form_10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
AND EXCHANGE ACT OF 1934
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For
the quarterly period ended June 30, 2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
AND EXCHANGE ACT OF 1934
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For
the transition period from
to
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Commission
file number: 000-31121
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AVISTAR
COMMUNICATIONS CORPORATION
(Exact
name of registrant as specified in its charter)
DELAWARE
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88-0463156
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(State
or other jurisdiction
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(I.R.S.
Employer Identification Number)
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of
incorporation or organization)
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1875 SOUTH GRANT STREET,
10 TH FLOOR, SAN MATEO, CA
94402
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(Address
of Principal Executive Office) (Zip Code)
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Registrant’s
telephone number, including area code: (650)
525-3300
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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 and Exchange Act of 1934
during the preceding 12 months (or for 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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer,” “large accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (check
one):
Large accelerated filer
o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company x
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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
At
July 17, 2008, 34,547,139 shares of common stock of the Registrant were
outstanding.
AVISTAR
COMMUNICATIONS CORPORATION
INDEX
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Item
3.
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Intentionally
Omitted
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`PART I - FINANCIAL
INFORMATION
Item 1. Financial
Statements
AVISTAR
COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
as
of June 30, 2008 and December 31, 2007
(in
thousands, except share and per share data)
|
|
June 30,
2008
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|
|
December 31,
2007
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|
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(unaudited)
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Assets:
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|
|
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Current
assets:
|
|
|
|
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Cash
and cash equivalents
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|
$ |
5,747 |
|
|
$ |
4,077 |
|
Short-term
investments
|
|
|
— |
|
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|
799 |
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Total
cash, cash equivalents and short-term investments
|
|
|
5,747 |
|
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|
4,876 |
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Accounts
receivable, net of allowance for doubtful accounts of $21 and $24 at June
30, 2008 and December 31, 2007, respectively
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|
1,115 |
|
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|
1,385 |
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Inventories
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|
458 |
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|
428 |
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Deferred
settlement and patent licensing costs
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|
1,256 |
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|
|
1,256 |
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Prepaid
expenses and other current assets
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|
394 |
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462 |
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Total
current assets
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8,970 |
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|
8,407 |
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Property
and equipment, net
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526 |
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|
767 |
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Long-term
deferred settlement and patent licensing costs
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481 |
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|
1,117 |
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Other
assets
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205 |
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|
286 |
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Total
assets
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$ |
10,182 |
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$ |
10,577 |
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Liabilities
and Stockholders’ Equity (Deficit):
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Current
liabilities:
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Line
of credit
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$ |
7,000 |
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$ |
5,100 |
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Accounts
payable
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|
|
581 |
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1,287 |
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Deferred
income from settlement and patent licensing
|
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|
5,520 |
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|
5,520 |
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Deferred
services revenue and customer deposits
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|
1,302 |
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|
2,231 |
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Accrued
liabilities and other
|
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1,591 |
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1,451 |
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Total
current liabilities
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15,994 |
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15,589 |
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Long-term
liabilities:
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Long-term
convertible debt
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7,000 |
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— |
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Long-term
deferred income from settlement and patent licensing
|
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1,987 |
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4,814 |
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Total
liabilities
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24,981 |
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20,403 |
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Commitments
and contingencies (Note 9)
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Stockholders’
equity (deficit):
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Common
stock, $0.001 par value; 250,000,000 shares authorized at June 30,
2008 and December 31, 2007; 35,730,014 and 35,678,807 shares issued
including treasury shares at June 30, 2008 and December 31, 2007,
respectively
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36 |
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36 |
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Less:
treasury common stock, 1,182,875 shares at June 30, 2008 and
December 31, 2007, at cost
|
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(53
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) |
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(53
|
) |
Additional
paid-in-capital
|
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96,331 |
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95,925 |
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Accumulated
deficit
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(111,113
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) |
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(105,734
|
) |
Total
stockholders’ equity (deficit)
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(14,799
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) |
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(9,826
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) |
Total
liabilities and stockholders’ equity (deficit)
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$ |
10,182 |
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$ |
10,577 |
|
The
accompanying notes are an integral part of these financial
statements.
AVISTAR
COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
for
the three and six months ended June 30, 2008 and 2007
(in
thousands, except per share data)
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Three
Months Ended
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Six
Months Ended
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June
30,
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June
30,
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June
30,
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June
30,
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2008
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2007
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2008
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2007
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(unaudited)
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(unaudited)
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Revenue:
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Product
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$ |
553 |
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$ |
704 |
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$ |
802 |
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$ |
1,962 |
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Licensing
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153 |
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4,321 |
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307 |
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4,553 |
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Services,
maintenance and support
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1,084 |
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873 |
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1,832 |
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1,775 |
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Total
revenue
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|
1,790 |
|
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|
5,898 |
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|
2,941 |
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|
8,290 |
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Costs
and Expenses:
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Cost
of product revenue*
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|
565 |
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|
711 |
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|
924 |
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|
1,440 |
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Cost
of services, maintenance and support revenue*
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|
603 |
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|
571 |
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|
1,122 |
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|
1,247 |
|
Income
from settlement and patent licensing
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(1,057
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) |
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(1,057
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) |
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(2,114
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) |
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(14,114
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) |
Research
and development*
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|
959 |
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1,840 |
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2,810 |
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3,497 |
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Sales
and marketing*
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|
789 |
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1,547 |
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2,118 |
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3,036 |
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General
and administrative*
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1,436 |
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1,948 |
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3,314 |
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8,411 |
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Total
costs and expenses
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3,295 |
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5,560 |
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8,174 |
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3,517 |
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(Loss)
income from operations
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(1,505
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) |
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338 |
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(5,233
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) |
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4,773 |
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Other
(Expense) income:
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Interest
income
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21 |
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101 |
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67 |
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214 |
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Other
(expense) income, net
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(128
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) |
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(51
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) |
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(213
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) |
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(106
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) |
Total
other (expense) income, net
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(107
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) |
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50 |
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(146
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) |
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|
108 |
|
Net
(loss) income
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$ |
(1,612 |
) |
|
$ |
388 |
|
|
$ |
(5,379 |
) |
|
$ |
4,881 |
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Net
(loss) income per share - basic and diluted
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$ |
(0.05 |
) |
|
$ |
0.01 |
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$ |
(0.16 |
) |
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$ |
0.14 |
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Weighted
Average Shares Used in Calculating:
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Basic
net (loss) income per share
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34,547 |
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|
34,230 |
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|
34,538 |
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|
34,166 |
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Diluted
net (loss) income per share
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34,547 |
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|
35,008 |
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34,538 |
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35,072 |
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*Including
Stock Based Compensation of:
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Cost
of product, services, maintenance and support revenue
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$ |
19 |
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$ |
53 |
|
|
$ |
26 |
|
|
$ |
113 |
|
Research
and development
|
|
|
88 |
|
|
|
180 |
|
|
|
151 |
|
|
|
384 |
|
Sales
and marketing
|
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|
(60
|
) |
|
|
108 |
|
|
|
(96
|
) |
|
|
293 |
|
General
and administrative
|
|
|
156 |
|
|
|
235 |
|
|
|
269 |
|
|
|
468 |
|
The
accompanying notes are an integral part of these financial
statements.
AVISTAR
COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
for
the six months ended June 30, 2008 and 2007
(in
thousands)
|
|
Six Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
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Net
(loss) income
|
|
$ |
(5,379 |
) |
|
$ |
4,881 |
|
Adjustments
to reconcile net (loss) income to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
268 |
|
|
|
148 |
|
Stock
based compensation for options issued to consultants and
employees
|
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|
350 |
|
|
|
1,258 |
|
Provision
for doubtful accounts
|
|
|
(3
|
) |
|
|
2 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
273 |
|
|
|
305 |
|
Inventories
|
|
|
(30
|
) |
|
|
153 |
|
Prepaid
expenses and other current assets
|
|
|
68 |
|
|
|
81 |
|
Deferred
settlement and patent licensing costs
|
|
|
636 |
|
|
|
637 |
|
Other
assets
|
|
|
81 |
|
|
|
(2
|
) |
Accounts
payable
|
|
|
(706
|
) |
|
|
(440
|
) |
Deferred
income from settlement and patent licensing and other
|
|
|
(2,827
|
) |
|
|
(2,744
|
) |
Deferred
services revenue and customer deposits
|
|
|
(929
|
) |
|
|
(1,118
|
) |
Accrued
liabilities and other
|
|
|
140 |
|
|
|
(698
|
) |
Net
cash (used in) provided by operating activities
|
|
|
(8,058
|
) |
|
|
2,463 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Maturities
of short-term investments
|
|
|
799 |
|
|
|
— |
|
Sale
of property and equipment
|
|
|
8 |
|
|
|
— |
|
Purchase
of property and equipment
|
|
|
(35
|
) |
|
|
(475
|
) |
Net
cash provided by (used in) investing activities
|
|
|
772 |
|
|
|
(475
|
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Line
of credit payments
|
|
|
(5,100
|
) |
|
|
— |
|
Borrowings
on line of credit
|
|
|
7,000 |
|
|
|
— |
|
Proceeds
from debt issuance
|
|
|
7,000 |
|
|
|
— |
|
Net
proceeds from issuance of common stock
|
|
|
56 |
|
|
|
296 |
|
Net
cash provided by financing activities
|
|
|
8,956 |
|
|
|
296 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
1,670 |
|
|
|
2,284 |
|
Cash
and cash equivalents, beginning of period
|
|
|
4,077 |
|
|
|
7,854 |
|
Cash
and cash equivalents, end of period
|
|
$ |
5,747 |
|
|
$ |
10,138 |
|
The
accompanying notes are an integral part of these financial
statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
Business, Basis of Presentation, and Risks and Uncertainties
Business
We were
founded as a Nevada limited partnership in 1993. We filed our articles of
incorporation in Nevada in December 1997 under the name Avistar Systems
Corporation. We reincorporated in Delaware in March 2000 and changed our
name to Avistar Communications Corporation in April 2000. The operating
assets and liabilities of the business were then contributed to our wholly owned
subsidiary, Avistar Systems Corporation, a Delaware corporation. In
July 2001, our Board of Directors and the Board of Directors of Avistar
Systems approved the merger of Avistar Systems with and into Avistar
Communications Corporation (Avistar or the Company). The merger was completed in
July 2001. In October 2007, the Company merged Collaboration Properties,
Inc., the Company's wholly-owned subsidiary, with and into the Company, with the
Company being the surviving corporation. Avistar has one wholly-owned
subsidiary, Avistar Systems U.K. Limited (ASUK).
