| If any of the following risks or uncertainties actually occurs, our business, financial condition or results of operations could be materially adversely affected |
| The following are not the only risks and uncertainties we face |
| Additional risks and uncertainties of which we are unaware or which we currently believe are immaterial could also materially adversely affect our business, financial condition or results of operations |
| We need to raise additional capital in the very near future |
| Our cash position at December 31, 2005, was approximately dlra1cmam600cmam000 and approximately dlra700cmam000 as of March 17, 2006 |
| Despite our two private placements in 2005 (in which we raised aggregate proceeds of approximately dlra5dtta4 million) and our secured convertible term note financing in December 2005 (in which we borrowed dlra2cmam100cmam000), given our projected cash burn rate, we need to raise additional capital to sustain our operations at current levels |
| We believe that our existing capital resources will enable us to fund operations into the second quarter of 2006 |
| Financing may not be available to us on acceptable terms, if at all |
| Our inability to raise capital when needed would severely harm our business |
| In addition, additional equity financing may dilute our stockholders’ interest, and additional debt financing, if available, may involve restrictive covenants and could result in a substantial portion of our operating cash flow being dedicated to the payment of principal and interest on debt |
| If adequate funds are not available, we might not be able to continue |
| 8 ______________________________________________________________________ [32]Table of Contents Our auditors opinion states that the operating losses and our potential inability to raise additional sources of capital raise substantial doubt about the Company’s ability to continue as a going concern |
| Our independent registered public accounting firm, Swenson Advisors, LLP, included a going concern qualification in its audit opinion on our consolidated financial statements for the fiscal year ended December 31, 2005 included in this Form 10-K as a result of our operating losses during fiscal 2005 and our potential inability to raise additional sources of capital |
| The “going concern” opinion may cause concern to one or more of our constituencies of employees, shareholders, debt holders, customers, vendors, or trade creditors |
| If any customer’s, vendor’s or trade creditor’s concern changes their business relations with us by stopping work, ceasing sales, requiring sales on cash terms or other changes, these changes may materially adversely affect our cash flows and results of operations |
| Our window of opportunity may be shrinking |
| It is difficult for companies like us, with small mass and limited resources, to compete in the video transport equipment industry against larger businesses |
| Our disadvantages have been heightened by our recent failures of execution in many aspects of our business including failures to close large product sales and strategic alliances, failure to focus our research and development on timely introduction of a series of attractive new products, and failure to raise enough new capital from investors to ensure our future; in addition, a former employee embezzled approximately dlra245cmam000 from us, primarily in the first half of 2005 |
| Although we believe our products remain technologically superior, our margin of superiority over certain large competitors may diminish as we presently do not offer an integrated solution: we have a narrow product offering |
| Moreover, our industry is now adopting international standards for forward error correction (“FEC”) and other technologies that today are proprietary |
| While we believe that our implementation of these standards is unique, and while an initial comparison test conducted by a major European broadcaster showed that our Vx8000 operating our implementation of the Pro-MPEG Code of Practice (COP) # 3 FEC performed best, the movement toward industry standards-based products may result in commoditization and may reduce our technological advantages, thereby resulting in lower selling prices and reduced gross margins, and thus negatively impact the results of our operations |
| For these and other reasons, our industry has been experiencing consolidation |
| We have incurred losses since inception and will likely not be profitable at least for the next several quarters |
| We have incurred operating losses since our inception in January 1998 |
| As of December 31, 2005, our accumulated deficit was approximately dlra55 million |
| We have never been profitable |
| We expect to continue to incur significant operating, sales, marketing, research and development and general and administrative expenses and, as a result, we will need to generate significant revenues to achieve profitability |
| Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future |
| Changes in senior management may result in difficulties |
| John Zavoli, our former CEO, President, Chief Financial Officer and General Counsel, and David Carnevale, our former Vice President of Corporate Development, separated from the Company in September 2005 |
| Henry Sariowan, our former Vice President of Strategic Technology Planning, separated from the Company in November 2005, and Daniel McCrary, our former Vice President of Marketing, separated from the Company in January 2006 |
| In November 2005, we appointed Thomas Tullie as CEO and President, replacing directors Frederick Cary and Robert Packer who had served as interim co-principal executive officers while we searched for a new CEO Also, in August 2005 we hired Jeremy Ferrell as Controller to replace David Houillion |
| Ferrell was promoted to Interim Chief Financial Officer in November 2005 |
| We hired Richard Segil as Vice President of Marketing in February 2006 |
| Further changes in management may occur from time to time |
| Changes in senior management of small companies are inherently disruptive, and efforts to implement any new strategic or operating goals or methods may also prove to be disruptive |
| 9 ______________________________________________________________________ [33]Table of Contents An ongoing lawsuit with the holders of a majority of our “Series A” 7prca Convertible Preferred Stock could be costly and result in substantial liabilities that would harm our business |
