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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2011

 

Commission File Number 0-25882

 


 

EZENIA! INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

04-3114212

(State or other jurisdiction of incorporation

 

(IRS Employer Identification No.)

or organization)

 

 

 

14 Celina Avenue, Suite 17-18, Nashua, NH  03063

(Address of principal executive offices, including zip code)

 

(603) 589-7600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No 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 (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer o

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company x

(Do not check if a smaller reporting company)

 

 

 

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

 

The number of shares outstanding of the registrant’s Common Stock as of April 29, 2011 was 15,601,601.

 

 

 



Table of Contents

 

EZENIA! INC.

INDEX

 

 

 

 

 

Page

 

 

 

 

 

Part I.

 

Financial Information

 

 

 

 

 

 

 

Item 1

 

Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

6

 

 

 

 

 

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

9

 

 

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

12

 

 

 

 

 

Item 4

 

Controls and Procedures

 

12

 

 

 

 

 

Part II.

 

Other Information

 

13

 

 

 

 

 

Item 1

 

Legal Proceeding

 

13

 

 

 

 

 

Item 1A

 

Risk Factors

 

13

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

13

 

 

 

 

 

Item 3

 

Defaults Upon Senior Securities

 

13

 

 

 

 

 

Item 4

 

(Removed and Reserved)

 

13

 

 

 

 

 

Item 5

 

Other Information

 

13

 

 

 

 

 

Item 6

 

Exhibits

 

13

 

 

 

 

 

Signatures

 

15

 

 

 

 

 

Exhibits & Certifications

 

16

 

Note: Ezenia!, the Ezenia! Logo, InfoWorkSpace, LaunchPad and Encounter are trademarks of Ezenia! Inc.  All other trademarks are property of their respective companies.

 

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Table of Contents

 

EZENIA! INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share related data)

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,018

 

$

1,759

 

Marketable securities

 

206

 

199

 

Accounts receivable

 

829

 

374

 

Prepaid software licenses, net

 

543

 

629

 

Prepaid expenses and other current assets

 

79

 

128

 

Total current assets

 

2,675

 

3,089

 

Deposits

 

29

 

29

 

Capitalized software, net

 

98

 

109

 

Prepaid software licenses, net of reserve and current portion

 

389

 

396

 

Equipment and improvements, net

 

53

 

62

 

Total assets

 

$

3,244

 

$

3,685

 

 

 

 

 

 

 

Liabilities and stockholders’ (deficit) equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

258

 

$

274

 

Accrued expenses

 

509

 

761

 

Accrued employee compensation and benefits

 

314

 

238

 

Accrued restructuring

 

45

 

86

 

Current portion of deferred revenue

 

1,809

 

1,226

 

Total current liabilities

 

2,935

 

2,585

 

 

 

 

 

 

 

Deferred revenue, net of current portion

 

401

 

488

 

 

 

 

 

 

 

Total liabilities

 

3,336

 

3,073

 

 

 

 

 

 

 

Stockholders’ (deficit) equity

 

 

 

 

 

Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued and outstanding

 

 

 

Common stock, $.01 par value, 40,000,000 shares authorized, 16,362,589 issued and 15,601,601 outstanding at March 31, 2011 and December  31, 2010

 

163

 

163

 

Capital in excess of par value

 

67,098

 

67,018

 

Accumulated deficit

 

(64,408

)

(63,624

)

Treasury stock at cost, 759,537 shares

 

(2,945

)

(2,945

)

Total stockholders’ (deficit) equity

 

(92

)

612

 

Total liabilities and stockholders’ (deficit) equity

 

$

3,244

 

$

3,685

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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EZENIA! INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for share and per share related data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

Product revenues

 

$

676

 

$

703

 

 

 

 

 

 

 

Cost of revenues

 

 

 

 

 

Cost of product revenue

 

239

 

245

 

 

 

 

 

 

 

Gross profit

 

437

 

458

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

General and administrative

 

479

 

597

 

Research and development

 

469

 

215

 

Sales and marketing

 

