| |
|
|
|
| |
|
|
2008(*) (***) |
|
|
|
2009(*) (***) |
|
|
|
2010(*)(**)(***) |
|
|
|
2011(*)(**) |
|
|
|
2012(*)(**) |
|
| |
|
(in thousands except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
102,519 |
|
|
$ |
89,383 |
|
|
$ |
75,014 |
|
|
$ |
72,273 |
|
|
$ |
49,949 |
|
|
Cost of sales
|
|
|
42,513 |
|
|
|
37,840 |
|
|
|
37,096 |
|
|
|
37,493 |
|
|
|
27,326 |
|
|
Inventory write-off
|
|
|
1,018 |
|
|
|
1,176 |
|
|
|
2,093 |
|
|
|
1,433 |
|
|
|
6,385 |
|
|
Gross profit
|
|
|
58,988 |
|
|
|
50,367 |
|
|
|
35,825 |
|
|
|
33,347 |
|
|
|
16,238 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, gross
|
|
|
14,574 |
|
|
|
11,391 |
|
|
|
8,440 |
|
|
|
12,552 |
|
|
|
14,825 |
|
|
Less grants and participations
|
|
|
2,140 |
|
|
|
809 |
|
|
|
536 |
|
|
|
1,844 |
|
|
|
2,161 |
|
|
Research and development, net
|
|
|
12,434 |
|
|
|
10,582 |
|
|
|
7,904 |
|
|
|
10,708 |
|
|
|
12,664 |
|
|
Selling and marketing
|
|
|
19,587 |
|
|
|
16,836 |
|
|
|
13,801 |
|
|
|
18,304 |
|
|
|
13,177 |
|
|
General and administrative
|
|
|
4,425 |
|
|
|
3,549 |
|
|
|
4,364 |
|
|
|
5,170 |
|
|
|
7,182 |
|
|
Amortization of intangible assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
186 |
|
|
|
2,235 |
|
|
Restructuring and other related expenses
|
|
|
1,457 |
|
|
|
1,394 |
|
|
|
1,787 |
|
|
|
6,020 |
|
|
|
- |
|
|
Acquisition related expenses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,622 |
|
|
|
1,102 |
|
|
Total operating costs and expenses
|
|
|
37,903 |
|
|
|
32,361 |
|
|
|
27,856 |
|
|
|
43,010 |
|
|
|
36,360 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
21,085 |
|
|
|
18,006 |
|
|
|
7,969 |
|
|
|
(9,663 |
) |
|
|
(20,122 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income (expenses), net
|
|
|
4,297 |
|
|
|
1,668 |
|
|
|
(99 |
) |
|
|
(1,015 |
) |
|
|
(2,895 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax
|
|
|
25,382 |
|
|
|
19,674 |
|
|
|
7,870 |
|
|
|
(10,678 |
) |
|
|
(23,017 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on Income
|
|
|
- |
|
|
|
- |
|
|
|
894 |
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
25,382 |
|
|
|
19,674 |
|
|
|
6,976 |
|
|
|
(10,678 |
) |
|
|
(23,017 |
) |
|
Loss from discontinued operations, net
|
|
|
(30,841 |
) |
|
|
(26,862 |
) |
|
|
(105.455 |
) |
|
|
(23,144 |
) |
|
|
(32,892 |
) |
|
Net loss
|
|
$ |
(5,459 |
) |
|
$ |
(7,188 |
) |
|
$ |
(98,479 |
) |
|
$ |
(33,822 |
) |
|
$ |
(55,909 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
4.03 |
|
|
$ |
3.17 |
|
|
$ |
1.12 |
|
|
$ |
(1.71 |
) |
|
$ |
(3.68 |
) |
|
Discontinued operations
|
|
|
(4.90 |
) |
|
|
(4.33 |
) |
|
|
(16.95 |
) |
|
|
(3.72 |
) |
|
$ |
(5.25 |
) |
|
Total
|
|
$ |
(0.87 |
) |
|
$ |
(1.16 |
) |
|
$ |
(15.83 |
) |
|
$ |
(5.43 |
) |
|
$ |
(8.93 |
) |
|
Weighted average number of shares used in computing basic net earnings (loss) per share
|
|
|
6,292 |
|
|
|
6,202 |
|
|
|
6,220 |
|
|
|
6,230 |
|
|
|
6,260 |
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
4.03 |
|
|
$ |
3.17 |
|
|
$ |
1.12 |
|
|
$ |
(1.71 |
) |
|
$ |
(3.68 |
) |
|
Discontinued operations
|
|
|
(4.90 |
) |
|
|
(4.33 |
) |
|
|
(16.95 |
) |
|
|
(3.72 |
) |
|
$ |
(5.25 |
) |
|
Total
|
|
$ |
(0.87 |
) |
|
$ |
(1.16 |
) |
|
$ |
(15.83 |
) |
|
$ |
(5.43 |
) |
|
$ |
(8.93 |
) |
|
Weighted average number of shares used in computing diluted net earnings (loss) per share
|
|
|
6,292 |
|
|
|
6,202 |
|
|
|
6,220 |
|
|
|
6,230 |
|
|
|
6,260 |
|
(*) Includes charges for stock-based compensation of approximately $4 million, $2.2 million, $ 1.8 million, $1.7 million and $ 0.9 million based on ASC 718 Compensation – “Stock Compensation” for the years ended December 31, 2008, 2009, 2010, 2011 and 2012, respectively.
(**) For more details of sales please see the financial statements for the year ended December 31, 2012 appearing elsewhere in this Annual Report.
(***) The historical financial results of our BWA Division, which we recently sold, have been reclassified as discontinued operations for all periods presented and the other financial information presented herein has been retrospectively adjusted in accordance with such reclassification.
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
(in thousands)
|
|
|
|
|
|
Working capital
|
|
$ |
115,817 |
|
|
$ |
132,813
|
|
|
$ |
109,978 |
|
|
$ |
62,079 |
|
|
$ |
8,397 |
|
|
Total assets
|
|
$ |
338,110 |
|
|
$ |
301,544 |
|
|
$ |
214,764 |
|
|
$ |
206,838 |
|
|
$ |
96,159 |
|
|
Shareholders’ equity
|
|
$ |
215,906 |
|
|
$ |
216,644 |
|
|
$ |
122,087 |
|
|
$ |
86,154 |
|
|
$ |
35,531 |
|
|
Capital Stock
|
|
$ |
423,468 |
|
|
$ |
428,086 |
|
|
$ |
431,534 |
|
|
$ |
434,696 |
|
|
$ |
436,469 |
|
|
B.
|
CAPITALIZATION AND INDEBTEDNESS
|
Not applicable.
|
C.
|
REASONS FOR THE OFFER AND USE OF PROCEEDS
|
Not applicable.
Our business, financial condition and results of operations could be seriously harmed due to any of the following risks, among others. If we do not successfully address the risks to which we are subject, we could experience a material adverse effect on our business, results of operations and financial condition, and our share price may decline. We cannot assure you that we will successfully address any of these risks.
Risks Related to Our Business and Our Industry
We have incurred significant losses in the past and we may continue to incur losses in the future, and the report of our independent registered public accounting firm relating to our financial statements includes an explanatory paragraph describing matters that raise substantial doubt as to our ability to continue as a going concern. While we recently sold certain of our patents and one of our divisions and are continuing to take other actions in an effort to streamline our business, we will need to obtain additional funding and to generate working capital to sustain our business. If we are unable to successfully streamline our business and obtain additional funding, we may have to further curtail our operations or cease our operations entirely.
In the years ended December 31, 2011 and 2012, our operating loss was $9.6 million and $20.1 million, respectively and in the years ended December 31, 2010, 2011 and 2012, our net loss was $98.5 million, $33.8 million and $55.9 million, respectively.
During the early 2000s, we focused our business on the development of WiMAX (Worldwide Interoperability for Microwave Access) technology. WiMAX technology, which was launched a number of years before Long Term Evolution (“LTE”) technology, was faced with fierce competition from LTE as a growing number of cellular operators adopted LTE for their 4th Generation Cellular Technology. By 2009, WiMAX was no longer the prevailing technology for the 4G mobile mass market. We continued to manufacture, market and sell WiMAX products for the 4G mobile mass market through 2012, and while this business generated revenues, it was not profitable.
As part of our strategy to focus on complementary wireless applications, in November 2011, we completed the acquisition of Wavion Ltd., a provider of carrier-grade Wi-Fi solutions (“Wavion”). For the purpose of financing the acquisition of Wavion in November 2011, we obtained a $ 30 million secured credit facility from Silicon Valley Bank (“SVB”). We decided to finance the acquisition rather than use our cash on hand in order to retain available cash to meet the substantial working capital needs of our WiMAX business while growing our new Wi-Fi business.
During 2011, we implemented a restructuring plan including the layoff of approximately 194 employees as well as the vacating of certain leased premises. Nonetheless, we continued to incur substantial losses. In addition, our sales of our Wi-Fi products decreased significantly in the second half of 2012 as the world was migrating to the new 802.11n standard and our WBSn product that had been developed based on that standard was not market ready.
During 2012, in particular in light of the significant cash requirements to fund the WiMAX business and the limited availability of credit both in the market generally and to Alvarion in particular, we were actively evaluating various alternatives to exit the WiMAX business. We ultimately decided to seek to sell the business and if we could not reach agreement with a buyer in a reasonable time, we would wind down the business. During 2012, we received several offers and negotiated with a number of potential buyers for the BWA Division, but we did not reach an agreement. As part of this process, we separated all of our licensed WiMAX business (the “BWA Division”) from our unlicensed business. While we continued to operate this business to maintain the customers, products and remain in the market, it it continued to generate significant losses and had a negative effect on working capital.
As a result of the difficulty we experienced with the launch and marketing of our WBSn product and our lack of success in disposing of the BWA Division, with respect to which we were required to continue to provide services to our customers and meet contractual commitments, we continued to suffer substantial losses during 2012. Our cash position was further negatively affected by our required principal and interest payments on the SVB Loan, as well as the closure of previously available credit lines with various Israeli banks.
Our working capital was approximately $8.4 million as of December 31, 2012 compared to $62.0 million as of December 31, 2011 and $109.9 million as of December 31, 2010. During 2012 and through May 12, 2013, due to the limited availability of credit and our lower cash balances resulting from our prior losses, we have not had the level of working capital and amounts available for product development, launch and support which we believe would be necessary to grow our business and make it profitable. In addition, our limited working capital has resulted, and may continue to result, in delays of shipments of our products, which has and may continue to have a material adverse effect on our revenues and our profitability.
We also have incurred accumulated losses of $388.9 million as of December 31, 2012 and $48 million in negative cash flow for the year ended December 31, 2012. We had $3.5 million in negative cash flow for the year ended December 31, 2011. As of December 31, 2012, we had $9.8 million in cash and cash equivalents and an $11 million outstanding revolving short term credit line.
The report of our independent registered public accounting firm with respect to our financial statements for the years ended December 31, 2012 and 2011 includes an explanatory paragraph that states that our declining sales, recurring losses, negative cash flows from operations, and our excess of credit line drawn over cash and cash equivalents as well as uncertainty in meeting credit line covenants raise substantial doubt about our ability to continue as a going concern. In order to continue as a going concern we will need to obtain funding in order to finance our working capital and sustain our ongoing operations and additional capital to enable product development and market growth. While we are currently actively seeking more funding, we cannot ensure that we will be able to obtain funding on terms that will be acceptable to us or at all. Additional funding raised through the issuance of equity interests may significantly dilute the equity interests of our current shareholders. Furthermore, if we raise additional funds through debt financing arrangements, if available, we may be required to pledge certain assets or enter into covenants that would restrict our business activities or our ability to incur further indebtedness, and such debt financing may be at interest rates and contain other terms that are not favorable to us. Our inability to obtain additional financing for working capital, product development, launch and support or for our other capital requirements on terms acceptable to us would result in our having to curtail our business operations further or cease our operations entirely.
In an effort to streamline our business, we recently sold part of our patent portfolio to Wi-Lan Inc. (“Wi-Lan”) and our BWA Division to Telrad Networks Ltd. (“Telrad”) and we are currently focused on our vertical markets businesses. In addition, we are continuing to seek to lower our expenses, including through reductions in the number of our employees across our company, a reduction in employee salaries and moving to new smaller and less expensive facilities. Such actions may not be effective and may not result in the anticipated cost savings and increase in working capital. Even if we are successful in reducing costs, the effects of such reductions on our business operations may ultimately have a material adverse effect on our financial condition and results of operations and our share price may decline.
We experienced a decline in orders for our products during 2012 compared to 2011. If customer order activity does not increase, our revenue and profitability will likely be materially adversely affected and we may be required to implement certain measures to preserve or enhance our operating results and cash position.
We experienced a significant decline in orders for our products in 2012 compared to 2011. We believe the decrease in orders for our products was attributable to delays in introductions of certain new products. While we would not expect a similar decline in 2013, if our order activity does not increase, our revenue and profitability would likely be materially adversely affected and would contribute to a determination as to whether implement further cost reduction measures and other initiatives to preserve and enhance our cash position. Any such measures may limit or hinder our ability to execute our strategy and achieve our objectives thereby adversely affecting our business.
Continued unfavorable global economic conditions could have a material adverse effect on our business, operating results and financial condition.
The crisis in the financial and credit markets in the United States, Europe and Asia which began in 2008 and 2009 and which has continued at varying levels of intensity since then, led to a global economic slowdown, with economies throughout the world experiencing periods of weakness. This has contributed to the downturn in our business. While the economies in some of the countries in which we operate have improved, if the economies in those countries weaken or if the economies in other countries in which we operate do not improve or weaken further, telecom carriers, service providers and our partners as well as other customers in such countries may further significantly reduce or postpone their technology spending as well as require aggressive vendor financing. This could result in further decreases in our revenues because of reductions in sales, longer sales cycles, slower market acceptance of our products and increased price competition. Any of these events would likely harm our business, operating results and financial condition. If global economic and market conditions, or economic conditions in the United States, Europe or Asia or other key markets do not improve or weaken further, our business, operating results and financial condition would be further materially adversely affected.
Adverse conditions in the telecommunications industry and in the telecommunications equipment market may decrease demand for our products and may harm our business, financial condition and results of operations.
Our systems are used by telecom carriers and service providers and within vertical markets, such as municipalities and utility companies. As a result of our customers’ continued tightened spending as well as the limited licenses and substantial capital requirements which limit growth into new markets, our revenues further declined in 2011 and 2012 and may continue to decline and our losses may increase in the future. Adverse market conditions in the past years have also led our customers and potential customers to be conservative in their spending, and this could continue in the future. Due to these conditions, the markets in which we operate may not grow as we expect or may decrease. While our goal is to increase our sales by expanding the range of customers that we address, there can be no assurance that we will be successful. These adverse conditions in the telecommunications industry contributed to the decline in our revenues in 2011 and 2012 and our revenues may continue to decline and our losses may continue to increase.
Markets implementing broadband wireless technologies and other new markets we attempt to penetrate may not become substantial commercial markets or may not evolve in a manner that will enable our products to achieve market acceptance. If such markets do not evolve or develop or we do not maintain or increase our market share within our current markets, our revenues may continue to decrease.
In order to maintain or increase our market share in the markets in which we operate, we must, among other things:
|
·
|
obtain third party funding for working capital;
|
|
·
|
retain and attract personnel with the relevant knowledge and experience;
|
|
·
|
continue to innovate and differentiate our technology position by designing, developing and manufacturing broadband wireless access products;
|
|
·
|
develop and cultivate additional sales channels in addition to our direct sales from which we currently generate our main revenues, including regional local partners or other strategic arrangements with leading manufacturers of access equipment, who can market our wireless broadband products to prospective customers, such as local exchange carriers, international cellular operators, Internet and application service providers, municipalities, customers in education, oil and gas, and other vertical markets, other private network operators and local telephone companies;
|
|
·
|
effectively establish and support relationships with customers, including local exchange carriers, Internet and application service providers, public fixed or mobile telephone service providers and private network operators; and
|
|
·
|
continue to enhance our maintenance and support services.
|
Our efforts in these markets may not succeed.
Intense competition in the markets for our products has had and may continue to have an adverse effect on our sales and profitability.
Multiple companies with a range of diverse products and solutions compete with us in the markets in which we sell our products. These competitors may have a vertical-focus or a multi-vertical focus. Some of these competitors also have a more complete networking solution than ours which may make their products more desirable to our potential customers. Many of these vendors have been able to grow their market share in the past few years in the territories in which we are active. We expect that competition from these vendors will continue to increase, both with respect to products that we currently offer and products that we intend to introduce in the future. As the market transitions toward standardization and Wi-Fi 802.11n technology, competition becomes increasingly challenging and makes room for entry level, low cost offerings by our competitors. We expect our competitors to continue improving the performance of their current products and to introduce new products or new technologies and such products or technologies may have better performance than our products or supplant our products entirely. In addition, our current lack of additional new technologies and resulting products may hurt our competitive positioning in the market place and our ability to develop new technologies and products has been and may continue to be adversely affected by our limited working capital.
We also face new competition from larger players in the telecom market and/or indoor wireless vendors, such as Cisco, Ericsson, Nokia Siemens and Rockus, as well as from start-up companies. Our license-exempt and vertical market business may be affected by the dynamics of spectrum allocations. The allocation of alternative spectrum such as TV white space spectrum, 24GHz unlicensed band, and 60GHz unlicensed band may become a relevant alternative to the current spectrum upon which our product portfolio is based. Additional license based spectrum, such as the 700MHz public safety band, 6GHz, 70GHz, or LMDS spectrum may become a relevant alternative for our vertical market customers and as such could adversely affect our license-exempt and vertical market business.
Most of our existing and potential competitors, including large competitors arising from the continued consolidation in the telecommunications equipment market, have substantially greater resources, including financial, technological, manufacturing and marketing, and distribution capabilities, and enjoy greater market recognition than we do. Increased competition, direct and indirect, has resulted in, and is likely to continue to result in, reductions of average selling prices, shorter product life cycles due to our competitors' launch of innovative products in the market more frequently, reduced gross margins, longer sales cycles and potential loss of market share and, consequently, could adversely affect our sales and profitability.
We have had limited success in our recent efforts, and we may not be able in the future, to differentiate our products from those of our competitors, successfully develop or introduce new products that are less costly, offer better performance than the products of our competitors, or offer our customers payment or other commercial terms as favorable as those offered by our competitors, particularly in light of the lack of available credit to both Alvarion and its customers specifically and in the markets generally. In addition, we may not be able to offer our products as part of integrated systems or solutions or provide services to the same extent as our competitors. A failure to accomplish one or more of these objectives could materially adversely affect our sales and profitability, harming our financial condition and results of operations.
Technological changes have had and may continue to have an adverse effect on the market acceptance of our current products and any products we develop in the future and may adversely affect our results of operations.
The markets for our products and the technologies utilized in the industry in which we operate evolve continuously.
