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MPC 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31
  3. Ex-31
  4. Ex-32
  5. Ex-32
  6. Ex-32

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

x        QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2007

 

o        TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to                

 

Commission file number 0-115404

 

MPC CORPORATION

(formerly, HYPERSPACE COMMUNICATIONS, INC.).

(Name of registrant as specified in its charter)

 

COLORADO

 

84-1577562

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer identification No.)

 

 

 

906 E. Karcher Rd., Nampa, ID 83687

(Address of principal executive offices)

 

 

 

(208) 893-3434

(Registrant’s telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  x   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

 

Large accelerated filer  o   Accelerated filer  o   Non-accelerated filer  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act).

 

Yes  o   No  x

 

As of April 30, 2007 there were 13,075,208 shares of the issuer’s no par value Common Stock outstanding.

 

 



 

 

INDEX

 

 

 

 

 

Part I – FINANCIAL INFORMATION

 

ITEM 1

FINANCIAL STATEMENTS (unaudited)

 

 

Sondensed Consolidated Balance Sheets

 

 

Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2007 and 2006

 

 

Notes to Interim Condensed Consolidated Financial Statements

 

 

 

 

ITEM 2

MANAGEMENTS#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

 

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

 

 

ITEM 4T

CONTROLS AND PROCEDURES

 

 

 

 

 

PART II – OTHER INFORMATION

 

ITEM 1

LEGAL PROCEEDINGS

 

 

 

 

ITEM 1A

RISK FACTORS

 

 

 

 

ITEM 6

EXHIBITS

 

 

 

 

 

 

 

 

Page- 1 -

 



 

 

 

A NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

The statements, other than statements of historical fact, included in this report are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “seek,” “could,” “should,” “continues,” or “believe,” or the negative or other variations thereof. We believe that the expectations reflected in such forward-looking statements are accurate. However, we cannot be assured that such expectations will occur. Our actual future performance could differ materially from such statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially. Our Annual Report on Form 10-KSB for the year ended December 31, 2006 describes many of the significant factors that could cause actual results and events to differ materially and that constitute material risks to our business. You should carefully review the risk factors set forth in such Form 10-KSB, as well as those described in this report. Forward-looking statements apply only as of the date of this report; as such, they should not be unduly relied upon for current circumstances. Except as required by law, we are not obligated to release publicly any revisions to these forward-looking statements that might reflect events or circumstances occurring after the date of this report or those that might reflect the occurrence of unanticipated events.

 

 

Page- 2 -

 



 

 

ITEM 1: FINANCIAL STATEMENTS

 

MPC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS 

(In thousands except share data)

 

 

March 31,

December 31,

 

2007

2006

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

$

1,519

 

$

4,839

 

Restricted cash

 

4,377

 

 

4,585

 

Accounts receivable, net

 

33,550

 

 

45,643

 

Inventories, net

 

20,911

 

 

18,189

 

Prepaid maintenance and warranty costs

 

7,615

 

 

6,391

 

Other current assets

 

790

 

 

935

 

Total Current Assets

 

68,762

 

 

80,582

 

 

 

 

 

 

 

 

Non-Current Assets

 

 

 

 

 

 

Property and equipment, net

 

4,290

 

 

4,914

 

Goodwill

 

22,197

 

 

22,197

 

Acquired intangibles, net

 

9,656

 

 

10,108

 

Long-term portion of prepaid maintenance and warranty costs

 

1,227

 

 

844

 

Other assets

 

3,473

 

 

3,792

 

Total Non-Current Assets

 

40,843

 

 

41,855

 

TOTAL ASSETS

$

109,605

 

$

122,437

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Accounts payable

$

29,544

 

$

32,536

 

Accrued expenses

 

4,987

 

 

4,354

 

Accrued licenses and royalties

 

2,194

 

 

1,540

 

Current portion of accrued warranties

 

2,211

 

 

2,220

 

Current portion of deferred revenue

 

17,774

 

 

15,607

 

Notes payable and debt

 

28,154

 

 

34,834

 

Total Current Liabilities

 

84,864

 

 

91,091

 

 

 

 

 

 

 

 

Long Term Liabilities

 

 

 

 

 

 

Non-current portion of accrued warranties

 

2,040

 

 

2,127

 

Non-current portion of deferred revenue

 

22,826

 

 

22,979

 

Derivative warrant liability

 

6,510

 

 

6,129

 

Derivative financial instruments at estimated fair value

 

19,061

 

 

21,234

 

Total Long Term Liabilities

 

50,437

 

 

52,469

 

TOTAL LIABILITIES

 

135,301

 

 

143,560

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

Preferred Stock, no par value; 1,000,000 shares authorized; no shares
issued and outstanding at 2007 and 2006

 

-

 

 

-

 

Common Stock, no par value, 100,000,000 shares authorized;
13,073,907 and 12,147,438 shares issued and outstanding at 2007
and 2006, respectively

 

62,062

 

 

61,454

 

Accumulated Deficit

 

(87,758

)

 

(82,577

)

Total Shareholders' Equity (Deficit)

 

(25,696

)

 

(21,123

)

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

$

109,605

 

$

122,437

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

Page- 3 -

 



 

 

MPC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except for share data)

 

 

Three Months Ended

 

March 31

 

2007

2006

 

 

 

 

 

 

 

Revenue

$

56,751

 

$

66,464

 

 

 

 

 

 

 

 

Cost of revenue

 

50,180

 

 

58,373

 

 

 

 

 

 

 

 

Gross margin

 

6,571

 

 

8,091

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

Research and development expense

 

497

 

 

1,150

 

Selling, general and administrative expense

 

9,913

 

 

10,909

 

Depreciation and amortization

 

1,151

 

 

2,019

 

Total operating expenses

 

11,561

 

 

14,078

 

 

 

 

 

 

 

 

Operating loss

 

(4,990

)

 

(5,987

)

 

 

 

 

 

 

 

Other (income) expense

 

 

 

 

 

 

Interest expense, net

 

1,519

 

 

1,478

 

Change in estimated fair value of derivative financial instruments

 

(1,246

)

 

 

Other expense

 

(82

)

 

37

 

Total other expense

 

191

 

 

1,515

 

 

 

 

 

 

 

 

Net loss

$

(5,181

)

$

(7,502

)

 

 

 

 

 

 

 

Basic and diluted weighted average Common

 

 

 

 

 

 

Shares outstanding

 

12,695

 

 

11,347

 

 

 

 

 

 

 

 

Basic and diluted loss per Common Share

$

(0.41

)

$

(0.66

)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

Page- 4 -

 



 

 

MPC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

Three Months Ended March 31,

 

2007

2006

OPERATING ACTIVITIES

 

 

 

 

 

 

Net Loss

$

(5,181

)

$

(7,502

)

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

Depreciation

 

698

 

 

755

 

Amortization of intangibles

 

453

 

 

1,265

 

Amortization of deferred loan costs

 

243

 

 

-

 

Change in estimated fair value of derivative financial instruments

 

(1,246

)

 

-

 

Stock compensation expense from vesting of restricted stock units

 

61

 

 

36

 

Valuation of warrant exchange

 

-

 

 

767

 

Loss on disposal of assets

 

-

 

 

35

 

Provision for bad debt

 

(19

)

 

-

 

Changes in Assets and Liabilities

 

 

 

 

 

 

Accounts receivable

 

12,114

 

 

10,003

 

Inventory

 

(2,722

)

 

807

 

Prepaid maintenance and warranties

 

(1,606

)

 

4,268

 

Other current assets

 

220

 

 

339

 

Accounts payable and accrued expenses

 

(2,360

)

 

(6,273

)

Accrued licenses and royalties

 

654

 

 

1,601

 

Accrued warranties

 

(96

)

 

26

 

Deferred revenue

 

2,013

 

 

(3,848

)

Net cash provided by operating activities

 

3,226

 

 

2,279

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

Purchase of property and equipment

 

(75

)

 

(77

)

Proceeds from the sale of fixed assets

 

-

 

 

2

 

MPC acquisition costs

 

-

 

 

(437

)

Net cash used by investing activities

 

(75

)

 

(512

)

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

Net activity on line of credit

 

(6,679

)

 

(7,423

)

Restricted cash related to letters of credit and financing facility

 

208

 

 

-

 

Payment of Note Payable

 

-

 

 

(48

)

Payments on capital leases

 

-

 

 

(110

)

Net Proceeds from the exercise of stock options

 

-

 

 

14

 

Proceeds from the exercise of warrants

 

-

 

 

3,104

 

Payment of stock issuance costs

 

-

 

 

(155

)

Net cash used by financing activities

 

(6,471

)

 

(4,618

)

 

 

 

 

 

 

 

Net cash increase (decrease) for period

 

(3,320

)

 

(2,851

)

 

 

 

 

 

 

 

Cash at beginning of period

 

4,839

 

 

3,897

 

 

 

 

 

 

 

 

Cash at end of period

$

1,519

 

$

1,046

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements

 

 

Page- 5 -

 



 

 

Supplemental disclosure of cash flow information:

(In thousands)

 

Cash paid for interest for the three months ended March 31, 2007 and 2006 was $896 and $780, respectively.

 

No cash was paid for income taxes for the three months ended March 31, 2007 and 2006.

 

MPC CORPORATION

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except share data)

 

The terms “we” “us” and “our” or the “company” as used in this quarterly report refer on a consolidated basis to MPC Corporation and to its wholly-owned subsidiaries, including MPC Computers, LLC, (“MPC”) which we acquired through a merger in July of 2005.

 

 

NOTE 1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

We were formed in 2001 as a Colorado-based company named HyperSpace Communications, Inc. and completed an initial public offering (“IPO”) in October 2004. In July 2005, we acquired MPC Computers, LLC, or MPC, which is now a wholly owned subsidiary. We are an enterprise IT hardware business providing products and services to customers in mid-sized businesses, government agencies and education. In January 2007, we changed our name to MPC Corporation.

 

Today our primary business is providing PC-based products and services to mid-sized businesses, government agencies and education organizations. We manufacture and market ClientPro® desktop PCs, TransPort® notebook PCs, NetFRAME® servers and DataFRAME™ storage products. We also provide hardware-related support services such as installation, technical support, parts replacement, and recycling. In addition to PCs, servers, and storage products, we also fulfill our customers’ requirements for third party products produced by other vendors including printers, monitors and software.

 

We focus our business on the Federal government, state/local government & education (“SLE”), and mid-size enterprise market. This focus enables us to tailor our operating model to better support the needs of these customers for customized products, services and programs. We sell directly to our customers and use a build-to-order manufacturing process that we believe is an efficient means to provide customized computing solutions.

 

These consolidated financial statements consolidate the accounts of MPC Corporation and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. References to a fiscal year refer to the calendar year in which such fiscal year commences. MPC’s fiscal year ends on the Saturday closest to December 31. MPC’s floating fiscal year-end typically results in a 52-week fiscal year, but will occasionally give rise to an additional week resulting in a 53-week fiscal year.

 

 

NOTE 2.

GOING CONCERN

 

The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and liquidation of liabilities in the ordinary course of business. However, there can be no assurance that we will be able to continue in the ordinary course of business due to our significant liquidity constraints, unprofitable operations and negative operating cash flows.

 

Management’s plans to continue operations in the ordinary course assume adequate financing initiatives along with continued vendor support through continued or increased credit lines, minimal cancellations of our backlog and successful implementation of previously announced cost cutting initiatives that are expected to be adequate to fund our operations for at least the next twelve months. There can be no assurance that we will be successful in our efforts to achieve future profitable operations or generate sufficient cash from operations, or obtain additional

 

Page- 6 -

 



 

funding in the event that our financial resources become insufficient. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Since the merger with MPC, we have been seeking to raise additional funds to operate the business. We have raised $12,139 of equity on the exercise of warrants and $14,486 from the sale of convertible debentures since the acquisition. The funds raised to date are not sufficient to execute our business plan. As noted in Note 4 “Notes Payable and Debt”, we replaced our prior credit facility with Wachovia Capital Finance Corporation (Western) with a new receivables sales financing facility with Wells Fargo Business Credit, Inc. in November 2006, and further amended the facility in February 2007, which has provided us additional limited liquidity. The shortfall in funding has been financed by vendors and other creditors who have allowed us to fall behind on our payment obligations or who have settled amounts due to them at amounts less than the original obligation. This funding shortfall and losses since the acquisition have resulted in extreme liquidity constraints. There can be no assurance that vendors and other creditors will continue to extend credit to us. It may be necessary for us to raise additional funds in the near future and we may not be able to do so. Absent raising a significant amount of additional funds in the near future, there is a material possibility that we will be required to file for bankruptcy protection unless vendors and other creditors continue to waive or defer amounts due. It is also likely that further delays in obtaining financing will do significant harm to vendor relationships and that orders received by us from customers, which are not yet shipped (i.e. in backlog), are at risk of being cancelled.

 

Some vendors may also be willing to continue to defer payment terms unless we complete additional financing. Certain vendors have entered into agreements with us for settlements of amounts due at less than the full amount owed, and additional vendors and other creditors may be willing to do so. Management is continuing initiatives to reduce overhead expenses and improve gross margins as evidenced by layoffs announced in July, 2006 and through other cost-cutting initiatives.

 

On April 13, 2006, we received a notice from the American Stock Exchange (“AMEX”) that we had failed to satisfy a continued listing rule due to significant operating losses and inadequate liquidity. We submitted a plan to AMEX on April 26, 2006 advising of the steps to be taken to improve our operating results and liquidity. On June 15, 2006, we announced that the AMEX accepted our plan for regaining compliance with the continued listing standards and granted an extension until June 30, 2006, to regain compliance with continued listing standards. We did not meet all of the continued listing standards by the target date of June 30, 2006, and requested an extension. We met with AMEX on December 12, 2006 and discussed the Company’s financial projections and progress made on the plan submitted to AMEX in April 2006, and again requested an extension to regain compliance. Based on information provided by us to AMEX at the December 12, 2006 meeting, as well as a review by AMEX of subsequent information provided by us, AMEX agreed to grant the Company an extension through May 31, 2007 (the “Revised Plan Period”). Our ability to regain compliance with the continued listing standards will be substantially dependent on our ability to implement adequate financing initiatives, successfully execute our business plan and cost cutting initiatives of which there is no assurance. There can be no assurance that we will be able to continue our listing on the AMEX or that AMEX will grant our request for an additional extension. AMEX will periodically review and assess our progress. If we do not show progress consistent with the plan to regain compliance with continued listing standards, AMEX will review the circumstances and may immediately commence delisting proceedings. Additionally, AMEX is authorized to initiate immediate delisting proceedings as appropriate in the public interest, notwithstanding the grant of the extension through the Revised Plan Period.

 

 

NOTE 3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Interim Financial Information and Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These financial statements include the accounts of MPC Corporation and all of its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

 

These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and related notes contained in our 2006 Annual Report on Form 10-

 

Page- 7 -

 



 

KSB. The comparative balance sheet and related disclosures at December 31, 2006 have been derived from the audited balance sheet and consolidated footnotes referred to above.

 

In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments of a recurring nature that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods presented in these unaudited interim condensed consolidated financial statements are not necessarily indicative of results to be expected for the full year.

 

The preparation of our condensed consolidated financial statements in conformity with GAAP necessarily requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the balance sheet dates, and the reported amounts of revenues and costs during the reporting periods. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on information that is currently available. Changes in facts and circumstances may cause us to revise estimates.

 

Our significant estimates include the collectibility of receivables and corresponding allowance for doubtful accounts, the reserve needed for possible future returns and discounts which may be granted, the carrying value and usefulness of inventory and the related inventory reserves, long-lived asset useful lives and impairment, estimated future volatility in our stock price, the timing and amount of future warranty and other product obligation expenses, the recognition of warranty revenue and the cost and settlement of current litigation or items in dispute.

 

Cash and Cash Equivalents

 

Cash equivalents consist of short-term investments that have a maturity of three months or less at the date of purchase. We had no cash equivalents at March 31, 2007 and December 31, 2006.

 

Restricted cash

 

Restricted cash at March 31, 2007 and December 31, 2006 includes $1,521 and $1,500 respectively held as collateral under our receivable financing facility, and $2,856 and $3,085 respectively, held as collateral for outstanding letter of credit.

 

Accounts Receivable

 

Accounts receivable are recorded at the invoiced amount and do not bear interest. We maintain an allowance for doubtful accounts at an amount estimated to be sufficient to provide adequate reserve against losses resulting from collecting less than full payment on receivables. Overdue accounts are reviewed, and an additional allowance is recorded when determined necessary to state receivables at an estimated realizable value. In judging the adequacy of the allowance for doubtful accounts, the we consider multiple factors including historical bad debt experience, the general economic environment, the aging of our receivables, and the financial condition of the customer A considerable amount of judgment is required when assessing the realization of receivables, including assessing the probability of collection and the current creditworthiness of each customer. The allowance for doubtful accounts totaled $1,850 and $1,830, respectively, as of March 31, 2007 and December 31, 2006.

