UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, DC
20549
FORM
6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE AS OF
1934
For the month of July
2010
Commission
file number: 2-0-27648
VOCALTEC
COMMUNICATIONS LTD.
(Translation
of registrant’s name into English)
12
BENNY GAON STREET, BUILDING 2B
POLEG
INDUSTRIAL AREA, NETANYA, ISRAEL 42504
(Address
of principal executive office)
Indicate
by check mark whether the registrant files or will file annual reports under
cover Form 20-F or Form 40-F.
Form 20-F
x
Form 40-F
¨
Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted
by Regulation S-T Rule 101(b)(1). Yes
¨
No
¨
Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted
by Regulation S-T Rule 101(b)(7). Yes
¨
No
¨
Indicate
by check mark whether the registrant by furnishing the information contained in
this Form is also thereby furnishing the information to the Commission pursuant
to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes
¨
No
x
If “Yes”
is marked, indicate below the file number assigned to registrant in connection
with Rule 12g3-2(b). Not applicable.
The
Merger
On July
16, 2010, VocalTec Communications Ltd., a company organized under the laws of
the State of Israel (“VocalTec”), VocalTec Merger Sub Inc., a Delaware
corporation and wholly-owned subsidiary of VocalTec (“Merger Sub”), and YMax
Corporation, a Delaware corporation (“YMax”), entered into an Agreement and Plan
of Merger (the “Merger Agreement”). Under the terms of the
Merger Agreement, Merger Sub merged with and into YMax, with YMax continuing as
the surviving entity as a wholly-owned subsidiary of VocalTec (the
“Merger”). Following the Merger, VocalTec will continue the
pre-closing operations of VocalTec and YMax.
The
shareholders of YMax received ordinary shares of VocalTec in consideration for
the Merger. The Merger Agreement provided that each share of YMax
outstanding immediately prior to the consummation of the Merger, or the
“Effective Time” (as such term is defined in the Merger
Agreement), was cancelled and the holder thereof was issued 0.10
ordinary shares of VocalTec (the “Merger Consideration”). VocalTec
has issued approximately 10,562,895 ordinary shares as Merger
Consideration.
VocalTec’s
ordinary shares outstanding at the Effective Time remain outstanding and those
ordinary shares are unaffected by the Merger. VocalTec’s ordinary
shares will trade on the
Nasdaq Global Market
under VocalTec’s name with the symbol “CALL” following the Merger.
The
foregoing summary of the terms of the Merger Agreement does not purport to be
complete and is qualified in its entirety by reference to the complete text of
the Merger Agreement, which is filed as Exhibit 10.1 to this Report on Form 6-K
and is incorporated herein by reference.
The
Merger Agreement has been included to provide investors and shareholders with
information regarding its terms. It is not intended to provide any other factual
information about VocalTec or YMax. The representations,
warranties and covenants contained in the Merger Agreement are made only for
purposes of the Merger Agreement and as of specified dates, will be solely for
the benefit of the parties to the Merger Agreement, and will be subject to
limitations agreed upon by the contracting parties, including being qualified by
confidential disclosures exchanged between the parties in connection with the
execution of the Merger Agreement. The representations and warranties may be
made for the purposes of allocating contractual risk between the parties to the
Merger Agreement instead of establishing these matters as facts, and may be
subject to standards of materiality applicable to the contracting parties that
differ from those applicable to investors. Investors are not third-party
beneficiaries under the Merger Agreement and should not rely on the
representations, warranties and covenants or any descriptions thereof as
characterizations of the actual state of facts or condition of VocalTec or YMax
or any of their respective subsidiaries or affiliates. Moreover, information
concerning the subject matter of the representations and warranties may change
after the date of the Merger Agreement, which subsequent information may or may
not be fully reflected in the VocalTec’s subsequent public
disclosures.
Forward-Looking
Statements
This
Information Statement contains forward-looking statements that involve
substantial risks and uncertainties. All statements, other than
statements of historical facts, contained in this Information Statement,
including statements about our strategy, future operations, future financial
position, future revenues, projected costs, prospects, plans and objectives of
management, are forward-looking statements. The words “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,”
“potential,” “will,” “would,” “could,” “should,” “continue” and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words.
Many
factors could cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements that
may be expressed or implied by such forward-looking statements. These factors
include, among other things:
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changes
to our business resulting from increased
competition;
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any
operational or cultural difficulties associated with the integration of
the businesses of VocalTec and
YMax;
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potential
adverse reactions or changes to business relationships resulting from the
announcement or completion of the
Merger;
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unexpected
costs, charges or expenses resulting from the
Merger;
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the
ability of the combined company to achieve the estimated potential
synergies or the longer time it may take, and increased costs required, to
achieve those synergies;
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our
ability to develop, introduce and market innovative products, services and
applications;
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our
customer turnover rate and our customer acceptance
rate;
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changes
in general economic, business, political and regulatory
conditions;
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availability
and costs associated with operating our
network;
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potential
liability resulting from pending or future litigation, or from changes in
the laws, regulations or policies;
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the
degree of legal protection afforded to our
products;
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changes
in the composition or restructuring of us or our subsidiaries and the
successful completion of acquisitions, divestitures and joint venture
activities; and
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the
various other factors discussed in the “Risk Factors” section of this
Information Statement.
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We may
not actually achieve the plans, intentions or expectations disclosed in our
forward-looking statements, and you should not place undue reliance on our
forward-looking statements. Actual results or events could
differ materially from the plans, intentions and expectations disclosed in the
forward-looking statements we make. We have included important
factors in the cautionary statements included in this Information Statement,
particularly in the “Risk Factors” section of this Information Statement, that
we believe could cause actual results or events to differ materially from the
forward-looking statements that we make. Our forward-looking
statements do not reflect the potential impact of any future acquisitions,
mergers, dispositions, joint ventures or investments we may make.
You
should read this Information Statement and the documents that we have filed as
exhibits to this Form 6-K with the understanding that our actual future results
may be materially different from what we expect. We do not assume any
obligation to update any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law.
The
Combined Company
VocalTec,
a pioneer voice-over-IP (“VoIP”) technology since 1994, is a provider of
carrier-class VoIP and convergence solutions for fixed and wireless
communication service providers. It provides trunking, peering and
residential/enterprise VoIP application solutions that enable flexible
deployment of next-generation networks (“NGNs”), as well as VoIP and IN
solutions targeted specifically at mobile service providers. VocalTec
develops, markets and supports advanced telecom solutions that enable the
deployment and smooth migration of telephony networks from legacy networks to
next generation, packet-based networks and the implementation of greenfield next
generation telecom networks. Designed for carriers, VocalTec’s
standards-based solutions handle call control, media relay, signaling and
security within state-of-the-art NGN and mobile networks. Its
SIP-based solutions support a variety of other protocols, including
Megaco/H.248, MGCP, H.323, SIGTRAN M3UA/IUA, SS7, MAP, INAP and CAMEL and
incorporate key elements of the IMS/TISPAN (IP Multimedia Subsystem)
architecture.
YMax has
built an Internet technology, sales and communication platform through
which it provides proprietary products and services to customers
worldwide. Its innovative product offerings include its first
product, the magicJack
®
, a
proprietary device enabling “voice over broadband” telephone services, as well
as other patent pending and proprietary technologies designed to further enhance
user mobility, connectivity and experience. YMax has built one of the
largest telecommunications networks based on the number of states in which it
operates within the United States. The portable magicJack
®
and
associated communications software allows users to make and receive free
telephone calls to and from anywhere in the world where the customer has
broadband access to the Internet and allows customers to make free calls back to
the United States from anywhere legally permitted in the world.
In
addition to supporting the magicJack
®
, YMax’s
technology platform provides opportunities for future business expansion as well
as enhancements to existing products and services. YMax offers other
valuable services including a standalone softphone that allows users to make and
receive free telephone calls ,using a headset or
the computer’s microphone and speakers, or the magicJack
®
, and
will be easily downloaded onto a home or small business computer anywhere
legally available in the world. The users call logs and contacts are kept on our
network so they will not be lost and can be downloaded onto any of the users
computers or applications on their softphones in the future.
The
combined companies expect to achieve operational and customer synergies through
the use of both VocalTec’s and YMax’s patent
portfolios. VocalTec’s significant VoIP experience will augment
YMax’s products and services, and VocalTec and YMax believe that the combination
will increase customer capabilities, expand and enhance strategic opportunities
and provide additional financial strength and flexibility.
Overview
of the Business of the Company
For
purposes of this section, a separate discussion of the business of each of
VocalTec and YMax, as such business existed prior to the Merger, is
presented.
VocalTec
VocalTec
was organized under the laws of the State of Israel in 1989 and is subject to
the Israeli Companies Law (the “Companies Law”). In November
2005, VocalTec consummated a business combination with Tdsoft Ltd. (“Tdsoft”)
and the shareholders of Tdsoft, pursuant to which VocalTec acquired all of the
issued and outstanding share capital of Tdsoft. Following
consummation of the transaction, Tdsoft became a wholly owned subsidiary of
VocalTec. Tdsoft was organized under the laws of the State of Israel
in April 1994. VocalTec’s principal executive offices are
located at 12 Benny Gaon Street, Building 2B, Poleg Industrial Area, Netanya,
Israel 42504l, and the telephone number at that location is
+972-9-970-3888. Our website is http://www.vocaltec.com.
VocalTec
is a provider of carrier-class voice-over-IP and Convergence solutions for fixed
and wireless communication service providers. VocalTec provides trunking,
peering and residential/enterprise VoIP application solutions that enable
flexible deployment of next-generation networks (“NGNs”), as well as VoIP and IN
solutions targeted specifically at mobile service providers. VocalTec develops,
markets and supports advanced telecom solutions that enable the deployment and
smooth migration of telephony networks from legacy networks to next generation,
packet-based networks and the implementation of greenfield next generation
telecom networks. Designed for carriers, VocalTec’s standards-based solutions
handle call control, media relay, signaling and security within state-of-the-art
NGN and mobile networks. VocalTec’s SIP-based solutions support a variety of
other protocols, including Megaco/H.248, MGCP, H.323, SIGTRAN M3UA/IUA, SS7,
MAP, INAP and CAMEL and incorporate key elements of the IMS/TISPAN (IP
Multimedia Subsystem) architecture.
Products
The
Essentra product line was designed to replace legacy products and simplify the
deployment of NGN networks and the migration of networks to new, SIP-based
networks. Following completion of the business combination with
Tdsoft in November 2005,VocalTec focused on completing the integration of the
companies’ operations, including product development, marketing, sales, customer
support, finance and administration. After careful analysis of the companies’
core strengths, VocalTec decided to focus on providing VoIP solutions for
carriers, by leveraging the VocalTec brand and the combined capabilities of both
VocalTec and Tdsoft under the Essentra brand and product line. In addition,
VocalTec management identified carriers in several geographic areas, including
Russia, the Commonwealth of Independent States (“CIS”), Africa, Latin America
and South East Asia, as VocalTec’s targeted growth markets.
Using
Essentra products, a variety of network solutions may be offered, to original
equipment manufacturers, or OEMs, resellers, existing carriers and emerging
operators, such as Voice Over BroadBand/Class 5 Replacement, SOHO, SME and
Corporate Hosted Services, VoIP based wholesale carriers and international long
distance carriers, national long distance, international gateway, voice over
WiMAX and mobile solutions for business travelers and oversees
workers.
The
Essentra product family includes several major elements required when
implementing VoIP networks:
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Essentra CX Media Gateway
Controller
. Essentra CX enables providers of National
and International Long Distance services as well as VoIP providers to
build and/or migrate their infrastructure to packet-based VoIP networks,
with seamless connectivity to PSTN/SS7 services. This is a scalable,
carrier-grade SIP-based media gateway
controller.
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Essentra EX Peering
Manager
. Essentra EX facilitates peering between SIP
and/or H.323 networks. It addresses carriers’ requirements in the areas of
protocol interworking, security and intelligent voice
routing.
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Essentra BAX Application
Server
. Essentra BAX enables the delivery of residential
and hosted enterprise VoIP services over a wide variety of broadband
access infrastructures. With a cost effective entry point and the
capability of scaling up to large numbers of subscribers over time, it
allows service providers to take advantage of evolving IP
opportunities.
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Essentra OSS Operation Support
Server
.
a centralized,
web-based management system, enabling remote management, service
configuration, monitoring and provisioning of Essentra
elements.
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Convergence Platform
.
The Smart Convergence Platform integrates SIP-based telephony (VoIP) into
the mobile core network. It offers end-users one identity, from one
telephone number, across many devices. The platform enables operators to
converge networks such as mobile, fixed and IP Multi-Media Systems (IMS).
The Smart Convergence Platform delivers a seamless end-user experience
between fixed and mobile networks. The Convergence Platform serves as the
underlying infrastructure for various applications and services including
such services as Plug N’ Talk, VCCPlus, and PC
Client.
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Essentra IN
. Essentra IN
encompasses a variety of Intelligent Network (IN) services offered by
VocalTec. These are enabled via the deployment of the solution as a
Service Control Point (SCP), an advanced IN solution providing both
traditional IN as well as Next Generation services. It enables handling
many session types and events including voice, SMS and other value-added
services.
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Multiline
. The
Multiline service provides mobile users with multiple lines operating
simultaneously on a single mobile handset via a regular SIM card.
Subscribers can own multiple identities for both incoming and outgoing
calls on a single device instead of carrying around two or more handsets.
The implementation for business travelers includes the provision of a
virtual-visiting-country-number enabled on the home-country device; in
this manner the business traveler benefits from multiple lines on his
single device.
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Sales and
Marketing
VocalTec
markets and distributes the Essentra products both directly and via multiple
distribution channels, and its main target customers for such products include
fixed-line national and international long distance carriers, competitive local
exchange carriers (CLEC), VoBB providers, incumbent local exchange carriers
(ILEC), alternative VoIP telephony carriers (such as Vonage) and Internet
Telephony Service Providers (ITSPs). Lately, VocalTec also added the mobile
operators to its target customers for the Essentra products by offering a new
set of solutions for mobile operators. VocalTec targets both carriers with an
existing infrastructure as well as those Greenfield carriers building new VoIP
networks.
Upon the
completion of the business combination with Tdsoft, VocalTec’s sales and
marketing efforts have been increased in order to enhance and leverage the
VocalTec brand, and to penetrate specific geographic areas in which VocalTec
believe the Essentra products can be successfully sold. Such areas included
primarily Russia, Commonwealth of Independent States (CIS), Africa, Latin
America and South East Asia. As part of these efforts, VocalTec reached
agreements with a large number of local agents and distributors/systems
integrators that assist VocalTec in the marketing of the Essentra products.
These efforts resulted in new customer acquisitions and serve as a platform for
further sales into each such target market.
In
addition, VocalTec is continuously making efforts to establish relationships
with channel partners, including resellers and other vendors, in order to
leverage their market presence and increase our market reach and sales of
Essentra products.
The sales
cycles for Essentra solutions are typically long as is common to the
telecommunications market and the nature of VocalTec’s Essentra products and
solutions. Once purchased by our end user customers, our
solutions require installation in the network. After installation,
the system usually enters into a service period of twelve to eighteen
months. VocalTec offers three primary maintenance and service
agreements, which are renewed on an annual basis. The standard
service is a 9X5 support service (i.e. during regular business hours), including
fixing of errors and faulty hardware replacement. The premium service includes a
24X7 support service and versions updates, while the premium plus service also
includes restricted eligibility to new product versions released.
YMax
YMax was
organized under the laws of the State of Delaware in 2005. YMax has
built an Internet technology, sales and communication platform through
which its provides proprietary products and services to customers
worldwide. Its platform has numerous capabilities that enable it to
offer a diverse range of services to consumers including voice communications,
relevant ads and Internet retail sales. Since the launch of YMax’s
first product, the magicJack®, YMax has been able to rapidly establish a large
and growing customer base of approximately six million. YMax
will offer other valuable services including standalone software that can be
used to complete a call, will not require proprietary hardware and will be
easily downloaded onto a home computer, a femtocell product that will allow
certain GSM cell phones to connect to the magicJack, and a premium magicJack®
with a CPU that will not require a personal computer to operate. YMax
is also developing applications that can be downloaded onto a smartphone, such
as an iPhone or BlackBerry, and have similar functionality as a magicJack, but
will use a smartphone instead of an analog phone. YMax’s
principal executive offices are located at 5700 Georgia Avenue, West Palm Beach,
Florida, 33405, United States, and its website is www.ymaxcorp.com.
Products
YMax’s
innovative product offerings include its first product, the magicJack®
(introduced in January 2008), a proprietary device weighing less than one ounce
and enabling “voice over broadband” telephone services, as well as other patent
pending and proprietary technologies designed to further enhance user mobility,
connectivity and experience. The magicJack allows users to make and receive free
telephone calls to and from most anywhere in the world. The device connects into
the USB port on any computer with a broadband connection and a customer simply
plugs a telephone into the other end of the magicJack® and is ready to make a
call. YMax’s femtocell product, in a next generation magicJack, will
allow a customer, when in range of a magicJack®, to use a cell phone to make or
receive a free call over our network. Additionally, the next generation
magicJack® will have advanced features, including proprietary 911 emergency
calling technology, that provides a customer’s location to 911 personnel when
connecting away from home. In the future, the softphone will display a contact
list that can be automatically populated with local business listings based on
geographical location as well as local advertisements, providing users with a
more relevant and tailored calling experience. YMax’s
magicJack® is portable and can be used to allow users to make and receive free
calls from any point in the world where the user has broadband access to the
Internet.
YMax
believes that its sophisticated network is one of a kind. YMax
has built one of the largest telephone communications networks based on the
number of states in which it operates within the United States. The design of
YMax’s network enables it to provide high-quality voice service at low cost,
particularly compared to its competitors who use third-party carriers for their
networks. YMax believes that its competitors have a higher cost
structure and less reliable network call quality, providing it with a strong
competitive advantage.
Product Platform and
Pipeline
In
addition to supporting the magicJack®, YMax’s network, together with its
proprietary softphone interface, serves as a platform for future product and
service offerings. YMax’s technology platform provides
opportunities for future business expansion as well as enhancements to existing
product and services. YMax intends to enhance the hardware and
software capabilities of its existing platform enabling additional revenue
streams beyond voice services such as content and information
services. This will allow YMax to further monetize its growing
user base by delivering targeted advertising and other relevant content directly
to our customers.
Future
products offerings may include:
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Femtocell.
A
next generation magicJack will allow a customer, when in range of a
magicJack, to use a cell phone to make a call over our
network. YMax calls this the “femtocell magicJack” or
“femtoJack.” A femtocell creates a small, personal base station
for cell phones designed for use in residential or small business
environments. A femtocell typically can support one or several
mobile phones, allowing an individual to make telephone calls using their
cell phone but completing the calls via the broadband
network. YMax believes that this product will be
attractive to potential customers who have poor cell phone reception in
their homes. The product also will allow customers to avoid
using purchased cell phone minutes by making calls over our network
instead of that of the cell phone
carrier.
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Standalone
Hardware.
YMax also intends to
develop a premium magicJack
®
that contains its own central
processing unit, thus permitting the customer to utilize the magicJack
without the need to connect the
magicJack
®
to a personal computer.
This device will allow our customers to use the premium
magicJack
®
device itself to make and
receive calls in a manner similar to any other wireless or landline
telephone, rather than making and receiving telephone cal
ls through a computer
’
s broadband
connection. In
addition, it will also be
enabled to perform like a current
magicJack.
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E911
. YMax
has patent pending and proprietary hardware and software that overcomes
problems associated with making emergency (911) calls on a nomadic or
portable broadband telephone service device. It has
demonstrated this technology to the FCC and to public safety officials and
believe that our 911 technology should become the standard for the nomadic
broadband telephone service
industry.
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YMax
intends to further monetize its growing customer base by utilizing its
technological platform and product portfolio by offering additional services and
products, including targeted and relevant content and information
services. Each time a customer makes or receives a call from their
computer using their magicJack, YMax’s softphone appears as a pop-up and is
visible on their computer screen. This allows YMax to deliver
advertising and other content directly to its customers.
YMax’s
future content services include:
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Advertising.
YMax
has the ability to target advertising to meet specific needs. When a
customer dials a pizzeria, for example, the softphone can display a real-time
advertisement or a discount coupon for that business or even a competing
store. By clicking on that advertisement, the customer is connected
directly to the advertiser. YMax also believe that retailers
who currently distribute the magicJack will have the opportunity to offer more
products to their identified customer base using our softphone’s advertising
space.
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Pay-per-Click
. A
softphone that supports “Pay-per-Click” functionality. This would
allow YMax to generate revenue any time a customer clicks through to sponsored
websites like Google, 411 information, or others.
·
One-click
Shopping
. Customers will have the opportunity to
purchase products with a single click of the mouse. The customer’s
registered location and, in the future, their measured location, as well as
other customer-specific information, is linked to the magicJack. YMax
can advertise products that our customers can purchase simply by clicking on the
displayed image.
YMax’s
Network
YMax has
switches and related equipment in 32 major cities across the United States and
can service our rapidly growing customer base. Its network also can
be scaled to support future growth. Since its inception, YMax has
focused on building its telecommunications network using a proprietary enhanced
services platform to make and deliver calls in the most cost effective manner
while maintaining superior quality voice applications. Its network
uses over 50 gateways, 65 session border controllers, application servers,
softswitches, and more than 130 servers.
Sales and
Marketing
YMax has
made initial sales of approximately six million magicJack units. YMax
relies on various marketing methods to advertise its products, including
Internet marketing and long and short form television
commercials. YMax currently distributes magicJack through retail
outlets, including Walmart, Radio Shack, Best Buy, Office Depot, Staples,
Walgreens, CVS and others, as well as through direct sales.
Manufacturing
In 2006,
YMax entered into a manufacturing and supply agreement with a Chinese company to
manufacture the magicJack devices. Certain components of the
magicJack are built for YMax, based on its specifications, in Taiwan and Hong
Kong and then sent to the Chinese manufacturer in Shandong, China for final
assembly.
YMax’s
supply chain and third party manufacturing arrangements are structured to allow
it to control product quality, realize cost efficiencies and minimize the risks
associated without having to disclose proprietary technology to multiple outside
parties during production. YMax’s strategy since 2007 has been to
vertically integrate its technology and design suppliers, and it has completed
three acquisitions since 2007 to effect this strategy. As a result of
these strategic acquisitions, YMax controls practically every stage in the
design of its products. Certain magicJack parts are sourced directly
by the production facility in China. YMax works closely with
its suppliers to plan inventory procurement in quantities that will meet
customer demand while minimizing inventory risks. YMax
purchases components and sub-assemblies through separate purchase orders and do
not currently have any long-term purchase contracts with these
suppliers.
VocalTec
VocalTec’s
market is highly competitive and rapidly evolving, and is characterized by
evolving standards, new alliances and consolidation. VocalTec’s
competitive landscape includes providers of softswitches (“trunking”),
application servers (“application”) and session border controllers (“peering”)
as well as those providers offering network and service convergence
solutions. The Essentra solution combines trunking, peering, mobile
and application elements. VocalTec’s principal competitors include
Huawei, ZTE, Veraz Networks, Cirpack (now part of Thomson Technology), Cisco
Systems, Iskratel and Sonus Networks Inc. as softswitch vendors; Broadsoft, and
NetCentrex (part of Comverse Technologies) as application server vendors;
AcmePacket and Genband as session border controller vendors; and Nokia Siemens
Networks, Mavenir and Counterpath as providers of VoIP-to-mobile convergence
services. Many of VocalTec’s competitors are difficult to compete
with, as they are larger than it is, have stronger brand recognition, have
greater long-term resources and can sustain larger price reductions for their
products.
VocalTec
believes that in such a rapidly changing market, key competitive factors include
time to market, technology and experience, reputation, a broad base of users,
strategic alliances, key reference customers, interoperability, product
performance, product features and ease of use, price, customer support,
distribution channels and the ability to respond quickly to emerging
opportunities.
YMax
YMax
faces competition from traditional telephone companies, wireless companies,
cable companies and alternative voice communication providers. Some of our
principal competitors are the traditional telephone service providers, such as
AT&T, Inc., Qwest Communications International Inc. and Verizon
Communications Inc., which provide telephone service based on the public
switched telephone network. Some of these traditional providers also
have added or are planning to add broadband telephone service services to their
existing telephone and broadband offerings. YMax also faces, or
expect to face, competition from cable companies, such as Cablevision Systems
Corp., Charter Communications, Inc., Comcast Corporation, Cox
Communications, Inc. and Time Warner Cable (a division of Time
Warner Inc.), which have added or are planning to add broadband telephone
services to their existing cable television, voice and broadband offerings.
Further, wireless providers, including AT&T Mobility, Sprint Nextel
Corporation, T-Mobile USA Inc., Verizon Wireless and Clearwire, offer
services that some customers may prefer over wireline service. In the
future, as wireless companies offer more minutes at lower prices, their services
may become more attractive to customers as a replacement for wireline
service. Some of these providers may be developing a dual mode phone
that will be able to use broadband telephone service where broadband access is
available and cellular phone service elsewhere, which will pose additional
competition to our offerings.
YMax also
competes against established alternative voice communication providers, such as
Skype, which like YMax’s magicJack subsidiary, is a non-interconnected VoIP
provider, and Vonage, and face competition from other large, well-capitalized
Internet companies, such as America Online, Inc., Google Inc.,
Microsoft Corporation, and Yahoo! Inc., which have recently launched, or
plan to launch, broadband telephone service. In addition, YMax will
compete with independent broadband telephone service providers.
Because
most of YMax’s target customers are already purchasing communications services
from one or more of these providers, success is dependent upon its ability to
attract target customers away from their existing providers. YMax
competes primarily through the quality and cost structure of its network and its
low pricing.
Many of
YMax’s actual and potential competitors enjoy greater name recognition, longer
operating histories, more varied products and services and larger marketing
budgets, as well as substantially greater financial, technical and other
resources than it does. In addition, YMax may also face future
competition from new market entrants. YMax believes that its
large existing user base, competitive pricing, efficient customer acquisition
model and low cost service delivery, position it well to compete effectively in
the future.
Intellectual
Property
Our means
of protecting our proprietary rights may not be adequate and our competitors may
independently develop technology that is similar to ours. Legal
protections afford only limited protection for our technology. The laws of many
countries do not protect our proprietary rights to as great an extent as do the
laws of the United States. Despite our efforts to protect our
proprietary rights, unauthorized parties have in the past attempted, and may in
the future attempt, to copy aspects of our products or to obtain and use
information that we regard as proprietary. Third parties may also design around
our proprietary rights, which may render our protected products less valuable,
if the design around is favorably received in the marketplace. In addition, if
any of our products or the technology underlying our products is covered by
third-party patents or other intellectual property rights, we could be subject
to various legal actions. We cannot assure you that our products do not infringe
patents held by others or that they will not in the future. Both
VocalTec and YMax have received in the past communications from third parties
relating to technologies used in their products (including, with respect to
YMax, the magicJack) that have alleged violation of other intellectual property
rights.
In response
to these communications, we have contacted these third parties to convey our
good faith belief that we do not violate those parties’ rights. We
cannot assure you that we will not receive further correspondence from these
parties, or not be subject to additional allegations of infringement from
others. Litigation may be necessary to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity, misappropriation, or other claims. Any such
litigation could result in substantial costs and diversion of our resources.
Moreover, any settlement of or adverse judgment resulting from such litigation
could require us to obtain a license to continue to use the technology that is
the subject of the claim, or otherwise restrict or prohibit our use of the
technology. Any required licenses may not be available to us on acceptable
terms, if at all. If we attempt to design around the technology at issue or to
find another provider of suitable alternative technology to permit us to
continue offering applicable software or product solutions, our continued supply
of software or product solutions could be disrupted or our introduction of new
or enhanced software or products could be significantly delayed.
VocalTec
VocalTec
relies on a combination of trade secrets, copyright, trademark and patent law,
together with non-disclosure and invention assignment agreements, to establish
and protect the technology used in its products. VocalTec has filed
numerous patent applications in the United States and other countries with
respect to certain technologies employed in its products. Some of those
applications have already registered and VocalTec has the rights to use these
registered patents, either under a non-exclusive license, or by owning these
patents. VocalTec currently holds more than 20
patents. VocalTec has not recently filed any new patent
application in the United States or elsewhere. VocalTec, Essentra,
TdSOFT, TdGATE, TdVIEW, PLUG & TALK, SmartFMC, and SmartIMS are trademarks
or registered trademarks of VocalTec and its fully-owned
subsidiaries.
YMax
YMax
relies on a combination of patent, copyright, trademark and trade secret laws,
as well as confidentiality agreements, to establish and protect its intellectual
property worldwide. YMax has filed numerous foreign and domestic
patent applications directed to its magicJack device and related
technologies, including elements such as E911 capability, emergency call
routing, emergency call location determination and femtocell capability.
At present, YMax has eight pending utility patent applications in the United
States, twenty-three pending foreign patent applications, and one pending
international patent application awaiting nationalization, directed to such
technologies. YMax is also actively researching new technologies and
improvements to its existing technologies and intends to pursue patent
protection for these technologies to the extent permissible by law and prudent
for its business. If and when patents issue from such pending
applications, those patents will expire between February 2026 and May
2030. One design patent has also been issued by the United States Patent
and Trademark Office, and another design patent application is pending in the
United States. Many of YMax’s software and network solutions have been developed
internally and are proprietary.
magicJack
LP’s registered US trademarks include MAGICJACK, MAGICJACK & Design,
MAGICIN, MAGICOUT, MAGICFIX and MAGICFIX & Design. The MAGICJACK mark
is also registered in China and in the European Union as a Community
Trademark. magicJack LP has pending US trademark applications for the
marks MAGICPHONE, MAGICCELL, and MAGICPAGE, MAGICTALK AND FEMTOJACK.
Trademark applications for the MAGICJACK mark have been filed and are pending in
certain foreign countries, including Canada, Mexico, Peru and El
Salvador. Trademark applications for the MAGICJACK & Design mark
are pending in Canada and Mexico. In Canada, magicJack LP has a
pending application for the MAGICCELL mark.