Market changes have and could in the future render our products and technologies obsolete or subject them to intense competition by alternative products or technologies or by improvements in existing products or technologies. New or enhanced products developed by our competitors may be technologically superior to our products, may limit our target markets or may render our products obsolete, and consequently adversely affect our results of operations. New chips introduced may include built-in capabilities which are currently an Alvarion product differentiator, which would lower the barrier for competition. For example, in the past, we focused our efforts on products using the WiMAX standard, however, cellular carriers adopted other standards introduced after WiMAX and our business was adversely affected.
The success of our technology depends on the following factors, among others:
|
|
·
|
market acceptance of new and innovative technologies employed by us;
|
|
|
·
|
market acceptance of standards for wireless broadband products employed by us;;
|
|
|
·
|
network capacity to handle growing demands for faster transmission of increasing amounts of data and voice;
|
|
|
·
|
cost-effectiveness and performance of our technology compared to other broadband wireless technologies;
|
|
|
·
|
reliability and security of our technology;
|
|
|
·
|
suitability of our technology for a sufficient number of geographic regions; and
|
|
|
·
|
safety and environmental concerns regarding wireless broadband transmissions.
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We have experienced and may continue to experience difficulties or delays in the introduction of new or enhanced products, which has resulted and could continue to result in reduced sales or unexpected expenses.
The development of new or enhanced products in vertical markets is a complex and uncertain process. For example, product development is multi-disciplinary, involving hardware design and development, software, integration, and intensive and complicated system design, and resulting in a long development cycle. We are engaged and will continue to be engaged in the development of various types of product lines, if we have sufficient capital to fund such development. We have experienced and may continue to experience design, development, manufacturing, marketing and other difficulties due to delays in our development or delays by third party vendors, and these delays have caused and could continue to cause difficulties or prevent our development, introduction or marketing of new products or product enhancements and subject us to intensified competition. For example, we were unable to successfully introduce our WBSn product when we had expected to do so in early 2012 as a result of product instability and were only able to reintroduce this product in the first quarter of 2013. In addition, our limited financial resources have constrained our ability to invest in research and development of new or enhanced products. Such difficulties have resulted and could continue to result in reduced sales, unexpected expenses or delays in the launch of new or enhanced products or our inability to timely introduce to the market our products, any of which may adversely affect our results of operations. Also, such delays could lead sales partners and distributors to turn to competing vendors. The launch and availability of certain of our new products, in particular our WBSn product, has also been delayed, which has harmed and may continue to harm our competitiveness and our ability to penetrate, and market these products in, vertical markets in an efficient and timely manner.
Businesses we acquired or may acquire in the future may not be successfully integrated with our operations and our technologies, which may harm our business and results of operations.
During the fourth quarter of 2011, we acquired Wavion in order to create new growth engines and penetrate into new market segments. Wavion is a provider of carrier grade outdoor Wi-Fi solutions, offering a variety of different products for Wi-Fi access and mobile cellular technologies (“3G/4G”) off-load applications. While we have generally been able to integrate Wavion into our business, this required significant resources and management attention. We cannot assure you that we will be able to successfully expand into new markets, such as the Wi-Fi market, as a result of any acquisition. We also cannot assure that the Wi-Fi market will grow as we expect or that our market share of the Wi-Fi market will grow as expected.
Further, once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected and may increase our costs of operations, which may be higher than expected. We also cannot assure you that we will succeed in retaining our employees or those of any acquired companies following any acquisition, including key employees in managerial positions. In particular, a number of key employees of Wavion have resigned from their positions since our acquisition of Wavion. The continued occurrence of any of these events could harm our business, financial condition or results of operations and as a result may decrease our share price in the future.
We obtained a loan facility from Silicon Valley Bank ("SVB") which has been amended and modified a number of times in order for us to remain in compliance. If we fail to comply with the terms of the loan agreement with SVB, our available cash and our business operations will be significantly harmed.
For the purpose of financing the acquisition of Wavion in November 2011, we obtained a $30 million credit facility from SVB (the “SVB Loan”). As part of the transaction, we pledged all of our assets under a floating charge, and created a fixed charge on our IP rights and receivables. The loan and security agreement with SVB contains various provisions related to compliance with financial covenants, restrictive covenants, including negative pledges, and other customary commitments, contained in facility agreements of this type. In April 2012, we breached certain financial covenants under the SVB Loan, however, we and SVB agreed on modifications to the terms of the SVB loan and on SVB’s waiver of the breach of covenant. We and SVB have modified the terms of the SVB Loan a number of other times, most recently in May 2013. As a result of our breach of the financial covenants under the SVB Loan, as well as various amendments to the SVB Loan, we repaid a total of $19 million during 2012 and $5.6 million during 2013 through May 12, 2013.
As of May 12, 2013 and following the completion of the sale of the BWA Division to Telrad, the outstanding balance of the SVB Loan is approximately $5.4 million. The terms of the SVB Loan were further amended in connection with the sale to Telrad and include financial covenants relating to our net tangible assets and our net losses or profits. In addition, the outstanding amount under the SVB Loan must be lower than the amount available thereunder at any time pursuant to the borrowing base provided for under the SVB Loan. There is no assurance that we will not breach the terms of the SVB Loan in the future or that we will remain in compliance with the amended terms. In addition, should we fail to comply with our obligations under the SVB Loan, SVB may require immediate repayment of the SVB Loan and realize on its security, which can significantly harm our available cash and our operations and may result in cessation of our operations in their entirety.
For more information please see "Item 10 C – Material Contracts" below.
We have experienced in the past, and may experience in the future, quarterly and annual fluctuations in our results of operations which have caused, and may cause, volatility in the market price of our ordinary shares.
We have experienced, and may continue to experience, significant fluctuations in our quarterly and annual results of operations, in particular, in light of the timing of new product introductions, intense competition, the continuing effects of the global economic slowdown and the continued limited availability of credit in the global capital markets. Any fluctuations may cause our results of operations to decrease below the expectations of securities analysts and investors. This would likely affect the market price of our ordinary shares.
Our quarterly and annual results of operations may vary significantly in the future for a variety of reasons, many of which are outside of our control, including the following:
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the introduction of our new products or enhancements or those of our competitors or of providers of complementary products;
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purchasing patterns of our customers, including the size and timing of orders and the timing of large scale deployments;
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the fulfillment of all revenue recognition criteria;
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customer deferral of orders in anticipation of new products, product features or price reductions;
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disruption or changes in the quality of our sources of supply;
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changes in the mix of products sold by us;
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mergers or acquisitions, by us, our competitors and existing and potential customers, if any;
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one-time charges such as asset impairment and restructuring charges;
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fluctuations in the exchange rate of the New Israeli Shekel (the “NIS”) against the United States dollar; and
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general economic conditions, including the unfavorable global economic conditions; and
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Our customers ordinarily require the delivery of products promptly after their orders are accepted. Historically, our business typically does not have a significant backlog of accepted orders. Consequently, revenues in any quarter depend primarily on orders that are received and accepted in that quarter. The deferral of the placing and acceptance of any large order from one quarter to another could materially and adversely affect our results of operations for the former quarter. The effects of deferrals of orders may be more significant in light of our limited working capital, which has resulted and may continue to result in a backlog of orders if we are unable to pay our suppliers and third party manufacturers on a timely basis. Our revenue recognition is dependent on various parameters and milestones. If revenues from our business in any quarter remain in the same level or decline in comparison to any previous quarter, our results of operations could be harmed.
Our products have long and unpredictable sales cycles which could adversely impact our revenues and results of operations.
The sales cycle for a portion of our large service providers encompasses significant technical evaluation and testing by each potential purchaser and a commitment of significant cash and other resources. The sales cycle can extend for more than one year and sometimes even two years from initial contact with a customer to receipt of a purchase order, and in certain instances may not even result in the receipt of an order. This time frame may be extended due to, among other reasons, a customer's desire to ensure that the systems work for a long period with increased number of subscribers’ coverage and capacity, a customer's need to obtain financing or other means of collateral to purchase systems incorporating our products, the regulatory authorization of competition in local services, and other regulatory hurdles.
As a result of the length of these sales cycles, revenues from our products may fluctuate from quarter to quarter and fail to correspond with associated expenses, which are largely based on anticipated revenues. In addition, the delays inherent in the sales cycles of our products raise additional risks of customers canceling or changing their product plans. Our revenues have been adversely affected by a significant customer, or a significant potential customer, reducing, delaying or canceling orders during the sales cycle or choosing not to deploy networks incorporating our products and our revenues may be adversely affected if this occurs in the future. Such fluctuation in revenue or cancellation of orders has had and may in the future have an adverse effect on our business and may affect the market price of our ordinary shares.
Our business is dependent upon our distributors, system integrators, service providers and other partners, who are under no obligation to purchase our products.
Our revenues are derived from sales to our independent partners, such as distributors, system integrators and service providers. Our distributors resell our products to others, who further resell our products to end users. Changes in the distribution and sales channels of our products, a loss of a major distributor or a major distributor’s loss of a major end-user, or our inability to establish effective distribution and sales channels for new products may impact our ability to sell our products and result in a loss of revenues. Additionally, sales through our distributors and system integrator channels expose our business to a number of risks, each of which could result in a reduction in the sales of our products. For example, some of these distributors, system integrators and other partners may terminate their relationships with us, consolidate or face financial problems, as well as promote competing products or emphasize alternative technologies, which may turn them into our competitors rather than our partners. In addition, while we expect that most of our distributors will continue to distribute our products, certain distributors who primarily distributed the products which were part of our BWA Division may cease to distribute our products entirely and certain distributors may seek other suppliers for their customers due to concerns regarding our level of working capital. All of the foregoing may result in a decline in the purchase of our products.
We are dependent upon the acceptance of our products by the market through our partners' efforts in marketing and sales. Generally, arrangements with our partners do not prevent them from selling competitive products and some of the arrangements do not contain minimum sales or marketing performance requirements. In addition, our efforts to increase sales may suffer from the lack of brand visibility resulting from the integration of these products into more comprehensive systems by distributors and system integrators. Changes in the financial condition, business or marketing strategies of our partners could have a material adverse effect on our results of operations. Any of these changes could occur suddenly and rapidly.
If our revenues decrease and our days- sales-outstanding (“DSOs”) increase, our cash position may be negatively affected and result in a greater cash shortfall.
Our DSOs decreased to 75 days in 2012 from 96 days in 2011. We expect that over time our DSOs may increase and we expect our DSOs will range between 100 to 120 days during 2013, mainly due to our customers requesting more favorable payment terms from us as part of increased competition, as well as the limited availability of credit in the capital markets, which may also affect our ability to collect our customers' debts in a timely manner or at all. In addition, we may experience an increase in DSOs if we fail to timely collect revenues from our customers.
We may experience a further decrease in our gross margin levels in the future, which may adversely affect our financial results.
We have been experiencing declines in gross margin. Our gross margin was 32.5% in 2012 compared to 46.1% in 2011. While the decline was mainly a result of a write off of excess inventory during 2012, this decline was also driven by our operations in a number of our markets, mainly due to (a) the delay in new project launches, (b) lower sales, (c) increased competition and (d) the economic concerns in these markets, all of which resulted in a low level of revenue and the sequential decline in gross margin. This decline in gross margin may continue over time. If our revenues do not increase and our operating expenses remain the same or increase, the decline in gross margin will have a negative impact on our results of operations.
Our products are complex and may have errors or defects that are detected only after full deployment.
Some of our products are highly complex and are designed to be deployed in complex settings. Although our products are tested during manufacturing and prior to deployment, our customers may discover errors after the products have been fully deployed. If we are unable to fix errors or other problems that may be identified in full deployment, including problems related to the site survey, radio planning and other problems that are not necessarily related to product functionality but to the associated services, or unable to correct the errors in a timely manner, we could experience:
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costs associated with remediation;
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loss of or delay in revenues;
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failure to achieve market acceptance and loss of market share;
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diversion of deployment of resources;
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diversion of research and development resources to fix errors in the field;
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increased service and warranty costs;
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legal actions or demands for compensation by our customers; and
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increased insurance costs.
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Our products are often integrated with other network components. There may be incompatibilities between these components and our products that could significantly harm service providers or their subscribers. Product problems in the field could require us to incur costs or divert resources and may subject us to liability for damages caused by the problems or delay research and development projects because of the diversion of resources. These problems could also harm our reputation and competitive position in the industry.
We could be subject to warranty claims and product recalls, which could be very expensive and harm our financial condition.
Products like ours sometimes contain undetected errors. These errors can cause delays in product introductions or require design modifications. In addition, we are dependent on unaffiliated suppliers for key components incorporated into our products. Defects in systems in which our products are deployed, whether resulting from faults in our products or products supplied by others, from faulty installation or from any other cause, may result in customer dissatisfaction. Additionally, we are continually marketing several new products. The risk of errors in these new products, as in any new product, may be greater than the risk of errors in established products. The warranties for our products typically permit customers to return for repair or replacement, within a period ranging from 16 to 21 months of purchase, any defective products. Any failure of a system in which our products are deployed (whether or not our products are the cause), any product recall and any associated negative publicity could result in the loss of, or delay in, market acceptance of our products and could harm our business, financial condition and results of operations. Although we attempt to limit our liability for product defects to product replacements, we may not be successful, and customers may sue us or claim liability for defective products and for related claims arising therefrom. A successful product liability claim could result in substantial cost or divert management’s attention and resources, which could have a negative impact on our financial condition and results of operations.
Our dependence on limited sources for key components of our products may lead to disruptions in the delivery and increased cost of our products, harming our business and results of operations.
We currently obtain key components for our products from a limited number of suppliers, and in some instances from a single supplier. In addition, some of the components that we purchase from single suppliers are custom-made. We cannot be sure that we will not experience increased costs or disruptions in the delivery of our product components. In addition, there is a global demand for some electrical components that are used in our systems and that are supplied by relatively few suppliers. Our dependence on these limited sources for key components for our products presents the following potential risks:
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as a result of our financial situation, in some cases, we have not been able and in the future we may not be able to obtain credit from our suppliers and we have not and may not have funds to pay for such components as needed to manufacture our products on a timely basis;
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delays in delivery or shortages of components, especially for custom-made components or components with long delivery lead times, could interrupt and delay manufacturing and result in cancellations of orders for our products;
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suppliers could increase component prices significantly and with immediate effect on the manufacturing costs of our products;
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some of our suppliers may cease to exist or face financial difficulties which could affect the supply chain;
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we may not be able to develop alternative sources for product components;
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suppliers could discontinue the manufacture or supply of components used in our products which may require us to modify our products and which may cause delays in product shipments, increased manufacturing costs and increased product prices;
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we may be required to hold more inventory for longer periods of time than we otherwise might in order to avoid problems from shortages or discontinuance, which has led to, and could in the future lead to, write offs of inventory; and
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due to the political situation in the Middle East and the fact that our headquarters are located in Israel, we may not be able to import necessary components from different countries world-wide.
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Our dependence on third party equipment embedded in our products and complementary systems may impact our business.
We rely on third party software and hardware embedded in our solution. If our licensors fail to support the software or hardware embedded in our solution we may suffer difficulties in supporting our customers and delivering our equipment. We are also dependent on complementary systems such as CPEs, and Access Service Networks Gateways, which are part of our solution. Failure by our vendors to deliver such products or their discontinuing production of such products may cause difficulties to, and may have an adverse effect, on our business.
Changes within any of these vendors’ environments can influence our business results. For example, the recent announcement by one of our major component suppliers that it would not continue supporting the existing chip set as it is moving to a new chip generation may influence price levels or change the partners’ roadmap in a way that could harm our business.
In addition, in the past, we experienced delays and shortages in the supply of components on more than one occasion. We may experience such delays in the future, harming our business and results of operations.
We must be able to manage expenses and inventory risks associated with meeting the demands of our customers.
To ensure that we are able to meet customer demand for our products, we seek to place orders with our subcontractors and suppliers based on our estimates of future sales, to the extent we have available working capital to make such purchases. If actual sales differ materially from these estimates, our inventory levels may be too high, and inventory may become obsolete and/or over-stated on our balance sheet. This result would require us to write off inventory, which could adversely affect our results of operations. In 2010, 2011 and 2012, we wrote off inventory related to our unlicensed business in the amounts of $2.1 million, $1.4 million, and $6.4 million, respectively.
We are required to place manufacturing orders well in advance of the time we expect to sell products, and this may result in us ordering a larger or smaller number of these products than required. If we lack working capital, then we may choose to order a smaller number of products. In the event that we order the manufacture of a greater or lesser amount of these products than necessary, we may be required to purchase the surplus products or to forego or delay the sale or delivery of the products that we did not order in advance. In either case, our business and results of operations may be adversely affected.
The limited manufacturing capacity of a number of subcontractors we depend on may prevent us from filling orders in the timeframe and with the quality specifications our customers demand, which may harm our business and results of operations.
We currently depend on a number of contract manufacturers with limited manufacturing capacity to manufacture our products. The assembly of certain of our finished products, and the manufacture of custom printed circuit boards utilized in electronic subassemblies and related services are also performed by these independent subcontractors. In addition, we rely on third-party “turn-key” manufacturers to manufacture certain sub-systems for our products. Reliance on third-party manufacturers exposes us to significant risks, including risks resulting from:
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potential lack of manufacturing capacity;
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limited control over delivery schedules;
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quality assurance and control;
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manufacturing yields and production costs;
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voluntary or involuntary termination of their relationship with us;
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concerns of our subcontractors regarding our company;
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difficulty in, and timeliness of, substituting any of our contract manufacturers, which could take as long as six months or more;
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the economic and political conditions in their environments; and
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the financial strength of our third party manufacturers.
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If the operations of our contract manufacturers are halted, even temporarily, or if our contract manufacturers are unable to operate at full capacity for an extended period of time, we may experience business interruption, increased costs, loss of goodwill and loss of customers.
Any of these risks could result in manufacturing delays or increases in manufacturing costs and expenses. If we experience manufacturing delays, we could lose orders for our products and, as a result, lose customers. There may be an adverse effect on our profitability and, consequently, on our results of operations, if we incur increased costs.
Regulation by governments or other public authorities may increase our costs of doing business, limit our potential markets or require changes to our products that may be difficult and costly.
Our business is premised on the availability of certain radio frequencies for two-way broadband communications. Radio frequencies are subject to extensive regulation under international treaties and local laws, which differ by country. Most of our products operate in license-free bands in the radio spectrum, while others operate in licensed bands. The regulatory environment in which we operate is subject to significant change, the results and timing of which are uncertain.
In some cases, the continued validity of licenses may be conditioned on the licensee complying with various conditions. In addition to regulation of available frequencies, our products must conform to a variety of national and international regulations that require compliance with administrative and technical requirements as a condition to the operation or marketing of devices that emit radio frequency energy.
The regulatory environment in which we sell our products subjects us to several risks, including the following:
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If our products operate in the license-free bands, United States Federal Communications Commission (“FCC”) rules and similar rules in other countries require operators of radio frequency devices, such as our products, to cease operation of a device if its operation causes interference with authorized users of the spectrum and to accept interference caused by other users;
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If the use of our products interferes with authorized users, or if users of our products experience interference from other users, market acceptance of our products could be adversely affected;
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Regulatory changes and restrictions imposed due to environmental concerns, such as restrictions imposed on the location of outdoor antennas; and
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Export control laws and regulations which are applicable to all of our products and technology may become more stringent in the future.