 

Inventory

 

Inventory is stated at the lower of cost or market, with cost determined on an average cost basis approximating first in first out (FIFO). We regularly evaluate the realizability of its inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, estimated service period, product end-of-life dates, estimated current and future market values, service inventory requirements and new product introductions, as well as other factors. If circumstances related to our inventories change, estimates of the realizability of inventory could materially change. At March 31, 2007 and December 31, 2006, our inventory valuation allowance totaled $5,335 and $5,185, respectively and was recorded as a reduction of inventory in the consolidated balance sheets. Inventory balances, net of valuation allowances, at March 31, 2007 and December 31, 2006 are:

 

Page- 8 -

 



 

 

 

(In thousands)

 

 

 

March 31, 2007

December 31, 2006

 

 

 

Raw materials

$ 16,087

$ 16,092

Work in process

215

236

Finished goods

4,609

1,861

 

 

 

Total inventory

$ 20,911

$ 18,189

 

Goodwill

 

We account for Goodwill in accordance with Statement of Accounting Standards (“SFAS”) 142, Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill no longer be amortized and that goodwill be tested annually for impairment or more frequently if events and circumstances warrant.

 

Goodwill represents the excess of the purchase consideration over the fair value of assets acquired less liabilities assumed in a business acquisition. Our acquisition of MPC gave rise to goodwill. We engaged an independent third party valuation expert to express an opinion on the fair value of the identifiable intangible and tangible assets of MPC as of acquisition date. Based on this valuation, we established the carrying amount of goodwill. We conduct goodwill impairment tests annually every October 31 or more frequently if impairment indicators arise.

 

Acquired Intangibles, net

 

Other intangible assets are accounted for in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires that intangible assets with estimable useful lives be amortized over their estimated useful lives, and be reviewed for impairment when changes in circumstances indicate that their carrying amounts are in excess of their estimated fair value. Acquired intangibles are amortized over their estimated useful lives ranging from 4 to 20 years.

 

Long-Lived Assets

 

Equipment and software are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives, primarily three to five years. Additions, improvements and major renewals are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term. Equipment held for lease is depreciated over the initial term of the lease to the equipment’s estimated residual value.

 

We assess the recoverability of our long-lived assets whenever adverse events or changes in circumstances or business climate indicate that expected undiscounted future cash flows related to such long-lived assets may not be sufficient to support the net book value of such assets. If undiscounted cash flows are not sufficient to support the recorded assets, impairment is recognized to reduce the carrying value of the long-lived assets to their estimated fair value. Cash flow projections are subject to a degree of uncertainty and are based on management’s estimate of future performance. Additionally, in conjunction with the review for impairment, the remaining estimated lives of certain of our long-lived assets are assessed.

 

Deferred Revenue  

 

Deferred revenue includes amounts billed to or received from customers for which revenue has not been recognized. This generally results from deferred software maintenance revenues that are recognized over the term of the contract, which generally range from 1-4 years. Also included in deferred revenue is revenue from the sale of enhanced and extended warranties, which are recognized as the related services are provided, which generally range from 3-5 years. These enhanced/extended warranties are deferred based on guidance provided in Technical Bulletin 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts, and are valued based on the list price, net of discounts offered to the customer.

 

Prepaid Maintenance and Warranty Costs

 

Page- 9 -

 



 

 

Prepaid maintenance and warranty costs include amounts paid to third party software vendors, outsourced providers of warranty fulfillment services and technology insurance vendors for which the related revenue has been deferred. These costs are recognized ratably with the related revenue.

 

Accrued Warranties 

 

We record warranty liabilities at the time of sale for the estimated costs that may be incurred under its standard limited warranty. The specific warranty terms and conditions vary depending upon the product sold, but generally include technical support, repair parts, labor and a period ranging from 90 days to five years. Factors that affect the warranty liability include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy warranty obligations. We regularly reevaluate our estimate to assess the adequacy of its recorded warranty liabilities and adjust the amounts as necessary. If circumstances change, or a dramatic change in the failure rates were to occur, the estimate of the warranty accrual could change significantly.

 

Concentrations

 

A concentration of credit risk may exist with respect to trade receivables, particularly customers within the US Federal Government. We perform ongoing credit evaluations on a significant number of our customers and collateral from our customers is generally not required. Five customers accounted for approximately 60% of trade receivables as of March 31, 2007 and were either agencies of, or resellers to, the Federal government.

 

A concentration of risk may exist with respect to our suppliers. We purchase certain products from single sources. In some cases, alternative sources of supply are not available. In other instances, we have established a procurement relationship with a single source if it determines that it makes business sense. In both of these situations, if the supply by a critical single-source supplier were interrupted or suspended, our ability to ship products in a timely manner will be adversely affected. In cases where alternative suppliers are available, the establishment and procurement from these alternative suppliers will result in delays and losses of sales, which will have an adverse effect on our operating results.

 

Revenue Recognition

 

We recognize revenue on hardware and peripherals, net of an allowance for estimated returns, when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable, and collectibility is reasonably assured. Delivery is not considered to have occurred until both title and risk of loss transfer to the customer, provided that no significant obligations remain. The timing of revenue recognition is dependent on shipping terms. For FOB destination agreements, which include all sales to the Federal government and some sales to state, local and education customers, we defer the cost of product revenue for in-transit shipments until the goods are delivered. In-transit product shipments to customers are included in inventory.

 

Net revenue includes sales of hardware, software and peripherals, and services (including extended service contracts and professional services). These products and services are sold either separately or as part of a multiple-element arrangement. We allocate revenue from multiple-element arrangements to the elements based on the relative fair value of each element, which is generally based on the relative sales price of each element when sold separately. The allocation of fair value for a multiple-element software arrangement is based on vendor specific objective evidence (“VSOE”). Revenue associated with undelivered elements is deferred and recorded when delivery occurs. The value of maintenance services on software sales is determined based on stated renewal rates and a comparison of the stated price of maintenance to software sold in a related transaction. To the extent we do not have VSOE from separate post contract support sales, we defer the software and the maintenance over the term of the agreement. Service revenue from software maintenance and support are recognized ratably over the maintenance term, which in most cases is one year. Term licenses are recognized ratably over the term of the related arrangement.

 

Revenue from extended warranty and service contracts, for which we are obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract or when the service is completed. In multiple element arrangements that include extended warranty and service contracts, we use the separation guidance provisions of Technical Bulletin 90-1 Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts to determine fair value. Revenue from sales of third-party extended warranty and service contracts, for which we are not obligated to perform, is recognized on a net basis at the time of sale.

 

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Shipping Costs

 

Shipping and handling costs are included in cost of revenue in the accompanying consolidated statement of operations for all periods presented.

 

Royalties

 

We have royalty-bearing license agreements allowing us to sell certain hardware and software products and to use certain patented technology. Royalty costs are accrued and included in cost of goods sold when the related revenue is recognized.

 

Research, Development, and Engineering Costs 

 

Research, development, and engineering costs are expensed as incurred, in accordance with SFAS No. 2, Accounting for Research and Development Costs. Research, development, and engineering expenses primarily include payroll and headcount related costs, contractor fees, infrastructure costs, and administrative expenses directly related to research and development support.

 

Income Taxes

 

We recognize deferred tax assets and liabilities based on the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. We make no provision for income taxes because, since inception, we have not been profitable. We have a net operating loss carry forward available to offset future federal and state income taxes.

 

Stock-Based Compensation – Stock Options

 

During the first quarter of fiscal 2006, we adopted the provisions of and accounted for stock-based compensation in accordance with SFAS 123R, Share-Based Payments, which replaced SFAS 123 and supersedes APB 25. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The valuation provisions of SFAS 123R applies to new grants and to grants that were outstanding as of the effective date and are subsequently modified. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. All options are granted at fair market value on the date of approval of the grant. Under the provisions of our incentive option plans, employees with vested options who leave our employment, are required to exercise or forfeit their options within 90 days after leaving employment regardless of the exercise period of the initial grant unless the terms of their departure from us allow for such longer time for exercise based on approval of the administrator. All of our stock options were vested as of December 31, 2005, and we ceased using stock options as a compensation tool.

 

Stock Based Compensation – Restricted Stock Units

 

Subsequent to the acquisition of MPC, we began issuing Restricted Stock Units (“RSUs”) as stock based compensation to members of our Board of Directors and employees. We record a non-cash compensation expense over the vesting life of the RSUs determined by the number of units granted multiplied by the fair market value at the date of grant. Compensation expense for RSUs issued after the merger is classified on the statement of operations as operating expense. During the three months ended March 31, 2007 and 2006, we recorded $61 and $36 respectively, in stock compensation expense for RSUs issued subsequent to the merger. We record a non-cash compensation expense over the period the restricted stock units vest.

 

Basic and Diluted Loss Per Share

 

We apply the provisions of SFAS No. 128, Earnings Per Share. At March 31, 2007 and 2006, dilutive potential common stock of 40,173,165 and 9,173,180, respectively, consisting of stock options, stock warrants, restricted stock units and convertible debt were not included in the computation of diluted loss per share because their effect

 

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was antidilutive; however, if we were to achieve profitable operations in the future, they could potentially dilute such earnings. During September and October 2006, we entered into financing arrangements, which have triggered anti-dilution provisions of previously issued securities. See Note 5 – Derivative Warrant Liabilities and Convertible Debentures. We have not yet determined the impact of these provisions. It is possible that the number of potential common stock could be greater than disclosed.

 

Reclassifications

 

Certain amounts in prior-period financial statements have been reclassified to conform with the current-period presentation. These reclassifications did not affect net income (loss).

 

New Accounting Pronouncements

 

New Accounting Standards

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement 115. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for us beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. We are currently evaluating the impact that SFAS No. 159 will have on our consolidated financial statements.

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. We will adopt this standard January 1, 2008. We do not expect it to have a material impact on our financial position or results of operations.

 

Recently Adopted Accounting Standards

In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109. FIN No. 48 clarifies the criteria for the measurement, recognition and derecognition of income taxes under FASB Statement No. 109, Accounting for Income Taxes. It also requires additional financial statement disclosures about uncertain tax positions including classification, interest and penalties. FIN 48 is effective January 2007. Because we have not been profitable since our initial public offering and the uncertainty as a going concern, we have not realized any deferred tax assets. FIN No. 48 did not have a material impact on our financial position or results of operations. If our tax status were to change in the future, we would have to reevaluate the impact of FIN No. 48 on our financial position and results of operations at that time.

 

 

NOTE 4

NOTES PAYABLE AND DEBT

 

(In thousands)

 

 

 

March 31, 2007

 

December 31, 2006

Wells Fargo Receivables Advance Facility

$

27,484

$

34,164

Debt Incurred in Merger

 

370

 

370

Convertible Bridge Loans

 

300

 

300

Total Notes Payable and Debt

$

28,154

$

34,834

 

 

Wells Fargo Receivables Advance Facility

 

On November 16, 2006 we entered into an agreement with Wells Fargo Business Credit, Inc. (“Wells Fargo”) for an accounts receivable assignment and advance facility (“Receivables Advance Facility”) that replaced our existing line of credit with Wachovia Capital Finance Corporation (Western) (“Wachovia”). Under the new facility, we may assign to Wells Fargo, and Wells Fargo may purchase from us, Accounts (as defined in the Receivables Advance Facility). Wells Fargo will advance 90% of the value of the purchased Accounts. Wells Fargo may adjust the

 

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advancement percentage at any time in its commercially reasonable discretion upon prior notice to us. We will pay fees equal to the Wells Fargo Prime Rate (as defined in the Receivables Advance Facility), plus 1.75% per annum multiplied by the total amount of Accounts purchased and not yet paid by our customers, computed daily. The effective rate at March 31, 2007 was 10.0%. Wells Fargo has the right to require that we re-purchase the Accounts in the event our customer does not pay the receivable within a timeframe specified under the Receivables Advance Facility, if a material customer dispute arises or in the event of a default under the Receivables Advance Facility. The Receivables Advance Facility is subject to customary default provisions. Wells Fargo has discretion under the Receivables Advance Facility as to the accounts purchased and the percentage advanced after submission of the Account for approval. Wells Fargo is not obligated to buy any Account from us that Wells Fargo does not deem acceptable in its sole discretion. There is no minimum amount of Accounts to be purchased by Wells Fargo under the Receivables Advance Facility. The facility is secured by substantially all of our assets. The Receivables Advance Facility is for a term of three (3) years. There is an annual fee of $100 in addition to a minimum fee. Early termination fees apply if the Receivables Advance Facility is terminated before the end of their term. The Receivables Advance Facility also provides for a $1,500 collateral account for the benefit of Wells Fargo for repayment of any obligations arising under the Receivables Advance Facility.

 

In February 2007, we entered into an amendment of the Receivables Advance Facility under which Wells Fargo agreed to advance an additional 7.5% of the face amount of currently outstanding accounts assigned to Wells Fargo, provided that the total advance does not exceed 97.5% of the face amount of any account (the “Temporary Advance”), and increase the advance rate on new accounts assigned to Wells Fargo to 98% of the amount of the accounts for a period of eight weeks (the “Special Facility Period”). We must repay the difference between the Advance and the Temporary Advance within four weeks after termination of the Special Facility Period. Failure to repay amounts advanced under the Special Facility would constitute an event of default under the Agreements. At any time when the Temporary Advance has been paid in full for a minimum of 60 days, we may request that the Special Facility be reinstated for another eight week period with repayment to be made within four weeks.

 

Debt Incurred in Merger

 

Debt incurred in connection with the merger with MPC of $370, was due July 25, 2006 including any unpaid interest, which is accrued at 5% per annum. We were unable to repay this amount due to our liquidity constraints. We are in discussions with these note holders about an extension to repay the amounts due. There is no assurance that we will be successful in renegotiating the terms of these notes. The holders have the right, at any time prior to payment, to convert all or any part of the then outstanding balance of principal and interest under these notes into shares of common stock at the conversion price of $3.00 per share, which was determined at the date of issuance. The common stock underlying these notes are covered by a registration rights agreement.

 

Convertible Bridge Loans

 

Convertible Bridge Loans were issued prior to our IPO. The outstanding amount was due April 2006 including any unpaid interest which is accrued at 12% per annum. The holder has the right, at any time prior to repayment, to convert all or any part of the then outstanding balance of principal and interest under these notes into shares of common stock at the conversion price of $3.50 per share. The notes include detachable warrants for purchase of common stock. The value of the warrants was recorded as interest expense in 2004. All of our assets at MPC Corporation collateralize the notes. These notes have registration rights. In May 2006, we repaid principal and interest to one note holder. There are two remaining note holders who have not yet been repaid. We are in default of the repayment terms on these notes and the default interest provision of 18% has been accruing on these notes since April 15, 2006. We are in discussions with these note holders about an extension to repay the amounts due. There is no assurance that we will be successful in renegotiating the terms of these notes.

 

Warrants and convertible debt issued in connection with financing activities are subject to the provisions of Emerging Issues Task Force (“EITF”) Issue 00-19: Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. EITF 00-19 provides that derivatives should be classified as either equity or a liability. If the derivative is determined to be a liability, the liability is fair valued each reporting period with the changes recorded to the consolidated balance sheet and consolidated statement of operations. In regard to the convertible debt set out above, we determined that the embedded conversion option qualified as equity under EITF 00-19 and would not be subject to bifurcation from the host instrument.

 

NOTE 5

DERIVATIVE WARRANT LIABILITES AND CONVERTIBLE DEBENTURES

 

 

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Derivative warrant liabilities and convertible debentures consist of the following:

 

(In thousands)

 

 

 

 

March 31, 2007

 

Derivative Warrants

 

Convertible Debentures

 

Fair Value

 

Fair Value

Face Value

 

 

 

 

 

New Convertible Debentures and Warrants

$                       3,329 

 

$        12,921 

$         9,849 

September 29, 2006 Financing

3,181 

 

6,140 

4,636 

 

$                       6,510 

 

$        19,061 

$       14,485 

 

 

(In thousands)

 

 

 

 

December 31, 2006

 

Derivative Warrants

 

Convertible Debentures

 

Fair Value

 

Fair Value

Face Value

 

 

 

 

 

New Convertible Debentures and Warrants

$                       3,123 

 

$        14,114 

$         9,849 

September 29, 2006 Financing

3,006 

 

7,120 

4,936 

 

$                       6,129 

 

$        21,234 

$       14,785 

 

Bridge Loan

 

On April 24, 2006, we entered into a Securities Purchase Agreement with certain existing investors pursuant to which we sold convertible debentures for an aggregate of $5,000. The investors also received an aggregate of 1,370,000 5-year warrants to purchase our no par value common stock for $3.12 per share, our fair market value on the day the transaction closed. In connection with the Bridge Loan we issued 64,103 shares of common stock as payment of an origination fee to the investors.

 

The convertible debentures accrued interest at 10% per annum and the $5,000 aggregate principal amount was originally scheduled to become due and payable July 24, 2006. We prepaid interest expense through July 24, 2006 with 40,064 shares of common stock at the time of the closing. On July 24, 2006, the maturity date on these debentures was extended to August 24, 2006 in return for an increase to the effective interest rate to 12%, payable in cash, for the period July 24, 2006 to August 24, 2006.

 

We concurrently entered into a registration rights agreement with the investors that required us to file a registration statement, and have it declared effective, covering all securities issued or issuable under this agreement within a period of 90 days from the date of the agreement (120 days if the registration statement receives a full review by the Securities and Exchange Commission). We filed the registration statement on November 8, 2006, but it has not yet been declared effective as of the date of this report. The registration rights agreement contains customary indemnification and contribution provisions.

 

These convertible notes were hybrid financial instruments that embody certain features that meet the definition of derivative financial instruments and require bifurcation under SFAS No. 133 Accounting for Derivative Financial Instruments. These embedded derivatives were required to be combined into one compound derivative financial instrument and carried at fair value as derivative liabilities.

