Item 1. Business.
Overview
Proxim Wireless Corporation (the “Company” or “Proxim Wireless”) provides high-speed wireless communications equipment and services in the United States and internationally. Its systems enable service providers, enterprises, and governmental organizations to deliver high-speed data, voice, and video connectivity enabling a broad range of applications. The Company provides wireless solutions for the mobile enterprise, security and surveillance, last mile access, voice and data backhaul, and municipal networks. The Company believes its wireless systems address the growing need of our customers and end-users to rapidly and cost effectively deploy high-speed communication networks.
The Company offers broadband wireless equipment in several technology segments, including Wi-Fi®, Wi-Fi mesh, WiMAX, and point to point (PTP) which includes millimeter wave. The Company offers products in three primary categories: (1) broadband wireless access (BWA), including proprietary point-to-multipoint (PMP), standards-based WiMAX, outdoor Wi-Fi mesh, and MeshMAX™ products; (2) enterprise Wi-Fi products primarily for use indoors, including our access points and Wi-Fi client devices; and (3) PTP products. We serve our equipment customers primarily indirectly through a global network of distributors, value-added resellers, product integrators, and original equipment manufacturers, and to a lesser extent, directly through our internal sales force.
Proxim Wireless Corporation was incorporated as a Delaware corporation on May 5, 2003.
Since our inception in May 2003, our company has grown through a combination of organic growth and acquisitions. Significant acquisitions are:
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Telaxis Communications Corporation - In April 2003, we (then a private company known as Young Design, Inc.) acquired Telaxis, a publicly traded company focused on developing high capacity millimeter wave wireless products, and thus became a publicly traded company. Young Design, Inc. had developed, produced, and sold wireless data products, primarily in microwave frequencies.
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KarlNet, Inc. - In May 2004, we acquired KarlNet, a pioneer and leader in software development for operating and managing wireless networks.
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Terabeam Corporation - In June 2004, we acquired Terabeam Corporation, a developer and provider of wireless fiber solutions using high frequency millimeter wave (60 GHz radio frequency) and free space optics (transferring data through the air with light) technologies which had raised a substantial amount of cash as a private company. In addition to the cash and wireless fiber solutions, the Terabeam Corporation acquisition provided us with the capability to pursue non-communication millimeter wave products business (such as radar systems and sub-systems) from military and non-military governmental and other customers through its Harmonix Division.
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Ricochet Networks - In June 2004, we acquired Ricochet Networks, Inc. Ricochet was a wireless Internet service provider, originally formed to acquire certain assets from the bankruptcy estate of
Metricom, that operated the Ricochet® wireless network in the Denver and San Diego metropolitan areas.
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Proxim Corporation - In July 2005, we acquired substantially all of the assets and operations of Proxim Corporation (“Old Proxim”) from the bankruptcy estate of Old Proxim. Old Proxim was the result of the merger between Western Multiplex Corporation and Proxim, Inc. in March 2002. Both Western Multiplex and Proxim, Inc. were designers and manufacturers of broadband wireless systems. In August 2002, Old Proxim acquired Agere Systems’ 802.11 wireless local area network equipment business, including its ORiNOCO® 802.11a and b product line.
On July 31, 2007, Ricochet Networks, Inc., a subsidiary of Proxim Wireless Corporation, sold the operations of the Ricochet wireless network in the greater Denver metropolitan area to Civitas Wireless Solutions, LLC (“Civitas”). In addition, on that same day, Ricochet Networks, Inc. ceased operations of the Ricochet network in the San Diego metropolitan area and is no longer in the business of providing wireless Internet services. As a result, the services business we had entered as a result of the Ricochet Networks, Inc. acquisition was classified as discontinued operations effective in the third quarter of 2007, and the financial results of the services business has been excluded from the historical financial results of the Company’s continuing business.
On August 29, 2008, the Company and Terabeam sold Terabeam’s Harmonix Division to Renaissance Electronics Corp. and its wholly owned subsidiary HXI, LLC . As a result, the Harmonix Division business was classified as discontinued operations, and the financial results of the Harmonix Division business has been excluded from the historical financial results of the Company’s continuing business.
Industry Background and Markets
Just as cellular phones have replaced the traditional POTS phone as the primary means of making phone calls for many individuals, we believe that mobile data terminals will similarly drive a demand for high speed broadband wireless networks. Advances in wireless technology continue to drive increases in data rates while at the same time reducing the cost thus creating an attractive business model for the deployment of wireless networks as an alternative to wired deployments. This makes wireless an ideal solution for Proxim’s primary four target markets: Last Mile Access, Video Surveillance, Enterprise Wireless LAN, and Cellular Backhaul.
Last Mile Access
Our products enable new means of providing broadband connectivity to a wide variety of service providers, many of whom are significantly smaller than the typical telephone or cable companies. Telecommunications carriers that do not have direct connectivity to the end customer through an existing medium such as copper, fiber, or cable cannot cost effectively create a new land line connection to that customer and are relegated to reselling the existing connectivity, possibly with enhancements, in some form or fashion. As a reseller, the telecommunications carrier is subjected to the quality of service and support provided by the underlying operator of the network. Extended range licensed or license-free fixed wireless broadband systems allow telecommunications carriers to establish an alternative network that they can own and control to enable them to offer superior connectivity head to head with the incumbent service provider. Our products allow a telecommunications carrier to offer broadband connectivity to markets where no wireline broadband has been previously deployed or as a cost effective overlay to compete with existing broadband services.
Many of our products operate in license-free portions of the radio frequency spectrum. That means service providers, enterprises, and other customers don’t have to obtain licenses before they can start utilizing those products. In addition only a limited number of licenses are typically available for sale for operation in licensed spectrum, and unlicensed frequencies are free and provide many more frequencies to choose from as well as much larger channel sizes which allows for much higher data rates. This allows any customer to rapidly and cost effectively reach a new market of subscribers demanding high speed broadband connectivity. Many small to medium sized ISPs (Internet Service Providers) and Rural Local Exchange Carriers have no other viable means to offer high-speed Internet service to their customers other than using the license-free radio bands. ISPs are increasingly offering wireless broadband connectivity and are known as WISPs (Wireless Internet Service Providers). Our BWA systems have been deployed by over 2,000 WISPs, many of which are serving areas that had no broadband access prior to the roll outs incorporating our equipment.
Security and Surveillance
In the post 9/11 world, terrorism, law enforcement, border patrol, public safety, and monitoring challenges have forced government organizations and enterprises worldwide to elevate security and surveillance as a top priority. These challenges have manifested as significant growth in the video surveillance market which in turn has created a significant opportunity for system integrators, equipment manufacturers, software vendors, and chip companies to compress, acquire, transport, and archive these large amounts of video traffic. Technology advances in video, wireless, and software make it now possible to use cost-effective fixed and mobile wireless solutions for comprehensive security and surveillance applications. Deploying wireless provides a customer greater flexibility to place the video cameras where required without the substantial expense of trenching or running wire and the recurring costs that come along with a wired infrastructure. Proxim’s wireless systems are designed to handle the high demands of IP video and have been deployed around the world.
Enterprise Wireless LAN Networks
Businesses, governments, and institutional enterprises are increasingly deploying high-speed wireless connections within buildings and also between multiple buildings occupied by the same or affiliated businesses or other enterprises in a campus or business complex setting. We have products for both the indoor wireless Local Area Network (WLAN) deployments as well as the outdoor WLAN and Point to Point building connectivity.
Our access point products fulfill the desire for cost-efficient yet robust and fast indoor wireless LANs. Our access points have always been compliant with IEEE 802.11a, b, and/or g and in 2008, we introduced our newest access point which is also compliant with IEEE 802.11n draft 2 which is certified for interoperability by the Wi-Fi Alliance. 802.11n networks provide a five-fold increase in throughput and two-fold increase in range over 802.11a/b/g networks. These enhanced performance capabilities simplify deployments and provide the needed capacity required to handle the increased network demands as laptops become more prevalent than desktops. In fact, the capacity of a wireless 802.11n network exceeds the throughput capabilities of the typical 10/100 wired LAN previously deployed. This provides a double benefit to enterprises: first, by eliminating the need for wired LAN access throughout the enterprise with corresponding savings and second, by enabling both faster and connectivity over the network wirelessly.
Additionally, enterprises are increasingly deploying high-speed connections between multiple buildings. Enterprises are turning to wireless systems to connect their LANs together as a lower cost, faster to deploy alternative to fiber. Also, it enables cost savings by eliminating the need for recurring T1/T3 fees. Our MP.11 and MP.16 product lines provide low cost, high speed point-to-multipoint connectivity to address this market. In addition, high-data-rate next generation wireless LAN systems such as 802.11n products are creating additional needs for LAN-to-LAN connectivity that often cannot be met by typical wired connections, depending upon the data rate required. The higher data rate capabilities within the LAN are generating demand for higher speed connections between LANs such as enabled by our GigaLink® products, with its Gigabit Ethernet (1.48 Gigabits per second) data rate capabilities.
Cellular Backhaul
We believe that the need for high-speed backhaul, the connections between cellular telephone towers and the rest of the cellular telephone network, will remain solid and even increase due to the increased capacity demands of existing cellular deployments as well as the deployment of new cellular systems. The amount of data that needs to be backhauled from cellular systems should increase significantly as 3G and other high-data-rate cellular systems are developed and deployed and more data intensive applications are offered. We believe that the backhaul data rates required for some individual cells will exceed the capabilities of the land line T-1/E-1 connections that are typically used today, thereby providing an attractive market for our Lynx, Tsunami, and other high-capacity products.
Increasing Acceptance and Demand to Carry Voice over Internet Protocol (VoIP)
There has been an increasing demand for Voice over Internet Protocol as a low cost replacement for existing telephone voice connections. VoIP permits a voice connection wherever an Internet connection exists. VoIP operates best in a broadband environment due to its connectivity and latency requirements, and we believe that wireless systems, such as systems built with our products, provide an excellent infrastructure for VoIP capabilities. A network providing high speed wireless data communications with our equipment could add VoIP capabilities with
little or no recurring expense but greatly expand the network’s addressable market through the addition of the voice offering. We support Quality of Service (QoS) from the client device all the way through our backhaul equipment so VoIP calls have the highest quality and lowest delay.
Strategy
Our objective is to be a leading global provider of broadband wireless access and wireless networking systems. Our strategy to accomplish this objective is to:
Capitalize on our technology expertise to introduce new products rapidly. Our team of engineers has multi-disciplinary technical capabilities, including radio frequency (RF) technology spanning from microwave to millimeter waves as well as digital signal processing, software, and networking expertise. With the Old Proxim operation acquisition, we greatly enhanced our engineering capabilities. Each of our major product categories has unique networking as well as RF requirements which require unique expertise. We believe integrating these capabilities is highly complex, and we intend to continue to take advantage of our technology expertise to introduce product enhancements and new products in a rapid and cost effective manner. We believe that our design center which expanded in India during 2007 has significantly increased our design capabilities and improved our time to market. As systems become more complex and sophisticated and particularly as systems operate at higher data rates and frequencies, we believe that it will become increasingly difficult for organizations without our breadth of skills to be competitive in product development.
Leverage our channels of distribution. We have established a significant distribution system around the world that addresses a very large reseller base. We believe that the leverage afforded by these indirect channels provides us with the opportunity to present our company and our products to a much broader audience than we could do on our own. Although we plan to continue to directly support and sell to major and strategic accounts, we are becoming more actively involved with partners who offer much greater exposure into opportunities than we could develop alone. We are working with these partners to leverage our sales people and technical knowledge to pursue a greater number of opportunities for our solutions.
Expand our sales efforts and sales outside of the United States. While our products are currently sold and approved for use in a number of countries around the world and we derive a significant percentage of our revenue from international sales, we intend to increase our international presence and further expand into new international markets where broadband wire line access is currently too expensive or unavailable. We believe that markets outside of the United States offer more growth opportunities due to the low level or even complete lack of communications infrastructure throughout much of the world. We intend to continue to expand our presence worldwide by expanding our international personnel, channels, and marketing efforts, obtaining regulatory approvals for deploying our systems in new international markets, increasing our total product offerings in both existing and new international markets, and establishing strategic alliances and partnerships. We have introduced products specifically intended for international markets, such as our Tsunami MP.16 3500 product.
Capitalization of Assets. Through our acquisition strategy, we have accumulated a broad range of assets and technologies. Some of these assets and technologies may have greater value to other parties than to us due to the greater size or strategic direction of the other parties. We will investigate opportunities that can allow us to create value from under-utilized assets of the Company.
Products
We classify our broadband wireless products primarily into three product lines: Broadband Wireless Access (BWA), Enterprise Wi-Fi, and Point-to-Point (PTP). The BWA product line includes proprietary point-to-multipoint (PMP) Tsunami™ MP.11 products, PMP WiMAX Forum Certified™ Tsunami MP.16 products, outdoor Wi-Fi mesh, and MeshMAX™ products. The Enterprise Wi-Fi product line includes ORiNOCO® 802.11 a/b/g/n access point and client card products. The PTP product line includes our Tsunami®, Lynx®, and GigaLink® products. When possible, we design our products and systems generally to use common features, components, and software.
We also receive revenue from servicing, repairing, and providing extended and enhanced warranties for our products.
Broadband Wireless Access Products
Our BWA point-to-multipoint systems enable service providers, businesses, and other enterprises to cost-effectively connect end-users to a central hub or connect multiple facilities within their private networks. Our PMP systems are deployed in a hub and spoke configuration consisting of a single central hub (or base station) and equipment located at remote end users’ locations. The base station wirelessly connects to the remote customer premises equipment, prioritizing transmissions and allocating slots of time to each end-user. Base stations are capable of supporting multiple pieces of equipment at remote locations. The base station in a service provider deployment is generally connected to the central office of a carrier or other service provider by a wired or wireless backhaul connection (such as our point-to-point products).
We have both proprietary PMP products and WiMAX standards-based PMP products. The primary difference is that we developed the proprietary products before any 802.16 standard existed while we developed our WiMAX PMP products to comply with the IEEE WiMAX standards. Thus, our WiMAX products are designed to interoperate with other IEEE WiMAX products. Our proprietary PMP products include our Tsunami MP.11 products, and our WiMAX PMP products include our MP.16 3500.
Tsunami MP.11. This product line supports PMP applications in unlicensed frequency bands. While designed before WiMAX standards existed, the Tsunami MP.11 offers similar capabilites proven in hundreds of thousands of deployments since the beginning of 2000. Some of these WiMAX like features include: scheduled media access controller (MAC), also known as polling, to enable a base station to hear all subscriber stations, preventing nodes from interfering with each other and thus increasing system throughput; and orthogonal frequency division multiplexing (OFDM), which enables near-line-of-sight connections. Additional features include: WiMAX Quality of Service (QoS); roaming with seamless handoffs at speeds up to 200 km/hour; and dynamic frequency selection (DFS) which has already received EN 301-893 v1.3.1 certification.
In 2008 we extended the MP.11 product line to include a high security FIPS certified product targeted at government, financial and healthcare institutions. The MP.11HS products support 256 bit AES encryption, secure management and FIPS 1402 level 2 certification. It is the first unlicensed WiMAX product to be FIPS certified and brings the highest level of security to PMP applications. Frequencies supported include 2.4GHz, 5.15-5.85GHz and 1.8GHz for federal deployments.
The MP.11 product family is capable of supporting converged voice, video, and data transmission in fixed and mobile applications, bringing capabilities of the WiMAX IEEE 802.16-2005 standard to market now, for the 900MHz, 1.8GHz, 2.4 GHz, 4.9GHz and 5.15-6.08GHz frequency bands available globally.
WiMAX. This product line supports PMP applications in licensed frequency bands. We have continued to be a pioneer in wireless networking equipment by deploying one of the world’s first WiMAX Forum Certified™ products, a point-to-multipoint base station based on the IEEE 802.16d-2004 standard. In essence, WiMAX is a version of point-to-multipoint technology that is based on publicly available standards rather than the non-public standards that we and other vendors have developed on a proprietary basis. In fact, we leveraged much of the expertise, field experience, and manufacturing capabilities of our existing products to launch our WiMAX product. Our WiMAX solutions are designed for scalable system deployments, beginning with entry-level single-sector base stations and growing into multi-sector configurations. This scalability lowers the barrier to deploy WiMAX systems and enables a wider variety of service providers to use this technology. We believe our WiMAX solution is currently the only time division duplexing (TDD) system in the world using Intel® chips for both the base station and subscriber unit, providing optimal data rate connectivity and interoperability with Intel-based subscriber units. Our WiMAX base station has received the WiMAX Forum certification of interoperability with equipment based on chipsets from three different vendors, providing greater levels of interoperability for service providers.
In 2008 we added a 3.3-3.4GHz variant to our licensed WiMAX product line which has been certified for use in Mexico. It has all the same features as our 3.5GHz solution and is optimized for enterprise and security and surveillance solutions with very high upstream performance.
Wi-Fi Mesh. Mesh is a protocol that allows the creation of self-configuring, self-healing wireless networks. In a mesh network, data traffic has multiple potential paths from the end user to one or more nodes that are connected to a wired or wireless backhaul connection. This allows the network to dynamically route around failures in the network and provide a much higher level of reliability than may be possible in a typical PTP or PMP network. Mesh deployments are being used at an increasing amount in cities around the world because they are easy
to deploy and they provide access to the current installed base of Wi-Fi-enabled devices while also providing redundancy in the network to ensure uptime. Proxim supports mesh on both indoor and outdoor access points and uses the ORiNOCO Mesh Creation Protocol (OMCP) to create self-forming and self-healing non-line of sight (NLOS) mesh networks. These products include a dual-radio configuration, which increases system capacity by allowing one radio to focus on Wi-Fi access and the other radio to perform mesh backhaul duties. The products also provide Quality of Service (QoS) enabling voice and video capability and enterprise-class security features. Our mesh product offerings include a 4.9 GHz outdoor mesh product which enables public safety applications using the dedicated FCC frequency band for public safety applications (police, fire, EMS). This product can be used for fixed or mobile applications and is designed to support optimal video throughput in a mobile roaming application.
Mesh is now a standard feature in our some of our indoor access points and is becoming a standard requirement for small to medium businesses that don’t want to run cable to install another Wi-Fi access point.
MeshMAX™. In January 2007, we introduced a multi-radio product line that incorporates WiMAX, Wi-Fi mesh, and Wi-Fi access, called MeshMAX. Service providers, municipalities, and other customers planning to deploy Wi-Fi mesh and WiMAX can benefit from both Wi-Fi mesh and WiMAX to provide their customers with the extensive broadband wireless coverage. Though both technologies are distinct - each with unique characteristics - they often are deployed in tandem using WiMAX for backhaul and Wi-Fi mesh to provide access to the growing base of Wi-Fi enabled devices and multi-mode Wi-Fi phones. Until the MeshMAX products, the only solution was to install two separate units, one WiMAX and one Wi-Fi mesh. With MeshMAX, these technologies are now integrated in a single compact outdoor enclosure. The MeshMAX product line supports licensed WiMAX frequencies in 3.3-3.6 GHz bands and unlicensed frequencies in 5.1-5.8 GHz bands for backhaul. For mesh interconnect and Wi-Fi access, MeshMAX supports unlicensed mesh frequencies of 5.1-5.8 GHz and 2.4 GHz. MeshMAX products minimize system latency and optimize Quality of Service (QoS) which is essential for services such as high speed broadband Internet access, video communication including security and surveillance, voice communication, and IPTV.