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We are subject to certain European directives like the directive on Waste Electrical and Electronic Equipment and the directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment and may also be subject to other similar legislation in other parts of the world.
Our proprietary technology is difficult to protect, and its unauthorized use by third parties may impair our ability to compete effectively.
Our success and ability to compete depends and will continue to depend, to a large extent, on maintaining our proprietary rights and the rights that we currently license or will license in the future from third parties. We rely primarily on a combination of patents, trademarks, trade secrets and copyright law and on confidentiality, non-disclosure and assignment-of-inventions agreements to protect our proprietary technology. We have obtained several patents and have several patent applications pending that are associated with our products. We also have several trademark registrations associated with our name and some of our products.
These measures may not be sufficiently adequate to protect our technology from third-party infringement. Our competitors may independently develop technologies that are substantially equivalent or superior to our technology. Third-party patent applications filed earlier may block our patent applications or receive broader claim coverage. In addition, any patents issued to us, if issued at all, may not provide us with significant commercial protection. Third parties may also invalidate, circumvent, challenge or design around our patents or trade secrets, and our proprietary technology may otherwise become known, or similar technology may be independently developed by competitors. Additionally, our products may be sold in foreign countries that provide less protection to intellectual property than that provided under U.S. or Israeli laws. Failure to successfully protect our intellectual property from infringement may damage our ability to compete effectively and harm our results of operations.
We could become subject to litigation regarding intellectual property rights, which could seriously harm our business.
From time to time we receive allegations that we have infringed upon a patent, trademark or other proprietary right. Based on the size and sophistication of our competitors and the history of rapid technological change in our industry, it is possible that several competitors may have intellectual property rights that could relate to our products. Therefore, we may need to litigate to defend against claims of infringement or to determine the validity or scope of the proprietary rights of others. Similarly, we may need to litigate to enforce or uphold the validity of our patent, trademarks and other intellectual property rights. Other actions may involve ownership disputes over our intellectual property or the misappropriation of our trade secrets or proprietary technology. As a result of these actions, we may have to seek licenses to third-parties' intellectual property rights, which may not be able to be successfully integrated into our products. These licenses may not be available to us on reasonable terms or at all. In addition, litigation could be expensive and time consuming and could result in court orders preventing us from selling our then-current products or from operating our business. Any infringement claim, even if not meritorious, could result in the expenditure of significant financial and managerial resources and harm our business, financial condition and results of operations. We have no assurance that any such allegation will not have a material adverse effect on our business, financial condition or results of operations.
If we are unable to maintain licenses to use certain technologies, we may not be able to develop and sell our products.
We receive licenses from third party companies for certain technologies we use in connection with some of our technologies. The loss of these licenses could impair our ability to develop and market our products. If we are unable to obtain or maintain the licenses that we need, we may be unable to develop and market our products or processes, or we may need to obtain substitute technologies of lower quality or performance characteristics or at greater cost. We cannot assure that we will be able to maintain these licenses or obtain additional licenses, if we need them in the future, on commercially reasonable terms or at all. Also, some of our products utilize open source technologies. These technologies are licensed to us on varying license structures. These licenses and others like them pose a potential risk to products should they be inappropriately used.
We depend on key personnel and several members of our senior management have been recently appointed.
Our future success depends, in part, on the continued service of key personnel. Most members of our senior management team are new to their positions. Our Chief Executive Officer assumed his position as of April 22, 2013 after serving as Corporate Vice President, Strategy & Business Development since 2011. Our CFO assumed his position as of January 1, 2013 after serving as vice president in our financial division since September 2009. They may need time to acquire the specific skills necessary to successfully carry out the tasks required of them, which could adversely affect our results of operations.
Eight of nine members of our senior management, were only appointed to their present positions in 2012 and another was only appointed in 2011. Some of these individuals had little or no previous experience working for Alvarion. Should any members of senior management, including our new Chief Executive Officer and Chief Financial Officer, fail to perform as expected, or should they or other new key managerial appointees fail to acquire the requisite knowledge and skills in a timely manner, or should they decide to leave the Company on their own initiative, our operations may be disrupted and this might materially adversely affect the results of our operations.
The reductions in force the Company underwent in the past few years, and may carry out in the future, may result in our not having adequate personnel resources for our operations. Such reductions in force may also have adverse effects on the morale of our employees, which may induce employees to leave the Company. If certain of our key technical, sales or senior management personnel terminate their employment and we are unable to retain qualified replacements, our business and results of operations could be harmed.
We may be classified as a passive foreign investment company.
As a result of the combination of our substantial holdings of cash, cash equivalents and securities and the decline in the market price of our ordinary shares from its historical highs, there is a risk that we could be classified as a passive foreign investment company (“PFIC”) for United States federal income tax purposes. However, based upon our market capitalization during 2012, we do not believe that we were a PFIC for 2012. We cannot assure you, however, that the United States Internal Revenue Service or the courts would agree with our conclusion if they were to consider our situation. There is no assurance that we will not become a PFIC in 2013 or in subsequent taxable years. If we were classified as a PFIC, U.S. taxpayers that own our ordinary shares would be subject to additional taxes upon certain distributions by us or upon gains recognized after a sale or disposition of our ordinary shares unless they appropriately elect to treat us as a “qualified electing fund” or to make a “mark-to-market election” under the U.S. Internal Revenue Code. Our classification as a PFIC could also adversely affect the market price of our ordinary shares. For more information, see “Item 10—Additional Information—Taxation—United States Federal Income Tax Considerations with Respect to the Acquisition, Ownership and Disposition of our Ordinary Shares—Passive Foreign Investment Company Status”.
The price of our ordinary shares is subject to volatility.
The price of our ordinary shares has experienced significant volatility in the past and may continue to do so in the future. On April 2, 2013, in order to increase our per share trading price to satisfy the $1.00 minimum bid price requirement for the continued listing on the NASDAQ Capital Market , we completed a reverse split of our ordinary shares, upon which our shareholders received one ordinary share of Alvarion for every 10 ordinary shares held by them. For the two year period ended December 31, 2012, the price of our ordinary shares on the NASDAQ Global Select Market and since October 19, 2012, the NASDAQ Capital Market has ranged from a high of $26.20 to a low of $3.20 (adjusted for the reverse split). On December 31, 2012 and April 30, 2013, the closing price of our ordinary shares on the NASDAQ Global Select Market was $3.70 (adjusted for the reverse split) and $2.96 respectively. We may continue to experience significant volatility in the future, based on the following factors, among others:
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general economic conditions;
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actual or anticipated fluctuations in our sales and results of operations;
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variations between our actual or anticipated results of operations and the published expectations of analysts;
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general conditions in the telecommunications equipment industry;
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announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures and capital commitments;
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introduction of technologies or product enhancements or new industry substitute standards that reduce the need for our products;
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the effect of general political conditions on our operations and results; and
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departures of key personnel.
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We must meet the Nasdaq Capital Market continued listing requirements or we risk delisting. If our ordinary shares are delisted, our share price may decline and it will likely make it more difficult for us to sell securities in a financing and for our shareholders to trade our shares.
Our ordinary shares began trading on the Nasdaq Capital Market on October 19, 2012. Prior to October 19, 2012, our ordinary shares were traded on the Nasdaq Global Select Market. On April 26, 2012, we received a notification letter from the Nasdaq Listing Qualifications staff of the Nasdaq Stock Market advising us that, based on the closing bid price of our common stock for the 30 consecutive business days prior to April 26, 2012, we no longer satisfied the requirement that our common stock maintain a minimum bid price of $1.00 per share as required by Nasdaq Listing Rule 5450(a)(1). Nasdaq stated in its letter that in accordance with Nasdaq Listing Rule 5810(c)(3)(A), we had been provided 180 calendar days, or until October 23, 2012, to regain compliance with the minimum bid price requirement. On October 24, 2012, since we met the continued listing requirement for market value of publicly held shares and all other applicable NASDAQ listing requirements, except the bid price requirement, we received an extension until April 22, 2012 to regain compliance with the minimum bid price requirement. Subsequently our ordinary shares were transferred to the Nasdaq Capital Market as of October 19, 2012. On April 1, 2013, we completed a one for ten reverse split of our ordinary shares and subsequently we regained compliance with the minimum bid price requirement.
We cannot ensure you that we will meet the minimum bid requirement or the other continued listing requirements of the Nasdaq Capital Market. If our ordinary shares are delisted from Nasdaq, we may be eligible to trade on the Over-The-Counter Bulletin Board, which may be a less liquid market, or on the pink sheets. In such case, our shareholders’ ability to trade, or obtain quotations of the market value of, shares of our ordinary shares would be severely limited because of lower trading volumes and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our securities. There can be no assurance that our ordinary shares, if delisted from the Nasdaq Capital Market, will be listed on a national securities exchange, a national quotation service, the Over-The-Counter Bulletin Board or the pink sheets. Delisting from Nasdaq, or even the issuance of a notice of potential delisting, would also result in negative publicity, make it more difficult for us to raise additional capital, adversely affect the market liquidity of our ordinary shares, reduce security analysts’ coverage of us and diminish investor, supplier and employee confidence.
Future sales or the potential for future sales of our securities may cause the trading price of our ordinary shares to decline and could impair our ability to raise capital through subsequent equity offerings.
Sales of a substantial number of our ordinary shares or other securities in the public markets, or the perception that these sales may occur, could cause the market price of our common shares or other securities to decline and could materially impair our ability to raise capital through the sale of additional securities.
Holders of our ordinary shares may be adversely affected through dilution.
We may need to issue equity in order to fund working capital, capital expenditures and product development requirements or to make acquisitions and other investments. If we choose to raise funds through the issuance of ordinary shares, the issuance will dilute the ownership interest of our current shareholders.
Operating in international markets exposes us to risks, which could cause our sales to decline and our operations to suffer and could expose us to various legal, business, political and economic risks.
While we are headquartered in Israel, approximately 97% of our sales in 2012 were generated globally, outside of Israel. Our products are marketed internationally and we are, therefore, subject to certain risks associated with international sales, including the following:
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trade restrictions, tariffs, and technology import and export license requirements, which may restrict our ability to export our products or may make our products less price-competitive;
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effects of economic conditions and credit availability;
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adverse tax consequences;
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greater difficulty in safeguarding intellectual property;
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difficulties in managing our overseas subsidiaries and staffing multiple offices and multiple research and development centers, and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;
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difficulties in enforcing contracts and implementing our accounts receivable function, which introduces revenue recognition, translation, proximity and cultural challenges;
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political and economic instability, particularly in emerging markets;
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reduced protection for intellectual property rights in some countries where we may seek to expand our sales in the future;
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laws and business practices favoring local companies;
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differing labor standards;
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costs of localizing our products for foreign countries and the lack of acceptance of localized products in foreign countries; and
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fluctuations in currency exchange rates and the implications on our financial statements.
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We may encounter significant difficulties with the sale of our products in international markets as a result of one or more of these factors. As we expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these risks. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.
There may be health and safety risks related to wireless products.
In recent years, there has been publicity regarding the potentially negative direct and indirect health and safety effects of electromagnetic emissions from cellular telephones and other wireless equipment sources, including allegations that these emissions may cause cancer. Our wireless communications products emit electromagnetic radiation. Health and safety issues related to our products may arise that could lead to litigation or other actions against us, or to additional regulation of our products. We may be required to modify our technology and may not be able to do so. We may also be required to pay damages that may reduce our profitability and adversely affect our financial condition. Even if these concerns prove to be baseless, the resulting negative publicity could affect our ability to market our products and, in turn, could harm our business and results of operations.
Conducting business in Israel entails special risks.
We are incorporated under Israeli law and our principal offices and the majority of our manufacturing and research and development facilities are located in the State of Israel. Political, economic and military conditions in Israel and in the Middle East directly affect our operations. We could be harmed by any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners or a significant downturn in the economic or financial condition of Israel. In the event of war, we and our Israeli subcontractors and suppliers may cease operations which may cause delays in the development, manufacturing or shipment of our products. In recent years, there has been an escalation in violence among Israel, Hamas and other groups, as well as extensive and continued hostilities along Israel's border with the Gaza Strip. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons which could attract preemptive actions by Israel and/or Western countries. Furthermore, since the beginning of 2011 there has been instability in the bordering countries such as Egypt and Syria. We have witnessed increased instability in the region, in particular related to the governmental changes in Egypt and the deterioration of the internal government and control of Syria's President Assad, over Syria's internal affairs. This and further deterioration could have an adverse effect on the stability of our region. Ongoing violence involving Israel, as well as tension between Israel and terror organizations and other countries in the Middle East, combined with political instability in the Middle East such as in Egypt, Libya, Syria, Iran and Lebanon, may have a material adverse effect on our business, financial condition and results of operations.
Furthermore, several countries, principally some of those in the Middle East, still restrict business with Israel and Israeli companies. These restrictive laws and policies may seriously limit our ability to offer our services to customers in these countries.
Our results of operations may be negatively affected by the obligation of our personnel to perform military service.
Many of our officers and employees in Israel are obligated to perform annual military service duty until they reach age 45 and, in the event of a military conflict, could be called to active duty. Our operations could be disrupted by the absence of a significant number of our employees due to military service or the absence for extended periods of one or more of our key employees due to military service. A disruption could materially and adversely affect our business, operating results and financial condition.
We currently benefit from local government programs as well as international programs and local tax benefits that may be discontinued or reduced.
We have received grants from the Government of Israel through the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor (“OCS”) for the financing of a portion of our research and development expenditures in Israel, pursuant to the provisions of The Encouragement of Industrial Research and Development Law, 1984, referred to as the “Research and Development Law”. Pursuant to our current arrangement with the OCS, the OCS finances up to 20% of our research and development expenses by reimbursing us for up to 66% of the approved expenses related to our generic research and development projects. In addition, we obtain other grants from the OCS to partially fund certain other research and development projects. These programs currently restrict our ability to manufacture particular products or transfer particular technology outside of Israel. The Research and Development Law and related regulations permit the OCS to approve the transfer of manufacturing rights outside Israel subject to approval of the research committee and in exchange for the payment of higher royalties, for royalty-bearing programs. If we fail to comply with these conditions, the benefits received could be canceled and we could be required to refund any payments previously received under these programs or pay additional amounts with respect to the grants received under these programs. If the Government of Israel discontinues or modifies these programs and potential tax benefits, our business, financial condition and results of operations could be materially and adversely affected.
We have also received grants from the European Union, Romania and Spain for the financing of a portion of our research and development expenditures in those countries through various European programs. Under these programs we need to comply with certain conditions. If we fail to comply with these conditions, the benefits received could be canceled and we could be required to refund any payments previously received under these programs or pay additional amounts with respect to the grants received under these programs. If the European Union, the Government of Spain and/or the Government of Romania discontinues or modifies these programs and potential tax benefits, our business, financial condition and results of operations could be materially and adversely affected.
In addition, we have been granted “Approved Enterprise” status under the Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”) for our production facilities in Israel. Such status enables us to obtain certain tax relief for a definitive period upon compliance with the Investment Law regulations. On April 1, 2005, an amendment to the Investment Law came into effect which significantly changed the provisions of the Investment Law. The amendment revised the criteria for investments qualified to receive tax benefits. An eligible investment program under the amendment will qualify for benefits as a “Privileged Enterprise” (rather than the previous terminology of Approved Enterprise). Among other things, the amendment provides tax benefits to both local and foreign investors and simplifies the approval process. However, the amendment provides that terms and benefits included in any certificate of approval granted prior to December 31, 2004 will remain subject to the provisions of the law as they were on the date of such approval. On January 1, 2011, another significant amendment to the Investment Law came into effect. Such amendment introduced new benefits to replace those granted in accordance with the provisions of the Investment Law in effect prior to such amendment. However, companies entitled to benefits under the Investment Law as in effect prior to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead irrevocably to forego such benefits and have the benefits of the new amendment apply. We have reviewed and evaluated the implications and effect of the benefits under the new amendment, and, while potentially eligible for such benefits, we have not yet chosen to be subject to the tax benefits introduced by such amendment. We believe that we are currently in compliance with the requirements of the Investment Law which are applicable to our enterprises. However, if we fail to comply with these conditions in the future, the tax benefits received could be canceled and we could be required to pay increased taxes in the future.
We are adversely affected by the devaluation of the U.S. dollar against the New Israeli Shekel and could be adversely affected by the rate of inflation in Israel.
Substantially all of our revenues are generated in U.S. dollars. A significant portion of our expenses, primarily salaries, building leases and related personnel expenses is currently incurred in NIS, and we anticipate that a significant portion of our expenses will continue to be denominated in NIS.
As a result, inflation in Israel and/or the devaluation of the U.S. dollar in relation to the NIS has and may continue to have the effect of increasing the cost in U.S. dollars of these expenses; hence, our dollar-measured results of operations are and may continue to be adversely affected, though, the inflation in Israel has been moderate in recent years. In order to manage the risks imposed by foreign currency exchange rate fluctuations, from time to time we enter into currency forward contracts and put and call options to hedge some of our foreign currency exposure. We can provide no assurance that our hedging arrangements will be effective. In addition, if we wish to maintain the dollar-denominated value of our products in non-U.S. markets, devaluation in the local currencies of our customers relative to the U.S. dollar may cause our customers to cancel or decrease orders or default on payment.
Provisions of Israeli law and our Articles of Association may delay, prevent or make difficult a merger or an acquisition of us, which could prevent a change of control and therefore depress the market price of our ordinary shares.
Our Articles of Association contain certain provisions that may delay or prevent a change of control, including a classified board of directors. Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date on which a merger proposal is filed by each merging company with the Israel Registrar of Companies and at least 30 days have passed from the date on which the shareholders of both merging companies have approved the merger. In addition, a majority of each class of securities of the target company must approve a merger. Moreover, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees (in head count) that do not have a personal interest in the tender offer, unless, following consummation of the tender offer, the acquirer would hold at least 98% of the company’s outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights. These provisions of Israeli law could have the effect of delaying or preventing a change of control of us, may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares. Furthermore, Israeli tax considerations may make potential acquisition transactions unappealing to us or to some of our shareholders.
It may be difficult to effect service of process and enforce U.S. judgments against our directors and officers in Israel or to assert U.S. securities laws claims in Israel.
We are incorporated in Israel. Our executive officers and a majority of our directors are not residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to obtain a judgment in the United States or collect or get an Israeli court to enforce a judgment obtained in the United States against us or any of those persons. Furthermore, it may be difficult to assert U.S. securities laws claims in original actions instituted in Israel.
As a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.
As a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Listing Rules.
We do not comply with the NASDAQ requirement that we obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans. Instead, we follow Israeli law and practice in accordance with which the establishment or amendment of certain equity based compensation plans is approved by our board of directors.
As a foreign private issuer listed on the NASDAQ Capital Market, we may also follow home country practice with regard to, among other things, executive officer compensation, director nomination, composition of the board of directors and quorum at shareholders’ meetings. In addition, we may follow our home country law, instead of the NASDAQ Listing Rules, which require that we obtain shareholder approval for 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. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY –
Our legal and commercial name is Alvarion Ltd. We were incorporated in September 1992 under the laws of the State of Israel. Since our inception, we have devoted substantially all of our resources to the design, development, manufacturing and marketing of wireless products.
