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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2010
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                         to                        .
 
Commission File Number: 000-31121
AVISTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
88-0463156
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
1875 South Grant Street, 10th Floor, San Mateo California
 
94402
(Address of Principal Executive Offices)
 
(Zip Code)

 
Registrant’s telephone number, including area code: (650) 525-3300
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities Registered pursuant to Section 12(g) of the Act:
 
 
Title of each class
 
Common Stock, $0.001 par value

 
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x
 
Indicate by check mark if the registrant is not required to file the reports pursuant to Section 13 or 15(d) of the Act. Yes o  No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o                                                                                     Accelerated filer o  
 
Non-accelerated filer o(Do not check if a smaller reporting company)      Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 
Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price of $0.53 per share for shares of the Registrant’s Common Stock on June 30, 2010 (the last business day of the Registrant’s most recently completed second fiscal quarter as reported by the OTC Market) was $7,160,496. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.  The Registrant’s Common Stock is currently quoted and traded on the OTC Market, an over-the-counter securities market.
 
As of March 3, 2011, the registrant had outstanding 39,273,370 shares of Common Stock.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
The Registrant incorporates by reference into Part III of this Annual Report on Form 10-K specific portions of its Proxy Statement for its 2011 Annual Meeting of Stockholders.
 
 



 
 

 

AVISTAR COMMUNICATIONS CORPORATION
 
ANNUAL REPORT ON FORM 10-K
 
YEAR ENDED DECEMBER 31, 2010
 
                                   TABLE OF CONTENTS
 
Page
 
PART I
         
Item 1. Business
   
3
   
Item 1A. Risk Factors
   
16
   
Item 1B. Unresolved Staff Comments
   
24
   
Item 2. Properties
   
24
   
Item 3. Legal Proceedings
   
24
   
Item 4. [Removed and Reserved]
   
24
   
PART II
         
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
   
25
   
Item 6. Omitted
   
25
   
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
25
   
Item 7A. Omitted
   
35
   
Item 8. Financial Statements and Supplementary Data
   
35
   
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
   
35
   
Item 9A. Controls and Procedures
   
35
   
Item 9B. Other Information
   
36
   
PART III
         
Item 10. Directors, Executive Officers and Corporate Governance
   
37
   
Item 11. Executive Compensation
   
37
   
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
   
37
   
Item 13. Certain Relationships and Related Transactions and Director Independence
   
38
   
Item 14. Principal Accountant Fees and Services
   
38
   
PART IV
         
Item 15. Exhibits, Financial Statement Schedules
   
39
   
Signatures
   
43
   
Index to Financial Statements
   
F-1
   

 
 
 
 

  2
 

 

Forward Looking Statements
 
This Annual Report on Form 10-K, the exhibits hereto and the information incorporated by reference herein contain “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and such forward looking statements involve risks and uncertainties. When used in this Annual Report, the words “expects,” “anticipates,” “believes,” “plans,” “intends” and “estimates” and similar expressions are intended to identify forward looking statements. These forward looking statements include predictions, among others, regarding our future revenues and profits, income from settlement and patent licensing, customer concentration, customer buying patterns, research and development expenses, sales and marketing expenses, general and administrative expenses, litigation and legal fees, income tax provision and effective tax rate, realization of deferred tax assets, liquidity and sufficiency of existing cash, cash equivalents, and investments for near-term requirements, sufficiency of leased facilities, purchase commitments, product development and transitions, expansion and licensing of our patent portfolio, competition and competing technologies, and financial condition and results of operations as a result of recent accounting pronouncements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include those discussed below and those discussed in “Item 1a. Risk Factors” as well as others incorporated by reference herein. Avistar Communications Corporation (the “Company,” “we,” or “us”) undertakes no obligation to publicly release any revisions to these forward looking statements to reflect events or circumstances after the date this Annual Report is filed with the Securities and Exchange Commission or to reflect the occurrence of unanticipated events.
 
PART I
 
Item 1.Business
 
Avistar Communications Corporation (“Avistar”, the “Company”, “us”, “our”, or “we”) was founded as a Nevada limited partnership in 1993. We filed our articles of incorporation in Nevada in December 1997 under the name Avistar Systems Corporation. We reincorporated in Delaware in March 2000 and changed our name to Avistar Communications Corporation in April 2000. The operating assets and liabilities of the business were then contributed to our wholly owned subsidiary, Avistar Systems Corporation, a Delaware corporation. In July 2001, our Board of Directors and the Board of Directors of Avistar Systems approved the merger of Avistar Systems with and into Avistar Communications Corporation. The merger was completed in July 2001.   In October 2007, we merged Collaboration Properties, Inc., the Company's wholly-owned subsidiary, with and into the Company, with Avistar being the surviving corporation.  Avistar has one wholly-owned subsidiary, Avistar Systems U.K. Limited (ASUK).
 
Our principal executive offices are located at 1875 South Grant Street, 10th Floor, San Mateo, California, 94402. Our telephone number is (650) 525-3300. Our trademarks include Avistar and the Avistar logo, AvistarVOS, Shareboard, vBrief and The Enterprise Video Company. This Annual Report on Form 10-K also includes Avistar and other organizations’ product names, trade names and trademarks. Our corporate website is www.avistar.com.
 
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge on our website when such reports are available on the U.S. Securities and Exchange Commission (“SEC”) website (see “Company—Investor Relations—SEC Information”). The public may read and copy any materials filed by Avistar with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing.
 
Overview
 
 Avistar is a technology company defined by its customers’ need to see the people they interact with. Organizations ranging from smaller companies to the largest global enterprises use desktop videoconferencing to improve collaboration among their employees, and to connect more effectively with customers and suppliers.
 
        We have three go-to-market strategies. Product and Technology Sales involves direct and channel sales of video and unified communications and collaboration solutions and associated support services to the Global 5000. Partner and Technology Licensing involves co-marketing, sales and development, embedding, integration and interoperability to enterprises. IP Licensing involves the prosecution, maintenance, support and generation of licensing revenue through either license or sale of the intellectual property that we have developed, some of which is used in our products.
 

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Using visual communications is smart
 
No one would argue about the benefit of unified, visual communication to business. It reduces the need for travel, with its cost and lost time, and enables a global hallway conversation. Organizations that use visual communications benefit from greater productivity, reduced expenses, increased margins and overall better work – life balance, all while improving the world we live in. The average 20% reduction in business travel shrinks our carbon footprint and makes the planet greener for everyone.
 
Avistar made it smarter
 
When we started in 1994, a relative handful of companies delivered desktop videoconferencing solutions.  The promise of visual communications was obvious, but at the time these companies delivered solutions that were expensive, inconvenient, and unreliable. Avistar has invested over a million man-hours to deliver what organizations need: a desktop videoconferencing experience that is reliable, easy to use, economical, and looks great. Under the hood, we took what we believe was a smarter approach: software-only technology combined with the most efficient bandwidth management techniques that we refined over years of experience through solving the challenges of delivering high quality video to and from large numbers of desktops across an organization and over business critical networks. And our results are visible – a superior desktop videoconferencing experience that gets used more fully throughout the enterprise than any other videoconferencing offerings.
 
Leading Unified Communications (UC) providers easily integrate Avistar technology
 
Our customers, across many industries, need the interoperability, scalability, and bandwidth / policy management that are built into Avistar videoconferencing. Our partners, who include some of the world’s leading technology firms, integrate or resell Avistar videoconferencing with their own software applications. Technology leaders like IBM, Logitech, and LifeSize deploy our solutions within theirs, to offer their customers video-enabled applications and business processes because we license Avistar videoconferencing to them as components. They are able to quickly integrate our flexible, cost-effective, high-definition videoconferencing with their own solutions.
 
Our product line is logically organized to meet the needs of a variety of organizations, big and small, including financial institutions, manufacturers, original equipment manufacturers (OEM) or resellers. End users and enterprise customers prefer the option of just paying for the capabilities they require.  We have built a platform that enables such choices. In addition, information technology (IT) groups want to understand the optional capabilities which we provide like multiparty calling and how they work in heterogeneous environments, to ensure that end users will use the infrastructure efficiently and productively.
 
Avistar desktop videoconferencing gets used more fully
 
Avistar deployments a few years ago have resulted in steadily increased usage in minutes per day of active utilization because our desktop videoconferencing works, and it works well. We offer network administrators and technology partners a completely scalable solution for managing bandwidth, protecting calls in progress, setting and administering policy with priority user classes, and central control so that one person can keep everyone’s video calls running smoothly. Our customers demand that their videoconferencing plays well with all others, and we believe that Avistar has the experience and tools to ensure that it will.
 
We believe our software-only approach is advantageous for both end user populations and our OEMs and resellers because it facilitates quick deployment, lower cost, and right-sized buying. Over the years, our services and support team have seen virtually every problem that relates to videoconferencing. Their accumulated knowledge is cycled back into our solutions, which are continually refined and improved. Furthermore, because Avistar is software-only, a simple update brings powerful new features to thousands of desktops immediately, with no hardware changes.
 
Whether an IT director or an OEM, videoconferencing is all about the end user, the individual who wants to click on a name or photo from their contact list, and be connected immediately, no matter if the other person is around the globe or behind the firewall of another company. Next, they want to single-click to add more people. Then, they want to see and hear everyone with no jitters and shaking. We solve the underlying challenges to make the people in that global conversation forget they are running multiparty, interoperable visual communications. Since our solutions are also available as components, our technology partners and OEMs can easily add the richest video experience available to their software offerings, boosting their market appeal.
 
Industry Background
 
Globalization, supported by the near ubiquity of communications networks such as the Internet, has allowed companies to lower costs, reach new markets, change business processes (e.g., eBusiness) and distribute and outsource operations. It also has meant increased competition, a faster business pace and less differentiation. These factors, coupled with the difficulty and cost of travel, increased risks due to socio-political uncertainties and pandemic concerns and the desire to reduce carbon emissions and environmental impact, are causing businesses to look for new tools that will help them increase productivity, reduce budgetary expenses, take advantage of revenue opportunities, and minimize business continuity risks. Enterprises of all sizes stand to benefit from new and advanced communication and collaboration tools that enable their employees, partners, suppliers and customers to collaborate more effectively and form tighter relationships within and across buildings and over disparate geographies and time zones. Communications tools that speed decision-making, build trust-based relationships, especially across cultures, and are software-presence-aware are becoming even more critical in today’s increasingly complex business environment.
 
 
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The emergence of the Internet has accelerated the adoption of network-based collaboration applications including email, instant messaging, and web conferencing. The increasing availability and affordability of bandwidth on communication networks is further driving businesses to utilize new communication tools, such as voice and video over IP, and are enabling users to connect from more places, including home offices and WiFi hot spots such as airports and hotels. This is enabling more distributed, mobile and global operations while maintaining communications.
 
Limitations of Current Means of Communication and Collaboration
 
As technology advances become more affordable and modes of communication expand, enterprises are seeking widely deployable and cost effective technology to replicate, at the desktop, the impact of visual communication and collaboration that occurs in a face-to-face meeting. Individuals generally prefer face-to-face encounters to less personal forms of communication because they can see one another and benefit from the non-verbal cues that speed communication and deepen understanding. This is particularly true for more complex interactions such as negotiations, sales, product development, project and crises management and decision making across geography/functions/cultures. However, in today’s globalized, fast-paced business environment, face-to-face interactions are often forgone due to the difficulty and time required for travel, and the need to act quickly. These time and distance challenges become increasingly difficult to deal with as the number of potential participants increase. Beyond traditional teleconferencing, attempts to conduct virtual meetings as an alternative to face-to-face meetings have generally been limited to conference room-based video conferencing and web-based data teleconferences.
 
To address the growing need for collaboration across distance and time, organizations have resorted to using a patchwork of discrete technologies, including video conferencing and teleconferencing, fax, email, instant messaging, Internet audio and video delivery and data sharing applications. Many of these technologies have been widely adopted, and collectively indicate the need for collaboration tools including visual unified communications solutions. However, these discrete technologies are not good substitutes by themselves for face-to-face meetings and presentations because they do not provide an integrated communications solution that fosters team interaction and delivers critical, time-sensitive information quickly and reliably. By providing face-to-face collaboration in an integrated communications solution, video can speed problem resolution and motivate action, trust and understanding. Additionally, users want to leverage knowledge and expertise by being able to create and publish video content from their desktop, either spontaneously, as with email or voicemail, or in a more formal manner for broader distribution through the Internet or corporate data network.
 
Although IP communications technologies are already in use at many enterprises, businesses and other organizations require increasingly comprehensive, integrated and scalable visual unified communication capabilities. For example, video conferencing is often limited to scheduled point-to-point communication from designated rooms or through the use of “roll-about” products, where call set-up procedures, lack of networking, bandwidth requirements and room availability greatly constrain functionality, spontaneity, usability, reliability and efficiency. Most individuals do not have immediate access to these video technologies, and the reservation and set-up time make them unlikely to be used on a spontaneous basis. Few of these video solutions are deployed widely to individuals to support them where and how they normally work—at their desks, integrated into the business applications they use. Usage and adoption of these systems is thus often limited.
 
Elements of a Complete Communications and Collaboration Solution
 
To become a critical tool in the enterprise, a communications solution must first and foremost provide application functionality that boosts worker productivity. It also has to be “self service” and provide high quality at scale, high reliability, low total cost of ownership, and be available to people where and when they do most of their work, which typically means at their desks, but increasingly means from home or while traveling. It must also effectively utilize existing and evolving network infrastructure. We believe a complete communications and collaboration solution must provide the following:
 
 
Applications and Functionality
 
 
·
Support or integrate into the applications people use, in the way they use them, to deliver real-time and non-real-time self service personnel for collaboration and visual communication;
 
 
·
Do so in an intuitive, “easy” manner in order to foster expanding usage;
 
 
Quality
 
 
·
Approximate the video and audio quality of television for natural and easy interaction;
 
 
·
Make interactions as realistic as possible by minimizing visual artifacts when transmitting and receiving video calls such as latency, jitter, freeze-frame, stutter and small frame size;
 
 
·
Seamlessly integrate all forms of audio, video and data communications;
 
 
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Scalability
 
 
·
Like the Internet and public telephone networks, the communications solution must be designed for size independence and should scale cost-effectively to support a very large numbers of users;
 
 
Virtualization
 
 
·
As cloud and virtual desktop infrastructures (VDI) are being more universally deployed and adopted, unified visual communication solutions need to operate effectively within these new computing environments;
 
 
·
Users will expect the same visual communications experience within the virtualized environment as they’ve experienced within their more traditional computing environment, and IT administrators will expect that their networks and server infrastructure will not be adversely affected by the virtualized desktop videoconferencing solution itself;
 
 
Reliability
 
 
·
Operate dependably and reliably to avoid user frustration, while minimizing support costs;
 
 
·
Provide visual unified communications with the ease of use, speed, quality, functionality, flexibility and global access of the telephone, while easily supporting more complex applications and situations;
 
 
Adaptability
 
 
·
Offer an upgradeable architecture that can evolve as bandwidth availability, protocols, standards and compression technologies change;
 
 
·
Include powerful software to manage an integrated suite of collaborative applications, relying on networked infrastructure;
 
 
·
Leverage current and future business investments in local and wide area networks, Internet protocol and standards-based infrastructures;
 
 
·
Reduce reliance on hardware components through a shift to software-based integrated communications functionality;
 
 
Affordability
 
 
·
Operate and scale cost effectively;
 
 
·
Utilize standard, low cost and widely available hardware components, such as “web-cams”;
 
 
·
Be cost-effective compared to other pervasive forms of enterprise communication, such as email; and
 
 
·
Deliver cost savings through innovations in support, network and resource management.
 
We believe high quality visual unified communications allow businesses to improve collaboration and thereby offer them the opportunity to increase productivity, enhance customer service and revenue generation, and facilitate business-to-business interactions that reduce costs, all on an accelerated basis. We also believe that, just as every organization now relies on a telephone network, and most businesses increasingly rely on the Internet, a market is emerging in which businesses and other organizations will choose to rely on fully integrated video, audio and data collaboration, regardless of networks, to make their business applications more effective.
 
The Avistar C3™ Platform and Solutions
 
Avistar delivers a suite of video, audio and collaboration solutions which are designed to support users in the office, via the conference room or on-the-go. It is through an intelligent coupling of various forms of communication and collaboration into daily work processes that we believe the benefits described above can be realized. To fulfill this, we deliver a communication and collaboration platform known as Avistar C3™. The Avistar C3™ platform provides a comprehensive and integrated suite of video, audio and collaboration applications that include on-demand access to interactive video calling and conferencing, content creation and publishing, broadcast origination and video distribution, and video-on-demand, as well as data sharing, presence-based directory services and network management. Our Avistar C3™ platform architecture is open and flexible in order to embrace continued technological innovation and standardization. It is designed to use existing and emerging communication and video standards such as session initiation protocol, or SIP. It also provides customers choice and flexibility in designing and implementing network topologies to best deliver high-quality video, audio and collaboration applications to desktops, conference rooms and individuals on-the-go.
 
 
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Interactive video calling.Our system allows users to participate in spontaneous interactive video collaborations from their desktops. Users can simultaneously see multiple participants in windows on their workstations or an external monitor. Additionally, our system provides full duplex audio, which allows multiple users to speak and hear each other clearly at the same time. The Avistar C3™ solution provides a stunning high-definition experience between desktops and also delivers continuous presence multiparty videoconferencing between end users, room solutions and other devices, all without requiring advance reservations or complicated conferencing services. Each participant has the full ability to utilize all the call functions of the system, such as adding or removing participants, focusing the view on one participant, putting anyone or the entire call on hold, and transferring the call. Advanced telephony features such as Caller ID, Do Not Disturb, Leave Message and Multiline Calling are also provided. All user features are designed to be simple to operate, intuitive and intelligent. By doing this, Avistar can ensure that its clients can setup calls quickly and participate on the call, without the need for additional and costly communications support staff.
 
Integrated collaboration & data sharing.In addition to communicating via desktop videoconferencing, users can simultaneously create and annotate a shared document using text or drawing tools color-coded specifically for each user. Our desktop sharing technology is based on the latest SIP dual video standards which support sharing the entire desktop or individual applications, based on end user selection.
 
Leading Unified Communication (UC) Platforms.Although industry leading UC platforms such as IBM Lotus Sametime, Microsoft OCS and Lync provide comprehensive presence, instant-messaging, email and telephony integration, the desktop videoconferencing features within these solutions often lack a feature rich videoconferencing experience, interoperability with both SIP and H.323 based room systems, continuous multiparty videoconferencing and advanced bandwidth management features. Avistar has recognized these UC solution shortcomings and has delivered the Avistar C3 Unified family of solutions that are specifically designed to close the UC videoconferencing gap and allow end users to experience a truly unified visual communications experience.
 
Our system has the following key features necessary to make integrated video collaboration effective, scalable and economical:
 
 
·
All Software Solution.   Our client and server solutions are delivered using all software components requiring no proprietary hardware. This allows our clients to reuse excess desktop and server capacity in addition to right-sizing their purchases. This means that Avistar clients can scale their Avistar solution as demand sales, unlike Avistar “hardware based” competitors who force their clients to pay ahead of demand.
 
 
·
Easy to use interface.Our applications combine the rich interaction of a face-to-face meeting with a self-service interface that’s intuitive and easy to use.
 
 
·
Click-to-connect simplicity.To initiate calls or add another user to a call already underway, a user simply clicks on either a name in the directory, or a predefined contact in a “buddy list”. Standard telephone-like features such as hold, hang-up, forward, “leave message” or “begin another call” are all completed with the click of a mouse, or keyboard shortcuts. Additionally, anyone on a network can initiate a video call to the desktop of colleagues, customers, suppliers and others on alternate networks.
 
