Our products incorporate technology
licensed from third parties. If any of these licenses are terminated, our
ability to develop and license our products could be delayed or
reduced.
We use
technology, including software, which we license from third parties. If we do
not maintain our existing third party technology licenses or enter into licenses
for alternative technologies, we could be required to cease or delay product
shipments while we seek to develop alternative technologies.
We depend on third parties to
provide electronic design automation software that is compatible with our
solution. If these third parties do not continue to provide compatible design
products, we would need to develop alternatives, which could delay product
introductions and cause our revenues and operating results to decline.
Our
customers depend on electronic design automation software to design their
products using our solution. We depend on the same software to develop our
products. Although we have established relationships with a variety of
electronic design automation vendors to gain access to this software and to
assure compatibility, these relationships may be terminated with limited notice.
If any of these relationships were terminated and we were unable to obtain
alternative software in a timely manner, our customers could be unable to use
our solution. In addition, we could experience a significant increase in
development costs, our development process could take longer, product
introductions could be delayed and our revenues and operating results could
decline.
If automated test equipment
companies are unwilling to work with us to make our technology compatible with
theirs, we may need to pursue alternatives, which could increase the time it
takes us to bring our solution to market and decrease customer acceptance of our
technology.
Although
we are presently working with a number of automated test equipment companies to
achieve optimal compatibility of our technologies, these companies may elect not
to work with us in the future. If automated test equipment companies are
unwilling to incorporate modifications into their equipment and operating
systems to allow them to work with our technology, we may need to seek
alternatives. These alternatives might not provide optimal levels of test
function, and pursuing these alternatives could increase the time and expense it
takes us to bring our technology to market, either of which could decrease
customer acceptance of our technology and cause our revenues and margins to
decline.
Our future success will depend on
our ability to keep pace with rapid technological advancements in the
semiconductor industry. If we fail to develop and introduce new products and
enhancements on a timely basis, our ability to attract and retain customers
could be impaired, which would cause our operating results to decline.
The
semiconductor industry is characterized by rapidly changing technology, evolving
industry standards, rapid changes in customer requirements, frequent product
introductions and ongoing demands for greater speed and functionality. We must
continually design, develop and introduce new products with improved features to
be competitive. Our products may not achieve market acceptance or adequately
address the changing needs of the marketplace, and we may not be successful in
developing and marketing new products or enhancements to our existing products
on a timely basis. The introduction of products embodying new technologies, the
emergence of new industry standards or changes in customer requirements could
render our existing products obsolete and unmarketable. We may not have the
financial resources necessary to fund future innovations. If we are unable, for
technical, legal, financial or other reasons, to respond in a timely manner to
changing market conditions or customer requirements, our business and operating
results could be seriously harmed.
Future changes in financial
accounting standards, including pronouncements and interpretations of accounting
pronouncements on software revenue recognition and stock-based compensation, may
cause adverse unexpected revenue and expense fluctuations and affect our
reported results of operations.
A change
in accounting policies can have a significant effect on our reported results and
may even affect our reporting of transactions completed before a change is
announced. In particular, new pronouncements and varying interpretations of
pronouncements on software revenue recognition and stock-based compensation have
occurred with frequency, may occur in the future and could impact our revenues,
expenses and results of operations. Required changes in our methods of revenue
recognition could result in deferral of revenues recognized in current periods
to subsequent periods or accelerated recognition of deferred revenues to current
periods, each of which could cause shortfalls in meeting the expectations of
investors and securities analysts. Our stock price could decline as a result of
any shortfall.
For
example, the adoption of SFAS 123(R), which requires compensation costs relating
to share-based payment transactions to be recognized in financial statements
beginning in January 2006, had a financial impact on our results of operations
and loss per share.
15
Accounting policies affecting many other aspects of our business,
including rules relating to revenue recognition and purchase accounting for
business combinations have recently been revised or are under review. Changes to
those rules or the questioning of current practices may adversely affect our
reported financial results or the way we conduct our business.
