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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 March 31, 2003.
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 Identification No.)
incorporation or organization)
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)
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 ___
As of May 16, 2003, 9,737,346 shares of the registrant's common stock were
outstanding.
PATH 1 NETWORK TECHNOLOGIES INC.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended March 31, 2003
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION.................................................3
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)....................................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......................................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK .............................................................31
ITEM 4. CONTROLS AND PROCEDURES............................................31
PART II - OTHER INFORMATION...................................................31
ITEM 1. LEGAL PROCEEDINGS..................................................31
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................32
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................32
ITEM 5. OTHER INFORMATION..................................................32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................33
SIGNATURES ................................................................34
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PATH 1 NETWORK TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in $ thousands except share data)
March 31, December 31,
2003 (unaudited) 2002 (audited)
--------------------- ---------------------
ASSETS
Current assets
Cash and cash equivalents $ 424 $ 396
Accounts receivable, net 338 438
Inventory 285 393
Other current assets 196 15
--------------------- ---------------------
Total current assets 1,243 1,242
Property and equipment, net 183 220
Debt issuance costs, net 209 107
Other assets 64 64
--------------------- ---------------------
Total Assets $ 1,699 $ 1,633
===================== =====================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued liabilities 1,159 $ 930
Accrued compensation and benefits 141 157
Current portion of notes payable 1,316 863
Deferred revenue 15 61
--------------------- ---------------------
Total current liabilities 2,631 2,011
Notes payable 541 161
--------------------- ---------------------
Total liabilities 3,172 2,172
--------------------- ---------------------
Stockholders' deficit
Preferred stock, 10 million shares authorized, $0.001 par value;
no shares issued or outstanding - -
Common stock, $0.001 par value;
40,000,000 shares authorized; 9,637,346 and 9,501,346 shares
issued and outstanding at March 31, 2003,
and December 31, 2002 respectively 10 10
Common stock to be issued 12 12
Additional paid-in capital 30,393 30,126
Deferred compensation (25) (50)
Accumulated deficit (31,863) (30,637)
--------------------- ---------------------
Total stockholders' deficit (1,473) (539)
--------------------- ---------------------
Total Liabilities and Stockholders' Deficit $ 1,699 $ 1,633
===================== =====================
See accompanying notes to these condensed consolidated financial statements.
PATH 1 NETWORK TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in $ thousands except per share data)
(unaudited)
Three Months Ended March 31,
2003 2002
-------------------- --------------------
Revenues
Product sales $ 598 $ -
Contract services 63 154
License revenue - -
-------------------- --------------------
Total revenues 661 154
-------------------- --------------------
Cost of revenues
Cost of product sales 338 -
Cost of contract services 18 123
-------------------- --------------------
Total cost of revenues 356 123
-------------------- --------------------
Gross profit 305 31
-------------------- --------------------
Operating expenses, before depreciation and amortization
Engineering research and development 362 517
Sales and marketing 291 193
General and administrative 640 702
Stock-based compensation 25 100
-------------------- --------------------
Total operating expense, before depreciation and amortization 1,318 1,512
-------------------- --------------------
Depreciation and amortization expense
Depreciation expense 42 35
Amortization expense 26 73
-------------------- --------------------
Total depreciation and amortization 68 108
-------------------- --------------------
Total operating expense 1,386 1,620
-------------------- --------------------
Operating loss (1,081) (1,589)
Other income (expense)
Interest expense, net (144) -
Loss on sale of securities - (590)
Other income (expense) (1) -
-------------------- --------------------
Total other expense (145) (590)
-------------------- --------------------
Loss from continuing operations (1,226) (2,179)
Discontinued operations - (251)
-------------------- --------------------
Net loss $ (1,226) $ (2,430)
==================== ====================
Net loss per common share from continuing operations (0.13) (0.26)
==================== ====================
Loss per common share - basic and diluted $ (0.13) $ (0.29)
==================== ====================
Weighted average common shares outstanding - basic and diluted 9,555 8,406
==================== ====================
See accompanying notes to these condensed consolidated financial statements.
PATH 1 NETWORK TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in $ thousands)
(unaudited)
Three Months Ended March 31,
2003 2002
-----------------------------------------
Cash flows from operating activities:
Net loss $ (1,226) $ (2,179)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 68 108
Amortization of deferred compensation 43 100
Accretion of debt discount & debt conversion expense 172 -
Loss on investment - 596
Changes in assets and liabilities
Accounts receivable 100 61
Inventory 108 -
Other current assets (181) 126
Other assets (128) -
Accounts payable and accrued liabilities 228 (14)
Accrued compensation and benefits (16) (53)
Deferred revenue (45) 75
-----------------------------------------
Cash used in operations (877) (1,180)
-----------------------------------------
Cash flows from investing activities:
Sale of marketable securities - 578
Purchase of property and equipment (5) (90)
-----------------------------------------
Cash provided by (used in) investing activities (5) 488
-----------------------------------------
Cash flows from financing activities:
Issuance of common stock 108 50
Issuance of convertible notes 802 -
Cash from extinguishment of shareholder notes - 86
-----------------------------------------
Cash provided by financing activities 910 136
-----------------------------------------
Cash flows from continuing operations 28 (556)
Cash flows from discontinued operations - (177)
-----------------------------------------
Increase (decrease) in cash and cash equivalents 28 (733)
Cash and cash equivalents, beginning of period 396 1,181
-----------------------------------------
Cash and cash equivalents, end of period $ 424 $ 448
=========================================
Supplemental cash flow disclosures:
Unrealized gain (loss) in marketable securities $ - $ (7)
=========================================
Capitalized debt issuance costs in connection with beneficial
conversion charges and warrants $ 76 $ -
=========================================
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 March 31, 2003, the
condensed consolidated statements of operations for the three-month periods
ended March 31, 2003 and 2002, and the condensed consolidated statements of cash
flows for the three-month period ended March 31, 2003 and 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, 2002 has been
audited. These quarterly consolidated 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 quarterly consolidated financial statements should be read
in conjunction with the financial statements and notes thereto for the year
ended December 31, 2002 included in the Company's Form 10-K filed March 31,
2003. The interim consolidated 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, 2003.
In the period from January 30, 1998 (inception) through March 31, 2003, the
Company incurred losses totaling $31.9 million. The accompanying consolidated
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. Our existing capital resources are insufficient to enable us to continue
operations as currently conducted. The cash crisis is very serious. Our
independent auditors' opinion expresses substantial doubt about our ability to
continue as a going concern. We need additional funding to meet current
commitments and continue development of our business. We currently have the cash
resources to continue our business at its current levels only for our immediate
needs. If we do not receive additional funding, our ability to continue as a
going concern cannot be assured. See "Liquidity and Capital Resources."
Management's plans are to manage costs in all areas of its operating plan until
sufficient capital is raised to support growth and more substantial orders and
revenues materialize. The Company has implemented various cost savings plans and
continues to manage costs. However, even with the focus on managing costs, 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's plans
include, but are not necessarily limited to: 1) further reducing costs and
focusing on selling existing products and services; 2) selling the Company's
assets through a merger or acquisition; or 3) seeking 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 periods 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 SFAS No. 142 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, namely Sistolic, and recorded an impairment
charge during the year ended December 31, 2001 of $689,000.
In April 2002, the FASB issued SFAS No. 145 ("SFAS No. 145") Rescission of SFAS
No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections. SFAS No.
145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt,
SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, and SFAS No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No.