 
·
Find Me, Follow Me.”Avistar video calling is built on directories and SIP features referred to as “Find Me, Follow Me.” Using this feature, our system is able to determine the location of any user at any time. To call a user it is not necessary to know their number or current location. As long as the Avistar user is logged into his or her Avistar application, the “Find Me, Follow Me” application automatically registers where that user is logged in, regardless of site or geography, and routes all calls to the user’s location. Using this “Find Me, Follow Me” technology, Avistar’s system makes video calling a one-click process and enables what we call “Video Instant Messaging”, all based on a simple SIP URI.
 
 
·
Network Bandwidth Management.  Avistar C3 Command™ provides system administrators with the ability to flexibly and proactively manage each of the various components of the network. Within our system, the most costly and complex equipment and software applications are shared as networked resources. This arrangement allows for redundancy and dynamic allocation of these resources to users who need them, and ensures that users experience the best video quality possible at the highest reliability and lowest cost of use. Servers and switches can be maintained, installed and repaired centrally, and many network support functions can be performed remotely over the data network, assisted by Avistar C3 Call Control™, thereby limiting the disruption of service to an individual user. Similarly, additional desktops and meeting rooms can be easily and inexpensively added to the Avistar platform, with those new users concurrently added to the Avistar directory. Additionally, our software makes call routing decisions to minimize communications costs and control bandwidth utilization. This functionality is protected under certain patents held by Avistar. Lastly, Avistar C3 Command™ supports network topology modeling in addition to allowing network and application administrators to setup bandwidth consumptions policies based on network link, class of user and or threshold limits.
 
 
·
Virtualization. We believe that only Avistar provides desktop videoconferencing support for VDI applications and thin terminals. The Avistar C3 Integrator™ solution allows our clients to experience a feature rich desktop videoconferencing experience on VDI solutions such as Citrix XenDesktop and XenApp, in addition to industry leading thin terminals from Dell, HP and Wyse. We believe that the Avistar architecture is perfectly suited to deliver desktop videoconferencing in these virtualized environments as it ensures that all application functionality is being executed within the server environment, while encoding and decoding takes place next to the webcam through an automated Avistar plug in. This approach is unique in our industry and further exemplifies Avistar’s commitment to lowering the cost and complexity of desktop videoconferencing within the enterprise.
 
 
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We believe our solution includes the following benefits to our customers:
 
 
·
Speed business processes. We provide a fully integrated Internet protocol-based video collaboration solution that allows individuals to seamlessly make video calls to anyone within their business, out to clients and to business partners, which can speed business processes by enhancing collaboration and communication.
 
 
·
Increased availability of knowledge within the enterprise. At many businesses, individuals who possess valuable knowledge often cannot effectively distribute their knowledge to the rest of the organization. Our system enables these businesses to access these individuals and disseminate their knowledge more efficiently and effectively by offering them the ability to call, broadcast or record from their desktops, and offering other users the ability to receive this information real-time, or access video recordings at a convenient time and location. The ability to spontaneously add additional participants to a call encourages personal communications between individuals who otherwise might not enjoy this access. In addition, our system gives every desktop the ability to create and publish valuable visual content, which can be distributed inside and outside the organization to support employee and customer needs worldwide.
 
 
·
Improved productivity and revenue generation.Our system helps companies increase the productivity of their employees and accelerate time critical decision-making. By creating a network of Avistar users, our customers can have face-to-face meetings within the enterprise and with customers and partners, without the costs and time delays of travel. Negotiations, crises management, sales, advisory services, decision-making and other persuasive communications are more effective when done face-to-face. Our solution allows interactions to happen in real-time, speeding up the manner in which business is done, freeing up time for employees, enhancing business-to-business communications, and potentially increasing revenue generation.
 
 
·
Enhanced customer and partner relationships.Our system helps companies to be more responsive to and develop stronger business relationships with their customers, partners and suppliers. An Avistar call is generally as easy and reliable as a telephone call or “instant message”, while being more personal. One of our customers has provided Avistar networks to their clients and business partners, including offshore outsource partners, in order to facilitate interactions and improve relationships.
 
 
·
Opportunity to leverage existing and future communication infrastructures.We provide an open architecture that uses existing standards and is designed to take advantage of emerging standards. Our system integrates into our customers’ existing network communications infrastructure, and supports the protocols a company may choose to use for video broadcasts, data sharing and the transport of information. However, video quality varies depending on the protocol selected. Our system utilizes existing data networks for transporting video, and is designed to support real time digital networking and video transmission. We have designed our system to continue to work with Internet protocol-based technologies as standards evolve and quality of service improves. We expect this flexibility, together with simplified software and hardware at the desktop, to allow companies to make effective use of their existing local area and wide area networks, as well as their next generation networks.
 
 
·
Better communication to face new business challenges such as globalization, business continuity planning, and distributed locations.Within global corporations, professionals collaborate daily with customers, partners and associates who are often located in different offices and/or different time zones. This has increasingly become the case as firms, due to economic and security concerns, have restricted travel, begun decentralizing their personnel across a more distributed set of locations, taking advantage of lower costs of real estate and increased business resiliency through distributed operations, and shifted more operations to outsourcing providers. In this context, critical information must be delivered on a timely basis and without confusion, as smoothly as if colleagues were working together in person. Avistar’s video product suite enables companies that are reducing travel and/or distributing their operations to easily and quickly connect small, remote offices as well as at-home workers to the central organization and still benefit from face-to-face interaction. Based on our experience in helping existing customers choose their optimal configurations, we are able to advise new customers on setups and configurations that will be most effective for a large central office, a small branch office, an outsourcing provider, or other remote locations.
 

 
System Architecture and Technology
 
Our visual unified communications solutions are based on our 10th major release of our open architecture, which enables users to communicate using various networking protocols and transport media, including IP networks and the Internet. We developed our architecture to address the necessary elements of a complete video-enabled collaboration solution.
 
 
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We believe that the following technical factors will transform and consolidate the existing video collaboration applications marketplace, creating a strong need for a software platform that will support this consolidation and evolution:
 
 
·
Improved compression technologies;
 
 
·
The widespread adoption of virtualized technologies;
 
 
·
Increased proliferation of broadband infrastructure (with enhanced tools to optimize bandwidth for video transmission (QOS; quality of service));
 
 
·
Developing availability of converged audio, video and data networks;
 
 
·
Improved computer processing speeds; and
 
 
·
Adoption of critical digital video and multimedia standards.
 
Our Avistar C3™ platform supports this consolidation and evolution by integrating industry standards for audio, video and data transport, but separating them from application functionality and system management. This allows our software application platform to manage the interoperation and transcoding of various standards to seamlessly integrate video, audio and data into complex applications, and not be limited by the functionality built into one particular, application-specific standard. It also allows the system to accommodate new and evolving standards with minimal disruption. Current industry and widely accepted proprietary standards supported include H.263, H.264, H.320, H.323, SIP, NTSC, PAL, MPEG, Microsoft Windows Media Video and Real Networks RealMedia. Our system uses TCP/IP, the standard Internet protocol, for providing video and audio calls, scheduling and starting broadcast presentations, and managing the creation of materials. In addition, we use TCP/IP for overall systems and network management throughout our Avistar C3™ software platform. This approach allows us to deliver connectivity throughout an enterprise and allows us to leverage existing Internet infrastructure. For delivery of high-quality video streams in the local area network, including wireless, we primarily utilize video over IP technology but offer a choice of IP or traditional circuit switched technologies, including the ability to mix and match network types. Thus, Avistar customers can successfully deploy desktop video across the enterprise, even if portions of their network, in older buildings for example, are not capable of supporting real-time video on their data networks. We use our gateways to translate between the various network technologies used in our system. These gateways are managed and controlled by our systems software with TCP/IP-based protocols.
 
We believe our video software platform positions us to lead the transformation described above. Further, we provide a suite of collaboration applications that seamlessly operate with the standards based systems allowing users to access this functionality in an easy and intuitive manner. We expect to make this platform more accessible to developers and to allow integration with other applications and network hardware.
 
Because of the intelligent integration of various video network components, all Avistar products are controlled by the Avistar C3™ platform, our architecture has the following key features:
 
 
·
Network management: Avistar C3™ utilizes open protocols for call set-up, call control and directory services. It also complies with standards and interfaces and connects with video networks through shared Avistar gateways, which are further connected via private or public telephony or TCP/IP networks. Servers communicate through our signaling system for video protocol, SSV, which is based on TCP/IP, the standard Internet protocol. Through this signaling system, servers exchange configuration information and allocate call resources during call set-up, and exchange network status information. The signaling system selects the optimal route for all video calls, helping to minimize call costs and performance demands on wide area network resources. Most videoconferencing equipment using industry standard compression technologies also can communicate with an Avistar network.
 
 
·
Transport standard independence: Our system selects the appropriate transport standards for transmitting information over networks to help deliver the highest quality video possible and full duplex audio in the most efficient manner. For example, the Avistar C3™ software automatically exchanges information among servers and switches to determine the best network route for video calls. For the transport of video over a local area network, our system uses either data networks with our IP endpoints, or existing spare Ethernet wires for our legacy product to deliver standards-compliant high quality signals. This allows customers to choose the transport type to best fit their network capabilities in the local area. In a wide area network, we use industry video compression standards across a customer’s private IP network,  VPN’s, the Internet, or the public telephony network. Recent product releases have enhanced our ability to support mobile and home workers who may have lower bandwidth connections. For the transmission of recorded content on corporate data networks or via the Internet, our system uses standard digital storage formats and transport technologies.
 
Avistar C3™ Infrastructure, Solutions, Product and Editions
 
The Avistar C3™ platform is comprised of the following solutions and bundled editions:
 
 
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Avistar C3™ - Endpoints
 
·  
Avistar C3 Media Engine™
 
The Avistar C3 Media Engine™ solution is Avistar’s all-software visual communications plug in for 3rd party applications. The Avistar C3 Media Engine™ solution is designed to enable rich and robust visual communications to any desktop application.
 
The Avistar C3 Media Engine™ is available as a Standalone, Avistar C3™ Pro, Avistar C3™ Business and Avistar C3™ Business Pro Editions.
 
·  
Avistar C3 Communicator™
 
The Avistar C3 Communicator™ - Standalone Edition is Avistar’s feature rich, HD capable desktop visual communication software application. The Avistar C3 Communicator™ solution can be used as a standalone desktop or integrated as part of a complete communications offering.
 
·  
Avistar C3 Unified™ for  Microsoft OCS
 
The Avistar C3 Unified™ for Microsoft OCS solution is Avistar’s next generation desktop visual communication application for the Microsoft OCS platform.  The Avistar C3 Unified™ for Microsoft OCS solution is designed as an integrated client plug in for Microsoft OCS. The Avistar C3 Unified™ for Microsoft OCS solution can be used in conjunction with certain other separately licensed Avistar C3™ solutions.
 
·  
Avistar C3 Unified™ for  Microsoft Lync
 
The Avistar C3 Unified™ for Microsoft Lync solution is Avistar’s next generation desktop visual communication application for the Microsoft Lync platform.  The Avistar C3 Unified™ for Microsoft Lync solution is designed as an integrated client plug in for Microsoft Lync. The Avistar C3 Unified™ for Microsoft Lync solution can be used in conjunction with certain other separately licensed Avistar C3™ solutions.
 
·  
Avistar C3 Unified™ for  IBM Lotus Sametime
 
The Avistar C3 Unified™ for IBM Lotus Sametime solution is Avistar’s next generation desktop visual communication application for the IBM Lotus Sametime platform.  The Avistar C3 Unified™ for IBM Lotus Sametime solution is designed as an integrated client plug in for IBM Lotus Sametime. The Avistar C3 Unified™ for IBM Lotus Sametime solution can be used in conjunction with certain other separately licensed Avistar C3™ solutions.
 
Avistar C3™ - Virtual Desktop Infrastructure (VDI) Support
 
·  
Avistar C3 Integrator™ for Citrix
 
The Avistar C3 Integrator™ for Citrix solution is Avistar’s integration answer to enable the Avistar C3™ platform to operate with the Citrix HDX protocol and thin client environment. The Avistar C3 Integrator™ for Citrix solution is available with the Avistar C3 Unified™ and Avistar C3 Communicator™ solutions.
 
·  
Avistar C3 Integrator™ for HP
 
The Avistar C3 Integrator™ for HP solution is Avistar’s integration answer to enable the Avistar C3™ platform to operate with the HP RGS protocol and thin client environment. The Avistar C3 Integrator™ for HP solution is available with the Avistar C3 Unified™ and Avistar C3 Communicator™ solutions.
 
Avistar C3™ - Infrastructure Solutions
 
·  
Avistar C3 Conference™
 
The Avistar C3 Conference™ solution is an all-software multiparty control unit (MCU) designed to deliver scalable, reliable and economical multiparty conferencing. The Avistar C3 Conference™ solution is packaged as part of the Avistar C3™ Business and Avistar C3™ Business Pro Editions and may be licensed on a standalone basis for use with other applications.
 
·  
Avistar C3 Conference™ for IBM Lotus Sametime
 
The Avistar C3 Conference™ for IBM Lotus Sametime solution is an all-software MCU designed to operate seamlessly with the IBM Lotus Sametime solution via the IBM Lotus Sametime TCSPI interface. This solution delivers a scalable, reliable and economical continuous- presence, multiparty conferencing experience to IBM Lotus Sametime users. The Avistar C3 Conference™ for IBM Lotus Sametime solution is sold on a standalone basis for use with the IBM Lotus Sametime platform.
 
·  
Avistar C3 Tunnel™ 
 
The Avistar C3 Tunnel™ solution is Avistar’s firewall traversal software designed to support videoconferencing over firewalls and networks. The Avistar C3 Tunnel™ solution is comprised of the following firewall traversal features, specifically the tunnel server, tunnel client and tunnel SDK and packaged as part of the Avistar C3™ Pro, Avistar C3™ Business and Avistar C3™ Business Pro Editions or may be licensed on a standalone basis for use with other applications.
 
 
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·  
Avistar C3 Connect™
 
The Avistar C3 Connect™ solution is Avistar’s all-software SIP-H.323 interoperability gateway. The Avistar C3 Connect™ solution is designed to operate as an integrated part of the Avistar C3 Call Control™ solution or may be licensed on a standalone basis for use with other applications.
 
·  
Avistar C3 Command™
 
The Avistar C3 Command™ solution is Avistar’s all-software dynamic bandwidth management solution. The Avistar C3 Command™ solution is designed to operate as an integrated part of the Avistar C3™ platform or may be licensed on a standalone basis for use with other applications.
 
·  
Avistar C3 Call Control™
 
The Avistar C3 Call Control™ solution is a general purpose SIP based communications server that provides centralized endpoint and infrastructure registration, management, reporting and configuration. The Avistar C3 Call Control™ solution seamlessly integrates the following software solutions:
 
o  
Avistar C3 Command™ (as part of the Avistar C3™ Pro, Avistar C3™ Business and Avistar C3™ Business Pro Editions)
 
o  
Avistar C3 Connect™ (as part of Avistar C3™ Pro and Avistar C3™ Business Editions)
 

Avistar C3™ Editions
 
The Avistar C3™ solutions described above are available on an individual (standalone) basis, or can be purchased as Editions which are predetermined endpoint and infrastructure bundles of our solutions. This allows our clients to purchase Avistar solutions based on current needs, with a clear and economical upgrade path. This also allows our clients to avoid over provisioning, ahead of demand, which occurs often within the videoconferencing industry. By packaging our solutions and providing an economical upgrade path, Avistar has further differentiated itself from its competitors, while being responsive to its customers’ needs.
 
The table below depicts how Avistar clients can choose from any of the Avistar C3™ endpoints listed above, alongside three Edition bundles. Each Edition fills a specific need and builds on the feature set of the previous Edition. As feature sets increase, so does cost. Clients can upgrade from one Edition to the next by paying an uplift charge (essentially the difference in price between the Editions being upgraded):
 

Editions

Patent Licensing
 
Historically, we have derived a significant portion of our annual revenues by licensing our broad portfolio of patents covering, among other areas, video and rich media collaboration technologies, networked real-time text and non-text communications and desktop workstation echo cancellation. This broad suite of patents enables much of the functionality of the Avistar C3™ platform. Licenses to third parties cover part of or all of our patent portfolio. End-to-end rich media collaborative application companies that have licensed Avistar patents include Polycom, Inc., Tandberg ASA, Sony Corporation and Sony Computer Entertainment Inc. (SCEI), Emblaze-VCON Ltd., Radvision, LifeSize Communications, Inc., Logitech, and International Business Machines Corp. (IBM).
 
 
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On December 18, 2009, we entered into a definitive agreement to sell substantially all of our patent portfolio and associated patent applications to Intellectual Ventures Fund 61 LLC, pending the fulfillment of certain requirements for closing. As of December 31, 2009, we had 99 U.S. and foreign patents covering various aspects of our technology, with expiration dates ranging from 2013 to 2018, and 26 pending patent applications.
 
On January 19, 2010, and prior to completing the Intellectual Ventures transaction, we concluded an agreement with Springboard Group S.A.R.L. granting to Skype a non-exclusive license to Avistar’s patent portfolio under Avistar’s standard terms and conditions. Then on January 21, 2010, we completed and closed the patent purchase transaction with Intellectual Ventures referenced above. As a result, associated rights, obligations, risks and costs for the sold patents and patent applications, including the patents in reexamination related to Microsoft petitions, are now the responsibility of Intellectual Ventures. As part of the transaction with Intellectual Ventures, we received a license-back to the transferred patents and patent applications for our current and future products covered by the portfolio.
 
Following this transaction, we retained a small forward-looking patent portfolio comprising one Canadian patent, one European application and four U.S. applications. We also retained continuing royalty income from existing patent licenses. We continue an active program to grow, license, and protect our intellectual property portfolio, primarily through the filing of patent applications. As of December 31, 2010, we held 1 issued U.S. patent and 1 issued Canadian patent, as well as 18 U.S. patent applications and 1 European patent application.

Segment Information
 
We operate through two segments:
 
 
·
Our products division engages in the design, development, manufacture, sale and marketing of networked video communications products.
 
 
·
Our intellectual property division engages in the development, prosecution, maintenance, support and generation of licensing revenue through license or sale of our intellectual property and technology, some of which is used in our video communications system.
 
Financial information regarding these segments is provided in Note 10 to our consolidated financial statements included in this Annual Report on Form 10-K.  Financial information relating to revenues and other operating income, net loss, operating expenses and total assets for the three years ended December 31, 2010, can be found in our Consolidated Financial Statements attached hereto.
 
Customers
 
 
Video Communications Products
 
As of December 31, 2010, we have licensed and recognized revenue with respect to over 35,000 end-users at over 400 customer sites in approximately 151 cities in over 40 countries. Because many of our customers operate on a decentralized basis, decisions to purchase our systems are often made independently by individual business units. As such, a single company may represent several separate accounts, and multiple customer sites may relate to the same company. 
 
For the year ended December 31, 2010, Intellectual Ventures, SKYPE, and Deutsche Bank AG and its affiliates accounted for 56%, 15%, and 12% of our total revenues, respectively.  For the year ended December 31, 2009, IBM, City Information Services and Deutsche Bank AG and its affiliates accounted for 35%, 19% and 14% of our total revenues, respectively. For the year ended December 31, 2008, Deutsche Bank AG and its affiliates, UBS Warburg LLC and its affiliates, IBM and Sony Corporation accounted for 40%, 19%, 18% and 11% of our total revenues, respectively. No other customer accounted for more than 10% of our total revenues in 2010, 2009 or 2008. The level of sales to any customer may vary from quarter to quarter, and while we continue to expand our indirect sales channel, we expect that significant customer concentration will continue for the foreseeable future. The loss of, or a decrease in the level of sales to, or a change in the ordering pattern of, any one of these customers could have a material adverse impact on our financial condition or results of operations. The nature and general terms of our product, maintenance and service sales/offerings, as well as the material terms of our agreements with Intellectual Ventures, SKYPE, IBM and Sony Corporation, are described in Note 2 to our consolidated financial statements under “Revenue Recognition and Deferred Revenue” included in this Annual Report on Form 10-K.  The material terms of our arrangements with Deutsche Bank, City Information Services and UBS were consistent with the general terms and conditions of our standard product, maintenance and service sales/ offerings to our customers.
 
