UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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(Mark
One)
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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, 2008
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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.
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Commission
file 001-33691
PROCERA
NETWORKS, INC.
(Exact
name of registrant as specified in its charter)
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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
(Address
of principal executive offices)
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95032
(Zip
Code)
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Registrant’s
telephone number, including area code:
(408)
354-7200
Securities
registered pursuant to Section 12(b) of the Act
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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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NYSE
Alternext U.S.
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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
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No
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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
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No
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Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities 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
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a 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):
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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(Do
not check if a smaller reporting company)
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Smaller
reporting
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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
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No
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The
aggregate market value of the voting stock held by non-affiliates of the
registrant based upon the closing price of the common stock reported on the NYSE
Alternext U.S. on June 30, 2008 was approximately
$102,351,992.*
The
number of shares of common stock outstanding as of February 27, 2009 was
84,498,491.
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*
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Excludes
1,810,595 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 Securities and Exchange Commission. 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
PR
OCER
A NETWORKS, INC.
FISCAL
YEAR 2008
Form
10-K
ANNUAL
REPORT
TABLE
OF CONTENTS
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PART
I
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5
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5
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13
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26
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26
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27
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27
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PART
II
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27
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27
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29
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32
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42
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43
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F-35
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F-35
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F-37
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PART
III
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44
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44
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50
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60
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63
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65
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PART
IV
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66
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66
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69
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71
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Exhibit
23.1
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Exhibit
31.1
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Exhibit
31.2
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Exhibit
32.1
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Exhibit
32.2
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PART
I
In
addition to historical information, this Annual Report on Form 10-K 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 Annual 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 reports on Form 10-K, 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 Annual Report on Form 10-K, we refer to Procera Networks, Inc., a Nevada
corporation, as “Procera” or the “Company” 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.
Item
1.
Bu
sine
ss
Overview
We
provide evolved traffic awareness, control and protection products and solutions
for a range of broadband service providers worldwide. Our products offer network
administrators the following advantages:
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Intelligent
network traffic identification, control and service
management;
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High
degree of accuracy in identifying applications running on their networks;
and
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The
ability to optimize the subscriber experience based on management of the
identified traffic.
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We currently have more than 600
customers who have collectively installed over 1,300 of our systems. Our
customers include:
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Internet
service providers;
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Wireless
service providers;
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Cable
multi-service operators;
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Telecommunications
companies;
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Large
businesses operating their own internal networks;
and
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Education
and government institutions.
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Our
products are marketed under the name of PacketLogic. We recently introduced our
next generation PL10000 product line, with which we expect to target Tier 1
service providers. We consider a Tier 1 service provider to be a very large
provider of broadband communications services, such as AT&T, Verizon,
British Telecom, or NTT DoCoMo.
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.
We
were incorporated in 2002, and in October 2003, we merged with Zowcom, Inc., a
publicly-traded Nevada corporation. 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. During the three months ended October 1, 2006, we
emerged from the development stage.
As
a result of the Netintact AB and Netintact PTY transactions, our core products
and business changed dramatically. PacketLogic, the flagship product and
technology of Netintact, now forms the core of our product offering. We sell our
products through our direct sales force, resellers, distributors, and systems
integrators in the Americas, Asia Pacific, and Europe.
Our
PacketLogic and DPI Technology
The
rapid growth of and reliance on the Internet by commercial and consumer users,
together with the uptake of new applications and equipment that facilitate the
Internet, have created a need for advanced network awareness, control and
protection tools. Generic deep packet inspection, or DPI, technology is intended
to provide the network intelligence required for effective business decisions by
examining and identifying packets of data as they pass an inspection point in
the network. This "intelligence" can be used for analysis of user behavior, for
optimum utilization of network investments, to protect the network from
malicious traffic, and to monetize the network by offering advanced
differentiated services.
We
believe our PacketLogic family of products offers the following improvements
over existing DPI solutions:
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Accuracy, control and
protection.
Our proprietary Datastream Recognition
Definition Language, or DRDL, processing engine allows us to provide our
customers with a high degree of application identification accuracy;
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Scalability.
Our
family of products is scalable from a few hundred megabits to
80 gigabits of traffic per second, up to 5 million subscribers
and up to 48 million simultaneous data flows; and
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Flexibility.
Our
products are deployable anywhere in a network and leverage off-the-shelf
hardware.
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PacketLogic's
modular, traffic and service management software is comprised of five individual
modules:
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Traffic
identification and classification;
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PacketLogic
gives broadband service providers the potential for new revenue opportunities by
enabling them to offer differentiated, premium broadband services that command
higher prices on an application and/or user-specific basis. Moreover, we believe
that the high degree of accuracy and control offered by PacketLogic delivers
unmatched protection and service levels throughout the network.
Industry
Background
The
Evolution of IP Networks.
In early stage Internet
Protocol, or IP, networks, hubs and switches provided basic hardware
connectivity and messages were sent using IP. Early stage network advances were
focused on improving the raw throughput performance of the networks. The early
advances did not provide network administrators with information about the
applications running on their networks and how they affected the Internet
experience of typical users. There was no need for this, as the network had
significantly more capacity than users and applications required.
Network
Problems.
Broadband service providers are
increasingly facing the following problems:
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Unprecedented traffic
growth.
The proliferation of video-intensive content,
such as IP television, gaming, and peer-to-peer downloads, is taxing the
ability of networks to meet demand.
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Limited service
differentiation.
Broadband service providers have been
limited in their ability to view and identify network traffic, which
therefore limits their ability to bill for, and differentiate themselves
by offering advanced services.
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Increased customer
churn.
With limits on their ability to differentiate
themselves with advanced services, broadband service providers have
battled the problem of high churn as customers seek low-cost providers of
similar services.
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Poor network
performance.
Increased demand on the network from high
bandwidth traffic has put strains on the capabilities of the networks,
resulting in a degradation of performance on applications that are
critical for running a business and demand high quality of service, such
as voice-over IP, or VoIP.
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Network
vulnerability.
As increased numbers of users access the
network, there has been a greatly increased likelihood of network attacks.
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Early
Responses to Network Problems.
First-generation
DPI solutions were introduced to allow network administrators to start to
identify applications and to begin to prioritize network traffic. These DPI
solutions from vendors including Cisco, Sandvine, Allot and Packeteer provided
some information on the applications running on the network and their influence
on traffic flow. We refer to networks with this capability as first-generation
"Smart" networks.
Deficiencies
of Early DPI Solutions.
However, first-generation
DPI products have deficiencies, perhaps the greatest of which is their limited
ability to accurately identify traffic types and applications. Because the
first-generation DPI products provide only limited visibility into the flows,
they provide only a limited ability to manage network traffic. First-generation
DPI products are a good start. They offer broadband service providers at least
some improved network control and the ability to provide some level of
differentiated services.
We
believe that the need for improved network intelligence and increased accuracy
of network traffic identification is gaining broad acceptance. A December 2008
report by Light Reading Insider forecast that the DPI market will grow from less
than $400 million in 2007 to over $1 billion in 2012. We believe the
growth in the DPI market is primarily driven by increased use of IP video
applications and the need for differentiated services. Accurate user and
application-awareness allows for differentiated services. This enables
differentiation in a highly competitive broadband market, which in turn can
generate customer loyalty and added revenue opportunities.
Our
Next-Generation DPI Solutions
Our
next-generation PacketLogic DPI solutions, which we call evolved DPI, bring deep
packet inspection to a new level, offering network administrators with a number
of key advancements including:
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High
degree of accuracy in identifying users and
applications;
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Awareness,
management and control of an unprecedented number of
users;
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Ability
to visualize users and applications in
real-time;
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Flexibility
to deploy and manage anywhere in the network;
and
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New
levels of throughput and
scalability.
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Evolved
DPI is an innovative variation of DPI technology developed in Sweden by our core
team of developers. We believe that our evolved DPI technology, which looks at
bi-directional packet flows, provides significantly more accurate application
identification than simpler DPI approaches used by our competitors. The accurate
identification of applications and users, in turn, is critical to maintaining
network efficiency. Additionally, our proprietary DRDL processing engine allows
the use of off-the-shelf hardware rather than customized Application Specific
Integrated Circuit, or ASIC, based solutions. We are thus able to quickly adopt
new, standards-based hardware platforms, such as Advanced Telecom Computing
Architecture, or ATCA, as they are introduced into the market.
We
believe the combination of our DRDL and evolved DPI technology enables us to
provide our customers with solutions having the following valuable
benefits:
High
Degree of Accuracy in Application and User
Identification.
PacketLogic, driven by our
proprietary DRDL processing engine, provides network administrators with a high
degree of accuracy in awareness, control and protection of their networks. By
providing improved accuracy in network traffic identification, PacketLogic
products give network managers access to relevant network traffic intelligence
that enables network optimization and the creation of differentiated services.
Moreover, the improved accuracy provides users with improved network protection
against malicious user behavior, such as denial of service.
Proven
Advanced DPI Technology.
We currently have over
600 PacketLogic customers worldwide, some of which have been using our DPI
solutions for over six years. All of our customers own or manage a broadband
network with subscriber numbers that vary from a few thousand to several hundred
thousand. This has enabled us to develop solutions that are very scalable while
also being flexible enough to deploy at several points in the network. Our
recently launched PL10000 product line is a result of the cumulative experience
with these customers and provides a platform that can support millions of
subscribers, thus extending PacketLogic deployment options to the very core of a
service provider's network.
Complete
Line of PacketLogic Solutions Provide Scalability and
Flexibility.
We offer a complete line of
PacketLogic solutions that cover a wide range of network configurations from a
very small internet service provider, or ISP, to the largest Tier 1
broadband network deployments. The PL10000 product line is a highly scalable
carrier-grade offering that can handle network traffic up to 80 gigabits per
second, up to 5 million subscribers and up to 48 million simultaneous
data flows. Given the range of our PacketLogic line, our products are deployable
anywhere in a network and, by leveraging off-the-shelf hardware, we can provide
quick, cost-effective upgrades.
Solutions
Running on Off-the-Shelf Hardware.
Our proprietary
PacketLogic software solutions enable the use of standards-based, off-the-shelf
hardware rather than customized inflexible ASIC based solutions. By using
off-the-shelf hardware, we can provide the users of our solutions with better
performance at lower cost versus competing products. Additionally, by avoiding
the timing delays related to designing custom hardware or custom ASICs, we can
have meaningful time-to-market advantages in introducing new features and
functionality.
Compatible
with Fixed and Wireless Networks.
A key
differentiating feature of our PacketLogic solutions is that they can be
utilized across both fixed and wireless networks. This has enabled us to target
both fixed line broadband service providers as well as wireless service
providers with our solution. We believe that this capability plays an important
role in today's converged networks where applications are expected to be
delivered ubiquitously across varied bandwidth constrained environments.
Growth
Strategy
Our
goal is to become the leader in DPI solutions to the broadband service provider
and enterprise markets on a global basis. We believe the PL10000 product line
positions us to capture an increasing share of the fast growing DPI market. We
plan to achieve our strategic growth objectives through the following
efforts:
Penetrate
Tier 1 Service Providers.
Our PL10000 product
line provides us with a solution that can address the network needs of
Tier 1 service providers. We have recently added new senior executives with
experience selling to Tier 1 service providers. Due to the launch of our
PL10000 product line and the recent addition of senior executives, we expect to
grow our revenues faster than was previously possible.
Expand
our Technology Advantage.
Our technology was
designed from its inception to have the ability to rapidly identify new
application signatures, and thereby adapt to the dynamic IP network environment.
We have a new product and new features roadmap that is prepared and updated in
conjunction with discussions with our customers and industry experts. Our
development organization in Sweden uses the roadmap to guide our efforts and
release new products. We intend to build upon the innovations of our R&D
team and the recently launched PL10000 product line. We expect to continue to
release products with state-of-the-art capabilities and plan to regularly
release new product features and software upgrades.
Expand
Global Distribution Channel.
We plan to utilize
existing value added reseller partners and to add new partners to penetrate
geographic regions and key industry verticals. We also intend to continue to
expand our channel partner and reseller network to further penetrate the small
and medium sized enterprise and university markets. Finally, we have recently
hired recognized industry sales leaders and field engineers to strengthen our
existing worldwide direct sales and channel partner program.
Pursue
New Partnerships.
We plan to establish
partnerships with large systems integrators and other vendors to further our
value proposition for Tier 1 service providers. We plan to provide complete
solutions by bundling our products with complementary products and technologies
from other solution providers.
Continue
to Leverage our Experienced Management Team.
Our
executive team, led by CEO James Brear, collectively has decades of experience
in the DPI and communications industry, and a strong track record of penetrating
large enterprise customers and Tier 1 service providers. The management
team's experience comes from industry leaders such as Cisco, Ellacoya, Force10
and Nortel. With this experience we expect to be able to successfully sell to
Tier 1 service provider customers, and to continue to introduce
state-of-the-art products and solutions.
Products
Our
PacketLogic solution is a growing portfolio of scalable evolved DPI products.
These range from the PL5600 product line, which serves megabit network
connections, commonly referred to as edge applications, the PL7600 product line,
which serves gigabit network connections, to the recently introduced PL10000
product line, which serves the multi-gigabit to multi-ten gigabit network
connections, commonly referred to as core applications.
Our
PacketLogic solution uses the same systems software across all of our hardware
platforms. This system software consists of five individual modules. The core
module, which is required in all systems, is the traffic identification and
classification module, or LiveView module, and performs the fundamental task of
identifying the applications and users. The other four software modules provide
tools for traffic shaping, traffic filtering, flow statistics and web-based
statistics. When combined with our portfolio of PacketLogic hardware platforms,
our solution delivers a real-time, scalable network traffic management
tool.
Our product revenue was entirely attributable to our PacketLogic products in
2008, 2007 and the last 4 months of 2006. Product revenue accounted
for 86% , 85% and 92% or our net revenue in 2008, 2007 and 2006
respectively. The balance of our revenue was service revenue, which
consisted primarily of maintenance revenue and , to a lesser extent, training
revenue. Maintenance revenue is recognized over the service period,
generally twelve months.
The
LiveView Module.
Our PacketLogic LiveView module
identifies applications and connections and provides network operators with a
detailed, real-time view of all traffic flowing through their IP network. The
traffic identification function of LiveView enables the control and protection
functionality of our traffic shaping and traffic filtering modules.
The
Traffic Shaping Module.
The PacketLogic traffic
shaping module is a powerful traffic and application management tool with
specialized features for large and complex networks, providing detailed,
sophisticated rules configuration and editing capabilities. Traffic shaping can
be used to control expensive, unwanted and/or unprioritized traffic in favor of
prioritized, active, business-and mission-critical data and value-added
application traffic. Network traffic can be restricted by type to defined
limits, thereby ensuring each traffic type has the appropriate subscribed
bandwidth and user performance expectation. Alternatively, our products can
apply effective traffic shaping by limiting bits, packets, connections per
second, concurrent connections, prioritizations, or combinations of these
criteria.
The
Traffic Filtering Module.
The traffic filtering
module uses information from the LiveView module and sets detailed rules for
filtering, such as direction of traffic, chat channel, user name, file name or
website address. PacketLogic allows network operators to keep undesired traffic
out of the network. The security of the PacketLogic device itself is ensured by
its transparency - meaning, it is not directly accessible by the end user.
The
Flow Statistics Module.
The PacketLogic flow
statistics module provides a complete picture of network traffic in real-time as
well as in historical perspective and can perform its function in either a local
or a remote database. The flow statistics module uses the information provided
by the LiveView module. 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 flow statistics module
an extremely valuable tool for identifying trends and gaining a detailed
understanding of and insight into the network traffic. By using the flow
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 flow
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-Based Statistics Module.
The PacketLogic
web-based statistics module provides the ability to see the same statistical
information via a standard web browser that is provided directly via the
PacketLogic client flow statistics module software. As a result, anyone with the
proper certification can access the PacketLogic device remotely, from any
Internet connected computer, and see what is happening on the network.
Our revenue is primarily derived from customers located in the united States,
Europe, Australia, Asia, Canada and the Middle East. Sales to
customers outside the United States were approximately 78%, 66% and 75% of net
sales in 2008, 2007 and 2006, respectively. All of our long-lived
assets were located in Sweden, the Unites States and to a lesser extent,
Australia at December 31, 2008 and 2007.
Our revenue is heavily dependent on sales to customers outside of the United
States. Consequently, we have financial exposure associated with
international economies as well as currency fluctuations.
Competition
We
believe that our primary competitors selling to broadband service providers
include:
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Ellacoya,
recently acquired by Arbor; and
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In
the college and university arena, our primary competitors include:
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Packeteer,
recently acquired by BlueCoat.
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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 Juniper, Ericsson
and Foundry.
While
most of our competitors are larger and better capitalized than we are, we do not
believe there is an entrenched dominant supplier in our market. Based on our
belief in our superior 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. Given the lack of an established leader and the potentially
substantial growth in market size, 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. With the introduction of the PL10000 product
line, our products now address service provider requirements ranging from one
megabit (edge applications) to the 80 gigabit per second market (core
applications).
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
currently have over 600 distinct customers. Our global customer base is located
throughout Europe, North America, Australia and Asia. All of our customers own
or manage a broadband network and have subscribers that vary in number from a
few thousand to several hundred thousand. We segment our current customers and
anticipated future customers into the following categories:
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Internet service
providers.
ISPs generally lease, rather than own, access
infrastructure. They compete by attempting to offer the best of breed
Internet service. ISPs' greatest competitive advantages are brand and
customer relationships. DPI solutions can improve the financial return of
ISPs by making their use of bandwidth more efficient and by allowing them
to offer best of breed quality.
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Wireless service
providers.
Wireless service providers are constrained by
the bandwidth of their wireless signals. Additionally, the number of users
connecting to any given point in the network varies. Controlling the
network traffic based on application type greatly improves the quality of
the experience of the average subscriber.
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Cable multi-service
operators.
Cable multi-service operators are constrained
by the bandwidth of their network and the varying number of users
connecting to any given loop in the network. Controlling network traffic
by application type greatly improves the quality of the experience of the
average subscriber.
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Telecommunications
companies.
Telecommunications companies use digital
subscriber lines to offer broadband services. Adding intelligence to their
networks can help them offer differentiated services.
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Large businesses operating
their own internal networks.
Businesses today rely on
large and complex networks for communication infrastructure. They
typically use service providers for Internet access and interconnectivity,
and can use DPI to optimize the use of their expensive network resources,
prioritize business critical applications and limit leisure use of
expensive network resources.
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Education and Government
Institutions.
Institutions provide Internet access to
students, faculty and employees. Universities are particularly vulnerable
to low quality of service for legitimate educational purposes because
students commonly use high-bandwidth applications.
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We are
not dependent on any single customer on a recurring basis, Additionally, we
operate in one business segment. For financial information about
geographic areas, reference is made to Section 16 of our Notes to Consolidated
Financial Statements, titled “Segment Information and Revenue by Geographic
Region.”
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 of our research and development is performed by our employees in Sweden. Our
research and development staff consists of a core team of accomplished software
programmers, who developed all of the PacketLogic modules, and the proprietary
DRDL processing engine. The modules were designed from the ground up to optimize
performance. This team is continuously advancing PacketLogic's feature set,
allowing us to address new markets such as wireless access and cable providers,
as well as provide new functionality such as protection and subscriber
management. Results from a May 2007 Tolly Group study indicate that our software
solution offered a high degree of accuracy in the identification of packet
flows, which we believe provides us with a significant advantage over less
advanced DPI approaches supplied with or in our competitors'
products. We are currently selling the twelfth version of
our PacketLogic
software suite, which
provides a new simplified graphical user interface and other advanced reporting
features. All of our research and develoopment costs are funded
internally. Our research and development costs were $3.3million, $3.2
million and $3.1 million for the twelve months ended December 31, 2008, 2007 and
2006, respectively
Intellectual
Property
Our
intellectual property rights are very central to our competitive position. Our
DRDL signature compiler, and the inherent complexity of our software-based
PacketLogic solution, makes it difficult to copy or replicate our features. We
rely primarily on trade secrets, contractual rights and trademarks surrounding
our proprietary software to protect our intellectual property. To help ensure
this protection, we include proprietary information and confidentiality
provisions in our agreements with third parties and employees.
Global
Services
Our
Global Services team provides both pre- and post-sales technical support to our
direct field sales organization channel partners and customers. Customers also
have access to the technical support team via a web-based partner portal, email,
and interactive chat forum. All issues are logged and tracked via a computerized
tracking system that provides automatic levels of escalation, and quick
visibility into problems by the R&D organization. This tracking system also
provides input to the development team for new feature requests from our
worldwide customer base. Global Services employees also provide classroom and
on-site training.
Manufacturing
In
order to facilitate rapid advancement of performance, the quickest time to
market, and advantages of volume purchasing, we have consciously chosen to use
industry-standard hardware, containing no Procera proprietary elements.
Therefore, we can focus on the development of the PacketLogic software solution.
This approach provides us with several key hardware supply advantages, including
assurance of key component supply, the ability to easily outsource our
manufacturing requirements to groups with greater scale and cost efficiency,
minimized lead times for product delivery, rapid design cycles, and the ability
to take advantage of the latest semiconductor industry advances. Specifically,
we leverage leading industry partners that provide us with products that are
able to meet key industry standards, such as Network Equipment Building Systems,
Osmine and Telcordia. We source only completed hardware boards and chassis, load
our proprietary software for specific orders, perform final tests, and ship to
our customers. At present, all shipments are made from our headquarters in
Silicon Valley.
Employees
As
of December 31, 2008, we had 50 full time employees and 4 full time independent
contractors.
Available information
Our annual reports on Form 10-K 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) or 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.
Item
1A. Risk
F
acto
rs
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 company.
We
were founded in 2002 and became a public company in October 2003 upon our merger
with Zowcom, Inc., a publicly-traded Nevada corporation having no
operations. Prior to our acquisitions 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. During this period, we generated insignificant
revenues from sales of our products. We completed our share exchange with
Netintact AB on August 18, 2006 and Netintact PTY on September 29,
2006. The products we sell are derived primarily from 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 our 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, which
include the following:
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successfully
introducing new products;
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successfully
servicing and upgrading new products once
introduced;
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increasing
brand name recognition;
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developing
new, strategic relationships and
alliances;
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managing
expanding operations and sales
channels;
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successfully
responding to competition; and
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attracting,
retaining and motivating qualified
personnel.
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If
we are unable to address 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 ended December 31, 2008, December 31, 2007 and
December 31, 2006 we had losses from operations of $15.0 million,
$13.6 million and $7.8 million, respectively. We expect to 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. If our revenue growth does not
occur or is slower than anticipated or our operating expenses exceed
expectations, our losses will be greater. We may never achieve
profitability.
We
may need to raise further capital, which could dilute or otherwise adversely
affect your interest in our company.
We
believe that our existing cash, cash equivalents and short term investments,
along with the cash that we expect to generate from operations, together with
debt financing that management believes is available, will be sufficient to meet
our anticipated cash needs for working capital and capital expenditures through
March 31, 2010.
However,
a number of factors may negatively impact our expectations, including, without
limitation:
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lower
than anticipated revenues;
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higher
than expected cost of goods sold or operating expenses;
or
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the
inability of our customers to pay for the goods and services
ordered.
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We
believe that current general economic and credit market crisis have created a
significantly more difficult environment for obtaining equity and debt
financing. 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, especially in light of the current
economic environment. 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.
Our
PacketLogic family of products is currently our only suite of products. All of
our current revenues and a significant portion of our future growth depend on
our ability to continue its commercialization.
All
of our current revenues and much of our anticipated future growth depend on our
ability to continue and grow the commercialization of our PacketLogic family of
products. We do not currently have plans or resources to develop additional
product lines, so our future growth will largely be determined by market
acceptance of our PacketLogic products. If customers do not adopt, purchase and
deploy our PacketLogic products, our revenues will not grow and may
decline.
Future
financial performance will depend on the introduction and acceptance of our
PL10000 product line and our future generations of PacketLogic
products.
Our
future financial performance will depend on the 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.
We
recently introduced our PL10000 product line. 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.
We
need to increase the functionality of our products and offer additional features
in order to be competitive.