145 requires, among other things, (i) that the modification of a lease that
results in a change of the classification of the lease from capital to operating
under the provisions of SFAS No. 13 be accounted for as a sale-leaseback
transaction, and (ii) the reporting of gains or losses from the early
extinguishment of debt as extraordinary items only if they met the criteria of
Accounting Principles Board Opinion No. 30, Reporting the Results of Operations.
The amendment of SFAS No. 13 is effective for transactions occurring on or after
May 15, 2002. Although the rescission of SFAS No. 4 is effective January 1,
2003, the FASB has encouraged early application of the provisions of SFAS No.
145. Management has assessed the impact of this interpretation and believes it
has no material effect on the Company's financial position, results of
operations, or cash flows.
In July 2002, the FASB issued Statement of Financial Accounting Standard No. 146
("SFAS No. 146"), Accounting for Costs Associated with Exit or Disposal
Activities (effective January 1, 2003). SFAS No. 146 replaces current accounting
literature and requires the recognition of costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Management has assessed the impact of
this interpretation and believes it has no material effect on the Company's
financial position, results of operations, or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. This interpretation also
clarifies the requirements related to the recognition of a liability by a
guarantor at the inception of a guarantee for the obligations that the guarantor
has undertaken in issuing that guarantee. Management has assessed the impact of
this interpretation and believes it has no material effect on the Company's
financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. This statement amends FASB Statement
No. 123 to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, the statement amends the disclosure requirements of Statement No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company has adopted
this statement for the period ended March 31, 2003.
The following table summarizes the impact on the Company's net loss had
compensation cost been determined based upon the fair value at the grant date
for awards under the stock option plans consistent with the methodology
prescribed under SFAS No. 123 (in thousands, except per share data):
Three Months Ended March 31,
2003 2002
-------------------------------------------
Net loss, as reported $ (1,226) $ (2,430)
Less: Stock-based employee compensation 76 42
-------------------------------------------
Pro forma net loss $ (1,301) $ (2,472)
===========================================
Basic and diluted loss per share:
As reported $ (0.13) $ (0.29)
===========================================
Pro forma $ (0.14) $ (0.29)
===========================================
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities. This interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. It further clarifies whether an entity shall be
subject to consolidation according to the provisions of this interpretation, if
by design, certain conditions exist. Management is assessing the impact of this
interpretation.
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. Provisions
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.
Contract Service Revenue
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 Revenue
Revenues from license fees are recognized when persuasive evidence of a sales
arrangement exists, delivery and acceptance have occurred, the price is fixed or
determinable, and collectability is reasonably assured.
Allowances for Doubtful Accounts, Returns and Discounts
We establish allowances for doubtful accounts, returns and discounts based on
credit profiles of our customers, current economic trends, contractual terms and
conditions and historical payment, return and discount experience, as well as
for known or expected events. If there were to be a deterioration of a major
customer's creditworthiness or if actual defaults, returns or discounts were
higher than our historical experience our operating results and financial
position could be adversely affected.
Warranty Reserves
We provide a limited warranty for our products. A provision for the estimated
warranty cost is recorded at the time revenue is recognized. Liabilities for the
estimated future costs of repair or replacement are established and charged to
cost of sales at the time the related revenue is recognized. The amount of
liability to be recorded is based on management's best estimates of future
warranty costs after considering historical and projected product failure rates
and product repair costs.
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 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 Company currently sells product to a limited number of customers. For the
period ended March 31, 2003, approximately 38% and 13%, respectively, of the
Company's product sales were to the Company's two largest customers.
Note 6 - Discontinued Operations
In March 2002, 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 ADC SRL, in exchange for the elimination of the remaining obligations by
the Company to Metar ADC SRL and its affiliates, including the payable of
$686,000, the return of all stock options granted to an Executive and the
Romanian employees, and a confirmation that performance criteria specified in
such Executive's employment agreement related to a potential $4 million bonus
were never met by him. The Company also received a limited use license to the
business unit's intellectual property. Metar ADC SRL also received 35,000 shares
of our common stock. The Executive 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 months ended
March 31, 2002, have been included in discontinued operations. We recorded a
loss of $251,000 from discontinued operations for the three months ended March
31, 2002.
Note 7- Stock Options
The Company accounts for stock-based compensation arrangements using the
intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion ("APB") 25, Accounting for Stock Issued to Employees,
Statement of Financial Accounting Standards (SFAS), Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans, and SFAS Interpretation 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. In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure. This statement amends FASB
Statement No. 123 to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, the statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has made the required disclosure under SFAS No. 148.
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 period ended March 31, 2003, the Company recorded
stock-based compensation expense of $25,000 related to the amortization of
options outstanding to employees. Stock-based compensation related to
consultants has been included in operating expense. For the same three-month
period in 2002, the Company recognized expense of $100,000 related to the
amortization of stock based compensation for employees and consultants.
Note 8 - Notes Payable
In 2002, the Company received approximately $1,031,000 from a private placement
of convertible notes with European investors (the "Euro notes") who were
existing 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. In addition, upon
conversion, the note holder will be issued warrants equal to the number of
shares to be issued.
Because the Euro notes' conversion price was below the trading market price of
stock on the day the Euro notes were issued, this resulted in an embedded
beneficial conversion element. As a result, we recorded a debt discount of
$301,000 and this sum is being accreted over the life of the debt or sooner in
the event of conversion. Through December 31, 2002, approximately 76% of the
note holders converted their notes into the Company's common stock. Upon
conversion, the Company expensed warrants to purchase 674,654 shares of common
stock at $1.60 per share for $293,000. The warrants are fully vested and expire
in June 2007. In 2002, we recorded non-cash interest expense of $573,000
relating to amortization of debt discount and issuance of common stock warrants
related to the Euro notes.
During 2002, the Company issued two convertible notes to The Laurus Master Fund
("Laurus"). In May 2002, we issued Laurus a 12%, 15-month convertible note in
the principal amount of $1,250,000. The note is convertible at a price of $1.40
per share. The Company secured a three-month deferral of principal and interest
under the note. In connection with the issuance of the 12% convertible note in
May 2002, we issued to Laurus warrants to purchase 125,000 shares of common
stock at $1.68 per share. The warrants are fully vested and expire on May 2009.
On November 7, 2002, we issued Laurus a 12% convertible note in the principal
amount of $300,000. The note is convertible at a price of $.85 per share and is
payable on a monthly basis over 18 months. In connection with the issuance of
the 12% convertible note in November 2002, the Company issued warrants to
purchase 75,000 shares of common stock at $.85 per share.
Because the Laurus notes' conversion prices were below the trading market prices
of the Company's stock on the dates of issue, this resulted in an embedded
beneficial conversion element. We recorded a debt discount of $779,000 and this
is being accreted over the life of the debt or sooner in the event of
conversion. In 2002, we recorded non-cash interest expense of $421,000 relating
to the accretion of debt discount and conversions related to the Laurus notes.
The price at which these Laurus notes convert into our stock generally varies
monthly in proportion to the price of our stock at the time of conversion, and
is based generally on a trailing market price.
As part of the November 7, 2002 convertible note transaction, the Company also
repriced the conversion price of the May 2002 convertible note and the 125,000
warrants (which had been purchased by the same investor) to $.85 per share. The
term of the May 2002 note was extended to May 7, 2004. The repricing resulted in
a non-cash charge of $130,000 in the fourth quarter ended December 31, 2002
related to debt conversion expense. The Company will incur additional non-cash
debt conversion expense in the future upon the conversion of both notes.
