UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2006
Commission File Number 0-25882
EZENIA! INC.
(Exact name of registrant as specified in its charter)
DELAWARE | | 04-3114212 |
(State or other jurisdiction of incorporation | | (IRS Employer Identification No.) |
or organization) | | |
14 Celina Avenue, Suite 17-18, Nashua, NH 03063
(Address of principal executive offices, including Zip Code)
(781) 505-2100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non- accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares outstanding of the registrant’s Common Stock as of April 30, 2006 was 14,638,421.
EZENIA! INC.
INDEX
Note: Ezenia!, the Ezenia! Logo, InfoWorkSpace, LaunchPad and Encounter are trademarks of Ezenia! Inc. All other trademarks are property of their respective companies.
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EZENIA! INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share related data)
(Unaudited)
| | March 31, | | December 31, | |
| | 2006 | | 2005 | |
Assets | | | | | |
Current assets | | | | | |
Cash and cash equivalents | | $ | 10,494 | | $ | 9,405 | |
Accounts receivable, less allowances of $428 at March 31,2006 and $339 at
December 31, 2005 | | 3,041 | | 4,533 | |
Prepaid software licenses | | 2,222 | | 2,477 | |
Prepaid expenses and other current assets | | 384 | | 311 | |
Deferred tax assets | | 462 | | 138 | |
Total current assets | | 16,603 | | 16,864 | |
| | | | | |
Capitalized software | | 140 | | — | |
Equipment and improvements, net | | 256 | | 247 | |
Total assets | | $ | 16,999 | | $ | 17,111 | |
| | | | | |
Liabilities and stockholders’ equity | | | | | |
Current liabilities | | | | | |
Accounts payable | | $ | 200 | | $ | 1,593 | |
Accrued expenses | | 218 | | 415 | |
Employee compensation and benefits | | 77 | | 46 | |
Deferred revenue | | 7,107 | | 7,125 | |
Total current liabilities | | 7,602 | | 9,179 | |
| | | | | |
Stockholders’ equity | | | | | |
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued and outstanding | | — | | — | |
Common stock, $.01 par value, 40,000,000 shares authorized, 15,283,859 issued and 14,623,422 outstanding at March 31, 2006; 15,248,386 issued and 14,587,949 outstanding at December 31, 2005 | | 153 | | 152 | |
Capital in excess of par value | | 64,021 | | 63,930 | |
Accumulated deficit | | (51,916 | ) | (53,289 | ) |
Treasury stock at cost, 660,437 shares at March 31, 2006 and December 31, 2005 | | (2,861 | ) | (2,861 | ) |
Total stockholders’ equity | | 9,397 | | 7,932 | |
Total liabilities and stockholders’ equity | | $ | 16,999 | | $ | 17,111 | |
See accompanying notes to unaudited condensed consolidated financial statements.
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EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for share and per share related data)
(Unaudited)
| | Three Months Ended | |
| | March 31, | |
| | 2006 | | 2005 | |
Revenues | | | | | |
Product revenue | | $ | 3,170 | | $ | 2,949 | |
Product development revenue | | 472 | | 118 | |
Service revenue | | 29 | | 75 | |
| | 3,671 | | 3,142 | |
Cost of revenues | | | | | |
Cost of product revenue | | 1,017 | | 1,037 | |
Cost of product development revenue | | 172 | | 41 | |
Cost of service revenue | | 5 | | 19 | |
| | 1,194 | | 1,097 | |
| | | | | |
Gross profit | | 2,477 | | 2,045 | |
| | | | | |
Operating expenses | | | | | |
Research and development | | 325 | | 286 | |
Sales and marketing | | 362 | | 412 | |
General and administrative | | 619 | | 539 | |
Depreciation | | 20 | | 5 | |
Occupancy and other facilities related expenses | | 98 | | 135 | |
Total operating expenses | | 1,424 | | 1,377 | |
| | | | | |
Income from operations | | 1,053 | | 668 | |
| | | | | |
Interest income, net | | 75 | | 29 | |
Other income | | — | | 8 | |
Income before income taxes | | 1,128 | | 705 | |
| | | | | |
Income tax benefit | | 246 | | — | |
Net income | | $ | 1,374 | | $ | 705 | |
| | | | | |
Earnings per share: | | | | | |
Basic and diluted | | $ | 0.09 | | $ | 0.05 | |
| | | | | |
Weighted average shares outstanding: | | | | | |
Basic | | 14,616,890 | | 14,309,274 | |
Diluted | | 14,933,847 | | 14,774,656 | |
See accompanying notes to unaudited condensed consolidated financial statements.
