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  • 10-Q (Feb 14, 2008)
  • 10-Q (Dec 19, 2007)
  • 10-Q (Nov 13, 2007)
  • 10-Q (Aug 14, 2007)
  • 10-Q (May 15, 2007)
  • 10-Q (Nov 14, 2006)

 
8-K

 
Other

Vyyo 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

 

x

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

 

 

For the Quarterly Period Ended December 31, 2007

 

 

 

or

 

 

o

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 000-30189

 

VYYO INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

94-3241270

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

6625 The Corners Parkway, Suite 100

 

 

Norcross, Georgia

 

30092

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (678) 282-8000

 

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 x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 

 

Large accelerated filer o

Accelerated filer o

 

 

 

 

Non-accelerated filer o

Small reporting company x

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of February 11, 2008, there were 18,693,512 shares of Common Stock outstanding.

 



 

INDEX

 

VYYO INC.

 

 

Page No.

PART I. FINANCIAL INFORMATION

1

 

 

Item 1. Condensed Consolidated Financial Statements

1

 

 

Condensed Consolidated Balance Sheets at December 31, 2007 and March 31, 2007

1

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2007 and December 31, 2006

2

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2007 and December 31, 2006

3

 

 

Notes to Condensed Consolidated Financial Statements

4

 

 

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

20

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

30

 

 

Item 4. Controls and Procedures

31

 

 

PART II. OTHER INFORMATION

31

 

 

Item 1A. Risk Factors

31

 

 

Item 6. Exhibits

45

 

 

SIGNATURES

46

 

i



 

PART I. FINANCIAL INFORMATION

Item 1.            Condensed Consolidated Financial Statements

 

Vyyo Inc.

Consolidated Balance Sheets

(In thousands of U.S. $, except share data)

(Unaudited)

 

 

 

December 31,
2007

 

March 31,
2007

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

10,185

 

$

24,134

 

Short-term investments (December 31, 2007 includes $5,000 of restricted cash)

 

7,548

 

7,020

 

Accounts receivable trade, net:

 

 

 

 

 

Related party

 

1,118

 

 

Other

 

396

 

468

 

 

 

1,514

 

468

 

Inventory, net

 

3,094

 

2,320

 

Other

 

1,141

 

923

 

Total Current Assets

 

23,482

 

34,865

 

Long-Term Assets:

 

 

 

 

 

Restricted cash

 

 

5,000

 

Property and equipment, net

 

1,392

 

1,662

 

Employee rights upon retirement funded

 

1,283

 

1,221

 

Debt issuance costs, net

 

127

 

150

 

TOTAL ASSETS

 

$

26,284

 

$

42,898

 

 

 

 

 

 

 

LIABILITIES AND CAPITAL DEFICIENCY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

1,975

 

$

1,349

 

Accrued liabilities

 

5,480

 

8,140

 

Deferred revenues, related party

 

3,508

 

3,679

 

Promissory note

 

6,500

 

 

Total Current Liabilities

 

17,463

 

13,168

 

 

 

 

 

 

 

Long-Term Liabilities:

 

 

 

 

 

Promissory note

 

 

5,401

 

Convertible note

 

35,000

 

35,000

 

Liability for employee rights upon retirement

 

3,039

 

2,345

 

Total Liabilities

 

55,502

 

55,914

 

Capital Deficiency:

 

 

 

 

 

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

 

 

 

Common stock, $0.0001 par value and paid in capital; 50,000,000 shares authorized, 18,659,720 and 18,316,231 shares issued and outstanding at December 31, 2007 and March 31, 2007, respectively

 

268,234

 

262,600

 

Accumulated other comprehensive gain (loss)

 

42

 

(1

)

Accumulated deficit

 

(297,494

)

(275,615

)

Total Capital Deficiency

 

(29,218

)

(13,016

)

TOTAL LIABILITIES AND CAPITAL DEFICIENCY

 

$

26,284

 

$

42,898

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

1



 

Vyyo Inc.

Condensed Consolidated Statements of Operations

(In thousands of U.S. $, except per share data)

(Unaudited)

 

 

 

Three Months Ended
December 31,

 

Nine Months Ended
December 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

REVENUES

 

 

 

 

 

 

 

 

 

Revenues

 

$

799

 

$

413

 

$

2,179

 

$

710

 

Revenues, related party

 

1,526

 

1,343

 

4,399

 

4,921

 

Total Revenues

 

2,325

 

1,756

 

6,578

 

5,631

 

COST OF REVENUES

 

 

 

 

 

 

 

 

 

Cost of products sold

 

670

 

354

 

2,129

 

539

 

Cost of products sold, related party

 

1,321

 

1,085

 

3,853

 

3,761

 

Write down of inventory

 

 

255

 

183

 

424

 

Insurance reimbursement for damaged inventory

 

 

(710

)

(101

)

(710

)

Total Cost of Revenues

 

1,991

 

984

 

6,064

 

4,014

 

GROSS PROFIT

 

334

 

772

 

514

 

1,617

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Research and development

 

3,068

 

2,872

 

9,091

 

8,755

 

Sales and marketing

 

2,191

 

1,967

 

7,266

 

6,618

 

General and administrative, net

 

2,856

 

1,790

 

7,505

 

5, 701

 

Total Operating Expenses

 

8,115

 

6,629

 

23,862

 

21,074

 

OPERATING LOSS

 

(7,781

)

(5,857

)

(23,348

)

(19,457

)

FINANCIAL INCOME

 

260

 

322

 

869

 

1,059

 

FINANCIAL EXPENSES

 

(889

)

(910

)

(2,502

)

(2,481

)

LOSS BEFORE INCOME TAXES

 

(8,410

)

(6,445

)

(24,981

)

(20,879

)

INCOME TAXES

 

(69

)

(88

)

3,102

 

(645

)

LOSS FROM CONTINUING OPERATIONS

 

(8,479

)

(6,533

)

(21,879

)

(21,524

)

DISCONTINUED OPERATIONS

 

 

 

 

78

 

LOSS FOR THE PERIOD

 

$

(8,479

)

$

(6,533

)

$

(21,879

)

$

(21,446

)

LOSS PER SHARE

 

 

 

 

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

 

 

 

 

Continuing operations

 

(0.46

)

(0.36

)

(1.18

)

(1.20

)

 

 

(0.46

)

(0.36

)

(1.18

)

(1.20

)

WEIGHTED AVERAGE NUMBER OF SHARES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

18,554

 

18,032

 

18,484

 

17,862

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

2



 

Vyyo Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands of U.S. $)

(Unaudited)

 

 

 

Nine Months Ended
December 31,

 

 

 

2007

 

2006

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Loss for the period

 

$

(21,879

)

$

(21,446

)

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

 

 

 

 

 

Income and expenses not involving cash flows:

 

 

 

 

 

Depreciation and amortization

 

621

 

621

 

Accretion and amortization of financing instruments, net

 

1,122

 

1,105

 

Write down of inventories

 

183

 

514

 

Stock-based compensation, net

 

4,018

 

3,421

 

Capital gain on sales of property and equipment

 

(6

)

(29

)

Decrease (increase) in assets and liabilities:

 

 

 

 

 

Accounts receivable, related party

 

(1,118

)

(991

)

Accounts receivable, other

 

72

 

510

 

Other current assets

 

(218

)

(32

)

Inventory

 

(957

)

(1,372

)

Accounts payable

 

626

 

110

 

Accrued liabilities

 

(2,444

)

866

 

Deferred revenues, related party

 

(171

)

3,738

 

Liability for employee rights upon retirement

 

694

 

350

 

Net cash used in operating activities

 

(19,457

)

(12,635

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchase of property and equipment

 

(421

)

(348

)

Purchase of short-term investments

 

(21,269

)

(28,048

)

Proceeds from sales and maturities of short-term investments

 

25,784

 

20,437

 

Proceeds from sale of property and equipment

 

10

 

29

 

Contributions to severance pay funds

 

(62

)

(172

)

Net cash provided by (used in) investing activities

 

4,042

 

(8,102

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from exercise of stock options

 

1,616

 

1,561

 

Proceeds from issuance of common stock, Senior Secured Note, 2006 Convertible Note and warrants, net of issuance costs

 

 

(417

)

Proceeds from issuance of 2007 Convertible Note, net of issuance costs

 

(150

)

 

Net cash provided by financing activities

 

1,466

 

1,144

 

Decrease in cash and cash equivalents

 

(13,949

)

(19,593

)

Cash and cash equivalents at beginning of period

 

24,134

 

27,009

 

Cash and cash equivalents at end of period

 

$

10,185

 

$

7,416

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for taxes

 

$

12

 

$

5

 

Cash paid for interest

 

$

1,036

 

$

1,037

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

3



 

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.             Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Vyyo Inc. have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals, reclassifications and adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year. You should read these interim unaudited condensed consolidated financial statements in conjunction with the audited consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2006, filed by Vyyo Inc. with the Securities and Exchange Commission (the “SEC”).

 

Change in Fiscal Year End

 

Effective December 3, 2007, the Company changed its fiscal year end from December 31 to March 31. The Company’s new fiscal year will commence April 1, 2008 and end on March 31, 2009.

 

Liquidity, Capital Resources and Going Concern Considerations

 

The consolidated financial statements of Vyyo Inc. and its wholly-owned subsidiaries (collectively, the “Company”) are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced significant losses and negative cash flows from operations since its incorporation. For the nine months ended December 31, 2007, the Company incurred a net loss of $21,879,000 and had an accumulated deficit of $297,494,000. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern will depend upon its ability to raise additional capital during the next three months. The Company is pursuing raising additional capital to fund its operations although there is no assurance that such capital will be available to the Company. The Company also is seeking to expand its revenue base by adding new customers and to further reduce expenses, including the restructuring plan discussed below in “—Costs Associated with Exit or Disposal Activities.” Failure to secure additional capital in the very short term or to expand its revenue base in the longer term will result in the Company depleting its available funds and not being able to pay its obligations when they become due. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

Costs Associated with Exit or Disposal Activities

 

On January 30, 2008, the Company’s board of directors approved, and on February 4, 2008, the Company announced, its intent to simplify the Company’s structure by streamlining its corporate organization and reducing operating costs to better address market needs and revenue opportunities in the cable industry.  As a result, the Company began implementing a restructuring plan and expects to record a restructuring charge in the fourth fiscal quarter ended March 31, 2008 in the range of $5,000,000 to $7,000,000.  This charge will be utilized to cover severance payments and other employee-related costs associated with the involuntary termination of approximately 100 employees of approximately $3,000,000 to $4,000,000, the write-off of inventory of approximately $1,000,000 to $1,500,000 and the vacating of certain operating building leases in Israel and related ancillary costs of approximately $1,000,000 to $1,500,000. A significant portion of these costs were related to the Company’s continuing strategy to focus on its Cable Solutions segment, to consolidate facilities in the United States and to significantly downsize its Wireless Solutions segment to support current customers only.  The Cable Solutions segment and the Wireless Solutions segment are described below.

 

The workforce reduction and reduction of outsourced services and contractors impact all functions within the Company, both in Israel and the United States, and include management and non-management positions.  The Company expects that all functions currently performed in Israel will be moved to the United States by the quarter ended June 30, 2008, and the Company is currently exploring its options to mitigate its affected real estate lease obligations in its facilities in

 

4



 

Israel. The Company also expects to record other costs related to the consolidation of the Company’s operations at its Georgia facility, but at this time is unable to estimate the costs expected to be incurred and whether these costs will be material.

 

The Company expects to complete the restructuring plan in the quarter ended June 30, 2008 and to reduce annual operating expenses by approximately $20,000,000, after payment of the severance costs described above.  These actions are consistent with the Company’s previous disclosures concerning operating cost reductions and exit from the wireless business. Management continues to evaluate additional opportunities to reduce operating costs.

 

On July 23, 2007, the Company implemented a cost reduction program that reduced its workforce by approximately 16% (when compared to the workforce levels as of June 30, 2007). The Company recorded approximately $400,000 in a one-time cash severance payment and related expenses. This cost reduction did not require the termination of any contractual obligations or require the Company to incur other material associated costs.

 

Financing

 

                On March 28, 2007, the Company closed the private placement (the “2007 Financing”) of a convertible note with Goldman, Sachs & Co. in exchange for $35,000,000 (the “2007 Convertible Note”), which included $17,500,000 of new funding and $17,500,000 of which the Company used to pay off the $10,000,000 10% Convertible Note (the “2006 Convertible Note”) and $7,500,000 9.5% Senior Secured Note (the “Senior Secured Note”) issued to Goldman, Sachs & Co. in March 2006 as described below. The 2007 Financing resulted in net proceeds to the Company of approximately $17,350,000. See note 7.

 

In March 2006, the Company closed the private placement (the “2006 Financing”) with Goldman, Sachs & Co. of $25,000,000 of common stock, the 2006 Convertible Note, the Senior Secured Note and warrants to purchase common stock. The 2006 Financing resulted in net proceeds to the Company of approximately $23,400,000. See note 7.

 

Organization and Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of Vyyo Inc. and its wholly-owned subsidiaries. All material inter-company balances and transactions have been eliminated in consolidation.

 

The Company provides cable and wireless broadband access solutions through two business segments: the “Cable Solutions” segment and the “Wireless Solutions” segment. The Company’s primary focus is now on its Cable Solutions segment, and significantly all of its internal resources are focused on enhancing its visibility in and penetration of the cable market.

 

The Company’s products are designed to address four markets: Cable, Telecommunication, Utility and Wireless Internet Service Providers (“WISP”). Although the Company is engaged to various degrees in these distinct markets, some of the Company’s core technologies overlap with its solutions.

 

The Company’s Cable Solutions segment includes the Company’s UltraBand™ products that are designed to expand cable operators’ typical hybrid-fiber coax (“HFC”) network capacity in the “last mile” by up to two times in the downstream and up to four times in the upstream. Additionally, it includes products that deliver telephony and data T1/E1 links to enterprise and cellular providers over cable’s HFC networks. The Cable Solutions segment also includes the results of operations of Xtend Networks Ltd., an Israeli company, and its wholly-owned, United States-based subsidiary, Xtend Networks Inc. (collectively, “Xtend”).

 

 The Company’s Wireless Solutions segment includes products which enable utilities and other network service providers to operate private wireless networks for communications, monitoring and Supervisory Control and Data Acquisition of their geographically disbursed, remote assets. Additionally, it includes the Company’s WISP and telecommunications products which address the needs of rural service providers to serve customers with wireless high-speed data beyond the reach of traditional terrestrial networks.

 

5



 

Summary of Significant Accounting Principles

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments 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 period.

 

On an on-going basis, management evaluates its estimates, judgments and assumptions. Management bases its estimates, judgments and assumptions on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates, judgments and assumptions.

 

Foreign Currency Transactions

 

The United States dollar is the functional currency for the Company and its subsidiaries and all of its sales are made in United States dollars. In addition, a substantial portion of the costs of the Company’s foreign subsidiaries are incurred in United States dollars. Since the United States dollar is the primary currency in the economic environment in which the Company and its foreign subsidiaries operate, monetary accounts maintained in currencies other than the United States dollar (principally cash and liabilities) are remeasured into United States dollars using the representative foreign exchange rate at the balance sheet date. Operational accounts and nonmonetary balance sheet accounts are measured and recorded at the rate in effect at the date of the transaction. The effects of foreign currency remeasurement are reported in current operations in the Statements of Operations as part of “Financial Income” and “Financial Expenses.”