On February 14, 2003, the Company entered into a $1 million revolving line of
credit with Laurus. This revolving line of credit ("the LOC") is secured by the
Company's accounts receivables and other assets, and the Company has the ability
to draw down advances under the LOC subject to limits. Under the terms of the
LOC, Laurus can convert advances made to the Company into common stock at a
fixed conversion price of $1.13 per share. In connection with the LOC, the
Company issued warrants to purchase 75,000 shares of the Company's Common Stock
at $1.13 per share. The Company borrowed a $300,000 advance under the LOC. The
Company recorded a non-cash debt discount of $23,000 in its quarter ended March
31, 2003.
On March 28, 2003, the Company signed a securities purchase agreement under
which the Company can raise up to $1.5 million through the issuance of 7%
convertible notes with a fixed conversion price of $.65 per share. In connection
with notes issued under this Agreement, the Company will issue up to 576,923
warrants to purchase the Company's common stock at $1.00 per share. Pursuant to
this Agreement, on March 28, 2003, the Company issued to Palisades Master Fund
L.P. ("Palisades") a note in the amount of $500,000, together with a warrant to
purchase up to 192,308 shares of the Company's common stock. Because the
conversion price of this note was below the market price of our stock on the
date the note was issued, this resulted in an embedded beneficial conversion
element. We recorded a non-cash debt discount of $53,000 related to this note in
our quarter ended March 31, 2003. See Note 9, Subsequent Event.
The Company's notes payable at March 31, 2003 are as follows (in thousands of
dollars):
Short-term notes payable consist of the following at March 31, 2003:
European investors (less unamortized debt discount of $5,000)1 $ 361
Laurus Master Funds Ltd (less unamortized debt discount of $235,000)2 678
Laurus Master Funds Ltd (less unamortized debt discount of $23,000)3 277
-------------------
$ 1,316
===================
1 Notes payable to European investors bear interest at 4.0% and are convertible
into the Company's stock at a rate of $1.20 per share.
2 These notes bear interest at 12.0% and are convertible into the Company's
common stock at a variable rate not to exceed $0.85 per share.
3 This Note is a $1 million A/R secured, revolving line of credit expiring in
February, 2006 that bears interest at Prime + 1.75%, and drawn-down amounts
are convertible into the Company's common stock at a rate of $1.13 per share.
Long-term notes payable consist of the following at March 31, 2003:
4% Euro notes due May, 2003 (less unamortized debt discount of $5,000) (convertible into
192,259 shares of common stock) $ 361
12% Laurus Master Funds notes due May, 2004 (less unamortized debt discount of
$268,000) (convertible into a minimum of 933,625 share of common stock) 772
Laurus Master Funds $1 million line of credit (less unamortized debt discount of
$23,000) (convertible into 265,487 shares of common stock) 277
7% Pallisades notes due March, 2005 (less unamortized debt discount of
$53,000)(convertible into 769,231 shares of common stock) 447
Less: Current maturities included in current liabilities (1,316)
-------------------
$ 541
===================
At March 31, 2003, the maturities of long-term debt are as follows:
2003 $ 1,064
2004 642
2005 500
-------------------
$ 2,206
===================
Note 9 - Subsequent Event
Pursuant to the March 28, 2003 securities purchase agreement under which the
Company can raise up to $1.5 million through the issuance of 7% convertible
notes with a fixed conversion price of $.65 per share, on April 4, 2003, the
Company issued in favor of Crescent International Ltd. a note in the amount of
$500,000, together with a warrant to purchase up to 192,308 shares of the
Company's common stock. Because the conversion price of this note was below the
market price of our stock on the date the note was issued, this resulted in an
embedded beneficial conversion element. We will record non-cash debt discount
related to this note in our quarter ending June 30, 2003.
On May 15, 2003, the Company closed the remaining $500,000 round on its $1.5
million, 7% convertible notes financing pursuant to the March 28, 2003
securities purchase agreement. In this remaining round, the Company issued a
total of $500,000, 7% convertible notes in favor of Palisades Master Fund, L.P.,
Crescent International, Ltd, Alpha Capital AG and Barucha, Ltd., together with
warrants to purchase up to a total of 192,308 shares of the Company's common
stock. Because the conversion prices of these notes were below the market price
of our stock on the date the notes were issued, this resulted in an embedded
beneficial conversion element. We will record non-cash debt discount related to
these notes in our quarter ending June 30, 2003.
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
our annual report on Form 10-K and other reports and filings made with the
Securities and Exchange Commission.
OVERVIEW
We are an industry leader in developing and supplying products that enable the
transportation and distribution of real-time, high-quality video over Internet
Protocol (IP) networks, such as the networks that comprise the Internet. Our
products are currently used in two different segments of the video market. Our
products are used by a variety of providers to transmit high-quality, real-time
video to one or more locations throughout the United States or the world (which
we refer to as "long-haul transmission"). Since our products transmit video
content using IP communication networks, our customers can use existing
infrastructure, thus lowering their costs and permitting them greater
flexibility in the delivery of video content. Our products are also used by
cable companies to supply video-on-demand services. Our customers include cable,
broadcast and satellite companies, movie studios, carriers and government and
educational institutions. Collectively, we refer to these customers as
communication service providers, or simply as providers.
Long Haul Customers
Our long haul customers use our products to transmit high-quality, real-time
video to one or a number of locations over existing IP networks. This ability to
send video over IP networks significantly reduces the current need of long haul
providers to rent dedicated high bandwidth connections to service the specified
locations. Our products not only provide a cost advantage to our customers, but
also enable them increased flexibility in where and when the video is
transmitted.
Customers using our products for long-haul transmission include DreamWorks LLC,
a major film production studio, for domestic and international creative
collaborations using high-definition video cameras. C-Span uses our products to
televise real-time, interactive classrooms between Washington, D.C. and the
University of Denver. PanAmSat uses our Cx1000 on the Level (3) backbone to
interconnect earth stations for video routing with the least delay. RTVI, a
Russian television network, runs live broadcast-quality Russian language
programming between Moscow and New York using our long haul product, and is
expanding its network internationally. Currently, Level (3) offers full and
part-time video services using our Cx1000 product to deliver broadcast video in
key US and European cities. Wiltel/Vyvx has moved video operations centers into
networking facilities to merge IP video, voice and data services that use our
Cx1000 product for video.
Cable Company Customers
The versions of our Chameleon vidX product line designed for cable television
companies allows them to use existing digital set-top boxes already in consumer
homes to provide video-on-demand services, a significant competitive advantage
over satellite providers. The more efficient use of existing bandwidth (both
into the home and within the network) allows cable companies to increase the
volume of content (whether movies, television or live events) available for
delivery whenever requested by the cable subscriber, or to increase the number
of subscribers served with existing content volume. We believe that the desire
for video-on-demand - indeed, all content-on-demand - will continue to rise as
consumers become increasingly aware of its availability and benefits, and as IP
networks enabled by our products provide access to significant amounts of
interactive programming previously unavailable. Cable companies currently using
our products include companies such as Time-Warner and Cablevision.
Additionally, our products will provide cable companies with flexibility to
deliver high definition television, which could potentially overwhelm the
bandwidth capacity of current delivery technologies. High definition television
requires at least five times the bandwidth currently required for standard
television transmissions. Using our products, providers can avoid incurring
significant capital expenditures to increase the capacity of existing
infrastructure, and can avoid significant recurring costs to maintain and
support the expanded networks resulting from high definition television and
increased numbers of channels. Should these providers use existing methods of
transmission, they might eventually be forced to decrease programming or other
services to conserve bandwidth.
Company Information
We were incorporated in Delaware in January 1998. Our principal executive
offices are located at 6215 Ferris Square, Suite 140, San Diego, California
92121. Our telephone number is (858) 450-4220. Our website is located at
www.path1.com.
