We are in the business of designing, developing and marketing our proprietary wireless radio frequency (“RF”) technologies for use in semiconductor circuits for wireless radio applications. Our immediate market focus is on securing licensing agreements for our Direct2Power™ or d2p™ RF transmit chain technology. Our target customers are top tier mobile handset manufacturers and their key semiconductor suppliers. We believe our proprietary wireless technologies embody significant industry advances that can be commercialized in the near term.
From late 2003 through June of 2005, we manufactured and sold branded wireless networking products that incorporated our proprietary technology through retail and internet retail distribution channels. All of our revenues from continuing operations to date were generated from these retail products. In June 2005, we exited our manufacturing and retail sales activities in pursuit of our longer-term business strategy of establishing relationships with original equipment manufacturers (“OEMs”) for the incorporation of our technology into their products. Our decision to exit the retail activities was precipitated by advances in our wireless technology resulting in increased interest from OEM prospects, specifically in the mobile handset market. We determined that the investment required to increase brand awareness, introduce new product offerings, and expand the distribution channel for retail products, would detract from our ability to capitalize on OEM opportunities.
Exiting the retail business resulted in charges to our 2005 second quarter operating results of approximately $4.7 million. During the second half of 2005, we sold our remaining finished product inventories, including those products reclaimed from retail and distribution channel partners, to a wholesaler. We also entered into a consignment arrangement for the liquidation of our remaining raw materials inventory and liquidated our manufacturing and prototype facility assets and other property and equipment utilized in retail business activities. As of December 31, 2005, we had substantially completed our retail exit activities.
In parallel with our retail exit activities in the second half of 2005, we began demonstrating our d2p wireless technology to prospective OEM customers in the mobile handset industry using semi-integrated circuits. At the end of 2005, we completed our first d2p integrated circuit (“IC”) which allowed us to demonstrate the advantages of our technology and its manufacturability in silicon. Throughout 2006, we continued to further integrate our technology in silicon while cultivating potential customer relationships. Our sales-related activities in 2006 included prototype demonstrations of our increasingly integrated D2P platform, support of in-depth technical due-diligence by prospective customers, analysis of prospective customer product plans, delivery of initial proposals and terms, and, ultimately, negotiations of proposed business relationships. In addition, early in 2006, we expanded our target customer base to include not only the top tier mobile handset OEM providers but also their key component suppliers. In the second half of 2006, we also initiated a campaign targeted at the wireless network providers who are key influencers to the OEMs in the mobile handset industry. We are also exploring potential business arrangements with one or more target customers outside the mobile handset industry who may have applications for our technology that are in concert with our development efforts in the mobile handset space.
Our current business strategy is to become a provider of intellectual property through licensing arrangements which will enable others to design and manufacture ICs incorporating our proprietary wireless technology. Based on the current status of business negotiations, we believe our first licensing arrangements will be realized in the near term.
To date, we have generated no revenue from licensing of our wireless RF transmit technologies. Our ability to generate revenues sufficient to offset costs is subject to our ability to successfully market our intellectual property for design into widely deployed products that are manufactured by others. We believe our technology has substantial advantages over competing technologies, especially in the third generation, or 3G, mobile handset market and generations that are likely to evolve beyond 3G, such as 3.9G and 4G mobile handset standards and applications. Our unique technology processes the RF waveform in a more optimal manner than existing technologies, thereby allowing OEMs to create handsets that have extended battery life, more easily incorporate multiple air interface standards and frequencies in smaller form factors, and reduce manufacturing costs. Our technology provides such attractive benefits, in part, because its unique integrated circuit architecture enables efficient digital circuit processing, eliminating many of the limitations of legacy analog processing. In addition, our technology has proven to be attractive to the network providers as it can increase capacity, coverage and data throughput of their mobile networks .
Recent Developments
Sale of Equity Securities to Fund Continuing Operations
On February 23, 2007, we completed the sale of an aggregate of 992,441 shares of our common stock to a limited number of domestic institutional and other investors in a private placement transaction pursuant to offering exemptions under the Securities Act of 1933. The shares, which represent 4.1% of our outstanding common stock on an after-issued basis, were sold at a price of $8.50 per share, for net proceeds of approximately $8.4 million. The net proceeds from this transaction will be used for general working capital purposes.
We will register the Common Stock issued in the private offering for re-offer and re-sale by the investors. We have committed to file the registration statement within 45 days of closing and to cause the registration statement to become effective on or prior to the earlier of (i) the fifth trading day following the date that we are notified by the SEC that the registration statement will not be reviewed or is no longer subject to review, and (ii) 120 days after the closing date. If the Common Stock is not registered for resale within those time periods, we will pay liquidated damages in the amount of one percent of the amount invested for each 30-day period (pro rated) until the filing or effectiveness of the registration statement, up to a maximum of ten percent of the gross proceeds.
Technology and Products
Our wireless technologies, collectively referred to as Energy Signal Processing or ESP™, represent unique, proprietary methods for processing RF waveforms in wireless applications. The technology applies to the transmit (baseband data to an RF carrier signal) and receive (RF carrier signal to baseband data) functions of a radio transceiver. The transmit portion of the technology is called Direct2Power, or d2p, and enables the transformation of a digital baseband signal to an RF carrier waveform, at the desired power output level, in a single unified operation. The receiver portion of the technology is called Direct2Data™, or d2d™, and enables the direct conversion of an RF carrier to baseband data signal. We are currently focused solely on commercialization of our d2p technology solutions.
