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8-K - WORLDGATE COMMUNICATIONS INC | v180276_8k.htm |
Exhibit
99.1
WorldGate Communications,
Inc. Earnings Conference Call for the Fiscal Year ended December 31,
2009
Operator’s
Introduction
Welcome
to the WorldGate Fourth Quarter and Year Ending 2009 Earnings conference
call. Just a reminder, today’s call is being recorded. At
this time, I would like to turn the call over to Mr. George Daddis, WorldGate’s
Chief Executive Officer.
George
Daddis
Hello
everyone and welcome to our Fourth Quarter and Year Ending 2009 earnings
conference call. Speaking on the call today with me, will be
Chris Vitale, our General Counsel and Joel Boyarski, our Chief Financial
Officer.
To get us
started, I am going to turn the call over to Chris.
Chris
Vitale
Thank
you, George. Hello everyone.
WorldGate
intends to utilize the Safe Harbor provisions of the United States Private
Securities Litigation Reform Act of 1995 with respect to the forward-looking
statements made during this presentation. The forward-looking statements include
statements regarding WorldGate's operating strategy going forward. These
statements are based on WorldGate's current expectations and are subject to
risks and uncertainties set forth in WorldGate's 2009 Annual Report on Form
10-K and in our preliminary proxy statement filed March 29, 2010. As
a result, WorldGate's actual results could differ materially from these
statements. This presentation is being made on the 6th of April,
2010. The content of this presentation contains time-sensitive
information that is accurate only as of the time hereof. If any portion of this
presentation is rebroadcast, retransmitted or redistributed at a later date,
WorldGate will not be reviewing or updating the material that is contained
herein.
George
Thank
you, Chris. Now I’d like to introduce Joel so he can go
over our financial results.
Joel
Boyarski
Thank
you, George. Good afternoon everyone. What I would like do today is briefly
review our revised accounting treatment of the WGI and ACN transactions, and
then briefly review the year end 2009 financial results. I will then
touch on the proposed reverse stock split and some of the significant
transactions subsequent to the fourth quarter ended December 31, 2009 which are
meaningful for us going forward.
Restatement of
Financials
Since the
year end financials have been impacted by certain restatements we have made I
will first review the nature of these restatements.
On March
29, 2010, we determined that our quarterly financial statements for the fiscal
quarters ended June 30, 2009 and September 30, 2009 should no longer be relied
upon. After reviewing comments from the Securities & Exchange
Commission, the issues raised in management’s discussions with the staff of the
SEC, the literature cited by the SEC, and the documentation relating to certain
transactions with WGI and ACN, we determined that we should revise our original
accounting for the WGI and ACN transactions.
We had
previously determined that the value received by WGI in the transaction exceeded
the fair value received by us by approximately $74 million and we initially
accounted for $60 million of such excess in fair value as a deferred revenue
asset and the balance of such excess in fair value as an expense of
approximately $14 million. We have now determined that the value
received by WGI in connection with the closing of such transactions should be
reflected as an equity transaction valued at approximately $7 million (which is
the sum of the fair value of the consideration given by WGI to us in exchange
for the securities issued by us to WGI). As a result, each of the
Form 10-Qs for the fiscal quarters ended June 30, 2009 and September 30, 2009
has been restated to reflect the reversal of the entries originally recorded for
this excess in fair value, including (a) the reversal of an expense of
approximately $14 million, (b) the reversal of the recording of a
deferred revenue asset of $60 million and (c) the reversal of a credit
originally recorded to the additional paid in capital account on our balance
sheet.
In
addition, the deferred revenue asset of $60 million would have offset $60
million of future revenue from ACN pursuant to the Master Purchase
Agreement. As a result of the revision to the accounting, there will
be no deferred revenue asset of $60 million and therefore no offset of such
amounts against future revenue from ACN pursuant to the Master Purchase
Agreement. Any future revenue from ACN pursuant to the Master
Purchase Agreement will be recognized as revenue consistent with applicable
general accepted accounting principles, including an offset to such revenue
related to the issuance to ACN of a warrant to purchase up to approximately 41
million shares of our common stock as the warrant becomes exercisable pursuant
to its terms.
The
result of this restatement is that the going forward accounting will be less
complex and easier to communicate to shareholders and more important there will
be no $60 million offset to the ACN revenue going forward, though as I already
noted, there will be revenue offsets related to the value of the ACN warrants
earned.
Financials- Year End
Summary
Let me
now turn to a brief review of the financials. The financials for the year ended
December 31, 2009 reflect a transition from our old to our new business model.