Our principal executive office is located at 1875 South Grant Street, 10th
Floor, San Mateo, California, 94402. Our telephone number is (650) 525-3300. Our
trademarks include Avistar and the Avistar logo, AvistarVOS, Shareboard, vBrief
and The Enterprise Video Company. This Quarterly Report on Form 10-Q also
includes our and other organizations’ product names, trade names and trademarks.
Our corporate website is www.avistar.com.
Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to reports filed pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of 1934,
as amended (Exchange Act), are available free of charge on our website when such
reports are available on the U.S. Securities and Exchange Commission
(SEC) website (see “Company—Investor Relations—SEC Information”). The
public may read and copy any materials filed by us with the SEC at the SEC’s
Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
The public may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet
site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at
http://www.sec.gov. The contents of these websites are not incorporated into
this filing.
Basis
of Presentation
The unaudited condensed consolidated
balance sheet as of June 30, 2008, the unaudited condensed consolidated
results of operations for the three and six months ended June 30, 2008 and 2007
and the unaudited condensed consolidated cash flows for the six months ended
June 30, 2008 and 2007 present the consolidated financial position of Avistar
and ASUK after the elimination of all intercompany accounts and transactions.
The unaudited condensed consolidated balance sheet of Avistar as of December 31,
2007 was derived from audited financial statements, but does not contain all
disclosures required by accounting principles generally accepted in the United
States of America, and certain information and footnote disclosures normally
included have been condensed or omitted pursuant to the rules and regulations of
the SEC. The consolidated results are referred to, collectively, as those
of Avistar or the Company in these notes.
The
functional currency of ASUK is the United States dollar. All gains and losses
resulting from transactions denominated in currencies other than the United
States dollar are included in the statements of operations and have not been
material.
The
Company’s fiscal year end is December 31.
Risks
and Uncertainties
The
markets for the Company’s products and services are in the early stages of
development. Some of the Company’s products utilize changing and emerging
technologies. As is typical in industries of this nature, demand and market
acceptance are subject to a high level of uncertainty, particularly when there
are adverse conditions in the economy. Acceptance of the Company’s products,
over time, is critical to the Company’s success. The Company’s prospects must be
evaluated in light of difficulties encountered by it and its competitors in
further developing this evolving marketplace. The Company has generated annual
losses since inception and had an accumulated deficit of $111 million as of
June 30, 2008. The Company’s operating results may fluctuate significantly
in the future as a result of a variety of factors, including, but not limited
to, the economic environment, the adoption of different distribution channels,
the timing of new product announcements by the Company or its competitors, and
the timing of the Company’s licensing and settlement activities.
The
Company’s future liquidity and capital requirements will depend upon numerous
factors, including, but not limited to, the costs and timing of its expansion of
product development efforts and the success of these development efforts, the
costs and timing of its sales and marketing activities, the extent to which its
existing and new products gain market acceptance, competing technological and
market developments, the costs involved in maintaining, enforcing and defending
patent claims and other intellectual property rights, the level and timing of
revenue, and other factors.
2.
Summary of Significant Accounting Policies
Unaudited
Interim Financial Information
The
financial statements filed in this report have been prepared by the Company,
without audit, pursuant to the rules and regulations of the SEC. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations.
In the
opinion of management, the unaudited financial statements furnished in this
report reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the results of operations for the interim
periods covered and of the Company’s financial position as of the interim
balance sheet date. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year. These financial
statements should be read in conjunction with the Company’s audited consolidated
financial statements and the accompanying notes for the year ended
December 31, 2007, included in the Company’s annual report on Form 10-K
filed with the SEC on March 31, 2008.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the period. Actual results could differ
from those estimates.
Cash
and Cash Equivalents and Short and Long-term Investments
The
Company considers all investment instruments purchased with an
original maturity of three months or less to be cash equivalents.
Investment securities with original or remaining maturities of more than three
months but less than one year are considered short-term investments. Auction
rate securities with original or remaining maturities of more than three months
are considered short-term investments even if they are subject to re-pricing
within three months. The Company was not invested in any auction rate securities
on June 30, 2008. Investment securities held with intent to reinvest or hold for
longer than a year, or with remaining maturities of one year or more, are
considered long-term investments. The Company’s cash equivalents at June 30,
2008 and December 31, 2007 consisted of money market funds and short-term
commercial paper with original maturities of three months or less, and are
therefore classified as cash and cash equivalents in the accompanying balance
sheets.
The
Company accounts for its short-term and long-term investments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments
in Debt and Equity Securities. The Company’s short and long-term
investments in securities are classified as available-for-sale and are reported
at fair value, with unrealized gains and losses, net of tax, recorded in other
comprehensive income (loss). Realized gains or losses and declines in value
judged to be other than temporary, if any, on available-for-sale securities are
reported in other income, net. The Company reviews the securities for
impairments, considering current factors including the economic environment,
market conditions, and the operational performance and other specific factors
relating to the businesses underlying the securities. The Company records
impairment charges equal to the amount that the carrying value of its
available-for-sale securities exceeds the estimated fair market value of the
securities as of the evaluation date. The fair value for publicly held
securities is determined based on quoted market prices as of the evaluation
date. In computing realized gains and losses on available-for-sale securities,
the Company determines cost based on amounts paid, including direct costs such
as commissions to acquire the security using the specific identification method.
The Company did not have any short or long-term investments at June 30, 2008.
The Company had no net unrealized losses on its short-term investment securities
at December 31, 2007.
See Note
3 for further information on fair value.
Cash,
cash equivalents and short-term investments consisted of the following at June
30, 2008 and December 31, 2007 (in thousands):
|
|
June
30, 2008
|
|
December 31,
2007
|
|
|
|
(Unaudited)
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
Cash
and money market funds
|
|
$
|
749
|
|
$
|
740
|
|
Commercial
paper cash equivalents
|
|
4,998
|
|
3,337
|
|
Total
cash and cash equivalents
|
|
5,747
|
|
4,077
|
|
Short-term
investments:
|
|
|
|
|
|
Short-term
investments (average 27 remaining days to maturity on December 31,
2007)
|
|
—
|
|
799
|
|
Total
cash, cash equivalents and short-term investments
|
|
$
|
5,747
|
|
$
|
4,876
|
|
Significant
Concentrations
A
relatively small number of customers accounted for a significant percentage of
the Company’s revenues for the three and six months ended June 30, 2008 and
2007. Revenues to these customers as a percentage of total revenues were as
follows for the three and six months ended June 30, 2008 and 2007:
|
|
Three Months Ended June
30,
|
|
Six Months Ended June
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Customer
A
|
|
*%
|
|
68%
|
|
*%
|
|
48%
|
|
Customer
B
|
|
14%
|
|
11%
|
|
17%
|
|
16%
|
|
Customer
C
|
|
69%
|
|
10%
|
|
63%
|
|
16%
|
|
Customer
D
|
|
*%
|
|
*%
|
|
10%
|
|
*%
|
|
* Less than 10%
Any
change in the relationship with these customers could have a potentially adverse
effect on the Company’s financial position.
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of temporary cash investments and trade receivables. The
Company has cash and investment policies that limit the amount of credit
exposure to any one financial institution or restrict placement of these
investments to financial institutions evaluated as highly credit worthy. As of
June 30, 2008, the Company had cash and cash equivalents on deposit with a major
financial institution that were in excess of FDIC insured limits. Historically,
the Company has not experienced any loss of its cash and cash equivalents due to
such concentration of credit risk. Concentrations of credit risk with respect to
trade receivables relate to those trade receivables from both United States and
foreign entities, primarily in the financial services industry. As of
June 30, 2008, approximately 86% of gross accounts receivable were
concentrated with two customers, each of whom represented more than 10% of the
Company’s total gross accounts receivable balance. As of December 31, 2007,
approximately 78% of accounts receivable were concentrated with three customers,
each of whom represented more than 10% of the Company’s total gross accounts
receivable balance. No other customer individually accounted for greater than
10% of total accounts receivable as of June 30, 2008 and December 31,
2007.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out method) or market. When
required, provisions are made to reduce excess and obsolete inventories to their
estimated net realizable value. Inventories consisted of the following (in
thousands):
|
|
June
30, 2008
|
|
December 31,
2007
|
|
|
|
(Unaudited)
|
|
Raw
materials and subassemblies
|
|
$
|
21
|
|
$
|
25
|
|
Finished
goods
|
|
437
|
|
403
|
|
Total
Inventories
|
|
$
|
458
|
|
$
|
428
|
|
Revenue
Recognition and Deferred Revenue
The Company recognizes product and services revenue in accordance with Statement
of Position (SOP) 97-2, Software Revenue Recognition
(SOP 97-2), as amended by SOP 98-9, Modification of
SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions
(SOP 98-9). The Company derives product revenue from the sale and
licensing of a set of desktop (endpoint) products (hardware and software) and
infrastructure products (hardware and software) that combine to form an Avistar
video-enabled collaboration solution. Services revenue includes revenue from
installation services, post-contract customer support, training and software
development. The installation services that the Company offers to customers
relate to the physical set-up and configuration of desktop and infrastructure
components of the Company’s solution. The fair value of all product,
installation services, post-contract customer support and training offered to
customers is determined based on the price charged when such products or
services are sold separately.