The
market in which we operate is highly competitive and unless we continue to
enhance the functionality of our products and add additional features, our
competitiveness may be harmed and the average selling prices for our products
may decrease over time. Such a decrease would generally result from the
introduction of competing products and from the standardization of DPI
technology. To counter this trend, we endeavor to enhance our products by
offering higher system speeds and additional features, such as additional
protection functionality, supporting additional applications and enhanced
reporting tools. We may also need to reduce our per unit manufacturing costs at
a rate equal to or faster than the rate at which selling prices decline. If we
are unable to reduce these costs or to offer increased functionally and
features, our profitability may be adversely affected.
Competition
for experienced personnel is intense and our inability to attract and retain
qualified personnel could significantly interrupt our business
operations.
Our
future performance 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 have recently expanded and plan to continue to expand in all areas
and will require experienced personnel to augment our current staff. We expect
to recruit 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 able to attract and retain 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, including our
CEO, James Brear, and our CTO, Alexander Haväng. Mr. Brear joined the
Company and became our CEO in February 2008. 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 in order to execute on
our business plan. 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. In California, where we are headquartered,
non-competition agreements with employees are generally unenforceable. As a
result, if a California employee leaves the Company, he or she will generally be
able to immediately compete against us.
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
his or her 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.
Also,
in early 2008 we reorganized our sales and marketing efforts, including a
significant reduction in workforce in these areas and the announcement of two
new senior sales management personnel. This reduction in our workforce may
impair our ability to recruit and retain qualified employees in the future, and
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.
Failure
to expand our sales teams or educate them about technologies and our product
families may harm our operating results.
The
sale of our products 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 teams to address all of the
customer requirements necessary to sell our products. We reorganized our sales
and marketing efforts in 2008, including a significant reduction in workforce in
these areas and the addition of two senior sales management personnel. We expect
to continue hiring in this area, but 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
cannot assure you that we will be able to 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.
Increased
customer demands on our technical support services may adversely affect our
relationships with our customers and our financial results.
We
offer technical support services with our products. We may be unable to respond
quickly enough to accommodate short-term increases in customer demand for
support services. We also may be unable to modify the format of our support
services to compete with changes in support services provided by actual or
potential competitors. Further customer demand for these services, without
corresponding revenues, could increase costs and adversely affect our operating
results. If we experience financial difficulties, do not maintain sufficiently
skilled workers and resources to satisfy our contracts, or otherwise fail to
perform at a sufficient level under these contracts, the level of support
services to our customers may be significantly disrupted, which could materially
harm our relationships with these customers and our results of
operations.
We
must continue to develop and increase the productivity of our indirect
distribution channels to increase net revenue and improve our operating
results.
A
key focus of our distribution strategy is 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 able to execute on 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 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 our potential to
achieve profitability.
We
may be unable to compete effectively with other companies in our market sector
which are substantially larger and more established and have greater
resources.
We
compete in a rapidly evolving and highly competitive sector of the networking
technology market, on the basis of price, service, warranty and the performance
of our products. 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,
Arbor/Ellacoya, BlueCoat/Packeteer, Juniper, Ericsson Foundry Networks 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 broadband 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 name recognition
and financial, sales and marketing, technical, manufacturing and other resources
and more established distribution channels than we do. 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 potential opportunity in the bandwidth
management solutions market, we also expect that other companies may enter 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.
If
we are unable to effectively manage our anticipated growth, we may experience
operating inefficiencies and have difficulty meeting demand for our
products.
We
seek to manage our growth so as not to exceed our available capital resources.
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.
If
demand for our products and services grows rapidly, we may experience
difficulties meeting the demand. For example, 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.
Unstable
market and economic conditions may have serious adverse consequences on our
business.
Our general business strategy may be adversely affected by the recent economic
downturn and volatile business environment and continued unpredictable and
unstable market conditions. If the current equity and credit markets deteriorate
further, or do not improve, it may make any necessary debt or equity financing
more difficult, more costly, and more dilutive. In addition, a
prolonged or profound economic downturn may result in adverse changes to demand
for our products, or our customers’ ability to pay for our products, which would
harm our operating results. There is also a risk that one or more of our current
service providers, manufacturers and other partners may not survive these
difficult economic times, which would directly affect our ability to attain our
operating goals on schedule and on budget. Failure to secure any necessary
financing in a timely manner and on favorable terms could have a material
adverse effect on our financial performance and stock price and could require us
to change our business plans.
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. 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
our 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 on the proprietary rights of
others, or if we agree to settle any 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 any
claims of infringement 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.
If
we are unable to have our products manufactured quickly enough to keep up with
demand, our operating results could be harmed.
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.
While
our PacketLogic products are software based, we rely on independent contractors
to manufacture the hardware components on which are products are installed and
operate. We are reliant on the performance of these contractors to meet business
demand, and 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 product components 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 product
components 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 endeavor to 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.
If
our suppliers fail to adequately supply us with certain original equipment
manufacturer, or OEM, sourced components, 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 of 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, failures or
bugs when new products or new versions or updates of existing products are first
released to the marketplace. For example, we recently introduced our
PL10000 product line. As with any new product introduction, previously
unaddressed errors in our PL10000 product line's accuracy or reliability, or
issues with its performance, may arise. 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 products are 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 properly 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.
Sales
of our products to large broadband service providers can involve a lengthy sales
cycle, which may cause our revenues to fluctuate from period to period and could
result in us expending significant resources without making any
sales.
Our
sales cycles are generally lengthy, as our customers undertake significant
testing to assess the performance of our products within their networks. As a
result, we may invest significant time from initial contact with a customer
until that end-customer decides to incorporate our products in its network. We
may also expend significant resources attempting to persuade large broadband
service providers to incorporate our products into their networks without any
measure of success. Even after deciding to purchase our products, initial
network deployment of our products by a large broadband service provider may
last several years. Carriers, especially in North America, often require that
products they purchase meet Network Equipment Building System, or NEBS,
certification requirements, which relate the reliability of telecommunications
equipment. While our PacketLogic products and future products are and are
expected to be designed to meet NEBS certification requirements, they may fail
to do so.
Due
to our lengthy sales cycle, particularly to larger customers, and our revenue
recognition practices, we expect our revenue may fluctuate dramatically from
period to period. In pursuing sales opportunities with larger enterprises, we
expect that we will make fewer sales to larger entities, but that the magnitude
of individual sales will be greater. As such, when we recognize a large sale,
particularly given our small size, we may report rapid revenue growth in the
period that the revenue from the large sale, which may not be repeated in an
immediately subsequent period. As such, our revenues could fluctuate
dramatically from period to period, which could cause the price of our common
stock to similarly fluctuate. In addition, even once we have received
commitments from a customer to purchase our products, in accordance with our
revenue recognition practices we may not be able to recognize and report the
revenue from that purchase for months or years. As a result, there could be
significant delays in our receipt and recognition of revenue following sales
orders for our products.
In
addition, if a competitor succeeds in convincing a large broadband service
provider to adopt that competitor's product, it may be difficult for us to
displace the competitor because of the cost, time, effort and perceived risk to
network stability involved in changing solutions. As a result we may incur
significant expense without generating any sales.
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
fluctuations 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. 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.
Legislative
and regulatory changes and future accounting pronouncements and regulatory
changes have, and will continue to have, an impact on our future financial
position and results of operations. In addition, insurance costs, including
health and workers' compensation insurance premiums, have been increasing on an
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
internal controls may be insufficient to ensure timely and reliable financial
information.
Effective
internal controls over financial reporting are necessary for us to provide
reliable financial reports and effectively prevent fraud. 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:
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●
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pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
company;
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●
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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
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●
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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.
|
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.
We
described a material weakness with our internal controls under Item 9A of
our Annual Report for the year ended December 31, 2007, as follows: we did
not complete our annual report on Form 10-K and financial reports in
sufficient time to allow for review and comment, which resulted in a significant
number of last minute changes and could have resulted in material errors to the
financial statements. We also identified significant deficiencies in our
internal controls. For the year ended December 31, 2008, we did not identify any
material weaknesses.
Failure
to address the identified weakness and significant deficiencies in a timely
manner might increase the risk of future financial reporting misstatements and
may prevent us from being able to meet our filing deadlines with the SEC. Under
the supervision of our Audit Committee, we are continuing the process of
identifying and implementing corrective actions where required to improve the
design and effectiveness of our internal control over financial reporting,
including the enhancement of systems and procedures. Significant additional
resources will be required to establish and maintain appropriate controls and
procedures and to prepare the required financial and other information. We have
a small accounting staff and limited resources and expect that we will continue
to be subject to the risk of additional material weaknesses and significant
deficiencies.
Even
after corrective actions are implemented, the effectiveness of our controls and
procedures may be limited by a variety of risks including:
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●
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faulty
human judgment and simple errors, omissions or
mistakes;
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●
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collusion
of two or more people;
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●
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inappropriate
management override of procedures;
and
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●
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the
risk that enhanced controls and procedures may still not be adequate to
assure timely and reliable financial
information.
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If
we fail to have effective internal controls and procedures for financial
reporting in place, we could be unable to provide timely and reliable financial
information. Additionally, if we fail to have effective internal controls and
procedures for financial reporting in place, it could adversely affect our
financial reporting requirements under future government contracts.
Accounting
charges may cause fluctuations in our annual and quarterly financial results
which could negatively impact the market price of our common stock.
Our
financial results may be materially affected by non-cash and other accounting
charges. Such accounting charges may include:
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●
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amortization
of intangible assets, including acquired product
rights;
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impairment
of goodwill;
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stock-based
compensation expense; and
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●
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impairment
of long-lived assets.
|
The
foregoing types of accounting charges may also be incurred in connection with or
as a result of business acquisitions. The price of our common stock could
decline to the extent that our financial results are materially affected by the
foregoing accounting charges. Our effective tax rate may increase, which could
increase our income tax expense and reduce our net income. Our effective tax
rate could be adversely affected by several factors, many of which are outside
of our control, including:
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changes
in the relative proportions of revenues and income before taxes in the
various jurisdictions in which we operate that have differing statutory
tax rates;
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●
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changing
tax laws, regulations and interpretations in multiple jurisdictions in
which we operate, as well as the requirements of certain tax
rulings;
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●
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changes
in accounting and tax treatment of stock-based
compensation;
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●
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the
tax effects of purchase accounting for acquisitions and restructuring
charges that may cause fluctuations between reporting periods;
and
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●
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tax
assessments, or any related tax interest or penalties, which could
significantly affect our income tax expense for the period in which the
settlements take place.
|
The
price of our common stock could decline to the extent that our financial results
are materially affected by the foregoing.
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 local suppliers. 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 seek to acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in executing our business strategy. Growth through acquisitions has
been a viable strategy used by other network control and management technology
companies. In 2006, we completed acquisitions of the Netintact entities. These
and any future acquisitions could distract our management and employees and
increase our expenses.
In
addition, following any acquisition, including our acquisition of the Netintact
entities, the integration of the acquired business, product, service or
technology is complex, time consuming and expensive, and may disrupt our
business. These challenges include the timely and efficient execution of a
number of post-transaction integration activities, including:
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integrating
the operations and technologies of the two
companies;
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retaining
and assimilating the key personnel of each
company;
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retaining
existing customers of both companies and attracting additional
customers;
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leveraging
our existing sales channels to sell new products into new
markets;
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developing
an appropriate sales and marketing organization and sales channels to sell
new products into new markets;
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retaining
strategic partners of each company and attracting new strategic partners;
and
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implementing
and maintaining uniform standards, internal controls, processes,
procedures, policies and information
systems.
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The
process of integrating operations and technology could cause an interruption of,
or loss of momentum in, our business and the loss of key personnel. The
diversion of management's attention and any delays or difficulties encountered
in connection with an acquisition and the integration of our operations and
technology could have an adverse effect on our business, results of operations
or financial condition. Furthermore, the execution of these post-transaction
integration activities will involve considerable risks and may not come to pass
as we envision. The inability to integrate the operations, technology and
personnel of an acquired business with ours, or any significant delay in
achieving integration, could have a material adverse effect on our business and,
as a result, on the market price of our common stock.
Furthermore,
we issued equity securities to pay for the Netintact acquisitions which had a
dilutive effect on its existing stockholders and we may have to incur debt or
issue equity securities to pay for any future acquisitions, the issuance of
which could be dilutive to our existing stockholders.
Risks
Related to Our Industry
Demand
for our products depends, in part, on the rate of adoption of
bandwidth-intensive broadband applications, such as peer-to-peer, or P2P, and
latency-sensitive applications, such as voice-over-Internet protocol, or VoIP,
Internet video and online video gaming applications.
Our
products are used by broadband service providers and enterprises to provide
awareness, control and protection of Internet traffic by examining and
identifying packets of data as they pass an inspection point in the network,
particularly bandwidth-intensive applications that cause congestion in broadband
networks and impact the quality of experience of users. In addition to the
general increase in applications delivered over broadband networks that require
large amounts of bandwidth, such as P2P applications, demand for our products is
driven particularly by the growth in applications which are highly sensitive to
network delays and therefore require efficient network management. These
applications include VoIP, Internet video and online video gaming applications.
If the rapid growth in adoption of VoIP and in the popularity of Internet video
and online video gaming applications does not continue, the demand for our
products may not grow as anticipated.
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.
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 execute our strategy, 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 and a decline in the trading price of our common
stock.
The
market for our products in the network provider market is still emerging and our
growth may be harmed if carriers do not adopt DPI solutions.
The
market for DPI technology is still emerging and the majority of our sales to
date have been to small and midsize broadband service providers and enterprises.
We believe that the Tier 1 carriers, as well as cable and mobile operators,
present a significant market opportunity and are an important element of our
long term strategy, but they are still in the early stages of adopting and
evaluating the benefits and applications of DPI technology. Carriers may decide
that full visibility into their networks or highly granular control over content
based applications is not critical to their business. They may also determine
that certain applications, such as VoIP or Internet video, can be adequately
prioritized in their networks by using router and switch infrastructure products
without the use of DPI technology. They may also, in some instances, face
regulatory constraints that could change the characteristics of the markets.
Carriers may also seek an embedded DPI solution in capital equipment devices
such as routers rather than the stand-alone solution offered by us. Furthermore,
widespread adoption of our products by carriers will require that they migrate
to a new business model based on offering subscriber and application-based
tiered services. If carriers decide not to adopt DPI technology, our market
opportunity would be reduced and our growth rate may be harmed.
The
network equipment market is subject to rapid technological progress and to
compete we must continually introduce new products or upgrades 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 or
upgrades 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.
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 they emerge, evolve and achieve acceptance. We will not be
competitive unless we continually introduce new products and product
enhancements that meet these emerging standards. 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 be compliant 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. 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.
Risks
Related to Ownership of 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, such as ours, 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. In addition our stock is thinly traded. We
cannot assure you that our stock will trade at the same levels of other stocks
in our industry or that in general, stocks in our industry 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 by our
competitors;
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changes
in financial estimates by securities
analysts;
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●
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conditions
or trends in the network control and management
industry;
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●
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changes
in the market valuations of other such industry related companies;
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●
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the
acceptance by institutional investors of our
stock;
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·
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rumors,
announcements or press articles regarding our operations, management,
organization, financial condition or financial
statements;
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●
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the
gain or loss of a significant customer; or
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●
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the
stock market in general, and the market prices of stocks of technology
companies in particular, have experienced extreme price volatility that
has adversely affected, and may continue to adversely affect, the market
price of our common stock for reasons unrelated to our business or
operating results.
|
Holders
of our common stock may be diluted in the future.
We are
authorized to issue up to 130,000,000 shares of common stock and 15,000,000
shares of preferred stock. 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, 2008,
there were 84,498,491 shares of common stock outstanding, outstanding warrants
to purchase 4,302,414 shares of common stock, and outstanding stock options to
purchase 7,988,274 shares of common stock. In addition, at December 31, 2008, we
have an authorized reserve of 3,558,447 shares of common stock which
we may grant as stock options or other equity awards pursuant to our stock
option plans.
Any
future issuances of our common stock would similarly dilute the relative
ownership interest of our current stockholders, and could also cause the trading
price of our common stock to decline.
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, 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 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. If, and to the extent,
outstanding options or warrants are exercised, you will experience dilution to
your holdings. In addition, shares issuable upon exercise of our outstanding
warrants and stock options may be immediately sold pursuant to an effective
registration statement. If a warrant or option holder exercises a warrant or an
option at an exercise price that is less than the prevailing market value of our
common stock, the holder may be motivated to immediately sell the resulting
shares to realize an immediate gain, which could cause the trading price of our
common stock to decline.
In
connection with our acquisition of the Netintact entities in 2006, we entered
into a lock-up agreement with the former Netintact stockholders under which they
agreed not to sell the approximately 19,000,000 shares of our common stock that
were issued to them as consideration for the acquisition or issuable upon
exercise of warrants issued in connection with the
acquisition. One-third of the shares and shares issuable on exercise
of warrants, or approximately 6,333,333 shares, were released from the lock-up
on the first year anniversaries of the acquisitions, on August 18, 2007 and
September 29, 2007. An additional third was released on the second anniversaries
of the acquisitions, with 6,040,000 shares being released on August 18, 2008 and
293,334 shares being released on September 29, 2008. The balance of the shares
will be released on the third year anniversaries of the acquisitions, with
6,040,000 shares being released on August 18, 2009 and 293,333 shares being
released on September 29, 2009. Once released from lock-up, the shares are
freely tradable and may generally be sold without restriction, which could cause
the trading price of our common stock to decline.
The
NYSE Alternext U.S. may delist our securities, which could limit investors’
ability to transact in our securities and subject us to additional trading
restrictions.
Our
shares of common stock are listed on the NYSE Alternext U.S. Maintaining our
listing on the NYSE Alternext U.S. requires that we fulfill certain continuing
listing standards, including maintaining a trading price for our common stock
that the NYSE Alternext U.S. does not consider unduly low and adhering to
specified corporate governance requirements. If the NYSE Alternext U.S. delists
our securities from trading, we could face significant consequences,
including:
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·
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a limited
availability for market quotations for our
securities;
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·
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reduced liquidity
with respect to our securities;
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·
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a determination that
our ordinary share is a “penny stock,” which will require brokers trading
in our ordinary shares to adhere to more stringent rules and possibly
result in a reduced level of trading activity in the secondary trading
market for our ordinary shares;
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·
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a limited amount of
news and analyst coverage for our company;
and
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·
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a decreased ability
to issue additional securities or obtain additional financing in the
future.
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In
addition, we would no longer be subject to NYSE Alternext U.S. rules, including
rules requiring us to have a certain number of independent directors and to meet
other corporate governance standards. Our failure to be listed on the NYSE
Alternext U.S. or another established securities market would have a material
adverse effect on the value of your investment in us.
If our
common stock is not listed on the NYSE Alternext U.S. or another national
exchange, the trading price of our common stock is below $5.00 per share and we
have net tangible assets of $5,000,000 or less, the open-market trading of our
common stock will be subject to the “penny stock” rules promulgated under the
Securities Exchange Act of 1934. If our shares become subject to the “penny
stock” rules, broker-dealers may find it difficult to effectuate customer
transactions and trading activity in our securities may be adversely affected.
Under these rules, broker-dealers who recommend such securities to persons other
than institutional accredited investors must:
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·
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make
a special written suitability determination for the
purchaser;
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·
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receive
the purchaser’s written agreement to the transaction prior to
sale;
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·
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provide
the purchaser with risk disclosure documents which identify certain risks
associated with investing in “penny stocks” and which describe the market
for these “penny stocks” as well as a purchaser’s legal remedies;
and
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·
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obtain
a signed and dated acknowledgment from the purchaser demonstrating that
the purchaser has actually received the required risk disclosure document
before a transaction in a “penny stock” can be
completed.
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As a
result of these requirements, the market price of our securities may be
depressed, and you may find it more difficult to sell our
securities.
Nevada
law and our articles of incorporation and bylaws contain provisions that may
discourage, delay or prevent a change in our management team that our
stockholders may consider favorable or otherwise have the potential to impact
our stockholders’ ability to control our company.
Nevada
law and our articles of incorporation and bylaws contain provisions that may
have the effect of preserving our current management or may impact our
stockholders’ ability to control our company, such as:
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authorizing
the issuance of “blank check” preferred stock without any need for action
by stockholders;
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·
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eliminating
the ability of stockholders to call special meetings of
stockholders;
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·
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restricting
the ability of stockholders to take action by written consent;
and
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·
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establishing
advance notice requirements for nominations for election to the Board of
Directors or for proposing matters that can be acted on by stockholders at
stockholder meetings.
|
These
provisions could allow our Board of Directors to affect your rights as a
stockholder since our Board of Directors can make it more difficult for common
stockholders to replace members of the Board. Because our Board of Directors is
responsible for appointing the members of our management team, these provisions
could in turn affect any attempt to replace our current management team. In
addition, the issuance of preferred stock could make it more difficult for a
third party to acquire us and may impact the rights of common stockholders. All
of the foregoing could adversely affect your rights as a stockholder of our
company and/or prevailing market prices for our common stock.
To date,
we have not paid any cash dividends and no cash dividends will be paid in the
foreseeable future. We do not anticipate paying cash dividends on our common
stock in the foreseeable future, and we cannot assure an investor that funds
will be legally available to pay dividends, or that, even if the funds are
legally available, the dividends will be paid
.
Item
1B.
Unreso
lved Staff
Comments
As
part of a review by the staff of the Securities and Exchange Commission (the
“Staff”) of our Annual Report on Form 10-K and our amended Annual Report on Form
10-K/A for the year ended December 31, 2007, we have received comments from the
Staff. We have responded to all of the Staff’s comments and our reponses are
currently under review by the Staff. As of the date of the filing of
this Annual Report on Form 10-K, certain of the Staff comments remain
unresolved. The Staff’s comments pertain primarily to: 1) expanding
the Overview section and quantifying and explaining changes in revenue in
comparative financial periods in the Management’s Discussion and Analysis
section; 2) providing a breakdown of revenues and costs by product and services
in the Statement of Operations; 3) providing an explanation for our method of
accounting for revenue under Statement of Position No. 97-2 (SOP No. 97-2) and
Staff Accounting Bulletin No. 104, as well as our methodology for establishing
Vendor Specific Objective Evidence under SOP No. 97-2; 4) reclassification of
amortization of certain acquisition related costs; and 5) a correction of a
typographical error in Management’s Annual Report on Internal Controls Over
Financial Reporting.
Item
2. Pr
opert
ies
Our
corporate headquarters are located in Los Gatos, California. On
November 14, 2007 we extended our then current lease for 5 years. As
a result of the extension, we have a 73-month lease for 11,772 square feet of
space that started on June 1, 2005 with monthly rent payments that range from
$12,949 per month for the first year to $19,424 during the last
year. Our Swedish subsidiary moved into a new office space located
in Varberg, Sweden. The lease for these 689 square meters of
space commenced on April 1, 2008 and the rent payments are approximately $10,025
monthly for lease-term of 60 months. The Swedish subsidiary also has
office space in Stockholm and Malmo. The rent payments for the
Stockholm office, are approximately $2,184 monthly and 27 months remained on the
lease at December 31, 2008. The rent payments for the Malmo office
are approximately $1,041 monthly and 24 months remained on the lease at December
31, 2008. We also lease 55 square meters in Melbourne,
Australia. The Melbourne lease is for 12 months starting July 1, 2008
with monthly rent payments 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.
Item
3. Legal
P
roc
eedings
None
Item
4. Sub
miss
ion of Matters to a Vote of Security Holders
The
Company’s 2008 Annual Meeting of Stockholders was held on November 12, 2008
(“Annual Meeting”). A total of 69,184,916 shares of common stock, or
82% of the outstanding shares, were represented in person or by
proxy. The results of the matters voted on at the Annual Meeting are
as follows:
(1)
a proposal to elect six nominees to serve as members of our Board of Directors
until the 2009 annual meeting or until their respective successors are elected
and have qualified, or until such director’s death, resignation or
removal;
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Number
of Shares
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Name
|
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For
|
|
Withheld
|
|
Scott
McClendon
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68,614,858
|
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570,058
|
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James
F. Brear
|
|
|
68,785,858
|
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398,058
|
|
Todd
Abbott
|
|
|
68,784,858
|
|
399,058
|
|
Staffan
Hillberg
|
|
|
68,783,858
|
|
400,058
|
|
Mary
Losty
|
|
|
68,785,858
|
|
398,058
|
|
Thomas
Saponas
|
|
|
68,783,858
|
|
400,058
|
All
nominees were elected to our Board of Directors.