We have completed several engineering prototypes of our d2p-based ICs targeted at mobile handset applications. These ICs were produced using a Silicon Germanium (SiGe) process through a fabrication relationship with IBM Microelectronics (“IBM”). These ICs are utilized to verify that our technology can be highly integrated in silicon and to demonstrate the benefits of the technology to OEM target customers. The portion of the IC that embodies the core RF technology is not customer-specific and therefore has been highly integrated in prototype ICs. We anticipate that OEM customers will engage us to customize the implementation of the core technology based on their specific interface and product requirements. Our current prototypes support multi-band (meaning multiple frequencies) and multi-mode (meaning multiple cellular standards and corresponding modulation formats) functionality. Our ICs support multiple bands of cellular and PCS frequencies and support the current and emerging cellular standards including GSM/EDGE, CDMA, W-CDMA, and HSUPA. We are also able to demonstrate 802.16e WiMax standards using PCS frequencies with our current ICs.
Our d2d (receiver) technology was first introduced in the form of transceiver ICs for the wireless local area networking (“WLAN”) market in 2002. In 2003, we began marketing ICs to OEMs and original design manufacturers (“ODM”s) who manufacture and sell WLAN products or application modules that incorporate WLAN capabilities. We found that the unique nature of the technology and related design requirements, the features that OEMs were interested in for volume WLAN applications, and the lack of brand recognition in the marketplace hindered our marketing efforts. As a result, in 2003, we initiated a business strategy of developing our own d2d-based WLAN products for marketing to end-users. We believe this strategy would not only generate initial product revenue but would also provide a proof of concept to OEMs and ODMs of the underlying technology. In addition, we believed the development of finished products enabled better understanding of the manufacturing requirements, design interface needs and other requirements which allows refinement of designs in subsequent generations of ICs.
In the fourth quarter of 2003, we introduced our first d2d-based WLAN end-user products for wireless Internet data networking applications. These products included a wireless local area networking card, designed for use with laptop computers, a wireless universal serial bus adaptor for use with desktop computers and a wireless four-port router for networking applications. All of our initial products were compliant with the 802.11b industry standard for WLAN communications. During 2004 and early 2005, we produced WLAN products for retail distribution and our product development efforts focused on expanding the retail offering to the 802.11g standard as well as to cordless telephones utilizing the d2d technology. In June 2005, we ceased production and development efforts for our WLAN end-user products and exited our retail business activities in order to focus exclusively on OEM opportunities, particularly with regard to our transmit technology implementation which we believe has broad adoption potential in the mobile handset market.
We anticipate that our receiver technology will also be ultimately adopted in the mobile handset market, however we estimate its adoption will lag behind the adoption of our transmit technology by at least twelve to eighteen months.
Marketing and Sales
Our marketing and sales activities are currently focused on top tier OEMs that design and/or manufacture mobile handsets, and the key semiconductor suppliers to those OEMs. We are engaged in discussions with companies that, based on industry data, collectively represent over 75% of the handset shipments worldwide. We are also exploring potential business arrangements with one or more target customers outside the mobile handset industry to the extent their applications for our technology are complimentary to our efforts in the mobile handset market. Our sales and sales support activities include prototype demonstrations of both semi-integrated and highly integrated circuits that showcase the benefits of the technology; support of detailed technology due-diligence discussions and testing; analysis of potential customer product roadmaps and integration alternatives; and negotiations of specific terms of potential business relationships.
We believe the sales cycle, from the initial customer meeting to the consummation of a business arrangement, is approximately 18-24 months. The length of the sales cycle is a result of many factors, including the unique nature of our technology; intense technology evaluation and due-diligence required based on the complex nature of radio frequency technology, in general, and the cellular specifications, in particular; our lack of tenure in the cellular industry; and the variety of licensing implementations and integration decisions that must be evaluated by the customer in order to assess the specific value proposition for their needs. We believe our initial design wins will occur in the near term and furthermore, we believe our sales cycle with additional customers will shorten significantly following initial adoption. Future sales cycles may be influenced by the terms of our initial customers and our ability to expand internal resources to support multiple customers.
Prior to June 2005, we promoted and sold our WLAN end-user products in the United States and Canada through traditional retailers, online retailers, value-added resellers (“VARs”) and direct through our own online store. In June 2005, we exited our retail business activities to pursue OEM opportunities. The retail exit included a reduction in retail sales and marketing staff and cessation of all retail marketing activities. We continued to work with our retail and distribution partners throughout the balance of 2005 to facilitate returns of unsold product in the channel. We sold our remaining retail product inventory to a wholesaler and anticipate no further revenue from retail product sales.
Competition
We operate in a highly competitive industry against companies with substantially greater financial, technical, and sales and marketing resources. Our transmit technology, which is currently being marketed to mobile handset OEMs, faces competition from incumbent providers of transmitters and power amplifiers including companies such as RF Microdevices, Anadigics, Skyworks, Texas Instruments, Freescale, Philips, and others. Each of our competitors, however, also has the potential of becoming a licensee of our technology. We also compete against RF engineering programs within the research and development organizations of our target customers. To date, we are unaware of any competing or emerging RF technologies that provide all the simultaneous benefits that our technology enables.
We believe we can gain OEM adoption, and therefore compete, based on the performance and cost advantages enabled by our unique circuit architecture, as supported by a solid and defensible intellectual property portfolio. Our intellectual property offering is capable of being compliant with mobile standards-based 3G requirements and can accept the same baseband data input as traditional or future offerings. In addition, we believe the improved power efficiencies enabled by our technology provide a solution to an existing problem in applications for 3G standards and beyond that the OEMs and wireless carriers alike are seeking to solve.
