P., Singer
Fund, L.P. and Singer Congressional Fund, L.P. The aforementioned
is based in part on a Schedule 13G filed jointly by Singer Fund
Management, LLC, Singer Opportunity Fund, L.P., Singer Fund, L.P. and
Singer Congressional Fund, L.P. with the Securities and Exchange
Commission on March 23, 2005. Eric Singer, by virtue of being
managing member of Singer Fund, L.P., Singer Fund Management,
LLC, and Singer Congressional Fund, L.P., has sole power to vote and
dispose of the securities owned by Singer Fund,
L.P.
|
|
(13)
|
Includes
195,833 shares subject to currently exercisable options and warrants
issued to Mr. Ohana. Does not include options to purchase
4,167 shares of common stock held by
Mr. Ohana.
|
|
(14)
|
Includes
144,375 shares of common stock subject to currently exercisable stock
options issued to Mr. Kahn. Does not include options to
purchase 5,625 shares of common stock which are not currently
exercisable.
|
|
(15)
|
Includes
145,833 shares subject to currently exercisable stock options issued to
Mr. Pons. Does not include options to purchase 4,167 shares of common
stock held by Mr. Pons.
|
|
Page
Number
|
|
|
Condensed
Balance Sheets as of June 30, 2008 (unaudited) and December 31,
2007
|
F-2
|
|
Condensed
Statements of Operations for the three and six months ended June 30, 2008
and 2007 (unaudited)
|
F-3
|
|
Condensed
Statements of Cash Flows for the six months ended June 30, 2008 and 2007
(unaudited)
|
F-4
|
|
|
|
|
Notes
to Condensed Financial Statements for the six months ended June 30,
2008 and 2007 (unaudited)
|
F-5
|
|
Report
of independent registered public accounting firm
|
F-13
|
|
Balance
Sheets as of December 31, 2007 and 2006
|
F-14
|
|
Statements
of Operations for the years ended December 31, 2007 and
2006
|
F-15
|
|
Statements
of Stockholders’ Equity for the years ended December 31, 2007 and
2006
|
F-16
|
|
Statements
of Cash Flows for the years ended December 31, 2007 and
2006
|
F-17
|
|
Notes
to Financial Statements for the years ended December 31, 2007 and
2006
|
F-18
|
|
June
30,
|
DECEMBER
31,
|
|||||||
|
|
2008
|
2007
|
||||||
|
Assets:
|
(UNAUDITED)
|
|||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 5,140,000 | $ | 5,928,000 | ||||
|
Royalty
and Interest Receivable
|
28,000 | 23,000 | ||||||
|
Other
current assets
|
41,000 | 71,000 | ||||||
|
Total
current assets
|
5,209,000 | 6,022,000 | ||||||
|
Security
Deposits
|
6,000 | 6,000 | ||||||
|
Patents
|
69,000 | 72,000 | ||||||
| $ | 5,284,000 | $ | 6,100,000 | |||||
|
Liabilities:
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 42,000 | $ | 103,000 | ||||
|
Accrued
expenses and other current liabilities
|
84,000 | 264,000 | ||||||
|
Total
current liabilities
|
126,000 | 367,000 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
Equity
|
||||||||
|
Common
stock - $0.01 par value ; authorized 50,000,000 shares;
|
||||||||
|
24,135,557
shares issued and outstanding at June 30, 2008 and December 31,
2007
|
241,000 | 241,000 | ||||||
|
Additional
paid-in capital
|
54,915,000 | 54,769,000 | ||||||
|
Accumulated
deficit
|
(49,998,000 | ) | (49,277,000 | ) | ||||
| 5,158,000 | 5,733,000 | |||||||
| $ | 5,284,000 | $ | 6,100,000 | |||||
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