Environmental
Matters
We are
subject to various federal, state and local environmental protection and health
and safety laws and regulations, and we incur costs to comply with those laws.
We lease real property, and some environmental laws hold current or previous
operators of businesses and real property liable for contamination on that
property, even if they did not know of and were not responsible for the
contamination. Environmental laws may also impose liability on any person who
disposes of hazardous substances, regardless of whether the disposal site is
owned or operated by such person. Although we do not currently anticipate that
the costs of complying with environmental laws will materially adversely affect
us, we cannot ensure that we will not incur material costs or liabilities in the
future due to the discovery of new facts or conditions, the occurrence of new
releases of hazardous materials or a change in environmental laws.
Regulation
VocalTec
VocalTec’s
research and development efforts have been financed, in part, through grants
that have received from the Office of the Chief Scientist of the State of Israel
(the “OCS”). Therefore, VocalTec must comply with the requirements of
the Israeli Law for the Encouragement of Industrial Research and Development,
1984 (the “Research Law”) and related regulations.
Under the
Research Law, the discretionary approval of an OCS committee is required for any
transfer of technology or manufacturing of products developed with OCS funding
outside of Israel. OCS approval is not required for the export of any products
resulting from the research or development. Such approvals, if granted, may be
subject to restrictions.
VocalTec
products must comply with various international and domestic regulations and
standards defined by regulatory agencies. In addition, deployment, sale and
marketing of products in certain countries may subject VocalTec to environmental
and other regulations including, in some instances, the requirement to provide
to customers the ability to return products at the end of their useful
life.
YMax or
its subsidiaries is subject to federal regulation under the rules and
regulations of the Federal Communications Commission (the “FCC”) and various
state and local regulations. magicJack believes that, like Skype, it
is a non-interconnected VoIP provider.
The FCC
has to date asserted limited statutory jurisdiction and regulatory authority
over the operations and offerings of certain providers of broadband telephone
services. FCC regulations may be applied now, or may in the future, be applied
to the broadband telephone operations of the Company. Other FCC
regulations apply to us because we operate network facilities and provide
international calling capability. Certain of our operations are also subject to
regulation by state public utility commissions (“PUCs”).
E911
Calling
The FCC
has required providers of interconnected VoIP services to provide 911 emergency
calling capabilities to their customers. As a non-interconnected VoIP
provider, magicJack may not now be required by the FCC to provide 911 service,
magicJack nevertheless currently provides a 911 solution for its magicJack
customers.
Many
state and local governments have sought to impose fees on customers of VoIP
providers, or to collect fees from VoIP providers, to support implementation of
E911 services in their area. Such fees are often put in terms of a
fee placed on monthly bills, or focused on use from a specific
location. The application of such fees with respect to magicJack
users and YMax is not clear.
Universal Service Fund
(USF)
The FCC
and many PUCs have established USF programs to ensure that affordable
telecommunications services are widely available, in high cost areas and for
income-eligible telephone subscribers. Other fees are imposed to meet
the costs of establishing and maintaining a numbering administration system, to
recover the shared costs of long-term number portability, and to contribute to
the Telecommunications Relay Services Fund. All telecommunications carriers must
contribute to these funds, and the requirements have been expanded to
interconnected VoIP providers. Non-interconnected VoIP providers have not been
subjected to these contribution requirements. The FCC and many PUCs
have for a number of years been considering substantial changes to the USF
system including changes in contribution methodology. Some proposals,
if adopted, could have a material adverse effect on YMax’s
business. USF charges are based on charges to the end user for
telecommunication services. magicJack does not charge for
telephone services.
Customer Privacy and
Promotional Activities
YMax is
subject to various federal and state laws and regulations seeking to protect the
privacy of customers’ personal information that restrict our ability to use such
information for marketing and promotional purposes. The FCC limits telephone
company and interconnected VoIP providers use of customer proprietary network
information such as telephone calling records without customer approval, and
requires those companies to protect it from disclosure. Federal and
state laws also limit our and other companies’ ability to contact customers and
prospective customers by telemarketing, email or fax to advertise
services.
Services for the
Disabled
Under
federal law, interconnected VoIP providers must take steps to ensure that
individuals with disabilities, including hearing impaired and other disabled
persons, have reasonable access to their services, if such access is readily
achievable.
Number
Portability
The FCC
requires interconnected VoIP providers to comply with Local Number Portability
rules that allow subscribers remaining in the same geographic area to switch
from a wireless, wireline or VoIP provider to any other wireless, wireline or
VoIP provider and keep their existing phone numbers.
YMax
may be subject to a number of PUC regulations that govern the terms and
conditions of its offerings, including billing practices, 911 fees, distribution
of telephone numbers, customer disputes and other consumer protection
matters.
In
addition to the foregoing regulations to which YMax may be subject directly,
changes to FCC and PUC regulations could affect the services, and the terms and
conditions of service, YMax is able to provide. Moreover, changes to any
regulations to which YMax is subject directly or indirectly could create
uncertainty in the marketplace that could reduce demand for its services,
increase the cost of doing business as a result of costs of litigation or
increased service delivery cost or could in some other manner have a material
adverse effect on its business, financial condition or results of operations.
Any new legislation or regulation, or the application of laws or regulations
from jurisdictions whose laws do not currently apply to our business, could have
an adverse effect on YMax’s business.
Risk
Factors
Risks
Related to the Business
YMax
could incur operating losses for the foreseeable future, and VocalTec has
incurred significant historical operating losses.
YMax had
net operating losses of approximately $25 million, $49 million and $13 million
in 2009, 2008 and 2007 respectively. VocalTec had net operating
losses of $3.2 million and $14.4 million in fiscal 2009 and 2007, respectively,
and operating income of $3.7 million in 2008. We expect to continue
to incur significant operating and capital expenditures as we increase our sales
and marketing activities to expand our customer base and increase our research
and development activities as we develop enhanced technologies and features to
improve our services, products and offerings, increase our general,
administrative and operating functions to support our growing operations, and
since some of our activities are in a market with typically long sale cycles
(primarily mobile VoIP products). As a result, we will need to
generate a significant amount of revenues to achieve and maintain
profitability. These increased expenses could exceed any revenues we
may generate. Our efforts to attract new customers and to provide our
current communications applications and services to an increased number of
customers may be more expensive than we currently anticipate. If we
do not significantly increase revenues after investing in these efforts, our
results from operations would be harmed. Even if we achieve
profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future. Because
of YMax’s limited operating history, the financial and operating
costs relating to the integration of VocalTec and YMax, and the early stage of
the market for some of our products and services, historical trends and expected
performance are difficult to analyze. If revenues grow more slowly
than we anticipate, or if operating expenses exceed our expectations or cannot
be adjusted accordingly, our business, results of operations and financial
condition will be adversely affected.
We
have experienced, and may continue to experience, significant fluctuations in
our quarterly results, which might make it difficult for investors to make
reliable period-to-period comparisons and may contribute to volatility in the
market price of our ordinary shares.
Our
operating results have fluctuated and may continue to fluctuate from period to
period for a number of reasons. Due to the past volatility of
the market for wireless communications and telecommunication equipment, we
cannot predict the impact on our revenues or results of operations that any
deterioration in such market may have.
Significant
annual and quarterly fluctuations in our results of operations may also be
caused by, among other factors, the timing and composition of orders from our
customers, reduced prices for our products, the economic viability and
credit-worthiness of our customers, the collectability of our receivables, the
timing of new product announcements and releases of new products by us and by
our competitors, potential adverse reactions or changes to business
relationships resulting from the announcement or completion of the Merger and
unexpected costs, charges or expenses resulting from the Merger.
Our
future results may also be affected by our ability to continue to develop,
introduce and deliver enhanced and new products in a timely manner, to offer new
products at competitive prices, to offer existing products at lower prices, to
compete with competitors that are larger than us and to anticipate and meet
customer demands. There can be no assurance that sales in any particular quarter
will not be lower than those of the preceding quarters, including comparable
quarters.
As a
result, we believe that period-to-period comparisons of our results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. The volatility in our operating results may
also result in significant volatility in our share price. It is also possible
that our quarterly results of operations may be below the expectations of public
market analysts and investors. If this happens, the price of our ordinary shares
is likely to decrease.
We
cannot assure you that investors or securities analysts will agree with our
estimate of the enterprise value of the combined company.
Our
initial estimated enterprise value of $245 million is based on management’s
assessment of the value of the combined company. We cannot assure
you that this valuation will meet the expectations of investors or securities
industry analysts. If we fail to meet or exceed such expectations for
these or any other reasons, the market price of our shares could decline.
The stock market generally, and the communications sector in
particular, can be volatile. Our share price can change dramatically in
ways unrelated to, or that bear a disproportionate relationship to, operating
performance. You should not rely on our estimated enterprise value as
being indicative of the value of the combined company.
The
market in which we participate is highly competitive and if we do not compete
effectively, our operating results may be harmed.
The
telecommunications industry is highly competitive. We will face
intense competition from traditional telephone companies, wireless companies,
cable companies and alternative voice communication providers.
The
principal competitors for YMax’s products and services include the traditional
telephone service providers, such as AT&T, Inc., Qwest Communications
International Inc. and Verizon Communications Inc., which provide
telephone service using the public switched telephone
network. Certain of these traditional providers also have added, or
are planning to add, broadband telephone service services to their existing
telephone and broadband offerings. We also face, or expect to face,
competition from cable companies, such as Cablevision Systems Corp., Charter
Communications, Inc., Comcast Corporation, Cox Communications, Inc.
and Time Warner Cable (a division of Time Warner Inc.), which have added or
are planning to add broadband telephone service services to their existing cable
television, voice and broadband offerings. Further, wireless
providers, including AT&T Mobility, Sprint Nextel Corporation, T-Mobile
USA Inc. Verizon Wireless and Clearwire, offer services that some customers
may prefer over wireline service. In the future, as
wireless companies offer more minutes at lower prices, their services may become
more attractive to customers as a replacement for wireline
service. We have no assurance that wireless providers will not
attempt to prevent the usage of our femtocell product by our customers, and any
blocking or fee imposed by such carriers of such usage could adversely affect
our revenue and results of operations. Some of these providers have
developed or may be developing their own femtocell products, as well as a dual
mode phone that will be able to use broadband telephone service where broadband
access is available and cellular phone service elsewhere, which will pose
additional competition to our offerings.
We also
compete against established alternative voice communication providers, such as
Vonage and Skype, and face competition from other large, well-capitalized
Internet companies, such as America Online, Inc., Microsoft Corporation and
Yahoo! Inc., which have recently launched or plan to launch broadband
telephone service. Google has recently launched its beta version of
Google Voice, and other companies may develop similar, competitive services in
the future. In addition, we compete with independent broadband
telephone service providers.
VocalTec
competes with providers of softswitches (“trunking”), application servers
(“application”) and session border controllers (“peering”) as well as those
providers offering network and service convergence solutions. Our
principal competitors for these products and services include Huawei, ZTE, Veraz
Networks, Cirpack (now part of Thomson Technology), Cisco Systems, Iskratel and
Sonus Networks Inc. as Softswitch vendors; Broadsoft, and NetCentrex (part of
Comverse Technologies) as application server vendors; AcmePacket and Genband as
session border controller vendors; and Nokia Siemens Networks, Mavenir and
Counterpath as providers of VoIP-to-mobile convergence services.
We expect our
combined business to rely on the magicJack product, together with an
accompanying communications software license, for a substantial portion of our
revenue. If we are unable to introduce new products or services, our
ability to generate significant future revenue may be limited, and our business
will be harmed.
We
anticipate that sales of our magicJack, and revenue derived from such sales and
from the software license that accompanies the magicJack,
will constitute a
substantial portion of net revenues during fiscal 2010. Any material
decrease in the overall level of sales of our magicJack, whether as a result of
competition, change in consumer demand, or any other factors, would have a
material adverse effect on our business, financial condition and results of
operations. We do not know whether sales of our other products and
services will ever reach the current sales levels of our magicJack
products. Our inability to successfully commercialize these
additional products and services could have a material adverse effect on our
efforts to diversify our product offerings and revenues and ultimately on our
business, financial condition and results of operations.
We
may face difficulty in attracting new customers, and if we fail to attract new
customers, our business and results of operations may suffer.
Most
traditional wireline and wireless telephone service providers and cable
companies are substantially larger and better capitalized than we are and have
the advantage of a large existing customer base. Because most of our
target customers are already purchasing communications services from one or more
of these providers, our success is dependent upon our ability to attract target
customers away from their existing providers. In addition, these competitors
could focus their substantial financial resources to develop competing
technology that may be more attractive to potential customers than what we
offer. Our competitors’ financial resources may allow them to offer
services at prices below cost or even for free in order to maintain and gain
market share or otherwise improve their competitive
positions. The Essentra products compete with existing,
comparable products of various companies, some of which have certain advantages
over us, including larger financial resources, access to prospective customers
and an established market for their products.
Our
competitors also could use their greater financial resources to offer broadband
telephone service with more attractive service packages that include on-site
installation and more robust customer service. In addition, because of the other
services our competitors provide, they may choose to offer broadband telephone
service as part of a bundle that includes other products, such as video, high
speed Internet access and wireless telephone service, which we do not offer.
This bundle may enable our competitors to offer broadband telephone service at
prices with which we may not be able to compete or to offer functionality that
integrates broadband telephone service with their other offerings, both of which
may be more desirable to consumers. Any of these competitive factors could make
it more difficult for us to attract and retain customers to our products, cause
us to lower our prices in order to compete and reduce our market share and
revenues.
We may be unable to obtain enough
phone numbers in desirable area codes to meet demand, which may adversely affect
our ability to attract new customers and our results of
operations
.
Our
operations are subject to varying degrees of federal and state regulation.
We currently allow customers to select the area code for their desired phone
number from a list of available area codes in cities throughout much of the
United States. This selection may become limited if we are unable to
obtain phone numbers, or a sufficient quantity of phone numbers, in certain area
codes, due to exhaustion and consequent shortages of numbers in those area
codes, restrictions imposed by federal or state regulatory agencies, or a lack
of telephone numbers made available to us by third parties. If we are
unable to provide our customers with a nationwide selection of phone numbers in
all geographical areas and are unable to obtain telephone numbers from another
alternative source, or are required to incur significant new costs in connection
with obtaining such phone numbers, our relationships with current and future
customers may be damaged, causing a shortfall in expected revenue, increased
customer attrition, and inability to attract new customers. As a result,
our business, results of operations and financial condition could be materially
and adversely affected.
We
may experience delays in the deployment of new products. If we are
not successful in the continued development, introduction or timely manufacture
of new products, demand for our products could decrease.
The
development of the magicJack resulted from our ability to anticipate changes in
technology, industry standards and service provider service offerings, and to
develop and introduce new and enhanced products and services to meet customer
demand. While we have several new products currently in development,
including an E911 solution, Femtocell and others, our continued ability to adapt
to such changes will be a significant factor in maintaining or improving our
competitive position and our prospects for growth. Factors resulting
in delays in product development include:
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rapid
technological changes in the broadband communications
industry;
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federal,
state and local regulations governing our products and
services;
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relationships
with manufacturers, other carriers and service providers;
and
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the
availability of third party technology for the development of new
products.
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There can
be no assurance that we will successfully introduce new products on a timely
basis or achieve sales of new products in the future. In addition, there can be
no assurance that we will have the financial and product design resources
necessary to continue to successfully develop new products or to otherwise
successfully respond to changing technology standards and service provider
service offerings. If we fail to deploy new products on a timely basis, then our
product sales will decrease, our quarterly operating results could fluctuate,
and our competitive position and financial condition would be materially and
adversely affected.
In
addition, our pursuit of necessary technology may require substantial time and
expense. We may need to license new technologies to respond to
technological change. These licenses may not be available to us on
terms that we can accept or may materially change the gross profits that we are
able to obtain on our products. We may not succeed in adapting our products to
new technologies as they emerge. Development and manufacturing
schedules for technology products are difficult to predict, and there can be no
assurance that we will achieve timely initial customer shipments of new
products. The timely availability of these products in volume and
their acceptance by customers are important to our future
success. Any future delays, whether due to product development
delays, manufacturing delays, lack of market acceptance, delays in regulatory
approval, or otherwise, could have a material adverse effect on our results of
operations.
Our
products must comply with various international and domestic regulations and
standards.
Our
products must comply with various international and domestic regulations and
standards defined by regulatory agencies. If we do not comply with existing or
evolving industry standards and other regulatory requirements or if we fail to
obtain in a timely manner any required domestic or foreign regulatory approvals
or certificates, we will not be able to sell our products where these standards
or regulations apply, which may harm our business. Moreover, distribution
partners or customers may require us, or we may otherwise deem it necessary or
advisable, to alter our products to address actual or anticipated changes in the
regulatory environment. Our inability to alter our products to address these
requirements and any regulatory changes could have a material adverse effect on
our business, financial condition, and operating results.
If
we do not correctly anticipate demand for our products, we may not be able to
secure sufficient quantities or cost-effective production of our products or we
could have costly excess production or inventories.
We have
generally been able to increase production to meet our increasing
demand. However, the demand for our products depends on many factors
and will be difficult to forecast. We expect that it will become more
difficult to forecast demand as we introduce and support multiple products, as
competition in the market for our products intensifies and as the markets for
some of our products mature to the mass market category. Significant
unanticipated fluctuations in demand could cause problems in our operations,
such as:
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If
demand increases beyond what we forecast, we would have to rapidly
increase production. We would depend on suppliers to provide additional
volumes of components and those suppliers might not be able to increase
production rapidly enough to meet unexpected
demand.
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Rapid
increases in production levels to meet unanticipated demand could result
in higher costs for manufacturing and supply of components and other
expenses. These higher costs could lower our profit margins. Further, if
production is increased rapidly, manufacturing quality could decline,
which may also lower our margins and reduce customer
satisfaction.
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If
forecasted demand does not develop, we could have excess production
resulting in higher inventories of finished products and components, which
would use cash and could lead to write-offs of some or all of the excess
inventories. Lower than forecasted demand could also result in excess
manufacturing capacity or reduced manufacturing efficiencies at our
facilities, which could result in lower
margins.
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Certain
aspects of our service materially differ from services offered by traditional
telephone service providers, which may limit the acceptance of our services by
mainstream consumers and our potential for growth.
Certain
aspects of our service are not the same as traditional telephone service, which
may limit the acceptance of our services by mainstream consumers and our
potential for growth. Our growth is dependent on the adoption of our
services by mainstream customers, so these differences are becoming increasingly
important. For example:
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our
E-911 and emergency calling services differ, in significant respects, from
the 911 service associated with traditional wireline and wireless
telephone providers;
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our
customers may at times experience lower call quality than they are used to
from traditional wireline telephone companies, including static, echoes
and delays in transmissions;
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our
customers may at times experience higher dropped-call rates than they are
used to from traditional wireline telephone
companies;
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customers
who obtain new phone numbers from us do not appear in the phone book and
their phone numbers are not available through directory assistance
services offered by traditional telephone
companies;
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our
customers cannot accept collect
calls;
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our
customers cannot reach certain telephone numbers;
and
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in
the event of a power loss or Internet access interruption experienced by a
customer, our service may be
interrupted.
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If
customers do not accept the differences between our service and traditional
telephone service, they may choose to remain with their current telephone
service provider or may choose to return to service provided by traditional
telephone companies, and customer demand for services will
decrease.
Our
emergency and E-911 calling services are different from those offered by
traditional wireline telephone companies and may expose us to significant
liability.
While we
do not believe we are today subject to regulatory requirements to provide such
capability, we provide our customers with emergency calling service/E-911
calling services that significantly differ from the emergency calling services
offered by traditional wireline telephone companies. Those differences may cause
significant delays, or even failures, in callers’ receipt of the emergency
assistance they need. Traditional wireline telephone companies route emergency
calls over a dedicated infrastructure directly to an emergency services
dispatcher at the public safety answering point, or PSAP, in the caller’s area.
Generally, the dispatcher automatically receives the caller’s phone number and
actual location information. The only location information that our E-911
service can transmit to a dispatcher at a PSAP is the information that our
customers have registered with us. A customer’s registered location may be
different from the customer’s actual location at the time of the call because
customers can use their magicJack device to make calls almost anywhere a
broadband connection is available. Significant delays may occur in a customer
updating their registered location information, and in applicable databases
being updated and new routing implemented once a customer has provided new
information. If our customers encounter delays when making emergency services
calls and any inability to route emergency calls properly, or of the answering
point to automatically recognize the caller’s location or telephone number, such
delays can have devastating consequences. Customers may, in the future, attempt
to hold us responsible for any loss, damage, personal injury or death suffered
as a result.
Traditional
phone companies also may be unable to provide the precise location or the
caller’s telephone number when their customers place emergency calls. However,
traditional phone companies are covered by federal legislation exempting them
from liability for failures of emergency calling services, and we are not
afforded such protection. In addition, we have lost, and may in the future lose,
existing and prospective customers because of the limitations inherent in our
emergency calling services. Additionally, service interruptions from our
third-party providers could cause failures in our customers’ access to E-911
services. Finally, we may decide not to offer customers E-911
services at all. Any of these factors could cause us to lose
revenues, incur greater expenses or cause our reputation or financial results to
suffer.
We
may decide to end our emergency and E-911 calling services in the future, which
may affect our revenues and expose us to significant liability.
Although
we currently make available emergency and E-911 services to users, we
do not believe that we are required by regulations to do
so. We may, in the future, decide to discontinue providing such
services. Discontinuing such services may adversely affect customer
demand and may affect our revenues. In addition, customers who fail
to reach emergency services may, in the future, attempt to hold us responsible
for any loss, damage, personal injury or death suffered as a
result.
If
our services are not commercially accepted by our customers, our prospects for
growth will suffer.
We expect
to derive a substantial amount of revenues from our broadband telephone service
offering sold to consumers and businesses. Our success relies on the commercial
acceptance of our offering from consumers and business. Although we
are currently selling our services to a number of customers, we cannot be
certain future customers will find our services attractive. If
customer demand for our services does not develop or develops more slowly than
anticipated, it would have a material adverse effect on our business, results
from operations and financial condition. In addition, we expect to
derive a substantial amount of revenue from pay-per-click online advertisers and
click-to-buy online retailers. Our success relies on the commercial acceptance
of our offering from these advertisers and retailers. We are not currently
selling our advertising and retailing services and we cannot be certain future
online advertisers and retailers will find our services attractive. If demand
for these services does not develop or develops more slowly than anticipated, it
would have a material adverse effect on our business, results of operations and
financial condition.
If
we are unable to retain our existing customers, our revenue and results of
operations would be adversely affected.
We offer
services pursuant to a software license agreement that is generally one year in
duration and allows our customers to utilize our network for telephone
calls. Our customers have no obligation to renew their software
license after their initial one-year period expires, and these software licenses
may not be renewed on the same or on more profitable terms. As a result, our
ability to grow depends in part on software license renewals. We may
not be able to accurately predict future trends in customer renewals, and our
customers’ renewal rates may decline or fluctuate because of several factors,
including their satisfaction or dissatisfaction with our services, the prices of
our services, the prices of comparable services offered by our competitors or
reductions in our customers’ spending levels. If our customers do not
renew their software licenses for our services, renew on less favorable terms,
or do not purchase additional functionality or subscriptions, our revenue may
grow more slowly than expected or decline, and our profitability and gross
margins may be harmed.
The
success of our business is dependent on cost-effective marketing and our growth
may be affected by increased media advertising costs.
A major
portion of our revenue growth is attributable to our media advertising,
including television advertising and banner advertisements on
websites. If advertising rates, which we do not control, are
substantially increased by television stations or by other media and we are
unable to utilize alternative advertising methods, such increases will have an
adverse effect on our business, results from operations and financial
condition. Additionally, if advertisers using web-based banner
advertising targeted towards our softphone users do not achieve the results they
desire or expect and cancel their advertising, our revenues and results of
operations would be adversely affected.
Failure
to establish and expand strategic alliances could prevent us from executing our
business model and adversely affect our growth.
Our
success depends on the ability to develop strategic relationships with leaders
in the retail, telephony, online advertising and online retail industry
segments. These relationships will enable us to expand our services
and products to a larger number of customers; develop and deploy new services
and products; enhance the magicJack brand; and generate additional revenue. We
may not be able to establish relationships with key participants in the
telephony, retail, online advertising and online retail industry
segments. Once we have established strategic relationships, we depend
on our partner’s ability to generate increased acceptance and use of our
services and products. To date, we have only established a limited
number of strategic relationships, and these relationships are in the early
stages of development. We have limited experience in establishing and
maintaining strategic relationships with the retail, telephony, online
advertising and online retailing industry participants. If we lose
any of these strategic relationships or if we fail to establish additional
relationships, or if strategic relationships fail to benefit us as expected, we
may not be able to execute our business plan and our business will
suffer.
The market for
our services and products is characterized by rapidly changing technology and
our success will depend on our ability to enhance our existing service and
product offerings and to introduce new services and products on a timely and
cost effective basis.
The
market for our services and products is characterized by rapidly changing
enabling technology, frequent enhancements and evolving industry
standards. Our continued success depends on our ability to accurately
anticipate the evolution of new products and technologies and to enhance our
existing products and services. Historically, several factors have
deterred consumers and businesses from using voice over broadband service,
including security concerns, inconsistent quality of service, increasing
broadband network traffic and incompatible software products. If we
are unable to address those concerns and foster greater consumer demand for our
products and services, our business and results of operations will be adversely
affected.
Our
success also depends on our ability to develop and introduce innovative new
services and products that gain market acceptance. We may not be successful in
selecting, developing, manufacturing and marketing new products and services or
enhancing existing products and services on a timely basis. We may
experience difficulties with software development, industry standards, design or
marketing that could delay or prevent our development, introduction or
implementation of new services and enhancements. The introduction of
new services by competitors, the emergence of new industry standards or the
development of entirely new technologies to replace existing service offerings
could render our existing or future services obsolete. If our
services become obsolete due to wide-spread adoption of alternative connectivity
technologies, our ability to generate revenue may be impaired. In addition, any
new markets into which we attempt to sell our services, including new countries
or regions, may not be receptive. If we are unable to successfully
develop or acquire new services, enhance our existing services to anticipate and
meet customer preferences or sell our services into new markets, our revenue and
results of operations would be adversely affected.
Increases in
credit card processing fees and high chargeback costs would increase our
operating expenses and adversely affect our results of operations, and an
adverse change in, or the termination of, our relationship with any major credit
card company would have a severe, negative impact on our
business.
A
significant number of our customers purchase our products through our website
and pay for our products and services using credit or debit
cards. The major credit card companies or the issuing banks may
increase the fees that they charge for transactions using their cards. An
increase in those fees would require us to either increase the prices we charge
for our products, or suffer a negative impact on our profitability, either of
which could adversely affect our business, financial condition and results of
operations.
We have
potential liability for chargebacks associated with the transactions we process,
or are processed on our behalf by merchants selling our products. If a
customer returns his or her magicJack at any time, or claims that our product
was purchased fraudulently, the returned product is “charged back” to us or our
bank, as applicable. If we or our sponsoring banks are unable to
collect the chargeback from the merchant’s account, or, if the merchant refuses
or is financially unable, due to bankruptcy or other reasons, to reimburse the
merchant’s bank for the chargeback, we bear the loss for the amount of the
refund paid.
We are
vulnerable to credit fraud, as we sell our magicJack product directly to
customers through our website. Card fraud occurs when a customer uses a
stolen card (or a stolen card number in a card not present transaction) to
purchase merchandise or services. In a traditional card-present transaction, if
the merchant swipes the card, receives authorization for the transaction from
the card issuing bank and verifies the signature on the back of the card against
the paper receipt signed by the customer, the card issuing bank remains liable
for any loss. In a fraudulent card-not-present transaction, even if the
merchant or we receive authorization for the transaction, we or the merchant are
liable for any loss arising from the transaction. Because sales made
directly from our website are card-not-present transactions, we are more
vulnerable to customer fraud. We are also subject to acts of consumer
fraud by customers that purchase our products and services and subsequently
claim that such purchases were not made.
In
addition, as a result of high chargeback rates or other reasons beyond our
control, the credit card companies or issuing bank may terminate their
relationship with us and there are no assurances that we will be able to enter
into a new credit card processing agreement on similar terms, if at
all. Upon a termination, if our credit card processor does not assist
us in transitioning our business to another credit card processor, the negative
impact on our liquidity likely would be significant. Any increases in
our credit card fees could adversely affect our results of operations,
particularly if we elect not to raise our service rates to offset the
increase. The termination of our ability to process payments on any
major credit or debit card, due to high chargebacks or otherwise, would
significantly impair our ability to operate our business.
We have
experienced rapid growth in recent periods. If we fail to manage our growth
effectively, we may be unable to execute our business plan, maintain high levels
of service or address competitive challenges adequately.
We have
experienced, and are currently experiencing, a period of significant growth in
our operations and number of customers. This growth has placed, and
our anticipated growth in our operations will continue to place, a significant
strain on our resources. As part of this growth, we may have to
implement new operational and financial systems and procedures and controls, to
expand, train and manage our employee base, and to maintain close coordination
among our technical, marketing, support and finance staffs. We must also
continue to attract, retain, and integrate personnel in all aspects of
operations. To the extent we acquire new businesses, we must also assimilate new
operations, technologies and personnel. We may be unable to manage
our expenses effectively in the future, which may negatively impact our gross
profit or operating expenses in any particular quarter.
Flaws in our technology and systems
could cause delays or interruptions of service, damage our reputation, cause us
to lose customers and limit our growth
.
Our
service may be disrupted by problems with our technology and systems, such as
malfunctions in our software or other facilities and overloading of our network.
Our customers may experience interruptions in the future as a result of these
types of problems. Interruptions may in the future cause us to lose
customers, which could adversely affect our revenue and
profitability. In addition, because our systems and our customers’
ability to use our services are Internet-dependent, our services may be subject
to “hacker attacks” from the Internet, which could have a significant impact on
our systems and services. If service interruptions adversely affect
the perceived reliability of our service, we may have difficulty attracting and
retaining customers and our brand reputation and growth may suffer.
Material defects
or errors in the software we use to deliver our services could harm our
reputation, result in significant costs to us and impair our ability to sell our
services.