213

 

266

 

Occupancy and other facilities-related expenses

 

58

 

97

 

Depreciation

 

10

 

34

 

Total operating expenses

 

1,229

 

1,209

 

 

 

 

 

 

 

Loss from operations

 

(792

)

(751

)

 

 

 

 

 

 

Other income

 

 

 

 

 

Other income

 

7

 

4

 

Interest income

 

1

 

4

 

Total other income

 

8

 

8

 

 

 

 

 

 

 

Net loss

 

$

(784

)

$

(743

)

 

 

 

 

 

 

Loss per share:

 

 

 

 

 

Basic and diluted

 

$

(0.05

)

$

(0.05

)

Weighted average common shares:

 

 

 

 

 

Basic and diluted

 

15,601,601

 

14,658,217

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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EZENIA! INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

Net loss

 

$

(784

)

$

(743

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

20

 

34

 

Stock-based compensation

 

80

 

130

 

Gain on marketable securities

 

(7

)

(4

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(455

)

(770

)

Prepaid software licenses

 

93

 

(203

)

Prepaid expenses and other current assets

 

49

 

39

 

Accounts payable, accrued expenses, employee and compensation benefits and accrued restructuring

 

(233

)

150

 

Deferred revenue

 

496

 

909

 

Net cash used in operating activities

 

(741

)

(458

)

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchases of equipment and improvements

 

 

(5

)

Capitalized software development costs

 

 

(84

)

Net cash used in investing activities

 

 

(89

)

 

 

 

 

 

 

Change in cash and cash equivalents

 

(741

)

(547

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,759

 

4,203

 

Cash and cash equivalents at end of period

 

$

1,018

 

$

3,656

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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EZENIA! INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Nature of Business and Basis of Presentation

 

Ezenia! Inc. (“Ezenia”, “we”, “our”, “us”, or the “Company”) operates in one business segment, which is the design, development, manufacturing, marketing and sale of conferencing and real-time collaboration solutions for corporate and governmental networks and eBusiness.  Founded in 1991, we develop and market products that enable organizations to provide high-quality group communication and collaboration capabilities to commercial, governmental, consumer and institutional users.  Our products allow individuals and groups, regardless of proximity constraints, to interact and share information in a natural, spontaneous way — voice-to-voice, face-to-face, mouse-to-mouse, keyboard-to-keyboard, flexibly, securely and in real time.  Using our products, individuals can interact through a natural meeting experience, allowing groups to work together effectively and disseminate vital information quickly in a secure environment.

 

The accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company sustained net losses of $784,000 and used cash in operating activities of $741,000 for the three months ended March 31, 2011.  The Company had a working capital deficiency, stockholders’ deficit and accumulated deficit of $260,000, $92,000 and $64.4 million, respectively, at March 31, 2011.  These factors raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time. The Company’s continuation as a going concern is dependent upon its ability to generate revenues or its ability to receive investment capital and loans from third parties to sustain its current level of operations.

 

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

In response to current financial conditions, we have undergone a reduction in our workforce from 25 employees to 13 employees in March 2011, as well as other reductions in other general and administrative expenses. We have also continued to strengthen our sales force in order to increase our sales volume.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Ezenia and its wholly-owned subsidiaries.  In the opinion of management, these financial statements contain all normal and recurring adjustments necessary for a fair presentation of the results of these interim periods. Certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, although we believe the disclosures in these financial statements are adequate to make the information presented not misleading.  These financial statements should be read in conjunction with our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010.  The results of operations for the interim periods shown are not necessarily indicative of the results for any future interim period or for the entire fiscal year.

 

Certain accounts in the December 31, 2010 and March 31, 2010 financial statements have been reclassified for comparative purposes to conform to the presentation in the March 31, 2011 financial statements.

 

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities at the date of the financial statements and revenue and expenses during the reported period.  Actual results could differ materially from these estimates.  The accounting policies applied are consistent with those disclosed in Note 2 of our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010.  The Company has evaluated all events or transactions through the date of this filing.  During this period, we did not have any material subsequent event that has not been previously disclosed.