|
June
30,
|
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Royalty
Revenue
|
$ | 65,000 | $ | — | $ | 134,000 | $ | — | ||||||||
|
Cost
of Revenue
|
4,000 | — | 7,000 | — | ||||||||||||
|
Gross
Profit
|
61,000 | — | 127,000 | — | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
General
and administrative
|
$ | 418,000 | $ | 619,000 | $ | 770,000 | $ | 1,233,000 | ||||||||
|
Non
Cash Compensation
|
73,000 | 766,000 | 146,000 | 1,227,000 | ||||||||||||
|
Total
Operating Expense
|
$ | 491,000 | 1,385,000 | 916,000 | 2,460,000 | |||||||||||
|
Loss
before interest income
|
(430,000 | ) | (1,385,000 | ) | ( 789,000 | ) | (2,460,000 | ) | ||||||||
|
Interest
income – net
|
28,000 | 48,000 | 68,000 | 63,000 | ||||||||||||
|
Net
Loss
|
$ | (402,000 | ) | $ | (1,337,000 | ) | $ | ( 721,000 | ) | $ | (2,397,000 | ) | ||||
|
Loss
per common share: basic and diluted
|
$ | (0.02 | ) | $ | (0.06 | ) | $ | (0.03 | ) | $ | (0.11 | ) | ||||
|
Weighted
average shares: basic and diluted
|
24,135,557 | 22,589,449 | 24,135,557 | 21,194,834 | ||||||||||||
|
SIX
MONTHS ENDED JUNE 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (721,000 | ) | $ | (2,397,000 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
3,000 | 5,000 | ||||||
|
Non
Cash Compensation
|
146,000 | 1,227,000 | ||||||
|
Changes
in:
|
||||||||
|
Prepaid
expenses and other current assets
|
26,000 | 45,000 | ||||||
|
Accounts
payable, accrued expenses and other current
liabilities
|
(242,000 | ) | (299,000 | ) | ||||
|
Net
cash used in operating activities
|
(788,000 | ) | (1,419,000 | ) | ||||
|
Cash
Flows from Investing Activities
|
— | — | ||||||
|
Cash
Flows from Financing Activities
|
||||||||
|
Issuance
of Common Stock, net of expenses of $275,000
|
—
|
4,767,000 | ||||||
|
NET
INCREASES (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(788,000 | ) | 3,348,000 | |||||
|
Cash
and cash equivalents, beginning of period
|
5,928,000 | 1,797,000 | ||||||
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 5,140,000 | $ | 5,145,000 | ||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
|
Cash
paid during the periods for:
|
||||||||
|
Interest
|
$ | 2,000 | $ | 2,000 | ||||
|
Taxes
|
$ | — | $ | — | ||||
|
NOTE
A –
|
NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
|
SIX MONTHS ENDED
JUNE 30,
|
||||
|
2008
|
2007
|
|||
|
Risk-free
interest rates
|
2.73%
- 3.28%
|
4.62%
|
||
|
Expected
option life in years
|
5
yrs.
|
5
yrs.
|
||
|
Expected
stock price volatility
|
37.32
- 39.35%
|
45.92%
|
||
|
Expected
dividend yield
|
-0-
|
-0-
|
||
|
[4]
REVENUE RECOGNITION:
|
|
[5]
LOSS PER SHARE:
|
|
[6]
CASH EQUIVALENTS:
|
|
NOTE
B –
|
COMMITMENTS AND CONTINGENCIES |
|
Services
Agreement:
|
|
Amended
Patent Purchase Agreement:
|
|
NOTE
B –
|
COMMITMENTS AND CONTINGENCIES: (continued) |
|
NOTE C
–
|
EMPLOYMENT
ARRANGEMENTS AND OTHER AGREEMENTS
|
|
NOTE C
–
|
EMPLOYMENT
ARRANGEMENTS AND OTHER AGREEMENTS:
(continued)
|
|
NOTE D
–
|
LITIGATION |
|
NOTE D
–
|
LITIGATION: (continued) |
|
NOTE D
–
|
LITIGATION: (continued) |
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash and cash
equivalents
|
$ | 5,928,000 | $ | 1,797,000 | ||||
|
Royalty and interest
receivable
|
23,000 | 4,000 | ||||||
|
Prepaid
insurance
|
71,000 | 74,000 | ||||||
