10-Q 1 eagle10qreport.htm FORM 10-Q 10 QSB

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2007

or

[   ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to

Commission File Number 001-15649


EAGLE BROADBAND, INC.

(Exact name of registrant as specified in its charter)


TEXAS
(State or other jurisdiction of incorporation or organization)

76-0494995
(I.R.S. Employer Identification Number)

101 COURAGEOUS DRIVE
LEAGUE CITY, TEXAS 77573
(Address of principal executive offices) (Zip Code)

(281) 538-6000
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [ X ] Yes     [   ] No


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

Large accelerated filer  [   ]   Accelerated filer   [   ]  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     [ X ] No


As of April 16, 2007, the registrant had 28,225,311 shares of common stock outstanding.







EAGLE BROADBAND, INC.
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 2007

TABLE OF CONTENTS


PART I–FINANCIAL INFORMATION

3

 

 

Item 1. Financial Statements

3

 

 

Consolidated Balance Sheets

3

 

 

Consolidated Statements of Operations

4

 

 

Consolidated Statements of Changes in Shareholders’ Equity (Deficit)

5

 

 

Consolidated Statements of Cash Flows

6

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

 

 

Item 4. Controls and Procedures

24

 

 

PART II–OTHER INFORMATION

25

 

 

Item 1. Legal Proceedings

25

 

 

Item 1A. Risk Factors.

25

 

 

Item 6. Exhibits

26




2



PART I–FINANCIAL INFORMATION

Item 1.

Financial Statements.

EAGLE BROADBAND, INC.
CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

February 28, 2007
(Unaudited)

 

August 31, 2006
(Audited)

ASSETS

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

689 

 

3,139 

Accounts receivable, net

 

 

514 

 

 

516 

Inventories

 

 

713 

 

 

734 

Assets held for sale

 

 

― 

 

 

899 

Prepaid expenses

 

 

176 

 

 

322 

Total Current Assets

 

 

2,092 

 

 

5,610 

 

 

 

 

 

 

 

Property and Equipment

 

 

 

 

 

 

Operating equipment

 

 

19,430 

 

 

18,691 

Less:  accumulated depreciation

 

 

(7,754)

 

 

(7,347)

Total Property and Equipment

 

 

11,676 

 

 

11,344 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

 

Deferred costs

 

 

129 

 

 

― 

Goodwill

 

 

4,095 

 

 

4,095 

Contract rights, net

 

 

370 

 

 

389 

Customer relationships, net

 

 

761 

 

 

129 

Other intangible assets, net

 

 

22 

 

 

197 

Total Other Assets

 

 

5,377 

 

 

4,810 

 

 

 

 

 

 

 

Total Assets

 

$

19,145 

 

21,764 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Notes payable & current portion of long-term debt, net of discount

 

$

3,437 

 

3,990 

Accounts payable

 

 

5,905 

 

 

6,147 

Accrued expenses

 

 

2,222 

 

 

1,929 

Accrued expenses – related party

 

 

2,602 

 

 

2,430 

Compound embedded derivative

 

 

1,796 

 

 

1,564 

Deferred revenue

 

 

52 

 

 

163 

Total Current Liabilities

 

 

16,014 

 

 

16,223 

 

 

 

 

 

 

 

Long-Term Liabilities

 

 

 

 

 

 

Long-term debt, net of current portion and discount

 

 

64 

 

 

1,443 

Compound embedded derivative

 

 

2,257 

 

 

2,153 

Warrant liability

 

 

944 

 

 

82 

Total Long-Term Liabilities

 

 

3,265 

 

 

3,678 

 

 

 

 

 

 

 

Total Liabilities

 

 

19,279 

 

 

19,901 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

— 

 

 

 

 

 

 

 

Shareholders’ Equity (Deficit)

 

 

 

 

 

 

Preferred Stock, $0.001 par value, 5,000,000 shares authorized, none issued

 

 

 

— 

Common Stock – $0.001 par value, 350,000,000 shares authorized,

 

 

 

 

 

 

21,890,125 and 12,092,758 issued and outstanding at February 28, 2007 and August 31, 2006, respectively

 

 

22 

 

 

12 

Additional paid in capital

 

 

248,648 

 

 

242,900 

Accumulated deficit

 

 

(248,804)

 

 

(241,049)

Total Shareholders’ Equity (Deficit)

 

 

(134)

 

 

1,863 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity (Deficit)

 

19,145 

 

21,764 


See accompanying notes to consolidated financial statements.




3



EAGLE BROADBAND, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands)

For the three months ended February 28,

 

For the six months
ended February 28,

 

2007

 

2006

 

2007

 

2006

Net Sales

 

 

 

 

 

 

 

 

 

 

 

Structured wiring

$

449 

 

463 

 

881 

 

885 

Broadband services

 

108 

 

 

110 

 

 

245 

 

 

360 

Products

 

313 

 

 

157 

 

 

712 

 

 

779 

Other

 

― 

 

 

40 

 

 

― 

 

 

78 

Total Sales

 

870 

 

 

770 

 

 

1,838 

 

 

2,102 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of Goods Sold

 

 

 

 

 

 

 

 

 

 

 

Direct labor and related costs

 

166 

 

 

200 

 

 

339 

 

 

493 

Products and integration service

 

172 

 

 

(2)

 

 

611 

 

 

254 

Impairment slow moving & obsolete inventory

 

― 

 

 

107 

 

 

― 

 

 

107 

Structured wiring labor and materials

 

444 

 

 

431 

 

 

851 

 

 

720 

Broadband services costs

 

23 

 

 

237 

 

 

44 

 

 

298 

Depreciation and amortization

 

57 

 

 

201 

 

 

115 

 

 

430 

Other manufacturing costs

 

― 

 

 

81 

 

 

― 

 

 

81 

Total Costs of Goods Sold

 

862 

 

 

1,255 

 

 

1,960 

 

 

2,383 

Gross Profit (Loss)

 

 

 

(485)

 

 

(122)

 

 

(281)

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

Salaries and related costs

 

733 

 

 

828 

 

 

1,490 

 

 

1,972 

Advertising and promotion

 

24 

 

 

13 

 

 

79 

 

 

44 

Depreciation and amortization

 

342 

 

 

317 

 

 

508 

 

 

662 

Other support costs

 

1,191 

 

 

1,608 

 

 

2,570 

 

 

2,664 

Research and development

 

78 

 

 

130 

 

 

65 

 

 

234 

Total Operating Expenses

 

2,368 

 

 

2,896 

 

 

4,712 

 

 

5,576 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from Operations

 

(2,360)

 

 

(3,381)

 

 

(4,834)

 

 

(5,857)

 

 

 

 

 

 

 

 

 

 

 

 

Other Income/(Expenses)

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

12 

 

 

12 

Interest expense

 

(998)

 

 

(278)

 

 

(1,693)

 

 

(280)

Derivative income/(expense)

 

(864)

 

 

20 

 

 

(1,023)

 

 

20 

Gain on sale of assets

 

― 

 

 

39 

 

 

― 

 

 

39 

Loss on extinguishment of debt

 

(41)

 

 

― 

 

 

(185)

 

 

― 

Other income/(expense)

 

(32)

 

 

― 

 

 

(32)

 

 

― 

Total Other Income (Expense)

 

(1,934)

 

 

(216)

 

 

(2,921)

 

 

(209)

 

 

 

 

 

 

 

 

 

 

 

 

Loss from Continuing Operations

 

(4,294)

 

 

(3,597)

 

 

(7,755)

 

 

(6,066)

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

― 

 

 

(475)

 

 

― 

 

 

(640)

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

$

(4,294)

 

(4,072)

 

(7,755)

 

(6,706)

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per Common Share:

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

$

(0.21)

 

(0.42)

 

(0.43)

 

(0.72)

Loss from discontinued operations

$

― 

 

(0.05)

 

― 

 

(0.08)

Net loss

$

(0.21)

 

(0.47)

 

(0.43)

 

(0.80)

See accompanying notes to consolidated financial statements.




4



EAGLE BROADBAND, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

(Shares and dollars in thousands)

 

Common Stock

Shares                 Value

 

Preferred Stock

 

Additional Paid in Capital

 

Retained Earnings

 

Total Shareholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity at August 31, 2005

 

8,235 

 

 

— 

 

237,212 

 

(214,116)

 

23,104 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year ended August 31, 2006

 

— 

 

 

— 

 

— 

 

 

— 

 

 

(26,933)

 

 

(26,933)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for services and compensation

 

151 

 

 

— 

 

— 

 

 

244 

 

 

— 

 

 

244 

Stock issued for retirement of debt and accrued liabilities

 

1,060 

 

 

 

— 

 

 

957 

 

 

— 

 

 

958 

Proceeds from sale of common stock, net

 

1,722 

 

 

 

— 

 

 

1,593 

 

 

— 

 

 

1,595 

Stock-based compensation

 

— 

 

 

— 

 

— 

 

 

642 

 

 

— 

 

 

642 

Reclassification of stock payable, net

 

425 

 

 

— 

 

— 

 

 

2,008 

 

 

— 

 

 

2,008 

Incentive shares to Dutchess for note

 

500 

 

 

 

— 

 

 

244 

 

 

— 

 

 

245 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity at August 31, 2006

 

12,093 

 

12 

 

— 

 

242,900 

 

(241,049)

 

1,863 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the six months ended February 28, 2007

 

— 

 

 

— 

 

— 

 

 

— 

 

 

(7,755)

 

 

(7,755)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for services and compensation

 

578 

 

 

 

— 

 

 

330 

 

 

— 

 

 

331 

Stock issued for retirement of debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for asset acquisition

 

1,204 

 

 

 

― 

 

 

637 

 

 

― 

 

 

638 

Proceeds from sale of common stock, net

 

4,131 

 

 

 

— 

 

 

2,296 

 

 

— 

 

 

2,300 

Stock-based compensation

 

— 

 

 

— 

 

— 

 

 

436 

 

 

— 

 

 

436 

Change in derivatives due to conversions

 

— 

 

 

— 

 

— 

 

 

(260)

 

 

— 

 

 

(260)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Deficit at February 28, 2007

 

21,890 

 

22 

 

— 

 

248,648 

 

(248,804)

 

(134)

See accompanying notes to consolidated financial statements.