Enterprise Wi-Fi Products
ORiNOCO Access Points. Our family of ORiNOCO access points extends the range of wired Ethernet networks for enterprises and municipal area networks by creating indoor and outdoor wireless networks in small, medium, and large venues. Corporate and other users can then access their wired Ethernet network wirelessly through the wireless network enabled by our products. Because our ORiNOCO access points are available with either single or dual radios in the product, the ORiNOCO access points provide configuration flexibility and increased network capacity. Our ORiNOCO access points also provide high-level security including WPA and WPA2. Web enabled and SNMP network management allow for simple configuration and remote management of each ORiNOCO network.
In November2008, we introduced our 802.11n single (AP800) and dual radio (AP8000) Access Points. IEEE 802.11n is the next generation of the Wi-Fi standard and the primary advantages of 802.11n-compliant products are significantly higher throughput and longer range. At the time of introduction, we believe that these products were the highest performing 802.11n access points generally available to commercial customers.
ORiNOCO Client Cards. Our ORiNOCO client cards deliver mobile convenience, easy installation, and a configuration utility that allows wireless users to connect quickly and simply. ORiNOCO client cards for notebook and desktop computers work together with all ORiNOCO access points and other infrastructure products as well as with third party wireless products supporting the relevant 802.11 IEEE standards. ORiNOCO client cards deliver the security levels enterprises desire with various levels of encryption including up to 152-bit WEP, WPA and WPA2 security. Client cards can be connected to computers internally or externally via a number of adapters including USB, ISA, PCI, and Ethernet and Serial external adapters.
Point-to-Point Products
Our point-to-point systems enable a dedicated communication link between two locations. Each link consists of radio equipment connected to the end user’s network at each of the two locations. Each radio is then connected to an external or integrated antenna, which is usually mounted on a rooftop or tower. The two antennae are then aimed at one another to create the dedicated wireless connection between the two locations. By using multiple systems, end users can connect multiple locations to form a more extensive network.
Lynx products. Our PTP Lynx products are primarily used by wireless cellular operators to connect their base stations to other base stations and to existing wire-line networks. This is commonly known as providing backhaul for the wireless cellular networks. In addition, these products are also used to establish campus and private networks and to provide fiber extension and last mile access. Our Lynx products are offered in different frequency bands with a variety of data transmission speeds. Lynx products can be linked together within a network and managed with simple network management protocol, or SNMP, software. SNMP is an industry standard set of rules that governs network management and monitors network devices and their functions. Our Lynx products also include a separate control and diagnostic channel, which enables remote monitoring of the system’s status and performance without reducing its carrying capacity.
Tsunami products. Our PTP Tsunami products primarily enable service providers, businesses, and other enterprises to expand or establish private networks by bridging Internet traffic among multiple facilities. In addition, these products are also used to provide last mile access. Tsunami products also are currently offered in a variety of license-exempt frequencies with a variety of data transmission speeds. Like our Lynx products, our point-to-point Tsunami products offer a fully integrated design and a separate control and diagnostic channel. In addition, our higher capacity point-to-point Tsunami systems include one or more additional T1 or E1 connections without reducing the carrying capacity of the system. The additional T1 or E1 connection is a standard telecommunications interface that is not based on Internet Protocol and is typically used for voice and/or video.
Quickbridge 60250 product. In November 2007, we announced our QuickBridge 60250 product, a PTP wireless hop-in-a-box that provides 200 Mbps of capacity in the 60 GHz unlicensed spectrum. The QuickBridge 60250’s small form factor, alignment bracket, and alignment scope make it easy to deploy and install. As a result, the QuickBridge 60250 is well suited to not only network operator, enterprise, and municipal applications but also for rapid construction of temporary networks for special events and when responding to disasters. The QuickBridge 60250 is a complete hop-in-a-box containing all of the components, including radio units, mounting hardware, power injectors and cables, required to deploy a reliable wireless connection operating over distances of up to 500 meters. Its low power consumption enables use of alternate power sources, such as solar power. The QuickBridge 60250 offers very low latency, making it ideal for voice and video applications. Our QuickBridge 60250 offers flexible management and easy administration. Network managers can monitor the link’s status and traffic using a Web user interface or by integrating it into a network management tool via SNMP.
GigaLink products. Our GigaLink products primarily enable service providers, businesses, and other enterprises to wirelessly satisfy very high bandwidth data transmission needs over relatively short distances. Given the high data transmission capabilities of these products (up to 1.48 Gigabits per second), we think of these products as fiber optic extension products. The connectivity needs may include creating a wireless fiber-like backbone or connecting buildings or campuses together with the highest data rate wireless bridges. The GigaLink product is a compact product operating in the 60 GHz millimeter-wave band between 57 GHz and 64 GHz. It enables fiberless transmission of data, voice and video communication at speeds up to 1.48 Gbps full duplex. It is engineered to provide link distances of up to 1,000 meters with 99.99% availability, depending upon prevailing rainfall rates in the geographic regions where it will be used. We also have GigaLink products operating in the recently allocated E-Band spectrum. The E-Band spectrum is 71-78 GHz, 81-86 GHz, and 92-95 GHz. The advantage is that the E-Band products offer longer distance links than the 60 GHz products.
In December 2008, we introduced a new long range Gigalink product which extends range to up to eight kilometers , while maintaining throughput at 1.48GBps with less than 1ms of latency.
Technology
We have developed or acquired a number of core technologies that form the basis of our current product offerings and which we expect to use in our future product development. Our primary areas of technology expertise are digital signal processing, media access control (MAC), networking, system software development, and RF technology.
Digital signal processing technology. Our products use either proprietary or third-party, standards-based digital signal processing (DSP) technologies and designs that we either develop specifically for use in wireless systems or adapt to those same wireless systems. Specifically, all of our ORiNOCO WLAN products utilize third-party chipsets that embody the requirements set forth by the 802.11a/b/g standards to ensure that we can achieve Wi-Fi standard certification. Similarly, our Tsunami WiMAX MP.16 BWA products use third-party chipsets that embody the requirements set forth by the 802.16d-2004 standards to ensure that we can achieve WiMAX standard
certification. Currently, all of our Tsunami and Lynx PTP products are implemented using our internally developed, proprietary FPGA or ASIC DSP solutions. We believe this combination of technologies and capabilities has enabled us to introduce a number of high-speed wireless products that we may not have been able to produce otherwise. We believe we can develop flexible, innovative products more quickly than those competitors without similar capabilities.
MAC. All of our layer 2 designs are done in house. We have customized standard Wi-Fi MAC solutions to provide advanced throughput and developed the majority of the layer 2 requirements for standard Wi-Fi devices while developing WiMAX 802.16-2004 and PTP solutions from the ground up.
Networking. We develop in house all of our layer 3-7 protocols on all our products. Our products features include NAT, VPN Passthru, firewalls, bandwidth management, QoS, routing, and security. We have developed certain unique networking capabilities that we believe deliver specific market advantage such as our Wireless Outdoor Routing Protocol (WORP) and ORiNOCO Mesh Control Protocol (OCMP). All of our products support 3 management interfaces: SNMP, Web and CLI, and most of our products allow encryption to secure the management link via SNMPv3, SSL and SSH. All of our products support advanced encryption over the wireless link and quality of service (QoS) to prioritize packets over the wireless medium.
System software. Our products are networking products and follow closely the principles set forth in the Open Systems Interconnection or OSI 7 Layer Model which is a guideline for the logical partition of functionality within and between distributed computing machines. Careful consideration is given to when to implement software to run on a host processor and when to implement it in firmware running in the DSP/ASIC/FPGA described above. There are industry practices, trade secrets, and specific industrial knowledge that influence our thinking and guide us to create the software architectures that meet the specific system requirements. We strive to leverage common software elements such as the VxWorks operating system and other third party components.
Radio frequency technology. Microwave and millimeter wave technology is the technology used to wirelessly transmit data, voice and video. Microwave technology uses radio frequencies ranging from 1 GHz up to 20 GHz. Millimeter wave uses radio frequencies in excess of 20 GHz. We have the ability to internally develop microwave and millimeter wave circuit board designs as well as qualify, direct, and utilize external partners. We believe having both internal and external design capabilities provides us with higher performance, lower production costs, shorter development cycles, and the ability to customize our products so that they can more easily be integrated with our existing products and with the networks of our various customers and end users.
Research and Development
Our primary research and development resources are located in Hyderabad, India. Our research and development efforts are focused on improving the functionality and performance of our existing products as well as developing new products to meet the changing needs of our diverse base of customers and end users. We are currently pursuing the following research and development initiatives:
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advancing our broadband mesh and MeshMAX systems;
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advancing our point-to-multipoint systems;
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advancing our point-to-point systems;
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adapting our products to additional frequencies and interfaces;
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developing higher speed products;
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designing our products for lower cost, outsourced manufacturing, assembly, and testing.
We devote a substantial portion of our resources to developing new products, enhancing existing products, expanding and improving our core wireless technologies, and strengthening our technological expertise. We have historically made and expect to continue to make significant investments in research and development. We invested approximately $3.7 million, $5.9 million, and $13.1 million in research and development activities in 2008, 2007, and 2006, respectively.
Sales and Marketing
We sell our products worldwide to service providers, businesses, and enterprise customers, primarily indirectly through distributors, value-added resellers, product integrators, and to lesser extent, directly to end-users through our sales force. We also sell through original equipment manufacturer (OEM) customers. We sell our OEM customers branded products as private label models. We also seek to stimulate market demand by increasing brand awareness and educating potential customers about the advantages of using our products.
Although our sales are generally made through distributors or value-added resellers and original equipment manufacturers, our sales force often develops direct relationships with end users either independently, in which case, the sales representative then brings in the distributor or value-added reseller to complete the sale, or together with the distributors or value-added resellers. We have established relationships with large national and international distributors, local and specialized distributors, and value-added resellers. The distributors sell our products, and the value-added resellers not only sell our products, but also assist their customers in network design, installation, and testing. In some cases, both distributors and value-added resellers also assist their customers with financing, maintenance, and the purchase of ancillary equipment necessary for the installation and operation of a wireless network.
Any significant decline in direct sales to end-users or in sales to our distributors or value-added resellers, or the loss of any of our major distributors, value-added resellers or OEM customers, could materially adversely affect our revenue.
Our backlog at December 31, 2008, was approximately $3.8 million, compared with backlog of approximately $9 million at December 31, 2007. Backlog includes orders confirmed with a purchase order. Because of the generally short cycle between order and shipment and occasional customer changes in delivery schedules or cancellations of orders, we do not believe that our backlog as of any particular date is necessarily indicative of the potential actual net sales for any future period. Accordingly, a significant component of our revenue expectations will be based almost entirely on internal estimates of future demand and not on firm customer orders and as a result may have higher risk of not occurring when forecasted. Planned operating expense levels are relatively fixed in the short term and are based in large part on these estimates. Because of the generally short order cycle, we need to maintain significant quantities of inventory on hand and at our contract manufacturers. If our estimates of expected demand for product are incorrect, we are exposed to excess and obsolete inventory costs.
During 2008 there was one customer who accounted for more than 10% of sales (18%). During the year ended December 31, 2007, three unrelated customers each accounted for more than 10% of sales (19%, 13% and 10%). During the year ended December 31, 2006, three unrelated customers each accounted for more than 10% of sales (16%, 10% and 10%). During the years ended December 31, 2008, 2007, and 2006, international sales accounted for approximately 63%, 59%, and 62%, respectively, of our total sales. We expect that our revenue from shipments to international customers to vary but remain significant as a percentage of total revenue.
Currently, substantially all of our sales are denominated in U.S. dollars. Accordingly, we are not directly exposed to material currency exchange risks other than the risk that exchange rate fluctuations may make our products more expensive for customers outside the United States and, as a result, could decrease international sales. In addition, we face risks inherent in conducting global business such as the risk that a weakened US dollar could result in higher international sales and service expenses as well as higher contract manufacturing costs. These risks, which are more fully described herein, include extended collection time for receivables, reduced ability to enforce obligations, potential supply constraints resulting in product delivery delays, and reduced protection for our intellectual property.
Customer Service
We are committed to providing our customers with a high level of service and support. We provide training, technical assistance and customer support on the installation, management, use, and testing of our products. We also provide warranties for our products which we believe are consistent with industry practices in our equipment markets, and we offer both in-warranty and out-of-warranty repair services. Our repair center is staffed with technicians who work directly with our quality assurance team to identify potential problems and repair equipment. In addition, we offer premium hardware and software support under our ServPak program.
Manufacturing
Our manufacturing strategy is to supply high quality products in a timely fashion to our customers, while making efforts to maximize our gross margins. We perform those manufacturing tasks internally that we believe cannot be effectively outsourced, but we outsource activities which can be performed more effectively by specialized manufacturing partners. Our ISO 9001-2000 certified manufacturing operation, based in our Milpitas, California facility, consists primarily of pilot production, final product assembly and testing for our most complex products, primarily certain of our PTP products. Our millimeter wave products are manufactured by HXI, LLC in Haverhill, MA. For our higher-volume products, which represent the majority of our products and product revenue, we outsource manufacturing and procurement of component parts to domestic and international contract manufacturers with the expertise and ability to achieve the cost reductions and quick response times to orders that we require, while maintaining our quality standards. This allows us to focus our internal resources on developing new products.
We depend on single or limited source suppliers for several of the key components used in our products. Any disruptions in the supply of these components or assemblies could delay or decrease our revenues. For example, we experienced product disruptions recently when one of our contract manufacturers changed the location of where our products are made to China from Taiwan. In addition, even for components with multiple sources, we have experienced, and may continue to experience, shortages due to capacity constraints caused by high industry demand. We do not have any long-term arrangements with our suppliers. If, for any reason, a supplier fails to meet our quantity or quality requirements, or stops selling components to us or to our contract manufacturers at commercially reasonable prices, we could experience significant production delays and cost increases, as well as higher warranty expenses and product reputation problems. Because the key components and assemblies of our products are complex, difficult to manufacture, and require long lead times, we may have difficulty finding alternative suppliers to produce our components and assemblies on a timely basis. We have experienced shortages of some key components in the past, which delayed related revenue, and we may experience similar shortages in the future. In addition, because the majority of our products have a short sales cycle of between 30 and 90 days, we may have difficulty in making accurate and reliable forecasts of product needs. As a result, we have in the past and could in the future experience shortages in supply, which could delay or decrease revenue because they drive customer cancellations and can induce customers to choose our competitors for their future needs.
We have, by design, limited internal manufacturing capability. There can be no assurance that we will be able to develop or contract for additional manufacturing capacity on acceptable terms on a timely basis if needed. In addition, in order to compete successfully, we will need to continue to achieve continual product cost reductions. Although we intend to achieve cost reductions through engineering improvements, production economies, and manufacturing at lower cost locations including some outside the United States, there can be no assurance that we will be able to do so. In addition, our ability to achieve such cost reductions is dependent also on volumes. In order to remain competitive, we must continue to introduce new products and processes into our manufacturing environment, and there can be no assurance that any such new products will not create obsolete inventories related to the older products being replaced. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in developing industries, particularly companies in relatively new and rapidly evolving markets. These risks include:
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an unpredictable customer demand environment;
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limited backlog;
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uncertain acceptance of new products and services;
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competition; and
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challenges in managing growth.
We cannot assure you that we will succeed in addressing these risks. If we fail to do so, our revenue and operating results could be materially harmed.
Competition
The markets for all three of our product categories are extremely competitive, and we expect that competition will intensify in the future. Increased competition could adversely affect our business and operating results through pricing pressures, the loss of market share, and other factors. The principal competitive factors affecting wireless local area networking and fixed wireless markets include the following: price; data throughput; effective radio frequency coverage area; interference immunity; network security; network scalability; integration with voice technology; wireless networking protocol sophistication; ability to meet and support industry standards; roaming capability; power consumption; product miniaturization; product reliability; ease of use; product costs; product features and applications; product time to market; product certifications; changes to government regulations with respect to each country served and related to the use of radio spectrum; brand recognition; OEM partnerships; marketing alliances; manufacturing capabilities and experience; effective distribution channels; and company reputation.
Our primary competition in our BWA markets include Airspan, Alvarion, Aperto, Cisco, Motorola (Canopy), Redline, and Tropos. Although we believe that our BWA products are well positioned and that our experience in this area is a competitive advantage in WiMAX development, it is difficult to ascertain what the actual impact of this technology to this business segment will be at this time. In the Wi-Fi Mesh market, current competition comes primarily from nascent companies such as Belair, Strix, Firetide, Skypilot and Tropos. Additionally, Cisco and Motorola have aggressively entered the market. Although the entrance of major competitors like Cisco and Motorola represent a serious force to reckon with, we also believe that their entrance indicates an important validation of the industry. Our intent to compete in the Wi-Fi Mesh market is to offer the most compelling solution in the market with attractive price points and a complete solution including our indoor WLAN, WiMAX or other PMP for distribution, and PTP backhaul solutions. We believe that we can offer the most complete Wi-Fi Mesh wireless network solution in the market.
We have extensive competition in our Enterprise Wi-Fi business, including without limitation, Cisco (including LinkSys), D-Link, Netgear, SMC, Buffalo, Motorola (Symbol Technologies), Aruba, Trapeze Networks, Meru and 3Com Corporation. Additionally, numerous Asia-based companies offer significant portfolios of low-price IEEE 802.11a/b/g products. We could also face future competition from companies that offer products which replace network adapters or offer alternative communications solutions, or from large computer companies, PC peripheral companies, as well as other large networking equipment companies. Furthermore, we could face competition from certain of our OEM customers, which have, or could acquire, wireless engineering and product development capabilities, or might elect to offer competing technologies. We can offer no assurance that we will be able to compete successfully against these competitors or those competitive pressures we face will not adversely affect our business or operating results.
With our PTP products, we face competition from Alcatel, Bridgewave, Ceragon Networks, Stratex Networks, Erricson, NEC, Redline, Motorola (Orthogon) and Nokia, many of which have broader distribution channels, brand recognition, and more diversified product lines with licensed solutions.
In addition, broadband wireless access solutions compete with other high-speed solutions such as cable modem technologies, satellite technologies, digital subscriber lines and fiber optic cables. Many of these alternative technologies can take advantage of existing installed infrastructure and have achieved significantly greater market acceptance and penetration than broadband wireless access technologies. Other factors that influence the choice between wireless and wire line products include reliability and security, speed and volume capacity, cost effectiveness, availability of sufficient frequencies and geographic suitability. We expect to face increasing competitive pressures from both current and future technologies in the broadband access market.
Many of our present and potential competitors have substantially greater financial, marketing, technical and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products. These competitors may succeed in establishing technology standards or strategic alliances in the markets in which we operate, obtain more rapid market acceptance for their products, or otherwise gain a competitive advantage. We can offer no assurance that we will succeed in developing products or technologies that are more effective than those developed by our competitors. Furthermore, we compete with companies that have high volume manufacturing and extensive marketing and distribution capabilities, areas in which we may not have as much experience. We can offer no assurance that we will be able to compete successfully against existing and new competitors as wireless markets evolve and the level of competition increases.