We are exposed to risks from
legislation requiring companies to evaluate their internal control over
financial reporting.
Section
404 of the Sarbanes-Oxley Act of 2002 requires our management to report on the
effectiveness of our internal control over financial reporting. Our independent
registered public accounting firm will be required to attest to the
effectiveness of our internal control over financial reporting beginning as
early as fiscal 2008. We have an ongoing program to perform the system and
process evaluation and testing necessary to comply with these requirements. We
expect to incur increased expense and to devote additional management resources
to Section 404 compliance. In the event our chief executive officer, chief
financial officer or independent registered public accounting firm determine
that our internal control over financial reporting is not effective as defined
under Section 404, investor perceptions of our company may be adversely affected
and could cause a decline in the market price of our stock.
Compliance with changing regulation
of corporate governance and public disclosure may result in additional
costs.
Changes
in the laws and regulations affecting public companies, including the provisions
of the Sarbanes-Oxley Act of 2002 and recent SEC and NASDAQ rules and
regulations, are creating new duties and requirements for us and our executives,
directors, attorneys and independent registered public accounting firm. In order
to comply with these rules, we will have to incur additional costs for personnel
and use additional outside legal, accounting and advisory services, which will
increase our operating expenses. Management time associated with these
compliance efforts necessarily reduces time available for other operating
activities, which could adversely affect operating results. To date, our costs
to comply with these rules have not been significant; however, we cannot predict
or estimate the amount of future additional costs we may incur or the timing of
such costs.
Our products may have errors or
defects that users identify after deployment, which could harm our reputation
and our business.
Our
products may contain undetected errors when first introduced or when new
versions or enhancements are released. We have from time to time found errors in
versions of our products, and we may find errors in our products in the future.
The occurrence of errors could cause sales of our products to decline, divert
the attention of management and engineering personnel from our product
development efforts and cause significant customer relations problems. Customer
relations problems could damage our reputation, hinder market acceptance of our
products and result in loss of future revenues.
We must continually attract and
retain engineering personnel, or we will be unable to execute our business
strategy.
Our strategy for encouraging the adoption of our technology
requires that we employ highly skilled engineers to develop our products and
work with our customers. In the past, we have experienced difficulty in hiring
and retaining highly skilled engineers with appropriate qualifications to
support our business. As a result, our future success depends in part on our
ability to identify, attract, retain and motivate qualified engineering
personnel. Competition for qualified engineers is intense, especially in the
Silicon Valley where our headquarters are located. If we lose the services of a
significant number of our engineers and we cannot hire and integrate additional
engineers, it could disrupt our ability to develop our products and implement
our business strategy.
We may be unable to replace the
technical, sales, marketing and managerial contributions of key
individuals.
We depend
on our senior executives, and our research and development, sales and marketing
personnel, who are critical to our business. We do not have long-term employment
agreements with our key employees nor do we maintain a key person life insurance
policy on any of our key employees. If we lose the services of any of these key
executives, our product development processes and sales efforts could be slowed.
We may also incur increased operating expenses and be required to divert the
attention of other senior executives to search for their replacements. The
integration of any executives or new personnel could disrupt our ongoing
operations.
If we fail to protect our
intellectual property rights, competitors may be able to use our technologies,
which could weaken our competitive position, reduce our revenues or increase our
costs.
Our
success and ability to compete depend largely upon the protection of our
proprietary technology. We rely on a combination of patent, copyright, trademark
and trade secret laws, confidentiality procedures and licensing arrangements to
establish and protect our proprietary rights. Our pending patent applications
may not result in issued patents, and our existing and future patents may not be
sufficiently broad to protect our proprietary technologies. Policing
unauthorized use of our products is difficult and we cannot be certain that the
steps we have taken will prevent the misappropriation or unauthorized use of our
technologies, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as U.S. laws. Any
patents we obtain or license may not be adequate to protect our
proprietary rights. Our competitors may independently develop similar
technology, duplicate our products or design around any patents issued to us or
our other intellectual property rights.