 

Investments in Marketable Securities

 

The Company’s investments in debt securities have been designated as available-for-sale. Available-for-sale securities are carried at fair value, which is determined based upon the quoted market prices of the securities, with unrealized gains and losses reported in the Balance Sheets as “Accumulated other comprehensive gain (loss),” a component of “Capital Deficiency,” until realized. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in the Statements of Operations as part of “Financial Income” or “Financial Expenses,” as applicable. The Company views its available-for-sale portfolio as available for use in its current operations. Accordingly, the Company has classified all investments as short-term in the Balance Sheets under “Short-term investments,” even though the stated maturity date may be one year or more from the current balance sheet date. Interest, amortization of premiums, accretion of discounts and dividends on securities classified as available-for-sale are also included in the Statements of Operations as part of “Financial Income” or “Financial Expenses,” as applicable.

 

The Company recognizes an impairment charge when the decline in the fair values of these investments below their cost basis is deemed to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the length of time and the extent to which the fair value has been below the cost basis, the current financial condition of the investee and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The Company recognized no other-than-temporary impairment in its available-for-sale securities nor realized losses for either the three or nine months ended December 31, 2007. The Company recognized no other-than-temporary impairment in its available-for-sale securities while recognizing realized losses of $11,000 for each of the three and nine months ended December 31, 2006.

 

Cash Equivalents

 

Cash equivalents are short-term, highly-liquid investments and deposits that have original maturities of three months or less at the time of investment and that are readily convertible to cash. As of December 31, 2007, short-term investments included $5,000,000 of restricted cash as security for a letter of credit.

 

6



 

Inventory

 

Inventory is stated at the lower of cost or market, where cost includes material and labor. The Company regularly monitors inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on the Company’s estimated forecast of future product demand and production requirements. Although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments would significantly impact the value of the inventory and reported operating results. If actual market conditions are different than the Company’s assumptions, additional provisions may be required. The Company’s estimates of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the provision required for excess and obsolete inventory. If the Company later determines that the inventory is overvalued, the Company would be required to recognize such costs in its cost of sales at the time of such determination. If the Company later determines that the inventory is undervalued, the Company may have overstated its cost of sales in previous periods and would be required to recognize additional operating income only when the undervalued inventory was sold. During the three and nine months ended December 31, 2007, the Company recorded an inventory valuation write-down of approximately $0 and $183,000, respectively. During the three and nine months ended December 31, 2006, the Company recorded an inventory valuation write-down of approximately $345,000 and $514,000, respectively.

 

The Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Statement No. 151, “Inventory Costs” (“FASB 151”), as of January 1, 2006, which did not have a material effect on the Company’s financial statements. Under FASB 151, the Company is required to recognize abnormal idle facility expenses as current-period charges, and to allocate fixed production overhead expenses to inventory based on normal capacity of the production facility.

 

Fair Value of Financial Instruments

 

The fair value of financial instruments included in the Company’s working capital approximates carrying value. The Syntek Promissory Note (described in note 4) and the 2007 Convertible Note delivered in the 2007 Financing are presented in the Balance Sheets as “Long-Term Liabilities,” at approximately their estimated fair value.

 

Debt Issuance Costs

 

Costs incurred in the issuance of the 2007 Convertible Note in the 2007 Financing consisted of payments to legal advisors in the year ended December 31, 2007. Costs incurred in the issuance of the 2006 Convertible Note and Senior Secured Note included warrants to purchase shares of the Company’s common stock issued to the Company’s financial advisor and cash payments made to legal and financial advisors in the year ended December 31, 2006. In the year ended December 31, 2006, the Company determined the fair value of the warrants based on the Black-Scholes option-pricing model. Issuance costs are deferred and amortized as a component of interest expense over the period from issuance through the first redemption date.

 

Extinguishment of Debt

 

In the 2007 Financing, the Company repaid the 2006 Convertible Note and Senior Secured Note. The Company accounted for this repayment as “extinguishment of debt” under Emerging Issues Task Force (“EITF”) 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” (“EITF 96-19”). The Company initially recorded the 2007 Convertible Note at its estimated fair value, and used that amount to determine the debt extinguishment loss of $3,263,000 resulting from recognition of $2,231,000 in unamortized accretion and $1,032,000 in unamortized issuance expenses related to the 2006 Convertible Note and Senior Secured Note.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets.

 

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related asset.

 

7



 

Impairment of Long-Lived Assets

 

Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), requires that long-lived assets, including definite life intangible assets to be held and used or disposed of by an entity, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under SFAS 144, if the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount, the Company would recognize an impairment loss and would write down the assets to their estimated fair values.

 

Revenue Recognition

 

The Company generates revenues from sales of its products. As of December 31, 2007, the Company’s revenues from services were not significant. The Company’s products are off-the-shelf products, sold “as is,” without further adjustment or installation. When establishing a relationship with a new customer, the Company also may sell these products together as a package, in which case the Company typically ships products at the same time to the customer.

 

 The Company records revenues from sales of products when (a) persuasive evidence of an arrangement exists; (b) delivery has occurred and customer acceptance requirements have been met, if any, and the Company has no additional obligations; (c) the price is fixed or determinable; and (d) collection of payment is reasonably assured. The Company’s standard sales terms generally do not include customer acceptance provisions. However, if there is a right of return, customer acceptance provision or there is uncertainty about customer acceptance, the Company defers the associated revenue until it has evidence of customer acceptance.

 

EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. The Company’s multiple deliverables arrangements are those arrangements with new customers in which the Company sells its products together as a package. Because the Company delivers these off-the-shelf products at the same time and the four revenue recognition criteria discussed above are met at that time, the adoption of EITF 00-21 had no impact on the Company’s financial position or results of operations.

 

The Company recognizes revenues related to the exclusivity provisions contained in the equipment purchase agreement with Arcadian Networks, Inc. described in note 3 on a straight line basis, over the 10-year term of that agreement.

 

Product Warranty

 

The Company provides for product warranty costs when it recognizes revenue from sales of its products. The Company calculates the provision as a percentage of sales, based on historical experience.

 

Research and Development Costs

 

Research and development costs are expensed as incurred and consist primarily of personnel, facilities, equipment and supplies for research and development activities. Grants received by the Company’s Israeli subsidiaries from the Office of the Chief Scientist at the Ministry of Industry and Trade in Israel and other research foundations are deducted from research and development expenses as the related costs are incurred or as the related milestone is met.

 

Loss Per Share of Common Stock

 

Basic and diluted loss per share are calculated and presented in accordance with SFAS No. 128, “Earnings Per Share” (“SFAS 128”), for all periods presented. All outstanding stock options and shares of restricted stock have been excluded from the calculation of the diluted loss per share because these securities are not dilutive for the presented periods. For the nine months ended December 31, 2007, the total number of shares of common stock related to outstanding options, the 2007 Convertible Note, warrants issued in connection with the 2006 Financing and restricted stock excluded from the calculations of diluted loss per share was 10,661,084. For the nine months ended December 31, 2006, the total number of shares of common stock related to outstanding options, the 2006 Convertible Note, warrants issued in connection with the 2006 Financing and restricted stock excluded from the calculations of diluted loss per share was 7,065,013.

 

8



 

Stock-Based Compensation

 

Prior to January 1, 2006, the Company accounted for employees’ stock-based compensation under the intrinsic value model in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations.

 

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-based Payment” (“SFAS 123(R)”). SFAS 123(R) supersedes APB 25 and related interpretations and amends SFAS No. 95, “Statement of Cash Flows.” SFAS 123(R) requires that awards classified as equity awards be accounted for using the grant-date fair value method. The fair value of stock options is determined based on the number of shares granted and the price of the Company’s common stock, and determined based on the Black-Scholes, Monte Carlo and the binomial option-pricing models, net of estimated forfeitures. The Company estimates forfeitures based on historical experience and anticipated future conditions. The Company uses the Monte Carlo valuation model only for stock options granted to executives in 2005 and 2006 where vesting is subject to specific stock price performance.

 

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 provides supplemental implementation guidance on SFAS 123(R), including guidance on valuation methods, inventory capitalization of stock-based compensation cost, income statement effects, disclosures and other issues. SAB 107 requires stock-based compensation to be classified in the same expense line items as cash compensation. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). In addition, the Company has reclassified stock-based compensation from prior periods to correspond to current period presentation within the same operating expense line items as cash compensation paid to employees.

 

The Company recognizes compensation cost for options granted with service conditions that have graded vesting schedules using the graded vesting attribution method.

 

The Company adopted the modified prospective transition method permitted by SFAS 123(R). Under this transition method, the Company implemented SFAS 123(R) as of the first quarter of 2006 with no restatement of prior periods. The valuation provisions of SFAS 123(R) apply to new awards and to awards modified, repurchased or cancelled after January 1, 2006. Additionally, the Company recognizes compensation cost over the remaining service period for the portion of awards for which the requisite service has not been rendered using the grant-date fair value of those awards as calculated for pro forma disclosure purposes under SFAS 123.

 

In November 2005, FASB issued Staff Position No. SFAS 123(R)-3 “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company adopted the alternative transition method provided therein for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee stock-based compensation, which is available to absorb tax deficiencies recognized after adoption of SFAS 123(R). As of January 1, 2006, the cumulative effect of the Company’s adoption of SFAS 123(R) was not material.

 

The Company accounts for equity instruments issued to third party service providers (non-employees) in accordance with the fair value of the instruments based on an option-pricing model, pursuant to the guidance in EITF 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.” The Company revalues the fair value of the options granted over the related service periods and recognizes the value over the vesting period using the Black-Scholes model.

 

The fair value of each stock option granted during the three and nine months ended December 31, 2007 and 2006

 

9



 

was estimated at the date of grant using the Black-Scholes and the binomial valuation models, using the following assumptions:

 

 

 

Three Months
Ended December 31,

 

Nine Months
Ended December 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

Black-Scholes model assumptions:

 

 

 

 

 

 

 

 

 

Risk-free interest rates ranges

 

3.41%-4.48

%

4.98%-5.02

%

3.41%-5.03

%

4.90%-5.25

%

Weighted-average expected life range

 

4.36-9.39

 

0.25-0.42

 

4.36-9.99

 

0.25-0.92

 

Volatility ranges

 

0.68-0.86

 

0.56-0.59

 

0.63-0.86

 

0.56-0.64

 

Dividend yields

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Binomial valuation model assumptions:

 

 

 

 

 

 

 

 

 

Risk-free interest rates ranges

 

3.30%-4.70

%

4.60%-5.16

%

3.30%-5.10

%

4.60%-5.33

%

Weighted-average expected life range

 

3.08-6.42

 

3.60-6.48

 

0.56-7.52

 

1.88-6.48

 

Volatility ranges

 

0.32-0.86

 

0.51-0.61

 

0.26-0.99

 

0.41-0.63

 

Dividend yields

 

 

 

 

 

 

Recent Accounting Pronouncements

 

In December 2007, FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which changes the accounting for business combinations. Under SFAS 141(R), an acquirer will be required to recognize all of the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141(R) will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141(R) will impact the Company in the event of any future acquisition.

 

In December 2007, FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not believe that SFAS 160 will have a material impact on its consolidated financial statements.

 

In February 2007, FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies 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 became effective for the Company beginning January 1, 2008. The Company is currently evaluating the impact that adoption of SFAS 159 will have on its consolidated financial statements.

 

In July 2006, FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 requires the affirmative evaluation that is more-likely-than-not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. FIN 48 also requires companies to disclose additional quantitative and qualitative information in their financial statements about uncertain tax positions. The Company adopted FIN 48 on January 1, 2007, which did not have a material impact on its consolidated financial statements.

 

Reclassifications

 

Certain amounts in the 2006 financial statements have been reclassified to conform to the 2007 presentation.

 

10



 

2.                                      Inventory, net

 

Inventory is comprised of the following:

 

 

 

December 31, 2007

 

March 31, 2007

 

 

 

(In thousands of U.S. $)

 

Raw materials

 

$

112

 

$

421

 

Work in process

 

304

 

455

 

Finished goods

 

2,678

 

1,444

 

 

 

$

3,094

 

$

2,320

 

 

3.                                      Equipment Purchase Agreement with Arcadian Networks, Inc. (Related Party)

 

On March 31, 2006, the Company entered into an Equipment Purchase Agreement (the “ANI Agreement”) with Arcadian Networks, Inc. (“ANI”). Davidi Gilo, the Company’s Chairman of the board of directors and former Chief Executive Officer, is also the Chairman of the board of directors of ANI and the sole member of the limited liability company that is the general partner of a major stockholder of ANI. Avraham Fischer, a director of the Company, is co-chief executive officer and a director of Clal Industries and Investments, Ltd., which invested $20,000,000 in ANI in August 2006. Goldman, Sachs & Co., a major stockholder in the Company and holder of the 2007 Convertible Note, is a stockholder of ANI.

 

Pursuant to the ANI Agreement, the Company sells certain of its products and services to ANI over a 10-year term. The ANI Agreement fixes the product prices for the first two years, after which time prices are subject to adjustment according to the amount of product purchased by ANI compared to specified forecasted purchase amounts.

 

The ANI Agreement provided that the Company would distribute its products to ANI on an exclusive basis in the United States, Canada and the Gulf of Mexico to identified markets if: (a) ANI made two non-refundable payments of $4,000,000 during each of the first two years of the ANI Agreement; (b) ANI met specified annual minimum product purchase amounts; and (c) ANI’s outstanding balances were below specified amounts.

 

The Company received an initial purchase order for $10,000,000 on March 31, 2006 (related to products to be purchased in the first year of the ANI Agreement) and the first exclusivity payment of $4,000,000 on April 3, 2006, which satisfied ANI’s requirements for exclusivity in the first year of the ANI Agreement. As of December 31, 2007, the Company had not received the second $4,000,000 exclusivity payment, and thus the exclusivity provisions of the ANI Agreement are of no further effect and the Company may sell all of its products and services in all markets in all territories.

 

For the three and nine months ended December 31, 2007, the Company recognized revenue of $1,526,000 and $4,399,000, respectively, under the ANI Agreement, which included income related to the exclusivity payment of $100,000 and $300,000, respectively, and product maintenance of $100,000 and $244,000, respectively. For the three and nine months ended December 31, 2006, the Company recognized revenue of $1,343,000 and $4,921,000, respectively, which included income related to the exclusivity payment of $100,000 and $300,000, respectively, and product maintenance of $49,000 and $103,000, respectively. The Company will recognize the exclusivity payments from ANI over the 10-year term of the Purchase Agreement.

 

As of December 31, 2007, ANI’s outstanding accounts receivable balance was $1,118,000, all of which was paid as of February 14, 2008. The Company had deferred revenues from sales to ANI of $3,508,000.