The year was marked by the development toward a new voice and video phone and
the establishment of the infrastructure necessary to implement the new business
model. The financials also reflect the restatement I noted
earlier.
Revenues
for the year ended December 31, 2009 were approximately $1.8 million primarily
reflecting approximately $700 thousand of product sales to VRS operators as well
as approximately $725 thousand resulting from the resolved arbitration
proceedings with Aequus whereby Aequus agreed to terminate our obligation to
provide certain prepaid engineering services pursuant to a previous agreement
with Aequus. In addition our recurring service revenues were
approximately $400 thousand. Gross margin for the year ended 2009 was
approximately $360 thousand.
Operating
expenses for the year ended December 31, 2009 were approximately $8.5 million,
an increase of approximately $1.9 million versus the previous year as we
increased efforts toward the development of our new video phone and operating
platform. The expenses reflected increased staffing related to the transition to
the new business model, including increased engineering and executive staff,
while paying current period and accruing future period severance expenses
related to officers that were terminated.
The net
loss for the year ended December 31, 2009 was approximately $6.3 million
compared to loss of approximately $9.3 million for the prior year.
Cash
amounted to approximately $580 thousand as of December 31, 2009.
Recent
Transactions
On the
previous conference call I spoke about the steps we had taken to improve our
cash position to help support us during the development stage of our business
model. I would like to highlight today that we have taken several
additional steps that will help our cash position as we move from the
development phase into the commercial availability phase of our business
model.
First, as
we previously announced on October 28, 2009, we entered into a Revolving Loan
and Security Agreement with WGI pursuant to which WGI will provide us a line of
credit in a principal amount of $3 million. To provide us additional
financial flexibility on March 9, 2010 the principal amount of the line of
credit was increased by an additional $2 million to $5 million in total. The
terms of the credit line remained the same.
On April
6, 2009 we entered into a commercial relationship with ACN pursuant to which we
agreed to design and sell video phones to ACN and ACN committed to purchase
300,000 videophones over a two-year period. On March 30, 2010, we
announced an amendment to the Master Purchase Agreement with ACN, which among
other changes amended the Master Purchase Agreement as follows:
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As
soon as practicable after we provide a demonstration to ACN of the working
video phone contemplated by the Master Purchase Agreement, ACN will issue
its first purchase order under the Master Purchase Agreement for 80,000
video phones.
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ACN
will pay us 50% of the purchase price for video phones pursuant to a
purchase order generally five (5) weeks prior to the delivery of video
phones to ACN at our manufacturing facility. ACN will pay us
the remaining 50% of the purchase price upon delivery of the video phones
to ACN at our manufacturing
facility.
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The
change in payment terms I just described has the beneficial effect of providing
significant working capital to help support our growth during the capital
intensive period related to the ramp up of sales.
As a
result of the increased credit line with WGI and the revised accelerated payment
terms of the Master Purchase agreement with ACN I just described, coupled with
the planned completion of the development of the Company’s new voice and video
phone and the commencement of delivery of these new video phones expected in May
2010 at our manufacturing facility in Asia, and our current forecast for the
sales of our product and services, including the placement of purchase orders
for the purchase of units by ACN, we believe we have achieved two significant
accomplishments. First, we believe that we will have sufficient working capital
to support our current operating plans through at least December 31, 2010 which
has helped us remove, for the first time in many years, the language in our 10-K
relating to the doubt about our continuing as a going
concern. Second, we have succeeded in establishing a financial
foundation necessary to exit the development phase and begin our revenue growth
phase.
Reverse Stock
Split
I would
now like to briefly address the reverse stock split that we recently noted in
the filing last week of our preliminary proxy.
The
reverse stock split is intended to increase our per share stock price to better
enable us to list the Common Stock on a national securities exchange, such as
NASDAQ. We believe that if we are successful in maintaining a higher
stock price following the reverse stock split, the stock will generate greater
interest among professional investors and institutions, which we anticipate
would result in greater liquidity and a stronger investor
base. Alternative markets like the OTC Bulletin Board, on which we
are currently listed, are generally considered to be less efficient and not as
widely followed as national securities exchanges, such as NASDAQ.
In order
for us to list our Common Stock on a national securities exchange, such as
NASDAQ, we must satisfy certain listing standards, one of which requires a
certain minimum bid price for shares of common stock. We believe that
this is the primary initial listing standard that we do not meet in order for us
to list our stock on such exchanges. We believe that the reverse stock split
would help us satisfy the applicable minimum bid price listing
standards.