| Gryphon Master Fund, LP and GSSF Master Fund, LP, which together hold a majority of our “Series A” 7prca Convertible Preferred Stock, filed a lawsuit against us in January 2006, in the United States District Court for the Northern District of Texas, alleging that the consent of a majority of the “Series A” Preferred Stock had been required in connection with our issuance of the secured convertible term notes and common stock purchase warrants to Laurus Master Fund, Ltd |
| (“Laurus”), but that such consent had not been obtained |
| We believe such consent was not required |
| The plaintiffs’ complaint states that they are seeking to recover from us an unspecified amount of damages, including interest, attorneys’ fees and court costs |
| We believe our defenses to the claims in this lawsuit are meritorious, however, due to the inherent uncertainties of litigation, we could incur substantial liabilities if the plaintiffs were to prevail in any respect in connection with their claims |
| In addition, even if we were to prevail in all respects or reach a settlement on mutually agreeable terms, the costs and expenses of any defense and/or settlement could be significant, and the litigation process could be time consuming and could divert our management and key personnel from our business operations |
| The occurrence of any of these events could result in substantial liabilities to us and harm our business |
| A similar lawsuit had been filed against us in January 2006 by Castle Creek Technology Partners LLC, which holds a majority of our Series B 7prca Convertible Preferred Stock, alleging that the consent of a majority of the Series B 7prca Convertible Preferred Stock was required in connection with such issuance |
| Although we believe such consent was not required and that we had meritorious defenses to Castle Creek’s claims, we settled this case on February 10, 2006 in order to avoid the uncertainties, risks, costs, expenses and diversion described above |
| We agreed to make payments, in stock and in cash, economically equivalent to accrued dividends on Castle Creek’s Series B 7prca Convertible Preferred Stock, and we agreed to issue stock upon any Series B conversion by Castle Creek so such conversion would be economically equivalent to a conversion by Castle Creek at a dlra2dtta6316 conversion price |
| We also agreed to an offer of similar terms to all the other holders of Series B 7prca Convertible Preferred Stock; we did so, and they all accepted the offer |
| We have offered to settle the Gryphon/GSSF lawsuit on the same terms as were provided to Castle Creek |
| We have also offered optional extension of the proposed settlement’s benefits and burdens to each of the respective minority “Series A” holders |
| Following our secured convertible term note financing in December 2005, we have a significant amount of debt outstanding and we may not be able to generate sufficient cash flow to meet our debt service obligations |
| In December 2005, we issued secured convertible term notes in an aggregate principal amount of dlra2cmam100cmam000, at par, which notes mature 36 months following issuance, have a variable interest rate of 250 basis points above prime, require monthly payments of accrued interest beginning January 1, 2006 and monthly payments of principal beginning March 1, 2006 |
| We are permitted, in certain circumstances, to make scheduled payments of principal and interest with respect to the notes in shares of common stock rather than cash |
| If, however, circumstances do not permit us to make such scheduled payments in shares of common stock (including if the average closing price of our common stock for the five trading days immediately preceding the date on which interest payments are due is less than 115prca of the fixed conversion price then in effect with respect to the notes), we will be required to make such payments in cash, and we may not be able to generate sufficient cash flows to service and repay this indebtedness and have sufficient funds left over to achieve profitability in our operations, meet our working capital and capital expenditure needs or compete successfully in our markets |
| If we cannot meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing the secured convertible term notes, which would allow the holders of such 10 ______________________________________________________________________ [34]Table of Contents notes to declare all borrowings outstanding thereunder to be immediately due and payable |
| If any of the indebtedness under the notes is thereby accelerated, we may not have sufficient funds available to make the required payments that are due thereunder |
| The secured convertible term notes are secured by substantially all of our assets, and those obligations rank senior to any rights of stockholders |
| The secured convertible term notes are secured by a first-priority lien on substantially all of our assets |
| In the event of any bankruptcy, liquidation, dissolution, reorganization or similar proceeding against us, the assets that are pledged as collateral securing the secured convertible term notes must be first used to pay such notes, as well as any other obligation secured by a priority lien on the collateral, in full, before making any distributions to stockholders, among others |
| This senior right of the noteholders could cause our stockholders to lose all or part of their investment |
| We face competition from established and developing companies, many of which have significantly greater resources, and we expect such competition to grow |
| The markets for our products, future products and services are competitive |
| We face direct and indirect competition from a number of established companies, including Tandberg Television, Thomson, Harris, Aastra and Scientific-Atlanta (Cisco), as well as development stage companies, and we anticipate that we will face increased competition in the future as existing competitors seek to enhance their product offerings and new competitors emerge |
| Many of our competitors have greater resources, sell a more complete product line or solution, have higher name recognition, have more established reputations within the industry and maintain stronger marketing, manufacturing, distribution, sales and customer service capabilities than we do |
| The technologies that our competitors and we offer are expensive to design, develop, manufacture and distribute |
| Competitive technologies may be owned and commercialized by established companies that possess substantially greater financial, marketing, technical and other resources than we do and, as a result, such companies may be able to develop their products more rapidly and market their products more extensively than we can |