International revenue, which consists of sales to customers with operations principally in Western Europe and Asia comprised 33%, 44%, and 51% of total revenue for 2010, 2009, and 2008, respectively. For 2010, 2009, and 2008, revenues to customers in the United Kingdom accounted for 12%, 34%, and 22% of total revenue, respectively.
 
 
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Licensing Activities
 
We derived approximately 77% or $15.1 million, 10% or $853,000, and 11% or $954,000, of our annual revenues in 2010, 2009, and 2008, respectively, by licensing or selling our broad portfolio of patents to third parties covering video and rich media collaboration technologies, networked real-time text and non-text communications and desktop workstation echo cancellation. Our license revenue in 2010 was primarily generated by the sale of substantially all of our patents to Intellectual Ventures for a one-time cash payment of $11.0 million and the licensing of our patents to SKYPE for an upfront license fee of $3.0 million in January 2010. Our license revenue in 2009 and 2008 was primarily royalties generated from licenses granted to Sony Corporation and its subsidiaries.
 
Sales and Marketing
 
Direct Sales.We have a direct sales force in the United States and Europe consisting of sales managers located in New York and London. Sales managers have direct responsibility for selling and account management of our technology at customer sites.
 
Indirect Sales.Through our partnership organization, we have established a set of relationships with strategic partners and value added resellers, in order to establish and expand an indirect channel of sales for our products.
 
Marketing.Our marketing efforts are directed towards Global 5000 companies with targeted solutions for the small and medium-size business (SMB) and Enterprise markets, focused on the specific collaboration needs of each. We also work with our existing customers to demonstrate how our solutions can further satisfy their needs, thereby growing our footprint within our installed base. We emphasize initiatives to develop market awareness of our solutions and services, as well as increase usage of our installed systems.
 
We also use marketing programs to build recognition of our corporate brand, foster partnerships, and promote our technology in regards to licensing opportunities.
 
Installation, Maintenance, Training and Support Services
 
We provide a wide variety of services for the implementation and support of our video communications products. These services range from product training, deployment assistance, custom product enhancements to custom onsite support. We generally install our systems for new customers. In an increasing number of cases, our customers’ information technology group or services partner install follow-on orders. In the future, we expect our customers or their services partners will increasingly perform the installation process.
 
The installation that we offer to our customers as a separately-priced service relates to the set up and configuration of desktop and infrastructure components of our solution. To accomplish this activity, our staff frequently interfaces with the customer’s internal IT staff and external suppliers, in order to provide for connectivity to the customer’s local and wide area networks, and for the connections between the various components purchased. The effective operation of software is checked by our staff during this installation process. Although the “work time” of this activity at a single location may be only one or two days, the coordination necessary for accommodating the equipment and establishing connectivity frequently creates cycle times of between two and six weeks at the customer’s site.
 
Our maintenance and support services ensure that customers benefit from the latest networked video technology through software upgrades and expedited repair services. Our customer support center provides voice and video call assistance to Avistar users and administrators throughout the world. On-site support is also available for a separate fee as is training on-site at a customer facility or at an Avistar location.
 
Backlog
 
We do not believe that backlog is a meaningful indicator of future business prospects. Therefore, we believe that backlog information is not material to an understanding of our overall business.
 
Research and Development
 
We believe that strong system development capabilities are essential to our strategy. Our research and development efforts focus on enhancing our core technology, developing additional applications, addressing emerging technologies, standards and protocols, and engaging in patent generation activities. Our system development team consists of engineers and software developers with experience in video and data networking, voice communications, video and data compression, email, collaboration and Internet technologies. We believe that our diverse technical expertise contributes to the highly integrated functionality of our system. We devote a significant amount of our resources to research and development as this is core to our business strategy and ongoing success.  Our research and development expense for the years ended December 31, 2010, 2009, and 2008 was $6.6 million, $3.9 million, and $5.2 million, respectively.
 
 
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Intellectual Property and Proprietary Rights
 
Our ability to compete and continue our long history of fundamental innovation depends substantially upon internally developed technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as licensing, non-disclosure and other agreements with our consultants, suppliers, customers, and employees to protect our internally developed technology.
 
We typically enter into confidentiality, license and nondisclosure agreements with our employees, consultants, prospective customers, licensees, and partners which seek to limit the use and distribution of our proprietary materials and prohibit reverse-engineering of our proprietary technologies. In addition, we control access to and distribution of our software, documentation and other proprietary information. Several of our license agreements with our customers require us to place our software source code into escrow. In such cases, these agreements provide that these customers may be entitled to retain copies of the software, and have a limited non-exclusive right to use and/or reproduce, maintain, update, enhance and produce derivative works of the software source code under the terms of the agreements if we fail to cure a contractual breach by us on a timely basis, or if we become the subject of a bankruptcy or similar proceeding. Additionally, we maintain a strong working relationship with vendors whom we identify as key suppliers, and assign preferred provider status to these vendors under agreements that secure ordering and extended warranty rights for us.
 
We have pursued registration of our key trademarks and service marks in the United States, the United Kingdom and certain other European countries, and intend to pursue additional registrations in more countries where we plan to establish a significant business presence. We own several United States, Canadian and United Kingdom trademarks, including Avistar and the Avistar logo, Avistar C3™, Avistar C3 Unified™, Avistar C3 Integrator™, Avistar C3 Conference™, Avistar C3 Desktop™, Shareboard and vBrief.
 
Competition
 
The market for video collaboration products and solutions is highly competitive. As a result of advances in technology, increases in communications capability and reductions in communications costs in the past several years, the market is now characterized by many competitors, rapidly changing technology, evolving user needs, developing industry standards and protocols and the frequent introduction of new products and services. Within the market for video collaboration products and solutions, we compete primarily with Polycom, Inc., Cisco Systems, Inc., Radvision, Ltd., and Emblaze-VCON Ltd.
 
With increasing interest in the power of video collaboration, unified communications and the establishment of communities of users, we face increasing competition from alternative communications solutions that employ new technologies or new combinations of technologies from companies such as Cisco Systems, Inc., Avaya, Inc., Nortel Networks Corporation, Microsoft Corporation, and IBM Corporation that enable web-based or network-based video and unified communications with low-cost digital camera systems.
 
We believe that the principal factors affecting competition in our markets include:
 
 
·
Product features, functionality and scalability;
 
 
·
Product quality and performance;
 
 
·
Product reliability and ease of use;
 
 
·
Use of open standards;
 
 
·
Quality of service and support;
 
 
·
Company reputation, size and financial stability;
 
 
·
Price and overall cost of ownership;
 
 
·
Integration with other desktop collaboration products; and
 
 
·
Document sharing, including internet-based collaboration.
 
Currently, our principal competitors are companies that provide products and services in specific areas where we offer our integrated system, such as:
 
 
·
Room-based point-to-point and multi-point video communications products;
 
 
·
Desktop video communications products;
 
 
·
Broadcast video products;
 
 
·
Video retrieval and viewing products;
 
 
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·
Desktop content creation products; and
 
 
·
Web-based data collaboration products.
 
While a number of companies have marketed applications that enable users to use individual features similar to our solutions, we do not believe that any single competitor currently offers as comprehensive a set of functionality as our solution provides. We believe these companies in many cases can also represent complementary opportunities to extend the reach of our solutions by potentially expanding the market for video and unified communications and collaboration.
 
We expect competition to increase significantly in the future from existing providers of specialized video and unified communications products, VOIP solution providers and other companies as they enter our existing or future markets, possibly including major telephone companies or communications equipment providers. These companies may develop similar or substitute solutions, which may be less costly or provide better performance or functionality than our systems. A number of our existing and potential competitors have longer operating histories, significantly greater financial, marketing, service, support, technical and other resources, significantly greater name recognition and a larger installed base of customers than we do. In addition, many of our current or potential competitors have well-established relationships with our current and potential customers, and have extensive knowledge of our industry. It is possible that new competitors or alliances among competitors may emerge and acquire significant market share. To be successful, we must continue to respond promptly and effectively to the challenges of developing customer requirements, technological change and competitors’ innovations. Accordingly, we cannot predict what our relative competitive position will be as the market evolves for video collaboration and unified communications products and services.
 
Employees
 
As of December 31, 2010, we had 51 employees, including personnel dedicated to research and development, customer service, including installation and support services, sales and marketing, and finance and administration. Our future performance depends in significant part upon the continued service of our key technical, sales and marketing, and senior management personnel, most of whom are not obligated to remain with us by an employment agreement. The loss of the services of one or more of our key employees could harm our business.
 
Executive Officers of the Registrant
 
Our officers and their ages as of December 31, 2010 were as follows:
 
Name
       
Age
   
Position
Robert F. Kirk
 
55
 
Chief Executive Officer
Elias A. MurrayMetzger
 
40
 
Chief Financial Officer, Chief Administrative Officer and Corporate Secretary
J. Chris Lauwers
 
50
 
Chief Technology and Product Officer
Anton F. Rodde
 
68
 
President, Intellectual Property Division
Stephen M. Epstein
 
45
 
Chief Marketing Officer
Stephen W. Westmoreland
 
55
 
Chief Information Officer
Michael J. Dignen
 
56
 
Senior Vice President, Sales
Bryan M. Kennedy
 
55
 
Vice President, Business Development

 
Robert F. Kirk joined Avistar in July 2009 as our Chief Executive Officer. He previously served as Chief Executive Officer of ChoicePay, Inc., a payment services company, from August 2008 to its sale to Tier Technologies, Inc. in January 2009.  Mr. Kirk served as Chief Executive Officer of VICOR, Inc., a provider of image-enabled receivables processing and management solutions, from August 2005 to its sale to Metavante Corporation in August 2007. Prior to his appointment as Chief Executive Officer of VICOR, Inc., in August 2005, Mr. Kirk served continuously in various management positions at VICOR, Inc. beginning in January 1999.  Mr. Kirk holds a Master's and Bachelor's degree in Business Administration from West Virginia University.
 
  Elias A. MurrayMetzger was promoted to the position of Chief Financial Officer, Chief Administrative Officer and Corporate Secretary in January 2010, after serving as our Chief Financial Officer and Corporate Secretary from April 2009 to January 2010 and Acting Chief Financial Officer and Corporate Secretary from January to April 2009.  From January 2006 to January 2009, Mr. MurrayMetzger served as our worldwide Corporate Controller, playing a key role in the Company’s financial reporting and compliance functions. From April 2004 to January 2006, Mr. MurrayMetzger served as Assistant Controller of Centra Software, Inc., a provider of software solutions for online business communication, collaboration and learning. During his tenure at Centra, Mr. MurrayMetzger successfully navigated Centra’s Sarbanes-Oxley compliance effort and SEC reporting functions. Mr. MurrayMetzger worked in the technology audit practice of PricewaterhouseCoopers from February 2000 to March 2004. He is a Certified Public Accountant (inactive) and has a Bachelors of Science in Agribusiness with a concentration in finance from California Polytechnic State University, San Luis Obispo.
 
 
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J. Chris Lauwers has been our Chief Technology and Product Officer since August 2005. He served as Chief Technology Officer from March 2001 to August 2005. He was our Vice President of Engineering from 1996 to 2001 and Director of Engineering from 1994 to 1996. He previously served as Principal Software Architect at VICOR, Inc. from 1990 to 1994, and as a research associate at Olivetti Research Center from 1987 to 1990. Dr. Lauwers holds a B.S. in electrical engineering from the Katholieke Universiteit Leuven of Belgium. Dr. Lauwers also holds an M.S. and a Ph.D. in electrical engineering and computer science from Stanford University.
 
Anton F. Rodde has been the President of the Intellectual Properties Division since December 2003. Prior to joining Avistar, he served as President and CEO of Western Data Systems, an ERP software company, from 1991 to 2002, as Group Vice President at Manugistics from 2002 to 2003, the company which acquired Western Data Systems, as President and General Manager of several subsidiaries of Teknekron Corporation, a technology incubator, from 1984 to 1991, as founder and President of Control Automation, a robotics company, from 1980 to 1984, and held a variety of technical and management positions at AT&T from 1970 to 1980. Dr. Rodde holds a B.S. in physics from Benedictine University and an M.S. and Ph.D. in physics from the Illinois Institute of Technology.
 
Stephen M. Epstein joined Avistar in January 2008. Prior to Avistar he was Vice President, Head of Product Management at Mantas, Inc. from July 2003 to January 2008, where he was responsible for global product strategy, managing product requirements, defining go to market plans and marketing strategy, while evaluating the financial services market. Prior to joining Mantas, Mr. Epstein was Head of Product & Business Development at Bang Networks from May 2002 to July 2003 where he spearheaded product and business development efforts, focusing on delivering real-time information distribution products. Mr. Epstein held senior-level management and product development positions including Head of Global Foreign Exchange Sales Technology and Group CTO at Deutsche Bank from March 1995 to May 2002.
 
Stephen W. Westmoreland joined Avistar as Chief Information Officer in October 2009 and he is responsible for our development, quality assurance, information technology and customer support functions.  From December 2003 to October 2009, he was Senior Vice President of Support Operations for VICOR, Inc., where he helped to significantly grow the company and played a leading role as part of Metavante’s successful acquisition of VICOR, Inc. Prior to that, Mr. Westmoreland held Chief Information Officer positions at Damage Studios and VALinux Systems. Mr. Westmoreland holds a BS degree in Computer Science from Louisiana Tech University.
 
Michael J. Dignen joined Avistar in July 2010 and is responsible for the company’s sales and account management initiatives.  Prior to joining Avistar, Mr. Dignen held executive sales management positions at US Dataworks from April 2009 to July 2010, Vicor (a business unit of Metavante Corp) from February 2002 to April 2009, and Profit Technologies Corporation from April 1995 to February 2002. Mr. Dignen has successfully sold enterprise sized software solutions into Fortune 500 companies, as well as emerging small and medium sized businesses. He has a proven track record driving sales efforts into promising new product areas while optimizing the efforts of his sales and account management teams. Mr. Dignen holds a Bachelor of Business Administration degree with a major in Finance from The George Washington University.

Bryan M. Kennedy joined Avistar in December 2009 as Avistar’s Vice President, Business Development.  Prior to Avistar, Mr. Kennedy held executive management positions at Avid Technology, a leader in digital media solutions, from November 2005 to January 2009. From 2001 to November 2005, Mr. Kennedy was self employed and provided consulting services related to mergers, acquisitions and corporate strategy to a variety of businesses. From 1992 to 2001, Mr. Kennedy was General Partner for Platinum Venture Partners, a leading venture capital firm. Mr. Kennedy was also a consultant for McKinsey and Company from 1988 to 1992. Mr. Kennedy holds a B.S. in Economics and Finance from Farleigh Dickenson University and an M.B.A. from Harvard Business School.

 
Item 1A. Risk Factors
 
Before you invest in our securities, you should be aware that our business faces numerous financial and market risks, including those described below, as well as general economic and business risks.  The following discussion provides information concerning the material risks and uncertainties that we have identified and believe may adversely affect our business, our financial condition and our results of operations.  Before you decide whether to invest in our securities, you should carefully consider these risks and uncertainties, together with all of the other information included in this Annual Report on Form 10-K for the year ended December 31, 2010 and in our other public filings.
 
 
Risks Relating to Our Common Stock
 
 
Our Stock is quoted on the OTC Market, which may decrease the liquidity of our common stock.
 
On June 24, 2009, the NASDAQ Stock Market, Inc. suspended our common stock from trading on NASDAQ because we did not evidence a market value of listed securities above $35.0 million for ten consecutive trading days, or otherwise demonstrate compliance with alternative continued listing standards, during the period from April 2, 2009 and June 22, 2009.  Since that time our common stock has been quoted on the OTC Market under the symbol AVSR.  On August 6, 2009, we withdrew our appeal to the NASDAQ Listing and Hearing Review Council. On August 31, 2009, the NASDAQ Stock Market, Inc. officially delisted our common stock.
 
 
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Broker-dealers often decline to trade in OTC Market stocks given that the market for such securities is often limited, the stocks are more volatile, and the risk to investors is greater than with stocks listed on other national securities exchanges. Consequently, selling our common stock can be difficult because smaller quantities of shares can be bought and sold, transactions can be delayed and news media coverage of our Company may be reduced. These factors could result in lower prices and larger spreads in the bid and ask prices for shares of our common stock as well as lower trading volume. Investors should realize that they may be unable to sell shares of our common stock that they purchase. Accordingly, investors must be able to bear the financial risks associated with losing their entire investment in our common stock.
 
 
Our common stock may be subject to penny stock rules, which may make it more difficult for our stockholders to sell their common stock.
 
Our common stock may be considered a “penny stock” pursuant to Rule 3a51-1 of the Exchange Act. Broker-dealer practices in connection with transactions in penny stocks are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are defined as equity securities with a price of less than $5.00 per share. The penny stock rules require a broker-dealer, prior to purchase or sale of a penny stock not otherwise exempt from the rules, to deliver to the customer a standardized risk disclosure document that provides information about penny stocks and the risks associated with the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer account. In addition, the penny stock rules generally require that, prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market of a stock that becomes subject to the penny stock rules.
 
 
Our common stock has been and will likely continue to be subject to substantial price and volume fluctuations due to a number of factors, many of which will be beyond our control, which may prevent our stockholders from reselling our common stock at a profit.
 
The trading price of our common stock has in the past been and could in the future be subject to significant fluctuations in response to:
 
 
General trends in the equities market, and/or trends in the technology sector;
 
 
Quarterly variations in our results of operations;
 
 
Announcements regarding our product developments;
 
 
The size and timing of agreements to license our remaining and future patent portfolio or enter into technology or distribution partnerships;
 
 
Developments in the examination of our patent applications by the U.S. Patent and Trademark Office;
 
 
Announcements of technological innovations or new products by us, our customers or competitors;
 
 
Announcements of competitive product introductions by our competitors;
 
 
Limited trading volume of shares; and,
 
 
Developments or disputes concerning patents or proprietary rights, or other events.
 
If our revenue and results of operations are below the expectations of public market securities analysts or investors, then significant fluctuations in the market price of our common stock could occur. In addition, the securities markets have recently experienced significant price and volume fluctuations, which have particularly affected the market prices for high technology and micro-cap companies, and which often are unrelated and disproportionate to the operating performance of specific companies. These broad market fluctuations, as well as general economic, political and market conditions, may negatively affect the market price of our common stock.
 
 
Provisions of our certificate of incorporation, our bylaws and Delaware law may make it difficult for a third party to acquire us, despite the possible benefits to our stockholders.
 
Our certificate of incorporation, our bylaws, and Delaware law contain provisions that may inhibit changes in our control that are not approved by our Board of Directors. For example, the Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the terms of this preferred stock, without any further vote or action on the part of the stockholders.
 
 
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These provisions may have the effect of delaying, deferring or preventing a change in the control of Avistar despite possible benefits to our stockholders, may discourage bids at a premium over the market price of our common stock, and may adversely affect the market price of our common stock and the voting and other rights of our stockholders.
 
 
Our principal stockholders can exercise a controlling influence over our business affairs and they may make business decisions with which you disagree and which may affect the value of your investment.
 
Our executive officers, directors and entities affiliated with them, in the aggregate, beneficially owned approximately 65% of our common stock as of December 31, 2010. If they were to act together, these stockholders would be able to exercise control over most matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. These actions may be taken even if they are opposed by other investors. This concentration of ownership may also have the effect of delaying or preventing a change in control of Avistar, which could cause the market price of our common stock to decline.
 
 
If our share price is volatile, we may be the target of securities litigation, which is costly and time-consuming to defend.
 
In the past, following periods of market volatility in the price of a company’s securities, security holders have often instituted class action litigation. Many technology companies have been subject to this type of litigation. Our share price has, in the past, experienced price volatility, and may continue to do so in the future. If the market value of our common stock experiences adverse fluctuations and we become involved in this type of litigation, regardless of the merits or outcome, we could incur substantial legal costs and our management’s attention could be diverted, causing our business, financial condition and operating results to suffer.
 

