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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________to____________.
Commission File Number 000-30928
PATH 1 NETWORK TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3989885
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6215 FERRIS SQUARE, SUITE 140, SAN DIEGO, CALIFORNIA 92121
(858) 450-4220
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
3636 Nobel Drive, Suite 400, San Diego, California 92122
(Former name, former address and former fiscal year,
if changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
The number of shares outstanding of the issuer's Common Stock, US$.001 par value
per share, as of August 7, 2002 was 8,440,275.
PATH 1 NETWORK TECHNOLOGIES INC.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2002
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION.................................................3
ITEM 1. FINANCIAL STATEMENTS................................................3
CONDENSED CONSOLIDATED BALANCE SHEETS....................................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS..........................4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS..........................5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.....................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK .............................................................30
PART II - OTHER INFORMATION...................................................30
ITEM 1. LEGAL PROCEEDINGS..................................................30
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................30
ITEM 5. OTHER INFORMATION..................................................31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................31
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PATH 1 NETWORK TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in US$, thousands except share data)
June 30, December 31,
2002 2001
-----------------------------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 1,367 $ 1,181
Restricted cash 46 -
Marketable securities, available for sale - 552
Accounts receivable 549 322
Inventory 72 78
Other current assets 29 207
-----------------------------------
Total current assets 2,063 2,340
Property and equipment, net 229 365
Assets of discontinued operations - 702
Debt issuance costs 800 -
Other assets 183 11
-----------------------------------
Total assets $ 3,275 $ 3,418
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 380 $ 898
Accrued compensation and benefits 343 469
Liabilities of discontinued operations - 702
Current portion of notes payable 1,086 -
Deferred revenue 74 -
-----------------------------------
Total current liabilities 1,883 2,069
Long-term liabilities:
Notes payable 436 -
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; no shares issued or outstanding - -
Common stock, $0.001 par value; 20,000,000 shares authorized, 8 8
8,449,676 and 8,204,801shares issued outstanding at
June 30, 2002, and Decemeber 31, 2001 respectively
Common stock issuable 849 -
Notes receivable from stockholders - (86)
Additional paid-in capital 28,682 26,801
Deferred compensation (126) (276)
Accumulated other comprehensive loss - (616)
Accumulated deficit (28,457) (24,482)
-----------------------------------
Total stockholders' equity 956 1,349
-----------------------------------
Total liabilities and stockholders' equity $ 3,275 $ 3,418
===================================
See accompanying notes to these condensed consolidated financial statements.
PATH 1 NETWORK TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in US$, thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Revenues:
Contract services $ 5 $ 300 $ 11 $ 300
Product sales 536 249 685 249
----------------- ---------------------------------------------------
Total revenues 541 549 696 549
----------------- ---------------------------------------------------
Cost of revenues:
Cost of contract services 1 261 2 261
Cost of product sales 266 75 367 75
----------------- ---------------------------------------------------
Gross profit $ 274 $ 213 $ 327 $ 213
Operating expenses:
Engineering research and development $ 423 $ 627 $ 995 $ 1,624
Sales and marketing 132 76 325 258
General and administrative 566 866 1,345 1,673
Stock-based compensation 73 (2,771) 173 (1,457)
----------------- ---------------------------------------------------
Total operating expenses (1,194) 1,202 (2,838) (2,098)
Interest income - 54 - 151
Interest expense (557) - (557) -
Loss on sale of securities - - (590) (49)
----------------- ---------------------------------------------------
Net income (loss) from continuing operations (1,477) 1,469 (3,658) (1,783)
================= ===================================================
Discontinued operations (66) (607) (317) (910)
----------------- ---------------------------------------------------
Net income (loss) $ (1,543) $ 862 $ (3,975) $ (2,693)
================= ===================================================
Income (loss) from continuing operations per
common share - basic $ (0.18) $ 0.18 $ (0.43) $ (0.22)
================= ===================================================
Income (loss) from continuing operations per $ (0.18) $ 0.15 $ (0.43) $ (0.22)
common share - diluted
================= ===================================================
Income (loss) from discontinued operations per
common share - basic $ (0.01) $ (0.07) $ (0.04) $ (0.11)
================= ===================================================
Income (loss) from discontinued operations per $ (0.01) $ (0.06) $ (0.04) $ (0.11)
common share - diluted
================= ===================================================
Income (loss) per common share - basic $ (0.18) $ 0.11 $ (0.47) $ (0.33)
================= ===================================================
Income (loss) per common share - diluted $ (0.18) $ 0.09 $ (0.47) $ (0.33)
================= ===================================================
Weighted average common shares outstanding -
basic 8,424 8,202 8,424 8,204
================= ===================================================
Weighted average common shares outstanding -
diluted 8,424 9,923 8,424 8,204
================= ===================================================
(*) The following table shows how the Company's stock-based compensation
would be allocated to the respective department expense line items:
Research and development $ 48 $ (1,256) $ 119 $ (696)
Sales and marketing 22 (467) 45 (256)
General and administrative 3 (1,048) 9 (505)
----------------- ---------------------------------------------------
$ 73 $ (2,771) $ 173 $ (1,457)
================= ===================================================
See accompanying notes to these condensed consolidated financial statements.
PATH 1 NETWORK TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in US$, thousands)
(unaudited)
Six Months Ended
June 30,
2002 2001
---------------------------------
Cash flows from operating activities:
Net loss from continuing operations $ (3,658) $ (1,783)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 165 349
Interest expense associated with discount on notes issued 557
Notes issued for salary reduction 33
Amortization of deferred compensation 173 (1,457)
Loss on investment 596 -
Changes in assets and liabilities:
Restricted cash (46) (200)
Other current assets 112 (28)
Inventory 6 -
Other assets (219) (43)
Accounts payable and accrued liabilities 27 (878)
Accounts receivable (227) -
Accrued compensation and benefits (142) (197)
Deferred revenue 74 876
---------------------------------
Cash provided by (used in) operating activities
(2,549) (3,361)
Cash flows from investing activities:
Sale of marketable securities 578 1,665
Purchase of Metar ADC assets - (1,000)
Purchases of property and equipment (90) (374)
---------------------------------
Cash provided by (used in) investing activities
488 291
Cash flows from financing activities:
Issuance of common stock for options exercised, net 54 38
Issue convertible notes 2,281 -
Cash from extinguishment of shareholder notes 86 114
---------------------------------
Cash provided by financing activities 2,421 152
Cash flows from discontinued operations (174) (910)
Increase (decrease) in cash and cash equivalents 186 (3,828)
Cash and cash equivalents, beginning of period 1,181 7,171
---------------------------------
Cash and cash equivalents, end of period $ 1,367 $ 3,343
=================================
Supplemental cash flow disclosures:
Unrealized gain/(loss) in marketable securities $ - $ ( 1,068)
=================================
Capitalized debt issuance costs in connection with beneficial
conversion charge and warrants $ 1,250 -
=================================
Issuance of common stock in connection with Felber settlement $ 545 -
=================================
Conversion of Notes to common stock issuable $ 9 -
=================================
See accompanying notes to these condensed consolidated financial statements.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis Of Presentation
The accompanying condensed consolidated balance sheet at June 30, 2002, the
condensed consolidated statements of operations for the three and six-month
periods ended June 30, 2002 and the condensed, consolidated statement of cash
flows for the six-month period ended June 30, 2002, have been prepared by Path 1
Network Technologies Inc. (the "Company") and have not been audited. The
condensed consolidated balance sheet at December 31, 2001 has been audited.
These quarterly financial statements, in the opinion of management, include all
adjustments, consisting only of normal and recurring adjustments, necessary to
state fairly the financial information set forth therein, in accordance with
accounting principles generally accepted in the United States. These financial
statements should be read in conjunction with the financial statements and notes
thereto for the year ended December 31, 2001 included in the Company's Form 10-K
filed April 15, 2002 and the Company's Form 10-Q filed May 14, 2002. The interim
financial information contained in this filing is not necessarily indicative of
the results to be expected for any other interim period or for the full year
ending December 31, 2002.