| Competitive technologies that offer a similar or superior capacity to converge and transmit audio, video and telephonic data on a real-time basis over existing networks may currently exist or may be developed in the future |
| We cannot assure you that any technology currently being developed by us is not being developed by others or that our technology development efforts will result in products that are competitive in terms of price or performance |
| If our competitors develop products or services that offer significant price or performance advantages as compared to our current and proposed products and services, or if we are unable to improve our technology or develop or acquire more competitive technology, we may find ourselves at a competitive disadvantage and our business could be adversely affected |
| In addition, competitors with greater financial, marketing, distribution and other resources than we have may be able to leverage such resources to gain wide acceptance of products inferior to ours |
| Our product line is relatively narrow, whereas many of our competitors can offer customers a complete solution that includes products that we do not manufacture or technologies which we have not developed |
| Our limited product line represents a significant competitive disadvantage for us |
| We need to develop and introduce new and enhanced products in a timely manner to remain competitive |
| Broadband communications markets are characterized by continuing technological advancement, changes in customer requirements and evolving industry standards |
| To compete successfully, we must on a timely basis design, develop, manufacture and sell new or enhanced products that provide increasingly higher levels of performance and reliability |
| However, in addition to the technological and managerial risks inherent in any 11 ______________________________________________________________________ [35]Table of Contents product development effort, we may not be able to develop these products on a timely basis if the development effort requires more financial resources than we are able to bring to bear, and we may not be able to introduce successfully any new products if our products: • are not cost effective, • are not brought to market in a timely manner, • are not in accordance with evolving industry standards and architectures, or • fail to achieve market acceptance |
| Technologies are changing rapidly, and we will be required to spend significant sums on research and development—particularly for new hardware designs and software development—to produce these next generation products |
| Our existing products may soon become difficult to produce because of end-of-life components, because of emerging governmental restrictions on the manufacture and sale of electronic products containing lead parts and components, and because of increasing demand in the market for new standards-based products |
| In order to develop and market successfully certain of our planned products for digital applications, we may be required to enter into technology development or licensing agreements with third parties |
| We cannot assure you that we will be able to enter into any necessary technology development or licensing agreement on terms acceptable to us, or at all |
| The failure to enter into technology development or licensing agreements when necessary could limit our ability to develop and market new products and, accordingly, could materially and adversely affect our business and operating results |
| We must re-engineer our current platform and products to comply with environmental laws and regulations |
| Our products are not currently in compliance with the “RoHS” (Reduction of certain Hazardous Substances) directive of the European Union which will require electronic components shipped into Europe after June 30, 2006 to be essentially lead-free |
| Various states and other countries are contemplating adopting this type of legislation and/or similar “WEEE” (Waste Electrical and Electronic Equipment) legislation designed to reduce the potential damage from hazardous substances contained in electronic components and parts |
| We will need to expend significant engineering resources to conform our existing products to this directive, as we believe noncompliant products will no longer be viable in some markets after June 30, 2006 |
| In addition, we will continue to need significant engineering resources for sustaining-development work (bug fixes, needed upgrades for specific customer bids, etc) |
| Increased costs associated with complying with these new environmental laws and regulations, when coupled with our existing cost structure and our limited resources, could delay development of next-generation products |
| Because we will incur significant increased costs in complying the new environmental laws and regulations described above, in addition to our existing operating, sales, marketing and research and development and general and administrative expenses, and because we have limited resources, our development toward next-generation products could be delayed or defocused |
| Development toward next-generation products is a significant factor in our ability to compete in our industry on a going-forward basis, and if we do not successfully develop such next generation products, we may not be able to compete effectively in our markets in the future and our products may become outdated or even obsolete |
| Delivery of real-time, broadcast-quality video via IP networks is a new market and subject to evolving standards |
| Delivery of real-time, broadcast-quality video over IP networks is novel and evolving, and it is possible that communication service providers or their suppliers will adopt alternative architectures and technologies for 12 ______________________________________________________________________ [36]Table of Contents delivering real-time, broadcast-quality video over IP networks or other types of networks that are incompatible with our current or future products |
| In addition to competing with video over IP vendors, we compete with existing or incumbent alternative technologies and architectures for transporting live broadcast video that have existed for many years such as satellite, circuit switched networks and ATM, and our customers may not be willing to move to using an IP network for transporting live video |
| If we are unable to design, develop, manufacture and sell products that incorporate or are compatible with these new or existing architectures or technologies, our business could suffer |