The
software applications underlying our products and services, or the products and
services sold by our subsidiaries, are inherently complex and may contain
material defects or errors, particularly when first introduced or when new
versions or enhancements are released. We have from time to time
found defects in our services, and new errors in our existing services may be
detected in the future. Any defects that cause interruptions to the availability
of our services could result in:
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a
reduction in sales or delay in market acceptance of our
services;
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product
returns, repairs, replacements or sales credits or refunds to our
customers;
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loss
of existing customers and difficulty in attracting new
customers;
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uncollectible
accounts receivable and delays in collecting accounts
receivable;
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legal
actions by our customers or, with respect to Essentra products, by our
customers’ end users;
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loss
of or delay in market acceptance of our
products;
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diversion
of development resources;
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harm
to our reputation; and
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increased
insurance costs.
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After the
release of our services, defects or errors may also be identified from time to
time by our internal team and by our customers. There can be no
assurance that, despite testing, errors will not be found in our products after
commencement of commercial deployment. The costs incurred in
correcting any material defects or errors in our services may be substantial and
could harm our operating results.
We may in
the future incur costs associated with support services. Moreover, as
our solutions grow in complexity, this risk may intensify over time and may
result in increased expenses.
Customers
may bundle, incorporate or connect Essentra products into or to complex systems
that contain errors or defects that may be unrelated to our Essentra products.
As a result, when our customers encounter problems, it may be difficult to
identify the product that caused the problem. In addition, such occurrences may
result in undue delays or cancellations of the implementation of our customers’
bundled products and services. In such cases, our reputation could be harmed and
our results of operations could be adversely affected, which could result in
reduced revenues or increased expenses.
Our
ability to provide our service is dependent upon third-party facilities and
equipment, the failure of which could cause delays or interruptions of our
service, damage our reputation, cause us to lose customers and limit our
growth.
Our
success depends on our ability to provide quality and reliable service, which is
in part dependent upon the proper functioning of facilities and equipment owned
and operated by third parties and is, therefore, beyond our control. Unlike
traditional wireline telephone service or wireless service, our service requires
our customers to have an operative broadband Internet connection and an
electrical power supply, which are provided by the customer’s Internet service
provider and electric utility company, respectively, and not by us. The quality
of some broadband Internet connections in certain geographic areas may be too
poor for customers to use our services properly. Our future growth
could be limited if broadband connections are not, or do not, become widely
available in markets that we target.
In
addition, if there is any interruption to a customer’s broadband Internet
service or electrical power supply, that customer will be unable to make or
receive calls, including emergency calls, using our service. Our customers may
experience such interruptions in the future. In addition, our E-911 service is
currently and will remain dependent upon one or more third-party providers.
Interruptions in service from these vendors could cause failures in our
customers’ access to E-911 services. If service interruptions
adversely affect the perceived reliability of our service, we may have
difficulty attracting new customers and our brand, reputation and growth will be
negatively impacted.
We depend on
overseas manufacturers, and for certain products, third-party suppliers, and our
reputation and results of operations would be harmed if these manufacturers or
suppliers fail to meet our requirements.
The
manufacture of the magicJack product is conducted by a manufacturing company in
China, and certain parts are produced in Taiwan and Hong Kong. These
manufacturers supply substantially all of the raw materials and provide all
facilities and labor required to manufacture our products. The manufacture
of certain Essentra products is conducted by a manufacturing company in
China. If these companies were to terminate their arrangements with
us or fail to provide the required capacity and quality on a timely basis,
either due to actions of the manufacturers; earthquake, fire, flood, or other
natural disaster; or the actions of their respective governments, we would be
unable to manufacture our products until replacement contract manufacturing
services could be obtained. To qualify a new contract manufacturer,
familiarize it with our products, quality standards and other requirements, and
commence volume production is a costly and time-consuming process.
We cannot assure you that we would be able to establish alternative
manufacturing relationships on acceptable terms or in a timely manner that would
not cause disruptions in our supply. Our reliance on these contract
manufacturers involves certain risks, including the following:
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lack
of direct control over production capacity and delivery
schedules;
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lack
of direct control over quality assurance, manufacturing yields and
production costs;
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risk
of loss of inventory while in transit from China, Hong Kong or
Taiwan
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the
risk of currency
fluctuation; and
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risks
associated with international commerce, including unexpected changes in
legal and regulatory requirements, changes in tariffs and trade policies,
risks associated with the protection of intellectual property, political
and economic instability and natural disasters, such as earthquakes,
typhoons or tsunamis.
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Any
interruption in the manufacture of our products would be likely to result in
delays in shipment, lost sales and revenue and damage to our reputation in the
market, all of which would harm our business and results of operations. In
addition, while our contract obligations with our contract manufacturer in China
is denominated in U.S. dollars, changes in currency exchange rates could
impact our suppliers and increase our prices.
We
rely on independent retailers to sell our magicJack products, and disruption to
these channels would harm our business.
Because
we sell a majority of our magicJack products to independent retailers, we are
subject to many risks, including risks related to their inventory levels and
support for our products. In particular, our retailers maintain
significant levels of our products in their inventories. If retailers
attempt to reduce their levels of inventory or if they do not maintain
sufficient levels to meet customer demand, our sales could be negatively
impacted.
Many of
our retailers also sell products offered by our competitors. If our
competitors offer our retailers more favorable terms, those retailers may
de-emphasize or decline to carry our products. In the future, we may not be able
to retain or attract a sufficient number of qualified retailers. If
we are unable to maintain successful relationships with retailers or to expand
our distribution channels, our business will suffer.
Our
VocalTec products are sold through channels, such as vendors, systems
integrators and business partners, who repackage or resell the products, under
varying types of OEM or reseller arrangements, to communications service
providers (rather than us selling our products directly to these service
providers).
To
continue this method of sales, we will have to allocate resources to train
vendors, systems integrators and business partners as to the use of our
products, resulting in additional costs and additional time until sales by such
vendors, systems integrators and business partners are made
feasible. Our business depends to a certain extent upon the success
of such channels and the broad market acceptance of their products. To the
extent that our channels are unsuccessful in selling their products, and as a
result, our products, our revenues and operating results will be adversely
affected.
Many
factors out of our control could interfere with our ability to market, license,
implement or support our products with any of our channels, which in turn could
harm our business. These factors include, but are not limited to, a change in
the business strategy of our channels, the introduction of competitive product
offerings by other companies that are sold through one or more of our channels,
potential contract defaults by one or more of our channels or changes in
ownership or management of one or more of our channels. Some of our competitors
may have stronger relationships with our channels than we do or offer more
favorable terms with respect to their products, and we have limited control, if
any, as to whether those channels implement our products rather than our
competitors’ products or whether they devote resources to market and support our
competitors’ products rather than our offerings. If we fail to maintain
relationships with these channels, fail to develop new channels, fail to
effectively manage, train, or provide incentives to existing channels or if
these channels are not successful in their sales efforts, sales of our products
may decrease and our operating results would suffer.
We
may not be able to maintain adequate customer care during periods of growth or
in connection with our addition of new and complex devices or features, which
could adversely affect our ability to grow and cause our financial results to be
negatively impacted.
We
consider our customer care to be critically important to acquiring and retaining
customers. Our customer care is provided by third parties located in
India and the Philippines. This approach exposes us to the risk that we may not
maintain service quality, control or effective management within these business
operations. The increased elements of risk that arise from conducting
certain operating processes in some jurisdictions could lead to an increase in
reputational risk. Interruptions in our customer care caused by
disruptions at our third-party facilities may cause us to lose customers, which
could adversely affect our revenue and profitability. If our customer
base expands rapidly, we may not be able to expand our outsourced customer care
operations quickly enough to meet the needs of our customer base, and the
quality of our customer care will suffer and our renewal rate may
decrease. As we broaden our magicJack offerings and our customers
build increasingly complex home networking environments, we will face additional
challenges in training our customer care staff. We could face a high
turnover rate among our customer service providers. We intend to have our
customer care provider hire and train customer care representatives in order to
meet the needs of our growing customer base. If they are unable to
hire, train and retain sufficient personnel to provide adequate customer care,
we may experience slower growth, increased costs and higher levels of customer
attrition, which would adversely affect our business and results of
operations.
If we are unable
to establish an effective process for local number portability provisioning, our
growth may be negatively impacted
.
We comply
with requests for local number portability from our customers at the end of the
30-day trial period. Local number portability means that our
customers can retain their existing telephone numbers when subscribing to our
services, and would in turn allow former customers of ours to retain their
telephone numbers should they subscribe to another carrier. For our
customers, transferring a telephone number from a traditional landline to our
service may take up to five (5) business days. By comparison,
transferring wireless telephone numbers among wireless service providers
generally takes several hours. New regulatory requirements that
become effective in August 2010 will require us to complete this process within
one business day. If we are unable to develop the technology to
expedite porting our customers’ numbers, demand for our services may be reduced,
we may be subject to regulatory enforcement activity, and this will adversely
affect our revenue and profitability.
Because
much of our potential success and value lies in our use of internally developed
hardware, systems and software, our failure to protect the intellectual property
associated with them could negatively affect us. Additionally, other
parties may have the right to use intellectual property important to our
business.
Our
ability to compete effectively is dependent in large part upon the maintenance
and protection of systems and software that we have developed internally. While
we have several pending patent applications for future service offerings, we
cannot patent all of the technology that is important to our
business. In addition, our pending patent applications may not be
successful. We will rely on copyright, trademark and trade secret laws, as well
as confidentiality procedures and licensing arrangements, to establish and
protect our rights to this technology. It may be possible for a third
party to copy or otherwise obtain and use this technology without
authorization. Policing unauthorized use of this technology is
difficult. The steps we take may not prevent misappropriation of the technology
we rely on. Enforcement of our intellectual property rights also
depends on our successful legal actions against these infringers, but these
actions may not be successful, even when our rights have been infringed. In
addition, effective protection may be unavailable or limited in some
jurisdictions. We use certain intellectual property rights under
licenses granted to us. Because we may not have the exclusive rights to
use some of our intellectual property, other parties may be able to compete
with us.
In
addition, third parties may assert infringement, misappropriation, or breach
of license claims against us from time to time. Such
claims could cause us to incur substantial liabilities and to suspend or
permanently cease the use of critical technologies or processes or the
production or sale of major products. Litigation to enforce or
defend our intellectual property rights could cause us to incur substantial
costs and divert resources away from our daily business, which in turn could
materially adversely affect our business and financial condition. A
settlement of or adverse judgment resulting from such litigation could require
us to obtain a license to continue to use the technology that is the subject of
the claim, or otherwise restrict or prohibit our use of the
technology. Any required licenses may not be available to us on
acceptable terms, if at all. If we attempt to design around the
technology at issue or to find another provider of suitable alternative
technology to permit us to continue offering applicable software or product
solutions, our continued supply of software or product solutions could be
disrupted or our introduction of new or enhanced software or products could be
significantly delayed.
The loss of key
personnel or an inability to attract and retain additional personnel may impair
our ability to grow our business.
We are
highly dependent upon the continued service and performance of our senior
management team and key technical and sales personnel, including our President
and Chief Executive Officer and employees from the companies that we have
recently acquired. The replacement of these individuals likely would
involve significant time and costs, and the loss of these officers may
significantly delay or prevent the achievement of our business
objectives.
We face
intense competition for qualified individuals from numerous technology,
software, wireless telephone and traditional telephone service provider
companies. If we are unable to attract new employees and retain our
current employees, we may not be able to develop and maintain our services at
the same levels as our competitors and we may, therefore, lose potential
customers and sales penetration in certain markets. Our failure to
attract and retain suitably qualified individuals could have an adverse effect
on our ability to implement our business plan and, as a result, our ability to
compete would decrease, our operating results would suffer and our revenues
would decrease.
We
may make acquisitions that prove unsuccessful or strain or divert our
resources.
We intend
to consider acquisitions of other companies in our industry that could
complement our business, including the acquisition of entities that would expand
our service offerings, increase our market share or offer access to other asset
classes that we do not currently serve. We have limited experience in completing
acquisitions of other businesses. If we do acquire other businesses, we may not
be able to successfully integrate these businesses with our own and we may be
unable to maintain our standards, controls and policies. We may fail in our
attempt to integrate acquired companies and businesses in such a way that we can
realize cross-selling opportunities and other synergies. Further, acquisitions
may place additional constraints on our resources by diverting the attention of
our management from our business operations. Through acquisitions, we may enter
areas in which we have no or limited experience, and an acquisition may be
unsuccessful in accomplishing the intended benefits of the transaction.
Moreover, any acquisition may result in substantial transaction-related
expenses, a potentially dilutive issuance of equity securities, the incurrence
of debt or amortization of expenses and related intangible assets, all of which
could have an adverse effect on our business and results of
operations.
Risks
Related to Regulation in the United States
Our
business is highly dependent on regulation that continues to
change.
Much of
the Competitive Local Exchange Carrier (“CLEC”) network services and carrier
services we provide are subject to significant regulation and may be adversely
affected by regulatory developments at the federal, state and local
levels. We operate in all fifty states under complex and evolving
state and local telecommunications and tax laws that vary from jurisdiction to
jurisdiction. Although we believe that such regulation does not
currently apply to us, certain broadband telephone services have also been
subjected to significant regulation and may be subjected to additional
regulation in the future. Complying with new or clarified
telecommunications, broadband telephone service, or tax regulations, and
obtaining required permits, licenses or certifications in numerous
jurisdictions, can be costly and disruptive to our business. If we fail to
comply with applicable regulations, or if those regulations change or are
clarified in a manner adverse to us, including in any of the ways described in
these risk factors related to regulation, our business and operating results may
suffer.
If
we cannot continue to obtain key network elements from our primary competitors
on acceptable terms, we may not be able to offer our local voice and data
services on a profitable basis, if at all.
We will
not be able to provide our local voice and data services on a profitable basis,
if at all, unless we are able to obtain key network elements from some of our
primary competitors on acceptable terms. To offer local voice and
data services in a market, we must connect our network with the networks of the
carrier in a specific market. This relationship is governed by an
interconnection agreement or carrier service agreement between us and that
carrier. We have such agreements with Verizon, AT&T, XO
Communications Services and the Embarq network in a majority of our
markets. If we are unable to continue these relationships, enter into
new interconnection agreements or carrier service agreements with additional
carriers to other markets or if these providers liquidate or file for
bankruptcy, our business and profitability may suffer.
Regulatory initiatives may continue
to reduce the maximum rates we are permitted to charge long distance service
providers for completing calls by their customers to customers served by our
network.
The rates
that we charge and are charged by service providers for terminating interstate
calls by their customers to customers served by our network, and for
transferring calls by our customers onto their networks, cannot exceed rates
determined by regulatory authorities. Under the applicable FCC
regulations, we were required to further reduce these rates to a baseline level
that existed for providers as of June 2004. The FCC may further reduce these
base rates to levels that are unprofitable to us. State regulatory
authorities may, in the future, similarly reduce the baseline rates we charge
for intrastate terminating calls. Such federal or state rate
reductions, if enacted, could affect our revenues and results of
operations.
Regulation
of broadband telephone services are developing and therefore uncertain; and
future legislative, regulatory or judicial actions could adversely impact our
business and expose us to liability.
The
current regulatory environment for broadband telephone services is rapidly
changing. Although YMax Communications Corp., one of our wholly-owned
subsidiaries, may be subject to certain regulation as a telecom service
provider, it and our other subsidiaries have developed in an environment largely
free from government regulation. However, the United States and other countries
have begun to assert regulatory authority over broadband telephone service and
are continuing to evaluate how broadband telephone service will be regulated in
the future. Both the application of existing rules to us and our competitors and
the effects of future regulatory developments are uncertain. Future
legislative, judicial or other regulatory actions could have a negative effect
on our business. If our VoIP telephony service or our other products
and services become subject to the rules and regulations applicable to
telecommunications providers, if current broadband telephone service rules are
clarified and applied to us, or if additional rules and regulations applicable
specifically to broadband telephone services are adopted, we may incur
significant compliance costs, and we may have to restructure our service
offerings, exit certain markets or start charging for our services at least to
the extent of regulatory costs or requirements, any of which could cause our
services to be less attractive to customers. We have, and may
continue to, face difficulty collecting such charges from our customers, and
collecting such charges may cause us to incur legal fees. We may be
unsuccessful in collecting all of the regulatory fees owed to us. The
imposition of any such additional regulatory fees, charges, taxes and
regulations on VoIP communications services could materially increase our costs
and may limit or eliminate our competitive pricing advantages.
Regulatory
and governmental agencies may determine that we should be subject to rules
applicable to certain broadband telephone service providers or seek to impose
new or increased fees, taxes, and administrative burdens on broadband telephone
service providers. We also may change our product and service
offerings in a manner that subjects them to greater regulation and
taxation. Such obligations could include requirements that we
contribute directly to federal or state Universal Service Funds. We
may also be required to meet various disability access requirements, number
portability obligations, and interception or wiretapping requirements, such as
the Communications Assistance for Law Enforcement Act. The imposition
of such regulatory obligations or the imposition of additional federal, state or
local taxes on our services could increase our cost of doing business and limit
our growth.
We offer
our products and services in other counties, and therefore could also be subject
to regulatory risks in each such foreign jurisdiction, including the risk that
regulations in some jurisdictions will prohibit us from providing our services
cost-effectively or at all, which could limit our growth. Currently, there are
several countries where regulations prohibit us from offering
service. In addition, because customers can use our services almost
anywhere that a broadband Internet connection is available, including countries
where providing broadband telephone service is illegal, the governments of those
countries may attempt to assert jurisdiction over us. Violations of
these laws and regulations could result in fines, criminal sanctions against us,
our officers or our employees, and prohibitions on the conduct of our
business. Any such violations could include prohibitions on our
ability to offer our products and services in one or more countries, could delay
or prevent potential acquisitions, expose us to significant liability and
regulation and could also materially damage our reputation, our brand, our
international expansion efforts, our ability to attract and retain employees,
our business and our operating results. Our success depends, in part, on our
ability to anticipate these risks and manage these difficulties.
The
success of our business relies on customers’ continued and unimpeded access to
broadband service. Providers of broadband services may be able to block our
services or charge their customers more for also using our services, which could
adversely affect our revenue and growth.
Our
customers must have broadband access to the Internet in order to use our
service. Providers of broadband access, some of whom are also
competing providers of voice services, may take measures that affect their
customers’ ability to use our service, such as degrading the quality of the data
packets we transmit over their lines, giving those packets low priority, giving
other packets higher priority than ours, blocking our packets entirely or
attempting to charge their customers more for also using our
services.
It is not
clear whether suppliers of broadband Internet access have a legal obligation to
allow their customers to access and use our service without interference. As a
result of certain decisions by the U.S. Supreme Court and the FCC, providers of
broadband services are subject to limited FCC regulation. In August
2008, however the FCC found that it had authority to order a major cable
operator to cease using network management practices that interfered with its
broadband service users’ ability to use certain types of
applications. The cable operator sought judicial review of the FCC’s
decision, and the court recently ruled that the FCC’s order lacked a sufficient
statutory basis. The FCC is currently considering a proposal by the
FCC Chairman to apply certain sections of Title II of the Communications Act to
the transmission component of broadband Internet access
service. In addition, the FCC has indicated it will commence a
Notice of Proposed rulemaking to codify so-called network neutrality
rules. The outcome of these proceedings cannot be
predicted. Interference with our service or higher charges levied by
broadband service providers for using our service could cause us to lose
existing customers, impair our ability to attract new customers and harm our
revenue and growth.
We
may be bound by certain FCC regulations relating to the provision of E-911
service, and if we fail to comply with new FCC regulations requiring us to
provide E-911 emergency calling services, we may be subject to fines or
penalties.
In 2005,
the FCC issued regulations requiring interconnected voice-over broadband
providers to notify customers of any differences between the broadband telephone
service emergency calling services and those available through traditional
telephone providers and obtain affirmative acknowledgments from customers of
those notifications. While we do not believe the FCC’s rules currently apply to
our offering, the FCC could, however, clarify or modify its ruling to obligate
us to provide E-911 services according to its specific requirements. According
to the FCC’s rules certain broadband communications companies must offer
enhanced emergency calling services, or E-911, to all of customers located in
areas where E-911 service is available from their traditional wireline telephone
company. E-911 service allows emergency calls from customers to be
routed directly to an emergency dispatcher in a customer’s registered location
and gives the dispatcher automatic access to the customer’s telephone number and
registered location information.
The
consequences of failure to comply fully with the FCC’s orders currently are
unclear. Limitations on our ability to provide E-911 service or to
comply with changing mandates of the FCC could materially limit our growth and
have a material adverse effect on our profitability.
Regulatory
rulings and/or carrier disputes could affect the manner in which we interconnect
and exchange traffic with other providers and the costs and revenues associated
with doing so.
We
exchange calls with other providers pursuant to applicable law and
interconnection agreements and other carrier contracts that define the rates,
terms, and conditions applicable to such traffic exchange. The calls we exchange
originate from and terminate to a customer that uses a broadband Internet
connection to access our services and are routed using telephone numbers of the
customer’s choosing. There is uncertainty, however, with respect to intercarrier
compensation for such traffic. The FCC has issued a number of rulings asserting
its jurisdiction over such traffic, but to date it has not issued any rulings on
the scope and rate of intercarrier compensation to be paid by carriers
exchanging voice traffic that originates on a broadband Internet connection and
terminates to the public switched telephone network or vice versa. Various state
commissions have also issued rulings with respect to the exchange of different
categories of traffic under interconnection agreements. To the extent that
another provider were to assert that the traffic we exchange with them is
subject to higher levels of compensation than we, or the third parties
terminating our traffic to the PSTN, pay today (if any), or if a provider from
whom we collect compensation for the exchange of such traffic were to refuse to
pay us going forward, we may need to seek regulatory relief to resolve such a
dispute. Given the uncertainty surrounding the current intercarrier compensation
regime, we cannot guarantee that the outcome of any proceeding would be
favorable, and an unfavorable ruling could adversely affect the amounts we
collect and/or pay to other providers in connection with the exchange of our
traffic.
Our
business is subject to privacy and security risks. If we are unable
to protect the privacy of our customers making calls using our network, or
information obtained from our customers in connection with their use or payment
of our services , in violation of privacy or security laws or expectations, we
could be subject to liability and damage to our reputation.
Customers
may believe that using our services to make and receive telephone calls using
their broadband connection could result in a reduction of their privacy, as
compared to traditional wireline carriers. Additionally, our website,
www.magicjack.com, serves as an online sales portal
.
We currently
obtain and retain personal information about our website users in connection
with such purchases. In addition, we obtain personal information
about our customers as part of their registration to use our products and
services. Federal, state and foreign governments have enacted or may
enact laws or regulations regarding the collection and use of personal
information.
Possession
and use of personal information in conducting our business subjects us to
legislative and regulatory burdens that could require notification of data
breach, restrict our use of personal information and hinder our ability to
acquire new customers or market to existing customers. We may incur expenses to
comply with privacy and security standards and protocols imposed by law,
regulation, industry standards or contractual obligations.
We have a
stringent privacy policy covering the information we collect from our customers
and have established security features to protect our network. However, our
security measures may not prevent security breaches. We may need to
expend resources to protect against security breaches or to address problems
caused by breaches. If unauthorized third parties were able to
penetrate our network security and gain access to, or otherwise misappropriate,
our customers’ personal information or be able to access their telephone calls,
it could harm our reputation and, therefore, our business and we could be
subject to liability. Such liability could include claims for misuse of personal
information or unauthorized use of credit cards. These claims could
result in litigation, our involvement in which, regardless of the outcome, could
require us to expend significant financial resources. Internet privacy is a
rapidly changing area and we may be subject to future requirements and
legislature that are costly to implement and negatively impact our
results.
Risks
Related to Network Security
Network
failures or system breaches could cause delays or adversely affect our service
quality, which may cause us to lose customers and revenue.
In
operating our network, we may be unable to connect and manage a large number of
customers or a large quantity of traffic at high speeds. Any failure or
perceived failure to achieve or maintain high-speed data transmission could
significantly reduce demand for our services and adversely affect our operating
results. In addition, computer viruses, break-ins, human error, natural
disasters and other problems may disrupt our network. The network security and
stability measures we implement may be circumvented in the future or otherwise
fail to prevent the disruption of our services. The costs and resources required
to eliminate computer viruses and other security problems may result in
interruptions, delays or cessation of services to our customers, which could
decrease demand, decrease our revenue and slow our planned
expansion.
Hardware
and software failures, delays in the operation of our computer and
communications systems or the failure to implement system enhancements may harm
our business.
Our
success depends on the efficient and uninterrupted operation of our software and
communications systems. A failure of our network could impede the delivery of
services, customer orders and day-to-day management of our business and could
result in the corruption or loss of data. Despite any precautions we
may take, damage from fire, floods, hurricanes, power loss, telecommunications
failures, computer viruses, break-ins and similar events at our various network
facilities could result in interruptions in the flow of data to our servers and
from our servers to our customers. In addition, any failure by our
computer environment to provide our required telephone communications capacity
could result in interruptions in our service. Additionally,
significant delays in the planned delivery of system enhancements and
improvements, or inadequate performance of the systems once they are completed,
could damage our reputation and harm our business. Finally, long-term
disruptions in infrastructure caused by events such as natural disasters, the
outbreak of war, the escalation of hostilities, and acts of terrorism
(particularly involving cities in which we have offices) could adversely affect
our businesses. Although we maintain general liability insurance, including
coverage for errors and omissions, this coverage may be inadequate, or may not
be available in the future on reasonable terms, or at all. We cannot
assure you that this policy will cover any claim against us for loss of data or
other indirect or consequential damages and defending a lawsuit, regardless of
its merit, could be costly and divert management’s attention. In
addition to potential liability, if we experience interruptions in our ability
to supply our services, our reputation could be harmed and we could lose
customers.
Our
service requires an operative broadband connection, and if the adoption of
broadband does not progress as expected, the market for our services will not
grow and we may not be able to grow our business and increase our
revenue.
Use of
our service requires that the user be a subscriber to an existing broadband
Internet service, most typically provided through a cable or digital subscriber
line, or DSL, connection. Although the number of broadband subscribers in the
U.S. and worldwide has grown significantly over the last five years, this
service has not yet been adopted by all consumers and is not available in every
part of the United States and Canada, particularly rural
locations. If the adoption of broadband services does not continue to
grow, the market for our services may not grow.
Risks
Relating Primarily to our Incorporation in Israel
Certain
provisions of our articles of association and Israeli law could delay, hinder or
prevent a change in our control.
Our
Articles of Association contain provisions which could make it more difficult
for a third party to acquire control of us, even if that change would be
beneficial to our shareholders. Specifically, our Articles of Association
provide that our board of directors is divided into three classes, each serving
a three-year term. In addition, certain provisions of the Companies Law could
also delay or otherwise make more difficult a change in our
control.
It
may be difficult to pursue an action in the U.S. or to enforce a U.S. judgment,
including actions or judgments based upon the civil liability provisions of the
U.S. federal securities laws, against us and our executive officers and
directors, or to assert U.S. securities law claims in Israel.
Certain
of our directors and officers are not residents of the United States and certain
of their assets and our assets are located outside the United
States. Without consent to service of process, additional procedures
may be necessary to serve individuals who are not U.S. residents. Therefore, it
may be difficult to serve process on those directors and officers who are not
U.S. residents, in order to commence any lawsuit against them before a U.S.
court, including an action based on the civil liability provisions of U.S.
federal securities laws.
An
investor also may find it difficult to enforce a U.S. court judgment in an
Israeli court, including a judgment based on federal securities
laws. An Israeli court will not enforce a foreign judgment if it was
given in a state whose laws do not provide for the enforcement of judgments of
Israeli courts (subject to exceptional cases) or if its enforcement is likely to
prejudice the sovereignty or security of the State of Israel.
An
investor may also find it difficult to bring an original action in an Israeli
court to enforce liabilities based upon the U.S. federal securities laws against
us, or against our directors and officers. Israeli courts may refuse to hear a
claim based on a violation of U.S. securities laws and rule that Israel is not
the most appropriate forum in which to bring such a claim. In addition, even if
an Israeli court agrees to hear such a claim, it may determine that Israeli law,
and not U.S. law, is applicable to the claim. If U.S. law is found to be
applicable, the content of applicable U.S. law must be proved as a fact, which
can be a time-consuming and costly process.
We
are a “foreign private issuer” and you will receive less information than you
would about us from a domestic U.S. corporation. In addition, we have
opted out of certain Nasdaq Marketplace listing requirements.
As a
“foreign private issuer,” we are exempt from certain rules under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) that impose certain
disclosure and procedural requirements in connection with proxy solicitations
under Section 14 of the Exchange Act. In addition, our directors, executive
officers and principal shareholders are exempt from the reporting and
“short-swing” profit recovery provisions of Section 16 of the Exchange Act and
the rules thereunder with respect to their purchases and sales of our shares. In
addition, we are not required to file periodic reports and financial statements
with the SEC as frequently or as promptly as U.S. companies whose securities are
registered under the Exchange Act. As a result, you may not be able to obtain
some information relating to us as you would for a domestic U.S.
corporation. Also, as a “foreign private issuer” listed on the Nasdaq
Capital Market, we may follow home country practice with regard to certain
matters instead of complying with the relevant Nasdaq Marketplace Rules,
including distribution of annual and quarterly reports to shareholders, approval
of related party transactions, composition of the board of directors, approval
of compensation of executive officers, director nomination process and regularly
scheduled meetings at which only independent directors are present and obtaining
shareholder approval for certain dilutive events (such as the establishment or
amendment of certain equity based compensation plans, an issuance that will
result in a change of control of the company, certain transactions other than a
public offering involving issuances of a 20% or more interest in the company and
certain acquisitions of the stock or assets of another company). We
have informed Nasdaq that we will follow Israeli practice in lieu of complying
with Nasdaq Marketplace Rules 5605(e)(2) (requiring companies to adopt a formal
written charter or board resolution addressing the company’s nominations
process), 5605(b)(2) (regularly scheduled meetings of the company’s independent
directors), 5620(c) (regarding quorum at shareholder meetings), 5635(c)
(regarding the establishment of or a material amendment to a stock option or
purchase plan or other equity compensation arrangement) and Nasdaq Marketplace
Rule 5635 (shareholder approval).
