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PROXIM WIRELESS CORP 10-Q 2008 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
OR
Commission
File Number 000-29053
PROXIM
WIRELESS CORPORATION
(Exact
name of registrant as specified in its charter)
2115
O’NEL DRIVE
SAN
JOSE, CA 95131
(Address
of principal executive offices)
(408)
731-2700
(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. Yes S No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No S
As of May
12, 2008, there were 23,519,069 shares of the registrant’s common stock
outstanding.
PROXIM WIRLESS CORPORATION
INDEX
PART I – FINANCIAL INFORMATION
This
Quarterly Report on Form 10-Q contains forward-looking statements as defined by
federal securities laws. Forward-looking statements are predictions
that relate to future events or our future performance and are subject to known
and unknown risks, uncertainties, assumptions, and other factors that may cause
actual results, outcomes, levels of activity, performance, developments, or
achievements to be materially different from any future results, outcomes,
levels of activity, performance, developments, or achievements expressed,
anticipated, or implied by these forward-looking
statements. Forward-looking statements should be read in light of the
cautionary statements and important factors described in this Form 10-Q,
including Part II, Item 1A — Risk Factors. We undertake no obligation
to update or revise any forward-looking statement to reflect events,
circumstances, or new information after the date of this Form 10-Q or to reflect
the occurrence of unanticipated or any other subsequent events.
Item 1. Financial Statements. PROXIM WIRELESS CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
See
accompanying notes
PROXIM WIRELESS CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
(Unaudited)
See
accompanying notes
PROXIM WIRELESS CORPORATION
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(In
thousands, except share data)
(Unaudited)
See
accompanying notes
PROXIM WIRELESS CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
See
accompanying notes PROXIM WIRELESS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
consolidated financial statements of Proxim Wireless Corporation (the “Company”
or “Proxim Wireless”) for the three month period ended March 31, 2008 and 2007
are unaudited and include all adjustments which, in the opinion of management,
are necessary to present fairly the financial position and results of operations
for the periods then ended. All such adjustments are of a normal
recurring nature except for the reporting of discontinued operations related to
Ricochet Networks, Inc. (see Note 11). These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2007 filed with the Securities and Exchange
Commission.
The
Company provides high-speed wireless communications equipment in the United
States and internationally. Its systems enable service providers,
enterprises, and governmental organizations to deliver high-speed data
connectivity enabling a broad range of applications. The Company
provides wireless solutions for the mobile enterprise, security and
surveillance, last mile access, voice and data backhaul, and municipal
networks. The Company believes its fixed wireless systems address the
growing need of our customers and end-users to rapidly and cost effectively
deploy high-speed communication networks.
The
Company changed its corporate name to “Proxim Wireless Corporation” from
“Terabeam, Inc.” effective September 10, 2007. Effective that same
date, the Company’s stock ticker symbol was changed to “PRXM” from
“TRBM.”
Proxim
Wireless operates in the broadband wireless equipment market
place. Proxim Wireless is a designer, manufacturer, and seller of
wireless telecommunications equipment (“Equipment”) which generated all of the
Company’s revenues and expenses during the first three months of
2008.
Prior to
the third quarter of 2007, Proxim Wireless and its subsidiaries also operated in
the services business. This services business (“Services”) was
acquired with the acquisition of Ricochet Networks, Inc. during the second
quarter of 2004 and was conducted through that Ricochet Networks
subsidiary. The Company announced the sale on July 31, 2007 of the
Ricochet wireless network and operations for greater Denver metropolitan area to
Civitas Wireless Solutions, LLC (“Civitas”). In addition, we announced that
Ricochet Networks, Inc. ceased operations of the San Diego network and is no
longer in the business of providing wireless internet services. There
are no significant inter-company transactions which affect the revenue or
expenses of either segment. As a result, the Services business was
classified as discontinued operations effective in the third quarter of 2007,
and the financial results of the Services business has been excluded from the
historical financial results of the Company’s continuing business beginning in
the third quarter of 2007. The Company now operates only one business segment,
broadband wireless equipment.
The
results of operations for any interim period are not necessarily indicative of
the results of operations for any other interim period or for a full fiscal
year.
Prior to
2006, the Company accounted for its stock-based compensation under the
recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees and related interpretations (“APB 25”). Under APB
25, no stock-based compensation cost was reflected in net income for grants of
stock prior to fiscal year 2006 because the Company grants stock options with an
exercise price equal to or greater than the market value of the underlying
common stock on the date of grant.
Effective
January 1, 2006 the Company adopted Statement of Financial Accounting Standards
No. 123 (Revised 2004) Share-Based Payment (“SFAS 123R”), which requires
the measurement and recognition of compensation
cost at fair value for all share-based payments, including stock options.
Stock-based compensation for 2007 and 2008 includes compensation expense,
recognized over the applicable vesting periods, for new share-based awards and
for share-based awards granted prior to, but not yet vested, as of December 31,
2005 (modified prospective application). Stock-based compensation for the
three-month periods ended March 31, 2008 and March 31, 2007 totaled
approximately $320,000 and $480,000, respectively
For the
quarter ended March 31, 2008, the operating loss from continuing operations was
$320,000 higher, and the basic and diluted loss per share were $0.01
higher, due to the adoption of SFAS 123R. Net cash used in operating
activities and net cash provided by financing activities were not changed by the
adoption of SFAS 123R.
The fair
value of each option grant has been estimated as of the date of grant using the
Black-Scholes options pricing model with the following weighted average
assumptions for 2008 and 2007: risk-free interest rate of 4.26% -
5.02% and 4.50% - 4.81%, expected life of four years for both years, volatility,
calculated using historical volatility, of 157% - 284% and 235% - 240% and
dividend rate of zero percent, respectively. Using these assumptions,
the weighted average fair value of the stock options granted in the quarter
ended March 31, 2008 was $0.82, and the weighted average fair value of the stock
options granted in the same time period in 2007 was $2.09. The fair value of the
stock options granted will be amortized as compensation expense over the vesting
period of the options. Estimates of fair value are not intended to
predict actual future events or the value ultimately realized by employees who
receive equity awards, and subsequent events are not indicative of the
reasonableness of the original estimates of fair value made by the Company under
SFAS 123R.
No tax
effects are recognized currently for the granting of share-based compensation
arrangements as the Company currently cannot estimate the realizability of
related tax benefits as the Company is in a net operating tax loss position with
tax NOL as described in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2007, as filed with the SEC.
The
Company reports comprehensive income in accordance with SFAS No. 130, “Reporting
Comprehensive Income.” During the three months ended March 31, 2008
and 2007, the Company had comprehensive losses from continuing operations of
$5.2 million and $2.7 million, respectively, including approximately $ 0 and
$34,000, respectively, of unrealized (losses) gains on available-for-sale
investments, net of income taxes of $0 for each period.
Inventory
consisted of the following at the indicated dates (in thousands):
Schedule
of Non-Amortizable Assets
Schedule
of Amortizable Assets
Amortization
is computed using the straight-line method over the estimated useful life, based
on the Company’s assessment of technological obsolescence of the respective
assets. Amortization expense for the three months ended March 31,
2008 totaled approximately $0.5 million. The weighted average
estimated useful life is 4.5 years. There is no estimated residual
value.
Property and equipment
consisted of the following balances for the dates indicated (in
thousands):
At March
31, 2008 and 2007, stock options and warrants to purchase shares of common stock
were outstanding but not included in the computation of diluted earnings for the
three month periods ended March 31, 2008 and 2007 because there was a net loss
for each of the applicable periods, and the effect would have been
anti-dilutive.
During
the three months ended March 31, 2008, there were two customers who accounted
for approximately 21% of consolidated sales, and in the corresponding three
months of 2007 these same customers accounted for 29% of consolidated
sales.
The
Company maintains the majority of its cash, cash equivalent, and restricted cash
balances at two major US banks. The balances are insured by the
Federal Deposit Insurance Corporation up to $100,000 per bank. At
March 31, 2008 and 2007, the uninsured portion totaled approximately $7.8
million and $7.5 million, respectively.
In
February 2006, the Company entered into a settlement agreement with Symbol
Technologies, Inc. and its subsidiaries (“Symbol”) resolving all outstanding
litigation between the companies.