|
Total current
assets
|
6,022,000 | 1,875,000 | ||||||
|
OTHER
ASSETS:
|
||||||||
|
Patent, net of accumulated
amortization of $28,000 and $21,000, respectively
|
72,000 | 79,000 | ||||||
|
Security
deposits
|
6,000 | 17,000 | ||||||
|
Total Other Assets
|
78,000 | 96,000 | ||||||
|
TOTAL ASSETS
|
$ | 6,100,000 | $ | 1,971,000 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable
|
$ | 103,000 | $ | 350,000 | ||||
|
Accrued
expenses
|
264,000 | 219,000 | ||||||
|
TOTAL
LIABILITIES
|
367,000 | 569,000 | ||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||
|
STOCKHOLDERS’
EQUITY
|
||||||||
|
Common
stock, $0.01 par value; authorized 50,000,000 shares;
24,135,557 and 19,764,724
issued and outstanding in 2007 and 2006,respectively
|
241,000 | 197,000 | ||||||
|
Additional paid-in
capital
|
54,769,000 | 47,484,000 | ||||||
|
Accumulated
deficit
|
(49,277,000 | ) | (46,279,000 | ) | ||||
|
TOTAL STOCKHOLDERS’
EQUITY
|
5,733,000 | 1,402,000 | ||||||
|
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
$ | 6,100,000 | $ | 1,971,000 | ||||
|
Year
Ended
|
||||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
ROYALTY
REVENUE
|
$ | 232,000 | — | |||||
|
COST
OF REVENUE
|
12,000 | — | ||||||
|
GROSS PROFIT
|
220,000 | — | ||||||
|
OPERATING
EXPENSES:
|
||||||||
|
General
and administrative
|
$ | 1,992,000 | $ | 1,548,000 | ||||
|
Non-cash
compensation
|
1,403,000 | 479,000 | ||||||
|
TOTAL OPERATING
EXPENSES
|
3,395,000 | 2,027,000 | ||||||
|
OPERATING LOSS
|
(3,175,000 | ) | (2,027,000 | ) | ||||
|
OTHER
INCOME (EXPENSES):
|
||||||||
|
Interest income,
net
|
177,000 | 69,000 | ||||||
|
LOSS BEFORE INCOME
TAXES
|
(2,998,000 | ) | (1,958,000 | ) | ||||
|
INCOME
TAXES
|
— | — | ||||||
|
NET LOSS
|
$ | (2,998,000 | ) | $ | ( 1,958,000 | ) | ||
|
Net
Loss Per Share - Basic and Diluted
|
$ | (0.13 | ) | $ | (0.10 | ) | ||
|
Weighted
average number of common shares outstanding
-Basic and
Diluted
|
22,250,144 | 18,952,137 | ||||||
|
Additional
|
||||||||||||||||||||
|
Common
Stock
|
Paid-in
|
Accumulated
|
||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||
|
Balance
– December 31, 2005
|
17,697,572 | $ | 177,000 | $ | 44,896,000 | $ | (44,321,000 | ) | $ | 752,000 | ||||||||||
|
Exercise
of Warrants
|
1,987,152 | 20,000 | 2,109,000 | — | 2,129,000 | |||||||||||||||
|
Issuance
of common stock for services
|
80,000 | — | 120,000 | — | 120,000 | |||||||||||||||
|
Granting
of options
|
— | — | 359,000 | — | 359,000 | |||||||||||||||
|
Net
loss
|
— | — | (1,958,000 | ) | (1,958,000 | ) | ||||||||||||||
|
Balance - December
31, 2006
|
19,764,724 | 197,000 | 47,484,000 | (46,279,000 | ) | 1,402,000 | ||||||||||||||
|
Reclassification
|
1,000 | (1,000 | ) | — | — | |||||||||||||||
|
Exercise
of options and warrants
|
1,037,500 | 10,000 | 1,191,000 | — | 1,201,000 | |||||||||||||||
|
Sales
of common stock, net of finder’s fee of $275,000
|
3,333,333 | 33,000 | 4,692,000 | — | 4,725,000 | |||||||||||||||
|
Granting
of options and extensions of options
|
— | — | 1,403,000 | — | 1,403,000 | |||||||||||||||
|
Net
loss
|
— | — | — | (2,998,000 | ) | (2,998,000 | ) | |||||||||||||
|
Balance - December
31, 2007
|
24,135,557 | $ | 241,000 | $ | 54,769,000 | $ | (49,277,000 | ) | $ | 5,733,000 | ||||||||||