| Moreover, our industry is rapidly adopting technical standards for transporting video over IP networks, and many customers appear to prefer standards-based or “open standards” products such as those operating the Pro-MPEG COP (Code of Practice) |
| Our Vx8000, launched in April 2005, is our first product that is Pro-MPEG standards-based |
| This move towards offering standards-based products for transporting video over IP networks may result in increased competition, adversely affect our ability to offer differentiated products incorporating our proprietary technology, and cause negative impact to our gross profit margins |
| Pricing pressure on our products has placed us at a competitive disadvantage |
| We have experienced significant pricing pressure in some of the markets for our products, predominantly the cable market |
| Due to competitive factors, cable customers have been willing to pay only reduced amounts for our products |
| This has placed us at a competitive disadvantage with our competitors which have the financial strength to withstand pricing pressures |
| Most of our competitors in the cable market sell a broader array of products as a bundled solution to cable customers, and these competitors can offer substantial discounts to cable customers on products that compete directly with ours, sometimes even as loss leaders |
| If we are unable to regain larger margins on such products, we may be forced to exit certain market segments and our results of operations and profitability will be negatively affected |
| Our quarterly financial results are likely to fluctuate significantly |
| Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period, particularly because our sales prospects are uncertain and our sales are made on a purchase order basis |
| In addition, we have not proven our ability to execute our business strategy with respect to establishing and expanding sales and distribution channels |
| Fluctuations may result from: • decreased spending on new products by our customers, • the timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors, • problems in our execution of key functions such as engineering, manufacturing, marketing and/or sales, • our ability to establish a productive sales force or partner with communication service providers or their suppliers, • demand and pricing of the products we offer, • purchases of our products by communication service providers in large, infrequent amounts consistent with past practice, • customer acceptance of the services our products enable, • interruption in the manufacturing or distribution of our products, • the willingness and ability of customers to conduct necessary trials and tests of our products prior to sale, and • general economic and market conditions, including war, acts of terrorism, and other conditions specific to the telecommunications industry |
| As a result, we may experience significant, unanticipated or unexpectedly large quarterly losses |
| 13 ______________________________________________________________________ [37]Table of Contents The sales cycle for certain of our products is lengthy, which makes forecasting of our customer orders and revenues difficult |
| The sales cycle for certain of our products is lengthy, often lasting six months to more than a year |
| Our customers generally conduct significant technical evaluations and trials of our products as well as competing products prior to making a purchasing decision, even in cases where they may have previously purchased our products for use in one region of their operations and later seek to deploy our products in another |
| In addition, purchasing decisions may also be delayed because of a customer’s internal budget approval processes |
| Because of the lengthy sales cycle and the size of customer orders, if orders forecasted for a specific customer for a particular period do not occur in that period, our revenues and operating results for that particular quarter could suffer |
| Moreover, a portion of our expenses related to an anticipated order is fixed and difficult to reduce or change, affecting results for a particular period |
| The rate of market adoption of our technology is uncertain and we could experience long and unpredictable sales cycles |
| Our products are based on new technology and, as a result, it is extremely difficult to predict the timing and rate of market adoption of our products or the rate of market adoption of applications enhanced by our products such as video-on-demand |
| Accordingly, we have limited visibility into when we might realize substantial revenue from product sales |
| We are providing new and highly technical products and services to enable new applications |
| This sales cycle could be lengthened even further by potential delays related to product implementation as well as delays over which we have little or no control, including: • the length or total dollar amount of our prospective customers’ planned purchasing programs contemplating our products, • changes in prospective customers’ capital equipment budgets or purchasing priorities, • prospective customers’ internal acceptance reviews, and • the complexity of prospective customers’ technical needs |
| These uncertainties, combined with many potential customers’ measured approaches to corporate spending on technology generally as well as new technologies such as ours, substantially complicate our planning and may reduce prospects for sales of our products |
| If our prospective customers curtail or eliminate their purchasing programs, decrease their budgets or reduce their purchasing priority, our results of operations could be adversely affected |
| Our customer base is concentrated and the loss of one or more of our key customers would harm our business |
| Historically, a significant majority of our sales have been to relatively few customers |
| We expect that sales to relatively few customers will continue to account for a significant percentage of our net sales for the foreseeable future |
| Almost all of our sales are made on a purchase order basis, and none of our customers has entered into a long-term agreement requiring it to purchase our products |
| The loss of, or any reduction in orders from, a significant customer would harm our business |
| The success of our business is dependent on establishing and expanding sales and distribution channels for our products |
| Although we intend to establish strategic relationships with leading suppliers, integrators and resellers to promote and distribute our products, we may not succeed |
