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| WGAT.OB > SEC Filings for WGAT.OB > Form 10-K on 26-Mar-2009 | All Recent SEC Filings |
26-Mar-2009
Annual Report
We may from time to time make written or oral forward-looking statements,
including those contained in the following Management's Discussion and Analysis
of Financial Condition and Results of Operations. The words "estimate,"
"project," "believe," "intend," "expect," and similar expressions are intended
to identify forward-looking statements, although not all forward-looking
statements contain these identifying words. In order to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, we are hereby identifying certain important factors that could cause our
actual results, performance or achievement to differ materially from those that
may be contained in or implied by any forward-looking statement made by or on
our behalf. The factors, individually or in the aggregate, that could cause such
forward-looking statements not to be realized include, without limitation, the
following: (1) difficulty in developing and implementing marketing and business
plans, (2) industry competition factors and other uncertainty that a market for
our products will develop, (3) challenges associated with distribution channels,
including both the retail distribution channel and HSD and telecommunications
service providers (e.g., uncertainty that they will offer our products,
inability to predict the manner in which they will market and price our products
and existence of potential conflicts of interests and contractual limitations
impeding their ability to offer our products), (4) continued losses,
(5) difficulty or inability to raise additional financing on terms acceptable to
us, (6) departure of one or more key persons, (7) default under, or acceleration
of the maturity of, our convertible debentures, (8) changes in regulatory
requirements, and (9) other risks identified in our filings with the Securities
and Exchange Commission, including the risks identified in "Item 1A. Risk
Factors" in this Report. We caution you that the foregoing list of important
factors is not intended to be, and is not, exhaustive. We do not undertake to
update any forward-looking statement that may be made from time to time by us or
on our behalf.
Results of Operations:
General
Our video phone business has not produced significant revenues to date. The extent and timing of future revenues for our business depends on several factors, including the rate of market acceptance of our products and the degree of competition from similar products. We cannot predict to what extent our video phone product will produce revenues, or when, or if, we will reach profitability.
In the spring of 2006, we entered into a multiyear agreement with Aequus Technologies Corp. ("Aequus") to purchase Ojo video phones through its wholly owned subsidiary Snap Telecommunications Inc. ("Snap!VRS"), a provider of VRS and VRI services for the deaf and hard of hearing. In the spring of 2007, we announced an expansion of our relationship with Aequus and Snap!VRS agreeing to work collaboratively to develop the preferred Video Relay Services ("VRS") phone for the VRS community. See "Item 1. Business - Overview" for more detail on the development of our relationship with Aequus and Snap!VRS. From 2006, we were reliant on the Aequus relationship as our primary customer relationship.
On February 4, 2008, we issued a current report on Form 8-K indicating that we were in a dispute with Aequus over the payment of significant monies that we believed Aequus owed to us. The refusal by Aequus to pay such monies had contributed to a shortfall in our available operating cash needed to continue operations, and accordingly, on January 30, 2008, we shut down our operations. The Form 8-K further indicated that this was a first step to winding down our business, which would occur if we were not able to secure payment of the monies believed to be owed to us by Aequus, and/or new financing.
On March 31, 2008, we entered into a new agreement with Aequus and Snap!VRS (the "March Aequus Agreement"). The March Aequus Agreement provided for the resolution of a dispute with Aequus regarding amounts we claimed were owed to us by Aequus including, (i) payment to us by Aequus of $5,000 in scheduled payments over the next ten months, (ii) agreement to arbitrate approximately $1,354 that we claimed was owed to us by Aequus for NRE, costs and (iii) purchase of an additional $1,475 of video phones by Aequus. As a result of this new agreement Aequus built a new data center, directly operating a video phone service for its customers.
In October 2008, Aequus failed to pay $953 owed to us for the purchase of video phones, and as a result we terminated our reseller agreement with Aequus. We are reviewing our possible remedies to recover the $953, including selling Aequus inventory that we have in our possession. We have also opened discussions with other VRS/VRI service providers.
