UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K/A
Amendment
No. 2
þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2007
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period
from to.
Commission
file 000-49862
PROCERA
NETWORKS, INC.
(Exact
name of registrant as specified in its charter)
Nevada
(State
of incorporation)
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33-0974674
(I.R.S.
Employer Identification No.)
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100C
Cooper Court
Los
Gatos, California 95032
(Address
of principal executive offices, including zip code)
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(408)
354-7200
(Registrant’s
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act
Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock par value $0.001 per share
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American
Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
o
No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
o
No
þ
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
þ
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
o
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Accelerated
filer
þ
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Non-accelerated
filer
o
(Do
not check if a smaller reporting company)
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Smaller
reporting
o
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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
þ
The
aggregate market value of the voting stock held by nonaffiliates of the
Registrant based upon the closing price of the common stock reported on the
American Stock Exchange on June 29, 2007 was approximately
$140,153,532.*
The
number of shares of common stock outstanding as of February 27, 2009 was
84,498,491
*
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Excludes
23,057,285 shares of Common Stock held by directors, officers and
stockholders or stockholder groups whose beneficial ownership exceeds 5%
of the Registrant’s Common Stock outstanding. The number of shares owned
by stockholders whose beneficial ownership exceeds 5% was determined based
upon information supplied by such persons and upon Schedules 13D and 13G,
if any, filed with the SEC. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct
or indirect, to direct or cause the direction of the management or
policies of the registrant, that such person is controlled by or under
common control with the Registrant, or that such persons are affiliates
for any other purpose.
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DOCUMENTS
INCORPORATED BY REFERENCE
Explanatory
Note
This
Amendment No. 2 on Form 10-K/A amends and restates the Annual Report on Form
10-K of Procera Networks, Inc. (the “Company”, “we,” “us,” or “our”) for the
year ended December 31, 2007 filed with the Securities and Exchange Commission
on April 2, 2008, as amended by Amendment No. 1 on Form 10-K/A filed with the
Securities and Exchange Commission on April 30, 2008 (collectively, the
“Original Report”). In response to comments received by the
Securities and Exchange Commission, this Form 10-K/A amends and replaces the
information previously filed in the Original Report.
This Form
10-K/A does not reflect events occurring after the filing of the Original Report
or modify or update those disclosures affected by subsequent events. Information
not affected by this amendment remains unchanged and reflects the disclosures
made at the time the Original Report was filed.
This
Amendment No. 2 should be read in conjunction with our periodic filings made
with the Securities and Exchange Commission, or the SEC, subsequent to the date
of the Original Filing, including any amendments to those filings, as well as
any Current Reports filed on Form 8-K subsequent to the date of the Original
Filing. In addition, as required by Rule 12b-15 under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), new certifications by our
principal executive officer and principal financial officer are filed as
exhibits to this Amendment No. 2 to our Annual Report on Form 10-K/A as Exhibits
31.5 31.6, 32.3 and 32.4.
FISCAL
YEAR 2007
Form
10-K/A
ANNUAL
REPORT
TABLE
OF CONTENTS
PART
I
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5
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Item 1.
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5
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Item 1A.
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10
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Item 1B.
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18
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Item 2.
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18
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Item 3.
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18
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Item 4.
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18
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PART
II
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19
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Item 5.
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19
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Item 6.
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21
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Item 7.
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23
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Item 7A.
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34
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Item 8.
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F-1
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Item 9.
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35
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Item 9A.
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35
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Item 9B.
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38
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PART
III
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39
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Item 10.
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39
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Item 11.
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44
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Item 12.
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54
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Item 13.
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57
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Item 14.
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58
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PART
IV
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59
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Item 15.
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59
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62
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64
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Exhibit 10.8
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65
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Exhibit 10.9
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65
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Exhibit 23.1
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66
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Exhibit 23.2
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66
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Exhibit 31.5
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66
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Exhibit 31.6
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66
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Exhibit 32.3
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66
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Exhibit 32.4
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66
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In
addition to historical information, this amended Annual Report on Form 10-K/A
contains forward-looking statements regarding our strategy, financial
performance and revenue sources that involve a number of risks and
uncertainties, including those discussed under the title “RISK FACTORS” in Item
1A. Forward-looking statements in this report include, but are not
limited to, those relating to our potential for future revenues, revenue growth
and profitability; markets for our products; our ability to continue to innovate
and obtain patent protection; operating expense targets; liquidity; new product
development; the possibility of acquiring (and our ability to consummate any
acquisition of) complementary businesses, products, services and technologies;
the geographical dispersion of our sales; expected tax rates; our international
expansion plans; and our development of relationships with providers of leading
Internet technologies
While
these forward-looking statements represent our current judgment on the future
direction of our business, such statements are subject to many risks and
uncertainties which could cause actual results to differ materially from any
future performance suggested in this Report due to a number of factors,
including, without limitation our ability to produce and commercialize new
product introductions, particularly our acceleration related technologies; our
ability to successfully compete in an increasingly competitive market; the
perceived need for our products; our ability to convince potential customers of
the value of our products; the costs of competitive solutions; our reliance on
third party contract manufacturers; continued capital spending by prospective
customers and macro economic conditions. Readers are cautioned not to
place undue reliance on the forward-looking statements, which speak only as of
the date of this Annual Report. We undertake no obligation to
publicly release any revisions to forward-looking statements to reflect events
or circumstances arising after the date of this document, except as required by
law. See “RISK FACTORS” appearing in Item 1A. Investors
may access our filings with the Securities and Exchange Commission including our
annual report on Form 10-K and subsequent amendments, our quarterly reports on
Form 10-Q, our current reports on Form 8-K and amendments to such reports on our
website, free of charge, at www.proceranetworks.com, but the information on our
website does not constitute part of this Annual Report.
Throughout
this amended Annual Report on Form 10-K/A, we refer to Procera Networks, Inc., a
Nevada corporation, as “Procera,” and, together with its consolidated
subsidiaries, as “we,” “our” and “us,” unless otherwise
indicated. Any reference to “Netintact” refers to our wholly owned
subsidiary, Netintact, AB., a Swedish corporation and Netintact, PTY, an
Australian corporation.
Overview
Procera
Networks is a leading provider of bandwidth management and control products for
broadband service providers worldwide. Our products offer network
administrators of service providers, governments, universities and
enterprises:
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Intelligent
network traffic identification, control and service management
solutions:
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Superior
accuracy in identifying applications running on their
networks;
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the
ability to optimize the experience of the subscribers based on management
of the identified traffic
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With
rapid growth in Internet usage, we believe our proprietary PacketLogic™ products
offer network administrators the leading Deep Packet Inspection (or DPI)
technology providing real-time application awareness and control of network
traffic with the scalability and flexibility required by today’s large
networks.
Our
solution, PacketLogic™, is a modular, traffic and service management system
comprised of five individual modules:
More than
400 service providers, higher-education institutions and other organizations
(with over 1,100 systems installed) have chosen PacketLogic ™ as
their network traffic management solution, including:
Service
Provider:
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SPs. Austar;
Mesa
Networks.
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Wireless Service Providers –
SingTel,
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Cable
MSO
’s – Com hem,
Optus
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Telcos. TeliaSonera;
Telenor.
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Institutions
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Large
Businesses. Panasonic; AstraZeneca;
Volkswagen.
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Education.
University
of
Cambridge
;
Yonsei
University
;
Cal
Poly
.
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Government. State
of
Vermont
;
Jönköping
,
Sweden
; Swedish Archive
Information
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Our
objective is to become a leader in user and application aware software solutions
that provide industry leading network control and monetization capabilities for
service providers and institutions .
Industry
Background
The “Dumb”
Network
. In the earliest days of computer networking, hubs and
switches provided basic hardware connectivity and messages were sent using the
Internet Protocol (IP). The next step in the evolution of network
technology was the introduction of routers that allowed the flow of packets
belonging to the same session to pass along different routes and over different
networks from sender to receiver. The introduction of B-RAS
(broadband remote access server) allowed for scalable subscriber aware
services. Many other advances were made that improved the performance
of the network, but of these advances, none provided the network administrator
with very little information about the applications being sent over their
network. The equipment and protocols were in that sense
“dumb”.
The Evolution of Computer
Networks.
Computer networks are currently experiencing
far-reaching changes that we expect will number the days of the “dumb”
network. At the root of the changes is the explosive increase in
peer-to-peer applications and video content transmitted which is taxing the
ability of networks to meet demand. Some well-known peer-to-peer and
video applications include: YouTube, Kazaa, Slingbox, Joost, Internet TV and
Bitorrent. Broadly speaking, these far-reaching changes are driven by the
demands of entertainment and are stretching current network (and network
management) technology beyond its current capabilities.
The
Problem.
The explosive growth in Internet usage has
stretched bandwidth to the point where the delivery of mission critical,
business applications is being disrupted. Continually adding raw
capacity to meet demand provides only a partial and uneconomic
solution.
The Need for a “Smart”
Network
. Adding the capability to distinguish between
applications and to prioritize delivery over the network ensures data from the
most important applications get through the network with the least
delay. In order to do this, the network equipment must provide
real-time information on the applications usage and be able to actively
influence traffic flow – we refer to networks that have this capability as
“Smart” networks. The need for such network intelligence is gaining
increasingly broad acceptance.
Current State of Network
Development.
There are a limited number of suppliers whose products allow
networks to be upgraded from “dumb” to “smart”. Perhaps the most well
known of these suppliers are: Cisco/P-cube, Sandvine, Allot and Ellacoya
(recently acquired by Arbor) and Procera. All suppliers of
smart-network upgrade equipment rely on some variant of packet inspection
technology – broadly called deep packet inspection, or DPI.
The
Procera Solution
Not all
packet inspection technology works the same way. Procera’s
PacketLogic™ solutions are based on a particularly effective variation of DPI
technology called “DFI” (deep flow inspection). DFI was
developed in Sweden by our core team of developers. It is a powerful software
solution that looks at the flow of packets in both directions (which may be
occurring on different network paths) to determine information on application
type and user(s). A key differentiation of our solution is that it provides
significantly more accurate identification than simpler DPI approaches used by
our competitors. We believe our DFI technology to be substantially
better at detecting applications and users, which is critical to maintaining
network efficiency. Of importance, PacketLogic™ can be utilized across both
fixed and wireless networks. This capability can play an important
role in today’s converged networks where applications are expected to be
delivered ubiquitously across limited bandwidth environments.
Markets
Procera’s
principal market consists of the commercial broadband service providers, such
as: ISP's, telephone companies, wireless ISP (WiSP's), FTTx (Fiber-to-the-Home,
Fiber-to-the-Premise), and cable companies. Additionally, Procera’s
market includes a class of customer that must manage their own network such as
higher education, hospitality and enterprise.
Products
PacketLogic™
is a modular, traffic management software system that consists of five
individual modules. The base module, which is required in all systems, is
the Surveillance module. The other four software modules
provide tools for Filtering, Traffic Shaping, Flow
Statistics and Web Statistics . When combined with our
portfolio of PacketLogic™ hardware platforms, our solution delivers a unique,
real-time, scalable network traffic management tool.
The Surveillance Module
: The
PacketLogic™ Surveillance module provides network operators a detailed,
real-time view of all traffic flowing through their IP network. This
comprehensive view of the network allows them to accurately monitor and conduct
analysis of traffic patterns to ensure the highest-quality user experience and
optimal utilization of bandwidth resources. The module tracks all inbound and
outbound connections, identified by local hosts (IP addresses) or application
protocols (services). The module also identifies and tracks in real-time all
service properties and connection details, allowing administrators to pinpoint
bandwidth usage down to individual users or hosts, as well as what that
bandwidth is being used for. The connection-tracking capabilities of the
PacketLogic™ network stack enable Deep Flow Inspection, in which packets are
placed into context. The flows – or connections – are also passed through our
traffic identification component, Datastream Recognition Definition Language
(DRDL), which is able to determine the application or protocol responsible for
generating the traffic, and also to extract Layer 7 properties such as URL, SIP
caller ID, or chat channel. This provides more precise information in the
Surveillance and Statistics modules, and more intuitive rule and policy setting
in the Traffic Shaping and Filtering modules.
The Traffic Shaping Module:
The PacketLogic™ Traffic Shaping module is a powerful traffic and application
management tool with unique features for large and complex networks, and
sophisticated rules configuration and editing capabilities. Traffic Shaping can
be used to limit expensive, unwanted and/or unprioritized traffic in favor of
prioritized, active, business- and mission-critical data and value-added
application traffic. Additionally, network quality of service (QoS via DSCP
settings) can be applied to network traffic. All traffic can thus be restricted
to defined limits, thereby ensuring each traffic type has the appropriate
subscribed bandwidth and user performance expectation. The Traffic Shaping
module offers the combined power and flexibility of the connection tracking and
identification of the PacketLogic™ network stack and the Layer 7 content
recognition of DRDL to define complex policies in precise and intuitive rules.
Through these rules, effective traffic shaping in terms of limiting bits,
packets, or connections per second, concurrent connections, prioritization, and
combinations of these criteria can be applied.
Filtering Module:
The
PacketLogic™ Filtering module provides highly sophisticated rules configuration
and editing capabilities, allowing creation of very detailed filtering
parameters. The Filtering module uses PacketLogic™’s Datastream Recognition
Definition Language (DRDL) to identify which application protocol (service) is
generating each connection, so operators are not limited to rules based upon
port numbers. The extracted traffic information allows detailed filtering rules
to be set on variables such as direction of traffic (inbound vs. outbound), chat
channel, user name, file name or Web URL, among others. Although it is a
transparent device, PacketLogic™ allows network operators to keep improper and
malicious traffic out of the network. The security of the PacketLogic™ device
itself is ensured by its being transparent, that is, it is not directly
addressable on the channel interfaces.
The Statistics Module:
The
PacketLogic™ Statistics module provides a complete picture of network traffic in
real-time as well as in historical perspective. The Statistics module relies
upon the Surveillance module to extract detailed information from the
bidirectional traffic flows and can collect it in either a local or remote
database. This same information can also be displayed using the
PacketLogic™ Administrator Client software. The ability to dig deeper into
traffic- and user-pattern details makes the PacketLogic™ Statistics module a
valuable tool for identifying trends and gaining a detailed understanding of and
insight into the network traffic. Using the Statistics module, network operators
can easily identify the properties of all users and applications, in addition to
their bandwidth consumption. The active user and application traffic properties
are highly detailed and granular, thus ensuring accurate identification of
abusive users and applications. The Statistics module offers the ability to
search by connection during a defined time interval – by application protocol,
destination, origin and many more criteria for each user and each
application.
The Web Statistics Module:
The PacketLogic™ Web Statistics module provides a complete picture of network
traffic in real-time or historic data via a standard browser. The Web Statistics
module relies upon the Surveillance and Statistics modules to extract detailed
information from the bidirectional traffic flows and store it in a local or
remote database. This stored information can then be displayed in a
standard Web browser using the Web Statistics module. The ability to dig deeper
into traffic- and user-pattern details makes the PacketLogic™ Web Statistics
module a valuable tool for identifying trends and gaining a detailed
understanding of and insight into the network traffic. Using the Web
Statistics module, network operators can easily identify the properties of all
active users and applications, in addition to their bandwidth consumption. The
network operator is also able to provide each user with Web access to their own
statistics – and only their own – using the capabilities in the Web Statistics
module. The active user and application traffic properties are highly detailed
and granular, thus ensuring accurate identification of abusive users and
applications. The Web Statistics module offers the ability to search by
connection during a defined time interval – by application protocol,
destination, origin and many more criteria for each user and each
application.
Competition
We
believe that our primary competitors selling to ISPs include:
|
·
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Ellocoya
(recently acquired by Arbor).
|
In the
college and university arena, Procera’s primary competitors
include:
We also
face competition from other platforms such as switch/router, router, SBC, VOIP
switch vendors that integrate a DPI solution into their products. These vendors
include many larger better capitalized companies such as Juniper, Ericsson,
Foundry and other such scale vendors.
While all
of our competitors are larger than Procera, we do not believe there is an
entrenched dominant supplier in our market. Based on belief in our
superior technology, we see an opportunity for us to capture meaningful market
share and participate in the strong growth forecasts for the DPI market. Given
the lack of an established leader and the potentially huge growth in market size
over the coming few years, we expect competition to intensify.
Our
primary method of differentiation from our competition is our superior DPI
technology, which enables service providers advanced identification of network
traffic. However, we also believe we effectively compete with respect
to price and service. Our current products compete most effectively
in applications which serve the megabit to two gigabit per second market,
commonly referred to as edge applications. Our current products do
not address applications requiring greater than two gigabit per second
throughput required by very large providers of communications services commonly
referred to as core applications.
We face
serious competition from suppliers of standalone DPI products such as Allot
Communications, Sandvine, Arbor/Ellacoya and Packeteer (recently acquired by
BlueCoat). We also face competition from vendors supplying platform products
with some limited DPI functionality, such as switch/routers, routers, session
border controllers and VoIP switches. In addition, we face competition from
vendors that integrate an advertised "full" DPI solution into their products
such as Cisco Systems, Juniper, Ericsson and Foundry.
For a
further discussion of risks related to our competition, please see the section
of this document titled Risk Factors, which elaborate on a number of risks
including competing against larger companies with greater resources, increasing
the productivity of our distribution channels, retaining and adding personnel,
expense management increasing the functionality of our products and offering
additional features and market growth.
Customers
We had
over 400 distinct customers worldwide on December 31, 2007. Our
customers are located primarily in Europe, North America, Australia and
Asia. All of our customers own or manage a broadband network with
subscribers rates that vary from a few thousand to hundreds of
thousands.
Sales
and Distribution
We use a
combination of direct sales and channel partners to sell our products and
services. We also engage a worldwide network of value added resellers
to penetrate particular geographic regions and market segments. The
direct and indirect sales mix varies by geography and target
industry.
Research
and Development
Substantially
all our research and development is performed by Procera employees in
Sweden. Our research and development staff consists of a core team of
accomplished developers. We are currently selling our eleventh
version of our PacketLogic™ software suite.
Intellectual
Property
We rely
primarily on trade secrets surrounding our proprietary software. To
help ensure trade secret protection, we include proprietary information and
confidentiality provisions in our agreements with third parties and employees
alike. We have also filed patent applications having claims that, if
approved, may cover a combination of design and process features that could
provide protection to our future network management solutions. We also own or
have applied for trademark protection in the countries in which we are doing
business.
Global
Services
Our
Global Services team provides both pre- and post-sales support to our direct
field sales organization and customers. Customers also have access to
the technical support team via a web-based partner portal, email and interactive
chat forum. Global Services employees also provide classroom and
on-site training. Finally, the Global Services team acts as a conduit
to the development team for technical issues and new features.
Manufacturing
We design
the hardware portion of our products, but outsource the manufacturing. The
product specifications ensure that products do not contain any proprietary or
sole sourced components. In addition, we specify that all hardware
designs conform to industry recognized standards which ensures continuity of
supply, low cost and the ability to take advantage of semiconductor industry
advances. We bring the completed hardware in house, load our
proprietary software and perform extensive testing before shipping to our
customers our fully-integrated solution.
Corporate
History
Procera
was founded in May 2002, and in October 2003, merged with Zowcom, Inc, a
publicly-traded Nevada corporation. The merged company initially
traded under the symbol OTCBB:PRNW. Procera and the shareholders of
Netintact AB, a Swedish corporation, entered into a share exchange agreement
effective August 18, 2006, making Netintact a wholly owned subsidiary of
Procera. On September 29, 2006, we acquired 100% ownership of
Netintact PTY, an Australian company. Netintact, AB developed
PacketLogic™ and sold this product family to over 200 customers by the time of
Netintact’s acquisition by us. Our common stock was listed on the
American Stock Exchange in September 2007 under the symbol PKT.
Employees
As of
December 31, 2007, we had 60 employees of which 56 were full time employees and
4 were independent contractors.
Available
information
Our
annual reports on Form 10-K and subsequent amendments, our quarterly reports on
Form 10-Q and our current reports on Form 8-K, and all amendments to those
reports, filed or furnished pursuant to Section 13(a) of 15(d) of the Securities
Exchange Act of 1934, are available free of charge on our website at
www.proceranetworks.com as soon as reasonably practicable after we file such
reports with the Securities and Exchange Commission (the “SEC”).
The SEC
also maintains a website containing reports, proxy and information statements,
annual filings and other relevant information available free of charge to the
public at www.sec.gov.
You
should carefully consider the risks described below, together with all of the
other information included in this report, in considering our business and
prospects. The risks and uncertainties described below contain forward-looking
statements, and our actual results may differ materially from those discussed
here. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations. Each of these
risk factors could adversely affect our business, operating results and
financial condition, as well as adversely affect the value of an investment in
our common stock.
WE
HAVE A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE OUR POTENTIAL FOR FUTURE
SUCCESS.
We
completed the merger of Netintact on August 18, 2006 and Netintact PTY on
September 29, 2006. The products we sell are exclusively from the
Netintact. While we have the experience of Netintact operations on a
stand alone basis, we have had limited operating history on a combined basis
upon which we can evaluate our business and prospects. We have yet to
develop sufficient experience regarding actual revenues to be achieved from our
combined operations.
We have
only recently launched many of the products and services on a worldwide
basis. Therefore, investors should consider the risks and
uncertainties frequently encountered by companies in new and rapidly evolving
markets. If we are unsuccessful in addressing these risks and
uncertainties, our business, results of operations and financial condition could
be materially and adversely affected.
WE
EXPECT LOSSES FOR THE FORESEEABLE FUTURE.
For the
fiscal years ending December 31, 2007, December 31, 2006 and January 1, 2006 we
had losses from operations of $13.6 million, $7.7 million and $6.7 million,
respectively. We will continue to incur losses from operations for
the foreseeable future. These losses will result primarily from costs
related to investment in sales and marketing, product development and
administrative expenses. Our management believes these expenditures
are necessary to build and maintain hardware and software technology and to
further penetrate the markets for our products. If our revenue growth
is slower than anticipated or our operating expenses exceed expectations, our
losses will be greater. We may never achieve
profitability.
WE
EXPECT TO NEED TO RAISE FURTHER CAPITAL.
Based on
current reserves and anticipated cash flow from operations, our working capital
may not be sufficient to meet the needs of our business through the end of
2008. However a number of factors including lower than anticipated
revenues, higher than expected cost of goods sold or expenses, or the inability
of our customers to pay for the goods and services ordered may negatively impact
our expectations. As a result, we anticipate raising additional
capital and/or obtain debt financing during 2008. If additional funds
are raised through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution and such securities may have rights, preferences
and privileges senior to those of our common stock. There can be no
assurance that additional financing will be available on terms favorable to us
or at all. If adequate funds are not available on acceptable terms,
we may not be able to fund expansion, take advantage of unanticipated growth or
acquisition opportunities, develop or enhance services or products or respond to
competitive pressures. In addition, we may be required to cancel
product development programs and/or lay-off employees. Such inability
to raise additional financing could have a material adverse effect on our
business, results of operations and financial condition.
HOLDERS
OF OUR COMMON STOCK MAY BE DILUTED IN THE FUTURE.
Our
stockholders have authorized us to issue up to 130,000,000 shares of common
stock and 15,000,000 shares of preferred stock and to the extent of such
authorization, our Board of Directors will have the ability, without seeking
stockholder approval, to issue additional shares of common stock and/or
preferred stock in the future for such consideration as our Board of Directors
may consider sufficient. The issuance of additional common stock
and/or preferred stock in the future will reduce the proportionate ownership and
voting power of our common stock held by existing stockholders. At
December 31, 2007 there were 76,069,233, shares of common stock outstanding,
warrants to purchase 7,714,407 shares of common stock, stock options to purchase
6,675,163 shares of common stock. In addition, there are ungranted
stock options to purchase 714,357 shares of common stock pursuant to our stock
option plans, and 300,000 shares committed but not yet issued for services
rendered.
On July
16, 2007, the company issued 3,999,750 restricted common shares to investors who
participated in a private placement sale of stock and warrants to purchase
199,988 shares of restricted common stock were issued as compensation to
placement agents.
On July
26, 2007, 247,500 restricted common shares were issued for investor relations
services to be performed from June 1, 2007 through August 31,
2008. Any future issuances of our common stock would dilute the
relative ownership interest of our current stockholders, and could cause the
trading price of our common stock to decline.
COMPETITION
FOR EXPERIENCED PERSONNEL IS INTENSE AND OUR INABILITY TO ATTRACT AND RETAIN
QUALIFIED PERSONNEL COULD SIGNIFICANTLY INTERRUPT OUR BUSINESS
OPERATIONS.
Our
future success will depend, to a significant extent, on the ability of our
management to operate effectively, both individually and as a
group. We are dependent on our ability to attract, retain and
motivate high caliber key personnel. We plan to expand in all areas
and will require experienced personnel to augment our current
staff. We expect to be recruiting experienced professionals in such
areas as software and hardware development, sales, technical support, product
marketing and management. We currently plan to expand our indirect
channel partner program and we need to attract qualified business partners to
broaden these sales channels. Economic conditions may result in
significant competition for qualified personnel and we may not be successful in
attracting and retaining such personnel. Our business will suffer if
it encounters delays in hiring these additional personnel.
Our
performance is substantially dependent on the continued services and on the
performance of our executive officers and other key employees. The
loss of the services of any of our executive officers or other key employees
could materially and adversely affect our business. We believe we
will need to attract, retain and motivate talented management and other highly
skilled employees to be successful. We may be unable to retain our
key employees or attract, assimilate and retain other highly qualified employees
in the future. Competitors and others have in the past, and may in
the future, attempt to recruit our employees. We currently do not
have key person insurance in place. If we lose one of the key
officers, we must attract, hire, and retain an equally competent person to take
their place. There is no assurance that we would be able to find such
an employee in a timely fashion. If we fail to recruit an equally
qualified replacement or incur a significant delay, our business plans may slow
down or stop. We could fail to implement our strategy or lose sales
and marketing and development momentum. We have recently announced
our plans to reorganize our sales and marketing efforts. These plans
included a significant reduction in force in these areas and the announcement of
two senior sales management personnel. There can be no assurance that
these personnel additions or our reorganization efforts will have the positive
effect on our business operations as planned by management
WE
MAY BE UNABLE TO COMPETE EFFECTIVELY WITH OTHER COMPANIES IN OUR MARKET SECTOR
WHO ARE SUBSTANTIALLY LARGER AND MORE ESTABLISHED AND HAVE SIGNIFICANTLY GREATER
RESOURCES.
We
compete in a rapidly evolving and highly competitive sector of the networking
technology market. We expect competition to persist and intensify in
the future from a number of different sources. Increased competition
could result in reduced prices and gross margins for our products and could
require increased spending by us on research and development, sales and
marketing and customer support, any of which could have a negative financial
impact on our business. We compete with Cisco Systems/P-Cube, Allot,
Ellocoya, and Sandvine, as well as other companies which sell products
incorporating competing technologies. In addition, our products and
technology compete for information technology budget allocations with products
that offer monitoring capabilities, such as probes and related
software. Lastly, we face indirect competition from companies that
offer service providers increased bandwidth and infrastructure upgrades that
increase the capacity of their networks, which may lessen or delay the need for
bandwidth management solutions.
Some of
our competitors are substantially larger than we are and have significantly
greater financial, sales and marketing, technical, manufacturing and other
resources and more established distribution channels. These
competitors may be able to respond more rapidly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than we can. We
have encountered, and expect to encounter, customers who are extremely confident
in and committed to the product offerings of our
competitors. Furthermore, some of our competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties to increase their ability to rapidly gain market share by
addressing the needs of our prospective customers. These competitors
may enter our existing or future markets with solutions that may be less
expensive, provide higher performance or additional features or be introduced
earlier than our solutions. Given the market opportunity in the bandwidth
management solutions market, we also expect that other companies may enter our
market with alternative products and technologies, which could reduce the sales
or market acceptance of our products and services, perpetuate intense price
competition or make our products obsolete. If any technology that is
competing with ours is or becomes more reliable, higher performing, less
expensive or has other advantages over our technology, then the demand for our
products and services would decrease, which would harm our
business.
OUR
PACKETLOGIC FAMILY OF PRODUCTS IS CURRENTLY OUR ONLY SUITE OF PRODUCTS, AND ALL
OF OUR CURRENT REVENUES AND A SIGNIFICANT PORTION OF OUR FUTURE GROWTH DEPENDS
ON ITS COMMERCIAL SUCCESS.
All of
our current revenues and a significant portion of our future growth depend on
the commercial success of our PacketLogic family of products. If
customers do not widely adopt, purchase and successfully deploy our PacketLogic
products, our revenues will not grow, and our business will be harmed
significantly.
THE
NETWORK EQUIPMENT MARKET IS SUBJECT TO RAPID TECHNOLOGICAL PROGRESS AND TO
COMPETE WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE BROAD MARKET
ACCEPTANCE.
The
network equipment market is characterized by rapid technological progress,
frequent new product introductions, changes in customer requirements and
evolving industry standards. If we do not regularly introduce new
products in this dynamic environment, our product lines will become
obsolete. Developments in routers and routing software could also
significantly reduce demand for our products. Alternative
technologies could achieve widespread market acceptance and displace the
technology on which we have based our product architecture. We cannot
assure you that our technological approach will achieve broad market acceptance
or that other technology or devices will not supplant our products and
technology.
IF
THE BANDWIDTH MANAGEMENT SOLUTIONS MARKET FAILS TO GROW, OUR BUSINESS WILL BE
ADVERSELY AFFECTED.
The
market for bandwidth management solutions is in an early stage of development
and our success is not guaranteed. Therefore, we cannot accurately
predict the future size of the market, the products needed to address the
market, the optimal distribution strategy, or the competitive environment that
will develop. In order for us to be successful, our potential
customers must recognize the value of more sophisticated bandwidth management
solutions, decide to invest in the management of their networks and the
performance of important business software applications and, in particular,
adopt our bandwidth management solutions. The growth of the bandwidth
management solutions market also depends upon a number of factors, including the
availability of inexpensive bandwidth, especially in international markets, and
the growth of wide area networks. The failure of the market to
rapidly grow would adversely affect our sales and sales prospects leading to
sustained financial losses.
FUTURE
FINANCIAL PERFORMANCE WILL DEPEND ON THE INTRODUCTION AND ACCEPTANCE OF NEW
PRODUCTS.
We
believe our current products address the needs of small to medium sized service
providers. Our future financial performance will also depend on the
successful development, introduction and market acceptance of new and enhanced
products that address additional market requirements in a timely and
cost-effective manner. In the past, we have experienced delays in product
development and such delays may occur in the future.
When we
announce new products or product enhancements that have the potential to replace
or shorten the life cycle of our existing products, customers may defer
purchasing our existing products. These actions could harm our
operating results by unexpectedly decreasing sales and exposing us to greater
risk of product obsolescence.
IF
WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WE MAY EXPERIENCE OPERATING
INEFFICIENCIES AND HAVE DIFFICULTY MEETING DEMAND FOR OUR PRODUCTS.
We seek
to regulate our growth due to capital requirements. If our customer
base and market grow rapidly, we would need to expand to meet this
demand. This expansion could place a significant strain on our
management, products and support operations, sales and marketing personnel and
other resources, which could harm our business.
In the
future, we may experience difficulties meeting the demand for our products and
services. The installation and use of our products requires
training. If we are unable to provide training and support for our
products, the implementation process will be longer and customer satisfaction
may be lower. In addition, our management team may not be able to
achieve the rapid execution necessary to fully exploit the market for our
products and services. We cannot assure you that our systems,
procedures or controls will be adequate to support the anticipated growth in our
operations. The failure to meet the challenges presented by rapid
customer and market expansion would cause us to miss sales opportunities and
otherwise have a negative impact on our sales and profitability.
We may
not be able to install management information and control systems in an
efficient and timely manner, and our current or planned personnel, systems,
procedures and controls may not be adequate to support our future
operations.
WE
HAVE LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND DEFEND AGAINST
CLAIMS WHICH MAY ADVERSELY AFFECT OUR ABILITY TO COMPETE.
For our
primary line of PacketLogic products, we rely on trade secret law, contractual
rights and trademark law to protect our intellectual property rights and for the
intellectual property we developed prior to the acquisition of Netintact, we
rely on a combination of copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property
rights. We cannot assure you that the actions we have taken will
adequately protect our intellectual property rights or that other parties will
not independently develop similar or competing products that do not infringe on
our patents. We enter into confidentiality or license agreements with
our employees, consultants and corporate partners, and control access to and
distribution of the software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise misappropriate or use our
products or technology.
In an
effort to protect our unpatented proprietary technology, processes and know-how,
we require our employees, consultants, collaborators and advisors to execute
confidentiality agreements. These agreements, however, may not
provide us with adequate protection against improper use or disclosure of
confidential information. These agreements may be breached, and we
may not become aware of, or have adequate remedies in the event of, any such
breach. In addition, in some situations, these agreements may
conflict with, or be subject to, the rights of third parties with whom our
employees, consultants, collaborators or advisors have previous employment or
consulting relationships. Also, others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets.
Our
industry is characterized by the existence of a large number of patents and
frequent claims and related litigation regarding patent and other intellectual
property rights. If we are found to infringe the proprietary rights
of others, or if we otherwise settle such claims, we could be compelled to pay
damages or royalties and either obtain a license to those intellectual property
rights or alter our products so that they no longer infringe upon such
proprietary rights. Any license could be very expensive to obtain or
may not be available at all. Similarly, changing our products or
processes to avoid infringing the rights of others may be costly or
impractical. Litigation resulting from claims that we are infringing
the proprietary rights of others could result in substantial costs and a
diversion of resources, and could have a material adverse effect on our
business, financial condition and results of operations.
WE
EXPECT OUR PRODUCTION VOLUME TO INCREASE, CAUSING DEPENDENCE ON CONTRACT
MANUFACTURERS WHICH COULD HARM OUR OPERATING RESULTS.
If the
demand for our products grows, we will need to increase our capacity for
material purchases, production, test and quality control
functions. Any disruptions in product flow could limit our revenue
growth and adversely affect our competitive position and reputation, and result
in additional costs or cancellation of orders under agreements with our
customers.
If we
rely on independent contractors to manufacture our products, we will be reliant
on their performance to meet business demand. We may experience
delays in product shipments from contract manufacturers. Contract
manufacturer performance problems may arise in the future, such as inferior
quality, insufficient quantity of products, or the interruption or
discontinuance of operations of a manufacturer, any of which could have a
material adverse effect on our business and operating results.
We do not
know whether we will effectively manage our contract manufacturers or that these
manufacturers will meet our future requirements for timely delivery of products
of sufficient quality and quantity. We also intend to regularly
introduce new products and product enhancements, which will require that we
rapidly achieve volume production by coordinating our efforts with those of our
suppliers and contract manufacturers. The inability of our contract
manufacturers to provide us with adequate supplies of high-quality products or a
reduction in the general capacity of the contract manufacturing industry may
cause a delay in our ability to fulfill orders and may have a material adverse
effect on our business, operating results and financial condition.
As part
of our cost-reduction efforts, we will need to realize lower per unit product
costs from our contract manufacturers by means of volume efficiencies and the
utilization of manufacturing sites in lower-cost
geographies. However, we cannot be certain when or if such price
reductions will occur. The failure to obtain such price reductions
would adversely affect our gross margins and operating results.
THERE
ARE CERTAIN ORIGINAL EQUIPMENT MANUFACTURER (“OEM”) SOURCED COMPONENTS WHICH, IF
THE SUPPLIER WERE TO FAIL TO ADEQUATERLY SUPPLY TO US, OUR PRODUCT SALES MAY
SUFFER.