Production and Supply
Our current business strategy is focused on licensing our intellectual property, not supply of ICs. As a result, the production capacity risk shifts to the OEM and its key semiconductor suppliers. We currently have a fabrication relationship with IBM for the production of our d2p-based prototype ICs on a SiGe process. We believe IBM has sufficient capacity to meet our foreseeable needs. In addition, our ICs can be produced using different materials and processes, if necessary, to satisfy capacity requirements and/or customer preferences.
Discontinued Operations
In May 2004, we completed the sale of certain designated assets of our video division to Thomson Broadcast & Media Solutions, Inc. and Thomson Licensing, SA (collectively referred to as “Thomson”). The assets sold included the PVTV and Cameraman products, services, patents, patent applications, trademarks, tradenames and other intellectual property, inventory, specified design, development and manufacturing equipment, and obligations under outstanding contracts for products and services and other assets.
The sales price of the assets was approximately $13.4 million. We recognized a gain on the sale of discontinued operations in 2004 of approximately $11.2 million which is net of losses on the disposal of remaining assets related to the video operations of approximately $0.6 million. We agreed not to compete with the business of the video division for five years after the closing date. We also agreed not to seek legal recourse against Thomson in respect of our intellectual property that was transferred or should have been transferred if used in connection with the video operations. Additionally, we indemnified Thomson against intellectual property claims for an unlimited period of time, without any minimum threshold, and with a separate maximum of $5,000,000. The operations of our video business unit were classified as discontinued operations when the operations and cash flows of the business unit were eliminated from ongoing operations. The prior years’ operating activities for the video business unit have also been reclassified to “Gain from discontinued operations” in the accompanying consolidated statement of operations.
Patents and Trademarks
We consider our intellectual property, including patents, patent applications and trademarks, to be significant to our competitive positioning. We have a program to file applications for and obtain patents, copyrights, and trademarks in the United States and in selected foreign countries where we believe filing for such protection is appropriate to establish and maintain our proprietary rights in our technology and products. As of December 31, 2006, we have obtained 44 U.S. and 52 foreign patents related to our ESP technologies and have 94 patent applications pending in the United States and other countries. In addition, in February 2007, we were granted our first United States patent specifically related to our d2p transmit technology. We estimate the economic lives of our patents to be fifteen to twenty years.
Research and Development
For the years ended December 31, 2006, 2005 and 2004, we spent approximately $9.5 million, $10.3 million, and $11.4 million, respectively, on research and development for continuing operations. Our research and development efforts have been devoted to the development of RF technologies and related products.
Employees
As of December 31, 2006, we had 51 full-time employees, of which 28 are employed in engineering research and development and product operations, 10 in sales and marketing, and 13 in executive management, finance and administration. Our employees are not represented by a labor union. We consider our employee relations satisfactory.
Available Information and Access to Reports
We file our annual report on Form 10-K and quarterly reports on Forms 10-Q, including amendments, as well as our proxy and other reports electronically with the Securities and Exchange Commission (“SEC”). The SEC maintains an Internet site ( http://www.sec.gov ) where these reports may be obtained at no charge. Copies of any materials filed with the SEC may also be obtained from the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the SEC Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Copies of these reports may also be obtained via the Company’s website (http://www.parkervision.com) via the link “SEC filings”. This provides a direct link to our reports on the SEC Internet site. We will provide copies of this annual report on Form 10-K and the quarterly reports on Forms 10-Q, including amendments, filed during the current fiscal year upon written request to Investor Relations, 7915 Baymeadows Way, Suite 400, Jacksonville, Florida, 32256. These reports will be provided at no charge. In addition, exhibits may be obtained at a cost of $.25 per page plus $5.00 postage and handling.
Item 1A. Risk Factors
In addition to other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered in evaluating our business because such factors may have a significant impact on our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements.
We have had a history of losses which may ultimately compromise our ability to implement our business plan and continue in operations.
We have had losses in each year since our inception in 1989, and continue to have an accumulated deficit which, at December 31, 2006, was $149.4 million. The net loss for 2006 was $15.8 million. To date, our technologies and products have not produced revenues sufficient to cover operating, research and development and overhead costs. We also will continue to make expenditures on marketing, research and development, pursuit of patent protection for our intellectual property and operational costs for fulfillment of any contracts that we achieve for the sale of our products or technologies. We expect that our revenues in the near term will not bring the company to profitability. If we are not able to generate sufficient revenues or we have insufficient capital resources, we will not be able to implement our business plan and investors will suffer a loss in their investment. This may result in a change in our business strategies.
We expect to need additional capital in the future, which if we are unable to raise will result in our not being able to implement our business plan as currently formulated.
Because we have had net losses and, to date, have not generated positive cash flow from operations, we have funded our operating losses from the sale of equity securities from time to time and the sale of our video division in 2004. We anticipate that our business plan will continue to require significant expenditures for research and development, patent protection, sales and marketing and general operations. Our current capital resources, including cash and short-term investments of $13.2 million and net proceeds from our February 2007 private placement transaction of approximately $8.4 million, are expected to sustain operations through the first quarter of 2008, if not longer. Thereafter, unless we increase revenues to a level that they cover operating expenses or we reduce costs, we will require additional capital to fund these expenses. Financing, if any, may be in the form of loans or additional sales of equity securities. A loan or the sale of preferred stock may result in the imposition of operational limitations and other covenants and payment obligations, any of which may be burdensome to us. The sale of equity securities will result in dilution to the current stockholders’ ownership. The long-term continuation of our business plan is dependent upon the generation of sufficient revenues from the sale of our products, additional funding or reducing expenses or a combination of the foregoing. The failure to generate sufficient revenues, raise capital or reduce expenses could have a material adverse effect on our ability to achieve our long-term business objectives.