The
Company recorded an intangible asset related to the license at December 31, 2005
based on the present value of the scheduled payments, and will amortize the
intangible asset over the useful life of the patents through
2014. The amortization expense recorded for the three months ended
March 31, 2008 totaled approximately $105,000. The Company also
recorded a license payable equal to the present value of the scheduled
payments. License agreements payable consisted (in
thousands):
Payouts
of License Agreements are as follows as of March 31, 2008, for the twelve months
ended (in thousands):
Warranty costs for the three
months ended March 31, 2008 were below the comparable quarter ended March 31,
2007. This reduction was due to an increase in the number of parts having
exhausted their warranty coverage without offsetting new reserve
requirements.
The
Company’s Services business was discontinued in the third quarter of
2007. That business was acquired with the acquisition of Ricochet
Networks, Inc. during the second quarter of 2004 and was conducted through that
Ricochet Networks subsidiary. The Company announced the sale on July
31, 2007 of the Ricochet wireless network and operations for greater Denver
metropolitan area to Civitas Wireless Solutions, LLC (“Civitas”). RNI received
(a) the assumption by Civitas generally of obligations relating to the operation
of the Ricochet® wireless network in the Denver, Colorado metropolitan
area, (b) a cash payment of $200,000, (c) 15% equity ownership in Civitas, and
(d) potential future payments contingent on certain future potential business of
Civitas. Ricochet Networks generally retained the obligations
relating to the operation of the Ricochet network in the San Diego, California
metropolitan area, the operation of which Ricochet Networks discontinued on July
31, 2007. In addition, substantially all of Ricochet Networks’ employees
were terminated effective July 31, 2007 and subsequently re-hired by
Civitas.
As a
result, Ricochet Networks is no longer in the business of providing wireless
internet services. The sale of the Denver metropolitan business to
Civitas, as well as reserve for closure of the San Diego network, was recorded
during the third quarter of 2007, and amounted to a loss of $51,000 for the
quarter ended March 31, 2008. Accordingly, the Services business
segment is being accounted for as a discontinued operation and the results of
the operations of the Services segment have been removed from the Company’s
financial statements for its continuing operations for all periods and is being
presented as a separate line item in the consolidated statement of operations
for discontinued operations.
On March,
28, 2008, the Company entered into a loan and security agreement (the “Loan
Agreement”) with a major multinational bank. The Loan Agreement
provides for a $7.5 million revolving line of credit and includes sublimits for
letters of credit, credit card services, and foreign exchange
contracts. However, the aggregate outstanding amount may not exceed
Proxim’s borrowing base as established under the Loan
Agreement. Proxim’s borrowing base generally is an amount equal to
80% of Proxim’s eligible accounts receivable subject to adjustment by the bank
(the current percentage being 70%). As of March 31, 2008, Proxim had
an outstanding loan balance of $3 million under this loan agreement. As a
continuing financial covenant, the Company must maintain a ratio of cash plus
eligible accounts receivable to current liabilities less deferred revenue of at
least 1.05 to 1.00. At the
end of the first quarter of 2008, the Company was not in compliance with that
financial covenant and has sought and obtained a waiver of that non-compliance
from the bank. The Loan Agreement may be amended to revise that
financial covenant and possibly add other financial and other
covenants. Any failure to negotiate acceptable amended covenants
could jeopardize our ability to satisfy our capital requirements and therefore
our ability to continue as a going concern. The accompanying
financial statements have been prepared assuming the Company will continue as a
going concern. No adjustments have been made as if the Company were
unable to continue as a going concern.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (“GAAP”), and expands disclosures about fair
value measurements. SFAS 157 does not require any new fair value measurements in
financial statements, but standardizes its definition and guidance in GAAP.
Thus, for some entities, the application of this statement may change current
practice. SFAS 157 is effective for the Company beginning on January 1,
2008. The Company is currently evaluating the impact that the adoption of this
statement may have on its financial position and results of operations. The
provisions of SFAS 157 did not have a material impact on our consolidated
financial statements.
In
February, 2007, the FASB issued SFAS 159 (“SFAS 159”) “The Fair Value Option for
Financial Assets and Financial Liabilities”. SFAS 159 permits entities to choose
to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the
impact of SFAS 159 on its consolidated financial position and results of
operations. The provisions of SFAS 159 did not have a material impact on our
consolidated financial statements.
In
December, 2007, the FASB issued SFAS 141R (“SFAS 141[R]”) Business Combinations:
Applying the Acquisition Method (SFAS 141[R]). SFAS 141[R] retains the
fundamental requirements of SFAS 141, but provides guidance on applying the
acquisition method when accounting for similar economic events including:
recognition and measurement of assets acquired, liabilities assumed and equity
interests. Recognition and measurement of goodwill acquired, and gains from
bargain purchase options. SFAS 141[R] is effective for years beginning on or
after December 15, 2008. The Company is currently assessing the impact of SFAS
141[R] on its consolidated financial position and results of
operation.
In
December, 2007 the FASB issued SFAS 160, Non Controlling Interests in
Consolidated Financials, an Amendment of ARB No. 51 (SFAS 160). SFAS 160
provides guidance for accounting and reporting of non-controlling interests in
consolidated financial statements, including:
SFAS 160
is effective for years beginning on or after December 15, 2008. The Company is
currently assessing the impact of SFAS 160 on its consolidated financial
position and results of operation.
IPO
Litigation
During
the period from June 12 to September 13, 2001, four purported securities
class action lawsuits were filed against Telaxis Communications Corporation, a
predecessor company to Proxim Wireless Corporation, in the U.S. District Court
for the Southern District of New York: Katz v. Telaxis Communications
Corporation et al., Kucera v. Telaxis Communications Corporation et al.,
Paquette v. Telaxis Communications Corporation et al., and Inglis v. Telaxis
Communications Corporation et al. The lawsuits also named one or more
of the underwriters in the Telaxis initial public offering and certain of its
officers and directors. On April 19, 2002, the plaintiffs filed a
single consolidated amended complaint which supersedes the individual complaints
originally filed. The amended complaint alleges, among other things,
violations of the registration and antifraud provisions of the federal
securities laws due to alleged statements in and omissions from the Telaxis
initial public offering registration statement concerning the underwriters’
alleged activities in connection with the underwriting of Telaxis’ shares to the
public. The amended complaint seeks, among other things, unspecified
damages and costs associated with the litigation. These lawsuits have
been assigned along with, we understand, approximately 1,000 other lawsuits
making substantially similar allegations against approximately 300 other
publicly-traded companies and their public offering underwriters to a single
federal judge in the U.S. District Court for the Southern District of New York
for consolidated pre-trial purposes. We believe the claims against us
are without merit and have defended the litigation vigorously. The
litigation process is inherently uncertain, however, and there can be no
assurance that the outcome of these claims will be favorable for
us.
On July
15, 2002, together with the other issuer defendants, Telaxis filed a collective
motion to dismiss the consolidated amended complaint against the issuers on
various legal grounds common to all or most of the issuer
defendants. The underwriters also filed separate motions to dismiss
the claims against them. In October 2002, the court approved a
stipulation dismissing without prejudice all claims against the Telaxis
directors and officers who had been defendants in the litigation. On
February 19, 2003, the court issued its ruling on the separate motions to
dismiss filed by the issuer defendants and the underwriter
defendants. The court granted in part and denied in part the issuer
defendants’ motions. The court dismissed, with prejudice, all claims
brought against Telaxis under the anti-fraud provisions of the securities
laws. The court denied the motion to dismiss the claims brought under
the registration provisions of the securities laws (which do not require that
intent to defraud be pleaded) as to Telaxis and as to substantially all of the
other issuer defendants. The court denied the underwriter defendants’
motion to dismiss in all respects.
In June
2003, along with virtually all of the other non-bankrupt issuer defendants, we
elected to participate in a proposed settlement agreement with the plaintiffs in
this litigation. If the proposed settlement had been approved by the
court, it would have resulted in the dismissal, with prejudice, of all claims in
the litigation against us and against the other issuer defendants who elected to
participate in the proposed settlement, together with the current or former
officers and directors of participating issuers who were named as individual
defendants. This proposed settlement was conditioned on, among other
things, a ruling by the court that the claims against us and against the other
issuers who had agreed to the settlement would be certified for class action
treatment for purposes of the proposed settlement, such that all investors
included in the proposed classes in these cases would be bound by the terms of
the settlement unless an investor opted to be excluded from the settlement.