(2) a
proposal to ratify the selection by the Audit Committee of PMB Helin Donovan,
LLP as independent auditors of the company for its fiscal year ended December
31, 2008;
|
For
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Against
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Abstain
|
|
69,065,286
|
|
98,011
|
|
20,620
|
The
selection of PMB Helin Donovan, LLP as our independent auditors for the fiscal
year ended December 31, 2008 was ratified.
PART
II
|
Item
5.
|
Market
for Reg
istran
t’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" from
June 24, 2003 until September 18, 2007 and beginning on September 19,
2007 it listed on the NYSE Alternext U.S., formerly known as the American Stock
Exchange under the symbol “PKT.” The following table sets forth, for the
periods indicated, the high and low closing prices per share of common stock as
stated in the Over the Counter Bulletin Board or the
NYSE Alternext U.S., as applicable.
.
|
|
|
Common
Stock
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.54
|
|
|
$
|
0.90
|
|
|
$
|
3.00
|
|
|
$
|
2.00
|
|
|
Second
Quarter
|
|
|
2.33
|
|
|
|
1.21
|
|
|
|
3.37
|
|
|
|
2.35
|
|
|
Third
Quarter
|
|
|
1.66
|
|
|
|
0.85
|
|
|
|
3.20
|
|
|
|
2.70
|
|
|
Fourth
Quarter
|
|
|
0.98
|
|
|
|
0.46
|
|
|
|
2.92
|
|
|
|
1.35
|
|
On
February 27, 2009, the closing price of our common stock on the AMEX was
$0.61.
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 deems relevant.
Recent
Sales of Unregistered Securities
On
November 13, 2008 an officer of the Company received a grant of
300,000 common shares in connection with his employment by the
company.
For the
above transactions, 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, 2008.
Holders
There
were 141 holders of record of our common stock as of February 27,
2009.
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 price of our common stock was 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, as amended, or
incorporated by reference in any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, as amended.
ASSUMES
$100 INVESTED ON JUNE 24, 2003
ASSUMES
DIVIDEND REINVESTED
|
|
|
PERIOD
ENDING
|
|
|
|
|
|
COMPANY/INDEX/MARKET
|
|
|
06/2003
|
|
|
12/31/2003
|
|
|
12/31/2004
|
|
|
12/31/2005
|
|
|
12/31/2006
|
|
|
12/31/2007
|
|
|
12/31/2008
|
|
|
Procera
Networks, Inc
|
|
|
100.00
|
|
|
|
256.41
|
|
|
|
161.54
|
|
|
|
42.74
|
|
|
|
187.18
|
|
|
|
119.66
|
|
|
|
77.78
|
|
|
AMEX
Composite
|
|
|
100.00
|
|
|
|
122.36
|
|
|
|
149.55
|
|
|
|
183.41
|
|
|
|
214.41
|
|
|
|
251.24
|
|
|
|
145.71
|
|
|
AMEX
Networking
|
|
|
100.00
|
|
|
|
141.32
|
|
|
|
140.97
|
|
|
|
133.56
|
|
|
|
142.83
|
|
|
|
147.2
|
|
|
|
80.89
|
|
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
We did
not repurchase any of our equity securities during the quarter ended December
31, 2008.
Item
6.
Sel
ected Financial Data
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.
The
Statement of Operations data for the years ended December 31, 2008, December 31,
2007, December 31, 2006, and the Balance Sheet data as of December 31, 2008 and
2007 has been derived from our audited financial statements included elsewhere
in this report. The Statement of Operations data for the years ended January 1,
2006 and January 2, 2005 and the Balance Sheet data as of December 31, 2006,
January 1, 2006 and January 2, 2005 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 loss per share)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
revenue
|
|
$
|
9,871
|
|
|
$
|
5,662
|
|
|
$
|
1,763
|
|
|
$
|
255
|
|
|
$
|
98
|
|
|
Service
revenue
|
|
|
1,653
|
|
|
|
1,011
|
|
|
|
151
|
|
|
|
--
|
|
|
|
--
|
|
|
Net
revenue
|
|
|
11,524
|
|
|
|
6,673
|
|
|
|
1,914
|
|
|
|
255
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
cost of goods sold
|
|
|
6,783
|
|
|
|
3,928
|
|
|
|
1,139
|
|
|
|
308
|
|
|
|
161
|
|
|
Service
cost of goods sold
|
|
|
527
|
|
|
|
452
|
|
|
|
184
|
|
|
|
--
|
|
|
|
--
|
|
|
Cost
of goods sold (2) (3)
|
|
|
5,310
|
|
|
|
4,380
|
|
|
|
1,323
|
|
|
|
308
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
|
4,214
|
|
|
|
2,293
|
|
|
|
591
|
|
|
|
(53
|
)
|
|
|
(63
|
)
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development (2)(3)
|
|
|
3,338
|
|
|
|
3,151
|
|
|
|
3,065
|
|
|
|
2,605
|
|
|
|
2,157
|
|
|
Sales
and marketing (2) (3)
|
|
|
8,864
|
|
|
|
7,825
|
|
|
|
2,565
|
|
|
|
1,753
|
|
|
|
901
|
|
|
General
and administrative (2) (3)
|
|
|
6,996
|
|
|
|
4,923
|
|
|
|
2,724
|
|
|
|
2,339
|
|
|
|
3,227
|
|
|
Total
operating expenses
|
|
|
19,198
|
|
|
|
15,899
|
|
|
|
8,354
|
|
|
|
6,697
|
|
|
|
6,285
|
|
|
Operating
loss
|
|
|
(14,984
|
)
|
|
|
(13,606
|
)
|
|
|
(7,763
|
)
|
|
|
(6,750
|
)
|
|
|
(6,348
|
)
|
|
Total
other income (expense), net
|
|
|
40
|
|
|
|
52
|
|
|
|
8
|
|
|
|
11
|
|
|
|
(15
|
)
|
|
Loss
before income taxes
|
|
|
(14,944
|
)
|
|
|
(13,554
|
)
|
|
|
(7,755
|
)
|
|
|
(6,739
|
)
|
|
|
(6,363
|
)
|
|
Provision
for income taxes
|
|
|
1,042
|
|
|
|
1,073
|
|
|
|
252
|
|
|
|
—
|
|
|
|
—
|
|
|
Net
Loss
|
|
$
|
(13,902
|
)
|
|
$
|
(12,481
|
)
|
|
$
|
(7,503
|
)
|
|
$
|
(6,739
|
)
|
|
$
|
(6,363
|
)
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.18
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.27
|
)
|
|
Diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.27
|
)
|
|
Shares
used in computing basic and diluted net loss per share:
|
|
|
79,144
|
|
|
|
71,422
|
|
|
|
50,444
|
|
|
|
30,445
|
|
|
|
23,593
|
|
|
(1)
|
We
adopted a calendar year end beginning with our fiscal year ending
2006. During the fiscal periods corresponding to 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
Period Ending (1)
|
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cost
of goods sold
|
|
$
|
51
|
|
|
$
|
23
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Research
and development
|
|
|
252
|
|
|
|
474
|
|
|
|
772
|
|
|
|
276
|
|
|
|
2
|
|
|
Sales
and marketing
|
|
|
411
|
|
|
|
741
|
|
|
|
263
|
|
|
|
29
|
|
|
|
76
|
|
|
General
and administrative
|
|
|
984
|
|
|
|
734
|
|
|
|
118
|
|
|
|
124
|
|
|
|
991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stock-based compensation
|
|
$
|
1,698
|
|
|
$
|
1,972
|
|
|
$
|
1,169
|
|
|
$
|
429
|
|
|
$
|
1,069
|
|
(3)
Includes amortization of acquired assets as
follows:
|
|
|
Fiscal
Period Ending (1)
|
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cost
of goods sold
|
|
$
|
1,526
|
|
|
$
|
1,526
|
|
|
$
|
509
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Sales
and marketing
|
|
|
1,439
|
|
|
|
1,439
|
|
|
|
475
|
|
|
|
—
|
|
|
|
—
|
|
|
General
and administrative
|
|
|
741
|
|
|
|
741
|
|
|
|
244
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
amortization of acquisition costs
|
|
$
|
3,706
|
|
|
$
|
3,706
|
|
|
$
|
1,228
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
Fiscal
Period Ending (1)
|
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Consolidated
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,721
|
|
|
$
|
5,865
|
|
|
$
|
5,214
|
|
|
$
|
1,255
|
|
|
$
|
4,148
|
|
|
Working
capital
|
|
|
5,273
|
|
|
|
6,291
|
|
|
|
5,571
|
|
|
|
734
|
|
|
|
3,983
|
|
|
Total
assets
|
|
|
15,991
|
|
|
|
17,412
|
|
|
|
18,148
|
|
|
|
1,698
|
|
|
|
4,653
|
|
|
Deferred
revenue
|
|
|
1,313
|
|
|
|
958
|
|
|
|
383
|
|
|
|
7
|
|
|
|
–
|
|
|
Accumulated
deficit
|
|
|
(51,740
|
)
|
|
|
(37,838
|
)
|
|
|
(25,357
|
)
|
|
|
(17,853
|
)
|
|
|
(11,114
|
)
|
|
Total
stockholders equity
|
|
$
|
9,059
|
|
|
$
|
12,373
|
|
|
$
|
13,934
|
|
|
$
|
851
|
|
|
$
|
4,107
|
|
Item
7. Man
ageme
nt’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 Annual Report 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 Annual Report. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including those set forth under “Business,” “Risk Factors” and elsewhere in this
Annual Report.
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
600 service providers, higher-education institutions and other organizations
(with over 1,300 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. During the three months ended October 1, 2006, we emerged
from the development stage.
As a result of the Netintact AB and Netintact PTY transactions, our core
products and business have changed dramatically. PacketLogic, the
flagship product and technology of Netintact, 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,
2008.
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,
Softw
are 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 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 support services
categorized as 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 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, 2008, 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 ratable 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 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.
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, which 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, 2007 and December 31, 2008, 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, 2007 and December 31, 2008, we have determined that our
intangible assets are reasonably stated and are expected to be recovered in the
future.
Allowance for Doubtful
Account
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, “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.
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 Statements 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 $194,775 of unrecognized tax benefits, none of which would affect our
effective tax rate if recognized.
Results of
Operations
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 Netintact on August 18, 2006 and Netintact PTY on September 29,
2006, we began to recognize increased revenues, 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
|
|
|
For
the twelve months
|
|
|
For
the twelve months
|
|
|
|
|
ended December
31
|
|
|
ended December
31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
2007
|
|
|
2006
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
product revenue
|
|
$
|
9,871
|
|
|
$
|
5,662
|
|
|
$
|
4,209
|
|
|
|
74
|
%
|
|
$
|
5,662
|
|
|
$
|
1,763
|
|
|
$
|
3,899
|
|
|
|
221
|
%
|
|
Net
support revenue
|
|
|
1,653
|
|
|
|
1,011
|
|
|
|
642
|
|
|
|
64
|
|
|
|
1,011
|
|
|
|
151
|
|
|
|
860
|
|
|
|
570
|
|
|
Total
revenue
|
|
$
|
11,524
|
|
|
$
|
6,673
|
|
|
$
|
4,851
|
|
|
|
73
|
%
|
|
$
|
6,673
|
|
|
$
|
1,914
|
|
|
$
|
4,759
|
|
|
|
249
|
%
|
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
:
|
|
|
For
the twelve months
|
|
|
For
the twelve months
|
|
|
|
|
ended
December 31
|
|
|
ended
December 31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
2007
|
|
|
2006
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
|
|
in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
2,546
|
|
|
$
|
2,391
|
|
|
$
|
155
|
|
|
|
6
|
%
|
|
$
|
2,391
|
|
|
$
|
516
|
|
|
$
|
1,875
|
|
|
|
363
|
%
|
|
EMEA
|
|
|
5,801
|
|
|
|
2,414
|
|
|
|
3,387
|
|
|
|
140
|
|
|
|
2,414
|
|
|
|
1,155
|
|
|
|
1,259
|
|
|
|
109
|
|
|
APAC
|
|
|
3,177
|
|
|
|
1,868
|
|
|
|
1,309
|
|
|
|
70
|
|
|
|
1,868
|
|
|
|
243
|
|
|
|
1,625
|
|
|
|
669
|
|
|
Total
|
|
$
|
11,524
|
|
|
$
|
6,673
|
|
|
$
|
4,851
|
|
|
|
73
|
%
|
|
$
|
6,673
|
|
|
$
|
1,914
|
|
|
$
|
4,759
|
|
|
|
249
|
%
|
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 and
September 2006, we discontinued offering OptimIP and commenced the sale of
PacketLogic, the flagship product and technology of Netintact, which accounted
for all of our subsequent revenue, and currently forms the core of our product
offerings.
Our revenue is derived from two sources: product revenue which includes
sales of our hardware appliances and bundled software licenses and service
revenue which includes revenue from product support and
services. Product revenue accounted for 86% and 85% of our net revenue in
2008 and 2007, respectively. Product revenue increased in 2008 as a
result of the introduction of the PL10000 product family and the continued
expansion of sales channels in our EMEA and APAC entities. The
PL10000 product family provided the company with the opportunity to expand our
product offering to the world’s largest service providers. 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 with our legacy product, OptimIP.
Service
revenue consists primarily of maintenance revenue and, to a lesser extent,
training revenue. Maintenance revenue is recognized over the service
period. The typical support term is generally twelve months. Service revenue
increased in 2008 versus 2007 as a result of the continued expansion of our
customer base. Service revenue increased in 2007 versus 2006 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
reorganized our sales organization in our EMEA region early in 2008 and
experienced significant growth by the end of the year. We
expanded our channel presence in APAC countries in 2007 and continued to see
strong growth in this region in 2007 and 2008. . In 2006,
the EMEA region experienced an OEM license sale which was discontinued in
2007. As a result our sales growth in EMEA was far below that
experienced by APAC and Americas.
Based on
our current sales growth and recent new product introductions such as the
PL10000, we believe that our revenue will continue to grow in 2009.
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
|
|
|
For
the twelve months
|
|
|
For
the twelve months
|
|
|
|
|
ended December
31
|
|
|
ended December
31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
2007
|
|
|
2006
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
2,044
|
|
|
$
|
1,499
|
|
|
$
|
545
|
|
|
|
36
|
%
|
|
$
|
1,499
|
|
|
$
|
461
|
|
|
$
|
1,038
|
|
|
|
225
|
%
|
|
EMEA
|
|
|
2,624
|
|
|
|
830
|
|
|
|
1,794
|
|
|
|
216
|
|
|
|
830
|
|
|
|
237
|
|
|
|
593
|
|
|
|
250
|
|
|
APAC
|
|
|
1,116
|
|
|
|
524
|
|
|
|
592
|
|
|
|
113
|
|
|
|
524
|
|
|
|
116
|
|
|
|
408
|
|
|
|
352
|
|
|
Amortization
of Acquired Assets
|
|
|
1,526
|
|
|
|
1,526
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,526
|
|
|
|
509
|
|
|
|
1,017
|
|
|
|
200
|
|
|
Total
costs of sales
|
|
$
|
7,310
|
|
|
$
|
4,379
|
|
|
$
|
2,931
|
|
|
|
67
|
%
|
|
$
|
4,379
|
|
|
$
|
1,323
|
|
|
$
|
3,056
|
|
|
|
231
|
%
|
By
category
|
|
|
For
the twelve months
|
|
|
For
the twelve months
|
|
|
|
|
ended
December 31
|
|
|
ended
December 31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
2007
|
|
|
2006
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials
|
|
$
|
3,857
|
|
|
$
|
1,715
|
|
|
$
|
2,142
|
|
|
|
|
|
$
|
1,715
|
|
|
$
|
295
|
|
|
$
|
1,420
|
|
|
|
|
|
Percent
of net product revenue
|
|
|
39
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
-9
|
%
|
|
|
30
|
%
|
|
|
0
|
|
|
|
|
|
|
|
-14
|
%
|
|
Applied
labor and overhead
|
|
|
877
|
|
|
|
523
|
|
|
|
354
|
|
|
|
|
|
|
|
523
|
|
|
|
78
|
|
|
|
445
|
|
|
|
|
|
|
Percent
of net product revenue
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
0
|
%
|
|
|
0
|
|
|
|
4
|
%
|
|
|
|
|
|
|
-5
|
%
|
|
Other
indirect costs
|
|
|
523
|
|
|
|
164
|
|
|
|
359
|
|
|
|
|
|
|
|
164
|
|
|
|
257
|
|
|
|
(93
|
)
|
|
|
|
|
|
Percent
of net product revenue
|
|
|
5
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
-2
|
%
|
|
|
3
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
12
|
%
|
|
Product
Costs
|
|
|
5,257
|
|
|
|
2,402
|
|
|
|
2,855
|
|
|
|
|
|
|
|
2,402
|
|
|
|
630
|
|
|
|
1,772
|
|
|
|
|
|
|
Percent
of net product revenue
|
|
|
53
|
%
|
|
|
42
|
%
|
|
|
|
|
|
|
-11
|
%
|
|
|
42
|
%
|
|
|
36
|
%
|
|
|
|
|
|
|
-7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support
costs
|
|
|
527
|
|
|
|
451
|
|
|
|
76
|
|
|
|
|
|
|
|
451
|
|
|
|
184
|
|
|
|
267
|
|
|
|
|
|
|
Percent
of net support revenue
|
|
|
32
|
%
|
|
|
45
|
%
|
|
|
|
|
|
|
13
|
%
|
|
|
45
|
%
|
|
|
122
|
%
|
|
|
|
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of Acquired Assets
|
|
|
1,526
|
|
|
|
1,526
|
|
|
|
-
|
|
|
|
|
|
|
|
1,526
|
|
|
|
509
|
|
|
|
1,017
|
|
|
|
|
|
|
Percent
of net total revenue
|
|
|
13
|
%
|
|
|
23
|
%
|
|
|
|
|
|
|
10
|
%
|
|
|
23
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
4
|
%
|
|
Total
costs of sales
|
|
$
|
7,310
|
|
|
$
|
4,379
|
|
|
$
|
2,931
|
|
|
|
|
|
|
$
|
4,379
|
|
|
$
|
1,323
|
|
|
$
|
3,056
|
|
|
|
|
|
|
Percent
of net total revenue
|
|
|
63
|
%
|
|
|
66
|
%
|
|
|
|
|
|
|
2%
|
%
|
|
|
66
|
%
|
|
|
69
|
%
|
|
|
|
|
|
|
3
|
%
|
2008 versus 2007.
Total cost
of goods sold during 2008 increased by $2,931 thousand as compared to 2007 but
decreased as a percentage of total revenue from 66% to 63%. Total
cost of product revenue increased by $2,142 thousand from 2007 to
2008. The increase in product costs resulted from the growth of sales
of our new PL10000 product line where hardware makes up a larger portion of each
sale.
Due to
our increased volume of sales activity, we expanded our materials management
function in 2008. This resulted in growing the applied labor and overhead
in 2008 by $354 thousand including payroll and related cost increases of $292
thousand as well as non-cash expenses of $28 thousand for stock-based
compensation.
Other
indirect costs increased by $359 thousand. Warranty costs increased by $54
thousand as a result of increased sale volume. As the majority of our
products are sourced from outside the United States, our freight costs increased
by $180 thousand during the year. Inventory adjustments associated
with slow moving, product obsolescence and physical adjustments increased by
$100 thousand and miscellaneous other adjustments were higher by $25
thousand.
In order
to support the growing sales volume we also added personnel to our
Technical Assistance Center thus leading to a $76 thousand increase in
support costs from 2007 to 2008.
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.
Gross
Profit or Loss and Margins
The
following table represents gross margin by entity:
|
|
|
For
the twelve months
|
|
|
For
the twelve months
|
|
|
|
|
ended
December 31
|
|
|
ended
December 31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
2007
|
|
|
2006
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
502
|
|
|
$
|
892
|
|
|
|
(390
|
)
|
|
|
(44
|
)
%
|
|
$
|
892
|
|
|
$
|
55
|
|
|
|
837
|
|
|
|
1,522
|
%
|
|
EMEA
|
|
|
3,177
|
|
|
|
1,584
|
|
|
|
1,593
|
|
|
|
101
|
|
|
|
1,584
|
|
|
|
918
|
|
|
|
666
|
|
|
|
73
|
|
|
APAC
|
|
|
2,061
|
|
|
|
1,344
|
|
|
|
717
|
|
|
|
53
|
|
|
|
1,344
|
|
|
|
127
|
|
|
|
1,217
|
|
|
|
958
|
|
|
Amortization
of Acquired Assets
|
|
|
(1,526
|
)
|
|
|
(1,526
|
)
|
|
|
0
|
|
|
|
(0
|
)
|
|
|
(1,526
|
)
|
|
|
(509
|
)
|
|
|
(1,017
|
)
|
|
|
200
|
|
|
Total
|
|
$
|
4,214
|
|
|
$
|
2,294
|
|
|
|
1,920
|
|
|
|
84
|
%
|
|
$
|
2,294
|
|
|
$
|
591
|
|
|
|
1,703
|
|
|
|
288
|
%
|
|
Percent
of net product sales
|
|
|
37
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
34
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
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 OptimIP 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 related 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.
Operating Expenses
|
|
|
For
the twelve months
|
|
|
For
the twelve months
|
|
|
|
|
ended December 31,
|
|
|
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
2007
|
|
|
2006
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
3,338
|
|
|
$
|
3,151
|
|
|
$
|
187
|
|
|
|
6
|
%
|
|
$
|
3,151
|
|
|
$
|
3,065
|
|
|
$
|
86
|
|
|
|
3
|
%
|
|
Sales
and marketing
|
|
|
8,864
|
|
|
|
7,825
|
|
|
|
1,039
|
|
|
|
13
|
|
|
|
7,825
|
|
|
|
2,565
|
|
|
|
5,260
|
|
|
|
205
|
|
|
General
and administrative
|
|
|
6,996
|
|
|
|
4,923
|
|
|
|
2,073
|
|
|
|
42
|
|
|
|
4,923
|
|
|
|
2,724
|
|
|
|
2,199
|
|
|
|
81
|
|
|
Total
|
|
$
|
19,198
|
|
|
$
|
15,899
|
|
|
$
|
3,299
|
|
|
|
21
|
%
|
|
$
|
15,899
|
|
|
$
|
8,354
|
|
|
$
|
7,545
|
|
|
|
90
|
%
|
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).
|
|
|
For
the twelve months
|
|
|
For
the twelve months
|
|
|
|
|
ended
December 31,
|
|
|
ended
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
2007
|
|
|
2006
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
3,338
|
|
|
$
|
3,151
|
|
|
$
|
187
|
|
|
|
6
|
%
|
|
$
|
3,151
|
|
|
$
|
3,065
|
|
|
$
|
86
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of net revenue
|
|
|
29
|
%
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
47
|
%
|
|
|
160
|
%
|
|
|
|
|
|
|
|
|
2008 versus
2007
. Research and development expenses for 2008 increased by
$187 thousand when compared to the fiscal year 2007 as a result of increased
consulting services of $84 thousand offset by reduced tooling and testing
services of $124 thousand, travel of $15 thousand and payroll of $105
thousand. Offsetting these expense increases was a non cash decrease
of $118 thousand for stock based compensation and increases as a result of
reduced fixed asset depreciation of $91 thousand.
2007 versus
2006.
Research and development expenses for fiscal 2007
increased by $86 thousand 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
thousand as well as increases in services $134 thousand and prototype materials
of $60 thousand. Offsetting these expense increases were expense
decreases associated with reduced payroll costs of $565 thousand associated with
the elimination of the OptimIP product line, reduction of operating expenses of
$342 thousand as a result of converting from a development stage company, and
lower stock based compensation expenses of $301 thousand.