In the period from January 30, 1998 (inception) through June 30, 2002, the
Company incurred losses totaling US$28.5 million. The accompanying financial
statements have been prepared assuming that the Company will continue as a going
concern. This basis of accounting contemplates the recovery of the Company's
assets and the satisfaction of its liabilities in the normal course of
conducting business. Management does not believe that the Company's existing
capital resources will enable the Company to fund operations for the next twelve
months. Management's plans are to reduce costs in all areas of its operating
plan until sufficient capital is raised to support growth and more substantial
orders materialize; however, even with its cost reduction plan, the Company
needs to raise additional funding to continue as a going concern. In the event
the Company does not receive additional funding, the Company plans to: 1)
further reduce costs and focus on selling existing products and services; 2)
sell the Company's assets through a merger or acquisition; or 3) seek protection
under bankruptcy statutes. Without additional financing, the Company will be
required to further delay, reduce the scope of, or eliminate one or more of its
research and development projects and significantly reduce its expenditures on
product deployment, and may not be able to continue as a going concern.
Reclassifications
Certain reclassifications have been made to prior period financial statements to
conform to current year presentation.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
No. 142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill
and indefinite lived intangible assets are no longer amortized but are reviewed
annually for impairment. Separable intangible assets that are not deemed to have
an indefinite life will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. As the Company did not have any goodwill on its
balance sheet, the adoption of FAS142 did not have a material impact on the
Company's financial statements.
In October 2001, the FASB issued SFAS No. 144 (FAS 144), Accounting for the
Impairment or Disposal of Long-Lived Assets. FAS 144 establishes a single model
to account for impairment of assets to be held or disposed, incorporating
guidelines for accounting and disclosure of discontinued operations. FAS 144 is
effective for fiscal years beginning after December 15, 2001 and, generally, its
provisions are to be applied prospectively. Management re-evaluated its
investment in acquired technology (i.e. Sistolic) and recorded an impairment
charge during the year ended December 31, 2001 of US$686,000. In April 2002, the
Company sold its Sistolic business unit for a loss of approximately US$66,000
(see note 5).
Note 2 - Management Estimates And Assumptions
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
Note 3 - Inventory
The Company records inventory, which consists primarily of raw materials used in
the production of video gateways and related products, at the lower of cost or
market. Cost is determined principally on the average cost method. Provision for
potentially obsolete or slow-moving inventory are made based on analysis of
inventory levels and future sales forecasts.
Note 4 - Revenue Recognition
Product Revenue
Revenue from product sales is recognized when title and risk of loss transfer to
the customer, generally at the time the product is delivered to the customer.
Revenue is deferred when customer acceptance is uncertain or when undelivered
products or services are essential to the functionality of delivered products.
The estimated cost of warranties is accrued at the time revenue is recognized.
Service and License Revenues
Revenue from support or maintenance contracts, including extended warranty
programs, is recognized ratably over the contractual period. Amounts invoiced to
customers in excess of revenue recognized on support or maintenance contracts
are recorded as deferred revenue until the revenue recognition criteria are met.
Revenue on engineering design contracts, including technology development
agreements, is recognized on a percentage-of-completion method, based on costs
incurred to date compared to total estimated costs, subject to acceptance
criteria. Billings on uncompleted contracts in excess of incurred costs and
accrued profits are classified as deferred revenue. License fees are recognized
when delivery requirements have been met, collection is probable and no further
obligations exist. Royalty revenue is recorded as earned in accordance with
specific terms of each license agreement when reasonable estimates of such
amounts can be made.
Note 5 - Reportable Operating Segments
The Company is a network communications technology company enabling simultaneous
delivery of broadcast quality and interactive video transmissions and other
real-time data streams over Internet Protocol (IP) Ethernet networks. For the
purpose of applying Statement of Financial Accounting Standards (SFAS) No. 131,
management determined that, subsequent to the discontinuance of the Silicon
Systems business unit ("Sistolic") in April 2002, it has one operating segment.
The Video Systems business unit is engaged in the development of system
solutions that enable broadcast quality video over IP. Utilizing TrueCircuit(R)
technology and other developed technologies and network traffic techniques, the
group has been able to transport broadcast quality video over an IP network
while significantly reducing the amount of latency and jitter associated with
the high speed transmission of data.
The Company currently sells product to a limited amount of customers for the
period ended June 30, 2002. For the period ended June 30, 2002, 56% and 31% of
the product sales were to two customers in the video infrastructure market.
Note 6 - Discontinued Operations
In March 2002, a large semiconductor company, with whom the Company entered into
a non-exclusive licensing agreement and an engineering services agreement in
December 2001, informed the Company that it was terminating their agreements.
The Company is in a payment dispute with this customer and is reviewing its
alternatives. As a result of this action, the Company decided to dispose of its
Sistolic business unit. On April 3, 2002, the Company disposed of the assets of
this business unit back to Metar SRL in exchange for the elimination of the
remaining obligations by the Company to Metar SRL and its affiliates, including
the payable of US$686,000, the return of all stock options granted to Michael
Florea and the Romanian employees, a confirmation that performance criteria
specified in Michael Florea's employment agreement related to a potential US$4
million bonus with the Company were never met by him. The Company also received
a limited use license to the business unit's intellectual property. Metar SRL
will also receive 35,000 shares of our common stock. Michael Florea resigned on
March 27, 2002, as an officer of the Company in anticipation of this
transaction. The results of operations and the loss on disposal for the three
and six-months ended June 30, 2002 and 2001 have been included in discontinued
operations.
Note 7- Stock Options
The Company accounts for stock-based compensation arrangements in accordance
with the provisions of Accounting Principles Board Opinion ("APB") 25,
Accounting for Stock Issued to Employees, SFAS No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans, and SFAS No.
38, Determining the Measurement Date for Stock Option, Purchase, and Award Plans
involving Junior Stock. The Company also complies with the disclosure provisions
of SFAS No. 123, Accounting for Stock-Based Compensation.
The Company accounts for equity instruments issued to non-employees using the
fair value method in accordance with the provisions of SFAS No. 123 and Emerging
Issues Task Issue No. 96-18, Accounting for Equity Instruments that are Issued
to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
Equity instruments issued to non-employees that are fully vested and
non-forfeitable are measured at fair value at the issuance date and expensed in
the period over which the benefit is expected to be received. Equity instruments
issued to non-employees which are either unvested or forfeitable, for which
counter-party performance is required for the equity instrument to be earned,
are measured initially at the fair value and subsequently adjusted for changes
in fair value until the earlier of: 1) the date at which a commitment for
performance by the counter-party to earn the equity instrument is reached or 2)
the date on which the counter-party's performance is complete.
During the three-month periods ended June 30, 2002 and 2001, the Company
recorded a stock-based compensation expense of US$73,000 and US$2,800,000
respectively, related to the amortization options outstanding to employees and
consultants.
Note 8 - Notes payable
4% convertible Notes
In April and May 2002, the Company received approximately $1,031,000 from a
private placement of convertible notes to European investors who were already
Company stockholders. The notes carry a 4% annual coupon, paid quarterly in cash
or stock, at the Company's discretion, and are convertible for a one-year
conversion term at a price of $1.20 per share. As the conversion price was below
the trading market price of the stock on the day of the notes were issued, the
Company recorded a debt discount of $226,430 and will amortize the debt discount
over the period of the convertible notes' convertibility period earliest
conversion date. In June 2002 the Company received notification from 76% of the
note holders of their intent to convert the instruments. As a result the portion
of the unamortized debt issuance cost related to the debt to be converted of
$172,143 was recorded as interest expense during the three months ended June 30,
2002. Due to the notice of conversion the Company has recorded 76% of the notes
payable as common stock issuable, the remaining portion of approximately
$281,000 is classified as current portion of notes payable in the accompanying
balance sheet as of June 30, 2002.