Liquidity And Capital Resources
Since our inception on January 30, 1998, we have financed our operations
primarily through the sale of common equity securities to investors and
strategic partners, as well as from the issuance of convertible notes.
From January 30, 1998 through March 31, 2003, we incurred losses totaling $31.9
million. The accompanying consolidated 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.
At March 31, 2003, we had negative working capital of $1,388,000, and an
increase of $28,000 in cash and cash equivalents compared to December 31, 2002.
Our plans are to contain and reduce costs in all areas of our operating plan
until sufficient capital is raised to support our growth and more substantial
product orders materialize; however, even with our cost reduction plans, we need
to raise additional funding to continue as a going concern. In the event we do
not receive additional funding, our plans may include, but are not necessarily
limited to: 1) further reducing costs and focusing on selling existing products
and services; 2) selling the Company's assets through a merger or acquisition;
or 3) seeking protection under bankruptcy statutes. Without additional
financing, we may 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 we may not be able to
continue as a going concern.
In 2002, the Company received approximately $1,031,000 from a private placement
of convertible notes with European investors (the "Euro notes") who were
existing 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. In addition, upon
conversion, the note holder will be issued warrants equal to the number of
shares to be issued.
Because the Euro notes' conversion price was below the trading market price of
stock on the day the Euro notes were issued, this resulted in an embedded
beneficial conversion element. As a result, we recorded a debt discount of
$301,000 and this will be accreted over the life of the debt or sooner in the
event of conversion. Through March 31, 2003, approximately 76% of the note
holders converted their notes into the Company's common stock. Upon conversion,
the Company expensed warrants to purchase 674,654 shares of common stock at
$1.60 per share for $293,000. The warrants are fully vested and expire in June
2007. In 2002, we recorded non-cash interest expense of $573,000 relating to
amortization of debt discount and issuance of common stock warrants related to
the Euro notes. Some of the Euro notes have matured but have not been paid. We
believe we have an arrangement with the holders of these outstanding Euro notes
to roll their notes into new notes.
During 2002, the Company issued two convertible notes to The Laurus Master Fund
("Laurus"). In May 2002, we issued Laurus a 12%, 15-month convertible note in
the principal amount of $1,250,000. The note was convertible into common stock
at a price of $1.40 per share. The Company secured a three-month deferral of
principal and interest under the note. In connection with the issuance of the
12% convertible note in May 2002, we issued to Laurus warrants to purchase
125,000 shares of common stock at $1.68 per share. The warrants are fully vested
and expire on May 2009.
On November 7, 2002, we issued Laurus a 12% convertible note in the principal
amount of $300,000. The note is convertible at a price of $.85 per share and is
payable on a monthly basis over 18 months. In connection with the issuance of
the 12% convertible note in November 2002, we issued warrants to purchase 75,000
shares of common stock at $.85 per share.
Because the Laurus notes' conversion prices were below the trading market prices
of our Company's stock on the dates of issue, this resulted in an embedded
beneficial conversion element. We recorded a debt discount of $779,000 and this
sum is being accreted over the life of the debt or sooner in the event of
conversion. In 2002, we recorded non-cash interest expense of $421,000 relating
to the accretion of debt discount and conversions related to the Laurus notes.
The price at which these Laurus notes convert into our stock generally varies
monthly in proportion to the price of our stock at the time of conversion, and
is based generally on a trailing market price.
As part of the November 7, 2002 convertible note transaction, we also repriced
the conversion price of the May 2002 convertible note and the 125,000 warrants
(which had been purchased by the same investor) to $.85 per share. The term of
the May 2002 note was extended to May 7, 2004. The reprice resulted in a
non-cash charge of $130,000 in the fourth quarter ended December 31, 2002
related to debt conversion expense. The Company will incur additional non-cash
debt conversion expense in the future upon the conversion of both notes.
On February 14, 2003, we entered into a $1 million revolving line of credit with
Laurus. This revolving line of credit ("the LOC") is secured by our accounts
receivables and other assets, and we have the ability to draw down advances
under the LOC subject to limits. Under the terms of the LOC, Laurus can convert
advances made to us into our common stock at a fixed conversion price of $1.13
per share. In connection with the LOC, we issued warrants to purchase 75,000
shares of our Common Stock at $1.13 per share.
On March 28, 2003, we signed a securities purchase agreement under which we can
raise up to $1.5 million through the issuance of 7% convertible notes with a
fixed conversion price of $.65 per share. In connection with notes issued under
this Agreement, we will issue up to 576,923 warrants to purchase our common
stock at $1.00 per share. Pursuant to this Agreement, on March 28, 2003, we
issued to Palisades Master Fund L.P. ("Palisades") a note in the amount of
$500,000, together with a warrant to purchase up to 192,308 shares of our common
stock. Because the conversion price of this note was below the market price of
our stock on the date the note was issued, this resulted in an embedded
beneficial conversion element. We recorded non-cash debt discount of $53,000
related to this note in our quarter ended March 31, 2003.
Pursuant to the March 28, 2003 securities purchase agreement under which the
Company can raise up to $1.5 million through the issuance of 7% convertible
notes with a fixed conversion price of $.65 per share, on April 4, 2003, the
Company issued in favor of Crescent International Ltd. a note in the amount of
$500,000, together with a warrant to purchase up to 192,308 shares of the
Company's common stock. Because the conversion price of this note was below the
market price of our stock on the date the note was issued, this resulted in an
embedded beneficial conversion element. We will record non-cash debt discount
related to this note in our quarter ending June 30, 2003.
On May 15, 2003, the Company closed the remaining $500,000 round on its $1.5
million, 7% convertible notes financing pursuant to the March 28, 2003
securities purchase agreement. In this remaining round, the Company issued a
total of $500,000, 7% convertible notes in favor of Palisades Master Fund, L.P.,
Crescent International, Ltd, Alpha Capital AG and Barucha, Ltd., together with
warrants to purchase up to a total of 192,308 shares of the Company's common
stock. Because the conversion prices of these notes were below the market price
of our stock on the date the notes were issued, this resulted in an embedded
beneficial conversion element. We will record non-cash debt discount related to
these notes in our quarter ending June 30, 2003.
For the foreseeable future, we expect to incur substantial additional
expenditures associated with cost of sales and 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. We are continuing to seek other sources
of additional capital to fund operations until we are able to fund operations
through internal cash flow.
At March 31, 2003, we had 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 possible need to
acquire new technology, the expansion of our sales and marketing efforts, and
our expansion internationally. We expect to continue to expend significant
amounts in all areas of our operations.
As noted above, we will need additional financing in 2003. 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 financing. 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 or significantly diluted, or such
equity securities may provide for rights, preferences or privileges senior to
those of the holders of our common stock.
Our existing capital resources are insufficient to enable us to continue
operations as currently conducted. The cash crisis is very serious. Our
independent auditors' opinion expresses substantial doubt about our ability to
continue as a going concern.
Cash used in operations was $877,000 at March 31, 2003, compared to $1,180,000
for the same period in 2002. The decrease in cash used in operations for the
quarter ended March 31, 2003, compared to the same period in the prior year was
due primarily to a lower net loss and a decrease in inventory.
Cash used in investing activities as of March 31, 2003, was $5,000, compared
cash provided of $488,000 as of March 31, 2002. Cash provided for the quarter
ended March 31, 2002 was primarily the result of our sale of marketable
securities in early 2002.
Cash provided by financing activities for the quarter ended March 31, 2003 was
$910,000, compared to cash provided of $136,000 at March 31, 2002. This change
was primarily due to the issuance of convertible notes.