5



EAGLE BROADBAND, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(Dollars in thousands)

 

For the six months
ended February 28,

 

 

2007

 

2006

Cash Flows from Operating Activities

 

 

 

 

 

 

Net Loss

 

$

(7,755)

 

(6,706)

 

 

 

 

 

 

 

Adjustments to Reconcile Net Loss to Net Cash

 

 

 

 

 

 

Stock option and warrant expense

 

 

436 

 

 

411 

Depreciation and amortization

 

 

623 

 

 

1,124 

Loss on extinguishment of debt

 

 

185 

 

 

― 

Amortization of debt discount

 

 

1,050 

 

 

― 

Derivative expense

 

 

1,023 

 

 

― 

Provision for bad debt

 

 

188 

 

 

494 

Stock issued for services rendered

 

 

331 

 

 

― 

Loss on sale of assets

 

 

― 

 

 

229 

Adjustments to cost of sales

 

 

― 

 

 

24 

Change in Assets and Liabilities:

 

 

 

 

 

 

(Increase)/decrease in accounts receivable

 

 

(186)

 

 

40 

(Increase)/decrease in inventories

 

 

21 

 

 

287 

(Increase)/decrease in prepaid expenses

 

 

146 

 

 

(91)

(Increase)/decrease in other assets

 

 

(14)

 

 

675 

Increase/(decrease) in accounts payable

 

 

(242)

 

 

(253)

Increase/(decrease) in accrued expenses

 

 

352 

 

 

(133)

Total Adjustment

 

 

3,913 

 

 

2,807

Net Cash Used for Operating Activities

 

 

(3,842)

 

 

(3,899)

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchase of property and equipment

 

 

(739)

 

 

(54)

(Increase)/decrease in deferred costs

 

 

(129)

 

 

― 

Proceeds on the sale of direct financing leases

 

 

899 

 

 

― 

Principal collections on direct financing leases

 

 

― 

 

 

195 

Proceeds from the sale of assets

 

 

― 

 

 

233 

Net Cash Provided by Investing Activities

 

 

31 

 

 

374 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Payments on notes payable and long-term debt

 

 

(2,139)

 

 

(103)

Proceeds from notes payable and long-term debt

 

 

1,200 

 

 

750 

Proceeds from sale of common stock, net

 

 

2,300 

 

 

― 

Net Cash Provided by Financing Activities

 

 

1,361 

 

 

647 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(2,450)

 

 

(2,878)

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

 

3,139 

 

 

4,020 

Cash and cash equivalents at the end of the period

 

$

689 

 

1,142 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

Net cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

319 

 

14 

Income taxes

 

$

― 

 

― 

Non-cash investing and financing disclosures

 

 

 

 

 

 

Common stock issued for retirement of debt

 

$

2,313 

 

― 

Common stock issued for asset purchase

 

$

638 

 

 

― 

See accompanying notes to consolidated financial statements.



6



Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements February 28, 2007 (Unaudited)

NOTE 1 - Basis of Presentation

The Consolidated Balance Sheet of the company as of February 28, 2007, the related Consolidated Statements of Operations for the three months and six months ended February 28, 2007 and 2006, the Consolidated Statements of Changes in Shareholders’ Equity (Deficit) as of February 28, 2007 and the Consolidated Statements of Cash Flows for the six months ended February 28, 2007 and 2006, included in the financial statements have been prepared by the company without audit.  In the opinion of management, the accompanying financial statements include all adjustments (consisting of normal, recurring adjustments) necessary to summarize fairly the company’s financial position and results of operations.  The results of operations for the three and six months ended February 28, 2007, are not necessarily indicative of the results of operations for the full year or any other interim period.  The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and Financial Statements and notes thereto included in the company’s August 31, 2006, Form 10-K.

On May 12, 2006, the company effected a 1-for-35 reverse stock split.  In these Notes to the Consolidated Financial Statements, all previously reported stock information has been adjusted to reflect the effect of the reverse stock split.

In accordance with the provisions of SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations of the disposed assets and the losses related to the sale of the security monitoring business component have been classified as discontinued operations for all periods presented in the accompanying consolidated statements of operations.  See Note 14 – Discontinued Operations.

NOTE 2 - Related Party Transactions

H. Dean Cubley, a former director of the company, is the holder of a promissory note with a remaining principal amount of $1,924,000.  The note is allegedly in default and the company is accruing interest under the terms of the original agreement.  The note was issued upon the modification of outstanding options for 57,143 common shares and reflects a guaranteed compensation of the modified options equivalent to $61.25 less the option strike price.  Interest payable of $678,000 and $506,000 has been accrued as of February 28, 2007 and August 31, 2006, respectively.  In August 2006, Mr. Cubley filed a lawsuit against the company for non-payment of the note. (See Note 8 – Legal Proceedings.)  The note payable and accrued interest are classified in the Balance Sheet as Accrued Expenses – Related Party.

NOTE 3 - Inventories

Inventories are valued at the lower of cost or market.  The cost is determined by using the FIFO method.  Inventories consist of the following items, in thousands:

 

 

February 28, 2007

 

August 31, 2006

Raw materials

 

$

242 

 

$

288 

Work in process

 

 

227 

 

 

169 

Finished goods

 

 

244 

 

 

277 

 

 

$

713 

 

$

734 



7






NOTE 4 - Intangible Assets

Intangible assets consist of the following (in thousands):

 

 

February 28, 2007

 

August 31, 2006

Goodwill

 

$

4,095 

 

$

4,095 

 

 

 

 

 

 

 

Contract Rights

 

$

9,603 

 

$

9,603 

Accumulated amortization

 

 

(9,233)

 

 

(9,214)

 

 

$

370 

 

$

389 

 

 

 

 

 

 

 

Customer Relationships

 

$

3,085 

 

$

2,447 

Accumulated amortization

 

 

(2,324)

 

 

(2,318)

 

 

$

761 

 

$

129 

 

 

 

 

 

 

 

Other intangible assets

 

$

3,374 

 

$

3,374 

Accumulated amortization

 

 

(3,352)

 

 

(3,177)

 

 

$

22 

 

$

197 

 

 

 

 

 

 

 

Total intangible assets

 

$

20,157 

 

$

19,519 

Total accumulated amortization

 

 

(14,909)

 

 

(14,709)

Net of amortization

 

$

5,248 

 

$

4,810 



Intangible assets are amortized using methods that approximate the benefit provided by the utilization of the assets.  Contract rights, customer relationships and other intangibles are amortized on a straight-line basis.  We continually evaluate the amortization period and carrying basis of intangible assets to determine whether subsequent events and circumstances warrant a revised estimated useful life or reduction in value.

Total amortization of intangible assets was $216,000 and $234,000 for the six months ended February 28, 2007 and 2006, respectively.

On January 2, 2007, the company completed the acquisition of a customer list from Connex Services, Inc., which was valued at $638,000 and is being amortized over eight months.  (See Note 13)

Utilizing a fair value standard as set forth in SFAS 142, as of August 31, 2006, management determined an impairment charge of $3,427,830 existed for the intangible assets of contract rights, customer relationships and other intangible assets related to the January 2001 merger of Clearworks.net, Inc.

The company assessed the fair value of goodwill as of August 31, 2006, and concluded that the goodwill valuations remain at an amount greater than the current carrying asset value.



8



NOTE 5 - Notes Payable and Long-Term Debt

The following table lists the company’s note obligations as of February 28, 2007, and August 31, 2006 (in thousands):

 

Annual Interest Rate

 

Due Date

 

February 28, 2007

 

August 31, 2006

Notes payable & long-term debt:

 

 

 

 

(Unaudited)

 

(Audited)

Dutchess convertible note and warrant, net of discount of $7,105 at February 28, 2007 and $334,593 at August 31, 2006

12%

 

May 2007

 

$

75 

 

480 

Dutchess promissory note, net of discount of $2,469,949 at February 28, 2007 and $4,288,389 at August 31, 2006

12%

 

July 2008

 

 

4,885 

 

 

3,835 

Dutchess promissory note, net of discount of $1,253,695 at February 28, 2007

12%

 

June 2008

 

 

1,021 

 

 

― 

Tail Wind non-convertible promissory note and convertibles notes, net of discount of $12,087 at February 28, 2007 and $149,618 at August 31, 2006

0%

 

March 2008

 

 

2,283 

 

 

4,625 

Note with related party

25%

 

August 2006

 

 

― 

 

 

200 

Note with related party, net of discount of $8,958 at

February 28, 2007

25%

 

April 2007

 

 

190 

 

 

― 

Notes payable

Various

 

Various

 

 

43 

 

 

92 

Less compound embedded derivative and warrant liability

 

 

 

 

 

(4,996)

 

 

(3,799)

Total debt

 

 

 

 

$

3,501 

 

5,433 

Less current maturities

 

 

 

 

 

(3,437)

 

 

(3,990)

Total long-term debt

 

 

 

 

$

64 

 

1,443 

The convertible notes and warrants issued during the second quarter of 2007 have been accounted for in accordance with SFAS 133 and EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”

DUTCHESS PROMISSORY NOTE

On February 2, 2007, the company entered into a promissory note agreement with Dutchess Private Equities Fund, Ltd., pursuant to which the company sold a $1,300,000, 12% promissory note due June 2, 2008.  The company agreed to issue 200,000 shares of unregistered restricted common stock and a warrant for 2,500,000 shares with an exercise price of $0.001 per share to Dutchess as an incentive for the investment.