Our industry is subject to rapid technological changes which if we are unable to match or surpass, will result in a loss of competitive advantage and market opportunity.
Because of the rapid technological development that regularly occurs in the microelectronics industry, we must continually devote substantial resources to developing and improving our technology and introducing new product offerings. For example, in fiscal years 2005 and 2006, we spent approximately $10.3 and $9.5 million, respectively, on research and development, and we expect to continue to spend a significant amount in this area in the future. These efforts and expenditures are necessary to establish and increase market share and, ultimately, to grow revenues. If another company offers better products or our product development lags, a competitive position or market window opportunity may be lost, and therefore our revenues or revenue potential may be adversely affected.
If our products are not commercially accepted, our developmental investment will be lost and our future business continuation will be impaired.
There can be no assurance that our research and development will produce commercially viable technologies and products. If existing or new technologies and products are not commercially accepted, the funds expended will not be recoverable, and our competitive and financial position will be adversely affected. In addition, perception of our business prospects will be impaired with an adverse impact on our ability to do business and to attract capital and employees.
If our patents and intellectual property do not provide us with the anticipated market protections and competitive position, our business and prospects will be impaired.
We rely on our intellectual property, including patents and patent applications, to provide competitive advantage and protect us from theft of our intellectual property. We believe that many of our patents are for entirely new technologies. If the patents are not issued or issued patents are later shown not to be as broad as currently believed, or are otherwise challenged such that some or all of the protection is lost, we will suffer adverse effects from the loss of competitive advantage and our ability to offer unique products and technologies. In addition, there would be an adverse impact on our financial condition and business prospects.
If we cannot demonstrate that our technologies and products can compete in the marketplace and are better than current competitive solutions, then we will not be able to generate the sales we need to continue our business and our prospects will be impaired.
We expect to face competition from chip suppliers such as RF MicroDevices, Anadigics, Skyworks, Texas Instruments and Philips, among others. Our technology may also face competition from other emerging approaches or new technological advances which are under development and have not yet emerged. If our technologies and products are not established in the market place as improvements over current, traditional chip solutions in wireless communications, our business prospects and financial condition will be adversely affected.
We believe that we will rely, in large part, on key business and sales relationships for the successful commercialization of our products, which if not developed or maintained, will have an adverse impact on achieving market awareness and acceptance and will result in a loss of business opportunity.
To achieve a wide market awareness and acceptance of our products, as part of our business strategy, we will attempt to enter into a variety of business relationships with other companies which will incorporate our intellectual property into their products and/or market products based on our technologies. Our successful commercialization of our products will depend in part on our ability to meet obligations under contracts with respect to the products and related development requirements. The failure of the business relationships will limit the commercialization of our products which will have an adverse impact on our business development and our ability to generate revenues and recover development expenses.
We are highly dependent on Mr. Jeffrey Parker as our chief executive officer whose services, if lost, would have an adverse impact on our leadership, industry perception, and investor perception about our future.
Because of Mr. Parker’s position in the company and the respect he has garnered in both the industry in which we operate and the investment community, the loss of the services of Mr. Parker might be seen as an impediment to the execution of our business plan. If Mr. Parker were no longer available to the company, investors may experience an adverse impact on their investment. We do not currently have an employment agreement with Mr. Parker. We maintain key-employee life insurance for our benefit on Mr. Parker.
If we are unable to attract highly skilled employees we will not be able to execute our research and development plans or provide the highly technical services that our products require.
Our business is very specialized, and therefore it is dependent on having skilled and specialized employees to conduct our research and development activities, operations, marketing and support. The inability to obtain these kinds of persons will have an adverse impact on our business development because persons will not obtain the information or services expected in the markets and may prevent us from successfully implementing our current business plans.
The outstanding options and warrants may affect the market price and liquidity of the common stock.
At December 31, 2006, we had 23,387,566 shares of common stock outstanding and had 6,752,273 exercisable options and warrants for the purchase of shares of common stock, assuming no terminations or forfeitures of such options and warrants. On December 31, 2007 and 2008, there will be 7,092,118 and 7,436,178 respectively, currently outstanding and exercisable options and warrants (assuming no new grants, terminations or forfeitures). All of the underlying common stock of these securities is or will be registered for sale to the holder or for public resale by the holder. The amount of common stock available for the sales may have an adverse impact on our ability to raise capital and may affect the price and liquidity of the common stock in the public market. In addition, the issuance of these shares of common stock will have a dilutive effect on current stockholders’ ownership.
Provisions in the certificate of incorporation and by-laws could have effects that conflict with the interest of stockholders.
Some provisions in our certificate of incorporation and by-laws could make it more difficult for a third party to acquire control. For example, the board of directors has the ability to issue preferred stock without stockholder approval, and there are pre-notification provisions for director nominations and submissions of proposals from stockholders to a vote by all the stockholders under the by-laws. Florida law also has anti-takeover provisions in its corporate statute.
We have a shareholder protection rights plan that may delay or discourage someone from making an offer to purchase the company without prior consultation with the board of directors and management which may conflict with the interests of some of the stockholders.