Results Of Operations
Three Months Ended March 31, 2003 vs. Three Months Ended March 31, 2002
For quarter ended March 31, 2003, net revenue was $661,000 compared to $154,000
during the three-month period ended March 31, 2002, reflecting a 329% increase.
Revenue in the quarter ended March 31, 2003 came principally from sales of our
products for the video over IP transport market, as well as from contract
services. In the quarter ended March 31, 2002 revenue was generated from
contract services.
Cost of goods sold increased to $356,000 from $123,000 in the quarter ended
March 31, 2003. Cost of goods sold for products consists primarily of raw
material costs, warranty costs and labor associated with manufacturing our
products. Cost of goods sold for contract services consists primarily of
engineering payroll costs.
Our gross profit increased over 800% to $305,000 from $31,000 in the quarters
ending March 31, 2003 and 2002, respectively. Our increase in gross profit
results primarily from the change in our business to selling products, as well
as our managing our production and development costs.
Engineering research and development expenses for the quarter ended March 31,
2003 decreased 33% to $362,000 from $517,000 in the quarter ended March 31,
2002. The decrease is due primarily to reduced cost of R&D personnel, and
reduced expenditures on to acquire development expertise and tools for our new
products.
Selling, marketing, and general and administrative expenses for the quarter
ended March 31, 2003 increased 4% to $931,000 from $895,000 for the quarter
ended March 31, 2002. The increase is primarily due to increased sales and
marketing expenses for payroll, trade shows and travel.
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. We record
compensation expense related to the outstanding options to consultants and some
employees for the amount of options that vest in that period. In the first
quarter ended March 31, 2003, we recorded a $25,000 non-cash charge for
stock-based compensation related to employees. Stock-based compensation related
to consultants has been included in operating expense. For the same three-month
period in 2002, the Company recognized expense of $100,000 related to the
amortization of stock based compensation for employees and consultants.
Interest expense for the quarter ended March 31, 2003 was $144,000. We reported
no interest income or expense in the quarter ended March 31, 2002. The increase
in interest expense predominantly consists of the amortization of deferred
interest and debt discount related to our convertible note borrowings in 2002.
We neither held nor sold portfolio securities in the quarter ended March 31,
2003. In the quarter ended March 31, 2002, we recorded a loss on sale of
securities totaling $590,000, reflecting our sale of securities that we held in
various companies, especially Leitch Technology Corporation.
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. On April 3, 2002, we
disposed of the assets of this business unit back to Metar ADC SRL and its
President ("Executive") in exchange for the elimination of our remaining
obligations to Metar ADC SRL and its affiliates, including the payable of
$686,000, the return of all stock options granted to the Executive and the
Romanian employees, and a confirmation that performance criteria specified in
the Executive's employment agreement with us related to a potential $4 million
bonus were never met by him. We also received a limited use license to the
business unit's intellectual property. In addition, the Romanian facility lease
was transferred to Metar ADC SRL and the Romanian employment contracts were
terminated. Metar ADC SRL was permitted to hire any and all Romanian employees.
Metar SRL also received 35,000 shares of our common stock. The Executive
resigned on March 27, 2002, as an officer of the Company in anticipation of this
transaction.
Sistolic's results of operations for the quarter ended March 31, 2002 have been
included in discontinued operations. We recorded a loss of $251,000 from
discontinued operations for the quarter ended March 31, 2002.
RISK FACTORS
Investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below together with all of the other
information included in this prospectus before making an investment decision.
The risks and uncertainties described below are not the only ones we face. If
any of the following risks actually occurs, our business, financial condition or
results of operations could suffer. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
WE ARE DEPENDENT UPON ADDITIONAL FUNDING TO MEET CURRENT COMMITMENTS, CONTINUE
DEVELOPMENT OF OUR BUSINESS AND MAINTAIN OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
Our existing capital resources are insufficient to enable us to continue
operations as currently conducted. The cash crisis is very serious. Our
independent auditors' opinion expresses substantial doubt about our ability to
continue as a going concern.
We need additional funding to meet current commitments and continue development
of our business. We currently have the cash resources to continue our business
at its current levels only for our immediate needs. If we do not receive
additional funding, our ability to continue as a going concern cannot be
assured.
OUR LIMITED SALES HISTORY MAKES IT DIFFICULT TO EVALUATE OUR PROSPECTS.
We were founded in January 1998 and have only been selling our products
commercially since 2002, which makes an evaluation of our prospects difficult.
Because of our limited sales history, we have limited insight into trends that
may emerge and affect our business. In addition, the revenues and income
potential of our business and market are unproven. An investor in our securities
must consider the challenges, expenses and difficulties we face as our sales and
marketing efforts mature.
WE RECENTLY LAUNCHED OUR INITIAL COMMERCIAL PRODUCTS AND SERVICES AND THEY MAY
NOT GAIN CUSTOMER ACCEPTANCE.
In 2002, we launched our two primary commercial products into the video
transport market and announced the deployment of our Chameleon vidX product line
in our first quarter of 2003. These products are in the early stages of
commercial deployment or are still in development. We may not be able to gain
customer acceptance of any of our products due to our lack of an established
track record, our financial condition, competition, price or a variety of other
factors. If our products and services are not accepted by potential customers,
or if these customers do not purchase our products and services at the levels we
anticipate, our operating results may be materially adversely affected.
WE FACE COMPETITION FROM ESTABLISHED AND DEVELOPING COMPANIES, MANY OF WHICH
HAVE SIGNIFICANTLY GREATER RESOURCES, AND WE EXPECT SUCH COMPETITION TO GROW.
The markets for our products, future products and services are intensely
competitive. We face direct and indirect competition from a number of
established companies, including Scientific-Atlanta, as well as development
stage companies, and we anticipate that we will face increased competition in
the future as existing competitors seek to enhance their product offerings and
new competitors emerge. Many of our competitors have greater resources, 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 and, as a result, such
companies may be able to develop their products more rapidly and market their
products more extensively than we can.
Competitive technologies that offer a similar or superior capacity to converge
and transmit audio, video and telephonic data on a real-time basis over existing
networks may currently exist or may be developed in the future. We cannot assure
you that any technology currently being developed by us is not being developed
by others or that our technology development efforts will result in products
that are competitive in terms of price or performance. If our competitors
develop products or services that offer significant price or performance
advantages as compared to our current and proposed products and services, or if
we are unable to improve our technology or develop or acquire more competitive
technology, our business could be adversely affected. In addition, competitors
with greater financial and other resources than we have may be able to leverage
such resources to gain wide acceptance of products inferior to ours.
OUR CUSTOMER BASE IS CONCENTRATED AND THE LOSS OF ONE OR MORE OF OUR KEY
CUSTOMERS WOULD HARM OUR BUSINESS.
Historically, a significant majority of our sales have been to relatively few
customers, including Scientific-Atlanta. We expect that sales to relatively few
customers will continue to account for a significant percentage of our net sales
for the foreseeable future. Almost all of our sales are made on a purchase order
basis, and none of our customers has entered into a long-term agreement
requiring it to purchase our products. The loss of, or any reduction in orders
from, a significant customer would harm our business.
OUR CRITICAL RELATIONSHIP WITH Scientific-Atlanta AS BOTH A CUSTOMER AND AS A
COMPETITOR MAY JEOPARADIZE OUR SUCCESS.
In 2002, approximately 66% of our revenues were from sales to Scientific-Atlanta
and its subsidiary, BarcoNet N.V. Should our level of business with
Scientific-Atlanta change, our results could be negatively impacted.