| We may not be able to 14 ______________________________________________________________________ [38]Table of Contents identify adequate partners, and even if identified, we may not be able to enter into agreements with these entities on commercially reasonable terms, or at all |
| To the extent that we enter into any such agreements with third parties, any revenues we receive from sales of our products in those markets will depend upon the efforts of such third parties, which in most instances will not be within our control |
| If we are unable to leverage effectively a partner to market our products more broadly than we can through our internal sales force, our business could be adversely affected |
| Internal Sales Force |
| We intend to expand our direct and indirect sales force and independent channel partners domestically and internationally for the promotion of our product lines and other future products to suppliers and communication service providers of all kinds |
| Competition for quality sales and marketing personnel and channel partners is intense |
| In addition, new employees, particularly new sales and marketing employees, will require training and education concerning our products and will also increase our operating expenses |
| There can be no assurance that we will be successful in attracting or retaining qualified sales and marketing personnel and partners |
| As a result, there can be no assurance that the sales force we are able to build will be of a sufficient size or quality to effectively market our products |
| We may not be able to profit from growth if we are unable to manage the growth effectively |
| This anticipated growth will place strain on our managerial, financial and personnel resources |
| The pace of our anticipated expansion, together with the complexity of the technology involved in our products and the level of expertise and technological sophistication incorporated into the provision of our design, engineering, implementation and support services, demands an unusual amount of focus on the operational needs of our future customers for quality and reliability, as well as timely delivery and post-installation and post-consultation field and remote support |
| In addition, new customers, especially customers that purchase novel and technologically sophisticated products such as ours, generally require significant engineering support |
| Therefore, adoption of our platforms and products by customers would increase the strain on our resources |
| To reach our goals, we may need to hire rapidly, while at the same time investing in our infrastructure |
| We expect that we will also have to expand our facilities |
| In addition, we will need to successfully train, motivate and manage new employees; expand our sales and support organization; integrate new management and employees into our overall operations; and establish improved financial and accounting systems |
| Indeed, even without consideration of future needs imposed by any future growth of our business, we need to upgrade several of these areas even to support our present levels of business |
| We may not succeed in anticipating all of the changing demands that growth would impose on our systems, procedures and structure |
| If we fail to effectively manage our expansion, if any, our business may suffer |
| We will depend on broadcasting, cable and satellite industry spending for a substantial portion of our revenue and any decrease or delay in spending in these industries would negatively impact our resources, operating results and financial condition |
| Demand for our products will depend on the magnitude and timing of spending by cable television operators, broadcasters, satellite operators and carriers for adopting new products for installation with their networks |
| Spending by customers in these sectors is dependent on a variety of factors, including: • overall demand for communication services and the acceptance of new video, voice and data services, • annual budget cycles, • the status of federal, local and foreign government regulation of telecommunications and television broadcasting, 15 ______________________________________________________________________ [39]Table of Contents • access to financing, • evolving industry standards and network architectures, • competitive pressures, • discretionary customer spending patterns, and • general economic conditions |
| We believe that the capital markets’ more measured approach to providing financing for emerging and even established telecommunications companies, since the bull market that ended in 2000, has reduced access to funding for potential and existing customers causing delays in the timing and scale of deployments of our equipment, as well as the postponement of certain projects by our customers |
| The timing of deployment of our equipment can be subject to a number of other risks, including the availability of skilled engineering and technical personnel |
| Product quality problems may negatively affect our revenues and results from operations, as well as disrupt our research and development efforts |
| We produce highly complex products that incorporate leading edge technology including hardware, software and embedded firmware |
| In addition to problems relating to the physical quality of manufacturing, our software and other technology may contain “bugs” that can prevent our products from performing as intended |
| There can be no assurance that our pre-shipment testing programs will be adequate to detect all defects either in individual products or which could affect numerous shipments that, in turn, could create customer dissatisfaction, reduce sales opportunities, or affect gross margins if the cost of remedying the problems exceed our reserves established for this purpose |
| Our inability to cure a product defect may result in the failure of a product line, serious damage to our reputation, and increased engineering and product re-engineering costs that individually or collectively would have a material adverse impact on our revenues and operating results |
| We rely on several key suppliers of components, sub-assemblies and modules that we use to manufacture our products, and we are subject to manufacturing and product supply chain risks |
| We purchase components, sub-assemblies and modules from a limited number of vendors and suppliers that we use to manufacture and test our products |
| Our reliance on these vendors and suppliers involves several risks including, but not limited to, the inability to purchase or obtain delivery of adequate supplies of such components, sub-assemblies or modules, increases in the prices of such items, quality, and overall reliability of our vendors and suppliers |