Certain
benefits available to us from Israeli government programs may be discontinued or
reduced at any time, which would likely increase our research and development
expenses.
VocalTec
benefits from participation by the OCS in certain of our research and
development projects. To be eligible for these participations, we must continue
to meet certain conditions. There can be no assurance that such participations
will be continued at their current levels or otherwise. The
termination or reduction of the participation of the OCS in research and
development projects is likely to increase our net research and development
expenses or limit or terminate certain research and development
projects. In addition, our royalty payment obligation towards the OCS
will continue even if we receive no additional, or reduced, grants from
the OCS.
The
grants we have received from the Israeli government for certain research and
development expenditures restrict our ability to manufacture product and
transfer technologies outside of Israel and require us to satisfy specified
conditions. If we fail to satisfy these conditions, we may be
required to refund grants previously received, together with interest
and penalties.
VocalTec’s
research and development efforts have been financed, in part, through grants
received from the OCS. VocalTec, therefore, must comply with the
requirements of the Research Law. Under the Research Law, the
discretionary approval of an OCS committee is required for any transfer of
technology or manufacturing of products developed with OCS funding. There is no
assurance that we would receive the required approvals for any proposed
transfer. Such approvals, if granted, may be subject to the additional
restrictions, including payment to OCS of a portion of any consideration
received from a transfer of technology to a non-Israeli company, or conditioning
such transfer upon an increase in the royalty rate. These
restrictions may impair our ability to sell our company, technology, assets or
to outsource manufacturing outside of Israel. The restrictions will continue to
apply even after we have repaid the full amount of royalties payable for the
grants.
Risks
Relating to the Merger
If
we are not successful in integrating our organizations, we will not be able to
operate efficiently after the merger.
Achieving
the benefits of the merger will depend in part on the successful integration of
VocalTec’s and YMax's operations and personnel in a timely and efficient
manner. The integration process requires coordination of different
development and engineering teams, and involves the integration of systems,
applications, policies, procedures, business processes and channel
operations. This integration will be difficult, unpredictable, and
subject to delay due to the coordination of geographically separate
organizations and because of possible cultural conflicts and different opinions
on technical decisions and product roadmaps. If we cannot
successfully integrate our operations and personnel, we will not realize the
expected benefits of the merger.
Integrating
our companies may divert management's attention away from our
operations.
Successful
integration of VocalTec’s and YMax’s operations, products and personnel may
place a significant burden on our management and our internal resources. The
diversion of management attention and any difficulties encountered in the
transition and integration process could harm our business, financial condition
and operating results.
We
expect to incur significant costs integrating the companies into a single
business, and if such integration is not successful we may not realize the
expected benefits of the merger.
We expect
to incur significant costs integrating YMax’s operations, products and
personnel. These costs may include costs for:
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employee
redeployment, relocation or
severance;
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conversion
of information systems;
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combining
research and development teams and
processes;
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reorganization
or closures of facilities; and
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relocation
or disposition of excess equipment.
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In
addition, we expect to incur significant costs in connection with the merger. We
do not know whether we will be successful in these integration efforts or in
consummating the merger and cannot assure you that we will realize the expected
benefits of the merger.
If
we fail to retain key employees, the benefits of the merger could be
diminished.
The
successful combination of VocalTec and YMax will depend in part on the retention
of key personnel. There can be no assurance that VocalTec will be able to retain
its or YMax’s key management, technical, sales and customer support
personnel. If we fail to retain such key employees, we may not
realize the anticipated benefits of the merger.
Our
sales could decline if customer relationships are disrupted by the
merger.
Our
customers may not continue their current buying patterns during the pendency of,
and following, the merger. Any significant delay or reduction
in orders for VocalTec’s or YMax’s products could harm the combined company's
business, financial condition and results of
operations. Customers may defer purchasing decisions as they
evaluate the likelihood of successful integration of VocalTec’s or YMax’s
products and the combined company's future product strategy, or consider
purchasing products of our competitors. Customers may also seek
to modify or terminate existing agreements, or prospective customers may delay
entering into new agreements or purchasing our products. In
addition, by increasing the breadth of VocalTec’s or YMax’s business, the merger
may make it more difficult for the combined company to enter into relationships,
including customer relationships, with strategic partners, some of whom may view
the combined company as a more direct competitor than either VocalTec or YMax as
an independent company.
Management’s
Discussion and Analysis of VocalTec’s Financial Condition and Results of
Operation
For
purposes of the Management’s Discussion and Analysis of VocalTec’s Financial
Condition and Results of Operation below, the terms “we”, “us,” “our,” or “the
Company” refer solely to VocalTec prior to the Merger, and do not reflect the
transaction with YMax.
Operating
and Financial Review and Prospects
The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and related
notes included in our Annual Report on Form 20-F for the fiscal year ended
December 31, 2009, filed with the Securities and Exchange Commission on May 12,
2010. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ
significantly from those projected in the forward-looking
statements. Factors that might cause future results to differ
significantly from those projected in the forward-looking statements include,
but are not limited to, those discussed below and described in Item 3.D - Key
Information - Risk Factors” of our Annual Report on Form 20-F for the fiscal
year ended December 31, 2009.
Overview
We are a
provider of carrier-class multimedia and voice-over-IP (VoIP) solutions for
fixed line and wireless communication service providers. We develop and market
an extensive VoIP offering that enables the flexible deployment of
next-generation networks (NGNs). Partnering with prominent system integrators,
resellers and equipment manufacturers, we serve an installed base of leading
service providers. Designed for easy integration in multi-vendor environments,
our solutions handle call control, media processing, signaling and security
within state-of-the-art NGN networks. Our SIP-based solutions support a variety
of protocols, including Megaco/H.248, MGCP, H.323, Sigtran, ISUP, MAP, INAP and
CAMEL and incorporate various elements of the IMS/TISPAN (IP Multimedia
Subsystem) architecture.
We
believe that continued investment in research and development is essential to
remain competitive in the marketplace and is directly related to the timely
development of new and enhanced products. Specifically, in order to bring our
future products to maturity and thereafter increase sales, we are allocating
significant resources to research and development activities, including
outsourcing certain research and development assignments. We expect to
participate only in OCS royalty bearing programs but we cannot make any
assurances that we will be awarded any future grants.
Growth in
the fixed line VoIP market is being driven largely by new entrants and service
providers looking to reduce operational costs and easily add new, advanced
services to their offering. In the wireless space, growth in VoIP is driven by
WiMAX providers gradually adding voice to their broadband offering as well as by
mobile providers currently deploying packet-based solutions primarily as a means
to reduce service costs associated with their international calling and roaming
offerings. While there are favorable industry trends that we believe create an
opportunity for us, the ultimate demand for our products will depend upon the
magnitude and timing of capital spending on VoIP infrastructure by
telecommunications service providers and our ability to penetrate the market
with new products and gain market share. The economic downturn experienced in
2009, in fact lead to communications service providers adopt a more cautious
approach to capital spending.
We plan
to increase our market share in the growing VoIP market, with an obvious focus
on our target geographies. In 2006, we started selling our products in new
regions, including Russia, Africa and Vietnam. In late 2006, we started selling
our products also to resellers/systems integrators, resulting in an increase in
the number of transactions. In 2007, while continuing to sell our solutions to
the markets discussed above, we also began selling our solutions to Latin
America both directly and through resellers/systems integrators. In 2008, while
continuing to sell our solutions in Europe and North America, we focused our
marketing efforts in the Former Soviet Union, Latin America and Africa. This
continued through 2009, where we saw further growth in our activity in Russia
and the Former Soviet Union as well as in the African region. We continued
developing the markets of Latin America and South East Asia. These represent our
current target markets.
Our
consolidated financial statements are prepared in accordance with U.S. GAAP, and
are the basis for the discussion and analysis of our results of operations,
liquidity and capital resources. Our functional and reporting currency is the
U.S. Dollar, which is the currency of the primary economic environment in which
our consolidated operations are conducted. Transactions and balances originally
denominated in dollars are presented at their original amounts. Transactions and
balances in currencies other than dollars (including NIS) are re-measured in
dollars in accordance with the principles set forth in ASC 830, “Foreign
Currency Matters.” Our reported amounts of assets, liabilities,
revenues and expenses and the related disclosure of contingent assets and
liabilities are based on certain estimates and judgments made in the preparation
of our financial statements, which estimates and judgments are revised
periodically as required. Our estimates and assumptions are based on factors
such as analysis of prior years' experience, trends within the Company and the
telecommunications industry, and general economic conditions. However, actual
results may differ from our estimates and assumptions as a result of varying
market and economic conditions, and may result in lower revenues and bigger
operating losses.
Revenues
In 2009,
we had sales of $6.4 million, compared to $6.1 million in 2008. Through2009, we
generated our revenues from sales of our products (primarily the Essentra family
products) and related services. Sales of products accounted for 66% of our
revenues in 2009 compared to 65% in 2008.
In late
2006, we began marketing and selling our products also through resellers/systems
integrators and partners. We sell our products to such resellers/systems
integrators/partners for a consideration that is generally lower than the prices
to end customers. As a result of the sale to resellers/system integrators, we
gain access to a broader range of customers, resulting in a larger amount of
transactions. Sales to most of our customers are generally made under
short-term non-cancelable purchase orders. Although our customers may provide us
with forecasts, our ability to predict revenues in any future period is limited
and subject to change based on demand for our customers' equipment.
We market
and sell our products worldwide. The percentages of our revenues by geographic
area for the periods indicated were as follows:
YEAR
ENDED DECEMBER 31,
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2007
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2008
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2009
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%
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%
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%
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Russia
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28
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51
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24
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Germany
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23
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16
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15
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Italy
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15
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11
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5
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Iceland
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3
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1
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1
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Europe
- other
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11
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1
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1
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Americas
(principally United States)
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6
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6
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5
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Asia
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2
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3
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4
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Israel
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3
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6
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7
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Africa
and Middle East
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9
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5
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38
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100
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%
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100
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%
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100
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%
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We
attribute revenues to the geographic area where the customer, or its business
unit that makes the purchase, is based.
Critical Accounting
Policies
Our
discussion and analysis of our financial condition and the results of operations
is based on our consolidated financial statements that have been prepared in
accordance with US GAAP. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we
evaluate our estimates, including those related to revenue recognition,
inventories accounting for stock-based compensation and taxation. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
We have
identified below our critical accounting policies. These policies are both the
most important to the portrayal of our financial condition and results of
operations and require our management's most difficult, subjective and complex
judgments and estimates. Actual results may differ from these estimates under
different assumptions or conditions.
Impairment of Long-Lived
Assets
The
long-lived assets and finite-lived intangible assets of the Company and
its subsidiaries are reviewed for impairment in accordance with ASC
360-10-35, “Property, Plant and Equipment-Subsequent Measurement”, when events
or changes in circumstances indicate that the carrying amount of an asset (or an
asset group) may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to the
future undiscounted cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds its
estimated fair values.
We use
the income approach in order to determine the fair value of intangible assets,
as no quoted price in active market exists for such assets. The income approach
requires management to predict forecasted cash flows, including estimates and
assumptions related to revenue growth rates and operating margins, future
economic and market conditions. Our estimates of market segment growth and our
market segment share and costs are based on historical data, various internal
estimates and certain external sources, and are based on assumptions that are
consistent with the plans and estimates we are using to manage the underlying
business. We base our fair value estimates on assumptions we believe to be
reasonable but that are unpredictable and inherently
uncertain. Actual future results may differ from those
estimates.
As
required by ASC 820, “Fair Value Measurements”, starting January 1, 2009, the
Company applies assumptions that marketplace participants would consider in
determining the fair value of long lived assets (or assets groups).
Revenue
Recognition
The
Company generates revenues from licensing the rights to use its software
products, from the sale of its systems and from providing maintenance,
engineering and support services, and in addition, from providing system
integration and products arrangements for which revenues are generated on a
fixed price basis. The Company's products are sold both to end users and to
resellers, who are considered end-users for the purpose of revenue
recognition.
Revenue
from licensing of software products and systems is recognized when all the
following criteria (which is outlined in ASC 985-605, “Software Revenue
Recognition”), are met: persuasive evidence of an arrangement exists, the
product has been delivered, no significant obligation to the customer remains,
the sales price is fixed or is determinable and collectability is reasonably
assured. The Company does not grant a right of return to its
customers.
Due to a
limited number of separate support services and maintenance contracts
consummated through 2007-2009, VSOE is not attainable to support allocation of
services and maintenance revenues. Accordingly, recognition of revenues from
bundled software arrangements are recognized ratably over the period of the last
delivered element in the arrangement, which is typically the customer support
and maintenance service period, provided that all other revenue recognition
criteria are met.
When an
arrangement provides for acceptance of the product by the customer, revenue is
only recognized when such acceptance is received from the
customer. In certain cases, when the Company sells its products
through resellers in new and emerging market channels for which no comparable
history has been established, the Company recognizes revenues only when all
obligations to the end user have been completed, and provided all other revenue
recognition criteria have been met.
Revenues
from arrangements including training and installation services are recognized
only after the services are performed.
Revenues
from software maintenance and technical support contracts are recognized on a
straight-line basis over the term of the maintenance and support
arrangement.
Revenues
from system integration long-term projects are generated from fixed-price
contracts according to which the time between the signing of the contract and
the final customer acceptance is usually over one year. Such contracts require
significant customization for each customer specific needs and, as such,
revenues from these type of contracts are recognized in accordance with ASC
605-35, “Construction-Type and Production-Type Contracts,” using contract
accounting based on the percentage of completion method.
Sales
under long-term fixed-price contracts which provide for a substantial level of
development efforts in relation to total contract efforts are
recorded using the cost-to-cost method of accounting as the basis to
measure progress toward completing the contract and recognizing revenues.
According to this method, revenues and profit are recorded based on the ratio of
costs incurred to estimated total costs at completion.
A number
of internal and external factors may affect the Company's costs estimates,
including labor rates, estimated future prices of material, revised estimates of
uncompleted work, efficiency variances, linkage to indices and exchange rates,
customer specifications and testing requirement changes. If any of the above
factors were to change, or if different assumptions were used in estimating
progress cost and measuring progress towards completion, it is possible that
materially different amounts would be reported in the Company's consolidated
financial statements. Changes in estimates due to changes in estimates resulting
from differences between actual performance and original forecasts are recorded
in the results of operations when they are reasonably determinable by
management, on a cumulative catch-up basis.
Estimates
of total project requirements are based on prior experience of customization,
delivery and acceptance of similar services, and are reviewed and updated
regularly by management. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are first determined, in
the amount of the estimated loss on the entire contract. As of December 31,
2009, there was no provision for losses.
The
Company believes that the use of the percentage of completion method is
appropriate as it has the ability to make reasonably dependable estimates of the
extent of progress towards completion, contract revenues and contract
costs. In addition, contracts executed include provisions that
clearly specify the enforceable rights regarding services to be provided and
received by the parties to the contracts, the consideration to be exchanged and
the manner and the terms of settlement, including in cases of termination for
convenience. In all cases the Company expects to perform its contractual
obligations and its customers are expected to satisfy their obligations under
the contract.
Estimated
gross profit or loss from long-term contracts may change due to changes in
estimates resulting from differences between actual performance and original
forecasts. Such changes in estimated gross profit are recorded in results of
operations when they are reasonably determinable by management, on a cumulative
catch-up basis.
As of
December 31, 2009, the Company adjusted the estimates of a project that was
signed with one of its major customers during the year. Such adjustments were
required in order to address a delay in the progress in this project. The
Company does not expect any loss from this project. As of the date of this
report, a material progress was achieved and the project is supposed to continue
as planned.
Income
Taxes
The
Company accounts for income taxes and uncertain tax positions in accordance with
ASC 740, “Income Taxes”. ASC 740 prescribes the use of the liability method
whereby deferred tax asset and liability account balances are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The Company and its
subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value. As of December 31, 2009, a full
valuation allowance was provided by the Company. See Note 15 to the Financial
Statements for the impact of an amendment ASC No. 740, Accounting for
Uncertainty in Income Taxes.
On
January 1, 2007, the Company adopted an amendment to ASC 740-10 (originally
issued as “FIN 48”). The amendment contains a two-step approach to recognizing
and measuring uncertain tax positions. The first step is to evaluate the tax
position taken or expected to be taken in a tax return by determining if the
weight of available evidence indicates that it is more likely than not that, on
an evaluation of the technical merits, the tax position will be sustained on
audit, including resolution of any related appeals or litigation processes. The
second step is to measure the tax benefit as the largest amount that is more
than 50% likely to be realized upon ultimate settlement. The Company accrues
interest and penalties related to unrecognized tax benefits in its provision for
income tax. The Company recognized an increase of approximately $34 in the
liability for unrecognized tax benefits, which was accounted for as an increase
to the January 1, 2007 balance of the accumulated deficit. See also Note 15 to
the Financial Statements.
Share-Based
Compensation
The
Company accounts for stock-based compensation in accordance with ASC 718,
“Compensation - Stock Compensation”. ASC 718 requires companies to estimate the
fair value of equity-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as an expense over the requisite service periods
in the Company's consolidated income statements.
The
Company estimated the value of equity employee stock options on the date of
grant using a Black-Scholes option-pricing valuation model. The fair value of
stock options awards, as determined on the date of grant, is affected by several
factors including our stock price, our stock price volatility, risk-free
interest rate, expected dividends and the expected term of the options. If such
factors change and we employ different assumptions for future grants, our
compensation expense may differ significantly from what we have recorded in the
current period.
In
addition, ASC 718 requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Estimated forfeitures are based on actual historical
pre-vesting forfeitures.
In the
future, if the number of equity awards that are forfeited by employees is lower
than expected, the expenses recognized in such future periods will be
higher.
The
Company recognizes compensation expense for the value of its awards granted
based on the straight line method over the requisite service period of each of
the awards, net of estimated forfeitures.
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Sales
In 2009,
we had sales of $6.4 million, compared to $6.1 million in 2008, an increase of
$0.3 million, or 5%. Through 2009, we generated our revenues from sales of our
products (primarily the Essentra family of products), from providing system
integration and products arrangements on a fixed price basis, and from the sale
of maintenance, support and other services. Sales of products accounted for 66%
of our revenues in 2009, whereas sales of services accounted for 34% of our
revenues in 2009. Sales in 2009 included an amount of $2.2 million to a
significant customer that was accounted for under contract accounting and
recognized based on the percentage to completion method. As of December 31,
2009, we adjusted the estimates of this project in order to address a delay in
the project's progress. As of the date of the annual report for the fiscal year
ended December 31, 2009, most of the reasons for the delay were
resolved.
Due to a
limited number of separate support services and maintenance contracts
consummated during such years, and since the Company began providing its
services through distributors and integrators (resulting in inconsistencies of
the portion of the contracts that is attributed to services), the Company was
unable to establish VSOE (as defined under “Revenue Recognition” above) with
respect to the support services and maintenance provided by the Company
subsequent to January 1, 2007. Accordingly, revenues from bundled software
arrangements in 2007 through 2009 are recognized ratably over the last
deliverable element in the arrangement, which is typically the support and
maintenance service period, assuming all other revenue recognition criteria are
met. Revenues from system integration long-term projects are recognized in
accordance with ASC 605-35, “Construction-Type and Production-Type Contracts,”
using contract accounting based on the percentage of completion method. For
additional information on our revenue recognition policies, see Note 2(j) to the
financial statements included as an exhibit to our annual report for the fiscal
year ended December 31, 2009.
In 2009,
we continued selling our products also to resellers/systems integrators and
partners. We sell our products to such resellers/systems integrators/partners
for a consideration that is lower than the prices to end customers. As a result
of the sale to resellers/systems integrators, we gain access to a broader range
of customers, resulting in a larger amount of transactions. We expect to
continue selling our products through such channels.
In 2009,
we continued selling our Essentra family of products as part of solutions
consisting also of certain hardware that we purchase from third parties,
resulting in a continuous increase in sales.
To date,
we have derived a substantial portion of our revenues from a relatively small
number of customers (including resellers/systems integrators and partners). Each
of the following customers accounted for more than 10% of our revenues for the
periods indicated:
YEAR
ENDED DECEMBER 31
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Deutche
telecom
|
|
|
22
|
%
|
|
|
15
|
%
|
|
|
14
|
%
|
|
Mobifon
2000
|
|
|
12
|
%
|
|
|
26
|
%
|
|
|
*
|
|
|
Integrated
Networks
|
|
|
10
|
%
|
|
|
*
|
|
|
|
*
|
|
|
ITI
|
|
|
*
|
|
|
|
14
|
%
|
|
|
*
|
|
|
Inline
|
|
|
*
|
|
|
|
*
|
|
|
|
10
|
%
|
|
Mobitel
|
|
|
*
|
|
|
|
*
|
|
|
|
35
|
%
|
* less
than 10%
Total
sales to the foregoing major customers accounted for 44%, 55% and 59% of our
total revenues for the years ended December 31, 2007, 2008 and 2009,
respectively.
In 2009,
the Company focused its marketing efforts in the Former Soviet Union, Africa,
Latin America and South-East Asia. The Company expects to continue focusing on
these target markets in 2010.
Cost of
Sales
Cost of
sales in 2009 was $2.3 million, or 36% of sales, compared with $2.9 million, or
48% of sales (including an amortization of acquired intangibles in the amount of
$0.3 million), in 2008. The effect of the amortization of acquired intangibles
as a percentage from sales in 2008 was 5% and in 2009 0%. Cost of products was
$1.8 million in 2009 and $2.0 million in 2008. Cost of services was $0.6 million
in 2009 and in 2008.
The
decrease in the cost of sales in 2009 compared to 2008 resulted mainly from a
higher percentage of software included in product revenues.
Cost of
our sales consists primarily of the cost of hardware components, salaries and
other related expenses of our employees who are engaged in the production and
support of our products and royalties paid by us to licensors of software and to
the OCS.
In 2009,
gross margins were 64%. In 2008, gross margins were 52%, including amortization
of acquired intangibles, which decreased the gross margins from
57%.
Operating
Expenses
Research and Development,
Net
Research
and development costs, net, were $2.1 million in 2009, including a $0.4 million
OCS grant, compared with $4.2 million in 2008, including a $0.1 million OCS
grant, representing 32% and 68% of sales in 2009 and 2008, respectively.
Research and development costs, net, consist principally of salaries and
benefits for software and hardware engineers and sub-contractors, related
facilities' costs and activities and expenses associated with computer, software
and other equipment used in software and hardware development and
testing. Research and development costs, net, in 2009 and 2008
included stock-based compensation amounts of $120,000 and $357,000,
respectively, due to recognition of expense for share based payments accounted
for under ASC 718. None of our software or hardware development costs have been
capitalized during any of the reported periods, as the amount of software and
hardware development costs eligible for capitalization incurred between the
completion of both: (1) product design and (2) either of a working model or a
detailed program design and the point of time the product is available for
general release, has been insignificant. The decrease in research and
development costs in absolute numbers in 2009 compared to 2008 resulted mainly
from a material decrease in the total operating expenses of the Company (mainly
salaries and other employee-related overhead expenses) in 2009 compared to 2008,
in addition to a decrease in the total number of R&D employees in Israel and
a measured migration of certain R&D activities towards our less costly
offshore development activity.
We
believe that continued investment in research and development is essential to
remain competitive in the marketplace and is directly related to the timely
development of new and enhanced products. Specifically, in order to bring our
future products to maturity and thereafter increase sales, we are allocating
significant resources to research and development activities, including
outsourcing certain research and development assignments.
Our
research and development efforts in 2009 have been financed primarily from
internal resources, in addition to a grant made by the OCS. In previous years we
also participated, and we may participate in the future, in OCS royalty-bearing
programs. Pursuant to the terms of the OCS royalty-bearing program, we are
required to pay royalties of between 3.5% and 4.5% of sales of products and
related services developed in any project partially funded by the OCS, up to an
amount of 100% of the grant obtained. For grants received under programs
approved subsequent to January 1, 1999, royalties are payable up to 100% of the
grant obtained plus interest at the annual rate of Libor applicable to U.S.
dollar deposits. We may apply in future years for additional grants from the
OCS; however, there is no assurance that we will be awarded any such future
grants.
Our
research and development expenses in 2009 and 2008 were net of participation
from the OCS. In 2009 and 2008, participation received or accrued from the OCS
was $0.4 million and $0.1 million, respectively. In 2009, we paid or accrued
royalties to the OCS in an aggregate amount of approximately $225,000 compared
with $208,000 in 2008. As of December 31, 2009, our contingent liability to the
OCS amounted to approximately $22 million. During 2008, we recorded an aggregate
income of $14.9 million, resulting from the sale of 15 of our patents and
certain patent-related rights.
Selling and
Marketing
In 2009,
selling and marketing expenses were $3.0 million, or 48% of sales, compared with
$3.6 million, or 58% of sales in 2008. Selling and marketing expenses include
salaries and benefits, sales commissions, travel expenses and related costs for
our sales and marketing personnel. Selling and marketing expenses in 2009 and
2008 included stock-based compensation amounting to $127,000 and $263,000,
respectively, due to recognition of expense for share based payments accounted
for under ASC 718. Selling and marketing expenses also include the costs of
programs aimed at increasing revenue, such as advertising, trade shows and other
market development programs. The decrease in selling and marketing costs in
absolute numbers in 2009 compared to 2008 resulted mainly from a material
decrease in the total operating expenses of the Company (mainly salaries and
other employee-related overhead expenses) in 2009 compared to 2008.
General and
Administrative
In 2009,
general and administrative expenses were $2.1 million, or 34% of sales, compared
with $2.7 million, or 44% of sales, in 2008. General and administrative expenses
consist principally of salaries and benefits, outside legal, accounting and
consultant fees, travel expenses and related costs for management, directors'
fees, directors and officers insurance, finance, logistics, human resources,
communication, information systems and administrative
personnel. General and administrative expenses in 2009 and 2008
included stock-based compensation amounting to $680,000 and $532,000,
respectively, due to recognition of expense for share based payments accounted
for under ASC 718. General and administrative expenses also include
expenses associated with computing equipment and software used in the
administration operations. The decrease in general and administrative
costs in absolute numbers in 2009 compared to 2008 resulted mainly from a
material decrease in the total operating expenses of the Company
(mainly salaries and other employee-related overhead expenses) in 2009 compared
to 2008.
Impairment of Goodwill and
Intangible Assets
In 2008,
we recorded approximately $4.0 million in expenses relating to impairment of
goodwill and intangible assets. Under ASC 350, Intangibles-Goodwill and Others,
goodwill is tested for impairment at least annually (or more frequently if
impairment indicators arise). Under ASC 360, “Property, Plant and
Equipment-Subsequent Measurement”, amortizable long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company performed an
impairment test mainly due to the fact that in addition to its losses, as of
December 31, 2008, the Company's market capitalization was lower than the
Company's shareholders' equity as of such date. No impairment of intangible
assets was recorded in 2009, due to the fact that, among others, the Company's
market capitalization was higher than the Company's shareholders'
equity.
Finance Income,
Net
Finance
income, net, in 2009 consisted principally of interest income received in
connection with our bank deposits, less bank charges and currency differences
between the NIS and US dollar. In 2009, finance income, net, was $132,000, or
approximately 2% of sales, compared to $90,000, or 1.5% of sales, in
2008. The increase from 2008 to 2009 is mainly due to changes in
currency exchange rates between the US dollar and NIS.
Taxes on Income, Tax Refunds
and Tax Benefits
In 2009,
VocalTec and Tdsoft had two and four, respectively, Approved Enterprise programs
under the Law for the Encouragement of Capital Investments, 1959. Such programs
are eligible for certain tax benefits for the first several years in which they
generate taxable income. Income derived from an Approved Enterprise is subject
to a zero tax rate for two years and up to an additional eight years of a
reduced corporate tax rate of 25% until the earlier of (i) seven to ten
consecutive years, commencing in the year in which the specific Approved
Enterprise first generates taxable income (which income is not offset by
deductions attributable to the other sources), (ii) twelve years from
commencement of production or (iii) fourteen years from the date of approval of
the Approved Enterprise status. Some of our production and development
facilities have been granted Approved Enterprise status. To date, neither of our
Approved Enterprise programs has generated any taxable income.
As of
December 31, 2009, we had net operating loss carryforwards in Israel of
approximately $192 million ($141 million allocated to VocalTec and $51 million
allocated to Tdsoft). This net-operating loss may be carried forward and offset
against future taxable income under applicable tax laws. Management currently
believes that since the Company has a history of losses, it is more likely than
not that the operating losses will not be utilized. As a result, the Company
provides full valuation allowance to completely reduce the deferred tax
assets. As of December 31, 2009, valuation allowance amounted to
approximately $35million comprised mostly from carry forward loss. We also had
an aggregate net-operating loss carryforwards in the U.S. of approximately $9
million, which may not be carried forward and offset against future taxable
income due to change of control in the Company following the merger between
Vocaltec and Tdsoft in November 2005 (for additional information, see Item 10E -
“taxation and government programs” in the VocalTec consolidated financial
statements filed as part of VocalTec’s Annual Report on Form 20-F for the fiscal
year ended December 31, 2009). Tax benefits, which apply to us under Israeli
law, do not apply to any income generated by any of our other
subsidiaries.
Net Income
(Loss)
Net loss
in 2009, was $2.5 million, compared with a net income of $3.7 million in 2008,
including income from sale of patents in the amount of $14.9 million and
impairment of goodwill and intangible assets in the amount of $4.0
million.
Our
financial statements are reported in dollars and the vast majority of our sales
are made in U.S. dollars. Most of our expenses are in NIS and dollars. The cost
of our operations in Israel, as expressed in dollars, is influenced by the
extent to which any increase/decrease in the rate of inflation in Israel is not
offset by the appreciation/depreciation of the NIS in relation to the dollar. In
2009, the rate of inflation in Israel was 3.9% and the rate of appreciation of
the NIS in relation to the dollar was 0.7%.