16
Litigation may be necessary to enforce our intellectual property rights
or to determine the validity or scope of the proprietary rights of others. As a
result of any such litigation, we could lose our proprietary rights and incur
substantial unexpected operating costs. We may need to take legal action to
enforce our proprietary rights in the future. Any action we take to protect our
intellectual property rights could be costly and could absorb significant
management time and attention. In addition, failure to adequately protect our
trademark rights could impair our brand identity and our ability to compete
effectively.
Any dispute involving our patents or
other intellectual property could include our industry partners and customers,
which could trigger our indemnification obligations to them and result in
substantial expense to us.
In any
dispute involving our patents or other intellectual property, our licensees
could also become the target of litigation. This could trigger technical support
and indemnification obligations in some of our license agreements which could
result in substantial expenses. In addition to the time and expense required for
us to support or indemnify our licensees, any such litigation could severely
disrupt or shut down the business of our licensees, which in turn could hurt our
relations with our customers and cause our revenues to decrease.
Failure to obtain export licenses
could harm our business.
We must
comply with U.S. Department of Commerce regulations in shipping our software and
hardware products and other technologies outside the United States. Although we
have not had any significant difficulty complying with these regulations to
date, any significant future difficulty in complying could harm our business,
operating results and financial condition.
We have limited control over
third-party representatives who market, sell and support our products in foreign
markets. Loss of these relationships could decrease our revenues and harm our
business.
We offer
our products and services for sale through distributors and sales
representatives in Great China, France, Germany, India, Israel, Japan, Korea and
the United Kingdom (UK). We anticipate that sales in these markets will account
for a portion of our total revenues in future periods. In 2005, we appointed a
sales representative in Israel and distributors in France and the UK. In 2006,
we appointed a sales representative in India. In 2007, we appointed a new
distributor in Japan, augmenting our direct sales organization. Our third-party
representatives are not obligated to continue selling our products, and they may
terminate their arrangements with limited prior notice. Growing our relationship
with these new distributors and sales representatives, or establishing
alternative distribution channels in these markets could consume substantial
management time and resources, decrease our revenues and increase our expenses.
We face business, political and
economic risks because a portion of our revenues and operations are outside of
the United States.
International revenues accounted for 24%, 16% and 18% of our total
revenues for the years ended December 31, 2007, 2006 and 2005, respectively. In
addition to our international sales, we have operations in Canada, Japan and the
UK. Our success depends upon continued expansion of our international
operations, and we expect that international revenues will continue to be an
important component of our total future revenues. Our international business
involves a number of risks, including:
-
our ability to adapt our products to foreign
design methods and practices;
-
the uncertainty of international orders due to
typically lengthy international selling cycles;
-
cultural differences in the conduct of
business;
-
difficulty in attracting qualified
personnel;
-
managing foreign branch offices and
subsidiaries;
-
longer payment cycles for and greater difficulty
collecting accounts receivable;
-
unexpected changes in regulatory requirements,
royalties and withholding taxes that restrict the repatriation of
earnings;
-
tariffs and other trade barriers;
-
the burden of complying with a wide variety of
foreign laws; and
-
political, economic, health or military conditions
associated with worldwide conflicts and events.
As a
result of our direct selling activities in Japan, a portion of our international
revenues is denominated in Japanese yen, which is subject to exposure from
movements in foreign currency exchange rates. In addition, most of our remaining
international revenues are denominated in U.S. dollars, creating a risk that
fluctuation in currency exchange rates will make our prices
uncompetitive. To the extent that profit is generated or
losses are incurred in foreign countries, our effective income tax rate may be
significantly affected. Any of these factors could significantly harm our future
international sales and, consequently, our revenues and overall results of
operations and business and financial condition.
17
We may be unable to consummate
future potential acquisitions or investments or successfully integrate acquired
businesses or investments or foreign operations with our business, which may
disrupt our business, divert managements attention and slow our ability to
expand the range of our proprietary technologies and products.