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EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | Three Months Ended | |
| | March 31, | |
| | 2006 | | 2005 | |
Operating activities | | | | | |
Net income | | $ | 1,374 | | $ | 705 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation | | 20 | | 5 | |
Share-based compensation | | 84 | | — | |
Deferred taxes | | (324 | ) | — | |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable | | 1,492 | | 637 | |
Prepaid software licenses | | 255 | | 157 | |
Prepaid expenses and other current assets | | (73 | ) | (88 | ) |
Accounts payable and accrued expenses | | (1,560 | ) | (788 | ) |
Deferred revenue | | (18 | ) | 858 | |
Net cash provided by operating activities | | 1,250 | | 1,486 | |
| | | | | |
Investing activities | | | | | |
Purchases of equipment and improvements | | (29 | ) | (24 | ) |
Capitalized software | | (140 | ) | — | |
Net cash used for investing activities | | (169 | ) | (24 | ) |
| | | | | |
Financing activities | | | | | |
Proceeds from issuance of stock under employee benefit plans | | 8 | | 41 | |
Net cash provided by financing activities | | 8 | | 41 | |
| | | | | |
Change in cash and cash equivalents | | 1,089 | | 1,503 | |
Cash and cash equivalents at beginning of period | | 9,405 | | 5,520 | |
Cash and cash equivalents at end of period | | $ | 10,494 | | $ | 7,023 | |
See accompanying notes to unaudited condensed consolidated financial statements.
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EZENIA! INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business and Basis of Presentation
Ezenia! Inc. (“Ezenia” or the “Company”) operates in one business segment, which is the design, development, manufacturing, marketing and sale of conferencing and real-time collaboration solutions for corporate and governmental networks and eBusiness. Founded in 1991, Ezenia develops and markets products that enable organizations to provide high-quality group communication and collaboration capabilities to commercial, governmental, consumer and institutional users. Ezenia’s products allow individuals and groups, regardless of proximity constraints, to interact and share information in a natural, spontaneous way – voice-to-voice, face-to-face, mouse-to-mouse, keyboard-to-keyboard, flexibly, securely and in real-time. Using our products, individuals can interact through a natural meeting experience, allowing groups to work together effectively and disseminate vital information quickly in a secure environment.
The accompanying unaudited condensed consolidated financial statements include the accounts of Ezenia Inc. and its wholly owned subsidiaries. In the opinion of management, these financial statements contain all normal and recurring adjustments necessary for a fair presentation of the results of these interim periods. Certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, although the Company believes the disclosures in these financial statements are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K as amended for the year ended December 31, 2005. The results of operations for the interim periods shown are not necessarily indicative of the results for any future interim period or for the entire fiscal year.
2. Revenue recognition
Product revenue consists of sales of InfoWorkSpace (“IWS”) software licenses and maintenance agreements, IWS product related training, installation, consulting, and video products. Revenue from sales of IWS software licenses and maintenance agreements is recognized ratably over the subscription software license contract periods, which are generally one year, pursuant to the guidance provided by Statement of Position (“SOP”) 97-2, “Software Revenue Recognition” (SOP 97-2), issued by the American Institute of Certified Public Accountants (“AICPA”). Revenue from IWS training, installation, and consulting services are recognized as the services are performed provided there is vendor specific objective evidence (“VSOE”) of fair value which is the price charged when the services are sold separately. Revenue from video product sales is recognized upon shipment to the customer and the fulfillment of all contractual terms and conditions, pursuant to the guidance provided by Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (SAB 104), issued by the Securities and Exchange Commission.
Product development revenue relates to contracts involving customization of the IWS product according to customer specifications. Revenue associated with contracts for product development revenue with milestone-based deliverables requiring a customers’ acceptance is recognized upon the customers’ acceptance in accordance with terms of the contract, in conformity with the guidance provided by SOP 81-1, “Accounting For Performance of Construction Type and Certain Production Type Contracts” issued by the AICPA. The associated cost recognition with these deliverables or milestones is deferred until the terms of acceptance are satisfied and revenue is recognized.
Service revenue represents sales of service contracts related to the maintenance of the Company’s legacy video product line. Maintenance revenue is deferred and recognized ratably over the term of the applicable
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agreement.
Products and software licenses are sold without any contractual right of return to the customer. Deferred revenue represents amounts received from customers under subscription software licenses, maintenance agreements, or for product sales in advance of revenue recognition. Judgments are required in evaluating the creditworthiness of our customers. In all instances, revenue is not recognized until we have determined, at the outset of the arrangement that collectibility is reasonably assured. Amounts billed to customers related to shipping and handling charges are recorded upon shipment and the related costs are included in cost of goods sold.
3. Share-based compensation
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, “Share-Based Payment” (SFAS 123R). This Statement is a revision of SFAS 123, “Accounting for Stock-Based Compensation” (SFAS 123), and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and its related implementation guidance. SFAS 123R establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the modified grant date fair value of the award and recognize that cost over the period that such services are performed. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB 25. The Company adopted SFAS 123R on January 1, 2006 under the modified-prospective transition method.
Prior to adopting SFAS 123R, we accounted for stock-based compensation under APB 25, as permitted by SFAS 123. No stock-based compensation cost was recognized in the statement of income for the three months ended March 31, 2005, as all options granted had an exercise price equal to the fair market value of the underlying common stock on the date of grant. We have applied the modified prospective method in adopting SFAS 123R. Accordingly, periods prior to adoption have not been restated and are not directly comparable to periods after adoption. Under the modified prospective method, compensation cost recognized in the three months ended March 31, 2006 includes (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, less estimated forfeitures, and (b) compensation cost for all share-based payments granted and vested subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.