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
Sales
In 2008,
we had sales of $6.1 million, compared to $5.8 million in 2007, an increase of
$0.3 million, or 6%. Through 2008, we generated our revenues from sales of our
products (primarily the Essentra family of products) and from the sale of
maintenance, support and other services. Sales of products accounted for 65% of
our revenues in 2008, whereas sales of services accounted for 35% of our
revenues in 2008. Due to a limited number of separate support services and
maintenance contracts consummated during such years, and since the Company began
providing its services through distributors and integrators (resulting in
inconsistencies of the portion of the contracts that is attributed to services),
the Company was unable to establish VSOE with respect to the support services
and maintenance provided by the Company subsequent to January 1,
2007. Accordingly, revenues from bundled software arrangements in
2007 and 2008 were recognized ratably over the last deliverable element in the
arrangement, which is typically the support and maintenance service period,
assuming all other revenue recognition criteria are met. The increase in our
revenues from the sale of products resulted from the deferral of approximately
$2.7 million of revenues from 2007 to 2008, due to the Company's inability for
the first time to establish VSOE during 2007. The decrease in revenues from the
sale of services in 2008 compared to 2007 resulted mainly from cancellation of a
yearly support contract from one of our major customers.
In 2008,
we continued selling our products also to resellers/systems integrators and
partners. We sell our products to such resellers/systems integrators/partners
for a consideration that is lower than the prices to end
customers. As a result of the sale to resellers/systems integrators,
we gain access to a broader range of customers, resulting in a larger amount of
transactions.
In 2008,
we continued selling our Essentra family of products as part of solutions
consisting also of certain hardware that we purchase from third parties,
resulting in an increase in sales (some of which were deferred from 2007, as
described above).
In 2008,
while continuing to sell our solutions in Europe and North America, the Company
focused its marketing efforts in the Former Soviet Union, Latin America and
Africa.
Cost of
Sales
Cost of
sales in 2008 was $2.9 million, or 48% of sales (including an amortization of
acquired intangibles in the amount of $0.3 million), compared with $3.4 million,
or 59% of sales (including an amortization of acquired intangibles in the amount
of $0.4 million and inventory write-off in the amount of $0.5 million), in 2007.
The effect of the amortization of acquired intangibles as a percentage from
sales was 5% in 2008 compared with 15% effect of the amortization of acquired
intangibles and inventory write off in 2007. Cost of products
was $2.0 million in 2008 and 2007. Cost of services was $0.6 million in 2008
compared with $0.5 million in 2007.
The
decrease in the cost of sales in 2008 compared to 2007 resulted from the
inventory write-off in 2007, which also explains the decrease in the cost of
sales as a percentage of sales in 2008 compared to 2007.
Cost of
our sales consists primarily of the cost of hardware components, salaries and
other related expenses of our employees who are engaged in the production and
support of our products and royalties paid by us to licensors of software and to
the OCS.
In 2008,
gross margins were 52%, including amortization of acquired intangibles, which
affected the gross margins by 5%. In 2007, gross margins were 41%, including
amortization of acquired intangibles and an inventory write-off, which affected
the gross margins by 15%.
Operating
Expenses
Research and Development,
Net
Research
and development costs, net, were $4.2 million in 2008, compared with $4.6
million in 2007, representing 68% and 79% of sales in 2008 and 2007,
respectively. Research and development costs, net, consist principally of
salaries and benefits for software and hardware engineers and sub-contractors,
related facilities' costs and activities and expenses associated with computer,
software and other equipment used in software and hardware development and
testing. Research and development costs, net, in 2008 and 2007 included
stock-based compensation amounts of $357,000 and $353,000, respectively, due to
recognition of expense for share based payments accounted for under ASC
718. None of our software or hardware development costs have been
capitalized during any of the reported periods, as the amount of software and
hardware development costs eligible for capitalization at this stage has
historically been insignificant. The decrease in research and development costs
in absolute numbers in 2008 compared to 2007 resulted mainly from a material
decrease in the number of R&D employees in 2008 compared to 2007, offset by
a decrease in OCS grants.
Our
research and development efforts in 2008 have been financed primarily from
internal resources. In previous years, we participated only in OCS of Israel
royalty-bearing programs. Pursuant to the terms of the OCS royalty-bearing
program, we are required to pay royalties of between 3.5% and 4.5% of sales of
products and related services developed in any project partially funded by the
OCS, up to an amount of 100% of the grant obtained. For grants received under
programs approved subsequent to January 1, 1999, royalties are payable up to
100% of the grant obtained plus interest at the annual rate of Libor applicable
to U.S. dollar deposits.
Our
research and development expenses in 2008 and 2007 were net of participation
from the OCS. In 2008 and 2007, participation received or accrued from the OCS
was $0.1 million and $0.8 million, respectively. In 2008, we paid or accrued
royalties to the OCS in an aggregate amount of approximately $208,000 compared
with $175,000 in 2007. As of December 31, 2008, our contingent liability to the
OCS amounted to approximately $22 million. During July 2008, the Company
consummated the sale of 11 of its patents for an aggregate selling price of
$12.5 million. On July 13, 2008, the OCS approved the consummation of the
foregoing sale, subject to the payment to the OCS of approximately $2.08
million, leading to net proceeds of $10.4 million. During December 2008, the
Company consummated the sale of four of its patents for an aggregate selling
price of $7.0 million. The OCS approved the consummation of the foregoing sale,
with no royalty payment obligation.
Selling and
Marketing
In 2008,
selling and marketing expenses were $3.6 million, or 58% of sales, compared with
$4.7 million or 82% of sales in 2007. Selling and marketing expenses include
salaries and benefits, sales commissions, travel expenses and related costs for
our sales and marketing personnel. Selling and marketing expenses in 2008 and
2007 included stock-based compensation amounting to $263,000 and $224,000,
respectively, due to recognition of expense for share based payments accounted
for under ASC 718. Selling and marketing expenses also include the costs of
programs aimed at increasing revenue, such as advertising, trade shows and other
market development programs. The decrease in selling and marketing expenses in
absolute numbers in 2008 compared to 2007 resulted primarily from decrease in
travel, marketing and subsidiaries-related expenses.
General and
Administrative
In 2008,
general and administrative expenses were $2.7 million, or 44% of sales, compared
with $2.0 million, or 35% of sales, in 2007. General and administrative expenses
consist principally of salaries and benefits, outside legal, accounting and
consultant fees, travel expenses and related costs for management, directors'
fees, directors and officers insurance, finance, logistics, human resources,
communication, information systems and administrative
personnel. General and administrative expenses in 2008 and 2007
included stock-based compensation amounting to $532,000 and $552,000,
respectively, due to recognition of expense for share based payments accounted
for under ASC 718. General and administrative expenses also include
expenses associated with computing equipment and software used in the
administration operations. The increase in general and administrative
expenses in absolute numbers resulted primarily from the increase in
professional services and salary expenses.
Impairment of Goodwill and
Intangible Assets
In 2008,
we recorded approximately $4.0 million in expenses relating to impairment of
goodwill and intangible assets, compared to approximately $5.4 million in 2007.
Under Statement of ASC 350, “350 Intangibles—Goodwill and Other” (formerly FAS
142), goodwill is tested for impairment at least annually (or more frequently if
impairment indicators arise). Under Statement of ASC 360, “Property, plant and
equipment” (formerly FAS 144), amortizable long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company decided to use
an income approach instead of the market price of the Company's shares mainly
due to the fact that in addition to its losses, as of December 31, 2008 and
2007, the Company's market capitalization was lower than the Company's
shareholders' equity as of such date.
Income for Sale of Patents,
Net
During
2008, we recorded an aggregate income of $14.9 million, resulting from the sale
of 15 of our patents and certain patent-related rights. Income from sales of
patents is included in operating expenses due to the fact that the patents are a
direct result of the Company's current operations.
Finance Income,
Net
Finance
income, net in 2008 consisted principally of interest income received in
connection with our bank deposits, less bank charges and currency differences
between the NIS and US dollar. In 2008, finance income, net was $90,000, or
approximately 1.5% of sales, compared to $230,000, or 4% of sales, in 2007. The
decrease from 2007 to 2008 is mainly due to decrease in interest income from
bank deposits attributed to material decrease in interest rates during these
years.
Taxes on Income, Tax Refunds
and Tax Benefits
As of
December 31, 2008, we had net operating loss carryforwards in Israel of
approximately $194 million ($141 million allocated to VocalTec and $53 million
allocated to Tdsoft). This net-operating loss may be carried forward and offset
against future taxable income under applicable tax laws. Management believes
that since the Company has a history of losses, it is more likely than not that
the operating losses will not be utilized. As a result, the Company provides
full valuation allowance to completely reduce the deferred tax
assets. As of December 31, 2008, valuation allowance amounted to
approximately $48 million comprised mostly from carry forward loss. We also had
an aggregate net-operating loss carryforwards in the U.S. of approximately $9
million, which may not be carried forward and offset against future taxable
income due to change of control in the Company following the merger between
Vocaltec and Tdsoft in November 2005. Tax benefits, which apply to us
under Israeli law, do not apply to any income generated by any of our other
subsidiaries.
Net Income
(Loss)
Net
income in 2008, including net income of $14.9 million from the sales of our
patents, was $3.7 million. Without the proceeds from the sales of our patents,
we had a net loss of $11.2 million in 2008, compared with a net loss of $14.2
million in 2007.
Our
financial statements are reported in dollars and the vast majority of our sales
are made in U.S. dollars. Most of our expenses are in New Israeli Shekels (NIS)
and dollars. The cost of our operations in Israel, as expressed in dollars, is
influenced by the extent to which any increase/decrease in the rate of inflation
in Israel is not offset by the appreciation/depreciation of the NIS in relation
to the dollar. In 2008, the rate of inflation in Israel was 3.8% and the rate of
appreciation of the NIS in relation to the dollar was 1.1%.
Liquidity and Capital
Resources
During
the past three years, we covered our cash flow requirements with cash proceeds
from sales of patents, operating revenues and grants from the OCS.
As of
December 31, 2009, we had approximately $10.6 million in cash and cash
equivalents and bank deposits, comprised of $7.5 million in cash and cash
equivalents and $3.1 million in bank deposits. As of December 31, 2008, we had
approximately $15.0 million in cash, cash equivalents and bank
deposits.
As of
December 31, 2009, we had working capital of approximately $7.8 million,
compared with $10.1 million as of December 31, 2008. The net decrease in working
capital during 2009 resulted primarily from the decrease in cash and cash
equivalents and bank deposits during 2009.
Net cash
used in operating activities was $4.1 million, $4.3 million and $3.9 million for
the years ended December 31, 2009, 2008 and 2007, respectively. Net cash
provided by investing activities was $7.1 million, $4.8 million and $2.5 million
for the years ended December 31, 2009, 2008 and 2007, respectively. Net cash
used in financing activities was $0.6 million in 2009.
The
Company had no net cash generated by financing activities in 2008 and
2007.
We
anticipate that operating expenses may exceed revenues, net of cost of sales in
2010 and possibly beyond if we do not sufficiently increase sales and reduce our
costs. We believe that our current cash and cash equivalents balances, together
with future estimated cash flows from operations and grants from the OCS, if
received, are sufficient to meet our anticipated cash needs for working capital
and capital expenditures for at least the next 12 months.
Capital
expenditures in 2009 were approximately $64,000, compared with $269,000 in 2008
and $178,000 in 2007.
We
maintained annual car leases in the amount of approximately $313,000 in 2009,
and our total liability for early termination of the leases is in the amount of
up to approximately $38,000.
Inventory and
Receivables
Inventories
as of December 31, 2009 were $63,000, compared to $38,000 as of December 31,
2008.
Trade
receivables are from sales of our products, primarily to telecommunications
systems integrators, resellers and service providers. Trade receivables are
presented at gross value less reserve for doubtful accounts of $0 as of December
31, 2009 and 2008. Trade receivables, net, as of December 31, 2009 and 2008 were
$0.2 million.
Prepaid
expenses and other receivables were $0.5 million as of December 31, 2009 and
2008.
Impact of Recently Issued
Accounting Standards
In
October 2009, the FASB issued an update to ASC 985-605, “Software-Revenue
Recognition” (originally issued as EITF 09-3). In accordance with the update to
the ASC, tangible products containing software components and non-software
components that function together to deliver the tangible product's essential
functionality are excluded from the scope of the software revenue recognition
guidance. In addition, hardware components of a tangible product containing
software component are always excluded from the software revenue guidance. The
mandatory adoption is on January 1, 2011. The Company may elect to adopt the
update prospectively, to new or materially modified arrangements beginning on
the adoption date, or retrospectively, for all periods presented. In such case
the Company must also adopt the amendment to ASC 605-25 with respect to
multiple-elements arrangements prior to January 1, 2011. The Company does not
expect the adoption of the update to have a material impact on the Company's
consolidated financial condition or results of operations.
In
October 2009, the FASB issued an update to ASC 605-25, “Revenue recognition -
Multiple-Element Arrangements”, that provides amendments to the criteria for
separating consideration in multiple-deliverable arrangements to:
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Provide
updated guidance on whether multiple deliverables exist, how the
deliverables in an arrangement should be separated, and how the
consideration should be allocated;
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Require
an entity to allocate revenue in an arrangement using estimated selling
prices (“ESP”) of deliverables if a vendor does not have vendor-specific
objective evidence of selling price (“VSOE”) or third-party evidence of
selling price (“TPE”);
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Eliminate
the use of the residual method and require an entity to allocate revenue
using the relative selling price method;
and
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Require
expanded disclosures of qualitative and
quantitative information regarding application of the
multiple-deliverable revenue arrangement
guidance.
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The
Company may elect to adopt the update prospectively, to new or materially
modified arrangements beginning on the adoption date, or retrospectively, for
all periods presented. The Company is currently evaluating the impact on its
consolidated results of operations and financial condition.
Off-Balance Sheet
Arrangements
There are
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future material effect on the company's financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
Contractual
Obligations
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Payments due by period (in thousands of
dollars)
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Total
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Less than 1 Year
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2-3 Years
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4-5 Years
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More than 5 Years
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Uncertain
tax positions (1)
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739
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739
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—
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—
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—
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Operating
Lease Obligations
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597
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177
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160
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160
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100
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Accrued
severance pay (2)
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1,030
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—
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—
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—
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1,030
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(1) Uncertain
income tax position under ASC 740, “Income Taxes “are due upon settlement and we
are unable to reasonably estimate the ultimate amount or timing of
settlement. See Note 15(i) in our Consolidated Financial Statements for further
information regarding the Company's liability under ASC 740.
(2) As
of December 31, 2009 we had $826,000 in severance pay funds to cover such
liabilities.
Management’s
Discussion and Analysis of YMax’s Financial Condition and Results of
Operation
For
purposes of the Management’s Discussion and Analysis of YMax’s Financial
Condition and Results of Operation below, the terms “we” and “the Company” refer
solely to YMax prior to the Merger, and do not reflect the transaction with
VocalTec.
Our
operating results and financial condition have varied in the past and could in
the future vary significantly depending on a number of factors. From time to
time, information provided by us or statements made by our employees contain
“forward-looking” information that involves risks and
uncertainties. These statements are neither promises nor
guarantees. Our actual results of operations and financial condition
have varied and could in the future vary significantly from those stated in any
forward-looking statements. The factors described in this Report on
Form 6-K under “Forward Looking Statements” and “Risk Factors,” among others,
could cause actual results to differ materially from those contained in this
Report on Form 6-K or presented elsewhere by our management from time to
time. Such factors, among others, could have a material adverse
effect upon our business, results of operations and financial
condition.
Introduction
The
following is a discussion of our financial condition and results of operations
for the fiscal years ended December 31, 2009, 2008 and 2007. This discussion
should be read in conjunction with our Consolidated Financial Statements, and
the Notes thereto, included elsewhere herein and the Selected Financial Data
included elsewhere herein. The results of operations for the periods presented
in this report are not necessarily indicative of the results expected for the
full year or for any future period.
Executive
Summary
We
operate a proprietary telecommunications network and software platforms to
deliver relevant, cost-effective telecommunications and other services and offer
our customers access to our telecommunications network via the magicJack
®
. In
January 2008, we introduced the first product for use over our network - the
magicJack
®
. The
magicJack
®
is a
proprietary device weighing less than an ounce and plugs into a USB port on any
computer enabling instant “voice over broadband” telephone service, as well as
other patent pending and proprietary technologies designed to further enhance
user mobility, connectivity and experience. The magicJack
®
takes
less than a minute to install and can be used for a customer’s phone service or
as a second line. The magicJack
®
is
portable and can be used anywhere a broadband connection and a computer are
available. Upon installation of the magicJack
®
, a
customer can plug a traditional telephone into the other end or use an intuitive
softphone interface that appears on the computer screen, which the customer can
use to place and receive calls. The magicJack
®
purchase
price includes the magicJack
®
device
and a one-year software license providing free broadband telephone service to
anywhere in the U.S. or Canada for the first year. The magicJack
®
requires
limited installation and support, and sells for substantially less than
comparable equipment and services offered by our competitors. Our magicJack
®
service
offerings include free local and long distance calling, free voice mail,
directory assistance, and other features. Renewing customers receive those same
services for each additional year for a very competitive annual fee, as compared
to other providers.
We have
built an Internet technology, sales and communication platform through which we
provide proprietary products and services to customers worldwide. Our platform
has numerous capabilities that enable us to offer a diverse range of services to
consumers including voice communications, relevant ads and Internet retail
sales.
We
believe our sophisticated network is one of a kind. We have built one
of the largest telephone communications networks based on the number of states
in which we operate within the United States. We have switches and related
equipment in 32 major cities across the United States and can service our
rapidly growing customer base. Our network can also be scaled to
support future growth. Since our inception, we have focused on
building our telecommunications network using a proprietary enhanced services
platform to make and deliver calls in the most cost effective manner while
maintaining superior quality voice applications. The design of our
network enables us to provide high-quality voice service at low cost,
particularly compared to our competitors who use third-party carriers for their
networks. Our network uses over 50 gateways, 65 session border
controllers, application servers, softswitches, and more than 130
servers.
Our
Competitive Positioning
We
believe that the key competitive factors in our market include:
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pricing
and cost structure;
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ease
of initial set-up and use;
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ease
of use and the design of features and capabilities that are attractive to
customers.
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We
compete primarily through the quality and cost structure of our network and our
low pricing. We believe that our large existing user base,
competitive pricing, efficient customer acquisition model, low cost service
delivery and customer care capabilities, position us well to compete effectively
in the future.
Certain
Trends and Uncertainties
The
following represents a summary of certain trends and uncertainties which could
have a significant impact on our financial condition and results of operations.
This summary is not intended to be a complete list of potential trends and
uncertainties that could impact our business in the long or short term. The
summary, however, should be considered along with the factors identified in
“Risk Factors,” of this Report on Form 6-K.
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We
continue to closely monitor current adverse economic conditions,
particularly as they impact the provision of broadband telephone service
and the internet, media and telecommunication
industries.
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We
believe that competition will continue to increase. Increased competition
could result from existing competitors or new competitors that enter the
market because of the potential opportunity. We will continue to closely
monitor competitive activity and respond accordingly. Increased
competition could have an adverse effect on our financial condition and
results of operations.
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We
believe that if we continue to grow revenue at expected rates, our cost of
revenue and operating expenses, including sales and marketing, research and
development and general and administrative expenses will increase in absolute
amounts but decrease as a percentage of revenues.
For a
description of the general trends we anticipate in various expense categories,
see the “Cost of Revenue and Operating Expenses” section below.
Components
of Revenue and Expenses
Revenues
We
generate revenues primarily from the sale and shipping of the magicJack
®
, which
includes a one-year license to access our network for year of free broadband
telephone service to anywhere in the U.S. or Canada, subsequent license renewal
fees for an additional one to five-year period, and sales of additional
magicJack
®
-related
services and fees. We sell magicJack units on a direct sales basis through our
website and through national retailers on a resale basis. Shipping and handling
fees are charged to customers purchasing magicJack units through our
website. License renewals are presently offered on a direct sales
basis through our website or our softphone. Combined revenues from
the sale of the magicJack
®
,
shipping and handling, license renewals and related services and fees, such as
fees charged for custom phone numbers and changing a phone number assigned to an
existing magicJack
®
,
represented approximately 82%, 90% and 83% of our revenues in fiscal years 2009,
2008 and 2007, respectively.
We offer
access to international calls to our customers at competitive rates on a prepaid
basis. In fiscal year 2009 and 2008, sales of access to international
calls generated approximately 6% and 4% of our revenues,
respectively. We also collect fees from other carriers for calls
terminated in our network as well as calls made to “800” numbers. These fees
represented approximately 8% and 6% of our revenues in fiscal years 2009 and
2008, respectively. We did not collect any such fees in fiscal year
2007.
The
remainder of our revenues, which comprises approximately 5% and 17% of our
annual revenues in fiscal years 2009 and 2008, respectively, were from ancillary
sales, consisting primarily of sales of hardware, software and service
agreements sold by one of our wholly-owned subsidiaries.
Cost
of Revenues
Cost of
revenues consist primarily of the cost of magicJack
®
units
sold, the direct cost of network and carrier services, costs incurred in the
shipping and handling of magicJack
®
units
and credit card fees related to our direct sales of magicJack. These costs are
expensed as incurred as we ship products with a right of return under our 30-day
free trial arrangement. We do not charge customers for shipping and handling
until the 30-day free trial period has expired.
Our
magicJack
®
units
are manufactured in China by a foreign company under a manufacturing and supply
agreement. Certain components of the magicJack
®
unit are
built to our specifications in foreign countries and then sent to our
manufacturer for final assembly.
Network
and carrier services include (i) access charges that we pay other carriers to
terminate domestic and international calls on their networks, (ii) network
transit costs of linking our switches to each other and linking with other
carriers’ switches on the public switched telephone network, (iii) costs of
colocating our switches in third party facilities, (iv) costs to provide 911
service to our customers, (v) cost of international minutes resold to our
customers and (vi) other miscellaneous costs incurred in the operation of our
network.
The
remainder of our cost of revenues relates to our ancillary sales and consists
primarily of cost of hardware and software sold by one of our wholly-owned
subsidiaries, as well as other allocated costs.
Operating
Expenses
Advertising
and marketing expenses include the cost of internet marketing, print media, long
and short form television commercials, and other promotional materials and
activities. Advertising and marketing costs are expensed as incurred. In order
to continue to grow our business and awareness of our products and services, we
expect that we will continue to commit resources to our sales and marketing
efforts. We expect that sales and marketing expenses will increase in absolute
dollars but decrease as a percentage of revenue over time as our revenue
increases.
General
and administrative expenses include personnel-related, network, outsourced
customer care personnel cost, legal and professional fees to address our
regulatory and compliance issues, bad debts, other costs incurred in the
administration of our business and other allocated costs. We expect that general
and administrative expenses will increase as we continue to add both internal
and outsourced personnel to operate and maintain our network, provide customer
care and enhance our internal information systems in connection with the growth
of our business.
Research
and development expenses consist primarily of personnel related costs for our
development team, consulting fees associated with outsourced development
projects, facilities rent, other development expenses and other allocated costs.
We have focused our research and development efforts on both improving ease of
use and functionality of our network, as well as developing new product
offerings. A number of our software developers are outside consultants located
in a foreign country. Therefore, a portion of research and development expense
is subject to fluctuations in foreign exchange rates. We expect that research
and development expenses will increase in absolute amount as we continue to
enhance and expand our network and introduce new products, but will decrease as
a percentage of revenue.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with United States generally accepted accounting principles (“GAAP”).
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of our consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. We evaluate our estimates on an on-going basis, including
those related to revenue, trade receivables and allowance for doubtful accounts,
the recoverability of long-lived assets, goodwill and other intangible assets,
the value of common stock issued in business combinations or underlying our
stock options, the expected forfeiture of stock options, income taxes and
estimates of likely outcomes related to certain contingent liabilities. We base
our estimates on historical experience and on various other assumptions that we
believe reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates or our estimates may be affected by
different assumptions or conditions. Critical accounting policies are those that
are both most important to the portrayal of a company’s financial position and
results of operations, and require management’s most difficult, subjective or
complex judgments. The following accounting policies and estimates are those
that management deems most critical. For a complete listing of our significant
accounting policies, see Note 2, “Summary of Accounting Policies,” in the Notes
to YMax’s Consolidated Financial Statements included elsewhere
herein.
Business
Combinations and Acquisitions
We
allocate the purchase price of an acquired business, on a preliminary basis, to
the identified assets and liabilities acquired based on their estimated fair
values at the dates of acquisition, with any residual amounts allocated to
goodwill. Purchase price allocations are considered preliminary until we have
obtained all required information to complete the allocation. Although the time
required to obtain the necessary information will vary with circumstances
specific to an individual acquisition, the “allocation period” for finalizing
purchase price allocations would not exceed one year from the date of
consummation of an acquisition. Adjustments to the allocation of purchase price
may decrease those amounts allocated to goodwill and, as such, may increase
those amounts allocated to other tangible or intangible assets, which may result
in higher depreciation or amortization expense in future periods. Revisions to
preliminary purchase price allocations, if any, are reflected retrospectively.
Assets acquired in a business combination that will be sold are valued at fair
value less cost to sell. Results of operating these assets are recognized
currently in the period in which those operations occur.
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued revised
guidance for accounting for business combinations, and established the
principles and requirements for how an acquirer (i) recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities
assumed and any noncontrolling interest in the acquiree; (ii) recognizes
and measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and (iii) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination.
Previously, any changes in income tax
valuation allowances as a result of income from acquisitions for certain
deferred tax assets would serve to reduce goodwill. Under this revised guidance,
any change in the valuation allowance related to income from acquisitions,
currently or in prior periods, now serves to reduce income taxes in the period
in which the reserve is reversed. Transaction related expenses that were
previously capitalized are now expensed as incurred. As of December 31,
2008, we had no deferred transaction-related expenses for business combination
transactions in negotiation. The provisions of this revised guidance apply
prospectively to business combinations consummated on or after January 1,
2009 and we had no transition adjustments on January 1, 2009.
Revenue
Recognition
We
generate revenues primarily from: (i) the sale and shipping of the
magicJack
®
,
subsequent license renewal fees, and sales of additional magicJack
®
-related
services and fees, (ii) telephony services charges and fees generated from the
sale of access to international calls, fees for origination of calls to
800-numbers and charges for out-of-network calls terminated on the our network,
and (iii) other ancillary sales. Revenue is recorded net of sales returns and
allowances. Our revenue recognition policies for each of these
revenue sources are described below:
magicJack
®
Revenue
We
recognize revenue from sale and shipping of direct sales of the magicJack
®
and
subsequent license renewal fees over the license period associated with the
respective initial license or renewal. Customers may purchase licenses for
continued use of our software to access our network for additional years either
when the original purchase is made, or at any time thereafter. The revenue
associated with a license for additional years is deferred and recognized
ratably over the extended license period.
Sales
Return Policy
We offer
our direct sales customers a 30-day free trial before have to pay for their
magicJack
®
unit. We
do not record or recognize revenue until the 30-day trial period has expired and
a customer’s credit card has been charged.
Returns
from retailers are accepted on an authorized basis. We also
offer certain retailers the right to return any unsold merchandise from their
initial stocking orders up to the point that such retailers have obtained sales
of an agreed number of magicJack
®
units.
We estimate potential returns under these arrangements at point of sale and
re-estimate potential returns on a quarterly basis. For the fiscal
year ended December 31, 2009, our estimates of returns and actual returns from
initial stocking orders have not been materially different.
Telephony
Services Revenue
Telephony
revenue is recognized as minutes are used. Telephony revenue is
generated from the sale of international minutes, fees for origination of calls
to 800-numbers and call termination fees charged to other telephone carriers on
a per-minute basis for out-of-network calls terminated on our
network.
Sales
of Telecommunications Hardware, Software and Service Agreements
Revenues
from sales of telecommunications hardware and our proprietary software are
recognized at the time of shipment to customers. Revenues from service
agreements are recognized over the term (generally one year) of the service
agreement. Service agreements include maintenance, technical support, training
and upgrades. If a service agreement for additional year(s) is purchased, the
associated revenue is deferred and recognized ratably over the extended term of
the service agreement. Revenues from sales of parts, services not covered by a
service agreement and custom design services are recognized as parts are shipped
or services are performed.
Trade
Receivables and Allowance for Doubtful Accounts
Our trade
receivables are comprised primarily of amounts owed to us by retailers who sell
the magicJack
®
and of
amounts owed by other carriers for calls terminated in our network. The Company
maintains an allowance for doubtful accounts based on the expected
collectability of its accounts receivables. That estimate is based on historical
collection experience, current economic and market conditions and a review of
the current status of each customer’s trade accounts receivable.
Goodwill
and Intangible Assets
We
account for goodwill and indefinite-lived intangible assets in accordance with
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 350, “
Intangibles – Goodwill and
Other
” (“ASC 350”). Our related indefinite-lived intangibles are tested
annually in accordance with ASC 350 during the fourth quarter of each fiscal
year to determine whether their carrying value exceeds their fair value.
Goodwill and other indefinite-lived intangible assets are also tested for
impairment on an interim basis if an event occurs or circumstances change
between annual tests that would indicate that impairment exists.
In
assessing goodwill and intangible assets for impairment, we determine our
enterprise value by reference to recent sales of our common stock to
non-affiliated investors and valuation analysis made in connection with
acquisitions and stock option grants. We have not considered other factors such
as a control premium for our common stock, which could affect our enterprise
value. We compare our carrying value, including goodwill with our estimated
enterprise value to determine whether our goodwill may be impaired. If an
impairment or impairment trend is indicated, we will use discounted projected
cash flows from operations to determine the implied fair value of our goodwill.
If the carrying value of our goodwill exceeds its implied fair value, then an
impairment has occurred, and impairment losses, if any, are reflected in
operating income or loss in the Consolidated Statements
of Operations.
In
accordance with ASC 350 and Topic 360, “
Property, Plant and
Equipment
,” we review finite-lived intangible assets for impairment
whenever an event occurs or circumstances change which indicates that the
carrying amount of such assets may not be fully recoverable. In evaluating the
fair value and future benefits of its long-lived and identified intangible
assets subject to amortization, we perform an analysis of the anticipated
undiscounted future net cash flow of the individual assets over the remaining
amortization period. We recognize an impairment loss if the carrying value of an
asset exceeds the expected future cash flows.