Reliance
upon OEMs, as well as industry supply conditions generally involves several
additional risks, including the possibility of a shortage of components and
reduced control over delivery schedules (which can adversely affect our
distribution schedules), and increases in component costs (which can adversely
affect our profitability). Most all our hardware products, or the components of
our hardware components, are based on industry standards and are therefore
available from multiple manufacturers. If our supplier were to fail to deliver,
alternative suppliers are available, although qualification of the alternative
manufacturers and establishment of reliable suppliers could result in delays and
a possible loss of sales, which could affect operating results
adversely. However, in some specific cases we have single-sourced
components, because alternative sources are not currently
available. If these components were to become not available, we could
experience more significant, though temporary, supply interruptions, delays, or
inefficiencies, adversely affecting our results of operations.
IF
OUR PRODUCTS CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS, WE COULD INCUR
SIGNIFICANT UNEXPECTED EXPENSES AND LOSE SALES.
Network
products frequently contain undetected software or hardware errors when new
products or new versions or updates of existing products are first released to
the marketplace. In the past, we have experienced such errors in
connection with new products and product upgrades. We expect that
such errors or component failures will be found from time to time in the future
in new or existing products, including the components incorporated therein,
after the commencement of commercial shipments. These problems may
have a material adverse effect on our business by causing us to incur
significant warranty and repair costs, diverting the attention of our
engineering personnel from new product development efforts, delaying the
recognition of revenue and causing significant customer relations
problems. Further, if our product is not accepted by customers due to
defects, and such returns exceed the amount we accrued for defect returns based
on our historical experience, our operating results would be adversely
affected.
Our
products must successfully interface with products from other
vendors. As a result, when problems occur in a computer or
communications network, it may be difficult to identify the sources of these
problems. The occurrence of hardware and software errors, whether or
not caused by our products, could result in the delay or loss of market
acceptance of our products and any necessary revisions may cause us to incur
significant expenses. The occurrence of any such problems would
likely have a material adverse effect on our business, operating results and
financial condition.
WE
EXPECT THE AVERAGE SELLING PRICES OF OUR PRODUCTS TO DECREASE, WHICH MAY REDUCE
GROSS MARGIN OR REVENUE.
The
network equipment industry has traditionally experienced a rapid erosion of
average selling prices due to a number of factors, including competitive pricing
pressures, promotional pricing, technological progress and a slowdown in the
economy that has resulted in excess inventory and lower prices as companies
attempt to liquidate this inventory. We anticipate that the average
selling prices of our products will decrease in the future in response to
competitive pricing pressures, excess inventories, increased sales discounts and
new product introductions by us or our competitors. We may experience
substantial decreases in future operating results due to the erosion of our
average selling prices.
SOME
OF OUR CUSTOMERS MAY NOT HAVE THE RESOURCES TO PAY FOR OUR
PRODUCTS.
Some of
our customers may experience serious cash flow problems and, as a result, find
it increasingly difficult to finance their operations. If some of
these customers are not successful in generating sufficient revenue or securing
alternate financing arrangements, they may not be able to pay, or may delay
payment for, the amounts that they owe us. Furthermore, they may not
order as many products from us as forecast, or cancel orders
entirely. The inability of some of our potential customers to pay us
for our products may adversely affect our cash flow, the timing of our revenue
recognition and the amount of revenue, which may cause our stock price to
decline.
OUR
OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY PRODUCT SALES OCCURRING OUTSIDE
THE UNITED STATES AND FLUCTUATIONS IN THE VALUE OF THE UNITED STATES DOLLAR
AGAINST FOREIGN CURRENCIES.
A
significant percentage of PacketLogic sales are generated outside of the United
States. PacketLogic sales and operating expenses denominated in foreign
currencies could affect our operating results as foreign currency exchange rates
fluctuate. Changes in exchange rates between these foreign currencies and the
U.S. Dollar will affect the recorded levels of our assets and liabilities as
foreign assets and liabilities are translated into U.S. Dollars for presentation
in our financial statements, as well as our net sales, cost of goods sold, and
operating margins. The primary foreign currencies in which we have exchange rate
fluctuation exposure are the European Union Euro, the Swedish Krona and the
Australian Dollar. As we expand, we could be exposed to exchange rate
fluctuation in other currencies. Exchange rates between these currencies and
U.S. Dollars have fluctuated significantly in recent years and may do so in the
future. Hedging foreign currencies can be difficult, especially if the currency
is not freely traded. We cannot predict the impact of future exchange rate
fluctuations on our operating results. We currently do not hedge any foreign
currencies
LEGISLATIVE
ACTIONS, HIGHER INSURANCE COSTS AND NEW ACCOUNTING PRONOUNCEMENTS ARE LIKELY TO
IMPACT OUR FUTURE FINANCIAL POSITION AND RESULTS OF OPERATIONS.
Recent
regulatory changes, including the Sarbanes-Oxley Act of 2002, and future
accounting pronouncements and regulatory changes have and will continue to have
an impact on our future financial position and results of
operations. These changes and proposed legislative initiatives are
likely to affect our general and administrative costs. In addition,
insurance costs, including health and workers' compensation insurance premiums,
have been increasing on a historical basis and are likely to continue to
increase in the future. Recent and future pronouncements associated
with expensing executive compensation and employee stock option may also impact
operating results. These and other potential changes could materially
increase the expenses we report under generally accepted accounting principles,
and adversely affect our operating results.
OUR
PRODUCTS MUST COMPLY WITH EVOLVING INDUSTRY STANDARDS AND COMPLEX GOVERNMENT
REGULATIONS OR ELSE OUR PRODUCTS MAY NOT BE WIDELY ACCEPTED, WHICH MAY PREVENT
US FROM GROWING OUR NET REVENUE OR ACHIEVING PROFITABILITY.
The
market for network equipment products is characterized by the need to support
new standards as different standards emerge, evolve and achieve
acceptance. We will not be competitive unless we continually
introduce new products and product enhancements that meet these emerging
standards. In the past, we have introduced new products that were not
compatible with certain technological standards, and in the future we may not be
able to effectively address the compatibility and interoperability issues that
arise as a result of technological changes and evolving industry
standards. Our products must comply with various United States
federal government requirements and regulations and standards defined by
agencies such as the Federal Communications Commission, in addition to standards
established by governmental authorities in various foreign countries and
recommendations of the International Telecommunication Union. Some of
our product offerings are used to support compliance of our customers with
CALEA. Accordingly we must comply with the changing requirements of
CALEA. If we do not comply with existing or evolving industry
standards or if we fail to obtain timely domestic or foreign regulatory
approvals or certificates we will not be able to sell our products where these
standards or regulations apply, which may prevent us from sustaining our net
revenue or achieving profitability.
FAILURE
TO SUCCESSFULLY EXPAND OUR SALES AND SUPPORT TEAMS OR EDUCATE THEM ABOUT
TECHNOLOGIES AND OUR PRODUCT FAMILIES MAY HARM OUR OPERATING
RESULTS.
The sale
of our products and services requires a concerted effort that is frequently
targeted at several levels within a prospective customer's
organization. We may not be able to increase net revenue unless we
expand our sales and support teams in order to address all of the customer
requirements necessary to sell our products.
We cannot
assure you that we will be able to successfully integrate our employees into the
company or to educate current and future employees in regard to rapidly evolving
technologies and our product families. Failure to do so may hurt our
revenue growth and operating results.
WE
MUST CONTINUE TO DEVELOP AND INCREASE THE PRODUCTIVITY OF OUR INDIRECT
DISTRIBUTION CHANNELS TO INCREASE NET REVENUE AND IMPROVE OUR OPERATING
RESULTS.
Our
distribution strategy focuses primarily on developing and increasing the
productivity of our indirect distribution channels through resellers and
distributors. If we fail to develop and cultivate relationships with
significant resellers, or if these resellers are not successful in their sales
efforts, sales of our products may decrease and our operating results could
suffer. Many of our resellers also sell products from other vendors
that compete with our products. We cannot assure you that we will be
able to enter into additional reseller and/or distribution agreements or that we
will be able to successfully manage our product sales channels. Our
failure to do any of these could limit our ability to grow or sustain
revenue. In addition, our operating results will likely fluctuate
significantly depending on the timing and amount of orders from our
resellers. We cannot assure you that our resellers and/or
distributors will continue to market or sell our products effectively or
continue to devote the resources necessary to provide us with effective sales,
marketing and technical support. Such failure would negatively affect revenue
and profitability.
OUR HEADQUARTERS ARE LOCATED IN
NORTHERN CALIFORNIA WHERE DISASTERS MAY OCCUR THAT COULD DISRUPT OUR OPERATIONS
AND HARM OUR BUSINESS
.
Our
corporate headquarters are located in Silicon Valley in Northern
California. Historically, this region has been vulnerable to natural
disasters and other risks, such as earthquakes, which at times have disrupted
the local economy and posed physical risks to us and our manufacturers'
property. In addition, terrorist acts or acts of war targeted at the
United States, and specifically Silicon Valley, could cause damage or disruption
to us, our employees, facilities, partners, suppliers, distributors and
resellers, and customers, which could have a material adverse effect on our
operations and financial results. We currently have significant
redundant, capacity in Sweden in the event of a natural disaster or catastrophic
event in Silicon Valley. In the event of such an occurrence, our
business could nonetheless suffer. The operations in Sweden are
subject to disruption by extreme winter weather.
ACQUISITIONS
MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS.
We may
acquire or make investments in complementary businesses, products, services or
technologies on an opportunistic basis when we believe they will assist us in
carrying out our business strategy. Growth through acquisitions has
been a successful strategy used by other network control and management
technology companies. In 2006, we completed mergers with the
Netintact entities. These and any future acquisitions could distract
our management and employees and increase our expenses. Furthermore,
Procera had to issue equity securities to pay for these acquisitions which had a
dilutive effect on its existing stockholders and it may have to incur debt or
issue equity securities to pay for any future acquisitions, the issuance of
which could be dilutive to Procera’s existing stockholders.
ANTI-TAKEOVER
PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A THIRD-PARTY
ACQUISITION OF PROCERA DIFFICULT.
We are a
Nevada corporation. Anti-takeover provisions of Nevada law and our
charter documents could make it more difficult for a third party to acquire
control of us, even if such change in control would be beneficial to
stockholders. Our articles of incorporation provide that our Board of
Directors may issue preferred stock without stockholder approval. The
issuance of preferred stock could make it more difficult for a third party to
acquire us. All of the foregoing could adversely affect prevailing
market prices for our common stock.
OUR
COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.
The
market price of our common stock is likely to be highly volatile as is the stock
market in general, and the market for small cap and micro cap technology
companies in particular, has been highly volatile. Investors may not
be able to resell their shares of our common stock following periods of
volatility because of the market's adverse reaction to volatility. We
cannot assure you that our stock will trade at the same levels of other stocks
in our industry or that industry stocks, in general, will sustain their current
market prices. Factors that could cause such volatility may include,
among other things:
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actual
or anticipated fluctuations in our quarterly operating
results;
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announcements
of technological innovations;
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changes
in financial estimates by securities
analysts;
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conditions
or trends in the network control and management
industry;
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changes
in the market valuations of other such industry related companies;
and
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the
acceptance of market makers and institutional investors of our
stock.
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OUR
COMMON STOCK IS CONSIDERED "A PENNY STOCK" AND MAY BE DIFFICULT TO
SELL.
The SEC
has adopted regulations which generally define "penny stock" to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to specific
exemptions. As the market price of our common stock has been less
than $5.00 per share during this quarter, our common stock is considered a
"penny stock" according to SEC rules. This designation requires any
broker or dealer selling these securities to disclose certain information
concerning the transaction, obtain a written agreement from the purchaser and
determine that the purchaser is reasonably suitable to purchase the
securities. These rules may restrict the ability of brokers or
dealers to sell our common stock and may affect the ability of investors to sell
their shares.
SHARES
ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT OUR
STOCK PRICE.
Sales of
substantial amounts of common stock, including shares issued upon the exercise
of outstanding options and warrants, under Rule 144 of the Securities Act of
1933, as amended, or otherwise could adversely affect the prevailing market
price of our common stock and could impair our ability to raise capital at that
time through the sale of our securities.
Sales of
a substantial number of shares of common stock after the date of this report
could adversely affect the market price of our common stock and could impair our
ability to raise capital through the sale of additional equity
securities. As of December 31, 2007, we had 76,069,233 shares of
common stock outstanding.
|
Unresolved Staff
Comments
|
We have
no unresolved SEC staff comments.
Our
headquarters are located in Los Gatos, California, 95032 where we conduct our
corporate administration, worldwide production and product testing, hardware
development and selling, general and administrative functions for the
Americas. We have a 73-month lease for that property starting from
June 1, 2005 and the monthly rent ranges from $12,949 per month for the first
year to $19,424 during the last year. The Swedish headquarters of
Netintact is located in Varberg, Sweden where we conduct our worldwide software
development and selling, general and administration for the EMEA
region. We have a 36 month lease for that property starting from May
31, 2005 and the rent is $5,612 per month for 331 square meters. The Swedish
headquarters is moving to its new facility in Varberg in April
2008. The lease will be for 60 months and the rent is $12,230 per
month for 689 square meters. Netintact PTY leases 55 square meters located
in Melbourne VIC 3004, Australia where we conduct our selling, general and
administration activities for the Asia Pacific region. This lease is
for 12 months starting July 1, 2007 with a monthly payment of
$1,592.
We
believe that our facilities are adequate for our needs and that additional
suitable space will be available on acceptable terms as required.
None
|
Submission
of Matters to a Vote of Security
Holders
|
There
were no matters submitted to a vote of securities holders during our fiscal
quarter ended December 31, 2007.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Our
common stock was quoted on the OTC Bulletin Board under the symbol "PRNW" until
September 18, 2007 and, as of September 19, 2007 it listed on the American Stock
Exchange under the symbol “PKT”. Our common stock has been traded on
the OTC Bulletin Board since June 24, 2003. Prior to that date, our
common stock was not actively traded in the public market. For the
periods indicated, the following table sets forth the high and low bid prices
per share of common stock as stated in the Over the Counter Bulletin Board or
the American Stock Exchange. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
|
|
Common
Stock
|
|
|
|
2007
|
|
|
2006
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
3.03
|
|
|
$
|
1.80
|
|
|
$
|
0.88
|
|
|
$
|
0.47
|
|
Second
Quarter
|
|
|
3.40
|
|
|
|
2.27
|
|
|
|
0.75
|
|
|
|
0.46
|
|
Third
Quarter
|
|
|
3.24
|
|
|
|
2.56
|
|
|
|
0.85
|
|
|
|
0.43
|
|
Fourth
Quarter
|
|
|
2.97
|
|
|
|
1.05
|
|
|
|
2.28
|
|
|
|
0.77
|
|
On March
17, 2008, the closing price of our common stock on the AMEX was
$1.15.
Dividend
Policy
Procera
has not declared or paid any cash dividends on its common stock or other
securities and does not anticipate paying any cash dividends in the foreseeable
future. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon Procera’s
financial condition, results of operations, capital requirements, and such other
factors as the Board of Directors deem relevant.
Recent
Sales of Unregistered Securities
In
October the company issued 100,047 common shares is connection with two cashless
exercises of warrants. In November the company issued 72,727 shares
of common stock to a placement agent in connection with our November 2006
private equity placement. In November 2007, an employee exercised
20,825 options to purchase common shares at a price of $14,994.
For these
instances, we relied on the exemption provided by Section 4(2) of the Securities
Act of 1933, as amended. The certificates representing the securities
issued displayed a restrictive legend to prevent transfer except in compliance
with applicable laws, and our transfer agent was instructed not to permit
transfers unless directed to do so by us, after approval by our legal
counsel.
Issuer
Purchases of Equity Securities
We did
not repurchase any of our equity securities during the fiscal year ended
December 31, 2007.
Holders
There
were 172 holders of record of our common stock as of March 17,
2008.
Performance
Graph
The graph
below compares the cumulative total return to security holders of our common
shares with the comparable cumulative return of two indexes: the AMEX composite
Index and the AMEX Networking Index. The graph assumes the investment of $100 on
June 24, 2003 the day on which the sales prices of our common stock were first
quoted on the OTC Bulletin Board, and the reinvestment of all dividends and
interest. Points on the graph represent the performance as of the last business
day of each of the fiscal years indicated.
COMPARISON
OF CUMULATIVE TOTAL RETURN
AMONG
PROCERA NETWORKS, INC.,
AMEX
COMPOSITE INDEX AND AMEX NETWORKING INDEX
The
information under the heading “Performance Graph” shall not be deemed filed for
purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by
reference in any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
ASSUMES
$100 INVESTED ON JUNE 24, 2003
ASSUMES
DIVIDEND REINVESTED
FISCAL
YEAR ENDING DEC. 31, 2007
|
|
PERIOD
ENDING
|
|
COMPANY/INDEX/MARKET
|
|
|
06/2003
|
|
|
12/31/2003
|
|
|
12/31/2004
|
|
|
12/31/2005
|
|
|
12/31/2006
|
|
|
12/31/2007
|
|
Procera
Networks, Inc
|
|
|
100.00
|
|
|
|
256.41
|
|
|
|
161.54
|
|
|
|
42.74
|
|
|
|
187.18
|
|
|
|
119.66
|
|
AMEX
Composite
|
|
|
100.00
|
|
|
|
122.36
|
|
|
|
149.55
|
|
|
|
183.41
|
|
|
|
214.41
|
|
|
|
251.24
|
|
AMEX
Networking
|
|
|
100.00
|
|
|
|
141.32
|
|
|
|
140.97
|
|
|
|
133.56
|
|
|
|
142.83
|
|
|
|
147.2
|
|
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
We did
not repurchase any of our equity securities during the fiscal year ended
December 31, 2007.
This
section presents our selected historical financial data. You should read the
financial statements carefully and the notes thereto included in this report and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” Included in Item 7 of this Form 10-K/A.
The
Statement of Operations data for the years ended December 31, 2007, December 31,
2006, and January 1, 2006 and the Balance Sheet data as of December 31, 2007 and
2006 has been derived from our audited financial statements included elsewhere
in this report. The Statement of Operations data for the years ended January 2,
2005 and December 28, 2003 and the Balance Sheet data as of January 1, 2006,
January 2, 2005 and December 28, 2003 has been derived from our audited
financial statements that are not included in this report. Historical results
are not necessarily indicative of future results. See the Notes to Financial
Statements for an explanation of the method used to determine the number of
shares used in computing basic and diluted net loss per share.
The
figures in the following table reflect rounding adjustments.
|
|
Fiscal
Year Ended (1)
|
|
|
|
(all
data in thousands except income (loss) per share)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
revenue
|
|
$
|
5,662
|
|
|
$
|
1,764
|
|
|
$
|
255
|
|
|
$
|
98
|
|
|
$
|
32
|
|
Service
revenue
|
|
|
1,011
|
|
|
|
150
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Net
revenue
|
|
|
6,673
|
|
|
|
1,914
|
|
|
|
255
|
|
|
|
98
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
cost of goods sold
|
|
|
3,928
|
|
|
|
1,139
|
|
|
|
308
|
|
|
|
161
|
|
|
|
62
|
|
Service
cost of goods sold
|
|
|
452
|
|
|
|
184
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Cost
of goods sold (2) (3)
|
|
|
4,380
|
|
|
|
1,323
|
|
|
|
308
|
|
|
|
161
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
2,293
|
|
|
|
591
|
|
|
|
(53
|
)
|
|
|
(63
|
)
|
|
|
(30
|
)
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development (2)(3)
|
|
|
3,151
|
|
|
|
3,065
|
|
|
|
2,605
|
|
|
|
2,157
|
|
|
|
1,376
|
|
Sales
and marketing (2) (3)
|
|
|
7,825
|
|
|
|
2,565
|
|
|
|
1,753
|
|
|
|
901
|
|
|
|
341
|
|
General
and administrative (2) (3)
|
|
|
4,923
|
|
|
|
2,724
|
|
|
|
2,339
|
|
|
|
3,227
|
|
|
|
1,151
|
|
Total
operating expenses
|
|
|
15,899
|
|
|
|
8,354
|
|
|
|
6,697
|
|
|
|
6,285
|
|
|
|
2,868
|
|
Operating
income (loss)
|
|
|
(13,606
|
)
|
|
|
(7,763
|
)
|
|
|
(6,750
|
)
|
|
|
(6,348
|
)
|
|
|
(2,898
|
)
|
Total
other income (expense), net
|
|
|
52
|
|
|
|
8
|
|
|
|
11
|
|
|
|
(15
|
)
|
|
|
(344
|
)
|
Income
(loss) before income taxes
|
|
|
(13,554
|
)
|
|
|
(7,755
|
)
|
|
|
(6,739
|
)
|
|
|
(6,363
|
)
|
|
|
(3,242
|
)
|
Provision
(benefit) for income taxes
|
|
|
1,073
|
|
|
|
252
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
(12,481
|
)
|
|
$
|
(7,503
|
)
|
|
$
|
(6,739
|
)
|
|
$
|
(6,363
|
)
|
|
$
|
(3,242
|
)
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.17
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.30
|
)
|
Diluted
|
|
$
|
(0.17
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.30
|
)
|
Shares
used in computing basic and diluted net income (loss) per
share:
|
|
|
71,422
|
|
|
|
50,444
|
|
|
|
30,445
|
|
|
|
23,593
|
|
|
|
10,700
|
|
|
(1)
|
We
adopted a calendar year end for our fiscal year ending
2006. During the fiscal periods corresponding to 2003, 2004 and
2005, our fiscal year ended on a 52-53 week period ending on the Sunday
closest to December 31.
|
|
(2)
|
Includes
stock-based compensation as
follows:
|
|
|
Fiscal Year
Ended (1)
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
2003
|
Cost
of goods sold
|
|
$
|
23
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
Research
and development
|
|
|
474
|
|
|
|
772
|
|
|
|
276
|
|
|
|
2
|
|
|
—
|
Sales
and marketing
|
|
|
741
|
|
|
|
263
|
|
|
|
29
|
|
|
|
76
|
|
|
—
|
General
and administrative
|
|
|
734
|
|
|
|
118
|
|
|
|
124
|
|
|
|
991
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stock-based compensation
|
|
$
|
1,972
|
|
|
$
|
1,169
|
|
|
$
|
429
|
|
|
$
|
1,069
|
|
$
|
85
|
|
(3)
|
Includes
amortization of acquired assets as
follows:
|
|
|
Fiscal Year
Ended (1)
|
|
(in
thousands)
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
Cost
of goods sold
|
|
$
|
1,526
|
|
|
$
|
509
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
Sales
and marketing
|
|
|
1,439
|
|
|
|
475
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
General
and administrative
|
|
|
741
|
|
|
|
244
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Total
amortization of acquisition costs
|
|
$
|
3,706
|
|
|
$
|
1,228
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
Ended (1)
|
|
(in
thousands)
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
Consolidated
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,865
|
|
|
$
|
5,214
|
|
|
$
|
1,255
|
|
|
$
|
4,148
|
|
|
$
|
1,936
|
|
Working
capital
|
|
|
6,291
|
|
|
|
5,571
|
|
|
|
734
|
|
|
|
3,983
|
|
|
|
1,807
|
|
Total
assets
|
|
|
17,411
|
|
|
|
18,148
|
|
|
|
1,698
|
|
|
|
4,653
|
|
|
|
2,306
|
|
Deferred
revenue
|
|
|
958
|
|
|
|
383
|
|
|
|
7
|
|
|
|
--
|
|
|
|
--
|
|
Accumulated
deficit
|
|
|
(37,838
|
)
|
|
|
(25,357
|
)
|
|
|
(17,853
|
)
|
|
|
(11,114
|
)
|
|
|
(4,751
|
)
|
Total
stockholders equity
|
|
$
|
12,373
|
|
|
$
|
13,934
|
|
|
$
|
851
|
|
|
$
|
4,107
|
|
|
$
|
1,880
|
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. We use words such as “may,” “will,” “expect,” “anticipate,”
“estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and
similar expressions to identify forward-looking statements. These statements
appearing throughout our amended 10-K are statements regarding our intent,
belief, or current expectations, primarily regarding our operations. You should
not place undue reliance on these forward-looking statements, which apply only
as of the date of this amended Annual Report on Form 10-K/A. Our actual results
could differ materially from those anticipated in these forward-looking
statements for many reasons, including those set forth under “Business” Item 1A
“Risk Factors” and elsewhere in this amended Annual Report on Form
10-K/A.
Overview
We are a
leading provider of bandwidth management, control and protection products and
solutions for broadband service providers worldwide. Our products
offer network administrators of service providers, governments, universities and
enterprises intelligent network traffic identification, control and service
management solutions.
Our
proprietary solution, PacketLogic, offers users the ability to monitor network
use on an application and user-specific basis in real-time, and offers real
improvements over existing DPI solutions. This capability allows network
administrators to maximize network utilization, reducing the need for additional
infrastructure investment. PacketLogic's modular, traffic and service management
software is comprised of five individual modules: traffic identification and
classification, traffic shaping, traffic filtering, flow statistics and
web-based statistics.
More than
400 service providers, higher-education institutions and other organizations
(with over 1,100 systems installed) have chosen PacketLogic ™ as
their network traffic management solution.
We face
serious competition from suppliers of standalone DPI products such as Allot
Communications, Sandvine, Arbor/Ellacoya and Packeteer (recently acquired by
BlueCoat). We also face competition from vendors supplying platform products
with some limited DPI functionality, such as switch/routers, routers, session
border controllers and VoIP switches. In addition, we face competition from
vendors that integrate an advertised "full" DPI solution into their products
such as Cisco Systems, Juniper, Ericsson and Foundry.
Most of
our competitors are larger, more established and have substantially greater
financial and other resources. Some competitors may be willing to
reduce prices and accept lower profit margins to compete with us. As
a result of this competition, we could lose market share and sales, or be forced
to reduce our prices to meet competition. However, we do not believe
there is an entrenched dominant supplier in our market. Based on our belief in
the superiority of our technology, we see an opportunity for us to capture
meaningful market share and benefit from what we believe will be strong growth
in the DPI market.
On August
18, 2006, we acquired the stock of Netintact AB, a Swedish
corporation. On September 29, 2006, we acquired the effective
ownership of the stock of Netintact PTY, an Australian company (“
Netintact
PTY
”). During the three months ended October 1, 2006, we
emerged from the development stage.
As a
result of the Netintact and Netintact PTY transactions, our core products and
business have changed dramatically. Netintact's flagship product and
technology, PacketLogic, now forms the core of our product
offering. We sell our products through our direct sales force,
resellers, distributors, and system integrators in the Americas, Asia Pacific,
and Europe.
We
continue to monitor the current unfavorable and uncertain domestic and global
economic conditions, and the potential impact on IT spending, including spending
for the products we sell. While we believe that our products may be less
affected by current conditions than many network products, we believe that our
customers are more carefully scrutinizing spending decisions, which could
negatively impact our future revenues.
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations are
based upon financial statements which have been prepared in accordance with
Generally Accepted Accounting Principles in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate these
estimates. We base our estimates on historical experience and on
assumptions that are believed to be reasonable. These estimates and
assumptions provide a basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions, and these differences may be
material. Our significant accounting policies are summarized in Note
2 to our audited financial statements for the year ended December 31, 2007
included elsewhere in this prospectus.
In accordance with SEC guidance, those
material accounting policies that we believe are the most critical to an
investor'
s understanding
of
our financial results and condition are discussed below.
Revenue
Recognition
Our most
common sale involves the integration of our software and a hardware
appliance. The software is essential to the functionality of the
product. We account for this revenue in accordance with Statement of
Position,
97-2
Software Revenue Recognition
,
as amended by
Modification of
SOP 98-9,
Software Revenue Recognition, With
Respect to Certain Transactions,
for all transactions involving
software. We recognize product revenue when all of the following have occurred:
(1) we have entered into a legally binding arrangement with a customer resulting
in the existence of persuasive evidence of an arrangement; (2) when product
title transfers to the customer as identified by the passage of responsibility
in accordance with the International Chamber of Commerce shipping term
(INCOTERMS 2000); (3) customer payment is deemed fixed or determinable and free
of contingencies and significant uncertainties; and (4) collection is
probable.
Our
product revenue consists of revenue from sales of our appliances and software
licenses. Product sales include a perpetual license to our software. Shipping
charges billed to customers are included in product revenue and the related
shipping costs are included in cost of product revenue. Virtually all
of our sales include post-contract support services (Service Revenue) which
consist of software updates and customer support. Software updates provide
customer access to a constantly growing library of electronic internet traffic
identifiers (signatures) and rights to non-specific software product upgrades,
maintenance releases and patches released during the term of the support period.
Support includes internet access to technical content, telephone and internet
access to technical support personnel and hardware support.
Receipt
of a customer purchase order is the primary method of determining persuasive
evidence of an arrangement exists.
Delivery
generally occurs when product title has transferred as identified by the passage
of responsibility per the INCOTERMS 2000. Our standard delivery terms are when
product is delivered to a common carrier from us, or our subsidiaries. However,
product revenue based on channel partner purchase orders is recorded based on
sell-through to the end user customers until such time as we have established
significant experience with the channel partner's ability to complete the sales
process. Additionally, when we introduce new products for which there is no
historical evidence of acceptance history, revenue is recognized on the basis of
end-user acceptance until such history has been established.
Since our
customer orders contain multiple items such as hardware, software, and services
which are delivered at varying times, we determine whether the delivered items
can be considered separate units of accounting as prescribed under Emerging
Issues Task Force (“EITF”) Issue No. 00-21, “
Revenue Arrangements with Multiple
Deliverables
(
EITF 00-21).EITF 00-21
states that delivered items should be considered separate units of accounting if
delivered items have value to the customer on a standalone basis, there is
objective and reliable evidence of the fair value of undelivered items, and if
delivery of undelivered items is probable and substantially in our
control. We use the residual method to recognize revenue when a
product agreement includes one or more elements to be delivered at a future date
and vendor specific objective evidence, or VSOE, of the fair value of all
undelivered elements exists. Through December 31, 2007, in virtually all of our
contracts, the only element that remained undelivered at the time of product
delivery was support and updates. We determine VSOE for PCS based on sales
prices charged to customers based upon renewal pricing for PCS. Each
contract or purchase order that we enter into includes a stated rate for PCS.
The renewal rate is equal to the stated rate in the original contract. We have a
history of such renewals, the vast majority of which are at the stated renewal
rate on a customer by customer basis. Under the residual method, the fair value
of the undelivered elements is deferred and the remaining portion of the
contract fee is recognized as product revenue. If evidence of the fair value of
one or more undelivered elements does not exist, all revenue is generally
deferred and recognized when delivery of those elements occurs or when fair
value can be established. When the undelivered element for which we do not have
a fair value is post contract support, revenue for the entire arrangement is
bundled and recognized ratably over the support period. Revenue related to these
arrangements is included in product and related support and services revenue in
the accompanying consolidated statements of operations. VSOE of fair value for
elements of an arrangement is based upon the normal pricing and discounting
practices for those services when sold separately and for support and updates is
additionally measured by the renewal rate offered to the customer. Prior to the
third quarter of 2005, we had not established VSOE for the fair value of support
contracts provided to our reseller class of customers. As such, prior to the
third quarter of 2005, we recognized all revenue on transactions sold through
resellers ratably over the term of the support contract, typically one year.
Beginning in the third quarter of 2005, we determined that we had established
VSOE of fair value of support for products sold to resellers, and began
recognizing product revenue upon delivery, provided the remaining criteria for
revenue recognition had been met.
Our fees
are typically considered to be fixed or determinable at the inception of an
arrangement, generally based on specific products and quantities to be
delivered. Substantially all of our contracts do not include rights of return or
acceptance provisions. To the extent that our agreements contain such terms, we
recognize revenue once the acceptance provisions are met or right of return
lapses. Payment terms to customers generally range from net 30 to 90 days. In
the event payment terms are provided that differ from our standard business
practices, the fees are deemed to not be fixed or determinable and revenue is
recognized when the payments become due, provided the remaining criteria for
revenue recognition have been met.
We assess the ability to collect from
our customers based on a number of factors, including credit worthiness of the
customer and past transaction
history with the customer. If the
customer is not deemed credit worthy, we defer all revenue from the arrangement
until payment is received and all other revenue recognition criteria have been
met.
Valuation of Long-Lived and
Intangible Assets and Goodwill
.
Effective
September 29, 2006, we completed the acquisition of Netintact, a privately held
software company and its subsidiaries. We issued 18,299,513 shares of
common stock with a total fair value of $9.4 million, in exchange for all
outstanding shares of Netintact AB and Netintact PTY. The acquisition
was accounted for by using the purchase method of accounting for business
combinations. We completed the valuation of the intangible assets and
analysis of deferred tax liabilities acquired in the Netintact transaction
pursuant to Statement of Financial Accounting
(“SFAS”) No.
109, paragraphs 30 and 258-260. Based on this analysis, the purchase
price ($9.4 million) was allocated to net worth acquired ($0.5 million),
intangible assets ($11.1 million), deferred tax impact ($3.1 million) and
goodwill ($.9 million).
We test
goodwill for impairment in accordance with Statement of Financial Accounting
Standards, “
Goodwill and Other
Intangible Assets
,”
SFAS 142 requires that
goodwill be tested for impairment at the “reporting-unit" level (Reporting Unit)
at least annually and more frequently upon the occurrence of certain events, as
defined by SFAS 142. Consistent with our determination that we have only one
reporting segment as defined in SFAS 131, “
Disclosures about Segments of an
Enterprise and Related Information
,” we have determined that we have only
one Reporting Unit. Goodwill is tested for impairment annually in a two-step
process. First, we determine if the carrying amount of our Reporting Unit
exceeds the “fair value” of the Reporting Unit, which would indicate that
goodwill may be impaired. If we determine that goodwill may be impaired, we
compare the “implied fair value” of the goodwill, as defined by SFAS 142, to our
carrying amount to determine if there is an impairment loss.
As of
December 31, 2006 and December 31, 2007, we concluded that there was no
impairment to the carrying value of goodwill.
In
accordance with SFAS 144, “Accounting
for Impairment or Disposal of
Long-lived Assets
,” we evaluate long-lived assets, including intangible
assets other than goodwill, for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Recoverability of these assets is measured by comparison of the
carrying amount of the asset to the future undiscounted cash flows the asset is
expected to generate. If the asset is considered to be impaired, the amount of
any impairment is measured as the difference between the carrying value and the
fair value of the impaired asset.
As of
December 31, 2006 and December 31, 2007, we have determined that our intangible
assets are reasonably stated and are expected to be recovered in the
future.
Allowance for Doubtful
Accounts
The
allowance for doubtful accounts reduces trade receivables to the amount that is
ultimately believed to be collectible. When evaluating the adequacy of the
allowance for doubtful accounts, management reviews the aged receivables on an
account-by-account basis, taking into consideration such factors as the age of
the receivables, customer history and estimated continued credit-worthiness, as
well as general economic and industry trends.
Stock Based
Compensation
Effective
January 2, 2006, the Company adopted the provisions of SFAS No. 123 (R),
“Share-Based Payment.” SFAS No. 123(R) requires the recognition of the fair
value of equity-based compensation. The fair value of stock options shares was
estimated using a Black-Scholes option valuation model. This model requires the
input of subjective assumptions, including expected stock price volatility and
estimated life of each award. The fair value of equity-based awards is measured
at grant date and is amortized over the vesting period of the award, net of
estimated forfeitures. All of the Company’s stock compensation is
accounted for as an equity instrument. The Company previously applied
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees,” and related interpretations and provided the required pro forma
disclosures of SFAS No. 123, “Accounting for Stock-Based
Compensation.” Prior to the adoption of SFAS No. 123 (R), the
Company provided the disclosures required under SFAS No. 123, as amended by SFAS
No. 148, “Accounting for Stock-Based Compensation—Transition and
Disclosures.” The Company recorded employee stock-based compensation
for the twelve months ended January 1, 2006 for options granted to employees
with a market value of the underlying common stock greater than exercise price
on the date of grant.