The note bears interest at 12%, provides for monthly interest and principal payments of $100,000 beginning June 2, 2007, and matures on June 2, 2008.  If any portion of the face amount of the note remains unpaid upon maturity, Dutchess has the right to increase such amount by five percent (5%) as an initial penalty and an additional two percent (2%) per month paid, pro rata for partial periods, compounded daily, as liquidated damages.  In the event of default, Dutchess may either (i) convert the note to a three-year convertible debenture or (ii) accelerate the payments due under the note.  The note is secured by all of the assets of the company.

The promissory note was determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature, conversion price, reset provision and the company’s optional early redemption right and cash payment penalty (compound embedded derivative liability).  At the date of issuance (February 2, 2007) the promissory note and compound embedded derivative liability were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques.  At inception, the fair value of this single compound embedded derivative’s was bifurcated from the host debt contract and recorded as a derivative liability which resulted in a reduction of the initial notional carrying amount of the promissory note.  The derivative liability will be marked-to-market each quarter with the change in fair value recorded in the income statement.

NOTE 6 - Stock Options and Warrants

In June 2005, the Board of Directors adopted, and the company’s shareholders approved, the 2005 Employee Stock Option Plan under which 30,000,000 shares (pre-reverse split) of the company’s common stock were reserved for issuance.  In February 2006, the Executive Committee of the Board of Directors of the company voted to amend the plan to reduce the shares available for issuance under the plan from 30,000,000 to 20,000,000.  On May 12, 2006, the company effected a 1-for-35 reverse stock split, which reduced the number of shares available for issuance under the plan to 571,429.  As of February 28, 2007, 467,850 shares of common stock had been issued under the plan, and options issued under the plan covering 341,205 shares were outstanding, of which 253,083 were exercisable.



9



In November 2006, the Board of Directors adopted, and the company’s shareholders approved, the 2007 Stock Option and Stock Bonus Plan, under which 2,000,000 shares of the company’s common stock have been reserved for issuance.  As of February 28, 2007, 114,235 shares of common stock had been issued under the plan and no stock options have been issued under the plan.

The weighted average fair value of the options granted during the six months ended February 28, 2007, is estimated at $0.45 on the date of grant.  The fair values of the options granted during the six months ended February 28, 2007, were determined using a Black-Scholes option-pricing model with the following assumptions:

 

 

December 2006
Grants

 

January 2007
Grants

Dividend Yield

 

0%

 

0%

Risk-free interest rate

 

4.53%

 

4.75%

Volatility

 

75%

 

69%

Expected Life

 

3.5 years

 

3.5 years

Option and warrant activity, including employees and third parties, was as follows for the six months ended February 28, 2007:

 

 

Shares

 

Weighted Average Exercise Price

Outstanding at beginning of period

 

 

474,040

 

$

20.95

 

Granted

 

 

3,096,245

 

 

0.10

 

Exercised

 

 

(78,333)

 

 

0.38

 

Forfeited/cancelled

 

 

(14,774)

 

 

14.12

 

Outstanding at end of period

 

 

3,477,178

 

$

2.79

 

Exercisable at end of period

 

 

3,389,056

 

$

2.61

 

Information about options and warrants outstanding was as follows at February 28, 2007:

Range of Exercise Prices

 

Number Outstanding

 

Avg. Remaining Contractual Life in Years

 

Average Exercise Price

 

Number Exercisable

 

Average Exercise Price

$0.001

 

2,500,000

 

4.93

 

$ 0.001 

 

2,500,000

 

$ 0.001 

$0.384

 

564,245

 

3.93

 

$ 0.384 

 

564,245

 

$ 0.384 

$0.48 – $0.9765

 

54,622

 

1.95

 

$ 0.79 

 

54,622

 

$ 0.79 

$4.20 – $9.45

 

269,893

 

2.71

 

$ 6.45 

 

193,512

 

$ 6.36 

$14.00 – $43.05

 

65,561

 

1.96

 

$ 26.14 

 

53,820

 

$ 25.02 

$262.50

 

22,857

 

1.15

 

$ 262.50 

 

22,857

 

$ 262.50 

 

 

3,477,178

 

4.47

 

$ 2.79 

 

3,389,056

 

$ 2.61 

NOTE 7 - Risk Factors

Financial instruments that potentially subject the company to concentrations of credit risk consist principally of trade accounts receivable.  The company controls credit risk associated with its receivables through credit checks and approvals, credit limits, and monitoring procedures. Generally, the company requires no collateral from its customers.  Two customers comprised 15% and 12%, respectively, of outstanding receivables at February 28, 2007.  Two customers comprised 34% and 13%, respectively, of outstanding accounts receivable at August 31, 2006.

For the six months ended February 28, 2007, substantially all of the company’s business activities have remained within the United States.  Approximately 25% of the company’s revenues and receivables have been created solely in the state of Texas, 15% in the international market, and the approximate 60% remainder relatively evenly over the rest of the nation during the six months ended February 28, 2007; whereas approximately 4% of the company’s revenues and receivables were created solely in the state of Texas, 0% in the international market, and the approximate 96% remainder relatively evenly over the rest of the nation during the six months ended February 28, 2006.



10



The company maintains cash deposits in banks which from time to time exceed the amount of deposit insurance available.  Management periodically assesses the financial condition of the institutions and believes that any potential credit loss is minimal.

NOTE 8 - Commitments and Contingent Liabilities

Leases

For the six months ended February 28, 2007 and 2006, rental expenses of approximately $149,900 and $153,000, respectively, were incurred.  Future minimum rental payments under the company’s primary office lease are as follows:

 

August 31,

 

Amount

For the six months ending

2007

 

$

149,901

For the year ending

2008

 

 

325,316

For the year ending

2009

 

 

243,987

 

Total

 

$

719,204

Legal Proceedings

In August 2006, Eagle became a defendant in H. Dean Cubley vs. Eagle Broadband, Inc.  Mr. Cubley, a former director of the company, filed a lawsuit against the company seeking to enforce a promissory note entered into by the company in December 2003, in lieu of the issuance of shares for stock options then held by Mr. Cubley, who was at the time Chairman of the Board of the company.  The lawsuit seeks recovery of the principal balance of approximately $1.9 million plus accrued interest.  The company has asserted defenses, including a defense that the execution of the promissory note by the company was induced by misrepresentations.  The company intends to vigorously defend the lawsuit.  The company has accrued $2.6 million in connection with this claim.

In May 2006, Eagle filed a demand for arbitration before JAMS in Los Angeles, California, in connection with an agreement between the company and GlobeCast North America Incorporated.  The company is seeking an arbitral award declaring that either (i) both parties are excused from performance due to the existence of a force majeure event or (ii) the company is excused from performance due to GlobeCast’s prior breach of the agreement.  GlobeCast denies that the agreement was unenforceable, that Eagle’s alleged failure to perform is excused and that there was a failure of any of the conditions precedent under the agreement.  GlobeCast also asserts that Eagle owes GlobeCast at least $250,000 for Eagle’s alleged failure to pay GlobeCast in accordance with the agreement, and, in the alternative, owes GlobeCast at least $1.5 million under a claim for restitution.  The company believes that its claims are meritorious and intends to vigorously pursue them, and that GlobeCast’s claims lack merit and intends to vigorously defend itself against them.  The company has accrued $250,000 in connection with this lawsuit.

In September 2005, the State of Texas filed a lawsuit against United Computing Group, Inc., and H. Dean Cubley, individually, for unpaid sales and use tax, interest and penalties in the amount of $568,637 for the time period of March 1998 through December 2001.  The company has accrued $560,000 in connection with this lawsuit.

In July 2003, Eagle became a defendant in Cornell Capital Partners, L.P., vs. Eagle Broadband, Inc., et al., Civil Action No. 03-1860 (KSH), in the United States District Court for the District of New Jersey.  The suit presents claims for breach of contract, state and federal securities fraud and negligent misrepresentation.  Cornell also alleged that Eagle defaulted on a convertible debenture for failing to timely register the shares of common stock underlying the convertible debenture and is seeking to accelerate the maturity date of the debenture.  In November 2003, the principal balance of the debenture was repaid, although the suit remains outstanding.  Cornell claims damages of approximately $1.3 million.  Eagle asserted counterclaims against Cornell for fraud and breach of contract in the amount of $2 million.  In March 2006, the court ruled in favor of Cornell on certain claims, granting Cornell’s motion for partial summary judgment on its breach of contract claim and denying all of Eagle’s counterclaims.  The court ruled in favor of Eagle on other claims, granting Eagle’s motion for summary judgment on Cornell’s claims of common law fraud, state and federal securities fraud, and negligent misrepresentation.  The company has accrued $1,150,000 in settlement expense against this lawsuit.