In connection with the issuance of the convertible notes in April and May 2002
the Company issued warrants to purchase 664,781 shares of common stock at $1.60
per share. The warrants are fully vested and expire in June 2007. The Company
recorded deferred interest expense on the warrants of $359,133 based upon a
Black-Scholes valuation, and will amortize the deferred interest over the life
of the notes. As a result of receiving notification that 76% of the notes will
be converted, the unamortized deferred interest balance on the portion of the
notes for which notification was received that totaled $273,030 was expensed in
June 2002 when the notes were converted.
12% convertible Notes
In May 2002, the Company issued a 12% convertible note in the principal amount
of $1,250,000. The note is convertible at a price of $1.40 per share and is
payable on a monthly basis over 18 months. As the conversion price was below the
trading market price of the stock on the day the note was issued the Company
recorded a debt discount of $543,515 and will amortize the debt discount over
the period of the convertible note earliest conversion date using the effective
interest method. Through June 30, 2002 $8,400 of the note had been converted by
the holder. As a result of the note being converted, the portion of the
unamortized debt issuance cost related to the note converted of $3,652 was
recorded as interest expense during the three months ended June 30, 2002. The
current portion of the notes payable is approximately $903,000 and is classified
as a short-term liability in the accompanying balance sheet as of June 30, 2002.
In connection with the issuance of the 12% convertible note in May 2002 the
Company issued warrants to purchase 125,000 shares of common stock at $1.68 per
share. The warrants are fully vested and expire, in May 2009. The Company
recorded deferred interest expense on the warrants of $121,162 based on a
Black-Scholes valuation, and will amortize the deferred interest over the life
of the notes. As a result of receiving notification that $8,400 of the note will
be converted, the unamortized deferred interest balance on the portion of the
notes for which notification was received that totaled $814, was expensed in
June 2002 when the notes were converted.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
This document may contain forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. Except to the extent required by federal law, we disclaim any duty
to update any of the forward-looking statements after the date of this report to
conform such statements to actual results or to changes in our expectations.
You are also urged to carefully review and consider the various disclosures made
by us which attempt to advise interested parties of the factors which affect our
business, including without limitation the disclosures made in this Item 2 or in
the Company's annual report on Form 10-K and other reports and filings made with
the Securities and Exchange Commission.
OVERVIEW
We design and sell products, using proprietary technology that enables the
real-time transmission of audio, video and voice data over a single Internet
Protocol (IP) network with end-to-end high quality of service (QoS). Our
products make it possible for packet-switched IP networks to provide
high-quality, real-time transmissions by coordinating the transport of packets
across these networks in a way that eliminates or minimizes delays and
unreliable delivery. We believe our products can make available the best of both
worlds - the reliability and speed of circuit-switched networks, such as
traditional telephone networks, along with the data carrying capability and low
cost of IP networks.
At the core of our suite of products is our patented, patent-pending and
copyrighted technology which is a software and hardware-based solution for
managing network traffic that is, at its essence, a method (or algorithm) for
the transmission of data on a real-time basis over IP networks and several trade
secrets and intellectual property in a variety of areas dealing with the
transport and distribution of data, voice and video over packet-based networks.
Our technology addresses the inherent deficiencies of packet switching as
applied to transmission of real-time signals by superimposing a circuit-switched
infrastructure on standard IP networking, while maintaining full compatibility
with existing IP networks. We believe that our technology combined with our
other proprietary know-how, is capable of supporting the efficient transmission
of all communications over a single network, thus bringing high-level QoS and
real-time audio, video and telephony capabilities to the Internet and to
standard IP networks.
Our customers and prospective customers include telecommunications companies,
cable television operators, wireless service providers, new competitive service
providers, broadcasters, government agencies, universities, systems integrators
and semi-conductor companies. We offer long haul video, voice and data products,
video-on-demand transmission products, and design and engineering services to
support these products.
We are focusing our efforts on Internet Protocol (IP)-based offerings for
broadcasters and the cable industry, Digital Subscriber Line (DSL) offerings for
the communications industry and integrated solutions for systems integrators
worldwide. Until recently, the resources of our Video Systems business unit were
devoted primarily to research and development. However, we now have products in
production and deployment. In the video transport market, for example, our Path
1 Cx1000 IP Video Gateway, which is a video gateway device designed to provide
high quality video transmission capabilities to diversified media companies,
television broadcasters, movie and broadcasting studios, is currently in
production and in the early stages of deployment by a small number of customers.
Our second product in the video transport market, the Path 1 Cx1400 IP Video
Multiplexer, which is a video-on-demand gateway device designed to provide high
quality video transmission capability to cable television operators, is being
deployed by BarcoNet, N.V., a wholly-owned subsidiary of Scientific-Atlanta,
Inc. BarcoNet is marketing a version of the Cx1400 IP Video Multiplexer in
Europe under the name "iMux".
Liquidity And Capital Resources
In the period from January 30, 1998 (inception) through June 30, 2002, we
incurred losses totaling US$28.5 million. The accompanying financial statements
have been prepared assuming that we will continue as a going concern. This basis
of accounting contemplates the recovery of our assets and the satisfaction of
our liabilities in the normal course of conducting business. We do not believe
that our existing capital resources will enable us to fund operations for the
next twelve months. Our goal is to reduce our current cash burn to US$250,000 -
US$350,000 per month. Our plans are to reduce costs in all areas of our
operating plan until sufficient capital is raised to support growth and more
substantial orders materialize; however, even with our cost reduction plan, we
need to raise additional funding to continue as a going concern. In the event we
do not receive additional funding, we plan to: 1) further reduce costs and focus
on selling existing products and services; 2) sell the Company's assets through
a merger or acquisition; or 3) seek protection under bankruptcy statutes.
Without additional financing, we will be required to further delay, reduce the
scope of, or eliminate one or more of our research and development projects and
significantly reduce our expenditures on product deployment, and may not be able
to continue as a going concern.
Since our inception on January 31, 1998, we have financed our operations
primarily through the sale of common equity and debt securities to investors and
strategic partners.
We anticipate that our existing resources will enable us to fund operations at
least through the first quarter of 2003. In April and May 2002, we received
approximately $1,031,000 from a private placement of convertible notes from
European investors who were already Company stockholders. The notes carry a 4%
annual coupon, paid quarterly in cash or stock, at our discretion, and are
convertible for a one-year conversion term at a price of $1.20 per share. As the
conversion price was below the trading market price of the stock on the day of
the notes were issued, we will record a debt discount of $226,430 and will
amortize the debt discount over the period of the convertible notes earliest
conversion date using the effective interest method. In June 2002 we received
notification from 76% of the note holders of their intent to convert the
instruments.
In connection with the issuance of the convertible notes in April and May 2002
we issued warrants to purchase 664,871 shares of common stock at $1.60 per
share. The warrants are fully vested and expire in June 2007.
In May 2002, we issued to Laurus Master Fund 12% convertible note in the
principal amount of $1,250,000. The note is convertible at a price of $1.40 per
share and is payable on a monthly basis over 18 months.
In connection with the issuance of the 12% convertible note in May 2002 we
issued warrants to purchase 125,000 shares of common stock at $1.68 per share.
The warrants are fully vested and expire on May 2009.
Cash, cash equivalents, restricted cash and marketable securities totaled
US$1,413,000 at June 30, 2002 compared to US$1,181,000 at December 31, 2001. For
the foreseeable future, we expect to incur substantial additional expenditures
associated with research and development in addition to increased costs
associated with staffing for management, manufacturing, sales and marketing and
administration functions. Additional capital is required to implement our
business strategies and fund our plan for future growth and business
development.
At June 30, 2002, we had net working capital of US$180,000 compared to net
working capital of US$271,000 at December 31, 2001. We are continuing to seek
other sources of additional capital to fund operations until we are able to fund
operations through internal cash flow.
Operating activities used US$2,500,000 in cash during the six-month period ended
June 30, 2002 and US$3,400,000 for the same period in 2001.