|
Year
Ended
|
||||||||
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net loss
|
$ | (2,998,000 | ) | $ | (1,958,000 | ) | ||
|
Adjustments to reconcile net
loss to net cash
|
||||||||
|
used in operating
activities:
|
||||||||
|
Depreciation and
amortization
|
18,000 | 8,000 | ||||||
|
Stock-based
compensation
|
1,403,000 | 359,000 | ||||||
|
Issuance of common stock for
services
|
— | 120,000 | ||||||
|
Changes in operating assets and
liabilities:
|
||||||||
|
Royalty and interest
receivable
|
(19,000 | ) | (1,000 | ) | ||||
|
Prepaid
insurance
|
3,000 | 8,000 | ||||||
|
Accounts payable and accrued
expenses
|
(202,000 | ) | 206,000 | |||||
|
NET CASH USED IN OPERATING
ACTIVITIES
|
(1,795,000 | ) | (1,258,000 | ) | ||||
|
CASH
FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and
equipment
|
— | (12,000 | ) | |||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Proceeds from issuance of
common stock, net of finders fee of $275,000
|
4,725,000 | — | ||||||
|
Proceeds from exercise of
options and warrants
|
1,201,000 | 2,129,000 | ||||||
|
NET CASH PROVIDED BY FINANCING
ACTIVITIES
|
5,926,000 | 2,129,000 | ||||||
|
NET INCREASE IN CASH AND CASH
EQUIVALENTS
|
4,131,000 | 859,000 | ||||||
|
CASH
AND CASH EQUIVALENTS, Beginning
|
1,797,000 | 938,000 | ||||||
|
CASH
AND CASH EQUIVALENTS, Ending
|
$ | 5,928,000 | $ | 1,797,000 | ||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
|
Cash paid during the years
for:
|
||||||||
|
Interest
|
$ | 4,000 | $ | 1,000 | ||||
|
Taxes
|
— | — | ||||||
|
[1]
|
Cash
equivalents:
|
|
[2]
|
Revenue
recognition:
|
|
[3]
|
Patents:
|
|
[4]
|
Impairment
of long-lived assets:
|
|
[5]
|
Income
taxes:
|
|
[6]
|
Net
Loss per share:
|
|
[7]
|
Use
of estimates:
|
|
[8]
|
Financial
instruments:
|
|
[9]
|
Stock-based
compensation:
|
|
Year
Ended
|
||||
|
December
31,
|
||||
|
2007
|
2006
|
|||
|
Risk-free
interest rates
|
3.28
– 4.67%
|
4.51
– 4.57%
|
||
|
Expected
option life in years
|
5
years
|
5
to 10 years
|
||
|
Expected
stock price volatility
|
37.32
- 45.92%
|
48.45
– 69.82%
|
||
|
Expected
dividend yield
|
0.00%
|
0.00%
|
||
|
[10]
|
Recently
issued accounting standards:
|
|
[1]
|
Private
Placement:
|
|
[2]
|
Stock
options:
|
|
2007
|
2006
|
|||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Options
|
Exercise
|
Options
|
Exercise
|
|||||||||||||
|
Outstanding
|
Price
|
Outstanding
|
Price
|
|||||||||||||
|
Options
outstanding at beginning of year
|
6,667,731 | (a)(b) | $ | 0.89 | 6,337,731 | (c) | $ | 0.87 | ||||||||
|
Granted
|
1,282,709 | (d)(e)(f)(g) | 1.58 | 330,000 | (a)(b) | 1.40 | ||||||||||
|
Cancelled/expired/Exercised
|
90,000 | 0.18 | — | |||||||||||||
|
Options
outstanding at end of year
|
7,860,440 | 1.01 | 6,667,731 | 0.89 | ||||||||||||
|
Options
exercisable at end of year
|
7,703,565 | $ | 0.99 | 6,562,106 | 0.87 | |||||||||||
|
(a)
|
Includes
an aggregate of 30,000 and 150,000 ten-year and five-year stock options
issued to directors on February 2, 2006 and December 20, 2006,
respectively, at exercise prices of $1.31 and $1.50 per
share. The Company recorded non-cash compensation of $8,000
and $132,000 relating to the issuance of these options for the
years ended December 31, 2007 and 2006,
respectively.
