UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB
|
x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the
fiscal year ended December
31, 2004
|
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 |
Commission
file number 0-07418
eLINEAR,
INC.
(Exact
name of small business issuer as specified in its charter)
Delaware 76-0478045
(State or
other jurisdiction of incorporation or organization) (IRS
Employer Identification No.)
2901
West Sam Houston Parkway North, Suite E-300, Houston, Texas
77043
(Address
of principal executive offices) (Zip
Code)
Registrant’s
telephone number, including area code: (713)
896-0500
Securities registered pursuant to Section 12(b) of the
Act: None
Securities
registered pursuant to Section 12(g) of the Act: $.02 Par Value Common
Stock
Check
whether the Issuer (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
o
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. o
Issuer’s
revenues for the fiscal year ended December 31, 2004, were
$24,065,753.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Issuer as of March 17, 2005, based upon the average bid
and asked price as of such date on the American Stock Exchange, was
$8,919,733.
The
Registrant’s common stock outstanding as of March 17, 2005, was 22,212,012
shares.
DOCUMENTS
INCORPORATED BY REFERENCE:
None
Transitional
Small Business Disclosure Format (Check One): Yes o No
x
eLINEAR,
INC.
INDEX
TO FORM 10-KSB
December
31, 2004
| |
|
|
|
|
Part
I |
Item
1. |
Description
of Business |
|
| |
Item
2. |
Description
of Property |
|
| |
Item
3. |
Legal
Proceedings |
|
| |
Item
4. |
Submission
of Matters to a Vote of Security Holders |
|
| |
|
|
|
|
Part
II |
Item
5. |
Market
for Common Equity and Related Stockholder Matters |
|
| |
Item
6. |
Management’s
Discussion and Analysis and Results of
Operations
and Financial Condition |
|
| |
Item
7. |
Financial
Statements |
|
| |
Item
8. |
Changes
in and Disagreements with Accountants on
Accounting
and Financial Disclosure |
|
| |
Item
8A. |
Controls
and Procedures |
|
| |
Item
8B |
Other
Information |
|
| |
|
|
|
|
Part
III |
Item
9. |
Directors,
Executive Officers, Promoters and Control Persons,
Compliance
with Section 16(a) of the Exchange Act |
|
| |
Item
10. |
Executive
Compensation |
|
| |
Item
11. |
Security
Ownership of Certain Beneficial Owners and
Management |
|
| |
Item
12. |
Certain
Relationships and Related Party Transactions |
|
| |
Item
13. |
Exhibits |
|
| |
Item
14. |
Principal
Accountant Fees and Services |
|
Some of
the statements contained in this report discuss future expectations,
contain projections
of results of operations or financial condition, or state other
"forward-looking" information. The words "believe," "intend," "plan," "expect,"
"anticipate," "estimate," "project" and similar expressions identify such
statement was made. These statements are subject to known and unknown risks,
uncertainties, and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and is derived using numerous
assumptions:
| |
- |
changes
in general economic and business conditions affecting Information
Technology ("IT") consulting development and implementation,
computer-based project management consulting and strategic business
consulting industries; |
- technical
developments that make the Company's products or services obsolete;
- changes
in the Company's business strategies;
- the level
of demand for the Company's products or services;
- the
Company's ability to develop or maintain strategic relationships;
and
| - |
global
economic conditions. |
The
Company does not promise to update forward-looking information to reflect actual
results or changes in assumptions or other factors that could affect those
statements. Future events and actual results could differ materially from those
expressed in, contemplated by, or underlying such forward-looking
statements.
PART
I
ITEM
1. DESCRIPTION OF BUSINESS
Overview
eLinear,
Inc., a Delaware corporation (the "Company" or "eLinear"), is a total IT
solutions provider of technology consulting, network and storage solutions
infrastructure and a provider of digital voice, data, video and security
services for both commercial and residential customers. Typically, the Company’s
customers are Fortune 2000 and Small to Medium Business ("SMB") organizations.
The Company’s services are offered to companies seeking to increase productivity
or reduce costs through investing in technology. A majority of the Company’s
customers are located in Houston, Texas. The Company’s Internet address is
http://www.elinear.com.
Information contained on the Company’s web site is not a part of this report.
The Company’s stock is traded on the American Stock Exchange under the symbol
"ELU".
The
Company provides IT consulting services through consulting solutions, creative
web site design, web site content management software and technical project
management and development services. Through NetView Technologies, Inc., a
wholly-owned subsidiary ("NetView"), the Company provides network and storage
solutions through product fulfillment, network and infrastructure design, data
storage architecture and is a certified partner with several Fortune 100 IT
solutions providers. Through NewBridge Technologies, Inc., a wholly-owned
subsidiary ("NewBridge"), the Company provides structured cabling, cabling
infrastructure design and implementation, security installation and monitoring
and digital services of voice, data and video over fiber optic networks to its
residential and commercial customers. Through TanSeco Systems, Inc., a
wholly-owned subsidiary ("TanSeco"), the Company has business centered on
premise security solutions which includes a three-year contract with RadioShack
Corporation to install kiosks throughout the United States, third party 24X7
security monitoring contracts with a variety of commercial customers and project
work installing security devices and fiber/cable in client locations across the
US.
Organizational
History
The
Company operated as a technology consulting business from December 1999 until
its acquisition of NetView in April 2003. It acquired its Internet consulting
business as a result of a reverse merger with Imagenuity, Inc. ("Imagenuity") in
1999. Since 1999 to date, its Internet consulting business consisted of Internet
consulting services, creative web site design, web site content management and
software and technical project management and development services. For the
fiscal year ended December 31, 2004, the consulting segment contributed less
than 1% of eLinear’s revenue. From 1995, its inception, the Company, which at
the time was named Kinetics.com, was engaged in marketing proprietary software
programs for use on the world wide web of the Internet. Kinetics.com marketed
two software programs designed for use on the Web in 1995 and 1996. During 1996,
several creditors of Kinetics.com obtained court judgements against it as a
result of non-payment of financial obligations and in 1997, Kinetics.com
transferred all of its assets to an unaffiliated third party. Subsequent to the
asset transfer, the only activities of Kinetics.com consisted of negotiating
settlements with its creditors and attempting to identify a suitable acquisition
or merger candidate . While Kinetics.com was the survivor in the merger, from an
accounting standpoint the transaction was accounted for as though it was a
recapitalization of Imagenuity and a sale of shares by Imagenuity in exchange
for the net assets of Kinetics.com. On July 31, 2000, the Company changed its
name to eLinear, Inc.
As a
result of the demise of such companies as Enron and others in Houston, Texas, IT
consulting was extremely limited and in order to grow its business, the Company
determined it should expand its offerings and accordingly, acquired NetView,
NewBridge and TanSeco.
On April
15, 2003, eLinear issued 12,961,979 shares
of common stock for 100% of the outstanding common stock of NetView. After the
merger the stockholders of NetView owned approximately 90% of the combined
entity. For financial reporting purposes this transaction was treated as an
acquisition of eLinear and a recapitalization of NetView using the purchase
method of accounting. For accounting purposes, the shares issued to eLinear’s
shareholders were accounted for as the consideration paid by NetView for the
acquisition of eLinear and was valued using the stock price on the date issued.
The purchase allocation resulted in goodwill of $451,920. NetView’s historical
financial statements replace eLinear’s in the accompanying financial statements.
On July
31, 2003, eLinear completed the acquisition of all the issued and outstanding
shares of NewBridge, a provider of communications deployment. Pursuant to the
transaction, eLinear issued an aggregate of 850,000 shares of restricted common
stock and options to purchase 300,000 shares of common stock. NewBridge was
incorporated in the State of Texas on February 20, 2002, and changed its name
from MMGD, Inc. to NewBridge on August 7, 2003. As of the effective date,
NewBridge became a wholly owned subsidiary of eLinear. The acquisition was
accounted for using the purchase method of accounting. For accounting purposes,
the shares issued to the NewBridge shareholders were accounted for as the
consideration paid by eLinear for the acquisition of NewBridge and were valued
using the stock price on the date issued. The purchase allocation resulted in
goodwill of $1,491,102.
In
November 2004, the Company acquired all of the outstanding and issued stock of
TanSeco from RadioShack Corporation ("RadioShack"). The Company purchased the
stock with cash and acquired inventory, fixed assets and security monitoring
contracts. Concurrent with this transaction, TanSeco entered into a three-year
services agreement with RadioShack whereby TanSeco will provide the
installation, service, repair and inspection of security, closed circuit
television and fire systems used by RadioShack for the security of its more than
5,000 company-owned stores, kiosks and other physical locations.
The
Company’s Products and Services
The
Company offers its products and services through four distinct business segments
as follows:
| 1) |
Consulting
services - the Company offers through this business segment strategic
consulting services, creative web site design, web site content management
software and technical project management and development
services; |
| 2) |
Product
fulfillment and network and storage solutions - through NetView, the
Company offers a complete solution to its customers for the acquisition,
management and configuration of complex storage and network server
installations; |
| 3) |
Communications
deployment - through NewBridge, the Company provides structured cabling,
which is a set of cabling and connectivity products that integrate the
voice, data, video and various management systems of a structure, cabling
infrastructure design and implementation, which is the design and
implementation of the structured cabling systems, security installation
and monitoring and digital services of voice, data and video over fiber
optic networks to its residential and commercial customers;
and |
| 4) |
Premise
security solutions - through TanSeco, the Company has business centered on
premise security solutions which includes a three-year contract with
RadioShack Corporation to install kiosks throughout the United States,
third party 24X7 security monitoring contracts with a variety of
commercial customers and project work installing security devices and
fiber/cable in client locations across the
US. |
The
products the Company sells are "off the shelf" products and it does not incur
expenses associated with research and development. The Company does not intend
to incur research and development costs in the future as it relies on its
vendors and suppliers of products to provide the product upgrades. The Company
will rely on its clients to purchase the upgrades from the Company.
The
combination of these four business segments provides a total IT solution to the
Company’s customers.
Technology
Integration and Consulting Services
The
Company’s technology consulting segment offers a full set of services ranging
from traditional technology consulting to managing complex technology
integration projects. The Company focuses on providing solutions to technology
related issues ranging from managing a software selection process to
installation and integration of complex software products. In addition to
providing complete customer technology services, the Company markets a
proprietary software product called "LinearCMS." This product is designed to
allow non-technical personnel to develop and maintain web pages on one or more
web sites through a web browser. It allows collaboration between subject matter
experts, web site copywriters and business users, creating a working environment
that intelligently differentiates web site content from design, and separates
content within pages so it can be presented, transformed and syndicated for
multiple purposes. The Company does not have any patents or copyrights on this
product. Typically, the Company’s contracts it has with its customers are
cancelable at any time with fourteen to thirty days’ notice. The Company markets
its services through its in-house sales staff.
Product
Fulfillment and Network and Storage Solutions
NetView
is a proven supplier of IT product fulfillment and network and storage
solutions. NetView is classified as a value-added reseller ("VAR") and has
various retail agreements and certifications with such companies as Hewlett
Packard, Cisco and IBM. Typically, NetView’s customers are Fortune 2000
businesses and Small to Medium Business ("SMB") organizations of which NetView
markets its products and services through its own direct sales and marketing
team, direct mail and trade shows.
Communications
Deployment
NewBridge
provides structured cabling, cabling infrastructure design and implementation,
security installation and monitoring and digital services of voice, data and
video over fiber optic networks to its residential and commercial customers.
NewBridge markets its products and services through its own direct sales and
marketing team. Typical customers of NewBridge are government agencies, school
districts and new construction residential sub-divisions.
Premise
Security Solutions
Through
TanSeco the Company has business centered on premise security solutions which
includes a three-year contract with RadioShack to install kiosks throughout the
United States, 24X7 security monitoring contracts with a variety of commercial
customers and project work installing security devices and fiber/cable in client
locations across the US.
Sales
and Marketing
The
Company utilizes its in-house staff of sales and sales support personnel to
market its products and services. The Company intends to increase this staff to
fully implement its business plan. The Company believes it can obtain a greater
market share by cross-selling its products and services to its existing customer
base and identifying new customers which can benefit from the Company’s total IT
solutions products and services. A majority of the Company’s customers are
located in Houston and Dallas, Texas, however, the Company intends to expand its
marketing strategy through acquisitions of complimentary
businesses.
With
respect to the source of the Company's revenue, the Company had one customer
which provided more than 10% of the Company's revenue for the fiscal year ended
December 31, 2004.
Competition
The IT
marketplace is intensely competitive and subject to rapid technological change.
The Company’s competitors include other IT solutions firms, Internet
professional service firms, software firms, product and service fulfillment
companies for the acquisition, management and configuration of storage and
network installations and providers of communications deployment. These
competitors are national, regional and local, including recognizable companies
such as EDS, IBM, CompuCom and Accenture. While the Company competes with many
entities that have well established brand names, large customer bases and
greater resources than it, it believes that its primary competitors are smaller
companies with business plans similar to the Company’s that rely upon
pre-existing relationships to generate repeat business. The Company anticipates
that it will face additional competition from new entrants that provide
significant performance, price, creative or other advantages over those offered
by the Company. Many of these competitors have greater name recognition and
resources than the Company.
The
Company’s primary focus is on solving well-defined customer problems or
providing a need-proven service. It is focused on delivering reliable and
effective IT consulting solutions, managed services, software, security
solutions, Internet telephony solutions, and network and storage solutions that
enable enterprises to restructure and integrate entire business processes,
extending them across enterprise boundaries to employees, customers and
suppliers. The Company believes that as its line of products, services and
solutions grows through internal and external initiatives, its sales force will
be presented with cross-selling potential. With appropriate training, its goal
is that each customer sales representative will be responsible for selling all
of eLinear’s offerings.
Customers
One
customer accounted for 18% of the Company’s revenue for fiscal year 2004. It
does not maintain long-term contractual arrangements with any of its customers
and, accordingly, there is no assurance that its customers will continue to
conduct business with eLinear in the future. The loss of this customer would
have a material adverse effect on its business operations. The Company’s
business model relies upon negotiated sales transactions with its customers on a
transaction by transaction basis. Because it does not enter into long-term
contracts with its customers, there is no assurance that the Company will be
able to conduct repeat business or long-term business with any one of its
current customers. The failure of its customers to continue to do business with
it would have a material adverse effect on its business operations.
Intellectual
Property, Proprietary Rights and Licenses
The
Company’s success depends to a significant degree on its methodologies and
software applications. The Company does not have any patents, registered
copyrights or registered trademarks. The Company relies, instead, on laws
protecting trade secrets, common law rights with respect to copyrights and
trademarks, as well as non-disclosure and other contractual agreements to
protect proprietary rights. There can be no guarantee that those laws, and the
procedures initiated to protect its business, will prevent misappropriation of
its proprietary software and web site applications. In addition, those
protections do not preclude competitors from developing products with similar
features as those of the Company.
Although
the Company believes its products and services are unique and do not infringe
upon the proprietary rights of others, there can be no assurance that
infringement claims will not be brought against the Company in the future. Any
such claim could result in costly litigation or have a material adverse effect
on the Company’s business, operating results and financial
condition.
Research
and Development
The
Company relies on the providers of the products it sells to upgrade their
products through research and development. Consequently, the Company does not
perform research and development and has not incurred any research and
development costs during the two previous fiscal years and does not anticipate
incurring any such costs in the current fiscal year.
Government
Regulation
The
Company’s communications deployment business sometimes requires licensing when
dealing with a government agency. NewBridge is licensed by the State of Texas as
an alarm installation company. Additionally, NewBridge is in the process of
applying for CLEC status to provide voice services. The residential communities
that it will provide video and data services for are not in "franchised" areas.
The utility easements in which it deploys the infrastructure are public and are
therefore unregulated.
Employees
As of
March 10, 2005, the Company had 126 full-time employees which had increased from
116 at December 31, 2004. None of the Company’s employees are covered by any
collective bargaining agreements. Management believes that its relations with
its employees are good and the Company has not experienced any work stoppages
attributable to employee disagreements.
Volatility
of Stock Market
There
have been significant fluctuations in the market price for the Company's common
stock. Factors such as variations in the Company's revenues, earnings and cash
flow and announcements of innovations or acquisitions by the Company or its
competitors could cause the market price of the common stock to fluctuate
substantially. In addition, the stock market has experienced price and volume
fluctuations that have particularly affected companies in the IT services
markets, resulting in changes in the market price of the stock of many companies
which may not have been directly related to the operating performance of those
companies. Such broad market fluctuations may adversely affect the market price
of the Company’s common stock.
ITEM
2. DESCRIPTION OF PROPERTY
The
Company’s executive and administrative offices are located at 2901 West Sam
Houston Parkway North, Suite E-300, Houston, Texas 77043. It leases these
facilities. Its lease covers approximately 25,300 square feet and expires on
November 30, 2005. Its lease payments are $19,228 per month for the period
October 2004 through April 2005 and $20,240 per month for the period May through
November 2005. The Company also has a marketing and sales office in Dallas,
Texas. It leases these facilities. Its lease covers approximately 7,186 square
feet and expires May 31, 2009. The lease payments are $8,898 per month and
includes monthly operating expenses, which will vary based on actual operating
expenses of the property. TanSeco leases office and warehouse space in Fort
Worth, Texas. The lease covers approximately 7,972 square feet and expires
October 31, 2007. The lease payments are $8,304 per month. The Company has no
present plans to invest in real estate, real estate mortgages, or persons or
entities primarily engaged in real estate activities.
ITEM
3. LEGAL PROCEEDINGS
From time
to time, the Company may become involved in litigation arising in the ordinary
course of its business. The Company is presently not subject to any material
legal proceedings outside of the ordinary course of business except as set forth
below:
On
December 16, 1999, eLinear and Imagenuity were served with a complaint captioned
Chris Sweeney v. Kinetics.com, Inc. and Imagenuity, Inc., Circuit Court, Duval
County, Florida, Civil Case Number 1999-7252-CA. The complaint alleged a breach
of an alleged oral modification of a written employment agreement between the
plaintiff, Chris Sweeney, and Imagenuity and alleged breaches by eLinear and
Imagenuity of fiduciary obligations which the plaintiff claims were owed to him.
Plaintiff is seeking as damages 20% of the Company’s common stock received by
the sole shareholder of Imagenuity in connection with the merger of Imagenuity
with and into eLinear’s subsidiary. After the filing of the complaint, eLinear’s
subsidiary, eLinear Corporation, was added as a defendant. The Company intends
to vigorously contest the case. While the Company believes the case to have no
merit, at this stage it is impossible to predict the amount or range of
potential loss, if any.
In
December 1999, the Company counter-sued Chris Sweeney in a lawsuit captioned
eLinear Corporation v. Chris Sweeney, United States District Court, District of
Colorado, Case Number 99-WM-2434. The complaint sought a determination of the
rights of the parties with respect to the termination of Chris Sweeney’s
employment agreement with Imagenuity. The lawsuit was indefinitely stayed
pending resolution of the Florida litigation discussed above.
On
October 17, 2003, the Company filed a civil suit against Jon Ludwig, its former
CEO, for the following causes of action: breach of fiduciary duty; negligent
misrepresentation; theft of trade secrets; theft/conversion of property;
wrongful interference with existing and prospective contracts; and civil
conspiracy. This case is currently in the 127th Judicial District in the
District Court of Harris County, Texas. Ipath, a direct competitor of the
Company and the current employer of defendant Ludwig, was added as an additional
defendant. The Company is alleging that iPath conspiracy, wrongful interference
with existing and prospective contracts, and fraud for its complicity with
Ludwig in the latter’s breach of fiduciary duty. The trial date has been set for
April 18, 2005.
On
November 11, 2004, the Company filed a demand for arbitration with the American
Arbitration Association against McData Corporation for breach of contract
relating to the termination of the contract in June 2004. Arbitrators are being
appointed and discovery is in the early stage.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted during the fourth quarter of the period covered in this
report to a vote of shareholders.
PART
II
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The
Company’s common stock trades on the American Stock Exchange under the symbol
"ELU" since April 1, 2004. Prior thereto, its common stock traded on the OTC
Bulletin Board. The following table sets forth the approximate high and low
closing sales prices per share as reported on the American Stock Exchange and
OTC Bulletin Board for the Company's common stock for the last two fiscal years.
The quotations reflect inter-dealer prices, without retail markups, markdowns or
commissions and may not represent actual transactions.
| |
|
High |
|
Low |
|
|
Year
2004 |
|
|
|
|
|
|
|
|
Quarter
ended December 31 |
|
$ |
1.60 |
|
$ |
0.84 |
|
|
Quarter
ended September 30 |
|
$ |
2.11 |
|
$ |
0.89 |
|
|
Quarter
ended June 30 |
|
$ |
3.25 |
|
$ |
1.50 |
|
|
Quarter
ended March 31 |
|
$ |
3.50 |
|
$ |
1.85 |
|
|
Year
2003 |
|
|
|
|
|
|
|
|
Quarter
ended December 31 |
|
$ |
2.75 |
|
$ |
1.19 |
|
|
Quarter
ended September 30 |
|
$ |
1.62 |
|
$ |
0.65 |
|
|
Quarter
ended June 30 |
|
$ |
1.00 |
|
$ |
0.45 |
|
|
Quarter
ended March 31 |
|
$ |
0.45 |
|
$ |
0.45 |
|
As of
March 10, 2005, there were approximately 215 shareholders of record of the
Company's common stock which does not include those shareholders whose common
stock is held in street name. The Company has neither declared nor paid any cash
dividends to date and current existing debt instruments preclude the Company
from paying dividends. The Company does not anticipate paying dividends in the
foreseeable future until such time as the Company has sufficient cash flow from
operations to justify payment of a dividend.