Intellectual Property
Our success depends on the preservation and protection of our product and manufacturing process designs and other proprietary technology. We use a variety of intellectual property in the development and manufacturing of our products, but do not believe that any of our intellectual property is individually critical to our current operations. Taken as a whole, however, we believe our intellectual property rights are significant. In addition to our registered intellectual property, we also use proprietary technology in our business. This technology includes internally developed proprietary error correction algorithms, fault tolerant systems, and comprehensive network management software and specialized knowledge and technical expertise that have been developed over time by our employees.
We rely on a combination of patents, trademarks, non-disclosure agreements, invention assignment agreements and other security measures in order to establish and protect our proprietary rights. In order to maintain the confidential nature of this technology, we have chosen to protect it by generally limiting access to it, treating portions of it as trade secrets and obtaining confidentiality or non-disclosure agreements from persons who are given access to it. All of our employees have signed a confidentiality agreement, which prohibits them from disclosing our confidential information, technology developments and business practices, as well as any confidential information entrusted to us by other parties.
In connection with our acquisition of substantially all the assets of Old Proxim, we were assigned three agreements previously between Old Proxim and Agere Systems Inc. These agreements were originally entered into between Old Proxim and Agere on August 5, 2002 in connection with Old Proxim’s acquisition of assets primarily relating to the 802.11 WLAN equipment business of Agere, including its ORiNOCO product line. The three agreements are:
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a three-year supply agreement pursuant to which Agere originally agreed to supply Old Proxim with chipsets, modules and cards at specified prices;
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a perpetual license originally enabling Old Proxim to use Agere technology related to the wireless LAN equipment business; and
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a 7-1/2 year patent cross-license agreement for Old Proxim’s and Agere’s respective patent portfolios.
We increased our patent portfolio substantially through the acquisitions of Telaxis, Terabeam Corporation, Ricochet, and the operations of Old Proxim (which included Western Multiplex and Agere Systems ORINOCO product line). While we do not believe that any of these patents individually is critical to our current equipment business, we believe our patent portfolio is quite valuable. Our patents generally are in the following areas:
We continue work to procure additional patents that are beneficial to our business and are looking at ways to optimize the value of the patents that we have recently acquired. We currently do not receive any material amounts from licensing any of our patents.
Government Regulation
Our products are subject to extensive telecommunications-based regulation by the United States and foreign laws and international treaties. We must conform our products to a variety of regulatory requirements and protocols established to, among other things, avoid interference among users of radio frequencies and to permit interconnection of equipment. Each country has different regulations and a different regulatory process. In order
for our products to be used in some jurisdictions, regulatory approval and, in some cases, specific country compliance testing and re-testing may be required. The delays inherent in this regulatory approval process may force us to reschedule, postpone or cancel the installation of our products by our customers, which may result in significant reductions in our sales.
In the United States, we are subject to various Federal Communications Commission, or FCC, rules and regulations. Current FCC regulations permit license-exempt operation in certain FCC-certified bands in the radio spectrum. Our wireless products are certified for operation in certain licensed frequencies and license-exempt operation in different frequency bands. Operation in these frequency bands is governed by rules set forth in Part 15 of the FCC regulations. The Part 15 rules are designed to minimize the probability of interference to other users of the spectrum and, thus, accord Part 15 systems license-exempt status in the frequency band. In the event that there is harmful interference caused by a Part 15 user, the FCC can require the Part 15 user to curtail transmissions that create interference. In this regard, if users of our products experience excessive interference from primary users, market acceptance of our products could be adversely affected, which could materially and adversely affect our business and operating results. The FCC, however, has established certain standards that create an irrefutable presumption of noninterference for Part 15 users and we believe that our products comply with such requirements. There can be no assurance that the occurrence of regulatory changes, including changes in the allocation of available license-exempt frequency spectrum, changes in the use of allocated frequency spectrum, or modification to the standards establishing an irrefutable presumption of non-interference for unlicensed Part 15 users, would not significantly affect our operations by rendering current products obsolete, restricting the applications and markets served by our products or increasing the opportunity for additional competition.
Our products are also subject to regulatory requirements in international markets and, therefore, we must monitor the development of radio frequency regulations in certain countries that represent potential markets for our products. While there can be no assurance that we will be able to comply with regulations in any particular country, we believe that we have designed our products to minimize the necessary design modifications required to meet various 2.4 GHz and 5 GHz international spread spectrum regulations, as well as in other frequency bands we may design our products to use. In addition, we will seek to obtain international certifications for our product line in countries where there are substantial markets for wireless networking systems. Changes in, or the failure by us to comply with, applicable domestic and international regulations could materially adversely affect our business and operating results. In addition, with respect to those countries that do not follow FCC regulations, we may need to modify our products to meet local rules and regulations.
Regulatory changes by the FCC or by regulatory agencies outside the United States, including changes in the availability of spectrum, could significantly affect our operations by restricting our development efforts, rendering current products obsolete or increasing the opportunity for additional competition. Several changes by the FCC were approved within the last eight years including changes in the availability of spectrum, as well as the granting of an interim waiver. These approved changes could create opportunities for other wireless networking products and services. There can be no assurance that new regulations will not be promulgated, that could materially and adversely affect our business and operating results. It is possible that the United States and other jurisdictions will adopt new laws and regulations affecting the pricing, characteristics and quality of broadband wireless systems and products. Increased government regulations could:
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decrease the growth of the broadband wireless industry;
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hinder our ability to conduct business internationally;
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reduce our revenues;
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affect the costs and pricing of our products;
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increase our operating expenses; and
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expose us to significant liabilities.
Any of these events or circumstances could seriously harm our business and results of operations.
We are also subject to U.S. government export controls. We rely on our customers to inform us when they plan to deliver our products to other countries, and we regularly inform our customers of the export controls with which they must comply. However, a violation of U.S. export controls could seriously harm our business.
Employees
As of December 31, 2008, we had 203 employees, including 48 in manufacturing and customer service, 74 in research and development, 61 in sales and marketing, and 20 in finance and administration. We are not a party to any collective bargaining agreement in the United States. We believe that relations with our employees are good.
Item 1A.
Item 1A. Risk Factors.
General Overview
This Annual Report on Form 10-K contains forward-looking statements as defined by federal securities laws which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, intentions, projections, developments, future events, performance or products, underlying assumptions and other statements which are other than statements of historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “contemplates,” “believes,” “estimates,” “predicts,” “projects,” and other similar terminology or the negative of these terms. From time to time, we may publish or otherwise make available forward-looking statements of this nature. All such forward-looking statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by the cautionary statements described in this Form 10-K, including those set forth below, and any other cautionary statements which may accompany the forward-looking statements. In addition, we undertake no obligation to update or revise any forward-looking statement to reflect events, circumstances, or new information after the date of this Form 10-K or to reflect the occurrence of unanticipated or any other subsequent events, and we disclaim any such obligation.
You should read forward-looking statements carefully because they may discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other forward-looking information. However, there may be events in the future that we are not able to accurately predict or control. Forward-looking statements are only predictions that relate to future events or our future performance and are subject to substantial known and unknown risks, uncertainties, assumptions, and other factors that may cause actual results, outcomes, levels of activity, performance, developments, or achievements to be materially different from any future results, outcomes, levels of activity, performance, developments, or achievements expressed, anticipated, or implied by these forward-looking statements. As a result, we cannot guarantee future results, outcomes, levels of activity, performance, developments, or achievements, and there can be no assurance that our expectations, intentions, anticipations, beliefs, or projections will result or be achieved or accomplished. In summary, you should not place undue reliance on any forward-looking statements.
Cautionary Statements
In addition to other factors and matters discussed elsewhere in this Form 10-K, in our other periodic reports and filings made from time to time with the Securities and Exchange Commission, and in our other public statements from time to time (including, without limitation, our press releases), some of the important factors that, in our view, could cause actual results to differ materially from those expressed, anticipated, or implied in the forward-looking statements include, without limitation, the following:
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We have been unable to increase our revenues and may be unable to grow our revenues in the future. We have been unable to increase our revenues for a number of quarters in a row despite being in what are perceived as expanding markets. This is having an adverse impact on our business, financial condition, and relations with customers, suppliers, employees, investors, and others. Our continued inability to increase our revenues could have a material adverse affect on our ability to continue as a going concern.
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We cannot predict whether we will be able to achieve profitability, which could adversely affect our ability to continue as a going concern and our stock price. We have not been profitable for the last three years. We have made no predictions concerning our future profitability or lack of profitability. Our inability to achieve profitability may affect our ability to continue as a going concern and cause the market price of our stock to decline or prevent it from rising.
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We currently have limited capital resources, which could adversely impact our operations, ability to grow our business, attractiveness as a supplier to customers, attractiveness to investors, and viability as an ongoing company. We have a recent history of unprofitable operations, and our capital resources have been declining and are very limited. These factors could cause potential customers to question our long-term viability as a supplier and thus decide not to purchase products from us. Further, our limited capital resources could inhibit our ability to grow our business because typically we have to pay our suppliers sooner than we receive payment from our customers. These factors could cause potential investors to question our long-term viability or believe that we will need to raise additional capital on terms more favorable than a typical investor would obtain by simply buying our stock in the public markets and thus decide not to purchase our stock. All these factors could have an adverse impact on our operations, financial results, stock price, and viability as an ongoing company.
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We have limited capital resources and our prospects for obtaining additional financing, if required, are uncertain. Additional financing may not be available to us in the future on acceptable terms or at all. If funds are not available, we may have to delay, scale back, or terminate business or product lines or our sales and marketing, research and development, acquisition, or manufacturing programs. Our inability to obtain capital could seriously damage our business, operating results, financial condition, viability as an ongoing company, and cause our stock price to decline.
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Our common stock may be delisted from the Nasdaq Capital Market, which could adversely affect our business and relations with employees, customers, and others. Our common stock is currently traded on the Nasdaq Capital Market. We do not currently comply with the continued listing requirements of that market and thus our stock may be delisted from that market. Some of the requirements we don’t meet have been suspended by Nasdaq through April 20, 2009. We may receive grace periods to try to regain compliance with some or all of the current deficiencies. There can be no assurance that we will be able to achieve compliance with these continued listing requirements at all or within any grace periods we receive. Any actions we might take to regain compliance (such as a reverse stock split) may have adverse effects on us, such as adverse reaction from employees, investors and financial markets in general, adverse publicity, and adverse reactions from customers. Should our stock be delisted from the Nasdaq Capital Market, we may apply to have our stock traded on the Over-The-Counter Bulletin Board or the Pink Sheets. There can be no assurance that our common stock would be timely admitted for trading on those markets. These alternatives may result in a less liquid and less transparent market available for existing and potential stockholders to buy and sell shares of our stock and could further depress the price of our stock.
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We have engaged an investment bank to assist us with the exploration of strategic alternatives, but there can be no certainty as to whether any strategic transaction will occur or the terms of any such transaction. In light of the unsolicited expressions of interest received by us, we engaged an investment banker to assist us with exploring strategic alternatives. These alternatives may include a sale of the company or some, substantially all, or all of the assets of the company. However, there can be no certainty as to whether any strategic or other actions might be undertaken following this engagement; the type, structure, timing, and terms of any such potential actions; the level of interest of third parties in pursuing any possible transactions; the time and costs required to consider possible strategic and other transactions and other corporate actions; management, affiliate, and board interest in and distraction due to considering these matters; and reactions, either positive or negative, of investors, competitors, customers, employees, and others to our engaging investment bankers and to any specific strategic alternative or opportunity selected by us.
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We may raise additional capital on terms that we or our stockholders find onerous, which could adversely affect our financial results and stock price. In the future, we may be able to raise additional debt or equity capital only on terms that we find onerous. Alternatively, some of our stockholders may find the terms of our capital arrangements to be onerous. We may also obtain funds
through arrangements with partners or others that may require us to relinquish rights to certain of our technologies or potential products or other assets. The terms of our capital arrangements or the perceived onerous nature of those arrangements could adversely affect our financial results and stock price.
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We may sell or otherwise dispose of portions of our business and assets for strategic reasons or to raise capital, which could adversely affect our business, financial results, and relationships. As we analyze our company, strategic direction, and capital requirements, we may decide to sell some of our product lines, intellectual property, or other assets. We may decide to do so for a variety of reasons, including to raise capital, to focus on certain portions of our current business, and to reduce our expenses. Any such decisions could adversely impact our relationships with customers, employees, investors, and others for a variety of reasons depending on the actual decisions made. For example, it may be perceived that such decisions are due to our questionable financial viability. It may be perceived that we have decided to dispose of certain product lines that some people may believe have more potential than others. Any such decisions and related consequences could have an adverse impact on our business, financial results, and relationships with third parties.
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Our lower stock price and weaker financial condition may make it harder to attract and retain qualified employees. Our lower stock price, resulting decreased incentive impact of stock options, difficulties in growing our revenue, lower cash levels, and general weaker financial condition may make it harder for us to retain our current employees in light of other employment opportunities that may be available to them. In addition, those same factors may make it harder for us to attract new employees. These difficulties may be exacerbated in our international locations, including our Hyderabad, India research and development center, which are located further from our headquarters. Our inability to retain current employees and attract new employees could have a material adverse impact on our business, financial condition, and relationships with third parties.
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The current economic downturn is having a significant adverse impact on our business due in part to our being a smaller, younger company. The overall economic climate in the United States and many other parts of the world is in a downturn. This downturn has resulted in our customers having less capital available from capital markets, and less willingness to spend internal capital, to purchase equipments such as ours. As a result, potential customers may be less willing to spend their limited budgets on products from us, a relatively small, young company that may not survive the leaner economic times. Also, it may be causing customers to pay us slower. Because we do not have the financial resources or name recognition of larger companies, this economic cycle may adversely affect the growth and stability of our business and our financial condition and results of operations.
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The broadband wireless equipment industry in which we principally operate is intensely competitive which could negatively impact our financial results. The telecommunications equipment industry in which we operate is intensely competitive. Most of our products are intended for outdoor broadband wireless networks (generally our broadband wireless access and point-to-point products) or indoor wireless networks (generally our enterprise Wi-Fi products). Competition is intense in this industry for a number of reasons. For example, there are relatively few barriers to entry in this market. Also, this industry has attracted substantial media and other attention in recent months in part due to the ability of this equipment to provide broadband Internet connectivity simply, quickly, and efficiently. These same reasons, among others, have caused a number of companies to develop products that compete (or could be viewed as competing) with ours. This large number of companies offering products that may be perceived to be similar or even interchangeable with our products can have the effect of reducing the prices at which we are able to sell our products. In turn, this can reduce our gross margins and negatively impact our general financial results.
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We face substantial competition from a number of larger companies with substantially greater resources and longer operating histories, and we may not be able to compete effectively. Many of our competitors or perceived competitors offer a variety of competitive products and services and some may offer broader telecommunications product lines. Many of these companies have greater customer recognition, installed bases, financial resources, and sales, production, marketing, manufacturing, engineering, and other capabilities than we do. Especially in these turbulent economic times, these larger companies may be more successful in obtaining customers.
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We also face competition from private and start-up companies given the limited barriers to entry in our business. We also face actual and potential competition from start-up and other private companies that are developing and marketing new commercial products and services. Many of the products we sell are based on standards established by the Institute of Electrical and Electronics Engineers (IEEE) that require interoperability. Also, there are not substantial technical development difficulties, manufacturing difficulties, prohibitive intellectual property rights, or high business start-up costs that may create greater barriers to entry in other businesses. As a result, there are limited barriers to entry into a number of markets we serve. This lack of significant barriers and the perceived attractiveness of some of these markets, among other reasons, have resulted in private companies entering these markets.
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We may experience difficulty in differentiating our products from other broadband wireless products which may reduce our sales and gross margins. We believe that some products in the broadband wireless equipment business in which we primarily operate have become commodities in which there is intense price competition, and we believe that trend will continue and intensify. We need to carefully and clearly distinguish our products from competing products and technologies that may be able to provide wireless broadband access or connectivity. Failure to distinguish our products for our customers, investors, and others could hinder market acceptance of our products, delay our obtaining customers for our products, force reductions in contemplated sales prices of our products, and reduce our overall sales and gross margins. This ability to distinguish is becoming more important as we try to introduce more feature-rich products at higher prices.
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Potential customers may view price as the primary differentiator between our products and products of our competitors, which could reduce the price at which we can sell our products and negatively impact our financial results. Because many products in our broadband wireless equipment business have to comply with specific public standards, at times potential customers may perceive there to be little other than price to differentiate our products from products of a competitor. This intense customer focus on pricing can have the effect of reducing the prices at which we are able to sell our products. In turn, this can reduce our gross margins and negatively impact our general financial results.
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Alternative broadband connectivity technologies may have advantages over our products and make our products less attractive to customers. A number of competing technologies may be able to provide high-speed, broadband access or connectivity. These competing technologies include digital subscriber lines, hybrid fiber coaxial cable, fiber optic cable, T-1/E-1 and other high-speed wire, laser (also known as free space optics), satellite, and other mesh wireless, point-to-multipoint wireless, and point-to-point wireless technologies. Some of these technologies may have advantages over our products, such as lower cost, greater range, better security, and greater current market acceptance.
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New broadband connectivity technologies may be developed that have advantages over our products and make our products less attractive to customers. New products or new technologies may be developed that supplant or provide lower-cost or better performing alternatives to our products. These new products, including new products we introduce, could reduce the sales of our existing products.
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The actual or potential availability of new broadband connectivity technologies could cause our customers to delay buying decisions. We operate in a business where there is rapid technological change, and new standards, products, and technologies are continually introduced to the market in actual or conceptual form. These new products or technologies may have or appear or be described to have advantages over our products or other products then currently available. Even though actual products may not be available until some (perhaps indefinite) time after initial introduction of the conceptual standard, product, or technology, the possibility of obtaining these new products could cause potential customers to delay their decision to buy products such as ours. This delay could adversely impact our business, financial condition, and results of operations.
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The costs of developing products to operate in accordance with these new broadband connectivity technologies would be substantial and could adversely affect our operating results. As a well-known supplier of broadband wireless equipment, we are expected to provide products on the cutting-edge of technology. This means supplying products operating in accordance with new
broadband connectivity technologies. Developing these products is a time-consuming and expensive process. These costs could adversely affect our operating results. Alternatively, if we do not develop new products, customers may view us as not maintaining our technological leadership so be unwilling to purchase products from us.
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We are selling into a market that has a broad range of desired product characteristics and features which may make it difficult for us to develop products that will address a broad enough market to be commercially viable. The market that we currently serve is experiencing a convergence of voice driven telecommunications methodology and data centric networking based methodology. As a result there exists a divergence of product requirements and corporate cultures for our customers and even within the same customer. Typically, established telecommunications providers desire extremely robust products with the expectation of a relatively long effective life. Networking providers on the other hand are looking for optimal performance at any given time with the assumption that they will be upgrading the equipment again in several years and therefore are extremely cost sensitive. In addition, established telecommunications providers seek products that fit into their existing networks while networking based providers prefer ethernet interfaces and data rates. If we are unable to satisfy one or more of the requirements of our current and prospective customers, we may lose, or fail to gain, meaningful market share.