Identifiable
intangible assets are stated at cost. Amortization is computed on identified
intangibles subject to amortization using the accelerated and straight-line
methods over the estimated useful lives of such assets, which range from three
to seventeen years. The costs of developing our patents, patent applications and
technology are charged to research and development expense.
Stock-based
Compensation
Stock-based
compensation generally consists of option grants or common stock awards to
employees or consultants that are measured at grant date, based on the fair
value of the award, and are recognized as an expense over the requisite service
period.
The fair
value of each option is estimated at the date of grant using the Black-Scholes
option valuation model. We estimate the fair value of the underlying
common stock at the date of grant based on the valuation of our common stock or
on recent sales of our common stock to non-affiliated investors and the expected
stock price volatility based on historical volatility within a representative
peer group of public companies. We also estimate expected award life as the term
of the options as there is no public market for its common stock, and minimal
forfeiture rates as all of our option grants have been fully vested at the date
of grant.
Income
Taxes
We
recognize deferred tax assets and liabilities for the expected tax consequences
of temporary differences between the tax basis of assets and liabilities and
their book basis using enacted tax rates in effect for the year the differences
are expected to reverse. We record a valuation allowance to reduce
the deferred tax assets to the amount that we estimate is more likely than not
to be realized.
We
adopted certain provisions of ASC Subtopic 740-10, formerly FASB Interpretation
No. 48, “
Accounting for
Uncertainty in Income Taxes
—
an interpretation of SFAS No.
109
” (“ASC 740-10”) as of January 1, 2007 with no material impact to our
consolidated financial position or its results of operations. The provisions of
ASC 740-10 prescribe a more-likely-than-not threshold for financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on derecognition of
income tax assets and liabilities, classification of current and deferred income
tax assets and liabilities, accounting for interest and penalties associated
with tax positions, accounting for income taxes in interim periods and income
tax disclosures. Any interest or penalties resulting from examinations will be
recognized as a component of the income tax provision.
Contingent
Liabilities
Certain
contingent liabilities may arise in the ordinary course of our business
activities. We accrue for contingent liabilities when it is probable that future
expenditures will be made and such expenditures can be reasonably estimated.
Reserves for contingent liabilities, if any, are reflected in our consolidated
financial statements based on management’s assessment, along with legal counsel,
of the expected outcome of the contingencies. If the final outcome of our
contingencies differs from that currently expected, it would result in a change
to earnings in the period determined.
Results
of Operations
The
following table presents our consolidated results of operations for the periods
indicated (in thousands). The consolidated statement of operations below have
been expanded to show the composition of our operating revenue and cost of
revenues items to enable a more meaningful discussion of our
operations.
|
|
|
Fiscal
Year Ended December 31,
|
|
|
2009
Compared
to
|
|
|
2008
Compared
to
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Operating
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of magicJack®
|
|
$
|
80,046
|
|
|
$
|
25,021
|
|
|
$
|
290
|
|
|
|
219.9
|
%
|
|
|
*
|
%
|
|
License
renewals
|
|
|
5,390
|
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
|
Shipping
and handling
|
|
|
10,733
|
|
|
|
4,592
|
|
|
|
21
|
|
|
|
133.7
|
|
|
|
*
|
|
|
magicJack®-related
products
|
|
|
452
|
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
|
International
prepaid minutes
|
|
|
6,584
|
|
|
|
1,401
|
|
|
|
-
|
|
|
|
370.0
|
|
|
|
*
|
|
|
Access
charges
|
|
|
8,967
|
|
|
|
2,075
|
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
|
Other
|
|
|
5,640
|
|
|
|
-
|
|
|
|
64
|
|
|
|
*
|
|
|
|
*
|
|
|
Total
Operating Revenue
|
|
|
117,812
|
|
|
|
33,089
|
|
|
|
375
|
|
|
|
256.0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of magicJacks® sold
|
|
|
23,358
|
|
|
|
9,284
|
|
|
|
657
|
|
|
|
151.6
|
|
|
|
*
|
|
|
Shipping
and handling
|
|
|
2,233
|
|
|
|
3,614
|
|
|
|
147
|
|
|
|
(38.2
|
)
|
|
|
*
|
|
|
Credit
card processing fees
|
|
|
2,758
|
|
|
|
2,335
|
|
|
|
26
|
|
|
|
18.1
|
|
|
|
*
|
|
|
Network
and carrier charges
|
|
|
25,575
|
|
|
|
10,202
|
|
|
|
2,251
|
|
|
|
150.7
|
|
|
|
*
|
|
|
Other
|
|
|
9,185
|
|
|
|
1,999
|
|
|
|
799
|
|
|
|
359.5
|
|
|
|
*
|
|
|
Total
Cost of Revenues
|
|
|
63,109
|
|
|
|
27,434
|
|
|
|
3,880
|
|
|
|
130.0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit (Loss)
|
|
|
54,703
|
|
|
|
5,655
|
|
|
|
(3,505
|
)
|
|
|
867.3
|
|
|
|
(261.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
32,104
|
|
|
|
33,137
|
|
|
|
562
|
|
|
|
(3.1
|
)
|
|
|
*
|
|
|
General
and administrative
|
|
|
41,811
|
|
|
|
20,341
|
|
|
|
7,594
|
|
|
|
105.6
|
|
|
|
167.9
|
|
|
Research
and development
|
|
|
5,483
|
|
|
|
1,654
|
|
|
|
1,526
|
|
|
|
231.5
|
|
|
|
8.4
|
|
|
Total
operating expenses
|
|
|
79,398
|
|
|
|
55,132
|
|
|
|
9,682
|
|
|
|
44.0
|
|
|
|
469.4
|
|
|
Operating
loss
|
|
|
(24,695
|
)
|
|
|
(49,477
|
)
|
|
|
(13,187
|
)
|
|
|
(50.1
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
gains (losses) on marketable securities
|
|
|
4,298
|
|
|
|
(1,446
|
)
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
|
Interest
and dividend income
|
|
|
708
|
|
|
|
132
|
|
|
|
36
|
|
|
|
*
|
|
|
|
*
|
|
|
Interest
expense
|
|
|
(1,180
|
)
|
|
|
(982
|
)
|
|
|
(801
|
)
|
|
|
20.2
|
|
|
|
22.6
|
|
|
Loss
on extinguishment of SJ Labs Note
|
|
|
(563
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
|
Investment
advisory fee
|
|
|
(1,115
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
|
Other
income (expense), net
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
|
Total
other income (expense)
|
|
|
2,155
|
|
|
|
(2,296
|
)
|
|
|
(765
|
)
|
|
|
*
|
|
|
|
*
|
|
|
Net
loss before income taxes
|
|
|
(22,540
|
)
|
|
|
(51,773
|
)
|
|
|
(13,952
|
)
|
|
|
|
|
|
|
(271.1
|
)
|
|
Income
tax (benefit) expense
|
|
|
(9
|
)
|
|
|
63
|
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
|
Net
loss
|
|
$
|
(22,531
|
)
|
|
$
|
(51,836
|
)
|
|
$
|
(13,952
|
)
|
|
|
(56.5
|
)
|
|
|
271.5
|
|
* - Not
meaningful.
Fiscal
Year Ended December 31, 2009 Compared to Fiscal Year Ended December 31,
2008
Operating
Revenue
Total
operating revenue was $117.8 million and $33.1 million for the fiscal year ended
December 31, 2009 and 2008, respectively, representing an increase of $84.7
million, or 256.0%. This increase in revenues was primarily attributable to the
following:
|
|
·
|
a
$55.0 million increase in revenues recognized for the sale of
magicJack
®
units as a result of a significant increase in sales, which resulted in
the recognition of revenues for a higher number of active units, offset in
part by a decrease in the average price of units sold a due to an
increasing percentage of magicJack
®
units being sold to retailers and distributors at wholesale prices as
opposed to direct sales to customers at retail
prices;
|
|
|
·
|
a
$6.9 million increase in revenues generated by access charges as the
number of calls terminated in our network
increased;
|
|
|
·
|
a
$6.1 million increase in shipping and handling revenues as a result of a
significant increase in revenues recognized from direct
sales;
|
|
|
·
|
a
$5.6 million increase in other revenues primarily as a result of revenues
generated by our wholly-owned subsidiary,
Stratus;
|
|
|
·
|
a
$5.4 million increase in renewal revenues as a result of early customers
staring to renew their licenses;
|
|
|
·
|
a
$5.2 million increase in revenues from prepaid international minutes as a
result of an increase in the number of customers, which resulted in higher
sales and usage of prepaid international minutes;
and
|
|
|
·
|
a
$0.5 million increase in revenues from magicJack
®
-related
products, which the Company started selling in
2009.
|
In late
2008 we started selling the magicJack
®
through
retailers. In the fiscal year ended December 31, 2009 and 2008, sales of the
magicJack
®
through
retail outlets represented approximately 75% and 25%, respectively, of
magicJack
®
units
sold. For the same periods, direct sales represented approximately 25% and 75%,
respectively, of magicJack
®
units
sold.
For the
fiscal year ended December 31, 2009, one customer, RadioShack, accounted
approximately 10% of our total operating revenue. For the fiscal year ended
December 31, 2008, no customer accounted for greater than 10% of our total
operating revenue.
Cost
of Revenues
Total
cost of revenues was $63.1 million and $27.4 million for the fiscal year ended
December 31, 2009 and 2008, respectively, representing an increase of $35.7
million, or 130.0%. This increase in cost of revenues was primarily attributable
to the following:
|
|
|
a
$15.4 million increase in network and carrier charges resulting from a
higher number of active magicJack®
units;
|
|
|
·
|
a
$14.1 million increase in the cost of magicJack
®
units sold driven by the recognition of costs for a higher number of
active units as a result of a significant increase in
sales;
|
|
|
·
|
a
$7.2 million increase in other costs of revenues primarily due to (i) an
increase in personnel-related costs, (ii) higher bad debt expense, and
(iii) costs related to our wholly-owned subsidiary, Stratus, which was
acquired in January 2009; and
|
|
|
·
|
a
$0.4 million increase in credit card processing
fees.
|
These
items were partially offset by a $1.4 million decrease in other shipping and
handling costs due to an increasing percentage of magicJack
®
units
being sold through retailers and distributors as opposed to sold direct to
customers.
Operating
Expenses
Total
operating expenses was $79.4 million and $55.1 million for the fiscal year ended
December 31, 2009 and 2008, respectively, representing an increase of $24.3
million, or 44.0%. This increase in operating expenses was primarily due to a
combined $25.3 million increase in general and administrative expenses and
research and development expenses primarily attributable to higher
personnel-related costs, including $23.0 million of the 2009 bonus for 2009
services. These increases were partially offset by a $1.0 million
decrease in advertising expenses as a result of reduced advertising volume in
fiscal year 2009 as compared to fiscal year 2008, when the magicJack
®
was
still being initially introduced to the market.
Other
Income (Expense)
Total other income (expense) was $2.2
million and ($2.3) million for the fiscal year ended December 31, 2009 and 2008,
respectively, representing an increase of $4.5 million, or 193.9%. This increase
in other income (expense) was due to changes in the items discussed
below.
Realized
Gains and Losses on Marketable Securities and Investment Advisory
Fee
Realized
gain on marketable securities in the fiscal year ended December 31, 2009 was
$4.3 million, as compared to a realized loss on marketable securities of $1.4
million in twelve months ended December 31, 2008. We were adversely affected by
the deteriorating capital markets in fiscal year 2008, and as a result, realized
significant losses in our investments. During the twelve months ended December
31, 2009, our investments were closely monitored and managed by our Chief
Executive Officer, Mr. Borislow, which contributed to significant realized
gains. We incurred a one-time investment advisory fee of $1.1 million during
fiscal year 2009, which was paid to Mr. Borislow for his investment advisory
services.
Interest
and Dividend Income
Interest
and dividend income was $0.7 million and $0.1 million for the fiscal year ended
December 31, 2009 and 2008, respectively, representing an increase of $0.6
million. This increase was primarily attributable to higher invested cash
balances during fiscal year 2009.
Interest
Expense
Interest
expense was $1.2 million and $1.0 million for the fiscal year ended December 31,
2009 and 2008, respectively, representing an increase of $0.2 million, or 20.2%.
The increase in interest expense was primarily attributable to $0.6 million
interest due on the note issued in connection with our acquisition of Stratus,
including amortization of discount, partially offset by a decrease in interest
expense attributable to other notes payable retired or converted into common
stock during the twelve months ended December 31, 2009. Refer to Note 12,
“Debt,” in the Notes to YMax’s Consolidated Financial Statements included
elsewhere herein for further details.
Loss
on Extinguishment of Debt
We
recorded a loss on extinguishment of debt of $0.6 million in fiscal year 2009 in
connection with the conversion of $3.5 million principal amount of notes payable
issued to the former shareholders of SJ Labs, which were converted into
3,000,000 shares of the Company’s common stock, under a January 2009 amendment
to the note agreement. SJ Labs is a wholly-owned subsidiary which we
acquired in February 2007. Refer to Note 3, “SJ Labs Acquisition” and
Note 12, “Debt,” in the Notes to YMax’s Consolidated Financial Statements
included elsewhere herein for further details.
Income
Tax (Benefit) Expense
Total income tax (benefit) expense was
$(9,000) and $0.1 million for the fiscal year ended December 31, 2009 and 2008,
respectively. Refer to Note 19, “Income Taxes,” in the Notes to YMax’s
Consolidated Financial Statements herein for further details on our state and
federal net operating loss carryforwards.
Net
Loss
As a
result of the foregoing items, net loss was $22.5 million and $51.8 million for
the fiscal year ended December 31, 2009 and 2008, respectively, representing a
decrease in net loss of $29.3 million.
Twelve Months
Ended December 31, 2008 Compared to Twelve Months Ended December 31,
2007
Operating
Revenue
Total
operating revenue was $33.1 million and $0.4 million for the fiscal years ended
December 31, 2008 and 2007, respectively, representing an increase of $32.7
million. This increase is due to the Company initiating sales of the
magicJack
®
in late
2007.
In late
2008 we started selling the magicJack
®
through
retailers, and sales of the magicJack
®
through
retail outlets in the fiscal year ended December 31, 2008 represented
approximately 25% of magicJack
®
units
sold.
For the
fiscal year ended December 31, 2008 and 2007, no customer accounted for greater
than 10% of our total operating revenue.
Cost
of Revenues
Total
cost of revenues was $27.4 million and $3.9 million for the fiscal year ended
December 31, 2008 and 2007, respectively, representing an increase of $23.5
million. This increase in cost of revenues was primarily attributable to a
combined $22.4 million increase in network and carrier charges, cost of
magicJack
®
units sold, shipping and handling and credit card processing fees as a
result of the initiation of sale of the magicJack
®
in late
2007. This increase was also attributable to a $1.2 million increase in other
costs of sale primarily related to our wholly-owned subsidiary, TigerJet, which
was acquired in June 2008.
Operating
Expenses
Total
operating expenses was $55.1 million and $9.7 million for the fiscal year ended
December 31, 2008 and 2007, respectively, representing an increase of $45.4
million. This increase in operating revenues was primarily attributable to: (i)
a $32.6 million increase in advertising expenses as a result of the Company
start selling the magicJack
®
in late
2007 and (ii) a $12.7 million increase in general and administrative expenses
caused by the initiation of sales of the magicJack
®
in late
2007, which resulted in increases in bad debt expense, legal costs and
professional fees, as well as higher personnel related costs and other general
business expenses.
Other
Expense
Total
other expense was $2.3 million and $0.8 million for the fiscal year ended
December 31, 2008 and 2007, respectively, representing an increase of $1.5
million, or 200.1%. This increase in other expense was due to changes
in the items discussed below.
Realized
Loss on Marketable Securities
We
realized losses on marketable securities in the fiscal year ended December 31,
2008 of $1.4 million as we were adversely affected by the deteriorating capital
markets in fiscal year 2008. We did not invest in marketable securities in the
fiscal year ended December 31, 2007.
Interest
and Dividend Income
Interest
and dividend income was $0.1 million and $36,000 for the fiscal year ended
December 31, 2008 and 2007, respectively, representing an increase of $0.1
million. This increase was primarily attributable to higher invested cash
balances during fiscal year 2008.
Interest
Expense
Interest
expense was $1.0 million and $0.8 million for the fiscal year ended December 31,
2008 and 2007, respectively, representing an increase of $0.2 million, or
22.6%. The increase in interest expense was primarily attributable to
the note payable to SJ Labs note holders being outstanding for twelve months in
2008 as compared to approximately nine months in 2007. Refer to Note 12, “Debt,”
in the Notes to YMax’s Consolidated Financial Statements included elsewhere
herein for further details.
Income
Tax Expense
Income
tax expense was $0.1 million and $0 for the fiscal year ended December 31, 2008
and 2007, respectively, representing an increase of $0.1 million. Refer to Note
19, “Income Taxes,” in the Notes to our Consolidated Financial Statements herein
for further details on our state and federal net operating loss
carryforwards.
Net
Loss
As a
result of the foregoing items, net loss was $51.9 million and $14.0 million for
the fiscal year ended December 31, 2008 and 2007, respectively, representing an
increase in net loss of $37.9 million.
Liquidity
and Capital Resources
Our primary sources of liquidity are
cash generated from operations and cash on hand. As of December 31, 2009, we had
cash and cash equivalents of $13.3 million, available-for-sale marketable
securities of $15.1 million and accounts receivables of $9.5 million. Our
accounts payable and current portion of long-term debt, net of discount, at
December 31, 2009 were $4.8 million and $4.9 million, respectively.
During
the fiscal year ended December 31, 2009, we generated positive operating cash
flows of $23.9 million, as compared to $1.1 million for the fiscal year ended
December 31, 2008. The increase was primarily attributable to: (i) a $29.3
million decrease in net loss, based on significant growth, offset in part by
smaller percentage increase in costs of sales and operating expenses, and (ii) a
$25.6 million non-cash bonus in fiscal year 2009. These items were partially
offset by changes in operating assets and liabilities attributable primarily to
increases in deferred revenues and deferred costs.
We currently believe that available
funds and cash flows generated by operations will be sufficient to fund our
working capital and capital expenditure requirements for at least the next
twelve months. If we decide to make future acquisitions, we may require new
sources of funding, including additional debt, equity financing or some
combination thereof. There can be no assurances that we will be able to secure
additional sources of funding or that such additional sources of funding will be
available to us on acceptable terms.
Cash
Flow
Net cash
provided by operating activities was $23.9 million and $1.1 million for the
fiscal year ended December 31, 2009 and 2008, respectively. During the fiscal
year ended December 31, 2009, the increase in net cash provided by operating
activities was primarily attributable to: (i) a $20.3 million increase in
deferred revenues attributable primarily by the increase in sale of renewals,
(ii) a $5.4 million increase in accrued expenses and other current liabilities,
(iii) a $2.3 million decrease in inventories, and (iv) a $27.5 million in
non-cash expenses primarily due to an increase in accrued bonuses due to the
$25.6 million bonus subsequently paid in shares of the Company’s common stock
discussed in Note 17, “Accrued Bonuses,” in the Notes to YMax’s Consolidated
Financial Statements included elsewhere herein, $2.9 million in depreciation and
amortization expense, a $1.6 million provision for doubtful accounts related to
our receivables from access charges and a $0.6 million loss on extinguishment of
the SJ Labs note, offset in part by a $4.3 million realized gain on sale of
available-for-sale securities. These items were partially offset by: (i) a $22.5
million net loss, (ii) a $5.9 million increase in accounts receivable driven by
higher access charges revenues and an increase in sales of magicJack
®
to
retailers, as well as accounts receivables related to our wholly-owned
subsidiary, Stratus, which was acquired in January 2009, (iii) a $2.0 million
decrease in accounts payable due to timing of payments, and (iv) a $0.9 million
increase in deferred costs.
During
the fiscal year ended December 31, 2008, net cash provided by operating
activities was primarily attributable to: (i) a $57.0 million increase in
deferred revenues attributable to the increase in sale of magicJack
®
, sale
of renewals and sale of international prepaid minutes, (ii) a $14.3 million
increase in non-cash expenses primarily as a result of $6.4 million stock-based
compensation, a $3.8 million provision for doubtful accounts primarily related
to our receivables from access charges, $1.7 million in depreciation and
amortization expense and a $1.4 million realized loss on sale of
available-for-sale securities, (iii) a $1.9 million increase in accounts payable
as a result of increase in overall purchases. These items were partially offset
by: (i) a $51.8 million net loss, (ii) a $9.1 million increase in accounts
receivables driven by higher access charges revenues and an increase in sales of
magicJack
®
to
retailers, as well as accounts receivables related to our wholly-owned
subsidiary, Stratus, which was acquired in January 2009, (iii) an $8.6 million
increase in deferred costs, and (iv) an $1.8 million increase in deposits and
other current assets.
Net cash
used in investing activities was $9.5 million and $10.3 million for the fiscal
year ended December 31, 2009 and 2008. Net cash used in investing activities for
the twelve months ended December 31, 2009 was primarily attributable to a $7.0
million net purchase of marketable securities, $1.7 million related to the
acquisition of Stratus’ assets and $0.8 million for purchases of property and
equipment. Net cash used in investing activities for the twelve
months ended December 31, 2008 was primarily attributable to a $5.2 million net
purchase of marketable securities, $3.0 million related to the acquisition of
TigerJet, $1.4 million for purchases of property and equipment and $0.8 million
for acquisition of intangible assets.
Net cash
used in financing activities was $4.0 million for the fiscal year ended December
31, 2009, as compared to net cash provided by financing activities of $11.1
million for the twelve months ended December 31, 2008. Net cash used in
financing activities for the twelve months ended December 31, 2009 primarily
consisted of $7.3 million related to repayment of loans to our Chief Executive
Officer and retirement of notes payable to SJ Labs note holders, partially
offset by $2.9 million proceeds from sale of common stock, net of issuance
costs, and $0.5 million proceeds for exercise of stock options. Net cash
provided by financing activities for the twelve months ended December 31, 2008
primarily consisted of: (i) $5.7 million proceeds from sale of common stock, net
of issuance costs, (ii) $5.0 million proceeds from sale of redeemable common
stock to an affiliate of an unrelated multinational entertainment products and
services retailer, (iii) $2.8 million proceeds from a short-term loan payable to
TigerJet prior to acquisition, and (iv) $0.8 million proceeds from issuance of
debt. These items were partially offset by $3.3 million primarily
related to repayment of loans to our Chief Executive Officer and our former
Chairman of the Board of Directors.
Debt
At December 31, 2009, our outstanding
indebtedness, which was comprised of a note payable due January 2011, totaled
$4.9 million. The Company retired the outstanding amount of this note in April
2010. Refer to Note 12, “Debt,” in the Notes to YMax’s Consolidated Financial
Statements included herein for further details.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
The
impact that our aggregate contractual obligations as of December 31, 2009 are
expected to have on our liquidity and cash flow in future periods is as follows
(in thousands):
|
|
|
Payments Due by Period
|
|
|
|
|
Total
|
|
|
Less Than 1
Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
More Than
5 Years
|
|
|
Long-term
debt obligations, principal (1)
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Long-term
debt obligations, interest
|
|
$
|
516
|
|
|
$
|
516
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Operating
lease obligations
|
|
$
|
774
|
|
|
$
|
252
|
|
|
$
|
420
|
|
|
$
|
102
|
|
|
$
|
-
|
|
|
Total
contractual obligations
|
|
$
|
6,290
|
|
|
$
|
5,768
|
|
|
$
|
420
|
|
|
$
|
102
|
|
|
$
|
-
|
|
(1)
Represents the face amount of fixed rate note payable. Amount does not include
unamortized discount of $0.1 million as of December 31, 2009.
Off-Balance
Sheet Arrangements
As of
December 31, 2009, we had no off-balance sheet arrangements.
New
Accounting Pronouncements
In June
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-06, “
Income Taxes (Topic 740) –
Implementation Guidance on Accounting for Uncertainty in Income Taxes and
Disclosure Amendments for Nonpublic Entities
” (“ASU 2009-06”). ASU
2009-06 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return by non-public and pass through entities.
The adoption of this standard did not have a material impact on our results of
operation, financial position and cash flows.
In
October 2009, the FASB issued ASU 2009-13, “
Multiple Deliverable Revenue
Arrangements
” (“ASU 2009-13”). ASU 2009-13 replaces Emerging Issues Task
Force (“EITF”) No. 00-21, “
Revenue Arrangements with Multiple
Deliverables
”, and clarifies the criteria for separating revenue between
multiple deliverables. ASU 2009-13 is effective for new revenue arrangements or
materially modified arrangements in periods subsequent to adoption. Adoption is
required for fiscal years beginning on or after June 15, 2010, but early
adoption is allowed. We adopted ASU 2009-13 as of January 1, 2009 for new
commercial revenue arrangements that fall within the scope of this standard. The
adoption of this standard did not have any impact on our results of operation,
financial position, cash flows and disclosures.
In October 2009, the FASB issued ASU
No. 2009-14, “
Certain Revenue
Arrangements that Include Software Elements
” (“ASU 2009-14”). ASU 2009-14
changes the accounting model for revenue arrangements that included both
tangible products and software elements. Under this guidance, tangible products
containing software components and non-software components that function
together to deliver the tangible product’s essential functionality are excluded
from the software revenue guidance in ASC Subtopic 985-605, “
Software Revenue
Recognition
.” ASU 2009-14 is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Early adoption is permitted on a prospective basis or by
retrospective application. We adopted ASU 2009-14 as of January 1, 2009. The
adoption of this standard did not have any impact on our results of operation,
financial position, cash flows and disclosures.
In January 2010, the FASB issued ASU
No. 2010-06, “
Fair Value
Measurements and Disclosures (ASC Topic 820): Improving Disclosures about Fair
Value Measurements
” (“ASU 2010-06”). ASU 2010-06 requires some new
disclosures and clarifies some existing disclosure requirements about fair value
measurement as set forth in ASC 820-10. The FASB’s objective is to improve these
disclosures and, thus increase the transparency in financial reporting. ASU
2010-06 is effective for interim and annual reporting periods beginning after
December 15, 2009, which would be our fiscal quarter beginning January 1, 2010.
We do not expect the adoption of ASU 2010-06 to have a material effect on our
disclosures.
In
February 2010, the FASB issued ASU No. 2010-09, “
Amendments to Certain Recognition
and Disclosure
Requirements
” (“ASU 2010-09”), which amends ASC Topic 855, “
Subsequent Events
.” The
amendments to ASC Topic 855 do not change existing requirements to evaluate
subsequent events, but: (i) defines a “SEC Filer”, which we were not;
(ii) removes the definition of a “Public Entity”; (iii) for SEC
Filers, reverses the requirement to disclose the date through which subsequent
events have been evaluated; and (iv) for non-SEC Filers,
requires them to
evaluate subsequent events through the date the financial statements are
available to be issued and disclose that date. ASU 2010-09 was effective for us
upon issuance. This guidance did not have a material impact on our results of
operations, financial position, cash flows, and disclosures.
Quantitative
and Qualitative Disclosures About Market Risk
We are
exposed to financial market risks that are inherent in our financial statements,
including changes in interest rates and foreign currency exchange rates that
could adversely affect our results of operations or financial
condition.
Exposure
to Interest Rates
The
primary objective of our investment activities is to preserve our capital until
it is required to fund operations while at the same time maximizing the income
we receive from our investments without incurring investment market volatility
risk. Our investment income is sensitive to the general level of
United States interest rates. In this regard, changes in the United
States interest rates affect the interest earned on our cash and cash
equivalents. Due to the short-term nature of our cash and cash
equivalent holdings, a 10% movement in market interest rates would not
materially impact on the total fair market value of our portfolio as of December
31, 2009.
Exposure to Exchange
Rates
Our overseas expenses are incurred
primarily in connection with the manufacturing of the magicJack
®
unit.
The majority of our overseas expenses are influenced by exchange rate
fluctuations in local currencies, including Hong Kong dollars, Taiwan dollars
and Chinese yuan. Due to the small percentage of our expenses that
are influenced by exchange rate fluctuations, a 10% movement in currency
exchange rates would not materially impact our results of
operations.
Unaudited
Selected Financial Results of YMax for the Three Months Ended March
31, 2010 Compared to Three Months Ended March 31, 2009
|
|
|
Fiscal Quarter Ended
March 31
|
|
|
Three Months Ended
March 31, 2010
Compared to
|
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
March 31, 2009
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
Total
operating revenue
|
|
$
|
31,397
|
|
|
$
|
26,552
|
|
|
|
18.2
|
%
|
|
Total
cost of revenues
|
|
|
15,238
|
|
|
|
14,352
|
|
|
|
6.2
|
|
|
Total
operating expenses
|
|
|
19,243
|
|
|
|
20,699
|
|
|
|
(7.0
|
)
|
|
Net
loss
|
|
$
|
(2,081
|
)
|
|
$
|
(10,253
|
)
|
|
|
(79.7
|
)
|
Operating
Revenue
Total
operating revenue was $31.4 million and $26.6 million for the three months ended
March 31, 2010 and 2009, respectively, representing an increase of $4.8 million,
or 18.2%. This increase in revenues was driven by primarily by an increase in
renewal revenues as a result of early customers renewing their software licenses
upon expiration of their initial or prior licenses, as well as increases in
revenues recognized from the sale of magicJack
®
units,
prepaid international minutes, and access charges. These increases in revenues
were partially offset by a decrease in shipping and handling revenues due to an
increasing percentage of magicJack
®
units
being sold through retailers and distributors as opposed to sold direct to
customers.
Cost
of Revenues
Total
cost of revenues was $15.2 million and $14.4 million for the three months ended
March 31, 2010 and 2009, respectively, representing an increase of $0.8 million,
or 6.2%. This increase in cost of revenues was primarily attributable to an
increase in network and carrier charges resulting from a higher number of active
magicJack
®
units
and an increase in the cost of magicJack
®
units
sold driven by the recognition of costs for a higher number of active units.
These items were partially offset by a decrease in other costs of revenues
primarily due to a decrease in personnel-related costs.