 

4.                                      Syntek Promissory Note

 

On June 30, 2004, the Company acquired all of the outstanding shares of Xtend, an Israeli privately-held company that was a development stage company at the time. As part of the purchase, the Company delivered a promissory note in the principal amount of $6,500,000 originally payable on March 31, 2007 (the “Syntek Promissory Note”). The Company accounted for the Syntek Promissory Note as contingent consideration since it was payable only if the Company was unable to meet certain key provisions. These key provisions were amended on December 16, 2005 as follows:

 

·                                          the maturity date was extended by one year from March 31, 2007 to March 31, 2008;

 

11



 

·                                          the provision that would have allowed acceleration of the Syntek Promissory Note if the sum of the Company’s cash, cash equivalents, short-term investments and accounts receivables, net of short- and long-term debt, was less than $20,000,000 on December 31, 2005 or June 30, 2006 was waived; and

 

·                                          the Syntek Promissory Note will be cancelled if:

 

(a)                                 the Company’s revenue (including that of all subsidiaries, except for newly-acquired businesses) equals or exceeds $60,000,000 and gross margin equal or exceeds 35%, for the year ended December 31, 2007; or

 

(b)                                beginning on the first day that the Company’s common stock closes at or above $18.00 per share and at any time thereafter, a sale by the holder of all of its Remaining Shares at an average sales price at or above $18.00 per share. “Remaining Shares” means those shares of the Company’s common stock received by the holder in connection with the Xtend acquisition; or

 

(c)                                 all of the Remaining Shares are included in a successfully concluded secondary offering (on Form S-3 or otherwise) at an offering price at or above $18.00 per share in which the holder either (i) sells all of the Remaining Shares or (ii) is provided an opportunity to sell all of such shares into such secondary offering and elects not to sell, provided that the successfully concluded offering included no fewer than the number of Remaining Shares; or

 

(d)                                the receipt by the holder of a bona fide offer for the purchase of all of the Remaining Shares at an average sales price at or above $18.00 per share. A “bona fide” offer means a fully-funded and unconditional offer for purchase by a buyer who has provable and sufficient financial resources to purchase all of the Remaining Shares for cash within a commercially reasonable period of time from the date of offer, not to exceed 30 days.

 

As security for the amended Syntek Promissory Note, the Company delivered a $5,000,000 irrevocable letter of credit, and deposited $5,000,000 with a bank and agreed to restrictions on withdrawal until the letter of credit is cancelled. The letter of credit will be cancelled if, for 45 consecutive trading days, all of the following conditions exist: (a) the weighted average trading price of the Company’s common stock is equal to or higher than $18.00 per share; (b) the average daily trading volume of the Company’s common stock is higher than 150,000 shares per day; and (c) the holder is lawfully able to sell publicly in one transaction or in a series of transactions, during such 45 consecutive trading days, all of its shares of the Company’s common stock without registration under the Securities Act of 1933, as amended.

 

The Company determined that, as of the time of the amendment of the Syntek Promissory Note in December 2005 and immediately prior to its amendment, the contingency had been resolved and therefore the Company recorded $6,500,000 as additional consideration paid in the Xtend acquisition. This resulted in an increase to the intangible assets acquired. Following an impairment test performed on the intangible assets, the assets were immediately impaired. In addition, the Company estimated the fair value of the amended Syntek Promissory Note at $3,967,000 and recorded this amount in the Balance Sheets as a long-term liability under “Promissory note.”

 

The Company recorded $2,533,000, the difference between the value of the amended Syntek Promissory Note and the original Syntek Promissory Note, as “Gain Resulting from Amendment to Promissory Note” in the Consolidated Statements of Operations for the year ended December 31, 2005. In addition, the Company concluded that the contingent non-payment/cancellation feature that exists in the amended Syntek Promissory Note met the criteria in paragraph 12 of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and is considered an embedded derivative instrument.  Accordingly, the contingent non-payment feature is subject to the accounting requirements of SFAS 133 whereby the contingent non-payment feature will be recorded at fair value at each reporting period with the adjustment to its fair value recorded in the Statements of Operations as “Financial Expenses.” The Company has elected to present the embedded derivative on a combined basis with the amended Syntek Promissory Note due to the legal right of offset between the two features of the note. The Company recorded expenses of approximately $389,000 and $1,099,000 for the three and nine months ended December 31, 2007, respectively, and $304,000 and $858,000 for the three and nine months ended December 31, 2006, respectively, resulting from the adjustment of the embedded derivative to its fair value.

 

12



 

As of December 31, 2007, the Company did not satisfy any cancellation feature described and the amended Syntek Promissory Note of $6,500,000 was recorded in the Balance Sheets as “Current Liabilities” and is due on March 31, 2008. The embedded derivative as of December 31, 2007 is valued at $0.

 

5.                                      Accrued Liabilities

 

Accrued liabilities consist of the following:

 

 

 

December 31, 2007

 

March 31, 2007

 

 

 

(In thousands of U.S. $)

 

Withholding tax*

 

$

523

 

$

3,577

 

Compensation and benefits

 

2,244

 

2,185

 

Royalties

 

985

 

950

 

Professional fees

 

401

 

322

 

Deferred rent

 

327

 

361

 

Interest payable to Goldman, Sachs & Co.

 

292

 

14

 

Warranty**

 

159

 

57

 

Deferred revenues

 

50

 

70

 

Other

 

499

 

604

 

 

 

$

5,480

 

$

8,140

 

 


* In June 2007, the Company signed an agreement with its Israeli wholly-owned subsidiary to restructure its intercompany debt, whereby $77,139,000 previously classified as an intercompany loan was replaced and converted into a convertible capital note. The convertible capital note is convertible into ordinary shares of the wholly-owned subsidiary. Additionally, $17,062,000 of accrued interest on the loan was forgiven. Following the restructuring of debt and after consultation with the Company’s tax advisors and based on a ruling received from the Israeli tax authorities, management concluded that the likelihood of an exposure to withholding tax on the interest forgiven is now remote. As a result, the Company reversed its provision for withholding tax on the debt interest of $3,226,000 (at March 31, 2007), which had been provided for as a liability in the Company’s financial statements. The reversal of the provision was recorded as income under “Income Taxes” in the Statements of Operations for the nine months ended December 31, 2007.

 

** The changes in the warranty balances consist of the following:

 

 

 

Nine Months

 

Three  Months

 

 

 

Ended

 

Ended

 

 

 

December 31, 2007

 

March 31, 2007

 

 

 

(In thousands of U.S. $)

 

Balance at beginning of period

 

$

57

 

$

66

 

Usage of warranty

 

(19

)

 

Product warranty issued for new sales

 

182

 

23

 

Changes in accrual of warranty periods ending

 

(61

)

(32

)

Balance at end of period

 

$

159

 

$

57

 

 

6.                                      Severance Liabilities

 

The amounts paid related to severance and severance expenses were

 

 

 

Three Months

 

Nine Months

 

 

 

Ended December 31,

 

Ended December 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands of U.S. $)

 

Amounts paid related to severance

 

$

240

 

$

170

 

$

857

 

$

844

 

Severance expenses

 

$

428

 

$

265

 

$

1,392

 

$

1,053

 

 

13



 

7.                                      Financing

 

2007 Financing

 

On March 28, 2007, the Company issued the 2007 Convertible Note ($35,000,000 principal; 5% annual interest), initially convertible into 3,500,000 shares of the Company’s common stock to Goldman, Sachs & Co., of which $17,500,000 was used to pay off in full the Company’s outstanding 2006 Convertible Note and Senior Secured Note delivered in the 2006 Financing.

 

The 2007 Convertible Note is convertible at the holder’s option into shares of the Company’s common stock at a conversion price of $10.00 per share, provided, that in no event may the holder own of record more than 14.8% of the outstanding shares of the Company’s common stock. In the event of a Fundamental Transaction (as defined in the 2007 Convertible Note to include sales of the Company’s assets and certain business combination transactions,) the holder may, at its option, require the Company to redeem all or any portion of the 2007 Convertible Note at a price equal to 101% of the principal amount, plus all accrued and unpaid interest, if any, and, subject to specified conditions, may be entitled to a cash “make-whole” premium, calculated in accordance with the terms of the 2007 Convertible Note.

 

Under the Amended and Restated Registration Rights Agreement executed in connection with the 2007 Convertible Note, the Company is required to file a registration statement on Form S-3 registering the resale of the shares issuable upon conversion of the 2007 Convertible Note for an initial two-year period, subject to extension under specified circumstances.

 

The Company accounted for the issuance of the 2007 Convertible Note (and the resulting repayment of the 2006 Convertible Note and Senior Secured Note) as extinguishment of debt under EITF 96-19. As a result of the extinguishment of the 2006 Convertible Note and Senior Secured Note, the Company recorded $3,263,000 in the Statements of Operations as “Financial Expenses” consisting of $2,231,000 of unamortized accretion and $1,032,000 of unamortized issuance expenses.

 

In accordance with the provisions of EITF 96-19, the Company recorded the 2007 Convertible Note at its fair value, which is estimated at $35,000,000. The 2007 Financing resulted in estimated net proceeds to the Company of approximately $17,350,000, following pay off in full of the 2006 Convertible Note and Senior Secured Note and payment of issuance expenses of approximately $150,000.

 

2006 Financing

 

In March 2006, the Company closed the private placement of $25,000,000 of common stock, the 2006 Convertible Note, the Senior Secured Note and warrants to purchase common stock to Goldman, Sachs & Co. In the 2006 Financing, the Company issued (a) 1,353,365 shares of common stock, (b) the 2006 Convertible Note ($10,000,000; 10% annual interest), (c) the Senior Secured Note ($7,500,000 principal; 9.5% annual interest), and (d) warrants to purchase 298,617 shares of common stock. The transaction resulted in estimated net proceeds to the Company of approximately $23,400,000.

 

The Company allocated the proceeds received in the 2006 Financing to the different instruments based on the relative fair value of each instrument as follows:

 

 

 

Face value

 

Relative fair
value

 

1,353,365 shares of common stock

 

$

7,500,000

 

$

8,260,000

 

10% Convertible Note

 

10,000,000

 

10,111,000

 

9.5% Senior Secured Note

 

7,500,000

 

4,830,000

 

Warrants to purchase 298,617 shares of common stock for $0.10 per share

 

 

1,799,000

 

Total gross proceeds received in 2006 Financing

 

$

25,000,000

 

$

25,000,000

 

 

The estimated issuance costs of the 2006 Financing were approximately $1,993,000 including (a) a $1,210,000 payment and issuance of warrants to purchase 79,559 shares of the Company’s common stock, at exercise prices ranging from $0.10 to $10.00 (at an estimated fair value of $366,000), to the Company’s financial advisor and (b) approximately $417,000 for legal and other professional fees and costs. Of these estimated issuance costs, $806,000 and $385,000 were allocated to the 2006 Convertible Note and the Senior Secured Note, respectively. These costs were amortized based on the

 

14



 

effective interest amortization method through the five-year term until maturity of the notes and recorded as interest expense, based on the effective interest method of amortization. The issuance costs described above were allocated to the different instruments based on their relative fair values.

 

As noted above, the Company repaid in full the 2006 Convertible Note and Senior Secured Note with proceeds from the 2007 Financing, and the unamortized accretion and unamortized issuance expenses were extinguished at that time.

 

8.                                      Stock-Based Compensation

 

Common Stock Reserved for Issuance

 

As of December 31, 2007, the Company reserved approximately 915,115 shares of common stock for issuance upon exercise of stock options and issuance of shares of restricted stock reserved under its stock-based compensation plans. These shares are available for issuance under the plans described below.

 

Stock Option Plans

 

The Company has the following stock option plans: the 1999 Employee and Consultant Equity Incentive Plan and the Fourth Amended and Restated 2000 Employee and Consultant Equity Incentive Plan (the “2000 Plan”). The Company currently makes grants only from the 2000 Plan, which permits the grant of incentive stock options (“ISOs”) to employees, nonstatutory stock options to employees, directors and consultants and stock options which comply with Israeli law if granted to persons who are subject to Israel income tax. The 2000 Plan also provides for the awards of restricted stock and stock bonuses.

 

ISOs must have an exercise price equal to the fair value of the common stock on the grant date as determined by the Company’s board of directors. The period within which the option may be exercised is determined at the time of grant, but may not be longer than 10 years. The number of shares reserved under the 2000 Plan is subject to automatic annual increases on the first day of each fiscal year, equal to the lesser of 1,500,000 shares or 10% of the number of outstanding shares on the last day of the immediately preceding year.

 

In March 2005, the Company granted certain executives 630,000 options to purchase shares of common stock for $7.50 to $10.50 per share. The options vest and become exercisable if the closing price of the Company’s common stock is at or above specified prices for 10 trading days out of any 30 consecutive trading days, so long as the optionee remains an employee of or consultant to the Company on the 10th day of the period. The options expire five years after the grant date, or, if earlier, 90 days after the optionee is no longer an employee of or consultant to the Company. As of December 31, 2007, 135,000 of these stock options were forfeited. For the three and nine months ended December 31, 2007 and 2006, the Company recorded expenses of $120,000 and $358,000, respectively, related to these stock options.

 

In August 2005, the Company granted certain employees options to purchase 145,000 shares of the Company’s common stock at an exercise price of $0.10 per share. The market price on the date of grant was $6.75, which resulted in deferred stock compensation of $964,000, of which $222,000 was amortized during the year ended December 31, 2005 under APB No. 25.

 

In March 2007, the Company granted its Vice Chairman of the board of directors 250,000 options to purchase shares of common stock for $6.31 per share. This grant was made to the Vice Chairman in his individual capacity as a consultant to the Company. The options vest and become exercisable in equal monthly installments over 48 months. These stock options may be accelerated upon the occurrence of specified events, including certain financing events, approval of the Company’s products in identified cable companies or upon a “Change of Control” (as defined in the related consulting agreement). For the three and nine months ended December 31, 2007, the Company recorded expenses of $88,000 and $454,000, respectively, related to these stock options.

 

15



 

Grant of Stock Options to Davidi Gilo

 

On February 10, 2006, the Company’s Compensation Committee approved the grant of stock options to Mr. Gilo, Chairman of the board of directors, to purchase 900,000 shares of the Company’s common stock. At the time, Mr. Gilo also was Chief Executive Officer of the Company. These options vest as follows:

 

(a)                 300,000 shares vested upon the closing of the 2006 Financing.

 

(b)                300,000 shares vest at such time as the per share price of the Company’s common stock closes at or above $10.44 for a period of any 22 (consecutive or non-consecutive) trading days, so long as Mr. Gilo remains an employee of or consultant to the Company on the 22nd day of such period.

 

(c)                 300,000 shares vest at such time as the per share price of the Company’s common stock closes at or above$15.66 for a period of any 22 (consecutive or non-consecutive) trading days, so long as Mr. Gilo remains an employee of or consultant to the Company on the 22nd day of such period.