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We may not develop products for the portions of the broadband connectivity and access markets that grow. Predicting which segments of the broadband connectivity and access markets will develop and at what rate these markets will grow and in what geographic locations is difficult. We may needlessly spend money and resources developing products for a market that does not develop. On the other hand, we may miss market opportunities if we fail to act promptly and decisively to develop new products. Our business, financial condition, and results of operations will be materially adversely affected if we develop the wrong product or miss market opportunities.
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Our sales may decline if we are unable to keep pace with rapid technological changes and industry standards. Our ability to succeed in our competitive market will depend upon successful development, introduction, and sale of new products and enhancements on a timely and cost-effective basis in response to changing customer requirements and competitors’ product developments. We may not be successful in selecting, developing, manufacturing, and marketing new products or enhancements which could adversely affect our sales. Our customers may believe that we are not investing sufficiently in research and development to maintain a strong pipeline of new products and therefore decide not to purchase current products from us.
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We believe that the prices for our products will decline over time which could hurt our financial results. We believe that average selling prices for our products will tend to decline from the point at which a product is initially priced and marketed. Reasons for this decline may include the maturation of such products, the effect of volume price discounts in existing and future contracts, technology changes, and the intensification of competition, including from lower-cost foreign suppliers. This price decline could hurt our financial results.
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The expected price decline of our products will hurt our financial results unless we are able to offset those declines with cost savings or new product introductions. We will attempt to offset expected price declines of our products by reducing our product costs and non-product costs and by introducing new products with higher gross margins. If we are unable to offset declining selling prices by reducing direct materials and manufacturing expenses, our gross margins will decline. If we cannot develop new products in a timely manner or we fail to achieve increased sales of new products at higher gross margins, our revenue and gross margins may decline.
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Our plans to continue to introduce new products will require capital and other investments that may not be recovered. We devote significant resources to the development and marketing of new products and technologies and expect to continue to do so. These investments include facilities, equipment, inventory, personnel, and other items to develop and produce these products and to provide marketing, sales, service and support, and administration organizations to service and support these products. We anticipate many of these commitments and expenditures would be made in advance of realization of increased sales, which may not occur. If sales do not increase as expected, our gross margins and general financial performance would be adversely affected.
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Our financial results have fluctuated significantly, and we expect the fluctuations will continue for a variety of reasons, many of which are out of our control. Our quarterly financial results have fluctuated significantly for a number of reasons including our acquisitions of the assets of Proxim Corporation in July 2005; Terabeam Corporation, Ricochet Networks, Inc., and KarlNet, Inc. in the second quarter of 2004; the combination of Telaxis and Young Design in April 2003; our limited long-term commitments from customers; the receipt of significant customer orders from time to time; timing of obtaining customers for any new products we may introduce; the mix of our product sales; our manufacturing capacity constraints and our ability to fulfill orders; our inability to obtain components in the quantities we need; new product introductions by us or by our competitors; seasonal factors that may affect capital spending by customers; and general economic conditions. We expect that many of these and other factors will continue to affect our business and will cause our financial results to fluctuate in the future.
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Our past acquisition and disposition activity contributes to the difficulty in predicting our future financial performance. We have engaged in a number of strategic activities over the years which have at times substantially changed the business and operations of the company. These acquisitions and dispositions have caused our financial results to fluctuate, sometimes dramatically. These past transactions and potential future acquisition or disposition activity could contribute to fluctuations in our financial results and to difficulties in predicting our financial performance.
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We may not achieve the contemplated benefits of any acquisition we make which could materially and adversely affect our business. We may not be able to achieve the expected synergies and other benefits of any acquisitions we make at all or to the extent and in the time periods expected. We may not be able to integrate the operations in a cost-effective, timely manner without material liabilities or loss of desired employees, suppliers, or customers. Our management may be distracted from our core business due to the acquisition. The expected cost savings from the transaction may not be fully realized or may take longer to realize than expected. The time and costs required to integrate, establish, manage, and operate the operations we acquire may be greater than we anticipated. Our investors, competitors, customers, suppliers, employees, and others may react negatively to the acquisition. We may make acquisitions in business areas in which we have little experience operating so may not fully benefit from the acquisition. We may face unexpected difficulties, costs, and delays in implementing common internal controls, disclosure controls, systems, and procedures, including financial accounting systems, particularly in light of the enhanced scrutiny given to those items in the current environment. Addition of these operations may increase the difficulty for us, financial analysts, and others to predict the combined company’s future business and financial performance. These factors may cause us to want or need to raise additional debt or equity capital, which, if available at all, may be on terms deemed undesirable by investors, customers, suppliers, employees, or others. These factors could materially and adversely affect our business, perception in our market, and financial results. Should these factors materially and adversely affect our business, it could result in a material impairment charge to write-down goodwill.
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Our past acquisitions and dispositions have exposed us to risks and liabilities, which could have a material adverse affect on our business. We have been and may be further exposed to lawsuits, risks, liabilities, or obligations imposed on or threatened against us arising from the various acquisition and disposition activities we have undertaken. For example, we believe that Symbol Technologies, Inc. commenced its lawsuit against us as a result of our acquiring Proxim Corporation’s operations. Our acquisition of Terabeam Corporation exposed us to a substantial number of leases for unused facilities, not all of which have been resolved to date. Under our agreement to buy KarlNet, Inc., we agreed to pay up to an additional $2.5 million if certain conditions were met. Although it is our position that none of that amount is owed, we have received a letter from sellers demanding payment of a portion of this amount. These contingencies and risks could result in obligations and liabilities for us, which could have a material adverse affect on our business.
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The fact that we receive few long-term purchase commitments from customers contributes to the difficulty in predicting our future financial performance. Due to the nature of our products and customers, we generally have a very short time between receiving an order and shipping the order. Few of our customers provide us with long-term purchase commitments. As a result, we generally have a relatively low backlog and have limited visibility of sales going forward. This lack of visibility
contributes to the difficulty in predicting our future financial performance by us, financial analysts, and investors.
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The fact that we receive few long-term purchase commitments from customers contributes to our inventory risk which could adversely affect our financial results. Due to the nature of our products and customers, we generally have a very short time between receiving an order and shipping the order. Few of our customers provide us with long-term purchase commitments. As a result, we generally have limited visibility of sales going forward. However, our customers generally demand relatively quick delivery of products. This means that we have to estimate product demand. If we under-estimate demand, we may lose sales. If we over-estimate demand, we may end up with having to take charges for excess and/or obsolete inventory or have to pay substantial amounts to cancel orders with our suppliers, both of which we have had to do in the past. These factors could adversely affect our financial results.
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Receipt of significant customer orders have caused our financial results to fluctuate and contribute to the difficulty in predicting our future financial performance. At times, we have received significant orders from customers that have caused our financial results to fluctuate. We expect that at times we may get similar significant orders in the future which could cause significant fluctuations in sales, gross margins, and operating results. These fluctuations contribute to the difficulty in predicting our future financial performance by us, financial analysts, and investors.
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Changes in stock option accounting rules have adversely impacted our reported operating results and may adversely affect our competitiveness in the employee marketplace. We have adopted FASB Statement No. 123R (“SFAS 123R”), Share-Based Payment, as our accounting method for stock options for accounting periods beginning January 1, 2006 and after. SFAS 123R requires that all share-based payments to all employees, including grants of employee stock options, are to be included in the financial statements based on their fair values. The adoption of SFAS 123R and resulting charges on our financial statements have significantly reduced our operating and net income, and we expect will continue to do so. These charges may result in our having operating and net losses rather than operating and net profits. As a result of adopting the changes specified in SFAS 123R, it could negatively impact our use of employee stock plans to reward employees, putting us at a competitive disadvantage in attracting and retaining key employees.
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Our indirect sales model makes us dependent on third party distributors and resellers, which could adversely impact our financial results and reputation. Most of our products are sold through both domestic and international distributors and resellers. These distributors and resellers carry and sell products from other suppliers in addition to our own. We expect to continue to engage additional distributors and resellers to sell our products. Use of distributors and resellers makes us dependent, to a large extent, on those third parties who will have the relationships with the end customers. We may not be successful in attracting qualified distributors and resellers. Use of these distributors and resellers could cause significant fluctuation in and adversely impact our future revenue and operating results due to price, extended payment term, and other concessions demanded by our distributors, our limited relationships with actual end-users of our products, the time and costs associated with maintaining our distributor and reseller relationships, the time and costs associated with engaging new distributors and resellers, the possibility that they may give other suppliers’ products priority over our own, the possibility of channel and price conflict, the possibility of customer confusion and customer dissatisfaction, and potential accounting, operational, and financial results problems if they build excess inventory.
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We have a limited number of distributors so any decrease in business from them could cause a decline in our revenue. The loss of business from any of our distributors or the delay of significant orders from our distributors could significantly reduce our revenue, even if it is only temporary. We do not have long-term contracts with our distributors. Our ability to accurately forecast our revenue hinges on the timing and size of future purchase orders taken by our distributors. Any reduction in revenue or in our ability to collect that revenue from customers could have a materially adverse affect on our operating results and financial condition.
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We may be unsuccessful in our efforts to obtain larger customers, and these efforts could adversely impact our current business. We are trying to expand our customer base by obtaining
larger customers. Our efforts may not be successful. For example, larger customers may not want to deploy products like many of ours that operate in unlicensed frequencies or they may seek products with feature sets that are different from what we offer. Our efforts could adversely impact our current business due to diversion of efforts and attention, our current customers not being pleased by our customer expansion efforts, and other reasons.
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Our business depends in part on continued demand for broadband connectivity and access. The future success of our business is dependent in part upon the continued and increasing demand for high-speed, broadband connectivity and access, particularly with regard to the Internet, and for high-speed telecommunications products. The markets for such services may not grow at all or as expected.
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We depend on our senior employees who are extensively involved in many aspects of our business, and our business would likely be harmed if we lose their services and cannot hire additional qualified personnel. Particularly because we are a small company, our future operating results depend in significant part upon the continued contributions of senior management and key sales and technical personnel, many of who would be difficult to replace if their services become unavailable to us due to death, illness, or other reasons. Future operating results also depend upon the ability to attract and retain qualified management, sales, and technical personnel. Competition for these personnel is intense, and we may not be successful in attracting or retaining them. Only a limited number of persons with the requisite skills to serve in these positions may exist, and it may be difficult for us to hire the skilled personnel we need. We have experienced difficulty in attracting, hiring, and retaining experienced sales personnel with the right blend of skills for our company, and we may experience difficulty with other types of personnel in the future.
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We have no key-man life insurance on any of our executive officers or other employees. Loss of the services of any of our key executive officers or other key employees could have a material adverse effect on our business, financial condition, and results of operations. The lack of key man insurance means that we would receive no insurance proceeds to buffer any such adverse effects.
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We do not currently have a succession plan in place. We currently do not have a succession plan in place if our chief executive officer or other senior personnel were to become unable to perform their responsibilities due to illness, injury, termination of service, or other reasons. Loss of the services of our chief executive officer or other senior personnel could have a material adverse effect on our business, financial condition, and results of operations. Lack of a succession plan could exacerbate our difficulties in overcoming the issues created by the loss of services of our chief executive officer or other senior personnel due to uncertainty and responsibility transition issues.
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Our limited internal manufacturing capacity may be insufficient to meet customers’ desires for our products, which could harm our sales and damage our reputation. Our internal manufacturing capacity, by design, is limited. At times, we have been unable to deliver certain internally-manufactured products as quickly and in the quantities that customers desire. These inabilities could damage relationships with customers and have a material adverse effect on our reputation, business, financial condition, and results of operations.
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Our limited internal manufacturing capacity makes us dependent on contract manufacturers, which could harm our sales and damage our reputation. Our internal manufacturing capacity, by design, is limited. We currently expect to rely on domestic and international contract manufacturers to provide manufacturing of our complete products, components, and subassemblies. Our failure to obtain satisfactory performance from any contract manufacturers could cause us to fail to meet customer requirements, lose sales, and expose us to product quality issues. For example, a recent decision by one of our contract manufacturers to transition manufacturing to China has had a negative impact on our ability to obtain quality product in the quantities and at the times desired. In turn, this could damage relationships with customers and have a material adverse effect on our reputation, business, financial condition, and results of operations.
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We may be unable to engage contract manufacturers to manufacture our products which could force us to increase our internal manufacturing capacity. The technical nature of our products, the wide variety of our products, and the current uncertainty and historical fluctuation in our business may make contract manufacturers unwilling or reluctant to manufacture products for us at all or on
acceptable terms. It may be difficult and time-consuming to engage a third-party manufacturer or manufacturers. If we are unable to engage a third-party manufacturer or manufacturers, we may have to increase our internal manufacturing capability. We may be unable to do so at all or without significant expense.
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Interruptions in our manufacturing operations could have an adverse effect on our revenue. Any interruption in our manufacturing operations could cause our product supply to be interrupted or lose market opportunities and have an adverse affect on our revenue, customer relationships, and operating results. Interruptions could result from introduction of new products or processes; timing, language, cultural, and other issues arising from the use of contract manufacturers located outside the U.S.; terminations of relationship with manufacturers; not producing products at adequate capacity; delays in shipments of our products due to changes in demand; or insufficient quality or quantity of products.
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Because many of our components or products are provided by limited or single-source suppliers, we may not be able to obtain sufficient quantities to meet our business needs. Many of the components, subassemblies, and services necessary for the manufacture of our systems are obtained from a sole supplier or a limited group of suppliers. We generally do not have any committed long-term supply agreements with these vendors. We have from time to time experienced an inability to obtain an adequate supply of required components and subassemblies. Our inability to obtain these components in the quantities and at the times we desire could halt production, reduce our ability to meet customer demands, and reduce our sales.
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Because many of our components or products are provided by limited or single-source suppliers, we may not be able to obtain sufficient quantities at prices to make our products profitably. Many of the components, subassemblies, and services necessary for the manufacture of our systems are obtained from a sole supplier or a limited group of suppliers. Our inability to obtain these items at the prices we desire could hurt our sales and lower our margins.
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Because many of our components or products are provided by limited or single-source suppliers, we may have to purchase extra inventory that ultimately may not be used. Many of the components, subassemblies, and services necessary for the manufacture of our systems are obtained from a sole supplier or a limited group of suppliers. A supplier may decide to end the manufacture of a product and provide us with an opportunity to make a last-time buy of the product. In that situation, we have to estimate our future needs for that product. If we underestimate, we would have an insufficient supply to manufacture our products. If we overestimate, we may end up purchasing inventory that is not used or becomes obsolete and that ultimately we have to write off. That loss could adversely affect our financial results.
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Our inability to receive sufficient quantities of limited or single source components or products could make us develop alternative sources, which could reduce our sales and may be time consuming and expensive if it can be done at all. In the event of a reduction or interruption in the supply of a key component, we may have to develop alternative sources for the component. We may not be able to locate an alternative supplier of certain products or components at all or at acceptable prices. Our inability to develop alternative sources for components could result in delays or reductions in product shipments, increase our costs, and reduce or eliminate our profit margins. Even if we are successful at developing alternative sources, a significant amount of time could be required to receive an adequate flow of components from the alternative source.
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Our inability to receive sufficient quantities of limited or single source components or products could make us reconfigure our products, which could reduce our sales and may be time consuming and expensive if it can be done at all. In the event of a reduction or interruption in the supply of a key component, we may have to reconfigure our products to work with different components. Reconfiguration of our products to adapt to new components could entail substantial time and expense. We may be unable to reconfigure our products to work with new components. Even if we are successful at reconfiguring our products, a significant amount of time could be required to receive an adequate flow of replacement components.
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Our reliance on limited or single-source suppliers makes us vulnerable to difficulties at those suppliers. The production of our products is vulnerable to production difficulties, quality variations, work stoppages, acts of God such as weather and fire, and other events beyond our control at our suppliers. All of these events could adversely affect the cost and timely delivery of our products.
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Failure to maintain adequate levels of inventory could result in a reduction or delay in sales and harm our results of operations. In a competitive industry such as the wireless telecommunications equipment industry, the ability to effect prompt turnaround and delivery on customer orders can make the difference in maintaining an ongoing relationship with our customers. This competitive market condition requires us to keep some inventory of certain products on hand to meet such market demands. Given the variability of customer requirements and purchasing power, it is difficult to predict the amount of inventory needed to satisfy demand. If we over- or under-estimate inventory requirements to fulfill customer needs, our results of operations could be adversely affected. If market conditions change swiftly, it may not be possible to terminate purchasing contracts in a timely fashion to prevent excessive inventory increases. In particular, increases in inventory could materially adversely affect operations if such inventory is ultimately not used or becomes obsolete.
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Difficulties in reducing our operating expenses could harm our results of operations. A material portion of our operating expenses is fixed. If we experience a material reduction or delay in sales, we may find it difficult to reduce our operating expenses on a timely basis. Difficulties of this nature would adversely affect our financial condition and harm our operating results.
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We typically permit flexible purchase order changes that may adversely affect our margins and operating results. We have typically permitted purchase orders to be modified or canceled with limited or no penalties. Any inability or failure to reduce actual costs or cancel supplier and contract manufacturing commitments in response to a customer modification or cancellation could adversely affect our gross margins and operating results.
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Our business and financial results could be adversely affected by warranty claims. Products as complex as ours frequently contain undetected errors or defects, especially when first introduced or when new versions are released. This is especially a concern for us given our anticipated continuing introduction of new products. The occurrence of such errors or defects could result in products being returned under warranty for repair or replacement with us having to bear the associated expense. Although we maintain what we believe to be appropriate overall warranty reserves based on historical repair occurrences, an unanticipated high repair occurrence related to a specific product or number of products could make the reserves inadequate at any specific time and adversely affect our financial results.
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Our business and financial condition could be adversely affected by product liability claims. Products as complex as ours frequently contain undetected errors or defects, especially when first introduced or when new versions are released. This is especially a concern for us given our anticipated continuing introduction of new products. The occurrence of such errors or defects could result in product liability claims being brought against us. Although we have not had any material product liability claims brought against us to date, such claims may be brought in the future and could adversely affect our financial results.
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Our international business activities expose us to a number of risks not present in our United States operations, which we have limited experience addressing. Our international business activities may carry additional costs, risks and difficulties, including complying with complex foreign laws and treaties applicable to doing business and selling our products in other countries; availability of suitable export financing; timing and availability of export licenses; tariffs and other trade barriers; difficulties in staffing and managing foreign operations; difficulties in complying with foreign customs and general ways of doing business; and political and economic instability which may be more pronounced in less-developed areas. We have limited experience in facing many of these issues and may not be able to address the issues in a manner to enable us to expand our international sales and operations.
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Because of international sales and operations, we may be exposed to currency risk that could adversely affect our financial condition and results of operations. A significant portion of our sales
are made to customers located outside the United States. Historically, our international sales have been denominated in United States dollars. For international sales that are denominated in United States dollars, a decrease in the relative value of foreign currencies could make our products less price-competitive and could have an adverse effect on our financial condition and results of operations. For any international sales denominated in foreign currencies, a decrease in the value of the foreign currencies relative to the United States dollars could result in decreased margins from those transactions.