 

2.  Revenue Recognition

 

Product revenue consists of sales of InfoWorkSpace (“IWS”) software licenses and maintenance agreements, IWS product—related training, installation, and consulting.  Revenue from sales of IWS software licenses and maintenance agreements is recognized ratably over the subscription software license

 

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contract period, which is generally one year. Revenue from IWS product-related training, installation, and consulting services is recognized as the services are performed because we believe we have established vendor specific objective evidence of fair value based on the price charged when the services are sold separately.

 

Product and software licenses are sold without any contractual right of return by the customer.  Deferred revenue represents amounts received from customers under subscription software licenses and maintenance agreements, or for product sales in advance of revenue recognition. Judgments are required in evaluating the creditworthiness of our customers.  In all instances, revenue is not recognized until we have determined, at the outset of the arrangement, that collectability is reasonably assured.  Amounts billed to customers related to shipping and handling charges are recorded upon shipment and the related costs are included in cost of goods sold.

 

3.  Stock-Based Compensation

 

We account for stock-based compensation as costs to be recognized for equity or liability instruments based on the fair value on the grant date, with expense recognized during the period over which an employee provides service in exchange for the award.  We estimate forfeitures at the grant date. Total stock-based compensation cost was $80,000 and $130,000 for the three months ended March 31, 2011 and 2010, respectively.

 

A summary of stock option activity under all of our stock option plans for the three months ended March 31, 2011 is as follows:

 

 

 

Number

 

Weighted Average

 

 

 

of Shares

 

Exercise Price

 

Options outstanding, December 31, 2010

 

3,346,672

 

$

0.98

 

Granted

 

135,000

 

0.09

 

Canceled

 

(254,553

)

0.25

 

Options outstanding, March 31, 2011

 

3,227,119

 

$

1.00

 

 

 

 

 

 

 

Options vested and expected to vest, March 31, 2011

 

3,071,442

 

$

1.04

 

 

 

 

 

 

 

Options exercisable, March 31, 2011

 

2,304,401

 

$

1.30

 

 

We estimate the fair value of each option award issued under our stock option plans on the date of grant using the Black-Scholes option-pricing model, using the assumptions noted in the below table.  Expected volatilities are based on historical volatility of our common stock.  We base the expected term of the options on our historical option exercise data with a minimum life expectancy equal to the vesting period of the option.  We base the risk-free interest rate on the U.S. Treasury yield in effect at the time of the grant for a term closest to the expected life of the options.

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

Expected volatility

 

187%-188%

 

153%

 

Risk-free interest rate

 

1.03%-1.28%

 

1.43%

 

Expected life in years

 

4.0

 

4.0

 

Expected dividend yield

 

None

 

None

 

 

Based on the above assumptions, the weighted average estimated fair value of options granted for the three months ended March 31, 2011 and 2010 was $0.09 and $0.10 per share, respectively.  We estimated forfeitures related to option grants at an annual rate of approximately 15%.

 

Other reasonable assumptions about these factors could provide different estimates of fair value.  Future changes in stock price volatility, life of options, interest rates, forfeitures and dividend practices, if any, may require changes in our assumptions, which could materially affect the calculation of fair value.

 

Total unrecognized stock-based compensation expense related to unvested stock options, expected to be recognized over a weighted average period of 1.22 years, amounted to $212,000 at March 31, 2011.

 

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4.  Research and Development Costs

 

Costs that are incurred internally in researching and developing computer software products are charged to expense until technological feasibility has been established. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers.

 

Judgment is required in determining when technological feasibility of a product is established. In most cases, we have determined that technological feasibility for our software products is reached shortly before the products are released to manufacturing.  In the first quarter of 2010, we determined that technological feasibility had been established for our newest product, MxM Secure version 2.0 (“MxM Secure”), therefore we capitalized $84,000 of costs related to the development of the product during the three months ended March 31, 2010.  The capitalized costs will be amortized over the expected life of the product which is three years.  During the three-month period ended March 31, 2011, we recorded approximately $11,000 of amortization expense related to the capitalized software.