Arrangements
that include multiple product and service elements may include software and
hardware products, as well as installation services, post-contract customer
support and training. Pursuant to SOP 97-2, the Company recognizes revenue
when all of the following criteria are met: (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed
or determinable, and (iv) collectibility is probable. The Company applies
these criteria as discussed below:
|
·
|
Persuasive evidence of an
arrangement exists. The Company requires a written contract, signed
by both the customer and the Company, or a purchase order from those
customers that have previously negotiated a standard end-user license
arrangement or volume purchase agreement, prior to recognizing revenue on
an arrangement.
|
|
·
|
Delivery has occurred.
The Company delivers software and hardware to customers physically. The
standard delivery terms are FOB shipping
point.
|
|
·
|
The fee is fixed or
determinable. The Company’s determination that an arrangement fee
is fixed or determinable depends principally on the arrangement’s payment
terms. The Company’s standard terms generally require payment within 30 to
90 days of the date of invoice. Where these terms apply, the Company
regards the fee as fixed or determinable, and recognizes revenue upon
delivery (assuming other revenue recognition criteria are met). If the
payment terms do not meet this standard, but rather, involve “extended
payment terms,” the fee may not be considered to be fixed or determinable,
and the revenue would then be recognized when customer installments are
due and payable.
|
|
·
|
Collectibility is
probable. To recognize revenue, the Company judges collectibility
of the arrangement fees on a customer-by-customer basis pursuant to a
credit review policy. The Company typically sells to customers with which
it has had a history of successful collections. For new customers, the
Company evaluates the customer’s financial position and ability to pay. If
the Company determines that collectibility is not probable based upon the
credit review process or the customer’s payment history, revenue is
recognized when cash is collected.
|
If there are any undelivered elements, the Company defers revenue for those
elements, as long as Vendor Specific Objective Evidence (VSOE) exists for the
undelivered elements. Additionally, per paragraph 14 of SOP 97-2, when the
Company provides installation services, the product and installation revenue is
recognized upon completion of the installation process and receipt of customer
confirmation, subject to the satisfaction of the revenue recognition criteria
described above. The Company believes that the fee associated with the delivered
product elements does not meet the collectibility criteria if the installation
services have not been completed. Customer confirmation is obtained and
documented by means of a standard form indicating the installation services have
been provided and the hardware and software components installed. When the
customer or a third party provides installation services, the product revenue is
recognized upon shipment, subject to satisfaction of the revenue recognition
criteria described above.
Payment for product is due upon shipment, subject to specific payment terms.
Payment for installation and professional services is due upon providing the
services, subject to specific payment terms. Reimbursements received for
out-of-pocket expenses incurred during installation and support services and
shipping costs, which have not been significant to date, are recognized as
revenue in accordance with Emerging Issues Task Force (EITF) Issue
No. 01-14 (EITF 01-14), Income Statement Characterization of Reimbursements
Received for “Out of Pocket” Expenses Incurred.
The price charged for maintenance and/or support is defined in the contract, and
is based on a fixed price for both hardware and software components as
stipulated in the customer agreement. Customers have the option to renew the
maintenance and/or support arrangement in subsequent periods at the same or
similar rate as paid in the initial year subject to contractual adjustments for
inflation in some cases. Revenue from maintenance and support services is
deferred and recognized pro-rata over the maintenance and/or support term, which
is typically one year in length. Payments for services made in advance of the
provision of services are recorded as deferred revenue and customer deposits in
the accompanying balance sheets. Training services are offered independently of
the purchase of product. The value of these training services is determined
based on the price charged when such services are sold separately. Training
revenue is recognized upon performance of the service.
The Company recognizes service revenue from software development contracts in
accordance with SOP 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. Revenue related to contracts for software
development is recognized using the percentage of completion method, when all of
the following conditions are met: a contract exists with the customer at a fixed
price, the Company has fulfilled all of its material contractual obligations to
the customer for each deliverable of the contract, verification of completion of
the deliverable has been received, and collection of the receivable is probable.
The amounts billed to customers in excess of revenues recognized to date are
deferred and recorded as deferred revenue and customer deposits in the
accompanying balance sheets. Assumptions used for recording revenue and earnings
are adjusted in the period of change to reflect revisions in contract value and
estimated costs to complete the contract. Any anticipated losses on contracts in
progress are charged to earnings when identified.
The Company recognizes revenue from the licensing of its intellectual property
portfolio according to SOP 97-2, based on the terms of the royalty,
partnership and cross-licensing agreements involved. In the event that a license
to the Company’s intellectual property is granted after the commencement of
litigation proceedings between the Company and the licensee, the proceeds of
such transaction are recognized as licensing revenue only if sufficient
historical evidence exists for the determination of fair value of the licensed
patents to support the segregation of the proceeds between a gain on litigation
settlement and patent license revenues consistent with Financial Accounting
Standards Board (FASB) Concepts Statement No. 6, Elements of Financial
Statements (CON 6). As of June 30, 2008, these criteria for
recognizing license revenue following the commencement of litigation had not
been met.
In July 2006, Avistar entered into a Patent License Agreement with Sony
Corporation (Sony) and Sony Computer Entertainment, Inc. (SCEI). Under the
license agreement, Avistar granted Sony and its subsidiaries, including SCEI, a
license to all of the Company’s patents with a filing date on or before
January 1, 2006 for a specific field of use relating to video conferencing.
The license covers Sony’s video conferencing apparatus as well as other
products, including video-enabled personal computer products and certain SCEI
PlayStation products. Future royalties under this license are being recognized
as estimated royalty-based sales occur in accordance with
SOP 97-2. The Company uses historical and forward looking sales
forecasts provided by SCEI and third party sources, in conjunction with actual
royalty reports provided periodically by SCEI directly to the Company, to
develop an estimate of royalties recognized for each quarterly reporting
period. The royalty reporting directly from SCEI to the Company is
delayed beyond the period in which the actual royalties are generated, and thus
the estimate of current period royalties requires significant management
judgment and is subject to corrections in a future period once actual royalties
become known.
Income
from Settlement and Patent Licensing
The Company recognizes the proceeds from settlement and patent licensing
agreements based on the terms involved. When litigation has been filed prior to
a settlement and patent licensing agreement, and insufficient historical
evidence exists for the determination of fair value of the patents licensed to
support the segregation of the proceeds between a gain on litigation settlement
and patent license revenues, the Company reports all proceeds in “income from
settlement and patent licensing” within operating costs and expenses. The gain
portion of the proceeds, when sufficient historical evidence exists to segregate
the proceeds, would be reported according to SFAS No. 5, Accounting for Contingencies.
When a patent license agreement is entered into prior to the commencement of
litigation, the Company reports the proceeds of such transaction as licensing
revenue in the period in which such proceeds are received, subject to the
revenue recognition criteria described above.
On
November 12, 2004, the Company entered into a settlement and a patent
cross-license agreement with Polycom Inc., thus ending litigation against
Polycom, Inc. for patent infringement. As part of the settlement and patent
cross-license agreement with Polycom, Inc, Avistar granted Polycom, Inc. a
non-exclusive, fully paid-up license to its entire patent portfolio. The
settlement and patent cross-license agreement includes a five-year capture
period from the date of the settlement, adding all new patents with a priority
date extending up to five years from the date of execution of the agreement.
Polycom, Inc, as part of the settlement and patent cross-licensing agreement,
made a one time payment to the Company of $27.5 million and Avistar paid $6.4
million in contingent legal fees to Avistar’s litigation counsel upon completion
of the settlement and patent cross-licensing agreement. The contingent legal
fees were payable only in the event of a favorable outcome from the litigation
with Polycom, Inc. The Company is recognizing the gross proceeds of $27.5
million from the settlement and patent cross-license agreement as income from
settlement and patent licensing within operations over the five-year capture
period, due to a lack of evidence necessary to apportion the proceeds between an
implied punitive gain element in the settlement of the litigation, and software
license revenues from the cross-licensing of Avistar’s patented technologies for
prior and future use by Polycom, Inc. Additionally, the $6.4 million in
contingent legal fees was deferred and is being amortized to income from
settlement and patent licensing over the five year capture period, resulting in
a net of $21.1 million being recognized as income within operations over the
five year capture period.
On February 15, 2007, the Company entered into a Patent License Agreement with
Tandberg ASA, Tandberg Telecom AS and Tandberg, Inc (Tandberg). Under this
agreement, Avistar dismissed its infringement suit against Tandberg, Tandberg
dismissed its infringement suit against us, and we cross-licensed each other’s
patent portfolios. The agreement resulted in a payment of $12.0 million to
us from Tandberg.