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Given the extent of our international operations, the decline in the value of the dollar has increased our expenses. We have significant international operations and employees located in countries outside the United States. Often salaries of those employees and other expenses of our international operations are paid in local currency of the those countries. The decline in the value of the dollar relative to the value of many currencies of other countries has had the impact of increasing the net expense to us of our international operations. Given the relatively fixed nature of these expenses, it is difficult to reduce these expenses quickly. Continued decline in the value of the dollar will continue to increase the net expense of our international operations. These increased expenses can adversely affect our results of operations and overall financial condition.
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The laws and legal systems of foreign governments may limit our ability to enforce our rights against our customers. Our customer purchase and other agreements may be governed by foreign laws, which may differ significantly from United States laws. Also, the court systems and procedures in foreign countries may differ significantly from United States courts. Therefore, we may be limited in our ability to collect our accounts receivable, to enforce our other rights under such agreements, and to collect damages, if awarded.
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Lack of relationships in foreign countries may limit our ability to expand our international operations and sales. In many cases, regulatory authorities in foreign countries own or strictly regulate local telephone companies. Established relationships between government-owned or government-controlled telephone companies and their traditional indigenous suppliers of telecommunications equipment often limit access to those markets. The successful expansion of our international operations in some markets will depend in part on our ability to form and maintain strong relationships with established companies providing communication services and equipment or other local partners in those regions. The failure to establish regional or local relationships could limit our ability to successfully market or sell our products in international markets and expand our international operations.
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Governmental regulation affecting markets in which we compete or products we make or services we offer could adversely affect our business and results of operations. Radio communications and services are extensively regulated by the United States and foreign governments as well as by international treaties. To operate in a jurisdiction, we must obtain regulatory approval for our products and comply with differing and evolving standards and regulations. The delays inherent in this approval process may cause the cancellation, postponement, or rescheduling of the installation of communications systems by us and our customers. The failure to comply with regulations in a jurisdiction could result in the suspension or cessation of our ability to operate in that jurisdiction. New regulations or changes in the interpretation of existing regulations could require us to modify our products or services and incur substantial costs to bring our products or services into compliance.
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Our products typically require regulatory approval before they can be commercially deployed. Our products must typically receive regulatory approvals before they can be commercially deployed. As a result, customers may require that we obtain these approvals before buying or agreeing to buy our products. Obtaining these approvals can be a long, expensive process. Delays in obtaining the necessary approvals could hinder market acceptance of our products, delay sales of our products, and adversely affect our ability to market those products.
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New regulations could have an adverse impact on our ability to supply products and our financial results. New regulations could be enacted that adversely impact our business. New regulations such as these may disrupt our supply of components needed to supply our products at the times and in the quantities desired by our customers. They may also require that we revise the design of some of our products and have some of our products re-qualified with our customers or regulatory
agencies. The new regulations may increase the costs of supplying products. These results could adversely impact our product supply capabilities, relationships with customers, and financial results.
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Changes in governmental regulation could adversely affect our competitive position. Governmental laws and regulations applicable to our products and services evolve and change frequently. These changes could hurt our competitive position, particularly if the changes have more impact on us than our competitors.
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At time we rely on a limited number of customers for a material portion of our sales, which exposes us to risks relating to the loss of sales and credit risk. For the year ended December 31, 2008, only one unrelated customer accounted for more than 10% of our sales. In addition, we have a number of other substantial customers. We are currently attempting to increase our number of substantial customers which could increase our customer concentration risks. Our ability to maintain or increase our sales in the future will depend in part upon our ability to obtain additional orders from these customers. Our customer concentration also results in concentration of credit risk. An acquisition of one of our significant customers could cause any current orders to be delayed or canceled and no new orders being placed with us and could further concentrate our customer base. Adverse developments such as these with our significant customers could adversely impact our sales and financial results.
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The continuing uncertainty in the telecommunications industry has caused us to maintain tight credit limits, which may be adversely affecting our sales. Many of our potential customers have faced or are facing financial difficulties due to the industry-wide uncertainty and depressed conditions. As a result, we have maintained what we believe to be stringent policies concerning the extension of credit to potential customers. We believe that these tight credit policies may be limiting our sales. As a result, we may loosen our credit policies, which may increase our sales but may also increase the likelihood of having bad debts from customers who can’t or won’t pay.
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Given the relatively small size of some of our customers, they may not be able to pay for the products they purchase from us in the time period we expect or at all. We are subject to credit risk in the form of trade accounts receivable. We could face difficulties in receiving payment in accordance with our typical policies allowing payment within 30 days, although we have granted longer terms to some customers. Some of our customers are new and smaller service providers which do not have the financial resources of existing, larger service providers. Any delay, inability, or refusal to pay for purchases of our products may materially adversely affect our business. Difficulties of this nature have occurred in the past, and we believe they will likely occur in the future.
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Our failure or inability to protect our intellectual property could adversely affect our business and operations, particularly in our equipment business which has otherwise relatively low barriers to entry. Our ability to compete depends in part on our ability to protect our intellectual property. The steps we have taken to protect our technology may be inadequate to prevent misappropriation of our technology and processes. Existing trade secret, trademark, and copyright laws offer only limited protection. Our patents could be invalidated or circumvented. Inability or failure to protect our intellectual property could remove a barrier to a competitor entering our broadband wireless equipment business, which in general has lower barriers to entry than other businesses.
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Laws of foreign countries where we do business may provide less intellectual property protection for our products, which could adversely affect our ability to compete in our price-sensitive business. The laws of certain foreign countries in which our products are or may be developed, manufactured, or sold may provide less protection for the intellectual property contained in our products. We may not seek to obtain patents and other forms of intellectual property rights in certain foreign countries to the same extent we seek United States patents and other forms of intellectual property protection, which could reduce our international protection. This may make the possibility of piracy of our technology and products more likely. This piracy could result in cheaper copies of our products being available on the market, which could adversely affect our business and financial results.
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Our intellectual property rights do not prevent other companies from developing similar technology, which could be superior to ours. Other companies could develop products that use
similar and perhaps superior technology. This technology could be developed in a way to not violate or infringe our intellectual property rights. As a result, our intellectual property rights provide no assurance that competing and perhaps superior products won’t be developed, even if we are able to protect our intellectual property rights.
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We may engage in litigation to protect our intellectual property, which could be costly, long, and distracting even if ultimately successful. If we believe our intellectual property rights are being infringed, we may commence litigation or take other actions to enforce our patents, protect our trade secrets and know-how, or determine the scope and validity of the patents or intellectual property rights of others. There can be no assurance that we would be successful in any such litigation. Further, any lawsuits we commence would increase the likelihood of counterclaims being brought against us by the companies we sue. Any litigation could result in substantial cost and divert the attention of our management, which could harm our operating results and future operations.
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Much of our material intellectual property is not protected by patents, which may reduce the extent to which we can protect our intellectual property. We rely primarily on trade secret laws, confidentiality procedures, patents, copyrights, trademarks, and licensing arrangements to protect our intellectual property. While we do have a number of patents, the patents alone do not provide significant protection for much of our intellectual property used in our current equipment products. A significant portion of our proprietary technology is know-how, and employees with know-how may depart before transferring their know-how to other employees. The fact that much of our intellectual property is not covered by patents could reduce the extent to which we can protect our rights in that intellectual property.
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Our products and operations could infringe on the intellectual property rights of others, which could have an adverse impact on our business. We would have to address any such infringements by seeking licenses, altering our products, or no longer selling the products. Any licenses we may be required to seek may be expensive or otherwise onerous. Similarly, changing our products may be costly, time-consuming, and impractical and could detract from the value of our products. A party making a claim of infringement could secure a judgment against us that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our products. Any claim of infringement by a third party also could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract the attention of our management. Any of these events could seriously harm our business.
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Intellectual property litigation has adversely impacted our financial results. Since 2006, we have been sued twice for purportedly infringing a third party’s intellectual property. The costs of defending those lawsuits and the costs of performing the settlements of those lawsuits have adversely affected our financial results and will continue to adversely affect our results. Additionally, our willingness to settle these claims brought against us may increase the likelihood that other companies will commence similar claims against us.
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Compliance with governmental regulations, such as Section 404 of the Sarbanes-Oxley Act, has increased our costs and impacted our financial results and could continue to do so. Increasing amounts of time and resources are being spent on complying with ever-changing governmental regulations and public disclosure requirements. Specifically, Section 404 of the Sarbanes-Oxley Act currently requires that management and independent public accountants review and evaluate annually internal control systems of companies subject to that section and attest to their effectiveness. We are not currently subject to the auditor review portions of Section 404. However, in anticipation of becoming subject to that section, we have begun our compliance efforts and are expending related time and costs. The costs and time required to become Section 404 compliant could be substantial, even assuming we are completely successful. In addition, even before becoming subject to Section 404, we are being billed significantly increased independent auditor fees, we believe largely due to the Sarbanes-Oxley Act and other regulations. Compliance with the Sarbanes-Oxley Act and other regulations could cause us to increase our legal, accounting, other personnel, and other costs as more time and personnel would be needed to help maintain compliance. These costs of compliance could adversely impact our financial results.
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We are a defendant in pending stockholder litigation that could materially and adversely affect our business. We are a party to four purported securities class action lawsuits. These lawsuits relate to the underwriters’ alleged unlawful activities in connection with our initial public offering in February 2000. An agreement-in-principle has been reached to resolve this litigation. There can be no assurance whether the parties will agree on the definitive terms of the settlement and whether that settlement ultimately will be approved in the judicial process. Accordingly, we cannot predict the outcome. Defending lawsuits of this nature can be a lengthy and expensive process, and we may not prevail. Even if we prevail or the action is settled, the costs associated with these lawsuits could be substantial. In addition, these lawsuits could have other material adverse impacts on us, such as management distraction, adverse publicity, and adverse reaction from the financial markets, from our customers, or from actual or potential strategic partners. The difficulties and uncertainties relating to these lawsuits very likely may be increased and complicated because of the large number of pending similar cases and other parties involved. The outcome of these lawsuits could materially compromise our ability to continue to operate our business.
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Proceeds under our directors’ and officers’ insurance policies may be unavailable or insufficient to cover our exposure arising from the pending stockholder litigation. We have a total of $15 million in directors and officers insurance coverage applicable to this pending stockholder litigation. We currently believe that this insurance coverage would be sufficient to cover our exposure arising from that litigation and the proposed agreement-in-principle to settle the litigation. However, the insurance proceeds may be unavailable if the companies issuing those policies experience financial difficulties or are otherwise unable or unwilling to pay under those policies. Also, there can be no assurance that proceeds under those policies would be sufficient to cover our exposure arising from this litigation.
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Our stock price has been volatile and may continue to be volatile. The market price of our common stock has been volatile and is likely to remain volatile. Some of the reasons for the volatility are within our control, but many are beyond our control and unrelated to our operating performance. We believe the following factors, among others, have contributed to our stock price volatility:
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Our financial performance and results
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Announcements by us concerning our relationships with our existing or new customers
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Announcements by us concerning our completed and contemplated acquisitions and other strategic plans and activities
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Announcements by our customers
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The relatively low number of shares of our stock that trade on an average day
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The introduction of new products by us
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The financial performance of our competitors
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The introduction of new products by our competitors
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Other announcements by our competitors
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General conditions of the financial markets
We expect these factors and others to continue to contribute to the volatility of our stock price.
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One stockholder owns a significant beneficial interest in our common stock and has other relationships which could allow him to influence matters requiring stockholder approval and our business in general. As of March 13, 2009, we believe that Lloyd I. Miller, III, directly and indirectly, controlled approximately 15% of our outstanding common stock. In addition, on that date, Mr. Miller held warrants to acquire another approximately 5% of our outstanding common stock (albeit at exercise prices higher than the price at which our common stock closed on the Nasdaq Capital Market on that date). Mr. Miller also lent money to the company in July 2008 and has rights as a creditor pursuant to the related lending transaction. Finally, Mr. Miller recommended that two of our current four independent members of our board of directors be elected to the board. As a result of his stock ownership, Mr. Miller may be able to exert influence over actions which require stockholder approval, for example, certain types of changes in control or amendments to our certificate of
incorporation. Also, because of his other relationships with the company, Mr. Miller may be able to exert influence over other corporate decisions and our business in general.
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Future actual or potential stock sales by Lloyd I. Miller, III could cause our stock price to fall. Mr. Miller controlled approximately 15% of our outstanding common stock on March 13, 2009. Because Mr. Miller owns directly or indirectly more than 10% of our outstanding common stock, any sales or distributions by Mr. Miller are required to be reported publicly shortly after they occur. Actual or potential sales of this stock by Mr. Miller could cause our stock price to fall or prevent it from increasing for numerous reasons. For example, a substantial amount of our common stock becoming available (or being perceived to become available) for sale in the public market could cause the market price of our common stock to fall or prevent it from increasing, particularly given the relatively low trading volumes of our stock. Also, Mr. Miller recommended that two people be placed on our current board of directors so sales by Mr. Miller could be viewed as being based on knowledge gained from those directors.
•
Future actual or potential sales of the stock we issue upon exercise of stock options could cause our stock price to fall. As of February 27, 2009, we had options outstanding to buy approximately 2,145,990 shares of our common stock and may grant options or other stock grants relating to an additional approximately 2,596,014 shares of our common stock. A substantial amount of this common stock becoming available (or being perceived to become available) for sale in the public market could cause the market price of our common stock to fall or prevent it from increasing, particularly given the relatively low trading volumes of our stock. Further, actual or potential sales of this stock could be viewed negatively by other investors because some of these stock options are held by our directors and senior executives.
•
If we acquire other companies or product lines by issuing stock, the result may be dilutive to existing stockholders. We may acquire other companies, businesses, and product lines in the future and may issue shares of our stock in connection with any such acquisitions. Any such issuances could significantly dilute the holdings of our current stockholders, particularly given the lower current trading price of our common stock.
•
If we raise additional capital by issuing stock, the result may be dilutive to existing stockholders. Our board of directors may decide to issue additional equity securities in many situations without the need for any stockholder vote. Given the recent prices for our common stock, significant dilution to our stockholders could result if we raise additional funds by issuing equity securities. Further, these issuances may also involve issuing stock at a price per share below the current trading prices.
•
The terms of any equity securities we may issue in the future may be better than the terms of our common stock. Our board of directors is authorized to create and issue equity securities that have rights, privileges, and preferences senior to those of our common stock. In many situations, our board could take these actions without the need for any stockholder vote. In particular, we have 4.5 million shares of “blank check” preferred stock which the board could issue, in many cases without any stockholder vote. The board could establish voting rights, dividend rights, liquidation rights, conversion rights, and other rights and preferences of this preferred stock senior and better than the rights associated with our common stock.
Possible Implications of Cautionary Statements
The items described above, either individually or in some combination, could have a material adverse impact on our reputation, business, need for additional capital, ability to obtain additional debt or equity financing, current and contemplated products gaining market acceptance, development of new products and new areas of business, cash flow, results of operations, financial condition, stock price, viability as an ongoing company, results, outcomes, levels of activity, performance, developments, or achievements. Given these uncertainties, investors are cautioned not to place undue reliance on any forward-looking statements.
Item 1B.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.
Item 2. Properties.
We lease multiple facilities for our operations in multiple different geographic locations.
Our headquarters is an approximately 45,000 square foot facility located in Milpitas, California. This facility accommodates some or all portions of the following departments: senior management, administration, finance, marketing, manufacturing, sales, and research and development. The term of the lease for this facility expires on October 1, 2013.
Our India subsidiary leases an approximately 13,000 square foot facility located in Hyderabad, India. This facility accommodates engineering, research and development, quality assurance, and related support functions for our India operations. The term of the lease for this facility expires in July 2013, subject to each party’s right to terminate the lease early on three months notice.
We lease five small facilities in Europe and Asia to accommodate our international sales and operations staff.
Our Young Design, Inc. subsidiary leases an approximately 15,000 square foot facility located in Falls Church, Virginia. The term of the lease for this facility expires on December 31, 2010. This facility is currently under-utilized and partially subleased.
Prior to the sale of the Harmonix Division of our Terabeam Corporation subsidiary in August 2008, we had leased an approximately 17,000 square foot facility located in Haverhill, Massachusetts for the HXI operations. As part of the sale of the HXI operations, the buyer of the HXI operations assumed the obligations under that lease from and after the date of the sale. This assumption did not release Proxim from its obligations under that lease, provided, however, that Proxim has no liability or obligations relating to or arising from (a) any amendment or modification of that lease or (b) any renewal or extension of the term of that lease beyond the initial scheduled term of that lease (October 31, 2015).
There are a small number of facilities leased by Terabeam Corporation prior to our acquiring that company that are not presently being used and that we have no present plans to use.
Item 3.
Item 3. Legal Proceedings.
IPO Litigation
During the period from June 12 to September 13, 2001, four purported securities class action lawsuits were filed against Telaxis Communications Corporation, a predecessor company to Proxim Wireless Corporation, in the U.S. District Court for the Southern District of New York: Katz v. Telaxis Communications Corporation et al., Kucera v. Telaxis Communications Corporation et al., Paquette v. Telaxis Communications Corporation et al., and Inglis v. Telaxis Communications Corporation et al. The lawsuits also named one or more of the underwriters in the Telaxis initial public offering and certain of its officers and directors. On April 19, 2002, the plaintiffs filed a single consolidated amended complaint which supersedes the individual complaints originally filed. The amended complaint alleges, among other things, violations of the registration and antifraud provisions of the federal securities laws due to alleged statements in and omissions from the Telaxis initial public offering registration statement concerning the underwriters’ alleged activities in connection with the underwriting of Telaxis’ shares to the public. The amended complaint seeks, among other things, unspecified damages and costs associated with the litigation. These lawsuits have been assigned along with, we understand, approximately 1,000 other lawsuits making substantially similar allegations against approximately 300 other publicly-traded companies and their public offering underwriters to a single federal judge in the U.S. District Court for the Southern District of New York for consolidated pre-trial purposes. We believe the claims against us are without merit and have defended the litigation vigorously. The litigation process is inherently uncertain, however, and there can be no assurance that the outcome of these claims will be favorable for us.
On July 15, 2002, together with the other issuer defendants, Telaxis filed a collective motion to dismiss the consolidated amended complaint against the issuers on various legal grounds common to all or most of the issuer defendants. The underwriters also filed separate motions to dismiss the claims against them. In October 2002, the
court approved a stipulation dismissing without prejudice all claims against the Telaxis directors and officers who had been defendants in the litigation. On February 19, 2003, the court issued its ruling on the separate motions to dismiss filed by the issuer defendants and the underwriter defendants. The court granted in part and denied in part the issuer defendants’ motions. The court dismissed, with prejudice, all claims brought against Telaxis under the anti-fraud provisions of the securities laws. The court denied the motion to dismiss the claims brought under the registration provisions of the securities laws (which do not require that intent to defraud be pleaded) as to Telaxis and as to substantially all of the other issuer defendants. The court denied the underwriter defendants’ motion to dismiss in all respects.