 

5.  Nonqualified Deferred Compensation Plan and Fair Value Measurements

 

In connection with our nonqualified deferred compensation plan (the “Plan”), eligible employees may elect to defer up to 100% of their base and incentive compensation into the Plan. We hold these funds in a rabbi trust managed by a third-party trustee, and we are under no obligation to establish a fund or reserve in order to pay the benefits under the Plan except in the event of a change in control.

 

These short-term investments are held in a rabbi trust and are reported at fair value using Level 1 inputs (quoted market values) as marketable securities on the accompanying condensed consolidated balance sheets. The unrealized gains (losses) related to the short-term investments for the three months ended March 31, 2011 and 2010 were approximately $7,000 and $4,000, respectively. They are reported as other income (expense), and the changes to the corresponding liability are recorded in general and administrative expenses, in the accompanying condensed consolidated statements of operations. As of March 31, 2011 and December 31, 2010, the fair value of the short-term investments and the corresponding liability were approximately $206,000 and $199,000, respectively.

 

6.  Earnings Per Share

 

Shares used in computing basic and diluted earnings per share for the three months ended March 31, 2011 and 2010 were as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

Basic weighted-average shares outstanding

 

15,601,601

 

14,658,217

 

Dilutive impact from outstanding stock options

 

 

 

Diluted weighted-average shares outstanding

 

15,601,601

 

14,658,217

 

Outstanding options excluded as impact is anti-dilutive

 

3,227,119

 

3,128,100

 

 

7.  Commitments and Contingencies

 

In December 2007, we completed the closure of our Colorado Springs facility and recorded a restructuring reserve to cover the remaining lease payments, net of estimated sublease proceeds.  Each quarter we record additional occupancy costs, resulting from the difference between the amount of actual sublease income that reduces our liability and the amount of sublease income we estimated when the reserve was established. The amount of these additional occupancy costs was $15,000 for the three months ended March 31, 2011, and the corresponding liability increased the restructuring liability on our condensed consolidated balance sheets. We estimate that we will have to pay $92,000, net of an expected sublease rental, over the remaining lease term. Our gross remaining lease obligation on our Colorado Springs facility, including estimated operating expense, is approximately $118,000.

 

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The adjustments to the accrued restructuring liability related to the shutdown of the Colorado Springs facility for the three months ended March 31, 2011 were as follows (in thousands):

 

Restructuring balance as of December 31, 2010

 

$

86

 

Cash payments

 

(56

)

Additional occupancy costs and other facilities related expenses

 

15

 

Restructuring liability at March 31, 2011

 

$

45

 

 

In December 2008, our software distribution license agreement with Microsoft was amended to extend the term through June 2011 and reduce the remaining purchase commitment to $2.75 million, of which $2.4 million was satisfied as of March 31, 2011. In April 2011, the remaining payment schedule was modified to extend the required payments to September 2011.  This moves $72,000 in payments from the second quarter of the fiscal year to the third quarter.  In addition to the remaining license purchase commitment, we have approximately $1.7 million of prepaid licenses on hand that have yet to be deployed to customers. Microsoft has agreed to allow the Company an additional three year period to deploy the prepaid licenses. As of March 31, 2011, we reviewed our forecast for license sales through the amended term (ending in June 2014) and believe that the $1.45 million excess purchase reserve that was established during the year ended December 31, 2007 remains appropriate for at least the next 12 months.

 

In response to current financial conditions, we have undergone a reduction in our workforce from 25 employees to 13 employees in March 2011, as well as other reductions in other general and administrative expenses. We have also continued to strengthen our sales force in order to increase our sales volume.

 

8. Related-Party Transactions

 

Payments to two companies previously owned by one of our directors, Selbre Associates and EC America, amounted to approximately $7,500 in the three-month periods ended March 31, 2011 and 2010, respectively. The two companies provide General Services Administration contract management and consulting in the marketing of our products to the Federal government. These two companies were sold to Immix Group in 2009.  Effective April 2011 this Director resigned.