Development
costs included in fiscal years 2008, 2007 and 2006 were $487,221, $742,580 and
$293,101 respectively. Development costs decreased in 2008 as a
result of completing the introduction of the PL10000 product family in early the
second quarter of 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.
|
|
|
For
the twelve months
|
|
|
For
the twelve months
|
|
|
|
|
ended December 31,
|
|
|
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
2007
|
|
|
2006
|
|
|
Variance in
|
|
|
Variance
in
|
|
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and Marketing
|
|
$
|
8,864
|
|
|
$
|
7,825
|
|
|
$
|
1,039
|
|
|
|
13
|
%
|
|
$
|
7,825
|
|
|
$
|
2,565
|
|
|
$
|
5,260
|
|
|
|
205
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of net revenue
|
|
|
77
|
%
|
|
|
117
|
%
|
|
|
|
|
|
|
|
|
|
|
117
|
%
|
|
|
134
|
%
|
|
|
|
|
|
|
|
|
2008 versus
2007
. Sales and marketing expenses for the fiscal year 2008
increased by $1,039 thousand when compared to fiscal year 2007. Sales
and marketing expenses increased due to increased expenses for commissions of
$352 thousand, travel of $344 thousand, facility cost of $150 thousand and
recruiting fees of $102 thousand. Offsetting these expense increases
were expense decreases related to payroll of $82 thousand and consultants of
$171 thousand. Non cash items that increased sales expense in 2008
versus 2007 were stock based compensation expense of $145 thousand and a reserve
of bad debt of $171 thousand.
2007 versus
2006.
Sales and marketing expenses for the fiscal year 2007
increased by $5,260 thousand 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
thousand. Payroll costs increased by $1,130 thousand as a result of
increasing from 22 sales and marketing employees at the end of 2006 to 33
employees by the end of 2007. Consulting expenses increased in 2007
by $410 primarily due to increased expenses for trade shows, product literature,
and channel development activities. We also had an increase of
$204,000 in 2007 for travel expenditures and stock based compensation increased
by $488,000.
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.
|
|
|
For
the twelve months
|
|
|
For
the twelve months
|
|
|
|
|
ended
December 31,
|
|
|
ended
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
in
|
|
|
Variance
in
|
|
|
2007
|
|
|
2006
|
|
|
Variance
in
|
|
|
Variance
in
|
|
|
|
|
(in
thousands)
|
|
|
Dollars
|
|
|
Percent
|
|
|
(in
thousands)
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$
|
6,996
|
|
|
$
|
4,923
|
|
|
$
|
2,073
|
|
|
|
42
|
%
|
|
$
|
4,923
|
|
|
$
|
2,724
|
|
|
$
|
2,199
|
|
|
|
81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of net revenue
|
|
|
6
|
%
|
|
|
74
|
%
|
|
|
|
|
|
|
|
|
|
|
74
|
%
|
|
|
142
|
%
|
|
|
|
|
|
|
|
|
2008 versus
2007
. General and administrative expenses for the fiscal year
ended December 31, 2008 increased by $2,073 thousand when compared to the
fiscal year ended December 31, 2007. Increases in general and
administrative expenses include $490 thousand for salaries and benefits, $298
thousand in recruiting, $370 for S-1 related costs, $107 thousand in legal, $117
thousand in facility related spending, $65 thousand for cash compensation
associated with Board duties, $119 thousand in consultants and
contractors. Non cash related cost increases in 2008 were $395
thousand in stock based compensation and $109 thousand in fair value of options
associated with an investor relations service.
2007 versus
2006.
General and administrative expenses for the fiscal year
ended December 31, 2007 increased by $2,199 when compared to the fiscal year
ended December 31, 2006. Expense increases during 2007 included,
professional services of $365 thousand, personnel costs of $316 thousand,
Netintact administrative costs of $213 thousand, travel related spending of $79
thousand, entry fees AMEX of $75 thousand, facility expenses including insurance
of $71 thousand, expensed tools of $32 thousand and miscellaneous
expenses of $23 thousand. Non cash cost related increases
in 2007 included amortization of assets acquired from Netintact
of $1,495 thousand, stock based compensation of approximately $471
thousand, the fair value of options associated with Ian investor relations
service of $58 thousand and expensed tools of $32
thousand
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
|
|
$
|
1,721,225
|
|
|
$
|
5,864,648
|
|
$(4,143,423)
|
The cash
and cash equivalents balance decreased $4.1 million from December 31,
2007 to December 31, 2008 due to activities in the following
areas.
|
|
|
Increase
(Decrease)
|
|
|
Net
cash used in operating activities
|
|
$
|
(12,247,189
|
)
|
|
Net
cash used in investing activities
|
|
|
(773,823
|
)
|
|
Net
cash provided by financing activities
|
|
|
8,867,691
|
|
|
Effect
of exchange rates
|
|
|
9,898
|
|
|
Net
change in cash and cash equivalents
|
|
$
|
(4,143,423
|
)
|
Although
we recorded a net loss of $13.9 million in 2008, our actual cash usage was $12.2
million as a result of non-cash adjustments. The
primary non-cash adjustments include stock based employee compensation of $1.7
million, stock based services expense of $0.7 million, intangible amortization
of $1.4 million, depreciation of $2.6 million and change in net worth of $3.7
million offset by the amortization of the tax benefit associated with the
intangible amortization of $1.0 million. Our primary uses of
cash for net working capital included an increase in inventories, accounts
receivable, deferred revenue and prepaid expenses offset by increases in
accounts payable, accrued expenses.
During
the fiscal year ending December 31, 2008, cash was provided primarily by the
proceeds of a private placement of equity in September 2008 totaling $5.8
million, the exercise of warrants and options totaling $2.5 million, and
issuance of debt of $0.55 million. 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 in 2007, 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 $0.15 million, intangible amortization of $1.4
million, depreciation of $2.5 million and change in net worth of
$0.55 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 a decrease in prepaid expenses.
We
recorded a net loss of $7.5 million in 2006 and used $5.4 million of cash in
operations primarily due to net non-cash adjustments. The primary
non-cash adjustments include stock based employee compensation of $1.2 million,
stock based services expense of $0.2 million, intangible amortization of $0.5
million, depreciation of $0.8 million and change in net worth of
$0.5 million offset by a decrease in accounts receivable of $1.1
million. Our primary uses of cash for net working capital
included an increase in deferred revenue, offset by a decrease in accounts
payable and prepaid and other current assets.
Based on
current reserves and anticipated cash flow from operations, our working capital
may not have been 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.
On March
13, 2009, the Company entered into a secured line of credit for working capital
purposes with Peninsula Bank. The Line of Credit Agreement provides for maximum
borrowings of $3 million through March 12, 2010. We believe, as a
result of this line of credit, we currently have sufficient cash and financing
commitments to meet our funding requirements over the next
year. However, we expect that we will need to raise substantial
additional capital to accomplish all of our business objectives over the next
several years. We expect to seek additional funding through a bank
credit facility or private equity. There can be no assurance as to the
availability or terms upon which such financing and capital might be
available.
Contractual
Obligations
.
As of December 31,
2008, Procera also had commitments for leased equipment from various sources
under non-cancelable capital leases with various expiration dates through 2014
as shown below. Interest rates on such commitments range from 9% to
10%.
As of
December 31, 2008, future minimum lease payments that come due in the current
and following fiscal years ending December 31 are as follows:
|
|
|
Payments
Due by Period
|
|
|
Contractual
Obligations
|
|
Total
|
|
|
<
1 Year
|
|
|
1-3
Years
|
|
|
4-5
Years
|
|
|
>
5 Years
|
|
|
Capital
leases
|
|
$
|
56,151
|
|
|
$
|
11,543
|
|
|
$
|
9,556
|
|
|
$
|
9,556
|
|
|
$
|
25,496
|
|
|
Operating
leases
|
|
|
1,206,269
|
|
|
|
394,293
|
|
|
|
388,543
|
|
|
|
263,041
|
|
|
|
160,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,262,420
|
|
|
$
|
405,836
|
|
|
$
|
398,099
|
|
|
$
|
272,597
|
|
|
$
|
185,888
|
|
Deferred
Revenue Items
The
following table represents our deferred revenue for the periods ending December
31, 2008 and 2007.
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
$
|
1,313,092
|
|
|
$
|
957,891
|
|
|
$
|
355,201
|
|
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 2008 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, 2008, we had no open non-cancelable
purchase orders with our third-party manufacturers.
Off-Balance
Sheet Arrangements
As of
December 31, 2008, we had no off-balance sheet items as described by Item
303(a)(4) of 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.
Item
7A. Quantitative
and Qu
alita
tive Disclosures about Market Risk
Foreign
Currency Risk
Our sales
contracts are denominated predominantly in United States dollars, Swedish
kroner, Australian dollars and the EURO. We incur certain operating
expenses in United States dollars, Swedish kroner 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 $1.7 million and $5.9 million at
December 31, 2008 and 2007, 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 2008, our interest income on cash and cash equivalents would
have declined immaterially, assuming consistent investment
levels.
Item
8. F
inan
cial Statements and Supplementary Data
PROCERA
NETWORKS, INC. AND SUBSIDIARIES
TABLE
OF CONTENTS
|
|
|
|
|
Page
|
|
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
F-1 to F-2
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
F-3
|
|
Consolidated
Statements of Operations and Comprehensive Loss for the years ended
December 31, 2008, 2007 and 2006
|
F-4
|
|
Consolidated
Statement of Stockholders’ Equity for the years ended December 31, 2008,
2007 and 2006
|
F-5
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-9
|
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, 2008 and 2007, and the related consolidated
statements of operations and other comprehensive loss, stockholders’ equity
(deficit) and cash flows for the fiscal years ended December 31, 2008, 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.
As
discussed in Note 2 to the consolidated financial statements, effective
January 1, 2007, Procera Networks, Inc., adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes — an Interpretation of SFAS No. 109.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Procera Networks, Inc. as of
December 31, 2008 and 2007, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31,
2008, in conformity with U.S. generally accepted accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Procera Networks, Inc.’s internal control over
financial reporting as of December 31, 2008, based on criteria established
in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 16, 2009 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
/s/ PMB
Helin Donovan, LLP
PMB Helin
Donovan, LLP
San
Francisco, California
March 16,
2009
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL
CONTROL OVER FINANCIAL REPORTING
The Board
of Directors and Stockholders
Procera
Networks, Inc.:
We have
audited Procera Networks, Inc.’s internal control over financial reporting as of
December 31, 2008 based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Procera Networks, Inc.’s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over
Financial Reporting as of December 31, 2008. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.
We
conducted our audit 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, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included 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 by, or
under the supervision of, the entity’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
entity’s board of directors, management, and other personnel 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.
In our
opinion, Procera Networks, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
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, Inc. as of December 31, 2008 and 2007 and the related
consolidated statements of operations, and comprehensive loss,
stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2008, and our report dated March 16, 2009
expressed an unqualified opinion on those consolidated financial
statements.
PMB
Helin Donovan, LLP
San
Francisco, California
March 16,
2009
|
PROCERA
NETWORKS, INC. AND SUBSIDIARIES
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,721,225
|
|
|
$
|
5,864,648
|
|
|
Accounts
receivable, net of allowance of $182,760 and $241,062 as of December 31,
2008 and 2007 respectively
|
|
|
5,454,745
|
|
|
|
1,819,272
|
|
|
Inventories,
net
|
|
|
3,445,802
|
|
|
|
1,320,022
|
|
|
Prepaid
expenses and other
|
|
|
824,340
|
|
|
|
520,137
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
11,446,112
|
|
|
|
9,524,079
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
2,573,045
|
|
|
|
4,476,224
|
|
|
Purchased
intangible assets, net
|
|
|
964,405
|
|
|
|
2,403,405
|
|
|
Goodwill
|
|
|
960,209
|
|
|
|
960,209
|
|
|
Other
non-current assets
|
|
|
47,294
|
|
|
|
47,805
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
15,991,065
|
|
|
$
|
17,411,722
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,457,430
|
|
|
$
|
668,289
|
|
|
Deferred
revenue
|
|
|
1,313,092
|
|
|
|
957,891
|
|
|
Accrued
liabilities
|
|
|
1,841,442
|
|
|
|
1,572,975
|
|
|
Notes
payable
|
|
|
550,000
|
|
|
|
-
|
|
|
Capital
leases payable
|
|
|
11,543
|
|
|
|
33,867
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
6,173,507
|
|
|
|
3,233,022
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities
|
|
|
|
|
|
|
|
|
|
Deferred
rent
|
|
|
24,234
|
|
|
|
7,797
|
|
|
Deferred
tax liability
|
|
|
695,239
|
|
|
|
1,734,855
|
|
|
Capital
leases payable
|
|
|
39,584
|
|
|
|
62,773
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
6,932,564
|
|
|
|
5,038,447
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 7)
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 15,000,000 shares authorized: none issued and
outstanding
|
|
|
---
|
|
|
|
---
|
|
|
Common
stock, $0.001 par value; 130,000,000 shares authorized; 84,498,491 and
76,069,233 shares issued and outstanding as of December 31, 2008 and 2007
respectively
|
|
|
84,498
|
|
|
|
76,069
|
|
|
Additional
paid-in capital
|
|
|
61,142,430
|
|
|
|
50,058,560
|
|
|
Accumulated
other comprehensive gain (loss)
|
|
|
(428,107
|
)
|
|
|
76,861
|
|
|
Accumulated
deficit
|
|
|
(51,740,320
|
)
|
|
|
(37,838,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
9,058,501
|
|
|
|
12,373,275
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
15,991,065
|
|
|
$
|
17,411,722
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
PROCERA
NETWORKS, INC. AND SUBSIDIARIES
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
Product
Sales
|
|
$
|
9,871,185
|
|
|
$
|
5,661,945
|
|
|
$
|
1,763,827
|
|
|
Support
Sales
|
|
|
1,652,769
|
|
|
|
1,010,596
|
|
|
|
150,603
|
|
|
Total
Sales
|
|
|
11,523,954
|
|
|
|
6,672,541
|
|
|
|
1,914,430
|
|
|
Cost
of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
cost of sales
|
|
|
6,782,877
|
|
|
|
3,927,659
|
|
|
|
1,139,455
|
|
|
Support
cost of sales
|
|
|
526,966
|
|
|
|
451,402
|
|
|
|
183,579
|
|
|
Total
Cost of sales
|
|
|
7,309,843
|
|
|
|
4,379,061
|
|
|
|
1,323,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,214,111
|
|
|
|
2,293,480
|
|
|
|
591,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and Development
|
|
|
3,338,360
|
|
|
|
3,151,438
|
|
|
|
3,065,266
|
|
|
Sales
and Marketing
|
|
|
8,863,511
|
|
|
|
7,824,581
|
|
|
|
2,565,445
|
|
|
General
and Administrative
|
|
|
6,996,151
|
|
|
|
4,923,204
|
|
|
|
2,723,641
|
|
|
Total
operating expenses
|
|
|
19,198,022
|
|
|
|
15,899,223
|
|
|
|
8,354,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(14,983,911
|
)
|
|
|
(13,605,743
|
)
|
|
|
(7,762,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
86,642
|
|
|
|
51,858
|
|
|
|
7,904
|
|
|
Interest
and other expense
|
|
|
(47,105
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Total
other income (expense)
|
|
|
39,537
|
|
|
|
51,858
|
|
|
|
7,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before taxes
|
|
|
(14,944,374
|
)
|
|
|
(13,553,885
|
)
|
|
|
(7,755,052
|
)
|
|
Income
tax benefit
|
|
|
1,042,269
|
|
|
|
1,072,505
|
|
|
|
251,573
|
|
|
Net
loss after taxes
|
|
|
(13,902,105
|
)
|
|
|
(12,481,380
|
)
|
|
|
(7,503,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), net
|
|
|
(504,968
|
)
|
|
|
62,480
|
|
|
|
14,381
|
|
|
Comprehensive
loss
|
|
$
|
(14,407,073
|
)
|
|
$
|
(12,418,900
|
)
|
|
$
|
(7,489,098
|
)
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.15
|
)
|
|
Shares
used in computing net loss per share-basic and diluted
|
|
|
79,144,479
|
|
|
|
71,422,184
|
|
|
|
50,443,688
|
|
The accompanying notes are an integral part of these
consolidated financial statements
Procera
Networks, Inc.
Statements
of Stockholders' Equity (Deficit) For the Twelve Months ended December 31, 2008,
2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Add.
Paid-In
|
|
|
Subscribed
Common
|
|
|
Other
Comprehensive
|
|
|
Accum.
|
|
|
|
|
|
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 investor 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
5,356,835
|
)
|
|
$
|
13,934,499
|
|
The accompanying notes are an integral part of these
consolidated financial statements
Procera
Networks, Inc.
Statements
of Stockholders' Equity (Deficit) continued
For
the Twelve Months Ended December 31, 2008, 2007 and 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 options and warrants at prices ranging from $0.075 -
$1.37
|
|
|
1,323,410
|
|
|
|
1,323
|
|
|
|
754,118
|
|
|
|
|
|
|
|
|
|
|
|
755,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
|
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 $2.47 per share to vendor for investor
relations 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
|
)
|
|
|
|
|
76,069,233
|
|
|
$
|
76,069
|
|
|
$
|
50,058,560
|
|
|
$
|
76,861
|
|
|
$
|
(37,838,215
|
)
|
|
$
|
12,373,275
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
Procera
Networks, Inc.
Statements
of Stockholders' Equity (Deficit) continued
For
the Twelve Months Ended December 31, 2008, 2007 and 2006
|
|
|
Common
Stock
|
|
|
Add.
Paid-In
|
|
|
Accum.
Other Comprehensive
|
|
|
Accum.
|
|
|
Total
Stockholders
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
(Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balances,
December 31, 2007
|
|
|
76,069,233
|
|
|
$
|
76,069
|
|
|
$
|
50,058,560
|
|
|
$
|
76,861
|
|
|
$
|
(37,838,215
|
)
|
|
$
|
12,373,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of
common
stock upon
exercise of options and warrants at prices ranging from $0.45 -
$1.59
|
|
|
2,659,501
|
|
|
|
2,659
|
|
|
|
2,520,704
|
|
|
|
|
|
|
|
|
|
|
|
2,523,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
1,697,903
|
|
|
|
|
|
|
|
|
|
|
|
1,697,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with the private placement of common shares
at prices ranging between $1.10 and $1.17 per share in September 2008,
less issuance costs
|
|
|
5,244,666
|
|
|
|
5,245
|
|
|
|
5,823,304
|
|
|
|
|
|
|
|
|
|
|
|
5,828,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock valued at between $1.40 and $1.45 per share
between June and September 2008 to service vendors
|
|
|
525,091
|
|
|
|
525
|
|
|
|
735,475
|
|
|
|
|
|
|
|
|
|
|
|
736,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants to purchase common stock valued at between $0.49 and $2.00 per
share to service vendors
|
|
|
|
|
|
|
|
|
|
|
306,484
|
|
|
|
|
|
|
|
|
|
|
|
306,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(504,968
|
)
|
|
|
|
|
|
|
(504,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,902,105
|
)
|
|
|
(13,902,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2008
|
|
|
84,498,491
|
|
|
$
|
84,498
|
|
|
$
|
61,142,430
|
|
|
$
|
(428,107
|
)
|
|
$
|
(51,740,320
|
)
|
|
$
|
9,058,501
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
Procera
Networks, Inc. and Subsidiaries
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(13,902,105
|
)
|
|
$
|
(12,481,380
|
)
|
|
$
|
(7,503,479
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services rendered
|
|
|
736,000
|
|
|
|
149,665
|
|
|
|
227,786
|
|
|
Compensation
related to stock-based awards
|
|
|
1,697,902
|
|
|
|
1,972,275
|
|
|
|
1,168,611
|
|
|
Fair
value of warrants issued to non-employees
|
|
|
306,484
|
|
|
|
-
|
|
|
|
73,770
|
|
|
Depreciation
|
|
|
2,580,950
|
|
|
|
2,452,259
|
|
|
|
797,686
|
|
|
Inventory
Reserve
|
|
|
(59,636
|
)
|
|
|
80,169
|
|
|
|
41,482
|
|
|
Amortization
of intangibles
|
|
|
1,439,000
|
|
|
|
1,439,000
|
|
|
|
474,595
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
(4,208,221
|
)
|
|
|
(501,591
|
)
|
|
|
(684,003
|
)
|
|
Inventories
|
|
|
(2,190,297
|
)
|
|
|
(1,144,178
|
)
|
|
|
(49,114
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
(340,504
|
)
|
|
|
307,934
|
|
|
|
232,461
|
|
|
Accounts
payable
|
|
|
1,836,272
|
|
|
|
375,696
|
|
|
|
(142,774
|
)
|
|
Accrued
liabilities, deferred rent
|
|
|
431,954
|
|
|
|
847,082
|
|
|
|
76,333
|
|
|
Deferred
income taxes
|
|
|
(1,039,616
|
)
|
|
|
(1,085,745
|
)
|
|
|
(298,252
|
)
|
|
Deferred
revenue
|
|
|
464,628
|
|
|
|
540,620
|
|
|
|
180,960
|
|
|
Net
cash used in operating activities
|
|
|
(12,247,189
|
)
|
|
|
(7,048,194
|
)
|
|
|
(5,403,938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(773,823
|
)
|
|
|
(499,503
|
)
|
|
|
(178,313
|
)
|
|
Cash
acquired in the acquisition of a business
|
|
|
-
|
|
|
|
-
|
|
|
|
452,669
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(773,823
|
)
|
|
|
(499,503
|
)
|
|
|
274,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from common stock
|
|
|
5,828,549
|
|
|
|
7,488,631
|
|
|
|
8,939,828
|
|
|
Proceeds
from exercise of warrants
|
|
|
2,175,572
|
|
|
|
674,177
|
|
|
|
265,012
|
|
|
Proceeds
from exercise of stock options
|
|
|
347,791
|
|
|
|
81,264
|
|
|
|
-
|
|
|
Proceeds
from issuance of debt instruments
|
|
|
550,000
|
|
|
|
-
|
|
|
|
-
|
|
|
Payment
on a loan
|
|
|
-
|
|
|
|
-
|
|
|
|
(110,000
|
)
|
|
Capital
lease payments
|
|
|
(34,221
|
)
|
|
|
(26,035
|
)
|
|
|
(8,070
|
)
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
2,158
|
|
|
Net
cash provided by financing activities
|
|
|
8,867,691
|
|
|
|
8,218,037
|
|
|
|
9,088,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rates on cash and cash equivalents
|
|
|
9,898
|
|
|
|
(19,869
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(4,143,423
|
)
|
|
|
650,471
|
|
|
|
3,959,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
5,864,648
|
|
|
|
5,214,177
|
|
|
|
1,254,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
1,721,225
|
|
|
$
|
5,864,648
|
|
|
$
|
5,214,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
41,084
|
|
|
$
|
5,855
|
|
|
$
|
7,894
|
|
|
Cash
paid for interest
|
|
$
|
30,055
|
|
|
$
|
6,559
|
|
|
$
|
5,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
NON CASH FLOW INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with the acquisition of Netintact AB
and PTY.
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,444,776
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
PROCERA
NETWORKS INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
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, telephone companies,
colleges and universities worldwide. The common stock of Procera began trading
on the NYSE Alternext U.S. under the trading symbol “PKT” in
2007.
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. The Company has operations in
California, Sweden, and Australia.
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
Beginning
with the fiscal year which ended December 31, 2006, the Company’s fiscal year
end is a 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
the Company’s continuation as a going concern. Certain amounts
from prior periods have been reclassified to conform to the current period
presentation. This reclassification has resulted in no changes to the
Company’s accumulated deficit or net losses presented.
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 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. Management based its estimates on experience
and other assumptions it believes 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, notes payable, capital leases,
accounts payable and accrued liabilities approximate fair value due to their
short maturities.
Concentration
of Credit Risk
The
financial instruments utilized by the Company that potentially subject the
Company to a concentration of credit risk consist of cash and cash equivalents.
Cash and cash equivalents are deposited in demand and money market accounts in
major financial institutions in the United States, Sweden and Australia.