In June 2003, along with virtually all of the other non-bankrupt issuer defendants, we elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If the proposed settlement had been approved by the court, it would have resulted in the dismissal, with prejudice, of all claims in the litigation against us and against the other issuer defendants who elected to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. This proposed issuer settlement was conditioned on, among other things, a ruling by the court that the claims against us and against the other issuers who had agreed to the settlement would be certified for class action treatment for purposes of the proposed settlement, such that all investors included in the proposed classes in these cases would be bound by the terms of the settlement unless an investor opted to be excluded from the settlement.
On December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a decision in re Initial Public Offering Securities Litigation that six purported class action lawsuits containing allegations substantially similar to those asserted against us (the so-called “focus cases”) may not be certified as class actions due, in part, to the Appeals Court’s determination that individual issues of reliance and knowledge would predominate over issues common to the proposed classes. On January 8, 2007, the plaintiffs filed a petition seeking rehearing en banc of the Second Circuit Court of Appeals’ decision. On April 6, 2007 the Court of Appeals denied the plaintiffs’ petition for rehearing of the Court’s December 5, 2006 ruling but noted that the plaintiffs remained free to ask the District Court to certify classes different from the ones originally proposed which might meet the standards for class certification that the Court of Appeals articulated in its December 5, 2006 decision. In light of the Court of Appeals’ December 5, 2006 decision regarding certification of the plaintiffs’ claims, the District Court entered an order on June 25, 2007 terminating the proposed settlement between the plaintiffs and the issuers, including us.
On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. On November 13, 2007, the issuer defendants and the underwriter separately moved to dismiss the claims against them in the amended complaints in the six focus cases. On March 26, 2008, the District Court issued an order in which it denied in substantial part the motions to dismiss the amended complaints in the six focus cases.
Additionally, on September 27, 2007, the plaintiffs moved to certify different classes in the six focus cases. The issuer defendants and the underwriter defendants filed separate oppositions to those motions on December 21, 2007. On October 10, 2008, the plaintiffs voluntarily withdrew their motions for class certification without prejudice.
On February 25, 2009, the parties advised the District Court that they have reached an agreement-in-principle to settle the litigation in its entirety. That agreement remains subject to further negotiation, filing with the District Court of definitive settlement documents, and final approval by the District Court. The litigation process is inherently uncertain and unpredictable, however, and there can be no guarantee as to the ultimate outcome of this pending lawsuit. While there can be no assurance as to the ultimate outcome of these proceedings, we currently believe that the final result of these actions will have no material effect on our consolidated financial condition, results of operations, or cash flows.
General
We are subject to potential liability under contractual and other matters and various claims and legal actions which are pending or may be asserted against us or our subsidiaries. These matters may arise in the ordinary course and conduct of our business.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of stockholders during the three months ended December 31, 2008.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is currently traded on the Nasdaq Capital Market under the symbol “PRXM.” The table below shows, for the calendar year quarters indicated, the high and low sale prices of our common stock as reported by the Nasdaq Capital Market. In each case, this information is based on published financial sources.
As of March 13, 2009, the number of stockholders of record of our common stock was approximately 216. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions. We have never declared or paid any cash dividends on any class of our common equity. We currently intend to retain any future earnings to fund the development and growth of our business and currently do not anticipate paying cash dividends in the foreseeable future. In addition, our agreements with our bank and subordinated lenders generally prohibit us paying dividends to our stockholders without prior approval of the bank and those lenders.
Equity Compensation Plan Information
The following table and narrative provide information about our equity compensation plans as of December 31, 2008. More information about our stock options is contained in our financial statements, including the notes thereto, included in this Annual Report on Form 10-K.
On July 17, 2001, our board of directors adopted our 2001 Nonqualified Stock Plan and reserved 375,000 shares of our common stock for issuance pursuant to that plan. The 2001 plan provided for the grant of non-qualified stock options, performance share awards, and stock awards (restricted or unrestricted) to directors, officers, and employees. The compensation committee of the board of directors generally administers the 2001 plan and recommended to the board of directors or decided itself the terms of stock rights granted, including the exercise price, the number of shares that may be purchased under individual option awards, and the vesting period of options. The board of directors may amend, modify, or terminate the 2001 stock plan at any time as long as the amendment, modification, or termination does not impair the rights of plan participants under outstanding options or other stock rights. Effective September 9, 2004, the 2001 plan was amended to reduce the number of shares of our common stock issuable thereunder to 175,764, which was the number of shares subject to outstanding options as of that date. No further grants or awards will be made pursuant to the 2001 plan.
Item 6.
Item 6. Selected Financial Data.
Not applicable
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Proxim’s broadband equipment is used by enterprises, service providers, carriers, government entities, educational institutions, healthcare organizations, municipalities and other organizations that need high-performance, secure and scalable broadband wireless solutions. To date, Proxim has shipped over 1.8 million units to more than 235,000 customers in over 65 countries worldwide. Proxim is ISO-9001 certified.
The Company changed its corporate name to “Proxim Wireless Corporation” from “Terabeam, Inc.” effective September 10, 2007. Effective that same date, the Company’s stock ticker symbol was changed to “PRXM” from “TRBM.”
Prior to the third quarter of 2007, Proxim Wireless and its subsidiaries also operated in the services business. This services business (“Services”) was acquired with the acquisition of Ricochet Networks, Inc. during the second quarter of 2004 and was conducted through that Ricochet Networks subsidiary. The Company announced the sale on July 31, 2007 of the Ricochet wireless network and operations for greater Denver metropolitan area to Civitas Wireless Solutions, LLC (“Civitas”). In addition, we announced that Ricochet Networks, Inc. ceased operations of the San Diego network and is no longer in the business of providing wireless internet services. As a result, the Services business was classified as discontinued operations effective in the third quarter of 2007, and the financial results of the Services business has been excluded from the historical financial results of the Company’s continuing business beginning in the third quarter of 2007.
Effective August 29, 2008 the Company sold substantially all assets of the Harmonix Division of its Terabeam Corporation subsidiary to Renaissance Electronics Corporation for gross proceeds of approximately $5.3 million . As part of the transaction, Proxim and Renaissance entered into an agreement to ensure the uninterrupted supply and support of the Gigalink® radios developed and manufactured by Harmonix for our customers.
Both Richochet and Harmonix division are all stated as discontinued operation in all the periods presented.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net revenue and expenses during the reporting period, and related disclosure of contingent assets and liabilities for the period reported and as of the date of the financial reports. We believe that the estimates and judgments upon which we rely are reasonable based upon information available to us at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements
Revenue Recognition
Product revenue is generally recognized upon shipment in accordance with SEC Staff Accounting Bulletin 104 (“SAB 104”), when persuasive evidence of an arrangement exists, the price is fixed or determinable, and collect ability is reasonably assured. The company offers most stocking distributors a stock rotation right pursuant to which they may return products that have been recently purchased provided they place an equal value order for new products from us and the value of the returned products is a small fraction of the value of products purchased from us in the preceding quarter. In general, we also offer most stocking distributors price protection on products in their
inventory or recently purchased from us in cases where we reduce prices on these products. In both cases , the distributors would receive a credit which can be used for purchase of additional products from us. In a small number of cases, we have agreed to accept return of discontinued or obsolete products. For other customers, we provide quarterly or annual rebates based on achievement of performance targets, loyalty discounts, and/or sales discounts. We apply SFAS No. 48,”Revenue Recognition When Right if Return Exists,” in determining when to recognize revenue. Under SFAS No. 48 revenue can be recognized if all of the following conditions are met:
1.
The price is fixed and determinable at the date of sale;
2.
The buyer’s payment obligation is not contingent on resale;
3.
The buyer’s payment obligation would not be changed in the event of theft or physical damage of the product;
4.
The buyer acquiring the product for resale has economic substance apart from that provided by the seller;
5.
The seller does not have significant obligations for future resale of the product; and
6.
The amount of future returns can be reasonably estimated.
Based on our application of the SFAS No. 48 principles to our different customers, we currently recognize some revenue on a “sell in” basis and some on a deferred “sell through” basis. Generally factors 1 through 5 are satisfied upon our delivery of the products to our customer. The estimation of future returns depends on contractual terms and our historical experience with the customer.
Proxim revenue consists of direct shipments to customers or other equipment manufacturers (OEM), and distributors who resell our products to third party customers.
In the case of direct customers or OEM manufacturers we recognize revenue at point of shipment from either Proxim’s facility or from our contract manufacturer’s facilities when the product is shipped from the respective docks since title and acceptance are passed to the end customer. We meet the conditions of SAB 104, and SFAS 48 for revenue recognition at point of shipment for direct customer and OEM sales.
In the case of Proxim products which are sold to distributors we generally recognize revenue to most distributors on a “sell in” basis at point of shipment since we have met all of the conditions specified in SAB104, and SFAS 48 at point of shipment to the distributors.
In the case of our three largest stocking distributors, although they have comparable distribution contracts to the smaller distributors, we have historically deferred revenue for shipments which are either in transit to them, or are included in their period ending inventory reports. This revenue deferral practice for larger distributors has been applied historically by Proxim. These larger distributors have historically returned more product and requested larger stock rotations and price discounts versus the smaller distributors which was the primarily reason that we have historically recognized their revenue using the “sell through” methodology. Under the “sell through” methodology we recognize revenue when our products are sold by these three largest stocking distributors.
Accounts Receivable Valuation
We maintain allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We assess the customer’s ability to pay based on a number of factors, including past transaction history with the customer as well as their creditworthiness. Management specifically analyzes accounts receivable and historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of any of our customers were to deteriorate in the future, resulting in an impairment of their ability to make payments, or they express unwillingness to pay for whatever reason, additional allowances may be required. We reserve 100% of outstanding receivable balances (a) from insolvent customers and (b) from customers which are delinquent by six months or more. We reserve 50% of outstanding receivable balances that are between 3 months to 6 months delinquent and subject to adjustments, as considered appropriate for specific situations.
Inventory Valuation
Inventories are stated at the lower of standard cost, which approximates actual cost under the first-in, first-out method, or market value. We perform a detailed assessment of inventory at each year-end balance sheet date, which includes, among other factors, a review of component demand requirements, product lifecycle and product development plans, and quality issues. Manufacturing inventory includes raw materials, work-in-process, and finished goods. Inventory valuation provisions are based on an excess obsolete report which captures all obsolete parts and products and all other inventory, which have quantities in excess of one year’s projected demand, or in the case of service inventories demand of up to five years. As a result of this assessment, we write down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated liquidation value based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In addition, on an annual basis we conduct a lower of cost or market evaluation which may necessitate additional inventory provisions.
Capitalized Software
We capitalize certain software development costs in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. We begin capitalizing software development costs upon the establishment of technological feasibility, which is established upon the completion of a working model or a detailed program design. Costs incurred prior to technological feasibility are charged to expense as incurred. Capitalization ceases when the product is considered available for general release to customers. . Capitalized software costs are amortized on a product-by-product basis. The annual amortization is the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product including the period being reported on. Generally, estimated economic lives of the software products do not exceed three years.
Warranty Provision
Proxim’s standard warranty term is one year on the majority of our products and up to two years on a select group of products. At times we provide longer warranty terms. Proxim provides an estimated cost of product warranties at the time revenue is recognized. Factors that affect the Company’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and costs per claim for repair or replacement. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service labor costs incurred in correcting a product failure. Should actual product failure rates, material usage, service labor or delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.
Valuation of Stock-based Awards
As of December 31, 2008, we have one active stock-based employee compensation plan and four inactive (legacy) plans, which are described more fully in Note 13.
As of January 1, 2006 we account for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123R. Under SFAS No. 123R, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period of the individual equity instrument. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term of stock options, the expected volatility of our stock, and expected dividends. The computation of the expected volatility assumption used in the Black-Scholes calculation for option grants is based on historical volatility as options on our stock are not traded. The Company uses the “simplified” method to determine the expected term for the “plain vanilla” options. We are also required to estimate the expected forfeiture of stock options in recognizing stock-based compensation expense. Further, we have elected to use the straight-line method of amortization for stock-based compensation related to stock options granted after January 1, 2006
Result of Operations
Comparison of Fiscal Year 2008 and 2007
The following table provides statement of operations data as a percentage of sales for the periods presented.
Sales
Sales for the year ended December 31, 2008 were $49.0 million as compared to $61.9 million for the same period in 2007, a decrease of $ 12.9 million or 21%. Our revenue declined primarily due to worldwide economic slowdown on broadband wireless sales.
For the years ending December 31, 2008 and 2007, international sales were approximately $30.8 million and $36.5 million, respectively, comprising 63% and 59% of our total sales. International sales remained relatively even on a year to year basis.
Cost of goods sold and gross profit
Cost of goods sold and gross profit for the years ended December 31, 2008 were approximately $28.6 million and $20.4 million, respectively. For the same period in 2007, costs of goods sold and gross profit were $35.1 million and $26.8 million, respectively. The cost of goods sold for the years ended December 31, 2008 and 2007 included restructuring provisions for excess obsolete inventory totaling $0 million and $2.5 million respectively. This is consistent with the overall decrease in revenue level for 2008. The cost of goods sold for the years ended December 31, 2007 included restructuring provisions for excess and obsolete inventory totaling $2.5 million
Sales and Marketing Expenses
Selling and marketing expenses consist primarily of employee salaries and associated costs for selling, marketing, and customer support. Selling and marketing expenses decreased to $17.0 million for the year ended December 31, 2008, from $20.0 million for the year ended December 31, 2007,representing a 15% decrease from
the prior year. The decrease was the result of lower headcount and reduced travel related to management’s objective of rationalizing selling costs by territory. Due to overall revenue decrease of 21% from 2007 to 2008, sales and marketing expenses as a percentage of sales increased to 35% in 2008 as compared to 33% in the previous year.
Restructuring charges related to the impairment of goodwill and purchased intangibles
During the year ended December 31, 2007, we recorded a charge for the impairment of amortizable intangible assets totaling $0.2 million and impairment to goodwill for $7.9 million. There is no restructuring charges or impairment of intangibles in 2008.
General and Administrative Expenses
General and administrative expenses consist primarily of employee salaries, benefits and associated costs for information systems, finance, legal, and administration of a public company. General and administrative expenses decreased to $11.7 million for the year ended December 31, 2008, from $12.1 million for the year ended December 31, 2007, a $0.3 million or 3% decrease. The decrease is primarily the result of overall cost reduction plan implemented in 2008 and offset by moving expense to the Company’s new headquarters and intellectual property lawsuit related legal expenses. General and administrative expenses as a percentage of sales during 2008 increased to 24% as compared to 20% in 2007 based on lower sales in 2008.
Research and Development Expenses
Research and development expenses consist primarily of personnel salaries and fringe benefits and related costs associated with our product development efforts. These include costs for development of products and components, test equipment and related facilities. Research and development expenses decreased to $3.8 million for the year ended December 31, 2008, from $5.9 million for the year ended December 31, 2007, a $2.1 million favorable reduction in our operating expenses. Research and development expenses decreased to 8% as a percentage of sales in 2008 compared to 10% in 2007. The decrease in research and development expenses was primarily due to reduction in headcount costs as significant R&D activities were transferred from California to Hyderabad, India starting in Q3 2007.
Other income (expenses)
Other income and expenses totaled approximately $0.1 million expense for the year ended December 31, 2008, as compared to $2.8 million income for the year ended December 31, 2007. The $2.9 million decrease in other income (expense) for the year ended December 31, 2008 was primarily due to recorded $0.7 million gain from the sale of patent in 2008 compared to $2.4 million gain recorded from the sale of patents in 2007. The higher expense in 2008 was also due to interest expense associated with a private debt placement as well as our bank line of credit (which was not in place during 2007).
Comparison of Fiscal Year 2007 and 2006
The following table provides statement of operations data as a percentage of sales for the periods presented.
Sales
Sales for the year ended December 31, 2007 were $61.9 million as compared to $68.1 million for the same period in 2006, a decrease of $6.2 million or 9%. Our revenue declined primarily due to disappointing sales results in the Americas and Asia Pacific regions.
For the years ending December 31, 2007 and 2006, international sales approximated $36.5 million and $42.2 million, respectively, comprising 59% and 62% of our total sales. International sales remained relatively even on a year to year basis.
Cost of goods sold and gross profit
Cost of goods sold and gross profit for the years ended December 31, 2007 were approximately $35.1 million and $26.8 million, respectively. For the same period in 2006, costs of goods sold and gross profit were $39.6 million and $28.5 million, respectively. This is consistent with the overall decrease in revenue from 2006 to 2007. The cost of goods sold for the years ended December 31, 2007 and 2006 included restructuring provisions for excess and obsolete inventory totaling $2.5 million and $1.5 million, respectively. Gross profit margin, as a percentage of sales, for the year ended December 31, 2007 was 43% with the restructuring provision and 47% without restructuring charges compared to a 42% net gross margin and 43% gross margin before restructuring costs for the same period in 2006. The increase in net gross margin percentage was primarily due to the product mix in 2007 as compared to 2006 and the higher margins recognized on our newer broadband products.
Sales and Marketing Expenses
Selling and marketing expenses consist primarily of employee salaries and associated costs for selling, marketing, and customer support. Selling and marketing expenses increased to $20.1 million for the year ended December 31, 2007, from $17.7 million for the year ended December 31, 2006 representing a 14% increase from the prior year. Sales and Marketing expenses as a percentage of sales increased to 32% in 2007 as compared to 26% in 2006. This increase was due primarily to increased headcount and higher expenses related to travel, commission and new account development.
Restructuring charges related to realignment of business groups
During the year ended December 31, 2007 we recorded approximately $91,000 of restructuring charges to operating expense. These charges consisted of one-time termination benefits related to a reduction in force, implemented in an effort to streamline operations in response to the first quarter financial results. During the year ended December 31, 2006 ,we recorded restructuring charges of $116,000 that consisted of operating lease commitments related to facilities which were closed during the year and severance payments to employees laid off subsequent to the Old Proxim acquisition.
Restructuring charges related to the impairment of goodwill and purchased intangibles
During the year ended December 31, 2007, we recorded a charge for the impairment of amortizable intangible assets totaling $0.2 million and impairment to goodwill for $7.9 million.
During the year ended December 31, 2006, the Company recorded an $8.9 million charge for the impairment of intangible assets for the period.
General and Administrative Expenses
General and administrative expenses consist primarily of employee salaries, benefits and associated costs for information systems, finance, legal, and administration of a public company. General and administrative expenses increased to $12.1 million for the year ended December 31, 2007, from $11.5 million for the year ended December 31, 2006, a $0.6 million or 5% increase. The increase is primarily the result of higher costs for salaries, benefits and associated costs for information systems. Higher general and administrative expenses can also be attributed to increased spending for finance, legal, amortization of intangibles, administration, insurance and audit fees. General and administrative expenses as a percentage of sales during 2007 increased to 20% as compared to 17% in 2006.