On January 27, 2009, we resolved the outstanding NRE Arbitration with Aequus, and in full satisfaction of the outstanding arbitration claim Aequus agreed to terminate any obligation on our part to provide certain prepaid engineering services pursuant to the March Aequus Agreement (Aequus had prepaid approximately $900 for these engineering services of which $725 was allocated to the settlement).
On December 12, 2008, we entered into a securities purchase agreement with WGI
Investor LLC ("WGI"), pursuant to which we agreed to issue and sell to WGI a
total of 202.5 million shares (the "WGI Shares") of our common stock ("Common
Stock"), as well as a warrant to purchase up to 140.0 million shares of Common
Stock in certain circumstances (the "Anti-Dilution Warrant"), in exchange for
(i) total cash consideration of $1,450, (ii) the cancellation of debentures held
by WGI under which approximately $5,100 in principal and accrued interest was
outstanding at December 31, 2008, and (iii) the cancellation of certain of
outstanding warrants held by WGI (the "Private Placement"). In December 2008,
WGI acquired from YA Global Investments, L.P. ("YA Global") the secured
convertible debentures we had previously issued to YA Global as well as the
outstanding warrants to purchase Common Stock then held by YA Global.
WGI is a private investment fund whose ownership includes owners of ACN, Inc. ("ACN"). ACN is a large direct seller of telecommunications services and a leading distributor of video phones. In December 2008, we agreed to enter into a commercial relationship pursuant to which we will design and sell videophones to ACN (the "Commercial Relationship"). As part of the Commercial Relationship, ACN will commit to purchase 300,000 videophones over a two-year period and will provide us with $1,200 to fund software development costs associated with the Commercial Relationship. In connection with the Commercial Relationship, we will grant ACN a warrant to purchase up to approximately 38.2 million shares of Common Stock at an exercise price of $0.0425 per share (the "ACN Warrant"). The ACN Warrant will vest incrementally based on ACN's purchases of videophones under the Commercial Relationship. Pursuant to the terms of the securities purchase agreement with WGI, we submitted for approval by our stockholders (i) the Private Placement and (ii) an amendment to our Amended and Restated Certificate of Incorporation to increase our authorized Common Stock to 700,000,000 shares, which approvals were obtained on March 20, 2009. We expect the closing of the Private Placement and the execution of the agreements relating to the Commercial Relationship is scheduled to be completed in early April 2009. However, no assurance can be made that such closing will occur.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally accepted accounting principles require 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 net revenues and expenses during the reporting period. Actual results could differ from those estimates.
Our significant accounting policies are described in Note 2 to the accompanying consolidated financial statements for the year ended December 31, 2008. Judgments and estimates of uncertainties are required in applying our accounting policies in many areas. Following are some of the areas requiring significant judgments and estimates: revenue recognition, accounts receivable, inventories, cash flow and valuation assumptions in performing asset impairment tests of long-lived assets, income taxes, stock based compensation, value of redeemable preferred stock, convertible debentures, related warrants and conversion options.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, the collectibility is reasonably assured, and the delivery and acceptance of the equipment has occurred or services have been rendered. Management exercises judgment in evaluating these factors in light of the terms and conditions of its customer contracts and other existing facts and circumstances to determine appropriate revenue recognition. Due to our limited commercial sales history, our ability to evaluate the collectibility of customer accounts requires significant judgment. We evaluate our equipment customer and service customers' accounts for collectibility at the date of sale and on an ongoing basis.
Revenues are also offset by a reserve for any price refunds and consumer rebates consistent with EITF Issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer."
During the year ended December 31, 2008 and 2007 we shipped approximately 9 and 400 units, respectively, with a sales value of approximately $2 and $128, respectively, to customers subject to a right of return should the units not be sold through to their customers. Revenue and cost of goods sold of $0 and $16, respectively, were deferred as of December 31, 2008 and 2007 in accordance with SFAS 48 "Revenue Recognition when a Right of Return Exists."