On
December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a
decision in In re Initial
Public Offering Securities Litigation that six purported class action
lawsuits containing allegations substantially similar to those asserted against
us may not be certified as class actions due, in part, to the Appeals Court’s
determination that individual issues of reliance and knowledge would predominate
over issues common to the proposed classes. On January 8, 2007, the
plaintiffs filed a petition seeking rehearing en banc of the Second Circuit
Court of Appeals’ decision. On April 6, 2007 the Court of Appeals denied the
plaintiffs’ petition for rehearing of the Court’s December 5, 2006 ruling but
noted that the plaintiffs remained free to ask the District Court to
certify classes
different from the ones originally proposed which might meet the standards for
class certification that the Court of Appeals articulated in its December 5,
2006 decision. The plaintiffs have since moved for certification of
different classes in the District Court.
In light
of the Court of Appeals’ December 5, 2006 decision regarding certification of
the plaintiffs’ claims, the District Court entered an order on June 25, 2007
terminating the proposed settlement between the plaintiffs and the issuers,
including us. Because it is expected that any possible future settlement with
the plaintiffs, if such a settlement were ever to be agreed to, would involve
the certification of a class action for settlement purposes, the impact of the
Court of Appeals’ class certification-related rulings on the possible future
settlement of the claims against us cannot now be predicted.
On August
14, 2007, the plaintiffs filed amended complaints in the six focus
cases. The issuer defendants and the underwriter defendants
separately moved to dismiss the claims against them in the amended complaints in
the six focus cases. On March 26, 2008, the District Court issued an
order in which it denied in substantial part the motions to dismiss the amended
complaints in the six focus cases. In addition, on October 1, 2007,
the plaintiffs submitted their briefing in support of their motions to certify
different classes in the six focus cases. The issuer defendants and
the underwriter defendants filed separate oppositions to those motions on
December 21, 2007. The motions to certify classes in the six focus
cases remain pending.
We intend
to continue to defend the litigation vigorously. The litigation
process is inherently uncertain and unpredictable, however, and there can be no
guarantee as to the ultimate outcome of this pending
lawsuit. Moreover, we believe that the underwriters may have an
obligation to indemnify us for the legal fees and other costs of defending these
suits. While there can be no assurance as to the ultimate outcome of
these proceedings, we currently believe that the final result of these actions
will have no material effect on our consolidated financial condition, results of
operations, or cash flows.
Linex
Technologies, Inc. Litigation
On June
1, 2007, Linex Technologies, Inc. filed suit against Proxim Wireless Corporation
for alleged patent infringement in the United States District Court for the
Eastern District of Texas, Marshall Division. Other named defendants
in this lawsuit are Belair Networks, Inc., Cisco Systems, Inc., Firetide, Inc.,
and Skypilot Networks, Inc. This lawsuit generally alleges that
Proxim’s mesh products infringe two United States patents purportedly owned by
Linex. Linex is seeking damages allegedly caused by the alleged
infringement of its two patents. This matter is at an extremely early
stage. We believe the claims against us are without merit and intend
to defend the litigation vigorously. The litigation process is
inherently uncertain, however, and there can be no assurance that the outcome of
these claims will be favorable for us.
KarlNet
On May
13, 2004, Proxim Wireless Corporation acquired KarlNet. The
definitive acquisition agreement contained provisions that provided for certain
contingent consideration after the initial acquisition date. Proxim
Wireless Corporation may pay up to an additional $2.5 million over the two years
following closing based on achievement of certain milestones and compliance with
other conditions. Although the Company has received a letter from
sellers demanding payment of the first $1.0 million contingent payment, it is
the Company’s position that, as of March 31, 2008, no events have occurred that
have triggered the obligation to pay any of the contingent
consideration.
General
We are
subject to potential liability under contractual and other matters and various
claims and legal actions which are pending or may be asserted against us or our
subsidiaries, including claims arising from the termination of the operations of
Ricochet Networks, Inc. in the San Diego metropolitan area and the transfer of
the operations of Ricochet Networks, Inc. in the Denver metropolitan area to
Civitas Wireless Solutions, LLC. These matters may arise in the
ordinary course and conduct of our business. While we cannot predict
the outcome of such
claims and legal actions with certainty, we currently believe that
such matters should not result in any liability which would have a material
adverse affect on our business.
We
received notification prior to the end of the quarter that one of our customers
in Latin America intended to return equipment previously recognized in revenue
in the prior year. As a result we reversed approximately $0.5 million in
revenue, and $0.1 million in cost associated with this return. The physical
return occurred during April, 2008 and was related to the customer’s inability
to pay their outstanding balance. We successfully negotiated for return of their
surplus inventory in exchange for forgiveness of their trade receivable
outstanding.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
Overview
We
provide high-speed wireless communications equipment in the United States and
internationally. Our systems enable service providers, enterprises,
and municipal and other governmental organizations to deliver high-speed data
connectivity enabling a broad range of voice and data
applications. These applications include security, surveillance,
mobile communications, and backhaul. We provide wireless solutions
for the mobile enterprise, security and surveillance, last mile access, voice
and data backhaul, and municipal networks. We believe our fixed
wireless systems address the growing need of our customers and end-users to
rapidly and cost effectively deploy high-speed broadband communication
networks.
We
changed our corporate name to “Proxim Wireless Corporation” from “Terabeam,
Inc.” effective September 10, 2007. This name change was effected by
means of merging Proxim Wireless Corporation, which was a wholly owned
subsidiary of Terabeam, Inc., with and into Terabeam, Inc. with Terabeam, Inc.
being the surviving company but with a corporate name of “Proxim Wireless
Corporation.” Effective that same date, our stock ticker symbol was
changed to “PRXM” from “TRBM.”
Proxim
Wireless operates in the broadband wireless equipment market
place. Proxim Wireless is a designer, manufacturer, and seller of
wireless telecommunications equipment (“Equipment”) which generated all of the
Company’s revenues and expenses during the first three months of
2008.
Prior to
the third quarter of 2007, Proxim Wireless and its subsidiaries also operated in
the services business. This services business (“Services”) was
acquired with the acquisition of Ricochet Networks, Inc. during the second
quarter of 2004 and was conducted through that Ricochet Networks
subsidiary. The Company announced the sale on July 31, 2007 of the
Ricochet wireless network and operations for greater Denver metropolitan area to
Civitas Wireless Solutions, LLC (“Civitas”). In addition, we announced that
Ricochet Networks, Inc. ceased operations of the San Diego network and is no
longer in the business of providing wireless internet services. As a
result, the Services business was classified as discontinued operations
effective in the third quarter of 2007, and the financial results of the
Services business has been excluded from the historical financial results of the
Company’s continuing business beginning in the third quarter of
2007.
Critical
Accounting Policies
The preparation of our consolidated
financial statements in accordance with accounting principles generally accepted
in the United States of America requires us to make estimates and assumptions
that affect: the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements; and the reported amounts of revenues and expenses during the
reporting periods. We are required to make judgments and estimates
about the effect of matters that are inherently uncertain. Actual
results could differ from our estimates. The most significant areas
involving our judgments and estimates are described below.
Revenue
Recognition
Product
revenue is generally recognized upon shipment in accordance with Staff
Accounting Bulletin 104 (“SAB 104”), when persuasive evidence of an arrangement
exists, the price is fixed or determinable, and collection is
reasonably assured. The Company offers most stocking distributors a stock
rotation right pursuant to which they may return products that have been
recently purchased provided they place an equal value order for new products
from us and the value of the returned products is a small fraction of the value
of products purchased from us in the preceding quarter. In general, we also
offer most stocking distributors price protection on products in their inventory
or recently purchased from us in cases where we reduce prices on these products.
In both cases, the distributors would receive a credit which can be used for
purchase of additional products from us. In a small number of cases, we have
agreed to accept return of discontinued or obsolete products. For other
customers, we provide quarterly or annual rebates based on achievement of
performance targets, loyalty discounts, and/or sales discounts. We
apply SFAS No. 48,”Revenue Recognition When Right if Return Exists,” in
determining when to recognize revenue. Under SFAS No. 48 revenue can
be recognized if all of the following conditions are met:
Based on
our application of the SFAS No. 48 principles to our different customers, we
currently recognize some revenue on a “sell in” basis and some on a deferred
“sell through” basis. Generally factors 1 through 5 are satisfied
upon our delivery of the products to our customer. The estimation of future
returns depends on contractual terms and our historical experience with the
customer.