Research and Development Expenses
Research and development expenses consist primarily of personnel salaries and fringe benefits and related costs associated with our product development efforts. These include costs for development of products and components, test equipment and related facilities. Research and development expenses decreased to $5.9 million for the year ended December 31, 2007, from $13.1 million for the year ended December 31, 2006, a $7.2 million favorable reduction in our operating expenses. Research and development expenses decreased to 10% as a percentage of sales in 2007 compared to 19% in 2006. The decrease in research and development expenses was primarily due to reduction in headcount costs as significant R&D activities were transferred from San Jose, California to Hyderabad, India combined with $0.8 million reduction in expenses related to software capitalization.
Other income (expenses)
Other income and expenses totaled approximately $2.8 million for the year ended December 31, 2007, as compared to $0.5 million for the year ended December 31, 2006. The $2.3 million increase in other income recognized for the year ended December 31, 2007 resulted primarily from a $2.4 million gain recorded from the sale of patents combined with a gain on the sale of marketable securities of $99,000. This was partially offset by a decrease in interest income net of interest expense by $96,000.
Adoption of FAS 123R
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004) Share-Based Payment (“SFAS 123R”), which requires the measurement and recognition of compensation cost at fair value for all share-based payments, including stock options. Stock-based compensation for the years ended December 31, 2007,and 2006 totaled approximately $2.0 million and $1.3 million respectively.
For the years ended December 31, 2007 and December 31, 2006, the operating losses were approximately $2.0 million and $1.3 million higher due to the adoption of SFAS 123R. Likewise, the basic and diluted loss per share for fiscal year 2007 and fiscal year 2006 were $0.09 and $0.06 higher due to the adoption of SFAS 123R using the fair value method for determining compensation cost. Net cash used in operating activities and net cash provided by financing activities were not changed by the adoption of SFAS 123R.
Liquidity and Capital Resources
General
At December 31, 2008, we had cash and cash equivalents of $5.1 million. This excludes restricted cash of $0.1 million. For the year ended December 31, 2008, cash used by operations was approximately $8.4 million. We currently are meeting our working capital needs through cash on hand (including cash we have borrowed) as well as internally generated cash from operations and other activities. Net cash provided by investing activities was $3.7 million including $4.5 million gross coming from sale of the Harmonix Division.
For the year ended December 31, 2008, cash provided by financing activities was approximately $3.4 million which was principally due to a $1.5 million credit line with a major bank secured by substantially all our assets (other than intellectual property). Subsequent to December 31, 2008 ,we secured a new $5.0 million
credit line through a different major bank secured by substantially all of our assets (other the intellectual property) and used some of the proceeds to pay down our existing $1.5 million credit line. During the second quarter of 2008, we borrowed $3.0 million from related party Lloyd I. Miller, III and Milfam II, L.P., an entity affiliated with Mr. Miller. See Part II. Item 8 Financial Statements and Supplementary Data Footnote 9 Long Term Debt- Related Party Transactions for details.
In the second quarter of 2008, we realized cash proceeds from the sale of patents totaling $850,000. There was an offsetting cost associated with this patent sale of $98,000. This is shown in the Consolidated Statement of Cash flows as cash from investing activities.
We believe that cash from operations, along with our cash on hand, should be sufficient to meet our operating cash requirements over the next twelve month period as currently contemplated. However, we recognize that we have limited cash on hand and limited margin for error in implementing our desired business plan. Our long-term financing requirements depend upon our growth strategy, which relates primarily to our desire to increase revenue both domestically as well as internationally. We incurred operating losses totaling $12.1 million for the year ended December 31, 2008, a decrease of $7.5 million over the same period of 2007. In 2009, we must continue our efforts to increase revenues and adjust operating expenses to levels that will produce positive cash flows and return us to operating profitability.
Since we have historically experienced fluctuations in our level of quarterly revenue, management is closely following revenue trends and operating expenses, and reviewing its long term business strategy to evaluate whether there will be a requirement for external financing to fund our operations. One significant constraint to our equipment business growth is the rate of new product introduction. New products or product lines may be designed and developed internally or acquired from existing suppliers to reduce the time to market and inherent risks of new product development. Our current resources may have to be supplemented through additional bank debt financing, public debt or equity offerings, product line or asset sales, or other means due to a number of factors, including our ability to replace revenues lost through the discontinuation of our services business and our desired rate of future growth. See Item 1A - Risk Factors above for more detailed discussion of risk factors.
Contractual Obligations
We have contractual obligations and commercial commitments totaling $3.4 million, as well as have inventory at subcontractors reserved as an other accrued liability totaling $615,000 , which are coming due over the next 12 months.
Recently Issued Accounting Standards
See Note 2 of Notes to Consolidated Financial Statements for recent accounting pronouncements that could have an effect on us.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, Disclosures about Market Risk.
Item 8.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
Report of Independent Registered Public Accounting Firm
TO THE BOARD OF DIRECTORS
PROXIM WIRELESS CORPORATION
Milpitas, California
We have audited the accompanying consolidated balance sheet of PROXIM WIRELESS CORPORATION (the “Company”) as of December 31, 2008 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year ended December 31, 2008. We also have audited the related financial statement Schedule II for the year ended December 31, 2008. These consolidated financial statements and financial statement Schedule II are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement Schedule II based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PROXIM WIRELESS CORPORATION as of December 31, 2008 and the consolidated results of its operations and cash flows for the year ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement Schedule II for the year ended December 31, 2008, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Mark Bailey & Company, Ltd.
Reno, Nevada
March 30, 2009
Report of Independent Registered Public Accounting Firm
TO THE BOARD OF DIRECTORS
PROXIM WIRELESS CORPORATION
Milpitas, California
We have audited the accompanying consolidated balance sheet of Proxim Wireless Corporation (the “Company”) as of December 31, 2007, and the related consolidated statement of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2007 and 2006. We also have audited the related financial statement Schedule II for the year ended December 31, 2007. These consolidated financial statements and financial statement Schedule II are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statements Schedule II based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PROXIM WIRELESS CORPORATION as of December 31, 2007 and the results of its operations and cash flows for the years ended December 31, 2007 and 2006 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement Schedule II for the year ended December 31,2007 when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Fitzgerald, Co., CPAs, P.C.
McLean, Virginia
March 27, 2008
(except for Note 16, as to which the date is March 28, 2009)
PROXIM WIRELESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
See accompanying notes to consolidated financial statements.
PROXIM WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
See accompanying notes to consolidated financial statements.
PROXIM WIRELESS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share data)
See accompanying notes to consolidated financial statements.
PROXIM WIRELESS CORPRATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes to consolidated financial statements.
PROXIM WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
We provide high-speed wireless communications equipment and services in the United States and internationally. Our systems enable service providers, enterprises, and governmental organizations to deliver high-speed data connectivity enabling a broad range of applications. We also provide wireless solutions for the mobile enterprise, security and surveillance, last mile access, voice and data backhaul, and municipal networks. We believe our fixed wireless systems address the growing need of our customers and end-users to rapidly and cost effectively deploy high-speed broadband communication networks. The Company’s service business segment that was conducted through the Ricochet Networks, Inc. subsidiary was discontinued in the third quarter of 2007. The Company now operates only one business segment, broadband wireless equipment.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Proxim Wireless Corporation and its wholly owned subsidiaries. Material inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Product revenue is generally recognized upon shipment, when persuasive evidence of an arrangement exists, the price is fixed or determinable, and collect ability is reasonably assured. The Company offers most stocking distributors a stock rotation right pursuant to which they may return products that have been recently purchased provided they place an equal value order for new products from us and the value of the returned products is a small fraction of the value of products purchased from us in the preceding quarter. In general, we also offer most stocking distributors price protection on products in their inventory or recently purchased from us in cases where we reduce prices on these products. In both cases , the distributors would receive a credit which can be used for purchase of additional products from us. In a small number of cases, we have agreed to accept return of discontinued or obsolete products. For other customers, we provide quarterly or annual rebates based on achievement of performance targets, loyalty discounts, and/or sales discounts. We apply SFAS No. 48, “Revenue Recognition When Right if Return Exists,” in determining when to recognize revenue. Under SFAS No. 48 revenue can be recognized if all of the following conditions are met:
1.
The price is fixed and determinable at the date of sale;
2.
The buyer’s payment obligation is not contingent on resale;
3.
The buyer’s payment obligation would not be changed in the event of theft or physical damage of the product;
4.
The buyer acquiring the product for resale has economic substance apart from that provided by the seller;
5.
The seller does not have significant obligations for future resale of the product; and
6.
The amount of future returns can be reasonably estimated.
We currently recognize some revenue on a “sell in” basis and some on a deferred “sell through” basis. Generally factors 1 through 5 are satisfied upon our delivery of the products to our customer. The estimation of future returns depends on contractual terms and our historical experience with the customer.
Proxim revenue consists of direct shipments to customers or other equipment manufacturers (OEM), and distributors who resell our products to third party customers.
In the case of direct customers or OEM manufacturers we recognize revenue at point of shipment from either Proxim’s facility or from our contract manufacturer’s facilities when the product is shipped from the respective docks since title and acceptance are passed to the end customer. This revenue recognition process is our “sell in” methodology which applies to all customers with exception of our largest stocking distributors who recognize revenue, as described below, through the “sell through” methodology.
As mentioned previously we offer most stocking distributors a stock rotation right pursuant to which they may rotate products for comparable value in their inventory that have been recently purchased from us and the value of the returned product is a relatively small percentage of the product purchased from us in the preceding quarter. In addition, we also offer most stocking distributors price protection on products in their inventory and recently purchased from us in cases where we have reduced prices on those products. These stock rotations and price discounts must be claimed and exercised within a one to two quarter time frame to be valid.
In the case of our three largest stocking distributors, although they have comparable distribution contracts to the smaller distributors, we have historically deferred revenue for shipments which are either in transit to them, or are included in their period ending inventory reports. This revenue deferral practice for larger distributors has been applied historically by Proxim. These larger distributors have historically returned more product and requested larger stock rotations and price discounts versus the smaller distributors which was the primary reason that we have historically recognized their revenue using the “sell through” methodology. Under the “sell through” methodology we recognize revenue when our products are sold out of these distributor’s ending inventories.
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks, money market accounts and investments with an original maturity of three months or less to be cash or cash equivalents. Investments consist of investments in investment-grade marketable equity securities.
Accounts Receivable Valuation
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We assess the customer’s ability to pay based on a number of factors, including past transaction history with the customer as well as their creditworthiness. Management specifically analyzes accounts receivable and historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of any of our customers were to deteriorate in the future, resulting in an impairment of their ability to make payments, or they express unwillingness to pay for whatever reason, additional allowances may be required. We reserve 100% of outstanding receivable balances (a) from insolvent customers and (b) from customers which are delinquent by six months or more. We reserve 50% of outstanding receivable balances that are between 3 months to 6 months delinquent subject to adjustments as considered appropriate for specific situations. We also reserve for pending material returns as well as sales discounts which are owed to our customer’s accounts.
Inventory Valuation
Inventories are stated at the lower of standard cost, which approximates actual cost under the first-in, first-out method, or market value. We perform a detailed assessment of inventory at each year-end balance sheet date, which includes, among other factors, a review of component demand requirements, product lifecycle and product development plans. Manufacturing inventory includes raw materials, work-in-process, and finished goods. Inventory valuation provisions are based on an excess obsolete report which captures all obsolete parts and products and all other inventory, which have quantities in excess of one year’s projected demand, or in the case of service inventories demand of up to five years. This covers both in warranty (two years), as well as out of warranty (up to five years) customer materials demand. Individual line item exceptions are identified for either inclusion or exclusion from the inventory valuation provision. As a result of this assessment, we write down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In addition, on an annual basis we conduct a lower of cost or market evaluation which may necessitate additional inventory provisions.
Warranty Provision
Proxim’s standard warranty term is one year on the majority of our products and up to two years on a select group of products. At times we provide longer warranty terms. Proxim provides an estimated cost of product warranties at the time revenue is recognized. Factors that affect the Company’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and costs per claim for repair or replacement. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service labor costs incurred in correcting a product failure. Should actual product failure rates, material usage, service labor or delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, which range from two to seven years for personal property .
Intangible Assets
Intangible assets are accounted for in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” and SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” Intangible assets with finite lives are amortized over the estimated useful lives using the straight-line method. The carrying values of purchased intangible assets are reviewed for possible impairment when events or changing circumstances indicate that the carrying amount of such assets may not be recoverable. We test our intangible assets annually during the second half of the year unless there are indications during an interim period that such assets may have become impaired. Indicators such as unexpected adverse economic factors, unanticipated technological change or competitive activities may signal that an intangible asset has become impaired. An impairment loss on purchased intangibles with finite lives is recognized if the carrying amount of the asset is not recoverable and its carrying amount exceeds its fair value. For either type of asset, after a loss is recognized, the adjusted carrying amount of the intangible asset becomes its new accounting basis.
Capitalized Software
We capitalize certain software development costs in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed . We begin capitalizing software development costs upon the establishment of technological feasibility, which is established upon the completion of a working model or a detailed program design. Costs incurred prior to technological feasibility are charged to expense as incurred. Capitalization ceases when the product is considered available for general release to customers. . Capitalized software costs are amortized on a product-by-product basis. The annual amortization is the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated
economic life of the product including the period being reported on. Generally, estimated economic lives of the software products do not exceed three years.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. The principal differences are net operating loss carry forwards, property and equipment, allowance for doubtful accounts, inventory reserves, and accruals.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109”, which 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. The company has assessed its tax liabilities and has booked appropriate tax provisions and has made FAS 109 and FIN 48 disclosures where warranted since adoption of these standards in Q1, 2007.
Stock based compensation
Beginning in 2006, we account for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123R. Under SFAS No. 123R, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period of the individual equity instrument. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term of stock options, the expected volatility of our stock, and expected dividends. The computation of the expected volatility assumption used in the Black-Scholes calculation for option grants is based on historical volatility as options on our stock are not traded. The Company uses the “simplified” method to determine the expected term for “plain vanilla” options. In addition, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially affected.
Per Share Amounts
Basic net income per common share and diluted net income per common share are presented in conformity with SFAS No. 128, Earnings per Share (“SFAS No. 128”), for all periods presented. In addition, the company has options and warrants outstanding which are anti-dilutive in a net loss situation. Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of shares of common stock outstanding, including dilutive common shares subject to repurchase and potential shares assuming the (i) exercise of dilutive stock options and warrants using the treasury stock method and (ii) issuance of committed but un-issued stock awards.
Under the treasury stock method, outstanding options are assumed to be exercised if their exercise price is below the average fair market value of our common stock for a given period, and the proceeds from the exercise of such options are assumed to be used by us to repurchase shares of our common stock on the open market.
Advertising
Advertising costs are expensed when incurred, and the amounts were not material for all periods presented.
Shipping and Handling Costs
Shipping and handling are charged to customers and included in both revenue and costs of goods sold on the Consolidated Statements of Operations.
Fair Values of Financial Instruments
Financial instruments, including cash equivalents, marketable securities, accounts receivable and accounts payable are carried in the consolidated financial statements at amounts that approximated fair value at December 31, 2008 and 2007. Fair values are based on market prices and assumptions concerning the amount and timing of estimated future cash flows and assumed discount rate, reflecting varying degrees of perceived risk. In April 2007, the FASB issued statement of FASB 159. The Fair Value Option for Financial Assets and Financial Liabilities. The statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company did not elect the fair value option for any of our financial assets or liabilities.
Recent Accounting Pronouncements
In September 2008, the FASB issued EITF issue 0705, Determining whether an instrument (or an Embedded Feature) is index to an Entity’s own Stock. EITF Issue 07-5 supersedes EITF issue 01-6, ‘ The meaning of Indexed to a Company’s Own Stock’ and establishes a two step process for evaluating whether equity-linked financial instruments and embedded features are index to a company’s own for the purposes of determining whether the scope exception described in paragraph 11(a) SFAS 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”, can be applied. EITF issue 07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008 (January 1, 2009 for calendar year companies), and interim periods within those fiscal years. Early application is not permitted by an entity that adopted an alternative accounting policy. The Company is currently assessing the impact of EITF 0705 on its consolidated financial position and results of operations.
In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) . The FSP will require the issuer of convertible debt instruments with cash settlement features to separately account for the liability and equity components of the instrument. The debt will be recognized at the present value of its cash flows discounted using the issuer’s nonconvertible debt borrowing rate at the time of issuance. The equity component will be recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability. The FSP will also require an accretion as interest expense of the resultant debt discount over the expected life of the debt. The transition guidance requires retrospective application to all periods presented, and does not grandfather existing instruments. The guidance will be effective for fiscal years beginning after December 15, 2008, and interim periods within those years. We do not expect the adoption of FASB No. 14-1 to have a material impact on our consolidated financial statements.
In April 2008, Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. 142-3, “Determination of the Useful Life of Intangible Assets” (FSP 142-3). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. We do not expect the adoption of FSP No. 142-3 to have a material impact on our consolidated financial statements.
In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 will be effective for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008, with early adoption permitted. We do not expect the adoption of FASB No. 161 to have a material impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin (“ARB”) No. 51. The standard changes the accounting for noncontrolling (minority) interests in consolidated financial statements including the requirements to classify noncontrolling interests as a component of consolidated stockholders’ equity, to identify earnings attributable to noncontrolling interests reported as part of consolidated earnings, and to measure the gain or loss on the deconsolidated subsidiary using the fair value of a noncontrolling equity investment. Additionally, SFAS No. 160 revises the accounting for both increases and decreases in a parent’s controlling ownership interest. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. We do not expect the adoption of SFAS No. 160 to have a material impact on our consolidated financial statements.
In December 2007, the FASB issued Statement No. 141 (revised), “Business Combinations” (SFAS 141(R)). The standard changes the accounting for business combinations, including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for preacquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs, and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141(R) will be effective prospectively for 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, with early adoption prohibited. We do not expect the adoption of FASB No. 141 to have a material impact on our consolidated financial statements.
3. Inventory
Inventory consisted of the following (in thousands):
4. Intangible Assets
The following table presents details of the Company’s intangible assets with indefinite and definite useful lives:
Schedule of Non-amortizable Assets:
Schedule of Amortizable Assets:
Amortization expense for years ended December 31, 2008, 2007 and 2006, totaled approximately $ 2.0 million, $2.1 million and $3.4 million, respectively. There is no estimated residual value. Expected amortization expense for 2009 to 2014 is listed as follows:
Estimated Amortization (in thousands)
5. Property and equipment
Property and equipment consisted of the following balances for the dates indicated (in thousands):
Depreciation expense totaled approximately $1.1 million, $1.5 million, and $1.7 million, respectively, for the periods ended December 31, 2008, 2007, 2006.
6. Allowance for Product Warranty Costs
The following table presents a summary of the changes to product warranty costs during the year ended December 31, 2008 and 2007 (in thousands):
7. Patent License Agreement - License Agreement Payable
In February 2006, Proxim Wireless Corporation and its subsidiaries entered into a settlement agreement with Symbol Technologies, Inc. and its subsidiaries (“Symbol”) resolving all outstanding litigation between the companies.
The Company recorded an intangible asset related to the license at December 31, 2005, based on the present value of the scheduled payments, and will amortize the intangible asset over the useful life of the patents through 2014. The Company also recorded a license payable equal to the present value of the scheduled payments. As of December 31, 2008 the remaining portion of license agreement payable is $1.0 million which is all current.