Equity
Compensation Plan Information
The
following table gives information about the Company’s common stock that may be
issued upon the exercise of options under its 2000 Stock Option Plan, 2003 Stock
Option Plan and 2004 Stock Option Plan as of December 31, 2004, which have been
approved by the Company’s shareholders, and under compensation arrangements that
were not approved by the Company’s shareholders.
|
Plan
Category |
Number
of Securities
To
be Issued Upon
Exercise
of Outstanding
Options,
Warrants and Rights
(A) |
Weighted
Average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights
(B) |
Number
of Securities
Remaining
Available for
Future
Issuance Under
Equity
Compensation
Plans
(Excluding Securities
Reflected
in Column A)
(C) |
|
Equity
Compensation Plans Approved by Security Holders |
3,481,250 |
$1.60 |
828,434 |
|
Equity
Compensation Plans Not Approved by Security Holders |
1,008,333
(1) |
$5.62 |
-- |
|
Total |
4,489,583 |
$2.50 |
828,424 |
|
(1) |
Includes
options to purchase 93,333 shares of common stock at $39.38 per share,
75,000 shares of common stock at $3.00 per share, 375,000 shares of common
stock at $2.90 per share, 265,000 shares of common stock at $2.18 per
share and 200,000 shares of common stock at $0.50 per share. These options
have expiration dates from 2005 through 2013 and each was negotiated on an
issuance-by-issuance basis between the holder and the
Company.. |
Recent
Sales of Unregistered Securities
Set forth
below is certain information concerning all issuances of securities by the
Company during the fiscal quarter ended December 31, 2004, that were not
registered under the Securities Act.
On
December 6, 2004, the Company issued 37,500 shares of common stock to a third
party in consideration of a settlement in a dispute of a consulting contract
valued at $60,000 pursuant to the exemption provided by Section 4(2) of the
Securities Act.
During
December 2004, the Company issued 319,248 shares of common stock to certain
investors as forgiveness of penalties of $353,224 associated with the delay in
obtaining effectiveness of the Company’s registration statement pursuant
to the exemption provided by Section 4(2) of the Securities Act.
All of
the above transactions were completed pursuant to Section 4(2) of the Securities
Act. With respect to issuances made pursuant to Section 4(2) of the Securities
Act, the transactions did not involve any public offering and were sold to a
limited group of persons. Each recipient either received adequate information
about the Company or had access, through employment or other relationships, to
such information, and the Company determined that each recipient had such
knowledge and experience in financial and business matters that they were able
to evaluate the merits and risks of an investment in the Company.
Except as
otherwise noted, all sales of the Company’s securities were made by officers of
the Company who received no commission or other remuneration for the
solicitation of any person in connection with the respective sales of securities
described above. The recipients of securities represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such
transactions.
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The
following discussion and analysis of the Company’s financial condition as of
December 31, 2004, and the Company’s results of operations for the years in the
two-year period ended December 31, 2004 and 2003, should be read in conjunction
with the Company’s audited consolidated financial statements and notes thereto
included elsewhere in this report.
Overview
The
Company currently consists of four operating segments:
| § |
Consulting
services. The Company offers consulting services, creative web site
design, web site content management software and technical project
management and development services. |
| § |
Product
fulfillment and network and storage solutions. Through NetView the Company
offers a complete solution to its customers for the acquisition,
management and configuration of complex storage and network server
installations. |
| § |
Communications
deployment. Through NewBridge the Company provides structured cabling,
which is a set of cabling and connectivity products that integrate voice,
data, video and various management systems, cabling infrastructure design
and implementation, which is the design and implementation of the
structured cabling systems, security installation and monitoring and
digital services of voice, data and video over fiber optic networks to its
residential and commercial customers. |
| · |
Security
solutions. Through TanSeco the Company has business centered on premise
security solutions which includes a three-year contract with RadioShack
Corporation to install kiosks throughout the United States, 24X7 security
monitoring contracts with a variety of commercial customers and project
work installing security devices and fiber/cable in client locations
across the US. |
The
Company operated as a technology consulting business from December 1999 until
its acquisition of NetView in April 2003. It acquired its Internet consulting
business as a result of a reverse merger with Imagenuity, Inc. (åImagenuityæ) in
1999. Since 1999 to date, its Internet consulting business consisted of Internet
consulting services, creative web site design, web site content management and
software and technical project management and development services. For the
fiscal year ended December 31, 2004, the consulting segment contributed less
than 1% of its revenue. Immediately prior to acquiring the business of
Imagenuity, eLinear, which at the time was named Kinetiks.com, Inc.
(åKinetiks.com") did not engage in any business activities except for
negotiating and compromising debt and searching for merger candidates. While
Kinetics.com was the survivor in the merger, from an accounting standpoint the
transaction was accounted for as though it was a recapitalization of Imagenuity
and a sale of shares by Imagenuity in exchange for the net assets of
Kinetics.com. On July 31, 2000, the Company changed its name to eLinear,
Inc.
The
Company completed the acquisitions of NetView and NewBridge during 2003. In
April 2003, the Company issued 12,961,979 shares
of common stock for all of the outstanding common stock of NetView. After the
merger the stockholders of NetView owned approximately 90% of eLinear.
Although
NetView became a wholly-owned subsidiary, for accounting purposes this
transaction was treated as an acquisition of eLinear and a recapitalization of
NetView using the purchase method of accounting. The acquisition resulted in
goodwill of $451,920. Since NetView is deemed to be the acquiring company for
accounting purposes, the financial information for the year ended December 31,
2003 is information derived from the financial statements of
NetView.
In July
2003, the Company completed the acquisition of all the outstanding shares of
NewBridge. Pursuant to the transaction, eLinear issued 850,000 shares of its
common stock valued at $935,000, using the market price on July 31, 2003, and
options to purchase 300,000 shares of common stock valued at $274,000 using the
Black-Scholes option pricing model, to the shareholders of NewBridge. The
acquisition was accounted for using the purchase method of accounting resulting
in goodwill of $1,491,102, as restated.
In
November 2004, the Company acquired all of the outstanding and issued stock of
TanSeco from RadioShack. As a result, TanSeco became a wholly-owned subsidiary
of eLinear. The Company purchased the stock with cash and acquired inventory,
fixed assets and security monitoring contracts. Concurrent with this
transaction, TanSeco entered into a three-year services agreement with
RadioShack whereby TanSeco will provide the installation, service, repair and
inspection of security, closed circuit television and fire systems used by
RadioShack for the security of its more than 5,000 company-owned stores, kiosks
and other physical locations.
Recent
Developments
On February
28, 2005, the Company entered into financing arrangements for a total principal
amount of $12 million with Laurus,
Iroquois Capital LP (åIroquoisæ), RHP Master Fund (åRHPæ), Basso Private
Opportunity Holding Fund Ltd. (åBasso Privateæ), and Basso Multi-Strategy
Holding Fund Ltd. (åBasso Multiæ), collectively, the (åInvestorsæ) in which it
issued to: (i) Laurus a convertible secured note in the principal amount of
$5,000,000 and a common stock purchase warrant to purchase up to 750,000 shares
of Company common stock at an exercise price of $1.25 per share; (ii) Iroquois a
convertible secured note in the principal amount of $5,000,000 and a common
stock purchase warrant to purchase up to 750,000 shares of Company common stock
at an exercise price of $1.25 pre share; (iii) RHP a convertible secured note in
the principal amount of $1,000,000 and a common stock purchase warrant to
purchase up to 150,000 shares of Company common stock at an exercise price of
$1.25 per share; (iv) Basso Private a convertible secured note in the principal
amount of $220,000 and a common stock purchase warrant to purchase up to 33,000
shares of Company common stock at an exercise price of $1.25 per share; and (v)
Basso Multi a convertible secured note in the principal amount of $780,000 and a
common stock purchase warrant to purchase up to 117,000 shares of Company common
stock at an exercise price of $1.25 per share. The terms between the Company and
each of the respective Investors are substantially similar and the Company has
agreed to treat each of the Investors pro
rata with
respect to this financing, including conversion, redemption and payments
thereto.
These
notes are secured by all of the Company and its subsidiaries’ assets.
The
payment of interest and principal, under certain circumstances, may be made with
shares of the Company common stock at a conversion price of no less than $1.00
per share. The Company has agreed to register the resale of the shares of the
Company common stock underlying the Investor Notes and the shares issuable upon
exercise of the Warrants. The
Investor Notes will accrue interest at a rate per annum equal to the åprime
rateæ published in the Wall Street Journal plus seventy five basis points, as
may be adjusted. The Company has the ability
to prepay any amounts owed under these Investors Notes at 110% of the principal
amount.
Under the
terms of the Investor Notes and related documents, 20% (including applicable
fees) of the principal amount of the Investor Notes was provided to Company for
immediate use upon the closing of the Investor Notes (åAmortizing Principalæ),
the remaining 80% (net of applicable fees) is held in restricted accounts for
each respective Investors (åRestricted Accountæ). The Company is obligated to
make monthly payments, either in cash or stock as determined by the Investor
Notes, beginning on June 1, 2005 for the Amortizing Principal, plus applicable
interest (the åMonthly Paymentæ). The Monthly Payment will be made (i)
automatically by a conversion in stock at a åFixed Conversion Priceæ, (ii) at
the discretion of the Company at a reduced conversion price, or (iii) in cash
paid by the Company at 110% of the Monthly Payment. The Monthly Payments shall
be automatically made in Company common stock at the Fixed Conversion Price if
(i) the shares of the Company common stock underlying the shares of the Investor
Notes are registered; and (ii) the average trading price of the Company common
stock for the five days preceding the Monthly Payment is greater than 110% of
the Fixed Conversion Price. If the Monthly Payment is not automatically
converted into shares of Company common stock because the average trading price
of the Company common stock for the five trading days prior to the due date of
the Monthly Payment is less than 110% of the Fixed Conversion Price, the Company
may, at its discretion, make the Monthly Payment in Company common stock at a
conversion price equal to 85% of the average trading price of the Company common
stock for the five lowest closing days for the 22 trading days prior to the
Company’s notice, but in no case shall the conversion price be less than $1.00.
As of February 28, 2005 the Fixed Conversion Price is $1.00, subject to
adjustment, but in no case less than $1.00.
The
Company will receive cash disbursements (less applicable accrued interest) for
the amounts held in the Restricted Account after (i) the Amortizing Principal,
plus interest, is paid in full, (ii) the shares of the Company common stock
underlying the Investor Notes are registered; and (iii) either the Company or
the Investor converts any amounts held in the Restricted Accounts into shares of
the Company’s common stock. If the Company converts the amounts held in the
Restricted Account, the amounts shall be converted at either (i) a price equal
to 85% of the average of the five lowest closing prices of the Company common
stock during the 22 trading days immediately prior to the date of a respective
repayment notice if the average closing price of the Company common stock is
less than 110% of the Fixed Conversion Price, but in no instance may such shares
by converted for less than $1.00; or (ii) at the Fixed Conversion Price, if the
average closing price of the Company common stock for the five consecutive
trading days immediately preceding the respective repayment notice is greater
than or equal to 115% of the Fixed Conversion Price.
The
Investors may convert all or any portion of the principal amounts of their
respective Investor Notes, including any accrued interest or fees thereon at the
Fixed Conversion Price.
Notwithstanding
the foregoing, the Company’s right to issue shares of its common stock in
payment of obligations under the Investor Notes shall be subject to the
limitation that the number of aggregate shares of common stock issued to each
Investor shall not exceed 25% of the aggregate dollar trading volume of the
Company common stock for the 22 trading days immediately preceding the date on
which the conversion is to occur. Furthermore, the Investors are not entitled to
convert their respective Investor Notes; if the aggregate Investors beneficial
ownership of the Company’s common stock would exceed pro
rata 19.99%
of the outstanding shares of common stock of the Company at the time of the
conversion.
The
warrants issued pursuant to this funding are exercisable by the Investors until
February 28, 2012, at $1.25 per share of Company common stock. The Warrants are
exercisable immediately.
The
Company has agreed to file a registration statement with the Securities and
Exchange Commission within a definitive period of time not to exceed 45 days
from February 28, 2005, in order to register the resale of the shares of
common stock underlying the Investor Notes and the shares issuable upon exercise
of the Warrants. If the
Company fails to meet this deadline, if the registration statement is not
declared effective prior to 105 days from February 28, 2005, if the registration
statement ceases to remain effective, or certain other events occur, the Company
has agreed to pay the Investors liquidated damages of 1.25% of the principal
amount of the Investor Notes per month.
Critical
Accounting Policies
General
The
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contain information that is pertinent to this management’s discussion and
analysis. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of any contingent assets and liabilities.
Management believes these accounting policies involve judgment due to the
sensitivity of the methods, assumptions and estimates necessary in determining
the related asset and liability amounts. Management believes it has exercised
proper judgment in determining these estimates based on the facts and
circumstances available to its management at the time the estimates were made.
The significant accounting policies are described in the Company's financial
statements (See Note 2 in Notes to Consolidated Financial
Statements).
Revenue
Recognition
The
Company’s revenue recognition policy is objective in that it recognizes revenue
when products are shipped or services are delivered. Accordingly, there are no
estimates or assumptions that have caused deviation from its revenue recognition
policy. Additionally, the Company has a limited amount of sales returns which
would affect its revenue earned.
The
Company accounts for arrangements that contain multiple elements in accordance
with EITF 00-21, "Revenue Arrangements with Multiple Deliverables". When
elements such as hardware, software and consulting services are contained in a
single arrangement, or in related arrangements with the same customer, the
Company allocates revenue to each element based on its relative fair value,
provided that such element meets the criteria for treatment as a separate unit
of accounting. The price charged when the element is sold separately generally
determines fair value. In the absence of fair value for a delivered element, the
Company allocates revenue first to the fair value of the undelivered elements
and allocates the residual revenue to the delivered elements. In the absence of
fair value for an undelivered element, the arrangement is accounted for as a
single unit of accounting, resulting in a delay of revenue recognition for the
delivered elements until the undelivered elements are fulfilled. The Company
limits the amount of revenue recognition for delivered elements to the amount
that is not contingent on the future delivery of products or services or subject
to customer-specified return or refund privileges.
The
Company recognizes revenue from the sale of manufacturer’s maintenance and
extended warranty contracts in accordance with EITF 99-19 net of its costs of
purchasing the related contracts.
Allowance
for Doubtful Accounts
The
Company maintains an allowance for doubtful accounts, which reflects the
estimate of losses that may result from the inability of some of the Company’s
customers to make required payments. The estimate for the allowance for doubtful
accounts is based on known circumstances regarding collectability of customer
accounts and historical collections experience. If the financial condition of
one or more of the Company’s customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Material differences between the historical trends used to estimate
the allowance for doubtful accounts and actual collection experience could
result in a material change to the Company’s consolidated results of operations
or financial position.
Goodwill
As of
December 31, 2004, the Company had $1,100,000 of goodwill, as restated,
resulting from the acquisition of NewBridge. Goodwill represents the excess of
cost over the fair value of the net tangible assets acquired and is not
amortized. However, goodwill is subject to an impairment assessment at least
annually which may result in a charge to operations if the fair value of the
reporting segment in which the goodwill is reported declines. In September 2004,
the Company performed a valuation analysis of the discounted projected estimated
future cash flows of NewBridge and the Company elected to write down a portion
of the goodwill related to NewBridge. Due to the large amount of goodwill
presently on the Company’s financial reports, if an impairment is required, the
Company’s financial condition and results of operations would be negatively
affected. During March 2004, the Company recorded an impairment charge of
approximately $451,000 related to the goodwill associated with the NetView
acquisition.
Accounting
for Stock-Based Compensation
The
Company accounts for stock-based compensation based on the provisions of
Accounting Principles Board Opinion No. 25, åAccounting for Stock Issued to
Employees,æ as amended by the Financial Accounting Standards Board
Interpretation No. 44, åAccounting for Certain Transactions Involving Stock
Compensation.æ Accounting Principles Board Opinion No. 25 and Financial
Accounting Standards Board Interpretation No. 44 state that no compensation
expense is recorded for stock options or other stock-based awards to employees
that are granted with an exercise price equal to or above the estimated fair
value per share of the company’s common stock on the grant date. The Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123, åAccounting for Stock-Based Compensation,æ which requires
compensation expense to be disclosed based on the fair value of the options
granted at the date of the grant.
In
December 2002, the Financial Accounting Standards Board issued its Statement No.
148, åAccounting for Stock-Based Compensation — Transition and Disclosure—an
amendment of Financial Accounting Standards Board Statement No. 123.æ This
Statement amends Statement of Financial Accounting Standards No. 123, to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of Statement of Financial Accounting
Standards No. 123 to require prominent disclosure about the effects on reported
net income of an entity’s accounting policy decisions with respect to
stock-based employee compensation. The transition and annual disclosure
provisions of Statement of Financial Accounting Standards No. 148 are effective
for fiscal years ending after December 15, 2002, and the interim disclosure
provisions were effective for the first interim period beginning after December
15, 2002. The Company did not voluntarily change to the fair value based method
of accounting for stock-based employee compensation, therefore, the adoption of
Statement of Financial Accounting Standards No. 148 did not have a material
impact on its operations and/or financial position.
Results
of Operations and Financial Condition
The
Company’s primary business focus is on solving well-defined customer problems or
providing a need-proven service. It is focused on delivering reliable and
effective IT solutions, managed services, software, security solutions, Internet
telephony solutions and network and storage solutions that enable enterprises to
restructure and integrate entire business processes while extending them across
enterprise boundaries to customers, employees and suppliers. As its arsenal of
products, services and solutions grows through internal and external
initiatives, its sales force will be required to leverage its cross-selling
potential. The Company earns its revenue through the sales efforts of its four
distinct business segments. When products and/or services are purchased, the
Company invoices its customers and subsequently receives payment for those
products and/or services, which generates the cash needed to pay for those
products and/or services. Due to its growth, the Company has been required to
obtain various lines of credit to finance the purchase of these
products.
Prior to
the acquisitions of NetView, NewBridge and TanSeco, the Company was a technology
consulting services firm providing strategic consulting solutions, creative web
site design, web site content management software and technical project
management and development services to companies seeking to increase
productivity or reduce costs through investing in technology. In order to
diversify its business plan, the Company began seeking merger candidates.
eLinear selected NetView due to its list of customers and management with the
view toward cross-selling its consulting services with NetView’s network and
storage solutions customers. Its acquisition of NewBridge was determined by its
desire to provide a total IT solutions product to its customers, which NewBridge
provided the ability to expand its business in the area of communications
deployment. The acquisition of TanSeco provided the Company an opportunity to
enter the security solutions business segment. In addition to its consulting
services it previously provided, it now offers a full range of IT solutions.
These acquisitions have in fact expanded its customer base and provided
additional sales opportunities, which were not previously available to it. The
Company intends to expand its business in all four segments of which it
operates.
eLinear
is specifically focused on growing its business across all offerings. This
growth will, in some instances, be pursued internally and in others, externally
via acquisitions.
Internal
Growth
The
primary focus internally will be on making strategic hires for its network
solutions, IP Telephony solutions and security solutions. This has and will
continue to include:
| 1) |
account
executives that bring to eLinear established relationships with customers;
and |
| 2) |
technical
resources and engineers that can assess, architect, design, implement,
support and maintain all the different aspects required by the Company’s
solutions. |
Much of
the Company’s internal growth will also come from leveraging its ability to
cross-sell its diverse offerings to its entire customer base. The Company also
plans to expand into the geographies that its current customers have presences
in, and hence, would be relatively easier than expanding into other geographies
without any inroads into them. More specifically, below are some current
initiatives being developed:
| 1) |
IP
Telephony - the design, architecting, implementation and roll-out of
corporate Voice Over Internet Protocol (åVOIPæ) telephone systems
integrated with data networks, eliminating the need for traditional
switching telephone systems. The Company has identified several account
executives and engineers that would enable broader customer coverage.
Concurrently, the Company is in the process of upgrading its certification
levels with partners in order to provide it with better services, pricing
and opportunities, primarily with Cisco
Systems; |
| 2) |
Network
Solutions - the Company continually hires account executives and engineers
that enable broader customer coverage by bringing new customers and skills
to eLinear. During 2004, the Company hired nearly 25 people in Dallas as
an extension of its Houston presence; and |
| 3) |
Security
Solutions - the Company is now focused on growing its security system
sales to its customers, with the solutions being enabled via strategic
partnerships with such companies as Cisco Systems, Netscreen and
others. |
All of
its solutions are distributed through its internal sales and engineering
forces.
External
Growth
The
primary focus externally will be on making strategic acquisitions into areas
that the Company feels it wants to compete, but will not be able to establish
and grow a competitive presence internally. The security systems arena is an
area where the Company’s acquisitions will be targeted. Intrusion technology
firms and security consulting firms that can perform vulnerability assessments,
penetration testing and security policy creation represent areas that the
Company feels it can be more effective by acquiring into.
Financing
Growth
Currently,
the Company has enough cash on hand and credit through its lines of credit to
fund its internal working capital needs, which include internal growth
initiatives over the next twelve months, and evaluating acquisitions. Moving
forward, should the Company determine that it is strategically important to make
multiple acquisitions, then the Company may need to pursue additional funding
for those acquisitions.
Purchase
of New Products
From a
procurement perspective, the Company has lines of credit with Textron, Ingram
Micro and GE Financial that are needed in order to fund the purchase of hardware
required for its solutions offerings. Its new products are purchased primarily
through one of the following four vendors: Ingram Micro, GE Financial, Synnex
and Tech Data. If the credit line at each vendor becomes over extended, then
that vendor gets paid by Textron immediately upon invoicing of the product.
eLinear then has 30 days to pay the vendor and 45 days to pay Textron. This
enables eLinear to maintain liquidity and rapid procurement on behalf of its
customers.
NetView
Acquisition
The
acquisition of NetView brought to eLinear customers that need services in the
network solutions market, including the design, procurement, implementation,
support and maintenance of corporate networks. NetView’s customer base ranges
from the likes of the Fortune 2000 to Small to Medium Businesses (åSMBæ).
Industry verticals that Netview customers are in, and hence are new markets to
eLinear, include energy, healthcare, state and local governments, finance and
several others. The opportunities acquired are general in nature and there was
not any specific opportunity that was deemed material in making this
acquisition. Network solutions will be selectively expanded through the hiring
of key account executives with long-term, well-established client
relationships.