In December 2000, Clearworks.net, Inc. became a defendant in State of Florida Department of Environmental Protection vs. Reco-Tricote, Inc., and Southeast Tire Recycling, Inc., currently known as Clearworks.net, Inc., in the Circuit Court of the Tenth Judicial Circuit in and for Polk County, Florida.  The Florida DEP included Clearworks in a lawsuit presenting claims for recovery costs and penalties for a waste tire processing facility.  The suit seeks recovery of costs and penalties in a sum in excess of $1 million, attorneys’ fees and cost of court.  Clearworks denies the claims against it and intends to vigorously contest all claims in this case and to enforce its indemnification rights against the principals of Southeast Tire Recycling.  The company has not accrued any expenses against this lawsuit, as the outcome cannot be predicted at this time.



11



The company is involved in lawsuits, claims and proceedings, including those identified above, which arise in the ordinary course of business.  In accordance with SFAS No. 5, “Accounting for Contingencies,” Eagle makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  The company believes it has adequate provisions for any such matters.  The company reviews these provisions at least quarterly and adjusts these provisions to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case.  Litigation is inherently unpredictable.  However, the company believes that it has valid defenses with respect to legal matters pending against it.  Nevertheless, it is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.

We intend to vigorously defend these and other lawsuits and claims against us.  However, we cannot predict the outcome of these lawsuits, as well as other legal proceedings and claims with certainty.  An adverse resolution of pending litigation could have a material adverse effect on our business, financial condition and results of operations.  The company is subject to legal proceedings and claims that arise in the ordinary course of business.  The company’s management does not expect that the results in any of these legal proceedings will have adverse affect on the company’s financial condition or results of operations.

NOTE 9 - Earnings per Share

The following is a reconciliation of the numerators and the denominators of the basic and diluted earnings per share computations for net income for the six months ended February 28, 2007 and 2006 (in thousands, except per share amounts):

 

For the six months ended February 28,

 

2007

 

2006

 

Net Income
/(Loss)

 

Shares

 

Per Share

 

Net Income
/(Loss)

 

Shares

 

Per Share

Continuing Operations:

 

 

 

 

 

 

 

 

 

 

(1)

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders

$

(7,755)

 

18,008

 

(0.43)

 

$

(6,066)

 

8,476 

 

(0.72)

Effective of dilutive securities

 

― 

 

― 

 

― 

 

 

― 

 

― 

 

― 

Diluted EPS

$

(7,755)

 

18,008

 

(0.43)

 

$

(6,066)

 

8,476 

 

(0.72)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders

$

― 

 

18,008

 

― 

 

$

(640)

 

8,476 

 

(0.08)

Effective of dilutive securities

 

― 

 

― 

 

― 

 

 

― 

 

― 

 

― 

Diluted EPS

$

― 

 

18,008

 

― 

 

$

(640)

 

8,476 

 

(0.08)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders

$

(7,755)

 

18,008

 

(0.43)

 

$

(6,706)

 

8,476 

 

(0.80)

Effective of dilutive securities

 

― 

 

― 

 

― 

 

 

― 

 

― 

 

― 

Diluted EPS

$

(7,755)

 

18,008

 

(0.43)

 

$

(6,706)

 

8,476 

 

(0.80)


(1)

The number of shares and per share amounts have been restated to reflect the impact of the May 12, 2006 one-for-thirty five reverse stock split.


NOTE 10 - Major Customers

The company had gross sales of $1,838,000 and $2,102,000 for the six months ended February 28, 2007 and 2006, respectively.  The company had two customers that each represented approximately 12% of the gross sales for the six months ended February 28, 2007, and had one customer that represented 25% of the gross sales for the six months ended February 28, 2006.



12



NOTE 11 - Industry Segments

This summary reflects the company’s current and past operating segments, as described below.  All have ceased operations except Eagle Broadband, Inc. and Eagle Broadband Services, Inc.

Eagle:

Eagle Broadband, Inc. (Eagle) is a provider of broadband, Internet Protocol (IP) and satellite communications technology and equipment with related software and broadband products.

EBS/DSS:

Eagle Broadband Services, Inc. (EBS) provides broadband services to residential and business customers in select communities.

D.S.S. Security, Inc. (DSS) was a wholesale security monitoring company.  (Has ceased operations.)

Clearworks Communications, Inc. provided solutions to consumers by implementing technology both within the residential community and home, through the installation of fiber optic backbones to deliver voice, video and data solutions directly to consumers.  (Has ceased operations.)

APC/HSI:

Atlantic Pacific Communications, Inc. (APC) specialized in providing professional data and voice cable and fiber optic installations through project management services on a nationwide basis for multiple site-cabling installations for end users and resellers.  (Has ceased operations.)

Clearworks Home Systems, Inc. (HSI) specialized in providing fiber optic and copper based structured wiring solutions and audio and visual equipment to single-family and multi-family dwelling units.  (Has ceased operations.)

UCG:

United Computing Group, Inc. (UCG) was a computer hardware and software reseller.  (Has ceased operations.)

Other:

Link-Two Communications, Inc. was a developer and marketer of messaging systems.  (Has ceased operations.)

Clearworks.net, Inc. (.NET) is inactive with exception of debt related expenses.  (Has ceased operations.)

Contact Wireless, Inc. was a paging, cellular, and mobile services provider and reseller whose assets were sold in October 2003.  (Has ceased operations.)

For the six months ended February 28, 2007 (in thousands):

 

APC/HSI

 

EBS/DSS

 

UCG

 

Eagle

 

Other

 

Elim.

 

Consol

Revenue

$

― 

 

$

245 

 

$

― 

 

$

1,593 

 

$

― 

 

$

― 

 

$

1,838 

Segment loss

 

― 

 

 

(446)

 

 

― 

 

 

(4,388)

 

 

― 

 

 

― 

 

 

(4,834)

Total assets

 

(8,918)

 

 

(28,403)

 

 

(3,100)

 

 

86,358 

 

 

16,320 

 

 

(43,112)

 

 

19,145 

Capital expenditures

 

― 

 

 

― 

 

 

― 

 

 

740 

 

 

― 

 

 

― 

 

 

740 

Depreciation and amortization

 

― 

 

 

355 

 

 

 

 

267 

 

 

― 

 

 

― 

 

 

623 

Goodwill

 

― 

 

 

― 

 

 

― 

 

 

4,095 

 

 

― 

 

 

― 

 

 

4,095 

For the six months ended February 28, 2006 (in thousands):

 

APC/HIS

 

EBS/DSS

 

UCG

 

Eagle

 

Other

 

Elim.

 

Consol

Revenue

$

— 

 

$

359 

 

$

— 

 

$

1,743 

 

$

— 

 

$

— 

 

$

2,102 

Segment loss

 

— 

 

 

(942)

 

 

(1)

 

 

(4,914)

 

 

— 

 

 

— 

 

 

(5,857)

Total assets

 

(8,917)

 

 

(16,713)

 

 

(3,097)

 

 

91,343 

 

 

16,320 

 

 

(43,111)

 

 

35,825 

Capital expenditures

 

— 

 

 

 

 

— 

 

 

50 

 

 

— 

 

 

— 

 

 

54 

Depreciation and amortization

 

— 

 

 

646 

 

 

 

 

445 

 

 

— 

 

 

— 

 

 

1,092 

Goodwill

 

― 

 

 

― 

 

 

― 

 

 

4,095 

 

 

― 

 

 

― 

 

 

4,095 



13






Reconciliation of Segment Loss from Operations to Net Loss (in thousands):

 

 

Six Months Ended
February 28,

 

 

2007

 

2006

Total segment loss from operations

 

$

(4,834)

 

(5,857)

Total other income (expense)

 

 

(2,921)

 

 

(209)

Net loss

 

$

(7,755)

 

(6,066)

The accounting policies of the reportable segments are the same as those described in the section titled Critical Accounting Policies.  The company evaluates the performance of its operating segments based on income before net interest expense, income taxes, depreciation and amortization expense, accounting changes and non-recurring items.

NOTE 12 - Equity Financing

In January 2007, the Company entered into an investment agreement with Brittany Capital Management Limited (“Brittany”).  The nature of the investment agreement is commonly known as an equity line of credit.  The maximum amount the company may raise under the equity line is $5,000,000, provided we register enough shares to raise this amount.  The company is not obligated to request the entire $5,000,000.  Over a period of 36 months, we may periodically deliver new issue shares of our common stock to Brittany, which then delivers cash to us based on a price per share tied to the current market price of our common stock.  The actual number of shares that we may issue subject to the investment agreement is not determinable as it is based on the market price of our common stock from time to time.

NOTE 13 - Asset Acquisition

In December 2006, the company entered into an agreement with Connex Services, Inc. (“Connex”), under which the company acquired all of Connex’s customers effective January 2, 2007.  Connex is a Houston-based IT services company providing national and international project management services for data, voice, fiber-optic, wireless, hospitality systems, access control, audio and satellite installations.  The company paid $638,000 in company common stock (1,203,774 shares).  The fair value of the customer list is being amortized over its expected life.