Cash provided by investing activities during the six-month period ended June 30,
2002 was approximately US$488,000 compared to US$291,000 for the six-month
period ended June 30, 2001. Cash provided by investing activities was primarily
the result of the sale of marketable securities. As of June 30, 2002 we have no
marketable securities available for sale.
At June 30, 2002, we have no material commitments other than our operating
leases. Our future capital requirements will depend upon many factors, including
the timing of research and product development efforts, the expansion of our
general and administrative functions and sales and marketing efforts and the
need to finance the manufacturing of commercial products that we may develop and
launch. We expect to continue to expend significant amounts on research and
development staffing, infrastructure and computer equipment to support on-going
research and development activities.
As noted above, we will need additional financing in 2002. We may pursue a
number of alternatives to raise additional funds, including borrowings; lease
arrangements; collaborative research and development arrangements with
technology companies; the licensing of product rights to third parties; or
additional public and private equity financings. There can be no assurance that
funds from these sources will be available on favorable terms, if at all. If we
raise additional funds through the issuance of equity securities, the percentage
ownership of our stockholders will be reduced, stockholders may experience
additional dilution or such equity securities may provide for rights,
preferences or privileges senior to those of the holders of our common stock.
Results Of Operations
Three Months Ended June 30, 2002 vs. Three Months Ended June 30, 2001
In the second quarter of 2002, we recognized revenue of US$541,000, compared to
US$549,000 revenue during the three-month period ended June 30, 2001. The 2002
revenue is the result of the initial shipments of our commercial products for
the video over IP transport market. We expect these initial revenues to come
from the broadcast transmission infrastructure segment of the video transport
market and the video on demand market, where we have established product (e.g.,
Cx1000 and Cx1400) and technology capabilities. In 2001 our revenue was
primarily generated through an engineering service contract with BarcoNet N.V.
and sales of an engineering proto-type to Leitch Technologies.
In the second quarter of 2002, cost of goods sold decreased to US$267,000 from
US$336,000 at June 30, 2001. Cost of goods sold for products consists of raw
material costs, warranty costs and labor associated with building product. Cost
of goods sold for contract services consists primarily of engineering payroll
costs. The reduction in costs of goods sold is due to the focus on shipment of
product, which has a margin on each unit sold versus engineering services where
there is not a fixed and determinable margin.
Engineering research and development expenses, excluding the effect of
stock-based compensation, have decreased when compared to the same period in
2001. The decrease of approximately US$204,000 is primarily a result of our
focus on reducing our operating expenditures, selling our Sistolic business unit
and curtailing the use of outside consultants. Although we believe that under
our current operating plan we possess the correct complement of engineering
staff and consultants to effectively continue the development and rollout of our
products, we will need to rapidly hire additional staff if our products achieve
a significant level of market acceptance.
General and administrative expenses, excluding the effect of stock-based
compensation, decreased from US$866,000 for the second quarter ended June 30,
2001 to US$566,000 for the second quarter ended June 30, 2002. The decrease of
approximately US$300,000 is primarily due to reduced operating expenses such as
rent, amortization of intangibles, payroll costs and outside consulting costs.
Stock-based compensation expense is a non-cash expense item that is recognized
as a result of stock options having exercise prices below estimated fair value.
Stock-based compensation expense is calculated as the difference between
exercise prices and estimated fair market value on the date of grant. If the
options are subject to variable accounting treatment, additional compensation
expense, positive or negative, is recognized each quarter based on the fair
market value of our common stock in accordance with the provisions of variable
stock option accounting. In the second quarter of 2001 our stock price fell
resulting in a large negative compensation "expense". In October 2001, we
offered our holders of Class B common stock options an opportunity to exchange
their options for Class A common stock options. Since all of the option holders
of options on Class B common stock elected to exchange their options for options
on Class A common stock, the Company ceased recording this compensation expense
related to employee options after a final one-time adjustment in October of
2001. We will continue to record compensation expense related to the outstanding
options to consultants and some employees for the amount of options that vest in
that period. Therefore, in the quarter ended June 30, 2002 the Company only
recognized the expense related to previously granted stock options held by
consultants and employees.
Our interest income decreased from US$54,000 of income for the three-month
period ended June 30, 2001 to US$557,000 of expense for the three-month period
ended June 30, 2002. The decrease of approximately US$611,000 is due to a
non-cash interest charge related to the issuance of convertible debentures at
below market price and issuance of warrants (see note 7).
Six Months Ended June 30, 2002 vs. Six Months Ended June 30, 2001
For the first six months of 2002 we recognized revenue of US$696,000 compared to
US$549,000 during the six-month period ended June 30, 2001. The 2002 revenue is
the result of the initial shipments of our commercial products for the video
over IP transport market. We expect these initial revenues to come from the
broadcast transmission infrastructure segment of the video transport market and
the video on demand market, where we have established product (e.g., Cx1000 and
Cx1400) and technology capabilities. For the same period in 2001 our revenues
were primarily a result of contract services performed for BarcoNet N.V. in the
development of our video multiplexer for the video on demand market, now known
as the Cx1400 and the sale of engineering proto-type units to Leitch
Technologies.
In the first and second quarter of 2002, cost of goods sold increased to
US$369,000 from US$336,000 for the six-month period ended June 30, 2001. Cost of
goods sold for products consists of raw material costs, warranty costs and labor
associated with building product. Cost of goods sold for contract services
consists primarily of engineering payroll costs. The slight reduction in costs
of goods sold is due to the focus on shipment of product, which has a margin on
each unit sold versus engineering services where there is not a fixed and
determinable margin.
Engineering research and development expenses, excluding the effect of
stock-based compensation, have decreased when compared to the same period in
2001. The decrease of approximately US$629,000 is primarily a result of our
focus on reducing our operating expenditures, the sale of our Sistolic business
unit and reduced use of outside consultants. Although we believe that under our
current operating plan we possess the correct complement of engineering staff
and consultants to effectively continue the development and rollout of our
products, we will need to rapidly hire additional staff if our products achieve
a significant level of market acceptance.
General and administrative expenses, excluding the effect of stock-based
compensation, decreased from US$1,673,000 for the six-month period ended June
30, 2001 to US$1,345,000 for the six-month period ended June 30, 2002. The
decrease of approximately US$328,000 is primarily due to reduced operating
expenses such as rent and payroll costs and outside consulting costs in the
second quarter ended June 30, 2002.
Stock-based compensation expense is a non-cash expense item that is recognized
as a result of stock options having exercise prices below estimated fair value.
Stock-based compensation expense is calculated as the difference between
exercise price and estimated fair market value on the date of grant. If the
options are subject to variable accounting treatment, additional compensation
expense, positive or negative, is recognized each quarter based on the fair
market value of our common stock in accordance with the provisions of variable
stock option accounting. In the second quarter of 2001 our stock price fell
resulting in a large negative compensation "expense". In October 2001, we
offered our holders of Class B common stock options an opportunity to exchange
their options for Class A common stock options. Since all of the option holders
of options on Class B common stock elected to exchange their options for options
on Class A common stock, the Company ceased recording this compensation expense
related to employee options after a final one-time adjustment in October of
2001. We will continue to record compensation expense related to the outstanding
options to consultants and some employees for the amount of options that vest in
that period. Therefore, in the six-month period ended June 30, 2002 the Company
only recognized the expense related to previously granted stock options held by
consultants and employees.
Our interest income decreased from US$151,000 of income for the six-month period
ended June 30, 2001 to US$557,000 of expense for the six-month period ended June
30, 2002. The decrease of approximately US$708,000 is due to a non-cash interest
charge related to the issuance of convertible debentures at below market price
and issuance of warrants(see note 7).