|
|
(b)
|
Includes
75,000 five-year stock options issued to each of the Chief Financial
Officer and a consultant to the Company on December 20, 2006 and February
2, 2006, respectively, at exercise prices of $1.50 and $1.20 per
share. The Company recorded non-cash compensation of $31,000
and $68,000 relating to the issuance of these options for the years ended
December 31, 2007 and 2006,
respectively.
|
|
(c)
|
In
2003, the Company granted 1,084,782 stock options to the Chairman and
Chief Executive Officer in connection with his employment agreement, of
which 200,000 stock options were vested in 2006. Accordingly,
the Company recorded non-cash compensation of $42,000 relating to these
options in accordance with SFAS 123
(R).
|
|
(d)
|
Includes
an aggregate of 75,000 five-year stock options granted to directors on
December 21, 2007, at exercise prices of $1.45 per share. The
Company recorded non-cash compensation of $42,000 relating to the issuance
of these options for the year ended December 31, 2007 since none of these
options were vested in 2007.
|
|
(e)
|
Includes
100,000 five-year stock options granted to a consultant to the Company on
December 21, 2007, at exercise prices of $1.45 per share. The
Company recorded non-cash compensation of $-0- relating to the issuance of
these options for the year ended December 31, 2007 since none of the
options were vested in 2007.
|
|
(f)
|
In
2007, the Company granted 375,000 stock options to the Chairman and Chief
Executive Officer in connection with his employment agreement, which were
fully vested in 2007. Accordingly, the Company recorded
non-cash compensation of $252,000 relating to these options in accordance
with SFAS 123 (R).
|
|
(g)
|
In
2007 the Company granted 732,709 stock options to the Chairman and Chief
Executive Officer in connection with the anti-dilution provision of his
employment agreement. Accordingly, the Company recorded
non-cash compensation of $403,000 relative to these options in
2007.
|
|
Weighted
|
|||||||||||||||||||||
|
Weighted
|
Average
|
Weighted
|
|||||||||||||||||||
|
Range
of
|
Average
|
Remaining
|
Average
|
||||||||||||||||||
|
Exercise
|
Options
|
Exercise
|
Life
in
|
Options
|
Exercise
|
||||||||||||||||
|
Price
|
Outstanding
|
Price
|
Years
|
Exercisable
|
Price
|
||||||||||||||||
|
$0.12
- $2.91
|
7,537,215 | $ | 0.85 | 4.19 | 7,414,715 | $ | 0.84 | ||||||||||||||
|
$3.00
- $3.75
|
146,625 | 3.44 | 2.31 | 112,250 | 3.56 | ||||||||||||||||
|
$4.13
- $5.69
|
77,100 | 5.08 | 2.08 | 77,100 | 5.08 | ||||||||||||||||
|
$6.00
- $6.88
|
89,500 | 6.21 | 2.13 | 89,500 | 6.21 | ||||||||||||||||
|
$10.00
|
10,000 | 10.00 | 2.21 | 10,000 | 10.00 | ||||||||||||||||
| 7,860,440 | 1.01 | 4.11 | 7,703,565 | 0.99 | |||||||||||||||||
|
[3]
|
Warrants:
|
|
Number
|
|||||||
|
of
|
Exercise
|
||||||
|
Warrants
|
Price
|
Expiration
Date
|
|||||
| 300,000 |
0.70
|
July
11, 2011 (a)
|
|||||
| 50,000 |
1.00
|
|
May
21, 2010 (b) (e)
|
||||
| 342,500 |
1.25
|
March
14, 2008 (b) (f)
|
|||||
| 52,500 |
1.25
|
March
14, 2008 (c) (g)
|
|||||
| 250,000 |
1.48
|
October
8, 2011 (a)
|
|||||
| 240,000 |
1.50
|
April
16, 2012 (d)
|
|||||
| 171,250 |
1.75
|
December
15, 2008 (b) (h)
|
|||||
| 350,000 |
1.75
|
May
21, 2010 (b) (i)
|
|||||
| 26,250 |
1.75
|
December
15, 2008 (c) (j)
|
|||||
| 123,750 |
1.75
|
May
21, 2010 (c) (k)
|
|||||
| 1,786,667 |
2.00
|
April
16, 2012 (d)
|
|||||
| 3,692,917 | |||||||
|
(a)
|
Issued
to CMH Capital Management Corp. in 2001, a company owned by the Chairman
and Chief Executive Officer.