Accounting for Income
Taxes
We record
a tax provision for the anticipated tax consequences of the reported results of
operations. In accordance with SFAS No. 109, "Accounting for Income Taxes", the
provision for income taxes is computed using the asset and liability method,
under which deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial reporting
and tax bases of assets and liabilities, and for the operating losses and tax
credit carryforwards. Deferred tax assets and liabilities are measured using the
currently enacted tax rates that apply to taxable income in effect for the years
in which those assets are expected to be realized or settled. We record a
valuation allowance to reduce deferred tax assets to the amount that is believed
more likely than not to be realized. Management believes that sufficient
uncertainty exists regarding the future realization of deferred tax assets and,
accordingly, a full valuation allowance has been provided against net deferred
tax assets. Tax expense has taken into account any change in the valuation
allowance for deferred tax assets where the realization of various deferred tax
assets is subject to uncertainty.
In June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes (FIN 48), an interpretation of FASB Statement No. 109.” FIN 48
clarifies the accounting for uncertainty in income taxes by prescribing a
two-step method of first evaluating whether a tax position has met a more likely
than not recognition threshold and second, measuring that tax position to
determine the amount of benefit to be recognized in the financial statements.
FIN 48 provides guidance on the presentation of such positions within a
classified statement of financial position as well as on derecognition, interest
and penalties, accounting in interim periods, disclosure, and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006.
We
adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, we recognized no material adjustment in the liability
for unrecognized income tax benefits. At the adoption date of January 1, 2007,
we had $176,639 of unrecognized tax benefits, none of which would affect our
effective tax rate if recognized.
From the
date of our inception on May 1, 2002 through July 2, 2006, we were a development
stage company, devoting all of our efforts and resources to developing and
testing new products and preparing for introduction of our products into the
market place. During this period, we generated insignificant revenues
from actual sales of our products.
After we
acquired NetintactAB on August 18, 2006 and Netintact PTY on September 29, 2006,
we began to recognize increased revenue, costs and expenses associated with the
acquired companies and the introduction of Netintact's PacketLogic product line
to a broader customer base. Beginning with the three months which
ended October 1, 2006, we emerged from our development stage.
Revenue
Our
revenue is derived from sales of our hardware appliances, bundled software
licenses and from product support and services.
|
|
|
|
|
|
|
|
Variance
in
|
|
|
|
|
|
|
|
|
Variance
in
|
|
|
|
|
|
|
2006
|
|
|
Dollars
|
|
|
Percent
|
|
|
2006
|
|
|
2005
|
|
|
Dollars
|
|
|
Percent
|
|
Product
Revenue
|
|
$
|
5,661,945
|
|
|
$
|
1,763,827
|
|
|
$
|
3,898,118
|
|
|
|
221
|
%
|
|
$
|
1,763,827
|
|
|
$
|
254,809
|
|
|
$
|
1,509,018
|
|
|
|
592
|
%
|
Service
Revenue
|
|
|
1,010,596
|
|
|
|
150,603
|
|
|
|
859,993
|
|
|
|
571
|
%
|
|
|
150,603
|
|
|
|
–
|
|
|
|
150,603
|
|
|
|
–
|
%
|
Total
|
|
$
|
6,672,541
|
|
|
$
|
1,914,430
|
|
|
$
|
4,758,111
|
|
|
|
249
|
%
|
|
$
|
1,914,430
|
|
|
$
|
254,809
|
|
|
$
|
1,659,621
|
|
|
|
651
|
%
|
We operate
from three legal entities including
Procera (Americas), Netintact
AB
(Europe, Middle East, Africa or EMEA) and
Netintact PTY (Asia Pacific or APAC). The table below presents the
breakdown of revenue by entity
;
:
|
|
|
|
|
|
|
|
Variance
in
|
|
|
|
|
|
|
|
|
Variance
in
|
|
|
|
|
|
|
2006
|
|
|
Dollars
|
|
|
Percent
|
|
|
2006
|
|
|
2005
|
|
|
Dollars
|
|
|
Percent
|
|
Americas
|
|
$
|
2,391,098
|
|
|
$
|
515,513
|
|
|
$
|
1,875,585
|
|
|
|
364
|
%
|
|
$
|
515,513
|
|
|
$
|
254,809
|
|
|
$
|
260,704
|
|
|
|
102
|
%
|
EMEA
|
|
|
2,413,544
|
|
|
|
1,155,497
|
|
|
|
1,258,047
|
|
|
|
109
|
%
|
|
|
1,155,497
|
|
|
|
–
|
|
|
|
1,155,497
|
|
|
|
–
|
%
|
APAC
|
|
|
1,867,899
|
|
|
|
243,420
|
|
|
|
1,624,479
|
|
|
|
667
|
%
|
|
|
243,420
|
|
|
|
–
|
|
|
|
243,420
|
|
|
|
–
|
%
|
Total
|
|
$
|
6,672,541
|
|
|
$
|
1,914,430
|
|
|
$
|
4,758,111
|
|
|
|
249
|
%
|
|
$
|
1,914,430
|
|
|
$
|
254,809
|
|
|
$
|
1,659,621
|
|
|
|
651
|
%
|
As
a result of the Netintact transactions, our core products and business changed
dramatically. Prior to our acquisition of the Netintact companies, we
were a development stage company, devoting substantially all our efforts and
resources to developing and testing new products and preparing for the
introduction of our products into the marketplace. Prior to August 2006, we had
an immaterial amount of sales resulting from our legacy OptimIP
products. As a result of our acquisition of Netintact in August 2006,
we discontinued offering OptimIP and commenced the sale of
Netintact's flagship product and technology, PacketLogic, which accounted for
all of our subsequent revenue, and currently forms the core of our product
offerings.
We derive
our revenue from two sources, product revenues and service
revenues. Product revenue accounted for 85% and 92% of our net
revenues in 2007 and 2006, respectively. Product revenue increased in 2007 as a
result of our PacketLogic products being sold for the full year as compared to
2006 when we acquired the PacketLogic product as a result of our acquisition of
Netintact. The consolidated financial results for 2006 include sales
of PacketLogic in EMEA for 4.5 months and APAC for 3 months. In 2007
and 2006, we sold 409 units and 107 units, respectively, of our Netintact
products. The average selling prices or ASP’s of our Netintact
products were $18,912 and $19,057, respectively in 2007 and 2006. The
decrease was due to a change in product mix. During 2007, we
increased our new customers as well as obtained additional orders from existing
customers. In 2007, there was no revenue associated withour legacy
products, OptimIP.
Service
revenue consists primarily of maintenance revenue and, to a lesser extent,
training revenue. Maintenance revenues is recognized over the service
period. The typical support term is generally twelve months. Service revenue
increased in 2007 as a result of our PacketLogic products being sold for the
full year as compared to 2006 when we acquired the PacketLogic product as a
result of our acquisition of Netintact. This increase resulted from a
larger customer base due to our new product sales.
We
expanded our presence in APAC countries in 2007 and we developed strong channel
sales in this region. In 2006, the EMEA region experienced an OEM
license sale which was discontinued in 2007. As a result EMEA’s
growth was far below that experienced by APAC and Americas.
2006 versus
2005.
During the fiscal year 2005, we recognized
revenues of $254,809 from sales of our OptimIP product offerings. As
a result of the acquisition of the PacketLogic product family, our revenue
increased to $1,914,430 for the fiscal year 2006, which included revenue derived
from sales of OptimIP of $91,939 and from PacketLogic of
$1,822,491.
Cost
of Goods Sold
Cost of
goods sold includes: (i) direct material costs for products sold and direct
labor and manufacturing overhead, (ii) costs expected to be incurred for
warranty, and (iii) adjustments to inventory values, including reserves for slow
moving, inactive inventory, engineering changes and adjustments to reflect the
company
’
's
policy of valuing inventory at lower of cost or market on a first-in, first-out
basis. The following tables present the breakdown of cost of sales by
entity and cost of sales by category.
By
entity
|
|
2007
|
|
|
2006
|
|
|
Dollars
|
|
|
Percentage
|
|
|
2006
|
|
|
2005
|
|
|
Dollars
|
|
|
Percentage
|
|
Americas
|
|
$
|
1,499,246
|
|
|
$
|
461,754
|
|
|
$
|
1,037,492
|
|
|
|
225
|
%
|
|
$
|
461,754
|
|
|
$
|
307,799
|
|
|
$
|
153,955
|
|
|
|
50
|
%
|
EMEA
|
|
|
830,263
|
|
|
|
237,008
|
|
|
|
593,255
|
|
|
|
250
|
%
|
|
|
237,008
|
|
|
|
--
|
|
|
|
237,008
|
|
|
|
--
|
|
APAC
|
|
|
523,552
|
|
|
|
115,605
|
|
|
|
407,947
|
|
|
|
353
|
%
|
|
|
115,605
|
|
|
|
--
|
|
|
|
115,605
|
|
|
|
--
|
|
Amortization
of
Acquired
assets
|
|
|
1,526,000
|
|
|
|
508,667
|
|
|
|
1,017,333
|
|
|
|
200
|
%
|
|
|
508,667
|
|
|
|
--
|
|
|
|
508,667
|
|
|
|
--
|
|
Total
|
|
$
|
4,379,061
|
|
|
$
|
1,323,034
|
|
|
$
|
3,056,027
|
|
|
|
231
|
%
|
|
$
|
1,323,034
|
|
|
$
|
307,799
|
|
|
$
|
1,015,235
|
|
|
|
330
|
%
|
By
category
|
|
2007
|
|
|
2006
|
|
|
Dollars
|
|
|
2006
|
|
|
2005
|
|
|
Dollars
|
|
Materials
|
|
$
|
1,714,877
|
|
|
$
|
295,403
|
|
|
$
|
1,419,474
|
|
|
$
|
295,403
|
|
|
$
|
184,878
|
|
|
$
|
110,525
|
|
%
net product revenue
|
|
|
30
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
17
|
%
|
|
|
73
|
%
|
|
|
|
|
Manufacturing
Overhead
|
|
|
522,354
|
|
|
|
78,056
|
|
|
|
444,298
|
|
|
|
78,056
|
|
|
|
36,531
|
|
|
|
41,525
|
|
%
net product revenue
|
|
|
9
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
4
|
%
|
|
|
14
|
%
|
|
|
|
|
Warranty
|
|
|
54,132
|
|
|
|
6,713
|
|
|
|
47,419
|
|
|
|
6,713
|
|
|
|
8,032
|
|
|
|
(1,319
|
)
|
%
net product revenue
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
0
|
%
|
|
|
3
|
%
|
|
|
|
|
Valuation
Reserve
|
|
|
110,296
|
|
|
|
250,616
|
|
|
|
(140,320
|
)
|
|
|
250,616
|
|
|
|
78,358
|
|
|
|
172,258
|
|
%
net product revenue
|
|
|
2
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
14
|
%
|
|
|
31
|
%
|
|
|
|
|
Product
costs
|
|
|
2,401,659
|
|
|
|
630.788
|
|
|
|
1,770,871
|
|
|
|
630.788
|
|
|
|
307,799
|
|
|
|
322,989
|
|
%
net product revenue
|
|
|
42
|
%
|
|
|
36
|
%
|
|
|
|
|
|
|
36
|
%
|
|
|
121
|
%
|
|
|
|
|
Service
costs
|
|
|
451,402
|
|
|
|
183,579
|
|
|
|
267,823
|
|
|
|
183,579
|
|
|
|
-
|
|
|
|
183,579
|
|
%
of service revenue
|
|
|
45
|
%
|
|
|
122
|
%
|
|
|
|
|
|
|
122
|
%
|
|
|
|
|
|
|
|
|
Amortization
of acquired assets
|
|
|
1,526,000
|
|
|
|
508,667
|
|
|
|
1,017,333
|
|
|
|
508,667
|
|
|
|
-
|
|
|
|
508,667
|
|
%
of net total revenue
|
|
|
23
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
Total
cost of sales
|
|
$
|
4,379,061
|
|
|
$
|
1,323,034
|
|
|
$
|
3,056,027
|
|
|
$
|
1,323,034
|
|
|
$
|
307,799
|
|
|
$
|
1,015,235
|
|
%
Revenue
|
|
|
66
|
%
|
|
|
69
|
%
|
|
|
64
|
%
|
|
|
69
|
%
|
|
|
(121
|
)%
|
|
|
61
|
%
|
2007 versus
2006.
Total cost of goods sold during 2007 as
compared to 2006 decreased to 66% of net product sales versus 69%
respectively. The decrease in costs during 2007 was primarily due to
low initial margins from a 3
rd
party product sold in 2007 and the increase in
manufacturing overhead. Cost of sales also increased during 2007 due to
amortization of intangible assets acquired from Netintact of approximately
$1,526,000.
We
applied 50% of our manufacturing costs to engineering in support of prototype
activities. In 2007, manufacturing costs were fully allocated to
revenue support. In addition, manufacturing costs expanded to
include additional product testing functions.
Valuation
reserves decreased during 2007 as the entire OptimIP product line was written
off in 2006 as a result of the changeover to the PacketLogic product
family.
2006 versus
2005.
Margins improved
from
2006
when
compared to 2005 primarily due to
higher
material costs and valuation reserves
in 2005.
Material costs in
2005 were over 72% of
net
product sales
primarily
due to low procurement volumes.
Valuation reserves were over 30% of
net product
sales
in 2005 as a result
of early stage product changes associated with
initial market review of
products. Cost of sales increased during 2006 due to amortization of intangible
assets acquired from Netintact of approximately $508,667.
Gross
Profit or Loss and Margins
The
following table represents gross margin by entity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
891,852
|
|
|
$
|
53,759
|
|
|
$
|
838,093
|
|
|
$
|
53,759
|
|
|
$
|
(52,990
|
)
|
|
$
|
106,749
|
|
%
Revenue
|
|
|
37
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
10
|
%
|
|
|
(21
|
)%
|
|
|
|
|
EMEA
|
|
|
1,583,281
|
|
|
|
918,489
|
|
|
|
664,792
|
|
|
|
918,489
|
|
|
|
--
|
|
|
|
918,489
|
|
%
Revenue
|
|
|
66
|
%
|
|
|
79
|
%
|
|
|
|
|
|
|
79
|
%
|
|
|
--
|
|
|
|
|
|
APAC
|
|
|
1,344,348
|
|
|
|
127,815
|
|
|
|
1,216,532
|
|
|
|
127,815
|
|
|
|
--
|
|
|
|
127,815
|
|
%
Revenue
|
|
|
72
|
%
|
|
|
53
|
%
|
|
|
|
|
|
|
53
|
%
|
|
|
--
|
|
|
|
|
|
Amortization
of
Acquired
assets
|
|
|
(1,526,000
|
)
|
|
|
(508,667
|
)
|
|
|
(1,017,333
|
)
|
|
|
(508,667
|
)
|
|
|
--
|
|
|
|
(508,667
|
)
|
%
Revenue
|
|
|
(35
|
)%
|
|
|
(38
|
)%
|
|
|
|
|
|
|
(38
|
)%
|
|
|
--
|
|
|
|
|
|
Total
|
|
$
|
2,293,480
|
|
|
$
|
591,396
|
|
|
|
1,702,084
|
|
|
$
|
591,396
|
|
|
$
|
(52,990
|
)
|
|
$
|
644,386
|
|
%
Revenue
|
|
|
34
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
31
|
%
|
|
|
(21
|
)%
|
|
|
|
|
2007 versus
2006.
Gross profit for 2007 increased by
$1,702,084 over 2006, primarily due to increased sales volume associated with
the Netintact acquisition and the PacketLogic family of
products. Product margin as a percentage of sales increased by 3%
from 2007 versus 2006.
Product
margins improved in the Americas as a result of conversion from low margin sales
of the OptimaIP product line to the more profitable PacketLogic
family. 2006 sales in the APAC region included a higher mix of
demonstrator sales which have no bundled software or relates software support
revenues. EMEA product margins were higher in 2006 than 2007
primarily due to OEM license sale (which has negligible cost of sale) in 2006,
which did not continue into 2007.
2006 versus
2005.
Gross profits for 2006 increased by $644,386
over 2005 primarily due to increased sales volume associated with the Netintact
acquisition.
Operating
Expenses
Research
and Development
Research
and development consists of costs associated with personnel, prototype
materials, initial product certifications and equipment
costs. Research and development costs are primarily categorized as
either sustaining (efforts for products already released) or development costs
(associated with new products).
|
|
Fiscal
year
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Research
and development expenses
|
|
$
|
3,151,438
|
|
|
$
|
3,065,266
|
|
|
$
|
2,604,897
|
|
Percent
of total revenue
|
|
|
47
|
%
|
|
|
160
|
%
|
|
|
1,022
|
%
|
2007 versus
2006.
Research and development expenses for fiscal
2007 increased by $86,172 when compared to fiscal
2006. Research and development expenses increased as a result
of the costs of the acquired Netintact companies of approximately $1,082,000,
and increases in services of $134,000, prototype materials of $60,000 and
miscellaneous expense increases of $18,000. Offsetting these expense
increases were expense decreases associated with reduced payroll costs of
$565,000 associated with the elimination of the OptimaIP product line, reduction
of operations expenses of $342,000 as a result of converting from a development
stage company, and lower stock based compensation expenses of
$301,000.
2006 versus
2005.
Research and development expenses for the fiscal
year 2006 increased by $460,369 when compared to the fiscal year 2006 as a
result of the costs of the acquired Netintact companies of approximately
$309,000 and stock based compensation expense of approximately
$512,000. Offsetting these expense increases were expense decreases
as a result of exiting the development phase of the OptimaIP product line
including lower prototype labor and procurement support of approximately
$203,000, lower prototype materials and equipment of approximately $95,000,
lower development personnel costs of approximately $45,000 and other
miscellaneous expense decreases of approximately $18,000.
Development
costs included in fiscal years 2007, 2006 and 2005 were $742,580, $293,101 and
$770,144 respectively. New product development costs decreased from
2005 to 2006 primarily as a result of completing the design stage of the
OptimaIP product line, exiting the development stage phase of operation and the
acquisition of the fully developed and tested PacketLogic product
line. Development costs increased in 2007 as compared to 2006 as a
result of exploring expanded market opportunities for the PacketLogic and DRDL
core technologies.
Sales
and Marketing
Sales and
marketing expenses primarily include personnel costs, sales commissions, and
marketing expenses such as trade shows, channel development and
literature.
|
|
Fiscal
year
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Sales
and marketing expenses
|
|
$
|
7,824,581
|
|
|
$
|
2,565,445
|
|
|
$
|
1,752,886
|
|
Percent
of total revenue
|
|
|
117
|
%
|
|
|
134
|
%
|
|
|
688
|
%
|
2007 versus 2006. Sales
and marketing expenses for the fiscal year 2007 increased by $5,259,136 when
compared to fiscal year 2006. The costs associated with the acquired
sales and marketing organizations of Netintact increased spending in 2007 by
approximately $2,305,000. Payroll costs increased by $1,130,000 as a
result of increasing employment from 22 employees at year end 2006 to 33
employees in 2007. Consulting expenses increased in 2007 by $410,000
primarily due to increased expenses for trade shows, product literature, and
channel development activities. Other expense increases in 2007
include travel expenditures of $204,000, stock based compensation of $488,000
and miscellaneous other items of $26,000. Sales and marketing expenses also
increased during 2007 due to amortization of intangible assets acquired from
Netintact of approximately $1,439,000.
2006
versus 2005. Sales and marketing expenses for the fiscal
year 2006 increased by $812,559 when compared to fiscal year
2005. Sales and marketing expenses increased as a result of costs
related to the acquired Netintact companies of approximately $455,000 and stock
based compensation expense of approximately $223,000. Offsetting
these expense increases were expense decreases related to lower independent
sales representative fees of approximately $103,000, lower employee related
costs of approximately $33,000 and miscellaneous other expense reductions of
approximately $20,000. Sales and marketing expenses also increased during 2006
due to amortization of intangible assets acquired from Netintact of
approximately $474,595.
General
and Administrative
General
and administrative expenses consist primarily of personnel and facilities costs
related to our executive, finance, human resources, and legal organizations,
fees for professional services and amortization of intangible
assets. Professional services include costs associated with legal,
audit and investor relations consulting costs.
|
|
Fiscal year
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
General
and administrative expenses
|
|
$
|
4,923,204
|
|
|
$
|
2,723,641
|
|
|
$
|
2,338,720
|
|
Percent
of total revenue
|
|
|
74
|
%
|
|
|
142
|
%
|
|
|
918
|
%
|
2007 versus
2006. General and administrative expenses for the fiscal
year ended December 31, 2007 increased by $2,199,563 when compared to the fiscal
year ended December 31, 2006. Expense increases during 2007 included
amortization of intangible assets acquired from Netintact of approximately
$741,333, stock based compensation of approximately $471,000, professional
services of $365,000, personnel costs of $316,000, Netintact administrative
costs of $213,000, travel related spending of $79,000, AMEX entrance fees of
$75,000, facility expenses including insurance of $71,000, investor relations of
$58,000, expensed tools of $32,000 and miscellaneous spending of
$23,000.
2006 versus
2005. General and administrative expenses for the fiscal
year ended December 31, 2006 increased by $384,921 when compared to the fiscal
year ended January 1, 2006. Increases in general and administrative
expenses include expenses of the acquired Netintact companies of approximately
$36,000, the amortization of intangible assets associated with the acquisition
of the Netintact companies of approximately $244,499, legal and audit
fees of approximately $297,000, investor relations expenses of
approximately
$371,000,
employee related expenses of approximately $91,000 and facility related expenses
of approximately
$35,000. Offsetting
these expense increases were expenses decreases due to reduction in expenses for
consultant payments of approximately $524,000 associated with unsuccessful
financings in 2005, insurance of approximately
$42,000,
stock based compensation of approximately $6,000, reduction of bad debt expenses
of approximately
$107,000 and
miscellaneous other expense reductions of approximately $11,000.
Interest
and Other Income
During fiscal 2007 we maintained higher
cash balances than in prior years as a result of a late 2006 private placement
of equity (PIPE) financing and a July 2007 PIPE. Net cash interest
and other income exceed $51,858 versus net interest and other income of $7,904
in 2006 and $10,578 in 2005. Interest charged to expense for the fiscal
year
ending
December 31, 2007 and 2006 was $6,559 and $8,918 respectively.
Liquidity
and Capital Resources
Balance
Sheet and Cash Flows
Cash and
Cash Equivalents and Investments. The following table
summarizes our cash and cash equivalents and investments, which are classified
as “available for sale” and consist of highly liquid financial
instruments:
|
|
Fiscal
year
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,864,648
|
|
|
$
|
5,214,177
|
|
|
$
|
650,471
|
|
The cash
and cash equivalents balance increased $0.7 million from December 31, 2006 due
to activities in the following areas.
|
|
Increase
(Decrease)
|
|
Net
cash used in operating activities
|
|
$
|
(7,048,194
|
)
|
Net
cash used in investing activities
|
|
|
(499,503
|
)
|
Net
cash provided by financing activities
|
|
|
8,218,037
|
|
Effect
of exchange rates
|
|
|
(19,869
|
)
|
Net
change in cash and cash equivalents
|
|
$
|
650,471
|
|
During
the fiscal year ending December 31, 2007, cash was provided primarily by the
proceeds of a private placement of equity in July 2007 totaling $7.5 million and
the exercise of warrants and options totaling $.8 million.
Although
we recorded a net loss of $12.5 million we used only $7.0 million of cash in
operations due to net non-cash adjustments. The primary non-cash
adjustments include stock based employee compensation of $2.0 million, stock
based services expense of $.5 million, intangible amortization of $3.7 million,
depreciation of $.2
million and
change in net worth of $.2
million
offset by the amortization of the tax benefit associated with the intangible
amortization of $1.1 million. Our primary uses of cash for net
working capital included an increase in inventories and accounts receivable and
deferred revenue
offset by
increases in accounts payable, accrued expenses and deferred revenue and a
decrease in prepaid expenses.
Based on
current reserves and anticipated cash flow from operations, our working capital
may not be sufficient to meet all of the needs of our business objectives
through the end of 2008. Our future capital requirements will depend
on many factors, including our rate of growth, the expansion of our sales and
marketing activities, development of additional channel partners and sales
territories, introduction of new products, enhancement of existing products, and
the continued acceptance of our products. We may also enter into
arrangements that require investment such as complimentary businesses, service
expansion, technology partnerships or acquisitions.
Debt and
Lease Obligations. At December 31, 2007, we had
obligations for leased equipment from various sources as shown
below. Interest rates on such debt range from 9% to 10%. We also
lease office space and equipment under non-cancelable operating and capital
leases with various expiration dates through 2014.
As of
December 31, 2007, future minimum lease payments that come due in the current
and following fiscal years ending December 31 are as follows:
|
|
Total
|
|
|
Less
than 1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than 5 years
|
|
Long
Term Debt Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Lease obligations
|
|
$
|
96,640
|
|
|
$
|
33,867
|
|
|
$
|
24,300
|
|
|
$
|
22,012
|
|
|
$
|
16,461
|
|
Operating
Lease Obligations
|
|
|
1,521,373
|
|
|
|
329,053
|
|
|
|
745,566
|
|
|
|
446,754
|
|
|
|
–
|
|
Total
|
|
$
|
1,618,013
|
|
|
$
|
362,920
|
|
|
$
|
769,866
|
|
|
$
|
468,766
|
|
|
$
|
16,461
|
|
Deferred
Revenue Items
The
following table represents our deferred revenue for the periods ending December
31, 2007 and 2006.
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
$
|
957,891
|
|
|
$
|
383,231
|
|
|
$
|
574,660
|
|
Product sales include post contract
support and hardware maintenance services which are deferred until earned. The
contract period typically is one year but can range as long as three
years. Additionally, when we introduce new products for which there
is no historical evidence of acceptance history, revenue is deferred until
receipt of end-user acceptance until such history has been
established. The increase in deferred revenue during 2007 is
reflective of an increasing base of customers and related support contract
renewals on historical sales.
Material
Commitments of Capital
We use
third-party contract manufacturers to assemble and test our
products. In order to reduce manufacturing lead-times and ensure an
adequate supply of inventories, our agreements with some of these manufacturers
allow them to procure long lead-time component inventory on its behalf based on
a rolling production forecast provided by the company. We may be
contractually obligated to purchase long lead-time component inventory procured
by certain manufacturers in accordance with our forecasts. In addition, we issue
purchase orders to our third-party manufacturers that may not be cancelable at
any time. As of December 31, 2007, we had no open non-cancelable
purchase orders with our third-party manufacturers.
Off-Balance
Sheet Arrangements
As of
December 31, 2007, we had no off-balance sheet items as described by Item 303(c)
of Securities and Exchange Commission Regulation S-K. We have not
entered into any transactions with unconsolidated entities whereby we have
financial guarantees, subordinated retained interests, derivative instruments or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities, or any other obligations under a variable interest in an
unconsolidated entity that provides us with financing, liquidity, market risk or
credit risk support.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “
Fair
Value
Measurements
,(SFAS 157). This
Standard defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles and expands disclosures about
fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 for financial assets and liabilities, as well as for any other
assets and liabilities that are carried at fair value on a recurring basis, and
should be applied prospectively. Subsequently, the FASB provided for a one-year
deferral of the provisions of SFAS. 157 for non-financial assets and liabilities
that are recognized or disclosed at fair value in the consolidated financial
statements on a non-recurring basis. We have not determined the effect that the
adoption of SFAS 157 will have on our consolidated results of operations,
financial condition or cash flows.
In
February 2008, the FASB issued FSP 157-2 “Partial Deferral of the Effective Date
of Statement 157” (FSP 157-2). FSP 157-2 delays the effective date of SFAS No.
157, for all 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 beginning after November 15,
2008. The Company is currently assessing the impact of SFAS No. 157-2 on the
Company’s consolidated statement of financial condition and results of
operations.
In
February 2007, the FASB issued SFAS No. 159, “
The Fair Value Option for Financial
Assets and Financial Liabilities
” (SFAS 159), which permits companies to
elect to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. This
election is irrevocable. SFAS 159 was effective for us on January 1, 2008. We
have not determined the effect that the adoption of SFAS 159 will have on our
consolidated results of operations, financial condition or cash
flows.
In
December 2007, the FASB issued SFAS No. 141R,
Business Combinations
, which
will significantly change the accounting for business combinations. SFAS No.
141R is effective for us for business combinations beginning in fiscal 2009. We
are currently evaluating this statement.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 ("SFAS 160"). The
standard changes the accounting for noncontrolling (minority) interests in
consolidated financial statements including the requirements to classify
noncontrolling interests as a component of consolidated stockholders’ equity,
and the elimination of "minority interest" accounting in results of operations
with earnings attributable to noncontrolling interests reported as part of
consolidated earnings. Additionally, SFAS 160 revises the accounting for both
increases and decreases in a parent’s controlling ownership interest. SFAS 160
is effective for fiscal years beginning after December 15, 2008, with early
adoption prohibited. Procera Networks is currently evaluating the impact that
the pending adoption of SFAS 160 will have on its financial
statements.
On March
19, 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133
(“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s
derivative and hedging activities. These enhanced disclosures will discuss (a)
how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. SFAS No. 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. We have not
determined the impact, if any SFAS No. 161 will have on our consolidated
financial statements.
See Note
1 in our Notes to Consolidated Financial Statements for information regarding
other recent accounting pronouncements.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
Foreign
Currency Risk
Our sales
contracts are denominated predominantly in United States dollars Swedish krona,
Australian dollars and the EURO. We incur certain operating expenses
in United States dollars, Swedish krona and Australian
dollars. Therefore, we are subject to volatility in cash flows due to
fluctuations in foreign currency exchange rates, particularly changes in the
aforementioned currencies. To date, we have not entered into any hedging
contracts since exchange rate fluctuations have had minimal impact on our
operating results and cash flows.
Interest
Rate Sensitivity
We had
unrestricted cash and cash equivalents totaling $5.9 million and $5.2 million at
December 31, 2007 and 2006, respectively. The unrestricted cash and cash
equivalents are held for working capital purposes. We do not enter into
investments for trading or speculative purposes. Cash and cash equivalents
include highly liquid investments with a maturity of ninety days or less at the
time of purchase. Cash equivalents consist primarily of money market securities,
Due to the high investment quality and short duration of these investments, we
do not believe that we have any material exposure to changes in the fair market
value as a result of changes in interest rates. Declines in interest rates,
however, will reduce future investment income. If overall interest rates had
fallen by 10% in 2007, our interest income on cash and cash equivalents would
have declined approximately $5,200, assuming consistent investment
levels.
|
Financial
Statements and Supplementary Data
|
PROCERA
NETWORKS, INC. AND SUBSIDIARIES
TABLE
OF CONTENTS
|
|
|
|
|
Page
|
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
|
F-1
- F-3
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
|
F-4
|
Consolidated
Statements of Operations for the years ended December 31, 2007, 2006 and
January 1, 2006
|
|
F-5
|
Consolidated
Statement of Share Holders Equity for the years ended December 31, 2007,
2006, and January 1, 2006
|
|
F-6
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006 and
January 1, 2006
|
|
F-9
|
Notes
to Consolidated Financial Statements
|
|
F-10
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Procera
Networks, Inc.
Los
Gatos, California
We have
audited the accompanying consolidated balance sheets of Procera Networks, Inc.
(“Procera”) as of December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders’ equity and cash flows for the fiscal
years ended December 31, 2007 and 2006. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Procera
Networks, Inc. as of December 31, 2007 and 2006 and the consolidated results of
their operations and their consolidated cash flows for the fiscal years ended
December 31, 2007 and 2006 in conformity with accounting
principles generally accepted in the United States of America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Procera’s internal control over financial
reporting as of December 31, 2007, based on criteria established in the Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission ( the COSO criteria) and our report dated March 24,
2008 expressed an adverse opinion on the company’s internal control over
financial reporting.
/s/ PMB
Helin Donovan, LLP
PMB Helin
Donovan, LLP
San
Francisco, California
March 24,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL
CONTROL OVER FINANCIAL REPORTING
The Board
of Directors and Stockholders
Procera
Networks, Inc.
Los
Gatos, California
We have
audited the accompanying consolidated balance sheets of Procera Networks,
Inc.(“Procera”) as of December 31 , 2007 and 2006, and the related
consolidated statements of operations, stockholders’ equity and cash
flows for the fiscal years ended December 31, 2007 and 2006. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management’s assessment as of December 31, 2007:
|
·
|
The
Company did not have sufficient control over the closing process and could
not prepare its financial statements, footnotes and 10-K disclosures in a
timely fashion. This weakness which resulted in significant
last minute changes to the Company’s financial reports and Form 10-K,
could have resulted in material errors to the financial
statements.
|
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Procera
Networks Corp. and subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of operations, stockholders’ equity and
comprehensive income (loss) and cash flows for each of the years in the two-year
period ended December 31, 2007. The aforementioned material weakness was
considered in determining the nature, timing, and extent of audit tests applied
in our audit of the 2007 consolidated financial statements, and this report does
not affect our report dated March 24, 2008 which expressed an unqualified
opinion on those consolidated financial statements.
In our
opinion, management’s assessment that Procera Networks, Inc., did not maintain
effective internal control over financial reporting as of December 31, 2007, is
fairly stated, in all material respects, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, because
of the effect of the material weaknesses described above on the achievement of
the objectives of the control criteria, Procera Networks, Inc., has not
maintained effective internal control over financial reporting as of December
31, 2007, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
PMB
Helin Donovan, LLP
San
Francisco, California
March 24,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
of
Procera Networks, Inc.
We have
audited the accompanying statements of operations, stockholders' equity
(deficit), and cash flows of Procera Networks, Inc. for the year ended January
1, 2006. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement
presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the results of its operations and its cash flows of Procera
Networks, Inc. for the year ended January 1, 2006, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Burr,
Pilger & Mayer LLP
Palo
Alto, California
February
13, 2006
PROCERA
NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,864,648
|
|
|
$
|
5,214,177
|
|
Accounts
receivable, net of allowance for doubtful accounts of $241,062 and
$11,672, as of December 31, 2007 and 2006 respectively
|
|
|
1,819,272
|
|
|
|
1,161,170
|
|
Inventories,
net
|
|
|
1,320,022
|
|
|
|
259,207
|
|
Prepaid
expenses and other current assets
|
|
|
520,137
|
|
|
|
284,225
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
9,524,079
|
|
|
|
6,918,779
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
4,476,224
|
|
|
|
6,330,948
|
|
Purchased
intangible assets, net
|
|
|
2,403,405
|
|
|
|
3,842,405
|
|
Goodwill
|
|
|
960,209
|
|
|
|
960,209
|
|
Other
non-current assets
|
|
|
47,805
|
|
|
|
95,919
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
17,411,722
|
|
|
$
|
18,148,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
668,289
|
|
|
$
|
286,232
|
|
Deferred
revenue
|
|
|
957,891
|
|
|
|
383,231
|
|
Accrued
liabilities
|
|
|
1,572,975
|
|
|
|
656,943
|
|
Capital
leases payable-current portion
|
|
|
33,867
|
|
|
|
20,982
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
3,233,022
|
|
|
|
1,347,388
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities:
|
|
|
|
|
|
|
|
|
Deferred
rent
|
|
|
7,797
|
|
|
|
20,621
|
|
Deferred
tax liability
|
|
|
1,734,855
|
|
|
|
2,820,600
|
|
Capital
leases payable-non-current portion
|
|
|
62,773
|
|
|
|
25,152
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
5,038,447
|
|
|
|
4,213,761
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
–
|
|
|
|
–
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 15,000,000 shares authorized; no shares issued
and outstanding as of December 31, 2007 and 2006
|
|
|
–
|
|
|
|
–
|
|
Common
stock, $0.001 par value; 100,000,000 shares authorized; 76,069,233 and
70,416,105 shares issued and outstanding as of December 31, 2007 and 2006,
respectively
|
|
|
76,069
|
|
|
|
70,416
|
|
Additional
paid-in capital
|
|
|
50,058,560
|
|
|
|
39,206,537
|
|
Accumulated
other comprehensive gain (loss)
|
|
|
76,861
|
|
|
|
14,381
|
|
Accumulated
deficit
|
|
|
(37,838,215
|
)
|
|
|
(25,356,835
|
)
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
12,373,275
|
|
|
|
13,934,499
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
17,411,722
|
|
|
$
|
18,148,260
|
|
See
accompanying notes to consolidated financial statements.