 

The Company recorded stock-based compensation expenses of $0 and $0 for the three and nine months ended December 31, 2006, respectively, related to the 300,000 options granted to Mr. Gilo that vested upon the closing of the 2006 Financing. In connection with the 600,000 stock options granted to Mr. Gilo which vest based on the closing price of the Company’s common stock, the Company recorded stock-based compensation expenses of $58,000 and $173,000 in the three and nine months ended December 31, 2007, respectively, and $58,000 and $173,000 in the three and nine months ended December 31, 2006, respectively. The Company determined these stock-based compensation expenses using the Monte Carlo valuation method.

 

Restricted Stock

 

Recipients of shares of restricted stock are entitled to cash dividends, if paid, and to vote their shares throughout the restricted period. The shares are valued at the market price on the grant date, and compensation is amortized ratably over the vesting period. The Company must recognize compensation expenses for shares of restricted stock subject to designated performance criteria if the performance criteria are being attained or it is probable that they will be attained.

 

A summary of stock option plans, shares of restricted stock and related information, under all of the Company’s equity incentive plans as of December 31, 2007 is as follows (in thousands of U.S. $, except per share data):

 

 

 

Options/Shares
available
for grants

 

Number
outstanding

 

Weighted
average
exercise
price

 

Weighted
average
fair value

 

Balance at April 1, 2007

 

728

 

6,616

 

$

5.46

 

 

Authorized

 

1,000

 

 

 

 

Granted*

 

(1,399

)

1,399

 

$

6.64

 

$

2.65

 

Exercised

 

 

(270

)

$

3.92

 

 

Cancelled

 

586

 

(586

)

$

5.90

 

 

Balance at December 31, 2007

 

915

 

7,159

 

$

5.71

 

 

 

 


* Includes 198,125 options granted to non-employee directors for the nine months ended December 31, 2007.

 

16



 

The following table summarizes information concerning outstanding and exercisable options under stock option plans as of December 31, 2007:

 

 

 

Options outstanding

 

Options exercisable

 

Range of exercise prices

 

Number
outstanding

 

Weighted
average
remaining
contractual
life

 

Weighted
average
exercise
price per
share

 

Number
exercisable

 

Weighted
average
exercise
price per
share

 

 

 

(In thousands)

 

(In years)

 

(In U.S. $)

 

(In thousands)

 

(In U.S. $)

 

Plans:

 

 

 

 

 

 

 

 

 

 

 

0.10

 

93

 

2.95

 

$

0.10

 

77

 

$

0.1

 

0.99

 

1

 

0.95

 

0.99

 

1

 

0.99

 

2.27-3.40

 

509

 

3.24

 

3.25

 

418

 

3.23

 

3. 92-5.86

 

2,853

 

4.11

 

4.77

 

1,774

 

4.62

 

5. 99-8.43

 

3,607

 

4.33

 

6.84

 

988

 

7.08

 

9.00-10.50

 

96

 

0.16

 

9.73

 

16

 

9.60

 

 

 

7,159

 

4.09

 

$

5.71

 

3,274

 

$

5.10

 

 

9.                                      Comprehensive Loss

 

The components of comprehensive loss are as follows:

 

 

 

Three Months
Ended December 31,

 

Nine Months
Ended December 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands of U.S. $)

 

Loss

 

$

(8,479

)

$

(6,533

)

$

(21,879

)

$

(21,446

)

Unrealized gain (loss) on available-for-sale securities

 

27

 

(1

)

43

 

(3

)

Comprehensive loss

 

$

(8,452

)

$

(6,534

)

$

(21,836

)

$

(21,449

)

 

10.                               Segment Reporting

 

The Company’s business is divided into two segments: “Cable Solutions” and “Wireless Solutions.”

 

 

 

Three Months
Ended December 31,

 

Nine Months
Ended December 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands of U.S. $)

 

Consolidated revenues from:

 

 

 

 

 

 

 

 

 

Cable Solutions

 

$

769

 

$

349

 

$

2,120

 

$

621

 

Wireless Solutions:

 

 

 

 

 

 

 

 

 

Related party

 

1,526

 

1,343

 

4,399

 

4,921

 

Other

 

30

 

64

 

59

 

89

 

 

 

1,556

 

1,407

 

4,458

 

5,010

 

Consolidated revenues

 

$

2,325

 

$

1,756

 

$

6,578

 

$

5,631

 

 

 

 

 

 

 

 

 

 

 

Operating loss:

 

 

 

 

 

 

 

 

 

Cable Solutions

 

(6,067

)

(5,476

)

(18,322

)

(12,696

)

Wireless Solutions

 

(1,714

)

(381

)

(5,026

)

(6,761

)

Total consolidated operating loss

 

(7,781

)

(5,857

)

(23,348

)

(19,457

)

 

 

 

 

 

 

 

 

 

 

Financial income

 

260

 

322

 

869

 

1,059

 

Financial expenses

 

(889

)

(910

)

(2,502

)

(2,481

)

Income tax

 

(69

)

(88

)

3,102

 

(645

)

Loss from continuing operations

 

$

(8,479

)

$

(6,533

)

$

(21,879

)

$

(21,524

)

 

17



 

The following provides information on the Company’s assets:

 

 

 

December 31, 2007

 

March 31, 2007

 

 

 

(In thousands of U.S. $)

 

Cash, cash equivalents and short-term investments

 

$

17,733

 

$

31,154

 

Restricted cash

 

 

5,000

 

Debt issuance costs, net

 

127

 

150

 

Cable Solutions

 

4,527

 

3,370

 

Wireless Solutions

 

3,897

 

3,224

 

 

 

$

26,284

 

$

42,898

 

 

 

 

Three Months
Ended December 31,

 

Nine Months
Ended December 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands of U.S. $)

 

Expenditures for long-lived assets:

 

 

 

 

 

 

 

 

 

Cable Solutions

 

$

160

 

$

776

 

$

307

 

$

828

 

Wireless Solutions

 

 

10

 

51

 

79

 

 

 

$

160

 

$

786

 

$

358

 

$

907

 

Depreciation expenses:

 

 

 

 

 

 

 

 

 

Cable Solutions

 

$

181

 

$

205

 

$

472

 

$

431

 

Wireless Solutions

 

24

 

 

149

 

190

 

 

 

$

205

 

$

205

 

$

621

 

$

621

 

 

The following is a summary of operations within geographic areas based on the location of the customers:

 

 

 

Three Months
Ended December 31,

 

Nine Months
Ended December 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands of U.S. $)

 

Revenues from sales to customers:

 

 

 

 

 

 

 

 

 

Cable Solutions segment:

 

 

 

 

 

 

 

 

 

North America

 

$

753

 

$

384

 

$

2,070

 

$

656

 

Rest of the world

 

16

 

 

50

 

 

 

 

$

769

 

$

384

 

$

2,120

 

$

656

 

Wireless Solutions segment:

 

 

 

 

 

 

 

 

 

North America, related party

 

$

1,526

 

$

1,343

 

$

4,399

 

$

4,921

 

North America

 

 

 

 

18

 

Rest of the world

 

30

 

29

 

59

 

36

 

 

 

$

1,556

 

$

1,372

 

$

4,458

 

$

4,975

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,325

 

$

1,756

 

$

6,578

 

$

5,631

 

 

 

 

December 31, 2007

 

March 31, 2007

 

 

 

(In thousands of U.S. $)

 

Property and equipment, net:

 

 

 

 

 

Israel

 

$

854

 

$

1,020

 

United States

 

538

 

642

 

 

 

$

1,392

 

$

1,662

 

 

Sales to major customers out of total revenues are as follows:

 

 

 

Three Months
Ended December 31,

 

Nine Months
Ended December 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

Customer A, related party

 

66

%

77

%

67

%

87

%

Customer B

 

32

%

19

%

31

%

11

%

 

18



 

11.                               Subsequent Events

 

Costs Associated with Exit or Disposal Activities

 

See note 1.

 

Notice of Delisting or Failure to satisfy a continued Listing Rule or Standard; Transfer of Listing.

 

On January 29, 2008, the Company received notice from The Nasdaq Stock Market (“NASDAQ”) that for the last 10 consecutive trading days the market value of the Company’s listed securities had been below the minimum $50,000,000 requirement for continued inclusion on The Nasdaq Global Market under Marketplace Rule 4450(b)(1)(A).  NASDAQ also informed the Company that it does not comply with Marketplace Rule 4450(b)(1)(B), which requires total assets and total revenue of $50,000,000 each for the most recently completed fiscal year or two of the last three most recently completed fiscal years.  Under The Nasdaq Global Market Continued Listing Requirements, the Company may maintain its listing qualifications without complying with the total assets and total revenue requirement if it is in compliance with the requirements of Nasdaq Marketplace Rule 4450(b)(1)(A) with respect to the market value of its listed securities being at least $50,000,000.  The notice has no immediate effect on the listing of the Company’s securities, and its common stock will continue to trade on The Nasdaq Global Market.

 

Pursuant to Marketplace Rule 4450(e)(4), the Company was provided 30 calendar days, or until February 28, 2008, to regain compliance. If, at any time before February 28, 2008, the market value of Company’s listed securities is $50,000,000 or more for a minimum of 10 consecutive business days, NASDAQ will determine if the Company complies with Marketplace Rule 4450(b)(1)(A). If compliance with the rule cannot be demonstrated by February 28, 2008, the Company will have the right to appeal a staff determination to delist the Company’s securities and the Company’s securities will remain listed until completion of the appeal process.  In addition, if the Company satisfies the continued listing requirements for The Nasdaq Capital Market, the Company has the ability to apply to transfer its securities from The Nasdaq Global Market to The Nasdaq Capital Market.  If the Company submits a transfer application by February 28, 2008, the initiation of the delisting proceedings will be stayed pending NASDAQ’s review of the application.

 

The Company is presently considering a number of alternatives to regain compliance with Nasdaq Marketplace Rule 4450(b)(1)(A) to remain listed on The Nasdaq Global Market.  If the Company does not resolve the listing deficiency, the Company may apply to transfer the listing of the Company’s common stock to The Nasdaq Capital Market.

 

Departure of Principal Officers

 

Avner KolOn January 30, 2008, Avner Kol’s employment with the Company was terminated. Mr. Kol previously served as the Company’s Chief Operating Officer.  The Company will enter into a separation agreement with Mr. Kol regarding the terms of his separation.

 

David GiloEffective as of February 1, 2008, Mr. Gilo agreed to reduce his annual salary from $200,000 to $12,000 in exchange for providing services to the Company for 20 hours per week. The Company will enter into a revised employment agreement with Mr. Gilo reflecting this change.

 

Consulting Agreement with James A. Chiddix

 

Effective as of February 1, 2008, the Company amended its Consulting Agreement with James A. Chiddix, the Company’s Vice Chairman of the board of directors.  Under the amended agreement, Mr. Chiddix’s consulting fee will be reduced from $15,000 to $7,500 per month in exchange for providing certain services to the Company for an average 40 hours per month.

 

19


 


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

 

You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the condensed consolidated financial statements and accompanying notes appearing elsewhere in this Quarterly Report on Form 10-Q of Vyyo Inc. The matters addressed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, with the exception of the historical information presented, contain forward-looking statements involving risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in Part II, Item 1A below and elsewhere in this report.

 

Overview

 

Vyyo Inc. and its wholly-owned subsidiaries (collectively, “we,” “us” or “our”) provide cable and wireless broadband access solutions through two business segments: our “Cable Solutions” segment and our “Wireless Solutions” segment. Our primary focus is on our Cable Solutions segment, and significantly all of our internal resources are focused on enhancing our visibility in and penetration of the cable market. The addition of James A. Chiddix as the Vice Chairman of our board of directors, Wayne H. Davis as our Chief Executive Officer, David Feldman as our Chief Technology Officer and Robert K. Mills as our Chief Financial Officer, all with substantial cable industry experience, validates our efforts and increases our visibility within the cable industry.

 

Effective December 3, 2007, we changed our fiscal year end from December 31 to March 31. Our new fiscal year will commence April 1, 2008 and end on March 31, 2009.

 

Our products are designed to address four markets: Cable, Telecommunication, Utility and Wireless Internet Service Providers (“WISP”). Although we are engaged to various degrees in these distinct markets, some of our core technologies overlap with our respective solutions.

 

Our Cable Solutions segment includes our UltraBand™ products that are designed to expand cable operators’ typical hybrid-fiber coax (“HFC”) network capacity in the “last mile” by up to two times in the downstream and up to four times in the upstream. Additionally, it includes products that deliver telephony and data T1/E1 links to enterprise and cellular providers over cable’s HFC networks. Our Cable Solutions segment also includes the results of operations of Xtend Networks Ltd., an Israeli company, and its wholly-owned, United States-based subsidiary, Xtend Networks Inc. (collectively, “Xtend”). We purchased all of the outstanding capital stock of Xtend on June 30, 2004 and consolidated its operations with our operations beginning July 1, 2004. For a discussion of our acquisition of Xtend, see note 7 of our 2006 annual Consolidated Financial Statements.

 

Our Wireless Solutions segment includes products which enable utilities and other network service providers to operate private wireless networks for communications, monitoring and Supervisory Control And Data Acquisition of their geographically disbursed, remote assets. Additionally, it includes our WISP and telecommunications products which address the needs of rural service providers to serve customers with wireless, high-speed data beyond the reach of traditional terrestrial networks.

 

We have experienced significant losses and negative cash flows from operations since our incorporation. For the nine months ended December 31, 2007, we incurred a net loss of $21,879,000 and had an accumulated deficit of $297,494,000. These matters raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will depend upon our ability to raise additional capital during the next three months. We are pursuing raising additional capital to fund our operations although there is no assurance that such capital will be available to us. We also are seeking to expand our revenue base by adding new customers and to further reduce expenses, including the restructuring plan discussed below. Failure to secure additional capital in the very short term or to expand our revenue base in the longer term will result in depleting our available funds and not being able to pay our obligations when they become due. See “Liquidity, Capital Resources and Going Concern Considerations.”

 

On January 30, 2008, our board of directors approved, and on February 4, 2008, we announced, our intent to simplify our structure by streamlining our corporate organization and reducing operating costs to better address market needs and revenue opportunities in the cable industry.  As a result, we began implementing a restructuring plan and expect to record a restructuring charge in the fourth fiscal quarter ended March 31, 2008 in the range of $5,000,000 to $7,000,000.  This

 

20



 

charge will be utilized to cover severance payments and other employee-related costs associated with the involuntary termination of approximately 100 employees of approximately $3,000,000 to $4,000,000, the write-off of inventory of approximately $1,000,000 to $1,500,000 and the vacating of certain operating building leases in Israel and related ancillary costs of approximately $1,000,000 to $1,500,000. A significant portion of these costs were related to our continuing strategy to focus on our Cable Solutions segment, to consolidate facilities in the United States and to significantly downsize our Wireless Solutions segment to support current customers only.

 

The workforce reduction and reduction of outsourced services and contractors impact all company functions, both in Israel and the United States, and include management and non-management positions.  We expect that all functions currently performed in Israel will be moved to the United States by the quarter ended June 30, 2008, and we are currently exploring our options to mitigate our affected real estate lease obligations. We also expect to record other costs related to the consolidation of our operations at our Georgia facility, but at this time we are unable to estimate the costs expected to be incurred and whether these costs will be material.