Had we used the fair value method prescribed by SFAS 123R to measure compensation related to stock options and awards to employees in prior periods, pro forma net income and pro forma earnings per share would have been as follows:
| | Three Months Ended | |
| | March 31, | | March 31, | |
(in thousands, except for per share data) | | 2006 | | 2005 | |
Net Income, as reported | | $ | 1,374 | | $ | 705 | |
| | | | | |
Add: share-based compensation expense included in reported net income | | 84 | | — | |
Deduct: share-based compensation expense determined under fair value method for all awards | | (84 | ) | (52 | ) |
Pro forma net income | | $ | 1,374 | | $ | 653 | |
| | | | | |
Earnings per share as reported: | | | | | |
Basic | | $ | 0.09 | | $ | 0.05 | |
Diluted | | $ | 0.09 | | $ | 0.05 | |
| | | | | |
Earnings per share pro-forma: | | | | | |
Basic | | $ | 0.09 | | $ | 0.05 | |
Diluted | | $ | 0.09 | | $ | 0.04 | |
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The Company’s Amended and Restated 1991 Stock Incentive Plan (the “1991 Plan”) provided for the sale or award of common stock, or the grant of incentive stock options or nonqualified stock options for the purchase of common stock, for up to 6,090,541 shares to officers, employees and consultants. The 1991 Plan terminated on March 31, 2001, and no further options have been granted under the 1991 Plan subsequent to that date. At March 31, 2006, there were 655,252 shares of common stock reserved to be issued upon exercise of outstanding options granted under the 1991 Plan.
The 2001 Stock Incentive Plan was approved and adopted by the Board of Directors on April 11, 2001 (the “2001 Stock Incentive Plan”). The 2001 Stock Incentive Plan provided for the sale or award of common stock, or the grant of non-qualified stock options for the purchase of common stock, for up to 5,000,000 shares to officers, directors, employees and consultants of the Company. The 2001 Stock Incentive Plan terminated on December 31, 2004 and no further options have been granted under the 2001 Stock Incentive Plan subsequent to this date. At March 31, 2006, there were 196,280 shares of common stock reserved to be issued upon exercise of outstanding options granted under the 2001 Stock Incentive Plan.
In April 1995, the Board of Directors and shareholders approved the Director Plan, which was amended by the Board of Directors on June 5, 2002 (the “Director Plan”). The Director Plan provided that the Board of Directors, at its discretion, was permitted to grant options to non-employee directors, subject to terms and conditions as determined by the Board of Directors. The Director Plan terminated on November 9, 2004, and no further options have been granted under the Director Plan subsequent to that date. At March 31, 2006, there were 34,000 shares of common stock reserved to be issued upon exercise of outstanding options granted under the Director Plan.
The 2004 Stock Incentive Plan was approved and adopted by the Board of Directors on December 31, 2004 (the “2004 Stock Incentive Plan”). The 2004 Stock Incentive Plan provides for the sale or award of common stock or the grant of non-qualified stock options for the purchase of common stock, for up to 7,500,000 shares to officers, directors, employees and consultants of the Company. The options granted under the 2004 Stock Incentive Plan generally vest over four years and have terms of ten years. The 2004 Stock Incentive Plan will terminate on December 31, 2014. At March 31, 2006, there were 1,461,400 shares of common stock reserved to be issued upon exercise of outstanding options granted and 6,036,850 shares were available for grant under the 2004 Stock Incentive Plan.
A summary of stock option activity under all plans for the quarter ended March 31, 2006 is as follows:
| | | | Weighted Average | |
| | Number | | Exercise Price | |
| | Of Shares | | Fair Value | |
Options outstanding, January 1, 2006 | | | 1,845,639 | | $ | 3.66 | |
Granted | | | 550,950 | | 3.29 | |
Exercised | | | (29,657 | ) | 0.28 | |
Canceled | | | (20,000 | ) | 0.70 | |
Options outstanding, March 31, 2006 | | | 2,346,932 | | $ | 3.64 | |
Options exercisable, March 31, 2006 | | | 938,417 | | $ | 5.97 | |
The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding at March 31, 2006 were 7.39 years and $2.5 million, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options exercisable at March 31, 2006 were 4.69 years and $720 thousand, respectively.
We estimate the fair value of each option award issued under the Plans on the date of grant using a Black-
8
Scholes based option-pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of our common stock. We base the expected term of the options on our historical option exercise data with a minimum life expected equal to the vesting period of the option. We base the risk-free interest rate on the U.S. Treasury yield in effect at the time of the grant for a term closest to the expected life of the options.
| | Three months ended March 31 | |
| | 2006 | | 2005 | |
Expected volatility | | 89.11 | % | 154.06 | % |
Risk-free interest rate | | 4.59 | % | 4.00 | % |
Expected life in years | | 4.0 | | 4.0 | |
Expected dividend yield | | None | | None | |
Based on the above assumptions, the weighted average estimated fair value of options granted in the first quarter of fiscal years 2006 and 2005 was $2.17 and $0.96 per share, respectively. We estimated forfeitures related to option grants at an annual rate of 18.47% per year.
Other reasonable assumptions about these factors could provide different estimates of fair value. Future changes in stock price volatility, life of options, interest rates, forfeitures and dividend practices, if any, may require changes in our assumptions, which could materially affect the calculation of fair value.
Total unrecognized equity-based compensation expense related to unvested stock options, expected to be recognized over a weighted average period of 1.74 years, amounted to $1.4 million at March 31, 2006.