PROCERA
NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
YEARS
ENDED DECEMBER 31, 2007 DECEMBER 31, 2006, AND JANUARY 1, 2006
|
|
Years
Ended December
|
|
|
|
Dec
31
|
|
|
Dec
31
|
|
|
Jan
1
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
revenue
|
|
$
|
5,661,945
|
|
|
$
|
1,763,827
|
|
|
$
|
254,809
|
|
Service
revenue
|
|
|
1,010,596
|
|
|
|
150,603
|
|
|
|
--
|
|
Net
sales
|
|
|
6,672,541
|
|
|
$
|
1,914,430
|
|
|
$
|
254,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
cost of goods sold
|
|
|
3,927,659
|
|
|
|
1,139,455
|
|
|
|
307,799
|
|
Service
cost of goods sold
|
|
|
451,402
|
|
|
|
183,579
|
|
|
|
--
|
|
Costs
of Goods Sold
|
|
|
4,379,061
|
|
|
|
1,323,034
|
|
|
|
307,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
2,293,480
|
|
|
|
591,396
|
|
|
|
(52,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development (1)
|
|
|
3,151,438
|
|
|
|
3,065,266
|
|
|
|
2,604,897
|
|
Sales
and marketing (1)
|
|
|
7,824,581
|
|
|
|
2,565,445
|
|
|
|
1,752,886
|
|
General
and administrative (1)
|
|
|
4,923,204
|
|
|
|
2,723,641
|
|
|
|
2,338,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
15,899,223
|
|
|
|
8,354,352
|
|
|
|
6,696,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(13,605,743
|
)
|
|
|
(7,762,956
|
)
|
|
|
(6,749,493
|
)
|
Interest
and other income, net
|
|
|
51,858
|
|
|
|
7,904
|
|
|
|
10,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(13,553,885
|
)
|
|
|
(7,755,052
|
)
|
|
|
(6,738,915
|
)
|
Income
tax benefit
|
|
|
1,072,505
|
|
|
|
251,573
|
|
|
|
–
|
|
Net
loss after tax
|
|
$
|
(12,481,380
|
)
|
|
$
|
(7,503,479
|
)
|
|
$
|
(6,738,915
|
)
|
Other
comprehensive income: Change in foreign currency translation
adjustment
|
|
|
62,480
|
|
|
|
14,381
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$
|
(12,418,900
|
)
|
|
$
|
(7,489,098
|
)
|
|
$
|
(6,738,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
$
|
(0.17
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computing basic and antidilutive net loss per
share
|
|
|
71,422,184
|
|
|
|
50,443,688
|
|
|
|
30,445,423
|
|
|
(1)
|
Includes
amortization of acquired assets as
follows:
|
|
|
Dec
31,
|
|
|
Dec
31,
|
|
|
Jan
1,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cost
of goods sold
|
|
$
|
1,526,000
|
|
|
$
|
508,667
|
|
|
$
|
--
|
|
Sales
and marketing
|
|
|
1,439,000
|
|
|
|
474,595
|
|
|
|
--
|
|
General
and administrative
|
|
|
741,333
|
|
|
|
244,499
|
|
|
|
--
|
|
Total
|
|
$
|
3,706,333
|
|
|
$
|
1,227,761
|
|
|
$
|
--
|
|
See accompanying notes to consolidated financial
statements.
Procera
Networks, Inc.
Statements
of Stockholders' Equity
For
the Twelve Months Ended December 31, 2007, December 31, 2006 and January 1,
2006
|
|
|
|
|
Stock
|
|
|
|
|
|
|
|
|
Accum.
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Issuance
|
|
|
Add.
Paid-In
|
|
|
Subscribed
Com. Stock
|
|
|
Comprehensive
|
|
|
Accum.
|
|
|
Stockholders'
|
|
Description
|
|
Shares
|
|
|
Amount
|
|
|
Costs
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
(loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
January 2, 2005
|
|
|
24,115,406
|
|
|
$
|
24,115
|
|
|
$
|
(771,892
|
)
|
|
$
|
11,645,247
|
|
|
|
5,762,500
|
|
|
$
|
4,324,375
|
|
|
|
-
|
|
|
$
|
(11,114,441
|
)
|
|
$
|
4,107,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with private placement of common stock at
$0.80 per share in December 2004, less issuance costs of
$285,625
|
|
|
5,762,500
|
|
|
|
5,763
|
|
|
|
-
|
|
|
|
4,318,612
|
|
|
|
(5,762,500
|
)
|
|
|
(4,324,375
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
of common stock at $1.86 per share to charity organization in connection
with private placement in December 2004
|
|
|
17,473
|
|
|
|
17
|
|
|
|
-
|
|
|
|
32,483
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,500
|
|
Issuance
of common stock for cash at $0.075 per share upon exercise of warrants in
March 2005
|
|
|
100,000
|
|
|
|
100
|
|
|
|
-
|
|
|
|
7,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,500
|
|
Issuance
of common stock for cash at $2.00 per share upon exercise of warrants in
March 2005, less issuance cost of $5,000
|
|
|
50,000
|
|
|
|
50
|
|
|
|
(5,000
|
)
|
|
|
99,950
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95,000
|
|
Issuance
of common stock for cash at $0.075 per share upon exercise of warrants in
April 2005
|
|
|
75,000
|
|
|
|
75
|
|
|
|
-
|
|
|
|
5,550
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,625
|
|
Issuance
of common stock for cash at $1.50 per share upon exercise of warrants in
April 2005, less issuance cost of $4,898
|
|
|
557,438
|
|
|
|
557
|
|
|
|
(4,898
|
)
|
|
|
835,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
831,259
|
|
Issuance
of common stock for cash at $1.40 per share upon exercise of warrants in
April 2005
|
|
|
102,500
|
|
|
|
103
|
|
|
|
-
|
|
|
|
143,397
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
143,500
|
|
See accompanying notes to consolidated financial
statements.
Issuance
of common stock for services provided at $0.51 per share in November
2005
|
|
|
165,000
|
|
|
|
165
|
|
|
|
-
|
|
|
|
83,985
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
84,150
|
|
Fair
value of common stock warrants issued to non-employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
542,648
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
542,648
|
|
Stock
based employee compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
429,386
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
429,386
|
|
Common
stock subscribed, net of issuance costs of $112,000
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,500,000
|
|
|
|
1,288,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,288,000
|
|
Common
stock subscribed for services to be rendered
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,833
|
|
|
|
22,917
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,917
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,738,915
|
)
|
|
|
(6,738,915
|
)
|
Balances,
January 1, 2006
|
|
|
30,945,317
|
|
|
$
|
30,945
|
|
|
$
|
(781,790
|
)
|
|
$
|
18,144,258
|
|
|
|
3,545,833
|
|
|
$
|
1,310,917
|
|
|
|
-
|
|
|
$
|
(17,853,356
|
)
|
|
$
|
850,974
|
|
See accompanying notes to consolidated financial
statements.
Procera
Networks, Inc.
Statements
of Stockholders' Equity (Deficit)
For
the Twelve Months Ended December 31, 2007, December 31, 2006 and January 1,
2006
|
|
Common
Stock
|
|
|
Add.
Paid-In
|
|
|
Subscribed
Com. Stock
|
|
|
Accum.
Other
Comprehensive
|
|
|
Accum.
|
|
|
Total
Stockholders
|
|
Description
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
(loss)
|
|
|
Deficit
|
|
|
Equity
|
|
Balances
January 1, 2006
|
|
|
30,945,317
|
|
|
$
|
30,945
|
|
|
$
|
17,362,468
|
|
|
|
3,545,833
|
|
|
$
|
1,310,917
|
|
|
$
|
-
|
|
|
$
|
(17,853,356
|
)
|
|
$
|
850,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with private placement at $.40 per share in
February 2006, less direct transaction costs
|
|
|
11,500,025
|
|
|
|
11,500
|
|
|
|
4,105,969
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,117,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock and placement agent warrants with private placement at
$.40 per share in February 2006, paid in 2005
|
|
|
3,500,000
|
|
|
|
3,500
|
|
|
|
1,396,500
|
|
|
|
(3,500,000
|
)
|
|
|
(1,288,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
112,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common stock and invester warrants in connection with November 2006
private placement at $1.00 per share, net of direct transaction
costs
|
|
|
5,100,000
|
|
|
|
5,100
|
|
|
|
4,835,259
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,840,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock at $0.60 per share in exchange for outstanding stock of
Netintact
|
|
|
17,539,513
|
|
|
|
17,540
|
|
|
|
9,153,543
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,171,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock at $0.82 per share in exchange for outstanding stock of
Netintact PTY
|
|
|
760,000
|
|
|
|
760
|
|
|
|
272,933
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
273,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
|
|
Common
Stock
|
|
|
Add.
Paid-In
|
|
|
Subscribed
Com. Stock
|
|
|
Accum.
Other
Comprehensive
|
|
|
Accum.
|
|
|
Total
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
(loss)
|
|
|
Deficit
|
|
|
Equity
|
|
Issuance
of common stock upon exercise of warrants at prices ranging from
$0.10-$1.37
|
|
|
246,250
|
|
|
|
246
|
|
|
|
266,766
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
267,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
|
1,168,611
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,168,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 825,000 shares of common stock having a market value of $0.70 per share
in exchange for 18 months of investor relations services
|
|
|
825,000
|
|
|
|
825
|
|
|
|
570,718
|
|
|
|
(45,833
|
)
|
|
|
(22,917
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
548,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of warrants issued to service providers
|
|
|
-
|
|
|
|
-
|
|
|
|
73,770
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
73,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,381
|
|
|
|
-
|
|
|
|
14,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss for 2006
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(7,503,479
|
)
|
|
|
(7,503,479
|
)
|
Balances,
December 31, 2006
|
|
|
70,416,105
|
|
|
$
|
70,416
|
|
|
$
|
39,206,537
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
14,381
|
|
|
$
|
(25,356,835
|
)
|
|
$
|
13,934,499
|
|
See accompanying notes to
consolidated financial statements.
Procera
Networks, Inc.
Statements
of Stockholders' Equity (Deficit)
For
the Twelve Months Ended December 31, 2007, December 31, 2006 and January 1,
2006
|
|
Common
Stock
|
|
|
Add.
Paid-In
|
|
|
Accum. Other
Comprehensive
|
|
|
Accum.
|
|
|
Total
Stockholders
|
|
Description
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
(Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
Balances,
December 31, 2006
|
|
|
70,416,105
|
|
|
$
|
70,416
|
|
|
$
|
39,206,537
|
|
|
$
|
14,381
|
|
|
$
|
(25,356,835
|
)
|
|
$
|
13,934,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock upon exercise of warrants at prices ranging from $0.075 -
$1.37
|
|
|
1,323,410
|
|
|
|
1,323
|
|
|
|
754,118
|
|
|
|
|
|
|
|
|
|
|
|
755,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
|
1,972,275
|
|
|
|
|
|
|
|
|
|
|
|
1,972,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with the private placement of common shares
at $2.00 per share in July 2007, less issuance costs
|
|
|
4,072,477
|
|
|
|
4,073
|
|
|
|
7,484,562
|
|
|
|
|
|
|
|
|
|
|
|
7,488,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock valued at $3.08 per share to vendor for search firm
services.
|
|
|
247,500
|
|
|
|
247
|
|
|
|
611,078
|
|
|
|
|
|
|
|
|
|
|
|
611,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock valued at $3.08 per share to vendor for search firm
services.
|
|
|
9,741
|
|
|
|
10
|
|
|
|
29,990
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,480
|
|
|
|
|
|
|
|
62,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss for 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,481,380)
|
|
|
|
(12,481,380)
|
|
Balances,
December 31, 2007
|
|
|
76,069,233
|
|
|
$
|
76,069
|
|
|
$
|
(50,058,560)
|
|
|
$
|
76,861
|
|
|
$
|
(37,838,215)
|
|
|
$
|
12,373,275
|
|
See accompanying notes to consolidated financial
statements.
Procera
Networks, Inc.
Consolidated
statements of Cash Flows
For
the Twelve Months Ended December 31, 2007, December 31, 2006 and January 1,
2006
|
|
Year
Ended
|
|
|
|
Dec
31,
|
|
|
Dec.
31,
|
|
|
Jan.
1,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(12,481,380
|
)
|
|
$
|
(7,503,479
|
)
|
|
$
|
(6,738,915
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,452,259
|
|
|
|
797,686
|
|
|
|
32,214
|
|
Amortization of
intangibles
|
|
|
1,439,000
|
|
|
|
474,595
|
|
|
|
—
|
|
Deferred income
taxes
|
|
|
(1,085,745
|
)
|
|
|
(298,252
|
)
|
|
|
—
|
|
Common stock
issued for services rendered
|
|
|
149,665
|
|
|
|
227,786
|
|
|
|
84,150
|
|
Common stock
subscribed for services
|
|
|
—
|
|
|
|
—
|
|
|
|
22,917
|
|
Compensation related
to stock-based awards
|
|
|
1,972,275
|
|
|
|
1,168,611
|
|
|
|
429,387
|
|
Fair value
of warrants issued to non-employees
|
|
|
—
|
|
|
|
73,770
|
|
|
|
542,647
|
|
Changes in
operating assets and liabilities, net of acquired assets and assumed
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(501,591
|
)
|
|
|
(684,003
|
)
|
|
|
22,872
|
|
Inventories
|
|
|
(1,064,009
|
)
|
|
|
(7,632
|
)
|
|
|
(13,403
|
)
|
Prepaids and
other current assets
|
|
|
307,934
|
|
|
|
232,461
|
|
|
|
45,793
|
|
Accounts payable
|
|
|
375,696
|
|
|
|
(142,774
|
)
|
|
|
221,910
|
|
Accrued
liabilities, deferred rent
|
|
|
847,082
|
|
|
|
76,333
|
|
|
|
(128,220
|
)
|
Deferred
revenue
|
|
|
540,620
|
|
|
|
180,960
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
158
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(7,048,194
|
)
|
|
|
(5,403,780
|
)
|
|
|
(5,478,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment, net
|
|
|
(499,503
|
)
|
|
|
(178,313
|
)
|
|
|
(25,335
|
)
|
Cash
acquired in the acquisition of a business
|
|
|
—
|
|
|
|
452,669
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) used in investing activities
|
|
|
(499,503
|
)
|
|
|
274,356
|
|
|
|
(25,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
7,488,631
|
|
|
|
8,939,828
|
|
|
|
—
|
|
Proceeds
from common stock subscription, net
|
|
|
—
|
|
|
|
—
|
|
|
|
1,288,000
|
|
Proceeds
from the exercise of warrants
|
|
|
674,177
|
|
|
|
265,012
|
|
|
|
1,082,884
|
|
Proceeds
from the exercise of stock options
|
|
|
81,264
|
|
|
|
—
|
|
|
|
—
|
|
Payments
on a capital lease
|
|
|
(26,035
|
)
|
|
|
(8,070
|
)
|
|
|
—
|
|
Payment
on loan payable
|
|
|
—
|
|
|
|
(110,000
|
)
|
|
|
—
|
|
Proceeds
from notes payable from a related party
|
|
|
—
|
|
|
|
—
|
|
|
|
240,000
|
|
Other
|
|
|
—
|
|
|
|
2,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
8,218,037
|
|
|
|
9,088,770
|
|
|
|
2,610,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rates on cash and cash equivalents
|
|
|
(19,869
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
650,471
|
|
|
|
3,959,346
|
|
|
|
(2,893,099
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
5,214,177
|
|
|
|
1,254,831
|
|
|
|
4,147,930
|
|
See accompanying notes to consolidated financial
statements.
|
|
|
Year
Ended
|
|
|
|
|
Dec
31,
|
|
|
|
Dec
31,
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
5,864,648
|
|
|
$
|
5,214,177
|
|
|
$
|
1,254,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
5,855
|
|
|
$
|
7,894
|
|
|
$
|
830
|
|
Cash
paid for interest
|
|
$
|
6,559
|
|
|
$
|
5,072
|
|
|
$
|
1,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
NON CASH FLOW INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with acquisition of Netintact AB and
Netintact PTY
|
|
$
|
—
|
|
|
$
|
9,444,776
|
|
|
$
|
—
|
|
Issuance of
common stock to charity organization in connection with the private
placement in December 2004
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,500
|
|
Conversion of
notes payable (See note 8)
|
|
$
|
—
|
|
|
$
|
130,000
|
|
|
$
|
—
|
|
Property and
equipment purchased with a capital lease
|
|
$
|
72,007
|
|
|
$
|
—
|
|
|
$
|
—
|
|
SUPPLEMENTAL NON
CASH FLOW INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets
acquired
|
|
|
|
|
|
|
1,225,225
|
|
|
|
|
|
Intangible assets
acquired
|
|
|
|
|
|
|
11,119,000
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
960,209
|
|
|
|
|
|
Less liabilities
assumed
|
|
|
|
|
|
|
(3,859,658
|
)
|
|
|
|
|
Net assets
acquired
|
|
|
|
|
|
|
9,444,776
|
|
|
|
|
|
Fair value
of common shares issued
|
|
|
|
|
|
|
9,444,776
|
|
|
|
|
|
Cash acquired
|
|
|
|
|
|
|
(452,669
|
)
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
PROCERA
NETWORKS INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JANUARY 1, 2006, DECEMBER 31, 2006 AND DECEMBER 31,
2007
1.
|
DESCRIPTION
OF BUSINESS
|
Procera
Networks, Inc. ("
Procera
"
or the "
Company
")
is a leading provider of bandwidth management and control products for broadband
service providers worldwide. Procera’s products offer network
administrators unique accuracy in identifying applications running on their
network, and the ability to optimize the experience of the service provider’s
subscribers based on management of the identified traffic.
The
company sells its products through its direct sales force, resellers,
distributors, and system integrators in the Americas, Asia Pacific, and Europe.
PacketLogic is deployed at more than 400 broadband service providers (“BSP’s”),
telephone companies, colleges and universities worldwide. The common stock of
Procera is listed on the American Stock Exchange under the trading symbol
“PKT”.
The
Company was incorporated IN 2002. On August 18, 2006, Procera
acquired the stock of Netintact AB, a Swedish corporation. On
September 29, 2006, Procera acquired the effective ownership of the stock of
Netintact PTY, an Australian company (“
Netintact
PTY
”).
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation
The
consolidated financial statements include the historical accounts of Procera and
its wholly owned subsidiaries, Netintact AB and Netintact PTY from
August 18, 2006 and September 29, 2006 respectively. All significant
intercompany transactions have been eliminated.
Fiscal
Year
Prior to
the fiscal year which ended December 31, 2006, the Company maintained its
accounting records on a 52-53 week fiscal year, with the fiscal year ending on
the Sunday nearest to December 31. Fiscal year 2005 ended January 1, 2006.
Beginning with the fiscal year which ended December 31, 2006, the Company
changed its’ fiscal year end to coincide with the calendar year
end.
Basis of
Presentation
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States, which contemplate
our continuation as a going concern.
Use of
Estimates
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to allowance
for doubtful accounts and sales returns, the value and marketability of
inventory, allowances for expected warranty costs, valuation of long-lived
assets, including intangible assets and goodwill, income taxes and stock-based
compensation, among others. We base our estimates on experience and other
criteria assumptions we believe are reasonable under expected business
conditions. Actual results may differ from these estimates if alternative
conditions are realized.
Fair
Value of Financial Instruments
The
carrying amounts of certain of the Company’s financial instruments including
cash and cash equivalents, accounts receivable, prepaid expenses, accounts
payable and accrued liabilities approximate fair value due to their short
maturities.
Concentration
of Credit Risk
The
company utilizes financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited in demand and money market
accounts in one financial institution in the United States. Deposits held with
financial institutions may exceed the amount of insurance provided on such
deposits. The Company has not experienced any material losses on its deposits of
cash and cash equivalents.
The
Company’s accounts receivable are derived from revenue earned from customers
located in the United States, Australia, Europe, Asia, Canada and the Middle
East. There are a limited number of customers accounting for the majority of
purchases in the industry worldwide.
On
December 31, 2007, accounts receivable consisted of amounts due from 62
customers. Four customers represented 16%, 12%, 5% and 5% of total
accounts receivable. No other customer represented more than 5% of
total accounts receivable.
During
Fiscal year 2007 three customers accounted for 15%, 11%, and 6% of revenues. No
other customer accounted for more than 5% of revenues.
For the
year ended January 1, 2006, two customers accounted for 46% and 15% of
revenues.
Cash and
Cash Equivalents and Restricted Cash
The
Company considers all highly liquid investments to mature within three months or
less to be cash equivalents.
Accounts
Receivable
Accounts
receivable are stated at net realizable value. Customers are on cash on delivery
terms until credit is approved.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts reduces accounts receivable to an amount that
management believes will be eventually collected. We evaluate the
adequacy of this allowance by reviewing the age of accounts receivable and also
take into consideration such as credit-worthiness, customer history and general
economic trends
Inventory
Inventory
is stated at the lower of cost or market. Cost is determined on a standard cost
basis which approximates actual cost on the first-in, first-out (“FIFO”) method.
Lower of cost or market is evaluated by considering obsolescence, excessive
levels of inventory, deterioration and other factors.
Property
and Equipment and assets held under capital lease
Property
and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, which is
three years for computer, tooling, test and office equipment and two years for
software. Leasehold improvements are amortized using the straight-line method
over the estimated useful lives of the assets or the term of the lease,
whichever is shorter. Whenever assets are retired or otherwise disposed of, the
cost and related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recognized in income for the period. The cost of
maintenance and repairs is expensed as incurred; significant improvements are
capitalized. Assets held under capital leases are recorded at
the lower of the net present value of the minimum lease payments or the fair
value of the leased asset at the inception of the lease.
Assets
Held under Capital Leases
Assets
held under capital leases are recorded at the lower of the net present value of
the minimum lease payments or the fair value of the leased asset at the
inception of the lease.
Impairment
of Long-Lived Assets
The
Company evaluates its long-lived assets for indicators of possible impairment by
comparison of the carrying amounts to future net undiscounted cash flows
expected to be generated by such assets when events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. Should an
impairment exist, the impairment loss would be measured based on the excess
carrying value of the asset over the asset’s fair value or discounted estimates
of future cash flows. The Company has not identified any such impairment losses
to date.
Impairment
of Finite Life Intangible Assets
The
Company evaluates its operations to ascertain if a triggering event has occurred
which would impact the value of finite-lived intangible assets (e.g., customer
lists). Examples of such triggering events include a significant disposal of a
portion of such assets, an adverse change in the market involving the business
employing the related asset, a significant decrease in the benefits realized
from an acquired business, difficulties or delays in integrating the business,
and a significant change in the operations of an acquired business.
As of
December 31, 2007, no such triggering event has occurred, and, no impairment
test was needed. An impairment test involves a comparison of undiscounted cash
flows against the carrying value of the asset as an initial test. If the
carrying value of such asset exceeds the undiscounted cash flow, the asset would
be deemed to be impaired. Impairment would then be measured as the difference
between the fair value of the fixed or amortizing intangible asset and the
carrying value to determine the amount of the impairment. The Company determines
fair value generally by using the discounted cash flow method. To the extent
that the carrying value is greater than the asset’s fair value, an impairment
loss is recognized for the difference.
Impairment
of Goodwill
The
Company periodically reviews the carrying value of intangible assets not subject
to amortization, including goodwill, to determine whether impairment may exist.
FASB Statement of Financial Accounting Standards No. 142,
Goodwill and Other
Intangible Assets
, requires that goodwill and certain intangible assets
be assessed annually for impairment using fair value measurement techniques.
Specifically, goodwill impairment is determined using a two-step process. The
first step of the goodwill impairment test is used to identify potential
impairment by comparing the fair value of a reporting unit with its carrying
amount, including goodwill. The estimates of fair value of a reporting unit,
generally the Company’s operating segments, are determined using various
valuation techniques with the primary technique being a discounted cash flow
analysis. A discounted cash flow analysis requires one to make various
judgmental assumptions including assumptions about future cash flows, growth
rates, and discount rates. The assumptions about future cash flows and growth
rates are based on the Company’s budget and long-term plans. Discount rate
assumptions are based on an assessment of the risk inherent in the respective
reporting units. If the fair value of a reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not impaired and the second
step of the impairment test is unnecessary. If the carrying amount of a
reporting unit exceeds its fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair value
of the reporting unit’s goodwill with the carrying amount of that goodwill. If
the carrying amount of the reporting unit’s goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to
that excess. The implied fair value of goodwill is determined in the same manner
as the amount of goodwill recognized in a business combination. That is, the
fair value of the reporting unit is allocated to all of the assets and
liabilities of that unit (including any unrecognized intangible assets) as if
the reporting unit had been acquired in a business combination and the fair
value of the reporting unit was the purchase price paid to acquire the reporting
unit.
As of
December 31, 2007, the Company concluded that there was no impairment to the
carrying value of goodwill.
Commitments
and Contingencies:
Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. The Company’s management and its
legal counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be sought
therein.
If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potentially material loss contingency is not
probable, but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material, would be
disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve
guarantees, in which case the nature of the guarantee would be
disclosed.
Stock and
Warrants Issued to Third Parties
The
Company accounts for stock and warrants issued to third parties, including
customers, in accordance with the provisions of the Emerging Issues Task Force
(EITF) Issue No. 96-18,
Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services
. Under the provisions of EITF
96-18, if none of the Company’s agreements have a disincentive for
nonperformance, the Company records a charge for the fair value of the stock and
the portion of the warrants earned from the point in time when vesting of the
stock or warrants becomes probable.
Stock-Based
Compensation
Effective
January 2, 2006, the Company adopted the provisions of SFAS No. 123 (revised
2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No.
123(R) 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 requisite service period. All of the Company’s stock compensation is
accounted for as an equity instrument. The Company elected to adopt the
modified-prospective application method as provided by SFAS No.
123(R).
Previous
to January 1, 2006, The Company applied Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
interpretations and provided the required pro forma disclosures of SFAS No. 123,
“Accounting for Stock-Based Compensation.”
No
stock-based compensation has been capitalized in inventory due to the
immateriality of such amounts.
The
Company estimates the fair value of stock options using a Black-Scholes
valuation model, consistent with the provisions of SFAS No. 123 (R), SEC SAB No.
107 and the Company’s prior period pro forma disclosures of net loss, including
stock-based compensation (determined under a fair value method as prescribed by
SFAS No. 123).
Revenue
Recognition
Our most
common sale involves the integration of our software and a hardware
appliance. The software is essential to the functionality of the
product. We account for this revenue in accordance with Statement of
Position, or SOP, 97-2,
Software Revenue
Recognition
, as amended by SOP 98-9,
Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain
Transactions,
for all transactions involving software. We
recognize product revenue when all of the following have occurred: (1) we have
entered into a legally binding arrangement with a customer resulting in the
existence of persuasive evidence of an arrangement; (2) when product title
transfers to the customer as identified by the passage of responsibility in
accordance with Incoterms 2000; (3) customer payment is deemed fixed or
determinable and free of contingencies and significant uncertainties; and (4)
collection is probable.
Our
product revenue consists of revenue from sales of our appliances and software
licenses. Product sales include a perpetual license to our software. Shipping
charges billed to customers are included in product revenue and the related
shipping costs are included in cost of product revenue. Virtually all
of our sales include support services (Service Revenue) which consist of
software updates and customer support. Software updates provide customers access
to a constantly growing library of electronic internet traffic identifiers
(signatures) and rights to non-specific software product upgrades, maintenance
releases and patches released during the term of the support period. Support
includes internet access to technical content, telephone and internet access to
technical support personnel and hardware support.
Receipt
of a customer purchase order is the primary method of determining persuasive
evidence of an arrangement exists.
Delivery
generally occurs when product title has transferred as identified by the passage
of responsibility per the International Chamber of Commerce shipping term
(INCOTERMS 2000). Our standard delivery terms are when product is
delivered to a common carrier from Procera, or its subsidiaries
(ex-works). However, product revenue based on channel partner
purchase orders are recorded based on sell-through to the end user customers
until such time as we have established significant experience with the channel
partner’s ability to complete the sales process. Additionally, when we introduce
new products for which there is no historical evidence of acceptance history,
revenue is recognized on the basis of end-user acceptance until such history has
been established.
Since our
customer orders contain multiple items such as hardware, software, and services
which are delivered at varying times, we determine whether the delivered items
can be considered separate units of accounting as prescribed under Emerging
Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables” (“EITF 00-21”). EITF 00-21 states that delivered items
should be considered separate units of accounting if delivered items have value
to the customer on a standalone basis, there is objective and reliable evidence
of the fair value of undelivered items, and if delivery of undelivered items is
probable and substantially in our control.
In these
circumstances, we allocate revenue to each separate element based on its vendor
specific objective evidence of fair value (“VSOE”). VSOE of fair value for
elements of an arrangement is based upon the normal pricing and discounting
practices for those services when sold separately and for support and updates is
additionally measured by the renewal rate offered to the customer. Through
December 31, 2007, in virtually all of our contracts, the only elements that
remained undelivered at the time of product delivery were post contract hardware
and software support and unspecified software updates. We determine VSOE for PCS
based on sales prices charged to customers based upon renewal pricing for
PCS. Each contract or purchase order that we enter into includes a
stated rate for PCS. The renewal rate is equal to the stated rate in the
original contract. We have a history of such renewals, the vast majority of
which are at the stated renewal rate on a customer by customer
basis.
When we
are able to establish VSOE for all elements of the sales order we separate the
deferred items accordingly. Revenue is recognized on the deferred
items using either the completed-performance or proportional-performance method
depending on the terms of the service agreement. When the amount of
services to be performed in the last series of acts is so significant in
relation to the entire service contract, that performance is deemed not to have
occurred until the final act is completed or when there are acceptance
provisions based on customer-specified objectives. Under these
conditions, we use the completed-performance method of revenue recognition which
is measured by the customer’s acceptance. We use the
proportional-performance method of deferred revenue recognition when a service
contract specifies activities to be performed by the Company and those acts have
been repeatedly demonstrated to be within our core
competency. Under this scenario, post contract support revenue
is recognized ratably over the life of the contract. The majority of
the revenue associated with our post contract support and service contracts is
recognized under the proportional-performance method using the straight line
method with the revenue being earned over the life of the contract. If evidence
of the fair value of one or more undelivered elements does not exist, all
revenue is generally deferred and recognized when delivery of those elements
occurs or when fair value can be established. When the undelivered element for
which we do not have a fair value is support, revenue for the entire arrangement
is bundled and recognized ratably over the support period.
In
certain contracts, billing terms are agreed upon based on performance milestones
such as the execution of measurement test, a partial delivery or the completion
of a specified service. Payments received before the unconditional
acceptance of a specific set of deliverables are recorded as deferred revenue
until the conditional acceptance has been waived.
Our fees
are typically considered to be fixed or determinable at the inception of an
arrangement, generally based on specific products and quantities to be
delivered. Substantially all of our contracts do not include rights of return or
acceptance provisions. To the extent that our agreements contain such terms, we
recognize revenue once the acceptance provisions or right of return lapses.
Payment terms to customers generally range from net 30 to 90 days. In the event
payment terms are provided that differ from our standard business practices, the
fees are deemed to not be fixed or determinable and revenue is recognized when
the payments become due, provided the remaining criteria for revenue recognition
have been met.
We assess
the ability to collect from our customers based on a number of factors,
including credit worthiness of the customer and past transaction history of the
customer. If the customer is not deemed credit worthy, we defer all revenue from
the arrangement until payment is received and all other revenue recognition
criteria have been met.
Deferred
Revenue
Our most
common sale includes a perpetual license for software, a hardware appliance
along with post contract support and unspecified updates. Where the
VSOE of the future deliverable is identifiable, that revenue is initially
included in Deferred revenue and recognized ratably over the term of the
agreement on a straight-line basis. If the VSOE of the future
deliverable is not identifiable, the total revenue is deferred and recognized
over the term of the agreement. For the year ended December 31, 2007
deferred revenue totaled $957,891 and is included as “Deferred revenue” in the
accompanying Balance Sheet.
Shipping
and Handling Costs
The
Company includes shipping and handling costs associated with inbound and
outbound freight in costs of goods sold.
Research
and Development
Research
and development expenses include internal and external costs. Internal costs
include salaries and employment related expenses, prototype materials, initial
product certifications, equipment costs and allocated facility costs. External
expenses consist of costs associated with outsourced software development
activities.
Development
costs incurred in the research and development of new products, other than
software, and enhancements to existing products are expensed as incurred. Costs
for the development of new software products and enhancements to existing
products are expensed as incurred until technological feasibility has been
established, at which time any additional development costs would be capitalized
in accordance with SFAS 86, "Accounting for Costs of Computer Software To Be
Sold, Leased, or Otherwise Marketed." To date, the Company's software has been
available for general release shortly after the establishment of technological
feasibility, which the Company defines as a working prototype and, accordingly,
capitalizable costs have not been material.
Advertising
Costs
Advertising
costs are expenses as incurred. Advertising expenses were not significant for
the periods ended December 31, 2007, December 31, 2006 and January 1,
2006.
Income
Taxes
The
Company accounts for its income taxes using the Financial Accounting Standards
Board Statements of Financial Accounting Standards No. 109, “Accounting for
Income Taxes,” which requires the establishment of a deferred tax asset or
liability for the recognition of future deductible or taxable amounts and
operating loss and tax credit carryforwards. Deferred tax expense or benefit is
recognized as a result of timing differences between the recognition of assets
and liabilities for book and tax purposes during the year.
Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Deferred tax assets are recognized for
deductible temporary differences and operating loss, and tax credit
carryforwards. A valuation allowance is established, when necessary, to reduce
that deferred tax asset if it is “more likely than not” that the related tax
benefits will not be realized.
Comprehensive
Income
The
Company has adopted Statement of Financial Accounting Standards No. 130,
“Reporting Comprehensive Income,” which establishes standards for reporting
comprehensive income and its components in the financial statements.
Comprehensive income consists of net income and other gains and losses affecting
shareholders’ equity that, under generally accepted accounting principles are
excluded from net income. For the Company, such items consist primarily of
foreign currency translation gains and losses.
Foreign
Currency Translation
Financial
statements of foreign subsidiaries, located in Sweden and Australia, where the
local currency, Swedish Krona and Australian Dollar is the functional currency,
are translated into U.S. dollars using period-end exchange rates for assets and
liabilities and average exchange rates during the period for revenues and
expenses. Cumulative translation adjustments associated with net
assets or liabilities are reported in non-owner changes in
equity. The foreign currency translations in non-owner
equity for the years ended December 31, 2007 and 2006 were 62,480 and
14,381 respectively.
Cash at
the Netintact subsidiaries, was translated at exchange rates in effect at
December 31, 2007 and 2006, and its cash flows were translated at the average
exchange rates for the years then ended. Changes in cash resulting
from the translations are presented as a separate item in the statements of cash
flows.
Registration
Rights Agreements
The
company’s management reviewed the Securities and Exchange Commission’s release
on December 1, 2005 entitled “current Accounting and Disclosure Issues in the
Division of Corporation Finance”. The Company has determined that it
does not have a contingent liability in regards to the registration rights
agreements to which is a party.
Recent
Accounting Pronouncements
In
February 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for
Certain Hybrid Financial Instruments”. SFAS No. 155 amends SFAS No
133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS
No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities”. SFAS No. 155, permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133, establishes a requirement to evaluate interest in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, clarifies that concentrations of credit risk
in the form of subordination are not embedded derivatives, and amends SFAS No.