 

9. Subsequent Events

 

The Board of Directors of Ezenia! Inc., in their continuing drive to reduce expenses, have decided to eliminate a layer of management and have therefore relieved Mr. Peter Janke of his responsibilities as President and COO of Ezenia effective as of April 1, 2011. On April 25, 2011, Peter E. Janke resigned as the Vice Chairman of the Board and from the Board of Directors of Ezenia! Inc. (the “Company”), effective immediately

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

SAFE HARBOR FOR FORWARD LOOKING STATEMENTS

 

This Form 10-Q, and other information provided by us or statements made by our directors, officers or employees from time to time, may contain “forward-looking” statements and information, which involve risks and uncertainties.  Statements indicating that we “expect,” “estimate,” “believe,” “are planning,” or “plan to,” are forward-looking, as are other statements concerning our business focus, strategic initiatives, product development initiatives, new product launches, changes in the competitive landscape, business and industry trends, future financial results, expense control initiatives, changes in and maintenance of our customer base and the potential development of new business, changes in our relationship with Microsoft and related purchase commitment reserve, our ability to generate cash and to meet our working capital needs, and other events that have not yet occurred. These forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements. Factors that may cause such differences include, but are not limited to, our ability to maintain or accurately forecast revenue growth or to anticipate and accurately forecast a decline in revenue from any of our products or services, customer acceptance of our IWS version

 

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3.0 and MxM Secure, version 2.0, our ability to compete in an intensely competitive market, our ability to develop and introduce new products or product enhancements on schedule and that respond to customer requirements and rapid technological change, our dependence on the U.S. government as our largest customer, budgetary constraints within the defense and intelligence communities or the redirection of such budgeted funds, new product introductions and product enhancements by competitors, our ability to select and implement appropriate business models, plans and strategies and to execute on them, our ability to identify, hire, train, motivate, and retain highly qualified management/other key personnel and our ability to manage changes and transitions in management/other key personnel, the impact of global economic and political conditions on our business, and unauthorized use or misappropriation of our intellectual property, as well as the risk factors discussed in Part I-Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010 and in other periodic reports filed with the Securities and Exchange Commission. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation to publicly update or revise any such statement to reflect any change in our expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements.

 

Overview

 

For the quarter ended March 31, 2011, revenue declined approximately 4% as compared to the same period in 2010, net loss was approximately ($784,000) compared to ($743,000), and basic loss per share was ($0.05),  which was the same for the quarter ended March 31, 2010.  The reduction in revenue is primarily attributed to a decrease in renewals and sales from certain Department of Defense, (the  “DoD”, customers as well as budgetary consolidations and the promotion of competing solutions by the Defense Information Systems Agency, (“DISA”), including a collaborative product being sponsored and offered for free by DISA to these customers. Even though our expense ratios were unfavorable as a result of the decline in revenue, our operating expenses remained relatively flat at $1.2 million quarter over quarter.

 

We continue to concentrate on enhancing our existing collaborative situational awareness product and service offerings. We continue our efforts to defend and re-establish our customer base within the military and intelligence community by pursuing new opportunities with various agencies and first responders.  Our sales organization, advisors and partners are focusing on new sales activities in adjacent markets, re-energizing existing partnerships and fostering new relationships with strategic resellers and system integrators.  Competition for the market for multi-media collaboration products, for military and commercial applications, however, remains highly competitive and has been negatively impacted by current economic and market conditions.

 

Results of Operations

 

Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010

 

Revenues:  Product revenues declined 4% to approximately $676,000 for the quarter ended March 31, 2011 from approximately $703,000 for the quarter ended March 31, 2010. We believe that the decline in IWS revenue is primarily the result of budgetary constraints and uncertainties within the DoD, as well as the redirection of information technology, or IT, purchases due to the Net-Centric Enterprise Services programs administered by DISA as described above.