Operating
Expenses
Total
operating expenses was $19.2 million and $20.7 million for the three months
ended March 31, 2010 and 2009, respectively, representing a decrease of $1.5
million, or 7.0%. This decrease in operating expenses was primarily due to
decreases in general and administrative expenses and research and development
expenses primarily attributable to reduced personnel-related costs, offset in
part by an increase in advertising expenses.
Net
Loss
Primarily
as a result of the foregoing items, net loss was $2.1 million and $10.3 million
for the three months ended March 31, 2010 and 2009, respectively, representing a
decrease of $8.2 million, or 79.7%.
Properties
VocalTec
VocalTec’s
headquarters are located in Netanya, Israel. These facilities
are used for management, administration, operations, marketing, sales, research
and development, and testing. VocalTec occupies 6,500 square
feet pursuant to a 6-year lease agreement expiring in April 2016. We
will pay a total annual rental amount of approximately $80,000 pursuant to the
lease terms regarding such premises.
YMax
YMax does
not own any of its properties. We maintain our executive offices, warehouse and
distribution center in a 15,000 square foot facility in West Palm Beach,
Florida. These premises are currently provided to us by our founder
at no monthly or annual rental charge. We pay for our utilities and
related expenses. All of our properties, including the properties utilized
by our subsidiaries, are leased. We believe that our facilities are
suitable for their purposes and sufficient to support our needs through 2010,
and that, as necessary, additional facilities can be secured for our anticipated
general corporate needs.
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information regarding the number of shares of our
Common Stock beneficially owned as of July 16, 2010 upon consummation of the
Merger, by each person or “group” (as that term is defined in Section 13(d)(3)
of the Exchange Act (i) who is known by us to beneficially own 5% or more of our
Common Stock, (ii) each of our directors and executive officers holding office
upon the consummation of the Merger and (iii) all of the directors and executive
officers as a group. Except as otherwise indicated, we believe, based on
information furnished by such persons, that each person listed below has sole
voting and investment power over the shares of common stock shown as
beneficially owned, subject to community property laws, where applicable. Shares
shown in the table below include shares held in the beneficial owner’s name or
jointly with others, or in the name of a bank, nominee or trustee for the
beneficial owner’s account. Beneficial ownership is determined under the rules
of the SEC and includes any shares which the person has the right to acquire
within 60 days after July 1, 2010 through the exercise of any stock option or
other right. The following table reflects a 1-for-5 reverse stock split effected
immediately prior to the Merger.
|
|
|
Ordinary Shares Beneficially
Owned
|
|
|
Beneficial Owner
|
|
Number
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
F
5%
Holders
|
|
|
|
|
|
|
|
Michael
Goldstone (1)
|
|
|
1,000,000
|
|
|
|
8.52
|
%
|
|
E
Executive Officers and
Directors
|
|
|
|
|
|
|
|
|
|
Daniel
Borislow (2)
|
|
|
2,831,391
|
|
|
|
24.1
|
%
|
|
Peter
Russo
|
|
|
29,849
|
|
|
|
*
|
|
|
Y.W.
Sing
|
|
|
222,653
|
|
|
|
1.90
|
%
|
|
Yoseph
Dauber (3)
|
|
|
7,979
|
|
|
|
*
|
|
|
Tsipi
Kagan (4)
|
|
|
5,600
|
|
|
|
*
|
|
|
Ilan
Rosen (5)
|
|
|
12,248
|
|
|
|
*
|
|
|
Richard
M. Schaeffer
|
|
|
35,500
|
|
|
|
*
|
|
|
Gerald
Vento
|
|
|
18,750
|
|
|
|
*
|
|
|
Officers
and directors as a group (8 persons)
|
|
|
3,163,970
|
|
|
|
27.0
|
%
|
(1) Mr.
Goldstone serves as a consultant to the Company.
(2) Includes
130,802 shares held by the spouse of Mr. Borislow and 2,400 shares held in a
trust, directed by Mr. Borislow’s spouse for the benefit of Mr. Borislow’s
children.
(3) Reflects
shares issuable to Mr. Dauber upon exercise of options that are presently
exercisable or exercisable within 60 days of July 1, 2010.
(4) Reflects
shares issuable to Ms. Kagan upon exercise of options that are presently
exercisable or exercisable within 60 days of July 1, 2010.
(5) Includes
11,508 shares issuable to Mr. Rosen upon exercise of options that are presently
exercisable or exercisable within 60 days of July 1, 2010.
* Represents
less than 1%.
Directors
and Executive Officers
The
following individuals serve as the directors and executive officers of the
Company as of the closing date of the Merger. All directors of the
Company hold office until his successor shall have been duly elected and
qualified, subject to his earlier death, resignation or removal. The
executive officers of the Company are appointed by our board of directors and
hold office until their death, resignation or removal from
office. There are no other family relationships between any of our
directors or executive officers.
Our
executive officers and directors and their respective ages and positions as
of July 1, 2010 are as follows:
|
Name
|
|
|
|
Position
|
|
|
|
|
|
|
|
Daniel
Borislow
|
|
48
|
|
Chief
Executive Officer and Director
|
|
Peter
Russo
|
|
53
|
|
Chief
Financial Officer and Treasurer
|
|
Y.W.
Sing
|
|
56
|
|
President,
TigerJet Networks, Inc; Director
|
|
Yoseph
Dauber (1)
|
|
75
|
|
External
Director
|
|
Tsipi
Kagan (1)
|
|
45
|
|
External
Director
|
|
Ilan
Rosen
|
|
53
|
|
Chairman
of the Board of Directors
|
|
Richard
M. Schaeffer
|
|
57
|
|
Director
|
|
Gerald
Vento (1)
|
|
63
|
|
Director
|
(1) Member
of Audit Committee
Daniel Borislow,
Chief Executive Officer and Director
.
Mr. Borislow was
appointed our President and Chief Executive Officer upon the consummation of the
Merger. Mr. Borislow is the founder of YMax and served as an
executive officer
and a director since its
inception in 2005. Mr. Borislow is the inventor of the
magicJack. In 1989, Mr. Borislow founded Tel Save (later known
as Talk.com), a telecommunications company and served as the Chairman and Chief
Executive Officer of Talk.com until 1999. Mr. Borislow has a Bachelor
of Arts and honorary Doctorate degrees from Widener University, where he also
serves on the Board of Directors.
Dr. Y. W. Sing,
President, TigerJet Networks, Inc. and Director
.
Dr.
Y. W. Sing is the President of our TigerJet Networks, Inc.
subsidiary. Dr. Sing brings more than 30 years of semiconductor
and VoIP communication industry experience to the Company. He has
served as a Director of YMax since 2008. Prior to its acquisition by
YMax in 2008, from 1998 to 2008, Dr. Sing founded and was the Chief Executive
Officer of TigerJet Networks, Inc. Prior to founding TigerJet,
Dr. Sing was the founder of 8x8 Inc./ Packet 8, a video conferencing and VoIP
company and served as Executive Vice President and Vice Chairman from 1987 to
1997. Dr. Sing received a PhD and MS degree in electrical engineering
from the University of California, Berkeley.
Yoseph
Dauber
,
Director.
Mr.
Dauber has served as an external director of VocalTec since August
2003. In October 2009, Mr. Dauber was appointed for a second
three-year term as an external director. Mr. Dauber has served as a director of
NICE Systems Ltd. since April 2002 Mr. Dauber also serves on the board of
directors of Delek Group. Mr. Dauber is currently the Chairman of Kcps Manof
Fund. Until January 2009, Mr. Dauber served as a director of Clal
Insurance Holdings Company. From September 2003 until November 2008 he served as
a member of the board of directors of Bank Hapoalim. Mr. Dauber holds
a Bachelor's degree in Economics and Statistics from the Hebrew University in
Jerusalem and a Masters degree in Law from Bar Ilan University.
Tsipi
Kagan
,
Director.
Ms.
Kagan was appointed as an external director of VocalTec in October
2008. Since November 2008 Ms. Kagan has served as the Chief Financial
Officer of Xjet Ltd., a private company developing and manufacturing equipment
for the production of solar cells. From 2003 to August 2008, Ms. Kagan served as
the Chief Financial Officer of Radvision Ltd., a communications equipment
developer. From 2000 to 2003, Ms. Kagan served as the Chief
Financial Officer of Phone-Or Ltd., a developer of optical microphones and
sensors. From 1994 to 2000, Ms. Kagan served as a Senior Manager at Ernst &
Young, Israel. Prior to joining Ernst & Young, Ms. Kagan served as a Public
Accountant at Miller, Kaplan, Arase & Co., Los Angeles. Ms. Kagan holds a BA
in Accounting and Economics from Tel Aviv University and a Certificate of
Advanced Accounting Studies from Tel Aviv University.
Ilan
Rosen
,
Chairman of the
Board of Directors.
Mr. Rosen was appointed as Chairman of our
Board of Directors in November 2005 (following and pursuant to the business
combination). Mr. Rosen has served as a special advisor to HarbourVest Partners
LLC since March 2003 and is a board member of Ozarot Ltd., an asset management
company. From November 1996 through January 2004, Mr. Rosen
served as Vice President of Teledata Networks (formerly ADC Telecommunications,
Israel and prior thereto Teledata Communications Ltd.) and in that capacity, in
addition to serving as chairman of the board of Tdsoft, Mr. Rosen served on the
board of directors of each of G-Connect Ltd., VManage Ltd., Mind CTI Ltd. and
various other companies. Mr. Rosen received a B.Sc. (cum laude) in mechanical
engineering from Tel Aviv University in 1979, and an MBA from Tel Aviv
University in 1986.
Richard M.
Schaeffer
,
Director.
Mr.
Schaeffer was elected to the Board upon the consummation of the
Merger. Mr. Schaeffer has served as a Director of YMax since
2009. Mr. Schaeffer served as the Chairman of the New York Mercantile
Exchange from 2006 to 2009. From 1996 to 2006, Mr. Schaeffer was a
Managing Director with ABN Amro Bank.
Gerald Vento,
Director
.
Mr. Vento was
elected to the Board upon the consummation of the Merger.
Mr. Vento has served as
a Director of YMax since 2008. From 1996 to 2002, Mr. Vento served as
the Chief Executive Officer of TelCorp PCS Inc. From 1993
to 1995, he served as the Vice Chairman and Chief Executive Officer of Sprint
Spectrum/American PCS, L.P., where he oversaw the development of the first PCS
network in the United States.
Peter Russo,
Chief Financial Officer and Treasurer
. Mr. Russo was appointed
our Chief Financial Officer and Treasurer upon the consummation of the
Merger. Mr. Russo served as the Chief Financial Officer of YMax
since 2005. Prior to joining YMax, he was a consultant and served as
the Chief Financial Officer of Group Long Distance, Inc. (GLD), a publicly
traded reseller of local and long distance services, from
1996-1999. Prior to joining GLD, Mr. Russo was the Executive
Vice President of State Bank of South Australia. Mr. Russo holds a
B.B.A. degree from Pace University in New York.
Certain
Relationships and Related Transactions, and Director Independence
Related
Party Transactions
For
the year ended December 31, 2009, YMax accrued a bonus, which was paid in
its common stock on March 15, 2010, to an aggregate of 107 of its employees,
directors and consultants. Daniel Borislow, our Chief
Executive Officer, was issued an aggregate of 4,567,500 shares, valued at
$7,993,125. Peter Russo, our Chief Financial Officer, was issued an
aggregate of 1,124,375 shares valued at $1,967,656. The
following members of the Board of Directors also received stock as payment for
the bonus: Gerald Vento received 250,000 shares valued at
$437,500, Richard Schaeffer received 140,000 shares valued at
$245,000 and Y.W. Sing received 196,000 shares valued at $343,000.
Director
Independence
The Board
of Directors has determined that none of Messrs. Dauber, Rosen, Schaeffer and
Vento, or Ms. Kagan, have a relationship that would interfere with the exercise
of independent judgment in carrying out the responsibilities of a director and
that each of these directors is “independent” as that term is defined under
Nasdaq Marketplace Rule 5605(a)(2).
Legal
Proceedings
From time
to time, we are involved in various routine legal proceedings incidental to the
ordinary course of our business. We do not believe that the outcome of these
pending legal proceedings will have a material adverse effect on our business or
consolidated financial condition or profitability. For additional
information, see Note 8 to the consolidated financial statements of VocalTec as
of, and for the years ended, December 31, 2009 and 2008, and Note 13 to the
attached consolidated financial statements of YMax as of, and for the years
ended, December 31, 2009 and 2008, and for each of the three years in the period
ended December 31, 2009.
Market
Price of and Dividends on the Registrant’s Common Equity and Related Stockholder
Matters
Prior to
the Merger, our ordinary shares traded on The NASDAQ Capital Market under the
symbol “VOCL”. Upon consummation of the Merger, our ordinary shares
now trade on the Nasdaq Global Market under the symbol
“CALL.” The following table sets forth the high and low sales
prices for our common stock as reported on The NASDAQ Capital Market for the
periods indicated, as adjusted to the nearest cent. The
following share prices reflect the 1-for-5 reverse stock split, as such split
was affected on July 16, 2010, in connection with the Merger.
|
|
|
High
|
|
|
Low
|
|
|
Fiscal
Year 2010:
|
|
|
|
|
|
|
|
Second
quarter
|
|
$
|
8.15
|
|
|
$
|
6.15
|
|
|
First
quarter
|
|
$
|
8.60
|
|
|
$
|
6.55
|
|
|
Year
Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
Fourth
quarter
|
|
$
|
10.75
|
|
|
$
|
7.80
|
|
|
Third
quarter
|
|
$
|
10.10
|
|
|
$
|
4.00
|
|
|
Second
quarter
|
|
$
|
7.00
|
|
|
$
|
1.65
|
|
|
First
quarter
|
|
$
|
2.05
|
|
|
$
|
0.90
|
|
|
Year
Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
Fourth
quarter
|
|
$
|
1.65
|
|
|
$
|
0.75
|
|
|
Third
quarter
|
|
$
|
2.60
|
|
|
$
|
1.10
|
|
|
Second
quarter
|
|
$
|
3.25
|
|
|
$
|
2.25
|
|
|
First
quarter
|
|
$
|
3.95
|
|
|
$
|
1.85
|
|
Based
upon information provided to us by our transfer agent and the terms of the
Merger Agreement, immediately following the Merger we had 11,736,188 ordinary
shares issued and outstanding. On the last reported trading
date prior to the consummation of the Merger, the last reported sale price on
the Nasdaq Capital Market of our ordinary shares was $1.32 per share (or $6.60,
reflecting the one-for-five reverse stock split).
Under the
terms of the Merger Agreement and pursuant to a registration rights agreement by
and between the Company and Mr. Borislow executed concurrently with the Merger
Agreement, Mr. Borislow was granted certain registration rights with respect to
the shares issued upon consummation of the Merger.
We have
never declared or paid cash dividends on the ordinary shares. We intend to
retain our earnings for future growth and therefore do not anticipate paying any
cash dividends in the foreseeable future.
Recent
Sales of Unregistered Securities
On July
16, 2010, the Company issued 10,562,895 Ordinary Shares to the former
stockholders of YMax Corporation in connection with the Merger. See
“The Merger” on page 2 of this Report on Form 6-K.
Since
January 1, 2007, VocalTec did not issue any of its ordinary shares other than
(i) 21,595 ordinary shares issued pursuant to the exercise of options and (ii)
3,341 shares issued as part of the consideration paid in connection with an
acquisition consummated by VocalTec in late 2009. The foregoing share
numbers reflect the 1-for-5 reverse stock split affected on July 16,
2010.
The
securities described above were issued in reliance on the exemption provided by
Section 4(2) of the Securities Act of 1933, as amended (the “Securities
Act”) and, in certain cases, in reliance on Regulation D promulgated
thereunder, or, in certain other cases, in reliance on Regulation S promulgated
under the Securities Act. The recipients of such securities
represented their intentions to acquire the securities for investment purposes
only and not with a view to, or for sale in connection with, any distribution
thereof. All recipients either received adequate information about us
or had adequate access, through their relationship with us, to information about
us. There were no underwriters employed in connection with any of the
transactions set forth above.
Description
of Registrant’s Registered Securities
The
Company had 11,736,188 Ordinary Shares issued and outstanding as of July 16,
2010 as a result of the issuance of 10,562,895 Ordinary Shares in connection
with the closing of the Merger, giving effect to the 1-for-5 reverse stock split
effected by the Company immediately prior to the consummation of the
Merger. On a split-adjusted basis, our authorized capitalization
consists of 30,000,000 Ordinary Shares, par value NIS 0.65. The
following summary description of the Ordinary Shares describes the material
terms of our capital stock.
VocalTec
is a public company organized in the State of Israel under the Companies
Law. We are registered with the Registrar of Companies of the
State of Israel.
Our
Articles of Association authorize one class of shares, which are our ordinary
shares. We may declare a dividend to be paid to the holders of our ordinary
shares according to their rights and interests in our profits. Our board may
declare interim dividends and a final dividend for any fiscal year only out of
retained earnings, or earnings derived over the two most recent fiscal years,
whichever is higher. The Companies Law and our Articles of Association provide
that our board may declare and pay dividends (subject to certain limitations)
without any further action by our shareholders. All unclaimed dividends may be
invested or otherwise used by the board for our benefit until those dividends
are claimed. In the event an unclaimed dividend is claimed, only the principal
amount of the dividend will be paid to the person entitled to the dividend.
Subject to the creation of any special rights regarding the distribution of
dividends, any dividends we declare will be distributed to shareholders in
proportion to their holdings.
If we
liquidate, after satisfying liabilities to creditors, our assets will be
distributed to the holders of ordinary shares in proportion to their
holdings.
Holders
of ordinary shares have one vote for each paid-up ordinary share on all matters
submitted to a vote of our shareholders. These voting rights may be affected by
the grant of any special voting rights to the holders of a class of shares with
preferential rights that may be authorized in the future.
Our
Articles of Association provide that directors are elected by a majority of the
voting power represented at the general meeting of our shareholders and voting
on the election. Our ordinary shares do not have cumulative voting rights in the
election of directors. Accordingly, the holders of ordinary shares representing
more than 50% of the voting power in our company have the power to elect all
directors. However, our board of directors (other than the external directors)
is divided into three classes, the members of each of which are elected until
the annual general meeting of our shareholders held in the third year after
their appointment.
We may,
subject to the applicable provisions of the Companies Law, issue redeemable
shares and subsequently redeem them. In addition, our board may make calls upon
shareholders in respect of any sum, which has not been paid up in respect of any
shares held by those shareholders.
Under the
Companies Law, the disclosure requirements that apply to an office holder also
apply to a controlling shareholder of a public company. “Office
holder” is defined as a director, general manager, chief business manager,
deputy general manager, vice general manager, executive vice president, vice
president, other manager directly subordinate to the general manager or any
other person assuming the responsibilities of any of the foregoing positions,
without regard to such person's title. A shareholder that holds more
than 50% of the voting rights in a public company is deemed to be a controlling
shareholder. A shareholder that holds more than 25% of the voting rights in a
public company may also be deemed to be a controlling shareholder, for purposes
of approval of certain related party transactions, if there is no other
shareholder holding more than 25% of the voting rights at such time.
Extraordinary transactions with a controlling shareholder or in which a
controlling shareholder has a personal interest, and the terms of compensation
of a controlling shareholder who is an office holder, require the approval of
the audit committee, the board of directors and the shareholders of the company,
in such order, provided that either (i) the shareholder approval includes the
approval of the holders of at least one third of the shares of shareholders
having no personal interest in the transaction who vote at the meeting
(abstained votes are disregarded), or (ii) the total number of shares of
shareholders having no personal interest in the transaction who vote against the
transaction does not exceed one percent of the aggregate voting rights in the
company.
The
Companies Law also requires a shareholder to act in good faith towards a company
in which he holds shares and towards other shareholders and to refrain from
abusing his power in the company, including in connection with the voting at a
shareholders' meeting on:
|
|
|
Any
amendment to the Articles of
Association;
|
|
|
|
An
increase in the company's authorized
capital;
|
|
|
|
Approval
of certain transactions with control persons and other related parties,
which require shareholder approval
|
A
shareholder has the general duty to refrain from depriving other shareholders of
their rights. Any controlling shareholder, any shareholder that knows that it
possesses the power to determine the outcome of a shareholder vote and any
shareholder that, under the provisions of the Articles of Associations, has the
power to appoint an office holder in the company, is under a duty to act in
fairness towards the company. The Companies Law does not describe the substance
of this duty (except by providing that the remedies generally available upon a
breach of contract will be available also in the event of a breach of the duty
to act with fairness) and such substance has not yet been adjudicated by Israeli
courts.
Modifications of Share
Rights
Under our
Articles of Association, the rights attached to any class may be varied by
adoption of the necessary amendment of the Articles of Association, provided
that the holders of shares of the affected class approve the change by a class
meeting in which the holders of at least 75% of the voting power represented at
the meeting and voting on the issue approve the change. Our
Articles of Association differ from the Companies Law in this respect as under
the law, changes in the rights of shareholders require the consent of more than
50% of the voting power of the affected class represented at the meeting and
voting on the change.
Shareholder Meetings and
Resolutions
We are
required to hold an annual general meeting of our shareholders once every
calendar year, but no later than 15 months after the date of the previous annual
general meeting. All meetings other than the annual general meeting of
shareholders are referred to as extraordinary general meetings. Extraordinary
general meetings may be called by our board whenever it sees fit, at such time
and place, within or without the State of Israel, as the board may determine. In
addition, the Companies Law provides that the board of a public company is
required to convene an extraordinary meeting upon the request of (a) any two
directors of the company or one quarter of the company's board of directors or
(b) one or more shareholders holding, in the aggregate, (i) at least five
percent of the outstanding shares of the company and at least one percent of the
voting power in the company or (ii) at least five percent of the voting power in
the company.
The
quorum required for a meeting of shareholders consists of at least two
shareholders present in person or by proxy who hold or represent in the
aggregate at least 33.3% of our issued share capital. A meeting adjourned for
lack of a quorum is adjourned to the same day in the following week at the same
time and place or any time and place as the chairman of the meeting
determines. At such reconvened meeting, the required quorum
consists of any two shareholders present in person or by proxy.
Notwithstanding
the foregoing, our Articles of Association provide that a resolution in writing
signed by all our shareholders then entitled to attend and vote at general
meetings or to which all such shareholders have given their written consent (by
letter, telegram, facsimile or otherwise) shall be deemed to have been
unanimously adopted by a duly convened general meeting.
Our
Articles of Association enable our board to fix a record date to allow us to
determine the shareholders entitled to notice of, or to vote at, any general
meeting of our shareholders. The record date may not be more than 40 days and
not less than four days before the date of the meeting. Each shareholder of
record as of the record date determined by the board may vote the shares then
held by that shareholder unless all calls and other sums then payable by the
shareholder in respect of its shares have not been paid.
Limitation on Ownership of
Securities
The
ownership and voting of our ordinary shares by non-residents of Israel are not
restricted in any way by our Articles of Association or by the laws of the State
of Israel, except for shareholders who are subjects of countries that are
enemies of the State of Israel.
Mergers and Acquisitions;
Tender Offers; Anti-Takeover Provision
The
Companies Law includes provisions allowing corporate mergers.
These provisions require that the board of directors of each company
that is party to the merger approve the transaction. In addition, the
shareholders of each company must approve the merger by a vote of the majority
of the company's shares, present and voting on the proposed merger at a
shareholders' meeting, called on at least 35 days' prior notice. In determining
whether the requisite majority has approved the merger, shares held by the other
party to the merger or any person holding at least 25% of such other party, are
excluded from the vote. If the merger would have been approved but for the
exclusion of the votes of certain shareholders as provided above, a court may
still approve the merger upon the request of holders of at least 25% of the
voting rights of a company, if the court holds that the merger is fair and
reasonable, taking into account the valuation of the parties to the merger and
the consideration offered to the shareholders. Upon the request of a creditor of
either party to the proposed merger, the court may delay or prevent the merger
if it concludes that there exists a reasonable concern that, as a result of the
merger, the surviving company will be unable to satisfy the obligations of any
of the parties to the merger, and the court may also provide instructions to
assure the rights of creditors. In addition, a merger may not be completed
unless at least 50 days have elapsed from the date that a notice of the merger
was filed with the Israel Registrar of Companies and at least 30 days have
elapsed from the date that shareholder approval of both merging companies was
obtained. Notwithstanding the foregoing, a merger is not subject to
shareholders’ approval if (i) the target company is a wholly-owned subsidiary of
the acquiring company and (ii) the acquiring company is issuing to the
shareholders of the target company up to 20% of its share capital and no person
will become, as a result of the merger, a control person, subject to certain
limitation relating to the counting of the votes, at a meeting of the
shareholders of a company that is a party to the merger, of any entity or person
that is either the other party to the merger or a control person
thereof.
The
Companies Law also provides that, except in certain circumstances set forth in
the Companies Law, the acquisition of shares in a public company must be made by
means of a special tender offer if, as a result of the acquisition, the
purchaser would become a 25% shareholder of the company. The rule does not apply
if there already is another 25% shareholder of the company. Similarly, the law
provides that an acquisition of shares in a public company must be made by means
of a special tender offer if, as a result of the acquisition, the purchaser
would become a 45% shareholder of the company, unless there already is a 45%
shareholder of the company. These requirements do not apply if, in general, the
acquisition (1) was made in a private placement that received the approval of
the company's shareholders; (2) was from a 25% or greater shareholder of the
company which resulted in the acquirer becoming a 25% or greater shareholder of
the company, or (3) was from a 45% or greater shareholder of the company which
resulted in the acquirer becoming a 45% or greater shareholder of the company.
The tender offer must be extended to all shareholders, but the offeror is not
required to purchase more than 5% of the company's outstanding shares,
regardless of how many shares are tendered by shareholders (if more shares are
tendered than proposed by the purchaser to be purchased, the purchaser will
purchase from all tendering shareholders the amount of shares proposed to be
purchased, on a pro rata basis). The tender offer may be consummated only if (i)
at least 5% of the company's outstanding shares will be acquired by the offeror,
and (ii) the number of shares tendered in the offer exceeds the number of
shares, the holders of which objected to the offer.
In
addition, the Companies Law provides that if, following any acquisition of
shares of a public company, the purchaser would hold 90% or more of the shares
of the company, such acquisition must be made by means of a full tender offer
for all of the target company's shares. An acquirer who wishes to eliminate all
minority shareholders must do so by means of a full tender offer and acquire
such amount of shares that will cause him to hold more than 95% of the
outstanding shares of the target company. If less than 5% of the outstanding
shares are not tendered, all of the shares that the acquirer offered to purchase
will be transferred to the acquirer by operation of law. The Companies Law
provides for appraisal rights if any shareholder files a request in court within
three months following the consummation of a full tender offer. If more than 5%
of the outstanding shares are not tendered in the full tender offer, the
acquirer may not acquire tendered shares if by doing so the acquirer would own
more than 90% of the outstanding shares of the target company.
Our
Articles of Association contain provisions that could delay, defer or prevent a
change in our control. These provisions include advance notice requirements and
a staggered board. Under the advance notice requirements, shareholders seeking
to propose items for inclusion on the agenda for a general meeting of
shareholders, must submit those items in writing to our corporate secretary not
less than 60 days (or not less than 90 days for the nomination of candidates for
election of directors) and not more than 120 days prior to the particular
meeting.
Indemnification
of Directors and Officers
Consistent
with the provisions of the Companies Law, our Articles of Association include
provisions permitting us to procure insurance coverage for our office holders,
exempt them from certain liabilities and indemnify them, to the maximum extent
permitted by law. Under the Companies Law, indemnification of,
and procurement of insurance coverage for our office holders must be approved by
our audit committee and our board of directors and, with respect to directors,
by our shareholders.
Exemption
Under the
Companies Law, an Israeli company may not exempt an office holder from liability
with respect to a breach of his duty of loyalty, but may exempt in advance an
office holder from his liability to the company, in whole or in part, with
respect to a breach of his duty of care (other than with respect to a breach of
duty of care with respect to the distribution of a dividend or redemption of the
company's securities). Under the Companies Law, a company may not indemnify an
office holder, nor enter into an insurance contract that would provide coverage
for any monetary liability incurred as a result of any of the
following:
|
|
|
a
breach by the office holder of his duty of loyalty, unless the office
holder acted in good faith and had a reasonable basis to believe that the
act would not prejudice the
company;
|
|
|
|
a
breach by the office holder of his duty of care, if such breach was done
intentionally or in disregard of the circumstances of the breach or its
consequences, other than a breach committed solely by
negligence
|
|
|
|
any
act or omission done with the intent to derive an illegal persona benefit;
or
|
|
|
|
any
fine levied against the office holder as a result of a criminal
offense.
|
Office Holder
Insurance
Our
Articles of Association provide that, subject to the provisions of the Companies
Law, we may enter into a contract for the insurance of the liability of any of
our office holders with respect to:
|
|
|
a
breach of his duty of care to us or to another
person;
|
|
|
|
a
breach of his duty of loyalty to us, provided that the office holder acted
in good faith and had reasonable cause to assume that his act would not
prejudice our interests;
|
|
|
|
a
financial liability imposed upon him in favor of another person concerning
an act performed by him in his capacity as an office
holder.
|
Indemnification of Office
Holders
Our
Articles of Association provide that we may indemnify an office holder
against:
|
|
|
a
financial liability imposed on him in favor of another person by any
judgment, including a settlement or an arbitrator's award approved by a
court concerning an act performed in his capacity as an office
holder;
|
|
|
|
reasonable
litigation expenses, including attorneys' fees, expended by the office
holder or charged to him by a court, in proceedings we institute against
him or instituted on our behalf or by another person, or in a criminal
charge from which he was acquitted, or in which he was convicted of an
offence that does not require proof of criminal intent;
or
|
|
|
|
reasonable
litigation expenses, including attorneys' fees, expended by the office
holder as a result of an investigation or proceeding instituted against
him by an authority authorized to conduct such investigation or
proceeding, provided that (i) no indictment (as defined in the Companies
Law) was filed against such office holder as a result of such
investigation or proceeding, and (ii) no financial liability as a
substitute for the criminal proceeding (as defined in the Companies Law)
was imposed upon him as a result of such investigation or proceeding or if
such financial liability was imposed, it was imposed with respect to an
offence that does not require proof of criminal
intent.
|
Under the
Companies Law, our Articles of Association may also include a provision
authorizing us to grant in advance an undertaking to indemnify an office holder,
provided that the undertaking is limited to such events which the board of
directors shall deem to be likely to occur in light of the operations of the
Company at the time that the undertaking to indemnify is made and for such
amounts or criteria which the board of directors may, at the time of the giving
of such undertaking to indemnify, deem to be reasonable under the circumstances.