 

We expect to complete the restructuring plan in the quarter ended June 30, 2008 and to reduce annual operating expenses by approximately $20,000,000, after payment of the severance costs described above.  These actions are consistent with our previous disclosures concerning operating cost reductions and exit from the wireless business. We continue to evaluate additional opportunities to reduce operating costs.

 

On July 23, 2007, we implemented a cost reduction program that reduced our workforce by approximately 16% (when compared to the workforce levels as of June, 2007). We recorded approximately $400,000 in a one-time cash severance payment and related expenses. This cost reduction did not require the termination of any contractual obligations or require us to incur other material associated costs.

 

On March 28, 2007, we closed the private placement of a convertible note with Goldman, Sachs & Co. in exchange for $35,000,000 (the “2007 Convertible Note”), which included $17,500,000 of new funding and $17,500,000 of which we used to pay off the 2006 Convertible Note and Senior Secured Note delivered in the 2006 Financing (all as described below). Our net proceeds from the 2007 Financing were approximately $17,350,000. See also note 7.

 

In March 2006, we closed the private placement of common stock, a convertible note, a senior secured note and warrants to purchase common stock with Goldman, Sachs & Co. in exchange for $25,000,000 (the “2006 Financing”). In the 2006 Financing we issued (a) 1,353,365 shares of our common stock, (b) a $10,000,000 10% Convertible Note (the “2006 Convertible Note”), (c) a $7,500,000 9.5% Senior Secured Note (the “Senior Secured Note”), and (d) warrants to purchase 298,617 shares of our common stock, all of which were exercised in 2006. Our net proceeds from the 2006 Financing were approximately $23,400,000.

 

Subsequent Events

 

Costs Associated with Exit or Disposal Activities

 

See Overview above.

 

Notice of Delisting or Failure to satisfy a continued Listing Rule or Standard

 

On January 29, 2008, we received notice from The Nasdaq Stock Market (“NASDAQ”) that for the last 10 consecutive trading days, the market value of the our listed securities has been below the minimum $50,000,000 requirement for continued inclusion on The Nasdaq Global Market under Marketplace Rule 4450(b)(1)(A).  NASDAQ also informed us  that we do not comply with Marketplace Rule 4450(b)(1)(B), which requires total assets and total revenue of $50,000,000 each for the most recently completed fiscal year or two of the last three most recently completed fiscal years.  Under The Nasdaq Global Market Continued Listing Requirements, we may maintain our listing qualifications without complying with the total assets and total revenue requirement if we are in compliance with the requirements of Nasdaq Marketplace Rule 4450(b)(1)(A) with respect to the market value of its listed securities being at least $50,000,000.  The notice has no immediate effect on the listing of our securities, and our common stock will continue to trade on The Nasdaq Global Market.

 

Pursuant to Marketplace Rule 4450(e)(4), we were provided 30 calendar days, or until February 28, 2008, to regain compliance. If, at any time before February 28, 2008, the market value of listed securities of our common stock is

 

21



 

$50,000,000 or more for a minimum of 10 consecutive business days, NASDAQ will determine if we comply with Marketplace Rule 4450(b)(1)(A). If compliance with the rule cannot be demonstrated by February 28, 2008, we will have the right to appeal a staff determination to delist our securities and our securities will remain listed until completion of the appeal process.  In addition, if we satisfy the continued listing requirements for The Nasdaq Capital Market, we have the ability to apply to transfer our securities from The Nasdaq Global Market to The Nasdaq Capital Market.  If we submit a transfer application by February 28, 2008, the initiation of the delisting proceedings will be stayed pending NASDAQ’s review of the application.

 

We are presently considering a number of alternatives to regain compliance with Nasdaq Marketplace Rule 4450(b)(1)(A) to remain listed on The Nasdaq Global Market.  If we do not resolve the listing deficiency, we may apply to transfer the listing of our common stock to The Nasdaq Capital Market.

 

Departure of  Principal Officers

 

Avner KolOn January 30, 2008, Avner Kol’s employment with us was terminated. Mr. Kol previously served as our Chief Operating Officer.  We will enter into a separation agreement with Mr. Kol regarding the terms of his separation.

 

David GiloEffective as of February 1, 2008, Mr. Gilo agreed to reduce his annual salary from $200,000 to $12,000 in exchange for providing services to us for 20 hours per week.  The Company will enter into a revised employment agreement with Mr. Gilo reflecting this change.

 

Consulting Agreement with James A. Chiddix

 

Effective as of February 1, 2008, we amended our Consulting Agreement with James A. Chiddix, our Vice Chairman of the board of directors.  Under the amended agreement, Mr. Chiddix’s consulting fee will be reduced from $15,000 to $7,500 per month in exchange for providing certain services to the Company for an average 40 hours per month.

 

Critical Accounting Principles

 

The discussion and analysis of our financial condition and results of operations is based upon our unaudited interim condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates, judgments and assumptions.

 

Our significant accounting principles are described in the notes to our 2006 annual consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2006. We determined the critical principles by considering accounting principles that involve the most complex or subjective decisions or assessments. We believe our most critical accounting principles include the following:

 

Revenue Recognition

 

We generate revenues from sales of our products. As of December 31, 2007, our revenues from services were not significant. Our products are off-the-shelf products, sold “as is,” without further adjustment or installation. When establishing a relationship with a new customer, we also may sell these products together as a package, in which case we typically ship products at the same time to the customer.

 

We record revenues from our products when (a) persuasive evidence of an arrangement exists; (b) delivery has occurred and customer acceptance requirements have been met, if any, and we have no additional obligations; (c) the price is fixed or determinable; and (d) collection of payment is reasonably assured. Our standard sales terms generally do not include customer acceptance provisions. However, if there is a right of return, customer acceptance provision or uncertainty about customer acceptance, we defer the associated revenue until we have evidence of customer acceptance.

 

22



 

Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables,” addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. Our multiple deliverables arrangements are those arrangements with new customers in which we sell our products together as a package. Because we deliver these off-the-shelf products at the same time and the four revenue recognition criteria discussed above are met at that time, the adoption of EITF No. 00-21 had no impact on our financial position or results of operations.

 

We recognize revenues related to the exclusivity provisions contained in the equipment purchase agreement with Arcadian Networks, Inc. (“ANI”) described in note 4 of our 2006 annual Consolidated Financial Statements on a straight line basis, over the 10-year term of that agreement.

 

Inventory

 

We regularly monitor inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of future product demand and production requirements. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments would significantly impact the value of our inventory and reported operating results. If actual market conditions are different than our assumptions, additional provisions may be required. Our estimate of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. If we later determine that our inventory is overvalued, we would be required to recognize such costs in our costs of sales at the time of such determination. If we later determine that our inventory is undervalued, we may have overstated our costs of sales in previous periods and would be required to recognize additional operating income only when the undervalued inventory was sold. During the three and nine months ended December 31, 2007, we recorded an inventory valuation write-down of approximately $0 and $183,000, respectively. During the three and nine months ended December 31, 2006, we recorded an inventory valuation write-down of approximately $345,000 and $514,000, respectively.

 

We adopted the provisions of the Financial Accounting Standards Board (“FASB”) Statement No. 151, “Inventory Costs” (“FASB 151”), as of January 1, 2006, which did not have a material effect on our financial statements. Under FASB 151 we are required to recognize abnormal idle facility expenses as current-period charges, and to allocate fixed production overhead expenses to inventory based on normal capacity of the production facility.

 

Extinguishment of Debt

 

In the 2007 Financing we repaid the 2006 Convertible Note and Senior Secured Note. We accounted for this repayment as “extinguishment of debt” under Emerging Issues Task Force 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” (“EITF 96-19”). We initially recorded the 2007 Convertible Note at its estimated fair value, and we used that amount to determine the debt extinguishment loss of $3,263,000 resulting from recognition of $2,231,000 in unamortized accretion and $1,032,000 in unamortized issuance expenses related to the 2006 Convertible Note and Senior Secured Note.

 

Fair Value of Financial Instruments

 

The fair value of the financial instruments included in our working capital approximates carrying value. The Syntek Promissory Note and the 2007 Convertible Note delivered in the 2007 Financing are presented in the Balance Sheets as “Long-Term Liabilities,” at approximately their estimated fair value.

 

Debt Issuance Costs

 

Costs incurred in the issuance of the 2007 Convertible Note consisted of cash payments to legal advisors in the year ended December 31, 2007. Costs incurred in the issuance of the 2006 Convertible Note and the Senior Secured Note included warrants to purchase shares of our common stock issued to our financial advisor and cash payments made to legal and financial advisors in the year ended December 31, 2006. In the year ended December 31, 2006, we determined the fair value of the warrants based on the Black-Scholes option-pricing model. Issuance costs are deferred and amortized as a component of interest expense over the period from issuance through the first redemption date.

 

23



 

Stock-Based Compensation

 

Prior to January 1, 2006, we accounted for employees’ stock-based compensation under the intrinsic value model in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations.

 

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-based Payment” (“SFAS 123(R)”). SFAS 123(R) supersedes APB 25 and related interpretations and amends SFAS No. 95, “Statement of Cash Flows.” SFAS 123(R) requires that awards classified as equity awards be accounted for using the grant-date fair value method. The fair value of stock options is determined based on the number of shares granted and the price of our common stock, and determined based on the Black-Scholes, Monte Carlo and the binomial option-pricing models, net of estimated forfeitures. We estimate forfeitures based on historical experience and anticipated future conditions. We use the Monte Carlo valuation model only for stock options granted to executives in 2005 and 2006 where vesting is subject to specific stock price performance.

 

In March 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”) which provides supplemental implementation guidance on SFAS 123(R), including guidance on valuation methods, inventory capitalization of stock-based compensation cost, income statement effects, disclosures and other issues. SAB 107 requires stock-based compensation to be classified in the same expense line items as cash compensation. We applied the provisions of SAB 107 in our adoption of SFAS 123(R). In addition, we have reclassified stock-based compensation from prior periods to correspond to current period presentation within the same operating expense line items as cash compensation paid to employees.

 

We recognize compensation cost for options granted with service conditions that have graded vesting schedules using the graded vesting attribution method.

 

We adopted the modified prospective transition method permitted by SFAS 123(R). Under this transition method, we implemented SFAS 123(R) as of the first quarter of 2006 with no restatement of prior periods. The valuation provisions of SFAS 123(R) apply to new awards and to awards modified, repurchased or cancelled after January 1, 2006. Additionally, we recognize compensation cost over the remaining service period for the portion of awards for which the requisite service has not been rendered using the grant-date fair value of those awards as calculated for pro forma disclosure purposes under SFAS 123.

 

In November 2005, FASB issued Staff Position No. SFAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (“SFAS 123(R)-3”). We adopted the alternative transition method provided therein for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee stock-based compensation, which is available to absorb tax deficiencies recognized after adoption of SFAS 123(R).  As of January 1, 2006, the cumulative effect of our adoption of SFAS 123(R) was not material.

 

We account for equity instruments issued to third party service providers (non-employees) in accordance with the fair value based on an option-pricing model, pursuant to the guidance in EITF 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.” We revalue the fair value of the options granted over the related service periods and recognize the value over the vesting period, using the Black-Scholes model.

 

Expense related to stock-based compensation is included in the following line items in the Statements of Operations:

 

 

 

Three Months
Ended December 31,

 

Nine Months
Ended December 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands of U.S. $)

 

Cost of revenues

 

$

17

 

$

23

 

$

49

 

$

69

 

Research and development

 

$

142

 

$

153

 

$

461

 

$

603

 

Sales and marketing

 

$

450

 

$

343

 

$

1,596

 

$

1,074

 

General and administrative

 

$

532

 

$

635

 

$

1,913

 

$

1,675

 

 

24



 

Recent Accounting Pronouncements

 

In December 2007, FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which changes the accounting for business combinations. Under SFAS 141(R), an acquirer will be required to recognize all of the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141(R) will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141(R) will impact us in the event of any future acquisition.

 

 In December 2007, FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. We do not believe that SFAS 160 will have a material impact on our consolidated financial statements.

 

In February 2007, FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This standard permits companies 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. This statement became effective for us beginning January 1, 2008. We are currently evaluating the impact that adoption of SFAS 159 will have on our consolidated financial statements.

 

In July 2006, FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 requires the affirmative evaluation that is more-likely-than-not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. FIN 48 also requires companies to disclose additional quantitative and qualitative information in their financial statements about uncertain tax positions. We adopted FIN 48 on January 1, 2007, which did not have a material impact on our consolidated financial statements.

 

Results of Operations

 

Revenues

 

Revenues increased to $2,325,000 in the three months ended December 31, 2007 from $1,756,000 in the three months ended December 31, 2006 and increased to $6,578,000 in the nine months ended December 31, 2007 from $5,631,000 in the nine months ended December 31, 2006. This increase in revenues for the three and nine months ended December 31, 2007 compared to the same period in the prior year was primarily due to an increase in sales of our Cable Solutions products of $385,000 and $1,464,000, respectively. Revenues from our Wireless Solutions products increased by $184,000 for the three months ended December 31, 2007 compared to the three months ended December 31, 2006 and decreased by $517,000 for the nine months ended December 31, 2007 compared to the nine months ended December 31, 2006.

 

Revenue for the three and nine months ended December 31, 2007 and 2006 did not include inventory previously written down to $0.

 

Our revenue is concentrated among relatively few customers. Though our principal revenue-generating customers are likely to vary on a quarterly basis, we anticipate that our revenues will remain concentrated among a few customers for the foreseeable future.

 

Cost of Revenues

 

Cost of revenues consists of component and material costs, direct labor costs, warranty costs and overhead related to manufacturing our products.

 

25



 

Cost of revenues increased to $1,991,000 during the three months ended December 31, 2007 from $984,000 during the three months ended December 31, 2006, and was $6,064,000 and $4,014,000 during the nine months ended December 31, 2007 and 2006, respectively. The increase in cost of revenues for the three months ended December 31, 2007 was primarily due to increases in shipments of our products. For the three months and nine months ended December 31, 2007, we recorded a write-down of inventory of $0 and $183,000, respectively, compared to a write-down of inventory of $345,000 and $514,000 for the three and nine months ended December 31, 2006, respectively. Our gross margins during the three and nine months ended December 31, 2007 decreased primarily due to the decrease in shipments of our products together with flat fixed costs. We anticipate that our gross margins will continue to fluctuate based on our product and customer mix, revenue level and inventory valuations.

 

Research and Development

 

Our research and development expenses were $3,068,000 and $2,872,000 during the three months ended December 31, 2007 and 2006, respectively, and $9,091,000 and $8,755,000 during the nine months ended December 31, 2007 and 2006, respectively. Of these expenses, the Cable Solutions segment accounted for approximately $2,373,000 and $2,261,000 during the three months ended December 31, 2007 and 2006, respectively, and $6,753,000 and $5,567,000 during the nine months ended December 31, 2007 and 2006, respectively. The Wireless Solutions segment accounted for the remaining expenses of approximately $695,000 and $611,000 during the three months ended December 31, 2007 and 2006, respectively, and $2,338,000 and $3,188,000 during the nine months ended December 31, 2007 and 2006, respectively. These expenses consisted primarily of personnel, facilities, equipment and supplies and were charged to operations as incurred. All of our research and development activities were conducted in our Israeli facility.