Avistar recognized the gross proceeds of $12.0 million from the patent license
agreement as income from settlement and patent licensing within operations in
the three months ended March 31, 2007. To recognize the proceeds as
revenue, the Company would have required a sufficient history of transactions to
allow us to isolate the aspect of the settlement attributable to the gain
associated with the process of litigation, separate from commercial compensation
for the use of our intellectual property. Sufficient evidence was not
available to allow this distinction. The Patent License Agreement with Tandberg
includes a ten year capture period, extending from the date of the agreement,
during which patents filed with a priority date within the capture period would
be licensed in addition to existing patents on the agreement date.
However, such additional patents would be licensed under the agreement solely
for purposes of the manufacture, sale, license or other transfer of existing
products of Tandberg and products that are closely related enhancements of such
products based primarily and substantially on the existing products.
Avistar reviewed the existing products of Tandberg and considered the
likelihood that future patent filings by the Company would relate to or
otherwise affect existing Tandberg products and closely related enhancements
thereto. Avistar concluded that the filing for such additional patents was
unlikely, and therefore concluded that the ten year capture period was not
material from an accounting perspective related to revenue
recognition.
The presentation within operating expenses is supported by a determination that
the transaction is central to the activities that constitute Avistar’s ongoing
major or central operations, but may contain a gain element related to the
settlement, which is not considered as revenue under the FASB CON 6. The Company did not have
sufficient historical evidence to support a reasonable determination of value
for the purposes of segregating the transaction into revenue related to the
patent licensing and an operating or non-operating gain upon settlement of
litigation, resulting in the determination that the entire transaction is more
appropriately classified as “income from settlement and patent licensing” within
operations, as opposed to revenue.
Stock-Based
Compensation
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123
(R), Share-Based
Payment (SFAS 123R), which establishes accounting for
stock-based awards exchanged for employee services. Accordingly, stock-based
compensation cost is measured at grant date, based on the fair value of the
award, and is recognized as expense over the employee’s service period. The
effect of recording stock-based compensation for the three and six months ended
June 30, 2008 and 2007 was as follows (in thousands, except per share
data):
|
|
Three Months Ended June
30,
|
|
Six Months Ended June
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Stock-based
compensation expense by type of award:
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
$
193
|
|
$
503
|
|
$
347
|
|
$
1,139
|
|
Non-employee
stock options
|
|
3
|
|
43
|
|
6
|
|
59
|
|
Employee
stock purchase plan
|
|
7
|
|
30
|
|
(3
|
)
|
60
|
|
Total
stock-based compensation
|
|
203
|
|
576
|
|
350
|
|
1,258
|
|
Tax
effect of stock-based compensation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Net
effect of stock-based compensation on net income (loss)
|
|
$
203
|
|
$
576
|
|
$
350
|
|
$
1,258
|
|
As of
June 30, 2008, the Company had an unrecognized stock-based compensation
balance related to stock options of approximately $6.4 million before
estimated forfeitures. SFAS 123R requires forfeitures to be estimated
at the time of grant and revised if necessary in subsequent periods if actual
forfeitures differ from those estimates. Based on the Company’s historical
experience of option pre-vesting cancellations, the Company has assumed an
annualized forfeiture rate of 13% for its executive options and 31% for
non-executive options. Accordingly, as of June 30, 2008, the Company estimated
that the stock-based compensation for the awards not expected to vest was
approximately $1.8 million, and therefore, the unrecognized stock-based
compensation balance related to stock options was adjusted to approximately $4.6
million after estimated forfeitures. This net amount will be
recognized over an estimated weighted average amortization period of 2.5 years.
During the three months ended June 30, 2008 and 2007, the Company granted
1,904,818 and 1,231,500 stock options with an estimated total grant-date fair
value of $876,000 and $1.8 million, respectively. During the six months ended
June 30, 2008 and 2007, the Company granted 2,403,318 and 1,519,500 stock
options with an estimated total grant-date fair value of $1.2 million and $2.3
million, respectively.
Valuation
Assumptions
The
Company estimated the fair value of stock options granted during the three and
six months ended June 30, 2008 and 2007 using a Black-Scholes-Merton valuation
model, consistent with the provisions of SFAS 123R and SEC Staff Accounting
Bulletin (SAB) No. 107 (SAB 107). The fair value of each option grant is
estimated on the date of grant using the Black-Scholes-Merton option valuation
model and the straight-line attribution approach with the following
weighted-average of the assumptions of both the three and six month periods
ended June 30, 2008 and 2007:
|
Employee Stock Option Plan
|
|
|
Three
and Six Months Ended
|
|
|
|
June
30, 2008
|
|
June
30, 2007
|
|
Expected
dividend
|
|
—
|
%
|
—
%
|
|
Average
risk-free interest rate
|
|
2.3
|
%
|
4.7
%
|
|
Expected
volatility
|
|
114
|
%
|
136
%
|
|
Expected
term (years)
|
|
2.4
|
|
6.1
|
|
|
Employee Stock Purchase Plan
|
|
|
Three
and Six Months Ended
|
|
|
|
June
30, 2008
|
|
June
30, 2007
|
|
Expected
dividend
|
|
—
|
%
|
—
|
%
|
Average
risk-free interest rate
|
|
2.3
|
%
|
5.1
|
%
|
Expected
volatility
|
|
176
|
%
|
96
|
%
|
Expected
term (months)
|
|
6.0
|
|
6.0
|
|
The
dividend yield of zero is based on the fact that the Company has never paid cash
dividends and has no present intention to pay cash dividends. The risk-free
interest rates are taken from the Daily Federal Yield Curve Rates as of the
grant dates as published by the Federal Reserve, and represent the yields on
actively traded treasury securities for terms that approximate the expected term
of the options. Expected volatility is based on the historical volatility of the
Company’s common stock over a period consistent with the expected term of the
stock-option. The expected term calculation is based on an average prescribed by
SAB 107, based on the weighted average of the vesting periods, which is
generally one quarter vesting after one year and one sixteenth vesting quarterly
for twelve quarters, and adding the term of the option, which is generally ten
years, and dividing by two. The Company uses this method because it does not
have sufficient historical exercise data to provide a reasonable basis upon
which to estimate expected term due to the limited number of exercises that have
occurred over the previous eight years during which its equity shares have been
publicly traded. In April 2008, the Company granted 1.9 million options to
employees, with one third vesting after six months and the remaining two thirds
vesting monthly thereafter until the entire grant is fully vested after 20
months. These options have a 3 year contractual term, with the
expected term calculation also based on an average prescribed by SAB
107.
3.
Fair Value Measurement
Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. Fair value is
defined under SFAS 157 as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Valuation techniques used to
measure fair value under FAS 157 must maximize the use of observable inputs and
minimize the use of unobservable inputs. The standard describes a fair value
hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value,
which are the following:
|
Level
1 – Quoted prices in active markets for identical assets or
liabilities.
|
|
Level
2 – Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable, or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
Level
3 – Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
|
In
accordance with FAS 157, the following table represents the Company’s fair value
hierarchy for its financial assets (cash equivalents and available for sale
investments) as of June 30, 2008 (in thousands):
|
|
Fair
Value
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Cash
Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$
84
|
|
$ 84
|
|
|
$
—
|
|
|
$
—
|
|
Commercial
paper
|
|
4,998
|
|
—
|
|
|
4,998
|
|
|
—
|
|
Total
cash equivalents
|
|
$
5,082
|
|
$
84
|
|
|
$
4,998
|
|
|
$
—
|
|
4.
Related Party Transactions
Robert P.
Latta, a member of the law firm Wilson Sonsini Goodrich & Rosati,
Professional Corporation (WSGR), served as a director of the Company from
February 2001 until June 2007. Mr. Latta and WSGR have represented the
Company and its
predecessors as corporate counsel since 1997. During the three and six months
ended June 30, 2007, payments of approximately $29,000, and $86,000 were
made to WSGR for legal services provided to the Company,
respectively.
On
January 4, 2008, Avistar issued $7,000,000 of 4.5% Convertible Subordinated
Secured Notes, which are due in 2010 (the Notes). The Notes were sold pursuant
to a Convertible Note Purchase Agreement to Baldwin Enterprises, Inc., a
subsidiary of Leucadia National Corporation, directors Gerald Burnett, Simon
Moss, R. Stephen Heinrichs, William Campbell, and Craig Heimark, officer Darren
Innes, and WS Investment Company, a fund associated with WSGR.
5. Net (Loss)
Income Per Share
Basic and
diluted net (loss) income per share of common stock is presented in conformity
with SFAS No. 128 (SFAS 128), Earnings Per Share, for all
periods presented.
In
accordance with SFAS 128, basic net (loss) income per share has been computed
using the weighted average number of shares of common stock outstanding during
the period, less shares subject to repurchase. Diluted net (loss) income per
share is computed on the basis of the weighted average number of shares and
potential common shares outstanding during the period. Potential common shares
result from the assumed exercise of outstanding stock options that have a
dilutive effect when applying the treasury stock method. The Company excluded
all outstanding stock options from the calculation of diluted net loss per share
for the three and six months ended June 30, 2008, because all such securities
are anti-dilutive (owing to the fact that the Company was in a loss position
during the time period). Accordingly, diluted net loss per share is equal to
basic net loss per share for the three and six months ended June 30, 2008. For
the three and six months ended June 30, 2007, due to the Company’s net income
for the period, the Company included the net effect of the weighted average
number of shares and dilutive potential common shares outstanding during the
period in the calculation of diluted net income per share.