Proxim
revenue consists of direct shipments to customers or other equipment
manufacturers (OEM), and distributors who resell our products to third party
customers.
In the
case of direct customers or OEM manufacturers we recognize revenue at point of
shipment from either Proxim’s facility or from our contract manufacturer’s
facilities when the product is shipped from the respective docks since title and
acceptance are passed to the end customer. We meet the conditions of SAB #104,
and SFAS No. 48 for revenue recognition at point of shipment for direct customer
and OEM sales.
In the
case of Proxim products which are sold to distributors we generally recognize
revenue to most distributors on a “sell in” basis at point of shipment since we
have met all of the conditions specified in SAB104, and SFAS No. 48 at point of
shipment to the distributors.
As
mentioned previously we offer most stocking distributors a stock rotation right
pursuant to which they may rotate products for comparable value in their
inventory that have been recently purchased from us and the value of the
returned product is a relatively small percentage of the product purchased from
us in the preceding quarter. In addition, we also offer most stocking
distributors price protection on products in their inventory and recently
purchased from us in cases where we have reduced prices on those products. These
stock rotations and price discounts must be claimed and exercised within a one
to two quarter time frame to be valid.
In the
case of our three largest stocking distributors, although they have comparable
distribution contracts to the smaller distributors, we have historically
deferred revenue for shipments which are either in transit to them, or are
included in their period ending inventory reports. This revenue deferral
practice for larger distributors has been applied historically by Proxim. These
larger distributors have historically returned more product and requested larger
stock rotations and price discounts versus the smaller distributors which was
the primarily reason that we have historically recognized their revenue using
the “sell through” methodology. Under the “sell through” methodology we
recognize revenue when our products are sold by these three largest stocking
distributors.
For our
services business, and prior to discontinuing the service operations on July 31,
2007, we recognized revenue when the customer paid for and then had access to
our network for the current fiscal period. Any funds the customer paid for
future fiscal periods were treated as deferred revenue and recognized in future
fiscal periods for which the customer was granted access to our
network. The Company did not have revenue from multiple deliverable
arrangements.
Cash
Investments
The
Company considers cash on hand, deposits in banks, money market accounts and
investments with an original maturity of three months or less to be cash or cash
equivalents. Investments consist of investments in investment-grade
marketable equity securities. The Company classifies the investments
as available-for-sale. Such securities are stated at fair value using
published market prices, with any material unrealized holding gains or losses
reported, net of any tax effects, as accumulated other comprehensive income
(loss), which is a separate component of
stockholders’ equity. Realized gains and losses and declines in value
judged to be other than temporary, if any, are included in
operations.
Accounts
Receivable Valuation
We
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. We assess the
customer’s ability to pay based on a number of factors, including past
transaction history with the customer as well as their creditworthiness.
Management specifically analyzes accounts receivable and historical bad debts,
customer concentrations, customer creditworthiness, current economic trends and
changes in our customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. If the financial condition of any of our
customers were to deteriorate in the future, resulting in an impairment of their
ability to make payments, or they express unwillingness to pay for whatever
reason, additional allowances may be required. We reserve 100% of outstanding
receivable balances (a) from insolvent customers and (b) from customers which
are delinquent by six months or more. We reserve 50% of outstanding receivable
balances that are between 3 months to 6 months delinquent subject to adjustments
as considered appropriate for specific situations.
Inventory
Valuation
Inventories
are stated at the lower of standard cost, which approximates actual cost under
the first-in, first-out method, or market value. We perform a detailed
assessment of inventory at each year-end balance sheet date, which includes,
among other factors, a review of component demand requirements, product
lifecycle and product development plans. Manufacturing inventory includes raw
materials, work-in-process, and finished goods. Inventory valuation provisions
are based on an excess obsolete report which captures all obsolete parts and
products and all other inventory, which have quantities in excess of one year’s
projected demand, or in the case of service inventories demand of up to five
years. Individual line item exceptions are identified for either inclusion or
exclusion from the inventory valuation provision. As a result of this
assessment, we write down inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of the inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual demand and market conditions are less favorable than those
projected by management, additional inventory write-downs may be
required. In addition, on an annual basis we conduct a lower of cost
or market evaluation which may necessitate additional inventory
provisions.
Warranty
Provision
Proxim’s
standard warranty term is one year on the majority of our products and up to two
years on a select group of products. At times we provide longer
warranty terms. Proxim provides an estimated cost of product
warranties at the time revenue is recognized. Factors that affect the
Company’s warranty liability include the number of installed units, historical
and anticipated rates of warranty claims, and costs per claim for repair or
replacement. While we engage in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of our
component suppliers, our warranty obligation is affected by product failure
rates, material usage and service labor costs incurred in correcting a product
failure. Should actual product failure rates, material usage, service labor or
delivery costs differ from our estimates, revisions to the estimated warranty
liability would be required.
Property
and Equipment
Property
and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the respective assets,
which range from two to seven years for personal property and 39 years for real
property.
Valuation
of Stock-based Awards
As of
December 31, 2007, we have one active stock-based employee compensation plan and
four inactive (legacy) plans, which are described more fully in Note 14 in our
Annual Report on Form 10-K filed with the SEC on March 28,
2008. As of
January 1, 2006 we account for stock-based compensation in accordance with the
fair value recognition provisions of SFAS 123R. Under SFAS 123R,
stock-based compensation cost is measured at the grant date based on the value
of the award and is recognized as expense over the vesting period of the
individual equity instrument. Determining the fair value of stock-based awards
at the grant date requires judgment, including estimating the expected term of
stock options, the expected volatility of our stock, and expected dividends. The
computation of the expected volatility assumption used in the Black-Scholes
calculation for option grants is based on historical volatility as options on
our stock are not traded. The Company uses the “simplified” method to
determine the expected term for the “plain vanilla” options. We are
also required to estimate the expected forfeiture of stock options in
recognizing stock-based compensation expense. Further, we have elected to use
the straight-line method of amortization for stock-based compensation related to
stock options granted after January 1, 2006.
Prior to
January 1, 2006, we accounted for stock-based employee compensation plans under
the recognition and measurement provisions of Accounting Principles Board
(APB) Opinion No. 25, “Accounting for Stock Issued
to Employees”
and related Interpretations, as permitted by FASB Statement (SFAS)
123, “Accounting for
Stock-Based Compensation”.
Capitalized
Software
We capitalize certain software
development costs in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. We begin capitalizing software
development costs upon the establishment of technological feasibility, which is
established upon the completion of a working model or a detailed program design.
Costs incurred prior to technological feasibility are charged to expense as
incurred. Capitalization ceases when the product is considered available for
general release to customers. Capitalized software development costs are
amortized to costs of revenues over the estimated economic lives of the software
products based on product life expectancy. Generally, estimated economic lives
of the software products do not exceed three years.
Foreign
Currency Transactions
The
functional currency of the Company's operations in all countries is the U.S.
dollar. Sales and purchase transactions are generally denominated in U.S.
dollars. Foreign currency transaction gains and losses are included in the
statement of operations and were not material for each period
presented. Results
of Operations
For
the three months ended March 31, 2008 and 2007
The
following table provides statement of operations data as a percentage of sales
for the periods presented.
Sales
Sales for
continuing operations for the three months ended March 31, 2008 were $11.2
million as compared to $16.7 million for the same period in 2007 for a decrease
of $5.5 million or 33%. Revenues from our broadband wireless access
business continue to grow as a percentage of revenue when compared to the
comparable quarter in 2007.
For the
quarters ending March 31, 2008 and 2007, international sales, excluding Canada,
approximated 59% and 50%, respectively, of total sales.
Cost
of goods sold and gross profit
Cost of
goods sold and gross profit for the three months ended March 31, 2008 were $6.2
million and $5.1 million, respectively. For the same period in 2007,
costs of goods sold and gross profit were $9.0 million and $7.6 million,
respectively. Gross profit margin, as a percentage of sales, for the three
months ended March 31, 2008 and 2007 was 45% and
46%, respectively. The slight decrease in gross margin
percentage was primarily due to the product mix in the current quarter compared
to the first quarter of the prior year.