 

We early adopted and applied the provisions of SFAS 155 Accounting for Certain Hybrid Instruments which permits fair value remeasurement for any hybrid instrument (on an instrument-by-instrument basis) that contains an embedded derivative that would otherwise have to be bifurcated. Under SFAS 155, the entire hybrid instrument was initially recorded at fair value and subsequent changes in fair value were recognized in earnings. As noted below, the debentures were rolled into a new financing for New Convertible Debentures and Warrants on September 6, 2006.

 

New Convertible Debentures and Warrants

 

On September 6, 2006, we entered into a securities purchase agreement with certain existing investors and new investors pursuant to which we sold convertible debentures for an aggregate of $4,550. Additionally, the investors of

 

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the April 24, 2006 Bridge Loan exchanged $5,000 face value of their convertible debentures plus $226 of accrued interest thereon into the new convertible debentures and the existing and new investors received 4,924,500 warrants. The debentures become convertible into shares of common stock at a conversion price of $0.75 per share. The warrants allow the purchase of our common stock for $1.10 per share and are for a term of 5 years. The debentures accrue interest at 8% per annum after shareholder approval was obtained in December 2006, and the aggregate principal amount becomes due and payable September 6, 2009. In the event that the debentures are not repaid on the maturity date, we will be in default and the debentures will begin to accrue interest at a rate of 22% per annum or the maximum amount permitted by law, whichever is less. The debentures contain various customary events of default as well as negative covenants that, among other things, prohibit us from incurring additional debt.

 

Because the conversion price for the debentures and the exercise price for the warrants is below market value and below the exercise and/or conversion price for certain previously issued warrants and convertible securities, anti-dilution rights of various security holders have been triggered and will result in the downward adjustment of the exercise and/or conversion price for various security holders, including the holders of our publicly traded warrants.

 

Both the debentures and the warrants contain provisions limiting conversion and exercise, or issuance of shares in lieu of interest, as the case may be, in the event that the holder’s beneficial ownership of our common stock would exceed 9.99%. We concurrently entered into a registration rights agreement with the investors that requires us to register all of the common stock issued and underlying the securities sold to the investors. The registration rights agreement contains customary indemnification and contribution provisions. We filed the registration statement with the Securities and Exchange Commission (”SEC”) on November 8, 2006 and amendments to the registration statement on January 12, 2007 and April 9, 2007, but due to the large number of shares of common stock being registered relative to the number of shares of our common stock currently outstanding, and the large number of shares of common stock that underlie convertible securities, we have encountered significant difficulties in having the registration statement declared effective. The registration statement is not yet effective and we cannot predict when, if ever, it will be declared effective by the SEC.

 

On March 5, 2007, we obtained amendments and waivers to, the registration rights agreement and the debentures. Pursuant to a letter agreement, the majority of the investors, including Crestview Capital Master, LLC and Toibb Investment LLC agreed to waive the penalty provisions for not yet having an effective registration statement, extended the dates for filing a registration statement and all related deadlines, including the date by which the initial registration statement must be declared effective by the SEC, by 120 days. The investors in this offering also agreed that no Event of Default is presently deemed to have occurred under the debentures. The 120-day extension period has lapsed and the registration statement has not yet been declared effective as of the date of this report. If we do not obtain effective registration of these private placements, we may be required to pay interest and/or redeem all or a portion of the outstanding convertible debentures by using our limited cash resources instead of using our common stock. Additionally, the warrants will not be exercisable in full and we will be required to continue seeking effective registration of the private placements, which could be costly.

 

We issued to one of the investors additional warrants to purchase up to 360,000 shares of common stock for $1.10 per share. The terms of these warrants are identical to the warrants issued as part of the financing. The warrants were accounted for as additional consideration given to the investors as part of the financing. In connection with this financing, we issued 546,000 warrants with a 5-year term to the placement agent to purchase our common stock for $1.10 per share.

 

The New Convertible Debentures are hybrid financial instruments that embody certain features that meet the definition of derivative financial instruments and require bifurcation under Statements on Financial Accounting Standards No. 133 as follows:

 

(i)    The conversion and anti-dilution protection features embedded in the debentures require bifurcation under FAS 133 because the risks associated with these features are not clearly and closely related to the host debt instrument. The conventional convertible exemption is not available for the hybrid instrument due to anti-dilution protections afforded the holders. In addition, an exemption for instruments indexed to a company’s own stock was not available because the hybrid instrument did not possess all conditions necessary for equity classification.

(ii)   The default redemption put embedded in the debentures requires bifurcation because the risks associated with these features are not clearly and closely related to the host debt instrument and they do not meet the definition of “indexed to a company’s own stock” which is necessary for equity classification.

 

 

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(iii) Certain buy-in and share delivery features met the definition for derivative accounting. However, we determined that share delivery was within our control and, therefore, the value of this feature would be de minimus.

 

Embedded derivatives that require bifurcation are required to be combined into one compound derivative financial instrument and carried at fair value as derivative liabilities. The 4,924,500 of detachable warrants, and related anti-dilution protection features were evaluated as freestanding derivative financial instruments under EITF 00-19, which provides the guidelines for equity classification. The warrants did not possess all of the conditions for equity classification due to the registration rights that require the delivery of registered shares, and did not provide for a mechanism for settlement should we be unable to deliver registered shares; in these instances, net-cash settlement is presumed. As such, the detachable warrants were required to be carried as liabilities at fair value. The warrants issued to the placement agent possessed all of the conditions for equity classification and were therefore classified as equity.

 

We applied the provisions of SFAS 155 for the New Convertible Debentures and Warrants as a hybrid instrument that contains an embedded derivative that would otherwise have to be bifurcated. The entire hybrid instrument was therefore initially recorded at fair value and subsequent changes in fair value were recognized in earnings.

 

We assumed an expiration term of 4.4 years, a volatility of 95.04% and interest rate of 4.54%. The estimated fair value of these derivative instruments at March 31, 2007 and December 31, 2006 are as follows:

 

 

 

Fair Value

 

Fair Value

 

 

(In thousands)

 

of Debt

 

of Warrants

 

Total

 

 

 

 

 

 

 

December 31, 2006

$

14,114

$

3,123

$

17,237

 

 

 

 

 

 

 

March 31, 2007

$

12,921

$

3,329

$

16,250

 

September 29, 2006 Financing

 

On September 29, 2006 we entered into a securities purchase agreement with certain existing investors and new investors pursuant to which we agreed to sell convertible debentures for an aggregate of $4,936. The investors also received an aggregate of 2,468,125 warrants to purchase our common stock. The debentures become convertible into shares of common stock at a conversion price of $0.75 per share. The warrants allow the purchase of our common stock for $1.10 per share and are for a term of 5 years. The debentures accrue interest at 8% per annum after shareholder approval was obtained in December 2006 and the aggregate principal amount becomes due and payable September 29, 2009. In the event that the debentures are not repaid on the maturity date, we will be in default and the debentures will begin to accrue interest at a rate of 22% per annum or the maximum amount permitted by law, whichever is less. The debentures contain various customary events of default as well as negative covenants that, among other things, prohibit us from incurring additional debt.

 

Both the debentures and the warrants contain provisions limiting conversion and exercise, or issuance of shares in lieu of interest, as the case may be, in the event that the holder’s beneficial ownership of our common stock would exceed 9.99%. We concurrently entered into a registration rights agreement with the investors that requires us to register all of the common stock issued and underlying the securities sold to the investors. The registration rights agreement contains customary indemnification and contribution provisions. The terms, conditions, features and accounting treatment of these debentures and warrants are substantially identical to the New Convertible Debentures and Warrants.

 

We filed the registration statement with the SEC on November 8, 2006 and amendments to the registration statement on January 12, 2007 and April 9, 2007, but due to the large number of shares of common stock being registered relative to the number of shares of our common stock currently outstanding, and the large number of shares of common stock that underlie convertible securities, we have encountered significant difficulties in having the registration statement declared effective.

 

We have not obtained any amendments or waivers from these investors and as a result, as of February 1, 2007 we began incurring liquidated damages under the registration rights agreement at the rate of 1.5% of the aggregate amount invested per month until the registration statement is declared effective.  These liquidated damages must be paid in cash, and they accrue interest at a rate of 18% per annum. We have notified the investors that we are currently unable to pay the interest and will accrue the interest to their account. There is no assurance that they will

 

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allow us to defer payment of the liquidated damages. We accrued $366 thousand in liquidated damages during the three months ended March 31, 2007 under the registration rights agreement. Additionally, since the registration statement was not declared effective by the SEC by April 2, 2007, an event of default occurred under the debentures and the holders are now able, at their option, to accelerate all amounts due thereunder. The holders have not yet chosen to accelerate such amounts due thereunder. After an event of default, the debentures would begin to accrue interest at the rate of 22% per annum.   

 

Until the registration statement is declared effective by the SEC, we will continue to incur liquidated damages, may be required to pay interest or other required payments in cash rather than stock and could be forced to use our limited cash resources to redeem all or a portion of the outstanding debentures. The registration statement is not yet effective and we cannot predict when, if ever, the registration statement will be declared effective by the SEC. 

 

In connection with this financing, we issued 499,867 warrants with a 5-year term to the placement agent to purchase our common stock for $1.10 per share.

 

We assumed an expiration term of 4.4 years, a volatility of 95.04% and an interest rate of 4.54%. The estimated probability of a dilutive financing transaction is based on management’s estimate of such a transaction in the future.

 

 

 

Fair Value

 

Fair Value

 

 

(In thousands)

 

of Debt

 

of Warrants

 

Total

 

 

 

 

 

 

 

December 31, 2006

$

7,120

$

3,006

$

10,126

 

 

 

 

 

 

 

March 31, 2007

$

6,140

$

3,181

$

9,321

 

 

NOTE 6

SHAREHOLDERS’ EQUITY

 

During the three months ended March 31, 2007, we issued 409,700 shares of common stock upon conversion of $300 face value of convertible debentures plus accrued interest with a fair value of $546. We also issued 516,769 shares of common stock upon the vesting of restricted stock units.

 

 

NOTE 7

LITIGATION

 

Phillip Adams & Associates, LLC

 

We are a defendant in a lawsuit, alleging infringement of certain patents, relating to floppy disk controllers, owned by Phillip Adams & Associates, LLC. We were added to this suit by an amended complaint filed on May 31, 2005 in the U.S. District Court, District of Utah. We have tendered indemnification demands to certain of our component suppliers. Because the case is still in the discovery phase, we are not able to determine the financial impact, if any, arising from an adverse result in the matter.

 

Bingham McCutchen, LLP

 

We are a defendant in a lawsuit filed by a law firm seeking damages for unpaid legal services. Bingham McCutchen alleges that approximately $530 is owed for services rendered. The suit was filed on or about December 20, 2006 in the District Court of the 3rd Judicial Court of the State of Idaho, Canyon County. Bingham McCutchen filed, but has not served, the complaint. The parties have agreed to a settlement and settlement documents are being prepared.

 

TPV International (USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd.

 

We are a defendant in a lawsuit filed by TPV International (USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd. The suit was filed on February 16, 2007 in the 98th Judicial Court of Travis County, Texas, alleging that we failed to pay invoices for computer equipment in the amount of approximately $2,200. We dispute the amount owed and are currently investigating claims we have against the plaintiffs.

 

Wacom Technology Corporation

 

 

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We are a defendant in a lawsuit filed by Wacom Technology Corporation. This suit was filed on March 6, 2007 in the U.S. District Court, District of Idaho alleging that we have failed to pay invoices for computer equipment in the amount of approximately $1,200. Wacom has filed a motion for default judgement.

 

Other Matters

 

We are involved in various other legal proceedings from time to time in the ordinary course of our business. We are not currently subject to any other legal proceedings that we believe will have a material impact on our business. However, due to the inherent uncertainties of the judicial process, we are unable to predict the ultimate outcome or financial exposure, if any, with respect to these matters.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management’s discussion and analysis of the results of operations and financial condition should be read in conjunction with the financial statements and related notes included in Item 1 of this report and with the Company’s Annual Report in Form 10-KSB for the year ended December 31, 2006.

 

OVERVIEW AND EXECUTIVE SUMMARY

 

We were formed in 2001 as a Colorado-based software company and completed an IPO. In July 2005, we acquired MPC, which is now our wholly owned subsidiary. Because of the MPC acquisition, the size and nature of our business and sales and marketing strategy has changed significantly from the time of our IPO. All discussion in this section will cover our ownership of MPC as our only current business.

 

Current Business

 

Today, our primary business is providing PC-based products and services to mid-sized businesses, government agencies and education organizations. We manufacture and market ClientPro® desktop PCs, TransPort® notebook PCs, NetFRAME® servers and DataFRAME™ storage products. We also provide hardware-related support services such as installation, technical support, parts replacement, and recycling. In addition to PCs, servers, and storage products, we also fulfill our customers’ requirements for third party products produced by other vendors, including printers, monitors and software.

 

We focus primarily on three markets: Federal government, SLE, and mid-size enterprise commercial. This focus enables us to tailor our operating model to better support the needs of these customers for customized products, services and programs. We sell directly to customers in each of our markets.

 

We use a build-to-order manufacturing process that we believe is an efficient means to provide customized computing solutions.

 

Strategic Plans and Initiatives

 

Following the MPC acquisition, we completed a strategic planning process in which we identified a new direction for the company. The desktop and notebook market is intensely competitive and customers increasingly see those products as commodities. We have also seen a trend toward notebooks and away from desktops. We will keep our focus on these products to maintain our market position. Our vision is to become an enterprise IT hardware business providing products and services to customers in mid-sized businesses, government agencies and education. This strategy directs our focus to grow our server and storage business, while taking advantage of opportunities in our traditional desktop and notebook PC markets.

 

In 2006 we implemented several strategic initiatives including, the following:

 

      Aligning our cost structure with our revenue and margin levels;

      Streamlining executive management;

      Realigning the MPC manufacturing process to a linear staffing methodology to improve overall efficiency

 

 

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      Reducing overhead spending in areas such as marketing, IT, research and development and human resources.

 

Although these initiatives will reduce our expense base, we cannot assure that we will be profitable going forward.

 

Gross Margin Initiatives

We launched initiatives to improve gross margin beginning in January 2006. We are focusing on returns, freight costs, manufacturing productivity and customer evaluation units as areas of opportunity to improve our gross margins. We continue to be active in cost management and constantly seek ways to run our business more cost effectively. There can be no assurance that improvements can be achieved.

 

Furthermore, we expect to focus on:

 

      Increasing the liquidity in our business and improving our balance sheet;

      Improving our gross margins;

      Continuing to make our operations more cost efficient;

      Seeking ways to sell and distribute our products more effectively;

      Penetrating segments of the US Federal Government where we have historically not made significant sales;

      Continuing to increase our sales to the mid-size enterprise market which typically has higher margins; and

      Working with our vendors to negotiate further credit extensions or larger lines of credit

 

 

RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS

Three months ended

 

(In millions)

March 31,

 

 

2007

2006

% Change

 

 

 

 

Revenue

$ 56.8

$ 66.5

-14.6%

 

 

 

 

Cost of revenue

50.2

58.4

-14.0%

 

 

 

 

Gross Margin

6.6

8.1

-18.5%

Gross Margin %

11.6%

12.2%

 

 

 

 

 

Operating Expenses

 

 

 

Research and development expense

0.5

1.2

-58.3%

Selling, general and administrative

9.9

10.9

-9.2%

Depreciation and amortization

1.2

2.0

-40.0%

Total Operating Expenses

11.6

14.1

-17.7%

Operating expenses as a % of Revenue

20.4%

21.2%

 

 

 

 

 

Operating Loss

$ (5.0)

$ (6.0)

-16.7%

Operating Loss as a % of Revenue

-8.8%

-9.0%

 

 

 

 

 

Other (Income) Expense

 

 

 

Interest expense, net

1.5

1.5

 

Change in estimated fair value of derivative financial instruments

(1.2)

-

 

Other expense

(0.1)

-

 

Total Other (Income)/Expense

0.2

1.5

 

 

 

 

 

Net loss

$ (5.2)

$ (7.5)

 

 

 

 

 

 

OPERATING RESULTS

 

Total Revenue

 

Revenue for the three months ended March 31, 2007 was $56.8 million, a decline of $9.7 million or 14.6% from the comparable period in 2006. The decrease in revenue was due to lower sales to our commercial, state/local

 

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government, and education customers. Due to our cash constraints in the second half of 2006, many of these customers’ orders were delayed and they therefore placed fewer orders with us during the first quarter of 2007. With the improvements we have achieved with our liquidity situation, our on-time delivery has improved and we hope to regain these customers’ business in 2007. Our orders in backlog decreased from approximately $28 million at the end of 2006 to approximately $22 million at the end of the first quarter 2007. Lower revenues from commercial, state/local government, and education customers were partially offset by higher revenues to federal government customers.

 

Additionally, our contract with the Department of Veterans Affairs (“VA”) terminated in August 2006. We were required to seek sales to the VA under other contracts that are less advantageous. Such restrictions had a negative effect on our revenues during our first quarter of 2007. VA sales in the first quarter amounted to approximately 7% of our revenues, compared to approximately 11% for the same period last year. We anticipate sales to the VA will improve in future periods. In April 2007, we were awarded a prime contractor position as a small business manufacturer on a new federal government-wide acquisition contract for the procurement of IT hardware and software. Federal agencies using the contract can meet their small-business procurement goals by purchasing from us under this contract. The contract, which runs over a seven-year period, allows several large federal agencies, including the VA, to procure IT hardware and software. We anticipate making deliveries under the contract beginning in June 2007. There can be no assurance that material sales under the contract will be achieved, as such contracts with federal, state and local governments do not guarantee any level of sales.