The
following table set forth the computation of basic and diluted net (loss) income
per share (in thousands, except per share data):
|
|
Three Months Ended June
30,
|
|
Six Months Ended June
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ (1,612
|
)
|
$ 388
|
|
$ (5,379
|
)
|
$ 4,881
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
34,547
|
|
34,230
|
|
34,538
|
|
34,166
|
|
Add:
dilutive employee and non employee stock options
|
|
—
|
|
778
|
|
—
|
|
906
|
|
Diluted
weighted average shares outstanding
|
|
34,547
|
|
35,008
|
|
34,538
|
|
35,072
|
|
Basic
and diluted net income (loss) per share
|
|
$ (0.05
|
)
|
$ 0.01
|
|
$ (0.16
|
)
|
$ 0.14
|
|
Due to
the net loss position in the three months and six months ended June 30, 2008,
the total number of potential common shares excluded from the calculation of
diluted net loss per share for the period was 304,335 and 300,736
respectively.
6.
Income Taxes
Income
taxes are accounted for using an asset and liability approach in accordance with
SFAS No. 109, Accounting for
Income Taxes (SFAS 109), which requires the recognition of taxes payable
or refundable for the current year and deferred tax liabilities and assets for
the future tax consequences of events that have been recognized in the Company’s
financial statements. The measurement of current and deferred tax liabilities
and assets are based on the provisions of enacted tax law. The effects of future
changes in tax laws or rates are not anticipated. The measurement of deferred
tax assets is reduced, if necessary, by the amount of any tax benefits that,
based on available evidence, are not expected to be realized.
Deferred
tax assets and liabilities are determined based on the difference between the
financial statement and the tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are provided if, based upon the weight of
available evidence, it is considered more likely than not that some or all of
the deferred tax assets will not be realized.
The Company accounts for uncertain tax
positions according to the provisions of FASB Financial Accounting Standards
Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48). FIN 48
contains a two-step approach for recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS 109. Tax positions are evaluated
for recognition by determining if the weight of available evidence indicates
that it’s probable that the position will be sustained on audit, including
resolution of related appeals or litigation. Tax benefits are then measured as
the largest amount which is more than 50% likely of being realized upon ultimate
settlement. The Company considers many factors when evaluating and estimating tax positions and tax
benefits, which may require periodic adjustments and which may not accurately
anticipate actual outcomes. No material changes have occurred in the
Company’s tax positions taken as of December 31, 2007 during the six months
ended June 30, 2008.
As of
December 31, 2007, the Company’s unrecognized tax benefits totaled $24.8
million.
7.
Segment Reporting
Disclosure
of segments is presented in accordance with SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information (SFAS 131). SFAS 131 establishes
standards for disclosures regarding operating segments, products and services,
geographic areas and major customers. The Company is organized and operates as
two operating segments: (1) the design, development, manufacturing, sale and
marketing of networked video communications products (products division) and (2)
the prosecution, maintenance, support and licensing of the Company’s
intellectual property and technology, some of which is used in the Company’s
products (intellectual property division). Service revenue relates mainly to the
maintenance, support, training, software development and installation of
products, and is included in the products division for purposes of reporting and
decision-making. The products division also engages in corporate functions, and
provides financing and services to its intellectual property division. The
Company’s chief operating decision-maker, its Chief Executive Officer (CEO),
monitors the Company’s operations based upon the information reflected in the
following table (in thousands). The table includes a reconciliation of the
revenue and expense classification used by the CEO with the revenue,
other income and expenses reported in the Company’s condensed consolidated
financial statements included elsewhere herein. The reconciliation for the
revenue category reflects the fact that the CEO views activity recorded in the
account “income from settlement and patent licensing” as revenue within the
intellectual property division.
|
|
Intellectual
Property Division
|
|
|
Products
Division
|
|
|
Reconciliation
|
|
|
Total
|
|
Three
Months Ended June 30, 2008 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
1,210 |
|
|
$ |
1,637 |
|
|
$ |
(1,057 |
) |
|
$ |
1,790 |
|
Depreciation
expense
|
|
|
— |
|
|
|
(137
|
) |
|
|
— |
|
|
|
(137
|
) |
Total
costs and expenses
|
|
|
(558
|
) |
|
|
(3,794
|
) |
|
|
1,057 |
|
|
|
(3,295
|
) |
Interest
income
|
|
|
— |
|
|
|
21 |
|
|
|
— |
|
|
|
21 |
|
Interest
expense
|
|
|
— |
|
|
|
(128
|
) |
|
|
— |
|
|
|
(128
|
) |
Net
income (loss)
|
|
|
652 |
|
|
|
(2,264
|
) |
|
|
— |
|
|
|
(1,612
|
) |
Assets
|
|
|
2,138 |
|
|
|
8,044 |
|
|
|
— |
|
|
|
10,182 |
|
Three
Months Ended June 30, 2007 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
5,298 |
|
|
$ |
1,657 |
|
|
$ |
(1,057 |
) |
|
$ |
5,898 |
|
Depreciation
expense
|
|
|
— |
|
|
|
(98
|
) |
|
|
— |
|
|
|
(98
|
) |
Total
costs and expenses
|
|
|
(765
|
) |
|
|
(5,852
|
) |
|
|
1,057 |
|
|
|
(5,560
|
) |
Interest
income
|
|
|
— |
|
|
|
101 |
|
|
|
— |
|
|
|
101 |
|
Interest
expense
|
|
|
— |
|
|
|
(51
|
) |
|
|
— |
|
|
|
(51
|
) |
Net
income (loss)
|
|
|
4,533 |
|
|
|
(4,145
|
) |
|
|
— |
|
|
|
388 |
|
Assets
|
|
|
3,624 |
|
|
|
12,510 |
|
|
|
— |
|
|
|
16,134 |
|
Six
Months Ended June 30, 2008 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
2,421 |
|
|
$ |
2,634 |
|
|
$ |
(2,114 |
) |
|
$ |
2,941 |
|
Depreciation
expense
|
|
|
— |
|
|
|
(268
|
) |
|
|
— |
|
|
|
(268
|
) |
Total
costs and expenses
|
|
|
(1,329
|
) |
|
|
(8,959
|
) |
|
|
2,114 |
|
|
|
(8,174
|
) |
Interest
income
|
|
|
— |
|
|
|
67 |
|
|
|
— |
|
|
|
67 |
|
Interest
expense
|
|
|
— |
|
|
|
(213
|
) |
|
|
— |
|
|
|
(213
|
) |
Net
income (loss)
|
|
|
1,092 |
|
|
|
(6,471
|
) |
|
|
— |
|
|
|
(5,379
|
) |
Assets
|
|
|
2,138 |
|
|
|
8,044 |
|
|
|
— |
|
|
|
10,182 |
|
Six
Months Ended June 30, 2007 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
18,587 |
|
|
$ |
3,817 |
|
|
$ |
(14,114 |
) |
|
$ |
8,290 |
|
Depreciation
expense
|
|
|
— |
|
|
|
(148
|
) |
|
|
— |
|
|
|
(148
|
) |
Total
costs and expenses
|
|
|
(5,920
|
) |
|
|
(11,711
|
) |
|
|
14,114 |
|
|
|
(3,517
|
) |
Interest
income
|
|
|
— |
|
|
|
214 |
|
|
|
— |
|
|
|
214 |
|
Interest
expense
|
|
|
— |
|
|
|
(106
|
) |
|
|
— |
|
|
|
(106
|
) |
Net
income (loss)
|
|
|
12,667 |
|
|
|
(7,786
|
) |
|
|
— |
|
|
|
4,881 |
|
Assets
|
|
|
3,624 |
|
|
|
12,510 |
|
|
|
— |
|
|
|
16,134 |
|
International
revenue, which consists of sales to customers with operations principally in
Western Europe and Asia, comprised 52% and 89% of total revenues for the three
months ended June 30, 2008 and 2007, respectively, and 52% and 78% of total
revenues for the six months ended June 30, 2008 and 2007, respectively. For
the three months ended June 30, 2008 and 2007, international revenues from
customers in the United Kingdom accounted for 19% and 74% of total product and
services revenue, respectively, and 24% and 55% for the six months ended June
30, 2008 and 2007, respectively. The Company had no significant long-lived
assets in any country other than in the United States for any period
presented.
8. Notes
Payable
On January 4, 2008, Avistar issued $7,000,000 of 4.5% Convertible Subordinated
Secured Notes (Notes). The Notes were sold pursuant to a Convertible Note
Purchase Agreement to Baldwin Enterprises, Inc., a subsidiary of Leucadia
National Corporation, directors Gerald Burnett, R. Stephen Heinrichs, William
Campbell, Simon Moss and Craig Heimark, officer Darren Innes, and WS Investment
Company (collectively, the Purchasers). The Company’s obligations under the
Notes are secured by the grant of a security interest in substantially all
tangible and intangible assets of the Company pursuant to a Security Agreement
among the Company and the Purchasers. The Notes have a two-year term, will be
due on January 4, 2010 and are convertible prior to
maturity. Interest on the Notes will accrue at the rate of 4.5% per
annum and will be payable semi-annually in arrears on June 4 and December 4 of
each year, commencing on June 4, 2008. From the one-year anniversary
of the issuance of the Notes until maturity, the holders of the Notes will be
entitled to convert the Notes into shares of common stock at an initial
conversion price per share of $0.70.