|
|
(b)
|
Issued
in connection with December 2004 private offering of common
stock.
|
|
(c)
|
Issued
in connection with the January 2005 private offering of common
stock.
|
|
(d)
|
Issued
in connection with the April 2007 private offering of common
stock.
|
|
(e)
|
These
warrants were to expire on December 21, 2007 and were extended to May 21,
2010.
|
|
(f)
|
These
warrants were to expire on December 21, 2007 and were extended to March
14, 2008.
|
|
(g)
|
These
warrants were to expire on January 12, 2008 and were extended to March 14,
2008.
|
|
(h)
|
These
warrants were to expire on December 21, 2007 and were extended to December
15, 2008.
|
|
(i)
|
These
warrants were to expire on December 21, 2007 and were extended to May 20,
2010.
|
|
(j)
|
These
warrants were to expire on January 12, 2008 and were extended to December
15, 2008.
|
|
(k)
|
These
warrants were to expire on January 12, 2008 and were extended to May 20,
2010.
|
|
[1]
|
Services
agreement:
|
|
[2]
|
Legal
fees:
|
|
[3]
|
Operating
leases:
|
|
[4]
|
Savings
and investment plan:
|
|
Year
Ended
|
||||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net operating loss carry
forwards
|
$ | 16,800,000 | $ | 16,136,000 | ||||
|
Options and warrants not yet
deducted, for tax purposes
|
705,000 | 177,000 | ||||||
|
Other
|
-0- | -0- | ||||||
| 17,505,000 | 16,313,000 | |||||||
|
Valuation
allowance
|
(17,505,000 | ) | (16,313,000 | ) | ||||
|
Net
deferred tax assets
|
$ | 0 | $ | 0 | ||||
|
Year
Ended
|
||||
|
December
31,
|
||||
|
2007
|
2006
|
|||
|
Income
tax benefit - statutory rate
|
(34.0)%
|
(34.0)%
|
||
|
State
and local, net
|
(3.5)%
|
(3.5)%
|
||
|
Valuation
allowance on deferred tax assets
|
37.5
%
|
37.5
%
|
||
|
[1]
|
In
December 2007, the Company extended the expiration date of warrants to
purchase an aggregate of 2,013,750 shares of our common stock (the
“Warrants”) issued to investors in the Company’s private offering
completed in December 2004 and January 2005. The Warrants were
exercisable for (i) an aggregate of 1,342,500 shares at an exercise price
of $1.25 per share (the “$1.25 Warrants”) and (ii) an aggregate of 671,250
shares at an exercise price of $1.75 per share (the “$1.75
Warrants”). Investors in the aforementioned private offering
included two principal stockholders of the Company, who invested an
aggregate of $1,250,000 and as part of the offering received an aggregate
of 625,000 $1.25 Warrants and 312,500 $1.75 Warrants, and a director of
the Company, who invested $100,000 and received 50,000 $1.25 Warrants and
25,000 $1.75 Warrants as part of the offering. The Warrants
were scheduled to expire on December 21, 2007 or January 13,
2008 (three (3) years from the date of issuance). The
expiration date of the Warrants (both the $1.25 Warrants and the $1.75
Warrants) was extended until March 14, 2008. In addition,
to the extent the holders exercised in full their $1.25 Warrants no later
than December 21, 2007, such holders were afforded an extension of
the expiration date of their $1.75 Warrants until May 21, 2010 such
that the exercise price of the $1.75 Warrants will remain at $1.75 per
share through March 31, 2009 and increased to $2.00 per share if
exercised thereafter until May 21, 2010, at which time they will
expire. In December 2007 (prior to December 21) holders of
$1.25 Warrants to purchase 902,500 shares were exercised which resulted in
proceeds to the Company of $1,128,125. To the extent the
remaining holders exercised in full their $1.25 Warrants prior to the new
expiration date of March 14, 2008, the expiration date of their $1.75
Warrants was extended until December 15, 2008 and such warrants will
be exercisable at $2.00 per share beginning March 14,
2008.