 
Risks Related to Our Business
 
 
We have incurred substantial losses in the past and may not be profitable in the future.

We recorded net income of $4.4 million for 2010, and net losses of $4.0 million for 2009 and $6.4 million for 2008.  As of December 31, 2010, our accumulated deficit was $111.7 million.  Our revenue and income from settlement and patent licensing may not increase, or even remain at its current level.  In addition, our operating expenses, which have been reduced recently, may increase as we continue to develop our business and pursue licensing opportunities.  As a result, to become profitable, we will need to increase our revenue and income from settlement and patent licensing by increasing sales to existing customers and by attracting additional new customers, distribution partners and licensees.  If our revenue does not increase adequately, we may not become profitable.  Due to the volatility of our product and licensing revenue and our income from settlement and patent licensing activities, we may not be able to achieve, sustain or increase profitability on a quarterly or annual basis.  If we fail to achieve or to maintain profitability or to sustain or grow our profits within the time frame expected by investors, the market price of our common stock may be adversely impacted.

 
Our expected future working capital needs may require that we seek additional debt or equity funding which, if not available on acceptable terms, could cause our business to suffer.
 
We may need to arrange for the availability of additional funding in order to meet our future business requirements. We have a revolving credit facility that matures on December 22, 2011, which provided us with a maximum line of credit amount of $8.0 million as of December 31, 2010. The line of credit was fully drawn in February 2011. On March 29, 2011, we issued $3.0 million of 4.5% Convertible Subordinated Secured Notes, with a two year term due in 2013, to Gerald Burnett, our Chairman.  If we are unable to obtain additional funding when needed on acceptable terms, we may not be able to develop or enhance our products, take advantage of opportunities, respond to competitive pressures or unanticipated requirements, or finance our efforts to protect and enforce our intellectual property rights, which could seriously harm our business, financial condition, results of operations and ability to continue operations.  We have in the past, and may in the future, reduce our expenditures by reducing our employee headcount in order to better align our expenditures with our available resources.  Any such reductions may adversely affect our ability to maintain or grow our business.
 
 
Any significant changes in our organizational structure, sales, marketing and distribution strategies, licensing efforts and strategic direction, if unsuccessfully implemented, could adversely affect our business and results of operations.
 
We have experienced significant changes in our management structure and composition in the past.  Simon Moss was appointed as President of our products division in July 2007 and was appointed as our Chief Executive Officer in January 2008 when Gerald Burnett resigned from his position as our Chief Executive Officer.  In January 2009, Bob Habig resigned from the position of Chief Financial Officer and he was replaced in that position by Elias MurrayMetzger, our Corporate Controller.  In July 2009, Simon Moss resigned from his positions as Chief Executive Officer and board member.  Shortly thereafter, Robert Kirk was appointed to replace Simon Moss as our Chief Executive Officer.  In August 2009, Darren Innes resigned from the position of General Manager and Vice President, Global Sales.
 
 
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Organizational changes and initiatives in our business are aimed at reducing our structural costs, increasing our organizational and partner-driven capacity, leveraging our reputation for innovation and intellectual property leadership, and growing and expanding our business.  However, these changes and initiatives involve transitional costs and expenses and result in uncertainty in terms of their implementation and their impact on our business. For example, our efforts to expand our market focus to additional verticals through the use of distribution partners has proven challenging as such distribution partners work to better understand our product and service offerings and integrate them into their own marketing and sales strategies.   As with any significant organizational change, our initiatives will take time to implement, and the results of these initiatives may not be fully apparent in the near term.  If our initiatives are unsuccessful in achieving our stated objectives, our business could be harmed and our results of operations and financial condition could be adversely affected.
 
 
Our market is in the early stages of development, and our system may not be widely accepted.
 
Our ability to achieve profitability depends in part on the widespread adoption of networked video communications systems and the sale and adoption of our video system in particular, either as a separate solution or as a technology integrated into a unified communications platform. If the market for our system and technology fails to grow or grows more slowly than we anticipate, we may not be able to increase revenue or achieve profitability. The market for our system is relatively new and evolving. We have to devote substantial resources to educating prospective customers, distributors and technology partners about the uses and benefits of our system and the value added through the adoption of our technology. Our efforts to educate potential customers and partners may not result in our system achieving broad market acceptance. In addition, businesses that have invested or may invest substantial resources in other video products may be reluctant or slow to adopt our system or technology. Consequently, the conversion from traditional methods of communication to the extensive use of networked video and unified communications may not occur as rapidly as we wish.
 
 
Our lengthy sales cycle to acquire new customers, large follow-on orders, distributors and technology partners may cause our operating results to vary significantly and make it more difficult to forecast our revenue.
 
We have generally experienced a product sales cycle of four to nine months for new customers or large follow-on orders from existing customers through direct sales.   This sales cycle is due to the time needed to educate customers about the uses and benefits of our system, and the time needed to process the investment decisions that our prospective customers must make when they decide to buy our system. Many of our prospective customers have neither budgeted expenses for networked video communications systems, nor for personnel specifically dedicated to the procurement, installation or support of these systems. As a result, our customers spend a substantial amount of time before purchasing our system in performing internal reviews and obtaining capital expenditure approvals. Economic conditions over the last several years have contributed to additional deliberation and an associated delay in the sales cycle.
 
Our lengthy sales cycle is one of the factors that has caused, and may continue to cause our operating results to vary significantly from quarter-to-quarter and year-to-year in the future. This makes it difficult for us to forecast revenue, and could cause volatility in the market price of our common stock.  Our shift to indirect distribution partners further limits the visibility we have on the progress and timing of large initial or follow-on orders. A lost or delayed order could result in lower than expected revenue in a particular quarter or year. There is also a tendency in the technology industry to close business deals at the end of a quarter, thereby increasing the likelihood that a possible material deal would not be concluded in a current quarter, but slip into a subsequent reporting period. This kind of delay may result in a given quarter’s performance being below shareholder expectations.
 
 
Because we still depend on a few customers for a majority of our product revenue, patent licensing and sale revenue and services revenue, the loss of one or more of them could cause a significant decrease in our operating results.
 
We currently depend on a limited number of customers with lengthy budgeting cycles and unpredictable buying patterns, and as a result, our revenue from quarter-to-quarter or year-to-year may be volatile. The loss of a major customer or the reduction, delay or cancellation of orders from one or more of our significant customers could cause our revenue to decline and our losses to increase.  Adverse changes in our revenue or operating results as a result of these budgeting cycles or any other reduction in capital expenditures by our large customers could also substantially reduce the trading price of our common stock.
 
 
We may not be able to modify and improve our products in a timely and cost effective manner to respond to technological change and customer demands.
 
Future hardware and software platforms embodying new technologies and the emergence of new industry standards and customer requirements could render our system non-competitive or even obsolete.  Additionally, communication and collaboration products and technologies are moving towards integrated platforms characterized as unified communications. The market for our system reflects:
 
 
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•      Rapid technological change;
 
•      The emergence of new competitors;
 
•      Significant development costs;
 
•      Changes in the requirements of our customers and their communities of users;
 
•      Integration of joint solutions in collaboration platforms;
 
•      Evolving industry standards;
 
•      Transition from hardware appliances and infrastructure to software; and
 
•      Transition to Internet protocol connectivity for video at the desktop, with increasing availability of bandwidth and quality of service.
 
Our system is designed to work with a variety of hardware and software configurations, and be integrated with commoditized components (example: “web cams”) of data networking infrastructures used by our customers. The majority of these customer networks rely on Microsoft Windows servers. However, our software may not operate correctly on other hardware and software platforms or with other programming languages, database environments and systems that our customers use. Also, we must constantly modify and improve our system to keep pace with changes made to our customers’ platforms, data networking infrastructures, and their evolving ability to integrate video with other applications. This may result in uncertainty relating to the timing and nature of our new release announcements, introductions or modifications, which in turn may cause confusion in the market, with a potentially harmful effect on our business. If we fail to promptly modify, integrate, or improve our system in response to evolving industry standards or customers’ demands, our system could become less competitive, which would harm our financial condition and reputation.
 
 
Difficulties or delays in integrating our products with technology partner’s products could harm our revenue and margins.
 
We generally recognize initial product and installation revenue upon the installation of our system in those cases where we are responsible for installation, which often entails working with sophisticated software and computing and communications systems. Under certain circumstances initial product and installation revenue is recognized under the percentage of completion method. The estimate of current period percentage of completion requires significant management judgment and is subject to updates in future periods until the project is complete. If we experience difficulties with installations or do not meet deadlines due to delays caused by our customers or ourselves, we could be required to devote more customer support, technical, engineering and other resources to a particular installation, modification or enhancement project, and revenue may be delayed.
 
 
Competition could reduce our market share and decrease our revenue.
 
The market in which we operate is highly competitive. In addition, because our industry is relatively new and is characterized by rapid technological change, evolving user needs, developing industry standards and protocols and the introduction of new products and services, it is difficult for us to predict whether or when new competing technologies or new competitors will enter our market. Currently, our competition comes from many other kinds of companies, including communication equipment, integrated solution, broadcast video and stand-alone “point solution” providers. Within the video-enabled network communications market, we compete primarily against Polycom, Inc., Cisco Systems, Inc., Sony Corporation, Apple Inc., Radvision Ltd. and Emblaze-VCON Ltd.  Many of these companies, including Polycom, Inc., Cisco, Sony, Radvision and Emblaze-VCON have acquired rights to use our patented technology through licensing agreements with us, which, in some cases, include rights to use future patents filed by us.  With increasing interest in the power of video collaboration and the establishment of communities of users, we believe we face increasing competition from alternative video communications solutions that employ new technologies or new combinations of technologies from companies such as Cisco Systems, Inc., Avaya, Inc., Microsoft Corporation and Nortel Networks Corporation that enable web-based or network-based video communications with low-cost digital camera systems.
 
 We expect competition to increase in the future from existing competitors, partnerships of competitors, and from new market entrants with products that may be less expensive than ours, or that may provide better performance or additional features not currently provided by our products. Many of our current and potential competitors have substantially greater financial, technical, manufacturing, marketing, distribution and other resources, greater name recognition and market presence, longer operating histories, lower cost structures and larger customer bases than we do. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements.
 
 
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We may be required to reduce prices or increase spending in response to competition in order to retain or attract customers, pursue new market opportunities or invest in additional research and development efforts. As a result, our revenue, margins and market share may be harmed. We cannot assure you that we will be able to compete successfully against current and future competitors and partnerships of our competitors, or that competitive pressures faced by us will not harm our business, financial condition and results of operations.
 
 
General economic conditions may impact our revenues and harm our business in the future, as they have in the past.
 
The U.S. and global economy has entered a recession and our customers and potential customers, partners and distributors may delay or forego ordering our products, and we could fall short of our revenue expectations for 2011 and beyond. Slower growth among our customers, tightening of customers’ operating budgets, retrenchment in the capital markets and other general economic factors all have had, and could in the future have, a materially adverse effect on our revenue, capital resources, financial condition and results of operations.
 
 
The sale of substantially all of our patents and patent applications in January 2010 is expected to affect our cash, expenses, revenues and income in future periods.

In prior periods, we have relied on patent licensing revenues and income from settlement and licensing activities to provide significant funding for our operations.  We recognized a total of $15.1 million, $4.5 million, and $5.2 million in patent licensing and sale revenues and income from settlement and licensing activities for the years ended December 31, 2010, 2009, and 2008, respectively.  In January 2010, we sold substantially all of our patent portfolio and associated patent applications to Intellectual Ventures for a one time cash payment of $11.0 million.  We retained royalty rights under our existing patent license agreements as well as a grant back license to the patents and patent applications for our current and future products.  As a result of this sale, we expect our efforts and expenditures on patent prosecution, licensing and settlement activities in future periods to be substantially reduced and our prospects for revenues from the licensing or sale of patents and patent applications and our prospects for generating new income from settlement and licensing activities to also be substantially reduced.  Accordingly, our ongoing operations will have to be funded directly from operations and from debt and equity financing activities.  Failure to generate cash from operations or from debt or equity financing activities could have a substantial and adverse affect on our business, operations and prospects.

 
Future revenues and income from settlement and licensing activities are difficult to predict for several reasons, including our lengthy and costly licensing cycle. Our failure to predict revenues and income accurately may cause us to miss analysts’ estimates and result in our stock price declining.
 
Because our licensing cycle is a lengthy process, the accurate prediction of future revenues and income from settlement and patent licensing from new licensees is difficult. The process of persuading companies to adopt our technologies can be lengthy, and other challenges to our patent portfolio may further complicate and delay our patent licensing efforts.  There is also a tendency in the technology industry to close business deals at the end of a quarter, thereby increasing the likelihood that a possible material deal would not be concluded in a current quarter, but slip into a subsequent reporting period. This kind of delay may result in a given quarter’s performance being below analyst or shareholder expectations. The proceeds of our intellectual property licensing efforts tend to be sporadic and difficult to predict. Recognition of those proceeds as revenue or income from settlement and licensing activities depends on the terms of the license agreement involved, and the circumstances surrounding the agreement. To finance litigation to defend or enforce our intellectual property rights, we may enter into contingency arrangements and other strategic transactions with investors, legal counsel or other advisors that would give such parties a significant portion of any future licensing and settlement amounts derived from our patent portfolio. As a result, our licensing and enforcement efforts are expected to result in significant volatility in our quarterly and annual financial condition and results of operations, which may result in us missing investor expectations, which may cause our stock price to decline.
 
 
Infringement of our proprietary rights could affect our competitive position, harm our reputation or cost us money.
 
We regard our system as open but proprietary. In an effort to protect our proprietary rights, we rely primarily on a combination of patent, copyright, trademark and trade secret laws, as well as licensing, non-disclosure and other agreements with our consultants, suppliers, customers, partners and employees. However, these laws and agreements provide only limited protection of our proprietary rights. In addition, we may not have signed agreements in every case, and the contractual provisions that are in place and the protection they produce may not provide us with adequate protection in all circumstances. Although we hold patents and have filed patent applications covering some of the inventions embodied in our systems, our means of protecting our proprietary rights may not be adequate. It is possible that a third party could copy or otherwise obtain and use our technology without authorization and without our detection. In the event that we believe a third party is infringing our intellectual property rights, an infringement claim brought by us could, regardless of the outcome, result in substantial cost to us, divert our management’s attention and resources, be time consuming to prosecute and result in unpredictable damage awards. A third party may also develop similar technology independently, without infringing upon our patents and copyrights. In addition, the laws of some countries in which we sell our system may not protect our software and intellectual property rights to the same extent as the laws of the United States or other countries where we hold patents. As we move to more of a software based system, inadequate licensing controls, unauthorized copying, and use, or reverse engineering of our system could harm our business, financial condition or results of operations.
 
 
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Others may bring infringement claims against us or challenge the legitimacy of our patents, which could be time-consuming and expensive to defend.
 
In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. We have been party to such litigation in the past and may be again in the future. The prosecution and defense of such lawsuits would require us to expend significant financial and managerial resources, and therefore may have a material negative impact on our financial position and results of operations. The duration and ultimate outcome of these proceedings are uncertain. We may be a party to additional litigation in the future to protect our intellectual property, or as a result of an alleged infringement of the intellectual property of others. These claims and any resulting lawsuit could subject us to significant liability for damages and invalidation of our proprietary rights. In addition, the validity of our patents has been challenged in the past and may be challenged in the future through reexamination requests or other means. These lawsuits or challenges of our patents legitimacy in the US or foreign patent offices, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management’s time and attention. Any potential intellectual property litigation also could force us to do one or more of the following:
 
•      Stop selling, incorporating or using products or services that use the challenged intellectual property;
 
•      Obtain from the owner of the infringed intellectual property a license to the relevant intellectual property, which may require us to license our intellectual property to such owner, or may not be available on reasonable terms or at all; and
 
•      Redesign those products or services that use technology that is the subject of an infringement claim.
 
If we are forced to take any of the foregoing actions, we may be unable to manufacture, use, sell, import and export our products, which would reduce our revenues.
 
 
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our consolidated operating results, our ability to operate our business and our stock price.
 
As a smaller reporting company, we are required to comply with certain portions of Section 404 of the Sarbanes Oxley Act of 2002.  We have expended significant resources in developing the necessary documentation and testing procedures required by Section 404 of the Sarbanes Oxley Act.  We cannot be certain that the actions we have taken and are taking to improve our internal control over financial reporting will be sufficient to maintain effective internal control over financial reporting in subsequent reporting periods or that we will be able to implement our planned processes and procedures in a timely manner.  In addition, we may be unable to produce accurate financial statements on a timely basis.  Any of the foregoing could cause investors to lose confidence in the reliability of our consolidated financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.
 
 
If our customers do not perceive our system or services to be effective or of high quality, our brand and name recognition would suffer.
 
We believe that establishing and maintaining brand and name recognition is critical for attracting and expanding our targeted customer base. We also believe that the importance of reputation and name recognition will increase as competition in our market increases. Promotion and enhancement of our name will depend on the success of our marketing efforts, and on our ability to continue to provide high quality systems and services, neither of which can be assured. If our customers do not perceive our system or services to be effective or of high quality, our brand and name recognition will suffer, which would harm our business.
 
 
Our system could have defects for which we could be held liable for, and which could result in lost revenue, increased costs, and loss of our credibility or delay in the further acceptance of our system in the market.
 
Our system may contain errors or defects, especially when new products are introduced or when new versions are released. Despite internal system testing, we have in the past discovered software errors in some of the versions of our system after their introduction. Errors in new systems or versions could be found after commencement of commercial shipments, and this could result in additional development costs, diversion of technical and other resources from our other development efforts or the loss of credibility with current or future customers. Any of these events could result in a loss of revenue or a delay in market acceptance of our system, and could harm our reputation.
 
 
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In addition, we have warranted to some of our customers that our software is free of viruses. If a virus infects a customer’s computer software, the customer could assert claims against us, which, regardless of their merits, could be costly to defend and could require us to pay damages and potentially harm our reputation.
 
Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability and certain contract claims. Our license agreements also typically limit a customer’s entire remedy to either a refund of the price paid or modification of our system to satisfy our warranty. However, these provisions vary as to their terms and may not be effective under the laws of some jurisdictions. Although we maintain product liability (“errors and omissions”) insurance coverage, we cannot assure you that such coverage will be adequate. A product liability, warranty or other claim could harm our business, financial condition and/or results of operations. Performance interruptions at a customer’s site could negatively affect the demand for our system or give rise to claims against us.
 
The third party software we license with our system may also contain errors or defects for which we do not maintain insurance. Typically, our license agreements transfer any warranty from the third party to our customers to the extent permitted. Product liability, warranty or other claims brought against us with respect to such warranties could, regardless of their merits, harm our business, financial condition or results of operations.
 
 
If we are unable to expand our indirect distribution channel, our business will suffer.
 
To increase our revenue, we must increase our indirect distribution channels, such as systems integrators, product partners and/or value-added resellers, which is a focus of our go-to market strategy, and/or effect sales through our customers. If we are unable to increase our indirect distribution channel due to our own cost constraints, limited availability of qualified partners or other reasons, our future revenue growth may be limited and our future operating results may suffer. We cannot assure you that we will be successful in attracting, integrating, motivating and retaining sales personnel and channel partners. Furthermore, it can take several months before a new hire or channel partner becomes a productive member of our sales force effort. The loss of existing salespeople, or the failure of new salespeople and/or indirect sales partners to develop the necessary skills in a timely manner, could impact our revenue growth.
 
 
We may not be able to retain our existing key personnel, or hire and retain the additional personnel that we need to sustain and grow our business.
 
We depend on the continued services of our executive officers and other key personnel. We do not have long-term employment agreements with our executive officers or other key personnel and we do not carry any “key man” life insurance. The loss of the services of any of our executive officers or key personnel could harm our business, financial condition and results of operations.
 