9. Commitments
and Contingencies
Facilities
leases
The Company leases its facilities under operating leases that expire through
March 2017. In May 2008 and June 2008, the Company subleased some of its
operating facilities in San Mateo, California and New York, New York, and
assigned its primary facility lease in London, United Kingdom. As a result of
these subleases and assignment, the future minimum lease commitments under all
facility leases as of June 30, 2008, net of sublease proceeds, are as
follows (in thousands):
Six
Months Ending December 31,
|
|
|
|
Amount
|
|
2008
|
|
|
$ 328
|
|
|
Year
Ending December 31,
|
|
|
|
|
|
2009
|
|
|
675
|
|
|
2010
|
|
|
687
|
|
|
2011
|
|
|
705
|
|
|
2012
|
|
|
221
|
|
|
thereafter
|
|
|
173
|
|
|
Total
future minimum lease payments
|
|
|
$ 2,789
|
|
|
Software
Indemnifications
Avistar
enters into standard indemnification agreements in the ordinary course of
business. Pursuant to these agreements, Avistar indemnifies, holds harmless, and
agrees to reimburse the indemnified party for losses suffered or incurred by the
indemnified party, generally Avistar’s business partners or customers, in
connection with any patent, copyright or other intellectual property
infringement claim by any third party with respect to its products. The term of
these indemnification agreements is generally perpetual. The maximum potential
amount of future payments Avistar could be required to make under these
indemnification agreements is generally limited to the cost of products
purchased per customer, but may be material when customer purchases since
inception are considered in aggregate. Avistar has never incurred costs to
defend lawsuits or settle claims related to these indemnification agreements.
Accordingly, Avistar has no liabilities recorded for these agreements as of June
30, 2008.
10.
Recent Accounting Pronouncements
In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No.
157 (FSP 157-2), to partially defer SFAS 157. FSP 157-2 defers the
effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), to fiscal years, and
interim periods within those fiscal years, beginning after November 15, 2008.
The Company is currently evaluating the impact of adopting the provisions of FSP
157-2.
In
December 2007, the FASB Emerging Issues Task Force reached a consensus and
published Issue No. 07-01, Accounting for Collaborative
Arrangements (EITF 07-01). EITF 07-01 defines a collaborative arrangement
as a contractual arrangement in which the parties are active participants to the
arrangements and exposed to significant risks and rewards that depend on the
commercial success of the endeavor. EITF 07-01 requires that costs incurred and
revenues generated from transactions with third parties should be reported by
the collaborators on the appropriate line item in their respective income
statements. EITF 07-01 also states that the income statement characterization of
payments between the participants to a collaborative arrangement should be based
on other authoritative literature if the payments are within the scope of such
literature. EITF 07-01 requires collaborators to disclose, in the footnotes to
financial statements in the initial period of adoption and annually thereafter,
the income statement classification and amounts attributable to transactions
arising from collaborative arrangements between participants for each period for
which an income statement is presented and information regarding the nature and
purpose of the collaborative arrangement, the collaborators' rights and
obligations under the arrangement, and any accounting policies for the
collaborative arrangement. EITF 07-01 is effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the impact of
adopting the provisions EITF 07-01.
11.
Other Matters
On November 16, 2007, the Company received a
deficiency letter from The NASDAQ Stock Market indicating that the Company did
not comply with Marketplace Rule 4310(c)(3), which requires that the Company
have a minimum of $2,500,000 in stockholders’ equity or $35,000,000 in market
value of listed securities or $500,000 of net income from continuing operations
for the most recently completed fiscal year or two of the three most recently
completed fiscal years. On June 30, 2008, Avistar received a notice
from The NASDAQ Stock Market’s Listing Qualifications Panel that the Panel has
decided to grant Avistar an exception to the market value of listed securities
requirement of the NASDAQ Capital Market through August 29, 2008. Under the
terms of the exception, during the period from July 1, 2008 to August 29, 2008,
Avistar must demonstrate the ability to close above a $35 million market value
for its listed securities for ten consecutive trading days.
On
April 18, 2008, Avistar received a deficiency letter from The NASDAQ Stock
Market indicating that Avistar does not comply with Marketplace Rule 4310(c)(4),
which requires the Company to have a minimum bid price of $1.00 for continued
listing. The NASDAQ Staff noted that for the 30 consecutive business
days prior to the date of its letter, the bid price of Avistar’s common stock
closed below $1.00 per share. The Company has been provided 180
calendar days, or until October 15, 2008, to regain compliance.
On June
30, 2008, Avistar received a notice from The NASDAQ Stock Market’s Listing
Qualifications Panel that the Panel has decided to grant Avistar an exception to
the continued listing requirements of the NASDAQ Capital Market through August
29, 2008. Under the terms of the exception, during the period from July 1, 2008
to August 29, 2008, Avistar must demonstrate the ability to close above a $35
million market value for its listed securities for ten consecutive trading
days.
If
Avistar is unable to regain compliance by August 29, 2008, Avistar’s securities
will be subject to de-listing. If Avistar achieves compliance with
the $35 million market value criteria by August 29, 2008, it will also have
regained technical compliance with the $1.00 per share listing requirement as
well, although the NASDAQ staff may impose an additional monitoring period to
assure longer-term compliance with the listing qualifications.
Certain statements in this “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” are forward looking
statements. These statements relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and other factors
that may cause our or our industry’s actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by the
forward looking statements. These risks and other factors include those listed
under “Risk Factors” elsewhere in this Quarterly Report on Form 10-Q. In some
cases, you can identify forward looking statements by terminology such as “may”,
“will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”,
“estimates”, “predicts”, “potential”, “continue” or the negative of these terms,
or other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. In evaluating these statements, you
should specifically consider the various risks outlined under the heading “Risk
Factors” in Part II of this Report. These factors may cause our actual results
to differ materially from any forward looking statement. Although we
believe that the expectations reflected in the forward looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements.
Avistar creates
technology that provides the missing critical element in unified communications:
bringing people in organizations face-to-face, through enhanced communications
for true collaboration anytime, anyplace. Our latest product, Avistar C3, draws
on over a decade of market experience to deliver a single-click desktop
videoconferencing and collaboration experience that moves business
communications into a new era. Available as a stand-alone solution, or
integrated with existing unified communications software from other vendors,
Avistar C3 users gain an instant messaging-style ability to initiate video
communications across and outside the enterprise. Patented bandwidth management
enables thousands of users to access desktop videoconferencing, Voice over IP
(VoIP) and streaming media without requiring substantial new network investment
or impairing network performance. By integrating Avistar C3 tightly
into the way they work, our customers can use our solutions to help reduce costs
and improve productivity and communications within their enterprise and between
enterprises, and to enhance their relationships with customers, suppliers and
partners. Using Avistar C3 software and leveraging video, telephony and Internet
networking standards, Avistar solutions are designed to be scalable, reliable,
cost effective, easy to use, and capable of evolving with communications
networks as bandwidth increases and as new standards and protocols emerge. We
currently sell our system directly and indirectly to the small and medium sized
business, or SMB and globally distributed organizations, or Enterprise, markets
comprising the Global 5000. Our objective is to establish our technology as the
standard for networked visual unified communications and collaboration through
direct sales, indirect channel sales/partnerships and the licensing of our
technology to others. We also seek to license our broad portfolio of patents
covering, among other areas, video and rich media collaboration technologies,
networked real-time text and non-text communications and desktop workstation
echo cancellation.
We derive product
revenue from the sale and licensing of our video-enabled networked
communications system, consisting of a suite of Avistar-designed software and
hardware products, including third party components. We also derive revenue from
fees for installation, maintenance, support, training services and software
development. In addition, we derive revenue from the licensing of our
intellectual property portfolio. Product revenue as a percentage of total
revenue was 31% and 12% for three months ended June 30, 2008 and 2007,
respectively and 27% and 24% for six months ended June 30, 2008 and 2007,
respectively.
We recognize
product and services revenue in accordance with Statement of Position
(SOP) 97-2, Software
Revenue Recognition (SOP 97-2), as amended by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions (SOP 98-9). We derive product
revenue from the sale and licensing of a set of desktop (endpoint) products
(hardware and software) and infrastructure products (hardware and software) that
combine to form an Avistar video-enabled collaboration solution. Services
revenue includes revenue from installation services, post-contract customer
support, training, out of pocket expenses, freight and software development. The
installation services that we offer to customers relate to the physical set-up
and configuration of desktop and infrastructure components of our solution. The
fair value of all product, installation services, post-contract customer support
and training offered to customers is determined based on the price charged when
such products or services are sold separately.
In June
2007, we entered into a Patent License Agreement with Radvision Ltd. Under the
license agreement, we granted Radvision and its subsidiaries a license in the
field of videoconferencing to all of our patents, patent applications and
patents issuing therefrom with a filing date on or before May 15, 2007. Also
under the license agreement, Radvision granted to us a license in the field of
videoconferencing to all of Radvision’s patents, patent applications and patents
issuing therefrom with a filing date on or before May 15, 2007. The license
agreement includes mutual releases of the parties from claims of past
infringement of the licensed patents. As partial consideration for the licenses
and releases granted under the agreement, Radvision made a one-time license
payment to us of $4.0 million, which was recognized as licensing revenue in the
three months ended June 30, 2007.
To date, a significant portion of our revenue has resulted
from sales to a limited number of customers, particularly Deutsche Bank AG, UBS
AG and their affiliates, Sony, SCEI and Radvision. Collectively, Deutsche Bank
AG, UBS AG and their affiliates, Sony and SCEI and Radvision accounted for
approximately 90% and 87% of total revenue for the six month periods ended
June 30, 2008 and 2007, respectively. As of June 30, 2008,
approximately 86% of our gross accounts receivable was concentrated with two
customers, each of whom represented more than 10% of our gross accounts
receivable. As of June 30, 2007, approximately 71% of our gross accounts
receivable was concentrated with three customers, each of whom represented more
than 10% of our gross accounts receivable.
On February 15, 2007, we entered into a Patent License
Agreement with Tandberg ASA, Tandberg Telecom AS and Tandberg, Inc. Under
this agreement, we dismissed our infringement suit against Tandberg, Tandberg
dismissed its infringement suit against us, and we cross-licensed each other’s
patent portfolios. The agreement resulted in a payment of $12.0 million to
us from Tandberg.