Our technology uses non-proprietary industry standard interfaces and designs for
video transport (known as IP/gigabit Ethernet). We are aware that
Scientific-Atlanta has developed a product line that operates with an
alternative to the open industry standard of IP/gigabit Ethernet.
We believe transporting video directly over a proprietary standard eliminates
the flexibility offered through open standards such as IP/gigabit Ethernet.
Nonetheless, Scientific-Atlanta's development, marketing and sale of its
proprietary standard-based products may compete directly with our development,
marketing and sales efforts. Since Scientific-Atlanta has greater financial and
other resources than we do, Scientific-Atlanta may be able to develop its
products more rapidly and market its products more extensively than we can.
Because of Scientific-Atlanta's name recognition, industry-reputation and other
reasons, Scientific-Atlanta's products could become the standard for delivery of
real-time, broadcast-quality video, in which case the sale of our products could
materially suffer. Scientific-Atlanta's products and may be superior to ours in
terms of price or performance, or inferior to ours but backed by superior
marketing and support capabilities. As a result, we may not be able to compete
successfully with Scientific-Atlanta, and our ability to gain market share for
our products could be adversely affected.
Our relationship with Scientific Atlanta, as both a significant customer and a
significant competitor, may have adverse consequences to our business. While
general risks are associated with any competitor and any customer, the
conflicting interests of Scientific-Atlanta (as a result of being both)
magnifies these risks with respect to Scientific-Atlanta as both a customer and
competitor. Scientific-Atlanta may decide to pursue its proprietary standard
based products and discontinue its relationship with us, as both a reseller and
an outside manufacturer. Loss of sales to Scientific-Atlanta and its
distribution network to communication service providers could adversely affect
our business.
WE HAVE INCURRED LOSSES SINCE INCEPTION AND WILL LIKELY NOT BE PROFITABLE FOR
THE NEXT SEVERAL QUARTERS.
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 several
quarters. As of March 31, 2003, our accumulated deficit was approximately $31.9
million. We expect to continue to incur significant operating, sales, marketing,
research and development and general and administrative expenses and, as a
result, we will need to generate significant revenues to achieve profitability.
Even if we do achieve profitability, we cannot assure you that we can sustain or
increase profitability on a quarterly or annual basis in the future.
OUR QUARTERLY FINANCIAL RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY.
Our quarterly operating results are difficult to predict and may fluctuate
significantly from period to period, particularly because our sales prospects
are uncertain and our sales are made on a purchase order basis. In addition, we
have not proven our ability to execute our business strategy with respect to
establishing and expanding sales and distribution channels. Fluctuations may
result from decreased spending on new products such as ours by communication
service providers or their suppliers, the timing of new product offerings,
acquisitions, licenses or other significant events by us or our competitors, our
ability to establish a productive sales force or partner with communication
service providers or their suppliers, demand and pricing of the products we
offer, consumer acceptance of the services our products enable, interruption in
the manufacturing or distribution of our products and general economic and
market conditions, including war, and other conditions specific to the
telecommunications industry. As a result, we may experience significant,
unanticipated quarterly losses.
THE SUCCESS OF OUR BUSINESS IS DEPENDENT ON ESTABLISHING AND EXPANDING SALES AND
DISTRIBUTION CHANNELS FOR OUR PRODUCTS.
Third-Party Collaborations. We intend to partner with the leading suppliers to
communication service providers, including Scientific-Atlanta, to promote and
distribute our products, both as an outside equipment manufacturer to suppliers
and with suppliers acting as resellers of our products. We may not be able to
identify adequate partners, and even if identified, we may not be able to enter
into agreements with these entities on commercially reasonable terms, or at all.
To the extent that we enter into any such agreements with third parties, any
revenues we receive from sales of our products in those markets will depend upon
the efforts of such third parties, which in most instances will not be within
our control. If we are unable to effectively leverage a partner to market our
products more broadly than we can through our internal sales force, our business
could be adversely affected.
Internal Sales Force. We have limited experience in marketing and selling our
products. We intend to expand our direct sales force domestically and
internationally for the promotion of each of our Cx1000, Cx1410 and Chameleon
vidX product lines and other future products to suppliers to and communication
service providers of all kinds. Competition for quality sales and marketing
personnel is intense. In addition, new employees, particularly new sales and
marketing employees, will require training and education concerning our products
and will also increase our operating expenses. There can be no assurance that we
will be successful in attracting or retaining qualified sales and marketing
personnel. As a result, there can be no assurance that the sales force we are
able to build will be of a sufficient size or quality to effectively market our
products.
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.
Our products are based on new technology and, as a result, it is extremely
difficult to predict the timing and rate of market adoption of our products, as
well the rate of market adoption of applications enhanced by our products such
as video-on-demand. Accordingly, we have limited visibility into when we might
realize substantial revenue from product sales. We are providing new and highly
technical products and services to enable new applications. 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 that 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 may reduce prospects for sales of our
products. If our prospective customers curtail or eliminate their purchasing
programs, decrease their budgets or reduce their purchasing priority, our
results of operations could be adversely affected.
WE WILL DEPEND ON CABLE, BROADCASTING AND SATELLITE INDUSTRY SPENDING FOR A
SUBSTANTIAL PORTION OF OUR REVENUE AND ANY DECREASE OR DELAY IN SPENDING IN
THESE INDUSTRIES WOULD NEGATIVELY IMPACT OUR RESOURCES, OPERATING RESULTS AND
FINANCIAL CONDITION.
Demand for our products will depend on the magnitude and timing of spending by
cable television operators, broadcasters, satellite operators and carriers for
adopting new products for installation with their networks.
These spending patterns are dependent on a variety of factors, including:
o access to financing;
o annual budget cycles;
o the status of federal, local and foreign government regulation of
telecommunications and television broadcasting;
o overall demand for communication services and the acceptance of new
video, voice and data services;
o evolving industry standards and network architectures;
o competitive pressures;
o discretionary customer spending patterns;
o general economic conditions.
Recent developments in capital markets have reduced access to funding for
potential and existing customers causing delays in the timing and scale of
deployments of our equipment, as well as the postponement of certain projects by
our customers. The timing of deployment of our equipment can be subject to a
number of other risks, including the availability of skilled engineering and
technical personnel.
WE NEED TO DEVELOP AND INTRODUCE NEW AND ENHANCED PRODUCTS IN A TIMELY MANNER TO
REMAIN COMPETITIVE.
Broadband communications markets are characterized by continuing technological
advancement, changes in customer requirements and evolving industry standards.
To compete successfully, we must design, develop, manufacture and sell new or
enhanced products that provide increasingly higher levels of performance and
reliability. However, we may not be able to successfully develop or introduce
these products if our products:
o are not cost effective,
o are not brought to market in a timely manner,
o are not in accordance with evolving industry standards and
architectures, or
o fail to achieve market acceptance.
In order to successfully develop and market certain of our planned products for
digital applications, we may be required to enter into technology development or
licensing agreements with third parties. We cannot assure you that we will be
able to enter into any necessary technology development or licensing agreement
on terms acceptable to us, or at all. The failure to enter into technology
development or licensing agreements when necessary could limit our ability to
develop and market new products and, accordingly, could materially and adversely
affect our business and operating results.
DELIVERY OF REAL-TIME, BROADCAST-QUALITY VIDEO VIA IP NETWORKS IS A NEW MARKET
AND SUBJECT TO EVOLVING STANDARDS.
Delivery of real-time, broadcast-quality video over IP networks is novel and
evolving and it is possible that communication service providers or their
suppliers will adopt alternative architectures and technologies for delivering
real-time, broadcast-quality video over IP networks that are in compatible with
our current or future products. If we are unable to design, develop, manufacture
and sell products that incorporate or are compatible with these new
architectures or technologies, our business could suffer.