On August 1, 2001, Floware Wireless Systems Ltd., a company incorporated under the laws of the State of Israel (“Floware”) merged with and into us. As a result of the merger, we emerged as the surviving company and Floware’s separate existence ceased. Upon the closing of the merger, we changed our name from BreezeCOM Ltd. to Alvarion Ltd. On April 1, 2003, we completed an acquisition of most of the assets and the assumption of related liabilities of InnoWave. In December 2004, we completed the amalgamation of interWAVE, and the interWAVE operations became our cellular mobile unit. In November 2006, we completed the sale of our cellular mobile unit to LGC Wireless, Inc. (“LGC”), a privately-held supplier of wireless networking solutions in exchange for promissory and convertible notes of LGC. In September 2007, LGC converted our convertible notes into LGC shares and thus we became a shareholder of LGC. In November 2007, ADC Telecommunications Inc. ("ADC") acquired LGC and we sold our LGC shares to ADC. In the beginning of 2011 we acquired the intellectual property of Clariton Networks (“Clariton”) for a contingent consideration of up to $8.5 million of which none has been paid through April 30, 2013 as we have determined not to develop a product based on this technology. On November 23, 2011, we completed the acquisition of Wavion Inc. for an aggregate consideration of up to $28.4 million all of which was paid through December 31, 2012. On September 28, 2012, we entered into an agreement for the sale of a portion of our patent portfolio to Wi-Lan related to our BWA Division for consideration of up to $ 19.0 million. Upon execution of the agreement we received $16.8 million as the first payment under the agreement and on May 13, 2013 we received a second payment in the amount of $1.5 million (with the second payment having been reduced based on changes to the portfolio of patents transferred to Wi-Lan). On April 2, 2013, we effected a one for ten reverse split of our ordinary shares. On May 10, 2013 we completed the sale to Telrad of our BWA Division. The consideration in the transaction was $ 4 million, payable in installments, and provides for additional performance –based milestone payments of up to $7.7 million. Alvarion and Telrad also entered into mutual reseller agreements pursuant to which Alvarion will continue to provide carrier licensed solutions to its partners and distributors and Telrad will provide Alvarion’s unlicensed solutions to its carrier customers after the transaction is completed. The parties also entered into a transition services agreement governing various services relating to the BWA Division which will be provided by us to Telrad for a transition period and the consideration to be paid therefor by Telrad.
Our principal executive offices are located at 21A HaBarzel Street, Tel Aviv 69710, Israel, and our telephone number is 972-3-645-6262. In 1995, we established a wholly-owned subsidiary in the United States, Alvarion, Inc., a Delaware corporation. Alvarion, Inc. is located at 6701 Democracy Blvd., Suite 300, Bethesda, Maryland. Alvarion, Inc. serves as our agent for service of process.
We also have several wholly owned subsidiaries worldwide that handle local support, promotion, sales and developing activities. For a discussion of our capital expenditures and divestitures, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
B. BUSINESS OVERVIEW
General –
We concentrate our resources on the broad industry of wireless broadband and carrier Wi-Fi. As a wireless broadband pioneer, we have been driving and delivering innovation for more than 15 years, from developing core technology to creating and promoting industry standards. Through our acquisition of Wavion, we have entered into the carrier grade Wi-Fi market, which is one of our primary businesses.
Our primary business is currently focused on two main markets, offering a wide variety of applications, which are mainly the following:
Vertical Markets (Enterprise):
Solutions for our Enterprise category include broadband wireless applications for a variety of vertical markets, providing owners and operators of public networks, private networks, utility companies and municipalities with broadband connectivity and applications that fulfill each organization's specific communication needs. Examples of such applications include government and municipal office connectivity, security and surveillance services, campus-to-campus broadband connectivity, oil and gas and mining company applications, emerging Smart Power Grids and Public Mobile Radio ("PMR") applications. In this market, we sell both WiMAX and Wi-Fi solutions, primarily in the license-exempt frequency bands with various applications, including point-to-point and point-to-multipoint.
Service Providers (Mobile, Fixed and Cable):
Solutions for Service Providers address these customers' challenges in providing ubiquitous coverage and sufficient capacity in an era of ever growing demand for data services and applications. These solutions include Wi-Fi networks for off-loading of mobile data traffic from 3G/4G networks In the Service Providers category, we are offering our acquired carrier- grade Wi-Fi products and solutions as well as Wi-Max Products, based on Alvarion’s core technology.
Our growth strategy is focused on providing optimized broadband wireless solutions to address connectivity, capacity and coverage challenges of public and private networks, enabling us to maintain our current position and grow along with the market demand for multi-technologies solutions and applications.
Recent Developments
During the early 2000s, we were at the forefront of the development of WiMAX (Worldwide Interoperability for Microwave Access) technology, which provides for a full range of frequency bands with both fixed and mobile solutions, enabling the delivery of business and residential broadband access, corporate VPNs (Virtual Private Network), toll quality telephony, mobile base station feeding, hotspot coverage extension, community interconnection, public safety communications, and mobile voice and data. Products based on the WiMAX technology compete with other wireless media technologies, including (i) HSPDA, HSUPA, EVDO and (ii) 3rd and 4th generation cellular technologies ("4G"), such as UMB LTE. In particular, WiMAX technology, which was launched a number of years before LTE, was faced with fierce competition from LTE as a growing number of cellular operators adopted LTE for their 4th Generation Cellular Technology. By 2009, LTE became the prevailing technology for the 4G mobile mass market. While there remained a market for WiMAX due to certain technological advantages it has over LTE, particularly in rural and suburban areas with low-density populations, we determined that, along with continuing to manufacture and sell WiMAX based products, we needed to find other new long term growth engines.
In 2010, we began to evaluate potential new directions and ruled out competing in the LTE technology market due to the fierce competition in that market, with participants such as Huawei, Ericsson and NSN as well as the substantial investment necessary for the development of this technology. At the conclusion of this strategic evaluation process, we determined that we should focus on complementary solutions for mobile operators and to consider alternatives for our WiMAX business which was generating significant but declining revenues. We began implementing this strategy with our acquisition of Clariton for only contingent consideration in early 2011, although we ultimately determined not to pursue the Clariton technology. As the next step in this strategy, in November 2011, we completed the acquisition of Wavion, a provider of carrier-grade Wi-Fi solutions. Wavion’s products use widely-accepted Wi-Fi technology and we believed that the Wi-Fi market was poised for continuing growth. In addition, we believed that the acquisition would be beneficial to Alvarion since this market segment was not dominated by the world’s largest vendors and these products would generate higher gross margins than Alvarion’s current WiMAX products. Finally, we recognized potential synergies based on internal know-how relating to Wi-Fi technology used in our BreezeACCESS VL and BreezeNET B products. Throughout this period, we continued to manufacture and sell our WiMAX based products and continued to enter into contracts with new and existing customers and make necessary commitments to purchase raw materials to manufacture the WiMAX products, though we increased our focus generally on the unlicensed market.
For the purpose of financing the acquisition of Wavion in November 2011, we obtained a $ 30 million secured credit facility from SVB. We decided to finance the acquisition rather than use our cash on hand in order to retain available cash to meet the substantial working capital needs of our WiMAX business while growing our new Wi-Fi business.
During 2011, we implemented a restructuring plan including the layoff of approximately 200 employees as well as the vacating of certain leased premises. Nonetheless, we continued to incur substantial losses, which were primarily the result of decline in revenues, increased competition which led to a decline in our profitability, and our inability to adapt our cost structure quickly enough to meet the reduction in revenues.
Prior to the acquisition, Wavion was marketing Wi-Fi products based on the 802.11b/g standard (“WBS”) and was developing its product based on the 802.11n standard (“WBSn”). Following the launch of the WBSn product, we noted certain problems with the stability and capacity of the product. We subsequently undertook intense efforts to improve the stability of the WBSn product and relaunched the product in the first quarter of 2013. While we continued sales of the WBS product, our sales of the WBS product decreased significantly in the second half of 2012 as the market was quickly migrating to the new 802.11n standard.
During 2012, in particular in light of the significant cash requirements to fund the WiMAX business and the limited availability of credit both in the market generally and to Alvarion in particular, we were also evaluating various alternatives to exit the WiMAX business. As part of this process, we separated the BWA Division, which included all of Alvarion’s licensed WiMAX business, from our unlicensed business. We ultimately decided to seek to sell the business and if we could not reach agreement with a buyer in a reasonable time, we would wind down the business. During 2012, we received several offers and negotiated with a number of potential buyers for the BWA Division, but we did not reach an agreement. The two primary challenges in disposing of the BWA Division were the long term commitments to our customers to provide product, service and support and the monetary obligations to our WiMAX suppliers, based on contractual commitments to purchase unused raw materials from such suppliers if we decide to exit the WiMAX business. . While we continued to operate this business to maintain the customers, products and remain in the market, it continued to generate significant losses for Alvarion and had a negative impact on our working capital.
Our other Vertical Products, primarily the BreezeMAX Extreme and BreezeACCESS VL continued to generate revenues during 2012, however, as these products had been on the market for a number of years, their sales declined in comparison to previous years. Due to our financial difficulty we were only capable of devoting relatively limited resources to developing replacements for these legacy products. We are beginning to replace these legacy products with our BreezeULTRA product, but we will need adequate working capital to market and sell this product.
As a result of the difficulty we experienced with the launch and marketing of our WBSn product and our lack of success in disposing of the BWA Division, with respect to which we were required to continue to provide services to our customers and meet contractual commitments, we continued to suffer substantial losses during 2012. Our cash position was further negatively affected by our required principal and interest payments on the SVB Loan, as well as the closure of previously available credit lines with various Israeli banks. The foregoing led to our monetizing various assets that we had available such as the sale of a portion of our patent portfolio in September and November 2012 to Wi-LAN for $16.8 million (and received an additional $1.5 million in May 2013) and a debt of Nortel Network Corporation to us (“Nortel Debt”) in October 2012 for $5.2 million. We believe that while these monetization activities improved our cash position, they did not hurt our long term growth as the patents we sold related primarily to our WiMAX technology as well as other technologies which were not supported by our current and future products. In addition, we received a license back to all patents we sold to Wi-LAN.
As noted above, the need to service the SVB Loan was negatively affecting our cash position and, as a result of our performance, we breached various financial covenants under the SVB Loan. As a result, we entered into a number of modifications and amendments to the terms and conditions of the SVB Loan. As part of those modifications and amendments and since our patent portfolio and the Nortel Debt that we sold were pledged in favor of SVB as security for the SVB Loan, we were required, through May 12, 2013, to repay an aggregate amount of approximately $25 million in principal amount of the SVB Loan, which further harmed our cash position.
In January 2013, we signed a term sheet for the sale of the BWA Division and, on February 21, 2013, we signed a definitive agreement with Telrad. Under this agreement, Telrad assumed a majority of the rights and obligations of the BWA Division as of February 21, 2013 including the obligation to provide products, service and support to our customers as well as a substantial portion of our obligations to our BWA Division suppliers. The closing of this transaction on May 10, 2013 generated some additional cash which marginally improved our financial situation and allows us to focus on our remaining businesses.
As a result of the foregoing, our working capital deteriorated during 2012 and this deterioration has continued into 2013. Our limited working capital has resulted and may continue to result in delays of shipments of our products, which has and may continue to have a material adverse effect on our revenues and profitability. The report of our independent registered public accounting firm with respect to our financial statements for the years ended December 31, 2012 and 2011 includes an explanatory paragraph that states that our declining sales, recurring losses, negative cash flows from operations, and our excess of credit line drawn over cash and cash equivalents as well as uncertainty in meeting credit line covenants, raise substantial doubt about our ability to continue as a going concern. We are currently seeking to raise additional capital and are continuing to seek to reduce costs and increase sales, particularly of our new products, in order to improve our working capital position and continue to operate as a going concern. We cannot ensure that we will be able to obtain funding on terms that will be acceptable to us or at all. If we are unable to obtain additional financing for working capital, product development, launch and support or for our other capital requirements, we would be required to curtail our business operations further or cease our operations entirely.
INDUSTRY DYNAMICS –
Carrier Grade Wi-Fi Technology
Driven by strong uptake among end-users, Wi-Fi has become a "game changer" for the mobile industry as well as fixed and other wireless market segments. With its high quality of service, low cost, high End-Users acceptance and ubiquitous availability, a growing number of users consume more traffic over Wi-Fi than on any other access technology. With this trend and with rapidly growing data requirements, operators have begun adopting Wi-Fi technology as a strategy for their future business. A growing number of operators, including AT&T, China Mobile, KDDI, DoCoMo, KT, PLDT, and Smart, are deploying or planning to deploy metro Wi-Fi networks for access and for cellular data offloading. With this trend the Company believes that the market for carrier-grade Wi-Fi equipment is poised to grow rapidly.
Carrier grade Wi-Fi is defined as a Wi-Fi infrastructure solution that enables operators to deliver the high quality service end-users expect with easy access, fast broadband speed, security, and ubiquitous indoor and outdoor coverage. From the operators’ perspective, carrier-grade Wi-Fi solutions must address the coverage and capacity needs of a large deployment and therefore should be scalable to millions of users, come with robust interference immunity technology (critical for operating in the unlicensed spectrum in which Wi-Fi is used) and enable rapid deployment.
Major carrier-grade Wi-Fi market trends:
We believe that Wi-Fi offloading is growing worldwide and that the number of Wi-Fi hotspots will increase substantially over the next several years. The expansion of Wi-Fi availability into large metro “hot-zones” such as San Francisco, London, Singapore, Seoul and Tokyo, will create opportunities for new applications and services such as indoor location-based navigation and location-based advertisements and there is already a growing interest in this space from small startups to large vendors such as Google, Microsoft and Nokia.
Alvarion WBSn – a family of carrier-grade Wi-Fi base stations:
WBSn is a family of advanced carrier-grade Wi-Fi base-stations operating in the 2.4 and 5 GHz bands. WBSn base-stations use powerful two-way beamforming 802.11n and unique interference immunity technology to deliver good range, capacity and indoor penetration. WBSn is a service-aware platform, addressing the growing demand for faster connectivity and video applications and is optimized for scalable large networks, and applications related to Wi-Fi hotspots, mobile data offloading, capacity wholesale, smart cities, indoor/outdoor large venues, and large corporate networks. WBSn base stations enable operators to rapidly deploy large scale Wi-Fi networks with the quality of service end-users expect.
The Evolution of Wireless Broadband –
During the last decade the desire to be connected regardless of time and place has grown extensively due to the introduction of new handsets allowing connectivity and easy-to-use applications (such as iPhones and iPads). Furthermore, the cultural effect of social networks (such as Facebook, Twitter, and LinkedIn) has changed the way people communicate on a daily basis.
Along with the increased demand for on-line connectivity, the wireless broadband market has grown due to the acceptance of wireless equipment as a high performance, cost-efficient alternative to wireline infrastructure for broadband connectivity.
In developed countries, government financial support encourages operators to provide broadband coverage in rural and suburban areas with low-density populations, where the business model for wired infrastructure is less cost-effective. In developing countries, government financial support is provided to encourage operators to offer basic telephony services and Internet access based on wireless broadband infrastructure in order to meet demand, mainly in urban and suburban areas.
The worldwide success of broadband connectivity and services creates demand for additional broadband networks mainly in regions where broadband was not yet widely available. The accelerated proliferation of broadband services and networks around the world as well as the commoditization of broadband devices and services has generated more demand for broadband in developing regions, often referred to as the world’s emerging markets. In these regions, wireline infrastructure is often non-existent, resulting in an accelerated widespread adoption of wireless broadband networks.
Government Spectrum Allocation Enables Network Deployments
Global telecom spectrum allocation is opening up the telecommunications industry to competition from new players. Wireless technologies require the use of frequencies contained within a given spectrum to transfer voice, multimedia and other data services. Usually, governments allocate a specific range of that spectrum, either licensed or license-exempt (“unlicensed”) bands, to carriers, operators, ISPs and other service providers, enabling them to launch a variety of broadband initiatives based exclusively on wireless networking solutions. We believe that during the coming years additional frequency bands for unlicensed spectrum will be released. Increased availability of unlicensed spectrum enables operators to address increasing demand for wireless broadband. New and developing technologies combine the use of licensed and license-exempt bands, allowing new cost-effective network deployment strategies and availability of coverage and capacity in very low density areas.
Additional Factors in the Widespread Adoption of Wireless Broadband
Over the last few years, wireless broadband networks have increasingly grown in popularity and we believe they will continue to do so, due in part to the inability of wired infrastructure to meet demand, but also because of the following factors:
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the low cost of Wi-Fi components made the insertion thereof to electronic devices very cost effective and common;
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our belief that Wi-Fi as well as LTE, which we do not provide, are currently the technologies that are the most advanced and well-suited to cost-effectively meet the requirements of personal broadband (fixed and mobile) and that Wi-Fi complements the LTE technology which is used by many mobile operators, especially in high traffic areas; allowing these operators to offer additional data services in unlicensed frequency bands based on the users’ existing mobile devices.
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competition among various types of telecommunications players to offer multiple services using a single network;
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growing trend of public access providers to build infrastructures owned by municipalities;
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rapid progression of standardization by international authorities, such as 802.11, 3GPP combined with the wide adoption of these standards by equipment vendors and carriers;
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attractiveness of the business model offered to operators that use high performance standardized and interoperable products;
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convergence of fixed and mobile services; and
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proliferation of user-friendly, Internet-centric end user devices which encourage the use of bandwidth thirsty applications.
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COMPANY STRENGTHS -
For more than 15 years, our primary business activity has been focused on fulfilling the growing demand for IP wireless broadband in the telecom industry by providing solutions and services to build wireless broadband networks. In addition, we have deployed through our customers fixed wireless broadband solutions for applications, such as toll quality telephony service, mobile base station feeding, hotspot coverage extension, municipal and community interconnection, utility company metering and monitoring applications, as well as public safety communications.
Our key strengths include:
Market Coverage and Brand Recognition: We are a worldwide wireless vendor with a business focus in unlicensed solutions, with carrier grade products for mobile operators and broadband wireless access networks, and we believe that we enjoy a strong brand purpose and brand identity.
Customer Base: We have a broad customer base, with extensive world-wide fixed, nomadic and mobile commercial deployments.
Technology: We have over 15 years of experience in end-to-end broadband wireless IP and we believe we have been a leader in the broadband wireless access market for more than a decade. In the Wi-Fi market, on which we are currently focused, we market our two-way beamforming 802.11n 3x3:3 base station with a unique Interference Immunity suite.
Execution Capabilities: We have the ability to deliver and deploy a complete end-to-end solution in terms of product, technology, and full end-to-end network deployments, radio planning and network services resulting in the ability to build long-term customer relationships (excluding civil work type of activities). We believe that we are able to provide flexibility and technology differentiators according to customer demands and needs.