Sales
and Marketing Expenses
Sales and
marketing expenses consist primarily of employee salaries and associated costs
for selling, marketing, customer and technical support as well as field
support. Sales and marketing expenses for the three months ended
March 31, 2008 were $5.0 million, an increase of $0.4 million over $4.6 million
for the same period in 2007. In order to drive various sales
initiatives in our multi-tier distribution model, we have increased our selling
and marketing expenses by adding additional headcount in the areas of sales
management, and technical sales personnel, and related marketing expenses due to
increased trade show presence. A key focus of the additional sales
and marketing efforts has been to expand our presence in the municipal security
and surveillance, mobile communications, last mile access, voice and backhaul
market applications. We continue to monitor the effectiveness of our
selling and marketing expenses as a percentage of our overall operating
expense. General
and Administrative Expenses
General
and administrative expenses consist primarily of employee salaries, benefits and
associated costs for information systems, finance, legal, amortization of
intangible assets, and administration, insurance, and auditing of a public
company. General and administrative expenses of continuing operations
were $3.4 million for the quarter ended March 31, 2008, and $3.0 million for the
same period in 2007. The increase of $0.4 million or 13% was primarily due
to additional compensation and benefit costs associated with the departure of
Proxim’s former CEO in February 2008. In addition, there were
additional fees related to public company compliance costs.
Research
and Development Expenses
Research
and development expenses consist primarily of personnel salaries and fringe
benefits and related costs associated with our product development
efforts. These include costs for development of software and
components, test equipment and related facilities. Research and
development expenses decreased to $1.6 million for the three months ended March
31, 2008 from $2.7 million for the three months ended March 31, 2007, an
approximate decrease of $1.1 million or 41%. The decrease in research
and development expenses was primarily due to a reduction in headcount and
related costs at our San Jose, California location as significant R&D
activities were transitioned from California to Hyderabad, India beginning
in the second half of fiscal 2007.
Discontinued
Operations
During
the third quarter 2007, Ricochet Networks, Inc. sold the Ricochet® network
operations for the Denver, Colorado metropolitan market to Civitas Wireless
Solutions, LLC and ceased operations of the San Diego network. The
net loss from discontinued operations in the first quarter of fiscal 2008 was
$0.1 million. This compares to a net loss generated by discontinued
operations of $0.3 million in the comparable quarter of 2007. The
decrease was due to the fact that the operations of that business were ended in
the second half of 2007.
Liquidity
and Capital Resources
At March
31, 2008, we had cash, cash equivalents, and investments available-for-sale of
$7.8 million. This excludes restricted cash of $0.1 million. For the
three months ended March 31, 2008, cash used by operations was approximately
$1.0 million. We currently are meeting our working capital needs
through cash on hand as well as internally generated cash from operations and
other activities and our bank line of credit.
For the
three months ended March 31, 2008, cash provided by financing activities was
approximately $3.0 million due to a credit line with a multi national bank
secured by certain portions of our accounts receivable balance at March 31,
2008.
We
believe that cash flow from operations, along with our cash on hand, should be
sufficient to meet the operating cash requirements over the next twelve month
period as currently contemplated. Our long-term financing
requirements depend upon our growth strategy, which relates primarily to our
desire to increase revenue both domestically as well as
internationally. However, although the acquisition of Old Proxim’s
operations in 2005 significantly increased both our domestic and international
revenue, we incurred operating losses totaling $5.0 million in the first three
months of 2008, a increase of $2.2 million over the same period of
2007. During the second quarter of 2008, we must continue our efforts
to increase revenues and adjust operating expenses to levels that will produce
positive cash flows and return us to operating profitability.
Due to
the fluctuations in quarterly revenue we have experienced since the Old Proxim
acquisition in 2005, management is closely following revenue trends and
operating expenses, and reviewing its long term business strategy to evaluate
whether there will be a requirement for external financing to fund our
operations. One significant constraint to our equipment business
growth is the rate of new product introduction. New products or
product lines may be designed and developed internally or acquired from existing
suppliers to reduce the time to market and inherent risks of new product
development. Our current resources may have to be supplemented
through additional bank debt financing, public debt or equity offerings, product
line or asset sales, or other means due to a number of factors, including our
ability to replace revenues lost through the discontinuation of our services
business and our
desired rate of future growth. See Item 1A – Risk Factors below and
the more detailed discussion of risk factors described in our Annual Report on
Form 10-K for the year ended December 31, 2007 filed with the Securities and
Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.
Disclosures
About Market Risk
The
following discusses our exposure to market risks related to changes in interest
rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are exposed to risks and
uncertainties, many of which are out of our control. Actual results
could vary materially as a result of a number of factors, including those
discussed below in Item 1A – Risk Factors.
As of
March 31, 2008, we had cash and cash equivalents of $7.8 million. The
majority of total cash and cash equivalents were on deposit in short-term
accounts with two major US banking organizations. Therefore, we do
not expect that an increase in interest rates would materially reduce the value
of these funds. The primary risk to loss of principal is the fact
that these balances are only insured by the Federal Deposit Insurance
Corporation up to $100,000 per bank. At March 31, 2008, the uninsured
portion totaled approximately $7.8 million. Although an immediate
increase in interest rates would not have a material effect on our financial
condition or results of operations, declines in interest rates over time would
reduce our interest income.
In the
past three years, all sales to international customers were denominated in
United States dollars and, accordingly, we were not exposed to foreign currency
exchange rate risks. However, we may make sales denominated in
foreign currencies in the future. Additionally, we import from other
countries. Our sales and product supply may therefore be subject to
volatility because of changes in political and economic conditions in these
countries. Our selling costs internationally are based in local currency
primarily where our sales and technical personnel reside. Our selling expenses
have been adversely impacted by the devaluation of the US dollar relative to
other major international currencies.
We
presently do not use any derivative financial instruments to hedge our exposure
to adverse fluctuations in interest rates, foreign exchange rates, and
fluctuations in commodity prices or other market risks; nor do we invest in
speculative financial instruments.
Due to
the nature of our liabilities and our short-term investments, we have concluded
that there is no material market risk exposure and, therefore, no quantitative
tabular disclosures are required.
Item 4T. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures, which are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized,
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer, or CEO,
and chief financial officer, or CFO, as appropriate to allow timely decisions
regarding required disclosure.
Under the
supervision and with the participation of our CEO and CFO, our management has
evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this quarterly report. Based on that
evaluation, our CEO and CFO concluded that our disclosure controls and
procedures were effective as of March 31, 2008. Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial
reporting is the process designed by and under the supervision of our CEO and
CFO to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of our financial statements for external reporting
in accordance with accounting principles generally accepted in the United States
of America. Management has evaluated the effectiveness of our
internal control over financial reporting using the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control—Integrated Framework.
Under the
supervision and with the participation of our CEO and CFO, our management, in
connection with the preparation of our annual report on Form 10-K, assessed the
effectiveness of our internal control over financial reporting as of December
31, 2007 and concluded that it is effective.
This
quarterly report does not, and our annual report on Form 10-K that we filed with
the Securities and Exchange Commission on March 28, 2008 did not, include an
attestation report of the company's registered public accounting firm regarding
internal control over financial reporting. Management's report was
not subject to attestation by the company's registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the company to provide only management's report in that annual
report.
Changes
in Internal Control over Financial Reporting
Under the
supervision and with the participation of our CEO and CFO, our management has
evaluated changes in our internal control over financial reporting that occurred
during our last fiscal quarter. Based on that evaluation, our CEO and
CFO did not identify any change in our internal control over financial reporting
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Important
Considerations
The
effectiveness of our disclosure controls and procedures and our internal control
over financial reporting is subject to various inherent limitations, including
cost limitations, judgments used in decision making, assumptions about the
likelihood of future events, the soundness of our systems, the possibility of
human error, and the risk of fraud. Moreover, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions and the risk
that the degree of compliance with policies or procedures may deteriorate over
time. Because of these limitations, there can be no assurance that
any system of disclosure controls and procedures or internal control over
financial reporting will be successful in preventing all errors or fraud or in
making all material information known in a timely manner to the appropriate
levels of management. PART
II – OTHER INFORMATION
Item 1. Legal Proceedings.