Such undertaking shall set forth such events which the board of directors shall
deem to be likely to occur in light of the operations of the
Company
at the time that the undertaking to indemnify is made, and the amounts and/or
criteria which the board of directors may, at the time of the giving of such
undertaking to indemnify, deem to be reasonable under the circumstances; and a
provision authorizing us to retroactively indemnify an office
holder.
The
foregoing description includes only a summary of certain provisions of our
Articles of Association and is qualified in its entirety by reference to the
full text of such document which was previously filed with the SEC on June 20,
2007 as Exhibit 1 to the Company's Annual Report on Form 20-F for the year ended
December 31, 2006, as amended on November 4, 2009, which amendment was filed as
Exhibit 1 to the Company's Annual Report on Form 20-F for the year ended
December 31, 2009,which Articles of Association, as so amended, are incorporated
herein by reference.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
There
were no changes in accounting principles or disagreements with our auditors
regarding applications of any accounting principles during the fiscal years
ended December 31, 2009 and 2008.
Selected
Financial Data and Unaudited Pro Forma Financial Results
Selected
Historical Financial Data - YMax
The
following selected financial data of YMax Corporation as of and for each of the
five fiscal years in the period ended December 31, 2009 have been derived
from YMax’s audited historical financial statements. The data below
is only a summary and should be read in conjunction with YMax’s fiscal year
2009, 2008 and 2007 audited financial statements and accompanying notes, as well
as management’s discussion and analysis of financial condition and results of
operations, as set forth in this Report on Form 6-K.
|
|
|
Fiscal Year Ended
|
|
|
|
|
December 31,
2005 (1)
|
|
|
December 31,
2006
|
|
|
December 31,
2007
|
|
|
December 31,
2008
|
|
|
December 31,
2009
|
|
|
|
|
(in thousands, except earnings per share)
|
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
375
|
|
|
$
|
33,089
|
|
|
$
|
117,812
|
|
|
Cost
of revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
3,880
|
|
|
|
27,434
|
|
|
|
63,109
|
|
|
Gross
(loss) profit
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,505
|
)
|
|
|
5,655
|
|
|
|
54,703
|
|
|
Operating
expenses
|
|
|
495
|
|
|
|
4,165
|
|
|
|
9,682
|
|
|
|
55,132
|
|
|
|
79,398
|
|
|
Operating
loss
|
|
|
(495
|
)
|
|
|
(4,165
|
)
|
|
|
(13,187
|
)
|
|
|
(49,477
|
)
|
|
|
(24,695
|
)
|
|
Interest
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(801
|
)
|
|
|
(982
|
)
|
|
|
(1,180
|
)
|
|
Other
income
(expense), net
(2)
|
|
|
-
|
|
|
|
6
|
|
|
|
36
|
|
|
|
(1,314
|
)
|
|
|
3,898
|
|
|
Loss
on extinguishment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(563
|
)
|
|
Loss
before provision (benefit) for income taxes
|
|
|
(495
|
)
|
|
|
(4,159
|
)
|
|
|
(13,952
|
)
|
|
|
(51,773
|
)
|
|
|
(22,540
|
)
|
|
Provision
(benefit) for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63
|
|
|
|
(9
|
)
|
|
Net
loss
|
|
$
|
(495
|
)
|
|
$
|
(4,159
|
)
|
|
$
|
(13,952
|
)
|
|
$
|
(51,836
|
)
|
|
$
|
(22,531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - Basic and Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.69
|
)
|
|
$
|
(0.26
|
)
|
|
Weighted
average common shares outstanding - Basic and Diluted
|
|
|
50,000
|
|
|
|
50,973
|
|
|
|
60,391
|
|
|
|
74,986
|
|
|
|
87,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
pro forma loss per share of common stock - Basic and
Diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
(2.31
|
)
|
|
$
|
(6.94
|
)
|
|
$
|
(2.63
|
)
|
|
Unaudited pro forma
weighted average common shares outstanding - Basic and Diluted
(5)
|
|
|
5,000
|
|
|
|
5,097
|
|
|
|
6,039
|
|
|
|
7,499
|
|
|
|
8,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
236
|
|
|
$
|
6,503
|
|
|
$
|
15,227
|
|
|
$
|
47,407
|
|
|
$
|
77,009
|
|
|
Property
and equipment, net
|
|
$
|
28
|
|
|
$
|
2,072
|
|
|
$
|
2,133
|
|
|
$
|
2,532
|
|
|
$
|
2,034
|
|
|
Goodwill
and other identified intangibles, net
|
|
$
|
17
|
|
|
$
|
98
|
|
|
$
|
6,445
|
|
|
$
|
15,466
|
|
|
$
|
20,598
|
|
|
Total debt, net of
discount
(3)
|
|
$
|
724
|
|
|
$
|
8,446
|
|
|
$
|
12,705
|
|
|
$
|
10,695
|
|
|
$
|
4,915
|
|
|
Redeemable comon
stock
(4)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,193
|
|
|
$
|
5,764
|
|
|
Total
capital deficit
|
|
$
|
(494
|
)
|
|
$
|
(2,794
|
)
|
|
$
|
(679
|
)
|
|
$
|
(33,924
|
)
|
|
$
|
(49,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
of property and equipment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
490
|
|
|
$
|
1,010
|
|
|
$
|
1,457
|
|
|
Amortization
of intangible assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
514
|
|
|
$
|
699
|
|
|
$
|
1,405
|
|
|
|
(1)
|
The
information for the fiscal year ended December 31, 2005 includes the
activity from inception (January 25, 2005) to December 31,
2005.
|
|
|
(2)
|
Other
(expense) income, net primarily includes realized gains (losses) on
marketable securities, interest and dividend income and investment
advisory fees. Other income for fiscal years 2006 and 2007 represents
dividend and interest income. Other expense in fiscal year 2008 was
primarily related to $1.4 million in realized losses on marketable
securities, partially offset by interest and dividend income of $0.1
million. Other income in fiscal year 2009 was primarily related to $4.3
million in realized gains on marketable securities and dividend and
interest income of $0.7 million, partially offset by a $1.1 million
investment advisory fee.
|
|
|
(3)
|
Includes
current maturities of long-term debt. Refer to Note 12, “Debt,” in the
Notes to YMax’s Consolidated Financial Statements included elsewhere
herein for further details.
|
|
|
(4)
|
In
August 2008, we entered into a stock purchase agreement with an
unaffiliated multinational entertainment products and services retailer,
whereby this retailer purchased 3,333,333 shares of our common stock for
$5.0 million. The amounts as of December 31, 2008 and 2009 represent the
estimated redemption value of the common stock held by the aforementioned
retailer, which included the original investment plus 11% accreted
dividend per annum. Refer to Note 14, “Redeemable Common Stock,” in the
Notes to YMax’s Consolidated Financial Statements herein for further
details.
|
|
|
(5)
|
Represents
the YMax weighted average common shares outstanding – basic and diluted
after giving effect to the 1-for-10 conversion to VocalTec ordinary shares
as a result of the merger.
|
Selected
Historical Financial Data - VocalTec
In
November 2005, VocalTec acquired all of the issued and outstanding ordinary
shares of Tdsoft Ltd., a privately-held company organized in Israel (“Tdsoft”),
and as consideration issued to the Tdsoft shareholders ordinary shares of
VocalTec constituting, immediately following such issuance, 75% of the issued
and outstanding share capital of VocalTec (the “business combination”). The
business combination was accounted under U.S. GAAP as a reverse acquisition and
therefore we are presenting in this report the consolidated financial statements
of Tdsoft for the eleven months ended November 30, 2005, the consolidated
financial statements of the combined company for the month of December 2005, and
for the years ended December 31, 2006, 2007, 2008 and 2009.
The data
below is only a summary and should be read in conjunction with VocalTec’s
financial statements and accompanying notes, as well as management’s discussion
and analysis of financial condition and results of operations as contained in
VocalTec’s reports filed with the SEC, including VocalTec’s Annual Report on
Form 20-F for the fiscal year ended December 31, 2009, filed with the SEC on May
12, 2010.
|
|
|
Years Ended
December
31,
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
(In thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
3,668
|
|
|
|
4,738
|
|
|
|
3,006
|
|
|
|
3,980
|
|
|
|
4,218
|
|
|
Services
|
|
|
925
|
|
|
|
2,542
|
|
|
|
2,748
|
|
|
|
2,134
|
|
|
|
2,189
|
|
|
|
|
$
|
4,593
|
|
|
|
7,280
|
|
|
|
5,754
|
|
|
|
6,114
|
|
|
|
6,407
|
|
|
Cost
of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,450
|
|
|
|
2,171
|
|
|
|
2,027
|
|
|
|
2,027
|
|
|
|
1,768
|
|
|
Services
|
|
|
315
|
|
|
|
563
|
|
|
|
523
|
|
|
|
580
|
|
|
|
569
|
|
|
|
|
|
1,765
|
|
|
|
2,734
|
|
|
|
2,550
|
|
|
|
2,607
|
|
|
|
2,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
write off
|
|
|
639
|
|
|
|
-
|
|
|
|
459
|
|
|
|
-
|
|
|
|
-
|
|
|
Amortization
of intangibles assets
|
|
|
172
|
|
|
|
392
|
|
|
|
385
|
|
|
|
328
|
|
|
|
-
|
|
|
|
|
$
|
2,576
|
|
|
|
3,126
|
|
|
|
3,394
|
|
|
|
2,935
|
|
|
|
2,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
2,107
|
|
|
|
4,154
|
|
|
|
2,360
|
|
|
|
3,179
|
|
|
|
4,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development, net
|
|
$
|
4,363
|
|
|
|
4,619
|
|
|
|
4,567
|
|
|
|
4,154
|
|
|
|
2,056
|
|
|
Selling
and marketing
|
|
|
2,763
|
|
|
|
4,147
|
|
|
|
4,736
|
|
|
|
3,554
|
|
|
|
3,044
|
|
|
General
and administrative
|
|
|
1,748
|
|
|
|
2,474
|
|
|
|
1,992
|
|
|
|
2,704
|
|
|
|
2,147
|
|
|
Income
from sale of patents, net
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,913
|
)
|
|
|
-
|
|
|
Impairment
of goodwill and intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
5,437
|
|
|
|
3,993
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net operating expenses (income)
|
|
$
|
8,874
|
|
|
|
11,240
|
|
|
|
16,732
|
|
|
|
(508
|
)
|
|
|
7,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(6,857
|
)
|
|
|
(7,086
|
)
|
|
|
(14,372
|
)
|
|
|
3,687
|
|
|
|
(3,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income, net
|
|
$
|
24
|
|
|
|
42
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Financial
income, net
|
|
|
184
|
|
|
|
32
|
|
|
|
230
|
|
|
|
90
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes on income
|
|
$
|
(6,649
|
)
|
|
|
(7,012
|
)
|
|
|
(14,142
|
)
|
|
|
3,777
|
|
|
|
(3,045
|
)
|
|
Tax
benefit (taxes on income)
|
|
|
19
|
|
|
|
-
|
|
|
|
(37
|
)
|
|
|
(69
|
)
|
|
|
(590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(6,630)
|
|
|
|
(7,012
|
)
|
|
|
(14,179
|
)
|
|
|
3,708
|
|
|
|
(2,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of redeemable convertible Preferred shares
|
|
|
(348
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Induced
conversion of convertible Preferred shares
|
|
|
(17,406
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
dividend on convertible Preferred shares
|
|
|
(2,585
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
in respect of reduction in exercise price of certain
warrants
|
|
|
-
|
|
|
|
(37
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net
income (loss) attributable to common shareholders
|
|
|
(26,969
|
)
|
|
|
(7,049
|
)
|
|
|
(14,179
|
)
|
|
|
3,708
|
|
|
|
(2,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income (loss) per Ordinary share
|
|
|
(34.05
|
)
|
|
|
(1.3
|
)
|
|
|
(1.92
|
)
|
|
|
0.50
|
|
|
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of Ordinary shares used in computing net loss per
share-basic and diluted
|
|
|
792
|
|
|
|
5,436
|
|
|
|
7,376
|
|
|
|
7,376
|
|
|
|
6,001
|
|
|
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2
007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
(In
thousands of US Dollars, except share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and short term deposits
|
|
$
|
5,138
|
|
|
$
|
8,954
|
|
|
$
|
4,496
|
|
|
$
|
14,990
|
|
|
$
|
10,559
|
|
|
Working
capital
|
|
$
|
925
|
|
|
$
|
8,196
|
|
|
$
|
657
|
|
|
$
|
10,120
|
|
|
$
|
7,848
|
|
|
Total
assets
|
|
$
|
22,442
|
|
|
$
|
24,587
|
|
|
$
|
14,328
|
|
|
$
|
18,160
|
|
|
$
|
13,858
|
|
|
Total
liabilities
|
|
$
|
9,579
|
|
|
$
|
6,049
|
|
|
$
|
8,621
|
|
|
$
|
7,518
|
|
|
$
|
5,354
|
|
|
Capital
stock
|
|
$
|
132
|
|
|
$
|
213
|
|
|
$
|
213
|
|
|
$
|
213
|
|
|
$
|
216
|
|
|
Accumulated
deficit
|
|
$
|
(66,854
|
)
|
|
$
|
(73,903
|
)
|
|
$
|
(88,116
|
)
|
|
$
|
(84,408
|
)
|
|
$
|
(86,863
|
)
|
|
Total
shareholders’ equity
|
|
$
|
12,863
|
|
|
$
|
18,538
|
|
|
$
|
5,707
|
|
|
$
|
10,642
|
|
|
$
|
8,504
|
|
|
Number
of Ordinary shares outstanding
|
|
|
4,661,627
|
|
|
|
7,376,364
|
|
|
|
7,376,364
|
|
|
|
7,376,364
|
|
|
|
5,810,898
|
|
Unaudited
Pro Forma Condensed Combined Financial Information of VocalTec and
YMax
The
unaudited pro forma condensed combined statements of operations for the fiscal
year ended December 31, 2009 combine the historical consolidated statements
of operations of VocalTec and YMax, giving effect to the Merger as if it had
occurred on January 1, 2009. The unaudited pro forma condensed
combined balance sheet as of December 31, 2009 combines the historical
consolidated balance sheets of VocalTec and YMax, giving effect to the Merger as
if it had occurred on December 31, 2009. For a complete description
of the terms of the Merger, see page 2 of this Report on Form 6-K.
The
historical consolidated financial information has been adjusted in the unaudited
pro forma condensed combined financial statements to give effect to pro forma
events that are (1) directly attributable to the
merger, (2) with respect to the statements of operations,
expected to have a continuing impact on the combined results and (3) factually
supportable. The unaudited pro forma condensed combined financial information
should be read in conjunction with the accompanying notes to the unaudited pro
forma condensed combined financial statements. In addition, the
unaudited pro forma condensed combined financial information was based on and
should be read in conjunction with the:
|
|
·
|
separate
historical financial statements of VocalTec as of and for the year ended
December 31, 2009 and the related notes included in VocalTec's Annual
Report on Form 20-F for the year ended December 31, 2009, which
is incorporated by reference into this Report on Form
6-K;
|
|
|
·
|
separate
historical financial statements of YMax as of and for the year ended
December 31, 2009 and the related notes, which are attached as an
exhibit to this Report on Form 6-K;
|
The
unaudited pro forma condensed combined financial information has been presented
for informational purposes only. The pro forma information is not necessarily
indicative of what the combined company's financial position or results of
operations actually would have been had the merger been completed as of the
dates indicated. In addition, the unaudited pro forma condensed combined
financial information does not purport to project the future financial position
or operating results of the combined company. There were no material
transactions between VocalTec and YMax during the periods presented in the
unaudited pro forma condensed combined financial statements that would need to
be eliminated.
The
unaudited pro forma condensed combined financial information has been prepared
using the acquisition method of accounting under GAAP, with YMax as the
acquiring and continuing company as YMax shareholders will own approximately 90%
of the combined entity. The operations of VocalTec will be included in the
future financial statements from the date of the Merger.
The
acquisition accounting is dependent upon certain valuations and other studies
that have not yet begun or are not yet completed, and will not be completed
until after the closing of the merger. Accordingly, the pro forma
adjustments are preliminary and have been made solely for the purpose of
providing unaudited pro forma condensed combined financial information and are
necessarily based upon preliminary information available at the time of the
preparation of this Report on Form 6-K. Differences between these
preliminary estimates and the final acquisition accounting will occur and these
differences could have a material impact on the accompanying unaudited pro forma
condensed combined financial statements and the combined company's future
results of operations and financial position. The unaudited pro forma
condensed combined financial information does not reflect any cost savings or
other synergies that the combined company may achieve as a result of the merger
or the costs to integrate the operations of VocalTec and YMax or the costs
necessary to achieve these cost savings and other synergies.
Unaudited
Pro Forma Condensed Combined Statement of Operations
For
the Year Ended December 31, 2009
(in
thousands, except per share data)
|
|
|
VocalTec
|
|
|
YMax
|
|
|
Pro Forma
Adjustments
|
|
|
Pro Forma
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,407
|
|
|
$
|
117,812
|
|
|
$
|
-
|
|
|
$
|
124,219
|
|
|
Cost
of revenues
|
|
|
2,337
|
|
|
|
63,109
|
|
|
|
434
|
(1)
|
|
|
65,880
|
|
|
Gross
profit (loss)
|
|
|
4,070
|
|
|
|
54,703
|
|
|
|
(434
|
)
|
|
|
58,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
3,020
|
|
|
|
32,104
|
|
|
|
-
|
|
|
|
35,124
|
|
|
General
and administrative
|
|
|
2,147
|
|
|
|
41,811
|
|
|
|
-
|
|
|
|
43,958
|
|
|
Research
and development
|
|
|
2,080
|
|
|
|
5,483
|
|
|
|
-
|
|
|
|
7,563
|
|
|
Total
operating expenses
|
|
|
7,247
|
|
|
|
79,398
|
|
|
|
-
|
|
|
|
86,645
|
|
|
Operating
loss
|
|
|
(3,177
|
)
|
|
|
(24,695
|
)
|
|
|
(434
|
)
|
|
|
(28,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
gains (losses) on marketable securities
|
|
|
-
|
|
|
|
4,298
|
|
|
|
-
|
|
|
|
4,298
|
|
|
Interest
and dividend income
|
|
|
132
|
|
|
|
708
|
|
|
|
-
|
|
|
|
840
|
|
|
Interest
expense
|
|
|
-
|
|
|
|
(1,180
|
)
|
|
|
-
|
|
|
|
(1,180
|
)
|
|
Loss
on extinguishment of SJ Labs Note
|
|
|
-
|
|
|
|
(563
|
)
|
|
|
-
|
|
|
|
(563
|
)
|
|
Investment
advisory fee
|
|
|
-
|
|
|
|
(1,115
|
)
|
|
|
-
|
|
|
|
(1,115
|
)
|
|
Other
income (expense), net
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
7
|
|
|
Total
other income (expense)
|
|
|
132
|
|
|
|
2,155
|
|
|
|
-
|
|
|
|
2,287
|
|
|
Net
loss before income taxes benefit
|
|
|
(3,045
|
)
|
|
|
(22,540
|
)
|
|
|
(434
|
)
|
|
|
(26,019
|
)
|
|
Income
tax benefit
|
|
|
(590
|
)
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
(599
|
)
|
|
Net
loss
|
|
$
|
(2,455
|
)
|
|
$
|
(22,531
|
)
|
|
$
|
(434
|
)
|
|
$
|
(25,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - Basic and Diluted
|
|
$
|
(0.41
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
$
|
(2.54
|
)
|
|
Weighted
average common shares outstanding - Basic and Diluted
|
|
|
6,001
|
|
|
|
87,999
|
|
|
|
(84,000
|
)(2)
|
|
|
10,000
|
|
(1)
Amortization of acquired patents and technology over a 25 year
period.
(2)
Represents the adjustment of VocalTec historical weighted average common shares
for effect of 1-for-5 reverse split, and of YMax historical weighted average
shares for effect of 1-for-10 conversion to VocalTec post reverse split shares
as a result of the merger.
Unaudited
Pro Forma Condensed Combined Balance Sheet
As
of December 31, 2009
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
|
VocalTec
|
|
|
YMax
|
|
|
Adjustments
|
|
|
Combined
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
10,582
|
|
|
$
|
13,335
|
|
|
$
|
-
|
|
|
$
|
23,917
|
|
|
Marketable
securities, at fair value
|
|
|
-
|
|
|
|
15,066
|
|
|
|
-
|
|
|
|
15,066
|
|
|
Accounts
receivable, net
|
|
|
199
|
|
|
|
9,525
|
|
|
|
-
|
|
|
|
9,724
|
|
|
Inventories
|
|
|
825
|
|
|
|
3,619
|
|
|
|
-
|
|
|
|
4,444
|
|
|
Deferred
costs
|
|
|
-
|
|
|
|
9,835
|
|
|
|
-
|
|
|
|
9,835
|
|
|
Deposits
and other current assets
|
|
|
462
|
|
|
|
2,160
|
|
|
|
-
|
|
|
|
2,622
|
|
|
Total
current assets
|
|
|
12,068
|
|
|
|
53,540
|
|
|
|
-
|
|
|
|
65,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
487
|
|
|
|
2,034
|
|
|
|
-
|
|
|
|
2,521
|
|
|
Intangible
assets, net
|
|
|
480
|
|
|
|
3,380
|
|
|
|
10,855
|
(1)
|
|
|
14,715
|
|
|
Goodwill
|
|
|
-
|
|
|
|
17,218
|
|
|
|
-
|
|
|
|
17,218
|
|
|
Deposits
and other non-current assets
|
|
|
823
|
|
|
|
837
|
|
|
|
-
|
|
|
|
1,660
|
|
|
Total
assets
|
|
$
|
13,858
|
|
|
$
|
77,009
|
|
|
$
|
10,855
|
|
|
$
|
101,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND CAPITAL DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
851
|
|
|
$
|
4,820
|
|
|
$
|
-
|
|
|
$
|
5,671
|
|
|
Accrued
expenses and other current liabilities
|
|
|
2,053
|
|
|
|
6,672
|
|
|
|
-
|
|
|
|
8,725
|
|
|
Accrued
bonuses
|
|
|
-
|
|
|
|
25,647
|
|
|
|
-
|
|
|
|
25,647
|
|
|
Deferred
revenue, current portion
|
|
|
1,313
|
|
|
|
55,361
|
|
|
|
-
|
|
|
|
56,674
|
|
|
Current
portion of long-term debt
|
|
|
-
|
|
|
|
4,915
|
|
|
|
-
|
|
|
|
4,915
|
|
|
Total
current liabilities
|
|
|
4,217
|
|
|
|
97,415
|
|
|
|
-
|
|
|
|
101,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue, net of current portion
|
|
|
-
|
|
|
|
22,877
|
|
|
|
|
|
|
|
22,877
|
|
|
Other
non-current liabilities
|
|
|
1,137
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,137
|
|
|
Total
liabilities
|
|
|
5,354
|
|
|
|
120,292
|
|
|
|
-
|
|
|
|
125,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
common stock
|
|
|
-
|
|
|
|
5,764
|
|
|
|
(5,764
|
)(2)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Accounts (see schedule below)
|
|
|
8,504
|
|
|
|
(49,047
|
)
|
|
|
16,619
|
(3)
|
|
|
(23,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and capital deficit
|
|
$
|
13,858
|
|
|
$
|
77,009
|
|
|
$
|
10,855
|
|
|
$
|
101,722
|
|
(1) To
reflect the allocation of the total consideration for the merger of $19,359 to
the estimated fair values of the VocalTec assets and liabilities resulting in an
excess of $10,855, which represents the estimated fair value of the acquired
patents and technology of VocalTec. The total consideration of $19,359 includes
the 1,173,293 post reverse split shares held by the existing VocalTec
shareholders after the merger at the estimated fair value of the VocalTec stock
of $16.50 on July 16, 2010, after giving effect to the 1-for-5 reverse split to
the closing market price of $3.30 per share.
(2) To
reflect the reclassification of YMax redeemable common stock as a result of the
expiration of redemption rights of such redeemable shares as a result of the
merger.
(3) Refer
to the table below for detail on adjustments to capital
accounts.
Unaudited
Pro Forma Combined Capital Accounts
As
of December 31, 2009
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
Post Merger
|
|
|
|
|
Pre-merger
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
VOCALTEC
COMMUNICATIONS, LTD
|
|
|
|
|
|
|
|
|
|
|
Share
capital:
|
|
|
|
|
|
|
|
|
|
|
Ordinary
shares of NIS 0.13 (US $0.03) par value: Authorized -
150,000,000
|
|
|
|
|
|
|
|
|
|
|
|
shares;
Issued - 5,866,472 shares; Outstanding pre-merger after
the
|
|
|
|
|
|
|
|
|
|
|
|
1-for-5
reverse split - 1,173,293; Outstanding post merger
11,736,188
|
|
$
|
34
|
|
|
$
|
308
|
(1)
|
|
$
|
342
|
|
|
Additional
paid-in capital
|
|
|
95,333
|
|
|
|
(95,333
|
)(3)
|
|
|
-
|
|
|
Accumulated
deficit
|
|
|
(86,863
|
)
|
|
|
86,863
|
(3)
|
|
|
-
|
|
|
Total
VocalTec
|
|
$
|
8,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YMAX
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value; 500,000,000 shares
authorized;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
issued and outstanding 102,295,612 pre-merger;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
issued and outstanding post merger
|
|
|
87
|
|
|
|
3
|
(4)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
(90
|
)(5)
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
43,808
|
|
|
|
(308
|
)(1)
|
|
|
68,676
|
|
|
|
|
|
|
|
|
|
8,470
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
10,855
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
5,761
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
90
|
(5)
|
|
|
|
|
|
Accumulated
other comprehensive income
|
|
|
30
|
|
|
|
|
|
|
|
30
|
|
|
Deficit
|
|
|
(92,972
|
)
|
|
|
-
|
|
|
|
(92,972
|
)
|
|
Total
YMax
|
|
|
(49,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
$
|
(40,543
|
)
|
|
$
|
16,619
|
|
|
$
|
(23,924
|
)
|
Adjustments
(1) To
record the issuance of 10,562,895 ordinary shares to YMax
shareholders.
(2) To
allocate consideration in excess of the net assets of VocalTec to patents and
intangible assets.
(3) To
eliminate the additional paid-in capital and deficit of VocalTec.
(4) To
eliminate the redeemable common stock of YMax.
(5) To
cancel the outstanding common stock of YMax.
|
Shares Outstandng as of July 16, 2010
|
|
Pre-Merger
|
|
|
Post Merger Outstanding Shares
|
|
|
|
|
Outstanding
|
|
|
VOCALTEC
|
|
|
YMAX
|
|
|
|
|
|
|
|
Shares
|
|
|
Shareholders
(1)
|
|
|
Shareholders
|
|
|
Total
|
|
|
VOCALTEC
COMMUNICATIONS, LTD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
shares of NIS 0.13 (US $0.03) par value: Authorized
150,000,000
shares; Issued and outstanding pre-merger - 5,866,472
shares;
Outstanding post merger - 11,736,188
|
|
5,866,472
|
|
|
1,173,293
|
|
|
10,562,895
|
|
|
11,736,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
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(1)
Reflect 1-for-5 reverse split.
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Financial
Statements and Exhibits
(a) The
following consolidated financial statements, related notes, report of
independent registered public accounting firm and supplementary data are
incorporated by reference into this Report on Form 6-K or are filed
herewith:
VocalTec
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Report
of Independent Registered Public Accounting Firm on the Consolidated
Financial Statements*
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Consolidated
Statements of Operations - Years Ended December 31, 2009, 2008 and
2007*
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Consolidated
Balance Sheets - December 31, 2009 and
2008*
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Statements
of Changes in Shareholders’ Equity - Years Ended December 31, 2009, 2008
and 2007*
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Consolidated
Statements of Cash Flows - Years Ended December 31, 2009, 2008 and
2007*
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Notes
to Consolidated Financial
Statements*
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YMax
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Report
of Independent Registered Certified Public Accounting Firm on the
Consolidated Financial Statements^
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Consolidated
Statements of Operations - Years Ended December 31, 2009, 2008 and
2007^
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Consolidated
Balance Sheets - December 31, 2009 and
2008^
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Statements
of Capital Deficit - Years Ended December 31, 2009, 2008 and
2007^
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Consolidated
Statements of Cash Flows - Years Ended December 31, 2009, 2008 and
2007^
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Notes
to Consolidated Financial
Statements^
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* Incorporated
herein by reference from VocalTec’s Annual Report on Form 20-F for the fiscal
year ended December 31, 2009, filed with the Securities and Exchange Commission
on May 12, 2010.
^ Filed
herewith.
(b) Exhibits.
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10.1
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Agreement
and Plan of Merger, dated July 16 , 2010, by and among VocalTec
Communications, Ltd., VocalTec Merger Sub Inc. and YMax
Corporation*
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10.2
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Registration
Rights Agreement, dated July 16, 2010, by and between the Company and
Daniel Borislow
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99.1
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Consolidated
Financial Statements of YMax Corporation and subsidiaries as of December
31, 2009 and 2008 and for each of the three years in the period ended
December 31, 2009
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99.2
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Press
release, dated July 16, 2010
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*
Pursuant to
Item 601(b)(2) of Regulation S-K, certain of the exhibits and
schedules may have been omitted. Such exhibits and schedules will be
provided to the Securities and Exchange Commission upon request.
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.
Date: July
19, 2010
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VOCALTEC
COMMUNICATIONS LTD.
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By:
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/s/ Daniel Borislow
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Name: Daniel
Borislow
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Title: President
and Chief Executive Officer
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