NOTE 14 – Discontinued Operations

On February 28, 2006, the company entered into an asset purchase agreement with a third party to acquire the assets of D.S.S. Security, Inc. for a purchase price of $1,400,000.  The following table reports the results of the component of Eagle’s operations reported as discontinued operations (in thousands):

 

Six months ended
February 28,

 

2007

 

2006

Broadband services revenues:

 

 

 

 

 

Sale of security contracts

$

— 

 

1,188 

Security monitoring revenue

 

— 

 

 

410 

Total revenue from discontinued operations

 

— 

 

 

1,598 

Cost of goods sold for security contracts sold

 

— 

 

 

579 

Operating expenses

 

— 

 

 

1,391 

Other expense

 

— 

 

 

268 

Net income (loss) on discontinued operations

$

— 

 

(640)



In accordance with the provisions of Statement of Financial Accounting Standard, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), the results of operations of the disposed assets and the losses related to this sale have been classified as discontinued operations for all periods presented in the accompanying consolidated statements of operations.



14



NOTE 15 - Financial Condition and Going Concern

The company has incurred a loss for the six months ended February 28, 2007, of $7,755,000 and has an accumulated deficit at February 28, 2007, of $248,804,000.  Because of its losses, the company will require additional working capital to develop its business operations.  The company intends to raise additional working capital through private placements, public offerings, bank financing or the sale of assets.

There are no assurances that the company will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from operations or (2) obtain additional financing through either private placements, public offerings or bank financing necessary to support the company’s working capital requirements.  To the extent that funds generated from operations and any private placements, public offerings or bank financing are insufficient, the company will have to raise additional working capital.  No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the company.

These conditions raise substantial doubt about the company’s ability to continue as a going concern.  The financial statements do not include any adjustments that might be necessary should the company be unable to continue as a going concern.

Management is pursuing additional financing and is continuously evaluating all financing options available to the company.

Management will continue to implement its plan, which includes expanding the delivery of the IPTVComplete to additional markets inside and outside Florida, expanding the newly acquired satellite installation and support services business to areas beyond Texas and Louisiana, devoting resources towards attaining market leadership in the IPTV and hospitality set-top box markets, and continuously evaluating gross margin performance and searching for additional opportunities to reduce operating expenses.  However, there can be no assurance that the company will be successful in achieving its objectives.

NOTE 16 - Subsequent Events

In March 2007, the company notified the American Stock Exchange (the “Amex”) that it would not pursue a hearing before the Amex Listing Qualifications Panel regarding the continued listing of the company’s stock.  The company’s stock was removed from listing on the Amex effective April 9, 2007.  The company’s stock is now traded in the over-the-counter market under the symbol “EAGB”.

In March 2007, the company entered into an agreement with Alliance Maintenance & Services, Inc. (“Alliance”), under which the company acquired Alliance’s telecom services division effective April 1, 2007.  As consideration for the purchase, Alliance will receive 1,851,852 shares of common stock of the company on July 5, 2007.  The company has agreed to register these shares for resale by Alliance.

In March and April 2007, the company issued a total of 563,620 shares of common stock to The Tail Wind Fund Ltd. in connection with a conversion under one of the convertible notes held by Tail Wind, reducing the balance of such note by $120,000.

During March and April 2007, the Company issued a total of 4,200,000 shares of common stock to Brittany Capital Management Limited under the equity line of credit and received proceeds of $776,080 therefrom.

In April 2007, the company entered into a Note Exchange Agreement with Ron Persons, under which the company agreed to issue to Mr. Persons 1,428,571 shares of company common stock in full satisfaction of the company’s obligation to pay the $200,000 principal balance of the promissory note entered into in December 2006, which was due on April 12, 2007.  Accrued interest on the note through April 12, 2007, was paid to Mr. Persons in cash.  The company also agreed to register the shares for resale by Mr. Persons.



15



Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q.  Information included herein relating to projected growth and future results and events constitutes forward-looking statements.  Actual results in future periods may differ materially from the forward-looking statements due to a number of risks and uncertainties, including but not limited to fluctuations in the construction, technology, communications and industrial sectors; the success of the company’s restructuring and cost reduction plans; the success of the company’s competitive pricing; the company’s relationship with its suppliers; relations with the company’s employees; the company’s ability to manage its operating costs; the continued availability of financing and working capital to fund business operations; governmental regulations, risks associated with regional, national, and world economies; and the ability to enter into strategic, profitable business relationships relating to our products and services.  Any forward-looking statements should be considered in light of these factors.  Eagle cannot guarantee future results, levels of activity, performance or achievements.  Moreover, neither Eagle nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements.  Eagle is under no duty to update any of the forward-looking statements after the date of this report to conform its prior statements to actual results.

Executive Overview

Eagle Broadband, Inc. (the “company” or “Eagle”), is a provider of Internet protocol (IP), information technology services and satellite communications products and services.  The company’s product offerings are:

·

IPTVComplete™, delivering over 250 channels of digital television and music content via IP to many market sectors, such as to multi-dwelling unit operators (e.g., condominiums), triple-play operators (Internet data, phone and television, all over IP) or telephone companies, including our MediaPro standard or high-definition set-top boxes for both hospitality and IPTV customers; and

·

IT Services, through which we provide various IP and satellite-related technology implementations to a broad cross section of markets, including remote network management, structured cabling, IT integration services and our patented SatMAX® satellite telephony extension technology.

In April 2007, the company signed a contract with a leading hospitality solutions provider under which a series of purchase orders are scheduled to be placed for its MediaPro IP3000HD, the newest offering in Eagle Broadband's line of IPTV set-top boxes.

Also in April 2007, the company received an initial purchase order from Sprint Nextel in the amount of $500,000 for a rollout of infrastructure network cabling and equipment installation supporting the activities of the U.S. Transportation Security Administration at a number of airports across the United States.  The company has been advised that this work must be completed promptly, and that if completed properly and in a timely manner, the company expects a series of such purchase orders for similar installations at additional airports.

In March 2007, the company entered into an agreement with Alliance Maintenance & Services, Inc. (“Alliance”), under which the company acquired Alliance’s telecom services division effective April 1, 2007.  Alliance’s telecom services division provides satellite and network support services to businesses throughout the south central United States.  In April 2007, the company started two significant rollouts for the installation of HughesNet satellite systems at CVS Pharmacy stores and Jack In The Box restaurants, and is preparing for a May rollout of installations for KFC restaurants.

In February 2007, the company entered into a multi-year agreement with FrontGate Broadband, a multi-service broadband provider, to deliver IPTV services to condominium and master planned properties in Florida.  FrontGate plans to deliver a wide range of popular standard and high-definition programming to properties it has under contract.  This programming supports FrontGate’s package of advanced voice-over-IP, high-speed data, security, environmental monitoring, white-glove amenities, wellness technology solutions and interactive entertainment services.  FrontGate will build and deliver fully integrated IP services over private, fiber-to-the-user (FTTU) networks to thousands of homes and end users.

In December 2006, the company entered into an agreement with Connex Services, Inc. (“Connex”), under which the company acquired all of Connex’s customers effective January 2, 2007.  Connex is a Houston-based IT services company providing national and international project management services for data, voice, fiber-optic, wireless, hospitality systems, access control, audio and satellite installations.



16



As of February 28, 2007, the company’s only active subsidiary was Eagle Broadband Services, Inc.  Eagle has a number of inactive subsidiaries that had results in one or more of the periods included in the financial statements covered by this report.  These inactive subsidiaries include: D.S.S. Security, Inc., Clearworks Communications, Inc., Clearworks.net, Inc., Clearworks Home Systems, Inc., United Computing Group, Inc., Atlantic Pacific Communications, Inc., and Link Two Communications, Inc.  Eagle has incorporated certain ongoing operations of the inactive subsidiaries into the active subsidiaries listed above including Atlantic Pacific Communications, Inc. and Clearworks Communications, Inc.  The consolidated financial statements include the accounts of the company and its subsidiaries.  All significant intercompany transactions and balances have been eliminated in consolidation.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.  The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of the company as a whole.  This discussion should be read in conjunction with our financial statements and accompanying notes for the six months ended February 28, 2007.

Results of Operations

Three and Six Months Ended February 28, 2007, Compared to Three and Six Months Ended February 28, 2006

The following table sets forth summarized consolidated financial information for the three and six months ended February 28, 2007 and 2006:

Condensed Financial Information

 

 

Three months ended February 28,

 

 

 

 

 

 

Six months ended February 28,

 

 

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

2007

 

2006

 

$ Change

 

% Change

Net sales

 

$

870 

 

$

770 

 

$

100 

 

13%

 

$

1,838 

 

$

2,102 

 

$

(264)

 

(13%)

Cost of goods sold

 

 

862 

 

 

1,255 

 

 

(393)

 

(31%)

 

 

1,960 

 

 

2,383 

 

 

(423)

 

(18%)

Gross profit

 

 

 

 

(485)

 

 

493 

 

 

 

 

(122)

 

 

(281)

 

 

159 

 

 

Percent of sales

 

 

0.9%

 

 

(63.0%)

 

 

 

 

 

 

 

(6.6%)

 

 

(13.4%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

2,368 

 

 

2,896 

 

 

(528)

 

(18%)

 

 

4,712 

 

 

5,576 

 

 

(864)

 

(15%)

Loss from operations

 

 

(2,360)

 

 

(3,381)

 

 

1,021 

 

(30%)

 

 

(4,834)

 

(5,857)

 

 

1,023 

 

(17%)

Other income (expense)

 

 

(1,934)

 

 

(216)

 

 

(1,718)

 

795%

 

 

(2,921)

 

 

(209)

 

 

(2,712)

 

1,298%

Loss from continuing operations

 

 

(4,294)

 

 

(3,597)

 

 

(697)

 

19%

 

 

(7,755)

 

 

(6,066)

 

 

(1,689)

 

28%

Loss from discontinued operations

 

 

― 

 

 

(475)

 

 

475 

 

(100%)

 

 

― 

 

 

(640)

 

 

640 

 

(100%)

Net loss

 

$

(4,294)

 

$

(4,072)

 

$

(222)

 

5%

 

$

(7,755)

 

$

(6,706)

 

$

(1,049)

 

16%

Overview

The 30% decrease in our loss from operations for the three months ended February 28, 2007, reflects the implementation of management’s initiatives to reduce operating expenses and improve gross margin performance by focusing our efforts primarily on our IPTV solutions division and IT services division.  The $493,000 improvement in gross margins in the current quarter was primarily due to reductions in cost of goods sold related to reductions in labor, depreciation and inventory write-offs.  The significant reduction in operating expenses in both the current quarter and the six-month period ended February 28, 2007, is discussed in more detail below.