On November 17, 2005, the board of directors adopted a shareholder protection rights plan which called for the issuance, on November 29, 2005, as a dividend, rights to acquire fractional shares of preferred stock. The rights are attached to the shares of common stock and transfer with them. In the future the rights may become exchangeable for shares of preferred stock with various provisions that may discourage a takeover bid. Additionally, the rights have what are known as “flip-in” and “flip-over” provisions that could make any acquisition of the company more costly. The principal objective of the plan is to cause someone interested in acquiring the company to negotiate with the board of directors rather than launch an unsolicited bid. This plan may limit, prevent, or discourage a takeover offer that some stockholders may find more advantageous than a negotiated transaction. A negotiated transaction may not be in the best interests of the stockholders.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties
Our headquarters are located in a 14,000 square foot leased facility in Jacksonville, Florida. We have an additional leased facility in Lake Mary, Florida primarily for engineering design activities. We believe our properties are in good condition and suitable for the conduct of our business.
Prior to June 2006, our headquarters and previous manufacturing operations were in a leased facility in Jacksonville, Florida, pursuant to a lease agreement with Jeffrey Parker, our chairman and chief executive officer, and Barbara Parker, a related party. Due to the cessation of our manufacturing activities in 2005, we relocated to a smaller facility in June 2006. We did not incur any losses related to early termination of our lease for that facility.
Refer to “Lease Commitments” in Note 11 to the Consolidated Financial Statements included in Item 8 for information regarding our outstanding lease obligations.
Item 3. Legal Proceedings
We are subject to legal proceedings and claims arising in the ordinary course of business. Based upon the advice of outside legal counsel, we believe that the final disposition of such matters will not have a material adverse effect on our financial position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded under the symbol PRKR on the Nasdaq Global Market ("Nasdaq"), which is the principal market for the common stock. Listed below is the range of the high and low bid prices of the common stock for the last three fiscal years, as reported by Nasdaq. The amounts represent inter-dealer quotations without adjustment for retail markups, markdowns or commissions and do not necessarily represent the prices of actual transactions.
|
2006
|
2005
|
2004
|
||||||||||
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
|||||||
|
1 st
Quarter
|
$10.91
|
$7.61
|
$13.27
|
$6.61
|
$10.09
|
$5.45
|
||||||
|
2 nd
Quarter
|
12.00
|
9.02
|
8.50
|
3.70
|
7.03
|
4.00
|
||||||
|
3 rd
Quarter
|
9.63
|
5.30
|
10.24
|
4.72
|
5.89
|
3.45
|
||||||
|
4 th
Quarter
|
11.98
|
6.53
|
9.50
|
4.85
|
9.20
|
3.89
|
Holders
As of February 28, 2007, there were 171 holders of record. We believe there are approximately 2600 beneficial holders of our common stock.
Dividends
To date, we have not paid any dividends on our common stock. The payment of dividends in the future is at the discretion of the board of directors and will depend upon our ability to generate earnings, our capital requirements and financial condition, and other relevant factors. We do not intend to declare any dividends in the foreseeable future, but instead intend to retain all earnings, if any, for use in the business.
Sales of Unregistered Securities
|
Date
of
sale
|
Title
of security
|
Number
sold
|
Consideration
received and description of underwriting or
other
discounts to market price afforded to purchasers
|
Exemption
from
registration claimed
|
If
option, warrant or
convertible
security, terms
of
exercise or
conversion
|
|
10/2/06
|
Options
to purchase common stock granted to an employee pursuant to the 2000
Plan
|
2,680
|
Option
granted - no consideration received by Company until exercised
|
4(2)
|
Exercisable
for seven years from the grant date at an exercise price of $6.80
per
share.
|
|
10/12/06
|
Options
to purchase common stock granted to officers and management employees
pursuant to the 2000 Plan
|
203,000
|
Options
granted - no
consideration
received by
Company
until exercise
|
4(2)
|
Expire
seven years from date granted, options vest over three years at an
exercise price of $8.81
|
|
10/13/06
to 10/17/06
|
Options
to purchase common stock granted to employees pursuant to the 2000
Plan
|
60,900
|
Options
granted - no
consideration
received by
Company
until exercise
|
4(2)
|
Expire
seven years from date granted, options vest over three years at exercise
prices ranging from $8.68 to $8.73
|
|
11/06
- 12/06
|
Options
to purchase common stock granted to employees pursuant to the 2000
Plan
|
74,550
|
Options
granted - no
consideration
received by
Company
until exercise
|
4(2)
|
Expire
seven years from date granted, options vest over three years at exercise
prices of $9.88 to $10.17
|
|
12/15/06
|
Options
to purchase common stock granted to employee pursuant to the 2000
Plan
|
1,000
|
Options
granted - no
consideration
received by
Company
until exercise
|
4(2)
|
Exercisable
for seven years from the grant date at an exercise price of $9.88
per
share.
|
Issuer Repurchase of Equity Securities.
None.
Performance Graph
The following graph shows a five-year comparison of cumulative total shareholder returns for our company, the Nasdaq U.S. Stock Market Index, the Nasdaq Electronic Components Index and Nasdaq Telecommunications Index for the five years ending December 31, 2006. The total shareholder returns assumes the investment on December 31, 2001 of $100 in our common stock, the Nasdaq U.S. Stock Market Index, the Nasdaq Electronic Components Index, and Nasdaq Telecommunications Index at the beginning of the period, with immediate reinvestment of all dividends.