IPO
Litigation
During
the period from June 12 to September 13, 2001, four purported securities class
action lawsuits were filed against Telaxis Communications Corporation, a
predecessor company to Proxim Wireless Corporation, in the U.S. District Court
for the Southern District of New York: Katz v. Telaxis Communications
Corporation et al., Kucera v. Telaxis Communications Corporation et al.,
Paquette v. Telaxis Communications Corporation et al., and Inglis v. Telaxis
Communications Corporation et al. The lawsuits also named one or more
of the underwriters in the Telaxis initial public offering and certain of its
officers and directors. On April 19, 2002, the plaintiffs filed a
single consolidated amended complaint which supersedes the individual complaints
originally filed. The amended complaint alleges, among other things,
violations of the registration and antifraud provisions of the federal
securities laws due to alleged statements in and omissions from the Telaxis
initial public offering registration statement concerning the underwriters’
alleged activities in connection with the underwriting of Telaxis’ shares to the
public. The amended complaint seeks, among other things, unspecified
damages and costs associated with the litigation. These lawsuits have
been assigned along with, we understand, approximately 1,000 other lawsuits
making substantially similar allegations against approximately 300 other
publicly-traded companies and their public offering underwriters to a single
federal judge in the U.S. District Court for the Southern District of New York
for consolidated pre-trial purposes. We believe the claims against us
are without merit and have defended the litigation vigorously. The
litigation process is inherently uncertain, however, and there can be no
assurance that the outcome of these claims will be favorable for
us.
On July
15, 2002, together with the other issuer defendants, Telaxis filed a collective
motion to dismiss the consolidated amended complaint against the issuers on
various legal grounds common to all or most of the issuer
defendants. The underwriters also filed separate motions to dismiss
the claims against them. In October 2002, the court approved a
stipulation dismissing without prejudice all claims against the Telaxis
directors and officers who had been defendants in the litigation. On
February 19, 2003, the court issued its ruling on the separate motions to
dismiss filed by the issuer defendants and the underwriter
defendants. The court granted in part and denied in part the issuer
defendants’ motions. The court dismissed, with prejudice, all claims
brought against Telaxis under the anti-fraud provisions of the securities
laws. The court denied the motion to dismiss the claims brought under
the registration provisions of the securities laws (which do not require that
intent to defraud be pleaded) as to Telaxis and as to substantially all of the
other issuer defendants. The court denied the underwriter defendants’
motion to dismiss in all respects.
In June
2003, along with virtually all of the other non-bankrupt issuer defendants, we
elected to participate in a proposed settlement agreement with the plaintiffs in
this litigation. If the proposed settlement had been approved by the
court, it would have resulted in the dismissal, with prejudice, of all claims in
the litigation against us and against the other issuer defendants who elected to
participate in the proposed settlement, together with the current or former
officers and directors of participating issuers who were named as individual
defendants. This proposed settlement was conditioned on, among other
things, a ruling by the court that the claims against us and against the other
issuers who had agreed to the settlement would be certified for class action
treatment for purposes of the proposed settlement, such that all investors
included in the proposed classes in these cases would be bound by the terms of
the settlement unless an investor opted to be excluded from the settlement.
On
December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a
decision in In re Initial
Public Offering Securities Litigation that six purported class action
lawsuits containing allegations substantially similar to those asserted against
us may not be certified as class actions due, in part, to the Appeals Court’s
determination that individual issues of reliance and knowledge would predominate
over issues common to the proposed classes. On January 8, 2007, the
plaintiffs filed a petition seeking rehearing en banc of the Second Circuit
Court of Appeals’ decision. On April 6, 2007 the Court of Appeals denied the
plaintiffs’ petition for rehearing of the Court’s December 5, 2006 ruling
but noted that the plaintiffs remained free to ask the District Court to certify
classes different from the ones originally proposed which might meet the
standards for class certification that the Court of Appeals articulated in its
December 5, 2006 decision. The plaintiffs have since moved for
certification of different classes in the District Court. In light
of the Court of Appeals’ December 5, 2006 decision regarding certification of
the plaintiffs’ claims, the District Court entered an order on June 25, 2007
terminating the proposed settlement between the plaintiffs and the issuers,
including us. Because it is expected that any possible future settlement with
the plaintiffs, if such a settlement were ever to be agreed to, would involve
the certification of a class action for settlement purposes, the impact of the
Court of Appeals’ class certification-related rulings on the possible future
settlement of the claims against us cannot now be predicted.
On August
14, 2007, the plaintiffs filed amended complaints in the six focus
cases. The issuer defendants and the underwriter defendants
separately moved to dismiss the claims against them in the amended complaints in
the six focus cases. On March 26, 2008, the District Court issued an
order in which it denied in substantial part the motions to dismiss the amended
complaints in the six focus cases. In addition, on October 1, 2007,
the plaintiffs submitted their briefing in support of their motions to certify
different classes in the six focus cases. The issuer defendants and
the underwriter defendants filed separate oppositions to those motions on
December 21, 2007. The motions to certify classes in the six focus
cases remain pending.
We intend
to continue to defend the litigation vigorously. The litigation
process is inherently uncertain and unpredictable, however, and there can be no
guarantee as to the ultimate outcome of this pending
lawsuit. Moreover, we believe that the underwriters may have an
obligation to indemnify us for the legal fees and other costs of defending these
suits. While there can be no assurance as to the ultimate outcome of
these proceedings, we currently believe that the final result of these actions
will have no material effect on our consolidated financial condition, results of
operations, or cash flows.
Linex Technologies
Litigation
On June
1, 2007, Linex Technologies, Inc. filed suit against Proxim Wireless Corporation
for alleged patent infringement in the United States District Court for the
Eastern District of Texas, Marshall Division. Other named defendants
in this lawsuit are Belair Networks, Inc., Cisco Systems, Inc., Firetide, Inc.,
and Skypilot Networks, Inc. This lawsuit generally alleges that
Proxim’s mesh products infringe two United States patents purportedly owned by
Linex. Linex is seeking damages allegedly caused by the alleged
infringement of its two patents. This matter is at an extremely early
stage. We believe the claims against us are without merit and intend
to defend the litigation vigorously. The litigation process is
inherently uncertain, however, and there can be no assurance that the outcome of
these claims will be favorable for us.
General
We are
subject to potential liability under contractual and other matters and various
claims and legal actions which are pending or may be asserted against us or our
subsidiaries, including claims arising from the termination of the operations of
Ricochet Networks, Inc. in the San Diego metropolitan area and the transfer of
the operations of Ricochet Networks, Inc. in the Denver metropolitan area to
Civitas Wireless Solutions, LLC. These matters may arise in the
ordinary course and conduct of our business. While we cannot predict
the outcome of such claims and legal actions with certainty, we currently
believe that such matters should not result in any liability which would have a
material adverse affect on our business.
Item 1A. Risk Factors.
General
Overview
This
Quarterly Report on Form 10-Q contains forward-looking statements as defined by
federal securities laws that are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
expectations, intentions, projections, developments, future events, performance
or products, underlying assumptions, and other statements, which are other than
statements of historical facts. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“could,” “expects,” “intends,” “plans,” “anticipates,” “contemplates,”
“believes,” “estimates,” “predicts,” “projects,” and other similar terminology
or the negative of these terms. From time to time, we may publish or
otherwise make available forward-looking statements of this nature. All
such forward-looking statements, whether written or oral, and whether made by us
or on our behalf, are expressly qualified by the cautionary statements described
in this Form 10-Q, including those set forth below, and any other cautionary
statements which may accompany the forward-looking statements. In
addition, we undertake no obligation to update or revise any forward-looking
statement to reflect events, circumstances, or new information after the date of
this Form 10-Q or to reflect the occurrence of unanticipated or any other
subsequent events, and we disclaim any such obligation.
You
should read forward-looking statements carefully because they may discuss our
future expectations, contain projections of our future results of operations or
of our financial position, or state other forward-looking
information. However, there may be events in the future that we are
not able to accurately predict or control. Forward-looking statements
are only predictions that relate to future events or our future performance and
are subject to substantial known and unknown risks, uncertainties, assumptions,
and other factors that may cause actual results, outcomes, levels of activity,
performance, developments, or achievements to be materially different from any
future results, outcomes, levels of activity, performance, developments, or
achievements expressed, anticipated, or implied by these forward-looking
statements. As a result, we cannot guarantee future results,
outcomes, levels of activity, performance, developments, or achievements, and
there can be no assurance that our expectations, intentions, anticipations,
beliefs, or projections will result or be achieved or
accomplished. In summary, you should not place undue reliance on any
forward-looking statements.