Although these financial institutions are considered creditworthy and the
Company has not experienced any material losses on its deposits of cash and cash
equivalents. Additionally,
the Company has
established guidelines to limit its exposure to credit risk by placing its
deposits with high credit quality financial institutions and placing investments
with maturities that maintain safety and liquidity within the Company's
liquidity needs.
Concentration
of credit risk with respect to accounts receivable is limited due to the number
of geographically diverse customers that make up the Company’s customer base,
thus increasing the trade credit risk (See note 16).
Cash
and Cash Equivalents
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. The Company carries its accounts receivable
at cost less an allowance for doubtful accounts. On a periodic basis,
the Company evaluates its accounts receivable and establishes an allowance for
doubtful accounts, based on a history of past write-offs and collections and
current credit conditions.
Bad
Debts
The
Company estimates bad debts utilizing the allowance method, based upon past
experience and current market conditions.
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. At December 31, 2008, 2007 and 2006, the allowance for doubtful
accounts was $182,760, $241,062, and $11,672, respectively.
Inventory
Inventories
consist primarily of finished goods and are stated at the lower of cost (on a
first-in, first-out basis) or market. The Company records inventory write-downs
for excess and obsolete inventories based on historical usage and forecasted
demand. Factors which could cause its forecasted demand to prove inaccurate
include the Company’s reliance on indirect sales channels and the variability of
its sales cycle; the potential of announcements of new products or
enhancements to replace or shorten the life cycle of current products, or cause
customers to defer their purchases; loss of sales due to product shortages; and
the potential of new or alternative technologies achieving widespread market
acceptance and thereby rendering the Company’s existing products obsolete. If
future demand or market conditions are less favorable than projections,
additional inventory write-downs may be required and would be reflected in cost
of sales in the period the revision is made. At December 31, 2008 and 2007,
the reserve for obsolete and excess inventory was $98,431 and $56,488,
respectively.
Property
and Equipment and Leasehold Improvements
Property
and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the improvements 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.
The
estimated service lives of property and equipment are principally as
follows:
|
Leasehold
improvements
|
Lesser
of useful life or lease term
|
|
Machinery,
office and computer equipment
|
2–5
years
|
|
Computer
software
|
3
years
|
|
Transportation
vehicles
|
3–5
years
|
Assets
Held under Capital Leases
Property
and equipment include gross assets acquired under capital leases of $146,350 and
$178,548 at December 31, 2008, and December 31, 2007, respectively. Related
amortization is included in accumulated depreciation of $78,418 and $66,131 at
December 31, 2008, and December 31, 2007, respectively. Capital leases are
included as a component of vehicles and equipment and machinery. Amortization of
assets under capital leases is included in depreciation expense. 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 or
a significant change in the operations of an acquired business.
As of
December 31, 2008, no such triggering event has occurred. 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, 2008, the Company concluded that there was no impairment to the
carrying value of goodwill.
Commitments
and Contingencies
Certain
conditions may exist on 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).
Prior 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 option
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
The
Company’s most common sale involves the integration of software and a hardware
appliance. The software is essential to the functionality of the
product. The Company accounts for this revenue in accordance with
Statement of Position (“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. The
Company recognizes product revenue when all of the following have occurred: (1)
the Company has 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.
Product
revenue consists of revenue from sales of appliances and software licenses.
Product sales include a perpetual license to the Company’s 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
sales include post-contract support (PCS) 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 that
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). The Company’s standard delivery terms are when
product is delivered to a common carrier from Procera, or its
subsidiaries. However, product revenue based on channel partner
purchase orders are recorded based on sell-through to the end user customers
until such time as the Company has established significant experience with the
channel partner’s ability to complete the sales process. Additionally, when the
Company introduces 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
customer orders contain multiple items such as hardware, software, and services
which are delivered at varying times, the Company determines whether the
delivered items can be considered separate units of accounting as prescribed
under 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 the Company’s control.
In these
circumstances, Procera allocates 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, 2008, in virtually all of the Company’s 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 entered into
includes a stated rate for PCS. The renewal rate is equal to the stated rate in
the original contract. The Company has a history of such renewals, the vast
majority of which are at the stated renewal rate on a customer by customer
basis.
When the
Company is able to establish VSOE for all elements of the sales order it
separates 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 a 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, the Company uses the
completed-performance method of revenue recognition which is measured by the
customer’s acceptance. The Company uses 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 its core competency. Under this
scenario, PCS revenue is recognized ratably over the life of the
contract. The majority of service revenue is recognized under the
proportional-performance method using the straight line method with the revenue
being earned over the life of the contract. A small portion of service revenue
is derived from providing training on products and the Company uses the
completed-contract method to recognize such 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 the
Company does 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.
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 the Company’s contracts do not include rights of
return or acceptance provisions. To the extent that agreements contain such
terms, the Company recognizes 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 the Company’s
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.
Procera
assesses the ability to collect from its 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, the Company defers all
revenue from the arrangement until payment is received and all other revenue
recognition criteria have been met.
Income
Taxes
The
Company accounts for income taxes under an asset and liability approach. This
process involves calculating the temporary and permanent differences between the
carrying amounts of the assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The temporary differences result
in deferred tax assets and liabilities, which would be recorded on the Company’s
Consolidated Balance Sheet in accordance with SFAS No. 109,
Accounting for Income Taxes
,
which established financial accounting and reporting standards for the effect of
income taxes. The Company must assess the likelihood that its deferred tax
assets will be recovered from future taxable income and, to the extent the
Company believes that recovery is not likely, the Company must establish a
valuation allowance. Changes in the Company’s valuation allowance in a period
are recorded through the income tax provision on the Consolidated Statement of
Operations.
On
January 1, 2007, the Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes—An interpretation of FASB Statement No. 109
(“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes” and prescribes a recognition threshold and measurement
attributes for financial statement disclosure of tax positions taken or expected
to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that
is more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN 48 provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. As a result of the
implementation of FIN 48, the Company recognized no material adjustment in the
liability for unrecognized income tax benefits. At the adoption date of January
1, 2007, the Company had $176,639 of unrecognized tax benefits, none of which
would affect its effective tax rate if recognized.
The
Company adopted SFAS 123(R) as of January 2, 2006 and, as a result,
incurred significant stock-based compensation expense, some of which related to
incentive stock options for which no corresponding tax benefit is recognized
unless a disqualifying disposition occurs. Disqualifying dispositions result in
a reduction of income tax expense in the period when the disqualifying
disposition occurs in an amount equal to the tax benefit relating to previously
recognized stock compensation expense. Tax benefits related to realized tax
deductions in excess of previously expensed stock compensation are recorded as
an addition to paid-in-capital.
Deferred
Revenue
The
Company’s 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, 2008 deferred revenue totaled $1,313,092 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 being declared technologically
feasible, which the Company defines as a working
prototype. Accordingly, those costs which could have been capitalized
have not been material.
Advertising
Costs
Advertising
expenses consist primarily of costs incurred in the design, development, and
printing of Company literature and marketing materials. Advertising
costs are expensed as incurred. Advertising expenses were not significant for
the years ended December 31, 2008, 2007 and 2006.
Comprehensive
Income (Loss)
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
stockholders’ 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. Other comprehensive income
(loss) and comprehensive income (loss) are displayed separately in the
consolidated statements of stockholders’ equity and other comprehensive
income/(loss).
Foreign
Operations
The
accompanying balance sheets contain certain recorded Company assets (principally
inventory, accounts receivable, cash and property, plant and equipment
comprising 28.7% of total assets) in two foreign countries - Sweden and
Australia. Although these countries are considered economically stable and the
Company has experienced no notable burden from foreign exchange transactions,
export duties, or government regulations, it is always possible that
unanticipated events in foreign countries could disrupt the Company’s
operations.
Foreign
Currency Translation
The
Company has adopted Financial Accounting Standard No. 52. Monetary assets
and liabilities denominated in foreign currencies are translated into United
States dollars at rates of exchange in effect at the balance sheet date. Gains
or losses are included in income for the year, except gains or losses relating
to long-term debt, which are deferred and amortized over the remaining term of
the debt. Non-monetary assets, liabilities and items recorded in income
arising from transactions denominated in foreign currencies are translated at
rates of exchange in effect at the date of the transaction.
The
Company’s operating subsidiaries in Sweden and Australia use their local
currency as their functional currency (Swedish Kroner and Australian Dollar).
The revenue and expenses of such subsidiaries have been translated into U.S.
dollars at average exchange rates prevailing during the period. Assets and
liabilities have been translated at the rates of exchange on the balance-sheet
date. Cumulative translation adjustments associated with net assets or
liabilities are recognized within other comprehensive income and reported as a
separate component in the statement of changes in stockholders’
equity. The resulting translation gain and loss adjustments are
recorded directly as a separate component of stockholders’ equity, Foreign
currency translation adjustments (non-owner equity) resulted in (loss)/gains of
$(504,968), $62,480 and $14,381 in 2008, 2007, and 2006, respectively. 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.
Business
Enterprise
Segments
Pursuant
to Statement of Financial Accounting Standards No. 131, "
Disclosures about Segments of an
Enterprise and Related Information
," (“SFAS No. 131”), the Company
operates in one reportable operating segment. SFAS No. 131 also established
standards for related disclosures about products and services and geographic
areas. Operating segments are defined as components of an enterprise about which
separate financial information is available, evaluated regularly by the chief
operating decision makers, or a decision making group, in deciding how to
allocate resources and in assessing performance. The Company does disclose
revenues and long-lived assets in different geographic locations (see
Note16).
Recent
Accounting Pronouncements
In
February 2007, FASB issued SFAS No. 159,
“
The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115
”
(SFAS No. 159). SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective
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 Company's long-term measurement
objectives for accounting for financial instruments. SFAS No. 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007, although earlier adoption is permitted.
The Company did not elect
to measure any additional assets or liabilities at fair value that are not
already measured at fair value under existing standards.
Management has
determined that adopting this statement had no effect on the Company’s financial
condition or results of operation.
In December 2007, the
FASB issued SFAS No. 141(R), “
Business Combinations
, “(SFAS
No. 141(R)), and SFAS No. 160, “
Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB
No. 51
,” (SFAS
No. 160), which introduce significant changes in the accounting for and
reporting of business acquisitions and noncontrolling interests in a subsidiary.
SFAS No. 141(R) is to be applied prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. SFAS No. 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption of both
statements is prohibited. The adoption of SFAS No. 141(R) and SFAS
No. 160 will only have an impact on our financial statements if we are
involved in a business combination that occurs after January 1, 2009.
In
February 2008, the FASB issued FSP FAS 157-2, ‘‘
Effective Date of FASB Statement
No. 157
,” which delays for one year the effective date of
SFAS 157 for most nonfinancial assets and nonfinancial liabilities.
Nonfinancial instruments affected by this deferral include assets and
liabilities such as reporting units measured at fair value in a goodwill
impairment test and nonfinancial assets acquired and liabilities assumed in a
business combination. Effective January 1, 2008, the
Company adopted SFAS 157 for financial assets and financial
liabilities recognized at fair value on a recurring basis. The partial adoption
of SFAS 157 for these items did not have a material impact on our financial
position, results of operations and cash flows. Management is currently
assessing the impact of SFAS No. 157-2 on the Company’s consolidated statement
of financial condition and results of operations.
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. The Company has not determined the impact, if any SFAS No. 161 will
have on its consolidated statement of financial condition and results of
operations.
In May
2008, FASB issued SFAS No. 162, "
The Hierarchy of Generally Accepted
Accounting
Principles
", (SFAS No.
162). SFAS No. 162 identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of
financial statements that are presented in conformity with generally accepted
accounting principles in the United States. SFAS No. 162 is effective
60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "
The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.
" The Company
does not expect SFAS No. 162 to have a material impact on its
consolidated statement of
financial condition and results of operations
.
In May
2008, the Emerging Issues Task Force of the FASB issued EITF 03-6-1, “
Determining Whether Instruments
Granted in Share-Based Payment Transaction Are Participating
Securities
.
”
This EITF requires unvested share-based payments that entitle employees to
receive nonrefundable dividends to also be considered participating securities,
as defined in EITF 03-6. The Company is currently evaluating the impact, if
any, EITF 03-6-1 will have on its financial position, results of operations
or cash flows.
In
October 2008, the FASB issued FASB Staff Position, or FSP, SFAS 157-3,
“
Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active
.” FSP
SFAS 157-3 clarifies the application of SFAS No. 157 in a market that
is not active and addresses application issues such as the use of internal
assumptions when relevant observable data does not exist, the use of observable
market information when the market is not active and the use of market quotes
when assessing the relevance of observable and unobservable data. FSP
SFAS 157-3 is effective for all periods presented in accordance with SFAS
No. 157. The guidance in FSP SFAS 157-3 is effective immediately and
did not have any significant impact on the Company upon adoption.
The FASB
recently issued a Staff Position (FSP) No. FSP 142-3, “
Determination of the Useful Life of
Intangible Assets
” (FSP 142-3) which amends the factors a company
should consider when developing renewal assumptions used to determine the useful
life of an intangible asset under SFAS No. 142, “
Goodwill and Other Intangible
Assets
” (SFAS 142). Paragraph 11 of SFAS 142 requires
companies to consider whether renewal can be completed without substantial cost
or material modification of the existing terms and conditions associated with
the asset. FSP 142-3 replaces the previous useful life criteria with a new
requirement — that an entity consider its own historical experience in
renewing similar arrangements. If historical experience does not exist then the
company would consider market participant assumptions regarding renewal
including highest and best use of the asset by a market participant, and
adjustments for other entity-specific factors included in paragraph 11 of
SFAS 142. The Company is currently evaluating the impact, if any,
SFAS 142-3 will have on its financial position, results of operations or
cash flows.
3. Merger
with Netintact
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. The results of operations for Netintact AB and
Netintact PTY 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 stockholders of
Netintact AB, 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, 2008, 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 obtained an independent third-party valuation of the intangible assets
contained therein. The independent third-party valuation 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, the Company 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 Statement of Financial Accounting
Standard No. 109 paragraph 30. The resulting effect to the Statements
of Operations and Cash Flows 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, the Company will engage a tax professional prior to
completing fair market valuation adjustments associated with future purchase
business combinations.
4. Liquidity
The
Company’s operating results will likely fluctuate from fiscal quarter to fiscal
quarter, and are difficult to predict. Since its inception, the
Company has relied on private financings to fund its development and
initial market penetration. The Company may require additional
debt or equity financing until such time as its 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.
The
Company has sustained recurring losses and negative cash flows from operations.
Over the past year, the Company’s growth has been funded through a combination
of private equity and lease financing. As of December 31, 2008, the Company had
approximately $1.7 million of unrestricted cash, $5.3 of working capital, and
$51.7 million in accumulated deficit. Additionally, the Company has incurred
losses since its inception as infrastructure and product development costs were
incurred in advance of obtaining customers.
Management
has taken several actions to ensure that the Company will continue as a going
concern through December 31, 2009, including headcount reductions and reductions
in discretionary expenditures. During 2008, the Company executed an agreement
with a group of private investors whereby the Company received approximately
$5.8 million by selling shares of its common stock and it received $2.5 million
from the exercise of warrants. In March 2009, the Company obtained a $3 million
secured line of credit from a bank. The Company believes that, as a result of
this, it currently has sufficient cash and financing commitments to meet its
funding requirements over the next year. However, the Company has experienced
and continues to experience negative operating margins and negative cash flows
from operations, as well as an ongoing requirement for substantial additional
capital investment. The Company expects that it will need to raise substantial
additional capital to accomplish all of its business objectives over the next
several years. In addition, the Company may wish to selectively pursue possible
acquisitions of businesses, technologies, content, or products complementary to
those of the Company in the future in order to expand its presence in the
marketplace and achieve operating efficiencies. The Company expects to seek to
obtain additional funding through a bank credit facility or private equity.
There can be no assurance as to the availability or terms upon which such
financing and capital 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 a useful life of approximately 3
years.
Intangible
assets consist of the following at December 31, 2008:
|
|
|
Gross
Intangible Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
Intangible Assets
|
|
|
Netintact
customer base
|
|
$
|
4,317,000
|
|
|
$
|
(3,352,595
|
)
|
|
$
|
964,405
|
|
6. Other
Balance Sheet Details
|
Accounts
Receivable
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
5,637,505
|
|
|
$
|
2,060,334
|
|
|
Less:
Allowance for doubtful accounts
|
|
|
(182,760
|
)
|
|
|
(241,062
|
)
|
|
Accounts
receivable, net
|
|
$
|
5,454,745
|
|
|
$
|
1,819,272
|
|
|
Inventory
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Finished
goods
|
|
$
|
3,247,586
|
|
|
$
|
1,062,398
|
|
|
Work
in process
|
|
|
74,892
|
|
|
|
21,287
|
|
|
Raw
Materials
|
|
|
221,755
|
|
|
|
292,825
|
|
|
Reserve
for obsolescence
|
|
|
(98,431
|
)
|
|
|
(56,488
|
)
|
|
Inventories,
net
|
|
$
|
3,445,802
|
|
|
$
|
1,320,022
|
|
|
Property and equipment
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$
|
1,281,806
|
|
|
$
|
736,439
|
|
|
Office
furniture and equipment
|
|
|
155,348
|
|
|
|
90,672
|
|
|
Computer
equipment
|
|
|
275,123
|
|
|
|
256,850
|
|
|
Software
|
|
|
6,853,705
|
|
|
|
6,856,063
|
|
|
Auto
|
|
|
62,194
|
|
|
|
75,877
|
|
|
Accumulated
depreciation
|
|
|
(6,055,131
|
)
|
|
|
(3,539,677
|
)
|
|
Property
and equipment, net
|
|
$
|
2,573,045
|
|
|
$
|
4,476,224
|
|
Depreciation
expense for the years ended December 31, 2008, 2007 and 2006 was
$2,580,950, $2,452,259 and $797,686, respectively.
|
Purchased Intangibles
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Netintact
customer base
|
|
$
|
4,317,000
|
|
|
$
|
4,317,000
|
|
|
Accumulated
amortization
|
|
|
(3,352,595
|
)
|
|
|
(1,913,595
|
)
|
|
Total
purchased intangibles
|
|
$
|
964,405
|
|
|
$
|
2,403,405
|
|
|
Accrued liabilities
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Payroll
and related
|
|
$
|
770,655
|
|
|
$
|
620,191
|
|
|
Audit
and legal services
|
|
|
253,580
|
|
|
|
196,000
|
|
|
Sales,
VAT, income taxes
|
|
|
78,599
|
|
|
|
140,175
|
|
|
Sales
commissions
|
|
|
547,867
|
|
|
|
299,926
|
|
|
Warranty
|
|
|
129,763
|
|
|
|
64,864
|
|
|
Inventory
receipts not invoiced
|
|
|
-
|
|
|
|
211,606
|
|
|
Other
|
|
|
60,978
|
|
|
|
40,213
|
|
|
Total
accrued liabilities
|
|
$
|
1,841,442
|
|
|
$
|
1,572,975
|
|
7. Commitments
and Contingencies
Leases
The
Company’s corporate headquarters are located in Los Gatos,
California. On November 14, 2007 the Company extended its then
current lease for 5 years. As a result of the extension, the Company
has a 73-month lease for 11,772 square feet of space that started on June
1, 2005 with monthly rent payments that range from $12,949 per month for the
first year to $19,424 during the last year. The Swedish subsidiary
moved into a new office space located in Varberg, Sweden. The
lease for these 689 square meters of space commenced on April 1, 2008 and the
rent payments are approximately $10,025 monthly for lease-term of 60
months. The Swedish subsidiary also has office space in Stockholm and
Malmo. The rent payments for the Stockholm office are
approximately $2,184 monthly and 27 months remained on the lease at December 31,
2008. The rent payments for the Malmo office are approximately $1,041
monthly and 24 months remained on the lease at December 31, 2008. The
Company also leases 55 square meters in Melbourne,
Australia. The Melbourne lease is for 12 months starting July 1, 2008
with monthly rent payments of $1,592.
As of
December 31, 2008, Procera also had commitments for leased equipment from
various sources under non-cancelable capital leases with various expiration
dates through 2014 as shown below. Interest rates on such commitments
range from 9% to 10%. The gross amount capitalized is $146,350 and
the accumulated depreciation on this equipment was $31,221 at December 31,
2008.
As of
December 31, 2008, future minimum lease payments that come due in the current
and following fiscal years ending December 31
st
are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
|
Operating
Leases
|
|
|
Years
ending December 31,
|
|
|
|
|
|
|
|
2009
|
|
$
|
11,543
|
|
|
|
394,293
|
|
|
2010
|
|
|
9,556
|
|
|
|
388,543
|
|
|
2011
|
|
|
9,556
|
|
|
|
263,041
|
|
|
2012
|
|
|
9,556
|
|
|
|
120,294
|
|
|
2013
|
|
|
9,556
|
|
|
|
40,098
|
|
|
and
thereafter
|
|
|
6,384
|
|
|
|
-
|
|
|
Total
minimum lease payments
|
|
$
|
56,151
|
|
|
$
|
1,206,269
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
amount representing interest
|
|
|
5,024
|
|
|
|
|
|
|
Present
value of minimum lease payments
|
|
|
51,127
|
|
|
|
|
|
|
Less:
current portion
|
|
|
11,543
|
|
|
|
|
|
|
Obligations
under capital lease, net of current portion
|
|
$
|
39,584
|
|
|
|
|
|
8. Notes
Payable
In August
2008, the Company received loan proceeds totaling $550,000 from an individual
and a financial institution and issued promissory notes in that amount (the
“Notes”). The Notes bear interest at a rate of 10% per annum, which interest is
due and payable each calendar quarter. The Notes are payable as
follows: $250,000 due February 2009, which was paid in full, and $300,000 due
August 2009. As of December 31, 2008, $550,000 of these Notes were
due in 2009 and classified as Notes payable – current portion and $14,014 of
interest payable related to the Notes is due and is classified as Accounts
payable in our Balance Sheets.
9. Guarantees
Indemnification
Agreements
The
Company enters into standard indemnification arrangements with certain of our
business partners and customers in the 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 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 the Company’s 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,
2008 and 2007:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Warranty
accrual, beginning of period
|
|
$
|
64,864
|
|
|
$
|
20,950
|
|
|
Charged
to cost of sales
|
|
|
64,899
|
|
|
|
54,128
|
|
|
Warranty
expenditures
|
|
|
---
|
|
|
|
(10,214
|
)
|
|
Warranty
accrual, end of period
|
|
$
|
129,763
|
|
|
$
|
64,864
|
|
10. Stockholders’
Equity
Preferred
Stock
The
Company is authorized to issue up to 15,000,000 shares of Preferred Stock, par
value $0.001 per share. As of December 31, 2008 and 2007, no shares of preferred
stock were issued and outstanding.
Common
Stock Transactions
The
Company is authorized to issue up to 130,000,000 shares of common stock, par
value $0.001 per share. As of December 31, 2008 there were 84,498,491 shares of
Common Stock issued and outstanding.
In
January 2006, the Company issued 825,000 shares of common stock to Liviakis
Financial Communications with a fair value of $548,626 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 were 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 of all the outstanding shares of
Netintact AB (a Swedish corporation) the Company agreed to exchange
15,713,513 shares of its common stock and put an additional 1,826,000 shares of
common stock held in escrow.
On
September 29, 2006, the Company agreed to exchange 684,000 shares of its common
stock and put 76,000 shares of common stock in escrow, 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.
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.
During
2006, the Company issued 246,250 shares of common stock upon the exercise of
warrants.
During
2007, the company issued 1,323,410 shares of common stock upon the exercise of
stock options and warrants.
In June
2007, the company issued 247,500 shares of common stock to Liviakis Financial
Communications with a fair value of $611,325 as consideration for 12 months of
investor relations services.
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.
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.
In
October 2007, the company issued 9,741 shares of common stock with a fair value
of $30,000 as consideration for services for the search of a VP in
Australia.
During
2008, the company issued 2,691,648 shares of common stock upon the exercise of
stock options and warrants.
In August
2008, the company issued 490,000 shares of common stock to Liviakis Financial
Communications with a fair value of $686,000 as consideration for 12 months of
investor relations services.