Experience in Wireless Broadband
Our experience in wireless broadband enabled us to identify the potential of WiMAX in early 2002, ahead of most equipment vendors. We were at the forefront of developments with WiMAX technology since its inception, at a company and industry level until we substantially exited this business in 2013. We further leveraged our experience in wireless broadband and WiMAX as we entered into carrier grade Wi-Fi, including through the acquisition of Wavion during the fourth quarter of 2011, through which we gained personnel with valuable experience and technical expertise in the field of carrier grade Outdoor Wi-Fi. We have thereby enhanced our experience in several key technologies such as beamforming, real time radio management, advanced antenna design and smart location management.
STRATEGY
Our growth strategy contains two primary elements. The first element is providing segments of wireless broadband networks for select enterprise vertical markets (including safe city, mining, education, municipalities, utilities, among others in licensed and license-exempt environments. We offer our customers optimized access, CPE’s and backhaul solutions. We plan to make additional investment in product development, channel recruitment and go-to-market activities in new vertical markets/domains. The second element of our strategy is to offer indoor coverage and capacity solutions and carrier-grade Wi-Fi offload systems to mobile carriers. This is a growing market looking for solutions to offload data from 3G/4G networks, creating a large demand for Wi-Fi solutions.
PRODUCTS –
Our BreezeMAX Wireless Broadband Access Solution Platforms (WiMAX technology in licensed exempt frequency bands)
BreezeMAX has become a popular solution for operators offering fixed high-bandwidth, VoIP and data services to evolve their networks to industry-standard solutions with improved outdoor and indoor customer premises equipment ("CPE") economics. This platform includes an enhanced offering of primary voice services and allows an operator to leverage legacy voice infrastructure. The system’s features and cost-effective, versatile subscriber units make BreezeMAX a widely accepted broadband wireless solution for service providers that are interested in improving their business model. The BreezeMAX platform for licensed frequency bands was part of the discontinued operation sold to Telrad. The BreezeMAX Extreme described below, operates in license exempt frequency bands and is part of the Alvarion product portfolio.
BreezeMAX Extreme 5000 and 3600 are the first wireless broadband solutions to bring WiMAX 16e technology to the 5 GHz license-exempt market. A highly integrated, all outdoor base station, BreezeMAX Extreme 5000 and 3600 are designed for ease-of deployment and reduced total cost of ownership. Built with the customer in mind these solutions offer easy configuration and a self-sustained ecosystem, ideally suited for Wireless Internet Service Providers (“WISP”s), municipalities, utilities, enterprises and public safety networks.
BreezeMAX Extreme 3650 is an all outdoor zero footprint WiMAX 16e wireless broadband solution for rural America.
Our Wireless Broadband Access Solutions (Non-WiMAX)We provide a broad range of integrated wireless broadband solutions, addressing different markets and frequency bands, designed for the various business models of carriers, service providers and private network owners such as municipalities, businesses, utilities and more. Our products address point-to-point and point-to-multipoint architectures for a wide scope of end-user profiles, including residential, small office/home office (“SOHO”), small/medium enterprises (“SME”), multi-tenant/multi-dwelling units (MTU/MDU) and large enterprises (corporate). Our core technologies include spread spectrum radio, linear radio, digital signal processing, modems, media access control, IP-based mobile switches, networking protocols and very large systems integration (“VLSI”).
Most of our non-Wi-Fi, non-WiMAX wireless broadband solutions are based on OFDM technology with NLOS (non-line of sight) capabilities, creating more possibilities to cover a wireless access network.
Many applications can be deployed over wireless broadband systems. Data, voice and video applications can be utilized by telecom operators, service providers and regional carriers based on the needs of their regions of operation.
In addition to data and voice, applications such as video surveillance are deployed over our networks in municipalities and other markets such as mining, oil and gas, campus deployments and more.
Wireless broadband solutions are implemented in a modular infrastructure, enabling swift, cost-effective roll-out as needed. Sectorized base stations are deployed to provide radio coverage to the targeted area, and frequency channels are reused in non-adjacent base station sectors, making the most efficient use of the available spectrum. Base stations are connected to the operator’s central office, or point-of-presence, using wired or wireless point-to-point solutions. End users are provided with CPE, typically consisting of an outdoor unit with a radio and an antenna connected to an indoor unit or indoor self-installed unit, which present voice and data interfaces to the customer network.
BreezeULTRA Products
Our BreezeULTRA P6000 is a family of wireless broadband products that operate in the 5.1 – 5.9 GHz unlicensed frequency band, leveraging 802.11n protocol. BreezeULTRA optimizes the performance of applications such as data, voice, or video using quality of service (QoS), to guarantee high-quality voice and support time-critical applications in parallel to broadband applications such as high-definition video streaming. To help meet the challenges of today’s hyper-dynamic world our BreezeULTRA products offer a combination of multiplicity, performance, organic growth and simplicity. BreezeULTRA P6000 supports non-line-of-sight coverage and mitigate interference with OFDM, MIMO (multiple-input and multiple-output), Diversity Techniques and DFS, to precisely meet bandwidth needs. BreezeULTRA P6000 is optimized for a variety of vertical markets and applications such as smart cities, public safety, Oil & Gas industry, education and backhauling.
BreezeACCESS Products
BreezeACCESS enables fixed high-speed data and voice, point-to-multipoint wireless broadband applications. BreezeACCESS products operate in several frequency bands to meet the needs of our customers in our market throughout the world. The BreezeACCESS product family consists of base stations, including access units, controllers and subscriber units. The latter operates optimally when connected to computers or computer networks utilizing the Internet Protocol. The subscriber units include subscriber units for data applications and subscriber units for data and telephony applications. BreezeACCESS is modular in design, allowing for a low initial investment, and is scalable to enable future growth.
BreezeACCESS VL is an OFDM-based, carrier-class, point-to-multipoint solution for wireless broadband outdoor connectivity and the delivery of high-quality data, voice and video services in urban and rural environments. BreezeACCESS VL lets WISPs, municipalities, governments, enterprises and utilities providers deliver an array of broadband wireless applications in urban and rural deployments. It provides enhanced QoS capabilities to enable the allocation of the necessary bandwidth and priority in line with application and user needs. BreezeACCESS VL supports an extended coverage range in the 4.9, 5 GHz frequencies and the license-exempt 900 MHz frequency bands, and features embedded security mechanisms with hardware-based encryption to ensure consistently secure wireless links that do not degrade performance. BreezeACCESS VL is a field-proven, flexible platform that enables diverse product configurations and power feeding options to match varying deployment needs. The solution adheres to Alvarion's "pay-as-you-grow" business model (enabling customers to start small and scale up) to ensure maximum scalability and supports a wide range of subscriber units to offer an affordable, optimized solution for what we believe is top performance.
BreezeNET B Products
Our BreezeNET B products are designed to provide highly reliable, backhaul, building-to-building bridging solutions, support mobile connectivity and provide individuals or small groups of users with wireless access to a LAN primarily for backhaul in the WISP market and building-to-building bridging solutions in the vertical market.
BreezeNET B products function as a wireless bridge system that provides high-capacity and high-speed point-to-point connectivity.
The BreezeNET B system operates in the unlicensed 2.4, 4.9-5.8 GHz bands and has flexible rate options: B10, B14, B28, B100, B300 delivering up to 250 Mbps with symmetric or fully symmetric, fixed or dynamically adjusted allocation reaching up to 60 km.
BreezeNET B operates in NLOS environments, such as buildings, foliage or ridgelines. The system also features adaptive modulation for automatic selection of modulation schemes to maximize data rate and improve spectral efficiency. BreezeNET B supports security sensitive applications through optional use of authentication and data encryption. The system supports Virtual Local Networks (“VLANs”), which enable secure operation, and VPN services, which allow workers in remote locations or remote offices to conveniently access their enterprise network.
Carrier Grade Wi-Fi – WBS Products
WBS-2400 is a carrier-grade range of base stations for advanced wireless broadband, and is a solution for urban and rural outdoor Wi-Fi deployments. Based on Alvarion’s spatially adaptive beamforming technology, and operating with any off-the-shelf 802.11b/g standard-based devices, the WBS-2400 provides significant performance gains in terms of range, throughput, indoor penetration and interference mitigation, enabling service providers to offer cost effective Wi-Fi service without compromising quality.
The beamforming technology maintains high quality signals under NLOS conditions, enabling uniform coverage of the entire area, and creating a larger addressable market per base station. The superior link gain provides higher throughput and network capacity, with the SDMA technology doubling the downlink capacity per base station. The inherent spatial filtering of the beamforming technology and the unique dynamic interference handling capabilities help ensure good operation even in noisy environments. WBS-2400 is cost-effective, and by increasing the addressable market per base station, and by the standards based approach, provides the lowest cost per line.
WBS-2400 is a robust and weatherproof IP-67 platform, and is designed to withstand extreme weather conditions. The WBS-2400 range of base stations have been optimized for a wide range of applications including business connectivity, municipal networks, metro zone networks for outdoor access and cellular data offload, public safety (video surveillance over wireless), VoIP / rural connectivity, education campuses, residential access, building coverage and the hospitality industry.
With an array of six antennas and six radios, the WBS-2400 Omni leverages our beamforming technology to provide superior connectivity, extended range and increased capacity, and succeeds in significantly increasing the coverage provided in comparison to conventional access points. Furthermore, our advanced SDMA technology increases the base station’s downlink capacity. These characteristics enable service providers, municipalities, and enterprises to deliver high quality Wi-Fi service with significantly fewer base stations compared to competing solutions at a much lower cost.
The WBS-2400 Sector base station is a solution for Wi-Fi deployments that require sector coverage. Based on an array of three antennas covering a 120° degree sector and three radios, the WBS-2400 sector leverages our beamforming technology to provide extended range and connectivity under both LOS and NLOS conditions. Furthermore, our advanced SDMA technology increases the base station’s downlink capacity. These characteristics enable service providers, municipalities, and enterprises to deliver high quality, Wi-Fi service with significantly fewer base stations compared to competing solutions at a much lower cost.
Carrier-Grade Wi-Fi -- WBSn Products
WBSn base stations, the Alvarion solution for carrier-grade Wi-Fi, is a family of advanced outdoor Wi-Fi base stations suitable for a broad range of applications. Operating in the license-exempt 2.4 and 5 GHz bands, and leveraging spatially adaptive beamforming together with 3x3:3 MIMO technology, the WBSn family delivers range and capacity, and addresses the growing needs of operators to deliver new content-rich services, while maintaining quality of service. WBSn base stations are carrier grade IP-68 certified, with a rich set of security, QoS and management tools, and with a built-in access controller, helping reduce cost and increase availability. Our spatially adaptive beamforming technology is based on an array of multiple radios and multiple antennas, leveraging the multiple signals received and transmitted. The multiple signals are properly adjusted by the beamforming technology to maximize the transmission signal at the client modem and the receiving signal at the base station modem. With Alvarion’s approach to beamforming, up to six powerful radios are in the base station and are used together with high gain antennas to form efficient dynamic beamforming per packet. The WBSn family is environmentally friendly with low power consumption, for off-grid powering, and complies with green standards.
Alvarion’s technology combines Tx and Rx spatially adaptive beamforming and 802.11n 3x3:3 MIMO for excellent coverage and capacity for delivering up to Gigabit per second capacity and 450 Mbps data speeds. The beamforming technology leverages a unique High Gain Diversely Polarized (HGDP) antenna array for enhanced performance, and significantly increases the link gain and interference immunity. Simultaneous 2.4 and 5 GHz band support for access services addresses the growing usage of 5 GHz in handheld devices and laptops, and the built-in integrated backhaul in 2.4 and 5 GHz, with self-forming and self-healing properties, provide strong performance under both LOS and NLOS conditions, by leveraging Alvarion’s beamforming and 3x3:3 MIMO technologies. WBSn base stations are complemented by Alvarion service provisioning, management tools, and a span of generic CPE devices, enabling numerous urban and rural applications at a low cost per bit. The WBSn base stations are IP-68 outdoor rated, are designed for high reliability, quality of service and security and come with a complete set of FCAPS management and service provisioning tools.
Alvarion’s base stations enable carriers, internet service providers, governments and private networks to deploy outdoor Wi-Fi networks in metropolitan and rural areas, for a variety of applications, including seamless cellular offload, hot-zone and hot-spots, residential and business access, rural communities, government and private networks, education (schools and universities), municipal networks and safe cities, the health and hospitality industries, oil and gas, industrial and construction sites, mining, terminal hubs, malls and other large venues, smart power grid and automatic meter reading and telemetry.
WBSn Carrier-Grade Wi-Fi Form Factors
The WBSn family includes base stations in four form factors, all IP-68 compliant, designed to withstand harsh outdoor environments, with flexible pole/wall installation and various field-of-view antennas. The WBSn-2400-S Sector base station operates in the 2.4 GHz band, and theWBSn-2450-S Sector base station, operates in the 2.4 and 5 GHz bands simultaneously. The sector form factor base stations are suited for building or street coverage, offering a range of direction that can be adjusted according to the coverage needs of the customer. The WBSn-2400-O Omni base station operates in the 2.4 GHz band, and the WBSn-2450-O Omni base station operates in the 2.4 and 5 GHz bands simultaneously. The Omni form factor base station offers 360 degree coverage, making it an excellent choice for providing effective Metro Wi-Fi, and consequently enabling carriers to comprehensively cover larger areas and address more customers per base station. Operating in the unlicensed band requires strong interference immunity algorithms and tools to cope with existing and future interferences. The built-in Interference Immunity Suite combines the inherent beamforming ability to suppress interference, comprising the Dynamic Interference Handling (DIH) algorithm that continuously optimizes receiver’s parameters according to noise level, the Automatic Channel Selection (ACS) algorithm for best operating channel online selection, the Wavion Rate Adaptation (WARA) for optimal rate selection in environments with high interference, and the capabilities of both Down Tilted Antennas (DTA) and sector antennas to reject noise out of their field-of-view.
Network Management Solutions. We provide advanced network management applications for our wireless solutions. Our network management applications are equipped with graphical user interfaces and provide a set of tools for configuring, monitoring and effectively managing our wireless networks.
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WavioNet is an advanced Simple Network Management Protocol based Network Management System (NMS) application for Alvarion’s carrier Wi-Fi solutions and products - Base Stations and CPEs. WavioNet offers a rich toolbox of network management and monitoring features. It offers flexible viewing options, advanced and customizable fault management, performance monitoring as well as configuration and user management.
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Star Management Suite is being used to manage the other products in Alvarion’s portfolio - the BreezeMAX Extreme, BreezeULTRA and BreezeAccess VL. It is fully compliant with Telecommunications Management Network (TMN) standards and simplifies network deployment and maintenance for networks of every scale. The Star Management Suite is made up of specific management tools that cover the entire service life-cycle - from initial installation to full service provision, and all monitoring, reporting and troubleshooting tasks required for efficient network operation. The Star Management Suite can be deployed gradually, module by module, in accordance with network needs.
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Our Geographic Markets
The following presents total revenue by geographic region:
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2010
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2011
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2012
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In thousands
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North America
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|
$ |
14,679 |
|
|
|
19 |
% |
|
$ |
16,822 |
|
|
|
23 |
% |
|
$ |
8,720 |
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|
|
17 |
% |
|
Latin America
|
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|
10,072 |
|
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|
14 |
% |
|
|
10,724 |
|
|
|
15 |
% |
|
|
6,788 |
|
|
|
14 |
% |
|
Europe, Middle East and Africa
|
|
|
38,875 |
|
|
|
52 |
% |
|
|
31,304 |
|
|
|
43 |
% |
|
|
16,169 |
|
|
|
32 |
% |
|
Asia Pacific
|
|
|
11,388 |
|
|
|
15 |
% |
|
|
13,423 |
|
|
|
19 |
% |
|
|
18,272 |
|
|
|
37 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
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|
$ |
75,014 |
|
|
|
100 |
% |
|
$ |
72,273 |
|
|
|
100 |
% |
|
$ |
49,949 |
|
|
|
100 |
% |
General – Industry Market Segments and Players
The operators in the wireless broadband market fall within the following categories, as determined by the industry:
Communications Service Providers: Tier One and Tier Two Operators
Tier One and Tier Two operators form the largest and most established group of telecom operators, with nationwide or global presence, serving tens of millions of users. These operators are a primary focus for our Wi-Fi offering.
In numerous cases, these operators have a broadband wireless services unit. These operations are well addressed by Wi-Fi networks which can provide robust services at high QoS levels to large scales of users and enable these operators to maintain their position at the front line of communications services business. An example of a Tier One carrier that is using our Wi-Fi offerings for such deployments is PLDT (Philippines)
With the proliferation of smartphones and tablet devices, many of the mobile Tier One and Tier Two operators are experiencing congestion and deteriorating QoS in their data networks. Wi-Fi equipment enables these operators to offload some of this traffic from their networks, resulting in improved QoS and user experience. Many of the world's leading mobile operators have publicly indicated their intent to use this technology approach, including AT&T, Verizon, Vodafone, Orange, NTT and KDDI.
Broadband Service Providers
Broadband service providers build their business model primarily on Point to Multi-Point solutions. Alvarion WiMAX products are one of the options these operators have. Broadband service providers are expected to constitute a greater portion of the Point to Multi-Point market in the future. Examples of service providers in this category include OMG Fast (United Sates), NGI S.p.A (Italy) and Adam Internet (Australia).
Vertical Markets
Private and government sectors that operate private networks for business management and operations are in constant need of technologies to support their operational requirements. Examples of such requirements are enterprises that require leased line replacement for cost-effective connectivity to provide VoIP and data services; metropolitan area networks for broadband connectivity; metering and monitoring applications used by utility companies to collect information and supervise operations; and cost-effective access within communities, municipalities and educational institutions. Additional areas that have leveraged broadband wireless effectively include surveillance, public safety and municipal applications. Government authorities and private organizations with government sponsored funds have begun to deploy broadband wireless systems to support remote video surveillance, traffic flow management, back-up for disaster recovery, leased line replacement, various forms of backhaul and other public safety uses. Examples may be found in various U.S. communities such as Houston, Texas, Richardson, Texas and many others.
2012 Partial Customer List
Telecom carriers and service providers using our products include, among others:
Beijing Huasun Unicreate Co.
Winncom Technologies, Inc
PCS Technologies, Inc.
NGI Spa
NEC
Wireless Connections
Nodes Network Com
Avances Tecnologicos
OMGFAST
Connect Data
Mirait Technologies Corp.
Arya Communications & Electronic Services
Sysnet Integrators Inc
Anixter (All Subsidiaries)
ITM Gmbh
Adam Internet
RLAN
Veracomp Sa
Systemas Y Servicios De Comu
ABSA Comunicaciones S.A.
Hutton Communications
Scansource Latin America
Equipements Scientifiques
Wireless Tech (Australia) Lt
Elmat S.P.A
Rikei Corporation
Photonix Communications Pty
Upgrade Communication As
Net Iletisim Ltd
TECHNOLOGIES UNDERLYING OUR PRODUCTS
We use internally developed core technologies and continue to invest in augmenting our expertise in networking, radio, digital signal processing (“DSP”) modem technologies, Media Access Control ("MAC") technologies and Radio Resource Management ("RRM") technologies. We also participate as active members in international standards committees.