Discontinued Operations
We decided to dispose of our Silicon Systems business unit ("Sistolic") after a
large semiconductor company, with whom we entered into a non-exclusive licensing
agreement and an engineering services agreement related to Sistolic's
technology, informed us that they were terminating their agreements in March
2002. Due to this material and adverse turn of events, we decided that we could
no longer sustain the negative cash flow from Sistolic. Therefore, on April 3,
2002, we disposed of the assets of this business unit back to Metar SRL and
Michael Florea in exchange for the elimination of the remaining obligations by
us to Metar SRL and its affiliates, including the payable of US$686,000, the
return of all stock options granted to Michael Florea and the Romanian
employees, and a confirmation that performance criteria specified in Michael
Florea's employment agreement related to a potential US$4 million bonus with us
were never met by him. We also received a limited use license to the business
unit's intellectual property in favor of us. In addition, the Romanian facility
lease was transferred to Metar SRL and the Romanian employment contracts were
terminated and Metar SRL was permitted to hire any and all Romanian employees.
Metar SRL will also receive 35,000 shares of our common stock. Michael Florea
resigned on March 27, 2002, as an officer of the Company in anticipation of this
transaction. Sistolic's results of operations for the three and six-months ended
June 30, 2002 and 2001 have been included in discontinued operations.
Risk Factors That May Affect Future Results
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER
INFORMATION INCLUDED HEREIN AS WELL AS THE INFORMATION INCLUDED IN OUR FORM 10-K
FILED ON APRIL 15, 2002 AND OTHER REPORTS AND FILINGS MADE WITH THE SECURITIES
AND EXCHANGE COMMISSION. OUR BUSINESS AND RESULTS OF OPERATIONS COULD BE
SERIOUSLY HARMED BY ANY OF THE FOLLOWING RISKS. THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE DUE TO ANY OF THESE RISKS AND STOCKHOLDERS MAY LOSE PART OR
ALL OF THEIR INVESTMENT.
The risks ands uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our operations. Our business and
results of operations could be seriously harmed by the occurrence of any of the
following risk factors. The trading price of our common stock could decline due
to occurrence of any of these risks, and you may lose part or all of your
investment.
We are dependent upon additional funding to meet current commitments, continue
development of our business and limit uncertainty as to our ability to continue
as a going concern; the prospect of obtaining such funding is uncertain.
We need additional funding to meet current commitments and continue development
of our business; if we do not receive additional funding, our ability to
continue as a going concern cannot be assured.
To this end, we have initiated a cost reduction program to reduce our negative
cash burn from over US$600,000 per month to approximately US$250,000 -
US$350,000 per month. We are reducing costs in all areas of our operating plan
until sufficient capital is raised to support growth and more substantial orders
materialize. In the event we do not receive additional funding, we plan to: 1)
further reduce our costs and focus on selling existing products and services; 2)
sell our assets through a merger or acquisition; or, 3) seek protection under
bankruptcy statutes. Even with our cost reduction plan, we need to raise
additional funding to continue as a going concern.
Even if we can continue operations, a lack of sufficient funding would
significantly limit our ability to take advantage of potential opportunities,
develop or enhance products or otherwise respond to competitive pressures. We
cannot assure you that additional financing will be available on terms favorable
to us, if at all.
If we raise additional funds through the issuance of equity or equity-linked
securities, the percentage ownership of our stockholders would be reduced. In
addition, these securities may have rights, preferences or privileges senior to
the rights of the securities held by our current stockholders.
We have incurred losses since inception and may never be profitable.
We have incurred operating losses since our inception in January 1998, and we
expect to incur losses and negative cash flow for at least the next few
quarters. As of June 30, 2002, our accumulated deficit was approximately US$28.5
million. We expect to continue to incur significant operating expenses and
research and development expenses and, as a result, we will need to generate
significant revenues to achieve profitability. Even if we do achieve
profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future.
The market price of our common stock has fluctuated in the past and is likely to
continue to do so, thereby increasing the risk that you may lose all or part of
your investment.
The market price for our common stock is susceptible to a number of
internal and external factors including:
o quarterly variations in operating results and overall financial condition;
o economic and political developments affecting technology spending generally
and adoption of new technologies and products such as ours;
o short-selling programs;
o changes in IT spending patterns and the rate of consumer acceptance of
video-on-demand;
o product sales progress, both positive and negative;
o the stock market's perception of the telecommunications equipment industry
as a whole;
o technological innovations by others;
o the introduction of new products or changes in product pricing policies by
us or our competitors;
o proprietary rights disputes or litigation;
o changes in earnings estimates by analysts or other factors;
o additions or departures of key personnel; and
o sales of substantial numbers of shares of our common stock or securities
convertible into or exercisable for our common stock.
These and other factors may make it difficult for our stockholders to sell
their shares into the open market if and when eligible to do so. In addition,
stock prices for many technology companies, especially early-stage companies
such as ourselves, fluctuate widely for reasons that may be unrelated to
operating results. These fluctuations, as well as general economic, market and
political conditions such as interest rate increases, recessions or military or
political conflicts, may materially and adversely affect the market price of our
common stock, thereby causing you to lose some or all of your investment.
We recently launched our initial commercial products and services, and these
products and services and our products still in development, may not gain
customer acceptance.
We have launched two commercial products for sale into the video transport
market: the Path 1 Cx1000 IP Video Gateway targeted toward the broadcast
transmission infrastructure segment of the video transport market, and the Path
1 Cx1400 IP Video Multiplexer targeted toward the video-on-demand infrastructure
segment of the video transport market. These products are in the early stages of
commercial deployment and are subject to all the risks attendant to new product
introductions, including the possible presence of undetected hardware or
software defects in our products, manufacturing and distribution limitations,
unforeseen delays in product installation and customer dissatisfaction. There
can be no assurance that either of these initial products, or our products still
in development, will achieve acceptance by our targeted markets at all, or in
time to assist in funding cash flow shortfalls.
We have limited product sales experience and we are relying primarily on a few
customers.
We have only a brief history of sales orders for our products and services.
As a result, potential customers may decline to purchase our initial products or
services due to our lack of an established "track record," the level of our
products' technological sophistication, price, our financial condition or other
factors. Further reasons why prospective customers may decline to invest in our
products and services, or may decide to purchase competitors' products and
services, include:
o introduction of competitive technologies, products and services that may
render our products and services obsolete;
o development or manufacturing delays that prevent the timely introduction of
our products to the market;
o failure by us to establish strong sales, marketing, distribution and
customer service capabilities;
o reluctance to commit capital to new products and services; and
o general economic conditions affecting rates of adoption of new
technologies, new technology purchases and services associated with such
new technologies.
In the event that our products and services are not adopted at the rates we
currently anticipate, or do not receive a significant acceptance from our
primary targeted dominant customer, our operating plan will be negatively
affected and our capital requirements and cash flow shortfalls will be greater
than currently anticipated.
To date, there has been only a limited public market for our common stock and
there is no assurance that an active trading market for our common stock will
ever exist.
To date, there has been only a limited public market for our securities and
there can be no assurance that a broad public market for our securities will
develop in the future, or if such a broad market does develop, that it will
last. Our common stock is presently quoted for trading on the OTC Bulletin
Board, a quotation service that displays real-time quotes and other information
about over-the-counter (OTC) equity securities, and on the Third Segment of the
Frankfurt Stock Exchange. Trading activity in our common stock on the OTC
Bulletin Board is limited and trading activity in our common stock on the
Frankfurt Stock Exchange is dormant. In addition, we may be unable to attract
and maintain good-quality market makers. In the event a liquid market for our
common stock does develop, there can be no assurance that the market will be
strong enough to absorb all of the common stock currently owned by our
stockholders and any common stock that may be issued in the future, restricted
shares of our common stock that are eligible for resale under Rule 144, combined
with (i) the shares (and warrants to purchase shares) that we anticipate selling
in any private placement offering, (ii) shares that we may issue to Laurus Funds
pursuant to our convertible note with them, (iii) shares of common stock owned
by Leitch Technology Corporation that Leitch, pursuant to its demand
registration rights, may require us to register for resale into the public
market, and (iv) shares issued or issuable pursuant to our stock option plans,
have the potential to create a supply/demand imbalance that could adversely
affect our stock price. In addition, subsequent issuances of equity or
equity-linked securities may further saturate the market for our common stock.
The resale of substantial amounts of our common stock will have an adverse
effect on the market price of our stock.