On
September 16, 2008, the Company closed a private placement sale of 5,244,666
shares of its common stock at prices of $1.10 and $1.17 per share to 66
institutional and other accredited investors and received cash proceeds of
$5,828,549, net of financing expenses of $18,900. In addition,
placement agent warrants to purchase 17,759 shares (fair value of $7,184) were
issued to the placement agents as compensation for their
services.
Warrants
At
December 31, 2008, warrants to purchase 4,302,414 shares of common stock are
outstanding. The following table sets forth the key terms of these
outstanding warrants.
|
Date
of Grant
|
|
Underlying
Security
|
|
Shares
Outstanding
|
|
Vesting
of Grant
|
|
Expiration
Date
|
|
Weighted
Average Exercise Price
|
|
Reason
for Grant of Warrants
|
|
Dec-02
|
|
Common
Stock
|
|
151,268
|
|
Milestones
|
|
Jun-09
|
|
$
|
0.01
|
|
Customer
Base
|
|
Feb-05
|
|
Common
Stock
|
|
100,000
|
(1)
|
Performance
|
|
Feb-10
|
|
$
|
1.78
|
|
Sales
services
|
|
Apr-05
|
|
Common
Stock
|
|
10,000
|
(2)
|
Immediate
|
|
Jun-09
|
|
$
|
1.86
|
|
Raising
capital
|
|
Jun-05
|
|
Common
Stock
|
|
75,000
|
(3)
|
Milestones
|
|
Jun-09
|
|
$
|
1.42
|
|
Investment
|
|
Feb-06
|
|
Common
Stock
|
|
1,038,875
|
(4)
|
Immediate
|
|
Feb-11
|
|
$
|
0.40
|
|
Raising
capital
|
|
Aug-06
|
|
Common
Stock
|
|
360,000
|
(5)
|
Immediate
|
|
Aug-09
|
|
$
|
1.40
|
|
Investor
relations
|
|
Aug-06
|
|
Common
Stock
|
|
569,107
|
(6)
|
Immediate
|
|
Aug-11
|
|
$
|
0.60
|
|
Acquisition
of Company
|
|
Nov-06
|
|
Common
Stock
|
|
1,380,000
|
(7)
|
Immediate
|
|
Nov-11
|
|
$
|
1.50
|
|
Raising
capital
|
|
Jan-07
|
|
Common
Stock
|
|
75,417
|
(8)
|
Immediate
|
|
Jan-10
|
|
$
|
2.14
|
|
Sales
services
|
|
Jul-07
|
|
Common
Stock
|
|
199,988
|
(9)
|
Immediate
|
|
Jul-12
|
|
$
|
2.00
|
|
Raising
capital
|
|
Jul-07
|
|
Common
Stock
|
|
70,000
|
(10)
|
Immediate
|
|
Jul-10
|
|
$
|
1.12
|
|
Raising
capital
|
|
May-08
|
|
Common
Stock
|
|
50,000
|
(11)
|
Immediate
|
|
Jun-09
|
|
$
|
0.83
|
|
Sales
services
|
|
May-08
|
|
Common
Stock
|
|
40,000
|
(12)
|
Immediate
|
|
Jun-09
|
|
$
|
2.00
|
|
Sales
services
|
|
Jun-08
|
|
Common
Stock
|
|
100,000
|
(13)
|
Immediate
|
|
Sep-09
|
|
$
|
0.49
|
|
Engineering services
|
|
Jun-08
|
|
Common
Stock
|
|
65,000
|
(14)
|
Immediate
|
|
Aug-09
|
|
$
|
0.49
|
|
Engineering services
|
|
Sep-08
|
|
Common
Stock
|
|
17,759
|
(15)
|
Immediate
|
|
Sep-11
|
|
$
|
1.75
|
|
Raising
capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,302,414
|
|
|
|
|
|
|
|
|
|
(Footnotes
correspond to the warrant table above)
On
February 23, 2005, the Company issued warrants to purchase 100,000 shares of
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 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 June
14, 2005 the Company issued warrants to purchase 75,000 shares of common stock
with an exercise price of $1.42 per share and a fair value of $71,801 to a
director of the Company as partial compensation for successfully directing an
equity raising event. (3)
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.
As of December 31, 2008, 1,038,875 warrants remain outstanding.
(4)
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. As of December 31, 2008, 360,000 warrants remain
outstanding. (5)
In
conjunction with the its agreement to acquire all of the outstanding shares of
Netintact AB, 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. As of December 31, 2008, 569,107 warrants remain
outstanding. (6)
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 $1.50 per share were issued to
private placement agents as compensation for their services in completing the
private placement. (7)
On
January 24, 2007 the Company 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. As of December 31, 2008, 75,417 warrants remain
outstanding. (8)
In
conjunction with the closing of a private placement sale of common stock on June
17, 2007, the Company 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 stockholders paid.
(9)
On July
31, 2007, the Company issued 70,000 warrants to purchase common stock at
$1.12 and a fair value of $132,328 in exchange for public relations services
performed. (10)
On May
13, 2008, the Company issued 50,000 warrants to purchase common stock at
$0.83 and a fair value of $56,524 in exchange for public relations services
performed. (11)
On May
13, 2008, the Company issued 40,000 warrants to purchase common stock at
$2.00 and a fair value of $25,743 in exchange for public relations services
performed. (12)
On June
30, 2008, the Company issued 100,000 warrants to purchase common stock at
$0.49 and a fair value of $92,557 in exchange for engineering services
performed. (13)
On June
30, 2008, the Company issued 65,000 warrants to purchase common stock at
$0.49 and a fair value of $59,698 in exchange for engineering services
performed. (14)
In
conjunction with the closing of a private placement sale of common stock on
September 19, 2008, the Company issued 17,759 warrants to purchase common stock
with a fair value of $7,184 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 $1.75, equivalent to the price stockholders
paid. (15)
The
exhibit below defines the outstanding warrants as of December 31, 2008 by
exercise price and the average contractual life before expiration.
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Number
Exercisable
|
|
|
$
|
0.01
|
|
|
|
151,268
|
|
|
|
0.47
|
|
|
|
151,268
|
|
|
|
0.40
|
|
|
|
1,038,875
|
|
|
|
2.16
|
|
|
|
1,038,875
|
|
|
|
0.49
|
|
|
|
165,000
|
|
|
|
0.68
|
|
|
|
165,000
|
|
|
|
0.60
|
|
|
|
569,107
|
|
|
|
2.63
|
|
|
|
569,107
|
|
|
|
0.75
|
|
|
|
50,000
|
|
|
|
0.50
|
|
|
|
50,000
|
|
|
|
1.12
|
|
|
|
70,000
|
|
|
|
1.58
|
|
|
|
70,000
|
|
|
|
1.40
|
|
|
|
360,000
|
|
|
|
0.59
|
|
|
|
360,000
|
|
|
|
1.42
|
|
|
|
75,000
|
|
|
|
0.45
|
|
|
|
75,000
|
|
|
|
1.50
|
|
|
|
1,380,000
|
|
|
|
2.92
|
|
|
|
1,380,000
|
|
|
|
1.75
|
|
|
|
17,759
|
|
|
|
2.71
|
|
|
|
17,759
|
|
|
|
1.78
|
|
|
|
100,000
|
|
|
|
1.20
|
|
|
|
--
|
|
|
|
1.86
|
|
|
|
10,000
|
|
|
|
0.28
|
|
|
|
10,000
|
|
|
|
2.00
|
|
|
|
239,988
|
|
|
|
3.04
|
|
|
|
239,988
|
|
|
|
2.14
|
|
|
|
75,417
|
|
|
|
1.07
|
|
|
|
75,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.05
|
|
|
|
4,302,414
|
|
|
|
2.16
|
|
|
|
4,202,414
|
|
11. Stock-Based
Compensation
In August
2003, October 2004 and October 2007, the Company’s board of directors and
stockholders adopted the 2003 Stock Option Plan, 2004 Stock Option Plan and
2007 Equity Incentive Plan, respectively (collectively referred to as the
“Plan”). The number of shares available for awards under the plans is as
follows: 2003 Plan - 2,500,000; 2004 Plan - 5,000,000; and 2007 Plan –
5,000,000. The following description of our Plan is a summary and
qualified in entirety by the text of the Plan. The purpose of the Plan is
to enhance our profitability and stockholder value by enabling the Company to
offer stock-based incentives to employees, directors and consultants. The
Plan authorizes the grant of options and other equity incentives to purchase
shares of the Company’s common stock to employees, directors and consultants.
Under the Plan, the Company 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 awards under the Plan is
12,500,000. As of December 31, 2008, 3,558,447 shares were available
for future grants. The options under the Plan vest over varying lengths of time
pursuant to various option agreements that the Company has 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 the Company’s 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 the Company and the
respective option holders. Awards under the Plan may not be made after the
tenth anniversary of the date of adoption of each respective stock option plan
but awards granted before that date may extend beyond that
date.
Optionee’s
have no rights as stockholders with respect to shares subject to the option
prior 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.
During
2008, nine employees exercised their rights to vested shares and purchased
842,799 shares of common stock as authorized by the Plan. Share
prices on exercised options during 2008 ranged from $0.45 to $1.19 per
share.
|
|
|
Shares Available for
Grant
|
|
|
Number of Options
Outstanding
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Remaining Contractual Life (in
years)
|
|
|
Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
5,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Reclassified
|
|
|
(300,000
|
)
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(5,098,418
|
)
|
|
|
5,098,418
|
|
|
|
1.29
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
(842,799
|
)
|
|
|
1.37
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
3,242,508
|
|
|
|
(3,242,508
|
)
|
|
|
1.62
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
3,558,447
|
|
|
|
7,988,274
|
|
|
$
|
1.25
|
|
|
|
8.19
|
|
|
$
|
563,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested and expected to vest at December 31, 2008
|
|
|
|
|
|
|
7,450,718
|
|
|
$
|
1.24
|
|
|
|
8.09
|
|
|
$
|
556,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested and exercisable at December 31, 2008
|
|
|
|
|
|
|
3,462,430
|
|
|
$
|
1.16
|
|
|
|
7.29
|
|
|
$
|
473,841
|
|
The
weighted average grant date fair value of options granted during the fiscal year
ended December 31, 2008, 2007 and 2006 was $1.29 and $1.92 and $0.74,
respectively. The total fair value of shares vested during the year ended
December 31, 2008, 2007 and 2006 was $1,175,585, $1,787,898 and $1,374,836,
respectively. The total fair value of shares forfeited and cancelled for the
fiscal year ended December 31, 2008, 2007 and 2006 was $5,595,758, $563,932 and
$3,831,217 respectively.
The
number of unvested shares as of December 31, 2008 and 2007 was 4,345,845 and
3,577,016, respectively and the weighted average grant date fair value of
unvested shares as of December 31, 2008 and 2007 was $1.36 and $1.30,
respectively. At December 31, 2008, the total compensation cost of $3,744,234
for unvested shares is expected to be recognized over the next 3.1 years on a
weighted average basis.
The
options outstanding and exercisable at December 31, 2008 were in the following
exercise price ranges:
|
|
|
|
Options
Outstanding
|
|
|
Options
Vested and Exercisable
|
|
|
|
|
|
At
December
31, 2008
|
|
|
At
December
31, 2008
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
Outstanding
|
|
|
Life
(Years)
|
|
|
Price
|
|
|
Outstanding
|
|
|
Life
(Years)
|
|
|
Price
|
|
|
$
|
0.50
- $0.69
|
|
|
|
1,501,353
|
|
|
|
5.87
|
|
|
$
|
0.48
|
|
|
|
1,256,350
|
|
|
|
7.02
|
|
|
$
|
0.57
|
|
|
$
|
0.70
- $1.19
|
|
|
|
1,462,439
|
|
|
|
6.34
|
|
|
$
|
0.89
|
|
|
|
1,257,439
|
|
|
|
6.83
|
|
|
$
|
0.95
|
|
|
$
|
1.20
- $3.35
|
|
|
|
5,024,482
|
|
|
|
1.69
|
|
|
$
|
0.44
|
|
|
|
1,128,641
|
|
|
|
7.51
|
|
|
$
|
1.95
|
|
|
|
|
|
|
|
7,988,274
|
|
|
|
3.33
|
|
|
$
|
0.53
|
|
|
|
3,462,430
|
|
|
|
7.29
|
|
|
$
|
1.16
|
|
The
Company’s equity incentive plans provide for the granting of options to purchase
shares of common stock to eligible employees (including officers) as well as to
its non-employee directors. Options may be issued with the exercise prices equal
to the fair market value of the common stock on the date of grant or at a price
determined by a committee of the Company’s board of directors. Stock options
vest and are exercisable over periods determined by the committee, generally
three to five years, and expire no more than 10 years after the
grant.
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, 2008, 2007 and 2006 and the allocation
to expense under SFAS No. 123(R) was as follows:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
$
|
51,069
|
|
|
$
|
23,310
|
|
|
$
|
16,274
|
|
|
Research
and development
|
|
|
251,543
|
|
|
|
473,691
|
|
|
|
771,585
|
|
|
Selling,
general and administrative
|
|
|
1,395,290
|
|
|
|
1,475,274
|
|
|
|
380,752
|
|
|
Stock-based
compensation before income taxes
|
|
|
1,697,902
|
|
|
|
1,972,275
|
|
|
|
1,168,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
effect on stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
stock-based compensation expenses after income tax and net effect on net
loss
|
|
$
|
1,697,902
|
|
|
$
|
1,972,275
|
|
|
$
|
1,168,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
on Basic and diluted net loss per share
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
The
amount of stock-based compensation capitalized in inventory has been
immaterial.
Valuation
Assumptions
The fair
value of each option award is estimated on the grant date using a Black-Scholes
option-pricing model that uses the weighted average assumptions noted in the
following table. The Company calculated the estimated life of stock options
granted using a "simplified" method, which is based on the average of the
vesting term and the term of the option, as a result of guidance from the SEC,
as contained in Staff Accounting Bulletin (SAB) No. 107 and
subsequently SAB No. 110 permitting the initial and continued use of this
method.
The fair
value of each option grant is estimated on the date of grant while the expense
is recognized over the employee requisite service period using the straight-line
attribution approach.
Expected
volatilities are estimated using the historical share price performance over the
expected term of the option. The Company determined that for 2008, 2007 and
2006, the historical volatility was more indicative of expected future stock
price volatility. The risk-free interest rate for the period matching the
expected term of the option is based on the U.S. Treasury yield curve in effect
at the time of the grant. The Black-Scholes model also requires a single
expected dividend yield as an input. The Company does not anticipate paying any
dividends in the near future and has never paid cash dividends.
The
following table sets forth information about the weighted-average assumptions
used for options granted in the years ended December 31, 2008, 2007 and
2006:
|
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected
term (in years)
|
|
|
4.08
- 4.44
|
yrs
|
|
|
5.25
- 7.00
|
yrs
|
|
|
3.00
- 4.00
|
yrs
|
|
Expected
volatility
|
|
|
98
- 99
|
%
|
|
|
93
- 102
|
%
|
|
|
101
- 105
|
%
|
|
Risk-free
interest rate
|
|
|
1.68
- 2.88
|
%
|
|
|
3.59
- 5.02
|
%
|
|
|
4.68
- 5.06
|
%
|
|
Dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The
dividend yield of zero is based on the fact that the Company has never paid cash
dividends and has no present intention to pay cash dividends. 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 2008 was calculated using a weighted average of the holding periods
for all awards (i.e., the average interval between the grant and exercise or
post-vesting cancellation dates) adjusted as appropriate.
12. Related
party transactions
On
September 16, 2008, the Company closed a private placement sale of 5,244,666
shares of its common stock prices of $1.10 and
$1.17. Mr. Thomas Saponas, a director of the Company
invested $1 million in this private placement at a price of $1.17 per
share.
The
Company had no related party transactions in the fiscal year ending December 31,
2008, 2007 and 2006.
13. Tax
The
components of income and loss before income taxes are as follows:
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Domestic
|
|
$
|
(12,830,273
|
)
|
|
$
|
(11,539,066
|
)
|
|
$
|
(7,729,336
|
)
|
|
Foreign
|
|
|
(2,114,101
|
)
|
|
|
(2,014,819
|
)
|
|
|
(25,716
|
)
|
|
Loss
before income taxes
|
|
$
|
(14,944,374
|
)
|
|
$
|
(13,553,885
|
)
|
|
$
|
(7,755,052
|
)
|
The
Company’s provision for income taxes consists of the following:
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current
income taxes
|
|
|
|
|
|
|
|
|
|
|
Federal/state
|
|
$
|
(869
|
)
|
|
$
|
5,255
|
|
|
$
|
-
|
|
|
Foreign
|
|
|
-
|
|
|
|
7,985
|
|
|
|
46,679
|
|
|
Total
current income taxes
|
|
|
(869
|
)
|
|
|
13,240
|
|
|
|
46,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal/state
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Foreign
|
|
|
(1,041,400
|
)
|
|
|
(1,085,745
|
)
|
|
|
(298,252
|
)
|
|
Total
deferred income taxes
|
|
|
(1,041,400
|
)
|
|
|
(1,085,745
|
)
|
|
|
(298,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$
|
(1,042,269
|
)
|
|
$
|
(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, 2008
|
|
|
December
31, 2007
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Federal
and state net operating losses
|
|
$
|
12,157,023
|
|
|
$
|
9,635,607
|
|
|
Research
credits
|
|
|
682,280
|
|
|
|
560,068
|
|
|
Non-deductible
accrued expenses
|
|
|
1,751,356
|
|
|
|
1,507,414
|
|
|
Valuation
allowance
|
|
|
(14,590,659
|
)
|
|
|
(11,703,089
|
)
|
|
Total
deferred tax assets
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liability:
|
|
|
|
|
|
|
|
|
|
Foreign
intangibles
|
|
|
(695,239
|
)
|
|
|
(1,734,854
|
|
|
Net
deferred tax liabilities
|
|
$
|
(695,239
|
)
|
|
$
|
(1,734,854
|
|
Reconciliation
between the tax provision computed at the Federal statutory income tax rate of
35% and the Company’s actual effective income tax provision is as
follows:
|
|
|
Fiscal
Year Ended
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Computed
at statutory rate
|
|
$
|
(5,081,088
|
)
|
|
$
|
(4,608,321
|
)
|
|
$
|
(2,626,910
|
)
|
|
Research
& development credits
|
|
|
(122,213
|
)
|
|
|
(72,543
|
)
|
|
|
(42,451
|
)
|
|
State
income taxes
|
|
|
(258,206
|
)
|
|
|
(272,498
|
)
|
|
|
(288,261
|
)
|
|
Stock
compensation – ISO
|
|
|
684,894
|
|
|
|
434,917
|
|
|
|
393,175
|
|
|
Loss
not benefited
|
|
|
3,724,634
|
|
|
|
3,429,234
|
|
|
|
2,177,312
|
|
|
Foreign
tax
|
|
|
–
|
|
|
|
7,985
|
|
|
|
46,129
|
|
|
Other
|
|
|
9,710
|
|
|
|
8,721
|
|
|
|
4,531
|
|
|
Total
|
|
$
|
(1,042,269
|
)
|
|
$
|
(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
$2,933,106 and by $2,384,581 for the fiscal years ended December 31, 2008 and
2007, respectively.
As of
December 31, 2008, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $31,815,000 which expire beginning after
the year 2020. The Company also has California net operating loss carryforwards
of approximately $22,983,235 which expire beginning after the year 2012. The
Company also has federal and California research and development tax credits of
$326,415 and $355,865. 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:
|
|
|
2008
|
|
|
Balance
at January 1, 2008
|
|
$
|
194,775
|
|
|
Increase
related to current year tax position
|
|
|
–
|
|
|
Increase
related to tax positions of prior years
|
|
|
–
|
|
|
Balance
at December 31, 2008
|
|
$
|
194,775
|
|
A total
of $194,190 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, 2008, 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 statute of limitations prior to December 31,
2008.
14. 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,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator
– Basic and diluted
|
|
$
|
(13,902,105
|
)
|
|
$
|
(12,481,380
|
)
|
|
$
|
(7,503,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
– basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
79,144,479
|
|
|
|
71,422,184
|
|
|
|
50,443,688
|
|
|
Weighted
average unvested common shares subject to repurchase
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
79,144,479
|
|
|
|
71,722,184
|
|
|
|
50,443,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share – basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock subscriptions
|
|
|
—
|
|
|
|
—
|
|
|
|
166,250
|
|
|
Common
stock reserved for incentives associated with the acquisition of
Netintact
|
|
|
—
|
|
|
|
—
|
|
|
|
5,462,758
|
|
|
Options
|
|
|
7,988,274
|
|
|
|
6,675,166
|
|
|
|
5,483,784
|
|
|
Warrants
|
|
|
4,302,414
|
|
|
|
7,714,407
|
|
|
|
8,901,344
|
|
|
Rights
to purchase common stock
|
|
|
—
|
|
|
|
300,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
antidilutive securities
|
|
|
12,290,688
|
|
|
|
14,689,573
|
|
|
|
20,014,136
|
|
15. Quarterly
results of Operations (unaudited)
Following is a summary of the quarterly results of operations for the years
ended December 31, 2008 and 2007:
|
|
|
March
31
|
|
|
June
30
|
|
|
Sept.
30
|
|
|
Dec.
31
|
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
|
All
data in thousands except loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,716
|
|
|
$
|
2,615
|
|
|
$
|
2,690
|
|
|
$
|
4,504
|
|
|
Cost
of Goods Sold
|
|
|
1,231
|
|
|
|
1,461
|
|
|
|
1,915
|
|
|
|
2,703
|
|
|
Product
Margin
|
|
|
485
|
|
|
|
1,154
|
|
|
|
775
|
|
|
|
1,801
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
662
|
|
|
|
1,026
|
|
|
|
809
|
|
|
|
841
|
|
|
Sales
and marketing
|
|
|
2,024
|
|
|
|
2,345
|
|
|
|
2,094
|
|
|
|
2,400
|
|
|
General
and administrative
|
|
|
1,525
|
|
|
|
1,971
|
|
|
|
1,897
|
|
|
|
1,604
|
|
|
Total
expenses
|
|
|
4,211
|
|
|
|
5,342
|
|
|
|
4,800
|
|
|
|
4,845
|
|
|
Loss
from operations
|
|
|
(3,726
|
)
|
|
|
(4,188
|
)
|
|
|
(4,025
|
)
|
|
|
(3,044
|
)
|
|
Interest
and other income (expense)
|
|
|
3
|
|
|
|
(12
|
)
|
|
|
12
|
|
|
|
35
|
|
|
Loss
before Tax
|
|
|
(3,723
|
)
|
|
|
(4,200
|
)
|
|
|
(4,013
|
)
|
|
|
(3,009
|
)
|
|
(Provision) benefit
from tax
|
|
|
240
|
|
|
|
283
|
|
|
|
260
|
|
|
|
260
|
|
|
Net
loss
|
|
$
|
(3,483
|
)
|
|
$
|
(3,917
|
)
|
|
$
|
(3,753
|
)
|
|
$
|
(2,749
|
)
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
Shares
used in computing basic and diluted net loss per common
share
|
|
|
76,118
|
|
|
|
77,120
|
|
|
|
79,018
|
|
|
|
84,267
|
|
|
|
|
March
31
|
|
|
June
30
|
|
|
Sept.
30
|
|
|
Dec.