Networking Technology
To support the unlicensed WiMAX platforms and other products, we have developed or otherwise acquired, and continue to invest in, networking expertise in the areas of IP Access and Mobile IP that is particularly adapted for mobile WiMAX networks, ASN-GW, Point-to-Point Protocol Over Ethernet (“PPPoE”) tunneling, VPN and VoIP, based on industry standards, such as H.323, SIP and MGCP, and other Internet standards and protocols. We have also developed, and are continuing to develop, know-how to satisfy market requirements with respect to quality of service, classes of services, committed information rate, maximum information rate, virtual LAN management and prioritization. We are developing access technology based on the IEEE 802.16-2004 and the IEEE 802.16e-2005 standards, as well as the WiMAX Forum™ technical specifications for both radio access and networking to further support the needs of customers using WiMAX. We have also developed a network management system that provides network surveillance, monitoring and configuration capabilities for all our products.
Radio Technology
We have in-house radio development capabilities to address the diverse frequency bands and modulation methods of our products. The modulation methods include Frequency Hopping Spread Spectrum (FHSS), Gaussian Frequency Shift Keying (GFSK), Direct Sequence Spread Spectrum (DSSS), Single Carrier QAM and OFDM and OFDMA. Our products include both TDD and FDD radios.
Our radio teams specialize in low cost, mass-production oriented radio design. The system level capability is software-assisted radio auto-calibration, which allows for reduced manufacturing costs and compensates for components’ parameter spread and instability, temperature-related changes and aging of components.
Our internal radio expertise enables us to attract customers by addressing promptly new needs, such as new frequency bands.
We have developed or otherwise acquired, and continue to invest in, radio technology expertise, specifically high efficiency, high power radios and new interfaces between the modem and the remote radio heads.
Digital Signal Processing ("DSP") Modem Technology
We maintain expertise in DSP and in modem design. Our capabilities include a hardware oriented design, as well as programmable DSP oriented design. Our modem design hinges on the Software Defined Radio paradigm. The extensive configurability of our base station modems, through Field Programmable Gate-Array (“FPGA”) and DSP reprogramming, allows us to readily introduce advanced features to our products and to follow amendments to emerging standards, including capability to upgrade deployed networks by downloading only software. Similarly, our CPE designs allow for upgradeability through over the air software download, simplifying our customers' operations.
We have also developed mixed signal ASICs containing DSP cores. Inclusion on-chip of analog-digital converters is instrumental to both cost reduction and power consumption reduction. First generation ASIC supports our IEEE 802.11-based FH-GFSK products, with the above-standard capability of delivering 3 Mbps, with automatic fall back to 2 Mbps and 1 Mbps as necessary. Our second generation ASIC is optimized for OFDM modulation, as used by the IEEE 802.11a/g standards and the IEEE 802.16a standard. This ASIC is based on proprietary programmable “very long instruction word” DSP architecture. The programmable architecture allows us to implement numerous beyond-standard capabilities, such as OFDMA extensions to the baseline OFDM mode.
DAS
Alvarion introduced a distributed antenna system offering in 2011. The system uses proprietary RF technology based on intellectual property acquired from Clariton. By manipulating cellular RF signals the system can transport these signals across cable TV infrastructure to provide coverage and capacity within large buildings. The technology is termed TrueActive and provides amplification at the end points called Remote Units where the cellular signal is being emitted towards mobile handsets and where the signal is being received from transmitting mobile handsets.
This structure provides uplink gain and minimal noise level required for high capacity cellular data networks. The technology is protected by various patent filings.
Alvarion Carrier Grade Wi-Fi Technology
Beamforming 802.11n
Alvarion’s technology combines Tx and Rx spatially adaptive beamforming and 802.11n 3x3:3 MIMO for effective coverage and capacity.
The true spatially adaptive beamforming technology leverages a High Gain Diversity Polarized (HGDP) antenna array for maximum performance. The beamforming significantly increases the link gain and interference immunity. Moreover, it exploits multipath to its advantage by coherently combining signals traveling in different propagation paths, providing LOS and NLOS coverage, and indoor penetration.
With 3x3 MIMO and three spatial data streams, Alvarion’s base stations set up a new market milestone delivering up to gigabit capacity and 450 Mbps data speeds.
Interference Immunity Suite
Alvarion’s interference immunity combines the beamforming inherent ability to suppress interference, the Dynamic Interference Handling (“DIH”) algorithm for continuous receiver parameter optimization according to the noise level, the Automatic Channel Selection (“ACS”) algorithm for optimal selection of the best operating channel, the Alvarion Rate Adaptation (“WARA”) for optimal rate selection for any environment, and the Down Tilted Antennas (“DTA”) and sector antennas capability to reject interference out of their field-of-view. Alvarion’s interference immunity suite leverages over a decade of outdoor Wi-Fi experience.
Multi-band Access
Alvarion’s multi-band access provides simultaneous 2.4 and 5 GHz band support for access services, addressing the growing usage of 5 GHz in handheld devices and laptops.
Integrated Backhaul
Alvarion’s integrated backhaul provides support in 2.4 and 5 GHz, with self-forming and self-healing, providing performance in both LOS and NLOS by leveraging Alvarion’s beamforming and 3x3:3 MIMO technologies.
Carrier Grade
Alvarion’s base stations are IP-67 outdoor rated and are designed for high reliability, quality of service and security. Alvarion base stations come with a complete set of FCAPS management and service provisioning tools.
WBSn Access Control embedded and WCC
The WBSn built-in Access Controller (“AC”) includes a powerful embedded AC function which enables access control and policy enforcement at the at the network edge. As a result of this, only policed traffic is backhauled, reducing backhauling capacity requirements and charges. Furthermore, the network is truly scalable with no single point of failure as the need for a powerful, data crunching centralized Access Controller is waived.
Wi-Fi Cloud Controller (“WCC”)
With large scale Wi-Fi networks the WCC acts as a mediation gateway to an operator’s core such as needed for Wi-Fi-3G/LTE mobility in trusted and untrusted non-3GPP network topologies.
IOT Labs and Activities
To support our OPEN Wi-Fi strategy and enable a strong ecosystem of Network Controllers, Clients, (such as Smart Phones), CPEs and devices by top industry vendors we have created our Inter-operability testing (IOT) capability which tests a variety of products for interoperability on an ongoing basis, with the goal of ensuring that customer specific configurations are fully supported. We test products from a variety of vendors in an Alvarion network environment using Alvarion BaseStations and, on occasion, an Alvarion Access Controller, depending on the customer configuration.
SALES, MARKETING AND SUPPORT OF OUR PRODUCTS –
We sell our products primarily through an extensive network of more than 200 active partners. These include global and local system integration and service fulfillment partners in various geographic regions, solution partners, national and local distribution partners, and resellers. Our distribution partners in turn sell to resellers, including value-added resellers and systems integrators, as well as to end users.
We currently sell and distribute our products in more than 120 countries worldwide. The use of different types of marketing channels through our partnership network enables us to market our products to many different markets and to meet the differing needs of our customers.
We are seeking additional strategic relationships with international partners, strong local partners and other key companies to increase our exposure and establish ourselves as a supplier to service providers, telecom markets and end-user markets that are not reached by our present distribution channels.
We operate in various regions. Our subsidiaries and representative offices, located throughout North America, South America, Europe, Africa and Asia, support our international marketing network.
We derive our revenues from different geographical regions. For a more detailed discussion regarding the geographic allocation of our revenues based on the location of our customers, see “Item 5—Operating and Financial Review and Prospects—Operating Results.”
We conduct a wide range of marketing activities aimed at positioning and generating recognition and awareness of our brands throughout the telecommunications industry, as well as identifying leads for distributors and other resellers. These activities include public relations, participation in trade shows and exhibitions, advertising programs, public speaking at industry forums and website maintenance.
We maintain a highly trained global technical support team that participates in providing customer support to customers who have purchased our products. This includes both direct support rendered by us when we perform turn-key projects, and local support by distributors’ and system integrators’ personnel trained by our support team, support through help desks and the provision of detailed technical information on our website, expert technical support for resolution of more difficult problems, as well as participation in pre-sales and post-sales activities conducted by our distribution channels with large customer accounts and key end users.
We organize technical seminars covering general technologies, as well as specific products and applications. We also have qualification programs to advance the technical knowledge of our distributors and their ability to sell and support our products. These seminars are held in various countries and in different languages as needed.
MANUFACTURING OPERATIONS AND SUPPLIERS –
We currently subcontract most of the manufacturing of our products. We have a pre-qualification process for our contract manufacturers, which includes the examination of the technological skills, production capacity and quality assurance ability of each contract manufacturer. Our manufacturing capacity planning is based on rolling forecasts done on a monthly basis. The forecasts provided to the subcontractors are based on internal company forecasts, and are up to six months. We purchase our raw materials from several suppliers.
Our products are currently manufactured primarily by several contract manufacturers located in Israel, with additional manufacturing also taking place in the Philippines and Taiwan. Final assembly and testing are performed by our contract manufacturers and are monitored and controlled by our quality assurance personnel. The testing criteria are validated by the automatic fail safe mechanisms in order to ensure that all activities successfully pass the testing criteria. We have processes in place for the ongoing performance of quality assurance at our own facilities and at our subcontractors’ facilities. The automating testing equipment which is developed and owned by us and testing procedures at our subcontractors are part of our Approved Enterprise programs.
We monitor quality with respect to each major stage of the production process, including the selection of components and subassembly suppliers, warehouse procedures, assembly of goods, final testing and packaging and shipping.
We currently obtain key components for our products from a limited number of suppliers, and in some instances from a single supplier. In addition, some of the components that we purchase from single suppliers are custom-made. See Item 3.D – Risk Factors – “Our dependence on limited sources for key components of our products may lead to disruptions in the delivery and increased cost of our products, harming our business and results of operations.”
We are ISO 9001, ISO 14000 and ISO 18000 certified. Our contractors are ISO 9002 certified.
All our manufacturing locations in Israel and in the Philippines comply with RoHS regulations.
PROPRIETARY RIGHTS –
In order to protect our proprietary rights in our products and technologies, we rely primarily upon a combination of patents, trademarks, trade secrets, and copyrights, as well as confidentiality, non-disclosure and assignment of inventions agreements. The proprietary rights described above are material to our business and profitability. Because our proprietary rights are diversified and independent of each other, we believe that we are not dependent on any one patent. We have trademark registrations in Israel, the United States, the European Union and many other countries. In addition, we have typically entered into nondisclosure, confidentiality and assignment of inventions agreements with our employees, our consultants and with some of our suppliers and customers who have access to sensitive information. We cannot assure you that the steps taken by us to protect our proprietary rights will be sufficient to prevent misappropriation of our technology or independent development or the sale by others of products with features based upon, or otherwise similar to, those of our products.
Given the rapid pace of technological development in the communications industry, we also cannot assure you that our products may not be adjudicated as infringing on existing or future proprietary rights of others. Although we believe that our technology has been independently developed and that none of our products infringe upon the rights of others, from time to time, we receive letters alleging that we have infringed upon a patent, trademark, license or other proprietary right. We have no assurance that any such allegation will not have a material adverse effect on our business, financial condition or results of operations.
We receive licenses to certain technologies from others for use in connection with some of our technologies. The loss of these licenses could impair our ability to develop and market our products. If we are unable to obtain or maintain the licenses that we need, we may be unable to develop and market our products or processes, or we may need to obtain substitute technologies of lower quality or performance characteristics or at greater cost.
THE COMPETITIVE ENVIRONMENT IN WHICH WE OPERATE –
The markets for our products are very competitive. Competition comes both from large network equipment vendors who have advantageous cost structure, scale advantage and can offer financing and turnkey solutions; and from smaller competitors providing lower end, lower cost solutions. We believe that the principal competitive factors in the markets for our products include:
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price and price/performance ratio;
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service and spectrum regulation and product certifications;
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end-to-end network integration;
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eco system terminal and modem variety;
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ability to support new industry standards;
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product time to market;
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brand strength, go-to market capabilities and sales channels;
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financial stability of the vendor;
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quality of service; and
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value proposition - coverage and capacity capabilities.
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Companies that compete with our products in the vertical markets include mainly Radwin, Redline, Proxim, and Ruckus Wireless. Companies that are engaged in the manufacture and sale or development of products that compete with our carrier-grade outdoor Wi-Fi products include Ruckus Wireless, Cisco, Altai, Aruba, GoNet, and BelAir (acquired by Ericsson). Other vendors in the 4G and Wi-Fi markets may become our competitors in the future.
Our products use wireless media, which also competes with alternative telecommunications transmission media, including leased lines, copper wire, fiber-optic cable, cable modems and satellite technologies. Our products compete with other wireless media technologies, including (i) 3G, HSPDA, HSUPA, EVDO and (ii) 4G, such LTE.
Many of our existing and potential competitors, have substantially greater resources including financial, technological, manufacturing, marketing and distribution capabilities, and enjoy greater recognition than we do.
Increased competition in our market results in price reductions, new business alliances, shorter product life cycles, reduced gross margins, longer sales cycles and loss of market shares, which could harm the results of our operations. We have designed and engineered our products to minimize costs, maximize margins and improve competitiveness. However, we cannot assure you that we will be able to compete successfully against current or future competitors.
For more information regarding our competitive strengths, please see “Item 4—Information on the Company—Business Overview—Company Strengths”.
GOVERNMENT REGULATION -
Our business is premised on the availability of certain radio frequencies for broadband communications. Radio frequencies are subject to extensive regulation under the laws of each country and international treaties. Each country has different regulation and regulatory processes for wireless communications equipment and uses of radio frequencies. In the United States, our products are subject to FCC rules and regulations. In other countries, our products are subject to national or regional radio authority rules and regulations. Current FCC regulations permit license-free operation in FCC-certified bands in the radio spectrum in the United States. In Europe, our products are subject to European Telecommunications Standards Institute (ETSI) rules and regulations. In other countries, the use of spectrum license, if any, and the purposes of such use, vary from country to country. Most of our products are intended for the license-exempt bands, while others operate in licensed bands. The regulatory environment in which we operate is subject to significant changes, the results and timing of which are uncertain.
In addition to regulation of available frequencies, our products must conform to a variety of national and international regulations that require compliance with administrative and technical requirements as a condition to marketing devices that emit radio frequency energy. These requirements were established, among other things, to avoid interference among users of radio frequencies and to permit the interconnection of equipment.
We are subject to export control laws and regulations with respect to all of our products and technology. In addition, Israeli law requires us to obtain a government license to engage in research and development, and export, of the encryption technology incorporated in some of our products. We currently have the required licenses to utilize the encryption technology in our products.
C. ORGANIZATIONAL STRUCTURE –
The following is a list of our subsidiaries, each of which is wholly-owned:
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Alvarion, Inc., incorporated under the laws of Delaware, United States;
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Alvarion Mobile, Inc.*, incorporated under the laws of Delaware, United States;
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Alvarion SARL, incorporated under the laws of France;
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Alvarion SRL, incorporated under the laws of Romania;
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Alvarion Asia Pacific Ltd., incorporated under the laws of Hong Kong;
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Alvarion do Brasil LTDA, incorporated under the laws of Brazil;
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Alvarion Uruguay SA, incorporated under the laws of Uruguay;
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Alvarion Japan KK, incorporated under the laws of Japan;
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Alvarion Israel (2003) Ltd., incorporated under the laws the State of Israel;
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Alvarion Spain, S.L, incorporated under the laws of Spain;
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Alvarion Tadipol* Sp.z o.o., incorporated under the laws of Poland;
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Alvarion Telsiz Sistemleri Ticaret A.Ş, incorporated under the laws of Turkey;
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Alvarion de Mexico S.A de C.V, incorporated under the laws of Mexico;
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Alvarion Philippines incorporated under the laws of Philippines;
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Alvarion South Africa (Pty) Ltd., incorporated under the laws of South Africa;
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Alvarion Italy SRL incorporated under the laws of Italy;
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Alvarion Singapore PTE Ltd., incorporated under the laws of Singapore.
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India 4Motion Broadband Wireless Network Private Limited, incorporated under the laws of India;
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Alvarion Singapore PTE Ltd., Taiwan Branch Preparatory Office incorporated under the laws of Taiwan.
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Alvarion del Ecuador S.A, incorporated under the laws of Ecuador;
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Alvarion Chile LIMITADA, incorporated under the laws of Chile;
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Alvarion S.A., incorporated under the laws of Argentina;
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Alvarion Costa Rica S.A, incorporated under the laws of Costa Rica;
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Alvarion Canada Ltd, incorporated under the laws of Canada;
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Interwave Communication Inc*, incorporated under the laws of Delaware, United States;
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PT. Alvaritech Indonesia, incorporated under the laws of Indonesia;
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Wavion, Inc., incorporated under the laws of Delaware, United States; and
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Wavion Ltd , incorporated under the laws of Israel.
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* Indirectly owned.
D. PROPERTY, PLANTS AND EQUIPMENT
We do not own any real estate. As of December 31, 2012, we leased an aggregate of approximately 157,135 square feet in Tel-Aviv, Israel for annual lease payments (including management fees) of approximately $3 million and incurred annual parking expenses in connection with these leases of approximately $0.4 million (21% of these expenses are attributed to our continuing operations). We have been occupying our main premises since April 2001. These premises serve as our corporate headquarters, as well as the site at which we conduct our main research and development activities and some quality assurance, final assembly and testing operations. The lease agreement for our main premises is effective until 2013. We also lease approximately 18,320 square feet of office facilities located at 5 Hamada Street, Yokneam Illit, Israel, at an annual rent of approximately $0.27 million. These premises serve as the corporate headquarters of our subsidiary in Israel, Wavion Ltd. We also leased approximately 12,647 square feet of office facilities located at 555 N. Mathilda Avenue, Suite 210, Sunnyvale, CA 94085, at an annual rent of approximately $0.2 million (which was terminated in April 2012). We also had an additional office in Maryland located at 6701 Democracy Blvd., Suite 300, Bethesda, MD, at an annual rent of approximately $0.1 million (which was terminated in May 2012). We also lease approximately 30,171 square feet of office facilities in Romania, at an annual rent of approximately $0.7 million (22% of these expenses are attributed to our continuing operations). These premises serve as the corporate headquarters of our Romanian subsidiary, Alvarion SRL, and as our principal research and development and technical support office in Romania. In addition, we lease office space for the operation of our facilities in Miami, France, China, Poland, Italy, South Africa, India and Spain. Some of the office space was vacated as part of our restructuring process (84,852 square feet of our headquarters in Tel – Aviv, Israel and 21,528 square feet of our offices in Romania) and we continue to assess our needs and are continually vacating additional portions our of our lease property in an effort to decrease our expenses. We believe that the facilities we currently lease are adequate for our current requirements.
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS –
The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth in “Item 3—Key Information—Risk Factors.”
Overview
We concentrate our resources on the broad industry of wireless broadband. As a wireless broadband pioneer, we have been driving and delivering innovation for more than 15 years, from developing core technology to creating and promoting industry standards.
Our vision is focused on providing optimized broadband wireless solutions to address connectivity, capacity and coverage challenges of public and private networks, enabling us to maintain our current position and grow along with the market demand for multi-technologies solutions and applications.
Our solutions are usually used in a point-to-multipoint, point-to-point and public Wi-Fi architecture and address a wide scope of end-user profiles, from the consumers, residential and SOHO markets, through SMEs and multi-tenant units/multi-dwelling units as well as applications in various vertical markets.