 

Gross Profit:  Cost of revenues includes material costs, costs of third-party software licenses, assembly labor and overhead, customer support costs, and engineering and development costs associated with product development revenue.  Gross profit as a percentage of revenue was approximately 64.6% for the quarter ended March 31, 2011 as compared to approximately 65.1% for the quarter ended March 31, 2010. The 0.5% decline in gross profit percentage was primarily due to the amortization of the capitalized MxM Secure software development costs.

 

Research and Development:  Research and development expenses include payroll, employee benefits, other headcount-related costs and miscellaneous costs associated with product development. Research and development expenses increased by 118% to approximately $469,000 for the quarter ended March 31, 2011 from approximately $215,000 for the quarter ended March 31, 2010.  The increase is due in part to the capitalization of $84,000 of engineering labor for our new product MxM Secure in the quarter ended March 31, 2010.  The balance is made up of additional headcount and consultants brought on to

 

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continue to enhance our new product.

 

Sales and Marketing:  Sales and marketing expenses include payroll, employee benefits, and other headcount-related costs associated with sales and marketing personnel, advertising, tradeshows, seminars, and other marketing-related programs.  Sales and marketing expenses decreased by 20% to approximately $213,000 for the quarter ended March 31, 2011 from approximately $266,000 for the quarter ended March 31, 2010. The decrease is primarily attributable to a decrease in consulting expenses.

 

General and Administrative:  General and administrative expenses include payroll, employee benefits, other headcount-related costs associated with the finance, human resources, management information systems, and other administrative headcount, legal and investor relations costs, and other administrative fees.  General and administrative expenses declined by 20% to approximately $479,000 for the quarter ended March 31, 2011 as compared to approximately $597,000 for the quarter ended March 31, 2010, primarily due to lower stock-based compensation costs and legal and professional fees, partially offset by an increase in compensation costs.

 

Occupancy and Other Facilities-Related Expenses:  Occupancy and other facilities-related expenses include rent expenses and other operating costs associated with our headquarters facility located in Nashua, New Hampshire, and sales office located in Sterling, Virginia.  Occupancy costs declined 40% to approximately $58,000 for the quarter ended March 31, 2011 from approximately $97,000 for the quarter ended March 31, 2010.  The decline is attributable to a reduction of $26,000 in costs related to the closure of the facility in Colorado Springs, Colorado, along with a consolidation of facilities in Nashua, New Hampshire.

 

Other Income:  For the quarter ended March 31, 2011, we had other income of $7,000 compared to other income of $4,000 for the quarter ended March 31, 2010. This difference results from unrealized gains on short-term investments.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

 

Liquidity and Capital Resources

 

At March 31, 2011, we had cash and cash equivalents on hand of approximately $1.0 million.  We incurred a loss from operations of approximately $792,000 for the three months ended March 31, 2011, and a net loss for the quarter of approximately $784,000.

 

In the three-month period ended March 31, 2011 we used cash from operations of approximately $741,000 compared to using cash of approximately $458,000 for the three months ended March 31, 2010.  The cash used from operations for 2011 and 2010 is primarily the result of the net loss and an increase in accounts receivable and prepaid software licenses, partially offset by deferred revenue.

 

We also invested approximately $84,000 in capitalized labor for our new product, MxM Secure during the three months ended March 31, 2010. There were no capitalized costs in 2011.

 

Our contractual obligations relate primarily to our facilities leases and a contractual purchase commitment.  We lease our primary facility in Nashua, New Hampshire under an operating lease, which was recently extended and expires in August 2012. We also have a lease for office space in Sterling, Virginia, for sales and technical support operations, which expires in June 2013. A portion of the space under our Colorado Springs facility is subleased through November 2011 and the remaining portion is currently available for subleasing as we have ceased operations there.