Our products and technologies are complex, and to successfully implement our business strategy and manage our business, an in-depth understanding of video communication and collaboration technologies and their potential uses is required. We need to attract and retain highly skilled technical and managerial personnel for whom there is intense competition. If we are unable to attract and retain qualified technical and managerial personnel due to our own cost constraints, limited availability of qualified personnel or other reasons, our results of operations could suffer and we may never achieve profitability. The failure of new personnel to develop the necessary skills in a timely manner could harm our business.
 
 
Our plans call for growth in our business, and our inability to achieve or manage growth could harm our business.
 
Failure to achieve or effectively manage growth will harm our business, financial condition and operating results. Furthermore, in order to remain competitive or to expand our business, we may find it desirable in the future to acquire other businesses, products or technologies. If we identify an appropriate acquisition candidate, we may not be able to negotiate the terms of the acquisition successfully, to finance the acquisition or to integrate the acquired businesses, products or technologies into our existing business and operations. In addition, completing a potential acquisition and integrating an acquired business may strain our resources and require significant management time.

 
Our international operations expose us to potential tariffs and other trade barriers, unexpected changes in foreign regulatory requirements and laws and economic and political instability, as well as other risks that could adversely affect our results of operations.
 
International revenue, which consists of sales to customers with operations principally in Western Europe and Asia, comprised 33%, 44%, and 51% of total revenues for the years ended December 31, 2010, 2009, and 2008, respectively. Some of the risks we may encounter in conducting international business activities include the following:
 
 
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•      Tariffs and other trade barriers;
 
•      Unexpected changes in foreign regulatory requirements and laws;
 
•      Economic and political instability;
 
•      Increased risk of infringement claims;
 
•      Protection of our intellectual property;
 
•      Restrictions on the repatriation of funds;
 
•      Potentially adverse tax consequences;
 
•      Timing, cost and potential difficulty of adapting our system to the local language standards in those foreign countries that do not use the English language;
 
•      Fluctuations in foreign currencies; and
 
•      Limitations in communications infrastructures in some foreign countries.
 
  Some of our products are subject to various federal, state and international laws governing substances and materials in products, including those restricting the presence of certain substances in electronics products. We could incur substantial costs, including fines and sanctions, or our products could be enjoined from entering certain jurisdictions, if we were to violate environmental laws or if our products become non-compliant with environmental laws. We also face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and certain other substances that apply to specified electronics products sold in the European Union (Restriction of Hazardous Substances Directive). The ultimate costs under environmental laws and the timing of these costs are difficult to predict. Similar legislation has been or may be enacted in other regions, including in the United States, the cumulative impact of which could be significant.
 
 
International political instability may increase our cost of doing business and disrupt our business.
 
Increased international political instability, evidenced by the threat or occurrence of terrorist attacks, enhanced national security measures and/or sustained military action may halt or hinder our ability to do business, may increase our costs and may adversely affect our stock price. This increased instability has had and may continue to have negative effects on financial markets, including significant price and volume fluctuations in securities markets. If this international political instability continues or escalates, our business and results of operations could be harmed and the market price of our common stock could decline.
 
Item 1B. Unresolved Staff Comments
 
None.
 
 
Item 2. Properties
 
We lease approximately 29,600 square feet of office space in San Mateo, California as our corporate headquarters and technology licensing activities, of which we occupy approximately 19,311 square feet and sublease approximately 10,289 square feet.  In addition, we lease approximately 7,000 square feet of office space in New York for sales and marketing functions, of which we sublease substantially all of the office space to third parties.  The above leases expire in March 2012 and 2017 respectively.  We believe that our existing facilities are adequate to meet our current requirements, and foresee no difficulties in meeting any future space requirements.
 
 
Item 3. Legal Proceedings
 
From time to time we are subject to legal proceedings and claims in the normal course of business that are not expected to have a material effect on our business. We make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  These provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, ruling, advice of legal counsel and other information and events pertaining to a particular case. However, dispute resolution is inherently unpredictable, and the costs and other effects of pending or future claims, litigation, legal and administrative cases and proceedings, and changes in any such matters, and developments or assertions by or against us relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on our business, financial condition and operating results.
 
 
Item 4. [Removed and Reserved]
 

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PART II
 

 
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock was traded on the NASDAQ National Market from August 17, 2000 until October 29, 2002 and was traded on the NASDAQ Capital Market from October 30, 2002 until June 23, 2009 under the symbol “AVSR.”  Our common stock is currently quoted and traded on the OTC Market, which is an over-the-counter securities market, under the symbol “AVSR”. Prior to August 17, 2000, there was no public market for our common stock.
 
On June 12, 2009, we received a letter from The NASDAQ Stock Market, or NASDAQ, indicating that the NASDAQ Hearings Panel, or the Panel, had determined to delist our Company’s shares from NASDAQ and would suspend our common stock from trading on NASDAQ effective at the open of trading on June 24, 2009.  The Panel's decision to suspend our common stock was the result of us not evidencing a market value of listed securities above $35.0 million for ten consecutive trading days, or otherwise demonstrating compliance with alternative continued listing standards, during the period from April 2, 2009 and June 22, 2009.  Trading of our common stock on NASDAQ was suspended on June 24, 2009. Since that time, our common stock has been quoted on the OTC Market. On June 17, 2009, we requested a review by the NASDAQ Listing and Hearing Review Council, or the Council, of the Panel’s decision. The Council granted our request for a review and requested us to submit additional information from the Company by August 7, 2009.  On August 6, 2009, we withdrew our appeal to the Council. On August 31, 2009, NASDAQ officially delisted our common stock.
 
The following table sets forth for the period indicated the high and low sale prices for our common stock, as reported by the OTC Market and the NASDAQ Capital Market.
 
   
Year Ended
December 31, 2010
 
Year Ended
December 31, 2009
 
   
High
 
Low
 
High
 
Low
 
First Quarter
 
$0.70
 
$0.31
 
$1.45
 
$0.78
 
Second Quarter
 
$0.58
 
$0.45
 
$1.13
 
$0.80
 
Third Quarter
 
$1.00
 
$0.40
 
$0.90
 
$0.40
 
Fourth Quarter
 
$1.05
 
$0.47
 
$0.75
 
$0.25
 

 
On December 31, 2010, the last reported sale price of our common stock on the OTC Market was $0.47 per share. According to the records of our transfer agent, as of December 31, 2010, there were 70 holders of record of our common stock and we believe there are a substantially greater number of beneficial holders.
 
 
Dividend Policy
 
We have never paid cash dividends on our common stock, and we do not anticipate paying cash dividends in the foreseeable future.
 
 
Equity Compensation Plan Information
 
The information required by this Item is included under Item 12 of Part III of this Annual Report on Form 10-K.
 
 
Item 6.Omitted
 
 
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward looking statements. These risks and other factors include those listed under “Risk Factors” elsewhere in this Annual Report on Form 10-K. In some cases, you can identify forward looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms, or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under “Risk Factors.” These factors may cause our actual results to differ materially from any forward-looking statement.  
 

25 
 

 

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. We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform our prior statements to actual results.
 
 
Overview
 
We create technology that provides the missing critical element in unified communications: bringing people in organizations face-to-face, through enhanced communications for true collaboration anytime, anyplace. Our latest product, Avistar C3™, draws on over a decade of market experience to deliver a single-click desktop videoconferencing and collaboration experience that moves business communications into a new era. Available as a stand-alone solution, or integrated with existing unified communications software from other vendors, Avistar C3™ users gain an instant messaging-style ability to initiate video communications across and outside the enterprise. Patented bandwidth management enables thousands of users to access desktop videoconferencing, Voice over IP (VoIP) and streaming media without requiring substantial new network investment or impairing network performance.  By integrating Avistar C3™ tightly into the way they work, our customers can use our solutions to help reduce costs and improve productivity and communications within their enterprise and between enterprises, and to enhance their relationships with customers, suppliers and partners. Using Avistar C3™ software and leveraging video, telephony and Internet networking standards, Avistar solutions are designed to be scalable, reliable, cost effective, easy to use, and capable of evolving with communications networks as bandwidth increases and as new standards and protocols emerge. We currently sell our system directly and indirectly to the small and medium sized business, or SMB, and globally distributed organizations, or Enterprise, markets comprising the Global 5000. Our objective is to establish our technology as the standard for networked visual unified communications and collaboration through limited direct sales, indirect channel sales/partnerships, and the licensing or sale of our technology and patents to others.
 
       We have three go-to-market strategies. Product and Technology Sales involves direct and channel sales of video and unified communications and collaboration solutions and associated support services to the Global 5000. Partner and Technology Licensing involves co-marketing, sales and development, embedding, integration and interoperability to enterprises. IP Licensing involves the prosecution, maintenance, support and generation of licensing revenue through either license or sale of the intellectual property that we have developed, some of which is used in our products.
 
2010 Financial Highlights
 
·  
Total revenue increased by $10.8 million over 2009 revenue to $19.7 million, primarily due to the license and sale of patents in 2010 for $14.0 million.
 
·  
Operating expense (research and development, sales and marketing, and general and administrative) for the year ended December 31, 2010 was $13.5 million, as compared to $11.8 million for the year ended December 31, 2009. The increase was primarily due to planned additional investments in engineering to develop new products in the Unified Communications and Virtual Desktop Infrastructure (VDI) markets.
 
·  
Net income was $4.4 million for the year ended December 31, 2010, or $0.11 per basic and diluted share, as compared to a net loss of $4.0 million, or $0.11 per basic and diluted share, for the year ended December 31, 2009, an improvement of $8.4 million.
 
·  
Cash and cash equivalents balance as of December 31, 2010 was $1.8 million. Cash generated from operations during the year ended December 31, 2010 was $6.0 million, compared to cash used in operations of $4.9 million for the year ended December 31, 2009.
 
·  
Total debt balance was $7.0 million as of December 31, 2010, a significant reduction from $11.3 million as of December 31, 2009.
 
Intellectual Property
 
Since inception, we have recognized the innovative value of our research and development efforts, and have invested in securing protection for these innovations through domestic and foreign patent applications and issuance. On January 19, 2010, we licensed our patents to Springboard Group S.A.R.L., or SKYPE, for an upfront license payment of $3.0 million. On January 21, 2010, we sold substantially all of our patent portfolio and associated patent applications to Intellectual Ventures Fund 61 LLC for a one time cash payment of $11.0 million.  Nevertheless, we retained royalty rights under our existing patent license agreements as well as a grant back license to the patents and patent applications for our current and future products.  As a result of this sale, we expect our efforts and expenditures on patent prosecution, licensing and settlement activities in future periods to be reduced, and that our prospects for revenues from licensing and sale of patents and patent applications in future periods and our prospects for generating new income from settlement and licensing activities could also be significantly reduced. Accordingly, or ongoing operations will have to be funded directly from operations and from debt and equity financing activities. Failure to generate cash from operations or from debt or equity financing activities could have a substantial and adverse effect on our business, operations and prospects. As of December 31, 2010, we held 1 issued U.S. patent and 1 issued Canadian patent, as well as 18 U.S. patent applications and 1 European patent application. We continue an active program to strategically grow and protect our intellectual property portfolio, primarily through the filing of patent applications. In the future, we also plan to generate licensing revenue through the license or sale of our existing patent portfolio and patent applications.
 
 
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Critical Accounting Policies
 
The preparation of our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
 
We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements:
 
 
·
Revenue recognition and deferred revenue;
 
 
·
Income from settlement and patent licensing;
 
 
·
Stock-based compensation; and
 
 
·
Valuation of accounts receivable.
 
 
Revenue Recognition and Deferred Revenue
 
We derive product revenue from the sale and licensing of our video-enabled networked communications system, consisting of a suite of Avistar-designed software and hardware products, including third party components. We also derive revenue from fees for installation, maintenance, support, training services and software development. In addition, we derive revenue from the licensing and sale of our intellectual property portfolio.
 
We recognize product and services revenue in accordance with Accounting Standards Codification (ASC) 985-605, Revenue Recognition - Software, or ASC 605-25, Revenue Recognition – Multiple-Element Arrangements. Product revenue includes revenue from the sale and licensing of a set of desktop (endpoint) products (hardware and software) and infrastructure products (hardware and software) that combine to form an Avistar video-enabled collaboration solution. Services revenue includes revenue from post-contract customer support, training and software development. The fair value of all product, post-contract customer support and training offered to customers is determined based on the price charged when such products or services are sold separately.

Arrangements that include multiple product and service elements may include software and hardware products, as well as post-contract customer support and training. Pursuant to ASC 985-605, we recognize revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is probable. We apply these criteria as discussed below: 

·  
Persuasive evidence of an arrangement exists. We require a written contract, signed by both the customer and Avistar, or a purchase order from those customers that have previously negotiated a standard end-user license arrangement or volume purchase agreement, prior to recognizing revenue on an arrangement.
 
·  
Delivery has occurred.  We deliver software and hardware to customers either electronically or physically and have no further obligations with respect to the agreement. The standard delivery terms are FOB shipping point.
 
·  
The fee is fixed or determinable. Our determination that an arrangement fee is fixed or determinable depends principally on the arrangement’s payment terms. Our standard terms generally require payment within 30 to 90 days of the date of invoice. Where these terms apply, we regard the fee as fixed or determinable, and recognize revenue upon delivery (assuming other revenue recognition criteria are met). If the payment terms do not meet this standard, but rather, involve “extended payment terms”, the fee may not be considered to be fixed or determinable, and the revenue would then be recognized when customer installments are due and payable.
 
·  
Collectibility is probable. To recognize revenue, we judge collectibility of the arrangement fees on a customer-by-customer basis pursuant to a credit review policy. We typically sell to customers which have had a history of successful collections. For new customers, we evaluate the customer’s financial position and ability to pay. If we determine that collectibility is not probable based upon the credit review process or the customer’s payment history, revenue is recognized when cash is collected.
 
 
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If there are any undelivered elements, we defer revenue for those elements, as long as vendor specific objective evidence (VSOE) of fair value exists for the undelivered elements. Payment for product is due upon shipment, subject to specific payment terms. Payment for professional services is due upon providing the services, subject to specific payment terms. Reimbursements received for out-of-pocket expenses and shipping costs, which have not been significant to date, are recognized as revenue in accordance with ASC 605-45, Revenue Recognition – Principal Agent Considerations.

The price charged for maintenance and/or support is defined in the contract, and is based on a fixed price for both hardware and software components as stipulated in the customer agreement. Customers have the option to renew the maintenance and/or support arrangement in subsequent periods at the same or similar rate as paid in the initial year subject to contractual adjustments for inflation in some cases. Revenue from maintenance and support services is deferred and recognized pro-rata over the maintenance and/or support term, which is typically one year in length. Payments for services made in advance of the provision of services are recorded as deferred revenue and customer deposits in the consolidated balance sheets. Training services are offered independently of the purchase of product. The value of these training services is determined based on the price charged when such services are sold separately. Training revenue is recognized upon performance of the service.
 
We recognize service revenue from software development contracts in accordance with ASC 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. Product and implementation revenue related to contracts for software development is recognized using the percentage of completion method, in accordance with the “Input Method”, when all of the following conditions are met: a contract exists with the customer at a fixed price, we expect to fulfill all of its material contractual obligations to the customer for each deliverable of the contract, a reasonable estimate of the costs to complete the contract can be made, and collection of the receivable is probable. The amount of revenue recognized is based on the total project fee under the agreement and the percentage of completion achieved.  The percentage of completion is measured by monitoring progress using records of actual time incurred to date in the project compared to the total estimated project requirements, which corresponds to the costs related to the earned revenues. Changes in estimates are recognized in the periods affected by the changes. Any anticipated losses on contracts in progress are charged to earnings when identified. The amounts billed to customers in excess of revenues recognized to date are deferred and recorded as deferred revenue and customer deposits in the consolidated balance sheets. The amount of revenue recognized in excess of billings is recorded as unbilled accounts receivable.
 
We recognize revenue from the licensing or sale of our intellectual property portfolio according to ASC 985-605, Revenue Recognition – Software, based on the terms of the royalty, partnership, cross-licensing and purchase agreements involved.
 
In July 2006, we entered into a Patent License Agreement with Sony Corporation (Sony) and Sony Computer Entertainment, Inc. (SCEI). Under the license agreement, we granted Sony and its subsidiaries, including SCEI, a license to all of our patents with a filing date on or before January 1, 2006 for a specific field of use relating to video conferencing. The license covers Sony’s video conferencing apparatus as well as other products, including video-enabled personal computer products and certain SCEI PlayStation products. Future royalties under this license are being recognized as estimated royalty-based sales occur in accordance with ASC 985-605, Revenue Recognition - Software.  We use historical and forward looking sales forecasts provided by SCEI and third party sources, in conjunction with past actual royalty reports provided periodically by SCEI directly to us, to develop an estimate of royalties recognized for each quarterly reporting period.  The royalty reports we receive directly from SCEI are delayed beyond the period in which the actual royalties are generated, and thus the estimate of current period royalties requires significant management judgment and is subject to corrections in a future period once actual royalties become known.

On September 8, 2008 and on September 9, 2008, we entered into a Licensed Works Agreement, Licensed Works Agreement Statement of Work and a Patent License Agreement with International Business Machines Corporation, or IBM, under which we agreed to integrate our bandwidth management technology and related intellectual property into future Lotus Unified Communications offerings by IBM, and to provide maintenance support services. An initial cash payment of $3.0 million was made by IBM to us on November 7, 2008, a second and third non-refundable payment of $1.5 million and $750,000 was made on August 31, 2009 and June 30, 2010, respectively.   We received the remaining non-refundable payment of $750,000 from IBM on December 31, 2010.  In addition, IBM has agreed to make future royalty payments to us equal to two percent of the world-wide net revenue derived by IBM from Lotus Unified Communications products sold that exceeds a contractual base amount, and maintenance payments received from existing customers, which incorporate our technology.  The agreements have a five year term and are non-cancelable except upon material default by either party.  The agreements convey to IBM a non-exclusive world-wide license to our patent portfolio existing at the time of the agreements and for all subsequent patents issued with an effective filing date of up to five years from the date of the agreements.  The agreements also provide for a release of each party for any and all claims of past infringement.  In April 2009, the agreements were amended to extend the initial term from five years to six years.  We have determined the value of maintenance based on VSOE, and allocated the residual portion of the initial $6.0 million to the integration project.  The residual portion was recognized under the percentage of completion method, in accordance with the “Input Method”, and the maintenance revenue is being recognized over the future maintenance service period.  As we believe there are no future deliverables associated with the intellectual property patent licenses, no additional provision for this element has been made.  The integration project was fully completed and delivered as of September 30, 2010, with maintenance support services being the only undelivered element. For the year ended December 31, 2010, we recognized $545,000 in product revenue and $310,000 in service, maintenance and support revenue.  For the year ended December 31, 2009, we recognized $2.4 million in product revenue and $655,000 in service revenue.
 
 
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On January 19, 2010, we entered into a patent license agreement with Springboard Group S.A.R.L. (SKYPE).  Under the agreement, we granted to SKYPE for the lives of the patents, a royalty-free, irrevocable, non-exclusive license under certain patents to make, have made (subject to certain limitations), use, import or export, offer to sell, sell, lease, license, or otherwise transfer or distribute certain licensed products.  These granted rights and license include rights for authorized entities and end users of SKYPE to form combinations with other products for certain authorized purposes.  As consideration for the license, we received a payment of $3.0 million from SKYPE on January 25, 2010 and recognized $3.0 million as revenue from licensing and sale of patents during the quarter ended March 31, 2010.
 
On January 21, 2010, we completed the sale of substantially all of our U.S. patents and patent applications, and related foreign patents and patent applications to Intellectual Ventures Fund 61 LLC (Intellectual Ventures) related to an agreement that was entered into on December 18, 2009. We retained royalty rights under our existing patent license agreements, and also obtained a full grant-back royalty-free, irrevocable license to the patent portfolio from Intellectual Ventures to make, use and sell any current and future Avistar product or service covered by the patents sold.  We received the purchase price of $11.0 million from Intellectual Ventures on January 21, 2010 and recognized $11.0 million as revenue from licensing and sale of patents during the quarter ended March 31, 2010.
 