4. Research and development costs
We account for research and development costs in accordance with several accounting pronouncements, including SFAS No. 2, “Accounting for Research and Development Costs”, and SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”. SFAS No. 86 specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs should be capitalized until the product is available for general release to customers. During the quarter ended March 31, 2006, we released Version 3.0 of our InfoWorkSpace software product. In connection with this development effort, a total of $140 thousand of costs were capitalized and will be amortized on a straight-line method over the remaining estimated economic life of the product, which we have determined to be two years.
Judgment is required in determining when technological feasibility of a product is established. In most cases, we have determined that technological feasibility for our software products/updates is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is established have generally not been material, and accordingly, were expensed when incurred in these instances. Research and development costs associated with product development work are deferred until such time as that work can be properly recognized as revenue.
5. Income taxes
The calculation of tax assets and liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Deferred tax assets and liabilities are generally determined at the end of each year and based on the future tax consequences that can be attributed to net operating loss and credit carryovers as well as the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. The realization of deferred tax assets is dependant upon the generation of future taxable income. In determining the valuation allowance, Ezenia considers past performance, expected future taxable income, and qualitative
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factors which Ezenia considers to be appropriate to be considered in estimating future taxable income. Ezenia’s forecast of expected future taxable income is for future periods that can be reasonably estimated. Changes in results that differ materially from our current expectations may cause us to change our judgment on future taxable income. These changes, if any, may require us to adjust our existing tax valuation allowance higher or lower than the amount we have previously recorded.
In the first quarter of 2006, as a result of our assessment of future taxable income, we released an additional $759 thousand of valuation allowance against deferred tax assets resulting in a net tax benefit of approximately $246 thousand for the quarter.
6. Net income per share
The Company reports earnings per share in accordance with the SFAS No. 128, Earnings per Share. Diluted earnings per share include the effect of dilutive stock options.
Shares used in computing basic and diluted earnings per share for the quarters ending March 31, 2006 and 2005 are as follows:
| | 2006 | | 2005 | |
Basic – weighted average shares outstanding | | 14,616,890 | | 14,309,274 | |
Dilutive impact from outstanding stock options | | 316,957 | | 465,382 | |
Diluted - weighted average shares outstanding | | 14,933,847 | | 14,774,656 | |
7. Commitments and contingencies
Ezenia’s contractual obligations relate primarily to its facilities leases and a contractual purchase commitment. The primary facility in Nashua, New Hampshire is leased under an operating lease, which expires in June 2010. We also have three other leases for office space in the United States, located in Colorado Springs, Colorado; Sterling, Virginia; and Alexandria, Virginia for sales, development and technical support operations. These leases expire at various dates through November 2011. Purchase commitments represent obligations under agreements which are not unilaterally cancelable by us, are legally enforceable and specify fixed or minimum amounts of goods or services at fixed or minimum prices.
Ezenia is subject to a variety of claims and suits that arise from time to time in the ordinary course of its business. Currently we are not a defendant in any claims or suits.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
This Form 10-Q, and other information provided by us or statements made by our directors, officers or employees from time to time, may contain “forward-looking” statements and information, which involve risks and uncertainties. Statements indicating that we “expect,” “estimate,” “believe,” “are planning” or “plan to” are forward-looking, as are other statements concerning our business focus, expansion of our sales, service, engineering and marketing organization, key differentiators in our market, changes in the competitive landscape, future financial results, product development and offerings, revenues from our legacy videoconference products and services, our ability to generate cash and to meet our working capital needs, and other events that have not yet occurred. These forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements. Factors that may cause such differences include, but are not limited to, our ability to maintain or accurately forecast revenue growth or to anticipate and accurately forecast a decline in revenue from any of our products or services; customer acceptance of our InfoWorkSpace version 3.0; our ability to compete in an intensely competitive market; our ability to develop and introduce new products or enhancements on schedule and that respond to customer requirements and rapid technological change; our dependence on the United States Government as our largest customer; new product introductions and enhancements by competitors; our ability to select and implement appropriate business models, plans and strategies and to execute on them; our ability to identify, hire, train, motivate, and retain highly qualified management/other key personnel and our ability to manage changes and transitions in management/other key personnel; the impact of global economic and political conditions on our business; unauthorized use or misappropriation of our intellectual property; as well as the risk factors discussed in Item 1A of Part II herein and in other periodic reports filed with the SEC. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation to publicly update or revise any such statement to reflect any change in our expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements.
Overview
The growth and acceptance of the IWS product line continued for the quarter ending March 31, 2006 as we recorded our tenth consecutive quarter of profitability. For the quarter, revenues increased approximately 16.8%, operating income was up approximately 57.6%, and earnings per share were $0.09, up $0.04 per share, when compared to the quarter ending March 31, 2005. Revenue relating to our IWS product increased approximately 25.3% for the quarter ending March 31, 2006 as compared to the comparable period in 2005. IWS-related revenue accounted for approximately 99.2% of total revenues. We continued to see a decline in revenue related to our legacy videoconferencing product line as expected. In addition, we continued to control costs resulting in operating expenses as a percentage of revenue dropping to approximately 38.8% for the quarter ending March 31, 2006, as compared to approximately 43.8% for the quarter ended March 31, 2005.