Our products operate primarily in the license-exempt bands and comply with various industry standards. Our core technologies include spread spectrum radio, linear radio, digital signal processing, modems, MAC, IP-based mobile switches, compact mobile networks, networking protocols and VLSI. We have intellectual property rights in these technologies.
In 2010, we began to evaluate potential new directions in addition to our core WiMAX products. At the conclusion of this strategic evaluation process, our board of directors determined that we should focus on complementary solutions for mobile operators.
On November 23, 2011, we completed the acquisition of Wavion, a provider of outdoor Wi-Fi applications for metro and rural areas with deployments in more than 75 countries. Featuring Wavion Base Stations with 802.11n in 2.4 GHz and 5 GHz unlicensed bands and in the 700 MHz licensed band, Wavion offers end-to-end solutions including access, backhaul, CPEs, management and service provisioning tools. The acquisition was for total consideration of approximately $28.4 million in cash (including a $2.7 million performance earn-out which was paid).
Throughout 2011 and 2012, we continued to manufacture and sell our WiMAX based products and continued to enter into contracts with new and existing customers and make necessary commitments to purchase raw materials to manufacture the WiMAX products.
For the purpose of financing the acquisition of Wavion in November 2011, we obtained a $ 30 million secured credit facility from SVB. We determined to finance the acquisition rather than use our cash on hand in order to retain available cash to meet the substantial working capital needs of our WiMAX business while growing our new Wi-Fi business.
During 2011, we implemented a restructuring plan including the layoff of approximately 194 employees as well as the vacating of certain leased premises. Nonetheless, we continued to incur substantial losses, which were primarily the result of decline in revenues, increased competition which led to a decline in our profitability, and our inability to adapt our cost structure quickly enough to meet the reduction in revenues. Following the launch of Wavion’s WBSn product, we noted certain problems with the stability of the product. We subsequently undertook intensive efforts to improve the stability of the WBSn product and relaunched the product in the first quarter of 2013. While we continued sales of the WBS product, our sales decreased significantly in the second half of 2012 as the market was quickly migrating to the new 802.11n standard.
During 2012, in particular in light of the significant cash requirements to fund the WiMAX business and the limited availability of credit both in the market generally and to Alvarion in particular, we were also evaluating various alternatives to exit the WiMAX business. As part of this process, we established the BWA Division, which included all of Alvarion’s licensed WiMAX business on a stand-alone basis. During 2012, we negotiated with a number of potential buyers for the BWA Division, but we could not reach an agreement. In the meantime, this business continued to general significant losses for Alvarion and had a negative impact on working capital.
Alvarion’s other Vertical Products, primarily the BreezeMAX Extreme and BreezeACCESS VL performed relatively well during 2012, however as these products have been on the market for a number of years, their sales did not grow in comparison to previous years. Due to our financial difficulty we were only capable of devoting relatively limited resources to developing replacements for these legacy products.
As a result of the difficulty we experienced with the launch and marketing of our WBSn product and our lack of success in disposing of the BWA Division, with respect to which we were required to continue to provide services to our customers and meet contractual commitments, we continued to suffer substantial losses during 2012. Our cash position was further negatively affected by our required principal and interest payments on the SVB Loan, as well as the closure of previously available credit lines with various Israeli banks. The foregoing led to our monetizing various assets that we had available such as the sale of a portion of our patent portfolio in September and November 2012 to Wi-LAN for $16.8 million (with respect to which we received an additional $1.5 million in May 2013) and the Nortel Debt in October 2012 for $5.2 million.
As noted above, the need to service the SVB Loan was negatively affecting our cash position and, as a result of our performance, we breached various financial covenants under the SVB Loan. As a result, we entered into a number of modifications and amendments to the terms and conditions of the SVB Loan. As part of those modifications and amendments and since our patent portfolio and the Nortel Debt that we sold were pledged in favor of SVB as security for the SVB Loan, we were required, through May 12, 2013, to repay an aggregate amount of approximately $25 million in principal amount of the SVB Loan, which further harmed our cash position.
On February 21, 2013, we entered into a definitive agreement with Telrad, pursuant to which Telrad acquired the BWA Division. The transaction was completed on May 10, 2013, and pursuant to the finally agreed terms, the consideration in the transaction is $4.0 million, with the first payment of $1.3 million payable at closing. We may also receive certain performance –based milestone payments of up to $7.7 million. As further described below, except as otherwise stated, our financial results present only our continuing business and reflect the BWA Division as discontinued operations for all periods covered thereby.
On December 10, 2012 we announced our intention to effect a reverse share split of our Ordinary Shares in a ratio of 1:10. Following execution of the reverse share split, our shareholders received one ordinary share of Alvarion for every 10 ordinary shares held by them, with fractional shares rounded up. The reverse share split was intended to increase our per share trading price to satisfy the $1.00 minimum bid price requirement for the continued listing on the NASDAQ Capital Market. The reverse share split became effective on April 2, 2013.
In 2012, our revenues decreased by 30.8% to approximately $49.9 million from approximately $72.2 million in 2011, primarily due to decreased sales of our BreezeACCESS VL and BreezeNET B products for which we have not developed sufficient replacements, delays in introduction of new products, aggressive competition, and the continued effects of the global economic slowdown.
During 2012 our gross margins decreased to approximately 32.5% of our revenues, compared to approximately 46.1% of revenues in 2011. This decrease in gross margin is mainly due to the write-off of excess and obsolete inventory in 2012 as a result of demand for our products (primarily WiMAX) being lower than the estimated amounts on which we based the quantity of our products that we manufactured and due to cancelations of projects during the year. In addition, the aggressive competition which we faced, the continued effects from the global economic slowdown and the limited availability of credit in the global capital markets contributed to the decline in gross margin.
During 2012, our net loss from continued and discontinued operations amounted to approximately $(55.9) million compared to a net loss of approximately $(33.8) million in 2011. This increase in net loss was primarily a result of the impairment of the fair value of the BWA Division based on its December 31, 2012 selling price.
Our operating expenses decreased to $ 36.4 million in 2012 compared to $ 43 million in 2011 mainly due to the $6 million of restructuring costs included in operating expenses for 2011 and the decrease in 2012 of the operating expenses resulting from the cost reductions.
As a result of the foregoing, our working capital deteriorated during 2012 and this deterioration has continued into 2013. Our limited working capital has resulted and may continue to result in delays of shipments of our products, which has and may continue to have a material adverse effect on our revenues and profitability. The report of our independent registered public accounting firm with respect to our financial statements for the years ended December 31, 2012 and 2011 includes an explanatory paragraph that states that our declining sales, recurring losses and negative cash flows from operations, and our excess of credit line over cash and cash equivalents as well as uncertainty in meeting credit line covenants raise substantial doubt about our ability to continue as a going concern. We are currently seeking to raise additional capital and continuing to seek to reduce costs and increase sales, particularly of our new products, in order to improve our working capital position and continue to operate as a going concern. We cannot ensure that we will be able to obtain funding on terms that will be acceptable to us or at all. If we are unable to obtain additional financing for working capital, product development, launch and support or for our other capital requirements, we would be required to curtail our business operations further or cease our operations entirely.
Critical Accounting Principles –
Our financial statements are prepared in accordance with United States generally accepted accounting principles, and audited in accordance with standards of the Public Company Accounting Oversight Board (United States). A discussion of the significant accounting policies that we follow in preparing our financial statements is set forth in Note 2 to our consolidated financial statements included in Part III of this Annual Report. In preparing our financial statements, we must make estimates and assumptions as to certain matters, including, for example, the amount of new materials and components that we will require to satisfy the demand for our products based on our sales estimates and the period of time that will elapse before our products become obsolete. While we endeavor diligently to assure that our estimates and assumptions have a reasonable basis and reflect our best assessment as to the future circumstances in which we anticipate, actual results may differ from the results estimated or assumed and the differences may be substantial as to require subsequent write-offs, write-downs or other adjustments to past results or current valuations.
The following is a summary of certain critical principles, which have a substantial impact upon our financial statements and which we believe are most important to keep in mind in assessing our financial condition and operating result:
Revenue Recognition. We generate revenues from selling our products indirectly through distributors as well as selling them directly to end users.
Revenues are recognized in accordance with ASC 605-10-S99-1 (SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”) and ASC 605-25 “Multiple-Element Arrangements” when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the seller’s price to the buyer is fixed or determinable, no further obligation exists and collectability is probable.
We generally do not grant a right of return on our products. However, we have granted to certain distributors limited rights of return on unsold products. Product revenues on shipments to these distributors are recognized based on their history of actual returns provided that all other revenue recognition criteria are met.
The Company's revenue recognition policies provide that, when a sales arrangement contains multiple elements, the Company allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence ("VSOE"), if available, third party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The Company establishes VSOE of selling price using the price charged for a deliverable when sold separately when they have not yet sold the deliverable separately, using the price established by management having the relevant authority. When VSOE cannot be established, the Company establishes the selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. The best estimate of selling price is established considering several external and internal factors including, but not limited to, historical sales, pricing practices and geographies in which the Company offers its products. The determination of ESP is judgmental.
For arrangements which include multiple elements, the Company considers the sale of equipment, professional services and maintenance to be three separate units of accounting in the arrangement in accordance with ASC 605-25, since all three elements have value to the customer on a standalone basis.
Equipment includes the software as the software is deemed incidental to the product as a whole. The Equipment element price was attained by using management best estimate based on the historical prices sold by the Company. The historical prices have been allocated based on product and region, due to variances between the regions in which the products have been sold.
Professional Services prices were based on TPE for which the Company has accumulated the prices from its suppliers throughout the year.
Maintenance price has been established using VSOE of fair value of maintenance services, based on the price charged when sold separately at renewal.
In transactions where a customer's contractual terms include a provision for customer acceptance, revenues are recognized either when such acceptance has been obtained or the acceptance provision has lapsed.
Advances from customers include advances and payments received from customers, for which revenue has not yet been recognized.
Accounts Receivable. We are required to assess the collectability of our accounts receivable balances. Generally, we do not require collateral; however, under certain circumstances we require letters of credit, additional guarantees or advance payments. A considerable amount of judgment is required in assessing the ultimate realization of these receivables including, but not limited to, the current credit-worthiness of each customer. We regularly review the amounts due and related allowance by considering factors, such as historical experience, credit quality, age of the accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. For certain accounts receivable balances, we are also covered by foreign trade risk insurance. Should we consider it necessary to increase the level of provision for doubtful accounts, required for a particular customer, then additional charges will be recorded when they become probable.
Allowance for doubtful accounts amounted to $0.3 million and $4.1 million as of December 31, 2011 and 2012, respectively. The balance as of December 31, 2012, includes a doubtful debts provision from the Wavion acquisition of $0.3 million. The Company charges off receivables when they are deemed uncollectible. Actual collection experience may not meet expectations and there may be an effect in the Company's ability to collect customers' debts in a timely manner or at all and this may result in increased bad debt expense.
Total doubtful debts expenses during 2010, 2011 and 2012 amounted to $1.0 million, $0.9 million and $3.9 million, respectively. Total write-offs amounted $ 0 million, $0.6 and $0.1 million in 2010, 2011 and 2012, respectively.
Inventory Valuation. Our policy for valuation of inventory and commitments to purchase inventory, including the determination of obsolete or excess inventory, requires us to perform a detailed assessment of inventory at each balance sheet date which includes a review of, among other factors, an estimate of future demand for products within specific time frames, valuation of existing inventory, as well as product lifecycle and product development plans. The business environment in which we operate the wide range of products that we offer and the sales-cycles we experience all contribute to the exercise of judgment relating to maintaining, utilizing and writing-off inventory. The estimates of future demand that we use in the valuation of inventory are the basis for our revenue forecast, which is also consistent with our short-term manufacturing plan. Inventory reserves are also provided to cover risks arising from non-moving or slow-moving items. We write-down our inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated market value which is based on assumptions about future demand and market conditions. We may be required to record additional inventory write-downs if actual market conditions are less favorable than those projected by our management.
Note 2h to our financial statements describes the write-offs and provisions that we made and recorded in 2010, 2011 and 2012 to reflect the decline in our expectations about the value of inventory, which had become excessive, unmarketable or otherwise obsolete or the inventory of new materials and components that we had purchased or committed to purchase in anticipation of forecasted sales which we did not consummate. In addition, changes in demand, which result in increased demand for our products, may lead to utilization of our previously written-off products. Note 2h to our financial statements describes the effect of the utilization of the related products of our prior years’ written-off components, which are reflected in our revenues without additional cost in the cost of sales in the period the inventory was utilized.
If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to increase our inventory allowances and our gross margin could be adversely affected. For example, in 2012, we were required to write-down a significant amount of inventory due to demand for our products that was lower than we had anticipated. In addition, if the demand for our products increases beyond our expectations following a write-off of inventory, we may need to further utilize our previously written-down inventory. Such utilization may contribute to our gross margin in future periods. Inventory management remains an area of management focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements.
Goodwill and long-lived asset impairment. We review goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable in accordance with ASC 350 “Intangibles – Goodwill and Others”.
Goodwill impairment testing is a two-step process. The first step involves comparing the fair value of a company's reporting units to their carrying amount. If the fair value of the reporting unit is determined to be greater than its carrying amount, there is no impairment. If the reporting unit's carrying amount is determined to be greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in this step is compared to the carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of the goodwill, an impairment loss equivalent to the difference is recorded.
The acquisition of Wavion in November 2011 has been incorporated into the single reportable segment of the Company. Nevertheless, Wavion was considered its own reporting unit in 2011 and 2012. As part of the Wavion acquisition, the Company recorded goodwill in an amount of $13.1 million. No impairment has been recorded in 2012 based on the impairment analysis performed by the Company. As a result of the discontinued operation of BWA division for the year ended December 31, 2012 the Company operated in one operating segment comprised of a single reporting unit.
Warranties. We provide for the estimated cost of product warranties at the time the product is shipped. Our products sold are covered by a warranty for periods ranging from 16 to 21 months. We accrue a warranty reserve for estimated costs to provide warranty services. Our estimate of costs to service the warranty obligations is based on historical experience and expectation of future conditions. We accrue for warranty costs as part of our cost of sales based on associated material costs and technical support labor costs. Material cost is primarily estimated based upon historical trends in the volume of product returns within the warranty period and the cost to repair or replace the equipment. Technical support labor cost is primarily estimated based upon historical trends in the rate of customer calls and the cost to support the customer calls within the warranty period. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty accrual will increase, resulting in decreased gross profit.
Stock-Based Compensation Expense. We account for equity-based compensation in accordance with ASC 718 “Compensation - Stock Compensation”. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods. Stock-based compensation expense recognized under ASC 718 for 2010, 2011 and 2012 was $1.8 million, $1.7 million and $0.9 million, respectively. Determining the fair value of stock-based awards at the grant date requires the exercise of judgment, including the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ from our estimates, equity-based compensation expense and our results of operations would be impacted. Our stock based compensation expense decreased in 2012 as a result of the cost reduction that we implemented during the year and a decrease in the number of our principal granted options.
We estimate the fair value of employee stock options using a Black-Scholes-Merton valuation model and for restricted stock units and options granted with par value exercise price, the fair value is calculated by multiplying the share price at the date of grant with the number of options granted. The fair value of an award is affected by our stock price on the date of grant as well as other assumptions, including the estimated volatility of our stock price over the expected term of the awards, and the estimated period of time that we expect employees to hold their stock options. The risk-free interest rate assumption is based upon United States bonds treasury interest rates appropriate for the expected life of the awards. We use the historical volatility of our publicly traded stock in order to estimate future stock price trends. In order to determine the estimated period of time that we expect employees to hold their stock options, we use historical behavioral patterns rates of employee groups by job classification. In 2012, the expected term of options granted is estimated based on historical experience and represents the period of time that options granted are expected to be outstanding. Our expected dividend rate is zero since we do not currently pay cash dividends on our ordinary shares and do not anticipate doing so in the foreseeable future.
Deferred Taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. In addition, we are subject to the continuous examination of our tax returns by the local tax authorities in each country that we have established corporations. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for taxes. A full valuation allowance was provided for the period ending December 31, 2012.
ASC 740-10-55 requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. ASC 740-10-55 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with FASB ASC 740 “Income Taxes”. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. As a multinational corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. If we ultimately determine that the payment of these liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine the liability no longer applies. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities.
Contingencies. We are involved in legal proceedings and other claims from time to time. We are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for any contingencies are made after careful analysis of each individual claim. The required reserves may change due to future developments in each matter or changes in approach, such as a change in the settlement strategy in dealing with any contingencies, which may result in higher net loss. If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material. See “Item 8A Financial Information Finance – Consolidated Statements and Other Financial Information – Legal Proceedings.”
Business Combination. We apply the provisions of ASC 805 "Business Combination", accordingly we are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed based on their estimated fair values. In allocating the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, we developed the required assumptions underlying the valuation work. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements, the acquired company’s brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio and discount rates.Management’s estimates of fair value are based upon assumptions believed to be reasonable, utilizing a market participant approach, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.
Discontinued Operations. As of December 31, 2012, our management determined to sell our BWA Division and the sale of the BWA Division was completed on May 10, 2013. Under the final terms agreed, we will receive a consideration of $4.0 million, paid in installments over four quarters, with the first payment of $1.;35 million payable at closing. In addition, we may receive certain performance based milestone payments of up to $7.7 million.
Under ASC 205, "Presentation of Financial Statements - Discontinued Operation" when a component of an entity, as defined in ASC 205, has been disposed of or is classified as held for sale, the results of its operations, including the gain or loss on its component are classified as discontinued operations and the assets and liabilities of such component are classified as assets and liabilities attributed to discontinued operations; that is, provided that the operations, assets and liabilities and cash flows of the component have been eliminated from our consolidated operations and we will have no significant continuing involvement in the operations of the component.
The BWA Division has been considered a "component of the entity" since it comprises of operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company's operations. Further, since no significant cash outflow or cash inflow are expected to be generated or paid by the Company in respect of the discontinued operation and we will have no significant continuing involvement in the operations of the component after the division is sold, the component meets the criteria to be considered as discontinued operation.
As a result, the assets and liabilities of the component were retroactively adjusted and classified as discontinued assets and liabilities as of December 31, 2011 and 2012 and the component's operation results and cash flows for the years ended December 31, 2010, 2011 and 2012 were retroactively adjusted and classified separately as net loss from discontinued operations.
Results of Operations –
As previously noted, except as otherwise stated, our results of operations represent only our continuing business and reflect the BWA Division as discontinued operations for all periods covered thereby.