 
Income from Settlement and Patent Licensing
 
We recognize the proceeds from settlement and patent licensing agreements based on the terms involved. When litigation has been filed prior to a settlement and patent licensing agreement, and insufficient historical evidence exists for the determination of fair value of the patents licensed to support the segregation of the proceeds between a gain on litigation settlement and patent license revenues, we report all proceeds in “income from settlement and patent licensing” within operating costs and expenses. The gain portion of the proceeds, when sufficient historical evidence exists to segregate the proceeds, would be reported according to ASC 450, Contingencies. When a patent license agreement is entered into prior to the commencement of litigation, we report the proceeds of such transaction as licensing revenue in the period in which such proceeds are received, subject to the revenue recognition criteria described above.
 
On November 12, 2004, we entered into a settlement and a patent cross-license agreement with Polycom Inc., thus ending litigation against Polycom, Inc. for patent infringement. As part of the settlement and patent cross-license agreement with Polycom, Inc, we granted Polycom, Inc. a non-exclusive, fully paid-up license to its entire patent portfolio. The settlement and patent cross-license agreement includes a five-year capture period from the date of the settlement, adding all new patents with a priority date extending up to five years from the date of execution of the agreement. Polycom, Inc, as part of the settlement and patent cross-licensing agreement, made a one-time payment of $27.5 million to us and we paid $6.4 million in contingent legal fees to our litigation counsel upon completion of the settlement and patent cross-licensing agreement. The contingent legal fees were payable only in the event of a favorable outcome from the litigation with Polycom, Inc.  We recognized the gross proceeds of $27.5 million from the settlement and patent cross-license agreement as income from settlement and patent licensing within operations over the five-year capture period, due to a lack of evidence necessary to apportion the proceeds between an implied punitive gain element in the settlement of the litigation, and software license revenues from the cross-licensing of our patented technologies for prior and future use by Polycom, Inc. Additionally, the $6.4 million in contingent legal fees was deferred and was amortized to income from settlement and patent licensing over the five year capture period, resulting in a net of $21.1 million being recognized as income within operations over the five year capture period. As of December 31, 2009, the deferred net income from settlement and patent licensing with Polycom, Inc. was fully recognized.
 
 
Stock-Based Compensation
 
We account for stock-based compensation to employees according to ASC 718, Compensation – Stock Compensation, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes-Merton assumptions such as stock price volatility and expected option terms, as well as expected option forfeiture rates. There is little experience or guidance with respect to developing these assumptions and models. ASC 718 requires the recognition of the fair value of stock compensation in net income (loss). Refer to Note 2 “Stock-Based Compensation” and Note 7 “Equity Compensation Plans” to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for more information.
 
 
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Valuation of Accounts Receivable
 
Estimates are used in determining our allowance for doubtful accounts and are based on our historical collection experience, historical write-offs, current trends, and the credit quality of our customer base and the characteristics of our accounts receivable by aging category. If the allowance for doubtful accounts were to be understated, our operating income could be significantly reduced. The impact of any such change or deviation may be increased by our reliance on a relatively small number of customers for a large portion of our total revenue. As of December 31, 2010, approximately 74% of our gross accounts receivable was concentrated with two customers, each of whom individually represented more than 10% of our gross receivables.  As of December 31, 2009, approximately 87% of our gross accounts receivable was concentrated with four customers, each of whom represented more than 10% of our total account receivables.
 
Results of Operations
 
The following table sets forth data expressed as a percentage of total revenue for the periods indicated.
 
   
Percentage of Total Revenue
 
   
Year Ended December 31,
 
   
2010
 
2009
 
2008
 
               
Revenue:
                         
Product
   
11
%
   
45
%
   
45
%
 
Licensing and sale of patents
   
77
     
10
     
11
   
Services, maintenance and support
   
12
     
45
     
44
   
Total revenue
   
100
     
100
     
100
   
Costs and expenses:
                         
Cost of product revenues
   
2
     
15
     
25
   
Cost of services, maintenance and support revenues
   
7
     
34
     
27
   
Income from settlement and patent licensing
   
     
(41)
 
   
(48)
 
 
Research and development
   
34
     
44
     
59
   
Sales and marketing
   
14
     
29
     
40
   
General and administrative
   
21
     
60
     
66
   
    Total costs and expenses
   
78
     
141
     
169
   
Income (loss) from operations
   
22
     
(41)
 
   
(69)
 
 
Other income (expense), net
   
     
(4)
 
   
(4)
 
 
Income (loss) before provision for (benefit from) income taxes
   
22
     
(45)
 
   
(73)
 
 
Provision for (benefit from) income taxes
   
(1)
 
   
     
   
Net income (loss)
   
23
%
   
(45)
%
   
(73)
%
 

COMPARISON OF 2010 AND 2009

Revenue
 
Total revenue increased by $10.8 million or 123%, to $19.7 million for 2010, from $8.8 million for 2009.
 
·  
Product revenue decreased by $1.8 million or 45%, to $2.1 million for 2010, from $3.9 million for 2009, mainly due to a decrease in the software product revenue recognized related to our agreement with IBM as we completed the software integration project in September 2010, and a decrease in hardware sales. We expect product revenue to increase moderately in 2011 compared to 2010 due to minimum royalty payments specified in contracts with our distribution partners and increased sales of new products.
 
·  
Licensing and patent sale revenue, relating to the licensing and sale of our patent portfolio, increased by $14.3 million, to $15.1 million for 2010, from $853,000 for 2009, mainly due to the sale of substantially all of our patents to Intellectual Ventures for $11.0 million and the licensing revenue from SKYPE totaling $3.0 million. Licensing and patent sale revenue in 2011 is expected to be significantly less than 2010 due to reduced sales of patents partially offset by increased licensing revenue.
 
·  
Services, maintenance and support revenue, which includes software implementation and enhancement, maintenance and support services, decreased by $1.6 million or 41%, to $2.4 million for 2010, from $4.0 million for 2009. This was primarily due to a decrease in service revenue from software implementation and enhancement services, and a decrease in the number of product maintenance contract renewals with existing customers during 2010. We expect service, maintenance and support revenue to decrease slightly in 2011 compared to 2010 due to reduced software implementation and enhancement services being performed.
 
 
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In 2010, revenue from three customers accounted for 83% of total revenue compared to three customers accounting for 68% of total revenue in 2009. No other customer accounted for greater than 10% of total revenue.  The level of sales to any customer may vary from quarter to quarter and from year to year. While we continue to expand our indirect sales channel, we expect that there will be significant customer concentration in future periods. The loss of any one of those customers may have a materially adverse impact on our financial condition and operating results.
 
Costs and expenses
 
Cost of product revenue.  Cost of product revenue decreased by $854,000, or 64%, to $473,000 in 2010 from $1.3 million for 2009. The decrease was primarily due to lower hardware product sales, a decrease in obsolete inventory write-off, and a reduction in personnel related expense and stock-based compensation.  We expect the cost of product revenue to vary with the mix of products sold in 2011.
 
Cost of services, maintenance and support revenue. Cost of services, maintenance and support revenue decreased by $1.6 million, or 53%, to $1.4 million in 2010 from $3.0 million in 2009, primarily due to a decrease in software implementation and enhancement services for customers. We expect the cost to vary with the mix of services, maintenance and support provided to our customers in 2011.
 
Income from settlement and patent licensing. Income from settlement and patent licensing decreased by $3.7 million or 100%, to $0 in 2010 from $3.7 million for 2009. The decrease was due to the completion of recognition of the net proceeds from the Polycom settlement and cross-licensing agreement in November 2009.
 
Research and development.Research and development expenses increased by $2.7 million, or 69%, to $6.6 million in 2010 from $3.9 million in 2009.  The increase was primarily due to the bonus payout to employees of our Intellectual Property division totaling $470,000 as a result of the completion of the sale of substantially all of our patents to Intellectual Ventures in January 2010, an increase in engineering headcount and deployment of external labor to accelerate the delivery of our product roadmap, and a lower allocation of engineering employee and external labor expenses to cost of services, maintenance and support revenue associated with a decrease in software implementation and enhancement services during 2010, compared to 2009. We expect a significant decrease in research and development expenses in 2011 compared to 2010 due to a significant reduction in bonus payouts, reduced patent prosecution expenses and a slight decrease in engineering headcount and the use of external labor to deliver new products.
 
Sales and marketing.Sales and marketing expenses increased by $217,000 or 8% to $2.8 million in 2010 from $2.6 million in 2009, primarily due to an increase in personnel expense and an increase in marketing activities. We expect the expense to remain relatively flat in 2011.
 
General and administrative.General and administrative expenses decreased by $1.1 million or 22% to $4.2 million in 2010 from $5.3 million in 2009, primarily due to a decrease in severance pay expense, a decrease in both general and patent legal fees, and a decrease in stock-based compensation. We expect the expense to decrease slightly in 2011 due to reduced legal expense associated with the sales of patents on intellectual property and as part of ongoing cost control measures.
 
Other income (expense), net
 
Other income (expense), net decreased by $372,000 or 86%, to a net expense of $60,000 in 2010 from a net expense of $432,000 in 2009, mainly due to a decrease in interest expense as a result of a lower average debt balance and lower interest rates.
 
Provision for (benefit from) income taxes
 
The benefit from income taxes of $240,000 for 2010 was primarily due to the tax refund received for the 2004 federal alternative minimum tax of $238,000 pursuant to the net operating loss carry-back election under the Worker, Homeownership and Business Assistance Act legislation. The benefit from income taxes of $29,000 for 2009 reflected mainly the realization of foreign corporate income tax benefit related to prior tax years for Avistar Systems U.K. Limited (ASUK), our wholly-owned subsidiary in the United Kingdom.
 

COMPARISON OF 2009 AND 2008

Revenue
 
Total revenue remained relatively flat at $8.8 million for 2009 compared to $8.8 million for 2008.
 
·  
Product revenue remained relatively flat at approximately $3.9 million for 2009 compared to $4.0 million for 2008.
 
 
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·  
Licensing and patent sale revenue, relating to the licensing and sale of our patent portfolio, decreased by $101,000 or 11%, to $853,000 for 2009, from $954,000 for 2008, mainly due to a decline in the ongoing royalty revenue from Sony.
 
·  
Services, maintenance and support revenue, which includes our funded software development and maintenance and support, increased by $195,000, or 5%, to $4.0 million for 2009, from $3.8 million for 2008, mainly due to increase in revenue from software implementation and enhancement services and professional on-site services provided to existing customers,  offset by decrease in revenue from maintenance contracts with existing customers and decrease in freight revenue due to decline in hardware sales.
 
In 2009, revenue from three customers accounted for 68% of total revenue compared to four customers accounting for 88% of total revenue in 2008. No other customer accounted for greater than 10% of total revenue. 
 
Costs and expenses
 
Cost of product revenue.  Cost of product revenue decreased by $868,000, or 40%, to $1.3 million in 2009 from $2.2 million for 2008. The decrease was primarily attributable to lower hardware product sales which carried a higher cost than software sales, partially offset by an increase in stock-based compensation in 2009.
 
Cost of services, maintenance and support revenue. Cost of services, maintenance and support revenue increased by $613,000, or 26%, to $3.0 million in 2009 from $2.4 million in 2008, primarily due to an increase in software implementation and enhancement services for customers, partially offset by a decrease in service overhead expense in 2009.
 
Income from settlement and patent licensing. Income from settlement and patent licensing decreased by $575,000, or 14%, to $3.7 million in 2009 from $4.2 million for 2008, reflecting the completion of the amortization of the net proceeds from the November 2004 Polycom settlement and cross-licensing agreement over a five year period that began in November 2004 and ended in November 2009.
 
Research and development.Research and development expenses decreased by $1.3 million, or 25%, to $3.9 million in 2009 from $5.2 million in 2008. The decrease was primarily attributable to a reduction in personnel and personnel related expenses, a greater allocation of engineering employees and external labor expenses to cost of services, maintenance and support revenue associated with an increase in software implementation and enhancement service deliveries, and a decrease in other engineering overhead expense in 2009.
 
Sales and marketing.Sales and marketing expenses decreased by $940,000, or 27% to $2.6 million in 2009 from $3.5 million in 2008. The decrease was primarily due to a reduction in personnel and personnel related expenses and cost optimization efforts, partially offset by an increase in stock-based compensation.
 
General and administrative.General and administrative expenses decreased by $431,000, or 8% to $5.3 million in 2009 from $5.7 million in 2008. The decrease was due primarily to an overall decrease in personnel and personnel related expenses and the ongoing cost optimization efforts, partially offset by severance expenses and increase in legal fees.
 
Other income (expense), net
 
Other income (expense), net increased by $87,000, or 25%, to a net expense of $432,000 in 2009 from a net expense of $345,000 in 2008, primarily due to a decrease in interest income as a result of lower interest rates and a decrease in the average outstanding balance of cash and cash equivalents that earned interest in 2009 compared to 2008.
 
Provision for (benefit from) income taxes
 
A net benefit from income taxes of $29,000 was recorded for 2009, compared to an expense of $23,000 in 2008, mainly due to realization of foreign corporate income tax benefit related to prior tax years for ASUK during 2009.
 
 
Liquidity and Capital Resources
 
We historically funded our operations with revenues generated from our products, services and patents, line of credit, proceeds from patent litigation settlements, public and private equity and debt financing.
 
We had cash and cash equivalents of $1.8 million as of December 31, 2010.  For the year ended December 31, 2010, we had a net increase in cash and cash equivalents of $1.5 million. The net cash provided by operations of $6.0 million for the year ended December 31, 2010 resulted primarily from the net income of $4.4 million, an adjustment for non-cash stock-based compensation expense of $1.3 million, an increase in deferred services revenue and customer deposits of $604,000, and a decrease in accounts receivable of $315,000. This was partially offset by a decrease in accounts payable of $408,000 and a decrease in accrued liabilities of $384,000.  The net cash used in investing activities of $228,000 for the year ended December 31, 2010 was due to the purchase of equipment.  The net cash used in financing activities of $4.2 million for the year ended December 31, 2010 related primarily to approximately $11.3 million in payments made on the line of credit, partially offset by $7.0 million of borrowings on the line of credit.
 
 
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Our gross accounts receivable balance decreased by $315,000 or 30% to $725,000 at December 31, 2010 from $1.0 million at December 31, 2009 mainly due to timing of sales and customer payments.
 
We had cash and cash equivalents of $294,000 as of December 31, 2009. For the year ended December 31, 2009, we had a net decrease in cash and cash equivalents of $4.6 million. The net cash used by operations of $4.9 million for the year ended December 31, 2009 resulted primarily from the net loss of $4.0 million, a decrease in deferred income from settlement and patent licensing of $4.7 million, and a decrease in deferred services revenue and customer deposits of $1.7 million.  This was partially offset by non-cash expenses of $2.1 million, a decrease in accounts receivable of $1.7 million and a decrease in deferred settlement and patent licensing costs of $1.1 million.  The net cash used in investing activities of $82,000 for the year ended December 31, 2009 was due to the purchase of property and equipment.  The net cash provided by financing activities of $363,000 for the year ended December 31, 2009 related primarily to $9.3 million of borrowings on our line of credit, partially offset by $5.0 million in payments made on the line of credit and $4.1 million in early repayments of convertible debt.
 
For the year ended December 31, 2008, we had a net increase in cash and cash equivalents of $821,000. The net cash used by operations of $8.9 million for the year ended December 31, 2008 resulted primarily from the net loss of $6.4 million, a decrease in deferred income from settlement and patent licensing of $5.6 million, an increase in accounts receivable of $1.3 million, a decrease in account payable of $708,000, partially offset by an increase in deferred services revenue and customer deposits of $1.5 million, non-cash expenses of $2.0 million,  and a decrease in deferred settlement and patent licensing costs of $1.3 million.  The net cash provided by investing activities of $718,000 for the year ended December 31, 2008 was primarily due to the maturities of short-term investments of $799,000.  The net cash provided by financing activities of $9.0 million for the year ended December 31, 2008 related primarily to $7.0 million in proceeds from the issuance of convertible debt in January 2008, and $7.0 million of borrowings on our line of credit, partially offset by payments made on our line of credit of $5.1 million.
 
Expenditures for property and equipment in 2010 were approximately $228,000. At December 31, 2010, we did not have any material commitments for future capital expenditures. We anticipate spending approximately $70,000 in capital expenditures during the next 12 months.
 
The following table summarizes our known contractual obligations and commitments as of December 31, 2010 (in thousands) for the periods presented.
 
   
Payments due by period
   
   
Total
 
Less than 1
Year
 
1 – 3
Years
 
3 – 5
Years
 
More than 
5 Years
   
Contractual obligations
                       
Operating lease obligations, net of projected sublease proceeds
  $
           1,072
  $
               825
  $
        233
  $
      23
  $
            (9)
 
 
Purchase obligations
 
164
 
137
 
27
 
 
   
Total
  $
                1,236
  $
            962
  $
         260
  $
        23
  $
             (9)
 
 

 
As of December 31, 2010, we had no material off-balance sheet arrangements, other than the contractual obligations described in the table above.   We enter into indemnification provisions under agreements with other companies in our ordinary course of business, typically with our contractors, customers, landlords and our investors. Under these provisions, we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party's activities under the agreement. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is generally unlimited. As of December 31, 2010, we had not incurred material costs to defend lawsuits or settle claims related to these indemnifications agreements and therefore, we have no liabilities recorded for these agreements as of December 31, 2010.
 
On January 19, 2010, we entered into a patent license agreement with SKYPE.  Under the Agreement, we granted to SKYPE for the lives of the patents, a royalty-free, irrevocable, non-exclusive license under certain patents to make, have made (subject to certain limitations), use, import or export, offer to sell, sell, lease, license, or otherwise transfer or distribute certain licensed products.  These granted rights and license include rights for authorized entities and end users of SKYPE to form combinations with other products for certain authorized purposes.  As consideration for the license, we received a payment of $3.0 million from SKYPE on January 25, 2010.
 
On January 21, 2010, we completed the sale of substantially all of our U.S. patents and patent applications, and related foreign patents and patent applications to Intellectual Ventures related to an agreement that was entered into on December 18, 2009.  We received the purchase price of $11.0 million from Intellectual Ventures on January 21, 2010.  We also obtained a full grant-back royalty-free, irrevocable license to the patent portfolio from Intellectual Ventures to make, use and sell any Avistar product or service covered by the patents sold.
 
 
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On December 23, 2006, we entered into a Revolving Credit and Promissory Note and a Security Agreement with a financial institution to borrow up to $10.0 million under a revolving line of credit subject to annual renewal with the consent of the Company and the lender. The Revolving Credit and Promissory Note was renewed and amended on December 22, 2009 which extended the maturity date of the facility by one year to December 21, 2010, and increased the line of credit from $10.0 million to $11.25 million until March 31, 2010 and thereafter the line of credit would decrease to $6.0 million.  The maximum facility amount was further reduced to $5.0 million in March 2010 and then increased to $7.0 million in August 2010 for the remainder of the period through the maturity date.   The Revolving Credit and Promissory Note was renewed and amended again on December 20, 2010 which extended the maturity date of the facility by one year to December 22, 2011 and increased the line of credit from $7.0 million to $8.0 million. The amended Security Agreement, amended on January 12, 2010, granted the lender a security interest in and right of setoff against substantially all of our assets, tangible and intangible, except for substantially all of our patents and patent applications sold to Intellectual Ventures pursuant to a patent purchase agreement dated as of December 18, 2009. Gerald Burnett, our Chairman, provided a collateralized guarantee to the financial institution, assuring payment of our obligations under the agreement and as a consequence, there are no restrictive covenants, allowing us greater access to the full amount of the facility. Dr. Burnett also provided us with a personal guarantee assuring us a line of credit of $8.0 million with the same terms and mechanisms as the existing revolving line of credit in the event the existing revolving line of credit from the financial institution was unavailable for any reason during the period from its termination on December 22, 2011 to March 31, 2012. The renewed line of credit requires monthly interest-only payments based on Adjusted LIBOR plus 0.90% or Prime Rate plus 1.00%. We elected Adjusted LIBOR plus 0.90% or 1.21% at December 31, 2010. We repaid $11.25 million in January 2010 with the proceeds of the sale of substantially all of the Company’s patents and patent applications to Intellectual Ventures and borrowed $7.0 million under the revolving line of credit during 2010. We had a debt balance of $7.0 million outstanding as of December 31, 2010.
 