31
|
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
|
All
data in thousands except loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,985
|
|
|
$
|
2,117
|
|
|
$
|
1,646
|
|
|
$
|
924
|
|
|
Cost
of goods sold
|
|
|
911
|
|
|
|
1,162
|
|
|
|
1,074
|
|
|
|
1,233
|
|
|
Product
margin
|
|
|
1,074
|
|
|
|
955
|
|
|
|
572
|
|
|
|
(309
|
)
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
842
|
|
|
|
691
|
|
|
|
770
|
|
|
|
848
|
|
|
Sales
and marketing
|
|
|
1,462
|
|
|
|
1,825
|
|
|
|
1,954
|
|
|
|
2,583
|
|
|
General
and administrative
|
|
|
885
|
|
|
|
1,327
|
|
|
|
1,267
|
|
|
|
1,444
|
|
|
Total
expenses
|
|
|
3,189
|
|
|
|
3,843
|
|
|
|
3,991
|
|
|
|
4,875
|
|
|
Loss
from operations
|
|
|
(2,115
|
)
|
|
|
(2,888
|
)
|
|
|
(3,419
|
)
|
|
|
(5,184
|
)
|
|
Interest
and other income (expense)
|
|
|
16
|
|
|
|
14
|
|
|
|
28
|
|
|
|
(6
|
)
|
|
Loss
before Tax
|
|
|
(2,099
|
)
|
|
|
(2,874
|
)
|
|
|
(3,391
|
)
|
|
|
(5,190
|
)
|
|
(Provision) benefit
from tax
|
|
|
240
|
|
|
|
265
|
|
|
|
301
|
|
|
|
267
|
|
|
Net
loss
|
|
$
|
(1,859
|
)
|
|
$
|
(2,609
|
)
|
|
$
|
(3,090
|
)
|
|
$
|
(4,923
|
)
|
|
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
|
|
|
68,378
|
|
|
|
68,905
|
|
|
|
73,090
|
|
|
|
75,223
|
|
|
|
|
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
|
|
|
|
492891
|
|
|
|
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
|
|
|
(1,704045
|
)
|
|
|
(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
|
|
|
|
|
|
(0.05
|
)
|
|
|
(0.04
|
)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
16. Segment
Information and Revenue by Geographic Region
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:
|
|
|
Years
Ended
|
|
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Country
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
2,097,008
|
|
|
$
|
2,218,408
|
|
|
$
|
469,419
|
|
|
Latin
America
|
|
|
449,244
|
|
|
|
180,560
|
|
|
|
82,203
|
|
|
Australia
|
|
|
964,126
|
|
|
|
694,534
|
|
|
|
195,252
|
|
|
Middle
East
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Asia
|
|
|
2,212,985
|
|
|
|
1,168,875
|
|
|
|
84,545
|
|
|
Europe
|
|
|
4,243,168
|
|
|
|
798,825
|
|
|
|
252,113
|
|
|
Scandinavia
|
|
|
1,557,423
|
|
|
|
1,611,339
|
|
|
|
830,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,523,954
|
|
|
$
|
6,672,541
|
|
|
$
|
1,914,430
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Long-lived
assets:
|
|
|
|
|
|
|
|
United
States
|
|
$
|
1,725,733
|
|
|
$
|
1,310,911
|
|
|
Sweden
|
|
|
2,747,667
|
|
|
|
6,530,482
|
|
|
Australia
|
|
|
71,553
|
|
|
|
46,250
|
|
|
Total
|
|
$
|
4,544,953
|
|
|
$
|
7,887,643
|
|
Foreign
sales as a percentage of revenues were 82%, 67% and 75% for the years ended
December 31, 2008, 2007 and 2006 respectively.
At
December 31, 2008, four customers represented 23%, 8%, 7% and 6% of total
accounts receivable and four customers accounted for 16%, 10%, 6% and 6% of
revenue. No other customer accounted for more than 5% of revenues or accounts
receivable balance. At December 31, 2007, four customers represented 16%, 12%,
5% and 5% of total accounts receivable and three customers accounted for 15%,
11%, and 6% of revenue. For the year ended December 31, 2006 two
customers accounted for 46% and 15% of revenue. The Company controls credit risk
through credit approvals, credit limits, and monitoring procedures. The Company
performs credit evaluations of its commercial customers but generally does not
require collateral to support accounts receivable.
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. Sales to customers outside the United States approximated 78% of net sales
in 2008, 66% in 2007 and 75% of net sales in 2006. The Company performs ongoing
credit evaluations of certain customers’ financial condition and, generally,
requires no collateral from its customers. Although, Sweden and Australia are
considered economically stable and the Company has experienced no notable burden
from foreign exchange transactions, export duties, or government regulations, it
is always possible that unanticipated events in foreign countries could disrupt
the Company’s operations. The Company’s products are marketed throughout the
world
17. Financial
Instruments
Effective
January 1, 2008, the Company adopted SFAS 157 for financial assets and
financial liabilities recognized at fair value on a recurring basis. The partial
adoption of SFAS 157 for these items did not have a material impact on our
financial position, results of operations and cash flows. The statement
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad categories. Level 1:
Quoted market prices in active markets for identical assets or liabilities that
the company has the ability to access. Level 2: Observable market based
inputs or unobservable inputs that are corroborated by market data such as
quoted prices, interest rates and yield curves. Level 3: Inputs are
unobservable data points that are not corroborated by market data. At December
31, 2008, the Company did not hold any such financial assets. Thus,
the adoption of SFAS 157 did not have a material impact on the basis for
measuring the fair value of these items.
18. Subsequent
events
Secured
Line of Credit - On March 13, 2009, the Company entered into a Secured line of
credit for working capital purposes with Peninsula Bank. The Line of Credit
Agreement provides for maximum borrowings of $3 million through March 12, 2010.
Borrowings will bear interest at the bank’s prime rate plus 3.5% but not less
than 8%. The maximum amount that may be outstanding under this credit facility
is $3,000,000. Under the terms of the Loan Agreement, the Company will pay
Peninsula Bank $30,000 as a fee during the term of the line of credit
agreement.
In
February 2009, the Company repaid $250,000 of the notes payable. This
left an outstanding balance of $300,000.
Item
9. C
han
ges In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item
9A. C
ont
rols and Procedures
Evaluation
of Disclosure Controls and Procedures
We have
adopted and maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply our judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As
required by Rule 13a-15(b), under the Securities Exchange Act of 1934, as
amended, we carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information required to be disclosed by us in
the reports that we file with the SEC.
Management’s
Report on Internal Control over Financial Reporting
We
prepared the consolidated financial statements and other information in our
Annual Report in accordance with accounting principles generally accepted in the
United States of America and we are responsible for their accuracy. The
financial statements necessarily include amounts that are based on our best
estimates and judgments. In meeting our responsibility, we rely on internal
accounting and related control systems. The internal control systems are
designed to ensure that transactions are properly authorized and recorded in our
financial records and to safeguard our assets from material loss or misuse. Such
assurance cannot be absolute because of inherent limitations in any internal
control system.
Our
Management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) of the
Securities Exchange Act of 1934. Our 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.
Because
of 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.
In
connection with the preparation of our annual financial statements, under
the supervison and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer we completed an assessment
of the effectiveness of our internal control over financial reporting as of
December 31, 2008. The assessment was based upon the framework described in
the “Integrated Control-Integrated Framework” issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). Our
assessment included an evaluation of the design of internal control over
financial reporting and testing of the operational effectiveness of internal
control over financial reporting. We have reviewed the results of the assessment
with the Audit Committee of our Board of Directors.
Based on
our assessment under the criteria set forth in COSO, management has concluded
that, as of December 31, 2008, Procera Networks maintained effective
internal control over financial reporting.
The
effectiveness of our internal control over financial reporting as of
December 31, 2008 has been audited by PMB Helin Donovan LLP, an independent
registered public accounting firm, as stated in their report which appears
herein.
Changes
in Internal Control over Financial Reporting
During
the quarter ended December 31, 2008, we made the following changes in our
internal control over financial reporting that have materially affected or are
reasonably likely to materially affect, our internal control over financial
reporting.
|
|
1.
|
We
added an experienced, Controller, who has an active CPA license, to our
financial staff
|
|
|
2.
|
We
augmented our full-time staff through the use of additional,
highly-experienced consultants with extensive SEC reporting expertise in
our industry.
|
Item
9B. Other
Infor
mati
on
On
November 8, 2008, the Compensation Committer authorized a change in annual
salary for our CEO, James Brear to $275,000 per year effective January 1,
2009.
On
December 22, 2008, the Compensation Committee authorized the Chief Executive
Officer to modify the salary structure of Paul Eovino, the incumbent interim
Chief Financial Officer, to $190,000 per year. This salary structure
was retroactively instituted in 2009 to the January 1 effective date of Mr.
Eovino’s change of duties.
On
January 20, 2009, the Compensation Committee authorized a cash bonus of $65,000
to the Chief Executive Officer for the 5 months ended December 31, 2008 and
$10,000 to the Chief Accounting Officer for the year ended December 31,
2008.
PART III
Item
10.
Directors,
Execu
tive
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 February 27, 2009:
|
|
|
|
|
|
|
|
|
Scott McClendon
(1*, 2)
|
|
69
|
|
Chairman
of the Board and Director
|
|
2004
|
|
James F. Brear
|
|
43
|
|
President,
Chief Executive Officer and Director
|
|
2008
|
|
Staffan
Hillberg (2, 3)
|
|
44
|
|
Director
|
|
2007
|
|
Mary
Losty (1, 3*)
|
|
49
|
|
Director
|
|
2007
|
|
Thomas Saponas
(1, 2*)
|
|
59
|
|
Director
|
|
2004
|
|
Todd Abbott
(3)
|
|
49
|
|
Director
|
|
2008
|
|
(1)
|
Member
of the Audit Committee of the Board of
Directors.
|
|
(2)
|
Member
of the Compensation Committee of the Board of
Directors.
|
|
(3)
|
Member
of the Nominating and Corporate Governance Committee of the Board of
Directors.
|
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.”
Scott
McClendon
has served as a member of our Board of Directors since March
2004 and as Chairman of the Board since November 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 us as our President, Chief Executive Officer and a member of
our Board of Directors in February 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 $750 million 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.
Staffan
Hillberg
has served as a member of our Board of Directors since January
2007 and is currently a member of our Nominating and Compensation committees.
Since September 2004, Mr. Hillberg has served as Managing Partner of 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. From
October 2003 to September 2004 he held the position of Managing CEO of
Scandinavian Financial Management AB, a private equity group based in
Sweden. 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 $20 million 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. Mr. Hillberg is
currently the individual selected by certain former Netintact stockholders as
their designated nominee to our Board who shall receive the support of former
Netintact stockholders and certain key holders of our common stock pursuant to a
voting agreement entered in August 18, 2006 among us, the former Netintact
stockholders and certain key holders of our common stock.
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 committees. Ms. Losty is
currently the General Partner at Cornwall Asset Management, LLC, a
portfolio management firm, 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.
Thomas
Saponas
has served as a member of our Board of Directors since April 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 (NYSE: KEI), an
electronic instruments company.
Todd
Abbott
has served as a member of our Board of Directors since May 2008
and is currently a member of the Nominating committee. He is currently SVP of
Sales and President of Field Operations for Avaya Inc., a role he took on
in May 2008. Prior to that, from January 2007 to May 2008, he served as EVP of
Worldwide Sales, Marketing and Customer Service at Seagate Technology, where he
led three units of its hard drive business. From November 2002 to January 2007,
Mr. Abbott was SVP of Worldwide Sales at Symbol Technologies, a provider of
enterprise mobility solutions. Previously, from August 1994 to October 2002, he
held various senior management positions at Cisco, his last position there as
EMEA Group VP of Service Provider Sales. He also led sales teams in APAC, where
he significantly helped build the business year-over-year, and directed a team
of 800 when overseeing EMEA. Mr. Abbott has a BS in finance and marketing
from Northeastern University.
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
February 27, 2009:
|
|
|
|
|
|
|
|
|
James F. Brear
|
|
43
|
|
President
and Chief Executive Officer (Principal Executive Officer)
|
|
2008
|
|
Paul Eovino
|
|
60
|
|
Interim
Chief Financial Officer and Vice President of Finance (Principal
Accounting Officer)
|
|
2006
|
|
Alexander Hävang
|
|
30
|
|
Chief
Technical Officer
|
|
|
|
David Green
|
|
42
|
|
Vice
President — Sales-Europe, Middle East, Africa (EMEA)
|
|
|
|
Jon Lindén
|
|
34
|
|
Vice
President — Marketing
|
|
|
|
David Ahee
|
|
42
|
|
Vice
President—Sales-Americas
|
|
|
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
account of the business experience of Mr. Brear is set forth above in
“Our Directors” in this Item 10.
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 part time role and became our full time Vice President–Finance
and Corporate Controller in March 2007. In January 2009, Mr. Eovino
became our interim Chief Financial Officer. 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 our strategic technology direction.
Mr. Haväng is widely known and a respected authority in the open source
community, and is the lead architect for our 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.
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 held sales and management positions 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, which was later acquired by Procera, in 2001 and has been our
Vice President of Product Management since January 2008. Mr. Lindén is
responsible for our 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.
David Ahee
brings nearly 20 years of sales and sales management experience in
working with mobile, fixed, and cable operators worldwide, as well as large
enterprises and OEMs/channels on a global basis. David joined Procera from Aylus
Networks where he served as Vice President of Worldwide Sales. Previously, David
served as Vice President of Worldwide Sales and Business Development at Auspice
prior to their acquisition by Arris. David also ran Sales at ThinkEngine
Networks where he played a key role in the acquisition of the company by
Cognitronics. David has also served as Vice President of Worldwide Sales at
Nexsi Systems, and as Vice President of North American Sales for Unisphere
Networks (now part of Juniper Networks), where he grew revenues from zero to $60
million. Earlier, David was with Ascend Communications, Newbridge Networks, and
ROLM. David holds a BS in Marketing with high honors from Wayne State
University.
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, 2008, 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 2008
and previous fiscal years, (i) Form 4 reports covering an aggregate of 19
transactions, were not filed timely by Todd Abbott (1), James Brear (1), Staffan
Hillberg (3), Mary Losty (4), Scott McClendon (5), Sven Nowicki (1) and Thomas
Saponas (4) and, (ii) Form 3 reports covering an aggregate of 2 transactions
were not filed timely by each of Todd Abbott and James Brear.
Corporate
Governance
The
Company has adopted corporate governance guidelines including a Code of Business
Conduct and Ethics, and charters for its Audit Committee, Compensation Committee
and Nominating and Corporate Governance Committee. The text of these materials
is posted on our website (www.proceranetworks.com) in connection with
“Investors” 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. The Code of Business Conduct and Ethics adopted by the
company is available to stockholders on our website (
http://www.proceranetworks.com/documents/investors/code-of-conduct-and-ethics.pdf)
.
Nominating
and Corporate Governance Committee
The
Nominating Committee of the Board of Directors is responsible for identifying,
reviewing and evaluating candidates to serve as our directors (consistent with
criteria approved by the Board), reviewing and evaluating incumbent directors,
recommending to the Board for selection candidates for election to the Board of
Directors, making recommendations to the Board regarding the membership of the
committees of the Board, assessing the performance of the Board, and developing
a set of corporate governance principles for us. The Nominating Committee is
composed of three directors: Messrs. Hillberg and Abbott and
Ms. Losty. All members of the Nominating Committee are independent (as
independence is currently defined in Section 121A(2) of the AMEX listing
standards). The Nominating Committee has adopted a written charter that is
available to stockholders on our website (
http://www.proceranetworks.com/documents/investors/nominating-committee.pdf
)
The
Nominating Committee believes that candidates for Director should have certain
minimum qualifications, including the ability to read and understand basic
financial statements, being over 21 years of age and having the highest
personal integrity and ethics. The Nominating Committee also intends to consider
such factors as possessing relevant expertise upon which to be able to offer
advice and guidance to management, having sufficient time to devote to the
affairs of the Company, demonstrated excellence in his or her field, having the
ability to exercise sound business judgment and having the commitment to
rigorously represent the long-term interests of our stockholders. However, the
Nominating Committee retains the right to modify these qualifications from time
to time. Candidates for director nominees are reviewed in the context of the
current composition of the Board, our operating requirements and the long-term
interests of stockholders. In conducting this assessment, the Nominating
Committee considers diversity, age, skills, and such other factors as it deems
appropriate given the current needs of the Board and the Company, to maintain a
balance of knowledge, experience and capability. In the case of incumbent
Directors whose terms of office are set to expire, the Nominating Committee
reviews these Directors' overall service to us during their terms, including the
number of meetings attended, level of participation, quality of performance, and
any other relationships and transactions that might impair the Directors'
independence. In the case of new Director candidates, the Nominating Committee
also determines whether the nominee is independent for AMEX purposes, which
determination is based upon applicable AMEX listing standards, applicable SEC
rules and regulations and the advice of counsel, if necessary. The Nominating
Committee then uses its network of contacts to compile a list of potential
candidates, but may also engage, if it deems appropriate, a professional search
firm. The Nominating Committee conducts any appropriate and necessary inquiries
into the backgrounds and qualifications of possible candidates after considering
the function and needs of the Board. The Nominating Committee meets to discuss
and consider the candidates' qualifications and then selects a nominee for
recommendation to the Board by majority vote.
Audit
Committee
The Audit
Committee of the Board of Directors was established by the Board in accordance
with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended, to oversee our corporate accounting and financial reporting processes
and audits of our financial statements. For this purpose, the Audit
Committee performs several functions. The Audit Committee reviews, acts on and
reports to the Board of Directors regarding various auditing and accounting
matters, including the selection of our independent auditors, the monitoring of
the rotation of the partners of the independent auditors, the review of our
financial statements, the scope of the annual audits, fees to be paid to the
auditors, the performance of our independent auditors and our accounting
practices. The Audit Committee is composed of three directors:
Messrs. Saponas and McClendon and Ms. Losty. The Audit Committee has
adopted a written charter that is available to stockholders on our website at
http://www.proceranetworks.com/documents/investors/audit-committee-charter.pdf
.
The Board of Directors annually reviews the NYSE Altrnext U.S Company Guide
definition of independence for Audit Committee members and financial
sophistication criteria. The Board of Directors has determined that all members
of our 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
Committee
The
Compensation Committee of the Board of Directors acts on behalf of the Board to
review, recommend for adoption and oversee our compensation strategy, policies,
plans and programs, including:
•determining
the salaries and incentive compensation of our officers and providing
recommendations for the salaries and incentive compensation of our other
employees; and
•administering
our stock option plan.
The
Compensation Committee has adopted a written charter that is available to
stockholders on our website at
http://www.proceranetworks.com/documents/investors/compensation-committee.pdf.
Compensation
Committee Processes and Procedures
Typically,
the Compensation Committee is expected to meet at least 2 times annually and
with greater frequency if necessary. The agenda for each meeting is usually
developed by the Chair of the Compensation Committee, in consultation with the
CEO. The Compensation Committee meets regularly in executive session. However,
from time to time, various members of management and other employees as well as
outside advisors or consultants may be invited by the Compensation Committee to
make presentations, provide financial or other background information or advice
or otherwise participate in Compensation Committee meetings. The charter of the
Compensation Committee grants the Compensation Committee full access to all of
our books, records, facilities and personnel, as well as authority to obtain, at
our expense, advice and assistance from internal and external legal, accounting
or other advisors and consultants and other external resources that the
Compensation Committee considers necessary or appropriate in the performance of
its duties. In particular, the Compensation Committee has the sole authority to
retain compensation consultants to assist in its evaluation of executive and
director compensation, including the authority to approve the consultant's
reasonable fees and other retention terms.
Under our
charter, the Compensation Committee may form, and delegate authority to,
subcommittees, as appropriate. There are currently no
subcommittees formed.
Historically,
the Compensation Committee has made most significant adjustments to annual
compensation, determined bonus and equity awards and established new performance
objectives at one or more meetings held during the first quarter of the year.
However, the Compensation Committee also considers matters related to individual
compensation, such as compensation for new executive hires, as well as
high-level strategic issues, such as the efficacy of our compensation strategy,
potential modifications to that strategy and new trends, plans or approaches to
compensation, at various meetings throughout the year. Generally, the
Compensation Committee's process comprises two related elements: the
determination of compensation levels and the establishment of performance
objectives for the current year. For executives other than the Chief Executive
Officer, the Compensation Committee solicits and considers evaluations and
recommendations submitted to the Committee by the Chief Executive Officer. In
the case of the Chief Executive Officer, the evaluation of his performance is
conducted by the Compensation Committee, which determines any adjustments to his
compensation as well as awards to be granted. For all executives and directors,
as part of its deliberations, the Compensation Committee may review and
consider, as appropriate, materials such as financial reports and projections,
operational data, tax and accounting information, tally sheets that set forth
the total compensation that may become payable to executives in various
hypothetical scenarios, executive and director stock ownership information,
company stock performance data, analyses of historical executive compensation
levels and current Company-wide compensation levels, and recommendations of the
Compensation Committee's compensation consultant, including analyses of
executive and director compensation paid at other companies identified by the
consultant. The Compensation Committee reviews, discusses and assesses its own
performance at least annually. The Compensation Committee also periodically
reviews and assesses the adequacy of its charter, including its role and
responsibilities as outlined in its charter, and recommends any proposed changes
to the Board of Directors for its consideration.
Item
11.
Executive
Comp
ensation
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
NYSE Alternext U.S. 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.
Our
Compensation Committee considers relevant market data in setting the
compensation for our executive Officers. During 2008 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 number 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.
Compensation
Elements
General –
Our executive compensation program is designed to attract, as needed,
individuals with the skills necessary for us to achieve our business plan, to
reward those individuals fairly over time, to retain those individuals who
continue to perform at or above the levels that we expect and to closely align
the compensation of those individuals with the performance of our company on
both a short-term and long-term basis. To that end, 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.
We view
the components of compensation as related but distinct. Although our
compensation committee reviews total compensation of our executive officers, we
do not believe that significant compensation derived from one component of
compensation should negate or reduce compensation from other components. We
determine the appropriate level for each compensation component based in part,
but not exclusively, on competitive benchmarking consistent with our recruiting
and retention goals, our view of internal equity and consistency, overall
company performance and other considerations we deem relevant. Except as
described below, our compensation committee has not adopted any formal or
informal policies or guidelines for allocating compensation between long-term
and currently paid out compensation, between cash and non-cash compensation or
among different forms of non-cash compensation. However, the compensation
committee's philosophy is to make a substantial percentage of an employee's
compensation performance-based and to keep cash compensation to a nominally
competitive level while providing the opportunity to be well rewarded through
equity if the company performs well over time. We also believe that for
technology companies stock-based compensation is a primary motivator in
attracting employees.
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 2008. 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 2008 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 25th and 50th
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 2008.
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 2008, a bonus program with specific measures for 2008 was not
implemented. The cash bonuses for 2008 were all entirely
discretionary awards
recommended by the Compensation Committee 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 progress on market development and
organization. The committee has recommended target cash bonus
incentives for 2009 based on the survey conducted in 2008. For
2008, all 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 stockholders. 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 appropriate cumulative equity
awards
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. In 2008, no executives were relocated.
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.
Compensation
of the Named Executive Officers in 2008
The table
below summarizes the total compensation paid or earned by each of our executive
officers including our Chief Executive Officer and Chief Financial Officer and
each of our three other most highly compensated executive officers for the
fiscal year ended December 31, 2008), and one additional individual that served
as an executive officer during the fiscal year ended December 31, 2008 but was
no longer serving at December 31, 2008. We refer to each of such
persons as a “named executive officer.”
|
Name and Principal Position
|
|
Fiscal Year
|
|
Salary
|
|
|
Bonus
|
|
|
Stock Awards
(1)
|
|
|
Option Awards (1)
|
|
|
All Other Compensation
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Brear
|
|
2008
|
|
$
|
217,273
|
(2)
|
|
$
|
125,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
342,273
|
|
|
Chief
Executive Officer
|
|
2007
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
2006
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas H. Williams,
(3)
|
|
2008
|
|
$
|
202,917
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
270,609
|
|
|
$
|
48,613
|
(4)
|
|
$
|
473,526
|
|
|
Chief
Financial Officer, Secretary
|
|
2007
|
|
|
181,458
|
|
|
$
|
25,000
|
|
|
|
–
|
|
|
|
177,120
|
|
|
|
–
|
|
|
|
383,578
|
|
|
and Director
|
|
2006
|
|
|
126,154
|
(5)
|
|
|
–
|
|
|
|
–
|
|
|
|
95,407
|
|
|
|
–
|
|
|
|
221,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Stepner,
|
|
2008
|
|
$
|
120,914
|
(6)
|
|
|
–
|
|
|
|
–
|
|
|
$
|
152,956
|
|
|
|
–
|
|
|
$
|
273,870
|
|
|
Retired
Chief Operating Officer
|
|
2007
|
|
|
98,333
|
(7)
|
|
|
–
|
|
|
$
|
304,893
|
|
|
|
96,223
|
|
|
|
–
|
|
|
|
499,449
|
|
|
|
|
2006
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Eovino,
|
|
2008
|
|
$
|
150,000
|
|
|
$
|
10,000
|
|
|
|
–
|
|
|
$
|
162,533
|
|
|
|
–
|
|
|
$
|
322,533
|
|
|
Vice
President–Finance and
|
|
2007
|
|
|
138,588
|
|
|
|
15,000
|
|
|
|
–
|
|
|
|
162,089
|
|
|
|
–
|
|
|
|
315,677
|
|
|
Corporate
Controller
|
|
2006
|
|
|
15,000
|
(8)
|
|
|
–
|
|
|
|
–
|
|
|
|
27,533
|
|
|
|
–
|
|
|
|
42,533
|
|
|
|
(1)
|
The
amounts in this column reflect the dollar amount recognized for financial
statement reporting purposes for the fiscal years ended December 31, 2008,
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. 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)
|
For
the partial year February 6, 2008 through December
31, 2008.
|
|
|
(3)
|
Retired
December 31, 2008.
|
|
|
(4)
|
Mr.