| Although in many cases we use standard parts and components for our products, certain components are presently available only from a single source or limited sources |
| Some of the materials used to produce our products are purchased from foreign suppliers |
| We do not generally maintain long-term agreements with any of our vendors or suppliers |
| Thus we may thus be unable to procure necessary components, sub-assemblies or modules in time to manufacture and ship our products, thereby harming our business |
| We operate under an agreement with a leading parts vendor to provide turnkey outsourced manufacturing services |
| To reduce manufacturing lead times and to ensure adequate component supply, we have instructed our vendor to procure inventory based on criteria and forecasts as defined by us |
| If we fail to anticipate customer demand properly, an oversupply of parts, obsolete components or finished goods could result, thereby adversely affecting our gross margins and results of operations |
| We may also be subject to disruptions in our manufacturing and product-testing operations that could have a material adverse affect on our operating results |
| We may not be able to hire and assimilate key employees |
| Our future success will depend, in part, on our ability to attract and retain highly skilled employees, including management, technical and sales personnel |
| Significant competition exists for employees in our 16 ______________________________________________________________________ [40]Table of Contents industry and in our geographic region |
| We may be unable to identify and attract highly qualified employees in the future |
| In addition, we may not be able to assimilate successfully these employees or hire qualified personnel to replace them |
| The loss of services of any of our key personnel, the inability to attract or retain key personnel in the future, or delays in hiring required personnel, particularly engineering and sales personnel, could make it difficult to meet key objectives such as timely and effective product introductions |
| Changes in the mix of product sales, product distribution model or customer base could negatively impact our sales and margins |
| We may encounter a shift in the mix of the various products that we sell—products that have varying selling prices based in part on the type of product sold, competitive conditions in the particular market into which the product is sold, applicable sales discounts, licensed product feature sets, whether we sell our products as an OEM, and whether the sale is a direct sale or an indirect channel sale through our VARs and resellers |
| Any change in any of these variables could result in a material adverse impact on our gross sales, gross margins and operating results |
| We may be unable to obtain full patent protection for our core technology and there is a risk of infringement |
| Since 2001, we have submitted several patent applications and provisional patent applications on topics surrounding our core technologies to supplement our existing patent portfolio |
| There can be no assurance that these or other patents will be issued to us, or, if additional patents are issued, that they or our three existing patents will be broad enough to prevent significant competition or that third parties will not infringe upon or design around such patents to develop competing products |
| There is no assurance that these or any future patent applications will be granted, or if granted, that they will not be challenged, invalidated or circumvented |
| In addition to seeking patent protection for our products, we intend to rely upon a combination of trade secret, copyright and trademark laws and contractual provisions to protect our proprietary rights in our products |
| There has been a trend toward litigation regarding patent and other intellectual property rights in the telecommunications industry |
| Although there are currently no lawsuits pending against us regarding possible infringement claims, there can be no assurance such claims will not be asserted in the future or that such assertions will not materially adversely affect our business, financial conditions and results of operations |
| Any such suit, whether or not it has merit, would be costly to us in terms of employee time and defense costs and could materially adversely affect our business |
| If an infringement or misappropriation claim is successfully asserted against us, we may need to obtain a license from the claimant to use the intellectual property rights |
| There can be no assurance that such a license will be available on reasonable terms if at all |
| We are subject to local, state and federal regulation |
| Legislation affecting us (or the markets in which we compete) could adversely impact our ability to implement our business plan on a going-forward basis |
| The telecommunications industry in which we operate is heavily regulated and these regulations are subject to frequent change |
| Future changes in local, state, federal or foreign regulations and legislation pertaining to the telecommunications field may adversely affect prospective purchasers of telecommunications equipment, which in turn would adversely affect our business |
| The market price of our common stock could be volatile and your investment could suffer a decline in value |
| The market prices for our common stock is likely to be volatile and could be susceptible to wide price fluctuations due to a number of internal and external factors, many of which are beyond our control, including: • quarterly variations in operating results and overall financial condition, 17 ______________________________________________________________________ [41]Table of Contents • economic and political developments affecting technology spending generally and adoption of new technologies and products such as ours, • customer demand or acceptance of our products and solutions, • short-selling programs, • stock selling by persons to whom we sold securities in one or more private placements at below-market prices, • changes in IT spending patterns and the rate of consumer acceptance of video-on-demand, • product sales progress, both positive and negative, • the stock market’s perception of the telecommunications equipment industry as a whole, • technological innovations by others, • cost or availability of components, sub-assemblies and modules used in our products, • the introduction of new products or changes in product pricing policies by us or our competitors, • proprietary rights disputes or litigation, • other litigation, • initiation of or changes in earnings estimates by analysts, • additions or departures of key personnel, and • sales of substantial numbers of shares of our common stock or securities convertible into or exercisable for our common stock |