The following tables present our total revenues attributed to the geographical regions based on the location of our customers for the years ended December 31, 2010, 2011 and 2012:
| |
|
2010
|
|
|
2011
|
|
|
2012
|
|
| |
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
| |
|
revenues
|
|
|
Percentage
|
|
|
revenues
|
|
|
Percentage |
|
|
revenues
|
|
|
Percentage |
|
| |
|
|
|
|
|
|
|
|
|
|
Of sales
|
|
|
|
|
|
|
|
| |
|
In
thousands
|
|
|
Of sales
|
|
|
In
thousands
|
|
|
|
|
In
thousands
|
|
|
|
|
|
North America (including the United States & Canada)
|
|
$ |
14,679 |
|
|
|
20 |
% |
|
$ |
16,822 |
|
|
|
23 |
% |
|
$ |
8,720 |
|
|
|
17 |
% |
|
Europe (without, Italy)
|
|
|
24,640 |
|
|
|
33 |
% |
|
|
16,640 |
|
|
|
23 |
% |
|
|
8,262 |
|
|
|
17 |
% |
|
Italy
|
|
|
10,610 |
|
|
|
14 |
% |
|
|
9,291 |
|
|
|
13 |
% |
|
|
2,947 |
|
|
|
6 |
% |
|
Asia (without China)
|
|
|
7,466 |
|
|
|
10 |
% |
|
|
6,230 |
|
|
|
9 |
% |
|
|
6,949 |
|
|
|
14 |
% |
|
China
|
|
|
3,922 |
|
|
|
5 |
% |
|
|
7,193 |
|
|
|
10 |
% |
|
|
11,323 |
|
|
|
23 |
% |
|
Others
|
|
|
13,697 |
|
|
|
18 |
% |
|
|
16,097 |
|
|
|
22 |
% |
|
|
11,748 |
|
|
|
23 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
75,014 |
|
|
|
100 |
% |
|
$ |
72,273 |
|
|
|
100 |
% |
|
$ |
49,949 |
|
|
|
100 |
% |
|
|
(1)
|
We have listed Italy and China separately within this table because each of these countries generated at least 10% of our total revenues during at least one of the last 3 years.
|
The following tables set forth, for the periods indicated, selected items from our consolidated statement of operations in U.S. dollars in thousands and as a percentage of total sales:
| |
|
Year Ended December 31,
|
|
| |
|
|
2010(*) |
|
|
|
2011(*) |
|
|
|
2012 |
|
| |
|
(In thousands)
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$ |
72,090 |
|
|
$ |
69,457 |
|
|
$ |
48,278 |
|
|
Services
|
|
|
2,924 |
|
|
|
2,816 |
|
|
|
1,671 |
|
|
Total Sales
|
|
|
75,014 |
|
|
|
72,273 |
|
|
|
49,949 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
35,616 |
|
|
|
33,582 |
|
|
|
24,972 |
|
|
Services
|
|
|
1,480 |
|
|
|
3,911 |
|
|
|
2,354 |
|
|
Write-off of excess inventory and provision for inventory purchase commitments
|
|
|
2,093 |
|
|
|
1,433 |
|
|
|
6,385 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
35,825 |
|
|
|
33,347 |
|
|
|
16,238 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, gross
|
|
|
8,440 |
|
|
|
12,552 |
|
|
|
14,825 |
|
|
Less – grants and participations
|
|
|
536 |
|
|
|
1,844 |
|
|
|
2,161 |
|
|
Research and development, net
|
|
|
7,904 |
|
|
|
10,708 |
|
|
|
12,664 |
|
|
Selling and marketing
|
|
|
13,801 |
|
|
|
18,304 |
|
|
|
13,177 |
|
|
General and administrative
|
|
|
4,364 |
|
|
|
5,170 |
|
|
|
7,182 |
|
|
Amortization of intangible assets
|
|
|
- |
|
|
|
186 |
|
|
|
2,235 |
|
|
Restructuring and other charges
|
|
|
1,787 |
|
|
|
6,020 |
|
|
|
- |
|
|
Acquisition related expenses
|
|
|
- |
|
|
|
2,622 |
|
|
|
1,102 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
27,856 |
|
|
|
43,010 |
|
|
|
36,360 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
7,969 |
|
|
|
(9,663 |
) |
|
|
(20,122 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses, net
|
|
|
(99 |
) |
|
|
(1,015 |
) |
|
|
(2,895 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax
|
|
|
7,870 |
|
|
|
(10,678 |
) |
|
|
(23,017 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income
|
|
|
894 |
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income ( loss) from continuing operations
|
|
|
6,976 |
|
|
|
(10,678 |
) |
|
|
(23,017 |
) |
|
Net loss from discontinued operations
|
|
|
(105,455 |
) |
|
|
(23,144 |
) |
|
|
(32,892 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(98,479 |
) |
|
$ |
(33,822 |
) |
|
$ |
(55,909 |
) |
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on foreign currency cash flow hedges
|
|
|
474 |
|
|
|
(5,273 |
) |
|
|
3,513 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss)
|
|
$ |
(98,005 |
) |
|
$ |
(39,095 |
) |
|
$ |
(52,396 |
) |
(*) Adjusted for discontinued operations
| |
|
Year Ended December 31,
|
|
| |
|
|
2010(*) |
|
|
|
2011(*) |
|
|
|
2012 |
|
| |
|
(As a percentage of sales)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
96.1 |
|
|
|
96.1 |
|
|
|
96.7 |
|
|
Services
|
|
|
3.9 |
|
|
|
3.9 |
|
|
|
3.3 |
|
|
Total Sales
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
47.5 |
|
|
|
46.5 |
|
|
|
50.0 |
|
|
Services
|
|
|
2.0 |
|
|
|
5.4 |
|
|
|
4.7 |
|
|
Write-off of excess inventory and provision for inventory purchase commitments
|
|
|
2.8 |
|
|
|
2.0 |
|
|
|
12.8 |
|
|
Gross margin
|
|
|
47.7 |
|
|
|
46.1 |
|
|
|
32.5 |
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, gross
|
|
|
11.2 |
|
|
|
17.4 |
|
|
|
29.7 |
|
|
Less – grants and participations
|
|
|
(0.7 |
) |
|
|
(2.6 |
) |
|
|
(4.4 |
) |
|
Research and development, net
|
|
|
10.5 |
|
|
|
14.8 |
|
|
|
25.3 |
|
|
Selling and marketing
|
|
|
18.4 |
|
|
|
25.3 |
|
|
|
26.4 |
|
|
General and administrative
|
|
|
5.8 |
|
|
|
7.2 |
|
|
|
14.4 |
|
|
Amortization of intangible assets
|
|
|
- |
|
|
|
0.3 |
|
|
|
4.5 |
|
|
Restructuring and other charges
|
|
|
2.4 |
|
|
|
8.3 |
|
|
|
- |
|
|
Acquisition related expenses
|
|
|
- |
|
|
|
3.6 |
|
|
|
2.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
37.1 |
|
|
|
59.5 |
|
|
|
72.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
10.6 |
|
|
|
(13.4 |
) |
|
|
(40.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses, net
|
|
|
(0.1 |
) |
|
|
(1.4 |
) |
|
|
(5.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax
|
|
|
10.5 |
|
|
|
(14.8 |
) |
|
|
(46.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on Income
|
|
|
1.2 |
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
9.3 |
|
|
|
(14.8 |
) |
|
|
(46.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) from discontinued operations
|
|
|
(140.6 |
) |
|
|
(32 |
) |
|
|
(65.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(131.3 |
) |
|
|
(46.8 |
) |
|
|
(111.9 |
) |
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on foreign currency cash flow Hedges
|
|
|
0.6 |
|
|
|
(7.3 |
) |
|
|
7.0 |
|
|
Total comprehensive (loss)
|
|
|
(130.7 |
) |
|
|
(54.1 |
) |
|
|
(104.9 |
) |
(*) Adjusted for discontinued operations
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Sales. Sales in 2012 were approximately $49.9 million, a decrease of approximately 30.9% compared to sales of approximately $72.3 million in 2011. This decrease was primarily due to a decrease in sales in 2012 of our legacy BreezeACCESS VL and BreezeNET B products for which we have not developed sufficient replacements compared to 2011, minimal sales of our WBSn product due to certain problems in its stability and capacity following its introduction in 2012, aggressive competition, and the continued effects of the global economic slowdown.
Sales in APAC accounted for approximately 36.6% of our sales in 2012 and totaled approximately $18.3 million, which represents an increase of approximately 36.6% compared to our 2011 sales in these regions which were approximately $13.4 million or 18.6% of our sales. This increase is primarily attributed to sales of the Company’s Wi-Fi products to a major customer in China. Sales in Europe, the Middle East and Africa accounted for approximately 32.4% of our sales in 2012 and totaled approximately $16.2 million, which represents a decrease of approximately 48.2% compared to our 2011 sales in these regions which were approximately $31.3 million or 43.3% of our sales. This decrease resulted from the economic crisis in Europe , lack of suitable replacement to our BreezeACCESS VL, increased competition, and a decision of a major customer in Italy to reduce its purchases from us in 2012. Sales in Central and Latin America accounted for 13.6% of our sales in 2012 compared to 14.8% of our sales in 2011. Sales in North America accounted for approximately 17.5% of our sales in 2012, compared to 23.3 % in 2011.
In each of 2011 and 2012, a single customer (different customer in each year) accounted for more than 10% of our revenues. We believe that due to the nature of our agreements and the associated large initial payments due, the identity of major customers generally varies from quarter to quarter and we do not believe that we are materially dependent on any one specific customer or any specific small number of customers.
Cost of Sales. Cost of sales for products and services consists primarily of cost of components, product manufacturing and assembly, labor, overhead and other costs associated with production. Cost of sales was approximately $ 27.3 million in 2012, a decrease of 27.2% compared to cost of sales of approximately $ 37.5 million in 2011 primarily due to lower revenues in 2012 compared to 2011. Cost of sales as a percentage of sales were approximately 54.7% and 51.9% for 2012 and 2011, respectively. The main reason for the decrease in our gross margins during 2012 was the inventory write-off that we booked based on lower than anticipated demand for our products (particularly unlicensed products, other than our Wi-Fi products) and cancellation of customer orders during the year.
Write-off of excess inventory and provision for inventory purchase commitments. We periodically assess our inventories valuation in relation to obsolete and slow-moving items based on revenue forecasts and technological obsolescence. If inventories on-hand exceed our estimates or become obsolete. This would result in a charge to our statement of operations and a corresponding reduction in our inventory and shareholders’ equity. Changes in demand for our products and in our estimates for demand create changes in provisions for obsolete inventory. As part of our ordinary course of business we evaluate, on a quarterly basis, our actual inventory needs versus our sales projections and write-off excess inventory and un-cancelable purchase commitments from our suppliers and subcontractors. As a result, we record charges related to the write-off of excess inventory and accrued a provision for inventory purchase commitments of new materials and components that we had purchased or committed to purchase in anticipation of forecasted sales that we did not consummate.
Write-off of excess inventory and provision for inventory purchase commitments increased to approximately $6.4 million for the year ended December 31, 2012, compared to approximately $1.4 million for the year ended December 31, 2011. This increase was primarily due to our write-off of excess and obsolete inventory in 2012, which resulted from lower than anticipated demand for our products and cancellation of customer orders during the year and our accrual of a provision for inventory purchase commitments.
Research and development expenses, net. Gross research and development expenses consists primarily of employee salaries, development-related raw materials and subcontractors, and other related costs partially offset by research and development funding. Gross research and development expenses were approximately $ 14.8 million in 2012, an increase of approximately 18.4% compared to gross research and development expenses of approximately $12.5 million in 2011. This increase was primarily due to the inclusion of a full year in 2012 of research and development expenses relating to the business acquired from Wavion in November 2011 and the additional research and development expenses relating to the work that was required to stabilize the WBSn product during 2012. Gross research and development as a percentage of sales was 29.7% in 2012, compared to 17.4% in 2011. Grants and other participations for funding approved research and development projects totaled approximately $2.2 million in 2012 and $1.8 million in 2011. Research and development expenses, net, were approximately $12.7 million in 2012, compared to approximately $10.7 million in 2011.
Selling and marketing expenses. Selling and marketing expenses consist primarily of costs relating to compensation attributable to employees engaged in selling and marketing activities, promotion, advertising, trade shows and exhibitions, travel and related expenses. Selling and marketing expenses were approximately $13.2 million in 2012, a decrease of approximately 27.9% compared to selling and marketing expenses of approximately $ 18.3 million in 2011. This decrease was primarily attributable to the impact in 2012 of our cost reduction initiatives that were approved in 2011. Selling and marketing expenses as a percentage of sales were 26.4% in 2012 compared to 25.3% in 2011.
General and administrative expenses. General and administrative expenses consist primarily of compensation costs for administration, finance and general management personnel, office maintenance, insurance costs, professional fees and other administrative costs. General and administrative expenses were approximately $7.2 million in 2012, an increase of approximately 38.5% compared to general and administrative expenses of approximately $ 5.2 million in 2011. This increase resulted from the amounts we recorded in 2012 for doubtful accounts. General and administrative expenses as a percentage of sales increased to 14.4% in 2012 from 7.2% in 2011.
Amortization of intangible assets. Amortization of intangible assets was $2.2 million in 2012 compared to $0.2 million recorded in 2011, which reflected a full year of amortization of intangible assets recorded in connection with our acquisition of Wavion in November 2011.
Restructuring costs. During 2011, we implemented a restructuring plan including the layoff of approximately 194 employees in 2011 as well as the vacating of certain leased premises. As a result, we recorded a restructuring charge of approximately $6.0 million in 2011 which primarily consists of employees' termination benefits, lease abandonment and repayment of grants. There were no such costs in 2012.
Financial expenses, net. Financial expenses, net, were $2.9 million in 2012, compared to financial expenses, net, of approximately $1.0 million in 2011. The increase in financial expenses is attributed mainly to a full year of interest in 2012 on the SVB Loan.
Net loss. In 2012, net loss from continuing operations was approximately $(23.0) million, compared to a net loss of approximately $(10.7) million in 2011. In 2012, net loss from discontinued operations was approximately $(32.9) million which included a loss of approximately $(17.3) million from the fair value impairment to selling price of the BWA Division in addition to the operating loss from the discontinued operations, compared to a net loss of approximately $(23.1) million in 2011, which included the restructuring charge of $(6) million related to the BWA Division.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Sales in 2011 were approximately $72.3 million, a decrease of approximately 3.6% compared to sales of approximately $75 million in 2010.
Sales in APAC reached approximately 18.6% of our sales in 2011 and totaled approximately $13.4 million, which represents an increase of approximately 17.5% compared to our 2010 sales in these regions which were approximately $11.4 million or 15.2% of our sales. Sales in Europe, the Middle East and Africa reached approximately 43.3% of our sales in 2011 and totaled approximately $31.3 million, which represents a decrease of approximately 19.5% compared to our 2010 sales in these regions which were approximately $38.9 million or 51.8% of our sales.The decrease in our sales in sales in Europe, the Middle East and Africa resulted from the crisis in the European economy and intense completion. Sales in Central and Latin America accounted for 14.8% of our sales in 2011 compared to 13.4% of our sales in 2010. Sales in North America accounted for approximately 23.3% of our sales in 2011, compared to 19.5% in 2010.
In 2011, one customer accounted for more than 10% of our revenues. In 2010, no customer accounted for more than 10% of our revenues.
Cost of sales. Cost of sales for products and services consists primarily of cost of components, product manufacturing and assembly, labor, overhead and other costs associated with production. Cost of sales was approximately $37.5 million in 2011, compared to cost of sales of approximately $37.1 million in 2010. Cost of sales as a percentage of sales were approximately 51.9% and 49.5% in 2011 and 2010, respectively.
Write-off of excess inventory and provision for inventory purchase commitments. Write-off of excess inventory and provision for inventory purchase commitments was approximately $1.4 million for the year ended December 31, 2011 compared to approximately $2.1 million for the year ended December 31, 2010.
Research and development expenses, net. Gross research and development expenses were approximately $12.5 million in 2011 compared to gross research and development expenses of approximately $8.4 million in 2010. This increase was primarily due to greater investment in research and development in 2011 compared to 2010. Gross research and development, as a percentage of sales was 17.4% in 2011, compared to 11.2% in 2010. Grants and other participations for funding approved research and development projects totaled approximately $1.8 million in 2011 and $0.5 million in 2010. Research and development expenses, net, were approximately $10.7 million in 2011, compared to approximately $7.9 million in 2010.
Selling and marketing expenses. Selling and marketing expenses were approximately $18.3 million in 2011 compared to selling and marketing expenses of approximately $13.8 million in 2010. This increase was primarily due to greater sales and marketing activity in 2011 from the increased focus on the unlicensed market in 2011. Selling and marketing expenses as a percentage of sales were 25.3% in 2011 compared to 18.4% in 2010.
General and administrative expenses. General and administrative expenses were approximately $5.2 million in 2011 compared to general and administrative expenses of approximately $4.4 million in 2010. This increase is related primarily to our increased focus on the unlicensed market in 2011. General and administrative expenses as a percentage of sales increased to 7.2% in 2011 from 5.8% in 2010.
Amortization of intangibles assets. As a result of acquisition of Wavion in November 2011, we had annual amortization charges of approximately $0.2 million recorded in 2011.
Restructuring costs. During 2011 and 2010, we implemented separate restructuring plans including the layoff of approximately 194 employees in 2011 and approximately 160 employees in 2010 as well as the vacating of certain leased premises. As a result, we recorded a restructuring charge of approximately $6.0 million in 2011 and approximately $1.8 million in 2010, which primarily consists of employees' termination benefits, lease abandonment and repayment of grants.
Financial expenses, net. Financial expenses, net, were $1.0 million in 2011, compared to financial expenses, net, of approximately $0.1 million in 2010. The increase in financial expenses is attributed mainly to the inflation in the currency change between the Dollar and other currencies and interest on the SVB Loan which was obtained in November 2011.
Net income (loss). In 2011, net loss from continuing operations was approximately $(10.7) million, compared to a net income of approximately $7 million in 2010. In 2011, net loss from discontinued operations was approximately $(23.1) million, compared to a net loss of approximately $(105.4) million in 2010 which included impairment of goodwill and intangible assets in the sum of $ (57.1) million.
Impact of Inflation and Currency Fluctuations –
A devaluation of the U.S. dollar against the NIS has a direct influence on the U.S. dollar cost of our operations. The majority of our sales, and part of our expenses, are denominated in dollars. However, a significant portion of our expenses, primarily labor expenses, is denominated in NIS unlinked to the U.S. dollar. Inflation in Israel and/or the devaluation of the dollar in relation to the NIS has the effect of increasing the cost in dollars of these expenses and has a negative effect on our profitability.
Because exchange rates between the NIS and the U.S. dollar fluctuate continuously, exchange rate fluctuations as recently experienced in Israel and especially larger periodic devaluations or revaluations, will have an impact on our profitability and period-to-period comparisons of our results of operations. The effects of foreign currency re-measurements are reported in our consolidated financial statements in the statement of operations.
To protect against exchange rate fluctuations, we have instituted several foreign currency hedging programs. These hedging activities consist of cash flow hedges of anticipated NIS payroll and forward exchange contracts to hedge certain trade payables in NIS. In 2011, the majority of the cash flow hedges were effective. For more information, see "Item 11—Qualitative and Qualitative Disclosures About Market Risk".
The following table presents information about the rate of inflation in Israel, the rate of devaluation or appreciation of the NIS against the U.S. dollar, and the rate of inflation of Israel adjusted for the devaluation:
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Israeli devaluation (appreciation)
rate %
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Israeli inflation adjusted for devaluation %
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