 

Our competitors generally have larger operations than we do and, generally have stronger financial positions. We believe these factors result in our competitors being able to procure raw materials at prices lower than us. These factors, along with our low manufacturing facility capacity utilization, results in our competitors having a greater ability to reduce selling prices in highly competitive bidding situations. We experienced a number of situations where sales opportunities were lost as a result of lower prices offered by our competitors that we were unable to match.

 

Gross Margin

 

Our gross margin as a percentage of revenue for the three months ended March 31, 2007 declined to 11.6% from 12.2% for the same period in 2006. Our cost cutting initiatives in 2006 to improve gross margin were offset, in part, by liquidity issues primarily in the third and fourth quarters of 2006, and to a lesser degree in the first quarter of 2007, resulting in lower sales and a lower utilization rate of our fixed labor costs. Our overall reduction in gross margins in the first quarter of 2007 was offset, in part, as our liquidity improved somewhat as a result of having greater access to our Receivables Advance Facility with Wells Fargo. We experienced lower gross margins from sales of our desktop and PC notebook products, as more customers view these products as a commodity, with price being the primary purchasing criteria.

 

Research and Development Expenses

 

Research and development expenses of $0.5 million decreased $0.7 million or 58.3% for the three months ended March 31, 2007 from $1.2 million in the first quarter of 2006, primarily due to our cost cutting initiatives in 2006.

 

Selling, General and Administrative Expenses (SG&A)

 

SG&A expenses for the three months ended March 31, 2007 were $9.9 million, a decline of $1.0 million or 9.2% from the same period in 2006. The decline in SG&A is primarily a result of ongoing cost reduction efforts and reduced commissions due to decreased sales. The restructuring actions announced in July 2006 began to have an effect on SG&A expenses during the fourth quarter of 2006, and have continued into our first quarter results.

 

Depreciation and Amortization

 

Deprecation and amortization consists of depreciation of purchased fixed assets and the non-cash amortization of acquired intangibles at the time of the merger with MPC in July 2005. Depreciation and amortization declined $0.8 million or 40.0% for the three months ended March 31, 2007 from the comparable quarter of 2006, primarily due to the $19.5 million impairment of acquired intangibles during the second quarter of 2006. The impairment resulted in a lower remaining balance of acquired intangibles and therefore a reduction of future amortization expense.

 

Change in Estimated Fair Value of Derivative Financial Instruments

 

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On April 24, 2006, we sold convertible debentures (the Bridge Loan) for an aggregate of $5.0 million and issued 1.37 million 5-year warrants to purchase, our common stock for $3.12 per share, and the fair value of our common stock on the date of the close of the transaction. These debentures plus accrued interest thereon were rolled into a new financing (New Convertible Debentures) on September 6, 2006 for which we received $4.55 million. In addition, we issued 4.9 million 5-year warrants to purchase our common stock for $1.10 per share, which was below the market value per share of $1.61 of our common stock on that date. As a result of anti-dilution provisions, the conversion price of the Bridge Loan warrants was reduced to $1.10. We entered into another financing (September 29, 2006 Financing) in which we sold $4.9 million of convertible debentures and issued 2.5 million 5-year warrants to purchase our common stock for $1.10 per share, which was below the market value of our common stock on that date. Additional warrants were issued in connection with these transactions.

 

These convertible debentures and warrants are derivative financial instruments that are carried at fair value as derivative liabilities. See Note 5 – “Derivative Warrant Liabilities and Convertible Debentures” in Notes to Consolidated Financial Statements in Item 1 of this report for more information regarding these financial instruments. During the three months ended March 31, 2007, we recognized income of $1.2 million, related to changes in fair value of these derivative financial instruments primarily as a result of a decline in the market price of our stock during the first quarter of 2006. We had no derivative liabilities during the three months ended March 31, 2006.

 

Significant estimates and assumptions are used in the determination of the fair values of these derivative financial instruments. The fair values are determined in part by, and will fluctuate with, the market value of our stock. If the market price of our stock increases during a period, the fair value of the derivatives is expected to increase and will adversely affect our earnings. A decline in the market price of our stock will cause a decrease in fair value of the derivatives and have a positive impact to earnings. We anticipate that the change in fair value of derivative financial instruments may likely have a material positive or negative effect on our earnings in future periods. The change in the fair value of these derivative financial instruments has no impact on our cash flows.

 

Income taxes

 

We make no provision for income taxes because, since inception, we have not been profitable. We have a net operating loss carry-forward available to offset future federal and state income tax expenses to an amount that approximates our accumulated deficits. Our net operating loss carry-forward will expire in varying amounts from 2021 to 2026. The utilization of the net operating loss carry-forward as an offset to future taxable income is subject to the limitations under US federal income tax laws. One such limitation is imposed where there is a greater than 50% change in ownership of our company.

 

OFF BALANCE SHEET ARRANGEMENTS

 

We have no off the balance sheet arrangements.

 

GUARANTEES

 

During our normal course of business, we have made certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to customers and licensees in connection with the use, sale and/or license of our products, (ii) indemnities to lessors in connection with our facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to claims based on our negligence or willful misconduct, (iv) indemnities involving the accuracy of representations in certain contracts, and (v) guarantees to certain vendors and creditors for balances owed. The duration of these indemnities and commitments in certain cases may be indefinite. The majority of these indemnities and commitments do not provide for any limitation of the maximum potential for future payments we could be obligated to make. We have not recorded any liability for these indemnities and commitments in the accompanying consolidated financial statements.

 

NEW AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

New Accounting Standards

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial

 

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Liabilities - Including an Amendment of FASB Statement 115. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for us beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. We are currently evaluating the impact that SFAS No. 159 will have on our consolidated financial statements.

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. We will adopt this standard January 1, 2008. We do not expect it to have a material impact on our financial position or results of operations.

 

Recently Adapted Accounting Standards

In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109. FIN No. 48 clarifies the criteria for the measurement, recognition and derecognition of income taxes under FASB Statement No. 109, Accounting for Income Taxes. It also requires additional financial statement disclosures about uncertain tax positions including classification, interest and penalties. FIN 48 is effective January 2007. Because we have not been profitable since our initial public offering and the uncertainty as a going concern, we have not realized any deferred tax assets. FIN No. 48 did not have a material impact on our financial position or results of operations. If our tax status were to change in the future, we would have to reevaluate the impact of FIN No. 48 on our financial position and results of operations at that time.

 

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

 

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of GAAP financial statements requires certain estimates, assumptions, and judgments to be made that may affect our consolidated statement of financial position and results of operations. Critical accounting estimates are those that are most important and material to our financial condition and results of operations and require management’s most difficult, subjective, or complex judgments, often as a result of the need to estimate matters that are inherently uncertain. We believe our most critical accounting policies and estimates relate to revenue recognition, including reserves needed for possible future returns and discounts; the carrying value and usefulness of inventory and related inventory reserves; the timing and amount of future warranty obligations; accounting for derivative financial instruments; and the impairment of acquired intangible assets. We have discussed the development, selection, and disclosure of our critical accounting policies and use of estimates with the Audit Committee of our Board of Directors. These critical accounting policies and our other accounting policies are described in Note 1 of “Notes to Interim Consolidated Financial Statements” included in “Item 1 — Financial Statements.”

 

Revenue Recognition

 

We frequently enter into sales arrangements with customers that contain multiple elements or deliverables such as hardware, software, peripherals, and services. Judgments and estimates are critical to ensure compliance with GAAP. These judgments relate to the allocation of the proceeds received from an arrangement to the multiple elements, the determination of whether any undelivered elements are essential to the functionality of the delivered elements, and the appropriate timing of revenue recognition. We offer extended warranty and service contracts to customers that extend and/or enhance the technical support, parts, and labor coverage offered as part of the base warranty included with the product. Revenue from separately priced extended warranty and service contracts, for which we are obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract. The amount recognized on a periodic basis within this term is based on management’s best estimate of how it will perform its obligations in future periods. This is based on past historic trends and other factors likely to have a future impact on warranty claims. The actual rate of warranty claims could differ materially from management’s estimates.

 

We record reductions in revenue in the current period for estimated future product returns related to current period sales. Management analyzes historical returns, current trends, changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns allowances in any accounting period. If actual returns

 

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exceed estimated returns, we would be required to record additional reductions to revenue which would affect earnings in the period the adjustments are made.

 

Inventory Valuation

 

We operate in a business environment subject to rapid changes in technology and customer demand. We record write-downs for components and products which have become obsolete or are in excess of anticipated demand or net realizable value. Historically, these write-downs have primarily related to warranty inventory. We perform an assessment of inventory each quarter, which includes a review of, among other factors, inventory on hand and forecast requirements, product life cycle (including end of life product) and development plans, component cost trends, product pricing and quality issues. Based on this analysis, we record an adjustment for excess and obsolete inventory. We may be required to record additional write-downs if actual demand, component costs or product life cycles differ from estimates, which would affect earnings in the period the write-downs are made.

 

Warranty Liabilities

 

We record warranty liabilities at the time of sale for the estimated costs that may be incurred under our standard limited warranty. The specific warranty terms and conditions vary depending upon the product sold but generally include technical support, parts, and labor over a period ranging from 90 days to three years. Factors that affect our warranty liability include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and the average cost of claims on our installed base to satisfy our warranty obligation. The anticipated rate of warranty claims is the primary factor impacting our estimated warranty obligation. The other factors are less significant due to the fact that the average remaining aggregate warranty period of the covered installed base is approximately 9 months, repair parts are generally already in stock or available at pre-determined prices, and labor rates which are fairly predictable and historically have not fluctuated significantly from period to period. Warranty claims are relatively predictable based on historical experience of failure rates. If actual results differ from our estimates, we revise our estimated warranty liabilities to reflect such changes. Each quarter, we reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.

 

Derivative Financial Instruments

 

The accounting for convertible debt with derivative features is highly complex, subject to a number of accounting pronouncements and subject to broad interpretations. Determination of the treatment of these convertible debt instruments is based on current interpretation of the facts, treatment by other companies and discussion with industry experts. Management is also required to make highly subjective estimates of future share price volatility, the probability of future events and effective discount rates. We anticipate that future changes in the fair value of our derivative financial instruments may have a material impact in our results of operations. Among other factors, the fair value of our derivative financial instruments is affected by the market value of our common stock. Increases in the market price of our common stock will adversely impact our financial results. Declines in the market value of our common stock will have a positive impact. The changes in the fair value of these derivatives have no impact on our cash flows.

 

Impairment of Acquired Intangible Assets

 

The estimates used by management in determining the impairment of acquired intangible assets is a critical accounting estimate susceptible to change from period to period. It requires management to make assumptions about future cash flows over future years and utilize an estimated discount rate. Management’s assumptions about future cash flows involves significant judgment because actual operating levels have fluctuated in the past and may continue to do so in the future and economic conditions may change. Also, the adoption of any new strategic plan inherently involves uncertainty. A significant adverse change in our business could result in a future impairment of the value of our acquired intangible assets.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of liquidity have been our Wells Fargo Receivables Advance Facility and additional funding through $14.5 million in private placements made during 2006.

 

We face significant constraints with respect to our liquidity and working capital. As of March 31, 2007, we had cash

 

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and cash equivalents of $1.5 million, current assets of $68.8 million and our current liabilities (exclusive of deferred revenue which is not yet earned) totaling $67.1 million. At March 31, 2007 our shareholder’s equity was a deficit of $25.7 million. Our operations have not generated positive annual cash flows since our IPO. For the three months ended March 31, 2007, cash provided by operating activities was $3.2 million.

 

Background

 

Our liquidity has been constrained because of various factors. A significant amount of cash withdrawn by MPC’s prior owner in the years before the acquisition left the business without adequate liquidity at the time of the acquisition. Since the acquisition, we have used funds to consummate the MPC acquisition, had insufficient revenues and gross margins to sustain our operations, incurred ongoing operating losses and interest expense on our debt, and have expended cash to support fundraising initiatives.

 

Since inception, we have financed our operations through the private placements of equity securities, convertible debt, loans from our founder and other members of our Board of Directors, short-term loans, a line of credit and net proceeds of $7.1 million from our IPO. In connection with our IPO, we also issued 3.6 million warrants. These warrants are exercisable at $5.50 per share, which is well above the current market price of our common stock. The warrants are callable by us at $0.25 per share if our common stock trades at or above $9.50 per share for 20 consecutive days. None of these warrants have yet been exercised, and we do not anticipate that a material amount of the warrants will be exercised unless we are able to exercise our call right, which would require our stock trading price to close at a price of at least $9.50 for 20 consecutive trading days. Our stock has never traded above $9.50 per share. From December 2005 to February 2006, we raised approximately $12.6 million, prior to expenses and commissions, through warrant exercises.

 

Because our liquidity has been constrained, we have managed our cash position by extending payments to suppliers, some of whom have placed us on credit hold, reduced credit lines or placed on a pre-pay position for products. On many occasions this has delayed delivery of components to our manufacturing facility until payments were made. We have also received notices of default and threatened litigation from numerous suppliers, including Microsoft, but have generally cured the defaults or settled the amount owed or otherwise managed the supplier relationship. However, in recent months, a number of suppliers have commenced litigation in an effort to collect alleged debts. Further recurring late payments will result in additional credit holds, additional requirements that we pre-pay for products, a refusal to deliver components or termination of supply arrangements, any of which could have a material adverse effect on our financial condition and results of operations.

 

During the quarters ended June 30, 2006 and September 30, 2006, delivery and credit issues with suppliers increased compared to prior periods because of late payments, but were alleviated to a limited extent later in our fourth quarter when we replaced our Wachovia Credit Facility with the Wells Fargo Receivables Advance Facility on November 16, 2006. Initially, the Receivables Advance Facility provided approximately $13 million in availability over the Wachovia Credit Facility. In February 2007, we amended the Receivables Advance Facility to obtain additional temporary liquidity as needed subject to the terms of the amendment as noted below. Financing under the Receivables Advance Facility is dependant upon our sales volume and related receivables to assign to Wells Fargo. Historically, our sales volume has been lower during the first two quarters of the year and increases during the third and fourth quarters due to the Federal-buying season. Periods of lower revenue volume and lower related receivables reduce our assignment of receivables, borrowing capacity, and our ability to cover our operating expenses. We continue to look for opportunities to increase our liquidity through extension of credit lines with our vendors, improved cash management and funding from other sources. There can be no assurance that vendors and other creditors will continue to extend credit to us. Any inability to maintain adequate liquidity may do significant harm to vendor relationships and that orders received by us from customers, which are not yet shipped (i.e. in backlog), are at risk of being cancelled. Insufficient liquidity may also impair our ability to execute our business plan and initiatives. Management is continuing initiatives to reduce overhead expenses and improve gross margins.

 

Funds raised through private placements, through the warrant exercises and through the Receivable Advance Facility have not been sufficient to fully address our liquidity constraints. We may need to raise a significant amount of additional funds to satisfy supplier payment obligations and to cover continued operating losses and negative operating cash flow. There can be no assurance that we will be able to secure additional sources of financing. Even if we do obtain additional funding, the amount of such funding may not be sufficient to fully address all of our liquidity constraints. If we are unable to obtain significant additional liquidity from third party financing sources, it will be difficult or impossible for us to cure our liquidity needs, and we may be forced to seek additional extension of credit terms with creditors and suppliers, which they may not be willing to provide. We may incur additional

 

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interest expenses or grant other concessions to suppliers in return for granting additional terms. Continuing liquidity constraints could negatively and materially impact our business and results of operations. In particular, our liquidity constraints could impact our ability to obtain components from suppliers, our ability to satisfy obligations to customers and to sell additional product to customers in the future, our ability to retain key employees and our ability to fund capital expenditures or execute our business strategies, or could result in bankruptcy.

 

Wells Fargo Receivables Advance Facility

 

On November 16, 2006, we entered into an agreement with Wells Fargo Business Credit, Inc. (“Wells Fargo”) for an accounts receivable assignment and advance facility (“Receivables Advance Facility”) that replaced our existing line of credit with Wachovia. Under the new facility, we may assign to Wells Fargo, and Wells Fargo may purchase from us, Accounts (as defined in the Receivables Advance Facility). Wells Fargo will advance 90% of the value of the purchased Accounts. Wells Fargo may adjust the advancement percentage at any time in its commercially reasonable discretion upon prior notice to us. We will pay fees equal to the Wells Fargo Prime Rate (as defined in the Receivables Advance Facility), plus 1.75% per annum multiplied by the total amount of Accounts purchased and not yet paid by our customers, computed daily. The effective rate at December 31, 2006 was 10.0%. Wells Fargo has the right to require that we re-purchase the Accounts in the event our customer does not pay the receivable within a timeframe specified under the Receivables Advance Facility, if a material customer dispute arises or in the event of a default under the Receivables Advance Facility. The Receivables Advance Facility is subject to customary default provisions. Wells Fargo has discretion under the Receivables Advance Facility as to the Accounts purchased and the percentage advanced after submission of the Account for approval. Wells Fargo is not obligated to buy any Account from us that Wells Fargo does not deem acceptable in its sole discretion. There is no minimum amount of Accounts to be purchased by Wells Fargo under the Receivables Advance Facility. The facility is secured by substantially all of our assets. The Receivables Advance Facility is for a term of three (3) years. There is an annual fee of $100 thousand in addition to a minimum fee. Early termination fees apply if the Receivables Advance Facility is terminated before the end of the term. The agreement also provides for a $1.5 million collateral account for the benefit of Wells Fargo for repayment of any obligations arising under the Receivables Advance Facility .