Williams received a one year extension on the term of a warrant in March
2008
|
|
|
(5)
|
For
the partial year March 20, 2006 through December 31,
2006.
|
|
|
(6)
|
For
the partial year January 1, 2008 through October 1,
2008.
|
|
|
7)
|
For
the partial year May 7, 2007 through December 31,
2007.
|
|
|
(8)
|
For
the partial year October 1, 2006 through December 31, 2006 as a part
time employee.
|
Fiscal 2008
Grant
of Plan-Based
Awards
The following table contains information regarding options granted during the
fiscal year ended December 31, 2008 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)
|
|
|
James Brear
|
|
02/09/08
|
|
|
2,250,000
|
|
|
|
—
|
|
|
$
|
1.41
|
|
|
$
|
2,241,450
|
|
___________
|
|
(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 Grant 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 was 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, at an exercise price of $1.41, 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
On
December 31, 2008, Mr. Williams retired as Procera’s Chief Financial
Officer, Secretary and Treasurer. Procera entered into a separation
agreement pursuant to which Mr. Williams may consult for the Company after
December 31, 2008 at an hourly rate of $150; 50 percent of Mr. Williams’
remaining unvested stock options on December 31, 2008 will vest immediately and
his vested options may be exercised through December 31, 2010.
David
Stepner
On
October 1, 2008 Dr. Stepner resigned as Procera’s Chief Operating
Officer. In connection with Dr. Stepner’s separation, on September
12, 2008 Procera entered into a separation and consulting agreement with Dr.
Stepner. Under the agreement, Dr. Stepner will provide
consulting services to Procera on an as-needed basis, up to a maximum of 50
hours per month at a rate of $100 per hour, through until December 31,
2008. In addition, pursuant to the separation and consulting
agreement and the May 21, 2007 employment agreement between Procera and Dr.
Stepner, the remaining 150,000 unvested shares of restricted stock previously
awarded to Dr. Stepner will continue to vest during the consulting period, with
such shares vesting in full on October 21, 2008.
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 February 28,
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
Potential payouts
upon termination or Change of Control
Other than the
provisions of the executive severance benefits to which our named executive
officers would be entitled to at the end of our fiscal year ending December 31,
2008 as set forth above, the Company has no liabilities under termination or
change of control conditions. We do not have a formal policy to
determine executive severance benefits. Each executive severance
arrangement is negotiated on an individual basis.
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, 2008, is valued at $489,574 for Mr. Brear, $162,533 for
Paul Eovino and $270,609 for
Thomas H. Williams. The amounts computed by person
assume the termination was effective as of December 31, 2008 and that all
eligibility requirements under the equity award agreement were
met. The values represent the portion of the stock option that is
assumed to be accelerated, calculated using a Black-Scholes option valuation
method without taking into effect estimated forfeiture.
Outstanding
Equity Awards at Fiscal Year-End
|
|
|
|
|
Option
Awards
|
|
Stock
Awards
|
|
|
|
|
|
|
Number
of Securities Underlying Unexercised Options
|
|
|
|
|
|
|
Number
of Shares or Units of Stock That Have Not Vested (#)
|
|
|
Market
Value of Shares or Units of Stock That Have Not Vested ($)
|
|
|
Name
|
|
|
|
|
|
|
|
|
|
Option
Exercise Price ($)
|
|
|
|
|
|
|
|
James Brear
|
|
|
(1
|
)
|
|
—
|
|
|
|
2,250,000
|
|
|
|
1.41
|
|
02/11/2018
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas H. Williams
|
|
|
(2
|
)
|
|
10,000
|
|
|
|
—
|
|
|
|
1.86
|
|
04/12/2009
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
(3
|
)
|
|
75,000
|
|
|
|
—
|
|
|
|
1.42
|
|
06/13/2009
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
(4
|
)
|
|
16,000
|
|
|
|
—
|
|
|
|
1.67
|
|
04/19/2015
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
(5
|
)
|
|
16,000
|
|
|
|
—
|
|
|
|
3.35
|
|
03/08/2014
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
(6
|
)
|
|
379,687
|
|
|
|
—
|
|
|
|
0.69
|
|
12/31/2010
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
(7
|
)
|
|
666,666
|
|
|
|
—
|
|
|
|
0.52
|
|
12/31/2010
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Eovino
|
|
|
(8
|
)
|
|
135,417
|
|
|
|
114,583
|
|
|
|
1.52
|
|
10/29/2016
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
(9
|
)
|
|
109,375
|
|
|
|
140,625
|
|
|
|
1.52
|
|
10/29/2016
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Stepner
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
The
option vests as to ¼ of the shares on the first anniversary of the vesting
commencement date of February 12, 2008 and 1/48 per month thereafter until
fully vested.
|
|
(2)
|
The
warrant vests 100% on the date of grant of April 13, 2005. A
one year extension of the expiration date was approved by the BOD on March
19, 2008.
|
|
(3)
|
The
warrant vests as to 1/2 of the shares on October 14, 2005 and 1/2 on
February 28, 2006. A one year extension of the expiration date
was approved by the Board of Directors on March 19,
2008.
|
|
(4)
|
The
option vests as to 1/4 of the shares on March 31, 2005 and 1/4 quarterly
thereafter until fully vested.
|
|
(5)
|
The
option vests as to 1/4 of the shares on March 31, 2004 and 1/4 quarterly
thereafter until fully vested.
|
|
(6)
|
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. On November 11, 2008 the Board of Directors
granted the acceleration of 1/2 of the unvested options as of December 31,
2008 and cancelled the remaining unvested
options.
|
|
(7)
|
The
option vests as to 1/3 of the shares on the date of grant of August 11.
2006 and 1/36
th
per month thereafter until fully vested. On November 11, 2008
the Board of Directors granted the acceleration of 1/2 of the unvested
options as of December 31, 2008 and cancelled the remaining unvested
options.
|
|
(8)
|
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.
|
|
(9)
|
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.
|
2008
Option Exercises
There
were no options exercised by any named executive officer during the fiscal year
ended December 31, 2008. 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, 2008, 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.
Nonqualified
Deferred Compensation
We do not
currently maintain non-qualified defined contribution plans or other deferred
compensation plans.
Components
of Director
Compensation
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.
Directors
who are also Procera’s employees receive no additional compensation for serving
on the Board during 2008. Beginning in fiscal year 2008, each of our
non-employee directors receives an annual retainer of $10,000. The
chair of each of the Audit, Compensation and Nominating/Governance Committees
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 also receives $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. Each of our non-employee directors also receives 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.
Procera
also reimbursed non-employee Directors for all travel and other expenses
incurred in connection with attending meetings of the Board of
Directors.
The
compensation plan for 2009 has no changes from the 2008 plan. In
2009, all current non-employee Directors have elected to forego all cash
compensation amounts in-lieu of equivalent option grants.
Pension
Plans
We
do not currently maintain any pension plans.
During
2008, we granted options to purchase an aggregate of 128,418 shares of common
stock to our non-employee directors at a weighted average exercise price per
share of $1.20. As of February 27, 2009, 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,
2008.
Director
Compensation Fiscal Year 2008
|
|
|
Fees
Earned or Paid in Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Saponas
|
|
$
|
—
|
|
|
$
|
52,766
|
|
|
$
|
—
|
|
|
$
|
52,766
|
|
|
Scott McClendon
|
|
|
39,500
|
|
|
|
28,392
|
|
|
|
—
|
|
|
|
67,892
|
|
|
Mary
Losty
|
|
|
25,500
|
|
|
|
23,767
|
|
|
|
—
|
|
|
|
49,267
|
|
|
Staffan Hillberg
(3)
|
|
|
—
|
|
|
|
45,142
|
|
|
|
9,000
|
|
|
|
54,142
|
|
|
Todd Abbott
(4)
|
|
|
—
|
|
|
|
22,476
|
|
|
|
—
|
|
|
|
22,476
|
|
|
(1)
|
The
amounts in this column reflect the dollar amount recognized for financial
statement reporting purposes for the fiscal year ended December 31, 2008,
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 may include a portion of 2007 options
granted in previous years that vest in 2008. Assumptions used
in the calculation of these amounts are included herein in the notes to
our audited financial statements for the fiscal year ended December 31,
2008.
|
|
(2)
|
The
following options were outstanding as of December 31, 2008; Mr. Saponas
162,217 shares; Mr. McClendon 134,000 shares; Ms. Losty 65,000
shares; Mr. Hillberg 88,720 shares; Mr. Abbott
16,481 shares.
|
|
(3)
|
As
the Chairman of the Board of the company’s wholly owned Swedish
subsidiary, Mr. Hillberg receives $9,000 in annual
compensation.
|
|
(4)
|
Mr.
Abbott joined the Board of Directors in May
2008.
|
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 2008. None of the
aforementioned individuals was, during fiscal 2008, 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.
|
|
Thomas Saponas
(Chair)
|
|
|
|
|
|
Scott McClendon
|
|
|
|
|
|
Staffan
Hillberg
|
|
|
|
Item 12.
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 (8 persons)
|
|
|
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 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 common stock grant of 300,000 shares of our common
stock.
|
|
(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 155,556 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
854,700 shares of common stock acquired in our August 2008 private
placement, non-qualified stock options to acquire 179,618 shares of our
common stock which may be exercised, in whole or in part, within 60 days
of February 27, 2009, and 108,667 shares of common stock purchased in open
market transactions.
|
|
(9)
|
Includes
1,500,000 shares of 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, 2008, we had three 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, the Amended 2004
Stock Option Plan and the 2007 Equity Incentive Plan. These plans
have been approved by our stockholders. From time to time
we issue special stock options to employees, directors and service providers,
inducement grants and warrants to purchase common shares, which have not been
approved by stockholders. The following table sets forth information as of
December 31, 2008.
|
|
|
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
|
|
|
7,988,274
|
(1)
|
|
$
|
0.91
|
|
|
|
3,558,448
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by stockholders(3) (4)
|
|
|
5,589,366
|
|
|
$
|
1.13
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
13,577,640
|
|
|
$
|
1.00
|
|
|
|
714,357
|
|
|
(1)
|
Includes
unexercised options issued pursuant to our 2007 Equity Incentive
Plan.
|
|
(2)
|
Includes
unissued options available pursuant to our 2007 Equity Incentive
Plan.
|
|
(3)
|
Includes
(i) 151,268 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)
|
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.
|
|
|
(iii)
|
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, 2009.
|
|
|
(iv)
|
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, 2009.
|
|
|
(v)
|
1,038,875
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 November 30, 2011.
|
|
|
(vi)
|
360,000
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,
2009.
|
|
|
(vii)
|
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.
|
|
|
(viii)
|
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.
|
|
|
(ix)
|
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.
|
|
|
(x)
|
199,988
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.
|
|
|
(xi)
|
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.
|
|
|
(xii)
|
50,000
shares subject to a warrant granted on May 13, 2008 to an individual for
marketing services rendered with an exercise price of $0.83 and an
expiration date of June 30,
2009
|
|
|
(xiii)
|
40,000
shares subject to a warrant granted on May 13, 2008 to an individual for
marketing services rendered with an exercise price of $2.00 and an
expiration date of June 30, 2009
|
|
|
(xiv)
|
100,000
shares subject to a warrant granted on June 30, 2008 to an individual
for development services rendered with an exercise price of $0.49 and an
expiration date of September 17,
2009
|
|
|
(xv)
|
65,000
shares subject to a warrant granted on June 30, 2008 to an individual
for development services rendered with an exercise price of $0.49 and an
expiration date of August 15, 2009
|
|
|
(xvi)
|
17,759
shares subject to a warrant granted on September 16, 2008 to a group of
placement agents for fees associated with our August 2008 private
placement financing with an exercise price of $1.75 and an expiration date
of September 15, 2011.
|
|
(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.
|
|
|
(vii)
|
17,850
common shares granted on March 12, 2008 for executive recruiting services
rendered with a fair market value of $1.40 per
share.
|
|
|
(viii)
|
490,000
common shares granted on June 27, 2008 for investor relations services to
be provided with a fair market value of $1.40 per
share.
|
|
|
(ix)
|
17,241
common shares granted on March 21, 2008 for financing services rendered
with a fair market value of $1.45 per
share.
|
Item 13.
Certain
Relationships and Related Tran
sactio
ns, and Director
Independence
Certain
Relationships and Related Transactions
Since
January 1, 2008, 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 stockholders 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
NYSE Alternext U.S. listing standards:
|
|
Thomas Saponas
|
|
|
|
|
|
Scott McClendon
|
|
|
|
|
|
Mary
Losty
|
|
|
|
|
|
Staffan
Hillberg
Todd Abbott
|
Under
applicable SEC and NYSE Alternext U.S. 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.
Thomas Saponas
; On
September 16, 2008, the Company closed a private placement sale of 5,244,666
shares of its common stock prices of $1.10 and
$1.17. Mr. Thomas Saponas, a director of the Company
invested $1 Million in this private placement at a price of $1.17 per
share.
Item 14.
Principal A
ccoun
ti
ng
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 2008 and 2007, and fees billed for other services
rendered by PMB Helin Donovan LLP and related expert services for
fiscal years 2008 and 2007.
|
|
|
Fiscal
Year
|
|
|
Fiscal
Year
|
|
|
|
|
|
|
|
|
|
|
Audit
Fees (1)
|
|
$
|
261,865
|
|
|
$
|
181,391
|
|
|
Audit-Related
Fees (2)
|
|
|
59,073
|
|
|
|
65,380
|
|
|
Tax
Fees (3)
|
|
|
66,349
|
|
|
|
85,154
|
|
|
All
Other Fees (4)
|
|
|
26,257
|
|
|
|
55,134
|
|
|
Total
|
|
$
|
413,544
|
|
|
$
|
367,059
|
|
|
|
(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 and the annual review of Sarbanes-Oxley
404 implementation. Of the audit fees in 2008, approximately
$247 thousand was related to services provided by PMB Helin Donovan and
$15 thousand was related to services provided by Burr Pilger Meyer, our
predecessor audit firm. Of the audit fees in 2007,
approximately $158,000 was related to services provided by PMB Helin
Donovan, $16 thousand was related to quarterly evaluation of 123R expenses
and $7,000 was related to services provided by Burr Pilger
Meyer.
|
|
|
(2)
|
Includes
fees for expert services provided primarily by PWC in Sweden in support of
the review and audit of our Swedish subsidiary and review of interim
financial statements.
|
|
|
(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
2008 and 2007.
|
|
|
(4)
|
Includes
fees for the preparation and review of our SB-2 Registration, S-8
Registration, Proxy statement, 8-K’s as
required.
|
|
|
All
fees described above were approved by the Audit
Committee.
|
Pre-Approval
Policy and Procedures
The Audit
Committee has adopted a policy that all services for audit, audit-related, taxes
and any other non-audit services 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 must be 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 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 2008 and 2007 were pre-approved by our Audit
Committee.
PART
IV
Item
15. E
xhibi
ts 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.
(c) Exhibits
The
following exhibits are incorporated by reference or filed herewith.
|
2.1*
Agreement and Plan of Merger by and between Zowcom, Inc. and the Company,
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 dated August 18, 2006 by and between Procera the Company
and the Sellers of Netintact 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 the 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 13, 2005 and incorporated herein by
reference.
|
|
3.3*
Certificate of Amendment to Articles of Incorporation included as Exhibit
3.3 to our form 10-Q filed on May 12, 2008 and incorporated herein by
reference.
|
|
3.4*
Amended and Restated Bylaws adopted on August 16, 2007 included as Exhibit
3.4 to our form 10-Q filed on May 12, 2008 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 19, 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 19, 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 December 6, 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 December 6, 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 December 6, 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 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
* Form 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 Warrant Agreement for December 2004 offering included as Exhibit
10.4 to our form 8-K filed on January 4, 2005 and incorporated herein by
reference.
|
|
4.14*
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.
|
|
4.15*
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.
|
|
4.16*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.
|
|
4.17*Form
of Subscription Agreement for September 2008 offering included as Exhibit
10.1 to our form 8-K filed on August 29, 2008 and incorporated herein by
reference.
|
|
4.18*Amendment
No. 1 to Subscription Agreement by and between the Company and Thomas A
Saponas entered into as of September 12, 2008 included as Exhibit 10.2 to
our form 8-K/A filed on September 17, 2008 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 13, 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 to our form 10-KSB 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 10-KSB 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 to our form 10-K filed on April 2, 2008, as amended, and incorporated
herein by reference.
|
|
10.9
*Retirement agreement between the Company and Douglas J. Glader, dated
November 29 2007 and included as Exhibit 10.9 to our form 10-K filed on
April 2, 2008, as amended, and incorporated herein by
reference.
|
|
10.10*Separation
and Consulting Agreement by and between the Company and David E. Stepner
entered into as of September 12, 2008 included as Exhibit 10.1 to our form
10-Q filed on November 12, 2008 and incorporated herein by
reference.
|
|
10.11*Amendment
to Separation and Consulting Agreement by and between the Company and
David E. Stepner entered into as of November 4, 2008 included as Exhibit
10.2 to our form 10-Q filed on November 12, 2008 and incorporated herein
by reference.
|
|
10.12*2007
Equity Incentive Plan included as Exhibit 10.1 to our form 10-Q filed on
May 12, 2008 and incorporated herein by reference.
|
|
10.13*Executive
Employment Agreement for James F. Brear dated as of February 11, 2008
included as Exhibit 10.2 to our form 10-Q filed on May 12, 2008 and
incorporated herein by reference.
|
|
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
13, 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.
|
|
24.1
Power of Attorney (included on signature page hereto).
|
|
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.
|
|
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.
|
*
Previously filed
SIGNA
TURES
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
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Los Gatos, State of California, on this 16
th
day of
March 2009.
|
|
Procera
Networks, Inc.
|
|
|
|
|
|
Date:
March 16, 2009
|
By:
|
/s/ James
F. Brear
|
|
|
|
James
F. Brear
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
Date:
March 16, 2009
|
By:
|
/s/ Paul
Eovino
|
|
|
|
Paul
Eovino
|
|
|
|
Interim
Chief Financial
Officer
|
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints, jointly and severally, James Brear and Paul Eovino,
and each of them acting individually, as his attorney-in-fact, each with full
power of substitution and resubstitution, for him or her in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K
(including post-effective amendments), and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact, or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
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
F. BREAR
|
|
President
and Chief Executive Officer
|
|
March
16, 2009
|
|
James
Brear
|
|
(Principal
Executive Officer) and Director
|
|
|
|
|
|
|
|
|
|
/s/ PAUL
EOVINO
|
|
Interim
Chief Financial Officer,
|
|
March
16, 2009
|
|
Paul
Eovino
|
|
(Principal
Accounting and Financial Officer)
|
|
|
|
|
|
|
|
|
|
/s/ THOMAS
SAPONAS
|
|
Director
|
|
March
16, 2009
|
|
Thomas
Saponas
|
|
|
|
|
|
|
|
|
|
|
|
/s/ SCOTT
MCCLENDON
|
|
Director
|
|
March
16, 2009
|
|
Scott
McClendon
|
|
|
|
|
|
|
|
|
|
|
|
/s/ MARY
LOSTY
|
|
Director
|
|
March
16, 2009
|
|
Mary
Losty
|
|
|
|
|
|
|
|
|
|
|
|
/s/ STAFFAN
HILLBERG
|
|
Director
|
|
March
16, 2009
|
|
Staffan
Hillberg
|
|
|
|
|
|
|
|
|
|
|
|
/s/ TODD
ABBOTT
|
|
Director
|
|
March
16, 2009
|
|
Todd
Abbott
|
|
|
|
|
EXHIBI
T INDEX
|
2.1*
Agreement and Plan of Merger by and between Zowcom, Inc. and the Company,
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 dated August 18, 2006 by and between Procera the Company
and the Sellers of Netintact 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 the 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 13, 2005 and incorporated herein by
reference.
|
|
3.3*
Certificate of Amendment to Articles of Incorporation included as Exhibit
3.3 to our form 10-Q filed on May 12, 2008 and incorporated herein by
reference.
|
|
3.4*
Amended and Restated Bylaws adopted on August 16, 2007 included as Exhibit
3.4 to our form 10-Q filed on May 12, 2008 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 19, 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 19, 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 December 6, 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 December 6, 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 December 6, 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 form 8-K filed on March 1, 2006 and incorporated
herein by reference.
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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.
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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.
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4.12
* Form 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.
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4.13*
Form of Warrant Agreement for December 2004 offering included as Exhibit
10.4 to our form 8-K filed on January 4, 2005 and incorporated herein by
reference.
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4.14*
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.
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4.15*
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.
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4.16*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.
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4.17*Form
of Subscription Agreement for September 2008 offering included as Exhibit
10.1 to our form 8-K filed on August 29, 2008 and incorporated herein by
reference.
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4.18*Amendment
No. 1 to Subscription Agreement by and between the Company and Thomas A
Saponas entered into as of September 12, 2008 included as Exhibit 10.2 to
our form 8-K/A filed on September 17, 2008 and incorporated herein by
reference.
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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.
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10.2*
Amended 2004 Stock Option Plan included as Exhibit 99.3 to our form 8-K
filed on October 13, 2005 and incorporated herein by
reference.
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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.
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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.
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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.
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10.6*
Employee Offer Letter for Jay Zerfoss dated May 10, 2002 included as
Exhibit 10.6 to our form 10-KSB filed on April 3, 2006 and incorporated
herein by reference.
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10.7*
Employee Offer Letter for Gary Johnson dated October 18, 2004 included as
Exhibit 10.8 on our form 10-KSB filed on April 3, 2006 and incorporated
herein by reference.
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10.8
*Lease extension by and between the Company and
Vasona Business Park dated November 20, 2007 included as Exhibit
10.8 to our form 10-K filed on April 2, 2008, as amended, and incorporated
herein by reference.
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10.9
*Retirement agreement between the Company and Douglas J. Glader, dated
November 29 2007 and included as Exhibit 10.9 to our form 10-K filed on
April 2, 2008, as amended, and incorporated herein by
reference.
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10.10*Separation
and Consulting Agreement by and between the Company and David E. Stepner
entered into as of September 12, 2008 included as Exhibit 10.1 to our form
10-Q filed on November 12, 2008 and incorporated herein by
reference.
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10.11*Amendment
to Separation and Consulting Agreement by and between the Company and
David E. Stepner entered into as of November 4, 2008 included as Exhibit
10.2 to our form 10-Q filed on November 12, 2008 and incorporated herein
by reference.
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10.12*2007
Equity Incentive Plan included as Exhibit 10.1 to our form 10-Q filed on
May 12, 2008 and incorporated herein by reference.
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10.13*Executive
Employment Agreement for James F. Brear dated as of February 11, 2008
included as Exhibit 10.2 to our form 10-Q filed on May 12, 2008 and
incorporated herein by reference.
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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
13, 2006 and incorporated herein by reference.
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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.
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23.1
Consent of Registered Public Accounting Firm –
PMB Helin Donovan, LLP.
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24.1
Power of Attorney (included on signature page hereto).
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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.
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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.
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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.
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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.
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* Previously
filed
73
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