 

The increase in our research and development expenses in our Cable Solutions segment during the three months ended December 31, 2007 compared to the same period in 2006 mainly resulted from increases in subcontractors, materials and other professional fees from $314,000 to $658,000 offset by decreases in salaries, compensation and recruiting fees from $1,312,000 to $1,059,000.

 

The increase in our research and development expenses in our Cable Solutions segment during the nine months ended December 31, 2007 compared to the same period in 2006 mainly resulted from increases in (a) salaries, compensation and recruiting fees from $2,805,000 to $3,421,000, (b) subcontractors, materials and other professional fees from $1,175,000 to $1,402,000, (c) travel expenses from $89,000 to $139,000 and (d) overhead expenses from $625,000 to $839,000.

 

The increase in our research and development expenses in our Wireless Solutions segment during the three months ended December 31, 2007 compared to the same period in 2006 resulted from increases in (a) salaries, compensation and recruiting fees from $359,000 to $386,000, (b) subcontractors and materials from $49,000 to $87,000, and (c) non-cash expenses related to stock option grants from $15,000 to $30,000 during the three months ended December 31, 2006 and 2007, respectively.

 

The decrease in our research and development expenses in our Wireless Solutions segment during the nine months ended December 31, 2007 compared to the same period in 2006 resulted from decreases in (a) salaries, compensation and recruiting fees from $1,702,000 to $1,384,000 due to decreased workforce, (b) subcontractors and materials from $544,000 to $279,000, (c) non-cash expenses related to stock option grants from $206,000 to $83,000 and (d) travel expenses from $93,000 to $33,000.

 

We anticipate that our research and development costs will decrease in the future due to our restructuring efforts and downsizing of our Wireless Solutions segment.

 

Sales and Marketing

 

Sales and marketing expenses increased to $2,191,000 from $1,967,000 and increased to $7,266,000 from $6,618,000 during the three and nine months ended December 31, 2007 and 2006, respectively. Sales and marketing expenses consist of salaries and related costs for sales and marketing employees, consulting fees and expenses for travel, trade shows, market research, branding and promotional activities.

 

26


 


 

Sales and marketing expenses for our Cable Solutions segment were approximately $2,012,000 and $6,879,000 during the three and nine months ended December 31, 2007, respectively, compared to $1586,000 and $5,068,000 for the three and nine months ended December 31, 2006, respectively.

 

The increase during the three months and nine months ended December 31, 2007 compared to the same periods in 2006 resulted mainly from increases in (a) salaries, compensation and recruiting fees of $248,000 and $734,000 due to increased workforce, (b) non-cash expenses related to stock option grants of $123,000 and $506,000, (c) professional fees of $63,000 and $30,000, and (d) marketing and miscellaneous expenses of $0 and $555,000, respectively.

 

Sales and marketing expenses for our Wireless Solutions segment were approximately $179,000 and $387,000 during the three and the nine months ended December 31, 2007, respectively. For the three and the nine months ended December 31, 2006, the sales and marketing expenses for our Wireless Solutions segment were $381,000 and $1,550,000, respectively. The decrease in the expenses for our Wireless Solutions segment in the three and nine months ended December 31, 2007 compared to the same periods in 2006 resulted from a decrease in the sales and marketing workforce of our Wireless Solutions segment following the equipment agreement signed with ANI and our focus on our Cable Solutions segment. During the three months ended December 31, 2006, we relocated our wireless sales and marketing department from Palo Alto, California to Norcross, Georgia, and decreased our workforce.

 

Given our reduction in workforce as a result of our restructuring efforts, we anticipate that our sales and marketing expenses will continue to decrease in future periods.

 

General and Administrative

 

General and administrative expenses were $2,856,000 and $1,790,000 during the three months ended December 31, 2007 and 2006, respectively. Of these expenses, approximately $1,799,000 and $1,633,000 were from our Cable Solutions segment and approximately $1,057,000 and $157,000 were from our Wireless Solutions segment during the three months ended December 31, 2007 and 2006, respectively.

 

For the nine months ended December 31, 2007 and 2006, general and administrative expenses were $7,505,000 compared to $5,701,000, respectively. Of these expenses, approximately $4,935,000 and $2,363,000 were from our Cable Solutions segment and approximately $2,570,000 and $3,338,000 were from our Wireless Solutions segment during the nine months ended December 31, 2007 and 2006, respectively. General and administrative expenses consisted primarily of personnel and related costs for general corporate functions, including finance, accounting, implementation of the Sarbanes-Oxley Act of 2002, strategic and business development and legal.

 

The increase in general and administrative expenses during the three months ended December 31, 2007 compared to the same period in 2006 was primarily due to increases in (a) non-cash expenses related to stock option grants from $1,675,000 to $1,913,000, (b) salaries, compensation and recruiting fees from $2,068,000 to $2,618,000, and (c) professional fees services from $482,000 to $1,365,000, mostly related to our implementation of internal controls over financial reporting required by the Sarbanes-Oxley Act of 2002.

 

We anticipate that our general and administrative expenses will decrease in future periods given our reduction in workforce and facilities as a result of our restructuring efforts.

 

Financial Income and Expense

 

“Financial Income” and “Financial Expense” includes interest and investment income, foreign currency remeasurement gains and losses. Net interest expense was $629,000 and $1,633,000 for the three and nine months ended December 31, 2007, respectively, compared to $588,000 and $1,422,000 for the three and nine months ended December 31, 2006, respectively. We had increased interest expenses due to our amended Syntek Promissory Note These increases were partially offset by interest income derived mainly from our cash and short-term investment balances.

 

We will incur increased interest expenses for the remainder of 2007 and beyond due to long-term debt issued in the 2007 Financing in which the 2007 Convertible Note bears an annual interest rate of 5% and the amortization of deferred expenses incurred as part of the 2007 Financing. Interest expenses also will increase given the accretion to the value of the

 

 

27



 

$6,500,000 amended Syntek Promissory Note. We recorded accretion of $2,533,000 throughout the term of the amended Syntek Promissory Note. We recorded $1,099,000 during the nine months ended  December 31, 2007.

 

Income Taxes

 

As of December 31, 2006, our Israeli subsidiaries had net operating loss carryforwards of approximately $96,000,000. These carryforwards have no expiration date.

 

Our Israeli subsidiaries have been granted “approved enterprise” status for several investment programs. The approved enterprise status entitles these subsidiaries to receive tax exemption periods, ranging from two to six years, on undistributed earnings commencing in the year in which the subsidiaries attain taxable income. In addition, this approved enterprise status provides a reduced corporate tax rate of between 10% to 25% (as opposed to the usual Israeli corporate tax rate of 29% for 2007) for the remaining term of the program on the subsidiaries’ proportionate share of income.

 

Since our Israeli subsidiaries have not achieved taxable income, the tax benefits periods have not yet commenced. The subsidiaries’ losses are expected to offset certain future earnings of the subsidiaries during the tax-exempt period; therefore, the utilization of the net operating losses will generate no tax benefits. Accordingly, deferred tax assets from such losses have not been included in our 2006 annual consolidated financial statements. The entitlement to the above benefits is conditioned upon the subsidiaries fulfilling the conditions stipulated by the law, regulations published thereunder and the instruments of approval for the specific investments in approved enterprises.

 

Liquidity, Capital Resources and Going Concern Considerations

 

Our financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have experienced significant losses and negative cash flows from operations since incorporation. For the nine months ended December 31, 2007, we incurred a net loss of $21,879,000 and had an accumulated deficit of $297,494,000. This raises substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will depend upon our ability to raise additional capital during the next three months. We are pursuing raising additional capital to fund our operations although there is no assurance that such capital will be available to us. We also are seeking to expand our revenue base by adding new customers. To further reduce expenses, we announced a restructuring on February 4, 2008 designed to reduce our annual operating expenses by $20,000,000 per year.

 

Failure to secure additional capital in the very short term or to expand our revenue base in the longer term would result in depleting our available funds and not being able to pay our obligations when they become due. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our possible inability to continue as a going concern.

 

As of December 31, 2007, we had $17,733,000 of cash, cash equivalents and short-term investments.

 

During the nine months ended December 31, 2007, net cash used in operations was $19,457,000, comprised mainly of our loss of $21,879,000, partially offset by (a) non-cash charges related to depreciation and amortization of $621,000, write-downs of inventory of  $183,000 and stock-based compensation of $4,018,000, (b) financing expenses of $1,122,000 resulting mainly from accretion of the amended Syntek Promissory Note, (c) an increase of liability for employee rights upon retirement of $694,000 and (d) changes in other working capital accounts of $4,210,000.

 

During the nine months ended December 31, 2006, net cash used in operations was $12,635,000, comprised mainly of our loss of $21,446,000 partially offset by (a) non-cash charges related to depreciation and amortization of $621,000, write-downs of inventory of $514,000 and stock-based compensation of $3,421,000, (b) a $350,000 increase in liability for employee rights upon retirement, (c) $1,105,000 of accretion and amortization of financing instruments, net and (d) changes in other working capital accounts of $2,829,000.

 

During the nine months ended December 31, 2007, net cash provided by investing activities was $4,042,000 comprised mainly of the sales and maturities of short-term investments, net of $4,515,000 in purchases of short-term investments and $421,000 in purchases of property and equipment. During the nine months ended December 31, 2006, net

 

 

28



 

cash used in investing activities was $8,102,000, comprised mainly of the purchase of $7,611,000 of short-term investments, net of sales and maturities of our short-term investments and purchases of property and equipment were $348,000.

 

Financing activities in the nine months ended December 31, 2007 and 2006 were approximately $1,466,000 and $1,144,000, respectively, related primarily to proceeds we received upon the exercise of stock options.

 

We have purchase obligations to our suppliers that support our operations in the normal cause of our business. The obligations require us to purchase minimum quantities of the suppliers’ products at a specified price. As of December 31, 2007 and December 31, 2006, we had approximately $2,501,000 and $1,136,000, respectively, of purchase obligations. These obligations are expected to become payable at various times through 2008.

 

Forward-Looking Statements

 

You should read Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in our Quarterly Report on Form 10-Q. The matters addressed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, with the exception of the historical information presented, contain forward-looking statements involving risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include:

 

·                  our belief that our ability to continue as a going concern will depend upon our ability to raise additional capital during the next three months;

 

·                  our belief that failure to secure additional capital in the very short term or to expand our revenue base in the longer term will result in depleting our available funds and not being able to pay our obligations when they become due;

 

·                  our expectation regarding the charges and reduction of expenses we expect will result after implementation of our restructuring plan, and the expected completion date of the plan;

 

·                  our expectation that all functions currently performed in Israel will be moved to the United States by the quarter ended June 30, 2008;

 

·                  our expectation that we may apply to transfer the listing of our common stock to The Nasdaq Capital Market if we do not regain compliance with Nasdaq Marketplace Rule 4450(b)(1)(A) to remain listed on The Nasdaq Global Market;

 

·                  our belief that our most critical accounting policies include policies related to revenue recognition, inventory, extinguishment of debt, fair value of financial instruments, debt issuance costs and stock-based compensation;

 

·                  our belief that SFAS 160 will not have a material impact on our consolidated financial statements;

 

·                  our anticipation that our revenues will remain concentrated among a few customers for the foreseeable future;

 

·                  our anticipation that our gross margins will continue to fluctuate based on our product and customer mix, revenue level and inventory valuations;

 

·                  our anticipation that our research and development costs will decrease in the future due to our restructuring efforts and downsizing of our Wireless Solutions segment;

 

·                  our anticipation that our sales and marketing expenses will continue to decrease in future periods given our reduction in workforce as a result of our restructuring efforts;

 

 

29



 

·                  our anticipation that general and administrative expenses will decrease in future periods given our reduction in workforce and facilities as a result of our restructuring efforts;

 

·                  our expectation that the losses of our Israeli subsidiaries will offset certain future earnings of the subsidiaries, if attained, during the tax-exempt period (provided under Israeli law); and

 

·                  our belief as to the payment of purchase obligations that are expected to become payable at various times through 2008.

 

You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “should,” “could,” “intend,” “expect,” “plan,” “estimate,” “project,” “anticipate,” “believe,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. The risks, uncertainties and assumptions referred to above that could cause our actual results to differ materially from the results expressed or implied by such forward-looking statements include those set forth under Item 1A below and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

 

Item 3.            Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to financial market risks including changes in interest rates and foreign currency exchange rates. Substantially all of our revenue and capital spending is transacted in United States dollars, although a substantial portion of the cost of our operations, relating mainly to our personnel and facilities in Israel, is incurred in New Israeli Shekels. We have not engaged in hedging transactions to reduce our exposure to fluctuations that may arise from changes in foreign exchange rates. In the event of an increase in inflation rates in Israel, or if appreciation of the New Israeli Shekels occurs without a corresponding adjustment in our dollar-denominated revenues, our results of operation and business could be materially harmed.

 

As of December 31, 2007, we had cash, cash equivalents and short-term investments of $17,733,000. Substantially all of these amounts consisted of corporate and government fixed income securities and money market funds that invest in corporate and government fixed income securities that are subject to interest rate risk. We place our investments with high credit quality issuers and by policy limit the amount of the credit exposure to any one issuer.

 

Our general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. Highly liquid investments with maturity of less than three months at the date of purchase are considered to be cash equivalents; investments with maturities of three months or greater are classified as available-for-sale and considered to be short-term investments.

 

While all our cash equivalents and short-term investments are classified as “available-for-sale,” we generally have the ability to hold our fixed income investments until maturity and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio. We may not be able to obtain similar rates after maturity as a result of fluctuating interest rates. We do not hedge any interest rate exposures.

 

The fair value of our available-for-sale securities and cash equivalents is also sensitive to changes in the general level of interest rates in the United States, and the fair value of our portfolio will fall if market interest rates increase. However, since we generally have the ability to hold these investments to maturity, these declines in fair value may never be realized. If market interest rates were to increase by 10% from levels at December 31, 2007, the fair value of our portfolio would decline by an immaterial amount.

 

The potential change noted above is based on sensitivity analyses performed on our financial position as of December 31, 2007. Actual results may differ as our analysis of the effects of changes in interest rates does not account for, among other things, sales of securities prior to maturity and repurchase of replacement securities, the change in mix or quality of the investments in the portfolio and changes in the relationship between short-term and long-term interest rates.

 

 

30



 

Item 4.            Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.        OTHER INFORMATION

 

Item 1A.         Risk Factors

 

Our business is subject to substantial risks, including the risks described below.

 

We have insufficient capital to execute our business plan.

 

We need additional capital to execute our business plan. If we are unsuccessful in securing additional cash in the very short term , either through additional equity and/or debt financings, we will not be able to successfully execute our business plan.  Further, if we do not secure additional capital in the next three months, we may not be able to continue as a going concern.

 

We have a history of significant losses, expect future losses and may never achieve or sustain profitability.