From June 2007 through October 2008 we shipped our video phone product to Aequus. We recognized product revenue at the time of shipment. In addition, we also received service fee revenues based on a percentage of the fees earned by Aequus for which their customer has received service. We recognize this service fee revenue upon confirmation from Aequus of the fees it has earned. We also receive service fee revenues from end customers which are recognized after the services have been performed.
During the year ended December 31, 2008, Aequus purchased $2,628 of Ojo units ($1,475 as agreed under the March Aequus Agreement discussed in "Results of Operations - General" and an additional $1,153 in purchases). We held the Ojo units purchased by Aequus pending shipment to Aequus' ultimate customers. We deferred revenue on these units in accordance with the SEC Staff Accounting Bulletin Topic 13 A (3) (a), "Bill and Hold Arrangements" until shipment to the ultimate Aequus customer. Of the total $2,628 of units purchased by Aequus (8,156 units) during the year ended December 31, 2008, $1,740 of units was shipped (5,404 units) to Aequus customers and recognized as revenue, and $888 of units purchased was recorded as deferred revenue. As of December 31, 2008, we continued to hold 2,752 Ojo units purchased by Aequus.
Pursuant to the March Aequus Agreement, Aequus agreed to pay us $5,000 over ten
months, with such amount related to multiple deliverables each having standalone
value with objective and reliable evidence of fair value, including: (i) a
specified amount of NRE ( with a fair value of $900), (ii) support and
transition training to Aequus to operate its own data center ("Training" with an
estimated fair value of $358), (iii) continued use of the WorldGate video phone
service center during the transition (with an estimated fair value of $230), and
(iv) the elimination of previously agreed service fees ("contract termination
fee", with a residual fair value of $3,512). These deliverables are all separate
units of accounting in accordance with EITF No. 00-21, "Revenue Arrangements
with Multiple Deliverables. We recognize revenue for the NRE and Training when
the service is provided. For the year ended December 31, 2008, revenue of $133
was recognized for NRE, and $358 was recognized for Training. Our obligation
regarding the NRE is to provide $900 of such NRE which may extend beyond a
period of twelve months. For the year ended December 31, 2008, we recorded
$3,165 of contract termination fees as other income. As of December 31, 2008 we
had received $4,600 of the $5,000 agreed payments. Of the $4,600 of payments,
$804 of such payments is reflected as deferred revenue and income as of December
31, 2008. In January 2009 we received the final remaining $400 of the $5,000
agreed payments. On January 27, 2009, we resolved the outstanding NRE
Arbitration with Aequus, and in full satisfaction of the outstanding arbitration
claim Aequus agreed to terminate any obligation on our part to provide certain
prepaid engineering services pursuant to the March Aequus Agreement (Aequus had
prepaid approximately $900 for these engineering services of which $725 was
allocated to the settlement).
We account for stock warrants issued to third parties, including customers, in accordance with the provisions of the Emerging Issues Task Force 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services," and EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)" ("EITF 01-9"). In connection with the Commercial Relationship expected to be entered into with ACN in April 2009, we will grant ACN a warrant to purchase up to approximately 38.2 million shares of our common stock at an exercise price of $0.0425 per share. This warrant will vest incrementally based on ACN's purchases of videophones under the Commercial Relationship. Under the provisions of EITF 96-18, we record a charge for the fair value of the portion of the warrant earned from the point in time when vesting of the warrant becomes probable. Final determination of fair value of the warrant occurs upon actual vesting. EITF 01-9 requires that the fair value of the warrant be recorded as a reduction of revenue to the extent of cumulative revenue recorded from that customer. Accordingly, the application of these accounting guidelines will require our reported revenue from the Commercial Relationship to be reduced to reflect the fair value of the warrant granted to ACN pursuant to the Commercial Relationship and the excess fair value of the equity issued in the Private Placement.