140 to eliminate the prohibition on the qualifying special-purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. This statement is
effective for all financial instruments acquired or issued after the beginning
of the Company’s first fiscal year that begins after September 15, 2006. The
Company has not yet determined the effect, if any, of SFAS No. 155 on its
financial position, operations or cash flows.
In June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), an interpretation of SFAS No. 109, “Accounting for
Income Taxes”. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in a company’s financial statements and prescribes a
recognition threshold and measurement process for financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition and will become effective for the Company for fiscal
years beginning after December 15, 2006. The Company has not yet
determined the effect of FIN No. 48 on its financial position, operations or
cash flows.
In
September 2006, FASB issued SFAS No. 157, “Fair Value
Measurements”. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. It applies
under other accounting pronouncements that require or permit fair value
measurements, the board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement
attribute. Accordingly, this statement does not require any new fair
value measurements. This statement is effective for all financial
instruments issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company has not yet determined
the effect, if any, of SFAS No. 157 on its financial position, operations or
cash flows.
In
February 2008, the FASB issued FSP 157-2 “Partial Deferral of the Effective Date
of Statement 157” (FSP 157-2). FSP 157-2 delays the effective date of SFAS No.
157, for all 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 beginning after November 15,
2008. The Company is currently assessing the impact of SFAS No. 157-2 on the
Company’s consolidated statement of financial condition and results of
operations.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 108 to address diversity in practice in quantifying financial
statement misstatements. SAB 108 requires that registrants quantify the impact
on the current year’s financial statements of correcting all misstatements,
including the carryover and reversing effects of prior years’ misstatements, as
well as the effects of errors arising in the current year. SAB 108 is effective
as of the first fiscal year ending after November 15, 2006, allowing a one-time
transitional cumulative effect adjustment to retained earnings as of January 1,
2006, for errors that were not previously deemed material, but are material
under the guidance in SAB No. 108. There was no impact on our consolidated
financial statements with respect to the adoption of SAB No. 108.
In
December 2007 the FASB issued SFAS No. 141R,
Business Combinations
, or
SFAS 141R. SFAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statement to
evaluate the nature and financial effects of the business combination. SFAS 141R
is effective for financial statements issued for fiscal years beginning after
December 15, 2008. Accordingly, any business combinations the Company engages in
will be recorded and disclosed following existing GAAP until January 1, 2009.
The Company expects SFAS No. 141R will have an impact on its consolidated
financial statements when effective, but the nature and magnitude of the
specific effects will depend upon the nature, terms and size of the acquisitions
we consummate after the effective date. The Company has not determined the
impact of this standard on its future consolidated financial
statements.
In
February 2007, FASB issued SFAS 159, “The Fair Value Option for Financial Assets
and Financial Liabilities”. SFAS No. 159 amends SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities”. SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective of
SFAS No. 159 is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS No. 159 is expected to expand the use of fair value
measurement, which is consistent with the Board’s long-term measurement
objectives for accounting for financial instruments. SFAS No. 159 applies to all
entities, including not-for-profit organizations. Most of the provisions of SFAS
No. 159 apply only to entities that elect the fair value option. However, the
amendment to SFAS No. 115 applies to all entities with available-for-sale and
trading securities. Some requirements apply differently to entities that do not
report net income. This statement is effective as of the beginning of
each reporting entity’s first fiscal year that begins after November 15,
2007. The Company has not yet determined the effect of SFAS No. 159
on its financial position, operations or cash flows.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 ("SFAS 160"). The
standard changes the accounting for noncontrolling (minority) interests in
consolidated financial statements including the requirements to classify
noncontrolling interests as a component of consolidated stockholders’ equity,
and the elimination of "minority interest" accounting in results of operations
with earnings attributable to noncontrolling interests reported as part of
consolidated earnings. Additionally, SFAS 160 revises the accounting for both
increases and decreases in a parent’s controlling ownership interest. SFAS 160
is effective for fiscal years beginning after December 15, 2008, with early
adoption prohibited. Procera Networks is currently evaluating the impact that
the pending adoption of SFAS 160 will have on its financial
statements.
On March
19, 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133
(“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s
derivative and hedging activities. These enhanced disclosures will discuss (a)
how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. SFAS No. 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. We have not
determined the impact, if any SFAS No. 161 will have on our consolidated
financial statements.
On August
18, 2006, Procera acquired 100% of the outstanding stock of Netintact, AB.,
(“Netintact AB”), a Swedish software company. At the time of its
acquisition by Procera, Netintact AB owned 51% of the outstanding shares of
Netintact PTY (“Netintact PTY”), an Australian company that
distributed Netintact AB’s products in Australia and Asia. On September 29,
2006, Procera acquired the remaining 49% of the outstanding shares of
Netintact PTY. Netintact AB’s and Netintact PTY’s results of
operations have been included in the consolidated financial statements since the
date of acquisition. Procera believes the Netintact companies were desirable and
valuable merger partners due to their strategic customer base, the technology
incorporated into their software products, and their success in penetrating
their markets (Europe, Australia and Asia).
Pursuant
to the terms of the Stock Exchange Agreement with the shareholders of Netintact,
Procera has committed up to 22,000,000 shares of common stock for the
acquisition. 19,000,000 shares were committed at the close of the
acquisition including 18,299,514 common shares and 700,486 warrants were
granted. 3,000,000 shares were committed based upon the attainment of
future milestones including 2,876,757 common shares and 123,243 incentive
warrants. The fair value of common stock issued for the acquisitions,
excluding the incentive shares was $9,444,776. The value of the common shares
issued was determined based on the market price of the Company’s common shares
on the effective date of the acquisition. In accordance with Statement of
Financial Accounting Standards No. 141,
Business
Combinations
, the Company did not accrue contingent consideration
obligations prior to the attainment of the objectives. At December
31, 2007, the objectives had not been fully accomplished and the future
incentive share obligation was cancelled.
The
following table presents the allocation of the acquisition cost, including
professional fees and other related acquisition costs, to the assets acquired
and liabilities assumed, based on their fair values:
Cash
and cash equivalents
|
|
$
|
452,669
|
|
Accounts
receivable
|
|
|
391,826
|
|
Inventories
|
|
|
129,041
|
|
Other
current assets
|
|
|
71,235
|
|
Property,
plant, and equipment
|
|
|
180,454
|
|
Intangible
assets
|
|
|
11,119,000
|
|
Goodwill
|
|
|
960,209
|
|
Total
assets acquired
|
|
|
13,304,434
|
|
Accounts
payable
|
|
|
215,775
|
|
Other
current liabilities
|
|
|
330,079
|
|
Deferred
revenue
|
|
|
194,952
|
|
Deferred
tax liability related to amortizable intangible assets
|
|
|
3,118,852
|
|
Total
liabilities assumed
|
|
|
3,859,658
|
|
Net
assets acquired
|
|
$
|
9,444,776
|
|
Following
the closing of the Netintact AB and Netintact PTY acquisition transactions,
Procera conducted a valuation of the intangible assets contained
therein. Procera allocated the total fair value of common stock for
the two acquisitions to intangible assets and net tangible assets. Of
the $12.1 million of acquired intangible assets, $1.0 million was assigned to
goodwill that is not subject to amortization and the remaining $11.1 million of
acquired intangible assets have a weighted-average useful life of approximately
3 years. The intangible assets that make up that amount include: product
software of $4.6 million, management information and related software of $2.2
million, and customer base of $4.3 million. The amounts allocated to the
intangible assets are not expected to be deductible for tax
purposes.
During
the reporting period ended October 1, 2006, we did not recognize the
effect of deferred tax liabilities resulting from the differences between
assigned values in the purchase price allocation and tax basis of assets
acquired and liabilities assumed in the purchase business combination of
Netintact as required under FAS109.30. The resulting effect to the Statements of
Operations and Cash Flows through the third quarter which ended October 1, 2006
were minimal and the associated adjustments have been made to the Balance Sheet
in Form 10-KSB for the fiscal year ended December 31, 2006.
To avoid
a recurrence of this issue, we will engage a tax professional prior to
completing fair market valuation adjustments associated with future purchase
business combinations.
The
following (unaudited) pro forma financial information below summarized the
consolidated results of operations of Procera and the Netintact entities on a
pro forma basis as if the acquisitions had occurred on January 1,
2005. The proforma information for 2005 includes acquisition related
costs, intangible amortization, and the combined results of Procera and
Netintact. The proforma information for 2006 includes additional
amortization costs for the preacquisition period and as well as the adjusted
consolidated results after the acquisition.
The 2007
proforma period costs are equivalent to the audited financial results as there
were not material differences in the revenues or expenses.
|
|
December
31, 2006
|
|
|
December
31, 2005
|
|
Sales
|
|
$
|
6,672,451
|
|
|
$
|
2,672,096
|
|
Net
income
|
|
$
|
(12,481,380
|
)
|
|
$
|
(7,581,147
|
)
|
Net
income per share—Basic and diluted
|
|
$
|
(0.17
|
)
|
|
$
|
(0.17
|
)
|
Weighted
average shares—Basic and diluted
|
|
|
71,422,184
|
|
|
|
45,829,876
|
|
The pro
forma information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would have
been achieved had the acquisition been consummated as of that time, nor is it
intended to be a projection of future results.
Our
operating results will likely fluctuate from fiscal quarter to fiscal quarter,
and are difficult to predict. Since our inception, we have relied on
private financings to fund our development and initial market
penetration. We may require additional debt or equity financing
until such time as our operations become self funding. There can be
no assurance that any new debt or equity financing could be successfully
consummated. The financial statements do not include any adjustments relating to
the recoverability and classification of the recorded asset amounts and
classification of liabilities that might result from the outcome of this
uncertainty.
We have
sustained recurring losses and negative cash flows from
operations. Over the past year, our growth has been funded through
private equity financing. As of December 31, 2007, we had $5.9
million of unrestricted cash and cash equivalents. During 2007, we
obtained equity financing through a private investor placement of
equity. The Company has experienced and continues to experience
negative cash flows from operations, as well as an ongoing requirement for
additional investment in operations. However, at December 31, 2007,
our accumulated deficit is $37.8 million and we have sustained an operating cash
flow deficiency of $26.3 million since inception. Our ability to achieve
continued and sustainable profitability is uncertain and is dependant on a
number of factors. For a discussion of some of the risks and uncertainties
affecting our business, see Item 1A “Risk Factors” of this amended Annual Report
on Form 10-K/A. Our operating results will likely fluctuate from fiscal quarter
to fiscal quarter, and are difficult to predict. Since our inception,
we have relied on private financings to fund our development and initial market
penetration. We may require additional debt or equity financing
until such time as our operations become self funding. We expect that
we will need to raise additional capital to accomplish our business plans. There
can be no assurance as to the availability or terms upon which such equity or
debt financing might be available.
5. Intangible
Assets
Effective
September 29, 2006, the Company completed the purchase of Netintact AB and
Netintact PTY, a privately held software company. The assets acquired
included approximately $4.3 million of intangible assets, other than goodwill.
The $4.3 million of acquired intangible assets was assigned to customer
lists. These intangible assets are subject to amortization. The $4.3
million of acquired intangible assets have an useful life of approximately 3
years.
Intangible
assets consist of the following at December 31, 2007:
|
Gross
|
|
|
|
Net
|
|
|
Intangible
|
|
Accumulated
|
|
Intangible
|
|
|
Assets
|
|
Amortization
|
|
Assets
|
|
Netintact
customer base
|
|
$
|
4,317,000
|
|
|
$
|
(1,913,595
|
)
|
|
$
|
2,403,405
|
|
6.
|
Other
Balance Sheet Details
|
Accounts
receivable
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Accounts
receivable
|
|
$
|
2,060,334
|
|
|
$
|
1,172,842
|
|
Less;
Allowance for doubtful accounts
|
|
|
(241,062
|
)
|
|
|
(11,672
|
)
|
Accounts
receivable, net
|
|
$
|
1,819,272
|
|
|
$
|
1,161,170
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Raw
materials and purchased parts
|
|
$
|
292,825
|
|
|
$
|
37,871
|
|
Work
in process
|
|
|
21,287
|
|
|
|
-
|
|
Finished
goods
|
|
|
1,062,398
|
|
|
|
340,300
|
|
Reserves
|
|
|
(56,488
|
)
|
|
|
(118,964
|
)
|
Inventory,
net
|
|
$
|
1,320,022
|
|
|
$
|
259,207
|
|
Prepaid
expenses and other current assets
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Prepaid
Investor relations services
|
|
$
|
326,040
|
|
|
$
|
160,420
|
|
Prepaid
insurance premiums
|
|
|
73,652
|
|
|
|
32,244
|
|
Prepaid
software licenses
|
|
|
8,711
|
|
|
|
27,085
|
|
Prepaid
rent
|
|
|
20,696
|
|
|
|
12,562
|
|
Prepaid
vehicle lease
|
|
|
-
|
|
|
|
6,723
|
|
Prepaid
equipment lease
|
|
|
7,308
|
|
|
|
3,676
|
|
Prepaid
maintenance
|
|
|
14,278
|
|
|
|
2,162
|
|
Other
prepaid expenses
|
|
|
69,452
|
|
|
|
39,353
|
|
Total
prepaid expenses and other current assets
|
|
$
|
520,137
|
|
|
$
|
284,225
|
|
Property
and equipment
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Tooling
and test equipment
|
|
$
|
736,439
|
|
|
$
|
305,623
|
|
Office
equipment
|
|
|
64,170
|
|
|
|
39,385
|
|
Computer
equipment
|
|
|
256,850
|
|
|
|
199,057
|
|
Software
|
|
|
54,063
|
|
|
|
40,368
|
|
Acquired
product software
|
|
|
4,578,000
|
|
|
|
4,578,000
|
|
Acquired
MI & related software
|
|
|
2,224,000
|
|
|
|
2,224,000
|
|
Vehicle
|
|
|
75,877
|
|
|
|
-
|
|
Furniture
and fixtures
|
|
|
26,502
|
|
|
|
17,830
|
|
Total
|
|
|
8,015,901
|
|
|
|
7,404,263
|
|
Less:
accumulated depreciation & amortization
|
|
|
(3,539,677
|
)
|
|
|
(1,073,315
|
)
|
Property
and equipment, net
|
|
$
|
4,476,224
|
|
|
$
|
6,330,948
|
|
Other
assets
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Netintact
customer base
|
|
$
|
4,317,000
|
|
|
$
|
4,317,000
|
|
Goodwill
|
|
|
960,209
|
|
|
|
960,209
|
|
Security
deposit - HR and payroll services
|
|
|
-
|
|
|
|
50,615
|
|
Security
deposit - Sales taxes collateral
|
|
|
30,000
|
|
|
|
30,000
|
|
Security
deposit - Facility lease
|
|
|
17,805
|
|
|
|
15,304
|
|
Total
other assets
|
|
|
5,325,014
|
|
|
|
5,373,128
|
|
Less:
Accumulated amortization
|
|
|
(1,913,595
|
)
|
|
|
(474,595
|
)
|
Total
other assets
|
|
$
|
3,411,419
|
|
|
$
|
4,898,533
|
|
|
|
|
|
|
|
|
Accrued
liabilities
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Payroll
and related expenses
|
|
$
|
620,191
|
|
|
$
|
371,762
|
|
Sales
Commission
|
|
|
299,926
|
|
|
|
10,111
|
|
Accrued
audit, tax & legal fees
|
|
|
196,000
|
|
|
|
123,022
|
|
Contingent
warranty liability
|
|
|
64,864
|
|
|
|
20,950
|
|
VAT and
sales taxes
|
|
|
81,074
|
|
|
|
45,497
|
|
Income
taxes accrued
|
|
|
59,101
|
|
|
|
44,880
|
|
Received
not invoiced
|
|
|
211,606
|
|
|
|
-
|
|
Other
accrued expenses
|
|
|
40,213
|
|
|
|
40,721
|
|
Total
accrued liabilities
|
|
$
|
1,572,975
|
|
|
$
|
656,943
|
|
7.
|
Commitments
and Contingencies
|
Leases
Our
headquarters are located in Los Gatos, California,
95032. On November 14, 2007 we extended our current lease for 5
years. As a result of the extension, we have a 73-month lease
starting from June 1, 2005 and the monthly rent ranges from $12,949 per month
for the first year to $19,424 during the last year. The Swedish
headquarters of Netintact is located in Varberg, Sweden. We have a 36
month lease starting from May 31, 2005 and the rent is $5,612 per month for 331
square meters. The Swedish headquarters is moving to its new facility also in
Varberg, Sweden in April 2008. The lease will be for 60 months and
the rent is $12,230 per month for 689 square meters. Netintact PTY leases
55 square meters in Melbourne VIC 3004, Australia; the lease is for
12 months starting July 1, 2007 with a monthly payment of $1,592.
As of
December 31, 2007, Procera had obligations for leased equipment from various
sources as shown below. Interest rates on such debt range from 9% to
10%. Procera also leases office space and equipment under non-cancelable
operating and capital leases with various expiration dates through
2012.
As of
December 31, 2007, future minimum lease payments that come due in the current
and following fiscal years ending December 31 are as follows:
|
|
Capital
Leases
|
|
|
Operating
Leases
|
|
2008
|
|
|
33,867
|
|
|
|
329,053
|
|
2009
|
|
|
14,082
|
|
|
|
369,252
|
|
2010
|
|
|
11,658
|
|
|
|
376,314
|
|
2011
|
|
|
11,658
|
|
|
|
263,304
|
|
2012
and thereafter
|
|
|
31,105
|
|
|
|
183,450
|
|
Total
minimum lease payments
|
|
|
102,370
|
|
|
$
|
1,521,373
|
|
Less:
Amount representing interest
|
|
|
5,730
|
|
|
|
|
|
Present
value of minimum lease payments
|
|
|
96,640
|
|
|
|
|
|
Less:
Current portion
|
|
|
33,867
|
|
|
|
|
|
Obligations
under capital lease, net of current portion
|
|
$
|
62,773
|
|
|
|
|
|
On
November 29, 2005, the Company received loan proceeds of $90,000 from Cagan
McAfee Capital Partners, a related party, and issued a promissory note in that
amount, bearing interest of 6% per annum, and maturing on April 1, 2006. This
loan, together with accrued interest of $562, was paid in full on January 6,
2006.
On
December 13, 2005, the Company received loan proceeds of $150,000 from Laird
Cagan, a related party who is a partner with Chadbourn Securities, Inc., and
issued a promissory note in that amount, bearing interest of 6% per annum, and
maturing on April 1, 2006. On February 28, 2006, Mr. Cagan requested that
$130,000 of the loan principal owed to him by the Company be converted to a
purchase of 325,000 shares of the Company’s common stock in conjunction with the
private placement sales of the Company’s common stock that closed on that date.
The remaining loan principal of $20,000, together with accrued interest of
$1,971, was paid in full by the Company on March 22, 2006.
At
December 31, 2006, the Company has no long-term or convertible debt
outstanding.
Indemnification
Agreements
The
Company enters into standard indemnification arrangements in our ordinary course
of business. Pursuant to these arrangements, the Company indemnifies, holds
harmless, and agrees to reimburse the indemnified parties for losses suffered or
incurred by the indemnified party, generally our business partners or customers,
in connection with any U.S. patent, or any copyright or other intellectual
property infringement claim by any third party with respect to our products. The
term of these indemnification agreements is generally perpetual anytime after
the execution of the agreement. The maximum potential amount of future payments
the Company could be required to make under these agreements is unlimited. The
Company has never incurred costs to defend lawsuits or settle claims related to
these indemnification agreements. As a result, the Company believes the
estimated fair value of these agreements is minimal.
The
Company has entered into indemnification agreements with its directors and
officers that may require the Company: to indemnify its directors and officers
against liabilities that may arise by reason of their status or service as
directors or officers, other than liabilities arising from willful misconduct of
a culpable nature; to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified; and to obtain
directors’ and officers’ insurance if available on reasonable terms, which the
Company currently has in place.
Product
Warranty
The
Company warrants its products for a specific period of time, generally twelve
months, against material defects. The Company provides for the estimated future
costs of warranty obligations in cost of sales when the related revenue is
recognized. The accrued warranty costs represent the best estimate at
the time of sale of the total costs that the Company expects to incur to repair
or replace product parts, which fail while still under warranty. The
amount of accrued estimated warranty costs are primarily based on current
information on repair costs. The Company periodically reviews the
accrued balances and updates the historical warranty cost trends. The
following table reflects the change in the Company’s warranty accrual during the
year ended December 31, 2007 and 2006:
|
|
Fiscal
year ended
|
|
|
|
Dec
31, 2007
|
|
|
Dec
31, 2006
|
|
Warranty
accrual, beginning of period
|
|
$
|
20,950
|
|
|
$
|
14,237
|
|
Charged
to cost of sales
|
|
|
54,128
|
|
|
|
6,713
|
|
Warranty
expenditures
|
|
|
(10,214
|
)
|
|
|
|
|
Warranty
accrual, end of period
|
|
$
|
64,864
|
|
|
$
|
20,950
|
|
Common
Stock
In
January 2005, the company issued 5,762,500 shares based on a private placement
subscribed in December 2004.
During
2005, the company issued 884,938 shares upon the exercise of common stock
warrants.
In March
2005, the Company issued 17,473 shares of common stock to a charity
organization.
In
November 2005, the Company issued 165,000 common shares with a fair value of
$84,150 as consideration for 18 months of investor relations services which
commenced in December 2005.
On
February 28, 2006, the Company closed private placement sales of 15,000,025
shares of its common stock at $0.40 per share to thirty-three institutional and
other accredited investors, and received cash proceeds of $5,517,469, net of
direct transaction costs of $482,541. In addition, warrants to
purchase 1,500,000 shares of the Company’s common stock at $0.40 per share with
a fair value of $712,315 was issued to placement agents as compensation for
their services in completing the private placement.
On August
18, 2006, as part of the agreement to acquire all the outstanding shares of
Netintact AB (a Swedish corporation) the Company agreed to exchange
15,713,513 shares of its common stock and 1,826,000 shares held in escrow.
(notes)
On
September 29, 2006, the Company agreed to exchange 760,000 shares of its common
stock, for 49% of the outstanding shares of Netintact PTY Ltd. (an Australian
corporation). Because 51% of the outstanding shares of
Netintact PTY were previously owned by Netintact AB, the Company now
controls all of the outstanding shares of Netintact PTY.
(notes)
On
November 30, 2006, the Company completed private placement sales of 5,100,000
shares of its common stock at $1.00 per share to fifteen institutional and
accredited investors, and received cash proceeds of $4,840,359, net of financing
expenses of $259,641. In addition, investors were issued warrants to
purchase 1,020,000 shares of the Company’s common stock with a fair value of
$1,319,607 (representing 20% of shares purchased in the private placement) at
$1.50 per share and warrants to purchase 1,530,000 shares of the Company’s
common stock at $1.50 per share with a fair value of $1,797,410 were issued to
placement agents as compensation for their services in completing the private
placement.
In
January 2006, the Company issued 825,000 shares with a fair value of $577,500 as
consideration for 18 months of investor relations services which commenced in
December 2005.
During
2006, the Company issued 80,000 shares upon the exercise of
warrants.
On July
17, 2007, the Company closed a private placement sale of 3,999,750 shares of its
common stock at $2.00 per share to 66 institutional and other accredited
investors and received cash proceeds of $7,488,635, net of financing expenses of
$510,865. In addition, placement agent warrants to purchase 199,988
shares (fair value of $510,587) were issued as compensation for their
services.
During
2007, the company issued 1,323,410 shares upon the exercise of common stock
options and warrants.
In June
2007, the company issued 247,500 shares with a fair value of $610,090 as
consideration for 12 months of investor relations services
In August
2007, the company issued 72,727 shares of common stock with a fair value of
$120,000 as consideration for placement agent services in connection with our
November 2006 private placement financing.
Warrants
(Footnotes
correspond to the warrant table below)
On
February 23, 2005, the Company issued warrants to purchase 100,000 shares of our
common stock with an exercise price of $1.78 per share to an independent sales
representative. The warrant was considered earned upon the successful
completion of a sale, payment and other factors. Due to the
conditions of earning the warrant, the fair value was determined to be $0.
(1)
On April
13, 2005 the Company issued warrants to purchase 10,000 shares of our common
stock with an exercise price of $1.86 per share and a fair value of $14,854 to a
Company director as compensation for completing an equity raising event in
December 2004. (2)
On May
12, 2005 the Company issued warrants to purchase 25,000 shares of our common
stock with an exercise price of $1.22 per share and a fair value of $22,569 to
an independent representative as compensation for assisting in securing a
facility lease. (3)
On June
14, 2005 the Company issued warrants to purchase 75,000 shares of our common
stock with an exercise price of $1.42 per share and a fair value of $8,102 to a
director of the Company as partial compensation for successfully directing an
equity raising event. (4)
On
September 13, 2005 the Company issued warrants to purchase 15,000 shares of our
common stock at a price of $0.68 to a independent consultant for product
specification and definition services. (5)
In
conjunction with the closing of private placement sales of common stock on
February 28, 2006, warrants to purchase 1,500,000 shares of the Company’s common
stock at $0.40 per share with a fair value of $712,315 were issued to
placement agents as compensation for their services in completing the private
placement. (6)
On August
2, 2004, warrants to purchase 400,000 shares of the Company’s common stock at
$1.40 per share with a fair value of $448,495 were issued to an investor
relations firm as compensation to perform investor relations services on behalf
of the Company during 2004. On August 2, 2006, the subject warrants were
cancelled and replacement warrants to purchase a total of 400,000 shares of the
Company’s common stock at $1.40 per share were issued to said investor relations
firm and one of its employees. (7)
In
conjunction with the its agreement to acquire all of the outstanding shares of
Netintact AB (a Swedish corporation), the Company agreed to issue warrants as of
the August 18, 2006 acquisition date to purchase 702,486 shares of the Company’s
common stock at a price of $0.60 per share and to issue warrants upon successful
completion of operating milestones to purchase 123,243 shares of the Company’s
common stock at a price of $0.60 per share. Said warrants are not exercisable
until the Company’s common stock has reached a market value of $2.00 or more and
sustains that value for 90 consecutive trading days. On December 12, 2006, the
Company’s stock closed with a market value of $2.06 per share and has remained
above $2.00 per share since that date. (8)
On
November 30, 2006, the Company completed private placement sales of 5,100,000
shares of its common stock at $1.00 per share to fifteen institutional and
accredited investors, and received cash proceeds of $4,840,359, net of financing
expenses of $259,641. In addition, investors were issued warrants to purchase
1,020,000 shares of the Company’s common stock (representing 20% of shares
purchased in the private placement) at $1.50 per share and warrants to purchase
360,000 shares of the Company’s common stock at $1.00 per share were issued to
private placement agents as compensation for their services in completing the
private placement. (9)
On
January 24, 2007, we granted 115,000 warrants to purchase common stock at $2.14
per share and a fair value of $169,814 in exchange for independent
contractor Sales services.(10)
In
conjunction with the closing of a private placement sale of common stock on June
17, 2007, we issued 199,998 warrants to purchase common stock with a fair value
of $510,587 to placement agents as compensation for their services.
The warrant quantity was approximately 5% of the shares purchased from the
company with a strike price of $2.00, equivalent to the price shareholders
paid.(11)
On July
31, 2007 we issued warrants to purchase our common stock at $1.12 and a fair
value of $132,328 in exchange for public relations services
performed.(12)
At
December 31, 2007, warrants to purchase 7,714,407 shares of common stock are
outstanding. The following table sets forth the key terms of these outstanding
warrants:
|
|
|
|
|
|
|
|
|
Weighted
Average Exercise Price
|
|
Reason
for Grant of Warrants
|
Dec-02
|
Common
stock
|
|
|
201,268
|
|
|
Milestones
|
Jun-07
|
|
$
|
0.01
|
|
Customer
base
|
Jun-03
|
Common
stock
|
|
|
50,000
|
|
|
Immediate
|
Jun-08
|
|
$
|
0.75
|
|
Raising
capital
|
Jun-03
|
Common
stock
|
|
|
50,000
|
|
|
Immediate
|
Jun-08
|
|
$
|
0.50
|
|
Legal
services
|
Dec-04
|
Common
stock
|
|
|
1,560,706
|
|
|
Immediate
|
Jul-08
|
|
$
|
1.25
|
|
Raising
capital
|
Dec-04
|
Common
stock
|
|
|
1,729,453
|
|
|
Immediate
|
Jul-08
|
|
$
|
1.37
|
|
Raising
capital
|
Feb-05
|
Common
stock
|
|
|
100,000
|
(1
|
)
|
Based
on sales performance
|
Feb-10
|
|
$
|
1.78
|
|
Sales
services
|
Apr-05
|
Common
stock
|
|
|
10,000
|
(2
|
)
|
Immediate
|
Apr-08
|
|
$
|
1.86
|
|
Raising
capital
|
May-05
|
Common
stock
|
|
|
25,000
|
(3
|
)
|
Immediate
|
Jul-08
|
|
$
|
1.42
|
|
Real
estate services
|
Jun-05
|
Common
stock
|
|
|
75,000
|
(4
|
)
|
Milestones
|
Jun-08
|
|
$
|
1.42
|
|
Strategic
investment
|
Sep-05
|
Common
stock
|
|
|
15,000
|
(5
|
)
|
Milestones
|
Jun-08
|
|
$
|
0.68
|
|
Sales
services
|
Feb-06
|
Common
stock
|
|
|
1,163,875
|
(6
|
)
|
Immediate
|
Jul-08
|
|
$
|
0.40
|
|
Raising
capital
|
Aug-06
|
Common
stock
|
|
|
400,000
|
(7
|
)
|
Immediate
|
Aug-08
|
|
$
|
1.40
|
|
Investor
relations
|
Aug-06
|
Common
stock
|
|
|
569,107
|
(8
|
)
|
Immediate
|
Aug-11
|
|
$
|
0.60
|
|
Acquisition
of a Company
|
Nov-06
|
Common
stock
|
|
|
1,380,000
|
(9
|
)
|
Immediate
|
Jan-11
|
|
$
|
1.50
|
|
Raising
capital
|
Jan-07
|
Common
Stock
|
|
|
115,000
|
(10
|
)
|
Immediate
|
Jan-10
|
|
$
|
2.14
|
|
Sales
services
|
Jul-07
|
Common
Stock
|
|
|
199,998
|
(11
|
)
|
Immediate
|
Jul-12
|
|
$
|
2.00
|
|
Raising
capital
|
Jul-07
|
Common
Stock
|
|
|
70,000
|
(12
|
)
|
Immediate
|
July-10
|
|
$
|
1.12
|
|
Investor
relations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,714,407
|
|
|
|
|
|
|
|
|
|
The
exhibit below defines the outstanding warrants as of December 31, 2007 by
exercise price and the average contractual life before expiration.
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
Number
|
|
Contractual
Life
|
|
Number
|
Price
|
|
Outstanding
|
|
(Years)
|
|
Exercisable
|
|
|
|
|
|
|
|
$
|
0.01
|
|
201,268
|
|
4.5
|
|
201,268
|
|
0.40
|
|
1,163,875
|
|
2.4
|
|
1,163,875
|
|
0.50
|
|
50,000
|
|
5.0
|
|
50,000
|
|
0.60
|
|
569,107
|
|
5.0
|
|
569,107
|
|
0.68
|
|
15,000
|
|
2.8
|
|
15,000
|
|
0.75
|
|
50,000
|
|
5.0
|
|
50,000
|
|
1.12
|
|
70,000
|
|
3.0
|
|
70,000
|
|
1.25
|
|
1,560,706
|
|
3.6
|
|
1,560,706
|
|
1.37
|
|
1,729,453
|
|
3.6
|
|
1,729,453
|
|
1.40
|
|
400,000
|
|
2.0
|
|
400,000
|
|
1.42
|
|
100,000
|
|
3.2
|
|
100,000
|
|
1.50
|
|
1,380,000
|
|
4.2
|
|
1,380,000
|
|
1.78
|
|
100,000
|
|
5.0
|
|
100,000
|
|
1.86
|
|
10,000
|
|
3.0
|
|
10,000
|
|
2.00
|
|
199,998
|
|
5.0
|
|
199,998
|
|
2.14
|
|
115,000
|
|
3.0
|
|
115,000
|
|
|
|
|
|
|
|
|
|
|
|
7,714,407
|
|
3.6
|
|
7,714,407
|
Stock
Option Plans
In August
2003 and October 2004 our board of directors and stockholders adopted the 2003
Stock Option Plan and 2004 Stock Option Plan, respectively (collectively
referred to as the “Plan”). The number of shares available for options under the
2003 Plan and 2004 Plan, as amended, is 2,500,000 and 5,000,000,
respectively. The following description of our Plan is a summary and
qualified in our entirety by the text of the Plan. The purpose of the
Plan is to enhance our profitability and stockholder value by enabling us to
offer stock based incentives to employees, directors and
consultants. The Plan authorizes the grant of options to purchase
shares of our common stock to employees, directors and consultants. Under the
Plan, we may grant incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986 and non-qualified stock options. Incentive
stock options may only be granted to our employees.
The
number of shares available for options under the Plan is
7,500,000. As of December 31, 2007, 714,357 shares were available for
future grants. The options under the Plan vest over varying lengths of time
pursuant to various option agreements that we have entered into with the
grantees of such options. The Plan is administered by the board of directors.
Subject to the provisions of the Plan, the board of directors has authority to
determine the employees, directors and consultants who are to be awarded options
and the terms of such awards, including the number of shares subject to such
option, the fair market value of the common stock subject to options, the
exercise price per share and other terms.
Incentive
stock options must have an exercise price equal to at least 100% of the fair
market value of a share on the date of the award and generally cannot have a
duration of more than 10 years. If the grant is to a stockholder
holding more than 10% of our voting stock, the exercise price must be at least
110% of the fair market value on the date of grant. Terms and conditions of
awards are set forth in written agreements between us and the respective option
holders. Awards under the Plan may not be made after the tenth
anniversary of the date of our adoption but awards granted before that date may
extend beyond that date.
Optionees
have no rights as stockholders with respect to shares subject to option prior to
the issuance of shares pursuant to the exercise thereof. An option
becomes exercisable at such time and for such amounts as determined by the board
of directors. An optionee may exercise a part of the option from the
date that part first becomes exercisable until the option
expires. The purchase price for shares to be issued to an employee
upon his exercise of an option is determined by the board of directors on the
date the option is granted. The Plan provides for adjustment as to
the number and kinds of shares covered by the outstanding options and the option
price therefore to give effect to any stock dividend, stock split, stock
combination or other reorganization.
The
following table summarizes activity under the equity incentive plans for the
three years ended December 31, 2007:
|
|
Shares
Available
For
Grant
|
|
|
Number
of
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Remaining
Contractual
Life
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 2, 2005
|
|
|
1,827,000
|
|
|
|
3,173,000
|
|
|
$
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
2,500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,263,000
|
)
|
|
|
1,263,000
|
|
|
|
1.27
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Cancelled
|
|
|
519,030
|
|
|
|
(519,030
|
)
|
|
|
1.36
|
|
|
|
|
|
|
|
Balance
at January 1, 2006
|
|
|
3,583,030
|
|
|
|
3,916,970
|
|
|
$
|
1.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Granted
|
|
|
(4,185,000
|
)
|
|
|
4,185,000
|
|
|
|
0.86
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Cancelled
|
|
|
2,618,186
|
|
|
|
(2,618,186
|
)
|
|
|
1.44
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
2,016,216
|
|
|
|
5,483,784
|
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,990,000
|
)
|
|
|
1,990,000
|
|
|
|
2.33
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
(110,480
|
)
|
|
|
0.75
|
|
|
|
|
|
|
|
Cancelled
|
|
|
688,141
|
|
|
|
(688,141
|
)
|
|
|
1.00
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
714,357
|
|
|
|
6,675,163
|
|
|
$
|
1.37
|
|
|
|
8.70
|
|
|
$
|
2,366,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested and expected to vest at December 31, 2007
|
|
|
|
|
|
|
6,138,611
|
|
|
$
|
1.35
|
|
|
|
8.52
|
|
|
$
|
2,225,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested and exercisable at December 31, 2007
|
|
|
|
|
|
|
3,098,147
|
|
|
$
|
1.14
|
|
|
|
8.01
|
|
|
$
|
1,427,087
|
|
The
weighted average grant date fair value of options granted during the fiscal year
ended December 31, 2007 and December 31, 2006 was $1.92 and $0.74, respectively.