 

In December 2008, our software distribution license agreement with Microsoft was amended to extend the term through June 2011 and reduce the remaining purchase commitment to $2.75 million, of which $2.4 million was satisfied as of March 31, 2011. In April 2011 the remaining payment schedule was modified to extend the required payments to September 2011.  This moves $72,000 in expected payments from the second quarter of the fiscal year to the third quarter. In addition to the remaining license purchase

 

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commitment, we have approximately $1.7 million of prepaid licenses on hand that have yet to be deployed to customers. Microsoft has agreed to allow the Company an additional three year period to deploy the prepaid licenses. As of March 31, 2011, we reviewed our forecast for license sales through the amended term (June 2011) and believe that the $1.45 million excess purchase reserve that was established during the year ended December 31, 2007 remains appropriate for at least the next 12 months.

 

We include standard intellectual property indemnification provisions in our licensing agreements in the ordinary course of business. Pursuant to our product license agreements, we will indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally business partners or customers, in connection with certain patent, copyright, or other intellectual property infringement claims by third parties with respect to our products. Other agreements with our customers provide indemnification for claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. Historically, our costs to defend lawsuits or settle claims relating to such indemnification provisions have been insignificant. Accordingly, the estimated fair value of these indemnification provisions is immaterial.

 

In May 2003, after failing to comply with certain continued listing standards for the NASDAQ SmallCap Market, including maintaining a minimum bid price of at least $1.00 per share, and the requirement to have a minimum of $2.5 million in stockholders’ equity, we received a delisting notification from NASDAQ.  After exercising our right for an appeal of this determination to a NASDAQ Listing Qualifications Panel, the Panel determined to delist our securities from The NASDAQ Stock Market in August 2003. Since then, our common stock has been quoted on the OTC Bulletin Board.  The market value and liquidity of our common stock, as well as our ability to raise additional capital, has been and may continue to be materially adversely affected by this delisting decision.

 

Operating costs remained relatively flat at approximately $1.2 million for the three months ended March 31, 2011, and for the three months ended March 31, 2010. Order bookings, which are purchase orders placed by customers, are not recognized as revenue until all requirements of that order are satisfied, although the cash flow received from these orders may more closely follow the receipt date of the order. Our cash balance declined by approximately $741,000 for the three months ended March 31, 2011 with cash on hand at the end of the period of approximately $1.0 million. Management believes that its existing cash resources and expected new and renewed license orders will be sufficient to fund its anticipated working capital and capital expenditure needs for at least the next several months.  The Company is currently reviewing all of its options for the long term.

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

 

To date, we have not utilized derivative financial instruments or derivative commodity instruments. We invest cash in highly liquid investments, consisting of highly rated U.S. and state government securities, commercial paper, mutual funds and short-term money market funds. These investments are subject to minimal credit and market risk and we have no debt other than our contractual lease obligations. A 10% change in interest rates would not have a material impact on our financial position, operating results or cash flows. We have closed our foreign offices, and sales to foreign customers are in U.S. dollars.  Therefore, we have no significant foreign currency risk.

 

Item 4.    Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of March 31, 2011, our management, under the supervision and with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures.  Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level to ensure that the information required to be disclosed in the reports filed or submitted by us under the Exchange Act was recorded, processed, summarized, and reported within the requisite time periods, including ensuring that such material information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.  There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.  Because of the inherent limitations in all control systems, no evaluation of controls can provide

 

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absolute assurance that all control issues and instances of fraud, if any, within the company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

There are no material pending legal proceedings to which we are a party or to which any of our property is subject.  From time to time, we are subject to a variety of claims and suits that arise in the ordinary course of business. While we cannot predict the outcome of these matters, we believe that the outcome will not materially affect our business, financial position or results of operations.

 

Item 1A.  Risk Factors

 

For factors that could affect our business, results of operation and financial condition, see the discussion of risk factors contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.  There were no material changes in these risk factors for the three months ended March 31, 2011.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  (Removed and Reserved)

 

Item 5.  Other Information

 

None

 

Item 6.      Exhibits

 

3.1(1)

 

Amended and Restated Certificate of Incorporation of the Registrant.

 

 

 

3.2 (2)

 

Certificate of Designations, Preferences and Rights of a Series of Preferred Stock of the Registrant dated as of April 21, 2008, classifying and designating the Series D Junior Participating Cumulative Preferred Stock.