Our current business focus is to continue to enhance our various collaborative product and service offerings, develop and deploy new products and services, and to expand our sales, service, engineering, and marketing organizations. This focus is subject to change as the driving influence in our future direction will be based on the needs of our customer base. The market for multi-media collaboration products is highly competitive and we expect both competition and the overall market, to significantly increase in the future. In addition, some of our current and potential competitors have longer operating histories and greater financial, technical, sales, and marketing resources. If we are unable to retain our existing customers in the US government, or we are unable to convince a sufficient number of new companies or customers with an interest in collaborative technologies to adopt the IWS collaborative software product over alternative
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technologies marketed by our competitors, our financial results would suffer. We believe that the key differentiating factors in the market will continue to be breadth of capabilities, demonstrated interoperability, price, performance, network management capabilities, reliability, scalability, customer support, and security.
We plan to continue to enhance existing products and offerings based on our customer requirements, as well as to work on developing new products and services which will expand the opportunities available to us in the overall collaboration market. In March 2006, the Company released its newest version of InfoWorkSpace, Version 3.0, along with announcing a number of new service offerings. InfoWorkSpace 3.0 adds and or enhances features which specifically address the key factors above: interoperability, scalability, multi-level security, enhancements to the user experience, network management, and reliability. In addition, we currently offer the following services for our products: IWS User Training, IWS Administrator Training, IWS Installation Training, Installation service, and Daily Consulting service. Extended maintenance service plans are also available. Beginning in April 2006, Ezenia began offering On-Line training for the IWS Administrator and IWS User courses. This training capability will save customers travel time, lost productivity, and unnecessary collateral expenses. In addition to expanding our training course offerings, we also began providing in April an unprecedented level of support to our customer base with our “Exercise and Deployment Services”, which are targeted to our government customers and allow military or other units or teams preparing for deployment or exercise maneuvers to eliminate the need to tear down, transport, and bring up their own systems, prior to and following these activities.
Results of Operations
Revenue: Revenue increased 16.8% to approximately $3.7 million for the quarter ended March 31, 2006 from approximately $3.1 million reported for the quarter ended March 31, 2005. This increase in revenue was principally related to increased sales of the Company’s InfoWorkSpace product line, which includes license, maintenance, consulting, training, and product development revenue. Product development revenue is revenue related to customization work performed for customers seeking enhancements to our current product and is generally milestone-based and not recognized until such work is completed and accepted by the customer. InfoWorkSpace product related revenues accounted for approximately 99.2% of total revenues for the quarter ending March 31, 2006, as compared to approximately 97.6% for the same period in 2005. Revenue from legacy videoconferencing products decreased approximately 61.3% for the period ended March 31 2006, as compared to the same period in 2005. We expect our legacy videoconferencing products and related services to continue to decline as a percentage of total revenues.
Revenue from international markets, primarily derived from sales of videoconferencing products and related services, accounted for approximately 1% of total revenue for the three month period ended March 31, 2006 as compared to approximately 3% for the same period in 2005.
Gross Profit: Cost of revenues includes material costs, costs of third-party software licenses, assembly labor and overhead, customer support costs, and engineering and development costs associated with product development revenue. Gross profit as a percentage of revenues was approximately 67.5% for the quarter ended March 31, 2006 as compared to approximately 65.0% for the quarter ended March 31, 2005. The increase in gross profit is primarily attributed to reduced IWS licensing costs offset by a slight decline in margin related to product development revenue from approximately 65.3% for the quarter ended March 31, 2005 to 63.6% for the current quarter.
Research and Development: Research and development expenses include payroll, employee benefits, other headcount related costs, and miscellaneous costs associated with product development. Research and development expenses increased by 13.6% to approximately $325 thousand for the quarter ended March 31, 2006 from approximately $286 thousand for the quarter ended March 31, 2005, due to an increase in headcount related costs, travel, consulting and the adoption of SFAS 123R which added approximately $13 thousand in additional compensation expense.
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Sales and Marketing: Sales and marketing expenses include payroll, employee benefits, and other headcount-related costs associated with sales and marketing personnel, advertising, tradeshows, seminars, and other marketing-related programs. Sales and marketing expenses decreased by 12.1%, to approximately $362 thousand for the quarter ended March 31, 2006 from approximately $412 thousand for the quarter ended March 31, 2005, due to a decrease in employee related compensation costs offset by increases in recruiting expense, and the adoption of SFAS 123R which added approximately $12 thousand in additional compensation expense for the quarter ended March 31, 2006 as compared to the quarter ended March 31, 2005.
General and Administrative: General and administrative expenses include payroll, employee benefits, and other headcount-related costs associated with the finance, human resources, management information systems, and other administrative headcount, and legal and investor relations costs, and other administrative fees. General and administrative expenses increased by 14.8% to approximately $619 thousand for the quarter ended March 31, 2006 as compared to approximately $539 thousand for the quarter ended March 31, 2005, primarily due to increases in headcount-related costs and the adoption of SFAS 123R which added approximately $53 thousand of additional compensation expense offset by decreases in legal and consultant costs.