 

In February 2007, we entered into an amendment to of the Receivables Advance Facility under which Wells Fargo agreed to advance an additional 7.5% of the face amount of currently outstanding Accounts assigned to Wells Fargo, provided that the total advance does not exceed 97.5% of the face amount of any Account (the “Temporary Advance”), and increase the advance rate on new accounts assigned to Wells Fargo to 98% of the amount of the accounts for a period of eight weeks (the “Special Facility Period”). We must repay the difference between the Advance and the Temporary Advance within four weeks after termination of the Special Facility Period. Failure to repay amounts advanced under the Special Facility would constitute an event of default under the Receivables Advance Facility. At any time when the Temporary Advance has been paid in full for a minimum of 60 days, we may request that the Special Facility be reinstated for another eight week period with repayment to be made within four weeks.

 

Fundraising Activities

 

Bridge Loan

 

On April 24, 2006, we obtained a bridge loan in the amount of $5 million. This bridge loan was obtained through a Securities Purchase Agreement with certain existing investors pursuant to which we sold convertible debentures for an aggregate of $5 million. The investors also received an aggregate of 1,370,000 warrants to purchase our no par value common stock for $3.12 per share, the fair market value on the day the transaction closed.

 

The convertible debentures accrued interest at 10% per annum and the $5 million aggregate principal amount became due and payable July 24, 2006. We prepaid the interest expense through July 24, 2006 with 40,064 shares of common stock at the time of the closing. On July 24, 2006, holders of the $5 million bridge loan agreed to extend the maturity date by 30 days to August 24, 2006 in return for an increase in the effective interest rate to 12%, payable in cash, for the extended term.

 

The debentures were convertible at the option of the holders into shares of common stock at an initial conversion price of $3.12 per share, subject to adjustment as set forth in the debentures. The exercise price of the warrants was reduced to $1.10 in connection with a September 6, 2006 financing. Except for the initial interest paid in shares of common stock at closing, all interest payments were required to be made on cash. The debentures contained various customary events of default as well as negative covenants that, among other things, prohibit us from incurring

 

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additional debt.

 

New Convertible Debentures and Warrants

 

On September 6, 2006, we entered into a securities purchase agreement with certain existing investors and new investors pursuant to which we sold convertible debentures for an aggregate of $4.6 million. Additionally, the investors of the April 24, 2006 bridge loan exchanged $5 million face value of their convertible debentures plus accrued interest thereon into the new convertible debentures and the existing and new investors received 4,924,500 additional warrants. The debentures become convertible into shares of common stock at a conversion price of $0.75 per share. The warrants allow the purchase of our common stock for $1.10 per share and are for a term of 5 years. The debentures accrue interest at 8% per annum after shareholder approval was obtained in December 2006 and the aggregate principle amount becomes due and payable September 6, 2009. In the event that the debentures are not repaid on the maturity date, we will be in default and the debentures will begin to accrue interest at a rate of 22% per annum or the maximum amount permitted by law, whichever is less. The debentures contain various customary events of default as well as negative covenants that, among other things, prohibit us from incurring additional debt.

 

Because the conversion price for the debentures and the exercise price for the warrants is below market value and below the exercise and/or conversion price for certain previously issued warrants and convertible securities, anti-dilution rights of various security holders have been triggered and will result in the downward adjustment of the exercise and/or conversion price for various security holders, including the holders of our publicly traded warrants.

 

Both the debentures and the warrants contain provisions limiting conversion and exercise, or issuance of shares in lieu of interest, as the case may be, in the event that the holder’s beneficial ownership of our common stock would exceed 9.99%. We concurrently entered into a registration rights agreement with the investors that requires us to register all of the common stock issued and underlying the securities sold to the investors. The registration rights agreement contains customary indemnification and contribution provisions. We filed the registration statement with the SEC on November 8, 2006 and amendments to the registration statement on January 12, 2007 and April 9, 2007, but due to the large number of shares of common stock being registered relative to the number of shares of our common stock currently outstanding, and the large number of shares of common stock that underlie convertible securities, we have encountered significant difficulties in having the registration statement declared effective. The registration statement is not yet effective and we cannot predict when, if ever, it will be declared effective by the SEC. On March 5, 2007, we obtained amendments and waivers to, the registration rights agreement and the debentures. Pursuant to a letter agreement, the majority of the investors, including Crestview Capital Master, LLC and Toibb Investment LLC agreed to waive the penalty provisions for not yet having an effective registration statement, extended the dates for filing a registration statement and all related deadlines, including the date by which the initial registration statement must be declared effective by the SEC, by 120 days. As of the date of this report the 120-day extension period has lapsed and the registration statement is not yet effective. The investors in this offering also agreed that no event of default is presently deemed to have occurred under the debentures.

 

In addition, we issued to one of the investors additional warrants to purchase up to 360,000 shares of common stock for $1.10 per share. The terms of these warrants are identical to the warrants issued as part of the financing. The warrants were accounted for as additional consideration given to the investors as part of the financing.

 

In connection with this financing, we issued 546,000 warrants with a 5 year term to the placement agent to purchase our common stock for $1.10 per share.

 

September 29, 2006 Financing

 

On September 29, 2006 we entered into a securities purchase agreement with certain existing investors and new investors pursuant to which we sold convertible debentures for an aggregate of $4.9 million. The investors also received an aggregate of 2,468,125 warrants to purchase our common stock. Subject to shareholder approval, the debentures become convertible into shares of common stock at a conversion price of $0.75 per share. The warrants allow the purchase of our common stock for $1.10 per share and are for a term of 5 years. The debentures accrue interest at 8% per annum and the aggregate principal amount becomes due and payable September 29, 2009. In the event that the debentures are not repaid on the maturity date, we will be in default and the debentures will begin to accrue interest at a rate of 22% per annum or the maximum amount permitted by law, whichever is less. The debentures contain various customary events of default as well as negative covenants that, among other things, prohibit us from incurring additional debt.

 

 

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Because the conversion price for the debentures and the exercise price for the warrants is below market value and below the exercise and/or conversion price for certain previously issued warrants and convertible securities, anti-dilution rights of various security holders have been triggered and will result in the downward adjustment of the exercise and/or conversion price for various security holders, including the holders of our publicly traded warrants.

 

Both the debentures and the warrants contain provisions limiting conversion and exercise, or issuance of shares in lieu of interest, as the case may be, in the event that the holder’s beneficial ownership of our common stock would exceed 9.99%. In connection with this financing, we issued 499,867 warrants with a 5-year term to the placement agent to purchase our common stock for $1.10 per share.

 

We concurrently entered into a registration rights agreement with the investors that requires us to register all of the common stock issued and underlying the securities sold to the investors. The registration rights agreement contains customary indemnification and contribution provisions.

 

We filed the registration statement with the SEC on November 8, 2006 and amendments to the registration statement on January 12, 2007 and April 9, 2007, but due to the large number of shares of common stock being registered relative to the number of shares of our common stock currently outstanding, and the large number of shares of common stock that underlie convertible securities, we have encountered significant difficulties in having the registration statement declared effective.

 

We have not obtained any amendments or waivers from these investors and as a result, as of February 1, 2007, we began incurring liquidated damages under the registration rights agreement at the rate of 1.5% of the aggregate amount invested per month until the registration statement is declared effective.  These liquidated damages must be paid in cash, and they accrue interest at a rate of 18% per annum.  Additionally, since the registration statement was not declared effective by the SEC by April 2, 2007, an event of default occurred under the debentures and the holders are now able, at their option, to accelerate all amounts due thereunder. The holders have not yet chosen to accelerate such amounts. After an event of default, the debentures begin to accrue interest at the rate of 22% per annum.   

 

Until the registration statement is declared effective by the SEC, we will continue to incur liquidated damages, will be required to pay interest or other required payments in cash rather than stock and could be forced to use our limited cash resources to redeem all or a portion of the outstanding debentures.  We cannot predict when, if ever, the registration statement will be declared effective by the SEC. 

 

CONTRACTUAL OBLIGATIONS

 

During the three months ended March 31, 2007, estimated purchase obligations increased $5.4 million. In addition, $300 thousand face value plus accrued interest of convertible debentures were converted to common stock with a fair value of $546 thousand. There were no other material changes in our contractual obligations during the three months ended March 31, 2007.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are subject to interest rate risk on our Wells Fargo Receivable Assignment Facility. The interest rate is a floating rate based on the prime rate plus a percentage. If interest rates continue to rise we will be subject to higher interest payments if outstanding balances remain unchanged.

 

We have convertible debentures and warrants that are derivative financial instruments and are carried at fair value as derivatives liabilities. The fair values are determined in part by, and fluctuate with, the market value of our stock. If the market price of our stock increases during a period the fair value of the derivatives is expected to increase and will adversely affect our earnings. A decline in the market price of our stock will cause a decrease in fair value of the derivatives and have a positive impact to earnings.

 

Currently most sales are in the United States. All of our foreign sales and purchases of product are denominated in US dollars minimizing its foreign currency risk. All of our international suppliers, mostly from Asia, denominate contracts in US dollars thereby eliminating foreign currency risk. In the future we may not be successful in negotiating most of our international supply agreements in US dollars thereby increasing our foreign currency risk. Amounts we pay for components from international suppliers could be affected by a continued weakening of the US dollar as compared with other foreign currencies. We currently have no foreign exchange contracts, option contracts

 

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or other foreign currency hedging arrangements. Management continues to evaluate the Company’s risk position on an ongoing basis to determine whether foreign exchange hedging strategies may need to be employed.

 

We depend on a relatively small number of third party suppliers for substantially all the components in our PC systems. Additionally, we maintain several single-source supplier relationships primarily to increase our purchasing power with these suppliers. If shortages or delays arise, the prices of these components may increase or the components may not be available at all. We do not have long-term supply contracts with suppliers that would require them to supply products to us for any specific period or in any specific quantities, which could result in shortages or delays. Supplier risks have also increased due to our liquidity problems and many suppliers have reduced credit limits and terms. Some suppliers do not grant us credit at all and require us to pre-pay for products. There is no assurance, absent future financing, that suppliers will continue to grant us credit at all. Should an increasing number of suppliers reduce or cancel our credit terms, and we are forced to pre-pay for products, it would have a material negative impact on our business and results of operations. In the event we are unable to prepay suppliers, bankruptcy could be a result.

 

ITEM 4T. CONTROLS AND PROCEDURES

 

We maintain a set of disclosure controls and procedures designed to reasonably assure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms. Disclosure controls are also designed to reasonably assure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). The evaluation of our disclosure controls performed by our CEO and CFO included obtaining an understanding of the design and objective of the controls, the implementation of those controls and the results of the controls on this report on Form 10-Q. In the course of the evaluation of disclosure controls, we reviewed the controls that are in place to record, process, summarize and report, on a timely basis, matters that require disclosure in our reports filed under the Securities Exchange Act of 1934. We also considered the adequacy of the items disclosed in this report on Form 10-Q.

 

As of the date of the financial statements, an evaluation was carried out under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of our disclosure controls and procedures. Based on that evaluation the CEO and the CFO concluded that as of March 31, 2007 our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that all information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our CEO and CFO, in a manner that allows timely decisions regarding required disclosure.

 

We have also reviewed changes in our internal control over financial reporting during the most recent fiscal quarter, and our CEO and CFO have concluded that there have been no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II.

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

Phillip Adams & Associates, LLC

 

We are a defendant in a lawsuit, alleging infringement of certain patents, relating to floppy disk controllers, owned by Phillip Adams & Associates, LLC. We were added to this suit by an amended complaint filed on May 31, 2005 in the U.S. District Court, District of Utah. We have tendered indemnification demands to certain of our component suppliers. Because the case is still in the discovery phase, we are not able to determine the financial impact, if any, arising from an adverse result in the matter.

 

Bingham McCutchen, LLP

 

We are a defendant in a lawsuit filed by a law firm seeking damages for unpaid legal services Bingham McCutchen alleges that approximately $530,000 is owed for services rendered. This suit was filed on or about December 20,

 

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2006 in the District Court of the 3rd Judicial Court of the State of Idaho, Canyon County. Bingham McCutchen filed, but has not served, the complaint. The parties have agreed to a settlement and settlement documents are being prepared.

 

TPV International (USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd.

 

We are a defendant in a lawsuit filed by TPV International (USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd. This suit was filed on February 16, 2007 in the 98th Judicial Court of Travis County, Texas alleging that we failed to pay invoices for computer equipment in the amount of approximately $2.2 million. We dispute the amount owed and are currently investigating claims we have against the plaintiffs.

 

Wacom Technology Corporation

 

We are a defendant in a lawsuit filed by Wacom Technology Corporation. This suit was filed on March 6, 2007 in the U.S. District Court, District of Idaho alleging that we have failed to pay invoices for computer equipment in the amount of approximately $1.2 million. Wacom has filed a motion for default judgement.

 

Other Matters

 

We are involved in various other legal proceedings from time to time in the ordinary course of our business. We are not currently subject to any other legal proceedings that we believe will have a material impact on our business. However, due to the inherent uncertainties of the judicial process, we are unable to predict the ultimate outcome or financial exposure, if any, with respect to these matters.

 

ITEM 1A.

RISK FACTORS

 

Investing in our securities involves a high degree of risk. You should carefully consider the following risk factors, and other information included in or incorporated by reference into this report, including our financial statements and the related notes thereto. Described below are the principal risks that we expect to face, however they are not the only risks we may face. Additional risks and uncertainties that we do not presently know about, or have not yet identified, may also adversely affect our business. Our business, operating results and financial condition could be seriously harmed and you could lose your entire investment by the occurrence of any of the following risks, or by unforeseen risks not listed below.

 

Risks Relating to Our Company

 

Our liquidity and working capital constraints have caused us to receive a going concern opinion from our independent auditors, negatively affect our business and results of operation, and could result in bankruptcy.

 

We face significant constraints with regard to liquidity and working capital that have and will probably continue to negatively impact our business. Due to these liquidity constraints, our external independent auditors issued reports containing a going concern qualification for the years ended December 31, 2006 and 2005 in their audit reports dated March 31, 2007 and March 20, 2006, respectively. We have pursued alternatives to increase our liquidity and ability to fund working capital. In December 2005, and January and February 2006, holders of warrants issued in connection with the acquisition of MPC transferred such warrants to various other individuals and entities who then exercised those warrants and purchased from us an aggregate of 4,193,267 shares of common stock at a price of $3.00 per share, for gross proceeds before expenses and commissions of $12.6 million. In April 2006, we entered into a private securities purchase agreement with investors for the sale of convertible debentures and warrants that resulted in gross proceeds to us before expenses and commissions of $5 million. In September and October 2006, we completed two private placements of convertible debentures and warrants that resulted in gross proceeds to us before expenses and commissions of $9.4 million. The proceeds of the warrant exercise and the convertible debenture offerings were for working capital and other corporate purposes, and have been almost entirely utilized to satisfy outstanding obligations to suppliers and creditors. The proceeds of the warrant exercise and the convertible debenture offerings are not sufficient to fully address our liquidity constraints, and we are continuing to pursue additional financing sources. We cannot assure you that additional financing will be available on terms acceptable to us, or at all.

 

Our new accounts receivable credit facility with Wells Fargo Business Credit, Inc. (“Wells Fargo”), obtained in November 2006, only provides us with liquidity if Wells Fargo elects, in its sole discretion, to purchase accounts

 

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receivable from MPC. Wells Fargo is not obligated to purchase any accounts receivable from MPC under this arrangement. If we are unable to obtain additional liquidity from third party financing sources, it will be difficult for us to reach profitability, execute on our business plan or continue operations without additional concessions from our creditors, which they may not be willing to provide. Our liquidity constraints negatively affect our business and results of operations. In particular, our liquidity constraints have and will continue to negatively impact our ability to obtain components from suppliers, our ability to retain customers and customer contracts, our ability to satisfy obligations and to sell additional product, our ability to retain key employees and our ability to fund capital expenditures or execute our business strategies, and could result in bankruptcy. Any additional secured debt funding may require approval of Wells Fargo and holders of our convertible debentures, and such approval may not be forthcoming.

 

As of March 31, 2007, we have unrestricted cash of $1.5 million. Our restricted cash at March 31, 2007, includes $1.5 million held as collateral under our receivables financing facility, and $2.9 million held as collateral for outstanding letters of credit.

 

We have failed to satisfy an AMEX listing requirement and may be delisted from the AMEX.

 

On April 14, 2006, we received a notice from the AMEX that we have failed to satisfy a continued listing rule. The notice was based on AMEX’s review of our Form 10-KSB for the fiscal year ended December 31, 2005, which included an audit opinion containing a going-concern qualification. The notice states that we are not in compliance with the AMEX Company Guide in that we have sustained losses which are so substantial in relation to our overall operations or our existing financial resources, or our financial condition has become so impaired that it appears questionable, in the opinion of the AMEX, as to whether we will be able to continue operations and/or meet our obligations as they mature. As required by the AMEX notice, we submitted a plan advising of the action we have taken, or will take that will bring us into compliance with the listing standards.