NewBridge
Acquisition
The
acquisition of NewBridge brought to eLinear customers that need services in the
network infrastructure market, including the design, procurement,
implementation, support and maintenance of physical network infrastructure such
as structured cabling, network access points (drops), secure card access, closed
circuit TV, and other services. NewBridge’s customer base includes Houston based
businesses, large and small, that require physical infrastructure for networks
in new facilities, expansions, upgrades and for maintenance of existing
facilities. Industry verticals that NewBridge customers are in include energy
and state and local governments. Part of the strategic reason for the
acquisition was an opportunity to develop infrastructure services for
residential communities. Network infrastructure solutions will be selectively
expanded through the hiring of key account executives with long-term,
well-established commercial client relationships. There is little emphasis on
the residential aspect of the infrastructure.
TanSeco
Acquisition
The
acquisition of TanSeco allowed the Company to enter the premise security
solutions business segment. Through this wholly-owned subsidiary, the Company
offers security services to RadioShack Corporation under a three-year agreement,
security monitoring through third parties and project work installing security
devices and fiber/cable in client locations throughout the US.
Challenges
and Risks
| 1) |
Continued
improvement in IT spending trends, specifically on security and regulatory
compliance technology enablement. eLinear plans to address this by
continually refocusing on solutions that are critical to clients granting
eLinear access to areas that warrant technology and strategic
spending; |
| 2) |
General
economic conditions at the local, regional and national level;
and |
| 3) |
Continued
access to capital and human capital resources. eLinear continually attends
conferences where capital sources are marketing their services and such
relationships are continually maintained. The Company continually utilizes
the services of recruiters in order to ensure access to high quality human
capital talent. |
Results
of Operations
Year
Ended December 31, 2004 to Year Ended December 31, 2003
The
following table sets forth certain operating information regarding the Company
for the years ended December 31, 2004 and 2003:
| |
|
|
2004 |
|
|
2003 |
|
|
Revenue |
|
$ |
24,065,753 |
|
$ |
13,501,140 |
|
|
Cost
of revenue |
|
|
20,476,838 |
|
|
11,367,405 |
|
|
Gross
profit |
|
|
3,588,915 |
|
|
2,133,735 |
|
|
Selling,
general and administrative expenses |
|
|
10,631,037 |
|
|
3,151,263 |
|
|
Depreciation
and amortization |
|
|
151,630 |
|
|
20,290 |
|
|
Loss
from operations |
|
|
(7,193,752 |
) |
|
(1,037,818 |
) |
|
Other
income (expense) |
|
|
(1,238,960 |
) |
|
15,657 |
|
|
Net
loss |
|
$ |
(8,432,712 |
) |
$ |
(1,022,161 |
) |
|
Net
loss per share - basic and diluted |
|
$ |
(0.42 |
) |
$ |
(0.07 |
) |
Revenue. Total
revenue for the year ended December 31, 2004 was $24,065,753 which was an
increase of 78% over the prior year period of $13,501,140. Revenue from the
consulting services business segment for fiscal 2004 was $106,515, which was
less than 1% of total revenue. The consulting services business segment has seen
a significant decline in customer utilization during 2003 and 2004. During
February 2004, the Company hired a primary consultant and several consulting
engineers and the Company intends to concentrate its efforts on building
additional consulting services customer relationships during the current fiscal
year. If successful, the Company does intend to add additional personnel to
increase sales, however, there are no guarantees that the Company will be
successful in this endeavor.
Revenue
generated from the network and storage solutions business segment for fiscal
2004 was $21,753,584, which was an increase of $9,067,451, or 71%, over fiscal
2003. The network and storage solutions business segment contributed 90% of
total revenue for fiscal 2004. The Company was able to increase its revenue over
the 2003 period primarily by the addition of sales personnel who had previous
customer relationships and the Company opened a sales office in Dallas, Texas
with satellite offices in Austin, Texas and Oklahoma City, Oklahoma. The
increase in revenue was due to an increase in the amount of product sold and was
not affected by an increase in pricing. eLinear intends to focus on adding
additional customers and personnel to service these customers.
Revenue
from the communications deployment business segment for fiscal 2004 was
$1,827,873, which was 8% of total revenue. This was an increase of $1,621,236,
or 785%, over the 2003 period. Since the acquisition of NewBridge did not occur
until July 31, 2003, revenue from the communications deployment segment for
fiscal 2003 was only for the period July 31 to December 31, 2003. The Company
continues to add new customers in this area and has increased its business from
its existing customer base.
Of the
revenue generated for the period ended December 31, 2004, one customer provided
in excess of 10% of the Company’s revenue. This customer provided 18% of the
Company’s revenue during fiscal 2004. The loss of that customer may have an
adverse financial effect on the Company.
Cost
of revenue. Total
cost of revenue for the year ended December 31, 2004 was $20,476,838, an
increase of $9,109,433, or 80%, over the 2003 period of $11,367,405. For the
network and storage solutions business segment, cost of revenue is comprised
primarily of the costs associated with acquiring hardware and software to fill
customer orders. For the consulting services business segment, cost of revenue
consists primarily of full-time personnel and contract employee costs associated
with projects the Company provides to its customers for a fee. For the
communications deployment and security solutions business segments, cost of
revenue consists primarily of materials and personnel to build the customer
infrastructure.
The
primary component of the increase in cost of revenue was the cost of procuring
hardware and software to fill an expanded number of customer orders. The cost of
hardware and software as a percent of revenue increased from 85% for fiscal 2003
to 87% for fiscal 2004. This increase was a result of the addition of a major
customer which received favorable pricing from the Company. In order to obtain
and retain this customer, the Company lowered its standard pricing for resale of
computer hardware and software to this customer. The Company was unable to
obtain a reduction in the cost of hardware and software purchased from its
vendors, resulting in a decrease in its gross margin. The Company does not
anticipate the favorable pricing it has granted to this customer will change in
the future. The Company’s principal suppliers of hardware and software products
are Hewlett Packard and Cisco, which contributed approximately 49% of its sales
for fiscal 2004. The Company anticipates they will continue to be its principal
suppliers in the future. Total cost of products amounted to $19,194,420 for
fiscal 2004. The Company anticipates that cost of revenue will increase as
revenue increases.
Gross
profit. Total
gross profit increased from $2,133,735 for the year ended December 31, 2003, to
$3,588,915 for the year ended December 31, 2004. The increase in gross profit
was a result of an increase in revenue from all business segments, with the
exception of the consulting services business segment. Total gross profit as a
percentage of revenue decreased from 16% for fiscal 2003 to 15% for fiscal 2004.
The primary reason for the decrease was a result of favorable pricing for
hardware and software purchases a major customer.
Operating
expenses. Total
operating expenses for the year ended December 31, 2004, were $10,782,667, an
increase of $7,611,114, or 240%, over fiscal 2003 of $3,171,553. The various
components of this increase are as follows
| § |
The
Company has added additional personnel in its network and storage
solutions business segment to facilitate the rapid increase in customer
orders, and it has reduced personnel in its consulting services business
segment, reflecting an increase in the use of subcontractors to execute on
projects as opposed to hiring full-time employees. At December 31, 2003,
the Company employed 27 which had increased to 116 as of December 31,
2004. Additionally, the Company opened a sales office in Dallas, Texas and
satellite offices in Austin, Texas and Oklahoma City, Oklahoma. The net
effect was an increase in payroll and related costs of $3,243,203, which
costs are composed of payroll, payroll taxes, sales commissions and
employee benefits. |
| § |
Office
administration expenses increased from $338,674 for the 2003 period to
$1,524,253 for the 2004 period. The components of office administration
are office rent, office administration, sales and marketing and dues and
subscriptions. The Company incurred initial start-up costs when opening
its sales offices in Dallas, Austin and Oklahoma City and relocating its
corporate headquarters in Houston, Texas. The Company does not anticipate
these costs will be incurred in the future. |
| § |
Professional
services, which is comprised of legal, accounting and consulting fees,
increased from $526,664 for the previous year period to $2,208,666 for the
current fiscal period. The Company has incurred additional legal,
accounting and outside services fees during the current fiscal year in
association with its financings and current litigation which was partially
offset by a reduction in contract services. The Company incurred non-cash
stock compensation expense of $857,484 for common stock issued to
consultants. |
| § |
In
March 2004 the consulting services reporting unit lost its largest
consulting contract and the other operations that it had prior to the
NetView acquisition with additional revenue declines due to the loss of a
key consulting services employee after the acquisition. Based on projected
future cash flows from the reporting unit, management determined a full
impairment charge of $451,925 was required. |
In
September 2004, the Company recorded impairment expense totaling $391,102
related to a portion of the goodwill related to the NewBridge acquisition in
July 2003. The Company performed a valuation analysis of the discounted
projected estimated future cash flows from the reporting unit. Based on the
valuation analysis, the Company elected to write down the goodwill for NewBridge
to $1,100,000 resulting in the impairment charge.
| § |
Other
expenses increased from $741,494 for prior year to $1,267,457 for the
current fiscal period. The Company has initiated an investor
awareness/marketing program to reach out to current and potential
investors and provide them with current news releases and information
about eLinear as well as to establish nationwide name recognition to build
the åeLinearæ name brand for future business. This program consists of
investor conferences, electronic media distribution, newspaper coverage,
third party representation through introduction to institutional entities
and radio coverage. The program was designed by in-house eLinear
employees. The cost of this program during the twelve months ended
December 31, 2004 approximated $862,000. The Company has incurred
penalties in association with Laurus and its financings in January and
February 2004 of $102,597 and $370,931, respectively, as a result in
delays in its two registration statements filed with the SEC, which
penalties are included in the other expenses category. A majority of the
remaining expenses were the Company’s listing fee to the American Stock
Exchange. |
Interest
Expense. Interest
expense for the year ended December 31, 2004 increased to $1,255,493 from
$30,775 for the prior year. Of this amount $419,707 was attributable to a one
time write-off of debt discounts associated with the Laurus credit facility and
a one time charge to interest expense of $338,925 for lowering the conversion
price on the Laurus credit facility. The balance was attributable to the
amortization of debt discounts and interest charges associated with the Laurus
credit facility.
Net
Loss. The net
loss for the year ended December 31, 2004 was $8,432,712, or $0.42 per share
basic and diluted, compared to a net loss of $1,022,161, or $0.07 per share
basic and diluted, for the previous year.
Liquidity
and Capital Resources
The
following summary table presents comparative cash flows of the Company for the
years ended December 31, 2004 and 2003:
| |
|
2004 |
|
2003 |
|
|
Net
cash used in operating activities |
|
$ |
(7,112,080 |
) |
$ |
(1,106,769 |
) |
|
Net
cash used in investing activities |
|
$ |
(1,962,163 |
) |
$ |
(19,143 |
) |
|
Net
cash provided by financing activities |
|
$ |
9,418,629 |
|
$ |
1,559,501 |
|
Changes
in cash flow. Net cash
used in operating activities for the year ended December 31, 2004, was
$7,112,080 compared to net cash used in operating activities of $1,106,769 for
the prior year. This was an increase of $6,005,311 over the prior year. The
primary components of net cash used in operating activities for fiscal 2004 were
a net loss of $8,432,712, increases in accounts receivable resulting from
increased sales when compared to the prior fiscal year and increases in
inventory and other current assets. The cash used in operating activities was
partially offset by non-cash charges totaling $3,989,924, an increase in accrued
liabilities of $864,891 which was comprised of accrued payables, payroll and
sales taxes and an increase in accounts payable. Cash used in investing
activities increased to $1,962,163 for the current fiscal year. In November
2004, the Company purchased all the outstanding stock of TanSeco for $750,000 in
cash and acquired inventory, fixed assets and security monitoring contracts. The
Company purchased computer hardware, office equipment and furniture and incurred
leasehold improvements during the current period for its new offices and
employees totaling $688,016. The Company does not believe it will incur
significant purchases in the future. As part of the Company’s loan agreement
with Textron, the Company was required to deposit $500,000 in a restricted
account in order to obtain a letter of credit. Cash provided by financing
activities increased from approximately $1,560,000 during fiscal 2003 to
approximately $9,419,000 for the current fiscal year. This increase was
attributable to sales of common stock of approximately $4,586,000, net proceeds
from the Laurus financing agreement of $4,705,697, and the exercise of stock
options and warrants of $615,843. This was partially offset by the repayment of
notes due to Messrs. Allen and Casey of $215,703 and payment of $273,000 in
finders fees associated with the Laurus financing agreement..
Capital
Resources. The
Company has funded its operations through the sale of common stock, the exercise
of stock options and warrants, short-term borrowings from two of its officers,
lines of credit and the Laurus financing agreement. During January and February
2004, the Company sold shares of common stock in two private placements for
aggregate net proceeds of $4,585,792. During the year ended December 31, 2004,
the Company received $615,843 through the exercise of stock options and
warrants. NetView has funded its operations by way of loans from Messrs. Allen
and Casey. At December 31, 2003, the amount due these individuals was $215,703.
These notes were subsequently repaid during January 2004. NetView has funded its
purchases of network and storage solutions products primarily through vendor
provided financing arrangements. In March 2003, NetView obtained a $1 million
line of credit from Textron Financial Corporation to fund purchases of network
and storage solutions product for delivery to customers. This line of credit was
secured by all of its assets. In February 2004, the Company retired this line of
credit, entered into a new $500,000 credit facility secured by a $500,000 letter
of credit to Textron and entered into a new credit facility with Laurus
discussed above.
Liquidity.
As of
December 31, 2004, the Company had cash balances in non-restricted accounts of
$898,869 and positive working capital of approximately $1,886,000. In January
2004, the Company completed a private offering and raised gross proceeds of
approximately $2,500,000. In February 2004, the Company completed a private
offering and raised gross proceeds of $2,460,000. Both of these financings
include warrants, which, if exercised, could raise up to approximately
$6,900,000.
In
February 2004, the Company obtained a secured revolving note with Laurus. Under
the terms of the agreement, the Company can borrow up to $5,000,000 at an annual
interest rate of prime plus .75% (with a minimum rate of 4.75%). The agreement
contains two notes: a minimum secured revolving note totaling $2,000,000 and a
revolving credit facility totaling $3,000,000 based on eligible accounts
receivable. At December 31, 2004, the Company had drawn down $2,000,000 under
the term loan and $2,705,697 under the revolver.
On
February 28, 2005, the Company entered into financing arrangements for a total
principal amount of $12 million as described in "Recent Developments". Of
this financing $2,400,000 gross proceeds has been funded to the Company and
$9,600,000 may be funded upon satisfaction of certain conditions, of which there
can be no assurance that this will occur.
The
Company believes it has sufficient capital to implement its business plan during
fiscal 2005 and to seek out acquisitions in order to more quickly grow
its business. Management believes that it will not begin to generate cash flow
from operations during fiscal 2005, however, it believes it has sufficient
capital resources to fund operations during fiscal 2005. If expenses are in
excess of its estimates or if revenue declines, the Company may need to obtain
additional financing to fund its operations. If the Company is required to
obtain additional financing, it will be required to do so on a best efforts
basis, as it currently has no commitments for any further
financing.
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements.
New
Accounting Pronouncements
During
December 2002, the FASB issued SFAS No. 148. Statement 148 establishes standards
for two alternative methods of transition to the fair value method of accounting
for stock-based employee compensation of FASB SFAS No. 123 åAccounting for
Stock-Based Compensationæ (åSFAS 123æ). SFAS 148 also amends and augments the
disclosure provisions of SFAS 123 and Accounting Principles Board Opinion 28
"Interim Financial Reporting" to require disclosure in the summary of
significant accounting policies for all companies of the effects of an entity’s
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The transition standards and disclosure requirements of SFAS 148 are effective
for fiscal years and interim periods ending after December 15, 2002. The Company
has adopted only the disclosure provisions of this statement.
SFAS No.
150, åAccounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity,æ was issued in May 2003 and requires issuers to classify
as liabilities (or assets under certain circumstances) three classes of
freestanding financial instruments that represent obligations for the issuer.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and is otherwise effective at the beginning of the first
interim period beginning after December 15, 2003. The adoption of this statement
did not have a material effect on the Company’s financial position, results of
operations or cash flows.
ITEM 7.
FINANCIAL STATEMENTS
INDEPENDENT
AUDITORS’ REPORT
To the
Board of Directors of:
eLinear,
Inc.
Houston,
Texas
We have
audited the accompanying balance sheet of eLinear, Inc., as of December 31, 2004
and 2003 and the related statements of operations, changes in sharehholders’
equity (deficit) and cash flows for each of the two years ended December 31,
2004 and 2003. These financial statements are the responsibility of eLinear’s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audit in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of eLinear, Inc. as of December 31,
2004 and 2003, and the results of its operations and cash flows for each of the
two years ended December 31, 2004 and 2003, in conformity with accounting
principles generally accepted in the United States of America.
As
discussed in Note 13, the Company restated its prior period financial
statements.
Lopez,
Blevins, Bork & Associates, LLP
Houston,
Texas
March 3,
2005
eLINEAR,
INC.
AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
| |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
|
ASSETS |
|
|
|
|
|
Restated |
|
Current
assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
898,869 |
|
$ |
554,483 |
|
|
Cash in
restricted accounts |
|
|
504,580 |
|
|
-- |
|
Accounts
receivable, net of allowance of $311,569 and $69,289 at
|
|
|
|
|
|
|
|
|
December 31,
2004 and 2003, respectively |
|
|
5,010,733 |
|
|
1,637,217 |
|
|
Inventory |
|
|
446,446 |
|
|
190,555 |
|
|
Other
current assets |
|
|
126,316 |
|
|
45,708 |
|
|
Total
current assets |
|
|
6,986,944 |
|
|
2,427,963 |
|
| |
|
|
|
|
|
|
|
|
Property
and equipment, net |
|
|
805,798 |
|
|
43,662 |
|
|
Other
assets: |
|
|
|
|
|
|
|
|
Goodwill |
|
|
1,100,000 |
|
|
1,943,022 |
|
|
Deferred
financing costs, net |
|
|
132,346 |
|
|
-- |
|
|
Contract
rights |
|
|
273,693 |
|
|
-- |
|
|
Deposits |
|
|
34,616 |
|
|
15,049 |
|
|
Total
other assets |
|
|
1,540,655 |
|
|
1,958,071 |
|
|
Total
assets |
|
$ |
9,333,397 |
|
$ |
4,429,696 |
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable, trade |
|
$ |
1,266,738 |
|
$ |
1,101,603 |
|
|
Line of
credit - revolver |
|
|
2,784,543 |
|
|
-- |
|
|
Payable
to officers |
|
|
-- |
|
|
36,336 |
|
|
Accrued
liabilities |
|
|
1,049,974 |
|
|
148,747 |
|
|
Notes
payable, officers |
|
|
-- |
|
|
215,703 |
|
|
Total
current liabilities |
|
|
5,101,255 |
|
|
1,502,389 |
|
|
Long-term
debt, net |
|
|
1,399,397 |
|
|
-- |
|
|
Commitments
and contingencies (Note 7) |
|
|
|
|
|
|
|
|
Shareholders'
equity: |
|
|
|
|
|
|
|
|
Preferred
stock, $.02 par value, 10,000,000 shares authorized, none
issued |
|
|
-- |
|
|
-- |
|
|
Common
stock, $.02 par value, 100,000,000 shares authorized, |
|
|
|
|
|
|
|
|
21,622,598 and
17,020,754 shares issued and outstanding at |
|
|
|
|
|
|
|
|
December 31,
2004 and 2003, respectively |
|
|
432,452 |
|
|
340,415 |
|
|
Additional
paid-in capital |
|
|
12,228,744 |
|
|
3,982,631 |
|
|
Accumulated
deficit |
|
|
(9,828,451 |
) |
|
(1,395,739 |
) |
|
Total
shareholders’ equity |
|
|
2,832,745 |
|
|
2,927,307 |
|
|
Total
liabilities and shareholders' equity |
|
$ |
9,333,397 |
|
$ |
4,429,696 |
|
See
accompanying notes to consolidated financial statements.
eLINEAR,
INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
Products |
|
$ |
21,472,050 |
|
$ |
12,623,092 |
|
|
Services |
|
|
2,513,383 |
|
|
878,048 |
|
|
Other |
|
|
80,320 |
|
|
-- |
|
|
Total
revenue |
|
|
24,065,753 |
|
|
13,501,140 |
|
| |
|
|
|
|
|
|
|
|
Cost
of revenue: |
|
|
|
|
|
|
|
|
Products |
|
|
19,194,420 |
|
|
10,840,416 |
|
|
Services |
|
|
1,282,418 |
|
|
526,989 |
|
|
Total
cost of revenue |
|
|
20,476,838 |
|
|
11,367,405 |
|
| |
|
|
|
|
|
|
|
|
Gross
profit |
|
|
3,588,915 |
|
|
2,133,735 |
|
| |
|
|
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses: |
|
|
|
|
|
|
|
|
Payroll
and related expenses |
|
|
4,787,634 |
|
|
1,544,431 |
|
|
Office
administration |
|
|
1,524,253 |
|
|
338,674 |
|
|
Professional
services |
|
|
2,208,666 |
|
|
526,664 |
|
|
Impairment of
goodwill |
|
|
843,027 |
|
|
-- |
|
|
Other |
|
|
1,267,457 |
|
|
741,494 |
|
|
Total
selling, general and administrative |
|
|
10,631,037 |
|
|
3,151,263 |
|
|
Depreciation
and amortization |
|
|
151,630 |
|
|
20,290 |
|
|
Total
operating expenses |
|
|
10,782,667 |
|
|
3,171,553 |
|
| |
|
|
|
|
|
|
|
|
Loss
from operations |
|
|
(7,193,752 |
) |
|
(1,037,818 |
) |
| |
|
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
Interest,
net |
|
|
(1,255,493 |
) |
|
(30,775 |
) |
|
Other |
|
|
16,533 |
|
|
46,432 |
|
|
Total
other income (expense) |
|
|
(1,238,960 |
) |
|
15,657 |
|
|
Net
loss |
|
$ |
(8,432,712 |
) |
$ |
(1,022,161 |
) |
| |
|
|
|
|
|
|
|
|
Net
loss per share: |
|
|
|
|
|
|
|
|
Basic
and diluted |
|
$ |
(0.42 |
) |
$ |
(0.07 |
) |
| |
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding: |
|
|
|
|
|
|
|
|
Basic
and diluted |
|
|
20,289,723 |
|
|
14,382,140 |
|
See
accompanying notes to consolidated financial statements.