 

We have incurred significant losses since our inception, and we expect to continue to incur losses for the foreseeable future. We incurred losses of $21,879,000 for the nine months ended December 31, 2007 and as of that date our accumulated deficit was $297,494,000. Our revenues and gross margins may not grow or even continue at their current levels and may decline even further. If our revenues do not rapidly increase, or if our expenses increase at a greater pace than our revenues, we will never become profitable.

 

Since we have recently reduced our workforce, our research and development efforts will be harmed.

 

On February 4, 2008 we announced our intent to simplify our structure by streamlining our corporate organization and reducing operating costs to better address market needs and revenue opportunities in the cable industry.  A significant portion of these costs were related to our continuing strategy to focus on our Cable Solutions segment, to consolidate our facilities in the United States and to significantly downsize our Wireless Solutions segment to support current customers only.

 

The workforce reduction of approximately 100 employees impacts all company functions, both in Israel and the United States, and includes management and non-management positions.

 

These reductions are in addition to a cost reduction program, announced July 23, 2007, that reduced our workforce by approximately 16% (when compared to the workforce levels as of June 30, 2007). The largest effect of this reduction was on our research and development activities. Our ability to further develop and market our products may be limited if we have not accurately predicted the appropriate workforce requirements for our research and development efforts.

 

 

31



 

If we fail to achieve significant market penetration and customer acceptance of our cable products, our prospects would be substantially harmed.

 

The market for broadband products in the cable industry is extremely competitive, subject to drastic technological changes, changes in capital expenditure budgets and highly fragmented. Our products in the Cable Solutions segment are new and relatively unknown; accordingly, we have not generated significant revenue in this segment. We have only relatively recently shipped our first commercial orders for our UltraBand solution to various systems of a top multi-service operator (“MSO”). There can be no assurance that installations of our cable products will be successful. As some of our cable products continue to be in a development stage, we may face challenges such as market resistance to new products, perceptions regarding customer support and quality control.

 

We will generate significant sales only if we are able to penetrate the market and create market share in this industry. If we are unable to do so, our business would be harmed and our prospects significantly diminished.

 

Our shares of common stock may be delisted from The Nasdaq Global Market and may not qualify for listing on The Nasdaq Capital Market.

 

On January 29, 2008, we received notification from the NASDAQ Listings Qualifications Department that we do not comply with the minimum $50,000,000 market value of listed securities required for continued listing on The Nasdaq Global Market set forth in Marketplace Rule 4450(b)(1)(A).  Accordingly, such securities are subject to delisting from The Nasdaq Global Market. As of that date, NASDAQ’s calculation of the market value of our listed securities was $44,920,520 based on 18,639,220 shares outstanding and a closing bid price of $2.41. There is no immediate change in the trading of our common stock on The Nasdaq Global Market.

 

If we cannot demonstrate compliance by February 28, 2008, then NASDAQ will provide written notification to us that our securities will be delisted, subject to our right to make an appeal to maintain our listing on The Nasdaq Global Market or to apply to list our securities on The Nasdaq Capital Market. During any appeal process, our shares of common stock will continue to trade on The Nasdaq Global Market. We also may apply to transfer our securities to The Nasdaq Capital Market. If we do so before February 28, 2008, the initiation of any delisting proceedings will be stayed pending review of our application.  There can be no assurance that we will be able to successfully appeal any delisting decision or that we will meet the criteria for transfer to The Nasdaq Capital Market.

 

A delisting would negatively impact the value of our common stock, as our common stock will likely be less liquid and may trade with larger variations between the bid and ask price. We also could lose support from institutional investors, brokerage firms and market makers, if any, that currently buy and sell our stock and may find it difficult to obtain future financing for the continuation of our operations or to use our stock in acquisitions. Further, delisting could result in the loss of confidence by our suppliers, customers and employees.  Any of these results could negatively impact our business.

 

We have written down and may need to further write-down our inventory in the future if our sales levels do not match our expectations, or if selling prices decline more than we anticipate, which could adversely impact our operating results.

 

We operate in an industry that is characterized by intense competition, supply shortages or oversupply, rapid technological change, unpredictable sales patterns, declining average selling prices and rapid product obsolescence, all of which make it more challenging to effectively manage our inventory. In addition, some of the components we require have long lead-times and we are required to order or build inventory well in advance of the time of anticipated sales.

 

Our inventory is stated at the lower of cost or market value. Determining market value of our inventory requires numerous judgments, including, but not limited to, judgments regarding average selling prices and sales volumes for future periods. We primarily utilize estimated selling prices for measuring any potential declines in market value below cost. When market value is determined to be below cost, we make appropriate allowances to reduce the value of inventories to net realized value. We may reduce the value of our inventory when we determine that inventory is slow moving, obsolete or excessive or if the selling price of the product is insufficient to cover product costs and selling expenses.

 

In this regard, our inventory increased substantially in 2005 because sales were substantially less than our anticipated demand and we were required to make advance inventory purchase commitments for anticipated sales. Accordingly, we recorded a write down of inventory and non-cancelable purchase commitments of $424,000 and $2,050,000

 

 

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for the years ended December 31, 2006 and 2005, respectively. For the three and nine months ended December 31, 2007, we recorded a write down of inventory of $0 and $183,000, respectively.

 

If our sales do not increase, the sales price of our products decrease or we are otherwise unable to control inventory levels consistent with actual demand, we may be required to write down additional inventory. Any such write-down would adversely affect our operating results in future periods.

 

If we default under the 2007 Convertible Note delivered to Goldman, Sachs & Co., the principal and accrued interest would become due and payable which would substantially harm our cash position and business prospects.

 

On March 28, 2007, we closed the 2007 Financing which included delivery of the 2007 Convertible Note in the principal amount of $35,000,000. The 2007 Convertible Note contains events of default that, if triggered, would require us to pay the principal and accrued interest under such note immediately (after the expiration of applicable cure periods). If an event of default occurs under the 2007 Convertible Note and the holder declares all outstanding principal and interest immediately due and payable, our cash position and business prospects would be substantially harmed.

 

Our success will depend on future demand for additional bandwidth by MSOs and their customers and the willingness and ability of MSOs to substantially increase available bandwidth on their networks using our alternative technology solution.

 

Because our cable products expand available bandwidth over existing infrastructure, demand for these products depends on demand for additional bandwidth by MSOs and their customers. The scope and timing of customer demand for additional bandwidth is uncertain and hard to predict. The factors influencing this demand include competitive offerings, applications availability, pricing models, costs, regulatory requirements and the success of initial roll-outs.

 

For our cable products to be sold in significant quantities, MSOs also must be willing and able to substantially increase the available bandwidth on their networks. MSOs may not be willing or able to develop additional services and revenue streams to justify the deployment of our technology. If the future demand for bandwidth is insubstantial, is addressed by alternative technologies or does not develop in the near future, our prospects would be adversely affected.

 

We have not yet produced or deployed our cable products in high volumes.

 

We have not yet produced our UltraBand solutions in high volumes and there may be challenges and unexpected delays, such as quality control issues, in our attempts to increase volume and lower production costs. Our long-term success depends on our ability to produce high quality products at a low cost and, in particular, to reduce the production cost of our cable products designed for residential use.

 

Because we have not yet deployed our UltraBand solutions in high volumes, there is significant technology risk associated with any such future deployment. We cannot be sure that any such high volume deployment would be successful.

 

Our future growth depends on market acceptance of several emerging broadband services, on the adoption of new broadband technologies and on several other broadband industry trends.

 

Future demand for our broadband products will depend significantly on the growing market acceptance of several emerging broadband services, including digital video, video-on-demand, high definition television, very high-speed data services and voice-over-internet protocol (“VoIP”) telephony. The effective delivery of these services will depend in part on a variety of new network architectures, such as fiber-to-the premises networks, video compression standards such as MPEG-4 and Microsoft’s Windows Media 9, the greater use of protocols such as IP and the introduction of new consumer devices, such as advanced set-top boxes and digital video recorders. If adoption of these emerging services and/or technologies is not as widespread or as rapid as we expect, our net sales growth would be materially and adversely affected.

 

 

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Furthermore, other technological, industry and regulatory trends will affect the growth of our business. These trends include the following:

 

·                                          convergence, or the desire of certain operators to provide a combination of video, voice and data services to consumers, also known as the “triple play;”

 

·              the use of digital video by businesses and governments;

 

·              the privatization of state owned telecommunication companies in other countries;

 

·                                          efforts by regulators and governments in the United States and abroad to encourage the adoption of broadband and digital technologies; and

 

·                                          the extent and nature of regulatory attitudes toward such issues as competition between operators, access by third parties to networks of other operators and new services such as VoIP.

 

If, for instance, operators do not pursue the triple play as aggressively as we expect, our net sales growth would be materially and adversely affected. Similarly, if our expectations regarding these and other trends are not met, our net sales could be materially and adversely affected.

 

We will need to develop distribution channels to market and sell our cable products.

 

Our UltraBand solutions are in the early stages of commercialization. We currently have limited relationships with potential customers and distributors as well as limited sales staff. We will be successful only if we are able to develop distribution channels to market and sell our cable products in sufficient volumes.

 

To develop such channels and market and sell our cable products, we need to grow our sales and marketing team. It may be difficult for us to hire and retain additional qualified personnel. We currently have limited exposure to global business opportunities, and will not be able to take advantage of meaningful potential global demand for our products unless and until we are able to develop meaningful global distribution channels and strategies.

 

Because of our long product development process and sales cycle, we may continue to incur substantial expenses without sufficient revenues that could cause our operating results to fluctuate.

 

A customer’s decision to purchase our products typically involves a significant technical evaluation, formal internal procedures associated with capital expenditure approvals and testing and acceptance of new systems that affect key operations. For these and other reasons, the sales cycle associated with our systems can be lengthy and subject to a number of significant risks, over which we have little or no control. Because of the growing sales cycle and the likelihood that we may rely on a small number of customers for our revenues, our operating results would be seriously harmed if such revenues do not materialize when anticipated, or at all.

 

We depend on cable and telecommunications industry capital spending for our revenue and any decrease or delay in such spending would adversely affect our prospects.

 

Demand for our products will depend on the size and timing of capital expenditures by telecommunications service providers and MSOs. These capital spending patterns are dependent upon factors including:

 

·              the availability of cash or financing;

 

·              budgetary issues;

 

·              regulation and/or deregulation of the telecommunications industry;

 

·              competitive pressures;

 

·              alternative technologies;

 

·              overall demand for broadband services, particularly relatively new services such as VoIP;

 

 

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·              industry standards;

 

·              the pattern of increasing consolidation in the industry; and

 

·              general consumer spending and overall economic conditions.

 

If MSOs and telecommunications service providers do not make significant capital expenditures, our prospects would be adversely affected.

 

If telecommunications service providers and systems integrators do not promote and purchase our products, or if the telecommunications equipment market does not grow, our business will be seriously harmed.

 

Telecommunications service providers continually evaluate alternative technologies, including digital subscriber line, fiber and cable. If service providers or systems integrators do not emphasize systems that include our products, choose to emphasize alternative technologies or promote systems of our competitors, our business would be seriously harmed.

 

Market conditions remain difficult and capital spending plans are often constrained. It is likely that further industry restructuring and consolidation will take place. Companies that have historically not had a large presence in the broadband access equipment market have expanded their market share through mergers and acquisitions. The continued consolidation of our competitors could have a significant negative impact on us. Further, our competitors may bundle their products or incorporate functionality into existing products in a manner that discourages users from purchasing our products or which may require us to lower our selling prices resulting in lower gross margins.

 

If the telecommunications market, and in particular the market for broadband access equipment, does not improve and grow, our business would be substantially harmed.

 

Competition may result in lower average selling prices, and we may be unable to reduce our costs at offsetting rates, which may impair our ability to achieve profitability.

 

There has been significant price erosion in the broadband equipment field. We expect that continued price competition among broadband access equipment and systems suppliers will reduce our gross margins in the future. We anticipate that the average selling prices of broadband access systems will continue to decline as product technologies mature. We may be unable to reduce our manufacturing costs in response to declining average per unit selling prices. Our competitors may be able to achieve greater economies of scale and may be less vulnerable to the effects of price competition than we are. These declines in average selling prices will generally lead to declines in gross margins and profitability for these systems. If we are unable to reduce our costs to offset declines in average selling prices, we may not be able to achieve or maintain profitability.

 

If the communications, Internet and cable television industries do not grow and evolve in a manner favorable to our business strategy, our business may be seriously harmed.

 

Our future success depends upon the growth of the communications industry, the cable television industry and, in particular, the Internet. These markets continue to evolve rapidly because of advances in technology and changes in customer demand. We cannot predict growth rates or future trends in technology development. It is possible that cable operators, telecommunications companies or other suppliers of broadband services will decide to adopt alternative architectures or technologies that are incompatible with our current or future products. If we are unable to design, develop, manufacture and sell products that incorporate or are compatible with these new architectures or technologies, our business will suffer. Also, decisions by customers to adopt new technologies or products are often delayed by extensive evaluation and qualifications processes and can result in delays of current products.

 

In addition, the deregulation, privatization and economic globalization of the worldwide communications market, which resulted in increased competition and escalating demand for new technologies and services, may not continue in a manner favorable to us or our business strategies. In addition, the growth in demand for Internet services and the resulting need for high-speed or enhanced communications products may not continue at its current rate or at all.

 

 

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The loss of one or more of our key customers would result in a loss of a significant amount of our revenues and adversely affect our business.

 

A relatively small number of customers account for a large percentage of our revenues, as set forth in the table below:

 

 

 

Three Months
Ended December 31,

 

Nine Months
Ended December 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

Customer A, related party

 

66

%

77

%

67

%

87

%

Customer B

 

32

%

19

%

31

%

11

%

 

We expect that we will continue to depend on a limited number of customers for a substantial portion of our revenues in future periods. The loss of a major customer could seriously harm our ability to sustain revenue levels, which would seriously harm our operating results.

 

In this regard, sales to Customer A in the three months ended December 31, 2007 accounted for the vast majority of our sales during that year. This customer was formed in 2006 and has a very limited history of operations, profitable or otherwise. If this customer is not successful in operating its business, or if sales to this customer are lower than our expectations, our wireless business could be harmed. Notwithstanding the foregoing, as sales to Customer A were made by our Wireless Solutions segment, if this customer is not successful, the effect to us will be tempered given the refocus of our internal resources on our Cable Solutions segment. In this regard, we expect that a significant source of our revenues in the coming years will be derived from our Cable Solutions segment rather than our Wireless Solutions segment.

 

We have designed products for our Wireless Solutions segment to meet the specifications of Customer A based on that customer’s assessment of the utility sector. Sales in our Wireless Solutions segment could be adversely affected if Customer A has not accurately assessed the needs of the utility sector.

 

If we do not effectively manage our costs, our business could be substantially harmed.

 

We have increased certain expenses to address new business opportunities in the Cable Solutions segment, and we will need to continue to monitor closely our costs and expenses. If the market for our cable solutions does not expand or takes longer to develop than we expect, we may need to further reduce our operations.

 

If we do not adequately protect our intellectual property, we may not be able to compete and our ability to provide unique products may be compromised.