 

On June 15, 2006, we announced that the AMEX accepted our plan for regaining compliance with the continued listing standards and granted us an extension to June 30, 2006, to regain compliance with continued listing standards. We did not meet all of the continued listing standards by the target date of June 30, 2006, and requested a further extension. We met with the AMEX on December 12, 2006, and discussed our financial projections and progress on the plan we submitted to the AMEX in April 2006. We again requested an extension to regain compliance. On January 26, 2007, the AMEX notified us that, although we remain out of compliance with certain of AMEX’S continued listing standards, we have demonstrated an ability to regain compliance with the continued listing standards. Accordingly, the AMEX agreed to grant us an extension to May 31, 2007 (“Revised Plan Period”) to become compliant with AMEX’S continued listing standards.

 

During the Revised Plan Period, we must provide monthly updates to the AMEX. These updates must include any significant corporate developments completed by us, as well as an assessment regarding our status as it relates to a potential bankruptcy filing. In addition, we must provide information concerning current cash balances, profit/loss statements and accounts payable updates, which include a list and aging of all outstanding payables, as well as whether any venders have suspended services due to lack of payment or other reason. AMEX will review us periodically to assess our progress. If we do not show progress consistent with the plan to regain compliance with continued listing standards, AMEX will review the circumstances and may immediately commence delisting proceedings. Additionally, AMEX is authorized to initiate immediate delisting proceedings as appropriate in the public interest, notwithstanding the grant of the extension through the Revised Plan Period.

 

Our ability to regain compliance with the continued listing standards will be substantially dependent on our ability to complete additional financing and/or operating initiatives, of which there is no assurance. There can be no assurance that we will be able to continue our listing on the AMEX. If we are unable to continue our listing on the AMEX, the value of your investment could be substantially reduced.

 

Under our accounts receivable credit facility, Wells Fargo is not obligated to purchase from us any accounts that it deems unacceptable in its sole discretion, and Wells Fargo is not required to purchase any minimum amount of accounts. If we default in our obligations under the facility, Wells Fargo could exercise several remedies and our assets will be subject to foreclosure, and we maybe forced to declare bankruptcy.

 

On November 16, 2006, we entered into an agreement with Wells Fargo for a Receivables Advance Facility that replaced our existing line of credit with Wachovia Capital Finance Corporation (Western) (“Wachovia”). We have unconditionally agreed to guarantee any and all payment obligations of MPC incurred under the facility.

 

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Under the Receivables Advance Facility, MPC may assign to Wells Fargo, and Wells Fargo may purchase from MPC, certain accounts receivable. Wells Fargo will advance to MPC a percentage of the value of the purchased accounts. The Receivables Advance Facility provides MPC with liquidity only to the extent that MPC is able to generate accounts receivable from its operations, and do not provide for borrowing by MPC against the value of its other assets. Additionally, Wells Fargo has the right to require that MPC repurchase the purchased accounts in the event MPC’s customer does not pay the accounts within specified timeframes, if a material customer dispute arises, or in the event of a default under the Receivables Advance Facility. Wells Fargo has discretion as to the percentage advanced to MPC against any accounts. Wells Fargo is not obligated to purchase any accounts from MPC that Wells Fargo deems unacceptable in its sole discretion, and it is not required to purchase any minimum amount of accounts receivable from MPC. Because of Wells Fargo’s discretion pursuant to the terms of the Receivables Advance Facility and because borrowing is available only against accounts receivable generated from MPC’s operations, we cannot assure you of the amount of liquidity, if any, that will be available to us from Wells Fargo.

 

The Receivables Advance Facility with Wells Fargo is secured by substantially all of MPC’s assets. In the event MPC defaults, our assets will be subject to foreclosure. Additionally, Wells Fargo has several additional remedies for default, including acceleration of MPC’s payment obligations and discontinuation of the purchase of accounts receivable. If, in the event of a default by MPC, Wells Fargo forecloses under the Receivables Advance Facility, we may be forced to declare bankruptcy and you will likely lose the entire value of your investment.

 

We have incurred substantial losses in the past and may incur losses in the future if we do not achieve revenue growth, gross margin improvement or a reduction of operating expenses as a percentage of revenues or a combination of the foregoing. Any future losses could decrease our ability to effectively operate the business, obtain additional liquidity and cause our stock price to decrease significantly, and could result in bankruptcy.

 

In 2005 and 2004, as stand-alone entities, we (under the name HyperSpace Communications) incurred net losses of $7.5 million and $3.2 million respectively, and MPC incurred net losses of $21.0 million and $6.2 million. In 2006, the combined company incurred a net loss of $58.7 million. Our loss during 2006 was partially the result of an approximately 22% decline in net sales compared to 2005 on a proforma basis, in part attributable to our liquidity constraints, competition, and decreased sales to several large federal agencies, along with a net increase in other income and expense of approximately $7 million, compared to 2005. Our gross margin in 2006 has also declined compared to comparable periods in 2005. Our HyperSpace software product line has declined significantly in sales, and we do not expect material sales of these products in the future. Net sales and gross margin may continue to decline. While we have reduced certain operating expenses, the reductions may not be sufficient to reach profitability. We will incur losses in the future if we do not achieve revenue growth, gross margin improvement or a reduction of operating expenses or a combination of the foregoing. Future losses raise doubts about our ability to achieve profitability, which could decrease our ability to effectively operate the business, obtain additional liquidity and result in a significant decrease in the price of our securities, and could result in bankruptcy.

 

If net sales continue to decline and we are unable to further reduce expenses, we will not have sufficient cash flow and, under those circumstances, we will need additional capital to continue operations and to execute on our business plan. Such additional capital may not be available and you could lose the entire value of your investment.

 

On a proforma basis, sales declined significantly in 2005 compared to 2004, and in 2006 compared to 2005. If net sales continue to decline and we are unable to make further reductions in expenses, we will not be able to fund our operations from cash generated by our business. Because of competitive pressures, the impacts of our liquidity constraints, generally declining average sales prices on many of our products, and other factors, it is probable that our revenues will continue to decline. We have principally financed our operations through the private placement of shares of common and preferred stock, debt and an IPO and MPC has financed its operations through internally-generated cash through credit facilities, with limited additional borrowing availability. If we fail to generate sufficient net sales and cash flow to fund operations, our ability to increase sales will be severely limited and we will not be able to operate effectively unless we are able to obtain additional capital through equity or debt financings. Such additional capital may not be available and you could lose the entire value of your investment.

 

We have had limited success in raising capital to address our liquidity needs in the past and may not be able to successfully raise capital in the future. If we are unable to raise additional funding, we will not be able to effectively operate the business, and you could lose the entire value of your investment.

 

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Historically, we have financed our operations through private placements of equity securities, convertible debt, loans from our founder and other Board members, short-term loans, a line of credit and $7.1 million in net proceeds from our IPO. Under its prior ownership before the merger, MPC made several unsuccessful attempts to raise additional capital to address its liquidity needs. Subsequent to the merger, we have made several attempts to raise additional capital. Except for funds raised though the exercise of warrants in late 2005 and early 2006 and the private placement of convertible debentures in April, September and October 2006, these attempts have also been unsuccessful. We may not be successful in future attempts to raise additional capital. If we are not able to raise additional capital to address our liquidity needs, we will not be able to effectively operate the business and you could lose the entire value of your investment.

 

Raising additional capital may substantially dilute existing shareholders.

 

If we are able to raise additional funds through the sale of equity or convertible securities, the financing likely will cause a significant dilution of the ownership percentage of existing shareholders.

 

We are required to account for certain of our convertible debentures as derivative financial instruments, which could have a significant positive or negative impact on our future earnings.

 

We issued convertible debentures during 2006 that require accounting for certain elements of such debentures as derivative financial instruments. In accordance with accounting principles generally accepted in the United States, we must re-measure these financial instruments at each reporting period. Changes in the fair market value of these financial instruments are required to be recognized in earnings. The calculation of the fair market value of these financial instruments contains significant management estimates, and as a result a positive or negative impact on our future earnings could be significant.

 

We face intense competition from the leading PC manufacturing companies in the world as well as from other hardware and information technology service companies. If we are unable to compete effectively, we may not be able to achieve sufficient market penetration to achieve and sustain profitability.

 

The PC industry is highly competitive and is characterized by aggressive pricing by several large branded and numerous generic competitors, short product life cycles, declining year-on-year average sale prices for personal computers and price sensitivity by customers. Our most significant PC hardware competitors, Dell, Gateway, Hewlett-Packard, and Lenovo, have substantially greater market presence and greater financial, technical, sales and marketing, manufacturing, distribution and other resources, longer operating histories, greater name recognition and a broader offering of products and services. Competitors for server and storage products include Rackable Systems, EMC and NetApp, which have greater market presence, technical resources and a broader offering of servers and storage products than we do. Many of our competitors also have greater resources to acquire and launch new products and technologies. Many of our competitors who are internationally based or manufacture offshore enjoy lower labor costs. Many of our competitors have greater resources to devote to the development, promotion and sale of products than we do and, as a result, are able to offer products and services that provide significant price or other advantages over those offered by us.

 

We do not attempt to compete on price alone, rather we compete primarily on the basis of:

 

      customer service, warranty and support;

      features and functionality of our products;

      product customization;

      product performance;

      product quality and reliability; and

      maintaining customer and supplier relationships.

 

To the extent we are unable to compete successfully in any of the foregoing categories, our revenue and business prospects will be affected adversely. We expect competitive pressures to continue into the foreseeable future, particularly as various competitors have from time to time announced intentions to expand their market share through price reductions. In recent periods, we have lost sales opportunities due to competitors proposing prices at levels that we are unable to match. We expect that average sales prices for PCs will continue to decline. If we continue to reduce PC prices in response to competition, are unable to reduce our overall cost structure at the same rate or greater than our declining average selling prices, or are unable to diversify into higher margin areas such as

 

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storage and servers, we will be unable to maintain or improve gross margins which will also affect liquidity and cash flows.

 

We intend to reduce our historical dependence on desktops and laptops, and shift our efforts to server and storage products, but we have not yet fully implemented this strategy and we may not be successful. We may not reach profitability if we do not meet our sales expectations or if our product mix and service offerings are substantially different than anticipated.

 

Our realized profit margins vary among our products and services offered and in 2006 and 2005, our gross margin earned was insufficient to cover all of our operating expenses. We intend to attempt to reduce our historical dependence on desktops and laptops and shift our development and sales efforts toward higher margin server and storage products. We have not yet fully implemented this strategy and we cannot assure you that we will be successful in making the shift or that any such shift will result in higher margins or profitability. If our mix of products and services is substantially different from what we anticipate in any particular period, our earnings could be less than expected. If we are unable to increase sales of higher margin products, including storage and servers, or if margins continue to decline in the current products we offer, our results of operations and financial condition will be adversely affected.

 

We have several large customers who represent a significant portion of our net sales. If we were to lose or experience a substantial decline in sales to one or more of these customers, our net sales may decline substantially.

 

Historically, MPC has derived a substantial portion of its net sales from various agencies within the US federal government, including agencies within the Department of Defense and civilian departments, as well as state and local government and educational customers. For the fiscal year ended December 31, 2006, MPC derived 39% of its net sales from agencies of the federal government. We expect to continue to derive a substantial portion of our net sales from these markets for the foreseeable future. Our sales to these customers may not continue in future periods. In 2006, we experienced declines in sales to most agencies within the US Federal Government compared to 2005, due in part to our ongoing liquidity constraints.

 

We are currently working to diversify our customer base by marketing our products to other agencies within the federal government and other customers within the state and local government and educational and mid-market enterprise markets. We may not be able to achieve a sufficient level of customer diversification to mitigate the risks associated with high customer concentration in the federal government market.

 

Our sales to federal government customers may continue to decline.

 

Historically, our sales to federal government customers have constituted a substantial portion of our revenue. Our net sales to federal government customers were $111 million and $159 million in 2006 and 2005, respectively. Federal sales may continue to decline because of a number of factors, including an increasing reliance by the federal government on “bulk buys”, where initial purchase price constitutes a primary factor in the purchase decision.

 

Our business plans are substantially dependent on our ability to improve gross margin, and there can be no assurance that we will be able to achieve this objective.

 

Success in our restructuring plans is substantially dependent on our ability to improve gross margin. Our gross margin for the three months ended March 31, 2007 declined to 11.6% from 12.2% for the same period in 2006. We have several initiatives to improve gross margin, but there can be no assurance that these initiatives will be successful. Our plans are dependant upon our ability to get such customers to purchase higher margin products, such as servers and storage, which historically have constituted a relatively small portion of our business. There is no assurance we will be successful with the initiatives

 

We rely on third party suppliers to provide critical components of our products, some of which are available from only one source. If our suppliers were unable to meet our demands or fail to deliver supplies because of our inability to meet payment terms, and alternative sources were not available, we could experience manufacturing interruptions, delays or inefficiencies.

 

We require a high volume of quality products and components for our product offerings, substantially all of which we obtain from outside suppliers. For example, we rely on Intel for its processors and motherboards and Microsoft

 

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for our operating systems and other software on our computer systems. We also procure a number of components from international suppliers, particularly from Asia. This carries potential political and foreign currency risk. We maintain several single-source supplier relationships primarily to increase our purchasing power with these suppliers. A few suppliers have sued us in attempts to collect past due amounts. If shortages or delays arise, the prices of these components may increase or the components may not be available at all. We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products to meet customer demand, which could adversely affect our business and financial results. We currently do not have long-term supply contracts with any of our suppliers that would require them to supply products to us for any specific period or in any specific quantities, which could result in shortages or delays.

 

Additionally, there are significant risks associated with our reliance on these third party suppliers, including:

 

      potential price increases, in particular, those that we may not be able to pass on to our customers;

      inability to achieve price decreases in our component costs;

      inability of suppliers to increase production and achieve acceptable product yields on a timely basis;

      delays caused by work stoppages or other disruptions related to the transport of components;

      reduced control over delivery schedules, including unexpected delays and disruptions;

      reduced control over product quality; and

      changes in credit terms provided to us.

 

Any of these factors could curtail, delay or impede our ability to deliver our products and meet customer demand.

 

Due to our limited liquidity, we have extended payment to many of our suppliers significantly beyond normal payment terms. We work diligently with suppliers to address concerns regarding late payments, and generally work to maintain good working relationships with key suppliers. In some instances, suppliers have placed us on credit hold, which has delayed delivery of components to our manufacturing facility while the issues are resolved. We have received notices of default from suppliers including Microsoft, but are attempting to manage the supplier relationships to the extent possible within the limits of our liquidity constraints. We may not be able to continue to do so. If we cannot obtain additional sources of liquidity, late payments to suppliers will recur, jeopardizing relationships and causing suppliers to stop working with us or to sell their products to our customers by other channels. Further, recurring late payments will result in additional credit holds, refusal to deliver components or termination of supply arrangements, any of which will have a material adverse effect on our financial condition or results of operations.

 

We are substantially dependent on the willingness of our suppliers to continue to provide credit terms. A decision by suppliers to reduce or terminate credit lines would have a material negative impact on our business, or could result in bankruptcy.

 

Because of our liquidity constraints, we have been significantly late in paying many of our suppliers. We endeavor to maintain strong relationships with the suppliers, but some suppliers have elected to reduce or eliminate credit terms. If suppliers continue to reduce or eliminate credit terms, we may be unable to continue to obtain necessary components and services in a timely fashion, or at all, which would have a material adverse affect on our business and our ability to continue operations, and could result in our bankruptcy

 

Our liquidity constraints have resulted in a delay in delivery of components to our factory and delivery products to our customers. Delayed orders could negatively impact our relations with our customers and could result in cancellation of orders.

 

Because of our liquidity constraints, some of our suppliers have delayed delivery of components to our facility pending resolution of payment issues. As a result, some of our deliveries to customers have been delayed. Continued delay in delivery of products could negatively impact our customer relationships and result in decreased sales. Additionally, customers may elect to cancel late orders.

 

If governmental agencies consolidate their purchasing, we may not be able to sell products to our customers at historic levels, which could have an adverse impact on our financial condition.

 

While federal agencies have tended to purchase on a decentralized basis, several government customers such as the Air Force and the IRS have begun to centralize their purchasing power and aggregate agency-wide PC requirements to award contracts to a single vendor. It is not clear whether this trend will expand to other agencies. Because of the

 

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highly competitive nature of large order opportunities, we are often unable to successfully compete for these opportunities while maintaining sufficient gross margins. If consolidation of purchasing by our governmental customers at the agency level continues, it will likely result in lost sales or sales that would not meet our margin expectations

 

Our contracts with governmental agencies make it difficult to accurately predict our future net sales and government customers may elect not to continue or extend contracts with us. Additionally, some of our historic subcontractors could elect to sell their products directly to the government or utilize other partners.

 

Our contracts with the federal, state and local governments do not guarantee any level of sales. These contracts merely authorize the sale of our products to various agencies within the government and are characterized as indefinite delivery/indefinite quantity contracts. Accordingly, our customers within the public sector may choose not to continue purchasing our products. The uncertainties related to seasonality of government purchases based on budgetary cycles, future contract performance costs, product life cycles, quantities to be shipped and delivery dates, among other factors, make it difficult to predict the future sales and profits, if any, which may result from such contracts. Our government customers may elect not to continue or extend their contracts with us. Changes in budgetary priorities, modifications, curtailments or terminations, or the failure to renew government contracts, may have a material adverse effect on our financial condition or results of operations in the future. The seasonality and the unpredictability of our public sector customers make our quarterly and yearly financial results difficult to predict and subjects them to significant fluctuation. Furthermore, because we are a prime contractor with the US Government, certain other suppliers act as subcontractors and partner with us to sell their products to the customers. We have been slow in paying subcontractors in connection with our sales of their products. As a result, these subcontractors could seek to sell directly to such agencies or utilize other partners. Additionally, some agencies are utilizing Dunn & Bradstreet or similar credit reports in evaluating proposals to obtain or renew contracts, and these reports on us are negatively impacted by our liquidity constraints.