Accounts Receivable
We record accounts receivable at the invoiced amount. Management reviews the receivable balances on a monthly basis. Management analyzes collection trends, payment patterns and general credit worthiness when evaluating collectibility and requires letters of credit whenever deemed necessary. Additionally, we may establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends related to past losses and other relevant information. Account balances would be charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of December 31, 2008 and 2007, we did not have an allowance for doubtful accounts or any off-balance sheet credit exposure related to our customers. At December 31, 2008 and 2007, approximately 96% and 82%, respectively, of accounts receivable was concentrated with one customer. Trade accounts receivable at December 31, 2008 and 2007 were $1,019 and $166 respectively. For the year ended December 31, 2008 and 2007 we recorded bad debt expense of $0 and $19, respectively.
Inventory.
Our inventory consists primarily of finished goods equipment to be sold to customers. The cost is determined on a First-in, First-out ("FIFO") cost basis. A periodic review of inventory quantities on hand is performed in order to determine and record a provision for excess and obsolete inventories. Factors related to current inventories such as technological obsolescence and market conditions are analyzed to determine estimated net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values. To motivate trials and sales of our Ojo product, we have historically subsidized, and may in the future continue to subsidize, certain of our product sales to customers that result in sales of inventory below cost. In accordance with Accounting Research Bulletin ("ARB") No. 43, we reflect such inventory at the lower of cost or market and reduced our inventory balance by $0 and $293, respectively, for the year ended December 31, 2008 and 2007 to reflect such valuation. Any significant unanticipated changes in the factors noted above could have an impact on the value of our inventory and our reported operating results. At December 31, 2008 and December 31, 2007 our inventory balance was $1,176 and $1,057, respectively. Included in the inventory balance reported as of December 31, 2008 are costs of units purchased by Aequus in a "Bill and Hold" arrangement of $745 that we continued to hold as of that date.
Long-Lived Assets.
Our long-lived assets consist of property and equipment. These long-lived assets are recorded at cost and are depreciated or amortized using the straight-line method over their estimated useful lives. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such assets are separately identifiable and are less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined by using the anticipated cash flows discounted at a rate commensurate with the risk involved. If useful life estimates or anticipated cash flows change in the future, we may be required to record an impairment charge.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation of property and equipment and valuation of inventories, for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that it is more likely than not that we will not recover the deferred tax asset, we must establish valuation allowances. To the extent we establish valuation allowances or increase the allowances in a period, we must include an expense within the tax provision in the statement of operations.
We have a full valuation allowance against the net deferred tax asset of $6,357 as of December 31, 2008, due to our lack of earnings history and the uncertainty as to the realizability of the asset. In the future, if sufficient evidence of our ability to generate sufficient future taxable income becomes apparent, we would be required to reduce our valuation allowance, resulting in a benefit from income tax in the consolidated statements of operations.
We adopted the provisions of Financial Accounting Standards Board ("FASB")
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109"("FIN 48"), on January 1, 2007. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS No. 109, "Accounting
for Income Taxes," and prescribes a recognition threshold and measurement
process for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance on
recognition, classification, interest and penalties, accounting in interim
period, disclosure and transition. Our ability to utilize our net operating loss
carryforwards and credit carryforwards may be subject to annual limitations as a
result of prior or future changes in ownership and tax law as defined under
Section 382 of the Internal Revenue Code of 1986. Such limitations are based on
our market value at the time of ownership change multiplied by the long-term
tax-exempt rate supplied by the Internal Revenue Service.
Upon completing an analysis as required by Section 382, it was determined that during July 2008, the Company experienced a change of ownership as defined. As a result of this change, the Company's net operating loss carryforward will be limited as previously described. Due to the limitations imposed by this Code Section, the Company will be unable to utilize significant amounts of its net operating loss and the remaining amounts will be subject to an annual limitation of $326. The federal net operating loss projected to be lost is $230,280 resulting in $7,160 remaining to be carried forward subject to annual limitations. The state net operating loss projected to be lost is $182,760 resulting in $7,160 remaining to be carried forward subject to annual limitations. The state net operating losses are also limited by state law to maximum utilization limits. The federal research and experimental credit will also be subject to an annual limitation. Due to the limitation, all but $144 of the credit is lost. The federal credits remaining will expire in 2028. All state research and experimentation credit carryovers have been refunded and no state credit remains.