Cautionary
Statements of General Applicability
In
addition to other factors and matters discussed elsewhere in this Form 10-Q, in
our other periodic reports and filings made from time to time with the
Securities and Exchange Commission, and in our other public statements from time
to time (including, without limitation, our press releases), some of the
important factors that, in our view, could cause actual results to differ
materially from those expressed, anticipated, or implied in the forward-looking
statements include, without limitation, the downturn and continuing uncertainty
in the telecommunications industry and global economy; the intense competition
in the broadband wireless equipment industry and resulting pressures on our
pricing, gross margins, and general financial performance; difficulties in
differentiating our products from competing broadband wireless products and
other competing technologies; the impact, availability, pricing, and success of
competing technologies and products; possible delays in our customers making
buying decisions due to the actual or potential availability of new broadband
connectivity technologies; difficulties in developing products that will address
a sufficiently broad market to be commercially viable; our developing products
for portions of the broadband connectivity and access markets that do not grow;
our inability to keep pace with rapid technological changes and industry
standards; expected declining prices for our products over time; our inability
to offset expected price declines with cost savings or new product
introductions; our inability to recover capital and other investments made in
developing and introducing new products; lack of or delay in market acceptance
and demand for our current and contemplated products; difficulties or delays in
developing, manufacturing, and supplying products with the contemplated or
desired features, performance, price, cost, and other characteristics;
difficulties in estimating costs of developing and supplying products;
difficulties in developing, manufacturing, and supplying products in a timely
and cost-effective manner; difficulties or delays in developing improved
products when expected or desired and with the additional features contemplated
or desired; decisions we may make to delay or discontinue efforts to develop and
introduce certain new products; negative reactions to any such decisions; costs
and accounting impacts from any such decisions; our fluctuating financial
results, which may be caused at times by receipt of large orders from customers;
our limited ability to predict our future financial performance; our possible
desire to make limited or no public predictions as to our expected future
financial performance; the expected fluctuation in customer demand and
commitments; difficulties in predicting our future financial performance, in
part due to our past and possible future acquisition activity; our inability to
achieve the contemplated benefits of our July 2005 acquisition of Proxim
Corporation’s operations and any other acquisitions we may contemplate or
consummate; management distraction due to those acquisitions; the ability of the
companies to integrate in a cost-effective, timely manner without material
liabilities or loss of desired employees or customers; the risk that the
expected synergies and other benefits of the transactions will not be realized
at all or to the extent expected; the risk that cost savings from the
transactions may not be fully realized or may take longer to realize than
expected; reactions, either positive or negative, of investors, competitors,
customers, suppliers, employees, and others to the transactions; the risk that
those transactions will, or could, expose us to lawsuits or other liabilities;
obligations arising from contractual obligations of Proxim Corporation that we
assumed; litigation risks, obligations, and expenses arising from contractual
obligations of Proxim Corporation that we assumed; management and
other employee
distraction due to any litigation arising from contractual obligations of Proxim
Corporation that we assumed; adverse impacts of purchase accounting treatment
and amortization and impairment of intangible assets acquired in any
acquisitions; our general lack of receiving long-term purchase commitments from
our customers; cancellation of orders without penalties; the ability of our
customers to return to us some or all of the products they had previously
purchased from us with the resulting adverse financial consequences; costs,
administrative burdens, risks, and obligations arising from terms and conditions
that we find onerous but that are imposed upon us by certain customers as a
condition of buying products from us; our not selling products to certain
customers due to our refusal to accept their terms and conditions of sale that
we find onerous; difficulties or delays in obtaining raw materials,
subassemblies, or other components for our products at the times, in the
quantities, and at the prices we desire or expect, particularly those that are
sole source or available from a limited number of suppliers; inability to
achieve and maintain profitability; purchases of excess inventory that
ultimately may not be used; difficulties or delays in developing alternative
sources for limited or sole source components; our having to reconfigure our
products due to our inability to receive sufficient quantities of limited or
sole source components; adverse impact of stock option and other accounting
rules; our reliance on third party distributors and resellers in our indirect
sales model; our dependence on a limited number of significant distributors; our
inability to obtain larger customers; dependence on continued demand for
broadband connectivity and access; difficulties in attracting and retaining
qualified personnel; our dependence on key personnel; competition from companies
that hire some of our former personnel; lack of key man life insurance on our
executives or other employees; lack of a succession plan; inability of our
limited internal manufacturing capacity to meet customers’ desires for our
products; our substantial reliance on contract manufacturers to obtain raw
materials and components for our products and to manufacture, test, and deliver
our products; interruptions in our manufacturing operations or the operations of
our contract manufacturers or other suppliers; interruptions or delays in
obtaining products in sufficient quantities and with acceptable quality from our
contract manufacturers due to changes in the country, the factory, or the
assembly line where our products are manufactured or other factors; additional
costs resulting from changes in the country, the factory, or the assembly line
where our contract manufacturers manufacture our products or other factors;
customer dissatisfaction resulting from increased costs or delays in our
products due to changes in the country, the factory, or the assembly line where
our contract manufacturers manufacture our products or other factors; possible
adverse impacts on us of the directive on the restriction of the use of certain
hazardous substances in electrical and electronic equipment (the RoHS
directive), including, without limitation, adverse impacts on our ability to
supply our products in the quantities desired and adverse impacts on our costs
of supplying products; possible adverse impacts on us of the waste electrical
and electronic equipment directive (the WEEE directive), including, without
limitation, adverse impacts on our ability to supply our products in the
quantities desired and adverse impacts on our costs of supplying products; our
failing to maintain adequate levels of inventory; costs and accounting impacts
associated with purchasing inventory that is later determined to be excess or
obsolete; our failure to effectively manage our growth; difficulties in reducing
our operating expenses; adverse impacts of the war in Iraq and the war on
terrorism generally; the potential for intellectual property infringement,
warranty, product liability, and other claims; risks, obligations, and expenses
arising from litigating or settling any such intellectual property infringement,
warranty, product liability, and other claims; management and other employee
distraction due to any such intellectual property infringement, warranty,
product liability, and other claims; risks associated with foreign sales such as
collection, currency, and political risk; limited ability to enforce our rights
against customers in foreign countries; lack of relationships in foreign
countries which may limit our ability to expand our international sales and
operations; difficulties in complying with existing governmental regulations and
developments or changes in governmental regulation; difficulties or delays in
obtaining any necessary Federal Communications Commission and other governmental
or regulatory certifications, permits, waivers, or approvals; possible adverse
consequences resulting from marketing, selling, or supplying products without
any necessary Federal Communications Commission or other governmental or
regulatory certifications, permits, waivers, or approvals; changes in
governmental regulations which could adversely impact our competitive position;
our maintaining tight credit limits which could adversely impact our sales;
difficulties in our customers or ultimate end users of our products obtaining
sufficient funding; difficulties in collecting our accounts receivable; failure
or inability to protect our proprietary technology and other intellectual
property; possible decreased ability to protect our proprietary technology and
other intellectual property in foreign jurisdictions; ability of third parties
to develop similar and perhaps superior technology without violating our
intellectual property rights; the costs and distraction of engaging in
litigation to protect our intellectual property rights, even if we are
ultimately successful; adverse impacts resulting from our settlement of
litigation initiated by Symbol Technologies, Inc.; time, costs, political
considerations, typical multitude of constituencies, and other factors involved
in evaluating, equipping, installing, and operating municipal networks; costs of
complying with governmental regulations such as Section 404 and other provisions
of the Sarbanes-Oxley Act; the expense of defending
and settling and the outcome of pending and any future stockholder litigation;
the expense of defending and settling and the outcome of pending and any future
litigation against us; the expected volatility and possible stagnation or
decline in our stock price, particularly due to the relatively low number of
shares that trade on a daily basis and public filings regarding sales of our
stock by one or more of our significant stockholders; future stock sales by our
current stockholders, including our current and former directors and management;
future actual or potential sales of our stock that we issue upon exercise of
stock options or stock warrants; possible dilution of our existing stockholders
if we issue stock to acquire other companies or product lines or to raise
additional capital; possible better terms of any equity securities we may issue
in the future than the terms of our common stock; our reliance on the line of
credit we recently established; the possibility that we may be required to repay
amounts drawn under that line of credit earlier than we have anticipated;
investment risk resulting in the decrease in value of our investments; and
risks, impacts, and effects associated with any acquisitions, investments, or
other strategic transactions we may evaluate or in which we may be
involved. Many of these and other risks and uncertainties are
described in more detail in our annual report on Form 10-K for the year ended
December 31, 2007 filed with the Securities and Exchange
Commission.