The total fair value of shares vested during the year ended December 31, 2007
and December 31, 2006 was $1,787,898 and $1,374,836, respectively. The total
fair value of shares forfeited and cancelled for the fiscal year ended December
31, 2007 and 2006 was $563,932 and $3,831,217 respectively.
The
number of unvested shares as of December 31, 2007 and 2006 was 3,577,016 and
4,366,782 respectively and the weighted average grant date fair value
of nonvested shares as of December 31, 2007 and 2006 was $1.30 and
$0.73 respectively. The total compensation cost of $3,960,244 for
nonvested shares is expected to be recognized over the next 2.8 years on a
weighted average basis.
The
options outstanding and exercisable at December 31, 2007 were in the following
exercise price ranges:
|
|
|
Options
Outstanding
|
|
|
Options
Vested and Exercisable
|
|
|
|
|
At
December 31, 2007
|
|
|
At
December 31, 2007
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
Outstanding
|
|
|
Life
(Years)
|
|
|
Price
|
|
|
Outstanding
|
|
|
Life
(Years)
|
|
|
Price
|
|
$
|
0.45
- $0.69
|
|
|
|
1,722,222
|
|
|
|
9.1
|
|
|
$
|
0.60
|
|
|
|
990,972
|
|
|
|
8.4
|
|
|
$
|
0.55
|
|
$
|
0.70
- $1.19
|
|
|
|
2,196,941
|
|
|
|
8.0
|
|
|
$
|
0.98
|
|
|
|
1,240,973
|
|
|
|
7.6
|
|
|
$
|
0.93
|
|
$
|
1.20
- $3.35
|
|
|
|
2,756,000
|
|
|
|
9.0
|
|
|
$
|
2.19
|
|
|
|
866,202
|
|
|
|
8.0
|
|
|
$
|
2.13
|
|
|
|
|
|
|
6,675,163
|
|
|
|
8.7
|
|
|
$
|
1.37
|
|
|
|
3,098,147
|
|
|
|
8.0
|
|
|
$
|
1.14
|
|
11.
|
Stock-Based
Compensation
|
Effective
January 2, 2006, the Company adopted the provisions of SFAS No. 123 (R),
“Share-Based Payment.” SFAS No. 123(R) 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 requisite service
period. All of the Company’s stock compensation is accounted for as
an equity instrument. The Company previously applied Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations and provided the required pro forma
disclosures of SFAS No. 123, “Accounting for Stock-Based
Compensation.”
The
Company elected to adopt the modified-prospective application method as provided
by SFAS No. 123(R). The effect of recording stock-based compensation
for the fiscal years ended December 31, 2007 and 2006 and the allocation to
expense under SFAS No. 123(R) was as follows:
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Stock-based
compensation from employee stock options
|
|
$
|
1,972,275
|
|
|
$
|
1,168,611
|
|
Tax
effect on stock-based compensation
|
|
|
|
|
|
|
-
|
|
Net
effect on net loss
|
|
$
|
1,972,275
|
|
|
$
|
1,168,611
|
|
|
|
|
|
|
|
|
|
|
Effect
on basic and diluted net loss per share
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
|
|
Year
Ended
|
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
Cost
of goods sold
|
|
$
|
23,310
|
|
|
$
|
16,274
|
|
Research
and Development
|
|
|
473,692
|
|
|
|
771,585
|
|
Selling,
general and administrative
|
|
|
1,475,273
|
|
|
|
380,752
|
|
Stock
based compensation before income taxes
|
|
|
1,972,275
|
|
|
|
1,168,611
|
|
Income
tax benefit
|
|
|
|
|
|
|
|
|
Total
stock-based compensation expenses after income taxes
|
|
$
|
1,972,275
|
|
|
$
|
1,168,611
|
|
No
stock-based compensation has been capitalized in inventory due to the
immateriality of such amounts.
The
Company estimates the fair value of stock options using a Black-Scholes
valuation model, consistent with the provisions of SFAS No. 123 (R), SEC SAB No.
107 and the Company’s prior period pro forma disclosures of net loss, including
stock-based compensation (determined under a fair value method as prescribed by
SFAS No. 123). The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option valuation model and the straight-line
attribution approach.
The
weighted average assumptions used for 2007, 2006 and 2005 are as
follows:
|
|
Year
Ended
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
January
1,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Risk
free interest rate
|
|
|
3.59%
- 5.02
|
%
|
|
|
4.64%
- 5.02
|
%
|
|
|
3.88
|
%
|
Expected
life of option
|
|
5.25
– 7.00 years
|
|
|
6.0
– 6.25 years
|
|
|
3.89
years
|
|
Expected
dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility
|
|
|
93%
- 102
|
%
|
|
|
110
|
%
|
|
|
114
|
%
|
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. Expected
volatility is based on historical volatility of the Company’s common stock. The
risk-free interest rates are taken from the 3-year and 7-year daily constant
maturity rate as of the grant dates as published by the Federal Reserve Bank of
St. Louis and represent the yields on actively traded Treasury securities for
comparable to the expected term of the options. The expected life of the options
granted in 2007 is calculated using the simplified method which uses the
midpoint between the vesting period and the contractual grant date.
Prior
to the Adoption of SFAS No. 123(R)
Prior to
the adoption of SFAS No. 123 (R), the Company provided the disclosures required
under SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by
SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and
Disclosures.” The Company recorded employee stock-based compensation for the
twelve months ended January 1, 2006 for options granted to employees with a
market value of the underlying common stock greater than exercise price on the
date of grant.
The
pro-forma information for the fiscal year ended January 1, 2006 was as
follows:
|
|
January
1, 2006
|
|
Net
loss as reported
|
|
$
|
(6,738,915
|
)
|
|
|
|
|
|
Add:
Stock-based employee compensation expense included in reported net loss,
net of related tax effects
|
|
|
429,386
|
|
|
|
|
|
|
Deduct;
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax
effects
|
|
|
(1,412,246
|
)
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(7,721,775
|
)
|
|
|
|
|
|
Earnings
per share basic and diluted:
|
|
$
|
(0.22
|
)
|
Pro
Forma
|
|
$
|
(0.25
|
)
|
12.
|
Related
party transaction
|
On
November 29, 2005, the Company received loan proceeds of $90,000 from Cagan
McAfee Capital Partners, a related party, and issued a promissory note in that
amount, bearing interest of 6% per annum, and maturing on April 1, 2006. This
loan, together with accrued interest of $562, was paid in full on January 6,
2006.
On
December 13, 2005, the Company received loan proceeds of $150,000 from Laird
Cagan, a related party who is a partner with Chadbourn Securities, Inc., and
issued a promissory note in that amount, bearing interest of 6% per annum, and
maturing on April 1, 2006. On February 28, 2006, Mr. Cagan requested that
$130,000 of the loan principal owed to him by the Company be converted to a
purchase of 325,000 shares of the Company’s common stock in conjunction with the
private placement sales of the company’s common stock that closed on this date.
The remaining loan principal of $20,000, together with accrued interest of
$1,971, was paid in full by the Company on March 22, 2006.
The
components of income and loss before income taxes are as follows:
|
|
December
31,
|
|
|
December
31,
|
|
|
January
1,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Domestic
|
|
$
|
(11,539,066
|
)
|
|
$
|
(7,729,336
|
)
|
|
$
|
(6,738,915
|
)
|
Foreign
|
|
|
(2,014,819
|
)
|
|
|
(25,716
|
)
|
|
|
-
|
|
Loss
before income taxes
|
|
$
|
(13,553,885
|
)
|
|
$
|
(7,755,052
|
)
|
|
$
|
(6,738,915
|
)
|
The
Company’s provision for income taxes consists of the following:
|
|
December
31,
|
|
|
December
31,
|
|
|
January
1,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Current
income taxes
|
|
|
|
|
|
|
|
|
|
Federal/state
|
|
$
|
5,255
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Foreign
|
|
|
7,985
|
|
|
|
46,679
|
|
|
|
-
|
|
Total
current income taxes
|
|
|
13,240
|
|
|
|
46,679
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal/state
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
(1,085,745
|
)
|
|
|
(298,252
|
)
|
|
|
-
|
|
Total
deferred income taxes
|
|
|
(1,085,745
|
)
|
|
|
(298,252
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$
|
(1,072,505
|
)
|
|
$
|
(251,573
|
)
|
|
$
|
-
|
|
Deferred
income taxes reflect the net tax effects of net operating loss and tax credit
carryovers and temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company’s deferred tax assets are as
follows:
|
|
Fiscal
Year Ended
|
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Federal
and state net operating losses
|
|
$
|
9,635,607
|
|
|
$
|
7,582,244
|
|
Research
credits
|
|
|
560,068
|
|
|
|
487,523
|
|
Non-deductible
accrued expenses
|
|
|
1,507,414
|
|
|
|
1,248,740
|
|
Valuation
allowance
|
|
|
(11,703,089
|
)
|
|
|
(9,318,507
|
)
|
Total
deferred tax assets
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liability:
|
|
|
|
|
|
|
|
|
Foreign
intangibles
|
|
|
(1,734,854
|
)
|
|
|
(2,774,471
|
|
Net
deferred tax liabilities
|
|
$
|
(1,734,854
|
)
|
|
$
|
(2,774,471
|
|
Reconciliation
between the tax provision computed at the Federal statutory income tax rate of
34% and the Company’s actual effective income tax provision is as
follows:
|
|
Fiscal
Year Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
January
1,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Computed
at statutory rate
|
|
$
|
(4,608,321
|
)
|
|
$
|
(2,626,910
|
)
|
|
$
|
(2,291,230
|
)
|
Research
& development credits
|
|
|
(72,543
|
)
|
|
|
(42,451
|
)
|
|
|
(147,171
|
)
|
State
income taxes
|
|
|
(272,498
|
)
|
|
|
(288,261
|
)
|
|
|
(118,709
|
)
|
Stock
compensation – ISO
|
|
|
434,917
|
|
|
|
393,175
|
|
|
|
-
|
|
Loss
not benefited
|
|
|
3,429,234
|
|
|
|
2,177,312
|
|
|
|
2,398,896
|
|
Foreign
tax
|
|
|
7,985
|
|
|
|
46,129
|
|
|
|
-
|
|
Other
|
|
|
8,721
|
|
|
|
4,531
|
|
|
|
158,214
|
|
Total
|
|
$
|
(1,072,505
|
)
|
|
$
|
(251,573
|
)
|
|
|
-
|
|
Realization
of deferred tax assets is dependent upon future earnings, if any, the timing and
amount of which are uncertain. Accordingly, the net deferred tax assets have
been fully offset by a valuation allowance. The Valuation Allowance increased by
$2,384,581 and by $2,110,793 for the fiscal years ended December 31, 2007
and 2006, respectively.
As of
December 31, 2006, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $24,993,337 which expire beginning after
the year 2020. The Company also has California net operating loss carryforwards
of approximately $19,517,545 which expire beginning after the year 2012. The
Company also has federal and California research and development tax credits of
$264,429 and $295,638. The federal research credits will begin to expire in the
year 2021 and the California research credits have no expiration date. The
Company also has California Manufacturer’s Investment Credit of $4,382 which
begins to expire after the year 2012.
Utilization
of the Company’s net operating loss may be subject to substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. Such an annual limitation could
result in the expiration of the net operating loss before
utilization.
We
adopted the provisions of Financial Standards Accounting Board Interpretation
No. 48 Accounting for Uncertainty in Income taxes (“FIN 48”) an interpretation
of FASB Statement No. 109 (“SFAS 109”) on January 1, 2007. As a
result of the implementation of FIN 48, we recognized no material adjustment in
the liability for unrecognized income tax benefits.
The
following table summarizes the activity related to our unrecognized tax
benefits:
|
|
2007
|
|
Balance
at January 1, 2007
|
|
$
|
176,639
|
|
Increase
related to current year tax position
|
|
|
18,136
|
|
Increase
related to tax positions of prior years
|
|
|
–
|
|
Balance
at December 31, 2007
|
|
$
|
194,775
|
|
A total
of $168,906 of the unrecognized tax benefits would affect our effective tax
rate.
We
recognize interest and penalties related to uncertain tax positions in income
tax expense. As of December 31, 2007, we have no accrued interest or
penalties related to uncertain tax positions. The tax years 2001-2007
remain open to examination by one or more of the major taxing jurisdictions to
which we are subject. The company does not anticipate that total
unrecognized tax benefits will significantly change due to the settlement of
audits and the expiration of statue of limitations prior to December 31,
2008.
Net Loss
per Share
Basic
earnings per share (“EPS”) is computed by dividing net loss by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur from common shares issuable through
stock options, warrants and other convertible securities, if
dilutive.
The
following table is a reconciliation of the numerator (net loss) and the
denominator (number of shares) used in the basic and diluted EPS calculations
and sets forth potential shares of common stock that are not included in the
diluted net loss per share calculation as the effect is
antidilutive:
|
|
December
31,
|
|
|
December
31,
|
|
|
January
1,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Numerator
– Basic and diluted
|
|
$
|
(12,481,380
|
)
|
|
$
|
(7,503,479
|
)
|
|
$
|
(6,768,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
– basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
71,422,184
|
|
|
|
50,443,688
|
|
|
|
30,445,423
|
|
Weighted
average unvested common shares subject to repurchase
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
71,722,184
|
|
|
|
50,443,688
|
|
|
|
30,445,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share – basic and diluted
|
|
$
|
(0.17
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock subscriptions
|
|
|
—
|
|
|
|
166,250
|
|
|
|
3,545,833
|
|
Common
stock reserved for incentives associated with the acquisition of
Netintact
|
|
|
—
|
|
|
|
5,462,758
|
|
|
|
—
|
|
Options
|
|
|
6,675,166
|
|
|
|
5,483,784
|
|
|
|
3,916,970
|
|
Warrants
|
|
|
7,714,407
|
|
|
|
8,901,344
|
|
|
|
7,213,178
|
|
Rights
to purchase common stock
|
|
|
300,000
|
|
|
|
—
|
|
|
|
292,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
antidilutive securities
|
|
|
14,689,573
|
|
|
|
20,014,136
|
|
|
|
14,968,081
|
|
15.
|
Quarterly
results of Operations (unaudited)
|
Following
is a summary of the quarterly results of operations for the years ended December
31, 2007 and 2006:
|
|
March
31
|
|
|
June
30
|
|
|
Sept.
30
|
|
|
Dec.
31
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
Revenues
|
|
$
|
1,984,930
|
|
|
$
|
2,117,000
|
|
|
$
|
1,645,657
|
|
|
$
|
924,954
|
|
Cost
of Goods Sold
|
|
|
910,604
|
|
|
|
1,162,302
|
|
|
|
1,074,569
|
|
|
|
1,231,585
|
|
Product
Margin
|
|
|
1,074,326
|
|
|
|
954,698
|
|
|
|
571,088
|
|
|
|
(306,631)
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
842,614
|
|
|
|
691,409
|
|
|
|
768,885
|
|
|
|
848,530
|
|
Sales
and marketing
|
|
|
1,462,636
|
|
|
|
1,824,486
|
|
|
|
1,953,365
|
|
|
|
2,584,095
|
|
General
and administrative
|
|
|
884,648
|
|
|
|
1,327,073
|
|
|
|
1,267,294
|
|
|
|
1,444,191
|
|
Total
expenses
|
|
|
3,189,898
|
|
|
|
3,842,968
|
|
|
|
3,989,544
|
|
|
|
4,876,816
|
|
Loss
from operations
|
|
|
(2,115,572
|
)
|
|
|
(2,888,270
|
)
|
|
|
(3,418,456
|
)
|
|
|
(5,183,447
|
)
|
Interest
and other income (expense)
|
|
|
16,561
|
|
|
|
14,323
|
|
|
|
27,466
|
|
|
|
(6,490
|
)
|
Loss
before Tax
|
|
|
(2,099,011
|
)
|
|
|
(2,873,947
|
)
|
|
|
(3,390,990
|
)
|
|
|
(5,189,937
|
)
|
(Provision) benefit
from tax
|
|
|
240,401
|
|
|
|
264,561
|
|
|
|
300,537
|
|
|
|
267,006
|
|
Net
loss
|
|
$
|
(1,858,610
|
)
|
|
$
|
(2,609,386
|
)
|
|
$
|
(3,090,453
|
)
|
|
$
|
(4,922,931
|
)
|
Basic
and diluted net loss per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
Shares
used in computing basic and diluted net loss per common
share
|
|
|
68,377,963
|
|
|
|
68,904,544
|
|
|
|
73,089,577
|
|
|
|
75,223,108
|
|
|
|
March
31
|
|
|
June
30
|
|
|
Sept.
30
|
|
|
Dec.
31
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
Revenues
|
|
$
|
22,332
|
|
|
$
|
54,751
|
|
|
$
|
420,859
|
|
|
$
|
1,416,488
|
|
Cost
of Goods Sold
|
|
|
80,596
|
|
|
|
169,984
|
|
|
|
292,896
|
|
|
|
779,558
|
|
Product
Margin
|
|
|
(58,264
|
)
|
|
|
(115,233
|
)
|
|
|
127,963
|
|
|
|
636,930
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
714,564
|
|
|
|
791,106
|
|
|
|
908,754
|
|
|
|
650,842
|
|
Sales
and marketing
|
|
|
436,105
|
|
|
|
440,513
|
|
|
|
492,891
|
|
|
|
1,195,936
|
|
General
and administrative
|
|
|
495,112
|
|
|
|
600,226
|
|
|
|
597,093
|
|
|
|
1,031,211
|
|
Total
expenses
|
|
|
1,645,781
|
|
|
|
1,831,845
|
|
|
|
1,998,738
|
|
|
|
2,877,989
|
|
Loss
from operations
|
|
|
(1,704,045
|
)
|
|
|
(1,947,078
|
)
|
|
|
(1,870,775
|
)
|
|
|
(2,241,059
|
)
|
Interest
and other income (expense)
|
|
|
(2,718
|
)
|
|
|
4,466
|
|
|
|
2,863
|
|
|
|
3,293
|
|
Loss
before Tax
|
|
|
(1,706,763
|
)
|
|
|
(1,942,612
|
)
|
|
|
(1,867,912
|
)
|
|
|
(2,237,766
|
)
|
(Provision) benefit
from tax
|
|
|
–
|
|
|
|
–
|
|
|
|
(12,397
|
)
|
|
|
263,970
|
|
Net
loss
|
|
$
|
(1,706,763
|
)
|
|
$
|
(1,942,612
|
)
|
|
$
|
(1,880,309
|
)
|
|
$
|
(1,973,796
|
)
|
Basic
and diluted net loss per common share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
Shares
used in computing basic and diluted net loss per common
share
|
|
|
36,461,326
|
|
|
|
46,745,012
|
|
|
|
55,488,782
|
|
|
|
64,248,470
|
|
The
Company operates in one segment, using one measure of profitability to manage
its business. Revenues for geographic regions are based upon the customer’s
location. The following are summaries of revenue and long lived assets by
geographical region:
|
|
Year
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
January
1,
|
|
REVENUES
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
United
States
|
|
$
|
2,253,944
|
|
|
$
|
469,419
|
|
|
$
|
208,786
|
|
Australia
|
|
|
863,875
|
|
|
|
195,252
|
|
|
|
-
|
|
Asia
|
|
|
84,545
|
|
|
|
84,545
|
|
|
|
36,466
|
|
Europe
|
|
|
1,044,049
|
|
|
|
252,113
|
|
|
|
9,557
|
|
South
America
|
|
|
180,560
|
|
|
|
60,702
|
|
|
|
-
|
|
Scandinavia
|
|
|
2,245,568
|
|
|
|
830,898
|
|
|
|
-
|
|
West
Indies
|
|
|
-
|
|
|
|
21,501
|
|
|
|
-
|
|
Total
|
|
$
|
6,672,541
|
|
|
$
|
1,914,430
|
|
|
$
|
254,809
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Long-lived
assets:
|
|
|
|
|
|
|
United
States
|
|
$
|
1,310,911
|
|
|
$
|
1,437,549
|
|
Sweden
|
|
|
6,046,063
|
|
|
|
9,263,358
|
|
Australia
|
|
|
46,250
|
|
|
|
44,355
|
|
Total
|
|
$
|
7,403,224
|
|
|
$
|
10,745,262
|
|
Foreign
sales as a percentage of revenues were 66% and 75% for the year ended December
31, 2007, and December 31, 2006, respectively.
The
Company’s accounts receivable are derived from revenue earned from customers
located in the United States, Australia, Asia, Europe, and the Middle East. The
Company performs ongoing credit evaluations of certain customers’ financial
condition and, generally, requires no collateral from its customers. For the
year ended December 31, 2007, three customers accounted for 15%, 11% and 6% of
revenues, respectively, and no other customer accounted for more than 5% of
total sales for the year. For the year ended December 31, 2006, three customers
accounted for 24%, 13% and 7% of revenues, respectively.
Appointment of
James
Brear
:
James Brear was
appointed President, CEO and as a member of the Board of Directors of the
Company in on February 12, 2007.
Registration Statement on Form
SB2:
The Company filed a registration statement on From SB2 on October 5,
2007, registering a total of 21,625,459 shares of our common stock for resale,
which declared effective by the Securities and Exchange on January 8,
2008.
Reduction in Force
: The
Company conducted a reduction in force in two phases affecting a total of 14
employees during the first quarter of 2008.
|
Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
|
On June
7, 2006, our auditors, Burr, Pilger & Mayer LLP
(“BPM”)
stated that we no longer fit the BPM client profile and resigned. The
independent auditor’s reports of BPM on our financial statements for the year
ended January 1, 2006 and January 2, 2005, or any later interim period through
the date of resignation, did not contain an adverse opinion or a disclaimer of
opinion, and were not modified as to uncertainty, audit scope or accounting
principles. During our two most recent fiscal years through the date of
resignation, we did not have any disagreements with BPM on any matter of
accounting principles or practice, financial statement disclosure, or auditing
scope or procedure, which if not resolved to the satisfaction of BPM would have
caused BPM to make reference to the subject matter thereof in connection with
BPM’s independent auditor’s report.
With the
approval of our board of directors, our Audit committee engaged PMB Helin
Donovan, LLP (“PMB”) as our independent registered public accounting firm for
the fiscal year ended December 31, 2006 and 2007. PMB accepted such appointment
on July 26, 2006. Prior to the appointment of PMB, we did not consult with PMB
on any matters relating to accounting opinions or any other matter related to us
which would require disclosure pursuant to Item 304(a)(2) of Regulation
S-B.
Evaluation
of Disclosure Controls and Procedures
We
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act, as of December 31, 2007. Our principal executive and financial
officers supervised and participated in the evaluation. Based on the evaluation,
our principal executive and financial officers each concluded that our
disclosure controls and procedures were not effective in providing reasonable
assurance that information required to be disclosed by us in the reports we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s forms and rules as of December
31, 2007. We determined that ht Company did not have sufficient
control over the closing process and could not prepare its financial statements,
footnotes and 10-K disclosures in a timely fashion. This weakness
resulted in significant last minute changes to the Company’s financial reports
and Form 10-K which could have resulted in material errors in the financial
reports and 10-K.
Internal
Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act. Internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP. Our internal control over financial reporting includes those policies
and procedures that:
|
i.
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
ii.
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that our
receipts and expenditures are being made only in accordance with
authorizations of our management and directors;
and
|
|
iii.
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our financial
statements.
|
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting can also be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may be inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management, including the chief executive officer and principal financial
officer, concluded that we did not maintain appropriate internal control
over financial reporting at December 31, 2007. In arriving at that conclusion,
we considered the criteria established in
Internal
Control—Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) and we
performed a complete assessment as outlined in
Commission Guidance
Regarding Management’s Report on Internal Control Over Financial Reporting Under
Section 13(a) or 15(d) of the Exchange
Act
("SOX"). The effectiveness of our internal
control over financial reporting as of December 31, 2007 has been audited by PMB
Henlin Donovan, our independent registered public accounting firm, as stated in
their report, which is included herein.
In
performing our assessment, we identified the risks that most likely affect
reliable financial reporting and are most likely to have a material impact on
the company’s financial statements, documented each business process within the
risk area, determined the control points related to the business process and
tested the design and effectiveness of each control. In addition to
process (transactional) level controls, we evaluated entity level controls to
determine if compensating controls mitigated any process level
risks. Entity level controls include a broad range of
non-transactional activities including account reconciliations, management
review of results, the company’s Code of Conduct and Audit Committee review of
practices and results.
SEC
Release 33-8809 defines “material weakness” as a deficiency, or a combination of
deficiencies in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the registrant’s
financial statement will not be prevented or detected on a timely
basis. SEC release 33829 defines “significant deficiency” as a
deficiency, or combination of deficiencies in internal control over financial
reporting that is less severe than a material weakness, yet important enough to
merit attention by those responsible for oversight of the registrant’s financial
reporting.
In
summary, as a result of our first assessment of internal control over financial
reporting under COSO criteria we identified a material weakness in a high risk
process and a number of significant deficiencies in high to low risk processes
within high risk areas of financial statement control. Despite
the existence of the material weakness and the significant
deficiencies, we believe that our consolidated financial statements contained in
this Form 10-K filed with the SEC fairly present our financial position, results
of operations and cash flows for the fiscal year ending December 31, 2007 in all
material respects. In conjunction with this conclusion, our independent
registered public accounting firm has tested our internal control over financial
reporting evaluation process and has provided an adverse opinion on the
Company’s control over financial reporting audit report.
As of
December 31, 2007, the following material weakness and significant deficiencies
in our internal control over financial reporting were identified:
Material
Weakness
|
1.
|
We
did not complete our 10-K and financial reports in sufficient time to
allow for review and comment which resulted in a significant number of
last minute changes. Based on the assessment conducted and the evaluation
of relevant criteria, management concluded that, as of December 31, 2007,
the Company’s Internal Control over financial reporting was not effective.
We intend to implement a plan for the year end close that permits earlier
completion of financial reports and a draft SEC form
10-K.
|
Significant
deficincies
|
1.
|
We
did not formally document many of the reviews conducted by the financial
department in the processing and preparation of the company financial
statements. These processes include journal entries, account
reconciliations, consolidations, equity reconciliations, disclosure
checklists and tax return preparation. The company plans to
remediate these issues by formalizing it’s documentation of financial
reviews.
|
|
2.
|
The
company did not conduct sufficient testing in 2007 to satisfy COSO
requirements for an accelerated filer. We became an accelerated
filer as of January 1, 2008 and became subject to COSO requirements on
July 1, 2007. We addressed the implementation of SOX
requirements but were unable to perform the necessary evaluations followed
by 2 quarters of testing as required in 2007. We will complete
the required testing cycles in
2008.
|
|
3.
|
We
did not have an adequate control over shipments and receipts of goods and
services. We expect to implement a company-wide enterprise
resource planning and financial reporting system in 2008 which will
include a more structured system of identifying shipments and
receipts.
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4.
|
We
did not have sufficient segregation of duties over a variety of financial
processes. Additional formal financial reviews will be
conducted on a regular basis over subsidiary activities where staff
limitations preclude segregation of duties. Where staffing
permits, activities and approvals will be segregated at the process
level.
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5.
|
We
did not maintain Human Resource documents current in such areas as job
descriptions, employee handbooks, training, compensation and performance
reviews. The company did not have a dedicated Human Resource
professional until December 2007. The company plans to
remediate these issues during 2008.
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|
6.
|
We
did not have in place a detailed budget versus actual review process for
departmental management. The company plans to implement
departmental financial performance review in
2008.
|
|
7.
|
We
do not have a “financial expert’ on the audit committee as defined by
Section 407 of SOX. The Audit Committee is actively pursuing a
remedy.
|
|
8.
|
The
Whistleblower contact is not a person independent person. The
Whistleblower contact will be changed in
2008.
|
Changes
in Internal Control Over Financial Reporting
As a
result of implementing the assessment process over the internal control over
financial reporting, we implemented various remediation measures to improve our
financial reporting and disclosure controls. As this is our first
report on internal control, none of the weaknesses identified below have been
previously disclosed. Some of the remedial actions taken since July
1, 2007 include;
|
1.
|
We
adopted a new Code of Conduct, based on a review of best practices,
relating to our directors, officers and
employees.
|
|
2.
|
We
implemented an “Ethics Line” (whistleblower) policy, with a call-in
feature
|
|
3.
|
We
implemented an “Ethics Line” (whistleblower) policy, with a call-in
feature
|
|
4.
|
Our
Board of Directors have reorganized the Audit, Compensation, and
Nominating/Governance Committees of the Board, in each case with
non-affiliated directors having appropriate expertise in such areas as
required for each Committee.
|
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5.
|
We
hired a highly qualified human resources
professional.
|
|
6.
|
We
hired a highly qualified full time controller for our Americas
operation.
|
|
7.
|
We
developed a personnel authorization process for the addition of new
employees.
|
|
8.
|
We
developed accounting procedures to review and monitor critical accounts
and transactions on a timely basis to ensure that financial statements are
accurately prepared and reviewed.
|
|
9.
|
We
established a recurring financial closing and quarterly reporting
process.
|
On
November 20, 2007, we entered into a Lease Extension with
Vasona Business Park to extend by five years the term of our current
lease with respect to our headquarters in Los Gatos, California. Our
headquarters is approximately 11,772 square feet, and as a result of the lease
extension we have a 73-month lease starting from June 1, 2005 and the monthly
rent ranges from $12,949 per month for the first year to $19,424 during the last
year.
PART
III
|
Directors, Executive Officers
and Corporate Governance.
|
Our
Directors
The name,
age, position(s), term and board committee membership for each member of our
Board of Directors is set forth below as of March 29, 2008:
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Scott McClendon
(1*, 2)
|
|
68
|
|
Chairman
of the Board and Director
|
|
2004
|
|
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|
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James F. Brear
|
|
42
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|
President,
Chief Executive Officer and Director
|
|
2008
|
|
|
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|
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Thomas H. Williams
(4)
|
|
69
|
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Chief
Financial Officer, Secretary and Director
|
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2003
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Staffan
Hillberg (2, 3)
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43
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Director
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2007
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Mary
Losty (1, 3*)
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48
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Director
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2007
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Thomas Saponas
(1, 2*)
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58
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Director
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2004
|
_________________
(1)
|
Member
of the Audit Committee of the Board of
Directors.
|
(2)
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Member
of the Compensation Committee of the Board of
Directors.
|
(3)
|
Member
of the Nominating and Corporate Governance Committee of the Board of
Directors.
|
(4)
|
Mr.
Williams resigned as a director and officer in December
2008.
|
The terms
of all directors will expire at the next annual meeting of stockholders, or when
their successors are elected and qualified. Directors are elected
each year, and all directors serve one-year terms. Officers serve at
the pleasure of the Board of Directors. There are no arrangements or
understandings between any director and any other person pursuant to which he or
she was or is to be selected as a director or nominee. We have, however, entered
into employment agreements with certain of our named executive officers
described in Part III, Item 11 below under the subheading “Employment,
Severance, Separation and Change of Control Agreements.”
Biographical
Information
Mr.
Scott
McClendon
has served as a member of our Board of Directors since March
1,
2004
and as Chairman of the Board since November 2,
2007. He is
currently a member of the Audit and Compensation Committees. Mr.
McClendon has been the Chairman of the Board for Overland Storage (NASDAQ OVRL)
since March 2001. He also served as Overland
’
'
s interim CEO from November 2006 to August 2007
and its President and CEO from October 1991 to March 2001, and was an officer
and employee until June 2001. Prior to his tenure with Overland, he
was employed by Hewlett Packard Company, a global manufacturer of computing,
communications and measurement products and services, for over 32 years in
various positions in engineering, manufacturing, sales and
marketing. He last served as the General Manager of the San Diego
Technical Graphics Division and Site Manager of Hewlett Packard in San Diego,
California. Mr. McClendon is a director of SpaceDev, Inc., an
aerospace development company. Mr. McClendon has a BSEE and MSEE from
Stanford University.
James
F.
Brear
joined Procera as its President, Chief Executive Officer and a member of
our Board of Directors on February 6, 2008. Mr. Brear is an industry
veteran with more than 18 years of experience in the networking industry, most
recently as vice president of worldwide sales and support for Bivio Networks, a
maker of deep packet inspection platform technology from July 2006 to January
2008. From September 2004 to July 2006 Mr. Brear was vice president
of worldwide sales for Tasman Networks (acquired by Nortel)
,
a maker of converged WAN solutions for
enterprise branch offices and service providers for managed WAN
services. From April 2004 to July 2004, Mr. Brear served as Vice
President of Sales at Foundry Networks, a provider of switching, routing,
security, and application traffic management solutions. Earlier in
his career, Mr. Brear was the vice president of worldwide sales for Force10
Networks from March 2002 to April 2004, during which time the company grew from
a pre-revenue start-up to the industry leader in switch routers for high
performance Gigabit and 10 Gigabit Ethernet. In addition, he spent
five years with Cisco Systems from July 1997 to March 2002 where he held senior
management positions in Europe and North America with responsibility for
delivering more than $750M in annual revenues selling into the world’s largest
service providers. Previously, Mr. Brear held a variety of
sales management positions at both IBM and Sprint
Communications. He holds a Bachelor of Arts degree from the
University of California at Berkeley.
Mr. Thomas H.
Williams
has served as a member of our Board of Directors since October
2003. From November 2007 to February 2008, he served as our interim
Chief Executive Officer. Mr. Williams has been our Chief
Financial Officer and Secretary since March 20, 2006, and continues to serve in
those capacities. Mr. Williams has 30 years experience as
a CFO and General Counsel in start-up and medium-sized venture capital-backed
technology companies. Prior to his service with us, Mr. Williams
served as interim CEO of TeleCIS Wireless, Inc. from November 2004 to March
2005. He served as CFO and later CEO at Bandwidth9, a company
developing tunable lasers for the fiber optics industry from 1999 through
November 2004 (Bandwidth filed for protection under Chapter 11 of the US
Bankruptcy code in August 2004). Previously, Mr. Williams has
held senior financial management and legal positions with IBM, Shell Oil,
Greyhawk Systems and IC Works. Mr. Williams holds a
B.S. degree in electrical engineering, a law degree from the University of
Minnesota and an M.B.A. from the University of California at
Berkeley. He is a member of the California, New York (inactive),
Federal and Patent bars.
Mr.
Staffan
Hillberg
has served as a member of our Board of Directors since January
11, 2007. He is currently a member of our Nominating and Compensation
committees. Mr. Hillberg is currently the managing CEO of
Scandinavian Financial Management AB, a private equity group based in Sweden
since October 2003. Since September 2004 he has also held the
position of Managing Partner at the MVI Group, one of the largest and oldest
business angel networks in Europe with over 175 million Euros invested in 75
companies internationally. While at MVI he has overseen a number of
successful exits among them, two IPO's in 2006 on the AIM exchange in London as
well as an IPO on the Swiss Stock Exchange. Prior to
Scandinavian Financial Management, he ran a local venture capital company from
June 2000 to July 2003 as well as co-founded and was the CEO of the computer
security company AppGate from August 1998 to June 2000,
with
operations in Europe and the USA, raising US$20M from ABN Amro, Deutsche Telecom
and GE Equity. Before this he was responsible for the online
activities of the Bonnier Group, the largest media group in Scandinavia,
spearheading their internet activities and heading up their sponsorship of MIT
Media Lab. Earlier he was the QuickTime Product Manager at Apple in
Cupertino and before this Multimedia Evangelist with Apple Computer Europe in
Paris, France. He has extensive experience as an investor and
business angel having been involved in the listing of two companies in Sweden,
Mirror Image and Digital Illusions where the latter was acquired by Electronic
Arts. Mr. Hillberg attended the M.Sc. program at Chalmers University of
Technology in Sweden and has an MBA from INSEAD in France.