8. Security Agreement -Line of Credit
On March, 28, 2008, the Company entered into a loan and security agreement (the “Loan Agreement”) with Comerica Bank. The Loan Agreement provides for a $7.5 million revolving line of credit and includes sublimit for letters of credit, credit card services, and foreign exchange contracts. On September 26, 2008, Proxim Wireless Corporation entered into a second amendment to loan and security agreement (the “Amendment”) with Comerica Bank (the “Bank”). The Original Loan Agreement as amended by the First Amendment is referred to as the “Loan Agreement.” The Amendment provides for a revolving line of credit not to exceed $1.5 million due on March 27, 2009. The amendment further reinstituted Proxim’s foreign exchange and credit card sublimit in a total amount equal to $300,000.
As of December 31, 2008, Proxim had an outstanding loan balance of $1.5 Million. The weighted average interest rate for this line of credit as of December 31,2008 was 5.8% and the Company is in compliance with the loan covenant.
In March 2009, the outstanding balance was paid in full and the relationship with Comerica Bank was terminated (see FN 18).
9. Long Term Debt- Related Party
On July 25, 2008, Proxim Wireless Corporation entered into a lending transaction with a related party, as defined in Form 8-K filed on July 29, 2008, Lloyd I. Miller, III and Milfam II L.P., an entity affiliated with Mr. Miller (together, the “Lenders”). The Lenders are related parties to the Company as described in more detail in the Form 8-K filed by the Company with the SEC on July 29, 2008. Pursuant to a securities purchase agreement dated as of July 25, 2008, the Lenders loaned Proxim the aggregate sum of $3.0 million. This loan is reflected by promissory notes dated July 25, 2008 from Proxim to each of the Lenders in the initial principal amount of $1.5 million. The notes are unsecured. In connection with this transaction, Proxim paid each Lender a cash fee of $22,500, being 1.5% of the amount lent by each Lender.
All outstanding amounts are scheduled to be repaid on July 25, 2011. Proxim may prepay any or all outstanding principal amounts at any time by paying to the Lenders 102% of the principal amount being repaid. All outstanding amounts must be prepaid upon a change of control of Proxim (as defined in the securities purchase agreement) by paying 102% of the entire principal amount then outstanding. Amounts may also be required to be repaid earlier upon the occurrence of specified defaults by Proxim.
The notes accrue interest at 16% per annum. Interest payments are due and payable monthly in arrears on the last day of each calendar month beginning on July 31, 2008. In lieu of paying accrued interest in cash on each interest payment date, Proxim, at its sole discretion, may elect to pay interest in kind at the rate of 19% per annum, compounding monthly, in which case the accrued interest will be added to the outstanding principal amount of the notes and interest will accrue on that aggregate principal amount thereafter.
In connection with the transactions contemplated by the securities purchase agreement, the Lenders agreed to cancel warrants that had been issued to the Lenders in July 2007. In the aggregate, warrants to purchase 925,000 shares of Proxim’s common stock at an exercise price of $2.45 per share were cancelled effective July 25, 2008.
In connection with the transactions contemplated by the securities purchase agreement, Proxim issued the two Lenders warrants, dated July 25, 2008, to purchase an aggregate of 1,250,000 shares of Proxim’s common stock (subject to adjustment) at an exercise price of $0.53 per share (subject to adjustment). The warrants may be exercised at any time until July 25, 2018. The warrants may be exercised by paying the exercise price to Proxim or by cashless exercise pursuant to a formula.
The incremental fair value of the warrants cancelled and regranted in connection with debt issuance was calculated on July 25, 2008 using the Black-Scholes option pricing model and amounted to $0.45M. The fair value of the warrants is initially recorded as debt discount and Additional Paid in Capital and amortized to interest expense over the term of the debt. As of Dec 31, 2008, the unamortized discount was $0.38M. During the year ended December 31, 2008, we paid $170,000 interest on the notes.
10. Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 2008, 2007, and 2006, respectively, is (in thousands):
A reconciliation of income taxes at the statutory federal income tax rate to net income taxes included in the accompanying statements of operations is as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows (in thousands):
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The Valuation Allowance increased by $8.2 million, $3.6 million, and $1.9 million for the periods ended December 31, 2008, 2007 and 2006, respectively.
As of December 31, 2008, the Company had a federal net operating loss carry forward of approximately $40 million. The net operating losses begin to expire in 2019 and will continue to do so through 2028, if not utilized.
As of December 31, 2008 the Company had state net operating loss carry forwards of approximately $30 million. The net operating losses will begin expiring in 2010 and will continue to do so through 2028, if not utilized.
As of December 31, 2008, the Company had federal research activity credit carry forwards of approximately $300,000. The credit expires in 2005.
Utilization of the Company’s net operating losses and research credits may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss before utilization.
U.S. income taxes were not provided for on a cumulative total of approximately $1.7 million of undistributed earnings for certain non-US subsidiaries. We have not provided U.S. income and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2008 because we intend to permanently reinvest such earnings outside the U.S. If these earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign income taxes previously paid on these earnings. The net additional deferred tax liability related to these earnings would be approximately $200,000, if recognized.
The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, the Company did not recognize any adjustment to the liability for uncertain tax positions and therefore did not record any adjustment to the beginning balance of retained earnings on the consolidated balance sheet. As of the date of adoption and at December 31, 2008, the Company had no unrecognized tax benefits and we do not expect any material change during the next year. Interest and penalties are zero, and our policy is to account for interest and penalties in tax expense in the income statement.
We file U.S, state and foreign income tax returns with varying statutes of limitations. The tax years from 1999 forward remain open to examination due to the carryover of unused net operating losses or tax credits for federal and state tax purposes. The foreign tax returns remain open to examination for the years 2005 forward.
11. Commitments and Contingencies
Leases
The Company has various operating leases for equipment, office and production space. These leases generally provide for renewal or extension at market prices.
Rent expense for the years ended December 31, 2008, 2007 and 2006 was approximately $ 1.9 million, $2.1 million, and $2.8 million, respectively.
The following is a summary of lease obligation as of December 31, 2008:
(in thousands)
Purchase Commitments:
On August 29, 2008, the Company entered into an Asset Purchase Agreement with Renaissance Electronics Corp. (“Renaissance”) and its wholly owned subsidiary HXI, LLC (together, the “Buyer”) relating to that Harmonix Division. Pursuant to the APA, the Company sold to Buyer generally all of its assets relating to its Harmonix Division in Haverhill, Massachusetts. Among the assets sold were US Patent Number 6,163,231 and US Trademark 2,655,290 - the GigaLink® trademark. The purchase price for these assets was approximately $5.3 million net of contractually agreed adjustments. Of this amount, $750,000 was retained by the Buyer as a deposit towards product purchases under the OEM Agreement entered into in connection with the sale, and the remaining approximately $4.6 million has been paid in cash. Per OEM agreement, the Company agreed to purchase products from the Buyer having an aggregate purchase price of at least $1.5 million during the first twelve month after August 29, 2008. As of Dec 31, 2008, $0.8M was remaining to purchase for next eight months in 2009. The Company also has commitment at December 31, 2008 totaling $0.6M at several contract manufacturers for inventory for which payment is outstanding.
12. 401(k) - Retirement Plan
The Company has a 401(k) retirement plan covering all employees who meet certain minimum eligibility requirements. Each year employees can elect to defer the lesser of 15% of earned compensation or the maximum amount permitted by the Internal Revenue Code. The Company makes contributions to the plan at its discretion. The Company made no contribution to the plan for the periods ended December 31, 2008, 2007 or 2006.
13. Stockholders’ Equity
Stock Warrants
The incremental fair value of the warrants cancelled and regranted in connection with $3M debt issuance was calculated on July 25, 2008 using the Black-Scholes option pricing model and amounted to $0.44M. The fair value of the warrants is initially recorded as debt discount and Additional Paid in Capital and amortized to interest expense over the term of the debt. The assumption used in estimated fair value of the warrants is as follows:
A summary of warrants activity is as follows:
Expiration dates of warrants are as follows:
Stock Options Issued
The Company has stock option plans that provide for the granting of options to employees, directors, and consultants. The Company has one active stock plan pursuant to which stock options and stock awards may be granted and four historical stock plans pursuant to which stock options are currently outstanding but under which no more stock options or other stock awards will be issued. The active stock plan permits the granting of options at various prices and requires that the options be exercisable at the prices and at the times as determined by the Board of Directors, not to exceed ten years from date of issuance. As of December 31, 2008, (a) 1,983,555 options were available for issuance under the active stock plan; (b) 2,640,410 options were outstanding under the active stock plan; and (c) 164,039 options were outstanding under the historical stock plans.
A summary of the option activity is as follows:
A summary of the stock options outstanding and exercisable as of December 31, 2008 is as follows:
We used the following assumptions to estimate the fair value of options granted and shares purchased under its employee stock plans for year ended December 31, 2008, 2007 and 2006:
The Company elected to use the “simplified” method to determine the expected term for “plain vanilla” options. Under this approach, the expected term is estimated to be the average of the vesting period combined with the contractual term of the options. We will continue to use the simplified method until our own employee exercise behavior data is sufficient to provide a reasonable basis.
We rely on the historical prices of our common stock in the calculation of expected volatility. Volatilities are calculated based on the historical prices of our common stock over a period equal to the expected term of our option grants.
We utilized our historical data as an estimate of the expected forfeiture rate. The average annual forfeiture rate was 19%, 10%, and 10% for year ended December 31, 2008, 2007, and 2006, respectively.
The weighted average grant date fair value of stock options granted to employees was $0.39, $1.73 and $2.49 per share during the years ended December 31, 2008, 2007 and 2006, respectively.
As of December 31, 2008, $0.8 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over the respective vesting terms of each award through 2011. The weighted average term of the unrecognized stock-based compensation expense is 1.7 years.
We received approximately $ 0 , $2,900 and $80,000 in cash from option exercises under all stock-based compensation plans for the years ended December 31, 2008, 2007 and 2006, respectively.
14. Concentrations
The Company maintained approximately $5.1 million of cash, cash equivalent, and restricted cash balances in several banks, primarily in the U.S. The balances are insured by the Federal Deposit Insurance Corporation up to $250,000 per bank. At December 31, 2008 and 2007, the uninsured portion totaled approximately $4.7 million and $5.9 million, respectively.
As of year ending December 31, 2008, we had two customers each accounting for more than 10% of total accounts receivable for the period.
During 2008 there was one unrelated customers who accounted for 18% of total sales. During the year ended December 31, 2007 three unrelated customers accounted for 19%, 13% and 10% of sale.. During the year ended December 31, 2006 three unrelated customers accounted for 16%, 10% and 10% of sales.
15. Related Party Transactions
Our Young Design, Inc. subsidiary leases a facility in Falls Church, Virginia. The property lease for the approximately 15,000 square foot facility commenced on January 1, 2001 and terminates on December 31, 2010. The lease provides for base monthly rent payments of $20,625 with a 3% fixed annual increase after the base year. There were no amounts due at year end 2008 and 2007, and payments under the lease totaled approximately $279,000 and $249,000 for the years ended December 31, 2008 and 2007, respectively.
This lease was entered into at a time when Young Design, Inc. was a private company owned by two stockholders - Concorde Equity, LLC and Michael Young. Concorde Equity was controlled by Robert Fitzgerald, who then was Chief Executive Officer of Young Design and who then became our Chief Executive Officer from April 2003 through January 2008. In August 2000, the shareholders of Young Design formed another company owned by them called Merry Fields, LLC. Merry Fields then purchased a building and leased the building to Young Design. Merry Fields needed to obtain bank financing to purchase the building and, as a condition to making the loan, the bank required that Young Design guarantee Merry Fields’ loan obligations to the bank.
Proxim then acquired Young Design in April 2003. Because Proxim at the time was publicly traded, equity ownership of the company was more widely held than just the two stockholders of Young Design (who were the two equity holders of Merry Fields). Therefore, Proxim wanted the guarantee by Young Design of Merry Fields’ obligations released. In the third quarter of 2005, Young Design (then a subsidiary of Proxim) was successful in convincing the bank to release the Young Design guarantee of Merry Fields’ obligations. Further Merry Fields paid off the bank loan in full in approximately June 2006.
16. Discontinued Operations
On August 29, 2008, the Company entered into an Asset Purchase Agreement (“APA”) with Renaissance Electronics Corp. (“Renaissance”) and its wholly owned subsidiary HXI, LLC (together, the “Buyer”) for the sale of the Company’s Harmonix Division.
Pursuant to the APA, the Company sold all of its assets relating to the Harmonix Division in Haverhill, Massachusetts. Among the assets sold were US Patent Number 6,163,231 and US Trademark 2,655,290 - the GigaLink® trademark. The purchase price for these assets was approximately $5.3 million net of contractually agreed adjustments. Of this amount, $750,000 was retained by the Buyer as a deposit towards product purchases under the OEM Agreement entered into in connection with the sale, and the remaining approximately $4.6 million has been paid in cash. The Company recognized a net gain of $2.4 million from this transaction, which was reported as part of discontinued operation gain/loss.
Proxim remains responsible for obligations relating to the Harmonix Division prior to August 29, 2008, while the Buyer generally is responsible for obligations relating to the Harmonix Division after August 29, 2008. All the employees of the Harmonix Division have been terminated by Proxim and substantially all of those employees have been hired by the Buyer.
The Company’s Services business was discontinued in the third quarter of 2007. The Company announced the sale on July 31, 2007 of the Ricochet wireless network and operations for greater Denver metropolitan area to Civitas Wireless Solutions, LLC (“Civitas”). RNI received (a) the assumption by Civitas generally of obligations relating to the operation of the Ricochet® wireless network in the Denver, Colorado metropolitan area, (b) a cash payment of $200,000, (c) 15% equity ownership in Civitas, and (d) potential future payments contingent on certain future potential business of Civitas. Ricochet Networks generally retained the obligations relating to the operation of the Ricochet network in the San Diego, California metropolitan area, the operation of which Ricochet Networks
discontinued on July 31, 2007. In addition, substantially all of Ricochet Networks’ employees were terminated effective July 31, 2007 and subsequently re-hired by Civitas
The following table illustrates the assets and liabilities that have been reclassified to held for sale:
The following table illustrates the activity included in discontinued operations by period:
The following table illustrates the reclassification in order for our prior period financial statements to conform to the current year presentation. The reclassification did not have an overall effect on our previously reproted results of operations or cash flows.
17. Segment Information
Our continuing business is conducted in one business segment, broadband wireless equipment. We operate our business worldwide with the following table illustrating the activity by geographic region:
18. Subsequent Events
On March 6, 2009, Proxim Wireless Corporation entered into a loan and security agreement (the “Loan Agreement”) with Bridge Bank,N.A.(the“Bank”), which was described in a Form 8-K filed with the Securities and Exchange Commission on March 12, 2009. The Loan Agreement provides for up to $5 million revolving line of credit and includes sublimit for letters of credit, cash management, and foreign exchange contracts. The aggregate outstanding amount may not exceed Proxim’s borrowing base as established under the Loan Agreement. Proxim’s borrowing base generally is an amount equal to 65% of Proxim’s eligible domestic accounts receivable plus the lesser of $1 million or 50% of Proxim’s eligible foreign accounts receivable. In conjunction with the terms set forth in this loan and security agreement with Bridge Bank on March 12, 2009, we paid off and closed our $1.5 million credit line with Comerica Bank.
Schedule II
Valuation and Qualifying Accounts
For The Years Ended December 31, 2008 and 2007
(in thousands)
Item 9.
Item 9. Changes in and Disagreements with Current and Predecessor Accountants on Accounting and Financial Disclosure.
On June 20, 2008, Proxim Wireless Corporation was advised by Fitzgerald, Snyder & Co., P.C. that it was resigning as Proxim’s independent accountants. Proxim understands that Fitzgerald, Snyder & Co., P.C. is resigning because Proxim’s engagement partner at that firm is leaving that firm. The reports of Fitzgerald, Snyder & Co., P.C. on the financial statements of Proxim Wireless Corporation and subsidiaries for the years ended December 31, 2006 and 2007 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. From January 1, 2006 through June 20, 2008, there were no disagreements with Fitzgerald, Snyder & Co., P.C. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Fitzgerald, Snyder & Co., P.C., would have caused them to make reference thereto in connection with their report on the financial statements for the applicable periods. Further, during that same time period, there were no “reportable events” as described in Item 304 of Regulation S-K.
Also on June 20, 2008, the Audit Committee of Proxim’s Board of Directors engaged the independent certified public accounting firm of Mark Bailey & Company, Ltd. as its independent auditors to (i) review Proxim’s interim financial statements for the quarters ending June 30, 2008 and September 30, 2008 and (ii) audit Proxim’s financial statements for the fiscal year ending December 31, 2008. From January 1, 2006 through June 20, 2008, neither Proxim nor anyone on its behalf consulted with Mark Bailey & Company, Ltd. regarding (i) either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on Proxim’s financial statements or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to that item) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer, or CEO, and chief financial officer, or CFO, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our CEO and CFO, our management has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2008.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is the process designed by and under the supervision of our CEO and CFO to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external reporting in accordance with accounting principles generally accepted in the United States of America. Management has evaluated the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Under the supervision and with the participation of our CEO and CFO, our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2008 and concluded that it is effective.
Changes in Internal Control over Financial Reporting
Under the supervision and with the participation of our CEO and CFO, our management has evaluated changes in our internal control over financial reporting that occurred during our last fiscal quarter. Based on that evaluation, our CEO and CFO did not identify any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Important Considerations
The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.
Item 9B.
Item 9B. Other Information.
Not applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Information responsive to this Item in our definitive proxy statement for our 2009 annual meeting of stockholders (the “2009 Proxy Statement”) is hereby incorporated by reference.
Code of Ethics
We have adopted a statement of business conduct and code of ethics that applies to all of our directors, officers, and employees, including our principal executive officer, principal financial officer, and principal accounting officer and controller. This statement has been posted on our website (http://ir.proxim.com/documentdisplay.cfm?DocumentID=3994). [updated website location]
Item 11.
Item 11. Executive Compensation.
Information responsive to this Item in our 2009 Proxy Statement is hereby incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information responsive to this Item in our 2009 Proxy Statement is hereby incorporated by reference.
Information relating to our equity compensation plans as of December 31, 2008 appears above under Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in this Annual Report on Form 10-K.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information responsive to this Item in our 2009 Proxy Statement is hereby incorporated by reference.
Item 14.
Item 14. Principal Accountant Fees and Services.
Information responsive to this Item in our 2009 Proxy Statement is hereby incorporated by reference.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this Form 10-K:
1. Financial Statements
See Index to Financial Statements under Item 8 - Financial Statements and Supplementary Data.
2. Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts
All other financial statement schedules have been omitted because they are not required, not applicable, or the information to be included in the financial statement schedules is included in the financial statements or the notes thereto.
3. Exhibits
See Exhibit Index.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Proxim Wireless Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Each person whose signature appears below hereby constitutes and appoints each of Pankaj S. Manglik and Thomas S. Twerdahl his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his own name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing as he could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Proxim Wireless Corporation and in the capacities and on the dates indicated.
EXHIBIT INDEX