CHANGES IN THE MIX OF OUR PRODUCT SALES, PRODUCT DISTRIBUTION MODEL OR CUSTOMER
BASE COULD NEGATIVELY IMPACT OUR SALES AND MARGINS.
We may encounter a shift the mix of the various products that we sell - products
that have varying selling prices based in part on the type of product sold,
applicable sales discounts, licensed product feature sets, whether we sell our
products as an OEM, and whether the sale is a direct sale or an indirect channel
sale through our VARs and resellers. Any change in any of these variables could
result in a material adverse impact on our gross sales, gross margins and
operating results.
WE MAY BE UNABLE TO OBTAIN FULL PATENT PROTECTION FOR OUR CORE TECHNOLOGY AND
THERE IS A RISK OF INFRINGEMENT.
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. 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 RELY ON SEVERAL KEY SUPPLIERS OF COMPONENTS, SUB-ASSEMBLIES AND MODULES THAT
WE USE TO MANUFACTURE OUR PRODUCTS, AND WE ARE SUBJECT TO MANUFACTURING AND
PRODUCT SUPPLY CHAIN RISKS.
We purchase components, sub-assemblies and modules from a limited number of
vendors and suppliers that we use to manufacture and test our products. Our
reliance on these vendors and suppliers involves several risks including, but
not limited to, the inability to purchase or obtain delivery of adequate
supplies of such components, sub-assemblies or modules, increases in the prices
of such items, quality, and overall reliability of our vendors and suppliers.
Although in many cases we use standard parts and components for our products,
certain components are presently available only from a single source or limited
sources. Some of the materials used to produce our products are purchased from
foreign suppliers. We do not generally maintain long-term agreements with any of
our vendors or suppliers. Thus we may thus be unable to procure necessary
components, sub-assemblies or modules in time to manufacture and ship our
products, thereby harming our business.
We also recently signed an agreement with a leading parts vendor to provide
turn-key outsourced manufacturing services. To reduce manufacturing lead times
and to ensure adequate component supply, we may instruct our vendor to procure
inventory based on criteria and forecasts as defined by us. If we fail to
anticipate customer demand properly, an oversupply of parts, obsolete components
or finished goods could result, thereby adversely affecting our gross margins
and results of operations.
We may also be subject to disruptions in our manufacturing and product-testing
operations that could have a material adverse affect on our operating results.
UNANTICIPATED DELAYS OR PROBLEMS ASSOCIATED WITH OUR PRODUCTS AND IMPROVEMENTS
MAY CAUSE CUSTOMER DISSATISFACTION OR DEPRIVE US OF OUR "FIRST TO MARKET"
ADVANTAGE.
Delays in developing and releasing products and improvements are not uncommon in
the industry in which we compete. In the event of performance problems with our
product offerings, delays of more than a few months in releasing improvements
could result in decreased demand for a particular product and adverse publicity,
which could further reduce demand for particular products or our products
generally.
PRODUCT QUALITY PROBLEMS MAY NEGATIVELY AFFECT OUR REVENUES AND RESULTS FROM
OPERATIONS.
We produce highly complex products that incorporate leading edge technology
including both hardware, software and embedded firmware. Our software and other
technology may contain "bugs" that can prevent our products from performing as
intended. There can be no assurance that our pre-shipment testing programs will
be adequate to detect all defects either in individual products or which could
affect numerous shipments that, in turn, could create customer dissatisfaction,
reduce sales opportunities, or affect gross margins if the cost of remedying the
problems exceed our reserves established for this purpose. Our inability to cure
a product defect may result in the failure of a product line, serious damage to
our reputation, and increased engineering and product re-engineering costs that
individually or collectively would have a material adverse impact on our
revenues and operating results.
WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL IN THE FUTURE WHEN NEEDED, WHICH
COULD PREVENT US FROM GROWING.
Even if one assumes that we can resolve our very serious short-term cash crisis,
we must raise additional capital to fund our operations and planned growth. We
cannot be certain that any such financing will be available on acceptable terms,
or at all, and our failure to raise capital when needed could seriously harm our
business. In addition, additional equity financing may dilute our stockholders'
interest, and debt financing, if available, may involve restrictive covenants
and could result in a substantial portion of our operating cash flow being
dedicated to the payment of principal and interest on debt. If adequate funds
are not available, we may need to curtail our operations significantly.
WE MAY NOT BE ABLE TO PROFIT FROM GROWTH IF WE ARE UNABLE TO EFFECTIVELY MANAGE
THE GROWTH.
We anticipate that we will need to grow 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 successfully train, motivate and manage new employees;
expand our sales and support organization; integrate new management and
employees into our overall operations; and establish improved financial and
accounting systems.
We may not succeed in anticipating all of the changing demands that growth would
impose on our systems, procedures and structure. If we fail to effectively
manage our expansion, if any, our business may suffer.
WE 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.
Despite the recent economic slowdown, 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. The loss of services of any of our key personnel, the
inability to attract or retain key personnel in the future, or delays in hiring
required personnel, particularly engineering and sales personnel, could make it
difficult to meet key objectives such as timely and effective product
introductions.
WE ARE DEPENDENT ON OUR KEY EMPLOYEES FOR OUR FUTURE SUCCESS.
Our success depends on the efforts and abilities of our senior management 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 and results of operations could be materially
harmed.
WE ARE SUBJECT TO LOCAL, STATE AND FEDERAL REGULATION.
Legislation affecting us (or the markets in which we compete) could adversely
impact our ability to implement our business plan on a going-forward basis. The
telecommunications industry in which we operate is heavily regulated and these
regulations are subject to frequent change. Future changes in local, state,
federal or foreign regulations and legislation pertaining to the
telecommunications field may adversely affect prospective purchasers of
telecommunications equipment, which in turn would adversely affect our business.
Risks Related to Investment in Our Securities
THE MARKET PRICE OF OUR COMMON STOCK COULD BE VOLATILE AND YOUR INVESTMENT COULD
SUFFER A DECLINE IN VALUE.
The market price for our common stock is likely to be volatile and could be
susceptible to wide price fluctuations due to a number of internal and external
factors, many of which are beyond our control, including:
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 customer demand or acceptance of our products and solutions;
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 cost or availability of components, sub-assemblies and modules used in
our products;
o the introduction of new products or changes in product pricing
policies by us or our competitors;
o proprietary rights disputes or litigation;
o initiation of or changes in earnings estimates by analysts;
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.
OUR EXECUTIVE OFFICERS, DIRECTORS AND 5% STOCKHOLDERS WILL BE ABLE TO EXERCISE
SUBSTANTIAL CONTROL OVER ALL MATTERS REQUIRING SHAREHOLDER APPROVAL.
As of March 31, 2003, a small number of our executive officers, directors and 5%
stockholders, beneficially own, in the aggregate, approximately 56% of our
outstanding common stock. 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.
THE ISSUANCE OF COMMON STOCK TO THE LAURUS MASTER FUND AND TO OUR OTHER
INVESTORS IN OUR CONVERTIBLE NOTES WOULD CAUSE SIGNIFICANT DILUTION TO OUR
STOCKHOLDERS, AND THE RESALE OF SUCH SHARES MAY DEPRESS THE PRICE OF OUR COMMON
STOCK.
Assuming a full $1.5 million funding of the March 28, 2003 securities purchase
agreement, our convertible notes issued during 2002 including, but not limited
to, Laurus, and our existing drawdown of the Laurus line of credit, we will have
outstanding derivative securities (in addition to stock options) convertible or
exercisable for approximately 5,256,961 shares of common stock. The issuance of
the Company's common stock under the convertible notes and other financing
agreements may have a material dilutive impact on our shareholders, as well as a
negative impact on our financial results.