eLINEAR,
INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
FOR
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Additional |
|
|
|
Total |
|
| |
|
Common
Stock |
|
Paid-in |
|
Accumulated |
|
Shareholders’ |
|
| |
|
Shares |
|
Amount |
|
Capital |
|
Deficit |
|
Equity
(Deficit) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Balances
January 1, 2003 |
|
|
12,961,979 |
|
$ |
259,240 |
|
$ |
-- |
|
$ |
(373,578 |
) |
$ |
(114,338 |
) |
|
Stock
issued in reverse acquisition |
|
|
1,043,761 |
|
|
20,875 |
|
|
429,843 |
|
|
-- |
|
|
450,718 |
|
|
Stock
issued for cancellation of warrants |
|
|
134,750 |
|
|
2,695 |
|
|
51,205 |
|
|
-- |
|
|
53,900 |
|
|
Exercise of
stock options |
|
|
573,700 |
|
|
11,474 |
|
|
733,969 |
|
|
-- |
|
|
745,443 |
|
|
Issuance of
stock options for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
forgiveness of debt |
|
|
-- |
|
|
-- |
|
|
13,188 |
|
|
-- |
|
|
13,188 |
|
|
Stock
issued for services |
|
|
126,000 |
|
|
2,520 |
|
|
340,789 |
|
|
-- |
|
|
343,309 |
|
|
Stock
options issued for services |
|
|
-- |
|
|
-- |
|
|
114,493 |
|
|
-- |
|
|
114,493 |
|
|
Stock
issued for cash, net of costs |
|
|
1,330,564 |
|
|
26,611 |
|
|
811,644 |
|
|
-- |
|
|
838,255 |
|
|
Stock
options issued for acquisition |
|
|
-- |
|
|
-- |
|
|
274,000 |
|
|
-- |
|
|
274,000 |
|
|
Stock
issued for acquisition |
|
|
850,000 |
|
|
17,000 |
|
|
1,195,500 |
|
|
-- |
|
|
1,230,500 |
|
|
Net
loss |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(1,022,161 |
) |
|
(1,022,161 |
) |
|
Balances,
December 31, 2003 |
|
|
17,020,754 |
|
|
340,415 |
|
|
3,982,631 |
|
|
(1,395,739 |
) |
|
2,927,307 |
|
|
Exercise of
stock options |
|
|
312,600 |
|
|
6,252 |
|
|
409,010 |
|
|
-- |
|
|
415,262 |
|
|
Exercise of
stock warrants |
|
|
200,581 |
|
|
4,012 |
|
|
196,569 |
|
|
-- |
|
|
200,581 |
|
|
Stock
issued for cash, net of costs |
|
|
3,194,225 |
|
|
63,884 |
|
|
4,521,908 |
|
|
-- |
|
|
4,585,792 |
|
|
Debt
discount |
|
|
-- |
|
|
-- |
|
|
1,039,620 |
|
|
-- |
|
|
1,039,620 |
|
|
Stock
issued for services |
|
|
575,190 |
|
|
11,504 |
|
|
845,980 |
|
|
-- |
|
|
857,484 |
|
|
Stock
option expense |
|
|
-- |
|
|
-- |
|
|
220,091 |
|
|
-- |
|
|
220,091 |
|
|
Stock
issued for cancellation of penalties |
|
|
319,248 |
|
|
6,385 |
|
|
346,839 |
|
|
-- |
|
|
353,224 |
|
|
Stock
warrants repriced for cancellation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of penalties |
|
|
-- |
|
|
-- |
|
|
327,171 |
|
|
-- |
|
|
327,171 |
|
|
Beneficial
conversion feature of note |
|
|
-- |
|
|
-- |
|
|
338,925 |
|
|
-- |
|
|
338,925 |
|
|
Net
loss |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(8,432,712 |
) |
|
(8,432,712 |
) |
|
Balances
December 31, 2004 |
|
|
21,622,598 |
|
$ |
432,452 |
|
$ |
12,228,744 |
|
$ |
(9,828,451 |
) |
$ |
2,832,745 |
|
See
accompanying notes to consolidated financial statements.
eLINEAR,
INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
| |
|
2004 |
|
2003 |
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(8,432,712 |
) |
$ |
(1,022,161 |
) |
|
Adjustments
to reconcile net loss to net cash used in |
|
|
|
|
operating activities: |
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
149,210 |
|
|
20,290 |
|
|
Impairment of
goodwill |
|
|
843,022 |
|
|
-- |
|
|
Bad
debt expense |
|
|
242,280 |
|
|
-- |
|
|
Amortization of
debt discounts |
|
|
658,517 |
|
|
-- |
|
|
Stock
and stock option based compensation |
|
|
1,077,575 |
|
|
511,702 |
|
|
Stock
issuance and warrant repricing for payment of penalties |
|
|
680,395 |
|
|
-- |
|
|
Beneficial
conversion feature of note |
|
|
338,925 |
|
|
-- |
|
|
Changes
in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(3,615,796 |
) |
|
(311,486 |
) |
|
Inventory |
|
|
(2,914 |
) |
|
(173,608 |
) |
|
Other current assets |
|
|
(80,608 |
) |
|
(45,708 |
) |
|
Accounts payable |
|
|
165,135 |
|
|
(115,517 |
) |
|
Accrued liabilities |
|
|
864,891 |
|
|
29,719 |
|
|
Net
cash used in operating activities |
|
|
(7,112,080 |
) |
|
(1,106,769 |
) |
| |
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of
property and equipment |
|
|
(688,016 |
) |
|
(9,886 |
) |
|
Restricted
cash |
|
|
(504,580 |
) |
|
-- |
|
|
Acquisition of
TanSeco |
|
|
(750,000 |
) |
|
-- |
|
|
Deposits |
|
|
(19,567 |
) |
|
(9,257 |
) |
|
Net
cash used in investing activities |
|
|
(1,962,163 |
) |
|
(19,143 |
) |
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from
notes payable due to officers |
|
|
-- |
|
|
161,262 |
|
|
Repayment on
notes payable due to officers |
|
|
(215,703 |
) |
|
(185,459 |
) |
|
Proceeds from
revolver, net |
|
|
2,705,697 |
|
|
-- |
|
|
Proceeds from
long-term debt |
|
|
2,000,000 |
|
|
-- |
|
|
Payment
of up-front financing costs |
|
|
(273,000 |
) |
|
-- |
|
|
Proceeds from
exercise of stock options and warrants |
|
|
615,843 |
|
|
745,443 |
|
|
Proceeds from
sale of common stock, net |
|
|
4,585,792 |
|
|
838,255 |
|
|
Net
cash provided by financing activities |
|
|
9,418,629 |
|
|
1,559,501 |
|
|
Net
increase in cash |
|
|
344,386 |
|
|
433,589 |
|
|
Cash
and cash equivalents, beginning of year |
|
|
554,483 |
|
|
120,894 |
|
|
Cash
and cash equivalents, end of year |
|
$ |
898,869 |
|
$ |
554,483 |
|
|
Non-cash
transactions: |
|
|
|
Issuance
of stock in reverse acquisition |
$
-- |
$
450,718 |
|
Issuance
of stock for acquisition |
$
-- |
$
1,504,500 |
|
Issuance
of options for forgiveness of debt |
$
-- |
$
13,188 |
See
accompanying notes to consolidated financial statements.
eLINEAR,
INC.
AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2004
Note
1. Organization
and Nature of Business
eLinear,
Inc. (åeLinearæ or the åCompanyæ) is a communications, security and compliance
company providing integrated technology solutions including information and
physical security, IP Telephony and network and storage solutions
infrastructure. Typically, the Company’s customers are Fortune 2000 and small to
medium sized business organizations. eLinear’s services are offered to companies
seeking to increase productivity or reduce costs through investing in
technology. eLinear has a national and international footprint and has its
headquarters in Houston, Texas.
On April
15, 2003, eLinear, Inc. issued 12,961,979 shares
of common stock for 100% of the outstanding common stock of NetView
Technologies, Inc. (åNetViewæ). After the merger the stockholders of NetView
owned approximately 90% of the combined entity. For financial reporting purposes
this transaction was treated as an acquisition of eLinear and a recapitalization
of NetView using the purchase method of accounting. (See Note 3.)
Prior to
its acquisition of NetView, eLinear, Inc. was a technology consulting services
firm providing strategic consulting solutions, creative web site design, web
site content management software, and technical project management and
development services to companies seeking to increase productivity or reduce
costs through investing in technology. The Company’s current customers are based
in the United States.
NetView
was incorporated in the State of Texas in December 2001 as an S-Corporation and
commenced operations on January 1, 2002. NetView is an information technology
solutions company that provides its customers with network and storage solutions
infrastructure and related services. NetView’s focus is on creating recurring
revenue streams from a diverse client base. NetView markets its products and
services through its own direct sales and marketing team, direct mail and trade
shows. NetView sells to entities throughout the United States; however, a
majority of its revenue is earned from sales in the State of Texas.
On July
31, 2003, eLinear completed the acquisition of all the issued and outstanding
shares of NewBridge Technologies, Inc. (formerly MMGD, Inc.) (åNewBridgeæ). (See
Note 3.) NewBridge is a digital provider of voice, data, video and security
services to residential and commercial developments. These services are over a
fiber or wireless infrastructure. NewBridge markets its services through its own
sales force and the majority of its revenue is earned in Texas.
On
November 3, 2004, eLinear acquired all of the outstanding and issued stock of
TanSeco Systems, Inc., a Delaware corporation (åTanSecoæ), from RadioShack
Corporation, a Delaware corporation. TanSeco is a nation wide security solutions
company, established over 35 years ago, that provides single source, integrated
life safety and physical security systems and security monitoring services to
commercial customers.
Hereinafter,
all references to eLinear include the operations and financial condition of
NetView for the two years ended December 31, 2004, and the operations of eLinear
consolidated with NetView since April 15, 2003, with NewBridge consolidated
since July 31, 2003 and with TanSeco consolidated since November 8, 2004. (see
Note 3).
Note
2. Summary
of Significant Accounting Policies
|
|
As
of December 31, 2004, eLinear had three wholly owned
subsidiaries, NetView Technologies, Inc., NewBridge Technologies,
Inc. and TanSeco Systems, Inc. All material inter-company balances and
inter-company transactions have been
eliminated. |
b) Cash
and Cash Equivalents
|
|
Cash
and cash equivalents consist of cash on hand and held in banks in
unrestricted accounts. The Company considers all highly liquid investments
with an original maturity of three months or less to be cash
equivalents. |
Inventories
are stated at the lower of average cost or market. The Company continually
assesses the appropriateness of inventory valuations giving consideration to
obsolete, slow-moving and non-saleable inventory.
d) Property
and Equipment
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated economic lives of the assets that range
between three and seven years.
e) Income
Taxes
The
Company accounts for income taxes using the liability method, under which the
amount of deferred income taxes is based on the tax effects of the differences
between the financial and income tax basis of the Company’s assets, liabilities
and operating loss carryforwards at the balance sheet date based upon existing
tax laws. Deferred tax assets are recognized if it is more likely than not that
the future income tax benefit will be realized. Since utilization of net
operating loss carryforwards is not assured, no benefit for future offset of
taxable income has been recognized in the accompanying financial
statements.
f) Goodwill
Goodwill
represents the excess of the purchase price over net assets acquired. Goodwill
is not amortized, but is tested at least annually for impairment. The impairment
testing is performed at a reporting unit level and consists of two steps. In the
first step, the Company compares the fair value of each reporting unit to its
carrying value. The Company determines the fair value of its reporting units
using the income approach, which requires the Company to calculate the fair
value of a reporting unit based on the present value of estimated future cash
flows. If the fair value of the reporting unit exceeds the carrying value of the
net assets assigned to that unit, goodwill is not impaired and the Company is
not required to perform further testing. If the carrying value of the net assets
assigned to the reporting unit exceeds the fair value of the reporting unit,
then the Company must perform the second step in order to determine the implied
fair value of the reporting unit’s goodwill and compare it to the carrying value
of the reporting unit’s goodwill. If the carrying value of a reporting unit’s
goodwill exceeds its implied fair value, then the Company must record an
impairment loss equal to the difference.
g) Long-lived
Assets
The
Company reviews for the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition are less than its carrying amount. The Company has not identified
any such impairment losses.
h) Use
of Estimates
The
preparation of the Company’s financial statements in conformity with generally
accepted accounting principles requires the Company’s management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
i) Comprehensive
Income (Loss)
Comprehensive
income is defined as all changes in shareholders’ equity, exclusive of
transactions with owners, such as capital instruments. Comprehensive income
includes net income or loss, changes in certain assets and liabilities that are
reported directly in equity such as translation adjustments on investments in
foreign subsidiaries, changes in market value of certain investments in
securities and certain changes in minimum pension liabilities. The Company’s
comprehensive loss was equal to its net loss for the years ended December 31,
2004 and 2003.
j) Revenue
Recognition
Consulting
Services Segment -
Revenue from time-and-materials service contracts, maintenance agreements and
other services are recognized as services are provided.
Communications
Deployment Segment -
Revenues from fixed-price contracts related to the delivery of voice, video and
data services are recognized in the period the services are performed. These
services are generally provided over a period of several weeks to months,
depending on the size of the contract.
Network
Storage and Solutions Segment -
Revenues on the sale of products, which are shipped from eLinear’s stock of
inventory, are recognized when the products are shipped provided that
appropriate signed documentation of the arrangement, such as a signed contract,
purchase order or letter of agreement, has been received, the fee is fixed or
determinable and collectability is reasonably assured. In accordance with
Emerging Issues Task Force ("EITF") Issue No. 99-19 "Recording Revenue Gross as
a Principal Versus Net as an Agent", revenue from drop shipments of third-party
hardware and software sales are recognized upon delivery, and recorded at the
gross amount when eLinear is responsible for fulfillment of the customer order,
has latitude in pricing, has risk of loss during shipment of the inventory,
incurs credit risk on the receivable and has discretion in the selection of the
supplier.
Shipping
and handling costs are included in cost of goods sold
Security
Solutions Segment -
Revenue from the sale of goods and services is recognized as the goods and
services are provided. Revenue from security and fire monitoring is recognized
monthly pursuant to the monitoring contract.
The
Company accounts for arrangements that contain multiple elements in accordance
with EITF 00-21, "Revenue Arrangements with Multiple Deliverables". When
elements such as hardware, software and consulting services are contained in a
single arrangement, or in related arrangements with the same customer, the
Company allocates revenue to each element based on its relative fair value,
provided that such element meets the criteria for treatment as a separate unit
of accounting. The price charged when the element is sold separately generally
determines fair value. In the absence of fair value for a delivered element, the
Company allocates revenue first to the fair value of the undelivered elements
and allocates the residual revenue to the delivered elements. In the absence of
fair value for an undelivered element, the arrangement is accounted for as a
single unit of accounting, resulting in a delay of revenue recognition for the
delivered elements until the undelivered elements are fulfilled. The Company
limits the amount of revenue recognition for delivered elements to the amount
that is not contingent on the future delivery of products or services or subject
to customer-specified return or refund privileges.
The
Company recognizes revenue from the sale of manufacturer’s maintenance and
extended warranty contracts in accordance with EITF 99-19 net of its costs of
purchasing the related contracts.
The
Company performs ongoing credit evaluations of its customers’ financial
condition and maintains reserves for potential credit losses based upon the
expected collectability of total accounts receivable. To date, losses resulting
from uncollectible receivables have not exceeded management’s
expectations.
m) Earnings
(Loss) Per Share
The
Company computes net income (loss) per share pursuant to Statement of Financial
Accounting Standards No. 128 åEarnings Per Shareæ. Basic net loss per share is
computed by dividing income or loss applicable to common shareholders by the
weighted average number of shares of the Company’s common stock outstanding
during the period. Diluted net income per share is determined in the same manner
as basic net income per share except that the number of shares is increased
assuming exercise of dilutive stock options and warrants using the treasury
stock method and dilutive conversion of the Company’s convertible debt and
preferred stock.
During
the year ended December 31, 2004 options to purchase 4,514,583 shares of common
stock, warrants to purchase 4,114,577 shares of common stock and 2,000,000
shares of common stock issuable upon the conversion of the Laurus credit
facility were excluded from the calculation of earnings per share since their
inclusion would be antidilutive. During the years ended December 31, 2004 and
2003 there was no convertible preferred stock outstanding.
During
the year ended December 31, 2003, options to purchase 1,990,183 shares of common
stock and warrants to purchase 26,611 shares of common stock were excluded from
the calculation of earnings per share since their inclusion would be
antidilutive.
n) Stock-Based
Compensation
The
Company accounts for compensation costs associated with stock options and
warrants issued to employees under the provisions of Accounting Principles Board
Opinion No. 25 (åAPB 25æ) whereby compensation is recognized to the extent the
market price of the underlying stock at the date of grant exceeds the exercise
price of the option granted. (See Note 9, åStock Options and Warrantsæ).
Accordingly, no compensation expense has been recognized for grants of options
to employees with the exercise prices at or above market price of the Company’s
common stock on the measurement dates. During the year ended December 31, 2004,
eLinear recognized compensation expense totaling $141,968 under the intrinsic
value method for stock options issued to employees and $67,123 under the fair
value method for options issued to outside directors. eLinear recognized
compensation expense totaling $62,000 in 2003 under the intrinsic value method
for stock options issued to employees and $52,493 under the fair value method
for options issued to consultants.
Had
compensation expense been determined based on the estimated fair value at the
measurement dates of awards under those plans consistent with the method
prescribed by SFAS No. 123, the Company’s December 31, 2004 and 2003, net loss
would have been changed to the pro forma amounts indicated below.
| |
|
December
31, 2004 |
|
December
31, 2003 |
|
| |
|
|
|
|
|
|
Net
income (loss): |
|
|
|
|
|
|
|
|
As
reported |
|
$ |
(8,432,712 |
) |
$ |
(1,022,161 |
) |
|
Stock
based compensation under fair value method |
|
|
(381,224 |
) |
|
(103,768 |
) |
|
Pro
forma |
|
$ |
(8,813,936 |
) |
$ |
(1,125,929 |
) |
| |
|
|
|
|
|
|
|
|
Net
income (loss) per share - basic and diluted: |
|
|
|
|
|
|
|
|
As
reported |
|
$ |
(0.42 |
) |
$ |
(0.07 |
) |
|
Stock
based compensation under fair value method |
|
|
(0.02 |
) |
|
(0.01 |
) |
|
Pro
forma |
|
$ |
(0.44 |
) |
$ |
(0.08 |
) |
The fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk free
rate of 3.5%; volatility of 206% for 2004 and 2003 with no assumed dividend
yield; and expected lives of six months.
o) Fair
Value of Financial Instruments
Financial
instruments that are subject to fair disclosure requirements are carried in the
financial statements at amounts that approximate fair value and include cash and
cash equivalents, accounts receivable and accounts payable. Fair values are
based on assumptions concerning the amount and timing of estimated future cash
flows and assumed discount rates reflecting varying degrees of perceived
risk.
p) New
Accounting Pronouncements
During
December 2002, the FASB issued SFAS No. 148. Statement 148 establishes standards
for two alternative methods of transition to the fair value method of accounting
for stock-based employee compensation of FASB SFAS No. 123 åAccounting for
Stock-Based Compensationæ (åSFAS 123æ). SFAS 148 also amends and augments the
disclosure provisions of SFAS 123 and Accounting Principles Board Opinion 28
"Interim Financial Reporting" to require disclosure in the summary of
significant accounting policies for all companies of the effects of an entity’s
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The transition standards and disclosure requirements of SFAS 148 are effective
for fiscal years and interim periods ending after December 15, 2002. The Company
has adopted only the disclosure provisions of this statement.
SFAS No.
150, åAccounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity,æ was issued in May 2003 and requires issuers to classify
as liabilities (or assets under certain circumstances) three classes of
freestanding financial instruments that represent obligations for the issuer.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and is otherwise effective at the beginning of the first
interim period beginning after December 15, 2003. The adoption of this statement
did not have a material effect on the Company’s financial position, results of
operations or cash flows.
Through
May 2003, the Company received vendor rebates for achieving certain purchase or
sales volume. The Emerging Issues Task Force ("EITF") Issue No. 02-16,
åAccounting by a Customer (including a Reseller) for Certain Consideration
Received from a Vendor" ("EITF 02-16") is effective for arrangements with
vendors initiated on or after January 1, 2003. EITF 02-16 addresses the
accounting and income statement classification for consideration given by a
vendor to a retailer in connection with the sale of the vendor’s products or for
the promotion of sales of the vendor's products. The EITF concluded that such
consideration received from vendors should be reflected as a decrease in prices
paid for inventory and recognized in cost of sales as the related inventory is
sold, unless specific criteria are met qualifying the consideration for
treatment as reimbursement of specific, identifiable incremental costs. The
provisions of this consensus have been applied prospectively. The adoption of
EITF 02-16 did not have a material impact on the Company's financial statements
as a whole.
Advertising
Costs
For the
years ended December 31, 2004 and 2003, the Company expensed approximately
$52,000, and $30,000 respectively.
Reclassifications
Certain
amounts as previously presented in the 2003 financial statements have been
reclassified to conform to the current year presentation.
Note
3. Acquisitions
On April
15, 2003, eLinear, Inc. issued 12,961,979 shares
of common stock for 100% of the outstanding common stock of NetView. After the
merger the stockholders of NetView owned approximately 90% of the combined
entity. For financial reporting purposes this transaction was treated as an
acquisition of eLinear and a recapitalization of NetView using the purchase
method of accounting. For accounting purposes, the outstanding shares of eLinear
immediately prior to the acquisition was accounted for as the consideration paid
by NetView for the acquisition of eLinear and was valued at $450,718 using the
stock price on such date. The excess purchase price over the fair value of net
tangible assets was $451,920, all of which was allocated to goodwill. NetView’s
historical financial statements replace eLinear’s in these financial
statements.
On July
31, 2003, eLinear completed the acquisition of all the issued and outstanding
shares of NewBridge Technologies, Inc (åNewBridgeæ), (formerly MMGD, Inc.).