I
encourage you to review our proxy for more detailed explanations of the proposed
reverse stock split and the associated benefits and inherent risks.
With that
I would now like to turn the call over to George.
George
Thank
you, Joel.
As you
can imagine, 2009 was a pivotal year in WorldGate’s history. On April
6, 2009, WGI and WorldGate completed a transaction giving WGI a controlling
interest in the Company. The company immediately started to execute
on a new vision to transform WorldGate, into a leading force in the drive to
real-time video communications.
Highlighting
some of the changes made in 2009 as a result of the WGI
transaction:
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We
built a new Board of Directors with extensive telecommunication industry
experience along with proven track records in growing start-ups and small
companies into larger, highly profitable companies was successfully
installed.
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We
made immediate changes and additions to the senior management team to
better align the company to our new direction. In areas
such as operations, sales, marketing and general management, we added
seasoned leaders with the capabilities and track record to bring our
vision for WorldGate to fruition.
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WorldGate’s
Engineering team was expanded, resourced and focused their efforts on
designing, developing and delivering our Next Generation Video
Phone. This is a completely redesigned video hardware and
software platform that will support our video communications business for
the next several years.
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And
finally, we introduced a new business model. I’ll take a moment to
review it with you now:
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WorldGate
is transitioning from a model focused primarily on one-time digital video
phone equipment sales to delivering an integrated video telephony
solution. We will not only offer what we believe is our
industry leading consumer video phones but we will also provide a turnkey
digital voice and video phone service. By building a service
that is able to not only provide video telephony, but also serve as a
home’s primary telephone service, we enable a recurring-revenue
based business model that encourages service loyalty and one
where we are able to bundle in the cost of the video phone itself –
similar to how mobile phones are packaged with services in the mobile
industry. The end result is a lower start-up cost to the
consumer driving faster market adoption. Further, we believe
WorldGate will be unique in the market in that we will offer an end-to-end
solution – digital video phones fully integrated with a digital voice
and video phone service.
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So
now when we go to market, we see the following channels for our new Ojo
Vision Video Phone and our new “Turn-Key” Digital Video Phone Services
Platform.
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In
the Agent Retail Channel, we will be selling digital voice and video phone
service to residential customers using agent sales
partnerships. Our ability to provide a turnkey recurring
revenue service business makes this an attractive addition to the business
model of many companies focused on the residential market but without a
telecommunication infrastructure or background in telecommunication
sales. Examples of customers in this channel include Direct
Selling Companies; Online Marketing and Online Retail Marketing
Companies; Electronic and Retail Stores; and Distribution
companies with consumer service
offerings.
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In
the Wholesale Channel, we will be selling the Ojo Vision Video Phone
and selected modules of our “Turn-Key” service offering such as
customer service, billing, network and supply chain distribution,
depending on the specific customer requirements. Here the
focus is on customers who already operate a portion of the service
infrastructure, including telecommunication companies, VoIP service
providers and select vertical providers in the Video Relay Service for
deaf and hard-of-hearing, Education and Healthcare Services
markets.
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In
the OEM Direct Channel, we will be selling Ojo Video Phones directly
to telecommunications service providers who already have a complete
digital voice and video management and network infrastructure, such as
Incumbent Service Providers, CLECs, International Telecom Service
Providers and Cable Service
Providers.
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Now that
we have a common understanding of the new business model, I’d like to look at
our business in 2010. We’ll begin by highlighting some key
industry trends.
There is
a tremendous amount of activity in the industry driving the demand for video and
video communications go forward. Consumers have embraced and are now
demanding video in everything they do. Some estimates are that up to
90% of the traffic on the internet is now video, as Consumers are watching
movies, news, video clips, engaging in social networking, texting video’s,
PC-to-PC video chat, and more. And our industry is rising to meet
this new demand. We’ve seen recent business video phone and
conferencing telepresence announcements in the business markets from equipment
providers like Polycom, Cisco and numerous others regarding their video
communication strategies for higher-end businesses, also reflect the increasing
importance of video in our everyday lives. In-stat Market Research
estimates within five years, nearly 10 million business media phones will be
shipped annually. And last month, Cisco introduced their new internet
router which they claim have enough capacity to handle simultaneous video calls
for every person in China. Specifically quoting John Chambers,
Cisco’s CEO, “Video is the killer app. Video brings the Internet to
life and most of the devices that will be coming on the network will evolve
quickly into video”.