WE OFFER STOCK OPTIONS TO OUR EMPLOYEES, NON-EMPLOYEE DIRECTORS, CONSULTANTS AND
ADVISORS, WHICH COULD RESULT IN ONGOING DILUTION TO ALL STOCKHOLDERS, INCLUDING
INVESTORS IN THIS OFFERING.
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 March
31, 2003, there were options outstanding to purchase 3,618,514 shares of common
stock under our 2000 Plan; 622,004 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.
In addition, as of March 31, 2003, there were 539,713 shares of common stock
subject to outstanding options granted other than under the 2000 Plan or
Purchase Plan. These non-plan options were granted to various employees,
directors, consultants and advisors.
We plan to continue to provide our employees opportunities to participate in the
Purchase Plan. We also plan 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 pursuant to a
written consent solicitation of our stockholders under a Proxy Statement filed
with the Securities and Exchange Commission on December 31, 2001. Therefore, the
issuance of further stock options and shares under the 2000 Plan to persons
other than officers, directors and previous optionees requires qualification,
and is restricted under the "blue sky" securities provisions of the California
Corporations Code. As a result, our ability to grant options and stock as a
means of attracting and retaining employees and directors will be materially
impaired.
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 any 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 March 31, 2003, we did not have any
marketable securities or investments in available-for-sale securities, nor did
we have any sales denominated in a currency other than the United States dollar.
Our $1 million revolving line of credit from Laurus has a floating interest
rate.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
------------------------------------------------
Our chief executive officer and chief financial officer, after evaluating the
effectiveness of our "disclosure controls and procedures" (as defined in
Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date (the
"Evaluation Date") within 90 days before the filing date of this quarterly
report, have concluded that as of the Evaluation Date, our disclosure controls
and procedures were effective and designed to ensure that material information
relating to us and our consolidated subsidiaries would be made known to them by
others within those entities.
(b) Changes in internal controls
----------------------------
There were no significant changes in our internal controls or in other factors
that could significantly affect those controls subsequent to the Evaluation
Date.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 14, 2003, we entered into a $1 million revolving line of credit with
Laurus Master Fund, Ltd. (Laurus"). This revolving line of credit ("the LOC") is
secured by our accounts receivables and other assets, and we have the ability to
draw down advances under the LOC subject to limits. Under the terms of the LOC,
Laurus can convert advances made to us at a fixed conversion price of $1.13 per
share. In connection with the LOC, we issued warrants to purchase 75,000 shares
of our Common Stock at $1.13 per share. We received a $300,000 advance under the
LOC in our quarter ended March 31, 2003. The issuance of the securities was
exempt from the Securities Act registration requirement, by virtue of Section
4(2) of the Securities Act.
On March 28, 2003, we signed a securities purchase agreement for the issuance of
7% convertible notes with a fixed conversion price of $.65 per share. In
connection with notes issued under this Agreement, we will issue warrants to
purchase our common stock at $1.00 per share. Pursuant to this Agreement, and in
exchange for $500,000 cash, on March 28, 2003, we issued to Palisades Master
Fund L.P. a convertible note in the amount of $500,000, together with warrants
to purchase up to 192,308 shares of our common stock. The issuance of the
securities was exempt from the Securities Act registration requirement, by
virtue of section 4(2) of the Securities Act.
On February 5, 2003, we issued 240,000 shares of our common stock to Del Mar
Consulting Group, Inc., pursuant to an Independent Consulting Agreement dated
November 27, 2002. We also granted an option for 70,000 shares of our common
stock exercisable at $1.00 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits. The following exhibits are included as part of this report. References
to "Path 1" or "us" in this Exhibit List mean Path 1 Network Technologies Inc.,
a Delaware corporation.
Exhibit
Number Description
10.1 Agreement dated March 28, 2003 by and between Path 1 and DTKA Holdings
Limited terminating Common Stock Purchase Agreement dated January 17,
2002.*
10.2 Securities Purchase Agreement dated March 28, 2003 among Path 1,
Palisades Master Fund L.P. and Crescent International Ltd.*
10.3 7% Convertible Debenture due March 27, 2005 issued to Palisades Master
Fund L.P. in the principal amount of $500,000.*
10.4 Registration Rights Agreement dated March 28, 2003, among Path 1,
Palisades Master Fund L.P. and Crescent International Ltd.*
10.5 Stock Purchase Warrant dated March 28, 2003 issued to Palisades Master
Fund L.P.*
10.6 7% Convertible Note due March 27, 2005 issued to HPC Capital Management
in the principal amount of $10,000.*
10.7 Stock Purchase Warrant dated March 28, 2003 issued to HPC Capital
Management*
10.8 Laurus Master Fund, Ltd. Waiver of Full Ratchet Rights in Connection
with issuance of Securities under Purchase Agreement dated March 26,
2003.*
10.9 Laurus Master Fund, Ltd. Waiver and Consent to Purchase Agreement dated
March 26, 2003.*
10.10 Materials and Manufacturing Management Agreement Board Assembly dated
February 1, 2003 by and between us and Arrow Electronics, Inc.
99.1 Certification under Section 906 of the Sarbanes-Oxley Act of 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/ John R. Zavoli
- -------------------------
John R. Zavoli
Chief Financial Officer, General Counsel and Corporate Secretary
Date: May 19, 2003
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Frederick A. Cary, the principal executive officer of Path 1 Network
Technologies Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Path 1 Network
Technologies Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 19, 2003
/s/ Frederick A. Cary
- -----------------------------------------
Frederick A. Cary
Principal Executive Officer
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, John R. Zavoli, the principal financial officer of Path 1 Network
Technologies Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Path 1 Network
Technologies Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 19, 2003
/s/ John R. Zavoli
- -----------------------------------------
John R. Zavoli
Principal Financial Officer
Exhibits. The following exhibits are included as part of this report. References
to "us" or "Path 1" in this Exhibit List mean Path 1 Network Technologies Inc.,
a Delaware corporation.
Exhibit
Number Description
10.1 Agreement dated March 28, 2003 by and between Path 1 and DTKA Holdings
Limited terminating Common Stock Purchase Agreement dated January 17,
2002.*
10.2 Securities Purchase Agreement dated March 28, 2003 among Path 1,
Palisades Master Fund L.P. and Crescent International Ltd.*
10.3 7% Convertible Debenture due March 27, 2005 issued to Palisades Master
Fund L.P. in the principal amount of $500,000.*
10.4 Registration Rights Agreement dated March 28, 2003, among Path 1,
Palisades Master Fund L.P. and Crescent International Ltd.*
10.5 Stock Purchase Warrant dated March 28, 2003 issued to Palisades Master
Fund L.P.*
10.6 7% Convertible Note due March 27, 2005 issued to HPC Capital Management
in the principal amount of $10,000.*
10.7 Stock Purchase Warrant dated March 28, 2003 issued to HPC Capital
Management*
10.8 Laurus Master Fund, Ltd. Waiver of Full Ratchet Rights in Connection
with issuance of Securities under Purchase Agreement dated March 26,
2003.*
10.9 Laurus Master Fund, Ltd. Waiver and Consent to Purchase Agreement dated
March 26, 2003.*
10.10 Materials and Manufacturing Management Agreement Board Assembly dated
February 1, 2003 by and between us and Arrow Electronics, Inc.
99.1 Certification under Section 906 of the Sarbanes-Oxley Act of 2002. *
* Filed Herewith