The company’s net loss for the current quarter increased slightly to $4.3 million, compared to $4.1 million for the same quarter of the prior fiscal year.  The current quarter includes the recognition of $864,000 in derivative expense, compared to $20,000 in derivative income in the same quarter of last year.  Derivative income or expense arises from changes in the fair value of our derivative financial instruments and does not represent cash inflows or outflows.  In addition, interest expense for the current quarter was $720,000 higher than the same period of the prior fiscal year, which reflects the effect of the $5.5 million promissory note entered into with Dutchess Private Equities Fund in July 2006 and the $1.3 million note entered into with Dutchess in February 2007.  These increases in



17



derivative expense and interest expense were offset by the more than $1 million improvement in loss from operations and the favorable impact of discontinuing our security monitoring business in February 2006.

For the six-month period ended February 28, 2007, our net loss is 16% higher than the same six-month period in the prior year.  This is due to derivative expense of over $1 million, compared to $20,000 in derivative income in the prior year, and a $1.3 million increase in interest expense compared to the prior six-month period.  These increases were partially offset by the significant reductions in operating expenses in the current six-month period and the favorable impact of discontinuing our security monitoring business.

Sales Information

Set forth below is a table presenting summarized sales information for our business segments for the three months and six months ended February 28, 2007 and 2006:

($ in thousands)

 

Three months ended February 28,

 

 

 

 

 

 

 

2007

 

% of Total

 

2006

 

% of Total

 

$ Change

 

% Change

Structured wiring

 

$

449

 

52%

 

$

463

 

60%

 

$

(14)

 

(3%)

Broadband services

 

 

108

 

12%

 

 

110

 

15%

 

 

(2)

 

(2%)

Products

 

 

313

 

36%

 

 

157

 

20%

 

 

156

 

100%

Other

 

 

 

0%

 

 

40

 

5%

 

 

(40)

 

(100%)

Total

 

$

870

 

100%

 

$

770

 

100%

 

$

100

 

13%


($ in thousands)

 

Six months ended February 28,

 

 

 

 

 

 

2007

 

% of Total

 

2006

 

% of Total

 

$ Change

 

% Change

Structured wiring

 

$

881

 

48%

 

$

885

 

42%

 

$

(4)

 

(1%)

Broadband services

 

 

245

 

13%

 

 

360

 

17%

 

 

(115)

 

(32%)

Products

 

 

712

 

39%

 

 

779

 

37%

 

 

(67)

 

(9%)

Other

 

 

 

0%

 

 

78

 

4%

 

 

(78)

 

(100%)

Total

 

$

1,838

 

100%

 

$

2,102

 

100%

 

$

(264)

 

(13%)

For the second quarter, net sales increased by 13% from the same quarter last year, due to an increase in products sales of $156,000 from the prior quarter.  This increase in products sales was due to the sale of 500 set-top boxes to a major hospitality customer and the sale and installation of SatMAX units to two customers.  For the six-month period ended February 28, 2007, net sales were $1.8 million, compared to $2.1 million for the same six-month period last year.  Sales from broadband services for the current six-month period was $115,000 lower than the same six-month period a year ago, which reflects management’s decision to contract with a third party to operate a majority of the company’s bundled services business in April 2006.  The lower products sales for the current six-month period reflect sales to a major customer in the first quarter of the prior year of $436,000 that have not re-occurred in the current fiscal year.



18



Cost of Goods Sold

The following table sets forth summarized cost of goods sold information for the three and six months ended February 28, 2006 and 2005

($ in thousands)

 

Three months ended February 28,

 

 

 

 

 

 

Six months ended February 28,

 

 

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

2007

 

2006

 

$ Change

 

% Change

Direct labor and related costs

 

$

166

 

$

200

 

$

(34)

 

(17%)

 

$

339

 

$

493

 

$

(154)

 

(31%)

Products and integration services

 

 

123

 

 

(2)

 

 

125

 

 

 

 

562

 

 

254

 

 

308

 

121%

Impairment slow moving & obsolete inventory

49

 

 

107

 

 

(58)

 

(54%)

 

 

49

 

 

107

 

 

(58)

 

(54%)

Structured wiring labor and material

 

 

444

 

 

431

 

 

13

 

3%

 

 

851

 

 

720

 

 

131

 

18%

Broadband services costs

 

 

23

 

 

237

 

 

(214)

 

(91%)

 

 

44

 

 

298

 

 

(254)

 

(85%)

Depreciation and amortization

 

 

57

 

 

201

 

 

(144)

 

(72%)

 

 

115

 

 

430

 

 

(315)

 

(73%)

Other manufacturing costs

 

 

 

 

81

 

 

(81)

 

(100%)

 

 

 

 

81

 

 

(81)

 

(100%)

Total

 

$

862

 

$

1,255

 

$

(393)

 

(31%)

 

$

1,960

 

$

2,383

 

$

(423)

 

(18%)

Cost of goods sold for the current quarter were down 31% from the prior quarter, reflecting continued workforce reductions, lower depreciation expense and lower broadband services costs due to management’s decision to contract with a third party to operate a majority of the company’s bundled services business.  The decrease in depreciation expense for both the three- and six-month periods are due to the impairment of long-lived assets taken in the year ended August 31, 2006.

For the six months ended February 28, 2007, the large decreases in direct labor, broadband services and depreciation costs were offset higher than normal product warranty costs, higher than expected costs in structured wiring, and an increase in product costs during in the first quarter of the current fiscal year.

Operating Expenses

The following table sets forth summarized operating expense information for the three and six months ended February 28, 2006 and 2005:

($ in thousands)

 

Three months ended February 28,

 

 

 

 

 

 

Six months ended February 28,

 

 

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

2007

 

2006

 

$ Change

 

% Change

Salaries and related costs

 

$

733

 

 

828

 

$

(95)

 

(11%)

 

$

1,490

 

$

1,972

 

$

(482)

 

(24%)

Advertising and promotion

 

 

24

 

 

13

 

 

10

 

77%

 

 

79

 

 

44

 

 

35

 

78%

Depreciation and amortization

 

 

342

 

 

317

 

 

25

 

8%

 

 

508

 

 

662

 

 

(154)

 

(23%)

Research and development

 

 

78

 

 

130

 

 

(51)

 

(40%)

 

 

64

 

 

234

 

 

(170)

 

(72%)

Other support costs

 

 

1,191

 

 

1,608

 

 

(417)

 

(26%)

 

 

2,570

 

 

2,664

 

 

(94)

 

(4%)

Total

 

$

2,368

 

$

2,896

 

$

(528)

 

(18%)

 

$

4,712

 

$

5,576

 

$

(864)

 

(15%)



19






The following table breaks out “Other support costs” information as presented in the preceding table for the three and six months ended February 28, 2007 and 2006:

($ in thousands)

 

Three months ended February 28,

 

 

 

 

 

 

Six months ended February 28,

 

 

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

2007

 

2006

 

$ Change

 

% Change

Auto related

 

$

7

 

$

11

 

$

(4)

 

(35%)

 

$

17

 

$

29

 

$

(12)

 

(42%)

Bad debt

 

 

186

 

 

121

 

 

65

 

54%

 

 

188

 

 

(781)

 

 

969

 

 

Delivery and postage

 

 

5

 

 

5

 

 

 

0%

 

 

11

 

 

160

 

 

(149)

 

(93%)

Fees

 

 

81

 

 

3

 

 

78

 

2,696%

 

 

92

 

 

9

 

 

83

 

878%

Insurance and office

 

 

145

 

 

74

 

 

71

 

96%

 

 

250

 

 

162

 

 

88

 

54%

Professional and contract labor

 

 

651

 

 

1,100

 

 

(449)

 

(41%)

 

 

1,494

 

 

2,089

 

 

(595)

 

(28%)

Rent

 

 

69

 

 

87

 

 

(18)

 

(21%)

 

 

145

 

 

176

 

 

(31)

 

(18%)

Repairs and maintenance

 

 

9

 

 

37

 

 

(28)

 

(76%)

 

 

15

 

 

66

 

 

(51)

 

(77%)

Travel

 

 

62

 

 

88

 

 

(26)

 

(29%)

 

 

140

 

 

169

 

 

(29)

 

(17%)

Taxes

 

 

(84)

 

 

(222)

 

 

138

 

 

 

 

(60)

 

 

(55)

 

 

(5)

 

9%

Telephone and utilities

 

 

24

 

 

99

 

 

(75)

 

(76%)

 

 

96

 

 

238

 

 

(142)

 

(60%)

Other

 

 

34

 

 

205

 

 

(171)

 

(83%)

 

 

203

 

 

402

 

 

(199)

 

(49%)

Total Other Support Costs

 

$

1,191

 

$

1,608

 

$

(417)

 

(26%)

 

$

2,570

 

$

2,664

 

$

(94)

 

(4%)

For the three months ended February 28, 2007, operating expenses decreased by 18% to $2.4 million, as compared to $2.9 million for same period last year, which is primarily the result of a $449,000 decrease in professional and contract labor related to a reduction in the utilization of outside legal, accounting and consultant services.  Salaries and related costs, telephone and utilities, and travel expenses also declined, which is due to the significant reductions in the company’s workforce.  Other expense for both the three and six month periods decreased significantly because the prior periods include satellite transponder costs that we no longer incur since our relationship with GlobeCast North America ended.  These decreases were offset by increases in fees, insurance costs, and bad debt expense.  Fees includes $60,000 paid to the American Stock Exchange for two additional listing applications filed in the current quarter, and insurance costs increased due to premium increases for D&O insurance.  Bad debt expense for the current quarter includes the effect settling the lawsuit with Lake Las Vegas for about $60,000 less than the amount the company had accrued as a receivable for that claim.