Item 6. Selected Financial Data
The following table sets forth our consolidated financial data as of the dates and for the periods indicated. The data has been derived from our audited consolidated financial statements. The selected financial data should be read in conjunction with our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The selected financial data for the statements of operations for all prior years has been restated to reflect the effects of discontinued operations.
|
For
the years ended December 31,
|
||||||||||||||||
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
Consolidated
Statement of Operations Data:
|
||||||||||||||||
|
Revenues,
net
|
$
|
0
|
$
|
996
|
$
|
441
|
$
|
23
|
$
|
0
|
||||||
|
Gross
margin
|
0
|
(2,041
|
)
|
(2,854
|
)
|
(7
|
)
|
0
|
||||||||
|
Operating
expenses
|
16,866
|
21,362
|
19,951
|
19,104
|
16,772
|
|||||||||||
|
Interest
and other income
|
1,051
|
304
|
217
|
476
|
905
|
|||||||||||
|
Loss
from continuing o perations
|
(15,815
|
)
|
(23,099
|
)
|
(22,588
|
)
|
(18,635
|
)
|
(15,867
|
)
|
||||||
|
Gain
(loss) from discontinued operations
|
0
|
0
|
7,773
|
(3,380
|
)
|
(1,405
|
)
|
|||||||||
|
Net
loss
|
(15,815
|
)
|
(23,099
|
)
|
(14,815
|
)
|
(22,015
|
)
|
(17,272
|
)
|
||||||
|
Basic
and diluted net loss per common
share
Continuing
operations
|
(0.68
|
)
|
(1.14
|
)
|
(1.25
|
)
|
(1.21
|
)
|
(1.14
|
)
|
||||||
|
Discontinued
operations
|
n/a
|
n/a
|
0.43
|
(0.22
|
)
|
(0.10
|
)
|
|||||||||
|
Total
basic and diluted net loss per
common share
|
(0.68
|
)
|
(1.14
|
)
|
(0.82
|
)
|
(1.43
|
)
|
(1.24
|
)
|
||||||
|
Consolidated
Balance Sheet Data:
|
||||||||||||||||
|
Total
assets
|
$
|
26,675
|
$
|
23,832
|
$
|
28,081
|
$
|
42,483
|
$
|
37,745
|
||||||
|
Shareholders’
equity
|
25,183
|
22,400
|
24,758
|
39,399
|
34,047
|
|||||||||||
|
Working
capital
|
13,313
|
10,833
|
10,471
|
23,225
|
18,992
|
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
We are in the business of designing, developing and marketing our proprietary wireless RF technologies for use in semiconductor circuits for wireless radio applications. Our immediate market focus is on securing licensing agreements for our d2p RF transmit chain technology. Our primary target customers are top tier mobile handset manufacturers and their key semiconductor suppliers. We believe our proprietary wireless technologies embody significant industry advances that can be commercialized in the near term.
We have made significant investments in developing our technologies and products, the returns on which are dependent upon the generation of future revenues for realization. We have not yet generated revenues sufficient to offset our operating expenses and have used the proceeds from the sale of equity securities to fund our operations.
In June 2005, we exited our retail business activities which represented our sole source of revenue from continuing operations. We expect to consummate initial license agreements in early 2007 for the design of our technology into mobile handsets. We intend to continue to use our working capital to support future marketing, sales, research and development and general operations. No assurance can be given that such expenditures will result in revenues, new products, or technological advances or that we have adequate capital to complete our products or gain market acceptance before requiring additional capital.
Critical Accounting Policies
We believe that the following are the critical accounting policies affecting the preparation of our consolidated financial statements:
Use of Estimates in the Preparation of Financial Statements
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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The more significant estimates made by management include the volatility, risk-free interest rate, forfeiture rate and estimate lives of share-based awards used in the calculation of the fair market value of share-based compensation, the assessment of impairment of assets and amortization period for intangible and long-lived assets, and the valuation allowance for deferred taxes. Actual results could differ from the estimates made. Management periodically evaluates estimates used in the preparation of the consolidated financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation.
Accounting for Stock Based Compensation
Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” (“FAS 123R”) which establishes accounting for equity instruments exchanged for employee services. Under the provisions of FAS 123R, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity grant). In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to FAS 123R. We have applied the provisions of SAB 107 in our adoption of FAS 123R.
Prior to January 1, 2006, we accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. We also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”. We elected to adopt the modified prospective transition method as provided by FAS 123R and, accordingly, financial statement amounts for the prior periods have not been retroactively adjusted to reflect the fair value method of expensing share-based compensation. Under the modified prospective method, share-based expense recognized after adoption includes: (a) share-based expense for all awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, as amended by SFAS 148 and (b) share-based expense for all awards granted or modified subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123R. Further, as required under FAS123R, we estimate forfeitures for options granted which are not expected to vest. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our stock-based compensation expense.
In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS No. 123R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, (“FSP FAS 123R-3”). FSP FAS 123R-3 provides a practical exception when a company transitions to the accounting requirements in FAS123R. FAS123R requires a company to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adopting FAS123R (termed the “APIC Pool”), assuming the company had been following the recognition provisions prescribed by SFAS No. 123. We have elected to use the shortcut method under FAP FAS 123R-3 to calculate our APIC Pool.
Impairment of Long Lived Assets
Property and equipment, patents, copyrights and other intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from three to twenty years. Management evaluates the recoverability of long-lived assets periodically and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate impairment exists.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”) and expands disclosure related to the use of fair value measures in financial statements. SFAS 157 does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in GAAP. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We will adopt the provisions of SFAS 157 on January 1, 2008. We have evaluated SFAS 157 and do not anticipate that it will have an impact on our financial statements when adopted.
In September 2006, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on how the effects of the carryover or reversal of prior year financial statement misstatements should be considered in quantifying a current year misstatement. Prior practice allowed the evaluation of materiality on the basis of (1) the error quantified as the amount by which the current year income was misstated (“rollover method”) or (2) the cumulative error quantified as the cumulative amount by which the current year balance sheet was misstated (“iron curtain method”). The guidance provided by SAB 108 requires both methods to be used in evaluating materiality. Immaterial prior year errors may be corrected with the first filing of prior year financial statements after adoption. The cumulative effect of the correction would be reflected in the opening balance sheet with appropriate disclosure of the nature and amount of each individual error corrected in the cumulative adjustment, as well as a disclosure of the cause of the error and that the error had been deemed to be immaterial in the past. SAB 108 is effective for our fiscal year ended December 31, 2006 . We have evaluated SAB 108 and determined that it does not have an impact on our financial statements.