We recognized the gross proceeds of $12.0 million from the patent license
agreement as income from settlement and patent licensing within operations in
the three months ended March 31, 2007. To recognize the proceeds as
revenue, we would have required sufficient history of transactions to allow us
to isolate the aspect of the settlement attributable to the gain associated with
the process of litigation, separate from commercial compensation for the use of
our intellectual property. Sufficient evidence was not available to allow
this distinction. The Patent License Agreement with Tandberg
includes a ten year capture period, extending from the date of the agreement,
during which patents filed with a priority date within the capture period would
be licensed in addition to existing patents on the agreement date.
However, such additional patents would be licensed under the agreement solely
for purposes of the manufacture, sale, license or other transfer of existing
products of Tandberg and products that are closely related enhancements of such
products based primarily and substantially on the existing products. We
reviewed the existing products of Tandberg and considered the likelihood that
future patent filings by us would relate to or otherwise affect existing
Tandberg products and closely related enhancements thereto. We concluded
that the filing for such additional patents was unlikely, and therefore
concluded that the ten year capture period was not material from an accounting
perspective related to recognition.
|
Services, maintenance and support
revenue, which includes our installation services, funded software
development and maintenance and support, increased by $211,000, or 24%, to
$1.1 million for the three months ended June 30, 2008, from $873,000 for
the three months ended June 30, 2007, due primarily to an increase in
revenue from professional on-site services provided to an existing
customer.
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Cost of
services, maintenance and support revenue. Cost of services,
maintenance and support revenue increased by $32,000, or 6%, to $603,000 for the
three months ended June 30, 2008, from $571,000 for the three months ended June
30, 2007. We expect cost of services, maintenance and support revenue to vary in
the future due to labor costs associated with funded software
projects.
Other expense, net, increased by $77,000, or 151%, to
$128,000 for the three months ended June 30, 2008, from $51,000 for the three
months ended June 30, 2007. The increase was due to higher interest expense due
to a higher balance of debt outstanding during the three months ended June 30,
2008 compared to the same period in 2007.
Research
and development. Research and development
expenses decreased by $687,000, or 20%, to $2.8 million for the six months ended
June 30, 2008 from $3.5 million for the six months ended June 30, 2007. The
decrease was primarily attributable to a decrease in personnel and personnel
related expenses, including a decrease of $233,000 in stock based compensation
expense, a decrease in external labor expense, partially offset by a decrease in
the amount of the reclassification of personnel expenses to cost of
services, maintenance and support expense related to work performed on funded
software development projects.
Interest income decreased by $147,000, or 69%, to $67,000 for
the six months ended June 30, 2008, from $214,000 for the six months ended June
30, 2007. The decrease was due to lower interest income due to both a decrease
in interest rates and a decrease in the average outstanding balance of
investments that earned interest in the six months ended June 30, 2008, as
compared to the same period in 2007.
Other expense, net, increased by $107,000, or 101%, to
$213,000 for the six months ended June 30, 2008, from $106,000 for the six
months ended June 30, 2007. The increase was due to higher interest expense due
to a higher outstanding balance of debt outstanding during the six months ended
June 30, 2008, as compared to the same period in 2007.
We had cash and cash equivalents of $5.7 million as of June
30, 2008, and cash, cash equivalents and short-term investments of $4.9 million
as of December 31, 2007. For the six months ended June 30, 2008, we had a net
increase in cash and cash equivalents of $1.7 million. The net cash used by
operations of $8.1 million for the six months ended June 30, 2008 resulted
primarily from the net loss of $5.4 million, a decrease in deferred income from
settlement and patent licensing of $2.8 million, a decrease in deferred services
revenue and customer deposits of $929,000, a decrease in account payable of
$706,000, all offset by a decrease in deferred settlement and patent licensing
costs of $636,000 and non-cash expenses of $615,000. The net cash provided
by investing activities of $772,000 for the six months ended June 30, 2008 was
primarily due to the maturities of short-term investments of $799,000. The
net cash provided by financing activities of $9.0 million for the six
months ended June 30, 2008 related primarily to $7.0 million in proceeds from
the issuance of convertible debt, and $7.0 million of borrowings on our line of
credit, offset by payments made on our line of credit of $5.1
million.
At June 30, 2008, we had open purchase orders and other
contractual obligations of approximately $601,000, primarily related to
inventory purchase commitments. We also have commitments that consist of
obligations under our operating leases. These purchase order commitments and
contractual obligations are reflected in our financial statements once goods or
services have been received or payments related to the obligations become due.
A table summarizing our minimum purchase
commitments to our contract manufacturers and our minimum commitments under
non-cancelable operating leases as of December 31, 2007 is included in our
Annual Report on Form 10-K for the year ended December 31, 2007, filed with the
Securities and Exchange Commission on March 31, 2008. In May 2008 and
June 2008, we subleased some of our office facilities in San Mateo, California
and New York, New York, and assigned our primary facility lease in London,
United Kingdom.
As of June 30, 2008, we
had no material off-balance sheet arrangements other than the operating leases
described in the contractual obligations table above. We enter
into indemnification provisions under agreements with other companies in our
ordinary course of business, typically with our contractors, customers,
landlords and our investors. Under these provisions, we generally indemnify and
hold harmless the indemnified party for losses suffered or incurred by the
indemnified party as a result of our activities or, in some cases, as a result
of the indemnified party's activities under the agreement. These indemnification
provisions generally survive termination of the underlying agreement. The
maximum potential amount of future payments we could be required to make under
these indemnification provisions is generally unlimited. As of June 30, 2008, we
have not incurred material costs to defend lawsuits or settle claims related to
these indemnifications agreements and therefore, we have no liabilities recorded
for these agreements as of June 30, 2008.
We currently believe that our existing cash and cash
equivalents balance and line of credit will provide us with sufficient funds to
finance our operations for the next 12 months. We intend to continue to invest
in the development of new products and enhancements to our existing products.
Our future liquidity and capital requirements will depend upon numerous factors,
including without limitation, general economic conditions and conditions in the
financial services industry in particular, the level and timing of product,
services and patent licensing revenues and income, the costs and timing of our
product development efforts and the success of these development efforts, the
costs and timing of our sales, partnering and marketing activities, the extent
to which our existing and new products gain market acceptance, competing
technological and market developments, and the costs involved in maintaining,
defending and enforcing patent claims and other intellectual property rights,
all of which may impact our ability to achieve and maintain profitability or
generate positive cash flows.
(a) Evaluation of
disclosure controls and procedures: Our management evaluated, with the
participation of our Chief Executive Officer and Chief Financial Officer, the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this Quarterly Report on Form 10-Q. Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act)) were effective in
providing reasonable assurance that information required to be disclosed by us
in reports that we file or submit under the Exchange Act (i) is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure, and (ii) is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and procedures, no
matter how well designed and executed, can provide only reasonable assurance of
achieving the desired control objectives. In addition, the design of
disclosure controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating
the benefits of possible controls and procedures relative to their
costs.
We recorded a net
loss of $5.4 million for the six months ended June 30, 2008, a net loss of $2.9
million for fiscal year 2007, and a net loss of $8.1 million for fiscal year
2006. As of June 30, 2008, our accumulated deficit was $111 million. Our
revenue and income from settlement and patent licensing may not increase, or
even remain at its current level. In addition, our operating expenses, which
have been reduced recently, may increase as we continue to develop our business
and pursue licensing opportunities. As a result, to become profitable, we will
need to increase our revenue and income from settlement and patent licensing by
increasing sales to existing customers and by attracting additional new
customers, distribution partners and licensees. If our revenue does not increase
adequately, we may not become profitable. Due to the volatility of our product
and licensing revenue and our income from settlement and patent licensing
activities, we may not be able to achieve, sustain or increase profitability on
a quarterly or annual basis. If we fail to achieve or to maintain profitability
or to sustain or grow our profits within the time frame expected by investors,
the market price of our common stock may be adversely impacted.
In July 2007,
Simon Moss was appointed as President of the products division of our
company. In September 2007, William Campbell resigned from the
position of Chief Operating Officer, and in November 2007, we announced that
Gerald Burnett was resigning from his position as our Chief Executive Officer
effective January 1, 2008 and that he would be replaced in that position by
Simon Moss. In addition, during the second half of 2007 and the six
months ended June 30, 2008, we implemented a number of other management changes.
In September 2007 and March 2008, we announced corporate initiatives
aimed at increasing our product sales, expanding our customer deployments and
support, improving our corporate efficiency and increasing our development
capacity. The components of this initiative
included:
On November 16,
2007, we received a deficiency letter from The NASDAQ Stock Market indicating
that we did not comply with Marketplace Rule 4310(c)(3), which requires that we
have a minimum of $2,500,000 in stockholders’ equity or $35,000,000 in market
value of listed securities or $500,000 of net income from continuing operations
for the most recently completed fiscal year or two of the three most recently
completed fiscal years. The NASDAQ staff noted that the market value
of our listed securities had been below the minimum $35,000,000 for the previous
10 consecutive trading days. On January 24, 2008, we presented a
remedial compliance plan to the NASDAQ Listing Qualification Panel
(Panel). On March 19, 2008, the Panel notified us that we had
regained compliance with the $35 million market value listing criteria, but that
the Panel had invoked its discretionary authority under NASDAQ Marketplace Rule
4300 in order to establish a special monitoring period, until June 1, 2008,
during which time we were required to close 10 consecutive trading days above a
$35 million market value, or be required to re-submit a remedial compliance plan
to the Panel.