Occupancy and Other Facilities Related Expenses: Occupancy and other facilities-related expenses include rent expense and other operating costs associated with the Company’s headquarters facility in Nashua, New Hampshire, and three other sales and development offices in Colorado and Virginia. Occupancy costs declined by 27.4% to approximately $98 thousand during the three-month period ended March 31, 2006 as compared to approximately $135 thousand for the corresponding period of the previous year. The decrease in spending was primarily due to a decrease in rent expense associated with the relocation of the headquarters to Nashua, New Hampshire in June 2005, and the relocation of our sales office in February 2005 from Alexandria, Virginia to Sterling, Virginia. Included also within rent expense for the quarter ended March 31, 2005 was a one-time charge of approximately $12 thousand related to the loss on the sublease of the Alexandria, Virginia facility.
Interest Income, net: Interest income, net consists of interest income on cash, cash equivalents and marketable securities. Interest income, net, increased to approximately $75 thousand for the three months ended March 31, 2006 from approximately $29 thousand for the period ended March 31, 2005. The increase is due to an increase of cash available for investment during the current quarter as compared to the quarter ended March 31, 2005.
Other Income: Other income consists primarily of sales of previously written off assets and other miscellaneous non-operating income. There was no other income for the quarter ended March 31, 2006 as compared to approximately $8 thousand for the quarter ended March 31, 2005.
Income Tax Benefit: The amount reported as current income tax benefit for the quarter ended March 31, 2006 is comprised of current income tax expense of approximately $512 thousand, in both federal and state taxes. In addition, the amount includes a deferred tax benefit of approximately $759 thousand associated with the release of a portion of our valuation allowance based on our conclusion that a portion of the deferred tax asset would be realized.
Liquidity and Capital Resources
At March 31, 2006, we had cash and cash equivalents of approximately $10.5 million. We generated profits from operations of approximately $1.1 million for the quarter ended March 31, 2006, and a net profit for the quarter of approximately $1.4 million, as compared with an operating profit and net profit in the quarter ended March 31, 2005 of approximately $668 thousand and $705 thousand, respectively.
We generated cash from operations of approximately $1.3 million for the quarter ended March 31, 2006
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compared to approximately $1.5 million for the quarter ended March 31, 2005. Increases in cash provided by operating activities in the first quarter of 2006 were primarily the result of increases in net income and decreases in accounts receivable and prepaid software licenses, offset by increased uses of working capital attributable to a decrease in accounts payable and accrued expenses and an increase in prepaid expenses and other current assets. Increases in cash provided by operating activities in the first quarter of 2005 were primarily the result of increases in net income and decreases in accounts receivable, prepaid software licenses, and an increase in deferred revenue offset by increased uses for working capital attributable to a decrease in accounts payable and an increase in prepaid expenses and other current assets.
The Company invested approximately $29 thousand in property and equipment during the first quarter of 2006 compared to approximately $24 thousand during the first quarter of 2005. The Company also invested approximately $140 thousand in capitalized software costs associated with the release of Version 3.0 of InfoWorkSpace during the current quarter. The Company has generated cash from financing activities of approximately $8 thousand and $41 thousand during the first quarter of 2006 and 2005 respectively, due to proceeds of sales of the Company’s common stock pursuant to the Company’s various stock plans.
Our contractual obligations relate primarily to our facilities leases and a contractual purchase commitment. We lease our primary facility in Nashua, New Hampshire, under an operating lease, which expires in June 2010. We also have three other leases for office space in the United States, located in Colorado Springs, Colorado; Sterling, Virginia; and Alexandria, Virginia for sales, development and technical support operations. In February 2006, we amended our operating lease for our development and technical support operation in Colorado Springs, Colorado whereby we added an additional 2,010 of square feet to the premises and extended the lease for an additional five years. These leases expire at various dates through November 2011.
In February 2005 we entered into a new agreement with Microsoft to extend an existing software distribution license agreement. Under the agreement, we are required to purchase a minimum of approximately $2.8 million of product during fiscal year 2006.
We include standard intellectual property indemnification provisions in our licensing agreements in the ordinary course of business. Pursuant to our product license agreements, we will indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally business partners or customers, in connection with certain patent, copyright or other intellectual property infringement claims by third parties with respect to our products. Other agreements with our customers provide indemnification for claims relating to property damage or personal injury resulting from the performance of services by Ezenia or its subcontractors. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been insignificant. Accordingly, the estimated fair value of these indemnification provisions is immaterial.
In May 2003, after failing to comply with certain continued listing standards for the NASDAQ SmallCap Market, including maintaining a minimum bid price of at least $1.00 per share, or the requirement for Ezenia to have a minimum $2.5 million in stockholders equity, Ezenia received a delisting notification from NASDAQ. After exercising its right for an appeal of this determination to a NASDAQ Listing Qualifications Panel, the Panel determined to delist Ezenia’s securities from The NASDAQ Stock Market in August 2003. Since then, Ezenia’s common stock has been quoted on the OTC Bulletin Board. The market value and liquidity of Ezenia’s common stock, as well as Ezenia’s ability to raise additional capital, has been and may continue to be materially adversely affected by this delisting decision.
Operating costs were in line with our expectations for the quarter ended March 31, 2006. Operating costs increased by approximately $47 thousand but decreased as a percentage of revenue to 38.8% from 43.8% for the quarter ended March 31, 2006 as compared to the same quarter for fiscal 2005. We remain committed to making the necessary investments in building and expanding our infrastructure in fiscal 2006.