We believe our stock has in the past been and may in the future be the
subject of short selling programs. Short sales can severely and negatively
affect the prices of stocks which have little market liquidity.
The rate of market adoption of our technology is uncertain and we could
experience long and unpredictable sales cycles, especially if the slowdown in
the telecommunications industry persists.
As ours is a new technology, it is extremely difficult to predict the
timing and rate of market adoption of our proposed products as well as of
related new video applications, and thus difficult to predict when we might
begin to realize revenue from product sales. We are providing new and highly
technical products and services to enable new applications. Thus, the duration
of our sales efforts with prospective customers in all market segments is likely
to be lengthy as we seek to educate them on the uses and benefits of our
products. This sales cycle could be lengthened even further by potential delays
related to product implementation as well as delays over which we have little or
no control, including:
o the length or total dollar amount of our prospective customers' planned
purchasing programs in regard to our products;
o changes in prospective customers' capital equipment budgets or purchasing
priorities;
o prospective customers' internal acceptance reviews; and
o the complexity of prospective customers' technical needs.
These uncertainties, combined with the worldwide slowdown in the
telecommunications business, which began in 2001, and the slowdown in corporate
spending on technology generally as well as new technologies such as ours,
substantially complicate our planning and reduce prospects for sales of our
products. If our prospective customers curtail or eliminate their purchasing
programs, decrease their capital budgets or reduce their purchasing priority,
our results of operations could be adversely affected.
Leitch Technology Corporation may not be an active, participating partner for us
in the professional broadcast video studio market.
In April 2000, we entered into a strategic marketing relationship with
Leitch Technology Corporation, a Canadian public company and international
distributor of professional video products that owns approximately one-third of
our outstanding common stock. As part of this strategic marketing relationship,
Leitch invested US$10 million in us and gave us 200,000 shares of Leitch common
stock in consideration of our entering into a Technology License Agreement with
Leitch, dated April 10, 2000 granting Leitch (i) a non-exclusive license to sell
and otherwise use our proprietary TrueCircuit(R) technology; and (ii) a
worldwide, exclusive license, even as to us, to sell and otherwise exploit our
TrueCircuit(R) technology in connection with commercial activities directed to
the professional broadcast video studio market. The non-exclusive license has a
term of five years (unless earlier terminated by us or Leitch) and is
automatically renewable for additional five-year periods (unless earlier
terminated by us or Leitch). The duration of the exclusive license with Leitch
is one year and, thereafter, automatically renews for five consecutive one-year
periods, provided we receive the minimum aggregate monies and other
consideration from Leitch required for that year. The minimum fees to be paid by
Leitch to maintain its exclusive license for the five-year exclusive term
escalate annually and total US$32 million, exclusive of royalties. After this
initial five-year term, provided the exclusive license is still in effect, the
minimum yearly thresholds would be negotiated, within certain parameters, by us
and Leitch. Leitch is not obligated to pay us royalties until March 2006 for any
of the TrueCircuit(R)-based products sold by Leitch or its sub-licensees under
the exclusive license. We are currently discussing with Leitch the renewal terms
and conditions for this exclusive license. We believe that, according to the
terms of the Technology License Agreement, Leitch is required to pay us US$2
million in cash or other consideration in order for Leitch's exclusive license
to be renewed in April 2003 (Leitch's failure to pay the required consideration
would cause Leitch's exclusive license to automatically convert to a
non-exclusive license). We believe that the exclusive license would then be
terminated in favor of a non-exclusive license. There can be no assurance that
we will come to a mutually acceptable resolution with Leitch regarding this
potential payment dispute and the status of their license. Furthermore, if it is
found that Leitch is required to pay us US$2 million to maintain its exclusive
license for the twelve (12) month-period beginning April 2003, we believe that
Leitch will decline to remit such payment.
Although we entered into a strategic marketing relationship with Leitch
with the expectation that Leitch, as an established company in the professional
video products field and an experienced manufacturer and distributor of video
products, would provide us with a significantly enhanced ability to manufacture,
sell and distribute our initial products in this field, Leitch had been
unsuccessful to date in selling TrueCircuit(R) technology-based products into
the professional broadcast video market or other markets. In 2002, Leitch
wrote-down their investment in us to zero. On March 28, 2002, Reginald J.
Tiessen resigned from our Board of Directors. With the December 2001 resignation
of John A. MacDonald from the Company's Board of Directors, this leaves Leitch
without current Path 1 Board representation. As of the date of this writing, we
do not believe that Leitch will be an active partner in developing the
professional broadcast video studio market for us. In addition, any further
deterioration in our relationship with Leitch could adversely affect Leitch's
motivation to market and sell our TrueCircuit(R) technology-based products into
the professional broadcast video studio market. This deterioration would be
especially damaging so long as Leitch retains its exclusive license, as Leitch
might fail to commit the necessary technical, financial and other resources to
successfully market our products into the professional broadcast studio video
market, yet still prevent us from doing so.
We recently disposed of the assets of our Silicon Systems group.
In October 2000, we agreed to purchase the assets of Metar ADC, an
application specific integrated circuit (ASIC) design and development company
based in Bucharest, Romania, from Metar SRL. We organized these assets into our
Silicon Systems business unit, which we named "Sistolic".
In December 2001, Sistolic entered into a non-exclusive licensing agreement
and an engineering services agreement with a large semiconductor company
pursuant to which Sistolic was to provide front-end design services. We
anticipated that the maximum amount of revenue we could realize from this
arrangement was approximately US$5.4 million. In March 2002, after considerable
work had been performed by us under the agreements, the large semiconductor
company informed us that they were summarily terminating these agreements.
Due to this material and adverse turn of events, we concluded that we could
no longer sustain the negative cash flow from the Silicon Systems business unit.
On April 3, 2002, we sold all of the assets of this business unit back to Metar
SRL. Although we retained a limited use license to the business unit's
intellectual property, we have little else to show for the time and funds we
invested in Sistolic.
We may be unable to obtain full patent protection for our core technology and
there is a risk of infringement.
On January 16, 2001, May 8, 2001 and May 31, 2001, we submitted additional
patent applications on topics surrounding our core technologies to supplement
our existing patent portfolio. However, there can be no assurance that these or
other patents will be issued to us, or, if additional patents are issued, that
they or our three existing patents will be broad enough to prevent significant
competition or that third parties will not infringe upon or design around such
patents to develop competing products. In addition, we have filed patent
applications in several foreign countries. There is no assurance that these or
any future patent applications will be granted, or if granted, that they will
not be challenged, invalidated or circumvented.
In addition to seeking patent protection for our products, we intend to
rely upon a combination of trade secret, copyright and trademark laws and
contractual provisions to protect our proprietary rights in our products. There
can be no assurance that these protections will be adequate or that competitors
have not or will not independently develop technologies that are substantially
equivalent or superior to ours.
There has been a trend toward litigation regarding patent and other
intellectual property rights in the telecommunications industry. Although there
are currently no lawsuits pending against us regarding possible infringement
claims, there can be no assurance such claims will not be asserted in the future
or that such assertions will not materially adversely affect our business,
financial conditions and results of operations. Any such suit, whether or not it
has merit, would be costly to us in terms of employee time and defense costs and
could materially adversely affect our business.
If an infringement or misappropriation claim is successfully asserted
against us, we may need to obtain a license from the claimant to use the
intellectual property rights. There can be no assurance that such a license will
be available on reasonable terms if at all.
We face competition from established and developing companies, many of which
have significantly greater resources than us, and we expect such competition to
grow.
The markets for our products, proposed products and services are very
competitive. We face direct and indirect competition from a number of
established companies and development stage companies, and we anticipate that we
shall face increased competition in the future as existing competitors seek to
enhance their product offerings and new competitors emerge. Many of our
competitors have greater resources, higher name recognition, more established
reputations within the industry and stronger manufacturing, distribution, sales
and customer service capabilities than we do.