Pursuant to the transaction, eLinear issued 850,000 shares of its common stock
valued at $1,230,500, using the stock price on the date of the merger, and
options to purchase 300,000 shares of common stock valued at $274,000 using
Black-Scholes options pricing model to the shareholders of NewBridge. As of the
effective date, NewBridge became a wholly-owned subsidiary of eLinear. The
acquisition was accounted for using the purchase method of accounting resulting
in an excess purchase price over the fair value of net tangible assets of
$1,491,102, as restated, all of which was allocated to goodwill.
The
following table summarizes the estimated fair value of the net assets acquired
and liabilities assumed at the acquisition dates.
| |
|
eLinear |
|
NewBridge |
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
110,467 |
|
$ |
126,455 |
|
$ |
236,922 |
|
|
Property
and equipment
|
|
|
11,392 |
|
|
11,082 |
|
|
22,474 |
|
|
Goodwill
|
|
|
451,920 |
|
|
1,100,000 |
|
|
1,943,022 |
|
|
Total
assets acquired
|
|
|
573,779 |
|
|
1,237,537 |
|
|
2,202,418 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
123,061 |
|
|
124,139 |
|
|
247,200 |
|
|
Net
assets acquired
|
|
$ |
450,718 |
|
$ |
1,361,676 |
|
$ |
1,955,218 |
|
The
consolidated statement of operations in the accompanying financial statements
for the year ended December 31, 2003 includes the operations of eLinear from
April 15, 2003 through December 31, 2003 and NewBridge from July 31, 2003
through December 31, 2003. The following are pro forma condensed statements of
operations for the years ended December 31, 2003 and 2002, as though the
acquisitions had occurred on January 1, 2002.
| |
|
Twelve
Months Ended
December
31, |
|
| |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
14,059,714 |
|
$ |
8,824,164 |
|
|
Net
loss
|
|
$ |
(1,093,213 |
) |
$ |
(264,814 |
) |
|
Net
loss per share - basic and diluted
|
|
$ |
(0.08 |
) |
$ |
(0.02 |
) |
On
November 3, 2004, eLinear acquired all of the outstanding and issued stock of
TanSeco from RadioShack. TanSeco is a nation wide security solutions company,
established over 35 years ago, that provides single source, integrated life
safety and physical security systems and security monitoring services to
commercial customers. Pursuant to this transaction, eLinear offered employment
to over 35 RadioShack employees. Concurrently with this transaction, TanSeco
entered into a three-year services agreement with RadioShack, pursuant to which,
TanSeco will provide the installation, service, repair and inspection of
security, closed circuit television, and fire systems used by RadioShack for the
security systems of its more than 5,000 company-owned stores located in the
continental United States, Puerto Rico and the U.S. Virgin Islands, kiosks and
other physical locations. In addition to providing services to RadioShack in
connection with the services agreement, TanSeco plans to do the following: (i)
continue to provide installation, service, repair, and inspection of security,
closed circuit television and fire systems to existing customers of TanSeco;
(ii) seek out and obtain, either independently or through the use of third
parties, new customers for TanSeco’s installation, service, repair, and
inspection of security, closed circuit television and fire systems services; and
(iii) through the use of third parties, provide monitoring services, which may
include monitoring fire alarms and burglar alarms, to new and existing customers
of TanSeco.
Note
4. Impairment
As of
December 31, 2004, the Company had $1,100,000 of goodwill, as restated,
resulting from the acquisition of NewBridge. Goodwill represents the excess of
cost over the fair value of the net tangible assets acquired and is not
amortized. However, goodwill is subject to an impairment assessment at least
annually which may result in a charge to operations if the fair value of the
reporting segment in which the goodwill is reported declines. In March 2004, the
Company recorded impairment expense totaling $451,920 related to 100% of the
goodwill recorded with the 2003 NetView acquisition. In March 2004 the
consulting services business segment lost its largest consulting contract and
the other operations that had been acquired in the acquisition had declined due
to the loss of a key employee after the acquisition. Based on projected
estimated future cash flows from that business segment, management determined a
full impairment charge was required. In September 2004, the Company performed a
valuation analysis of the discounted projected estimated future cash flows of
NewBridge and the Company elected to write down a portion of the goodwill
related to NewBridge. Due to the large amount of goodwill presently on the
Company’s financial reports, if an impairment is required, the Company’s
financial condition and results of operations would be negatively
affected.
Note
5. Credit
Facilities
In
February 2004, the Company obtained a secured revolving note with Laurus Master
Fund, Ltd. (åLaurusæ). Under the terms of the agreement, the Company can borrow
up to $5,000,000 at an annual interest rate of prime plus .75% (with a minimum
rate of 4.75%). The agreement contains two notes: a minimum secured note
totaling $2,000,000 (återm noteæ) and a revolving credit facility totaling
$3,000,000 (årevolveræ) based on eligible accounts receivable.
Line
of Credit - Revolver
The
Laurus revolver provides for borrowings of up to the lesser of; (i) $3 million
or (ii) 90% of the Company’s eligible accounts receivable. The Company borrowed
$1,000,000 under the revolving facility on the date of the agreement. The
revolving credit facility has a term of three years and accrues interest on
outstanding balances at the rate of prime (5.50% as of December 31, 2004) plus
0.75% (with a minimum rate of 4.75%). The Company is
permitted to go over its borrowing limit, which is referred to as getting an
åoveradvance,æ if the Company gets the approval of Laurus. These overadvances
typically accrue interest at a rate of 1.5% per month, but until August 2004,
the Company was not required to pay this interest amount on any overadvances. In
October 2004, Laurus agreed to fund an additional $500,000, which loan was not
deemed an overadvance. This credit facility is secured by all of the Company’s
assets. In consideration for the issuance of seven-year warrants to purchase
150,000 shares of the Company’s common stock at $1.90 per share and the
forgiveness of penalties owed to Laurus in the approximate amount of $153,000 as
of October 31, 2004, the Company agreed in October 2004 to reduce the conversion
price of the credit facility from $2.91 to $1.00 per share. The Company recorded
$338,925 of interest expense in the fourth quarter of 2004 for this beneficial
conversion feature. At the option of the holder, the outstanding balance on the
credit facility can be converted into shares of Company common stock at a
conversion price of $1.00 per share. In connection with the execution of this
credit facility, and in connection with the October 2004 amendment, the Company
issued Laurus seven-year warrants to purchase a total of 440,000 shares of
Company common stock at exercise prices ranging from $1.90 to $3.22 per share.
The Company has the ability to prepay any amounts owed under this credit
facility at 115% of the principal amount. As
amounts are drawn on this line of credit, to the extent the current market price
exceeds the fixed conversion price, additional interest expense will be
recognized for this beneficial conversion feature. All stock conversion prices
and exercise prices are subject to adjustment for stock splits, stock dividends
or similar events. The Company paid back the $1,000,000 revolver during the
quarter ended June 30, 2004. As of December 31, 2004, the Company had $2,784,543
outstanding under the revolver.
Term
Note
The term
note has a term of three years. The Company has the option of paying scheduled
interest and principal, or prepaying all or a portion of the term note with
shares of its common stock at the fixed conversion price of $1.00 per share,
provided that the shares are registered with the Securities and Exchange
Commission or with cash at 115% of the outstanding balance. Laurus also has the
option to convert all or a portion of the term note into shares of the Company’s
common stock at any time, subject to certain limitations, at a fixed conversion
price of $1.00 per share. The term note is secured by a blanket lien on all of
the Company’s assets. As of December 31, 2004, the Company had $2,000,000
outstanding under the term note, the maximum amount available.
In
conjunction with the Laurus credit facility, Laurus was paid a fee of $219,500
and received a seven-year warrant to purchase up to a total of 440,000 shares of
the Company’s common stock at prices ranging from $1.90 to $3.22 per share. The
warrants, which are exercisable immediately, were valued at $529,338 using a
modified Black-Scholes option pricing model. The value of these warrants and the
fees paid to Laurus were recorded as a discount to the term note and are being
amortized over the term of the loan using the effective interest
method.
The
credit facility is considered to have a beneficial conversion feature since the
fair market value of the common stock issuable upon conversion of the term note
exceeded the value allocated to the term note on the date of issuance. The
difference between the market value of the shares issuable upon conversion and
the value allocated to the term note of $510,282 is considered to be the value
of the beneficial conversion feature. The value of the beneficial conversion
feature has also been recorded as a discount to the term note and is being
amortized over the term of the loan using the effective interest method. In the
event the investors convert the debentures prior to the maturity of the
agreements, then generally accepted accounting principles require the Company to
expense the unamortized balance of the debt discount in full.
In
addition to the $219,500 fee paid to Laurus, the Company paid $273,000 in
finder’s fees to vSource Capital. The $273,000 was capitalized as deferred
financing costs and is being amortized using the effective interest method over
the term of the loan agreement.
During
the quarter ended June 30, 2004, the Company paid back the original $1,000,000
it had drawn under the revolver during the quarter ended March 31, 2004.
Therefore, the Company expensed one third of the discounts recorded in
connection with the credit facility on the date the funds were repaid resulting
in additional non-cash interest expense of approximately $420,000 during the
quarter ended June 30, 2004.
The
following table illustrates the borrowings and repayments made by the Company
and the beneficial conversion features and amortization on the Laurus credit
facility through December 31, 2004:
|
Original
loan draw down amount |
|
$ |
3,000,000 |
|
|
Add:
Net amount of borrowings |
|
|
1,784,543 |
|
|
Face
value of amount borrowed |
|
|
4,784,543 |
|
|
Fee
paid to Laurus |
|
|
(219,500 |
) |
|
Beneficial
conversion amount |
|
|
(1,039,620 |
) |
|
Amortization
of debt discounts |
|
|
658,517 |
|
|
Laurus
debt, net as of December 31, 2004 |
|
$ |
4,183,940 |
|
As part
of the above credit
facility, the
Company agreed to file a registration statement with the SEC in order to
register the resale of any shares issuable upon conversion of up to $2 million
of the credit
facility and upon
the exercise of the warrants. The terms of its agreement with Laurus require it
to file the registration statement and have the registration statement declared
effective by a definitive period of time, not to exceed 150 days from February
23, 2004, or within 15 days of the Company’s current registration statement
being declared effective by the SEC, whichever is earlier. The Company’s current
registration statement was declared effective on September 10, 2004. If the
Company fails to meet this deadline, if the registration statement is not
declared effective prior to the 90th day
after filing the registration statement, if the registration statement ceases to
remain effective, or certain other events occur, the Company has agreed to pay
Laurus liquidated damages of 1.5% of the principal amount of the convertible
portion of the note per month. In
consideration for the issuance of seven-year warrants to purchase 150,000 shares
of the Company’s common stock at $1.90 per share, Laurus forgave approximately
$153,000 in penalties. Laurus is
limited to owning or beneficially owning a maximum of 4.99% of the Company’s
outstanding shares of common stock. In addition, each time the Company borrows
$2 million under the credit facility, the Company will be required to file an
additional registration statement covering the possible conversion of that
amount of the note. The Company’s registration statement filed with the SEC to
register the conversion shares and shares underlying the warrants was declared
effective by the SEC on December 30, 2004. The Company is not obligated at any
time to repurchase any portion of the Laurus conversion shares nor the shares
underlying the warrants.
During
February 2004, the Company retired its $1,000,000 line of credit with Textron
Financial Corporation with the proceeds from the Laurus credit facility and
entered into a new $500,000 credit facility with Textron collateralized with a
$500,000 letter of credit.
Note
6. Property
and Equipment
Property
and equipment consist of the following at December 31, 2004 and
2003:
| |
|
Estimated |
|
December
31, |
|
| |
|
Lives |
|
2004 |
|
2003 |
|
|
Vehicles |
|
|
5
years |
|
$ |
33,807 |
|
$ |
12,806 |
|
|
Computer
software and equipment |
|
|
3
years |
|
|
231,116 |
|
|
72,411 |
|
|
Furniture
and equipment |
|
|
7
years |
|
|
610,349 |
|
|
20,159 |
|
|
Leasehold
improvements |
|
|
Life
of lease |
|
|
129,549 |
|
|
-- |
|
| |
|
|
|
|
|
1,004,821 |
|
|
105,376 |
|
|
Accumulated
depreciation |
|
|
|
|
|
(199,023 |
) |
|
(61,714 |
) |
|
Net
property and equipment |
|
|
|
|
$ |
805,798 |
|
$ |
43,662 |
|
Note
7. Commitments
and Contingent Liabilities
Lease
Obligations
The
Company’s executive and administrative offices are located at 2901 West Sam
Houston Parkway, North Suite E-300, Houston, Texas 77043. It leases these
facilities. Its lease covers approximately 25,300 square feet and expires on
November 30, 2005. Its lease payments are $19,228 per month for the period
October 2004 through April 2005 and $20,240 per month for the period May through
November 2005. The Company also has a marketing and sales office in Dallas,
Texas. It leases these facilities. Its lease covers approximately 7,186 square
feet and expires May 31, 2009. The lease payments are $8,898 per month and
includes monthly operating expenses, which will vary based on actual operating
expenses of the property. TanSeco leases office and warehouse space in Fort
Worth, Texas. The lease covers approximately 7,972 square feet and expires
October 31, 2007. The lease payments are $8,304 per month. The Company has no
present plans to invest in real estate, real estate mortgages, or persons or
entities primarily engaged in real estate activities.
Future
minimum lease payments under non-cancelable leases with terms in excess of one
year are as follows:
Twelve
Months Ending December 31, |
|
|
|
|
2005 |
|
$ |
427,640 |
|
|
2006 |
|
|
209,048 |
|
|
2007 |
|
|
190,911 |
|
|
2008 |
|
|
106,777 |
|
|
2009 |
|
|
35,592 |
|
|
Total |
|
$ |
969,968 |
|
Legal
Proceedings
From time
to time, the Company may become involved in litigation arising in the ordinary
course of its business. The Company is presently not subject to any material
legal proceedings outside of the ordinary course of business except as set forth
below:
On
December 16, 1999, eLinear and Imagenuity were served with a complaint captioned
Chris Sweeney v. Kinetics.com, Inc. and Imagenuity, Inc., Circuit Court, Duval
County, Florida, Civil Case Number 1999-7252-CA. The complaint alleged a breach
of an alleged oral modification of a written employment agreement between the
plaintiff, Chris Sweeney, and Imagenuity and alleged breaches by eLinear and
Imagenuity of fiduciary obligations which the plaintiff claims were owed to him.
Plaintiff is seeking as damages 20% of the Company’s common stock received by
the sole shareholder of Imagenuity in connection with the merger of Imagenuity
with and into eLinear’s subsidiary. After the filing of the complaint, eLinear’s
subsidiary, eLinear Corporation, was added as a defendant. The Company intends
to vigorously contest the case. While the Company believes the case to have no
merit, at this stage it is impossible to predict the amount or range of
potential loss, if any.
In
December 1999, the Company counter-sued Chris Sweeney in a lawsuit captioned
eLinear Corporation v. Chris Sweeney, United States District Court, District of
Colorado, Case Number 99-WM-2434. The complaint sought a determination of the
rights of the parties with respect to the termination of Chris Sweeney’s
employment agreement with Imagenuity. The lawsuit was indefinitely stayed
pending resolution of the Florida litigation discussed above.
On
October 17, 2003, the Company filed a civil suit against Jon Ludwig, its former
CEO, for the following causes of action: breach of fiduciary duty; negligent
misrepresentation; theft of trade secrets; theft/conversion of property;
wrongful interference with existing and prospective contracts; and civil
conspiracy. This case is currently in the 127th Judicial District in the
District Court of Harris County, Texas. Ipath, a direct competitor of the
Company and the current employer of defendant Ludwig, was added as an additional
defendant. The Company is alleging that iPath conspiracy, wrongful interference
with existing and prospective contracts, and fraud for its complicity with
Ludwig in the latter’s breach of fiduciary duty. The trial date has been set for
April 18, 2005.
On November 11, 2004, the Company
filed a demand for arbitration with the American Arbitration Association against
McData Corporation for breach of contract relating to the termination of the
contract in June 2004. Arbitrators are being appointed and discovery is in the
early stage.
Note
8. Common
Stock
In
February 2004, the Company sold 1,230,000 shares of its common stock at a price
of $2.00 per share, together with five-year warrants to purchase an aggregate of
615,000 shares of common stock at an exercise price of $3.00 per share (the
åClass A Warrantsæ), and warrants to purchase 615,000 shares of common stock at
an exercise price of $2.50 per share (the åClass B Warrantsæ) expiring on the
earlier of two years from the closing date or one year from the date a
registration statement registering the resale of the shares underlying the
warrants and the shares becomes effective for an aggregate purchase price of
$2,460,000, in a private placement transaction. The Company received proceeds
totaling $2,257,800, net of offering costs of $202,200. In addition, the Company
issued 61,500 Class A Warrants and 61,500 Class B Warrants to vSource1 as a
finders fee.
All of
the Class A Warrants and Class B Warrants issued in the February 2004 offering
are exercisable immediately. Subject to certain exceptions, in the event that on
or before the date on which the warrants are exercised, the Company issues or
sells, or is deemed to have issued or sold in accordance with the terms of the
warrants, any shares of common stock for consideration per share less than the
exercise price of the warrants as then in effect, then the exercise price of the
warrants will be adjusted in accordance with a weighted average formula
contained in the warrants.
In
January 2004, the Company sold 1,964,223 shares of its common stock at a price
of $1.29 per share, together with five-year warrants to purchase an aggregate of
1,178,535 shares of common stock at an exercise price of $1.89 per share (the
åClass A Warrantsæ), and warrants to purchase 1,090,145 shares of common stock
at an exercise price of $1.55 per share (the Class B Warrantsæ), expiring on the
earlier of fourteen months from the closing date or eight months from the date a
registration statement registering the resale of the shares underlying the
warrants and the shares becomes effective for an aggregate purchase price of
$2,533,850, in a private placement transaction. The Company received proceeds
totaling $2,326,481, net of offering costs of $207,369. In addition, the Company
issued 117,854 Class A Warrants and 109,015 Class B Warrants to vSource1 as a
finders fee.
All of
the warrants issued in the January 2004 offering are exercisable immediately.
Subject to certain exceptions, in the event that on or before the date on which
the warrants are exercised, the Company issues or sells, or is deemed to have
issued or sold in accordance with the terms of the warrants, any shares of
common stock for consideration per share less than the exercise price of the
warrants as then in effect, then the exercise price of the warrants will be
adjusted to equal the consideration per share of common stock issued or sold or
deemed to have been issued and sold in such dilutive issuance, provided that if
such exercise price is adjusted to a $1.00 per share of common stock, any
additional issuances shall only further reduce the exercise price of the
warrants in accordance with a weighted average formula contained in the
warrants.
As part
of the above financings, the Company agreed to file a registration statement
with the SEC in order to register the resale of the shares purchased and the
shares issuable upon exercise of the warrants. If (i) the registration statement
is not declared effective prior to the 120th day
after the closing date of each financing, (ii) the Company fails to respond to
the comments provided by the SEC to its registration statement within ten days
of receipt of comments; or (iii) the registration statement has been declared
effective by the SEC and it ceases to remain continuously effective until all
the registered securities are resold, the Company has agreed to pay the
investors 1.5% of the aggregate purchase price for the first month, and if the
event continues to occur, 2.0% of the purchase price per month thereafter. The
Company’s registration statement was declared effective by the SEC on September
10, 2004. As settlement for the penalties, the Company issued 319,248 shares of
its common stock valued at $353,224 and lowered the exercise price on certain
warrants to $1.00 per share and extended the expiration dates, which repricing
was valued at $327,171.
The
Company issued 312,600 shares of common stock for stock options exercised during
2004 resulting in proceeds totaling $415,262 and 200,581 shares of common stock
for stock warrants exercised during 2004 resulting in proceeds totaling
$200,581.
The
Company issued 575,190 shares of its common stock valued at $857,484 to third
parties for consulting services during 2004. The Company measured the
transactions at the date of issuance at the quoted market price. There are no
performance commitments or penalties for non-performance, therefor, the Company
recorded the services at the date of issuance.
Note
9. Stock
Options and Warrants
Stock
Option Plans
On March
31, 2000, the directors of the Company approved the 2000 Stock Option Plan (the
å2000 Planæ) under which up to 1,000,000 shares of the Company’s common stock
may be issued. The 2000 Plan was approved by the Company’s shareholders at its
annual shareholder meeting. Under the 2000 Plan, incentive and nonqualified
stock options may be granted to employees, directors and consultants of the
Company. Awards under the 2000 Plan will be granted as determined by the
Company’s Board of Directors. The options that may be granted pursuant to the
2000 Plan may be either incentive stock options qualifying for beneficial tax
treatment for the recipient or nonqualified stock options. The term of the
options granted under the 2000 Plan will be fixed by the Company, provided the
maximum option term may not exceed ten years from the grant date (incentive
stock options are granted at an exercise price of not less than 100% (110% for
individuals owning 10% or more of the Company’s common stock at the time of
grant) of the common stock’s fair market value at the date of grant.
Nonqualified stock options may be granted at an exercise price determined by the
Company’s Board of Directors. Vesting rights will be fixed by the Company’s
Board of Directors provided, however, that an outside director not have the
right to exercise more than 50% of the shares granted until six months after the
grant date. As of December 31, 2004, incentive stock options to purchase 639,000
shares exercisable at prices ranging from $0.32 to $2.65 per share that vest
immediately to over a four-year period were outstanding. As of December 31,
2004, non-qualified stock options to purchase 187,750 shares exercisable at
prices ranging from $0.75 to $39.38 per share that vest immediately to over a
four-year period were outstanding. Of these amounts, 229,250 options were vested
as of December 31, 2004.