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, “Accounting for Income Taxes.” FIN 48 provides a comprehensive model for how a company should recognize, measure, present and disclose uncertain tax positions that a company has taken or expects to take on a tax return. FIN 48 becomes effective for annual periods beginning after December 15, 2006. We will adopt the provisions of FIN 48 effective January 1, 2007. We are in the process of evaluating the impact of FIN 48 and its impact on our financial statements when adopted.
Results of Operations for Each of the Years Ended December 31, 2006, 2005 and 2004
Exit from Retail Business Activities
In June 2005, we announced our plan to exit our retail business activities and continue our pursuit of an OEM business strategy for commercialization of our proprietary wireless technologies. Our decision to exit the retail activities was precipitated by advances in our wireless technology that generated increased interest from OEM prospects, especially in the mobile handset market. Management determined that the investment required to increase brand awareness, expand product offerings, and expand the distribution channel for retail products would detract from our ability to capitalize on OEM opportunities.
Exiting the retail business resulted in charges to our second quarter 2005 operating results totaling approximately $4.7 million, primarily related to employee severance benefits and the reduction of assets to their expected recovery value. During the second half of 2005, we reclaimed unsold product inventory from the distribution channel, liquidated our raw materials and finished product inventories through wholesale channels and liquidated our manufacturing and prototype facility assets and other property and equipment utilized in the retail business activities. We substantially completed our retail exit activities by the end of 2005.
Revenues
We had no revenues for the year ended December 31, 2006. Revenues for the years ended December 31, 2005 and 2004 included retail product revenue of $995,991 and $190,811, respectively. In addition, revenues for the year ended December 31, 2004 included royalty revenue of $250,000 from a one-time previously deferred royalty payment upon termination of a licensing agreement.
Prior period product revenues represent sales of wireless consumer product through retail channels. The increase in product revenue of $805,180 from 2004 to 2005 was primarily a result of the expansion of our retail distribution channel starting in the third quarter of 2004. At the time of our exit from retail business activities we had products in approximately 300 retail storefronts. Although we exited our retail business activities in June 2005, product revenues from the retail channel continued through the second half of 2005 as retailers continued to sell through discontinued products and we recognized previously deferred revenue based on expiration of retailers rights to return products. At December 31, 2004, we had deferred revenue from product sales in the distribution channel of $407,403.
Revenues for the period ended December 31, 2005 and 2004 were net of an allowance (recovery) for sales returns of $(80,333) and $97,958, respectively. In addition to the reserve for sales returns, gross revenue was reduced for price protection programs, customer rebates and cooperative marketing costs deemed to be sales incentives under Emerging Issues Task Force, (EITF) Issue 01-19, to derive net revenue. For the years ended December 31, 2005 and 2004, net revenue was reduced for cooperative marketing costs in the amount of $29,932 and $233,201, respectively.
Our generation of future revenues is dependent upon our ability to successfully consummate relationships with OEMs for integration of our technology into widely deployed products that are manufactured by others. To date, we do not have any OEM contracts for our technology. We anticipate consummating initial licensing agreements for our technology in the near term. We expect that revenues from these agreements will include up-front technology access fees, non-recurring engineering fees for design support services, and ultimately royalty revenues on a per unit sold basis. Based on the design cycle in the mobile handset market, we anticipate that royalty revenues will not be recognized within the first twelve months following the initial customer agreement. As such, we do not anticipate that revenues in 2007 will be sufficient to offset our operating expenses.
Gross Margin
The gross margins for products and royalties for the years ended December 31, 2005 and 2004 were as follows:
|
2005
|
|
2004
|
|||||
|
Products
|
$
|
(2,040,823
|
)
|
$
|
(3,103,900
|
)
|
|
|
Royalties
|
0
|
250,000
|
|||||
|
Total
|
$
|
(2,040,823
|
)
|
$
|
(2,853,900
|
)
|
Our product margin in 2005 reflects a write down of inventory to net realizable value in the amount of $2,250,586. This write down was a result of our exit from retail activities in the second quarter of 2005, resulting in a mark down of remaining product inventory to estimated wholesale values.
Our product margin in 2004 reflects a write down of inventory to net realizable value in the amount of $2,768,854. This write down was triggered by a significant price decrease on our wireless networking product line in the fourth quarter of 2004, along with the high carrying costs of initial production inventory.
The margin recognized on royalty revenues in 2004 was due to the recognition of a one-time, previously deferred prepaid royalty in connection with the termination of a licensing agreement.
Research and Development Expenses
Our research and development expenses decreased by $763,111 or 7%, from $10,284,305 in 2005 to $9,521,194 in 2006. Our research and development expenses decreased by $1,138,396 or 10%, from $11,422,701 in 2004 to $10,284,305 in 2005.
The decrease in research and development expenses from 2005 to 2006 was primarily due to cost reductions following the June 2005 retail exit including a reduction in retail product development personnel and related costs of approximately $1,800,000 and a reduction in depreciation and amortization of retail related assets of approximately $900,000. These decreases were offset by increases in expenses for the use of outside design firms of approximately $1,000,000, increases in employee stock compensation expense due the adoption of “FAS123R” of approximately $700,000, and increases in prototype costs of approximately $220,000 stemming from increases in the number of prototype chip production runs.