For the six months ended February 28, 2007, operating expenses are down 15%.  However, in the quarter ended November 30, 2005, the company recognized a credit to bad debt expense of approximately $900,000 due to the collection of a receivable in November 2005 of an account previously deemed uncollectible.  Excluding this credit, operating expenses for the six-month period ended February 28, 2006 were approximately $6.5 million, compared to operating expenses for the current six-month period of $4.7 million, a decrease of over 27%.  Most of this $1.8 million decrease in operating expenses is due to reductions in our workforce and in the utilization of outside professional and contract labor.  Other factors contributing to the decrease include:

·

Decreases in depreciation for long-lived assets and intangibles, reflecting the effect of the impairment charges recorded for the year ended August 31, 2006.

·

Decreases in delivery and postage expenses as the prior six-month period reflects higher than normal delivery costs associated with warranty work.

·

Decreases in telephone and utilities costs related to workforce reductions.

Changes in Cash Flow

Eagle’s operating activities used net cash of $3,842,000 during the six months ended February 28, 2007, compared to $3,899,000 in the six months ended February 28, 2006.  Eagle’s investing activities provided net cash of $31,000 in the six months ended February 28, 2007, compared to cash provided of $374,000 in the six months ended February 28, 2006.  The decrease was due to capital expenditures of $739,000 primarily for the completion of the super-headend in Miami, Florida, which was offset by the sale of equipment leases for $899,000.  Eagle’s financing activities provided net cash of $1,361,000 in the six months ended February 28, 2007, compared to $647,000 of cash provided in the six months ended February 28, 2006.  For the six months ended February 28, 2007, the company raised approximately $3.5 million, consisting primarily of drawdowns under the equity credit line with Dutchess



20



Private Equities Fund and additional borrowings from Dutchess, which was offset by paying down approximately $2.1 million of notes payable.

Liquidity and Capital Resources

Historically, the company has not generated cash in amounts adequate to meet its operating needs, but has instead relied upon third-party funding or has sold assets to meet those needs.  It is unlikely that the company will generate adequate amounts of cash to fund its operations over the remainder of the fiscal year; however, company management continues to implement its plan to increase sales and gross profit, and continues to reduce operating expenses.  The initiatives in this plan include, but are not limited to:

·

Expanding the satellite and network support services business purchased from Alliance Maintenance & Services, Inc. to areas beyond Texas and Louisiana.

·

Expanding the delivery of IPTVComplete to additional customers in the Miami, Florida area and elsewhere around the U.S.

·

Devoting additional resources towards attaining market leadership in the IPTV and hospitality set-top box markets.

·

Continuously evaluating gross margin performance and search for opportunities to further reduce operating expenses.

Until the company’s operations generate cash sufficient to fund our operating needs, we will continue to rely upon third-party funding.  If we are unable to raise additional financing, we will need to curtail operations or sell assets.  Management is working with a variety of investment bankers to obtain significant, long-term financing for the company.  Though we have been successful at raising additional capital on this basis in the past, we can provide no assurance that we will be successful in any future financing endeavors.  In addition, the company has two equity lines of credit upon which it can draw, provided registration statements are filed and declared effective by the SEC.

In January 2007, the company entered into an agreement with Brittany Capital Management Limited (“Brittany”) for a $5,000,000 equity line of credit.  Under this agreement, the company may request drawdowns by delivering a “put notice” to Brittany stating the dollar amount of shares we intend to sell to Brittany.  The purchase price Brittany is required to pay for the shares is equal to 93% of the “market price.”  The “market price” is equal to the lowest closing best bid price during the pricing period.  The pricing period is the five-trading-day period beginning on the day Brittany receives a drawdown request.  The amount we may request in a given drawdown is the lesser of (i) 200% of the average daily U.S. market trading volume of our common stock for the three trading days prior to the request multiplied by the average of the three daily closing best bid prices immediately preceding our request, or (ii) $500,000.  In January 2007, a registration statement was declared effective by the SEC, registering 4,200,000 shares for resale by Brittany.  As of April 20, 2007, the company had issued 4,200,000 shares to Brittany, and thus is unable to make additional drawdowns under the Brittany equity line until a new registration statement is filed and declared effective by the SEC.  In April 2007, the company filed a registration statement to register an additional 2,800,000 shares for resale by Brittany, which, as of the date of this report, has not been declared effective by the SEC.

The company also has a $5,000,000 equity line of credit agreement with Dutchess Private Equities Fund, L.P. (“Dutchess”).  Similar to the Brittany equity line, the company makes drawdown requests, and Dutchess purchases a number of shares at a price equal 93% of the market price of our stock to fund the drawdown requests.  To date, the company has drawn down approximately $3.8 million under the Dutchess equity line.  In December 2006, based on a new interpretation of Rule 415 by the staff of the SEC, the SEC limited the number of shares we could register for resale by Dutchess.  As a result, the company may not register additional shares for resale by Dutchess until mid-June 2007, and is thus currently unable to make drawdown requests under the Dutchess equity line.

Contractual Obligations

The following table sets forth contractual obligations to be settled in cash as of February 28, 2007:

(Thousands of dollars)
Contractual Obligations

 

Total

 

Less than
1 year

 

1-3 years

 

3-5 years

 

More than
5 years

Debt Obligations (Current & Long Term)

 

$

7,844

 

$

2,200

 

$

5,644

 

$

 

$

Operating Lease Obligations

 

 

719

 

 

150

 

 

569

 

 

 

 

Total

 

$

8,563

 

$

2,350

 

$

6,213

 

$

 

$

The company’s contractual obligations consist of long-term debt and interest as set forth in Note 4 to the company’s financial statements, Notes Payable and Long-Term Debt, and certain obligations for office space operating leases requiring future minimal commitments under non-cancelable leases set forth in Note 7–Commitments and Contingent Liabilities.



21



Off-Balance Sheet Arrangements

As of February 28, 2007, we did not have any significant off-balance-sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

CRITICAL ACCOUNTING POLICIES

The Consolidated Financial Statements and Notes to Consolidated Financial Statements contain information that is pertinent to this management’s discussion and analysis.  Management strives to report the financial results of the company in a clear and understandable manner, even though in some cases accounting and disclosure rules are complex and require us to use technical terminology.  In preparing our consolidated financial statements, we follow accounting principles generally accepted in the United States.  These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations as reflected in our financial statements.  These judgments and estimates are based on past events and expectations of future outcomes.  Management believes it has exercised proper judgment in determining these estimates based on the facts and circumstances available to its management at the time the estimates were made.  Actual results may differ from our estimates.

Management continually reviews its accounting policies, how they are applied and how they are reported and disclosed in our financial statements.  Following is a summary of our more significant accounting policies and how they are applied in the preparation of the financial statements.

Revenue Recognition

The company’s revenue recognition policy is objective in that it recognizes revenue when products are shipped or services are delivered.  Accordingly, there are no estimates or assumptions that have caused deviation from its revenue recognition policy.  Additionally, the company has a limited amount of sales returns which would affect its revenue earned.

Eagle accounts for arrangements that contain multiple elements in accordance with EITF 00-21, “Revenue Arrangements with Multiple Deliverables”.  When elements such as hardware, software and consulting services are contained in a single arrangement, or in related arrangements with the same customer, Eagle allocates revenue to each element based on its relative fair value, provided that such element meets the criteria for treatment as a separate unit of accounting.  The price charged when the element is sold separately generally determines fair value.  In the absence of fair value for a delivered element, Eagle allocates revenue first to the fair value of the undelivered elements and allocates the residual revenue to the delivered elements.  In the absence of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a delay of revenue recognition for the delivered elements until the undelivered elements are fulfilled.  Eagle limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services or subject to customer-specified return or refund privileges.

Allowance Method Used to Record Bad Debts

The company uses the allowance method to account for uncollectible accounts receivable.  The company’s estimate is based on historical collection experience and a review of the current status of accounts receivable.  The company reviews its accounts receivable balances by customer for accounts greater than 90 days old and makes a determination regarding the collectibility of the accounts based on specific circumstances and the payment history that exists with such customers.  The company also takes into account its prior experience, the customer’s ability to pay and an assessment of the current economic conditions in determining the net realizable value of its receivables.  The company also reviews its allowances for doubtful accounts in aggregate for adequacy following this assessment.  Accordingly, the company believes that its allowances for doubtful accounts fairly represent the underlying collectibility risks associated with its accounts receivable.