 

 

 

3.3(1)

 

Amended and Restated By-Laws of the Registrant.

 

 

 

4.1(1)

 

Specimen Stock Certificate.

 

 

 

4.2(2)

 

Shareholder Rights Agreement, dated as of April 15, 2008, between the Registrant and Computershare Trust Company, N.A., as Rights Agent.

 

 

 

4.3(3)

 

Amendment, dated February 10, 2011, to the Shareholder Rights Agreement dated as of April 15, 2008, between the Registrant and Computershare Trust Company, N.A., as Rights Agent.

 

 

 

31.1*

 

Certification of Khoa D. Nguyen, Chairman and Chief Executive Officer of the Company,

 

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filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 

 

 

31.2*

 

Certification of Thomas J. McCann, Chief Financial Officer of the Company, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 

 

 

32.1**

 

Certification of Khoa D. Nguyen, Chairman and Chief Executive Officer of the Company, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 

 

 

32.2**

 

Certification Certification of Thomas J. McCann, Chief Financial Officer of the Company, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 


* Filed herewith

 

** Furnished herewith

 

(1)          Incorporated by reference from the Company’s Registration Statement on Form S-1.

(2)          Incorporated by reference from the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on April 21, 2008 (File No. 000-25882).

(3)          Incorporated herein by reference to the Company’s Registration Statement on Form 8-A/A filed with the Securities and Exchange Commissions on February 11, 2011 (File No. 000-25882).

 

Copies of any of these exhibits are available without charge upon written request to Investor Relations, Ezenia! Inc., 14 Celina Avenue, Suite 17-18, Nashua, NH 03063.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

EZENIA! INC.

(Registrant)

 

Date: May 13, 2011

By:

/s/ Khoa D. Nguyen

 

 

Khoa D. Nguyen

 

 

Chairman and Chief Executive Officer,

 

 

(principal executive officer)

 

 

 

Date: May 13, 2011

By:

/s/ Thomas J. McCann

 

 

Thomas J. McCann

 

 

Chief Financial Officer and Secretary

 

 

(principal financial and accounting

 

 

officer)

 

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Exhibits

 

 

Index

 

 

 

 

 

3.1(1)

 

Amended and Restated Certificate of Incorporation of the Registrant.

 

 

 

3.2 (2)

 

Certificate of Designations, Preferences and Rights of a Series of Preferred Stock of the Registrant dated as of April 21, 2008, classifying and designating the Series D Junior Participating Cumulative Preferred Stock.

 

 

 

3.3(1)

 

Amended and Restated By-Laws of the Registrant.

 

 

 

4.1(1)

 

Specimen Stock Certificate.

 

 

 

4.2(2)

 

Shareholder Rights Agreement, dated as of April 15, 2008, between the Registrant and Computershare Trust Company, N.A., as Rights Agent.

 

 

 

4.3(3)

 

Amendment, dated February 10, 2011, to the Shareholder Rights Agreement dated as of April 15, 2008, between the Registrant and Computershare Trust Company, N.A., as Rights Agent.

 

 

 

 

 

 

 

 

 

31.1*

 

Certification of Khoa D. Nguyen, Chairman and Chief Executive Officer of the Company, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 

 

 

31.2*

 

Certification of Thomas J. McCann, Chief Financial Officer of the Company, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 

 

 

32.1**

 

Certification of Khoa D. Nguyen, Chairman and Chief Executive Officer of the Company, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 

 

 

32.2**

 

Certification Certification of Thomas J. McCann, Chief Financial Officer of the Company, furnished suant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 


* Filed herewith

 

** Furnished herewith

 

(1)          Incorporated by reference from the Company’s Registration Statement on Form S-1.

(2)          Incorporated by reference from the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on April 21, 2008 (File No. 000-25882).

(3)          Incorporated herein by reference to the Company’s Registration Statement on Form 8-A/A filed with the Securities and Exchange Commissions on February 11, 2011 (File No. 000-25882).

 

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