 

Our success depends in part on our ability to protect our proprietary technologies. We rely on a combination of patent, copyright and trademark laws, trade secrets and confidentiality and other contractual provisions to establish and protect our proprietary rights. Our pending or future patent applications may not be approved and the claims covered by such applications may be reduced. If allowed, our patents may not be of sufficient scope or strength, and others may independently develop similar technologies or products. Litigation, which could result in substantial costs and diversion of our efforts, may also be necessary to enforce any patents issued or licensed to us or to determine the scope and validity of third party proprietary rights. Any such litigation, regardless of the outcome, could be expensive and time consuming, and adverse determinations in any such litigation could seriously harm our business.

 

Similarly, our pending or future trademark applications may not be approved and may not be sufficient to protect our trademarks in the markets where we either do business or hope to conduct business. The inability to secure any necessary trademark rights could be costly and could seriously harm our business.

 

We regularly evaluate and seek to explore and develop derivative products relating to our Cable Solutions segment. We may not be able to secure all desired intellectual property protection relating to such derivative products. Furthermore, because of the rapid pace of change in the broadband industry, much of our business and many of our products rely on technologies that evolve constantly and this continuing uncertainty makes it difficult to forecast future demand for our products.

 

 

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Because substantially all of our revenues are generated in United States dollars while a portion of our expenses are incurred in New Israeli Shekels, our results of operations could be seriously harmed if the rate of inflation in Israel exceeds the rate of devaluation of the New Israeli Shekel against the United States dollar.

 

Our functional currency is the United States dollar. We generate substantially all of our revenues in United States. dollars, but we incur a substantial portion of our expenses, principally salaries and related personnel expenses related to research and development, in New Israeli Shekels. As a result, we are exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the dollar or that the timing of this devaluation lags behind inflation in Israel.

 

We may not be able to successfully operate businesses that we may acquire, in a cost-effective and non-disruptive manner and realize anticipated benefits.

 

We may explore investments in or acquisitions of other companies, products or technologies, including companies or technologies that are not complementary or related to our current solutions. We ultimately may be unsuccessful in operating and/or integrating an acquired company’s personnel, operations, products and technologies into our business. These difficulties may disrupt our ongoing business, divert the time and attention of our management and employees and increase our expenses.

 

Moreover, the anticipated benefits of any acquisition may not be realized or may not be realized in the time period we expect. Future acquisitions could result in dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other identifiable intangible assets and the incurrence of large and immediate write-offs, any of which could seriously harm our business. In addition, we could spend significant resources in searching for and investigating new business opportunities, and ultimately may be unsuccessful in acquiring new businesses.

 

Our participation or lack of participation in industry standards groups may adversely affect our business.

 

We do not participate in the standards process of the Cable Television Laboratories, Inc., a cable industry consortium that establishes cable technology standards and administers compliance testing. In the future, we may determine to join or not join other standards or similar organizations. Our membership in these organizations could dilute our proprietary intellectual property rights in our products while our failure to participate in others could jeopardize acceptance of any of our products that do not meet industry standards.

 

Product standardization, as may result from initiatives of MSOs, could adversely affect our prospects.

 

Product standardization initiatives encouraged by MSOs and telecommunications companies may adversely affect revenues, gross margins and profits. In the past, standardization efforts by major MSOs have negatively impacted equipment vendors by leading to equipment obsolescence, commoditization and reduced margins. If our products do not comply with future standards, our prospects could be adversely affected.

 

Our quarterly operating results fluctuate, which may cause our share price to decline.

 

Our quarterly operating results have varied significantly in the past and are likely to vary significantly in the future. These variations result from a number of factors, including:

 

·                                          the uncertain timing and level of market acceptance for our systems and the uncertain timing and extent of rollouts of broadband access equipment and systems by the major service providers;

 

·                                          the fact that we often recognize a substantial proportion of our revenues in the last few weeks of each quarter;

 

·                                          the ability of our existing and potential direct customers to obtain financing for the deployment of broadband access equipment and systems;

 

·                                          the mix of products sold by us and the mix of sales channels through which they are sold;

 

·                                          reductions in pricing by us or our competitors;

 

 

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·              global economic conditions;

 

·                                          the effectiveness of our system integrator customers in marketing and selling their network systems equipment;

 

·              changes in the prices or delays in deliveries of the components we purchase or license; and

 

·              any acquisitions or dispositions we may effect.

 

A delay in the recognition of revenue, even from one customer, could have a significant negative impact on our results of operations for a given period. Also, because only a small portion of our expenses vary with our revenues, if revenue levels for a quarter fall below our expectations, we would not be able to timely adjust expenses accordingly, which would harm our operating results in that period. We believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indicators of future performance. If our operating results fall below the expectations of investors in future periods, our share price would likely decline.

 

Because we operate in international markets, we are exposed to additional risks which could cause our international sales to decline and our foreign operations to suffer.

 

Our reliance on international suppliers exposes us to foreign political and economic risks, which may impair our ability to generate revenues. These risks include:

 

·              economic, inflation and political instability;

 

·              terrorist acts, international conflicts and acts of war;

 

·              our international customers’ ability to obtain financing to fund their deployments;

 

·              changes in regulatory requirements and licensing frequencies to service providers;

 

·              import or export licensing requirements and tariffs;

 

·              labor shortages or stoppages;

 

·              trade restrictions and tax policies; and

 

·              limited protection of intellectual property rights.

 

Any of the foregoing difficulties of conducting business internationally could seriously harm our business.

 

Because we generally do not have contracts with our customers, our customers can discontinue purchases of our systems at any time, which could adversely affect future revenues and operating results.

 

We generally sell our broadband access equipment and systems based on individual purchase orders. Our customers generally are not obligated by agreements to purchase our systems, and the agreements we have entered into do not obligate our customers to purchase a minimum number of systems. Our customers can generally cancel or reschedule orders on short notice and discontinue using our systems at any time. Further, having a successful field system trial does not necessarily mean that the customer will order large volumes of our systems. The reduction, delay or cancellation of orders from one or more of our customers could seriously harm our operating results.

 

The effects of regulatory actions could impact spectrum allocation and frequencies worldwide and cause delays or otherwise negatively impact the growth and development of the broadband market, which would adversely affect our business.

 

Countries worldwide are considering or are in the process of allocating frequencies for wireless applications, but not all markets have done so. If the United States and/or other countries do not provide sufficient spectrum for wireless applications or reallocate spectrum in the wireless frequency bands for other purposes, our customers may delay or cancel deployments in broadband wireless, which could seriously harm our business. Further, if our customers are unable to obtain licenses or sufficient spectrum in the wireless frequency bands our business could be seriously harmed.

 

 

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The cable industry is also heavily regulated and changes in the regulatory landscape may adversely affect our business. For example, cable operators are currently required to carry a significant number of analog channels. A reduction or elimination of this requirement may free bandwidth for these operators and reduce the potential market for our products.

 

Competition may decrease our market share, net revenues and gross margins, which could cause our stock price to decline.

 

The market for broadband access equipment and systems is intensely competitive, rapidly evolving and subject to rapid technological change. The main competitive factors in our markets include:

 

·              product performance, features and reliability;

 

·              price;

 

·              stability;

 

·              scope of product line;

 

·              sales and distribution capabilities;

 

·              technical service and support;

 

·              relationships, particularly those with system integrators and operators; and

 

·              industry standards.

 

Certain of our competitors and potential competitors have substantially greater financial, technical, distribution, marketing and other resources than we have and, therefore, may be able to respond more quickly to new or changing opportunities, technologies and other developments. In addition, many of our competitors have longer operating histories, greater name recognition, broader product lines and established relationships with system integrators and service providers. Our primary competitors are Cisco Systems, Inc. through their Scientific Atlanta subsidiary; Motorola, Inc.; BigBand Networks, Inc.; C-Cor Incorporated and Narad Networks, Inc. Most of these competitors have existing relationships with one or more of our prospective customers. In the cable industry, our cable offerings face competition from technologies such as digital set-top boxes, high-end compression technologies and DVRs. Furthermore, the move toward open standards may increase the number of operators who will offer new services, which in turn may increase the number of competitors and drive down the capital expenditures per subscriber deployed. We may not be able to compete successfully against our current and future competitors, and competitive pressures could seriously harm our business.

 

Hardware defects or firmware errors could increase our costs and impair the market acceptance of our systems, which would adversely affect our future operating results.

 

Our systems occasionally contain certain defects or errors. This may result either from defects in components supplied by third parties or from errors or defects in our firmware or hardware that we have not detected. We have in the past experienced, and may experience from time-to-time, defects in new or enhanced products and systems after shipments, or defects in deployed systems. This could occur in connection with stability or other performance problems. Our customers integrate our systems into their networks with components from other vendors. Accordingly, when problems occur in a network system, it may be difficult to identify the component that caused the problem. Regardless of the source of these defects or errors, we will need to divert the attention of our engineering personnel from our product development efforts to address the defect or error. We have incurred in the past and may again incur significant warranty and repair costs related to defects or errors, and we also may be subject to liability claims for damages related to these defects or errors. The occurrence of defects or errors, whether caused by our systems or the components of another vendor, may result in significant customer relationship problems and injury to our reputation and may impair the market acceptance of our systems.

 

 

39



 

We depend on contract manufacturers and third party equipment and technology suppliers, and these manufacturers and suppliers may be unable to fill our orders or develop compatible, required technology on a timely basis, which would result in delays that could seriously harm our results of operations.

 

We currently have relationships with a limited number of contract manufacturers for the manufacturing of our products, substantially all of whom are located in Israel and Taiwan. These relationships may be terminated by either party with little or no notice. If our manufacturers are unable or unwilling to continue manufacturing our systems in required volumes, we would have to identify qualified alternative manufacturers, which would result in delays causing our results of operations to suffer. Our relatively limited experience with these manufacturers and lack of visibility as to the manufacturing capabilities of these companies if our volume requirements significantly increase does not provide us with a reliable basis on which to project their ability to meet delivery schedules, yield targets or costs. If we are required to find alternative manufacturing sources, we may not be able to satisfy our production requirements at acceptable prices and on a timely basis, if at all. Any significant interruption in supply would affect the allocation of systems to customers, which in turn could seriously harm our business. In addition, we currently have no formal written agreement with a manufacturer for our modem products. Our current inventory of modems is unlikely to fulfill anticipated demand, and we will therefore be required to find a manufacturer in the near future. Our inability to enter into an agreement with a manufacturer for our modems would harm our business.

 

In addition to sales to system integrators, we also sell in some instances directly to service providers. Such direct sales require us to resell equipment to service providers manufactured by third party suppliers and to integrate this equipment with the equipment we manufacture. We are particularly dependent on third party radio suppliers in selling our 3GHz and other products. We currently have limited relationships with third party suppliers. If we are unable to establish meaningful relationships with suppliers, or if these suppliers are unable to provide equipment that meets the specifications of our customers on the delivery schedules required by our customers, and at acceptable prices, our business would be substantially harmed.

 

Our UltraBand solutions are implemented over the HFC plant and, as such, they interface and integrate with existing products from multiple other vendors. Future offerings by these vendors may not be sufficiently compatible with our UltraBand solutions. In addition, we depend on the continuous delivery of components by various manufacturers of electronic connectors, filters, boards and transistors.

 

Furthermore, we have produced certain of our products only in limited quantities. If demand for these products increases significantly, we will need to implement and address additional processes, procedures and activities necessary to support increased production. If we are unable to do so, our business would be substantially harmed.

 

We obtain some of the components included in our solutions from a single source or a limited group of suppliers, and the loss of any of these suppliers or delay or shortages in the supply of components could cause production delays and a substantial loss of revenue.

 

We currently obtain key components from a limited number of suppliers. Some of these components are obtained from a single source supplier. We generally do not have long-term supply contracts with our suppliers.  Further, we have experienced delays and shortages on more than one occasion. These factors present us with the following risks:

 

·                                    delays in delivery or shortages in components could interrupt and delay manufacturing and result in cancellation of orders for our systems;

 

·            suppliers could increase component prices significantly and with immediate effect;

 

·                                    we may not be able to develop alternative sources for system components, if or as required in the future;

 

·                                    suppliers could discontinue the manufacture or supply of components used in our systems. In such event, we might need to modify our systems, which may cause delays in shipments, increased manufacturing costs and increased systems prices; and

 

·                                    we may hold more inventory than is immediately required to compensate for potential component shortages or discontinuation.

 

 

40



 

The occurrence of any of these or similar events would harm our business.  Our inability to obtain adequate manufacturing capacity at acceptable prices, or any delay or interruption in supply, could reduce our revenues or increase our cost of revenue and could seriously harm our business.

 

Third parties may bring infringement claims against us that could harm our ability to sell our products and result in substantial liabilities.

 

Third parties could assert, and it could be found, that our technologies infringe their proprietary rights. We could incur substantial costs to defend any litigation, and intellectual property litigation could force us to do one or more of the following:

 

·              obtain licenses to the infringing technology;

 

·              pay substantial damages under applicable law;

 

·              cease the manufacture, use and sale of infringing products; or

 

·              expend significant resources to develop non-infringing technology.

 

Any infringement claim or litigation against us could significantly harm our business, operating results and financial condition.

 

Government regulation and industry standards may increase our costs of doing business, limit our potential markets or require changes to our business model and adversely affect our business.

 

The emergence or evolution of regulations and industry standards for broadband products, through official standards committees or widespread use by operators, could require us to modify our systems, which may be expensive and time-consuming, and to incur substantial compliance costs. Radio frequencies are subject to extensive regulation under the laws of the United States, foreign laws and international treaties. Each country has different regulations and regulatory processes for wireless communications equipment and uses of radio frequencies. Failure by the regulatory authorities to allocate suitable, sufficient radio frequencies to potential customers in a timely manner could result in the delay or loss of potential orders for our systems and seriously harm our business.

 

Some of our products and technology are subject to export control laws and regulations. We are subject to the risk that more stringent export control requirements could be imposed in the future on product classes that include products exported by us, which would result in additional compliance burdens and could impair the enforceability of our contract rights. We may not be able to renew our export licenses as necessary from time to time. In addition, we may be required to apply for additional licenses to cover modifications and enhancements to our products. Any revocation or expiration of any requisite license, the failure to obtain a license for product modifications and enhancements, or more stringent export control requirements could seriously harm our business.

 

We are incurring additional costs and devoting more management resources to comply with increasing regulation of corporate governance and disclosure.

 

The Sarbanes Oxley Act of 2002 and the resulting rules of the Nasdaq Stock Market will continue to require changes in our corporate governance, public disclosure and compliance practices. The scope of rules and regulations applicable to us has increased and will continue to increase our legal and financial compliance costs.

 

As a public company, our systems of internal controls over financial reporting are required to comply with the standards adopted by the Securities and Exchange Commission (“SEC”) and the Public Company Accounting Oversight Board (the “PCAOB”). We will be required to make our first annual certification on our internal controls over financial reporting in our annual report for the fiscal year ended March 31, 2008. In preparing for such certification, we are evaluating

 

 

41



 

our internal controls for compliance with applicable SEC and PCAOB requirements, and we may be required to design enhanced processes and controls to address issues identified through this review. This could result in significant delays and cost to us and require us to divert sub