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Ezenia’s success in achieving its goal of showing consistent quarterly top line and bottom line growth is largely dependent on whether it can continue to grow its future order bookings and related revenue targets. Order bookings, which are purchase orders placed by customers, are properly not recorded as revenue or recognized as revenue until all requirements of that order are satisfied, although the cash flow received from these orders may more closely follow the receipt date of the order. Accordingly, largely as a result of its successive quarters of profitability, management believes that its existing cash resources will be sufficient to fund its anticipated working capital and capital expenditure needs for at least the next twelve months. We anticipate that we will continue to generate positive cash flow from operations for 2006 and that existing cash reserves will therefore be sufficient to meet our working and capital requirement needs during this period.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
To date, Ezenia has not utilized derivative financial instruments or derivative commodity instruments. Ezenia invests cash in highly liquid investments, consisting of highly rated U.S. and state government securities, commercial paper and short-term money market funds. These investments are subject to minimal credit and market risk and Ezenia has no debt other than its contractual lease obligations. A 10% change in interest rates would not have a material impact on Ezenia’s financial position, operating results or cash flows. We have closed our foreign offices, and sales to foreign customers from the United States are in U.S. dollars. Therefore, Ezenia has no significant foreign currency risk.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of March 31, 2006, the Company’s management, under the supervision and with the participation of both the chief executive officer and the chief financial officer, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level to ensure that the information required to be disclosed on the reports filed or submitted by the Company under the Securities Exchange Act of 1934 was recorded, processed, summarized, and reported within the requisite time periods, including ensuring that such material information is accumulated and communicated to the Company’s management to allow timely decisions regarding required disclosure. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2006 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving it stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS
Liquidity and history of losses. As further described under Liquidity and Capital Resources, management believes due to the growth and acceptance of our IWS product, the expected growth of Internet-based collaboration products in general, and our successive quarters of profitability and continued vigilance on cost control, that our cash and available resources will enable us to continue as a viable entity. There can be no assurances that we can achieve our goal of showing consistent quarterly revenue and profit growth.
Dependence on major customers. While we are focusing efforts on broadening our customer base, sales to a relatively small number of customers within the US government, specifically within the DoD and the intelligence community, have accounted for a significant portion of revenue. This concentration of customers may cause revenues and operating results to fluctuate from quarter-to-quarter based on major customers’ requirements, and the timing of their orders and shipments. Our agreements with customers generally do not include minimum purchase commitments or exclusivity arrangements. Our operating results could be materially and adversely affected if any present or future major customer were to choose to reduce its level of orders, were to change to another vendor for purchases of a similar product, were to realize a reduction in approved funding for collaborative technologies, or were to delay paying or fail to pay amounts due to us.
Third Party Technology. Ezenia utilizes certain technology which it licenses from third parties, including software which is integrated with internally developed software, and used in the Company’s products to perform key functions. There can be no assurance that functionally similar technology will continue to be available on commercially reasonable terms in the future, or at all. In particular, in February 2005 Ezenia entered into a new agreement with Microsoft Corporation to extend an existing software distribution license agreement. The software distribution license agreement allows Ezenia to integrate Microsoft’s Live Communication software with our proprietary software, to create IWS.
Reduced demand for traditional videoconferencing products. The demand for traditional videoconferencing technology has experienced a rapid decline. Ezenia’s videoconferencing product and related services revenue declined to approximately $495 thousand in 2005, from approximately $633 thousand in 2004 and approximately $2.3 million in 2003. We expect that sales of this legacy hardware technology will continue to decline in 2006.
Evolving markets. Sales of real-time collaboration products account for a significant and increasing portion of Ezenia’s revenue. Our success depends, to a significant extent, on the acceptance and the rate of adoption of Internet-based collaboration products, in general, and the IWS product, in particular. There can be no assurance that any of the markets for our products will develop to the extent, in the manner, or at the rate anticipated by us. In addition, future prices that we are able to obtain for our products may decrease as a result of new product introductions by others, price competition, technological change or other factors.
Rapid technological change. The market for our products is characterized by rapidly changing technology, evolving industry standards, emerging network architectures and frequent new product introductions. The adoption rate of new technologies and products may adversely impact near-term growth of the conferencing market as users evaluate the alternatives. We have invested, and for 2006 plans to continue to invest, in product development and products incorporating certain of these new technologies. Many other companies are also developing products incorporating these new technologies that are competitive with our current and future offerings. Ezenia’s success will depend, in part, upon our ability through continued investments to maintain technological leadership, to enhance and expand our existing product offerings, and to select and develop in a timely manner new products that achieve market acceptance.
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Competition. The market for multimedia collaboration products is highly competitive. Ezenia expects competition to increase significantly in the future, as the market for similar products is expected to significantly expand. A number of companies have introduced or announced their intention to introduce products that could be competitive with Ezenia’s products, and the rapidly evolving nature of the markets in which Ezenia competes may attract other new entrants, as they perceive opportunities. Some of Ezenia’s current and potential competitors have longer operating histories and greater financial, technical, sales, and marketing resources. If we are unable to retain our existing customers in the US government, or were unable to convince a sufficient number of new companies or customers with an interest in collaborative technologies to adopt the IWS collaborative software product over alternative technologies marketed by our competitors, our financial results would suffer.