On April
16, 2003, the Board of Directors adopted the 2003 Stock Option Plan (the å2003
Planæ), which allows for the issuance of up to 2,000,000 stock options to
directors, executive officers, employees and consultants of the Company. The
2003 Plan was approved by the Company’s shareholders at its annual shareholder
meeting. Under the 2003 Plan, incentive and nonqualified stock options may be
granted to employees, directors and consultants of the Company. Awards under the
2003 Plan will be granted as determined by the Company’s Board of Directors. The
options that may be granted pursuant to the 2003 Plan may be either incentive
stock option qualifying for beneficial tax treatment for the recipient or
nonqualified stock options. The term of the options granted under the 2003 Plan
will be fixed by the Company, provided the maximum option term may not exceed
ten years from the grant date (incentive stock options are granted at an
exercise price of not less than 100% (110% for individuals owning 10% or more of
the Company’s common stock at the time of grant) of the common stock’s fair
market value at the date of grant. Nonqualified stock options may be granted at
an exercise price determined by the Company’s Board of Directors. Vesting rights
will be fixed by the Company’s Board of Directors. As of December 31, 2004,
incentive stock options to purchase 979,500 shares exercisable at prices ranging
from $0.67 to $3.25 per share that vest immediately to over a four-year period
were outstanding. As of December 31, 2004, non-qualified stock options to
purchase 495,000 shares exercisable at $0.50 per share that vest immediately to
over a three-year period were outstanding. Of these amounts, 469,325 options
were vested as of December 31, 2003. In addition to the options granted pursuant
to the 2003 Plan, the Company issued 364,658 shares of its common stock to
outside consultants for services
On
February 10, 2004, the Board of Directors adopted the 2004 Stock Option Plan
(the å2004 Planæ), which allows for the issuance of up to 2,000,000 stock
options to directors, executive officers, employees and consultants of the
Company. The 2004 Plan was approved by the Company’s shareholders at its annual
shareholder meeting. Under the 2004 Plan, incentive and nonqualified stock
options may be granted to employees, directors and consultants of the Company.
Awards under the 2004 Plan will be granted as determined by the Company’s Board
of Directors. The options that may be granted pursuant to the 2004 Plan may be
either incentive stock option qualifying for beneficial tax treatment for the
recipient or nonqualified stock options. The term of the options granted under
the 2004 Plan will be fixed by the Company, provided the maximum option term may
not exceed ten years from the grant date (incentive stock options are granted at
an exercise price of not less than 100% (110% for individuals owning 10% or more
of the Company’s common stock at the time of grant) of the common stock’s fair
market value at the date of grant. Nonqualified stock options may be granted at
an exercise price determined by the Company’s Board of Directors. Vesting rights
will be fixed by the Company’s Board of Directors. As of December 31, 2004,
incentive stock options to purchase 1,205,000 shares exercisable at prices
ranging from $0.90 to $3.10 per share that vest over a four-year period were
outstanding. There were no nonqualified stock options outstanding as of December
31, 2004, and none of the options outstanding were exercisable. In addition to
the options granted pursuant to the 2004 Plan, the Company issued 162,942 shares
of its common stock to outside consultants for services.
Stock
option activity during the periods indicated is as follows:
| |
|
Number
of Shares |
|
Weighted
Average Exercise Price |
|
|
Outstanding,
January 1, 2003 |
|
|
1,187,083 |
|
$ |
5.44 |
|
|
Granted |
|
|
1,376,800 |
|
|
0.73 |
|
|
Exercised |
|
|
(573,700 |
) |
|
1.31 |
|
|
Forfeited |
|
|
-- |
|
|
-- |
|
|
Expired |
|
|
-- |
|
|
-- |
|
|
Outstanding,
December 31, 2003 |
|
|
1,990,183 |
|
$ |
3.38 |
|
|
Granted |
|
|
2,901,500 |
|
|
1.74 |
|
|
Exercised |
|
|
(312,600 |
) |
|
1.33 |
|
|
Forfeited |
|
|
(64,500 |
) |
|
0.85 |
|
|
Expired |
|
|
-- |
|
|
-- |
|
|
Outstanding,
December 31, 2004 |
|
|
4,514,583 |
|
$ |
2.51 |
|
|
Exercisable,
December 31, 2004 |
|
|
1,706,908 |
|
$ |
3.79 |
|
At
December 31, 2004, the range of exercise prices and weighted average remaining
contractual life of outstanding options was $0.32 to $39.38 and 4.2 years,
respectively. The weighted average grant date fair value of the options issued
in 2004 and 2003 amounted to $1.74 and $0.73, respectively.
Common
Stock Warrants
In
connection with the debt (Note 5) and equity (Note 8) fundings, the Company
issued warrants to acquire common stock at various prices. The following table
summarizes the warrants outstanding as of December 31, 2004:
|
Exercise
Price |
|
Financing
Date |
|
Outstanding
Warrants |
|
Expiration
Date |
|
| |
|
|
|
|
|
|
|
|
|
|
|
$0.70 |
|
|
December
2003 |
|
|
26,611 |
|
|
December
2005 |
|
|
$1.00 |
|
|
January
2004 |
|
|
666,859 |
|
|
June
2005 |
|
|
$1.00 |
|
|
February
2004 |
|
|
240,000 |
|
|
June
2005 |
|
|
$1.55 |
|
|
January
2004 |
|
|
381,719 |
|
|
March
2005 |
|
|
$1.89 |
|
|
January
2004 |
|
|
1,296,388 |
|
|
January
2009 |
|
|
$2.50 |
|
|
February
2004 |
|
|
386,500 |
|
|
February
2006 |
|
|
$3.00 |
|
|
February
2004 |
|
|
676,500 |
|
|
February
2009 |
|
|
$1.90 |
|
|
October
2004 |
|
|
150,000 |
|
|
October
2011 |
|
|
$3.05 |
|
|
February
2004 |
|
|
200,000 |
|
|
February
2011 |
|
|
$3.19 |
|
|
February
2004 |
|
|
50,000 |
|
|
February
2011 |
|
|
$3.22 |
|
|
February
2004 |
|
|
40,000 |
|
|
February
2011 |
|
|
Total |
|
|
|
|
|
4,114,577 |
|
|
|
|
All
warrants are exercisable at December 31, 2004. The Company has not filed and is
not required to file a registration statement for the warrants issued for its
December 2003 financing.
Note
10. Related
Party Transactions
Notes
payable and accrued liabilities due to officers of the Company at December 31,
2003, consisted of the following:
| |
|
| |
|
|
|
|
|
Note
payable to an officer with interest at 7% per annum and principal and
interest due July 1, 2004, without collateral. |
|
$ |
81,303 |
|
| |
|
|
|
|
|
Note
payable to an officer with interest at 7% per annum and principal and
interest due July 1, 2004, without collateral. |
|
|
134,400 |
|
| |
|
|
|
|
|
Accrued
liabilities due to officers |
|
|
36,336 |
|
|
Total |
|
$ |
252,039 |
|
Accrued
liabilities includes $31,336 of accrued interest related to the notes payable to
officers and $5,000 in advances from an officer. During January 2004, the
Company repaid the aforementioned notes payable.
Note
10. Industry
Segments
The
Company has adopted the provisions of Statements of Financial Accounting
Standards No. 131, åDisclosures about Segments of an Enterprise and Related
Informationæ (åSFAS 131æ). At December 31, 2004, the Company’s four business
units, NetView, NewBridge, eLinear and TanSeco, have separate management teams
and infrastructures that offer different products and services;.
| |
|
For
the Year Ended December 31, 2004 |
|
|
Dollars
($) |
|
Consulting
Services |
|
Network
and Storage Solutions |
|
Communications
Deployment |
|
Security
Solutions |
|
Consolidated |
|
|
Revenue |
|
|
106,515 |
|
|
21,753,584 |
|
|
1,827,873 |
|
|
377,781 |
|
|
24,065,753 |
|
|
Segment
loss |
|
|
(6,009,770 |
) |
|
(1,356,590 |
) |
|
(878,379 |
) |
|
(187,973 |
) |
|
(8,432,712 |
) |
|
Total
assets |
|
|
1,730,410 |
|
|
4,726,771 |
|
|
1,781,988 |
|
|
1,094,228 |
|
|
9,333,397 |
|
|
Capital
expenditures |
|
|
343,636 |
|
|
295,113 |
|
|
11,286 |
|
|
37,981 |
|
|
688,016 |
|
|
Depreciation
and amortization |
|
|
55,929 |
|
|
66,572 |
|
|
4,703 |
|
|
24,426 |
|
|
151,630 |
|
| |
|
For
the Year Ended December 31, 2003
(Restated) |
|
|
Dollars
($) |
|
Consulting
Services |
|
Network
and Storage Solutions |
|
Communications
Deployment |
|
Security
Solutions |
|
Consolidated |
|
|
Revenue |
|
|
608,370 |
|
|
12,686,133 |
|
|
206,637 |
|
|
-- |
|
|
13,501,140 |
|
|
Segment
loss |
|
|
(717,565 |
) |
|
(216,303 |
) |
|
(88,293 |
) |
|
-- |
|
|
(1,022,161 |
) |
|
Total
assets |
|
|
1,071,083 |
|
|
1,695,284 |
|
|
1,663,329 |
|
|
-- |
|
|
4,429,696 |
|
|
Capital
expenditures |
|
|
-- |
|
|
9,886 |
|
|
-- |
|
|
-- |
|
|
9,886 |
|
|
Depreciation |
|
|
2,686 |
|
|
15,568 |
|
|
2,036 |
|
|
-- |
|
|
20,290 |
|
The
accounting policies of the reportable segments are the same. The Company
evaluates the performance of its operating segments based on income before net
interest expense, income taxes, depreciation expense, accounting changes and
non-recurring items.
Note
11. Income
Taxes
eLinear
has incurred net losses since the merger with NetView (See Note 3.) and,
therefore, has no tax liability. The net deferred tax asset generated by the
loss carry-forward has been fully reserved. The valuation allowance increased by
approximately $170,000. The cumulative operating loss carry-forward is
approximately $6,000,000 and $1,000,000 at December 31, 2004 and 2003,
respectively, and will expire in the years 2024 and 2023.
Deferred
income taxes consist of the following at December 31, 2004 and
2003:
| |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
Deferred
tax assets |
|
$ |
2,000,000 |
|
$ |
170,000 |
|
|
Valuation
allowance |
|
|
(2,000,000 |
) |
|
(170,000 |
) |
|
|
|
$ |
-- |
|
$ |
-- |
|
NetView
was an S-Corporation in 2002 and upon the completion of the merger with eLinear
(See Note 3.), NetView terminated its S-Corporation status for income tax
purposes. The pro forma income tax expense shown in the accompanying financial
statements indicates the results as if the Company applied the current policy
for income taxes.
Note
12. Significant
Concentration
One
customer accounted for approximately 18% of sales for the year ended December
31, 2004. No other customers represented more than 10% of sales of the Company
for the year ended December 31, 2004. The Company had three customers which had
in excess of 10% of the Company’s accounts receivable balance at December 31,
2004. These customers had 17%, 11% and 10%, respectively, of the Company’s
accounts receivable balance.
Note
13. Restatement
The
Company originally filed the financial statements and accounted for the stock
issued in the acquisition of NewBridge using an average stock price fifteen days
prior to and subsequent to the date of the merger. The Company has revised the
average stock price and calculated the purchase price using the stock price on
the date of the merger. The balance sheet was restated to increase goodwill and
additional paid in capital by $295,500 for the change in the value of the
stock.
Note
14. Subsequent
Events - Unaudited
Funding
On
February 28, 2005, the Company entered into financing arrangements for a total
principal amount of $12 million with Laurus,
Iroquois Capital LP (åIroquoisæ), RHP Master Fund (åRHPæ), Basso Private
Opportunity Holding Fund Ltd. (åBasso Privateæ), and Basso Multi-Strategy
Holding Fund Ltd. (åBasso Multiæ), collectively, the (åInvestorsæ) in which it
issued to: (i) Laurus a convertible secured note in the principal amount of
$5,000,000 and a common stock purchase warrant to purchase up to 750,000 shares
of Company common stock at an exercise price of $1.25 per share; (ii) Iroquois a
convertible secured note in the principal amount of $5,000,000 and a common
stock purchase warrant to purchase up to 750,000 shares of Company common stock
at an exercise price of $1.25 pre share; (iii) RHP a convertible secured note in
the principal amount of $1,000,000 and a common stock purchase warrant to
purchase up to 150,000 shares of Company common stock at an exercise price of
$1.25 per share; (iv) Basso Private a convertible secured note in the principal
amount of $220,000 and a common stock purchase warrant to purchase up to 33,000
shares of Company common stock at an exercise price of $1.25 per share; and (v)
Basso Multi a convertible secured note in the principal amount of $780,000 and a
common stock purchase warrant to purchase up to 117,000 shares of Company common
stock at an exercise price of $1.25 per share. The terms between the Company and
each of the respective Investors are substantially similar and the Company has
agreed to treat each of the Investors pro
rata with
respect to this financing, including conversion, redemption and payments
thereto.
These
notes are secured by all of the Company and its subsidiaries’ assets.
The
payment of interest and principal, under certain circumstances, may be made with
shares of the Company common stock at a conversion price of no less than $1.00
per share. The Company has agreed to register the resale of the shares of the
Company common stock underlying the Investor Notes and the shares issuable upon
exercise of the Warrants. The
Investor Notes will accrue interest at a rate per annum equal to the åprime
rateæ published in the Wall Street Journal plus seventy five basis points, as
may be adjusted. The Company has the ability
to prepay any amounts owed under these Investors Notes at 110% of the principal
amount.
Under the
terms of the Investor Notes and related documents, 20% (including applicable
fees) of the principal amount of the Investor Notes was provided to Company for
immediate use upon the closing of the Investor Notes (åAmortizing Principalæ),
the remaining 80% (net of applicable fees) is held in restricted accounts for
each respective Investors (åRestricted Accountæ). The Company is obligated to
make monthly payments, either in cash or stock as determined by the Investor
Notes, beginning on June 1, 2005 for the Amortizing Principal, plus applicable
interest (the åMonthly Paymentæ). The Monthly Payment will be made (i)
automatically by a conversion in stock at a åFixed Conversion Priceæ, (ii) at
the discretion of the Company at a reduced conversion price, or (iii) in cash
paid by the Company at 110% of the Monthly Payment. The Monthly Payments shall
be automatically made in Company common stock at the Fixed Conversion Price if
(i) the shares of the Company common stock underlying the shares of the Investor
Notes are registered; and (ii) the average trading price of the Company common
stock for the five days preceding the Monthly Payment is greater than 110% of
the Fixed Conversion Price. If the Monthly Payment is not automatically
converted into shares of Company common stock because the average trading price
of the Company common stock for the five trading days prior to the due date of
the Monthly Payment is less than 110% of the Fixed Conversion Price, the Company
may, at its discretion, make the Monthly Payment in Company common stock at a
conversion price equal to 85% of the average trading price of the Company common
stock for the five lowest closing days for the 22 trading days prior to the
Company’s notice, but in no case shall the conversion price be less than $1.00.
As of February 28, 2005 the Fixed Conversion Price is $1.00, subject to
adjustment, but in no case less than $1.00.
The
Company will receive cash disbursements (less applicable accrued interest) for
the amounts held in the Restricted Account after (i) the Amortizing Principal,
plus interest, is paid in full, (ii) the shares of the Company common stock
underlying the Investor Notes are registered; and (iii) either the Company or
the Investor converts any amounts held in the Restricted Accounts into shares of
the Company’s common stock. If the Company converts the amounts held in the
Restricted Account, the amounts shall be converted at either (i) a price equal
to 85% of the average of the five lowest closing prices of the Company common
stock during the 22 trading days immediately prior to the date of a respective
repayment notice if the average closing price of the Company common stock is
less than 110% of the Fixed Conversion Price, but in no instance may such shares
by converted for less than $1.00; or (ii) at the Fixed Conversion Price, if the
average closing price of the Company common stock for the five consecutive
trading days immediately preceding the respective repayment notice is greater
than or equal to 115% of the Fixed Conversion Price.
The
Investors may convert all or any portion of the principal amounts of their
respective Investor Notes, including any accrued interest or fees thereon at the
Fixed Conversion Price.
Notwithstanding
the foregoing, the Company’s right to issue shares of its common stock in
payment of obligations under the Investor Notes shall be subject to the
limitation that the number of aggregate shares of common stock issued to each
Investor shall not exceed 25% of the aggregate dollar trading volume of the
Company common stock for the 22 trading days immediately preceding the date on
which the conversion is to occur. Furthermore, the Investors are not entitled to
convert their respective Investor Notes; if the aggregate Investors beneficial
ownership of the Company’s common stock would exceed pro
rata 19.99%
of the outstanding shares of common stock of the Company at the time of the
conversion.
The
warrants issued pursuant to this funding are exercisable by the Investors until
February 28, 2012, at $1.25 per share of Company common stock. The warrants are
exercisable immediately.
The
Company has agreed to file a registration statement with the Securities and
Exchange Commission within a definitive period of time not to exceed 45 days
from February 28, 2005, in order to register the resale of the shares of
common stock underlying the Investor Notes and the shares issuable upon exercise
of the Warrants. If the
Company fails to meet this deadline, if the registration statement is not
declared effective prior to 105 days from February 28, 2005, if the registration
statement ceases to remain effective, or certain other events occur, the Company
has agreed to pay the Investors liquidated damages of 1.25% of the principal
amount of the Investor Notes per month.
Stock
Option Plan
On
December 21, 2004, the Board of Directors adopted the 2005 Stock Option Plan
(the å2005 Planæ), which allows for the issuance of up to 4,000,000 stock
options to directors, executive officers, employees and consultants of the
Company. The 2005 Plan must be approved by the Company’s shareholders before any
stock options may be issued pursuant to the 2005 Plan. Under the 2005 Plan,
incentive and nonqualified stock options may be granted to employees, directors
and consultants of the Company. Awards under the 2005 Plan will be granted as
determined by the Company’s Board of Directors. The options that may be granted
pursuant to the 2005 Plan may be either incentive stock options qualifying for
beneficial tax treatment for the recipient or nonqualified stock options. The
term of the options granted under the 2005 Plan will be fixed by the Company,
provided the maximum option term may not exceed ten years from the grant date
(incentive stock options are granted at an exercise price of not less than 100%
(110% for individuals owning 10% or more of the Company’s common stock at the
time of grant) of the common stock’s fair market value at the date of grant.
Nonqualified stock options may be granted at an exercise price determined by the
Company’s Board of Directors. Vesting rights will be fixed by the Company’s
Board of Directors. As of December 31, 2004, there were no options outstanding
under the 2005 Plan.
Related
Party Transaction
On
February 18, 2005, the Company borrowed $135,000 from Tommy Allen, vice chairman
of the Company. This loan was repaid on March 8, 2005.
ITEM
8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On
October 12, 2004, the Company dismissed Malone & Bailey, PLLC as its
auditors. Malone & Bailey's audit report on eLinear's consolidated financial
statements as of December 31, 2003, and for the year then ended did not contain
an adverse opinion or disclaimer of opinion, or qualification or modification as
to uncertainty, audit scope or accounting principles. The Company filed a Report
on Form 8-K on October 14, 2004, reflecting that it replaced Malone &
Bailey, LLP, as its independent auditor with Lopez, Blevins, Bork &
Associates, LLP ("Lopez Blevins"). Members of Lopez Blevins, prior to the
formation of Lopez Blevins, performed all the audit-related work while employed
with Malone & Bailey, LLP, in connection with conducting eLinear’s audit for
the fiscal year ended December 31, 2003. Lopez Blevins reaudited eLinear’s
fiscal year ended December 31, 2003. There were no other changes to the Amended
Form 10-KSB for the year ended December 31, 2003, previously filed on September
8, 2004.
During
the most recent fiscal year ended December 31, 2003, and in the subsequent
interim periods through the date of dismissal, there were no disagreements with
Malone & Bailey on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of Malone & Bailey would have caused Malone
& Bailey to make reference to the matter in their report. eLinear requested
Malone & Bailey to furnish it a letter addressed to the Commission stating
whether it agreed with the above statements. A copy of that letter, dated
October 14, 2004, is filed as Exhibit 16.1 to the Form 8-K.
The
Company retained the services on October 13, 2004 of Lopez, Blevins, Bork &
Associates, LLP as eLinear's principal accountant to audit the financial
statements of eLinear for the year ended December 31, 2004. The decision to
change accountants was approved by the Board of Directors.
On
September 2, 2003, the Board of Directors of the Company received and accepted
the resignation of Gerald R. Hendricks & Company, P.C. as the Company’s
independent public accountants. The Company retained the services of Malone
& Bailey, PLLC as independent public accountants to audit the Company’s
consolidated financial statements for the year ending December 31, 2003. The
Company filed a Form 8-K on September 8, 2003, which was amended on September
22, 2003 reporting this event.
ITEM
8A. CONTROLS AND PROCEDURES.
In
accordance with the Exchange Act, the Company carried out an evaluation, under
the supervision and with the participation of management, including its Chief
Executive Officer and Principal Accounting Officer, of the effectiveness of its
disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, the Company’s Chief Executive Officer and
Principal Accounting Officer concluded that the Company’s disclosure controls
and procedures were effective as of December 31, 2004, to provide reasonable
assurance that information required to be disclosed in its reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms. There has been no change in the Company’s internal controls
over financial reporting that occurred during the year ended December 31, 2004,
that has materially affected, or is reasonably likely to materially affect, its
internal controls over financial reporting.
ITEM
8B. OTHER INFORMATION.
In
December 2004, the Company issued 319,248 shares of common stock to certain
investors as forgiveness of penalties of $353,224 associated with the delay in
obtaining effectiveness of a company registration statement.
PART
III
ITEM
9.
The
Company’s executive officers and directors, and their ages and positions as of
March 10, 2005 are as follows:
|
Name |
Age |
Position |
|
Kevan
M. Casey |
33 |
Chairman
of the Board |
|
Michael
Lewis |
43 |
Chief
Executive Officer, President and Director |
|
Tommy
Allen |
41 |
Vice
Chairman, Secretary and Director |
|
Ramzi
M. Nassar |
33 |
Chief
Strategy Officer |
|
JoAnn
Agee |
46 |
Principal
Accounting Officer, Controller and Assistant Secretary |
|
J.