|
|
[2]
|
On
December 21, 2007, the Company extended the expiration date of
warrants issued in December 2004 to a director of the Company, to purchase
50,000 shares of our common stock, from December 21, 2007 until May
21, 2010.
|
|
[1]
|
On
February 28, 2007, the Company entered into a new Employment
Agreement with Corey M. Horowitz pursuant to which Mr. Horowitz continued
to serve as Chairman and Chief Executive Officer for a two year term at an
annual base salary of $288,750 for the first year, increasing by 5% for
the second year. In connection with his employment agreement,
Mr. Horowitz was issued a five (5) year option to purchase 375,000 shares
of common stock at an exercise price of $1.46 per share which vests, on a
quarterly basis over a one year period subject to acceleration upon a
change of control. The Company also issued to Mr. Horowitz
on the one year anniversary date (February 28, 2007) an additional five
(5) year option to purchase a minimum of 375,000 shares of common stock at
an exercise price equal to the closing price of our common stock on the
date of grant, which option will vest on a quarterly basis over a one year
period. In addition to the aforementioned option grants, the
Company agreed to extend for an additional three (3) years the expiration
dates of all options and warrants (an aggregate of 2,620,000 shares)
expiring in calendar year 2007 and 2008 owned by Mr. Horowitz and CMH
Capital Management Corp. (“CMH”), an affiliate. Under the terms
of his Employment Agreement, Mr. Horowitz shall receive bonus compensation
in an amount equal to 5% of Company royalties or other payments (before
deduction of payments to third parties including, but not limited to,
legal fees and expenses and third party license fees) received from
licensing its patents (including patents currently owned and acquired or
licensed on an exclusive basis during the period in which Mr. Horowitz
continues to serve as an executive officer of the Company) (the “Royalty
Bonus Compensation”). During 2007, Mr. Horowitz received
$12,000 of Royalty Bonus Compensation. Mr. Horowitz shall also
receive bonus compensation equal to 5% of the gross proceeds from (i) the
sale of any of the Company’s patents or (ii) the Company’s merger with or
into another corporation or entity. The Royalty Bonus
Compensation shall continue to be paid to Mr. Horowitz for the life
of each of the Company’s patents with respect to licenses
entered
|
|
[2]
|
On
December 20, 2006, the Company entered into a new agreement with
David Kahn pursuant to which he agreed to continue to serve as Chief
Financial Officer through December 31, 2008. In
consideration for his services, Mr. Kahn is compensated at the rate of
$6,615 per month for the period through December 31, 2007 and $6,945
per month for the year ended December 31, 2008. Mr. Kahn
was also issued a five (5) year option to purchase 75,000 shares of common
stock at an exercise price of $1.50 per share. The option
vested 30,000 shares on the date of grant and the balance of the shares
(45,000) vest on a quarterly basis in equal amounts of 5,625 shares
beginning March 31, 2007 through December 31,
2008. The agreement further provides that the Company may
terminate the agreement at any time for any reason. In the
event Mr. Kahn’s services are terminated without “Good Cause” (as
defined), he will be entitled to accelerated vesting of all unvested
shares underlying the option and the lesser of (i) six months base monthly
compensation or (ii) the remaining balance of the monthly compensation
payable through December 31,
2008.