 

Compliance with government contract provisions is subject to periodic audit, and noncompliance with contract terms could result in contract termination, substantial monetary fines and damages, suspension or debarment from doing business with the government and other civil or criminal liability. Additionally, government contracts are terminable at the government’s convenience or upon default.

 

Compliance with government contract provisions is subject to periodic audit. Noncompliance with such contract provisions and government procurement regulations could result in termination of our government contracts, substantial monetary fines or damages, suspension or debarment from doing business with the government and civil or criminal liability. During the term of any suspension or debarment by any government agency, we could be prohibited from competing for or being awarded any contract or order. In addition, substantially all of our government contracts are terminable at any time at the government’s convenience or upon default. Upon termination of a government contract for default, the government may also seek to recover from the defaulting contractor the increased costs of procuring the specified goods and services from a different contractor.

 

The estimated cost of providing a product warranty is recorded at the time net sales are recognized, and if actual failure rates exceed the estimates, revisions to the estimated warranty liability would be required and could negatively affect earnings in the period that the adjustments are made.

 

We provide warranties with the sale of most of our products. The estimated cost of providing the product warranty is recorded at the time net sales is recognized based on its historical experience. Estimated warranty costs are affected by ongoing product failure rates, specific product class failures outside of experience and material usage and service delivery costs incurred in correcting a product failure or in providing customer support. If actual product failure rates, material usage or service delivery costs exceed the estimates, revisions to the estimated warranty liability would be required and could negatively affect earnings in the period the adjustments are made. Actual financial claims for defects may be larger than expected and accrued warranty reserves.

 

You cannot rely on past operating results and our future operating results will likely fluctuate.

 

Our past results prior to July 2005 do not include the results of MPC Computers, LLC. Our past results should not be relied upon as an indicator of our future performance. MPC’s operating results have varied greatly in the past and likely will vary in the future depending upon a number of factors including the successful execution of our new business strategies. This initiative entails entering new markets, developing new product and service offerings and

 

Page- 35 -

 



 

pursuing new customers many of these factors are beyond our control. Our revenues, gross margins and operating results may fluctuate significantly due to, among other things:

 

      shortages and delays in delivery of critical components, including components from foreign suppliers;

      competition;

      ability to timely pay our suppliers;

      business and economic conditions overall and in our markets;

      seasonality in the timing and amount of orders we receive from our customers that may be tied to budgetary cycles, product plans or equipment rollout schedules;

      cancellations or delays of customer product orders, or the loss of a significant customer;

      an increase in operating expenses;

      new product announcements or introductions;

      our ability to develop, introduce and market new products and product enhancements on a timely basis, if at all;

      the sales volume, the timing of component purchases for product assembly, product configuration and mix of products;

      technological changes in the market for our products; and

      reductions in the average selling prices that we are able to charge to our customers due to competition or other factors.

 

Due to these and other factors, our net sales may not increase or even remain at their current levels. Because a majority of our operating expenses are fixed in the short-term, a small variation in our net sales can cause significant variations in our earnings from quarter to quarter and our operating results may vary significantly in future periods. Therefore, our historical results may not be a reliable indicator of our future performance.

 

Claims that we are infringing upon intellectual property rights of third parties could subject us to significant litigation and licensing expenses, or prevent us from selling ours products. Because of our liquidity constraints, a significant intellectual property claim or litigation could have a material negative impact our business and ability to continue operations or result in bankruptcy.

 

From time to time, other companies and individuals assert patent, copyright, trademark or intellectual property rights to technologies or marks that are important to the technology industry in general or to our business in particular. Any litigation or other dispute resolution regarding patents or other intellectual property could be time-consuming and expensive, and divert our management and other key personnel from business operations. In some cases, we may be able to seek indemnification from suppliers of allegedly infringing components, but we cannot assure you that suppliers would agree to provide indemnification or be financially capable of covering potential damages or expenses. The complexity of technology and the uncertainty of intellectual property litigation increase the risks and potential costs associated with intellectual property infringement claims. Additionally, many of our competitors have significantly larger patent portfolios, which may increase the probability that claims will be asserted against us and decrease our ability to defend such claims. Claims of intellectual property infringement might also require us to enter into license agreements with costly royalty obligations, payments for past infringement or other unfavorable terms. If we are unable to obtain royalty or license agreements on terms acceptable to us then we may be subject to significant damages or injunctions against the development and sale of certain products. Because of our liquidity constraints, a significant intellectual property claim or litigation, including a claim or litigation with Adams, (See Part II, Item 1 – “Legal Proceedings”), could have a material impact on our ability to maintain the operations of the business or could result in bankruptcy.

 

Our business success may be dependent on our ability to obtain licenses to intellectual property developed by others on commercially reasonable and competitive terms.

 

Our product offerings are dependent upon obtaining patent and other intellectual property rights from third parties. We may not continue to have access to existing or new third party technology for use in our products. It may be necessary in the future to seek or renew licenses relating to various aspects of our products and business methods. However, the necessary licenses may not be available on acceptable terms and obtaining licenses could be costly. If we or our suppliers are unable to obtain such licenses, we may be forced to market products without certain desirable technological features. We could also incur substantial costs to redesign our products around other parties’ protected technology. Because of our liquidity constraints, we may not be able to acquire necessary licenses or pay the costs to redesign our products.

 

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We rely primarily on our direct sales force to generate revenues, and may be unable to hire additional qualified sales personnel in a timely manner or retain our existing sales representatives.

 

To date, we have relied primarily on our direct sales force to sell our products. This sales force has developed close relationships with our customers. The competition for qualified sales personnel in our industry is very intense. If we are unable to retain our existing sales personnel or replace any professionals who leave, we may not be able to maintain or grow or maintain our current level of revenues.

 

General economic, business or industry conditions may adversely affect our future operating results and financial condition.

 

Weak economic conditions in the United States may adversely affect our product sales. If general economic and industry conditions deteriorate, customers or potential customers could reduce their technology investments and demand for our products and services could be adversely affected. For example, reductions in state and local budgets as a result of weak economic conditions have adversely affected MPC’s sales to many of its customers in the public sector.

 

Our inability to properly anticipate customer demand or effectively manage our supply chain could result in higher or lower inventory levels that could adversely affect our operating results and our balance sheet.

 

By distributing products directly to our customers and employing “just-in-time” supply chain management techniques, we have historically been able to avoid the need to maintain high levels of finished goods and component inventory as compared to other manufacturers who do not sell directly to end users and employ just-in-time manufacturing techniques. This has minimized costs and allowed us to respond more quickly to changing customer demands, reducing our exposure to the risk of product obsolescence. However, customer concentration, seasonality within our business and changing demands may all result in our inability to properly anticipate customer demand that could result in excess or insufficient inventory of certain products. In addition, we maintain certain component products in inventory. A decrease in market demand or a decision to increase supply, among other factors, could result in higher finished goods and component inventory levels and a decrease in value of this inventory could have a negative effect on our results of operations and our balance sheet. Further, while we have generally been able to effectively manage our supply chain in the past, we may not be able to continue to do so, which could have a similar adverse effect on our results of operations. Our liquidity constraints make it difficult to effectively employ our “just-in-time” supply chain management techniques because delayed payment to suppliers may result in delayed delivery of components.

 

Failure of any portion of our infrastructure at our sole manufacturing facility could have a material adverse effect on our business.

 

We are highly dependent on our manufacturing infrastructure to achieve our business objectives. If we experience a problem that impairs our manufacturing infrastructure, such as a computer virus, intentional disruption of IT systems by a third party, a work stoppage, or manufacturing failure, including the occurrence of a natural disaster which affects our sole manufacturing facility in Nampa, Idaho, the resulting disruptions could impede our ability to book or process orders, manufacture and ship in a timely manner or otherwise carry on our business in the ordinary course. Any such events could cause us to lose significant customers or net sales and could require us to incur significant expense to eliminate these problems and address related security concerns. Further, because of the seasonality of our business, the potential adverse effect resulting from any such events or any other disruption to our business could be accentuated if it occurs during a disproportionately heavy demand or shipping cycle during any fiscal year period.

 

Our failure to effectively manage product migration and increasingly short product life cycles may directly affect the demand for our products and our profitability.

 

Our business model depends on being able to anticipate changing customer demands and effectively manage the migration from one product to another. Our industry is characterized by rapid changes in technology and customer preferences, which result in the frequent introduction of new products, short product life cycles and continual improvement in product price for performance characteristics. Product migrations present some of the greatest challenges and risks for any technology company. We work closely with customers, product and component suppliers and other technology developers to evaluate the latest developments in products. The success of our product introductions depends on many factors including the availability of new products, access to and rights to use

 

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proprietary technology, successful quality control and training of sales and support personnel. Furthermore, it is difficult to accurately forecast customer preferences, demands or market trends or transitions. Even if we are successful in developing or transitioning to new or enhanced products or techniques, they may not be accepted by customers or we may not be able to produce them on a timely basis, or at all. Accordingly, if we are unable to effectively manage a product migration, our business and results of operations could be negatively affected.

 

If defects are discovered in our products after shipment, we could incur additional costs.

 

Our products may contain undetected defects. Discovery of the defects may occur after shipment, resulting in a loss of or delay in market acceptance, which could reduce our product sales and net sales. In addition, these defects could result in claims by customers for damages against us. Any damage claim could distract management’s attention from operating our business and, if successful, result in significant losses that might not be covered by our insurance. Even if such a claim were to prove unsuccessful, it could cause harm to our reputation and goodwill and could damage our relationship with actual and potential customers.

 

If we lose the services of one or more members of our executive management team or other key employees, we may not be able to execute our business strategy.

 

Our future success depends in large part upon the continued service of our executive management team and other key employees. The loss of services of any one or more members of our executive management team or other key employees could seriously harm our business. In recent months we have experienced greater turnover in personnel than we have historically experienced and several of our executive officers have terminated their employment with us or resigned. The inability to quickly replace necessary personnel with qualified employees could harm our business. It is possible that our liquidity constraints, or continued declines in sales, may cause our management and employees to pursue other opportunities and we may not be able to replace them with qualified employees.

 

If we are unable to attract and retain qualified personnel, our ability to develop and successfully market our products could be harmed and our growth could be limited.

 

We believe that our success depends largely on the talents and efforts of highly skilled individuals. As a result, our future success is dependent on our ability to identify, attract, retain and motivate highly skilled research and development, sales and marketing, finance and customer service and support personnel. Any of our current employees may terminate their employment at any time. The loss of any of our key employees or our inability to attract or retain qualified personnel could delay the development and introduction of, and harm our ability to sell, our products. Competition for hiring individuals with the skills applicable to our business is intense. We may not be able to hire or retain the personnel necessary to execute our business plan.

 

Our recent restructuring actions will place additional workload and responsibility on continuing employees and it is possible that some employees will pursue other opportunities.

 

In 2006, we completed a restructuring program that included a reduction in employee headcount. The reduction in employees has placed additional workload and responsibility on continuing employees, and it is possible that some employees will elect to pursue other employment opportunities. The loss of key employees could have a material negative impact on our business. The reductions included some sales management and personnel, and it is possible that such reductions could negatively impact our sales.

 

Any acquisitions we make could result in dilution to our existing shareholders and could be difficult to integrate, which could cause difficulties in managing our business, resulting in a decrease in the value of your investment.

 

Evaluating acquisition targets is difficult and acquiring other businesses involves risk. Our completion of the acquisition of other businesses would subject us to a number of risks, including the following:

 

      difficulty in integrating the acquired operations and retaining acquired personnel;

      limitations on our ability to retain acquired sales and distribution channels and customers;

      diversion of management’s attention and disruption of our ongoing business; and

      limitations on our ability to incorporate acquired technology and rights into our product and service offerings and maintain uniform standards, controls, procedures and policies.

 

 

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Furthermore, we may incur indebtedness or issue equity securities to pay for future acquisitions. The issuance of equity or convertible debt securities would be dilutive to our then existing shareholders. We would need approval from Wells Fargo under our credit facility in order to issue additional debt. We are also prohibited from incurring additional debt in certain circumstances under our September 2006 Convertible Debentures. There can be no assurance we would obtain such approvals.

 

Risks Relating To Our Securities

 

We may incur significant liquidated damages and could default on our convertible debentures if we do not register shares of common stock held by certain of our security holders.

 

We are obligated to register shares of common stock underlying the convertible debentures and warrants that we sold in September and October 2006 private placements.  We filed the registration statement with the SEC on November 8, 2006 and amendments to the registration statement on January 12, 2007 and April 9, 2007, but due to the large number of shares of common stock being registered relative to the number of shares of our common stock currently outstanding, and the large number of shares of common stock that underlie convertible securities, we have encountered significant difficulties in having the registration statement declared effective. The registration statement is not yet effective and we cannot predict when, if ever, it will be declared effective by the SEC. As a result, we are currently accruing significant liquidated damages.  These liquidated damages will continue to accrue until an effective registration statement is in place.  Additionally, an event of default may occur under the convertible debentures if the registration statement is not effective within 180 days after closing.  Investors who purchased the convertible debentures in September 2006 have agreed to waive the event of default relating to their convertible debentures, but we cannot assure you that they will continue to waive the event of default or that investors who purchased the convertible debentures in October 2006 will waive an event of default relating to their convertible debentures.  We do not know when, or if, the SEC will declare the registration statement effective and continued accrual and subsequent payment of liquidated damages, and/or an event of default under the convertible debentures, could have a material adverse effect on our business and results of operations. 

 

An active trading market for our securities has not developed and the prices of our securities may be volatile.

 

An active sustained trading market for our securities has not yet developed. We do not have any analyst coverage of our securities or any commitments to provide research coverage. Our stock price has been volatile since our IPO and the acquisition of MPC in July 2005 which was privately held. The price at which our securities trade is likely to be highly volatile and may fluctuate substantially due to a number of factors including, but not limited to, those discussed in the other risk factors described above and the following:

 

      volatility in stock market prices and volumes, which is particularly common among smaller capitalized companies;

      lack of research coverage for companies with small public floats;

      failure to achieve sustainable financial performance;

      actual or anticipated fluctuations in our operating results;

      announcements of technological innovations by us or others;

      entry of new or more powerful competitors into our markets or consolidation of existing competitors to create larger, more formidable competitors;

      terrorist attacks either in the US or abroad;

      general stock market conditions; and

      the general state of the US and world economies.

 

Any future sales of our common stock may depress the prices of our securities and negatively affect the value of your investment.

 

Sales of a substantial number of shares of our common stock into the public market, or the perception that these sales could occur, could adversely affect the prices of our securities or could impair our ability to obtain capital through an offering of equity securities.

 

If any of the holders of our common stock opt to sell large blocks of our common stock into the public market, it could depress the price of our securities and make it difficult for us to raise capital through an offering of equity securities. In addition, if a significant number of the holders of our public warrants exercise their warrants and re-

 

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sell the underlying shares of our common stock in a relatively short period of time, the sale of those shares could depress the market price for our common stock.

 

We do not intend to pay dividends and you may not experience a return on investment without selling your securities.

 

We have never declared or paid, nor do we intend in the foreseeable future to declare or pay, any cash dividends on our common stock. Since we intend to retain all future earnings to finance the operation and growth of our business, you will likely need to sell your securities in order to realize a return of or on your investment, if any.

 

Our amended and restated articles of incorporation and bylaws contain provisions that could delay or prevent a change in control even if the change in control would be beneficial to our shareholders.

 

Our amended and restated articles of incorporation and bylaws contain provisions that could delay or prevent a change in control of our company, even one beneficial to our shareholders. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Among other things, these provisions:

 

      authorize the issuance of preferred stock that can be created and issued by the board of directors without prior shareholder approval and deter or prevent a takeover attempt;

      prohibit shareholder action by written consent, thereby requiring all shareholder actions to be taken at a meeting of our shareholders;

      prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of shareholders to elect director candidates;

      provide that our board of directors is divided into three classes, each serving three-year terms; and

      establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by shareholders at shareholder meetings.

 

 

ITEM 6.