Ms.
Mary Losty
has served as a member of our Board of Directors since March,
2007. She is currently a member of the Audit and Nominating and
Corporate Governance Committees. Ms. Losty is currently the General
Partner at Cornwall Asset Management, LLC, a portfolio management firm located
in Baltimore, Maryland, where she is responsible for the firm’s investment in
numerous companies. Ms. Losty’s prior experience includes working as
a portfolio manager at Duggan & Associates and as an equity research analyst
at M. Kimelman & Company. Prior to that she worked as an
investment banker at Morgan Stanley and Co., and for several years prior to that
she was the top aide to James R. Schlesinger, a five-time U.S. cabinet
secretary. Ms. Losty received both her B.S. and Juris Doctorate
degrees from Georgetown University, the latter with magna cum laude
distinction. She is a member of the American Bar Association and a
commissioner for Cambridge, Maryland
’
'
s Planning and Zoning Commission. Ms.
Losty also sits on the board of directors of the American Board of the United
Nations University for Peace, an institution which enjoys the exclusive status
of being sanctioned by all 192 member states of the United Nations.
Mr.
Thomas
Saponas
has served as a member of our Board of Directors since April 22,
2004 and is currently a member of the Audit and Compensation committees. Mr.
Saponas served as the Senior Vice President and Chief Technology Officer of
Agilent Technologies, Inc. (NYSE: A) from August 1999 until he retired in
October 2003. Prior to being named Chief Technology Officer, from
June 1998 to April 1999, Mr. Saponas was Vice President and General Manager of
Hewlett-Packard
’
'
s Electronic Instruments Group. Mr. Saponas
has held a number of positions since the time he joined Hewlett-Packard.
Mr. Saponas served as General Manager of the Lake Stevens Division
from August 1997 to June 1998 and General Manager of the Colorado Springs
Division from August 1989 to August 1997. In 1986, he was a White House Fellow
in Washington, D.C. Mr. Saponas has a BSEE/CS (Electrical Engineering and
Computer Science) and an MSEE from the University of Colorado. Mr. Saponas
is a director of nGimat, a nanotechnology company, a director of Time Domain, an
ultra wideband communications company, and a director of Keithley Instruments
(KEI on NYSE), an electronic instruments company. He also serves on the Visiting
Committee on Advanced Technology at the National Institute of Standards and
Technology.
Our
Executive Officers and Significant Employees
Set forth
below are the name, age, position(s), and a brief account of the business
experience of each of our executive officers and significant employees as of
March 29, 2008:
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|
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James F. Brear
|
|
42
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President
and Chief Executive Officer (Principal Executive Officer)
|
|
2008
|
|
|
|
|
|
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|
Thomas H. Williams
|
|
69
|
|
Chief
Financial Officer and Secretary
|
|
2006
|
|
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David Stepner
(1)
|
|
63
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Chief
Operating Officer
|
|
2007
|
|
|
|
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Paul Eovino
|
|
59
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|
VP,
Corporate Controller (Principal Accounting Officer)
|
|
2006
|
|
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|
Alexander Hävang
|
|
29
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Chief
Technical Officer
|
|
2006
|
|
|
|
|
|
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|
John Pirillo
|
|
45
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|
Vice
President — Sales-Americas
|
|
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|
David Green
|
|
41
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Vice
President — Sales-Europe, Middle East, Africa (EMEA)
|
|
|
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|
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|
Jon Lindén
|
|
33
|
|
Vice
President — Marketing
|
|
|
(1)
|
Dr.
Stepner resigned from the Company as of October 1,
2008.
|
There are
no arrangements or understandings between any executive officer and any other
person pursuant to which he or she was or is to be selected as an executive
officer or nominee. We have, however, entered into employment agreements with
certain of our named executive officers described in Part III, Item 11 below
under the subheading “Employment, Severance, Separation and Change of Control
Agreements.”
The brief
accounts of the business experience of Mr. Brear and Mr. Williams are
set forth above in “Our Directors” in this Item 10.
David
Stepner
has been our Chief
Operating Officer since May 2007. Mr. Stepner is a Silicon
Valley veteran with extensive experience in aggressively growing a variety of
successful high-tech companies. From June 2001 to March 2007,
Dr. Stepner was CEO of Teja Technologies, a software company targeting the
networking equipment market. Prior to that, he was general manager of the
platforms business unit of Wind River Systems, developer of the Tornado
development environment and VxWorks operating system from 1999
through 2000. He came to Wind River via its acquisition of Integrated Systems
Inc. (ISI), where he served as president of its Diab-SDS subsidiary, and earlier
as vice president of R&D from 1993 to 1999. Dr. Stepner also held
executive positions at Greyhawk Systems, which he co-founded, and Diasonics,
which conducted the largest IPO in history up to its time, and was vice
president of R&D at Measurex Corp. Dr. Stepner received a B.S. from
Brown University, and an M.S. and Ph.D. in electrical engineering from
Stanford University
.
Paul
Eovino
has over 30 years
experience in executive and managerial financial positions in companies ranging
in size from startup to over $2 billion in annual sales. Mr. Eovino joined
Procera Networks in October 2006 in a consulting role and became our full time
Vice President–Finance and Corporate Controller and Principal Accounting Officer
in March 2007. From February 2004 to January 2007, Mr. Eovino held the dual
positions of CFO for Expresso Fitness, a virtual reality exercise bicycle
manufacturer, and Synfora, an EDA Software developer. From December 2000 to
January 2004, Mr. Eovino was the Corporate Controller for Bandwidth9, a
MEMS manufacturer of tunable lasers for the fiber optic market.
Mr. Eovino's early career included over 15 years experience in various
international financial management positions with NCR, GenRad, and BICC-Boschert
as well as 8 years with Greyhawk Systems. Mr. Eovino graduated from
Rider University with a degree in Accounting and Financial
Management.
Alexander
Haväng
has
been our CTO since August 2006 and was a founding owner of Netintact,
a wholly owned subsidiary of Procera since August
2000. Mr Haväng is responsible for the company’s strategic
technology direction. Mr. Haväng is widely known and a
respected authority in the open source community, and is the lead architect for
Procera’s industry-recognized, deep packet inspection-based network traffic and
service management solution, PacketLogic. Earlier in his career, Haväng was one
of the chief architects for the open source streaming server software Icecast,
along with the secure file transfer protocol GSTP. He spent the early part of
his career at IDA systems, an IT solution provider for the Swedish government,
along with a stint in the Swedish military. Mr. Haväng
studied computer science at the Linköping University in
Sweden.
John
Pirillo
has been Procera’s Vice President of Sales for Americas since February 25,
2008. He has managed revenue responsibilities across all segments of
network service providers, including wireline, wireless, cable multi-system
operators (MSOs), ISPs, universities, enterprises and the federal
government. Most recently, he was vice president of sales – Americas
for Ellacoya Networks, a maker of deep packet inspection technology (sold
to Arbor Networks in 2008) from May 2006 to February
2008. Previously, he served as vice president of sales
for ECI Telecom from May 2005 to May 2006, Caspian Networks from September 2002
to October 2003, and Amber Networks (sold to Nokia in 2001) from January
2000 to September 2001. He also held sales management positions at
Ascend Communications (sold to Lucent Technologies in 1999) from 1994 to
1999 and Network Systems Corp from 1989 to 1994. He holds an M.B.A.
degree from Rollins College and a B.S. degree from the University of
Central Florida.
David
Green
has
developed extensive industry knowledge and relationships with Tier 1 telco
broadband providers, wireless providers, ISPs and channel partners. Prior to
joining Procera in March, 2008, he was most recently general manager – EMEA for
Ellacoya (now Arbor Networks) from August 2004 to March 2008, a maker of
deep packet inspection technology. Previously from November 1996 to
July 2004, he was sales for the cable and service-provider segment for Cisco
Systems and earlier in his career he held sales and management positions for
3Com from 1995 to 1996 and for Cabletron Systems from 1992 to 1995.
Jon
Lindén
joined Netintact (acquired by Procera) in 2001 and has been our Vice
President of Product Management since January 2008. Mr. Lindén is
responsible for Procera’s overall global product strategy and
execution. He has a background in sales and business development with
extensive experience in managing networking products throughout their
lifecycle. Prior to joining Netintact, Mr. Lindén was the CEO of
the venture-funded company TheSchoolbook.com from 1999 to 2001, and headed-up
sales and marketing at a content management software company from 1998 to
1999. Early in his career, he was project manager at the Swedish
Trade Council in Chicago from 1997 to 1998.
Family
Relationships
There are
no family relationships among any of our directors and executive
officers.
Section
16(a) Beneficial Ownership Reporting Compliance
Under
Section 16(a) of the Securities Exchange Act of 1934, as amended and the rules
and regulations promulgated by the Securities and Exchange Commission, or SEC,
our directors, executive officers and beneficial owners of more than ten percent
of any class of equity security are required to file periodic reports of their
ownership, and changes in that ownership, with the SEC. To the
Company’s knowledge, based solely on a review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, during the fiscal year ended December 31, 2007, all Section 16(a)
filing requirements applicable to its officers, directors and greater than ten
percent beneficial owners were complied with except that for fiscal year 2007
and previous fiscal years, Form 4 reports (i) covering an aggregate of 5
transactions, was not filed by Thomas H. Williams, (ii) covering an aggregate of
3 reports were not filed by each of Scott McClendon and Mary Losty, (iii)
covering an aggregate of 2 transactions, were not filed by each of Thomas
Saponas, Paul Eovino and David Stepner, and (iv) covering 1 transaction was not
filed by Stephan Hillberg. Form 3 reports were not filed for fiscal
year 2007 by each of David Stepner, Paul Eovino, Mary Losty and
Stephan Hillberg.
Corporate
Governance
The
Company has adopted corporate governance guidelines including a Code of Conduct
and Ethics, and charters for its Audit Committee, Compensation Committee and
Governance Committee. The text of these materials are posted on our website
(www.proceranetworks.com) in connection with “Investor Relations” materials;
however, information found on our website is not incorporated by reference into
this report. In addition, copies of these materials can be requested by any
stockholder and will be provided free of charge by writing to: Corporate
Secretary, Procera Networks, Inc., 100 Cooper Court, Los Gatos,
California 95032.
Code
of Business Conduct and Ethics
We have
adopted a Code of Business Conduct and Ethics that applies to our directors and
employees (including our principal executive officer, principal financial
officer, principal accounting officer and controller. In addition, we intend to
promptly disclose (i) the nature of any amendment to the policy that applies to
our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions and
(ii) the nature of any waiver, including an implicit waiver, from a provision of
the policy that is granted to one of these specified individuals, the name of
such person who is granted the waiver and the date of the waiver on our website
in the future.
Nominating
and Corporate Governance Committee
There
have been no material changes to the procedures by which security holders may
recommend nominees to our Board of Directors.
Audit Committee
The Audit
Committee of the Board of Directors, established in accordance with section
3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, oversees our
corporate accounting and financial reporting process. Three directors
comprise the Audit Committee: Scott McClendon, Mary Losty and
Thomas Saponas. The Board of Directors annually reviews the
American Stock Exchange Company Guide definition of independence for Audit
Committee members and financial sophistication criteria. The Board of
Directors has determined that all members of the Company’s Audit Committee are
independent (as independence is currently defined in Section 803A of the Company
Guide) and that at least one member of the Audit Committee qualifies as
financially sophisticated (as financially sophisticated is defined by Section
803B(2)(a)(iii) of the Company Guide).
Our Board
of Directors has determined that Procera does not have an audit committee
financial expert serving on its Audit Committee as defined under the applicable
Securities and Exchange Commission standard. The Board of Directors
has found it difficult to identify and recruit an individual with the correct
skill set, industry knowledge and professional background to serve the Company
in this role. However, our Board of Directors is actively pursuing
corrective action.
Compensation Discussion
and Analysis
Overview of
Compensation Program
The goal
of our executive compensation program is to provide a structure of incentives
and rewards that will drive behavior and performance in a way that builds long
term value for our stockholders. In support of this goal we have
implemented compensation and benefit programs that are designed to:
|
•
|
Align
the interests of management and
stockholders
|
|
•
|
Enable
the recruitment and retention of high quality executives
and
|
|
•
|
Provide
fair and reasonable levels of
compensation
|
Compensation
Objectives
The
following are the principal objectives of our compensation
programs:
Performance
– We strive to maintain a performance-oriented culture. Each of our compensation
elements are designed to encourage performance improvement of our executive
officers. We expect our executive officers to perform to high standards of
competence.
Alignment
with stockholders – We set our goals based on the business milestones that we
believe are most likely to drive long term stockholder value and by tying
significant elements of executive compensation to our business
success. Cash bonuses are designed to acknowledge short term goal
accomplishment while over the long term, executive officers expect to benefit
directly from increases in the value of our common stock through equity
participation, primarily stock options.
Recruiting
and retention – Building an outstanding organization and delivering excellence
in all aspects of our performance requires that we hire, and retain, high
quality executives. We believe that an environment in which
employees are able to have an enjoyable, challenging and rewarding work
experience is critical to our ability to recruit and retain the right
people. A crucial aspect of that environment is the structure of
incentives and rewards that are embedded in the compensation
structure. We strive to keep this structure competitive so that
qualified people are motivated to join our team and to continue to grow and
succeed at Procera.
Fair and
reasonable compensation – We strive to make our compensation programs fair in
relation to other executives within the organization and in relation to
comparable positions in other companies. We set compensation levels that are
reasonable in terms of our overall financial and competitive condition as a
company and that reflect the experience, skills and level of responsibility of
the executive. We utilize executive compensation resources to aid in
benchmarking all components of our executive compensation levels to outside
market conditions.
Compensation
Process
The
Compensation Committee of the Board of Directors operates under a board-approved
charter. This charter specifies the principal responsibilities of the
committee as follows: (i) to review and approve the overall compensation
strategy (including performance goals, compensation plans, programs and
policies, employment and similar agreements with executive officers); (ii) to
determine the compensation and terms of employment of the chief executive
officer and the other executive officers; (iii) to administer and to recommend
adoption, change or termination of plans, including option plans, bonus plans,
deferred compensation plans, pension plans and (iv) to establish appropriate
insurance for the directors and officers. The committee consists of
three directors, each of whom satisfies the independence requirements of the
American Stock Exchange Company Guide as well as applicable SEC and IRS
regulations.
The
performance of each of our executive officers is evaluated annually at the end
of the calendar year. The chief executive officer’s performance is evaluated by
the Compensation Committee and the performance of the other executive officers
is evaluated by the chief executive officer and reviewed with the Compensation
Committee. The factors taken into account in the evaluation of performance
include the extent to which pre-established goals and business plans were
accomplished and the extent to which the executive demonstrated leadership,
creativity, teamwork and commitment, and embodied our company
values. Other factors that are considered in making compensation
determinations are the experience, skill level and level of responsibility of
the executive and competitive market conditions.
All
options or restricted stock awards granted to executive officers and directors
must be approved by either the Compensation Committee or the Board of
Directors. At the time of hire, options and/or restricted stock
awards are granted effective on the employment start date for the
executive. Generally, we assess all of our executive officers on an
annual basis for potential additional stock option grants. These
annual awards are approved by the Compensation Committee or by the Board of
Directors.
Compensation
Elements
General –
We have implemented specific compensation elements to address our objectives
including base salary, equity participation, benefits and a cash bonus
plan. These elements combine short term and longer term incentives
and rewards in meeting our executive compensation goals.
Market
Compensation Data – Our Compensation Committee considers relevant market data in
setting the compensation for our executive Officers. During 2007 the
Compensation Committee selected Radford Surveys and Consulting to provide
competitive data for establishing officer and director
compensation. Radford was selected because of their experience and
quantity of companies surveyed. They also showed considerable
experience with Silicon Valley high technology companies. A broad
survey was used of companies with similar revenue, headcount and market
capitalization. Specific comparable companies were not used as the
resources required for selecting and conducting a narrow survey were not
justified by the total compensation budget and stage of development of the
company.
Base
Salary – In determining base salaries for our executive officers, we benchmark
each of our executive positions using data compiled by the Radford Surveys and
Consulting. The specific report used was the Radford Intro Program, which
included 184 technology companies with revenues estimated to be below $100
million for 2007. This survey was further subdivided into
categories of companies, with revenues expected to be under $10 million, $10 -
$39.9 million and over $40 million. The companies in these subgroups were not
identified by name. After consideration of all data, our compensation
committee elected to target compensation at the $10 - $39.9 million subgroup as
our targeted revenue run rate at the end of 2007 was expected to be in that
range.
The $10 -
$39.9 million category was further broken down into six percentile subgroups
representing the average salary within a given percentile. These
companies were also not identified by name. Since our expected
revenue target was at the low range of the subgroup, the compensation targets
were defined by comparison to survey respondents between the 25
th
and
50
th
percentile. We obtained detailed compensation data for executive
positions similar to the positions at our company for this revenue subgroup
percentile. The compensation elements developed by this comparison
method included targeted basic salary, incentive bonus and equity components for
the calendar year 2007.
Cash
Bonus – While we believe that the provision of short-term cash incentives is
important to aligning the interests of executive officers and stockholders, and
to the rewarding of performance, we also take into account the overall financial
situation of the company. Since the survey process occurred
during 2007, a bonus program with specific measures for 2007 was not
implemented. The cash bonuses for 2007 were all entirely
discretionary awards recommended by the compensation committed based on the
committee’s assessment of executive officers’ performance and accomplishments
during the year with input from the Chief Executive Officer and were not based
on pre-determined or specific corporate or individual performance
targets. The primary achievements, as considered by the Compensation
Committee in awarding the discretionary bonuses, were our merger with Netintact,
our increase in revenue between 2006 and 2007, financing achievements
and cost control and employee retention. The committee has
recommended target cash bonus incentives for 2008 based on the survey conducted
in 2007. The chief executive officer will receive an initial
bonus of 50% of his annual base salary after his first six months of his
employment with the Company and is eligible for a discretionary performance
bonus of up to 80% for the remainder of 2008 provided, however that for 2008,
the annual bonus will be prorated over the time between the end of the first six
months of Mr. Brear’s employment and the end of calendar year
2008. For 2008, the other executive officers are each eligible for a
total target bonus of up to 80% of base salary.
Equity
Incentive – We utilize stock options as the primary method of equity
participation for our executive officers. Equity awards are made for reward and
recognition of long term contribution to the shareholders. We
determine option grants by reference to our own capitalization structure, the
Radford Surveys and to internally generated benchmarks that we have established
to determine appropriate levels of stock option grants for our
employees. Because of the long term nature of this incentive, the
awards were evaluated over a multiyear period. The committee
determined that all of the officers had significant recent awards either as
hiring incentives or retention awards in 2006 or 2007 except the former
CEO. As a result the committee recommended only the CEO receive an
equity award in the form of stock options in 2007.
Benefits
– We provide a competitive range of health and other benefit programs to our
executive officers. These are provided on the same basis to executive
officers and all employees. These include health and dental
insurance, life and disability insurance, and a 401(k) plan.
Relocation
– When necessary and appropriate, upon the hire of new executives, we may pay
additional amounts in reimbursement of relocation costs and/or as additional
compensation to assist with the high cost of housing in the San Francisco Bay
Area.
Severance
and Change of Control – Under provisions of our chief executive officer’s
employment agreement, in the event of a termination of employment for reasons
other than cause, he is entitled to receive salary payments and continuation of
certain healthcare benefits for six months together with his initial bonus, if
not yet paid, all bonuses awarded during the prior calendar year, if not yet
paid, and a pro-rated bonus for the calendar year in which his employment is
terminated. In the event of an actual or constructive termination of
employment of our chief executive officer, or certain of our other executive
officers as described below under “Employment, Severance, Separation and Change
of Control Agreements,” other than for cause, within twelve months after a
change of control of the company, the unvested portion of any equity awards
granted will immediately become fully vested. We entered into these
arrangements to attract and retain the service of our executive
officers. Under provisions of our former chief executive officer’s
retirement agreement, he is entitled to receive salary payments and continuation
of certain healthcare benefits for the 18 month period ending April
2009.
Section
162(m) Treatment Regarding Performance-Based Equity Awards
Under
Section 162(m) of the Internal Revenue Code of 1986, as amended, a public
company is generally denied deductions for compensation paid to the chief
executive officer and the next four most highly compensated executive officers
to the extent the compensation for any such individual exceeds one million
dollars for the taxable year. Our executive compensation programs are designed
to preserve the deductibility of compensation payable to executive officers,
although deductibility will be only one among a number of factors considered in
determining appropriate levels or types of compensation.
Components
of Director Compensation
Directors
who are also Procera’s employees received no additional compensation for serving
on the Board during 2007. Procera reimbursed non-employee Directors
for all travel and other expenses incurred in connection with attending meetings
of the Board of Directors. In addition, Directors were awarded
options to purchase 12,500 shares of common stock at current market price for
each quarter of service provided. The 2007 option awards were based
on an option methodology established in 2004.
As a
result of the data from the Radford Surveys & Consulting, the Compensation
Committee developed a more comprehensive methodology of compensating
non-employee Directors for 2008. The 2008 compensation plan includes
elements which recognize increased responsibilities for committee participation
and general board meeting demands and combine elements of compensation for
meeting attendance, committee participation as well as equity
incentives.
Compensation
of the Named Executive Officers in 2007
The table
below summarizes the total compensation paid or earned by our Chief Executive
Officer, Chief Financial Officer and each of our three other most highly
compensated executive officers for the fiscal year ended December 31, 2007
(representing all of our executive officers serving at that date who earned over
$100,000 in salary and bonus for the fiscal year ending on that date), and one
additional individual that served as an executive officer during the fiscal year
ended December 31, 2007 but was no longer serving at December 31,
2007. We refer to each of such persons as a “named executive
officer.”
Name
and Principal
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas H. Williams,
|
|
2007
|
|
$
|
181,458
|
|
|
$
|
25,000
|
|
|
|
—
|
|
|
$
|
177,120
|
|
|
|
—
|
|
|
$
|
383,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Financial Officer, Interim Chief Executive Officer, Secretary and
Director
|
|
2006
|
|
|
126,154
|
(7)
|
|
|
—
|
|
|
|
—
|
|
|
|
95,407
|
|
|
|
—
|
|
|
|
221,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Stepner,
|
|
2007
|
|
$
|
98,333
|
(4)
|
|
|
—
|
|
|
$
|
304,893
|
|
|
$
|
96,223
|
|
|
|
—
|
|
|
$
|
499,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Operating Officer
|
|
2006
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Eovino,
|
|
2007
|
|
$
|
138,588
|
|
|
$
|
15,000
|
|
|
|
—
|
|
|
$
|
162,089
|
|
|
|
—
|
|
|
$
|
315,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice
President , Corporate Controller, Chief Accounting Officer
|
|
2006
|
|
|
15,000
|
(5)
|
|
|
—
|
|
|
|
—
|
|
|
|
27,533
|
|
|
|
—
|
|
|
|
42,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sven Nowicki,
|
|
2007
|
|
$
|
97,924
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
35,851
|
(2)
|
|
$
|
133,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Manager, Netintact, Director
|
|
2006
|
|
|
33,710
|
(6)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Glader,
|
|
2007
|
|
$
|
231,133
|
|
|
$
|
50,000
|
|
|
|
—
|
|
|
$
|
3,244
|
|
|
$
|
39,472
|
(3)
|
|
$
|
323,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retired
Chief Executive Officer
|
|
2006
|
|
|
245,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
245,000
|
|
_____________
|
(1)
|
The
amounts in this column reflect the dollar amount recognized for financial
statement reporting purposes for the fiscal years ended December 31, 2007
and 2006, in accordance with Statement of Financial Accounting Standards
No. 123R (SFAS 123R). Pursuant to SEC rules, the amounts shown
exclude the impact of estimated forfeitures related to service-based
vesting conditions. Assumptions used in the calculation of
these amounts are included in the notes to our audited financial
statements for the fiscal year ended December 31, 2007, included in our
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on April 2, 2008. These amounts reflect the
company’s accounting expense for these awards, and do not correspond to
the actual value that will be recognized by the named
executives.
|
|
(2)
|
Mr.
Nowicki earned compensation related to commissions on
sales
|
|
(3)
|
Mr.
Glader retired effective November 2, 2007. Other compensation
represents retirement compensation and continuing health benefit
reimbursements which continue for 18
months.
|
|
(4)
|
For
the partial year May 7, 2007 through December 31,
2007
|
|
(5)
|
For
the partial year October 1, 2006 through December 31, 2006 as a part time
employee.
|
|
(6)
|
For
the partial year August 18, 2006 through December 31,
2006
|
|
(7)
|
For
the partial year March 20, 2006 through December 31,
2006
|
Fiscal
2007 Grant of Plan-Based Awards
The
following table contains information regarding options granted during the fiscal
year ended December 31, 2007 to the named executive officers.
|
|
|
|
|
All
Other Stock Awards: Number of Shares of Stock or Units
(#)
|
|
|
All
Other Option Awards: Number of Securities Underlying Options
(#)
|
|
|
Exercise
or Base Price of Option Awards ($/Sh)
|
|
|
Grant
Date
Fair Value
of
Stock Option
Awards
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Stepner
|
|
07/11/07
|
|
|
|
300,000
|
|
|
|
—
|
|
|
$
|
3.00
|
|
|
$
|
304,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Stepner
|
|
07/11/07
|
|
|
|
—
|
|
|
|
250,000
|
|
|
$
|
3.00
|
|
|
|
81,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas H. Williams
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Eovino
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sven Nowicki
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Glader
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
_____________
|
(1)
|
Represents
the full grant date fair value of each individual equity award (on a
grant-by-grant basis) as computed under SFAS
123R.
|
Discussion of
Summary Compensation and Grants of Plan-Based Awards Tables
Our
executive compensation policies and practices, pursuant to which the
compensation set forth in the Summary Compensation Table and the Grants of
Plan-Based Awards table was paid or awarded, are described above under
“Compensation Discussion and Analysis.” A summary of certain material terms of
our compensation plans and arrangements is set forth below.
Employment,
Severance, Separation and Change of Control Agreements
We have
entered into the following employment arrangements with each of the named
executive officers reflected in the Summary Compensation Table.
James
F.
Brear
On
February 11, 2008, the Company entered into an executive employment agreement
with James F. Brear, as Chief Executive Officer, President and a
member of the Company’s Board of Directors. Pursuant to this
agreement, Mr. Brear will receive an annual base salary of $240,000,
subject to annual review and increases at the discretion of the Board of
Directors. Mr. Brear will receive an initial bonus of 50% of his
annual base salary after his first six months of employment with the Company
provided he remains an active employee through that time. In
addition, Mr. Brear is eligible for an annual discretionary performance bonus
equal to 80% of his annual base salary as determined by the Board of Directors;
provided, however, that for calendar year 2008, the Annual bonus shall be
prorated over the time between the end of the first six months of Mr. Brear’s
employment and the end of Calendar year 2008.
The
Company also granted Mr. Brear an option to purchase 2,250,000 shares of
the Company’s common stock, which will vest over four years, with 25% of the
shares vesting on the one year anniversary of Mr. Brear’s first day of
employment with the Company and the remaining shares vesting in 36 equal monthly
installments thereafter.
Under the
Employment Agreement, either the Company or Mr. Brear may terminate his
employment at any time. If the Company terminates Mr. Brear’s
employment without cause or Mr. Brear terminates his employment with good
reason, the Company will be obligated to pay Mr. Brear severance equal to six
months at his then current base salary, the maintenance of health insurance
coverage for Mr. Brear and his eligible dependents for a period of six months,
the full amount of his Initial Bonus if it has not previously been paid, the
full amount of any Annual Bonus awarded for the completed calendar preceding
termination if not already paid, and a pro-rated Annual Bonus for the calendar
year in which his employment terminates. Finally, if the Company
terminates Mr. Brear’s employment without cause or Mr. Brear
terminates his employment with good reason within twelve months after a change
in control, the unvested portion of any equity awards granted to Mr. Brear
prior to his termination will immediately become fully vested.
Thomas
H.
Williams
In
March 2006, Procera entered into an offer letter with
Mr. Thomas H. Williams employing him as Chief Financial
Officer. The agreement provides for a base salary of $160,000 per
annum. In addition, Procera granted to Mr. Williams an option to
purchase 450,000 shares of Procera common stock at a price of $.69 per
share. In August, 2006 Mr. Williams was granted an option to
purchase an additional 750,000 shares at an option price of $.52 per
share. In August 2007, Mr. Williams’ base salary was increased
to $190,000 per annum. On November 2, 2007, in connection with his
promotion to interim Chief Executive Officer, Mr. Williams’ salary was
increased to $245,000. Mr. Williams is eligible to participate
in any executive bonus programs adopted by the Company’s board of
directors. There are no severance provisions. If the
Company terminates Mr. Williams’
s
employment
without cause or if Mr. Williams terminates his employment with good reason
within twelve months after a change in control, the unvested portion of any
equity awards granted to Mr. Williams prior to his termination will
immediately become fully vested
David
Stepner
In
May 2007, Procera entered into an offer letter with Mr. David Stepner
employing him as Chief Operating Officer. The agreement provides for
a base salary of $160,000 per annum. The company granted Mr. Stepner
an option to purchase 250,000 shares of Procera common stock at a price of $3.00
per share with a vesting period of three years The options vest over a three
year period with one-sixth vesting 6 months after his start date and the
remaining shares vesting in 30 equal monthly installments
thereafter. Mr. Stepner was also granted 300,000 shares of
common stock with a vesting date of November 7,
2008. Mr. Stepner is eligible to participate in any executive
bonus program adopted by the Company’s board of directors. There are
no Severance provisions. If the Company terminates Mr. Stepner’s
employment without cause or if Mr. Stepner terminates his employment with
good reason within twelve months after a change in control, the unvested portion
of any equity awards granted to Mr. Stepner prior to his termination will
immediately become fully vested
Paul
Eovino
In
October 2006, the Company entered into a letter agreement with Paul Eovino
employing him as Vice President of Finance and Corporate
Controller. The agreement provides for a base salary of $150,000 per
annum on a full time basis. Mr
.
Eovino worked on a part time basis at a
rate of 60% of full time for the period October 1, 2006 through March 31, 2007
and became a full time employee on March 1,
2007. Mr. Eovino was also granted an option to purchase
500,000 shares of common stock; 250,000 of these shares commenced vesting in
October 2006 and the remaining 250,000 commenced vesting in March
2007. Mr. Eovino is eligible to participate in any executive
bonus program adopted by the Company’s board of directors. There are
no Severance provisions. If the Company terminates Mr. Eovino’s
employment without cause or if Mr. Eovino terminates his employment with
good reason within twelve months after a change in control, the unvested portion
of any equity awards granted to Mr. Eovino prior to his termination will
immediately become fully vested
Douglas
Glader
In
November 2007, the company entered into a retirement and separation agreement
with Douglas Glader, former Chief Executive Officer, Chairman of the Board
of Directors and Director. Pursuant to this agreement,
Mr. Glader is entitled to receive benefits equal to 18 months of his base
salary as well as a maximum of 18 months health care continuation under the
Consolidated Omnibus Budget Reconciliation Act (“COBRA”) paid for by the
Company. The salary portion of the retirement agreement is valued at
$39,472, $245,000 and $83,028 in 2007, 2008 and 2009
respectively. The health care continuation benefit is valued at
$1,056, $12,675 and $5,281 in 2007, 2008 and 2009 respectively.
Potential payouts
upon termination or Change of Control
Other than the
provisions of the executive severance benefits to which our Named Executive
Officer’s would be entitled to at the end of our fiscal year ending December 31,
2007 as set forth above, the Company has no liabilities under termination or
change of control conditions.
Under the
terms of option agreements with our Named Executive Officers, the value of
equity award acceleration, in the event of a change of control of Procera, as of
December 31, 2007, is valued at $322,808 for Thomas H. Williams,
$513,377 for David Stepner and $459,178 for
Paul Eovino. The amounts computed by person assume the
termination was effective as of December 31, 2007 and that all eligibility
requirements under the equity award agreement were met. The values
represent the portion of the stock option that is assumed to be accelerated,
calculated using a Black-Scholes option valuation method without taking into
effect estimated forfeiture.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Securities Underlying Unexercised Options (1)
|
|
|
|
|
|
|
|
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
|
|
Market
Value of Shares or Units of Stock That Have Not Vested
($)(5)(3)
|
|
Name
|
|
|
|
|
|
|
|
|
|
|
Option
Exercise Price ($)
|
|
|
Option
Expiration Date
|
|
|
|
|
|
Thomas H. Williams
|
|
(1
|
)
|
|
|
10,000
|
|
|
|
—
|
|
|
|
1.86
|
|
|
04/12/2008
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
75,000
|
|
|
|
—
|
|
|
|
1.42
|
|
|
06/13/2008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
16,000
|
|
|
|
—
|
|
|
|
1.67
|
|
|
04/19/2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
16,000
|
|
|
|
—
|
|
|
|
3.35
|
|
|
03/08/2014
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
196,875
|
|
|
|
253,125
|
|
|
|
0.69
|
|
|
03/19/2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
333,334
|
|
|
|
416,666
|
|
|
|
0.52
|
|
|
08/10/2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Stepner
|
|
(7
|
)
|
|
|
—
|
|
|
|
250,000
|
|
|
|
3.00
|
|
|
07/10/2017
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
300,000
|
|
|
$
|
304,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Eovino
|
|
(9
|
)
|
|
|
72,917
|
|
|
|
177,083
|
|
|
|
1.52
|
|
|
10/29/2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
250,000
|
|
|
|
1.52
|
|
|
10/29/2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sven Nowicki
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Glader
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
__________________
(1)
|
The
warrant vests 100% on the date of grant of April 13,
2005.
|
(2)
|
The
warrant vests as to 1/2 of the shares on October 14, 2005 and 1/2 on
February 28, 2006.
|
(3)
|
The
option vests as to 1/4 of the shares on March 31, 2005 and 1/4 quarterly
thereafter until fully vested.
|
(4)
|
The
option vests as to 1/4 of the shares on March 31, 2004 and
1/4 quarterly thereafter until fully
vested.
|
(5)
|
The
option vests as to 1/4 of the shares on the first anniversary of the date
of hire of March 20, 2006 and 1/48 per month thereafter until fully
vested.
|
(6)
|
The
option vests as to 1/3 of the shares on the date of grant of August 11,
2006 and 1/36 per month thereafter until fully
vested.
|
(7)
|
The
option vests as to 1/6 of the shares 6 months from the date of grant of
July 11, 2007 and 1/36 per month thereafter until fully
vested.
|
(8)
|
The
unrestricted stock vests 100% on November 7,
2008.
|
(9)
|
The
option vests as to 1/4 of the shares on the first anniversary of the date
of hire of October 30, 2006 and 1/48 per month thereafter until fully
vested.
|
(10)
|
The
option vests as to 1/4 of the shares on the first anniversary of the date
of full time employment of March 1, 2007 and 1/48 per month thereafter
until fully vested.
|
2007
Option Exercises
There
were no options exercised by any named executive officer during the fiscal year
ended December 31, 2007. We do not have any stock appreciation rights plans in
effect and we have no long-term incentive plans, as those terms are defined in
SEC regulations. During the fiscal year ended December 31, 2007, we did not
adjust or amend the exercise price of stock options awarded to the named
executive officers. We have no defined benefit or actuarial plans covering any
named executive officer.