| In addition, stock prices for many technology companies, especially early-stage companies such as ours, fluctuate widely for reasons that may be unrelated to operating results |
| These fluctuations, as well as general economic, market and political conditions such as interest rate increases, recessions or military or political conflicts, may materially and adversely affect the market price of our common stock, thereby causing you to lose some or all of your investment |
| In addition, if the average daily trading volume in our common stock is low, the resulting illiquidity could magnify the effect of any of the above factors on our stock price |
| Newly adopted accounting regulations requiring companies to expense stock options will result in a decrease in our earnings, or an increase in our losses, and our stock price may decline |
| The Financial Accounting Standards Board recently adopted the previously proposed regulations that will eliminate the ability to account for share-based compensation transactions using the intrinsic method that we currently use and generally would require that such transactions be accounted for using a fair-value-based method and recognized as an expense in our consolidated statement of operations |
| We will be required to expense the fair value of stock options vested after December 31, 2005 |
| Currently, we generally only disclose such expenses on a pro forma basis in the notes to our consolidated financial statements in accordance with accounting principles generally accepted in the United States |
| The adoption of this new accounting regulation will have a significant impact on our results of operations when or if we issue stock options after December 31, 2005, and our stock price could decline accordingly |
| The stock options and bonus stock we offer to our employees, non-employee directors, consultants and advisors could result in ongoing dilution to all stockholders |
| We maintain three equity compensation plans: (i) the 2000 Stock Option/Stock Issuance Plan (the “2000 Plan”), pursuant to which we may issue an aggregate of 710cmam000 options and shares of common stock to 18 ______________________________________________________________________ [42]Table of Contents employees, officers, directors, consultants and advisors, (ii) the 2001 Employee Stock Purchase Plan (the “Purchase Plan”), pursuant to which our employees are provided the opportunity to purchase our stock through payroll deductions, and (iii) the 2004 Equity Incentive Plan (the “2004 Plan”), pursuant to which we may issue a total of 900cmam000 options and shares of common stock to employees, officers, directors, consultants and advisors |
| As of December 31, 2005, 475cmam000 shares of stock had been granted directly to current and former executives of the Company and there were options outstanding to purchase 63cmam227 shares of common stock under our 2000 Plan; 570cmam533 shares of common stock remained available for issuance under the 2000 Plan |
| A maximum of 41cmam667 shares of common stock have been authorized for issuance under the Purchase Plan |
| As of December 31, 2005, there were options outstanding to purchase 368cmam249 shares of common stock and 288cmam000 shares of stock had been granted directly to current executives of the Company under our 2004 Plan; 243cmam751 shares of common stock remained available for issuance under the 2004 Plan |
| In addition, as of December 31, 2005, there were 131cmam999 shares of common stock subject to outstanding options granted other than under the 2004 Plan, the 2000 Plan or the Purchase Plan |
| 16cmam999 of these non-plan options were granted in prior years to various employees, directors, consultants and advisors before the creation of any stock option plan and 115cmam000 were granted as inducement stock options to Thomas Tullie, our new CEO, in 2005 |
| We plan to continue to provide our employees opportunities to participate in the Purchase Plan |
| We also plan to issue options to purchase sizable numbers of shares of common stock to new and existing employees, officers, directors, advisors, consultants or other individuals as we deem appropriate and in our best interests |
| This could result in substantial dilution to all stockholders and increased control by management |
| The conversion or exercise, as applicable, of our outstanding convertible preferred stock, secured convertible term notes and warrants could result in significant ongoing dilution to all stockholders |
| As of December 31, 2005, there were outstanding warrants to purchase up to 4cmam353cmam921 shares of our common stock with a weighted average exercise price of dlra5dtta18 per share |
| The weighted average remaining life for all of the outstanding warrants as of December 31, 2005 was 3dtta02 years from December 31, 2005 |
| In addition, at December 31, 2005, there were 814cmam998 shares of “Series A” 7prca Convertible Preferred Stock and 761cmam537 shares of Series B 7prca Convertible Preferred Stock outstanding |
| These shares are convertible into shares of common stock |
| Also, we issued an aggregate amount of dlra2cmam100cmam000 of secured convertible term notes in December 2005 |
| These notes are convertible into shares of our common stock, and we are required in certain circumstances to make scheduled principal and interest payments in shares of our common stock rather than in cash |
| The issuance of any shares of our common stock pursuant to the conversion or exercise of the above securities could significantly dilute your ownership in the Company, and the sale of such shares of common stock in the market could cause the market price of our common stock to decline as a result of the increased supply of shares, which could in turn cause you to lose a portion of your investment |
| The significant downward pressure on the market price of our common stock that would result from the sale of a significant amount of such shares of common stock could also encourage “short sales” by holders of our securities |
| These “short sales” occur when an investor commits to sell a security that he or she does not own at the time such commitment is made, but that the investor hopes to buy in earnest at a lower price in the future before he or she must deliver the security to the counterparty on the original sale |
| Investors typically engage in short selling when they believe that the price of the underlying security will decline before the time of settlement |