The principal competitive factors in the market for multimedia collaboration are, and should continue to be, breadth of capabilities, demonstrated interoperability, price, performance, network management capabilities, reliability, scalability, customer support and security. Ezenia plans to compete by offering collaboration and enterprise products with a broad range of capabilities and high performance. However, we cannot be certain that potential customers will be attracted to our products, especially if competitors were to invest substantially more money into their products and technology.
Acceptance of IWS in the commercial market. In 2001, Ezenia purchased the operating assets and intellectual property of the IWS business unit of General Dynamics Electronic Systems. We entered into the purchase agreement with the expectation that the transaction would result in certain benefits including, among other things, benefits relating to expanded and complementary product offerings, enhanced revenues, increased market opportunity, new technology, the addition of engineering personnel, and the expectation that we would be successful in expanding the market for IWS products, both within certain organizations of the US government, including the DoD and the intelligence community, but also commercially. There can be no assurance of success in the commercial market for IWS or other products that we may introduce, in 2006 or beyond.
Protection of proprietary technology. Ezenia’s success depends, to a large extent, on its ability to protect its proprietary technology. Ezenia relies primarily on a combination of contractual rights, trade secrets and copyrights to protect its intellectual property rights, including the fully-paid, non-exclusive, non-transferable license granted by Tandberg to Ezenia for use in connection with its videoconferencing and enterprise collaboration products.
Retention of key employees. Ezenia’s success depends, to a significant degree, upon the continuing contributions of its key management, sales, marketing, and research and development personnel, many of whom would be difficult to replace, including Khoa Nguyen, Ezenia’s Chief Executive Officer. Ezenia does not carry a key-man life insurance on any of its employees, including Mr. Nguyen. Ezenia does not have employment contracts with its key personnel other than Mr. Nguyen. Ezenia believes that its future success will depend in large part upon its ability to attract and retain such key employees.
Stock price volatility. The market price of Ezenia’s common stock, like that of other technology companies, is highly volatile and is subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by Ezenia or its competitors, changes in financial estimates by securities analysts or other events or factors. Ezenia’s stock price may also be affected by broader market trends unrelated to Ezenia’s performance.
Market for Company’s common equity. The shares of the Ezenia’s common stock were delisted from The Nasdaq National Market in August 2003 and are now traded on the OTC Bulletin Board. As a result, an investor may find it more difficult to dispose of the securities due to low trading volume or obtain accurate quotations as to the market value of the securities. In addition, Ezenia is subject to Rule 15c2-11 promulgated by the SEC. If Ezenia fails to meet criteria set forth in such Rule (for example, by failing to file periodic reports as required by the Exchange Act), various practice requirements are imposed on broker-dealers who sell securities governed by the Rule to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability
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determination for the purchaser and have received the purchaser’s written consent to the transactions prior to sale. Consequently, the Rule may have a material adverse effect on the ability of broker-dealers to sell Ezenia’s securities, which may materially affect the ability of shareholders to sell the securities in the secondary market. The delisting could make trading Ezenia’s shares more difficult for investors, potentially leading to further declines in the share price. It would also make it more difficult for Ezenia to raise additional capital. Due to the delisting, Ezenia would also incur additional costs under state blue-sky laws if Ezenia were to sell equity.
Board of director recruitment. Currently we have six directors on our Board, five of whom meet the standards for independence as specified by the SEC and the national stock exchanges. Historically, we have strived to have an audit committee comprised of at least three independent directors, as required by the national stock exchanges. Currently we have three directors serving on our audit committee, all of whom meet the standards for independence as specified by the SEC. One of our directors, Gerald P. Carmen, has the necessary financial expertise to serve as chairman of our audit committee. We are continuing in our attempts to identify additional qualified individuals to serve as independent directors of Ezenia. However, the market for highly qualified individuals available and willing to serve as directors to companies similar to ours is intense, and there can be no assurance that we will be able to identify, recruit and ultimately secure the services of such individuals in a timely manner or at all.
Item 5. Other Information
None
Item 6. Exhibits
Exhibit
Number | | Description of Exhibit |
| | |
31.1 | | Certificate of Khoa D. Nguyen, President and Chief Executive Officer of the Company, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
| | |
31.2 | | Certificate of Roger N. Tuttle, Chief Financial Officer of the Company, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |
| | |
32.1 | | Certificate of Khoa D. Nguyen, President and Chief Executive Officer of the Company, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
| | |
32.2 | | Certificate of Roger N. Tuttle, Chief Financial Officer of the Company, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
Copies of any of these exhibits are available without charge upon written request to Investor Relations, Ezenia! Inc., 14 Celina Avenue, Suite 17-18, Nashua, NH 03063.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EZENIA! INC.
(Registrant)
Date: May 15, 2006 | By: | /s/ Khoa D. Nguyen | |
| | Khoa D. Nguyen |
| | Chairman, Chief Executive Officer, and President |
| | (Principal Executive Officer) |
| | |
| | |
Date: May 15, 2006 | By: | /s/ Roger N. Tuttle | |
| | Roger N. Tuttle |
| | Chief Financial Officer and Secretary |
| | (Principal Financial and Accounting Officer) |
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