Leonard Ivins |
69 |
Director |
|
Carl
A. Chase |
54 |
Director |
|
Ryan
Cravey |
32 |
Director |
Kevan
M. Casey served
as the Company’s president since April 16, 2003, and as its chief executive
officer from May 2003 until his resignation as CEO on December 21, 2004. Mr.
Casey has served as Chairman of the Board since May 2003. Mr. Casey also serves
as chief executive and chairman of the board of Unicorp, Inc., an independent
oil and gas company. He and Mr. Allen founded NetView Technologies, Inc. in
December 2001 and Mr. Casey served as its president from its inception. In 1998,
he founded United Computing Group and United Consulting Group, a value-added
reseller and an information technology consulting firm, where he served as
president and chief executive officer. In December 1999, United Computing Group
and United Consulting Group were acquired by ClearWorks.net, Inc., and Mr. Casey
continued as president of the companies until December 2001.
Michael
Lewis served
as the Company’s executive vice president of sales and operations since May 25,
2004, became the Company’s president in August 2004, became the Company’s CEO in
December 2004 and was appointed to the Board of Directors effective January 1,
2005. Mr. Lewis has more than 19 years experience in the technology systems
integration industry. Mr. Lewis served as president of LIBAC Corporation, a
start-up software company targeted at the financial printing industry from May
2002 to May 2004. Prior to LIBAC from December 2001 to August 2002, he was chief
operating officer for UnBound Technologies, a wireless technology company which
Mr. Lewis helped develop from start-up through a business integration with
Sprint PCS. Mr. Lewis served as senior vice president and general manager for
ComputerTech, a Houston-based integrator, from November 1996 to March
2002.
Tommy
Allen served
as the Company’s senior vice president and as a director of the company since
April 16, 2003, and became vice chairman in August 2004. He and Mr. Casey
founded NetView Technologies, Inc. in December 2001 and Mr. Allen served as its
secretary and treasurer from its inception. From July 1999 to December 2001, Mr.
Allen served as vice president for United Computing Group and United Consulting
Group, a value-added reseller and an information technology consulting firm. In
December 1999, United Computing Group and United Consulting Group were acquired
by ClearWorks.net, Inc., and Mr. Allen continued as vice president of the
companies until December 2001. From 1996 to June 1999, Mr. Allen served as
senior account executive for ComputerTech, Inc.
Ramzi
M. Nassar has
served as the Company’s chief strategy officer since January 2004. From June
2003 until joining eLinear, Mr. Nassar worked with De Bellas & Co., where he
was involved in the firm’s merger and acquisition projects and valuation
engagements. From July 2002 until October 2003, Mr. Nassar worked at CIBC World
Markets and from July 1999 until May 2001, Mr. Nassar worked at Morgan Stanley,
each in their M&A groups. From 1993 until 1997, Mr. Nassar worked in various
capacities with Computer Sciences Corporation in the consulting and systems
integration division. Mr. Nassar is a graduate of Rice University with a double
major in Economics and Managerial Studies earned an MBA from the MIT Sloan
School of Management.
JoAnn
Agee has
served as the Company’s controller since August 2004 and principal accounting
officer since January 2005. Prior to joining the Company, Ms. Agee was assistant
controller for ComputerTech, Inc., a Houston-based integrator, from March 2000
to July 2004. From February 1995 until January 2000, Ms. Agee was general
accounting manager for Containment Solutions, Inc., a Conroe, Texas based
company which manufactures fiberglass underground storage tanks and steel above
ground storage tanks..
J.
Leonard Ivins has
served as a director since November 2000. Mr. Ivins also serves as chairman of
the Company’s compensation committee and as a member of the audit committee.
Since 1995, he has been a private investor. Previously, Mr. Ivins was a founder
and co-owner of a privately held company that was an FDIC and RTC contractor.
From 1979 to 1981, Mr. Ivins was a turnaround and workout consultant to small,
publicly held oil and gas companies. From 1970 to 1975, Mr. Ivins was president
of The Woodlands Development Corporation and a director of Mitchell Energy and
Development Corp.
Carl
A. Chase has
served as a director since April 16, 2003. Mr. Chase also serves as chairman of
the audit committee and as a member of the compensation committee. Mr. Chase
also serves as chief financial officer and director of Unicorp, Inc., an
independent oil and gas company. From April 2001 until January 2005, Mr. Chase
served as senior vice president - budgets & controls for Rockport Healthcare
Group, Inc., a preferred provider organization for work-related injuries and
illnesses and currently serves as an independent consultant to Rockport. Prior
to joining Rockport, Mr. Chase was an independent consultant to Rockport from
June 2000. From August 1999 to May 2000, Mr. Chase was chief financial officer
of ClearWorks.net, Inc. Mr. Chase also served as chief financial officer of
Bannon Energy Incorporated, an independent oil and gas company, from December
1992 to August 1999.
Ryan
Cravey has
served as a director since March 5, 2004. Mr. Cravey also serves as a member of
the audit committee. Since April 1, 2002, Mr. Cravey has been the owner of
IQUEST Networking Solutions, a privately held IT consulting company for the
small to medium business market in Houston and Austin, Texas. Prior to forming
IQUEST, Mr. Cravey was operations manager for United Computing Group, a
value-added reseller of computer hardware and software, from October 1998 to
March 31 2002, where he managed sales accounts and the purchasing, receiving and
shipping of over $24 million in product.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires the Company’s directors,
executive officers and persons who own beneficially more than ten percent of the
Company’s common stock, to file reports of ownership and changes of ownership
with the SEC. Based solely on the reports received by the company and on written
representations from certain reporting persons, the Company believes that the
directors, executive officers and greater than ten percent beneficial owners
have complied with all applicable filing requirements, except for the
following:
| · |
Mr.
Allen filed a Form 5 for sales of Company common stock made on September
10, 2004 and December 1, 2, 3, and 6 on January 7,
2005, |
| · |
Mr.
Casey filed a Form 5 for sales of Company common stock made on September
10, 2004 and December 1, 2, 3, and 6 on January 7, 2005,
and |
| · |
Mr.
Chase filed a Form 4 for sales of Company common stock made on December 1,
2, 3, 6,7,8,9 and 10 on December 15, 2004. |
Audit
Committee
The
Company’s audit committee oversees its corporate accounting and financial
reporting process. Among other duties, it:
| § |
evaluates
the Company’s independent auditors’ qualifications, independence and
performance; |
| § |
determines
the engagement of the independent auditors; |
| § |
approves
the retention of the Company’s independent auditors to perform any
proposed permissible non-audit services; |
| § |
reviews
the Company’s financial statements; |
| § |
reviews
the Company’s critical accounting policies and estimates;
|
| § |
oversees
the internal audit function; and |
| § |
discusses
with management and the independent auditors the results of the annual
audit and the review of the Company’s quarterly financial statements.
|
The
current members of the Company’s audit committee are Messrs. Chase, who is the
committee chair, and Ivins and Cravey. Mr. Chase is the Company’s audit
committee financial expert.
Code
of Ethics
The
Company has adopted a Code of Ethics that applies to all of its directors,
officers (including its chief executive officer, chief financial officer, chief
accounting officer and any person performing similar functions) and
employees.
ITEM
10. EXECUTIVE COMPENSATION
The
following table provides information about the compensation received during the
last three fiscal years to the Company’s ånamed executive officersæ. None of the
Company’s other employees received greater than $100,000 in salary and bonus
during the last three fiscal years.
Summary
Compensation Table
| |
|
|
|
|
|
Long
Term Compensation |
|
| |
|
|
|
Annual
Compensation |
|
Awards |
|
Name
and
Principal
Position |
|
Year |
|
Salary
($) |
|
Bonus
($) |
|
Securities
Underlying Options / SARs (#) |
|
|
Kevan
M. Casey,
Prior
Chief Executive Officer |
|
|
2004 |
|
96,000 |
|
30,807
(2 |
) |
|
-- |
|
| |
|
|
2003 |
|
70,154
(1) |
|
24,000
(3 |
) |
|
100,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Michael
Lewis,
Chief
Executive Officer |
|
|
2004 |
|
54,646
(4) |
|
46,500
(5 |
) |
|
450,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Tommy
Allen,
Vice
President & Secretary |
|
|
2004 |
|
96,000 |
|
33,000
(7 |
) |
|
-- |
|
| |
|
|
2003 |
|
70,154
(6) |
|
24,000
(8 |
) |
|
100,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Ramzi
Nassar,
Chief
Strategy Officer |
|
|
2004 |
|
84,923
(9) |
|
51,000
(10 |
) |
|
460,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Mr.
Casey joined eLinear in April 2003 and served as CEO from May 2003 until
December 2004. This amount includes all compensation paid to Mr. Casey
since April 2003. |
| (2) |
Includes
$9,807 for a $1,000 per month auto and home office
allowance. |
| (3) |
Includes
$9,000 for a $1,000 per month auto and home office
allowance. |
| (4) |
Mr.
Lewis joined eLinear in May 2004 and became CEO in December 2004. This
amount includes all compensation paid to Mr. Lewis since May
2004. |
| (5) |
Includes
$6,000 for a $1,000 per month auto and home office allowance and $18,000
for a relocation allowance. |
| (6) |
Mr.
Allen joined eLinear in April 2003. This amount includes all compensation
paid to Mr. Allen since April 2003. |
| (7) |
Includes
$12,000 for a $1,000 per month auto and home office
allowance. |
| (8) |
Includes
$9,000 for a $1,000 per month auto and home office
allowance. |
| (9) |
Mr.
Nassar joined eLinear in January 2004. This amount includes all
compensation paid to Mr. Nassar since January
2004. |
| (10) |
Includes
$11,000 for a $1,000 per month auto and home office
allowance. |
Option
Issuances
The
following table sets forth information concerning individual grants of stock
options made during the last fiscal year to the Company’s named executive
officers. No stock appreciation rights were issued during the fiscal
year.
Option
Grants in Last Fiscal Year
(Individual
Grants)
|
Name |
|
Number
of Securities
Underlying
Options
Granted
(#) |
|
Percent
of Total
Options
Granted to
Employees
in
Fiscal
Year |
|
Exercise
or
Base
Price
($/Sh) |
|
Expiration
Date |
|
|
Michael
Lewis (1) |
|
|
450,000 |
|
|
16 |
% |
$ |
2.00 |
|
|
May
2009 |
|
|
Ramzi
Nassar |
|
|
460,000 |
|
|
17 |
% |
$ |
2.00 |
|
|
January
2009 |
|
(1) Does not
include options to purchase 450,000 shares of the Company’s common stock at
exercise prices of $1.19 per share for 300,000 incentive stock options and $0.10
per share for 150,000 non-qualified stock options, which grant is subject to the
approval of the 2005 Stock Option Plan by shareholders.
AGGREGATED
OPTION EXERCISES IN LAST FISCAL YEAR
AND
FY-END OPTION VALUES
|
Name |
|
Shares
Acquired on Exercise
(#) |
|
Value
Realized
($) |
|
Number
of Unexercised Securities Underlying Options at FY-End
(#) |
|
Value
of Unexercised
In-the-Money
Options
at FY-End
($)
(1) |
|
| |
|
|
|
|
|
Exercisable |
|
Unexercisable |
|
Exercisable |
|
Unexercisable |
|
|
Kevan
M. Casey |
|
|
-- |
|
|
-- |
|
|
100,000 |
|
|
-- |
|
$ |
70,000 |
|
|
-- |
|
|
Michael
Lewis |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
450,000 |
|
|
-- |
|
|
-- |
|
|
Tommy
Allen |
|
|
-- |
|
|
-- |
|
|
100,000 |
|
|
-- |
|
$ |
70,000 |
|
|
-- |
|
|
Ramzi
Nassar |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
460,000 |
|
|
-- |
|
|
-- |
|
|
(1) |
The
closing price of the Company’s common stock as of the end of its fiscal
year ended December 31, 2004 was $1.20 per
share. |
Employment
Agreements and Change in Control Agreements
The
Company has an employment agreement with Mr. Allen. Under the terms of the
agreement, he is to receive as compensation a monthly salary of $8,000, a
quarterly retention bonus of $3,000, and additional monthly compensation to
cover auto expenses and the cost of a home office totaling $1,000 per month. The
amount of the quarterly retention bonus was subsequently raised to $5,000. The
agreement is terminable with fourteen (14) days written notice with no
additional compensation due upon termination.
Prior to
Mr Casey's resignation as chief executive officer effective December 21, 2004,
Mr. Casey had an employment agreement identical to Mr. Allen's. The Company
entered into a consulting agreement with Mr. Casey effective January 1, 2005,
which agreement is described in the following section under åDirector
Compensation.æ
Upon his
acceptance as chief executive, the Company entered into a one-year agreement
with Mr. Lewis. Under the terms of the agreement, Mr. Lewis receives an annual
base salary of $128,000 for the initial one-year period and in the event the
Company extends the agreement for fiscal 2006, Mr. Lewis will receive an annual
base salary of $176,000. In addition, Mr. Lewis received a signing bonus of
$24,000 payable in six monthly installments of $4,000 each commencing on January
31, 2005, and the ability to earn additional bonuses based upon specific
measurement targets. Mr. Lewis also received an option to purchase 450,000
shares of Company common stock in May 2004 at an exercise price of $2.00 per
share. Additionally, Mr. Lewis received a five-year employee stock option to
purchase 300,000 shares of Company common stock at an exercise price of $1.19
per share and a four-year non-qualified stock option to purchase 150,000 shares
of Company common stock at an exercise price of $0.10 per share, which options
are subject to the authorization and approval of the shareholders of the Company
of the 2005 Stock Option Plan. The employee shares vest over a five-year period,
provided that no vesting can occur unless Mr. Lewis is employed on the
respective vesting date. However, if the Company terminates Mr. Lewis during the
term for any reason other than for cause, the employee options due Mr. Lewis
will be prorated in relation to the date of Mr. Lewis’ employment termination
and the prorated amount will vest immediately. If the Company undergoes a change
of control, all of Mr. Lewis’ options will vest immediately. If the Company
terminates Mr. Lewis for any reason other than cause, the Company has agreed to
pay Mr. Lewis $32,000 if terminated prior to June 30, 2005, and $64,000 if
terminated between July 1 and December 31, 2005.
In
January 2004, the Company entered into a two-year agreement with Mr. Nassar.
Under the terms of the agreement, Mr. Nassar receives monthly compensation of
$8,000, a quarterly bonus of $5,000, a home office and car allowance of $1,000
per month, and a to be determined annual performance bonus. Mr. Nassar also
received a five-year employee option to purchase 460,000 shares of Company
common stock at an exercise price of $2.00 per share. The vesting schedule for
the shares is 25% upon the one-year anniversary of the agreement and 25% each
subsequent year thereafter, provided that no vesting can occur unless Mr. Nassar
is employed on the respective vesting date. However, if the Company terminates
Mr. Nassar during the two-year term for any reason other than for cause, the
options due Mr. Nassar will be prorated in relation to the date of Mr. Nassar’s
employment termination and the prorated amount will vest immediately. If the
Company undergoes a change of control, all of Mr. Nassar’s options will vest
immediately. If the Company terminates Mr. Nassar for any reason other than
cause, the Company has agreed to pay Mr. Nassar the lesser of six months salary
or the salary due Mr. Nassar through the end of the two-year term.
Director
Compensation
Directors
who are also employees do not receive any compensation for serving as directors.
All directors are reimbursed for ordinary and necessary expenses incurred in
attending any meeting of the board of directors or any board committee or
otherwise incurred in their capacities as directors.
Effective
January 1, 2005, Mr. Casey has a consulting agreement with the Company of which
he receives a monthly fee of $5,000 and a payment of $6,000 at the beginning of
each quarter for his services as director of business development. Additionally,
Mr. Casey receives $1,000 per month as payment for a car allowance and
healthcare costs, reimbursement of actual business related expenses and an
office equipped with a computer, fax machine and telephone. He will also
receives as compensation a cash bonus of one percent (1%) of all amounts funded
to the Company up to $2 million and two percent (2%) of all amounts in excess of
$2 million. Mr. Casey received approximately $40,000 on the closing
of the $12 million financing and is entitled to additional amounts as cash is
made available to the Comapny from the restricted accounts. Mr. Casey’s
agreement began on December 22, 2004 and terminates on December 31, 2006, unless
terminated sooner in accordance with the agreement.
Mr. Ivins
receives $4,500 per quarter for his services as chairman of the compensation
committee and $1,500 per quarter for services as a member of the audit
committee. Mr. Ivins also receives $200 per board meeting attended and $850 per
month for reimbursement of certain expenses incurred as a director. During the
twelve month period ended December 31, 2004, Mr. Ivins earned $32,200 for his
board services. On December 21, 2004, Mr. Ivins received a four-year
non-qualified stock option to purchase 75,000 shares of Company common stock at
an exercise price of $0.75 per share, which options vested immediately. In April
2003, in connection with his board services, Mr. Ivins received a non-qualified
stock option to purchase 100,000 shares of Company common stock at an exercise
price of $.50 per share expiring in March 2008.
Mr. Chase
receives $4,500 per quarter for his services as chairman of the audit committee
and $1,500 per quarter for services as a member of the compensation committee.
Mr. Chase received a bonus of $4,000 during fiscal 2004 for his services to the
Company during fiscal 2003. In addition, beginning January 1, 2005, Mr. Chase
receives an additional $2,000 per month for services provided to the Company’s
management team. During the twelve months ended December 31, 2004, Mr. Chase
earned $28,000 for his board services. Upon joining the Company’s board in April
2003, Mr. Chase received a non-qualified stock option to purchase 250,000 shares
of Company common stock at an exercise price of $.50 per share expiring in April
2007.
Mr.
Cravey receives $1,500 per quarter for his services as a member of the audit
committee and $200 per board meeting attended. During the twelve months ended
December 31, 2004, Mr. Cravey earned $3,400 for his board services. Upon joining
the Company’s board in March 2004, Mr. Cravey received a non-qualified stock
option to purchase 50,000 shares of Company common stock at an exercise price of
$2.75 per share expiring March 2008.
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
As of
March 17, 2005, 22,212,012 shares of common stock were outstanding. The
following table sets forth, as of such date, information with respect to shares
beneficially owned by
| § |
each
person who is known by the Company to be the beneficial owner of more than
5% of its outstanding shares of common
stock; |
| § |
each
of the Company’s directors; |
| § |
each
of the Company’s named executive officers; and
|
| § |
all
of the Company’s directors and executive officers as a
group. |
Beneficial
ownership has been determined in accordance with Rule 13d-3 of the Exchange Act.
Under this rule, shares may be deemed to be beneficially owned by more than one
person (if, for example, persons share the power to vote or the power to dispose
of the shares). In addition, shares are deemed to be beneficially owned by a
person if the person has the right to acquire shares (for example, upon exercise
of an option) within 60 days of the date of this table. In computing the
percentage ownership of any person, the amount of shares includes the amount of
shares beneficially owned by the person by reason of these acquisition rights.
As a result, the percentage of outstanding shares of any person does not
necessarily reflect the person’s actual voting power.
To the
Company’s knowledge, except as indicated in the footnotes to this table and
pursuant to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them. Unless otherwise indicated, the business
address of the individuals listed is 2901 West Sam Houston Parkway North, Suite
E-300, Houston, Texas 77043.
|
Name
and Address of
Beneficial
Owner |
|
Number
of
Shares
Beneficially
Owned |
|
Percentage
of
Outstanding
Shares |
|
|
Tabitha
Casey |
|
|
6,411,289(1 |
) |
|
28.7 |
% |
|
Kevan
M. Casey |
|
|
6,411,289(2 |
) |
|
28.7 |
% |
|
Michael
Lewis |
|
|
10,000(3 |
) |
|
* |
|
|
Nancy
Allen |
|
|
6,411,290(4 |
) |
|
28.7 |
% |
|
Tommy
Allen |
|
|
6,411,290(5 |
) |
|
28.7 |
% |
|
Ramzi
M. Nassar |
|
|
142,500(6 |
) |
|
* |
|
|
J.
Leonard Ivins |
|
|
565,800(7 |
) |
|
2.5 |
% |
|
Carl
A. Chase |
|
|
134,445(8 |
) |
|
* |
|
|
Ryan
Cravey |
|
|
16,667(9 |
) |
|
* |
|
|
All
Executive Officers and Directors as a group (8 persons) |
|
|
13,691,991(10 |
) |
|
58.9 |
% |
| |
|
|
|
|
|
|
|
______________________
* Less
than one percent (1%)
| (1) |
Includes
options held by Ms. Casey’s husband, Kevan Casey, to purchase 100,000
shares of common stock at an exercise price of $0.50 per share expiring
April 16, 2007 and 129,619 shares owned by Ms. Casey’s husband, the record
holder. |
| (2) |
Includes
options to purchase 100,000 shares of common stock at an exercise price of
$0.50 per share expiring April 16, 2007. Includes 6,181,670 shares owned
by Mr. Casey’s wife, the record holder. |
| (3) |
Excludes
(i) an option to purchase 450,000 stock options issued in May 2004 which
will vest 25% on May 25, 2005 and (ii) an additional 450,000 stock options
which won’t be issued until shareholder approval of the 2005 Stock Option
Plan. |
| (4) |
Includes
options held by Ms. Allen’s husband, Tommy Allen, to purchase 100,000
shares of common stock at an exercise price of $0.50 per share expiring
April 16, 2007 and 129,619 shares owned by Ms. Allen’s husband, the record
holder |
| (5) |
Includes
options to purchase 100,000 shares of common stock at an exercise price of
$0.50 per share expiring April 16, 2007. Includes 6,181,671 shares owned
by Mr. Allen’s wife, the record holder. |
| (6) |
Includes
options to purchase 115,000 shares of common stock at an exercise price of
$2.00 per share expiring January 14, 2009. |
| (7) |
Includes
options to purchase 565,000 shares of common stock at exercise prices
ranging from $0.50 to $3.00 per share expiring from November 28, 2005 to
December 29, 2010. Mr. Ivins’ business address is 2036 Brentwood Drive,
Houston, Texas 77019. |
| (8) |
Includes
options to purchase 134,400 shares of common stock at an exercise price of
$0.50 per share expiring April 16, 2007. Mr. Chase’s business address is
1117 Herkimer Street, Houston, Texas 77008. |
| (9) |
Includes
options to purchase 16,667 shares of common stock at an exercise price of
$2.75 per share expiring March 5, 2008. Mr. Cravey’s business address is
9542 Bending Willow Ln., Houston, Texas
77064. |
| (10) |
Includes
options to purchase 1,031,112 shares of common
stock. |
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
At
December 31, 2003, notes payable and accrued liabilities due to two of the
Company’s officers totaled $252,039. The two notes earned interest at 7% per
annum, were due July 1, 2004 and had a principal balances due of $81,303 and
$134,400, respectively. Additionally, there was accrued liabilities totaling
$36,336 of which $31,336 was accrued interest on these notes. These notes and
accrued liabilities were retired during the first quarter of fiscal
2004.