The technologies that our competitors and we offer are expensive to design,
develop, manufacture and distribute. Competitive technologies may be owned and
distributed by established companies that possess substantially greater
financial, technical and other resources than we do.
Competitive technologies that offer a similar or superior capacity to
converge and transmit audio, video and telephonic data on a real-time basis over
existing networks may currently exist or may be developed in the future. We
cannot assure you that any technology currently being developed by us is not
being developed by others or that our technology development efforts will result
in products that are competitive in terms of price and performance. If our
competitors develop products or services that offer significant price or
performance advantages as compared to our current and proposed products and
services, or if we are unable to improve our technology or develop or acquire
more competitive technology, our business could be adversely affected.
We may not be able to profit from growth if we are unable to effectively manage
the growth.
Assuming we receive adequate funding to conduct our business as presently
proposed to be conducted, we anticipate that we could grow rapidly in the
future. This anticipated growth will place strain on our managerial, financial
and personnel resources. The pace of our anticipated expansion, together with
the complexity of the technology involved in our products and the level of
expertise and technological sophistication incorporated into the provision of
our design, engineering, implementation and support services, demands an unusual
amount of focus on the operational needs of our future customers for quality and
reliability, as well as timely delivery and post-installation and
post-consultation field and remote support. In addition, new customers,
especially customers that purchase novel and technologically sophisticated
products such as ours, generally require significant engineering support.
Therefore, adoption of our platforms and products by customers would increase
the strain on our resources. To reach our goals, we will need to hire rapidly,
while, at the same time investing in our infrastructure. We expect that we will
also have to expand our facilities. In addition, we will need to:
o successfully train, motivate and manage new employees;
o expand our sales and support organization;
o integrate new management and employees into our overall operations; and
o establish improved financial and accounting systems.
We may not succeed in anticipating all of the changing demands that growth
would impose on our systems, procedures and structure. If we fail to effectively
manage our expansion, our business may suffer.
We may not be able to hire and assimilate key employees.
Our future success will depend, in part, on our ability to attract and
retain highly skilled employees, including management, technical and sales
personnel. Significant competition exists for employees in our industry and in
our geographic region. We may be unable to identify and attract highly qualified
employees in the future. In addition, we may not be able to successfully
assimilate these employees or hire qualified personnel to replace them.
We are dependent on our key employees for our future success.
Our success depends on the efforts and abilities of our senior management,
specifically Frederick A. Cary, Ronald D. Fellman, David A. Carnevale, Bernard
J. Tyler, Yendo Hu and other senior managers and certain other key personnel. If
any of these key employees leaves or is seriously injured and unable to work and
we are unable to find a qualified replacement, then our business could be
harmed.
Unanticipated delays or problems in introducing our intended products or
improvements to our intended products may cause customer dissatisfaction or
deprive us of the "first to market" advantage.
Delays in the development of products and the launch of commercial products
are not uncommon in high tech industries such as ours. If we experience problems
related to the introduction or modification of our intended products or the
reliability and quality of such products, which problems delay the introduction
of our intended products or product improvements by more than a few months, we
could experience reduced product sales and adverse publicity. We believe the
company first to market with viable products will gain a significant advantage
with customers; delays could prevent us from being the company that gains this
advantage.
The issuance of common stock to DTKA Holdings under our equity line and to
purchasers of units in our 2002 private placement offering would cause
significant dilution to our stockholders, and the resale of such shares by DTKA
and the purchasers in the private placement may depress the price of our common
stock.
In January 2002, we entered into a common stock purchase agreement with
DTKA Holdings Limited, a British Virgin Islands company, for the potential
future issuance and sale of up to US$10 million of common stock, which is
required to be registered. Under this arrangement, we, at our sole discretion,
may, from time to time, draw down on this facility (otherwise known as an
"equity line"), requiring DTKA Holdings to purchase shares of our common stock
at prices calculated on the basis of discounts ranging from 6.5% to 8.5% from
the daily volume weighted average price of our common stock on the principal
exchange or trading market on which our common stock is trading on the date of
the draw down. We may not draw down on this facility until we have filed a
registration statement with the Securities and Exchange Commission to register
enough shares of common stock to cover the shares to be issued pursuant to such
draw down, and until this registration statement has been declared effective. As
of June 30, 2002 we have not begun the registration process. The issuance of
shares of common stock to DTKA Holdings pursuant to this equity line could
result in significant dilution to our stockholders. However, we do not currently
intend to draw down on any funds under this facility.
The issuance of common stock to Laurus Funds in connection with our convertible
note to them would cause significant dilution to our stockholders, and the
resale of such shares by Laurus may depress the price of our common stock.
In May 2002, we issued a 12% convertible note in the principal amount of
$1,250,000. The note is convertible at a price of $1.40 per share and is payable
on a monthly basis over 18 months. For the three months ended June 30, 2002
$8,400 of the note had been converted by the holder. However as a result of the
note being converted, the portion of the unamortized debt issuance cost related
to the note converted of $3,652 was recorded as interest expense during the
three months ended June 30, 2002.
We offer stock options to our employees, non-employee directors, consultants and
advisors, which could result in ongoing dilution to all stockholders.
We maintain two equity compensation plans: (i) the 2000 Stock Option/Stock
Issuance Plan (the "2000 Plan"), pursuant to which we may issue options and
common stock to employees, officers, directors, consultants and advisors, and
(ii) the 2001 Employee Stock Purchase Plan (the "Purchase Plan"), approved by
our stockholders in February 2002, pursuant to which our employees are provided
the opportunity to purchase our stock through payroll deductions. As of June 30,
2002, there were options outstanding to purchase 3,859,621 shares of common
stock under our 2000 Plan; 380,897 shares of common stock remain available for
issuance under the 2000 Plan. A maximum of 250,000 shares of common stock have
been authorized for issuance under the Purchase Plan.
We plan to continue to provide our employees opportunities to participate
in the Purchase Plan. We also wish to issue options, either under the 2000 Plan
or otherwise, to purchase sizable numbers of shares of common stock to new and
existing employees, officers, directors, advisors, consultants or other
individuals as we deem appropriate and in our best interests. These ongoing
purchases of our common stock (as well as future option grants by us and
subsequent exercises of options) could result in substantial dilution to all
stockholders and increased control by management.
The number of shares of common stock subject to currently outstanding
options under the 2000 Plan, as well as shares of common stock subject to
options granted other than under the 2000 Plan, exceeds 30% of the total number
of shares of our currently outstanding common stock. The California Department
of Corporations has issued regulations for companies seeking qualification of
stock option plans, which regulations require that the total number of shares
issuable upon exercise of all options shall not exceed 30% of such companies'
outstanding shares, unless a percentage higher than 30% is approved by at least
two-thirds of the outstanding shares entitled to vote. We unsuccessfully sought
to obtain this two-thirds supermajority vote of the outstanding shares.
Therefore the issuance of further stock options and shares under the 2000 Plan
to persons other than officers, directors and previous optionees requires
qualification, which under current conditions we cannot obtain, of the
securities under the "blue sky" securities provisions of the California
Corporations Code. This may limit our ability to grant options and stock as a
means of attracting and retaining employees.
We are subject to local, state and federal regulation, as well as the rules of
any stock exchanges on which our securities might trade.
Legislation affecting us (or the markets in which we compete) could
adversely impact our ability to implement our business plan on a going-forward
basis. The telecommunications industry is heavily regulated and these
regulations are subject to frequent change. Future changes in local, state,
federal or foreign regulations and legislation pertaining to the
telecommunications field may adversely affect prospective purchasers of
telecommunications equipment, which in turn would adversely affect our business.
Our executive officers, directors and 5% stockholders currently maintain
substantial voting control over us and possess certain rights of first offer and
first refusal in regard to offers and sales of our securities.