On January 4, 2008, we issued $7,000,000 of 4.5% Convertible Subordinated Secured Notes, which were due in 2010 (Notes). The Notes were sold pursuant to a Convertible Note Purchase Agreement to Baldwin Enterprises, Inc., a subsidiary of Leucadia National Corporation, directors Gerald Burnett, R. Stephen Heinrichs, William Campbell, and Craig Heimark, former officers Simon Moss and Darren Innes, and WS Investment Company. Our obligations under the Notes were collateralized by the grant of a security interest in substantially all our tangible and intangible assets pursuant to a Security Agreement among us and the purchasers. Prior to the election of the Note holders to convert their notes, the Notes had a two year term which would have come due on January 4, 2010 and were convertible prior to maturity.  Interest on the Notes accrued at the rate of 4.5% per annum and was payable semi-annually in arrears on June 4 and December 4 of each year, commencing on June 4, 2008.  Commencing on the one year anniversary of the issuance of the Notes until maturity, the holders of the Notes would have been entitled to convert the Notes into shares of common stock at an initial conversion price per share of $0.70.  In May 2009, we issued a total of 4,199,997 shares of common stock to Gerald Burnett, R. Stephen Heinrichs, William Campbell, Craig Heimark, Simon Moss and WS Investment Company upon their election to convert their Notes in the aggregate principal amount of $2.9 million into common stock. In October 2009, we repaid the Notes issued to Darren Innes in full with a payment of approximately $60,000 and in December 2009, we repaid the Notes issued to Baldwin Enterprises, Inc. in full with a payment of $4.0 million.  As of December 31, 2009 and 2010, there was no convertible debt outstanding.
 
    On March 29, 2011, we sold a 4.5% Convertible Subordinated Secured Note due 2013 in the principal amount of $3,000,000 (the “2011 Note”). The 2011 Note was sold pursuant to a Convertible Note Purchase Agreement, dated as of March 29, 2011 (the “Purchase Agreement”), among us and our director Gerald Burnett (the “Purchaser”).  Our obligations under the 2011 Note are secured by the grant of a security interest in substantially all of our tangible and intangible assets pursuant to a Security Agreement among us and the Purchaser dated as of March 29, 2011.  The terms of the 2011 Note are substantially similar to our 4.5% Convertible Subordinated Secured Notes due 2010 sold pursuant to a Convertible Note Purchase Agreement, dated as of January 4, 2008, among us, Baldwin Enterprises, Inc., a subsidiary of Leucadia National Corporation and certain other parties (See above). The 2011 Note has a two year term and will be due on March 29, 2013.  The 2011 Note may not be prepaid or redeemed prior to maturity.  In the event certain circumstances as described in the Purchase Agreement occur prior to March 29, 2012, we have the option, at our sole discretion, to prepay the 2011 Note without the consent of the Purchaser.  The pre-payment fee would be $50,000 for every one million dollars that is pre-paid.  Interest on the 2011 Note will accrue at the rate of 4.5% per annum and will be payable semi-annually in arrears on March 29 and September 29 of each year, commencing on September 29, 2011.  From the one year anniversary of the issuance of the 2011 Note until maturity, the holder of the 2011 Note will be entitled to convert the 2011 Note into shares of our common stock at an initial conversion price per share of $0.70.  In connection with the issuance of the 2011 Note, we also entered into amendments to the Second Amended and Restated Revolving Credit Facility Promissory Note and to the Fourth Amended and Restated Security Agreement with a financial institution to permit the grant of a security interest to the Purchaser of the 2011 Note and to allocate specific assets of Avistar solely to secure our obligations under the 2011 Note.
  
Based on the proceeds we received from issuance of the 2011 Notes, the results of our ongoing revenue generation and cost reduction efforts, the availability of the revolving credit facility with a financial institution, and Dr. Burnett’s personal guarantee of a line of credit, we believe that there will be sufficient funds to finance our operations for the next 12 months. We intend to continue to invest in the development of new products and enhancements to our existing products. Our future liquidity and capital requirements will depend upon numerous factors, including without limitation, general economic conditions and conditions in the financial services industry in particular, the level and timing of product, licensing and service revenue, the maintenance of our cost control measures structured to align operations with predictable revenues, the costs and timing of our product development efforts and the success of these development efforts, the costs and timing of our sales, partnering and marketing activities, the extent to which our existing and new products gain market acceptance and competing technological and market developments, all of which may impact our ability to achieve and maintain profitability or generate positive cash flows.
 
 
34
 

 
 
        From time to time, we may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. There can be no assurance that such funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional debt or equity financing arrangements may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require us to relinquish some or all of our rights to certain of our technologies or products. Our inability to raise capital when needed could have a material adverse effect on our business, operating results and financial condition.
 
Recent Accounting Pronouncements
 
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issue Task Force (ASU 2009-13), and ASU No. 2009-14, Software (Topic 985) – Certain Revenue Arrangements That Include Software Elements (ASU 2009-14). ASU 2009-13 requires companies to allocate revenue in multiple-element arrangements based on an element’s estimated selling price if vendor-specific or other third party evidence of value is not available.  ASU 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality.  Both statements are effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. These statements became effective for the Company on January 1, 2011. The Company does not expect the adoption of these statements to have a material impact on the Company’s financial condition and results of operations.
 
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements (ASU 2010-06). This ASU requires new disclosures and clarifies certain existing disclosure requirements about fair value measurements. ASU 2010-06 requires a reporting entity to disclose significant transfers in and out of Level 1 and Level 2 fair value measurements, to describe the reasons for the transfers and to present separately information about purchases, sales, issuances and settlements for fair value measurements using significant unobservable inputs. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective for interim and annual reporting periods beginning after December 15, 2010; early adoption is permitted. The Company adopted this statement on January 1, 2010. The adoption of this statement did not have a material impact on the Company’s financial condition and results of operation.  The Company does not expect the adoption of this statement relating to disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements to have a material impact of the Company’s financial condition and results of operations.
 
In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09 or ASC 855-10).  The update removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated.  The change alleviates potential conflicts between ASC 855-10 and the SEC’s requirements.  ASU 2010-09 is effective upon issuance of the final update.  The Company adopted this statement upon its issuance. The adoption of this statement did not have a material impact on the Company’s financial condition and results of operations.

Item 7A. Omitted
 
Item 8. Financial Statements and Supplementary Data
 
Our consolidated financial statements and Report of Independent Registered Public Accounting Firm appears on pages F-2 through F-25 of this Report.
 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None
 
Item 9A. Controls and Procedures
 
Evaluation of disclosure controls and procedures
 
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K (the Evaluation Date). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded as of the Evaluation Date that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective such that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and (ii) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
 
 
35
 

 
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010 based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the criteria set forth in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.
 
This annual report does not include an attestation report from the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
 
Changes in Internal Control over Financial Reporting
 
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 
 
Item 9B. Other Information
 
None
 

36 
 

 

PART III
 
 
 
Item 10. Directors, Executive Officers and Corporate Governance
 
The information required by this item is incorporated by reference to the sections captioned “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in our Proxy Statement related to the 2011 Annual Meeting of Stockholders, to be filed with the SEC within 120 days of December 31, 2010, pursuant to General Instruction G(3) of Form 10-K (the “Proxy Statement”). Certain information required by this item concerning executive officers is set forth in Part I of this Report in “Business—Executive Officers,” and certain other information required by this item is incorporated by reference from the sections captioned “Principal Stockholders” contained in our Proxy Statement.
 
We have adopted a code of ethics that applies to our principal executive officers and all members of our finance department, including the principal financial officer and principal accounting officer. This code of ethics, which also applies to employees generally, is posted on our Internet website (http://www.avistar.com/about-us/investor-relations/ethics-policy/).
 
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our website, at the address and location specified above.
 
 
Item 11. Executive Compensation
 
The information required by this item is incorporated by reference to the section captioned “Executive Compensation and Other Matters” contained in our Proxy Statement.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The information required by this item is incorporated by reference to the sections captioned “Principal Stockholders”, “Executive Compensation and Other Matters” and “Certain Transactions” contained in our Proxy Statement.
 
Equity Compensation Plan Information
 
The following table provides information as of December 31, 2010 with respect to the shares of our Common Stock that may be issued upon exercise of options and vesting of restricted stock units under our existing equity compensation plans.
 
   
A
 
B
 
C
 
Plan Category
 
Number of securities
to be issued upon
exercise of outstanding
options and restricted stock units
 
Weighted-average
exercise price of
outstanding options
 
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
Column A)
 
Equity compensation plans approved by security holders
   
10,399,817
(1)
   
$0.69
     
3,895,134
(2)
 
Equity compensation plans not approved by security holders
   
     
     
   
   Total
   
10,399,817
     
$0.69
     
3,895,134
   
 

(1)
This number reflects the number of shares to be issued upon exercise of outstanding options and vesting of restricted stock units under our 2009 Equity Incentive Plan ( “2009 Plan”), 2000 Stock Option Plan (“2000 Plan”) and 2000 Director Option Plan (“Director Plan”). This number excludes purchase rights accruing under the 2010 Employee Stock Purchase Plan (“2010 ESPP”). The 2010 ESPP authorizes the granting of stock purchase rights to eligible employees during six month offering periods commencing on the first trading day on or after February 1 and August 1 of each year. Shares are purchased through employee payroll deductions at purchase prices equal to 85% of the fair market value of our Common Stock on either the first trading day of each offering period or the date of the purchase, whichever is lower.
 
(2)
Includes 2,746,474 shares remaining available for issuance under the 2009 Plan and 1,148,660 shares available for issuance under the 2010 ESPP. No securities are available for future issuance under the 2000 Plan, the Director Plan and the 2000 Employee Stock Purchase Plan (“2000 ESPP”) as of December 31, 2010.  The 2000 Plan was terminated with respect to future grants in December 2009. Both the Director Plan and the 2000 ESPP expired in April 2010. The 2009 Plan provides for an annual increase in the number of shares of Common Stock reserved for issuance thereunder on the first day of our fiscal year beginning with the fiscal year 2010, in an amount equal to the lesser of (x) 6,000,000 shares, (y) 4% of the outstanding shares of the Company’s Common Stock as of the last day of the preceding fiscal year, calculated on a fully diluted basis, and (z) such lesser amount as determined by the Board. No shares were added to the 2009 Plan for fiscal year 2010.
 
 
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Item 13. Certain Relationships and Related Transactions and Director Independence
 
The information required by this item is incorporated by reference to the sections captioned “Proposal One—Election of Directors,” “Compensation Committee Interlocks and Insider Participation” and “Certain Transactions” contained in our Proxy Statement.
 

 
Item 14. Principal Accountant Fees and Services
 
The information required by this section is incorporated by reference from the information in the section entitled “Ratification of Appointment of Independent Registered Public Accounting Firm” in our Proxy Statement.
 

38 
 

 


PART IV
 

 
Item 15. Exhibits, Financial Statement Schedules
 
(a)(1) Financial Statements
 
The following financial statements are filed as part of the Annual Report:
 
   
Page
   
Report of Independent Registered Public Accounting Firm
   
F-2
   
Consolidated Balance Sheets as of December 31, 2010 and 2009
   
F-3
   
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
   
F-4
   
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2010, 2009 and 2008
   
F-5
   
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
   
F-6
   
Notes to the Consolidated Financial Statements
   
F-7
   

 
(a)(2) Financial Statement Schedules
 
Schedules II---Valuation and Qualifying Accounts (see page S-1)
 
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.
 
(a)(3) Exhibits
 
The following exhibits are filed herewith or incorporated by reference as indicated below.
 
3.2
 
Second Amended and Restated Certificate of Incorporation (Incorporated by reference to an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-39008) as declared effective by the Securities and Exchange Commission on August 16, 2000.)
3.3
 
Amended and Restated Bylaws of Avistar Communications Corporation (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 16, 2010)
4.1
 
Specimen Certificate evidencing shares of Common Stock (Incorporated by reference to an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-39008) as declared effective by the Securities and Exchange Commission on August 16, 2000.)
10.1
 
2000 Stock Option Plan, as amended* (Incorporated by reference to an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-39008) as declared effective by the Securities and Exchange Commission on August 16, 2000.)
10.2
 
2000 Director Option Plan, as amended* (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission on April 28, 2006.)
10.3
 
Form of Director Option Agreement* (Incorporated by reference to an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-39008) as declared effective by the Securities and Exchange Commission on August 16, 2000.)
10.4
 
Form of Indemnification Agreement* (Incorporated by reference to an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-39008) as declared effective by the Securities and Exchange Commission on August 16, 2000.)
10.5
 
Lease Agreement among Avistar Communications Corporation and Crossroads Associates and Clocktower Associates dated December 1, 2006 (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission on March 22, 2007.)
10.6
 
Common Stock Purchase Agreement by and among Avistar Communications Corporation and The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust, Grady Burnett and Wendolyn Hearn dated October 15, 2003 (Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the three months ended September 30, 2003 filed with the Securities and Exchange Commission on October 23, 2003.)
 
 
39
 

 
 

10.7
 
Stock Purchase Agreement among Avistar Communications Corporation, Fuller & Thaler Behavioral Finance Fund, Ltd. and Fuller & Thaler Avalanche Fund, L.P. dated March 23, 2004 (Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 filed with the Securities and Exchange Commission on May 11, 2004.)
10.8
 
Settlement Agreement among Avistar Communications Corporation, Collaboration Properties, Inc. and Polycom, Inc. dated November 12, 2004 (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission on March 28, 2005.)
10.9†
 
Patent Cross-License Agreement Among the Company, Collaboration Properties, Inc. and Polycom, Inc. dated November 12, 2004 (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission on April 28, 2006.)
10.10
 
 
Patent License Agreement dated May 15, 2006 among Avistar Communications Corporation, Collaboration Properties, Inc., Sony Corporation and Sony Computer Entertainment, Inc. (Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the three months ended September 30, 2006 filed with the Securities and Exchange Commission on November 14, 2006.)
10.11
 
 
Patent License Agreement dated February 15, 2007 by and among Avistar Communications Corporation, Collaboration Properties, Inc., Tandberg ASA, Tandberg Telecom AS, and Tandberg, Inc. (Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 filed with the Securities and Exchange Commission on May 14, 2007)
10.12†
 
Patent License Agreement dated May 15, 2007 by and among Avistar Communications Corporation, Avistar Systems (UK) Limited, and Radvision LTD.  (Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed with the Securities and Exchange Commission on August 3, 2007)
10.13
 
Amendment dated December 17, 2007 to the Guaranty issued by Gerald J. Burnett and The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust in favor of JPMorgan originally dated December 23, 2006. (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission on March 31, 2008)
10.14
 
Convertible Note Purchase Agreement among the Company and the Purchasers named therein dated January 4, 2008 (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 9, 2008)
10.15
 
Security Agreement among the Company, Baldwin Enterprises, Inc., as Collateral Agent, and the Purchasers named therein dated January 4, 2008 (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 9, 2008)
10.16
 
Form of 4.5% Convertible Subordinated Secured Note Due 2010 (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 9, 2008)
10.17
 
Inter-creditor Agreement among the Purchasers of the 4.5% Convertible Subordinated Secured Notes Due 2010 dated January 4, 2008 (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 9, 2008)
10.18
 
Licensed Works Agreement between Avistar Communications Corporation and International Business Machines Corporation dated September 8, 2008 (Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the three months ended September 30, 2008 filed with the Securities and Exchange Commission on November 14, 2008.)
10.19
 
Licensed Works Agreement Statement of Work between Avistar Communications Corporation and International Business Machines Corporation dated September 8, 2008 (Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the three months ended September 30, 2008 filed with the Securities and Exchange Commission on November 14, 2008.)
 
10.20
 
 
Patent License Agreement between Avistar Communications Corporation and International Business Machines Corporation dated September 9, 2008. (Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the three months ended September 30, 2008 filed with the Securities and Exchange Commission on November 14, 2008.)

 
40
 

 

 
10.21
 
Amended and Restated Revolving Credit Promissory Note issued by Avistar Communications Corporation to JPMorgan Chase Bank, N.A. dated December 22, 2008 (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on March 31, 2009..)
10.22
 
Amended and Restated Collateral Agreement dated December 22, 2008 between Avistar Communications Corporation and JPMorgan Chase Bank, N.A. dated December 22, 2008 (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on March 31, 2009.)
10.23
 
Amended and Restated Form of Note Sale Agreement among Gerald J. Burnett, The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust and JPMorgan Chase Bank, N.A. (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on March 31, 2009.)
10.24
 
Personal guarantee issued by Gerald J. Burnett in favor of Avistar Communications Corporation dated March 29, 2009 (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on March 31, 2009.)
10.25
 
Separation Agreement and Release between Avistar Communications Corporation and Simon Moss dated July 8, 2009* (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K. filed with the Securities and Exchange Commission on July 14, 2009)
10.26
 
Employment Agreement between Avistar Communications Corporation and Robert Kirk dated July 14, 2009* (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2009 and amended on July 17, 2009.)
10.27
 
Compromise Agreement between Avistar Systems (UK) Limited and Darren Innes dated August 19, 2009 *( Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 25, 2009.)
10.28
 
2009 Equity Incentive Plan* (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2009.)
10.28.1
 
2009 Equity Incentive Plan Form of Stock Option Agreement* (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2009.)
10.28.2
 
2009 Equity Incentive Plan Form of Restricted Stock Unit Agreement* (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2009.)
10.29
 
Patent Purchase Agreement dated December 18, 2009 between Avistar Communications Corporation and Intellectual Ventures Fund 61 LLC.  (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission on March 30, 2010.)
10.30
 
Second Amended and Restated Revolving Credit Promissory Note issued by Avistar Communications Corporation to JPMorgan Chase Bank, N.A. dated December 22, 2009. (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission on March 30, 2010.)
10.31
 
Second Amended and Restated Collateral Agreement between Avistar Communications Corporation and JPMorgan Chase Bank, N.A. dated December 22, 2009. (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission on March 30, 2010.)
10.32
 
Second Amended and Restated Guaranty issued by Gerald J. Burnett and The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust in favor of JPMorgan Chase Bank, N.A. dated December 22, 2009. (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission on March 30, 2010.)
10.33
 
Amended and Restated Note Sale Agreement among Gerald J. Burnett, The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust and JPMorgan Chase Bank, N.A. (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission on March 30, 2010.)
10.34
 
Facility Agreement between Avistar Communications Corporation and JPMorgan Chase Bank, N.A. dated January 11, 2010. (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission on March 30, 2010.)