On
February 18, 2005, the Company borrowed $135,000 from Tommy Allen, vice chairman
of the Company. This loan was repaid on March 8, 2005.
ITEM
13. EXHIBITS
| (a) |
Exhibits.
The following exhibits of the Company are included
herein. |
Exhibit
No. Description
| 2.1 |
Agreement
and Plan of Merger, dated October 11, 1999, between Registrant, eLinear
Corporation and Imagenuity, Inc. (incorporated by reference to Exhibit A-1
to Registrant’s Current Report on Form 8-K, dated October 25,
1999) |
| 2.2 |
Agreement
and Plan of Merger, dated April 15, 2003, between Registrant, NetView
Acquisition Corp. and NetView Technologies, Inc. (incorporated by
reference to Exhibit 2.2 to Registrant’s Annual Report on form 10-KSB,
dated April 15, 2002) |
| 3.1 |
Articles
of Incorporation of Registrant (incorporated by reference to Registrant’s
Form 10-KSB for the period ended December 31,
1995) |
| 3.2 |
Bylaws
of Registrant (incorporated by reference to Registrant’s Form 10-KSB for
the period ended December 31, 1995) |
| 3.3 |
Amended
and Restated Certificate of Incorporation of Registrant (incorporated by
reference to Registrant’s Form 10-QSB for the period ended June 30,
2000) |
| 4.1 |
Specimen
of Registrant’s Common Stock Certificate (incorporated by reference to
Registrant’s Form 10-KSB for the period ended December 31,
1995) |
10.1 Employment
Agreement with Tommy Allen (incorporated by reference to Exhibit 10.3 to
Registrant’s Annual Report on Form 10-KSB, dated April 15, 2003) *
| 10.2 |
2000
Stock Option Plan (incorporated by reference to Exhibit 4.1 to
Registrant’s Definitive Proxy Statement on Schedule 14A, dated June 30,
2000) * |
| 10.3 |
Amendment
No. 1 to Registrant’s 2000 Stock Option Plan (incorporated by reference to
Exhibit 4.2 to Registrant’s Form S-8, dated July 31, 2001)
* |
| 10.4 |
Amended
and Restated 2003 Stock Option Plan (incorporated by reference to Exhibit
10.1 to Registrant’s Form S-8, dated January 14, 2003)
* |
| 10.5 |
Form
of Indemnification Agreement for all officers and directors of Registrant
(incorporated by reference to Registrant’s Form 10-QSB filed with the
Commission on October 24, 2000) |
| 10.6 |
Securities
Purchase Agreement dated as of January 12, 2004 between eLinear, Inc. and
the Investors named therein (incorporated by reference to Exhibit 10.1 to
Registrant’s Form 8-K, dated January 28,
2004) |
| 10.7 |
Form
of Class A Warrant issued to each of the Investors in the Securities
Purchase Agreements dated as of January 12, 2004 (incorporated by
reference to Exhibit 10.2 to Registrant’s Form 8-K, dated January 28,
2004) |
| 10.8 |
Form
of Class B Warrant issued to each of the Investors in the Securities
Purchase Agreements dated as of January 12, 2004 (incorporated by
reference to Exhibit 10.3 to Registrant’s Form 8-K, dated January 28,
2004) |
| 10.9 |
Registration
Rights Agreement issued to each of the Investors in the Securities
Purchase Agreements dated as of January 12, 2004 (incorporated by
reference to Exhibit 10.4 to Registrant’s Form 8-K, dated January 28,
2004) |
| 10.10 |
Employment
Agreement with Ramzi Milad Nassar (incorporated by reference to Exhibit
10.12 to Registrant’s Annual Report on Form 10-KSB, dated February 13,
2004) * |
| 10.11 |
Securities
Purchase Agreement dated as of February 4, 2004 between eLinear, Inc. and
the Investors named therein (incorporated by reference to Exhibit 10.13 to
Registrant’s Annual Report on Form 10-KSB, dated February 13,
2004) |
| 10.12 |
Form
of Class A Warrant issued to each of the Investors in the Securities
Purchase Agreements dated as of February 4, 2004 (incorporated by
reference to Exhibit 10.14 to Registrant’s Annual Report on Form 10-KSB,
dated February 13, 2004) |
| 10.13 |
Form
of Class B Warrant issued to each of the Investors in the Securities
Purchase Agreements dated as of February 4, 2004 (incorporated by
reference to Exhibit 10.15 to Registrant’s Annual Report on Form 10-KSB,
dated February 13, 2004) |
| 10.14 |
Registration
Rights Agreement issued to each of the Investors in the Securities
Purchase Agreements dated as of February 4, 2004 (incorporated by
reference to Exhibit 10.16 to Registrant’s Annual Report on Form 10-KSB,
dated February 13, 2004) |
| 10.15 |
Common
Stock Purchase Warrant Agreement dated as of February 23, 2004 by and
between eLinear, Inc. and Laurus Master Fund, LLC (incorporated by
reference to Exhibit 10.18 to Registrant’s Form 8-K, dated February 26,
2004) |
| 10.16 |
Secured
Revolving Note Agreement dated as of February 23, 2004 by and between
eLinear, Inc., NetView Technologies, Inc. and NewBridge Technologies, Inc.
and Laurus Master Fund, LLC (incorporated by reference to Exhibit 10.19 to
Registrant’s Form 8-K, dated February 26,
2004) |
| 10.17 |
Secured
Convertible Minimum Borrowing Note Agreement dated as of February 23, 2004
by and between eLinear, Inc., NetView Technologies, Inc. and NewBridge
Technologies, Inc. and Laurus Master Fund, LLC (incorporated by reference
to Exhibit 10.20 to Registrant’s Form 8-K, dated February 26,
2004) |
| 10.18 |
Minimum
Borrowing Note Registration Rights Agreement dated as of February 23, 2004
by and between eLinear, Inc. and Laurus Master Fund, LLC (incorporated by
reference to Exhibit 10.21 to Registrant’s Form 8-K, dated February 26,
2004) |
| 10.19 |
Funds
Escrow Agreement dated as of February 23, 2004 by and between eLinear,
Inc., NetView Technologies, Inc. and NewBridge Technologies, Inc. and
Laurus Master Fund, LLC (incorporated by reference to Exhibit 10.22 to
Registrant’s Form 8-K, dated February 26,
2004) |
| 10.20 |
eLinear,
Inc. 2004 Stock Option Plan (incorporated by reference to Exhibit A to
Registrant’s Definitive Information Statement, dated October 15, 2004)
* |
| 10.21 |
Employment
Agreement dated January 15, 2005, with Michael Lewis
* |
| 10.22 |
Amendment
to the Security Agreement and Ancillary Agreement with Laurus Master Funs,
LLC (incorporated by reference to Exhibit 10.24 to Registrant’s Form SB-2
dated November 5, 2004) |
| 10.23 |
Stock
Purchase Agreement of TanSeco Systems, Inc. (incorporated by reference to
Exhibit 10.25 to Registrant’s Form SB-2 dated November 5,
2004) |
| 10.24 |
Service
Agreement with RadioShack Corporation (incorporated by reference to
Exhibit 10.26 to Registrant’s Form SB-2 dated November 5,
2004) |
| 10.25 |
Form
of Master Security Agreement, dated as of February 28, 2005, by and
between eLinear, Inc., NetView Technologies, Inc., NewBridge Technologies,
Inc., TanSeco Systems, Inc. and Investor (incorporated by reference to
Exhibit 10.1 to Registrant’s Form 8-K dated March 3,
2005) |
| 10.26 |
Form
of Common Stock Purchase Warrant Agreement, dated as of February 28, 2005,
by and between eLinear, Inc. and Investor (incorporated by reference to
Exhibit 10.2 to Registrant’s Form 8-K dated March 3,
2005) |
| 10.27 |
Form
of Secured Convertible Term Note, dated as of February 28, 2005, by and
between eLinear, Inc. and Investor (incorporated by reference to Exhibit
10.3 to Registrant’s Form 8-K dated March 3,
2005) |
| 10.28 |
Form
of Restricted Account Agreement, dated as of February 28, 2005, by and
between eLinear, Inc., the bank and Investor (incorporated by reference to
Exhibit 10.4 to Registrant’s Form 8-K dated March 3,
2005) |
| 10.29 |
Form
of Registration Rights Agreement, dated as of February 28, 2005, by and
between eLinear, Inc. and Investor (incorporated by reference to Exhibit
10.5 to Registrant’s Form 8-K dated March 3,
2005) |
| 10.30 |
Form
of Stock Purchase Agreement, dated as of February 28, 2005, by and between
eLinear, Inc. and Investor (incorporated by reference to Exhibit 10.6 to
Registrant’s Form 8-K dated March 3, 2005) |
| 10.31 |
Consulting
Agreement dated December 22, 2005 with Kevan Casey
* |
14.1 Code of
Ethics (incorporated by reference to Exhibit 14.1 to Registrant’s Annual Report
on Form 10-KSB, dated February 13, 2004)
| 21.1 |
Subsidiaries
of Registrant (incorporated by reference to Exhibit 21.1 to Registrant’s
Form 10-QSB filed with the Commission on December 19,
2003) |
23.1 Consent
of Lopez, Blevins, Bork & Associates, LLP
| 31.1 |
Certification
of Michael J. Lewis |
| 31.2 |
Certification
of Joann Agee |
| 32.1 |
Certification
for Sarbanes-Oxley Act of Michael J. Lewis |
| 32.2 |
Certification
for Sarbanes-Oxley Act of Joann Agee |
* Indicates
management contract or compensatory plan or arrangement.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit
Fees
The
aggregate fees billed by Lopez, Blevins, Bork & Associates LLP (åLBBæ) for
professional services rendered for the audit of the Company’s annual financial
statements for the fiscal year ended December 31, 2004, and for the reviews of
the financial statements included in the Company’s quarterly reports on Form
10-QSB for that fiscal year were $35,200.
The
aggregate fees billed by Malone & Bailey PLLC (åMalone & Baileyæ) for
professional services rendered for the reviews of the financial statements
included in the Company’s quarterly reports on Form 10-QSB for the fiscal year
ended December 31, 2004, were $7,900. The aggregate fees billed by Malone &
Bailey for professional services rendered for the audit of the Company’s annual
financial statements for the fiscal year ended December 31, 2003, and for the
reviews of the financial statements included in the Company’s quarterly reports
on Form 10-QSB for that fiscal year were $23,400. In addition to these fees,
Malone and Bailey billed $15,580 for professional services rendered in the
review of two Form SB-2’s filed by the Company with the SEC during fiscal
2004.
The
aggregate fees billed by Gerald R. Hendricks & Company, P.C. (åHendricksæ)
for professional services rendered for the review of the Company’s Form S-8 and
two Form SB-2’s filed by the Company with the SEC during fiscal 2004 were
$11,250.
Financial
Information Systems Design and Implementation Fees
Neither
Malone & Bailey, LBB nor Hendricks rendered professional services to the
Company for information technology services relating to financial information
systems design and implementation for the fiscal years ended December 31, 2004
and 2003.
All
Other Fees
Other
than the services described above under åAudit Fees,æ for the fiscal years ended
December 31, 2004 and 2003, neither Malone & Bailey nor LBB received any
other fees.
Audit
Committee Pre-Approval Policies and Procedures
The 2004
and 2003 audit services provided by Malone & Bailey and LBB were approved by
the Audit Committee. The Audit Committee implemented pre-approval policies and
procedures related to the provision of audit and non-audit services. Under these
procedures, the Audit Committee pre-approves both the type of services to be
provided by the Company’s independent accountants and the estimated fees related
to these services. During the approval process, the Audit Committee considers
the impact of the types of services and related fees on the independence of the
auditor. These services and fees deemed compatible with the maintenance of the
auditor’s independence, including compliance with the SEC rules and
regulations.
Throughout
the year, the Audit Committee reviews revisions to the estimates of audit and
non-audit fees initially approved.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized
eLINEAR,
INC.
By:
/s/
Michael Lewis___________
Michael
Lewis, Chief Executive Officer
Date:
March 18, 2005
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/
Kevan Casey Chairman
of the Board March 18,
2005
Kevan
Casey
/s/
Michael Lewis CEO,
President and Director March 18,
2005
Tommy
Allen
/s/
Tommy Allen Vice
President and Vice Chairman March 18,
2005
Tommy
Allen
/s/
Joann Agee Principal
Accounting Officer March 18,
2005
Joann
Agee
/s/ J.
Leonard Ivins Director March18,
2005
J.
Leonard Ivins
/s/
Carl A. Chase Director March 18,
2005
Carl A.
Chase
/s/
Ryan Cravey Director March 18,
2005
Ryan
Cravey
INDEX
TO EXHIBITS
Exhibit
No. Description
| 2.1 |
Agreement
and Plan of Merger, dated October 11, 1999, between Registrant, eLinear
Corporation and Imagenuity, Inc. (incorporated by reference to Exhibit A-1
to Registrant’s Current Report on Form 8-K, dated October 25,
1999) |
| 2.2 |
Agreement
and Plan of Merger, dated April 15, 2003, between Registrant, NetView
Acquisition Corp. and NetView Technologies, Inc. (incorporated by
reference to Exhibit 2.2 to Registrant’s Annual Report on form 10-KSB,
dated April 15, 2002) |
| 3.1 |
Articles
of Incorporation of Registrant (incorporated by reference to Registrant’s
Form 10-KSB for the period ended December 31,
1995) |
| 3.2 |
Bylaws
of Registrant (incorporated by reference to Registrant’s Form 10-KSB for
the period ended December 31, 1995) |
| 3.3 |
Amended
and Restated Certificate of Incorporation of Registrant (incorporated by
reference to Registrant’s Form 10-QSB for the period ended June 30,
2000) |
| 4.1 |
Specimen
of Registrant’s Common Stock Certificate (incorporated by reference to
Registrant’s Form 10-KSB for the period ended December 31,
1995) |
10.1 Employment
Agreement with Tommy Allen (incorporated by reference to Exhibit 10.3 to
Registrant’s Annual Report on Form 10-KSB, dated April 15, 2003) *
| 10.2 |
2000
Stock Option Plan (incorporated by reference to Exhibit 4.1 to
Registrant’s Definitive Proxy Statement on Schedule 14A, dated June 30,
2000) * |
| 10.3 |
Amendment
No. 1 to Registrant’s 2000 Stock Option Plan (incorporated by reference to
Exhibit 4.2 to Registrant’s Form S-8, dated July 31, 2001)
* |
| 10.4 |
Amended
and Restated 2003 Stock Option Plan (incorporated by reference to Exhibit
10.1 to Registrant’s Form S-8, dated January 14, 2003)
* |
| 10.5 |
Form
of Indemnification Agreement for all officers and directors of Registrant
(incorporated by reference to Registrant’s Form 10-QSB filed with the
Commission on October 24, 2000) |
| 10.6 |
Securities
Purchase Agreement dated as of January 12, 2004 between eLinear, Inc. and
the Investors named therein (incorporated by reference to Exhibit 10.1 to
Registrant’s Form 8-K, dated January 28,
2004) |
| 10.7 |
Form
of Class A Warrant issued to each of the Investors in the Securities
Purchase Agreements dated as of January 12, 2004 (incorporated by
reference to Exhibit 10.2 to Registrant’s Form 8-K, dated January 28,
2004) |
| 10.8 |
Form
of Class B Warrant issued to each of the Investors in the Securities
Purchase Agreements dated as of January 12, 2004 (incorporated by
reference to Exhibit 10.3 to Registrant’s Form 8-K, dated January 28,
2004) |
| 10.9 |
Registration
Rights Agreement issued to each of the Investors in the Securities
Purchase Agreements dated as of January 12, 2004 (incorporated by
reference to Exhibit 10.4 to Registrant’s Form 8-K, dated January 28,
2004) |
10.10
Employment
Agreement with Ramzi Milad Nassar (incorporated by reference to Exhibit 10.12 to
Registrant’s Annual Report on Form 10-KSB, dated February 13, 2004)
*
10.11
Securities
Purchase Agreement dated as of February 4, 2004 between eLinear, Inc. and the
Investors named therein (incorporated by reference to Exhibit 10.13 to
Registrant’s Annual Report on Form 10-KSB, dated
February 13, 2004)
10.12
Form of
Class A Warrant issued to each of the Investors in the Securities Purchase
Agreements dated as of February 4, 2004 (incorporated by reference to Exhibit
10.14 to Registrant’s Annual Report on Form 10-KSB, dated February 13,
2004)
10.13 Form of
Class B Warrant issued to each of the Investors in the Securities Purchase
Agreements dated as of February 4, 2004 (incorporated by reference to Exhibit
10.15 to Registrant’s Annual Report on Form 10-KSB, dated February 13,
2004)
10.14
Registration
Rights Agreement issued to each of the Investors in the Securities Purchase
Agreements dated as of February 4, 2004 (incorporated by reference to Exhibit
10.16 to Registrant’s Annual Report on Form 10-KSB, dated February 13,
2004)
10.15 Common
Stock Purchase Warrant Agreement dated as of February 23, 2004 by and between
eLinear, Inc. and Laurus Master Fund, LLC (incorporated by reference to Exhibit
10.18 to Registrant’s Form 8-K, dated February 26, 2004)
10.16 Secured
Revolving Note Agreement dated as of February 23, 2004 by and between eLinear,
Inc., NetView Technologies, Inc. and NewBridge Technologies, Inc. and Laurus
Master Fund, LLC (incorporated by reference to Exhibit 10.19 to Registrant’s
Form 8-K, dated February 26, 2004)
10.17 Secured
Convertible Minimum Borrowing Note Agreement dated as of February 23, 2004 by
and between eLinear, Inc., NetView Technologies, Inc. and NewBridge
Technologies, Inc. and Laurus Master Fund, LLC (incorporated by reference to
Exhibit 10.20 to Registrant’s Form 8-K, dated February 26, 2004)
10.18
Minimum
Borrowing Note Registration Rights Agreement dated as of February 23, 2004 by
and between eLinear, Inc. and Laurus Master Fund, LLC (incorporated by reference
to Exhibit 10.21 to Registrant’s Form 8-K, dated February 26, 2004)
10.19 Funds
Escrow Agreement dated as of February 23, 2004 by and between eLinear, Inc.,
NetView Technologies, Inc. and NewBridge Technologies, Inc. and Laurus Master
Fund, LLC (incorporated by reference to Exhibit 10.22 to Registrant’s Form 8-K,
dated February 26, 2004)
10.20
eLinear,
Inc. 2004 Stock Option Plan (incorporated by reference to Exhibit A to
Registrant’s Definitive Information Statement, dated October 15, 2004)
*
10.21
Employment
Agreement dated January 15, 2005, with Michael Lewis *
10.22
Amendment
to the Security Agreement and Ancillary Agreement with Laurus Master Funs, LLC
(incorporated by reference to Exhibit 10.24 to Registrant’s Form SB-2 dated
November 5, 2004)
10.23 Stock
Purchase Agreement of TanSeco Systems, Inc. (incorporated by reference to
Exhibit 10.25 to Registrant’s Form SB-2 dated November 5, 2004)
10.24
Service
Agreement with RadioShack Corporation (incorporated by reference to Exhibit
10.26 to Registrant’s Form SB-2 dated November 5, 2004)
10.25 Form of
Master Security Agreement, dated as of February 28, 2005, by and between
eLinear, Inc., NetView Technologies, Inc., NewBridge Technologies, Inc., TanSeco
Systems, Inc. and Investor (incorporated by reference to Exhibit 10.1 to
Registrant’s Form 8-K dated March 3, 2005)
10.26
Form of
Common Stock Purchase Warrant Agreement, dated as of February 28, 2005, by and
between eLinear, Inc. and Investor (incorporated by reference to Exhibit 10.2 to
Registrant’s Form 8-K dated March 3, 2005)
10.27 Form of
Secured Convertible Term Note, dated as of February 28, 2005, by and between
eLinear, Inc. and Investor (incorporated by reference to Exhibit 10.3 to
Registrant’s Form 8-K dated March 3, 2005)
10.28 Form of
Restricted Account Agreement, dated as of February 28, 2005, by and between
eLinear, Inc., the bank and Investor (incorporated by reference to Exhibit 10.4
to Registrant’s Form 8-K dated March 3, 2005)
|
10.29 |
Form
of Registration Rights Agreement, dated as of February 28, 2005, by and
between eLinear, Inc. and Investor (incorporated by reference to Exhibit
10.5 to Registrant’s Form 8-K dated March 3,
2005) |
10.30 Form of
Stock Purchase Agreement, dated as of February 28, 2005, by and between eLinear,
Inc. and Investor (incorporated by reference to Exhibit 10.6 to Registrant’s
Form 8-K dated March 3, 2005)
| 10.31 |
Consulting
Agreement dated December 22, 2005 with Kevan Casey
* |
14.1 Code of
Ethics (incorporated by reference to Exhibit 14.1 to Registrant’s Annual Report
on Form 10-KSB, dated February 13, 2004)
| 21.1 |
Subsidiaries
of Registrant (incorporated by reference to Exhibit 21.1 to Registrant’s
Form 10-QSB filed with the Commission on December 19,
2003) |
23.1 Consent
of Lopez, Blevins, Bork & Associates, LLP
31.1 Certification
of Michael J. Lewis
31.2 Certification
of Joann Agee
32.1 Certification
for Sarbanes-Oxley Act of Michael J. Lewis
32.2 Certification
for Sarbanes-Oxley Act of Joann Agee