As of June 30, 2002, a small number of our executive officers, directors
and 5% stockholders, beneficially own, in the aggregate, approximately 48% of
our outstanding common stock; these stockholders are Leitch Technology
Corporation, Ronald D. Fellman and Douglas A. Palmer. As a result, these
stockholders (or subgroups of them) retain substantial control over matters
requiring approval by our stockholders, such as the election of directors and
approval of significant corporate transactions. Pursuant to the terms of a
stockholders' agreement with Leitch, dated April 10, 2000, Ronald D. Fellman and
Douglas A. Palmer, who together hold approximately 15% of our outstanding common
stock, have agreed to vote all securities of Path 1 held by them in favor of
designees of Leitch for two positions on our seven-person Board of Directors,
for as long as Leitch continues to hold at least 20% of our capital stock (on an
as-converted, as-exercised, fully-diluted basis). As of June 30, 2002, Leitch
held approximately one-third of our outstanding common stock. Leitch has
declined, for the time being, to exercise its right to designate director
nominees.
Under this Stockholders' Agreement, Leitch Technology Corporation also has
rights of first refusal to purchase (i) any equity securities offered in a
private sale by Dr. Fellman, Dr. Michael Elliott and Dr. Palmer, and (ii) its
pro rata share of any capital stock, or rights, options, warrants or to purchase
capital stock issued by us, on the same terms and at the same price offered by
us to the third party or parties. These rights of first refusal and the voting
agreement give Leitch the potential to maintain or expand its substantial equity
position in us and exert significant influence over matters of corporate
governance. The right of first refusal with respect to securities offerings by
us could, in certain circumstances, serve as a deterrent to future acquirors,
especially if Leitch does not approve of a proposed merger or acquisition, and
could give Leitch the leverage to condition its consent to offerings of our
securities on our adoption of policies favored by Leitch. In addition, Leitch
maintains demand registration rights pursuant to which it can require us to
register its shares of our common stock with the Securities and Exchange
Commission for resale into the public market. Such registration and resale could
adversely affect the price of our common stock.
Our equity compensation plans give wide latitude to the plan administrator
(our Board of Directors or committee thereof) to make option grants or stock
issuances to our officers and directors and to grant broad auxiliary rights in
connection with such option grants or stock issuances (e.g. full or partial
acceleration of vesting upon change of control or upon attainment of certain
performance milestones). In January 2002, our executive officers and employees
were granted stock options under our 2000 Stock Option/Stock Issuance Plan in
return for their agreement to voluntarily reduce their salaries for a period of
90-days. Additional option grants to our officers and directors would serve to
increase their equity ownership of the company and would allow these officers
and directors, should they choose to exercise their options, to exert increased
control over us.
Our charter documents contain provisions that could discourage a takeover.
Our Certificate of Incorporation and Bylaws contain provisions that may
have the effect of making more difficult or delaying attempts by others to
obtain control of us, even when these attempts may be in the best interests of
the stockholders. Our Certificate of Incorporation authorizes our Board of
Directors, without further stockholder approval, to issue one or more series of
preferred stock. Any such series of preferred stock could have rights, including
voting rights, superior to that of our common stock, and rights to elect
directors as a class. Grant of such rights could provide the preferred stock
holders with significant control over matters of corporate governance.
In addition, our Bylaws state that special meetings of the stockholders may
only be called by 20% or more of the outstanding stock entitled to vote at such
meeting, and also require that all significant transactions, even those that
would not otherwise require a vote of the Board of Directors, be reviewed and
approved by the Board. These Bylaws provisions may defer the calling of a
meeting at which a change of control might be effected and may serve to deter
potential acquirers.
We do not intend to pay cash dividends.
We have never paid cash dividends on our capital stock and do not anticipate
paying any cash dividends in the foreseeable future
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We would be exposed to changes in interest rates primarily from our marketable
securities and investments in certain available-for-sale securities. Under our
current policies, we do not use interest rate derivative instruments to manage
exposure to interest rate changes. At June 30, 2002, we did not have any
marketable securities or investments in available-for-sale securities.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 18, 2002 we completed the registration of 2,285,714 shares of common
stock pursuant to a securities purchase agreement between us and Laurus Funds,
Ltd.
On August 7, 2002 we filed Form SB-2 to register 1,767,676 shares of common
stock pursuant to a private placement completed in May 2002.
These were private placements, exempt from the Securities Act registration
requirement by virtue of Securities Act Section 4(2).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 14, 2002 the Annual Meeting of Stockholders was held. The following
directors were re-elected to serve on the Board of Directors until their term
expires at the next annual meeting of stockholders in 2003: Ronald D. Fellman
(6,188,473 for; 0 abstain/withheld), James A. Bixby (6,188,473 for; 0
abstain/withheld), Frederick A. Cary (6,188,473 for; 0 abstain/against), Robert
B. Clasen (6,188,473 for; 0 abstain/against), Robert L. Packer (6,188,473 for; 0
abstain/against), In addition, the stockholders approved the following proposal:
Proposal #2. Ratification of the selection of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 2002. There were
6,188,473 votes for and no votes against.
Proposal #3. To approve and adopt an amendment to the 2000 Stock Option/Issuance
Plan increasing the authorized number of shares to 4,260,000. There were
4,411,324 votes for, 167,750 votes against and 589,669 abstained, with 1,019,730
broker non-votes.
Proposal #4. To approve, under our 2000 Stock Option Stock/Issuance Plan total
option and share grants equal to up to 65% of the Company's outstanding stock.
There were 4,403,124 votes for, 169,750 votes against and 595,869 abstained,
with 1,019,730 broker non-votes.
Proposal #2 and proposal #3 were adopted. Proposal #4 required a supermajority
of 2/3rds of the total shares outstanding. Since there were insufficient votes
to constitute a supermajority, proposal #4 failed.
ITEM 5. OTHER INFORMATION
On July 12, 2002, Richard B. Slansky resigned as Chief Financial Officer of the
Company.
On July 12, 2002 Douglas A. Palmer resigned from the Company.
In May 2002, Dr. Ronald Fellman commenced a qualified selling plan under SEC
10B5-1. The plan runs for sixty trading days starting July 29, 2002 and sells a
maximum of 500 shares per day.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three-month period ended June 30,
2002.
Exhibits. The following exhibits are included as part of this report. References
to "us" in this Exhibit List mean Path 1 Network Technologies inc., a Delaware
corporation.
Exhibit
Number Description
10.18 Separation and General Release between us and Richard B. Slansky dated
July 8, 2002. *
10.19 Letter of Resignation from Douglas A. Palmer dated May 24, 2002. *
10.20 Consulting Agreement between us and Douglas A. Palmer dated May 24,
2002. *
10.22 Securities Purchase Agreement between us and our current European
Shareholders. (1)
10.23 Convertible promissory note issued to various European Shareholders.
(1)
99.1 Certification under Section 906 of the Sarbanes-Oxley Act of 2002. *
(1) This exhibit was previously filed as part of, and is hereby incorporated by
reference to, our Registration Statement on Form SB-2, filed with the commission
on August 7, 2002.
* Filed Herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Path 1 Network Technologies Inc.
By: /s/ Frederick A. Cary
- -------------------------
Frederick A. Cary
President and Chief Executive Officer
By: /s/ Donald W. Raymond
- ------------------------
Donald W. Raymond
(Principal Financial and Accounting Officer)
Date: August 14, 2002
Exhibits. The following exhibits are included as part of this report. References
to "us" in this Exhibit List mean Path 1 Network Technologies inc., a Delaware
corporation.
Exhibit
Number Description
10.18 Separation and General Release between us and Richard B. Slansky dated
July 8, 2002. *
10.19 Letter of Resignation from Douglas A. Palmer dated May 24, 2002. *
10.20 Consulting Agreement between us and Douglas A. Palmer dated May 24,
2002. *
10.22 Securities Purchase Agreement between us and our current European
Shareholders. (1)
10.23 Convertible promissory note issued to various European Shareholders.
(1)
99.1 Certification under Section 906 of the Sarbanes-Oxley Act of 2002. *
(1) This exhibit was previously filed as part of, and is hereby incorporated by
reference to, our Registration Statement on Form SB-2, filed with the commission
on August 7, 2002.
* Filed Herewith