Future issuances of common stock may further affect this analysis which might cause additional limitation on our ability to utilize net operating loss carryforwards. We have determined that upon closing of the Private Placement pursuant to which WGI will acquire 63% of our shares, our ability to utilize our remaining net operating loss carryforwards and credit carryforwards will again be subject to additional annual limitations as a result of current tax law as defined under Section 382.
Stock-Based Compensation.
Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised 2004), "Share-Based Payment," using the modified-prospective-transition method which requires the recognition of compensation expense on a prospective basis. SFAS No. 123(R) requires that all stock based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. Under this method, in addition to reflecting compensation for new share-based awards, expense is also recognized to reflect the remaining service period of awards that had been included in pro-forma disclosure in prior periods. SFAS No. 123(R) also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating inflows. As a result, our net loss before taxes for the year ended December 31, 2008 and 2007 included approximately $632 ($0.01 per share) and $1,075 ($0.02 per share), respectively, of stock based compensation. The stock based compensation expense is included in general and administrative expense in the consolidated statements of operations.
Accounting for Preferred Shares and Related Warrants.
We account for redeemable preferred stock in accordance with EITF topic D-98 "Classification and Measurement of Redeemable Securities," and the redeemable preferred stock was recorded in the consolidated financial statements as temporary equity. Additionally, the fair value of warrants and preferred stock conversion options were recorded as liabilities as a result of their features that require accounting under SFAS 133 "Accounting for Derivative Instruments and Hedging Activities, as amended" ("SFAS 133"). At each reporting balance sheet date, an evaluation is made of these valuations and marked to market. Fair value is determined using the Black-Scholes method. Key assumptions used in the Black-Scholes method include actual period close stock price, applicable volatility rates, remaining contractual life and period close risk free interest rate. There were no preferred shares outstanding as of December 31, 2008. On June 23, 2007, the holder converted the remaining 166 shares of preferred stock. As a result only the warrants are still accounted for under SFAS 133.
Accounting for Secured Convertible Debentures and Related Warrants.
We account for conversion options embedded in convertible notes in accordance with SFAS No. 133 "and EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). SFAS 133 generally requires companies to bifurcate conversion options embedded in convertible notes from their host instruments and to account for them as free standing derivative financial instruments in accordance with EITF 00-19. EITF 00-19 states that if the conversion option requires net cash settlement in the event of circumstances that are not solely within our control that they should be classified as a liability embedded measured at fair value on the balance sheet.
On May 18, 2007, we and the investor in the August 11, 2006 transaction amended the terms of the secured convertible debentures to remove the investor's ability, upon conversion of the debentures, to demand cash in lieu of shares of common stock, and to clarify that we may issue restricted shares if there is no effective registration statement at the time of conversion. The terms of the convertible debentures were amended to permit us to reclassify the derivative conversion option liability embedded in the convertible debentures from debt to equity.
We initially accounted for the warrants issued in the August 11, 2006 convertible debenture transaction as a liability at fair value in accordance with SFAS 133 and EITF 00-19 as there were insufficient authorized shares. On October 11, 2006, we received stockholder approval to increase the number of authorized shares and the warrants were reclassified to equity at fair value. Fair value is determined using the Black-Scholes method. Key assumptions used in the Black-Scholes method include conversion price, actual period close stock price, applicable volatility rates, remaining contractual life and period close risk free interest rate.
Results of Operations
2008 versus 2007
Revenues
Revenues. Net revenues for the year ended December 31, 2008 and 2007 were $2,969 and $3,445, respectively. This decrease of $476, or 14%, primarily reflects the reduced sales of Ojo units to our VRS customer including the impact due to the shutdown of our operations from January 30, 2008 through March 11, 2008 as a result of our cash shortfall related in part to a dispute with this customer over the payment of significant monies which we believed was owed to us and the customer's refusal to pay such monies. Product sales decreased by $645, and service revenues decreased by $147 for the year ended December 31, 2008 . . .
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