Clearly
this is a market on the move. And as WorldGate, we are already
there.
With
customers like ACN selling 15,000 to 20,000 consumer video phones per month and
our new next generation video phone a month away, we believe WorldGate is well
positioned to capture a significant portion of the video communications
market. A market that we believe is proven, but as of yet,
untapped.
Mirroring
the above market activity, over the past few months as we’ve started and
accelerated our sales efforts, we have approached and been approached by many
different prospective customers across the different video communication market
segments that we are focused on, and most are very interested in our next
generation video phones and our ability to pair these phones with our turnkey
services offering. Active prospect discussions
include:
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OEM
– Including telecom carriers, cable service providers and VoIP service
providers.
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Wholesale
– Including VoIP service providers and selected verticals like Video Relay
Service Providers.
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Turn-Key
– Including direct selling companies, retail, SMB/SOHO agents and other
distribution companies.
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While I
won’t go into any specifics, I can tell you the Sales and Marketing team is very
enthusiastic about the upcoming next generation video phone launch and is very
actively working a healthy sales funnel.
Additionally,
we have decided on the name for our new video phone. In fact, we
decided on a naming strategy for the company as we go forward in the market and
I would like to spend a minute to review it with you now:
The
holding company will be WorldGate. Underneath
this holding company are two divisions. Division 1 is Ojo Labs and is the
engineering and manufacturing division of the company. Division 2 is
Ojo Services
and is the turn-key digital voice and video phone services division of the
company. And the name of our new, next generation consumer video
phone is……. Ojo
Vision. Putting it into practice, Ojo Services will sell the
Ojo Vision video phone manufactured by Ojo Labs.
With all
of that as a backdrop, I am happy to report that we continue to make great
progress in the four pillars of our 2010 plan. The four pillars
are:
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1.
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Our
Financial Foundation
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2.
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The
development of our Next Generation Digital Video
Phone
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3.
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The
development and introduction of our new “Turn-Key” Digital Voice and Video
Phone Services
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4.
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And
investing in our Team.
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Financial
Foundation
We’ll
begin with our financials. Joel has reviewed some of the specifics around
several of our recent financial transactions. I’d like to set these in the
context of our business for you now.
For 2010,
we have two primary goals:
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First,
we will improve visibility and liquidity to our investors by moving to a
national stock exchange such as NASDAQ. As you have seen in our recent
proxy statement, reorganizing our equity structure through a reverse stock
split is one of the first steps we will take to enable such a
listing.
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Our
second goal is to establish a strong financial footing enabling a drive to
strong revenue growth and profitability. The extension of our credit line
with WGI to $5M coupled with the accelerated payment terms from our
imminent deliveries of video phones to ACN provide us with this financial
foundation. Sales and marketing activities and continued expansions of our
product line are all enabled as well as the removal of any going concern
issues from our financial
statements.
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Now I’d
like to review with you the second pillar of our plan and give you an update on
the development of our Next Generation Digital Video Phone
Platform.
Next Generation Digital
Video Phone Platform
We have
completely redesigned, reengineered and are developing a totally new video
hardware and software platform that will support our video communications
business for the next several years.
Utilizing
this new video platform, the development of our first next generation digital
video phone, Ojo Vision, is on-time and tracking to our previously announced
schedule. And next week, we plan to officially start the hardware
production lines, which will allow us to start shipping video phones to our
customers in May. Let me review a few of the milestones with
you:
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After
a comprehensive search and negotiation process to identify and select our
contract manufacturing partner, we are pleased to be partnering with
Kenmec Mechanical Engineering, a Taiwan company with manufacturing
facilities in Taiwan and China. They are a world class
manufacturing company with more than 30 years experience in high-tech
manufacturing.
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Working
with our new partner Kenmec, we met our unit manufacturing cost target,
which is significantly lower than the unit manufacturing cost of our Ojo
PVP-900R model video phone.
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The
early production units produced by Kenmec have passed hardware
certification and the tooling has been approved. The initial
beta test video phones have already been produced by Kenmec and are
actively being tested by WorldGate, as well as undergoing Engineering
evaluation trials with ACN. As I mentioned above,
commercial hardware production is slated to start next week with the first
deliveries to ACN scheduled in May for their customer availability in
June.
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Pre-Production
Software was released in March as planned with incremental software
releases on track for late April and early May as we work to finalize our
network software production load in May
2010.
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Starting
in June 2010, we also have several large OEM opportunities where we’ll be
commencing engineering evaluation
trials.