Specific
Cautionary Statements Relating to Revenues
We have
been unable to increase our revenues for a number of quarters in a row despite
being in what are perceived as expanding markets. This is having an
adverse impact on our business, financial condition, and relations with
customers, suppliers, employees, investors, and others. We may not be
able to increase revenues in the future. Our continued inability to
increase our revenues could have a material adverse affect on our ability to
continue as a going concern.
Specific
Cautionary Statements Relating to Capital Resources
We
currently have limited capital resources, which could adversely impact our
operations, ability to grow our business, attractiveness as a supplier to
customers, attractiveness to investors, and viability as an ongoing
company. We have a recent history of unprofitable operations, and our
capital resources have been declining and are limited. These factors
could cause potential customers to question our long-term viability as a
supplier and thus decide not to purchase products from us. Further,
our limited capital resources could inhibit our ability to grow our business
because typically we have to pay our suppliers sooner than we receive payment
from our customers. These factors could cause potential investors to
question our long-term viability or believe that we will need to raise
additional capital on terms more favorable than a typical investor would obtain
by simply buying our stock in the public markets and thus decide not to purchase
our stock. All these factors could have an adverse impact on our
operations, financial results, stock price, and viability as an ongoing
company.
We have
limited capital resources and our prospects for obtaining additional financing,
if required, are uncertain. Our future capital requirements will
depend on numerous factors, including expansion of marketing and sales efforts,
development costs of new products, the timing and extent of commercial
acceptance for our products, and potential changes in strategic
direction. Additional financing may not be available to us in the
future on acceptable terms or at all. If funds are not available, we
may have to delay, scale back, or terminate business or product lines or our
sales and marketing, research and development, acquisition, or manufacturing
programs. We may raise additional capital on terms that we or our
stockholders find onerous. Any equity, debt, or convertible
securities that we may issue in the future may have better terms than the terms
of our common stock. We may sell or otherwise dispose of portions of
our business and assets for strategic reasons or to raise
capital. Investors, customers, employees and others may react
negatively to any business or asset dispositions we may effect. These
factors could seriously damage our business, operating results, financial
condition, viability as an ongoing company, and cause our stock price to
decline.
Specific
Cautionary Statements relating to Bank Line of Credit
At the
end of the first quarter of 2008, the Company was not in compliance with the
financial covenant contained in the loan agreement the Company recently executed
with a bank. The Company sought and obtained a waiver of that
non-compliance from the bank. Failure to satisfy that covenant in the
future could have a material adverse effect on the ability of the Company to
continue as a going concern if the bank decided to require the Company to repay
the $3.0 million outstanding under that loan agreement, particularly given the
limited cash on hand at the Company. The Company and the bank are
also discussing amending the loan agreement to change the existing financial
covenant and possibly to add other financial and other
covenants. Those additional covenants could create restrictions on
our ability to conduct operations in our normal course. Failure to
reach agreement on revised terms of the loan agreement could result in the bank
requiring the repayment of the $3.0 million outstanding under that loan
agreement if the Company fails to comply with the existing terms, which could
have a material adverse effect on the ability of the Company to continue as a
going concern, particularly given the limited cash on hand at the
Company.
Specific
Cautionary Statements Relating to Nasdaq Delisting Possibility
Our
common stock may be delisted from the Nasdaq Capital Market, which could
adversely affect our business and relations with employees, customers, and
others. Our common stock is currently traded on the Nasdaq Capital
Market. We have received notice from The Nasdaq Stock Market that our
stock price (technically, the closing bid price) has failed to maintain the
required minimum $1.00 per share. We have been given until August 20,
2008 to achieve compliance with that rule by having the bid price of our stock
close at $1.00 or more for at least ten
consecutive business days. If compliance with that rule is not be
demonstrated by August 20, 2008, Nasdaq will determine whether we meet the
initial listing criteria for the Nasdaq Capital Market, except for the bid price
requirement. If so, Nasdaq will notify us that we have been granted
an additional 180 day compliance period. There can be no assurance
that we will be able to achieve compliance with this minimum bid price rule by
August 20, 2008; that we would be granted an additional 180 day compliance
period; or that we would be able to achieve compliance with the minimum bid
price rule even if granted the additional compliance period. While
there are many actions that may be taken to attempt to increase the price of our
stock, two of the possibilities are a reverse stock split and a stock
repurchase. At this time, we have limited capital available for any
stock repurchase. Any such actions (even if successful) may have
adverse effects on us, such as adverse reaction from employees, investors and
financial markets in general, adverse publicity, and adverse reactions from
customers. There are other requirements for continued listing on the
Nasdaq Capital Market, and there can be no assurance that we will continue to
meet these listing requirements. Should our stock be delisted from
the Nasdaq Capital Market, we may apply to have our stock traded on the
Over-The-Counter Bulletin Board. There can be no assurance that our
common stock would be timely admitted for trading on that
market. This alternative may result in a less liquid market available
for existing and potential stockholders to buy and sell shares of our stock and
could further depress the price of our stock.
Specific
Cautionary Statements relating to Intellectual Property Litigation
On June
1, 2007, Linex Technologies, Inc. filed suit against Proxim Wireless Corporation
for alleged patent infringement in the United States District Court for the
Eastern District of Texas, Marshall Division. Other named defendants
in this lawsuit are Belair Networks, Inc., Cisco Systems, Inc., Firetide, Inc.,
and Skypilot Networks, Inc. This lawsuit generally alleges that
Proxim’s mesh products infringe two United States patents purportedly owned by
Linex. Linex is seeking damages allegedly caused by the alleged
infringement of its two patents. This matter is at an extremely early
stage. We believe the claims against us are without merit and intend
to defend the litigation vigorously. The litigation process is
inherently uncertain, however, and there can be no assurance that the outcome of
these claims will be favorable for us. Even if we are completely
successful in defending the claims asserted against us in this lawsuit, we
expect we will incur significant defense costs and that management, technical,
and other personnel will be distracted and diverted by this
lawsuit.
Specific
Cautionary Statements relating to Ricochet Actions
In August
2007, Ricochet Networks, Inc., a subsidiary of Proxim Wireless Corporation,
announced that it had discontinued operation of the Ricochet® network in the San
Diego metropolitan area and sold the operations of the Ricochet network in the
Denver metropolitan area. There can be no assurance whatsoever that
we will realize the expected benefits of these actions at all or to the extent
anticipated. Other risks associated with these actions include the
risk that cost savings from these actions may not be fully realized or may take
longer to realize than expected; the possibilities that these actions could
result in increased liabilities and other adverse consequences; reactions,
positive or negative, of customers, investors, employees, contract
counterparties, competitors, and others to these actions; the uncertain impact
of these actions on the trading market, volume, and price of Proxim Wireless
Corporation’s stock; the time and costs of discontinuing the operations of the
Ricochet network in the San Diego metropolitan area; exposure to costs and
liabilities relating to the Ricochet network in the Denver metropolitan area;
legal, financial statement, and accounting ramifications resulting from these
actions; and management and board interest in and distraction due to these
actions. These risks relating to the Denver Ricochet network may have
increased due to the fact that the buyer of the Ricochet network in the Denver
metropolitan area has recently discontinued operations.
Possible
Implications of Cautionary Statements
The items
described above, either individually or in some combination, could have a
material adverse impact on our reputation, business, need for additional
capital, ability to obtain additional debt or equity financing, current and
contemplated products gaining market acceptance, development of new products and
new areas of business, sales, cash flow, results of operations, financial
condition, stock price, viability as an ongoing company, results, outcomes,
levels of activity, performance, developments, or achievements. Given
these uncertainties, investors are cautioned not to place undue reliance on any
forward-looking statements. Item 6. Exhibits.
See
Exhibit Index.
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
EXHIBIT
INDEX
______________
All
non-marked exhibits are filed herewith.
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