| In the event of a significant increase in short selling of our common stock, other investors may interpret such increase as a sign that the market price of our common stock will decline, causing further downward pressure on the market price |
| The holder who purchased our secured convertible term notes and common stock purchase warrants is contractually prevented (subject to default by the Company or waiver by the holder upon 75 days’ notice to the Company) from converting its notes and/or exercising its warrants if such conversion or exercise would result in such holder owning more than 4dtta99prca of our issued and outstanding shares of common stock |
| The holder is also 19 ______________________________________________________________________ [43]Table of Contents further prevented from owning more than 19dtta99prca of our issued and outstanding common stock under any circumstances |
| The holder could, however, effectively avoid these limitations by selling some of the shares of common stock that it acquires upon partial conversion of the notes or partial exercise of the warrants and then receiving additional shares upon further conversion of the notes or further exercise of the warrants |
| In this way, the holder could sell more shares of our common stock than these contractual limits while never holding more than such limits |
| The issuance of such shares of common stock could result in significant ongoing dilution to all stockholders |
| The principal and interest payable on the secured convertible term notes are convertible into shares of our common stock, and under certain circumstances this conversion is mandated |
| The number of shares of our common stock that are issuable upon conversion of the notes is equal to the aggregate amount of the principal, interest and fees then due and payable with respect to the notes divided by the fixed conversion price then in effect (which, as of the date of this prospectus, is dlra2dtta6316) |
| The fixed conversion price is subject to potential future adjustment, which would result in the notes becoming convertible into a greater or lesser number of shares of our common stock |
| For example, in the event of any stock splits, combinations, dividends or other share issuances, the fixed conversion price then in effect with respect to the notes would be proportionately reduced or proportionately increased, as applicable, so that the notes would be convertible into a greater or lesser number of shares of our common stock, in order to reflect the effect of such transactions and to ensure that the holder of the notes is not disadvantaged thereby |
| In the event of any reclassification of our common stock, the notes would thereafter become convertible into the number and kind of securities that existed immediately prior to the reclassification, or immediately after the reclassification, in the sole election of each holder |
| The interest payable on the outstanding principal amount of the notes is equal to the “prime rate” (as published in The Wall Street Journal) plus two and a half percent (2dtta5prca) |
| On February 28, 2006, the resulting interest rate to us was ten percent (10prca), and as of such date, we had accrued dlra15cmam925 in interest under the notes, all of which has in fact been paid in cash by us |
| Our common stock is subject to the rights and preferences of our mandatorily-redeemable convertible preferred stock |
| In January and February 2005, we issued 864cmam229 shares of 7prca Convertible Preferred Stock in a Series A private placement |
| These shares had an aggregate original liquidation preference of dlra2cmam808cmam750 above the common stock, have an aggregate cumulative dividend of approximately dlra200cmam000 per year, must be redeemable in four years, and are convertible into common stock (with favorable anti-dilution adjustments if we issue stock below fair market value) |
| For example, if we were to issue any common stock or securities convertible into common stock below the current market price for such common stock, the conversion price with respect to each of the 7prca Convertible Preferred Stock and the Series B 7prca Convertible Preferred Stock would automatically be adjusted pursuant to a weighted-average antidilution formula so that the shares of such 7prca Convertible Preferred Stock and the Series B 7prca Convertible Preferred Stock would be convertible into a greater number of shares of our common stock |
| Also, without approval of a majority of the 7prca Convertible Preferred Stock, we cannot repurchase or redeem common stock (except pursuant to repurchase agreements with service providers) or borrow money or issue debt securities other than in a strategic transaction, in connection with an acquisition of another entity, or pursuant to an independent-directors-approved commercial borrowing, secured lending or lease financing transaction |
| In the second quarter of 2005, we issued 792cmam306 shares of Series B 7prca Convertible Preferred Stock, with rights and preferences substantially similar to those of Series A As of February 28, 2006, there remains outstanding 814cmam998 shares of 7prca Convertible Preferred Stock and 746cmam157 shares of Series B 7prca Convertible Preferred Stock |
| 20 ______________________________________________________________________ [44]Table of Contents The agreements governing the secured convertible term note contains various covenants which may limit our ability to operate our business |
| The agreements governing the secured convertible term note contains various provisions that limit our ability to, among other things: declare or pay dividends on our common stock, issue mandatorily redeemable preferred stock, redeem any preferred stock, effect certain mergers or other corporate transactions, materially alter or change the scope of our business, sell or lease assets, or create or incur additional indebtedness |
| These restrictions could limit our ability to plan for or react to market conditions or meet extraordinary capital needs or otherwise restrict corporate activities, any of which could have a material adverse impact on our business |
| Also, upon our failure to comply with any of the covenants contained in the agreements governing the secured convertible term note, the holder thereof may accelerate the indebtedness outstanding thereunder, and we may not have sufficient funds available to make the required payments |
| We do not intend to pay cash dividends |
| We have never paid cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future |