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And
finally, due to demand, we have accelerated our international deployment
schedule for planned introductions into the European Union Countries in
July 2010 and into Australia and New Zealand in August/September
2010. Additional country certifications are planned to
follow.
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You may
have noticed that I have been using the world “platform” to describe our current
development initiative. That is because what we are developing is so
much more than just our next digital video phone – We are developing a next
generation Digital Video Phone Platform. Leveraging
this new platform, we plan on developing a full line of digital video phones to
support not only the requirements of the consumer market, but the small and home
office business market as well. We also plan on introducing new
features and functionality, while opening the platform for 3rd party
development and 3rd party
applications. And we plan on doing this with a continuing effort to
push video quality higher while trying to drive costs lower to provide the best
value possible to our partners and customers.
Knowing
all of this, you now understand why ACN so confidently committed to purchase
more than 300,000 video phones over the next two years. They like
many of our partners and customers want differentiation – and they’ll get it
with WorldGate Quality that will deliver a stunning, true-to-life communication
experience.
Now I’d
like to transition to a review of our progress on the third pillar of our plan,
which is the development and deployment of our “Turn-Key” Digital Voice and
Video Phone Services platform.
“Turn-Key” Digital Voice and
Video Phone Services Platform
As much
of the industry knows, building an indirect channel and the infrastructure
necessary to support it is a difficult task. I am happy to announce
our system development and deployment tracked to our previously announced
schedule and we turned up our first partners and related customers on our new
platform in March, 2010.
As you
can imagine, many of our current signed partners, as well as our prospective
partners are waiting for the delivery of our new Ojo Vision Video Phone in
June. In addition, the market implementation by each partner will
vary significantly both in scope and timing depending on the partner’s rollout
schedule. Some will be ready to implement within 60 days, while
others will take significantly longer. We expect that our services
revenue will start to accelerate after the introduction of the Ojo Vision Video
Phone.
If you’d
like to see our “Turn-Key” services platform in action, please go to www.wgatephone.com.
And with
that, I think this is a good time to transition to the fourth pillar of our plan
– investing in our team.
Investing in our
Team
I believe
that the most important asset of any company lies in its people, and therefore
WorldGate’s ability to successfully meet the challenges imposed by our new
business model rests in the strength of its team. Over the past several months,
we have invested in and shaped our staffing plan. We have selectively added new
individuals to our Engineering team to help us accelerate the development
schedule and efforts around our next generation digital video
platform. Additionally, we have added a few new individuals to our
Sales and “Turn-Key” Services Operations Team. Go forward, we will
continue to selectively add resources as we make progress on our 2010 and 2011
plans.
Because
we are growing and moving forward on multiple fronts, we have been looking for
new office space very close to our current WorldGate headquarters in the Trevose
area. Two weeks ago we announced our new offices will be located at
the Horizon Corporate Center, located in Bensalem, PA, approximately 30 minutes
north of Philadelphia. Given the current real-estate market
conditions, we were able to secure a lease with a brand new, Class A, corporate
center – one of the most attractive buildings in our region. We are
very excited about our move as it will be designed and built-out to our unique
specifications. In addition to a modern workspace, there will be
multiple engineering labs designed for research and development, system and
network integration, interoperability testing, quality control and assurance,
acoustics’ engineering, and certification management. We are planning
our move to the new location for the August, 2010 timeframe.
In
summary,
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Our
Financial Foundation continues to get
stronger.
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The
development and deployment of our Next Generation Digital Video Phone, Ojo
Vision, is on-track for May customer
deliveries.
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The
development and introduction of our new “Turn-Key” Digital Voice and Video
Phone Services was deployed on time, our initial customers were turned up
in February and we are poised to start accelerating revenues following the
launch of the Ojo Vision Video
Phone.
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And
finally, we continue to selectively grow our Team, bringing the best of
the best together, to deliver the highest quality video communication
experience to consumers.
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When I
joined the company seven months ago, I was attracted by WorldGate’s
extraordinary video technology and my belief the timing of the market
opportunity for video communications was poised to take off. And
given everything we’ve accomplished over the past several months, and everything
I’ve experienced in the market and in my discussions with both current and
prospective customers, I am more convinced than ever that our vision to bring
innovative video technology to consumers with a commitment to build significant
long-term shareholder value is right, and the market opportunity for video
communications is now.
At this
time, I am going to ask the operator to come back on and help us as we open the
call for Questions and Answers.