EXHIBITS

 

EXHIBIT INDEX

 

Exhibit

 

 

Number

 

Description of Document

2.1

 

Agreement and Plan of Merger, dated as of March 20, 2005 by and among the Registrant, Spud Acquisition Corp., GTG PC Holdings, LLC and GTG-Micron Holding Company, LLC, as amended (1)

 

 

 

2.2

 

Securities Purchase Agreement dated April 24, 2006 (2)

 

 

 

2.3

 

Securities Purchase Agreement dated September 6, 2006 (3)

 

 

 

2.4

 

Securities Purchase Agreement dated September 29, 2006 (4)

 

 

 

3.1

 

Amended and Restated Articles of Incorporation of the Registrant, as amended (5)

 

 

 

3.2

 

Amended and Restated Bylaws of the Registrant, as amended (19)

 

 

 

4.1

 

Specimen common stock certificate (6)

 

 

 

4.2

 

Form of Representative’s Option Agreement for Units (7)

 

 

 

4.3

 

Form of Warrant Agreement (7)

 

 

 

4.4

 

Form of Warrant (8)

 

 

 

4.5

 

2001 Equity Incentive Plan (9)

 

 

 

 

 

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4.6

 

2004 Equity Incentive Plan (10)

 

 

 

4.7

 

Form of Convertible Debenture entered into in connection with Securities Purchase Agreement dated April 24, 2006 (2)

 

 

 

4.8

 

Form of Warrant entered into in connection with Securities Purchase Agreement dated April 24, 2006 (2)

 

 

 

4.9

 

Registration Rights Agreement dated April 24, 2006 entered into in connection with Securities Purchase Agreement dated April 24, 2006 (2)

 

 

 

4.10

 

Form of Lock-up Agreement entered into in connection with Securities Purchase Agreement dated April 24, 2006 (2)

 

 

 

4.11

 

Registration Rights Agreement dated July 25, 2005, as amended December 6, 2006 (11)

 

 

 

4.12

 

Form of $1.10 Warrant (12)

 

 

 

4.13

 

Form of $1.60 Warrant (12)

 

 

 

4.14

 

Form of Convertible Debenture entered into in connection with Securities Purchase Agreement dated September 6, 2006 (3)

 

 

 

4.15

 

Form of Warrant entered into in connection with Securities Purchase Agreement dated September 6, 2006 (3)

 

 

 

4.16

 

Registration Rights Agreement entered into in connection with Securities Purchase Agreement dated September 6, 2006 (3)

 

 

 

4.17

 

Form of Lock-up Agreement entered into in connection with Securities Purchase Agreement dated September 6, 2006 (3)

 

 

 

4.18

 

Form of Convertible Debenture entered into in connection with Securities Purchase Agreement dated September 29, 2006 (4)

 

 

 

4.19

 

Form of Warrant entered into in connection with Securities Purchase Agreement dated September 29, 2006 (4)

 

 

 

4.20

 

Registration Rights Agreement entered into in connection with Securities Purchase Agreement dated September 29, 2006 (4)

 

 

 

4.21

 

Form of Letter Agreement amending and waiving provisions of the Registration Rights Agreement dated September 6, 2006 and Convertible Debentures due September 6, 2009 (20)

 

 

 

10.1

 

Form of Employment Memorandum for certain MPC Computers Officers (13)

 

 

 

10.2

 

Form of Indemnity Agreement with each Director and certain Officers (13)

 

 

 

10.3

 

Management Incentive Plan (14)

 

 

 

10.4

 

Commercial Lease with Micron Technology Inc., dated April 30, 2001, as amended (14)

 

 

 

10.5

 

Employment Agreement between HyperSpace Communications, Inc. and John P. Yeros dated as of September 28, 2005, as amended on September 6, 2006 (15)

 

 

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10.6

 

Employment Agreement between HyperSpace Communications, Inc. and Michael R. Whyte dated as of October 12, 2006 (16)

 

 

 

10.7

 

Employment Agreement between MPC Corporation and Curtis M. Akey dated as of April 16, 2007 (21)

 

 

 

10.8

 

Account Purchase Agreement dated November 16, 2006 between Wells Fargo and MPC Computers, LLC (18)

 

 

 

10.9

 

Account Purchase Agreement dated November 16, 2006 between Wells Fargo and MPC-G, LLC (18)

 

 

 

10.10

 

Account Purchase Agreement dated November 16, 2006 between Wells Fargo and MPC Solution Sales, LLC (18)

 

 

 

10.11

 

Cross-Collateral and Cross Default Agreement dated November 16, 2006 (18)

 

 

 

10.12

 

Guaranty by Corporation dated November 16, 2006 by HyperSpace Communications, Inc. for the benefit of Wells Fargo Bank. (18)

 

 

 

10.13

 

Guaranty by Corporation dated November 16, 2006 by HyperSpace Communications, Inc. for the benefit of Wells Fargo Bank. (18)

 

 

 

10.14

 

Guaranty by Corporation dated November 16, 2006 by HyperSpace Communications, Inc. for the benefit of Wells Fargo Bank. (18)

 

 

 

31.1*

 

Certification of the Chairman and Chief Executive Officer of MPC Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*

 

Certification of the Chief Financial Officer of MPC Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1**

 

Certification of the Chairman and Chief Executive Officer of MPC Corporation, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2**

 

Certification of the Chief Financial Officer of MPC Corporation, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

* Filed herewith.

** Furnished herewith.

 

 

 

(1) Incorporated by reference to Exhibit No. 2.1 to the Registrant’s Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on March 25, 2005 and on Form 8-K, filed on May 16, 2005 and July 12, 2005.

 

 

 

(2) Incorporated by reference to Exhibits 2.1, 4.1, 4.2, 4.3, and 4,4 respectively, on Form 8K, filed with the Securities and Exchange Commission on April 28, 2006.

 

(3) Incorporated by reference to Exhibits 2.1, 4.1, 4.2, 4.3, 4.4, and 99.2 respectively, on Form 8K, filed with the Securities and Exchange Commission on September 11, 2006.

 

(4) Incorporated by reference to Exhibits 2.1, 4.1, 4.2 and 4.3 respectively, on Form 8K, filed with the Securities and Exchange Commission on October 5, 2006.

 

(5) Incorporated by reference to Exhibit No. 4.1 to the Registrant’s Report on Form S-3, filed with the

Securities and Exchange Commission on October 6, 2005.

 

 

 

 

 

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(6) Incorporated by reference to Exhibit No. 4.1 to Amendment No. 3 to the Registrant’s Registration

Statement on Form SB-2/A, filed with the Securities and Exchange Commission on July 23, 2004.

 

 

 

(7) Incorporated by reference to Exhibit Nos. 4.7 and 4.8, respectively, to Post-Effective Amendment No. 1

to the Registrant’s Registration Statement on Form SB-2, filed with the Securities and Exchange

Commission on October 1, 2004.

 

 

 

(8) Incorporated by reference to Exhibit No. 4.9 to Amendment No. 7 to the Registrant’s Registration

Statement on Form SB-2, filed with the Securities and Exchange Commission on September 24, 2004.

 

 

 

(9) Incorporated by reference to Exhibit No. 99.1 to the Registrant’s Registration

Statement on Form S8, filed with the Securities and Exchange Commission on July 25, 2005.

 

 

 

(10) Incorporated by reference to Exhibit No. 99.2 on Form S-8, filed with the Securities and

Exchange Commission on July 25, 2005

 

 

 

(11) Incorporated by reference to Exhibits 99.1 and 99.2 on Form 8K, filed with the Securities and Exchange Commission on December 12, 2005.

 

(12) Incorporated by reference to Exhibits 4.1 and 4.2 respectively, on Form 8K, filed with the Securities and Exchange Commission on December 15, 2006.

 

(13) Incorporated by reference to Exhibit 10.4 and 10.5 on Form 10-QSB filed with the Securities and

Exchange Commission on November 14, 2005.

 

(14) Incorporated by reference to Exhibit 10.3 and 10.4, respectively on From 10KSB, filed with the Securities

and Exchange Commission on March 31, 2006.

 

(15) Incorporated by reference to Exhibits 10.1 on Form 8-K, filed with the Securities and Exchange Commission on September 30, 2005 and Exhibit 99.3 on Form 8K, filed with the Securities and Exchange Commission on September 11, 2006, respectively.

 

 

 

(16) Incorporated by reference to Exhibit 99.1 on Form 8K, filed with the Securities and Exchange Commission

on October 12, 2006.

 

 

 

(17) Incorporated by reference to Exhibit 99.1, on Form 8K, filed with the Securities and Exchange Commission on

January 12, 2007.

 

(18) Incorporated by reference to Exhibit Nos. 99.1, 99.2, 99.3, 99.4, 99.5, 99.6, and 99.7, respectively, on Form 8-K, filed with the Securities and Exchange Commission on November 22, 2006.

 

(19) Incorporated by reference to Exhibit 3.1 on Form 8-K filed with the Securities and Exchange Commission on March 29, 2007.

 

(20) Incorporated by reference to Exhibit 4.21 on Form 10-KSB filed with the Securities and Exchange Commission on April 3, 2007.

 

(21) Incorporated by reference to Exhibit 99.1 on Form 8-K filed with the Securities and Exchange Commission on April 18, 2007.

 

 

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

MPC Corporation

 

 

 

 

Date: May 15, 2007

/s/: John P. Yeros

 

John P. Yeros

 

Chairman and CEO

.

 

 

 

Date: May 15, 2007

/s/: Curtis M. Akey

 

Curtis M. Akey

 

Chief Financial Officer

 

 

 

Page- 45 -

 



 

 

 

EXHIBIT INDEX

 

Exhibit

 

 

Number

 

Description of Document

2.1

 

Agreement and Plan of Merger, dated as of March 20, 2005 by and among the Registrant, Spud Acquisition Corp., GTG PC Holdings, LLC and GTG-Micron Holding Company, LLC, as amended (1)

 

 

 

2.2

 

Securities Purchase Agreement dated April 24, 2006 (2)

 

 

 

2.3

 

Securities Purchase Agreement dated September 6, 2006 (3)

 

 

 

2.4

 

Securities Purchase Agreement dated September 29, 2006 (4)

 

 

 

3.1

 

Amended and Restated Articles of Incorporation of the Registrant, as amended (5)

 

 

 

3.2

 

Amended and Restated Bylaws of the Registrant, as amended (19)

 

 

 

4.1

 

Specimen common stock certificate (6)

 

 

 

4.2

 

Form of Representative’s Option Agreement for Units (7)

 

 

 

4.3

 

Form of Warrant Agreement (7)

 

 

 

4.4

 

Form of Warrant (8)

 

 

 

4.5

 

2001 Equity Incentive Plan (9)

 

 

 

4.6

 

2004 Equity Incentive Plan (10)

 

 

 

4.7

 

Form of Convertible Debenture entered into in connection with Securities Purchase Agreement dated April 24, 2006 (2)

 

 

 

4.8

 

Form of Warrant entered into in connection with Securities Purchase Agreement dated April 24, 2006 (2)

 

 

 

4.9

 

Registration Rights Agreement dated April 24, 2006 entered into in connection with Securities Purchase Agreement dated April 24, 2006 (2)

 

 

 

4.10

 

Form of Lock-up Agreement entered into in connection with Securities Purchase Agreement dated April 24, 2006 (2)

 

 

 

4.11

 

Registration Rights Agreement dated July 25, 2005, as amended December 6, 2006 (11)

 

 

 

4.12

 

Form of $1.10 Warrant (12)

 

 

 

4.13

 

Form of $1.60 Warrant (12)

 

 

 

4.14

 

Form of Convertible Debenture entered into in connection with Securities Purchase Agreement dated September 6, 2006 (3)

 

 

 

4.15

 

Form of Warrant entered into in connection with Securities Purchase Agreement dated September 6, 2006 (3)

 

 

 

4.16

 

Registration Rights Agreement entered into in connection with Securities Purchase Agreement dated September 6, 2006 (3)

 

 

Page- 46 -

 



 

 

 

 

 

 

4.17

 

Form of Lock-up Agreement entered into in connection with Securities Purchase Agreement dated September 6, 2006 (3)

 

 

 

4.18

 

Form of Convertible Debenture entered into in connection with Securities Purchase Agreement dated September 29, 2006 (4)

 

 

 

4.19

 

Form of Warrant entered into in connection with Securities Purchase Agreement dated September 29, 2006 (4)

 

 

 

4.20

 

Registration Rights Agreement entered into in connection with Securities Purchase Agreement dated September 29, 2006 (4)

 

 

 

4.21

 

Form of Letter Agreement amending and waiving provisions of the Registration Rights Agreement dated September 6, 2006 and Convertible Debentures due September 6, 2009 (20)

 

 

 

10.1

 

Form of Employment Memorandum for certain MPC Computers Officers (13)

 

 

 

10.2

 

Form of Indemnity Agreement with each Director and certain Officers (13)

 

 

 

10.3

 

Management Incentive Plan (14)

 

 

 

10.4

 

Commercial Lease with Micron Technology Inc., dated April 30, 2001, as amended (14)

 

 

 

10.5

 

Employment Agreement between HyperSpace Communications, Inc. and John P. Yeros dated as of September 28, 2005, as amended on September 6, 2006 (15)

 

 

 

10.6

 

Employment Agreement between HyperSpace Communications, Inc. and Michael R. Whyte dated as of October 12, 2006 (16)

 

 

 

10.7

 

Employment Agreement between MPC Corporation and Curtis M. Akey dated as of April 16, 2007 (21)

 

 

 

10.8

 

Account Purchase Agreement dated November 16, 2006 between Wells Fargo and MPC Computers, LLC (18)

 

 

 

10.9

 

Account Purchase Agreement dated November 16, 2006 between Wells Fargo and MPC-G, LLC (18)

 

 

 

10.10

 

Account Purchase Agreement dated November 16, 2006 between Wells Fargo and MPC Solution Sales, LLC (18)

 

 

 

10.11

 

Cross-Collateral and Cross Default Agreement dated November 16, 2006 (18)

 

 

 

10.12

 

Guaranty by Corporation dated November 16, 2006 by HyperSpace Communications, Inc. for the benefit of Wells Fargo Bank. (18)

 

 

 

10.13

 

Guaranty by Corporation dated November 16, 2006 by HyperSpace Communications, Inc. for the benefit of Wells Fargo Bank. (18)

 

 

 

10.14

 

Guaranty by Corporation dated November 16, 2006 by HyperSpace Communications, Inc. for the benefit of Wells Fargo Bank. (18)

 

 

 

31.1*

 

Certification of the Chairman and Chief Executive Officer of MPC Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

Page- 47 -

 



 

 

 

31.2*

 

Certification of the Chief Financial Officer of MPC Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1**

 

Certification of the Chairman and Chief Executive Officer of MPC Corporation, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2**

 

Certification of the Chief Financial Officer of MPC Corporation, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

* Filed herewith.

** Furnished herewith.

 

 

 

(1) Incorporated by reference to Exhibit No. 2.1 to the Registrant’s Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on March 25, 2005 and on Form 8-K, filed on May 16, 2005 and July 12, 2005.

 

 

 

(2) Incorporated by reference to Exhibits 2.1, 4.1, 4.2, 4.3, and 4,4 respectively, on Form 8K, filed with the Securities and Exchange Commission on April 28, 2006.

 

(3) Incorporated by reference to Exhibits 2.1, 4.1, 4.2, 4.3, 4.4, and 99.2 respectively, on Form 8K, filed with the Securities and Exchange Commission on September 11, 2006.

 

(4) Incorporated by reference to Exhibits 2.1, 4.1, 4.2 and 4.3 respectively, on Form 8K, filed with the Securities and Exchange Commission on October 5, 2006.

 

(5) Incorporated by reference to Exhibit No. 4.1 to the Registrant’s Report on Form S-3, filed with the

Securities and Exchange Commission on October 6, 2005.

 

 

 

(6) Incorporated by reference to Exhibit No. 4.1 to Amendment No. 3 to the Registrant’s Registration

Statement on Form SB-2/A, filed with the Securities and Exchange Commission on July 23, 2004.

 

 

 

(7) Incorporated by reference to Exhibit Nos. 4.7 and 4.8, respectively, to Post-Effective Amendment No. 1

to the Registrant’s Registration Statement on Form SB-2, filed with the Securities and Exchange

Commission on October 1, 2004.

 

 

 

(8) Incorporated by reference to Exhibit No. 4.9 to Amendment No. 7 to the Registrant’s Registration

Statement on Form SB-2, filed with the Securities and Exchange Commission on September 24, 2004.

 

 

 

(9) Incorporated by reference to Exhibit No. 99.1 to the Registrant’s Registration

Statement on Form S8, filed with the Securities and Exchange Commission on July 25, 2005.

 

 

 

(10) Incorporated by reference to Exhibit No. 99.2 on Form S-8, filed with the Securities and

Exchange Commission on July 25, 2005

 

 

 

(11) Incorporated by reference to Exhibits 99.1 and 99.2 on Form 8K, filed with the Securities and Exchange Commission on December 12, 2005.

 

(12) Incorporated by reference to Exhibits 4.1 and 4.2 respectively, on Form 8K, filed with the Securities and Exchange Commission on December 15, 2006.

 

(13) Incorporated by reference to Exhibit 10.4 and 10.5 on Form 10-QSB filed with the Securities and

Exchange Commission on November 14, 2005.

 

(14) Incorporated by reference to Exhibit 10.3 and 10.4, respectively on From 10KSB, filed with the Securities

 

 

Page- 48 -

 



 

 

 

and Exchange Commission on March 31, 2006.

 

(15) Incorporated by reference to Exhibits 10.1 on Form 8-K, filed with the Securities and Exchange Commission on September 30, 2005 and Exhibit 99.3 on Form 8K, filed with the Securities and Exchange Commission on September 11, 2006, respectively.

 

 

 

(16) Incorporated by reference to Exhibit 99.1 on Form 8K, filed with the Securities and Exchange Commission

on October 12, 2006.

 

 

 

(17) Incorporated by reference to Exhibit 99.1, on Form 8K, filed with the Securities and Exchange Commission on

January 12, 2007.

 

(18) Incorporated by reference to Exhibit Nos. 99.1, 99.2, 99.3, 99.4, 99.5, 99.6, and 99.7, respectively, on Form 8-K, filed with the Securities and Exchange Commission on November 22, 2006.

 

(19) Incorporated by reference to Exhibit 3.1 on Form 8-K filed with the Securities and Exchange Commission on March 29, 2007.

 

(20) Incorporated by reference to Exhibit 4.21 on Form 10-KSB filed with the Securities and Exchange Commission on April 3, 2007.

 

(21) Incorporated by reference to Exhibit 99.1 on Form 8-K filed with the Securities and Exchange Commission on April 18, 2007.

 

 

 

Page- 49 -

 

 

 

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