The decrease in research and development expenses from 2004 to 2005 was primarily due to the reduction of personnel and third party development fees of approximately $750,000, a reduction in depreciation and amortization expense of approximately $570,000, and a reduction in outside prototype costs, including foundry costs, of approximately $320,000. These reductions were somewhat offset by increases in maintenance costs for software development tools of approximately $200,000, increases in professional fees related to patents of approximately $160,000, and an increase in overhead and other costs related to utilizing our manufacturing facility in the first half of 2005 for prototypes of approximately $230,000. The decreases in personnel, third party development fees, amortization expense and prototype expenses resulted from our exit from retail activities in June 2005. The decreases in foundry costs are, in part, due to utilization of shared foundry services as opposed to dedicated foundry runs which cost three to four times more per run.
The markets for our products and technologies are characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. Our ability to successfully develop and introduce, on a timely basis, new and enhanced products and technologies will be a significant factor in our ability to grow and remain competitive. Although the percentage of revenues invested in our research and development programs may vary from period to period, we are committed to continue investing in our technology development. We anticipate that we will use a substantial portion of our working capital for research and development activities in 2007.
We anticipate that the consummation of initial customer relationships in 2007 may result in increased development expenses; however, we believe that some or all of such increases may be offset by non-recurring engineering fees paid to us by customers.
Marketing and Selling Expenses
Marketing and selling expenses decreased by $1,023,360 or 33%, from $3,141,187 in 2005 to $2,117,827 in 2006. Marketing and selling expenses increased by $656,998 or 26%, from $2,484,189 in 2004 to $3,141,187 in 2005.
The decrease in marketing and selling expenses from 2005 to 2006 was primarily due to cost reductions in personnel and related costs of approximately $670,000 and reduced retail promotional costs of approximately $540,000 following the June 2005 exit from retail. These costs reductions were partially offset by an increase in employee stock compensation expense of approximately $320,000 following the adoption of “FAS123R.”
The increase in marketing and selling expenses from 2004 to 2005 was primarily due to an increase of approximately $890,000 in payroll and related costs for increases in sales and marketing personnel, offset by a decrease of approximately $350,000 in costs related to marketing promotional activities. The increase in payroll and related costs was due to increases in sales and marketing personnel late in 2004 and early in 2005 primarily related to the retail business, as well as the severance costs for retail related employees upon the exit from retail activities in June 2005. The decrease in overall promotional costs from 2004 to 2005 was due to market launch expenses incurred in the second half of 2004 upon expansion of the retail channel, as well as the cessation of retail marketing activities in June 2005.
We are committed to continuing our investment in marketing and selling efforts in order to continue to increase market awareness and penetration of our products and technologies.
General and Administrative Expenses
General and administrative expenses consist primarily of executive, finance and administrative personnel costs and costs incurred for insurance, shareholder relations and outside professional services. Our general and administrative expenses decreased by $805,144 or 13%, from $6,037,796 in 2005 to $5,232,652 in 2006. Our general and administrative expenses decreased by $6,665, or less than 1%, from $6,044,461 in 2004 to $6,037,796 in 2005.
The reduction in general and administrative costs from 2005 to 2006 is due to a reduction in personnel costs of approximately $470,000 stemming from staff reductions as well as the movement of certain senior management personnel to different areas of supervision. We had a reduction in bad debt expense of approximately $140,000 following the exit from retail, a reduction in share-based consulting fees of approximately $680,000, and a reduction in professional fees of approximately $310,000 from both legal and accounting fees. These reductions were partially offset by increases in employee and director stock compensation expense of approximately $860,000 following the adoption of “FAS123R.”
From 2004 to 2005, the decrease in general and administrative expenses is due to a decrease in payroll and related costs of approximately $320,000 and decreases in corporate insurance costs of approximately $200,000, offset by increases in board expenses and outside professional fees of approximately $360,000 and increases in bad debt expenses of approximately $120,000.
Impairment Loss and Loss on Disposal of Equipment
For 2006, we recognized a gain of $5,191 on the disposal of assets.
For 2005, we recognized impairment charges on certain long-lived assets related to the exit of our retail activities. These charges include impairment of prepaid license fees of approximately $662,000, impairment of other intangible assets of approximately $584,000 and impairment of fixed assets, primarily the manufacturing and prototype facility assets, of approximately $626,000. Additionally, an aggregate loss of $27,000 was recognized on the disposal of equipment in the normal course of business.
For 2004, there were no impairment charges or losses on disposal of equipment.
Interest Income and Other
Interest income and other consist of interest earned on our investments, net gains recognized on the sale of investments, and other miscellaneous income and expense. Interest income and other was $1,050,824, $303,729, and $217,382, for the years ended December 31, 2006, 2005, and 2004, respectively.
The increase of $747,095 from 2005 to 2006 is primarily due to higher interest rates and higher average cash balances in 2006.
The increase of approximately $86,347 from 2004 to 2005 was primarily due to an increase in interest earned from the proceeds of the private placement in the first quarter of 2005.
Discontinued Operations
On May 14, 2004, we completed the sale of certain designated assets of our video division to Thomson Broadcast & Media Solutions, Inc. and Thomson Licensing, SA (collectively referred to as “Thomson”). The prior years’ operating activities for the video business unit have been reclassified to “Gain from discontinued operations” in the accompanying Statements of Operations.
Net gain from discontinued operations for the year ended December 31, 2004 includes the following components:
|
2004
|
||||
|
Net
revenues
|
$
|
1,507,955
|
||
|
Cost
of goods sold and operating
expenses
|
4 |