Director
Compensation
During
fiscal year 2007, each of our non-employee directors received a grant of option
to purchase 50,000 shares of our common stock. The members of the
Board of Directors are also eligible for reimbursement for their expenses
incurred in connection with attendance at Board meetings in accordance with our
policy on reimbursement of business expenses.
In
December 2007, the Compensation Committee approved a revised compensation
structure for each of our non-employee directors and was approved by the full
Board of Directors in January 2008. Beginning in fiscal year 2008,
each of our non-employee directors will receive an annual retainer of
$10,000. The chair of each of the Audit, Compensation and
Nominating/Governance Committees will receive an additional annual retainer of
$5,000, $2,500 and $2,500, respectively. In addition the Compensation
Committee approved an additional annual retainer of $10,000 for our Chairman of
the Board. All annual cash compensation amounts are earned on a
quarterly basis. Each director will also receive $1,000 for attending
each Board of Directors or Committee meeting in person or $500 for attending
telephonically. Each non-employee director may make the annual
election to forego the cash compensation payable to non-employee directors and
to instead receive an additional option grant, equivalent in value to such cash
compensation. The members of the Board of Directors are also eligible for
reimbursement for their expenses incurred in connection with attendance at Board
meetings in accordance with our policy. Each of our non-employee directors will
also receive a grant of option to purchase 3,750 shares of our common stock each
quarter at the fair market value on the first day of each
quarter. Such options are not intended by us to qualify as incentive
stock options under the Code.
During
2007, we granted options to purchase an aggregate of 200,000 shares of common
stock to our non-employee directors at a weighted average exercise price per
share of $1.50. As of March 31, 2008, no options have been exercised
to purchase any shares issued to Directors as compensation.
The
following table provides information regarding compensation of non-employee
directors who served during the fiscal year ended December 31,
2007.
Director
Compensation Fiscal Year 2007
|
|
Fees
Earned or Paid in Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Saponas
|
|
$
|
—
|
|
|
$
|
47,543
|
|
|
|
—
|
|
|
$
|
47,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott McClendon
|
|
|
—
|
|
|
|
47,543
|
|
|
|
—
|
|
|
|
47,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mary
Losty
(3)
|
|
|
—
|
|
|
|
92,888
|
|
|
|
—
|
|
|
|
92,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Staffan Hillberg
(4)
|
|
|
—
|
|
|
|
73,053
|
|
|
|
—
|
|
|
|
73,053
|
|
___________________
(1)
|
The
amounts in this column reflect the dollar amount recognized for financial
statement reporting purposes for the fiscal year ended December 31, 2007,
in accordance with SFAS 123R. This expense is determined by
computing the fair value of each option on the grant date in accordance
with SFAS 123R and recognizing that amount as expense ratably over the
option vesting term and accordingly includes a portion of 2007 options
granted in previous years that vest in 2007. Assumptions used
in the calculation of these amounts are included in the notes to our
audited financial statements for the fiscal year ended December 31, 2007,
included in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission on April 2,
2008.
|
(2)
|
The
following options were outstanding as of December 31, 2007; Mr. Saponas
119,000 shares; Mr. McClendon 119,000; Ms. Losty 50,000 shares; Mr.
Hillberg 50,000.
|
(3)
|
Ms.
Losty joined the Board of Directors in March
2007.
|
(4)
|
Mr.
Hillberg joined the Board of Directors in January
2007.
|
Compensation
Committee Interlocks and Insider Participation
Tom Saponas,
Scott McClendon and Staffan Hillberg served as members of the Compensation
Committee of our Board of Directors in fiscal 2007. None of the
aforementioned individuals was, during fiscal 2007, an officer or employee of
Procera, was formerly an officer of Procera or had any relationship requiring
disclosure by Procera under Item 404 of regulation S-K. No
interlocking relationship exists between any of our executive officers or
Compensation Committee members, on the one hand, and the executive officers or
compensation committee members of any other entity, on the other hand, nor has
any such interlocking relationship existed in the past.
Report
of the Compensation Committee
The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis required by Item 402(b) of Regulation S-K with management and
included in this Item 11. Based on these reviews and discussions, the
Compensation Committee recommended to the Board that the Compensation Discussion
and Analysis be included in our Annual Report on Form 10-K/A.
|
Thomas Saponas
(Chair)
|
|
|
|
Scott McClendon
|
|
|
|
Staffan
Hillberg
|
|
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters.
|
Security Ownership
The following
table sets forth information regarding ownership of our common stock as of
February 27, 2009 (or such other date as provided below) by (a) each person or
beneficial ownership group known to us to own more than 5% of the outstanding
shares of our common stock, (b) each director of the Company, (c) our chief
executive officer, our chief financial officer and each other executive officer
named in the compensation tables appearing in Item 11 above and (d) all
directors and executive officers as a group. Each stockholder’s percentage
ownership is based on 84,498,491 shares of our common stock outstanding as of
February 27, 2009. Options and warrants to purchase shares of the
common stock that are exercisable within 60 days of February 27, 2009, are
deemed to be beneficially owned by the persons holding these options and
warrants for the purpose of computing percentage ownership of that person, but
are not treated as outstanding for the purpose of computing any other person’s
ownership percentage. The information in this table is based on
statements in filings with the SEC, or other reliable information.
Name and
Address of Beneficial Owner(1)
|
|
Amount
and Nature of Beneficial Ownership(2)
|
|
|
|
|
|
|
|
|
|
|
|
Principal Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
—
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Directors and
Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James F. Brear
(3)
|
|
|
656,250
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Thomas H. Williams
(4)
|
|
|
1,209,553
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
David Stepner
(5)
|
|
|
300,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Paul Eovino
(6)
|
|
|
296,875
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Scott McClendon
(7)
|
|
|
246,984
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Tom Saponas
(8)
|
|
|
1,142,985
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Mary Losty
(9)
|
|
|
1,879,236
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
Staffan Hillberg
(10)
|
|
|
101,175
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Todd Abbott
(11)
|
|
|
27,354
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All directors
and executive officers as a group (9 persons)(12)
|
|
|
5,833,058
|
|
|
|
6.7
|
%
|
_____________
*
|
Represents beneficial
ownership of less than 1% of the outstanding shares of our common
stock.
|
(1)
|
Unless otherwise
indicated, the address of each beneficial owner is care of Procera
Networks, Inc, 100 Cooper Court, Los Gatos,
CA 95032.
|
(2)
|
Beneficial ownership
is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to
securities. Except as otherwise indicated below, this table is
based on information supplied by officers, directors and principal
stockholders. The inclusion in this table of such shares does
not constitute an admission that the named stockholder is a direct or
indirect beneficial owner of, or receives the economic benefit of, such
shares. Except as otherwise stated below, each of the named
persons has sole voting and investment power with respect to the shares
shown (subject to community property
laws).
|
(3)
|
Includes incentive
stock options to acquire 2,250,000 shares of our common stock, which may
be exercised in whole or in part within 60 days of February 27,
2009.
|
(4).
|
Includes
46,200 shares of our common stock acquired through the purchase of
founders’ shares, warrants to purchase 85,000 shares of our common stock
which may be exercised, in whole or in part, within 60 days of February
27, 2009, non-qualified stock options to acquire 32,000 shares of our
common stock which may be exercised, in whole or in part, within 60 days
of February 27, 2009 and incentive stock options to acquire 1,046,353
shares of our common stock which may be exercised, in whole or in part,
within 60 days of February 27,
2009.
|
(5)
|
Includes a
grant of 300,000 shares of our common stock which was fully vested on
November 7, 2008.
|
(6)
|
Includes incentive
stock options to acquire 500,000 shares of our common stock which may be
exercised, in whole or in part, within 60 days of February 27,
2009.
|
(7)
|
Includes non-qualified
stock options to acquire 134,000 shares of our common stock which may be
exercised, in whole or in part, within 60 days of February 27, 2009 and
91,428 shares of common stock purchased in open market
transactions.
|
(8)
|
Includes non-qualified
stock options to acquire 162,217 shares of our common stock which may be
exercised, in whole or in part, within 60 days of February 27, 2009,
854,700 shares of our common stock acquired in our August 2008 private
placement and 108,667 shares of our common stock purchased in open market
transactions.
|
(9)
|
Includes 1,500,000
shares of our common stock acquired in our November 2006 private
placement, warrants to purchase 300,000 shares of our common stock which
may be exercised, in whole or in part, within 60 days of February 27, 2009
and non-qualified options to acquire 79,236 shares of our common stock
which may be exercised, in whole or in part, within 60 days of February
27, 2009.
|
(10)
|
Includes
non-qualified stock options to acquire shares of our common stock which
may be exercised, in whole or in part, within 60 days of February 27,
2009.
|
(11)
|
Includes non-qualified
stock options to acquire shares of our common stock which may be
exercised, in whole or in part, within 60 days of February 27,
2009.
|
Equity
Compensation Plan Information
At
December 31, 2007, we had two equity incentive plans under which equity
securities are or have been authorized for issuance to our employees,
consultants or directors; The 2003 Stock Option Plan and the 2004 Stock Option
Plan. These plans have been approved by our
stockholders. From time to time we issue to employees,
directors and service providers special stock options, inducement grants and
warrants to purchase common shares, and these grants have not been approved by
stockholders. The following table sets forth information as of December 31,
2007.
|
|
Number of
Securities
to
be Issued Upon
Exercise of
Outstanding
Options,
Warrants
and
Rights
(a)
|
|
|
Weighted
Average
Exercise Price
of
Outstanding
Options,
Warrants
and
Rights
(b)
|
|
|
Number of
Securities
Remaining
Available
for
Future Issuance
Under Equity
Compensation
Plans
(Excluding
Securities
Reflected in Column
(a)
(c)
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by stockholders
|
|
|
6,675,163
|
(1)
|
|
$
|
1.37
|
|
|
|
714,357
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by stockholders(3) (4)
|
|
|
5,136,109
|
|
|
$
|
1.09
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
11,811,272
|
|
|
$
|
1.25
|
|
|
|
714,357
|
|
(1)
|
Includes
unexercised options issued pursuant to our 2003 and 2004 Stock Option
Plan.
|
(2)
|
Includes
unissued options available pursuant to our 2003 and 2004 Stock Option
Plan
|
(3)
|
Includes
(i) 201,268 shares subject to a warrant granted on December 20, 2002 to a
financial advisor for consulting services rendered with an exercise price
of $0.01 and an expiration date of June 19,
2009.
|
|
(ii)
|
50,000
shares subject to a warrant granted on June 5, 2003 to a legal firm for
consulting services rendered with an exercise price of $0.50 and an
expiration date of June 6, 2008.
|
|
(iii)
|
100,000
shares subject to a warrant granted on February 23, 2005 to an individual
for sales services rendered with an exercise price of $1.78 and an
expiration date of February 23,
2010.
|
|
(iv)
|
10,000
shares subject to a warrant granted on April 13, 2005 to an individual for
financing services rendered with an exercise price of $1.86 and an
expiration date of April 13, 2008.
|
|
(v)
|
25,000
shares subject to a warrant granted on June 1, 2005 to an individual for
real estate services rendered with an exercise price of $1.42 and an
expiration date of July 12, 2008.
|
|
(vi)
|
75,000
shares subject to a warrant granted on June 14, 2005 to an individual for
financing services rendered with an exercise price of $1.42 and an
expiration date of June 14, 2008.
|
|
(vii)
|
15,000
shares subject to a warrant granted on September 13, 2005 to an individual
for product development services rendered with an exercise price of $0.68
and an expiration date of June 14,
2008.
|
|
(viii)
|
1,163,875
shares subject to a warrant granted on February 28, 2006 to a group of
placement agents for fees associated with our February 2006 private
placement financing with an exercise price of $0.40 and an expiration date
of July 12, 2008.
|
|
(ix)
|
400,000
shares subject to a warrant granted on August 2, 2006 to an individual for
investor relations services rendered with an exercise price of $1.40 and
an expiration date of August 2,
2008.
|
|
(x)
|
1,380,000
shares subject to a warrant granted on November 30, 2006 to a group of
placement agents for fees associated with our November 2006 private
placement financing with an exercise price of $1.50 and an expiration date
of November 30, 2011.
|
|
(xi)
|
15,000
shares subject to a warrant granted on January 24, 2007 to an individual
for recruitment services rendered with an exercise price of $2.14 and an
expiration date of January 23,
2010.
|
|
(xii)
|
100,000
shares subject to a warrant granted on January 24, 2007 to an individual
for sales services rendered with an exercise price of $2.14 and an
expiration date of January 23,
2010.
|
|
(xiii)
|
199,998
shares subject to a warrant granted on July 16, 2007 to a group of
placement agents for fees associated with our July 2007 private placement
financing with an exercise price of $2.00 and an expiration date of July
17, 2012.
|
|
(xiv)
|
70,000
shares subject to a warrant granted on July 31, 2007 to an individual for
institutional investor relations services rendered with an exercise price
of $1.12 and an expiration date of July 31,
2010.
|
(4)
|
Includes
(i) 72,727 common shares granted on January 24, 2007 for financing
services rendered with a fair market value of $1.65 per
share.
|
|
(ii)
|
165,000
common shares granted on February 8, 2005 for investor relations services
to be provided with a fair market value of $0.51 per
share.
|
|
(iii)
|
825,000
common shares granted on November 30, 2005 for investor relations services
to be provided with a fair market value of $0.70 per
share
|
|
(iv)
|
247,500
common shares granted on May 2, 2007 for investor relations services to be
provided with a fair market value of $2.47 per
share.
|
|
(v)
|
11,000
common shares granted on October 11, 2004 for sales services rendered with
a fair market value of $0.92.
|
|
(vi)
|
9,741
common shares granted on December 11, 2007 for executive recruiting
services rendered with a fair market value of $3.08 per
share.
|
|
Certain Relationships and
Related Transactions, and Director
Independence
.
|
Certain
Relationships and Related Transactions
Since
January 1, 2007, there has not been nor are there currently proposed any
transactions or series of similar transactions to which we were or are to be a
party in which the amount involved exceeds $120,000 and in which any director,
executive officer, holder of more than 5% of our common stock or any member of
the immediate family of any of the foregoing persons had or will have a direct
or indirect material interest, other than the following
transactions:
Employment
Agreements
Information
on our executives employment agreements is located under the caption,
“Employment, Severance, Separation and Change of Control Agreements”
above.
Director
and Officer Indemnification Agreements
In
addition to the indemnification provisions contained in our restated certificate
of incorporation and bylaws, we generally enter into separate indemnification
agreements with our directors and officers. These agreements require
us, among other things, to indemnify the director or officer against specified
expenses and liabilities, such as attorneys’ fees, judgments, fines and
settlements, paid by the individual in connection with any action, suit or
proceeding arising out of the individual’s status or service as our director or
officer, other than liabilities arising from willful misconduct or conduct that
is knowingly fraudulent or deliberately dishonest, and to advance expenses
incurred by the individual in connection with any proceeding against the
individual with respect to which the individual may be entitled to
indemnification by us. We also intend to enter into these agreements
with our future directors and executive officers.
Company
Policy Regarding Related Party Transactions
It is our
policy that the Audit Committee approve or ratify transactions involving
directors, executive officers or principal shareholders or members of their
immediate families or entities controlled by any of them or in which they have a
substantial ownership interest in which the amount involved exceeds $120,000 and
that are otherwise reportable under SEC disclosure rules. Such
transactions include employment of immediate family members of any director or
executive officer. Management advises the Audit Committee on a
regular basis of any such transaction that is proposed to be entered into or
continued and seeks approval. The company has not yet adopted a
written related-persons transaction policy.
Director
Independence
Our board
has determined that the following directors are “independent” under current
American Stock Exchange listing standards:
|
Thomas Saponas
|
|
|
|
Scott McClendon
|
|
|
|
Mary
Losty
|
|
|
|
Staffan
Hillberg
|
Under
applicable SEC and American Stock Exchange rules, the existence of certain
“related party” transactions above certain thresholds between a director and the
Company are required to be disclosed and preclude a finding by the Board that
the director is independent. In addition to transactions required to
be disclosed under SEC rules, the Board considered certain other relationships
in making its independence determinations, and determined in each case that such
other relationships did not impair the director’s ability to exercise
independent judgment on our behalf. Specifically, the Board considered the
following information:
Mary
Losty:
In
November 2006, Mary Losty purchased shares of our equity securities in a private
placement financing and was granted warrants associated with this
financing. Ms. Losty was appointed to the board in March
2007.
|
Principal Accountant Fees and
Services.
|
The
following table presents the fees for professional audit services rendered by
PMB Helin Donovan LLP the Company’s principal accountant and related expert
services for fiscal years 2007 and 2006, and fees billed for other services
rendered by PMB Helin Donovan LLP and related expert services for
fiscal years 2007 and 2006.
|
|
Fiscal
Year
|
|
|
Fiscal
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit
Fees (1)
|
|
$
|
186,391
|
|
|
$
|
67,420
|
|
Audit-Related
Fees (2)
|
|
|
65,380
|
|
|
|
39,140
|
|
Tax
Fees (3)
|
|
|
85,154
|
|
|
|
26,015
|
|
All
Other Fees (4)
|
|
|
50,134
|
|
|
|
—
|
|
Total
|
|
$
|
387,059
|
|
|
$
|
132,575
|
|
_____________
(1)
|
Includes
fees for the audit of the annual financial statements included in our Form
10-K and the review of interim financial statements included on Forms 10-Q
by our principal accounting firms. Of the audit fees in 2007,
approximately $158 thousand was related to services provided by PMB Helin
Donovan and $7 thousand was related to services provided by Burr Pilger
Meyer, our predecessor audit firm and $16 thousand related to quarterly
evaluation of 123R expenses, and $5 thousand for an annual intangible
valuation assessment . Of the audit fees in 2006, approximately
$55 thousand was related to services provided by PMB and $12 thousand was
related to services provided by
BPM.
|
(2)
|
Includes
fees for expert services provided primarily by PWC in Sweden in support of
the review and audit of our Swedish subsidiary, Netinact, including the
annual financial statements included in our Form 10-K and the review of
interim financial statements included on Forms
10-Q.
|
(3)
|
Includes
fees for the preparation of statutory and regulatory filings associated
with tax accounting, footnotes and returns. These services were
provided by Mohler, Nixon Williams, LLP in the US and PWC in Sweden
during 2007 and 2006.
|
(4)
|
Includes
fees for the preparation and review of our form SB-2 Registration, form
S-8 Registration, Proxy statement, form 8-K’s as required and the annual
review of Sarbanes-Oxley section 404
implementation.
|
All fees
described above were approved by the Audit Committee.
Pre-Approval
Policies and Procedures
The Audit
Committee has adopted a policy that all audit, audit-related, tax and any other
non-audit service to be performed by our independent registered public
accounting firm must be pre-approved by the Audit Committee. Our company policy
is that all such services be pre-approved prior to the commencement of the
engagement. The Audit Committee is also required to pre-approve the estimated
fees for such services, as well as any subsequent changes to the terms of the
engagement. The Audit Committee has delegated the authority (within specified
limits) to the chair of the Audit Committee to pre-approve such services if it
is not practical to wait until the next Audit Committee meeting to seek such
approval. The Audit Committee chair is required to report to the Audit Committee
at the following Audit Committee meeting any such services approved by the chair
under such delegation.
The Audit
Committee will only approve those services that would not impair the
independence of the independent registered public accounting firm and which are
consistent with the rules of the SEC and the Public Company Accounting Oversight
Board.
Under
this policy, the Audit Committee meets at least annually to review and where
appropriate approve the audit and non-audit services to be performed by the
Company’s independent registered public accounting firm. Any subsequent requests
to have the independent registered public accounting firm perform any additional
services must be submitted in writing to the Audit Committee by our chief
financial officer, together with the independent registered public accounting
firm, which written request must include an affirmation from each that the
requested services are consistent with the SEC and Public Company Accounting
Oversight Board’s rules on auditor independence.
All fees
paid to PMB Helin Donovan for 2007 and 2006 were pre-approved by our Audit
Committee.
PART
IV
|
Exhibits
and Financial Statement Schedules
|
The
financial statements filed as part of this report are listed on the index to
financial statements on page F-4.
|
(b)
|
Financial
Statement Schedules
|
The
information required with respect to financial statement schedules is contained
within the presentation of the consolidated financial statements and related
notes.
The
following exhibits are incorporated by reference or filed herewith.
2.1*
Agreement and Plan of Merger dated June 24, 2003 included as Exhibit A to
our Preliminary Proxy Statement on Schedule 14A filed on August 25, 2003
and incorporated herein by reference.
|
2.2*
First Amended and Restated Stock Exchange Agreement and Plan of
Reorganization by and between Procera the Company and the Sellers of
Netintact dated August 18, 2006 included as exhibit 2.1 to our form 8-K
filed on August 31, 2006 and incorporated herein by
reference.
|
2.3*
Form of Closing Date Warrant Agreement dated August 18, 2006 included as
exhibit 2.2 to our form 8-K filed on August 31, 2006 and incorporated
herein by reference.
|
2.4*
Form of Incentive Warrant Agreement dated August 18, 2006 included as
exhibit 2.3 to our form 8-K filed on August 31, 2006 and incorporated
herein by reference.
|
2.5*
Lockup Agreement dated August 18, 2006 included as exhibit 2.4 to our form
8-K filed on August 31, 2006 and incorporated herein by
reference.
|
2.6*
Voting Agreement dated August 18, 2006 included as exhibit 2.5 to our form
8-K filed on August 31, 2006 and incorporated herein by
reference.
|
2.7*
Form of Escrow Agreement included as exhibit 2.6 to our form 8-K filed on
August 31, 2006 and incorporated herein by reference.
|
2.8*
First Amendment to First Amended and Restated Stock Exchange Agreement and
Plan of Reorganization by and between the Company and the
Sellers of Netintact dated November, 2006 included as exhibit 2.8 to our
form 10-KSB filed on April 16, 2007 and incorporated herein by
reference.
|
3.1*
Articles of Incorporation included as Exhibit 3.1 to our form SB-2 filed
on February 11, 2002 and incorporated herein by reference.
|
3.2*
Certificate of Amendment to Articles of Incorporation included as Exhibit
99.1 to our form 8-K filed on October 12, 2005 and incorporated herein by
reference.
|
3.3*
Bylaws included as Exhibit 3.3 to our form SB-2 filed on February 11, 2002
and incorporated herein by reference.
|
4.1*Form
of Subscription Agreement for July, 2007 offering included as Exhibit 10.1
to our form 8-K filed on July 17, 2007 and incorporated herein
by reference.
|
4.2*Form
of Registration Rights Agreement for July, 2007 offering included as
Exhibit 10.2 to our form 8-K filed on July 17, 2007 and
incorporated herein by reference.
|
4.3*
Form of Warrant Agreement for July, 2007 offering included as Exhibit 4.3
to our form SB-2 filed on October 5, 2007 and incorporated herein by
reference.
|
4.4*
Form of Subscription Agreement for November, 2006 offering included as
Exhibit 2.1 to our form 8-K filed on November 30, 2006 and
incorporated herein by reference
|
4.5*
Form of Registration Rights Agreement for November, 2006 offering included
as Exhibit 2.3 to our form 8-K filed on November 30, 2006 and incorporated
herein by reference.
|
4.6*Form
of Warrant agreement for November, 2006 offering included as Exhibit 2.2
to our form 8-K filed on November 30, 2006 and incorporated herein by
reference.
|
4.7*
Form of Subscription Agreement for February, 2006 offering included as
Exhibit 10.1 to our form 8-K filed on March 1, 2006 and
incorporated herein by reference.
|
4.8*
Form of Amendment to Stock Subscription Agreement for February, 2006
offering included as Exhibit 10.2 to our form 8-K filed on March 1, 2006
and incorporated herein by reference.
|
4.9*
Form of Registration Rights Agreement for February, 2006 offering included
as Exhibit 10.4 to our on Form 8-K filed on March 1, 2006 and incorporated
herein by reference.
|
4.10*
Form of Subscription Agreement for December 2004 offering included as
Exhibit 10.1 to our form 8-K filed on January 4, 2005 and
incorporated herein by reference.
|
4.11*
Form of Registration Rights Agreement for December 2004 offering included
as Exhibit 10.2 to our form 8-K filed on January 4, 2005 and
incorporated herein by reference.
|
4.12
* From of Warrant agreement for December 2004 offering included as Exhibit
10.3 to our current report form 8-K filed on January 4, 2005 and
incorporated herein by reference.
|
4.13*
Form of Subscription Agreement for June 2003 offering included as Exhibit
4.13 to our form SB-2 filed on October 5, 2007 and incorporated herein by
reference..
|
4.14*
Form of Registration Rights Agreement for June 2003 offering included as
Exhibit 4.14 to our form SB-2 filed on October 5, 2007 and incorporated
herein by reference..
|
4.15*
Form of Warrant Agreement for June 2003 offering included as Exhibit 4.15
to our form SB-2 filed on October 5, 2007 and incorporated herein by
reference..
|
10.1*
2003 Stock Option Plan included as Exhibit 10.1 to our form SB-2 filed on
January 8, 2004 and incorporated herein by reference.
|
10.2*
Amended 2004 Stock Option Plan included as Exhibit 99.3 to
our form 8-K filed on October 12, 2005 and incorporated herein
by reference.
|
10.3*
Lease agreement by and between the Company and Vasona Business Park dated
as of May 1, 2005 included as Exhibit 10.3 to our form SB-2 filed on
October 5, 2007 and incorporated herein by reference.
|
10.4*
Employee Offer Letter for Douglas J. Glader dated September 17, 2003
included as Exhibit 10.3 to our form SB-2 filed on January 8, 2004 and
incorporated herein by reference.
|
10.5*
Employee Offer Letter for Thomas H. Williams dated March 6, 2006 included
as Exhibit 99.1 to our form 8-K filed on March 23, 2006 and
incorporated herein by reference.
|
10.6*
Employee Offer Letter for Jay Zerfoss dated May 10, 2002 included as
Exhibit 10.6 form 10KSB filed on April 3, 2006 and incorporated herein by
reference.
|
10.7*
Employee Offer Letter for Gary Johnson dated October 18, 2004 included as
Exhibit 10.8 on our form 10KSB filed on April 3, 2006 and incorporated
herein by reference.
|
10.8
*Lease extension by and between the Company and
Vasona Business Park dated November 20, 2007 included as Exhibit
10.8.
|
10.9
*Retirement agreement between the Company and Douglas J. Glader,
dated November 29 2007 and included as Exhibit 10.9.
|
16.1*
Letter on changing registrants certifying accountant dated June 13, 2006
included as Exhibit 16.1 to our form 8-K filed on June 7,
2006 and incorporated herein by reference.
|
21.1*
List of Subsidiaries included as Exhibit 21.1 to our form SB-2 filed on
October 5, 2007 and incorporated herein by reference.
|
23.1
Consent of Registered Public Accounting Firm – PMB Helin Donovan,
LLP.
|
23.2
Consent of Registered Public Accounting Firm– Burr, Pilger &
Mayer LLP.
|
31.1*
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2
* Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.3*
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.4*
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.5
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.6
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1* Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2* Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.3 Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.4 Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
Previously filed
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this Annual Report on Form
10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Los Gatos, State of California, on this 10th day of March
2009.
|
Procera
Networks, Inc.
|
|
|
|
Date: March
10,2009
|
By:
|
/s/ James Brear
|
|
|
James Brear
|
|
|
President
and Chief Executive Officer
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Name
|
|
Title
|
|
Date
|
|
/s/ JAMES BREAR
|
|
President
and Chief Executive Officer
|
|
March
10, 2009
|
James Brear
|
|
(Principal
Executive Officer) and Director
|
|
|
|
|
|
|
|
/s/ PAUL EOVINO
|
|
interim
Chief Financial Officer
|
|
March
10, 2009
|
Paul Eovino
|
|
and
Vice President of Finance
|
|
|
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
/s/ THOMAS SAPONAS*
|
|
Director
|
|
March
10, 2009
|
Thomas Saponas
|
|
|
|
|
|
|
|
|
|
/s/ SCOTT MCCLENDON*
|
|
Director
|
|
March
10, 2009
|
Scott McClendon
|
|
|
|
|
|
|
|
|
|
/s/ MARY
LOSTY*
|
|
Director
|
|
March
10, 2009
|
Mary
Losty
|
|
|
|
|
|
|
|
|
|
/s/ STEFFAN HILLBERG*
|
|
Director
|
|
March
10, 2009
|
Steffan Hillberg
|
|
|
|
|
|
|
|
|
|
/s/ TODD ABBOTT*
|
|
Director
|
|
March
10, 2009
|
Todd Abbott
|
|
|
|
|
|
|
|
|
|
*By:
/s/ PAUL EOVINO
|
|
|
|
|
Paul Eovino
|
|
|
|
|
Attorney-in-fact
|
|
|
|
|
March
10, 2009
|
|
|
|
|
2.1*
Agreement and Plan of Merger dated June 24, 2003 included as Exhibit A to
our Preliminary Proxy Statement on Schedule 14A filed on August 25, 2003
and incorporated herein by reference.
|
2.2*
First Amended and Restated Stock Exchange Agreement and Plan of
Reorganization by and between Procera the Company and the Sellers of
Netintact dated August 18, 2006 included as exhibit 2.1 to our form 8-K
filed on August 31, 2006 and incorporated herein by
reference.
|
2.3*
Form of Closing Date Warrant Agreement dated August 18, 2006 included as
exhibit 2.2 to our form 8-K filed on August 31, 2006 and incorporated
herein by reference.
|
2.4*
Form of Incentive Warrant Agreement dated August 18, 2006 included as
exhibit 2.3 to our form 8-K filed on August 31, 2006 and incorporated
herein by reference.
|
2.5*
Lockup Agreement dated August 18, 2006 included as exhibit 2.4 to our form
8-K filed on August 31, 2006 and incorporated herein by
reference.
|
2.6*
Voting Agreement dated August 18, 2006 included as exhibit 2.5 to our form
8-K filed on August 31, 2006 and incorporated herein by
reference.
|
2.7*
Form of Escrow Agreement included as exhibit 2.6 to our form 8-K filed on
August 31, 2006 and incorporated herein by reference.
|
2.8*
First Amendment to First Amended and Restated Stock Exchange Agreement and
Plan of Reorganization by and between the Company and the
Sellers of Netintact dated November, 2006 included as exhibit 2.8 to our
form 10-KSB filed on April 16, 2007 and incorporated herein by
reference.
|
3.1*
Articles of Incorporation included as Exhibit 3.1 to our form SB-2 filed
on February 11, 2002 and incorporated herein by reference.
|
3.2*
Certificate of Amendment to Articles of Incorporation included as Exhibit
99.1 to our form 8-K filed on October 12, 2005 and incorporated herein by
reference.
|
3.3*
Bylaws included as Exhibit 3.3 to our form SB-2 filed on February 11, 2002
and incorporated herein by reference.
|
4.1*Form
of Subscription Agreement for July, 2007 offering included as Exhibit 10.1
to our form 8-K filed on July 17, 2007 and incorporated herein
by reference.
|
4.2*Form
of Registration Rights Agreement for July, 2007 offering included as
Exhibit 10.2 to our form 8-K filed on July 17, 2007 and
incorporated herein by reference.
|
4.3*
Form of Warrant Agreement for July, 2007 offering included as Exhibit 4.3
to our form SB-2 filed on October 5, 2007 and incorporated herein by
reference.
|
4.4*
Form of Subscription Agreement for November, 2006 offering included as
Exhibit 2.1 to our form 8-K filed on November 30, 2006 and
incorporated herein by reference
|
4.5*
Form of Registration Rights Agreement for November, 2006 offering included
as Exhibit 2.3 to our form 8-K filed on November 30, 2006 and incorporated
herein by reference.
|
4.6*Form
of Warrant agreement for November, 2006 offering included as Exhibit 2.2
to our form 8-K filed on November 30, 2006 and incorporated herein by
reference.
|
4.7*
Form of Subscription Agreement for February, 2006 offering included as
Exhibit 10.1 to our form 8-K filed on March 1, 2006 and
incorporated herein by reference.
|
4.8*
Form of Amendment to Stock Subscription Agreement for February, 2006
offering included as Exhibit 10.2 to our form 8-K filed on March 1, 2006
and incorporated herein by reference.
|
4.9*
Form of Registration Rights Agreement for February, 2006 offering included
as Exhibit 10.4 to our on Form 8-K filed on March 1, 2006 and incorporated
herein by reference.
|
4.10*
Form of Subscription Agreement for December 2004 offering included as
Exhibit 10.1 to our form 8-K filed on January 4, 2005 and
incorporated herein by reference.
|
4.11*
Form of Registration Rights Agreement for December 2004 offering included
as Exhibit 10.2 to our form 8-K filed on January 4, 2005 and
incorporated herein by reference.
|
4.12
* From of Warrant agreement for December 2004 offering included as Exhibit
10.3 to our current report form 8-K filed on January 4, 2005 and
incorporated herein by reference.
|
4.13*
Form of Subscription Agreement for June 2003 offering included as Exhibit
4.13 to our form SB-2 filed on October 5, 2007 and incorporated herein by
reference..
|
4.14*
Form of Registration Rights Agreement for June 2003 offering included as
Exhibit 4.14 to our form SB-2 filed on October 5, 2007 and incorporated
herein by reference..
|
4.15*
Form of Warrant Agreement for June 2003 offering included as Exhibit 4.15
to our form SB-2 filed on October 5, 2007 and incorporated herein by
reference..
|
10.1*
2003 Stock Option Plan included as Exhibit 10.1 to our form SB-2 filed on
January 8, 2004 and incorporated herein by reference.
|
10.2*
Amended 2004 Stock Option Plan included as Exhibit 99.3 to
our form 8-K filed on October 12, 2005 and incorporated herein
by reference.
|
10.3*
Lease agreement by and between the Company and Vasona Business Park dated
as of May 1, 2005 included as Exhibit 10.3 to our form SB-2 filed on
October 5, 2007 and incorporated herein by reference.
|
10.4*
Employee Offer Letter for Douglas J. Glader dated September 17, 2003
included as Exhibit 10.3 to our form SB-2 filed on January 8, 2004 and
incorporated herein by reference.
|
10.5*
Employee Offer Letter for Thomas H. Williams dated March 6, 2006 included
as Exhibit 99.1 to our form 8-K filed on March 23, 2006 and
incorporated herein by reference.
|
10.6*
Employee Offer Letter for Jay Zerfoss dated May 10, 2002 included as
Exhibit 10.6 form 10KSB filed on April 3, 2006 and incorporated herein by
reference.
|
10.7*
Employee Offer Letter for Gary Johnson dated October 18, 2004 included as
Exhibit 10.8 on our form 10KSB filed on April 3, 2006 and incorporated
herein by reference.
|
10.8
*Lease extension by and between the Company and
Vasona Business Park dated November 20, 2007 included as Exhibit
10.8.
|
10.9
*Retirement agreement between the Company and Douglas J. Glader,
dated November 29 2007 and included as Exhibit 10.9.
|
16.1*
Letter on changing registrants certifying accountant dated June 13, 2006
included as Exhibit 16.1 to our form 8-K filed on June 7,
2006 and incorporated herein by reference.
|
21.1*
List of Subsidiaries included as Exhibit 21.1 to our form SB-2 filed on
October 5, 2007 and incorporated herein by reference.
|
23.1
Consent of Registered Public Accounting Firm –
PMB Helin Donovan, LLP.
|
23.2
Consent of Registered Public Accounting
Firm– Burr, Pilger & Mayer LLP.
|
31.1*
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2
* Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.3*
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.4
* Certification of Principal Financial Officer
pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
31.5
Certification of Principal Executive Officer
pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
31.6
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1
* Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
32.2* Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.3
Certification of Principal Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
32.4
Certification of Principal Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
* Previously
filed
66
Procera Networks, Inc. (AMEX:PKT)
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