41
 

 
 

10.35
 
Fourth Amended and Restated Security Agreement between Avistar Communications Corporation and JPMorgan Chase Bank, N.A dated January 11, 2010. (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission on March 30, 2010.)
10.36
 
UCC Financing Statement Amendment between Avistar Communications Corporation and JPMorgan Chase Bank, N.A (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission on March 30, 2010.)
10.37
 
Personal guarantee issued by Gerald J. Burnett in favor of Avistar Communications Corporation dated March 26, 2010 (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission on March 30, 2010.)
10.38
 
Patent License Agreement dated January 19, 2010 between Avistar Communications Corporation and Springboard Group S.A.R.L. (Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10 Q for the three months ended March 31, 2010 filed with the Securities and Exchange Commission on May 7, 2010.)
10.39
 
Amendment to Second Amended and Restated Revolving Credit Promissory Note issued by Avistar Communications Corporation to JPMorgan Chase Bank, N.A. dated February 22, 2010. (Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10 Q for the three months ended March 31, 2010 filed with the Securities and Exchange Commission on May 7, 2010.)
10.40
 
2010 Employee Stock Purchase Plan (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 16, 2010)
10.41
 
Second Amendment to Second Amended and Restated Revolving Credit Promissory Note issued by Avistar Communications Corporation to JPMorgan Chase Bank, N.A. dated August 16, 2010 (Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10 Q for the three months ended September 30, 2010 filed with the Securities and Exchange Commission on November 5, 2010.)
10.42
 
Third Amendment to Second Amended and Restated Revolving Credit Promissory Note issued by Avistar Communications Corporation to JPMorgan Chase Bank, N.A. dated December 30, 2010
10.43
 
Reaffirmation of Guaranty issued by Gerald J. Burnett and Marjorie J. Burnett Revocable Trust in favor of JPMorgan Chase Bank, N.A. dated December 20, 2010
10.44
 
Personal guarantee issued by Gerald J. Burnett in favor of Avistar Communications Corporation dated March 29, 2011
21.1
 
Subsidiaries of the Company
23.1
 
Consent of Independent Registered Public Accounting Firm: Burr Pilger Mayer, Inc.
24.1
 
Power of Attorney (see page 41)
31.1
 
Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer
31.2
 
Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer
32
 
Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
Indicates management contract or compensatory plan or arrangement required to be filed an exhibit pursuant to Item 14(c) of Form 10-K.
 
Portions of the exhibit have been omitted pursuant to a request for confidential treatment and the omitted portions have been separately filed with the Commission.
 
 
(b) Exhibits
 
    The exhibits filed as part of this report are listed in Item 15(a)(3) of this Form 10-K/A.
 
(c) Schedules
 
The financial statement schedules required by Regulation S-X and Item 8 of this form are listed in Item 15(a)(2) of this Form 10-K.
 

42 
 

 

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   
AVISTAR COMMUNICATIONS CORPORATION
   
By:
/s/   ROBERT F. KIRK
     
Robert F. Kirk
     
Chief Executive Officer and Director
       
Date: March 31, 2011
       

 
POWER OF ATTORNEY
 
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert F. Kirk and Elias A. MurrayMetzger, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, to sign any and all amendments (including post- effective amendments) to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, or any of them, shall do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
 
 
Signature
     
Title
     
Date
 
/s/   Gerald J. Burnett
 
Chairman
 
March 31, 2011
Gerald J. Burnett
       
/s/   Robert F. Kirk
 
Chief Executive Officer and Director
 
March 31, 2011
Robert F. Kirk
 
(Principal Executive Officer)
   
/s/   Elias A. MurrayMetzger
 
Chief Financial Officer, Chief Administrative Officer and Corporate Secretary
 
March 31, 2011
Elias A. MurrayMetzger
 
 (Principal Financial and Accounting Officer)
   
/s/   William L. Campbell
 
Director
 
March 31, 2011
William L. Campbell
       
/s/   Craig F. Heimark
 
Director
 
March 31, 2011
Craig F. Heimark
       
/s/   R. Stephen Heinrichs
 
Director
 
March 31, 2011
R. Stephen Heinrichs
       
/s/   Robert M. Metcalfe
 
Director
 
March 31, 2011
Robert M. Metcalfe
       

43 
 

 


INDEX TO FINANCIAL STATEMENTS
 
   
Page
Report of Independent Registered Public Accounting Firm
 
F-2
Consolidated Balance Sheets as of December 31, 2010 and 2009
 
F-3
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
 
F-4
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2010, 2009 and 2008
 
F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
 
F-6
Notes to the Consolidated Financial Statements
 
F-7

F-1 
 

 


Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Stockholders of
 
Avistar Communications Corporation
 
We have audited the accompanying consolidated balance sheets of Avistar Communications Corporation and its subsidiary (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the related financial statement schedule listed in Item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor have we been engaged to perform, an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avistar Communications Corporation and its subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 

 
 /s/ BURR PILGER MAYER, INC.
 
San Jose, California
March 30, 2011

F-2 
 

 


AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS
 
as of December 31, 2010 and 2009
 
(in thousands, except share and per share data)
 
   
December 31,
2010
 
December 31,
2009
 
Assets:
                 
Current assets:
                 
Cash and cash equivalents
    $
          1,817
      $
       294
   
Accounts receivable, net of allowance for doubtful accounts of $4 and $13 at December 31, 2010 and 2009, respectively
   
721
     
1,027
   
Inventories
   
23
     
56
   
Prepaid expenses and other current assets
   
413
     
300
   
Total current assets
   
2,974
     
1,677
   
Property and equipment, net
   
184
     
147
   
Other assets
   
108
     
132
   
Total assets
    $
         3,266
      $
        1,956
   
                   
Liabilities and Stockholders’ Equity (Deficit):
                 
Current liabilities:
                 
Line of credit
    $
        7,000
      $
       11,250
   
Accounts payable
   
399
     
807
   
Deferred services revenue and customer deposits
   
2,612
     
2,008
   
Accrued liabilities and other
   
1,048
     
1,432
   
Total current liabilities
   
11,059
     
15,497
   
Long-term liabilities:
                 
Other liabilities
   
59
     
73
   
Total liabilities
   
11,118
     
15,570
   
Commitments and contingencies (Note 4)
                 
Stockholders’ equity (deficit):
                 
Common stock, $0.001 par value; 250,000,000 shares authorized at December 31, 2010 and 2009; 40,304,235 and 40,159,466 shares issued at December 31, 2010
and 2009, respectively
   
40
     
40
   
Less: treasury stock, 1,182,875 shares at December 31, 2010 and 2009, at cost
   
(53)
 
   
(53)
 
 
Additional paid-in-capital
   
103,817
     
102,504
   
Accumulated deficit
   
(111,656)
 
   
(116,105)
 
 
Total stockholders’ equity (deficit)
   
(7,852)
 
   
(13,614)
 
 
Total liabilities and stockholders’ equity (deficit)
    $
         3,266
      $
        1,956
   

 
The accompanying notes are an integral part of these consolidated financial statements.

  F-3
 

 

AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
for the years ended December 31, 2010, 2009 and 2008
 
(in thousands, except per share data)
 
   
Year Ended December 31,
   
2010
 
2009
 
2008
             
Revenue:
               
Product
  $
2,146
  $
     3,932
  $  
       3,957
 
Licensing and sales of patents
 
15,114
 
853
   
954
 
Services, maintenance and support
 
2,397
 
4,039
   
3,844
 
Total revenue
 
19,657
 
8,824
   
8,755
 
Costs and expenses:
               
Cost of product revenues*
 
473
 
1,327
   
2,195
 
Cost of services, maintenance and support revenues*
 
1,386
 
2,965
   
2,352
 
Income from settlement and patent licensing
 
-
 
(3,651)
 
 
(4,226)
 
Research and development*
 
6,577
 
3,888
   
5,200
 
Sales and marketing*
 
2,798
 
2,581
   
3,521
 
General and administrative*
 
4,154
 
5,298
   
5,729
 
Total costs and expenses
 
15,388
 
12,408
   
14,771
 
Income (loss) from operations
 
4,269
 
(3,584)
 
 
(6,016)
 
Other income (expense):
               
Interest income
 
1
 
8
   
94
 
Other income (expense), net
 
(61)
 
(440)
 
 
(439)
 
Total other income (expense), net
 
(60)
 
(432)
 
 
(345)
 
Income (loss) before provision for (benefit from) income taxes
 
4,209
 
(4,016)
 
 
(6,361)
 
Provision for (benefit from) income taxes
 
(240)
 
(29)
 
 
23
 
Net income (loss)
  $
4,449
  $
(3,987)
$
 
     (6,384)
 
Net income (loss) per share – basic and diluted
  $
     0.11
  $
(0.11)
$
 
      (0.18)
 
Weighted average shares used in calculating basic net income (loss) per share
 
39,061
 
37,318
   
34,551
 
Weighted average shares used in calculating diluted net income (loss) per share
 
39,874
 
37,318
   
34,551
 
*Including stock-based compensation of:
               
Cost of product, services, maintenance and support revenue
  $
         41
  $
        234
  $  
        141
 
Research and development
 
359
 
579
   
511
 
Sales and marketing
 
208
 
228
   
38
 
General and administrative
 
660
 
848
   
817
 

 
The accompanying notes are an integral part of these consolidated financial statements.

F-4 
 

 

AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
 
for the years ended December 31, 2010, 2009 and 2008
 
(in thousands, except share amounts)
 
 
                   Additional        Total
   Common Stock    Treasury Stock    Paid-In    Accumulated    Stockholder's
   shares    amount    shares    amount    Capital    Deficit    Equity (Deficit)
Balance at December 31, 2007  35,678,807  $  36    1,182,875  $ (53)  $  95,925  $  (105,734)  $  (9,826)
Issuance of common stock to employees pursuant to employee stock purchase plan
 66,373  
 
 
   67  
   67
Issuance of common stock to employees pursuant to exercise of options
 5,500  
 
 
   7  
   7
Non-employee stock-based compensation
 
 
 
   18  
   18
Employee stock-based compensation
 
 
 
   1,489  
   1,489
Net loss
 
 
 
 
   (6,384)    (6,384)
Balance at December 31, 2008  35,750,680    36    1,182,875    (53)    97,506    (112,118)    (14,629)
Issuance of common stock to employees pursuant to employee stock purchase plan
 41,182  
 
 
   30  
   30
Issuance of common stock to employees pursuant to exercise of options
 167,607  
 
 
   143  
   143
Non-employee stock-based compensation
 
 
 
   9  
   9
Issuance of common stock pursuant to conversion of convertible debt
 4,199,997    4  
 
   2,936  
   2,940
Employee stock-based compensation
 
 
 
   1,880  
   1,880
Net loss
 
 
 
 
   (3,987)    (3.987)
Balance at December 31, 2009  40,159,466    40    1,182,875    (53)    102,504    (116,105)    (13,614)
Issuance of common stock to employees pursuant to employee stock purchase plan
 139,769  
 
 
   42  
   42
Issuance of common stock to employees pursuant to exercise of options
 5,000  
 
 
   3  
   3
Non-employee stock-based compensation
 
 
 
   31  
   31
Employee stock-based compensation
 
 
 
   1,237  
   1,237
Net Income
 
 
 
 
   4,449    4,449
Balance at December 31, 2010  40,304,235  $  40    1,182,875  $  (53)  $  103,817  $  (111,656)  $  (7,852)
 
The accompanying notes are an integral part of these consolidated financial statements.

F-5 
 

 

AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
for the years ended December 31, 2010, 2009 and 2008
 
(in thousands)
 
   
Year Ended December 31,
   
2010
 
2009
 
2008
             
Cash Flows from Operating Activities:
               
Net income (loss)
  $
     4,449
  $
       (3, 987)
$
 
      (6,384)
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Depreciation
 
191
 
245
   
538
 
Compensation on equity awards issued to consultants and employees
 
1,268
 
1,889
   
1,507
 
Provision for doubtful accounts
 
(9)
 
(7)
 
 
(4)
 
Changes in assets and liabilities:
               
Accounts receivable
 
315
 
1,681
   
(1,312)
 
Inventories
 
33
 
251
   
121
 
Prepaid expenses and other current assets
 
(113)
 
20
   
142
 
Deferred settlement and patent licensing costs
 
 
1,100
   
1,273
 
Other assets
 
24
 
25
   
129
 
Accounts payable
 
(408)
 
228
   
(708)
 
Deferred income from settlement and patent licensing and other
 
(14)
 
(4,701)
 
 
(5,560)
 
Deferred services revenue and customer deposits
 
604
 
(1,679)
 
 
1,456
 
Accrued liabilities and other
 
(384)
 
50
   
(69)
 
Net cash provided by (used in) operating activities
 
5,956
 
(4,885)
 
 
(8,871)
 
Cash Flows from Investing Activities:
               
Maturities of short and long-term investments
 
 
   
799
 
Sale of property and equipment
 
 
   
8
 
Purchase of property and equipment
 
(228)
 
(82)
 
 
(89)
 
Net cash (used in) provided by investing activities
 
(228)
 
(82)
 
 
718
 
Cash Flows from Financing Activities:
               
Line of credit payments
 
(11,250)
 
(5,049)
 
 
(5,100)
 
Proceeds from line of credit
 
7,000
 
9,299
   
7,000
 
Proceeds from convertible debt issuance
 
 
   
7,000
 
Payment of convertible debt
 
 
(4,060)
 
 
 
Net proceeds from issuance of common stock
 
45
 
173
   
74
 
    Net cash (used in) provided by financing activities
 
(4,205)
 
363
   
8,974
 
Net increase (decrease) in cash and cash equivalents
 
1,523
 
(4,604)
 
 
821
 
Cash and cash equivalents, beginning of year
 
294
 
4,898
   
4,077
 
Cash and cash equivalents, end of year
$
     1,817
  $
       294
  $  
     4,898
 
Supplemental Cash Flow Information:
               
Cash paid for income taxes
  $
       105
  $
          15
  $  
        —
 
Cash paid for interest
 
70
 
465
   
412
 
Non-Cash Financing Activities:
               
Debt converted to equity
  $
      —
  $
         2,940
  $  
        —
 

The accompanying notes are an integral part of these consolidated financial statements.

F-6 
 

 



AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
 
NOTES TO FINANCIAL STATEMENTS
 

 
1.
Business, Organization, Basis of Presentation, and Risks and Uncertainties
 
Business
 
Avistar Communications Corporation (“Avistar” or the “Company”) creates technology that provides the missing critical element in unified communications: bringing people in organizations face-to-face, through enhanced communications, for true collaboration anytime, anyplace. The Company’s latest product, Avistar C3™, draws on over a decade of market experience to deliver a single-click desktop videoconferencing and collaboration experience that moves business communications into a new era. Available as a stand-alone solution, or integrated with existing unified communications software from other vendors, Avistar C3™ users gain instant messaging-style ability to initiate video communications across and outside the enterprise. Patented bandwidth management enables thousands of users to access desktop videoconferencing, Voice over IP (VoIP) and streaming media without requiring substantial new network investment or impairing network performance.  By integrating Avistar C3™ tightly into the way they work, customers can use Avistar’s solutions to help reduce costs and improve productivity and communications within their enterprise and between enterprises, to enhance their relationships with customers, suppliers and partners. Using Avistar C3™ software and leveraging video, telephony and Internet networking standards, Avistar solutions are designed to be scalable, reliable, cost effective, easy to use, and capable of evolving with communications networks as bandwidth increases and as new standards and protocols emerge. The Company currently sells the Avistar system directly and indirectly to small and medium size businesses, or SMBs, and large globally distributed organizations, or Enterprise markets, comprising the Global 5000. The Company’s objective is to establish its technology as the standard for networked visual unified communications and collaboration through limited direct sales, indirect channel sales/partnerships and the licensing of the Company’s technology to others.
 
Organization
 
The Company was founded as a Nevada limited partnership in 1993. The Company filed articles of incorporation in Nevada in December 1997 under the name Avistar Systems Corporation. The Company reincorporated in Delaware in March 2000 and changed the Company name to Avistar Communications Corporation in April 2000. The operating assets and liabilities of the business were then contributed to the Company’s wholly owned subsidiary, Avistar Systems Corporation, a Delaware corporation. In July 2001, the Company’s Board of Directors and the Board of Directors of Avistar Systems approved the merger of Avistar Systems with and into Avistar Communications Corporation. The merger was completed in July 2001.  In October 2007, the Company merged Collaboration Properties, Inc., the Company's wholly-owned subsidiary, with and into the Company, with the Company being the surviving corporation. Avistar has one wholly-owned subsidiary, Avistar Systems U.K. Limited (ASUK).
 
Basis of Presentation
 
The accompanying financial statements present the consolidated financial position, results of operations, and cash flows of Avistar and ASUK after elimination of all intercompany accounts and transactions. The consolidated results are referred to, collectively, as those of Avistar or the Company in these notes. The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.
 
The functional currency of ASUK is the United States dollar. All gains and losses resulting from transactions denominated in currencies other than the United States dollar are included in the statements of operations and have not been material.
 
The Company’s fiscal year end is December 31.
 
Risks and Uncertainties
 
The markets for the Company’s products and services are in the early stages of development. Some of the Company’s products utilize changing and emerging technologies. As is typical in industries of this nature, demand and market acceptance are subject to a high level of uncertainty, particularly when there are adverse conditions in the economy. Acceptance of the Company’s products, over time, is critical to the Company’s success. The Company’s prospects must be evaluated in light of difficulties encountered by it and its competitors in further developing this evolving marketplace. The Company has generated losses since inception and had an accumulated deficit of $111.7 million as of December 31, 2010. The Company’s operating results may fluctuate significantly in the future as a result of a variety of factors, including, but not limited to, the economic environment, the adoption of different distribution channels, and the timing of new product announcements by the Company or its competitors.
 
 
F-7
 

 
 
The Company’s future liquidity and capital requirements will depend upon numerous factors, including, but not limited to, the ability to become profitable or generate positive cash flow from operations, the Company’s cost reduction efforts,  Dr. Burnett’s personal guarantee to Avistar to support an extension of the revolving line of credit through March 31, 2012, the Company’s ability to obtain a renewal of its existing line of credit or a new line of credit with another bank, the costs and timing of its expansion of product development efforts and the success of these development efforts, the costs and timing of its expansion of sales and marketing activities, the extent to which its existing and new products gain market acceptance, competing technological and market developments, the costs involved in maintaining, enforcing and defending patent claims and other intellectual property rights, the level and timing of revenue, and other factors. If adequate funds are not available on acceptable terms or at all, the Company’s ability to achieve or sustain positive cash flows, maintain current operations, fund any potential expansion, take advantage of unanticipated opportunities, develop or enhance products or services, or otherwise respond to competitive pressures would be significantly limited.
 

 
2.
Summary of Significant Accounting Policies and Balance Sheet Details
 
Use of Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, income and expenses during the period. Actual results may differ from those estimates.
 
Cash and Cash Equivalents and Short and Long-term Investments
 
The Company considers all investment instruments purchased with an original maturity of three months or less to be cash equivalents. Investment securities with original or remaining maturities of more than three months but less than one year are considered short-term investments. Auction rate securities with original or remaining maturities of more than three months are considered short-term investments even if they are subject to re-pricing within three months. Investment securities held with the intent to reinvest or hold for longer than a year, or with remaining maturities of one year or more, are considered long-term investments. The Company was not invested in any short-term investments, auction rate securities or long-term investments as of December 31, 2010 and 2009. The Company’s cash equivalents at December 31, 2010 and 2009 consisted of money market funds with original maturities of three months or less, and are therefore classified as cash and cash equivalents in the accompanying consolidated balance sheets.
 
Fair Value Measurements
 
The Company measures the fair value of financial instruments in accordance with Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
 
 
Level 1 – Quoted prices in active markets for identical assets or liabilities.
 
 
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable, or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents) as of December 31, 2010 and 2009 (in thousands):
 
   
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Cash Equivalents:
                     
Money market funds
 
$             5
 
$           5
   
$             —
   
$           —
 
Total cash equivalents
 
$             5
 
$           5
   
$             —
   
$           —
 

 
 
F-8
 

 
 
Significant Concentrations
 
A relatively small number of customers have accounted for a significant percentage of the Company’s revenue for the years ended December 31, 2010, 2009 and 2008. Revenues from these customers as a percentage of total revenues for each fiscal year are as follows:
 
   
2010
 
2009
 
2008
 
Customer A
   
56%
 
   
—%
 
   
—%
 
 
Customer B
   
15%
 
   
—%
 
   
—%
 
 
Customer C
   
12%
 
   
14%
 
   
40%
 
 
Customer D
   
*%
 
   
35%
 
   
18%
 
 
Customer E
   
*%
 
   
19%
 
   
*%
 
 
Customer F
   
*%
 
   
*%
 
   
19%
 
 
Customer G
   
*%
 
   
*%
 
   
11%
 
 
*
Less than 10%