|
|
[1]
|
In
August 2005, the Company commenced patent litigation against D-Link
Corporation and D-Link Systems, Incorporated (collectively “D-Link”) in
the United States District Court for the Eastern District of Texas, Tyler
division (Civil Action No. 6:05W291), for infringement of the Company’s
Remote Power Patent. The complaint sought, among other things,
a judgment that the Company’s Remote Power Patent is enforceable and has
been infringed by the defendants. The Company also sought a
permanent injunction restraining the defendants from continued
infringement, or active inducement of infringement by others, of the
Remote Power Patent.
|
|
[2]
|
On
November 17, 2005 the Company entered into a Settlement Agreement with
PowerDsine, Inc and PowerDsine Ltd. which dismisses, with prejudice, a
civil action brought by PowerDsine in the United States District Court for
the Southern District of New York that sought a declaratory judgment that
U.S. Patent No. 6,218,930 (the “Remote Power Patent”) owned by the Company
was invalid and not infringed by PowerDsine and/or its
customers. Under the terms of the Settlement Agreement, the
Company has agreed that it will not initiate litigation against PowerDsine
for its sale of Power over Ethernet (PoE) integrated
circuits. In addition, the Company has agreed that it will not
seek damages for infringement from customers that incorporate PowerDsine
integrated circuit products in PoE capable Ethernet switches manufactured
on or before April 30, 2006. PowerDsine has agreed that it will not
initiate, assist or cooperate in any legal action relating to the Remote
Power Patent. The Company also agreed that it will not initiate
litigation against
PowerDsine or its customers for infringement of the Remote Power Patent
arising from the manufacture and sale of PowerDsine Midspan products for
three years following the dismissal date. Following such three year
period, the Company may seek damages for infringement of the Remote Power
Patent from PowerDsine or its customers with respect to the purchase and
sale of Midspan products beginning 90 days following the dismissal
date.
|
|
[1]
|
In
February 2008, the Company commenced litigation against several major data
networking equipment manufacturers in the United States District Court for
the Eastern District of Texas, Tyler Division, for infringement of the
Company’s Remote Power Patent. The defendants in the lawsuit
include Cisco Systems, Inc., Cisco Linksys, LLC, Enterasys Networks, Inc.,
3COM Corporation, Inc., Extreme Networks, Inc., Foundry Networks, Inc.,
Netgear, Inc. and Adtran, Inc. The Company seeks injunctive
relief and monetary damages for infringement based upon reasonable
royalties as well as treble damages for the defendants continued willful
infringement of the Remote Power Patent. To date all of the
defendants, other than Netgear, Inc., have answered the complaint and
asserted that they do not infringe any valid claim of the Remote Power
Patent, and further asserted that, based on several different theories,
the patent claims are invalid or unenforceable. In addition to
these defenses, the defendants also asserted counterclaims for, among
other things, non-infringement, invalidity, and unenforceability of the
Remote Power Patent. In the event that the courts determine
that the Remote Power Patent is not valid or enforceable, and/or that the
defendants do not infringe, any such determination would have a material
adverse effect on the Company.
|
|
[2]
|
Dovel
& Luner, LLP provides legal services to the Company with respect to
the above referenced litigation (See Note K[1]). The terms of
the Company’s agreement with Dovel & Luner, LLP provides for legal
fees of a maximum aggregate cash payment of $1.5 million plus a
contingency fee of up to 24% depending upon when an outcome is
achieved.
|
|
[3]
|
On
March 7, 2008, the Company further extended the expiration dates of
its outstanding $1.25 Warrants and $1.75 Warrants (See Note H[1]) as
follows: (i) the expiration date of the $1.25 Warrants was
extended from March 14, 2008 until June 16, 2008 and the
exercise price of such warrants was adjusted to $1.30 per share and (ii)
the expiration date of our $1.75 Warrants was extended until December 15,
2008 and the exercise price of such warrants was adjusted to $2.00 per
share.
|