To date, a significant portion of our revenue and income from
settlement and patent licensing has resulted from sales or licenses to a limited
number of customers, particularly Deutsche Bank AG, UBS AG, Polycom, Inc.,
Radvision Ltd., and Sony and SCEI and their affiliates. Collectively,
Deutsche Bank AG, UBS AG, Polycom, Inc., Sony Corporation, and their affiliates
accounted for approximately 94% of combined revenues and income from settlement
and patent licensing for the three months ended June 30, 2008. As of June 30,
2008, approximately 86% of our gross accounts receivable was concentrated with
two customers, each of whom represented more than 10% of our gross accounts
receivable. As of December 31, 2007, approximately 78% of our gross
accounts receivable was concentrated with three customers, each of whom
represented more than 10% of our gross accounts receivable.
The loss of a major customer or the reduction, delay or
cancellation of orders from one or more of our significant customers could cause
our revenue to decline and our losses to increase. For example, income
from settlement and licensing activities from Tandberg, which was $12.0 million
in the first quarter of 2007, was a one-time payment. Additionally, we expect to
complete the amortization of the Polycom, Inc. proceeds in 2009. If we are
unable to license our patent portfolio to additional parties on terms equal to
or better than our agreements with Polycom, Inc. and Tandberg, our licensing
revenue and our income from settlement and licensing will decline, which could
cause our losses to increase. We currently depend on a limited number of
customers with lengthy budgeting cycles and unpredictable buying patterns, and
as a result, our revenue from quarter-to-quarter or year-to-year may be
volatile. Adverse changes in our revenue or operating results as a result of
these budgeting cycles or any other reduction in capital expenditures by our
large customers could substantially reduce the trading price of our common
stock.
Our system is designed to work with a variety of hardware and
software configurations, and be integrated with commoditized components
(example: “web cams”) of data networking infrastructures used by our customers.
The majority of these customer networks rely on Microsoft Windows servers.
However, our software may not operate correctly on other hardware and software
platforms or with other programming languages, database environments and systems
that our customers use. Also, we must constantly modify and improve our system
to keep pace with changes made to our customers’ platforms, data networking
infrastructures, and their evolving ability to integrate video with other
applications. This may result in uncertainty relating to the timing and nature
of our new release announcements, introductions or modifications, which in turn
may cause confusion in the market, with a potentially harmful effect on our
business. If we fail to promptly modify, integrate, or improve our system in
response to evolving industry standards or customers’ demands, our system could
become less competitive, which would harm our financial condition and
reputation.
The market in which we operate is highly competitive. In
addition, because our industry is relatively new and is characterized by rapid
technological change, evolving user needs, developing industry standards and
protocols and the introduction of new products and services, it is difficult for
us to predict whether or when new competing technologies or new competitors will
enter our market. Currently, our competition comes from many other kinds of
companies, including communication equipment, integrated solution, broadcast
video and stand-alone “point solution” providers. Within the video-enabled
network communications market, we compete primarily against Polycom, Inc.,
Tandberg ASA, Sony Corporation, Apple Inc., Radvision Ltd. and Emblaze-VCON
Ltd. Many of these companies, including Polycom, Inc., Tandberg, Sony,
Radvision and Emblaze-VCON have acquired rights to use our patented technology
through licensing agreements with us, which, in some cases, include rights to
use future patents filed by us. With increasing interest in the power of
video collaboration and the establishment of communities of users, we believe we
face increasing competition from alternative video communications solutions that
employ new technologies or new combinations of technologies from companies such
as Cisco Systems, Inc., Avaya, Inc., Microsoft Corporation and Nortel
Networks Corporation that enable web-based or network-based video communications
with low-cost digital camera systems.
We expect competition to increase in the future from existing
competitors, partnerships of competitors, and from new market entrants with
products that may be less expensive than ours, or that may provide better
performance or additional features not currently provided by our products. Many
of our current and potential competitors have substantially greater financial,
technical, manufacturing, marketing, distribution and other resources, greater
name recognition and market presence, longer operating histories, lower cost
structures and larger customer bases than we do. As a result, they may be able
to adapt more quickly to new or emerging technologies and changes in customer
requirements.
The international economic slowdown and the downturn in the
investment banking industry that began in 2000 and continued for a number of
years negatively affected our business, and a reoccurrence of a difficult
economic environment may do so in the future. During the previous economic
downturn, the investment banking industry suffered a sharp decline, which caused
many of our existing and potential customers to cancel or delay orders for our
products. The U.S. economy may slow, and our customers and potential customers
may delay ordering our products, and we could fall short of our revenue
expectations for 2008 and beyond. Slower growth among our customers, tightening
of customers’ operating budgets, retrenchment in the capital markets and other
general economic factors all have had, and could in the future have, a
materially adverse effect on our revenue, capital resources, financial condition
and results of operations.
Because our licensing cycle is a lengthy process, the
accurate prediction of future revenues and income from settlement and patent
licensing from new licensees is difficult. The process of persuading companies
to adopt our technologies, or convincing them that their products infringe upon
our intellectual property rights, can be lengthy. There is also a tendency in
the technology industry to close business deals at the end of a quarter, thereby
increasing the likelihood that a possible material deal would not be concluded
in a current quarter, but slip into a subsequent reporting period. This kind of
delay may result in a given quarter’s performance being below analyst or
shareholder expectations. The proceeds of our intellectual property licensing
and enforcement efforts tend to be sporadic and difficult to predict.
Recognition of those proceeds as revenue or income from settlement and licensing
activities depends on the terms of the license agreement involved, and the
circumstances surrounding the agreement. To finance litigation to
defend or enforce our intellectual property rights, we may enter into
contingency arrangements with investors, legal counsel or other advisors that
would give such parties a significant portion of any future licensing and
settlement amounts we derive from our patent portfolio. As a result, our
licensing and enforcement efforts are expected to result in significant
volatility in our quarterly and annual financial condition and results of
operations, which may result in us missing investor expectations, which may
cause our stock price to decline.
We regard our system as open but proprietary. In an effort to
protect our proprietary rights, we rely primarily on a combination of patent,
copyright, trademark and trade secret laws, as well as licensing, non-disclosure
and other agreements with our consultants, suppliers, customers, partners and
employees. However, these laws and agreements provide only limited protection of
our proprietary rights. In addition, we may not have signed agreements in every
case, and the contractual provisions that are in place and the protection they
produce may not provide us with adequate protection in all circumstances.
Although we hold patents and have filed patent applications covering some of the
inventions embodied in our systems, our means of protecting our proprietary
rights may not be adequate. It is possible that a third party could
copy or otherwise obtain and use our technology without authorization and
without our detection. In the event that we believe a third party is infringing
our intellectual property rights, an infringement claim brought by us could,
regardless of the outcome, result in substantial cost to us, divert our
management’s attention and resources, be time consuming to prosecute and result
in unpredictable damage awards. A third party may also develop similar
technology independently, without infringing upon our patents and copyrights. In
addition, the laws of some countries in which we sell our system may not protect
our software and intellectual property rights to the same extent as the laws of
the United States or other countries where we hold patents. As we move to more
of a software based system, inadequate licensing controls, unauthorized copying,
and use, or reverse engineering of our system could harm our business, financial
condition or results of operations.
We rely on a combination of license, development and
nondisclosure agreements, trademark, trade secret and copyright law, and
contractual provisions to protect our other, non-patentable intellectual
property rights. If we fail to protect these intellectual property rights, our
licensees, potential licensees and others may seek to use our technology without
the payment of license fees and royalties, which could weaken our competitive
position, reduce our operating results and increase the likelihood of costly
litigation. The growth of our business depends in part on the applicability of
our intellectual property to the products of third parties, and our ability to
enforce intellectual property rights against them. In addition, effective trade
secret protection may be unavailable or limited in certain foreign countries.
Although we intend to protect our rights vigorously, if we fail to do so, our
business will suffer.
To increase our revenue, we must increase the size and/or the
productivity of our direct sales force and add indirect distribution channels,
such as systems integrators, product partners and/or value-added resellers,
which is
a focus of our go-to market strategy, and/or effect sales through our
customers. If we are unable to maintain or increase our direct sales force or
add indirect distribution channels due to our own cost constraints, limited
availability of qualified personnel or other reasons, our future revenue growth
may be limited and our future operating results may suffer. We cannot assure you
that we will be successful in attracting, integrating, motivating and retaining
sales personnel and channel partners. Furthermore, it can take several months
before a new hire or channel partner becomes a productive member of our sales
force effort. The loss of existing salespeople, or the failure of new
salespeople and/or indirect sales partners to develop the necessary skills in a
timely manner, could impact our revenue growth.
Exhibit No.
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Description
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31.1
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Rule 13a-14(a)/15d-14(a)
Certification by the Chief Executive Officer.
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31.2
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Rule 13a-14(a)/15d-14(a)
Certification by the Chief Financial Officer.
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32.1
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Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized, on the 31st day of July 2008.
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AVISTAR
COMMUNICATIONS CORPORATION
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By:
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/s/
SIMON B. MOSS
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Simon
B. Moss
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Chief
Executive Officer
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(Principal
Executive Officer)
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By:
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/s/
ROBERT J. HABIG
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Robert
J. Habig
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Chief
Financial Officer
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(Principal
Financial and Accounting Officer)
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Exhibit No.
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Description
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31.1
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Rule 13a-14(a)/15d-14(a)
Certification by the Chief Executive Officer.
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31.2
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Rule 13a-14(a)/15d-14(a)
Certification by the Chief Financial Officer.
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32.1
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Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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