Deferred Revenues

Revenues that are billed in advance of services being completed are deferred until the conclusion of the period of the service for which the advance billing relates.  Deferred revenues are included on the balance sheet as a current liability until the service is performed and then recognized in the period in which the service is completed.

Impairment Assessment

Statement of Financial Accounting Standards No. 142 (SFAS 142), “Goodwill and Other Intangible Assets” requires that goodwill and intangible assets be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances.  The carrying amount of an intangible asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  That assessment shall be based on the carrying amount of the asset at the date it is tested for recoverability.



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The company performed, with the assistance of independent valuation experts, an impairment test of the carrying value of intangible assets.  Eagle has intangible assets related to goodwill, contracts, customers and subscribers.  For the year ended August 31, 2006, the company determined there had been continued erosion of contract rights, customer relationships and other intangible assets primarily attributable to the BDS assets acquired in the January 2001 merger of Clearworks.net, Inc.

These intangible assets were valued using a present value technique of future cash flows since no quoted market for these intangible assets was available.  The future cash flows were based on supportable assumptions provided by management based on historical performance, current contracts in place, future plans and market information and were reviewed by the outside valuation experts for reasonableness.  In addition, multiple scenarios were considered and each cash flow alternative was probability weighted.  The fair value assigned to the intangible asset was the discounted future weighted cash flows.

Utilizing a fair value standard as set forth in SFAS 142, as of August 31, 2006, management determined an impairment charge of $3,427,830 existed for the intangible assets of contract rights, customer relationships and other intangible assets primarily attributable to the BDS assets acquired in the January 2001 merger of Clearworks.net, Inc.

Utilizing a fair value standard as set forth in SFAS 142, as of August 31, 2005, management determined an impairment charge of $23,913,000 existed for the intangible assets of contract rights, customer relationships and other intangible assets primarily attributable to the BDS assets acquired in the January 2001 merger of Clearworks.net, Inc.

Management assessed the fair value of intangibles and concluded that no impairment exists for the quarter ended February 28, 2007. However, management assesses the fair value of intangibles on a quarterly basis and may determine that an impairment is necessary in future periods.

Eagle assessed the fair value of goodwill as of August 31, 2006 and concluded that the goodwill valuations remain at an amount greater than the current carrying asset value.  Eagle assessed the fair value of the intangible assets as of August 31, 2005 and concluded that the goodwill and other intangible assets valuations remain at an amount greater than the current carrying and other intangible assets value. Eagle assessed the fair value of the intangible assets as of August 31, 2004 and concluded that the goodwill and other intangible assets valuations remain at an amount greater than the current carrying and other intangible assets value.



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Impairment of Long-Lived Assets

Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets” requires that long-lived assets (asset groups) shall be tested for recoverability whenever events or change in circumstances indicate that its carrying amount may not be recoverable.  The company’s market capitalization for the years ending August 31, 2006 and 2005, has been below the book value of these assets which indicated the need to test for recoverability.  The company performed, with the assistance of independent valuation experts, tests to determine if an impairment loss existed.  For purposes of recognition and measurement of an impairment loss, a long-lived asset is grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets.

These tests took into consideration a number of factors including (i) current market conditions, (ii) the company’s current and future financial performance, (iii) intrinsic risks evident in the markets in which the company operates and (iv) the underlying nature of Eagle’s operations and business.

Utilizing a fair value standard as set forth in SFAS 144 as of August 31, 2006, management determined an impairment of $10,341,262 existed for certain Houston-area communities where broadband infrastructure had been installed.

Utilizing a fair value standard as set forth in SFAS 144 as of August 31, 2005, management determined an impairment of $3,230,000 existed for certain Houston-area communities where broadband infrastructure had been installed.

Management assessed the fair value of long-lived assets and concluded that no impairment exists for the quarter ended February 28, 2007. However, management assesses the fair value of long-lived assets on a quarterly basis and may determine that an impairment is necessary in future periods.

Accounting for Stock-Based Compensation

In December 2004, the FASB issued a revision to SFAS 123 (also known as SFAS 123R) that amends existing accounting pronouncements for share-based payment transactions in which an enterprise receives employee and certain non-employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments.  SFAS 123R eliminates the ability to account for share-based compensation transactions using APB 25 and generally requires such transactions be accounted for using a fair-value-based method.  SFAS 123R’s effective date would be applicable for awards that are granted, modified, become vested, or settled in cash in interim or annual periods beginning after December 15, 2005.  SFAS 123R includes three transition methods: one that provides for prospective application and two that provide for retrospective application.  The company adopted SFAS 123R prospectively commencing in the first quarter of the fiscal year ending August 31, 2006.  The adoption of SFAS 123R will cause the company to record as expense each quarter a non-cash accounting charge approximating the fair value of such share-based compensation meeting the criteria outlined in the provisions of SFAS 123R.

Derivative Financial Instruments

The company accounts for all derivative financial instruments in accordance with SFAS No. 133.  Derivative financial instruments are recorded as liabilities in the consolidated balance sheet, measured at fair value.

In connection with the sale of debt or equity instruments, we may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity.  Additionally, the debt or equity instruments may contain embedded derivative instruments, such as embedded derivative features, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.

Derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur.  For options, warrants and bifurcated embedded derivative features that are accounted for as derivative instrument liabilities, we estimate fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques.  The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option.  We have estimated the future volatility of our common stock price based on not only the history of our stock price but also the experience of other entities considered comparable to us.  The fair value of the derivative liabilities are subject to the changes in the trading value of the company’s common stock.  As a result, the company’s financial statements may fluctuate from quarter to quarter based on factors such as the price of the company’s stock at the balance sheet date and the amount of shares converted by note holders and/or exercised by warrant holders.  Consequently, our financial position and results of operations may vary from quarter to quarter based on conditions other than our operating revenues and expenses.



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Under SFAS No. 133, all derivative financial instruments held by the company are not designated as hedges.

Discontinued Operations

In accordance with the provisions of Statement of Financial Accounting Standard, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), the results of operations of the disposed assets and the losses related to the sale of the component of residential security monitoring have been classified as discontinued operations for all periods presented in the accompanying consolidated statements of operations.

Item 4.

Controls and Procedures.

The company’s Chief Executive Officer and Principal Accounting Officer have evaluated the effectiveness of the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of February 28, 2007.  Based on such evaluation, such officers have concluded that the company’s disclosure controls and procedures are effective.

Changes in Internal Controls

There has been no change in the company’s internal control over financial reporting identified in connection with our evaluation as of the end of the fiscal quarter ended February 28, 2007, that has materially affected, or is reasonably likely to materially affect, the company’s internal controls over financial reporting.



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PART II–OTHER INFORMATION

Item 1.

Legal Proceedings.

In December 2006, the company reached a settlement in a lawsuit filed by the company in December 2005 against Neva Holdings, LLC (“Neva”) and other entities affiliated with Neva for breach of a Termination Agreement entered into in August 2005 between the company and Neva.

Item 1A.

Risk Factors.

We have a history of operating losses and may never achieve profitability.

From inception through February 28, 2007, we have incurred an accumulated deficit in the amount of $248,804,000.  For the six months ended February 28, 2007, we incurred losses from continuing operations in the amount of $7,755,000.  We anticipate that we will incur losses from operations for the foreseeable future.  Our future revenues may never exceed operating expenses, thereby making the continued viability of our company dependent upon raising additional capital.

As we have not generated positive cash flow from operations, our ability to continue operations is dependent on our ability to either begin to generate positive cash flow from operations or our ability to raise capital from outside sources.

We have not generated positive cash flow from operations and have relied on external sources of capital to fund operations.  At February 28, 2007, we had approximately $689,000 in cash, cash equivalents and securities available for sale, and a working capital deficit of approximately $13,916,000.  Our net cash used by operations for the six months ended February 28, 2007, was approximately $3,842,000.

In April 2007, our common stock was removed from listing on the American Stock Exchange, which could limit investors’ ability to make transactions in our common stock and subject our common stock to “penny stock” trading restrictions.

On November 29, 2006, the company received notice from the American Stock Exchange (“Amex”) that the company did not satisfy certain of the Amex’s continued listing standards concerning shareholders equity and losses from continuing operations.  On January 5, 2007, the company submitted a plan demonstrating the company’s ability to satisfy such continued listing standards.  On February 7, 2007, the company received notice from the Amex that the staff of the Amex’s Listing Qualifications Department determined not to accept the company’s plan, and the company requested a hearing before an Amex Listing Qualifications Panel.  On March 27, 2007, company notified the Amex that the Board of Directors of the company determined not to pursue the hearing before the Panel, and the company’s stock was removed from listing on the Amex effective April 9, 2007.

Delisting from the Amex could result in a limited availability of market quotations for our common stock and will likely result in a designation of our common stock as a “penny stock” under SEC Rule 3a51-1.  The principal effect of being designated a “penny stock” is that securities broker-dealers cannot recommend our stock but must trade it on an unsolicited basis.  Such a designation may result in a reduced level of trading activity in the secondary trading market for our common stock, a limited amount of news and analyst coverage for our company and a decreased ability to issue additional securities or obtain additional financing in the future.



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Item 6.

Exhibits.

Exhibit Number

 

Description

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Chief Executive Officer and Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

EAGLE BROADBAND, INC.

 

 

Date: April 23, 2007

By:   /s/ DAVID MICEK

 

David Micek

 

President and Chief Executive Officer

 

 

Date: April 23, 2007

By:   /s/ MARK MANN

 

Mark Mann

 

Corporate Controller and Principal Accounting Officer






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