We may
expand the range of our proprietary technologies and products, acquire or make
investments in additional complementary businesses, technologies or products, if
appropriate opportunities arise. For example, in 2004, we completed the
acquisition of SiVerion, Inc. We may be unable to identify suitable acquisition
or investment candidates at reasonable prices or on reasonable terms, or
consummate future acquisitions or investments, each of which could slow our
growth strategy. Our acquisition of SiVerion, Inc. and any future acquisitions
may involve risks such as the following:
-
we may not achieve the anticipated benefits of the
acquisitions;
-
our acquisition and integration costs may be
higher than we anticipated and may cause our quarterly and annual
operating results to fluctuate;
-
we may be unable to retain key employees, such as
management, technical or sales personnel, of the acquired
businesses;
-
we may experience difficulty and expense in
assimilating the operations and personnel of the acquired businesses,
which
could be further affected by the acquired
businesses not being located near our existing sites;
-
we may incur amortization or impairment expenses
if an acquisition results in significant goodwill or other intangible
assets;
-
we may be unable to complete the development and
application of the acquired technology or products or integrate the
technology or products with our own;
-
we may be exposed to unknown liabilities of
acquired companies;
-
we may experience difficulties in establishing and
maintaining uniform standards, controls, procedures and
policies;
-
our relationships with key customers of acquired
businesses may be impaired, due to changes in management and
ownership of the acquired businesses; or
-
our stockholders may be diluted if we pay for the
acquisition with equity securities.
These
factors could disrupt our ongoing business, distract our management and
employees and increase our expenses or otherwise harm our operating
results.
Intellectual property litigation,
which is common in our industry, could be costly, harm our reputation, limit our
ability to license or sell our proprietary technologies or products and divert
the attention of management and technical personnel.
The
semiconductor industry is characterized by frequent litigation regarding patent
and other intellectual property rights. While we have not received formal notice
of any infringement of the rights of any third party, questions of infringement
in the semiconductor field involve highly technical and subjective analyses.
Litigation may be necessary in the future to enforce any patents we may receive
and other intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity, and we may not prevail in
any future litigation. Any such litigation, whether or not determined in our
favor or settled, could be costly, could harm our reputation and could divert
the efforts and attention of our management and technical personnel from normal
business operations. Adverse determinations in litigation could result in the
loss of our proprietary rights, subject us to significant liabilities, require
us to seek licenses from third parties or prevent us from licensing our
technology or selling our products, any of which could harm our business.
Our stock price may decline
significantly because of stock market fluctuations that affect the prices of
technology stocks. A decline in our stock price could result in securities class
action litigation against us that could divert managements attention and harm
our business.
The stock
market has experienced significant price and trading volume fluctuations that
have adversely affected the market prices of common stock of technology
companies. These broad market fluctuations may reduce the market price of our
common stock. In the past, securities class action litigation has often been
brought against a company after periods of volatility in the market price of
securities. In the future, we may be a target of similar litigation. Securities
litigation could result in substantial costs and divert our managements
attention and resources, which in turn could harm our ability to execute our
business plan.
18
Our stock may fail to meet the
requirements for continued listing on The Nasdaq Capital Market, in which case
the price and liquidity of our common stock may decline. The reverse stock split
of our common stock may reduce the liquidity of our common stock, and the market
price of our common stock may decline.
Because
we failed to comply with the $1.00 minimum bid price rule set forth in Nasdaq
Marketplace Rule 4450(a)(5) for continued listing on The Nasdaq Global Market,
we applied to transfer our common stock to The Nasdaq Capital Market. Our common
stock began trading on The Nasdaq Capital Market on October 24, 2007. The
transfer of our common stock to The Nasdaq Capital Market could adversely affect
the liquidity of our common stock, which could adversely affect the market price
of our common stock.
We are
subject to the continued listing requirements of The Nasdaq Capital Market and
were provided an additional 180 calendar days (until April 7, 2008) to comply
with the $1.00 minimum closing bid price continued listing requirement of The
Nasdaq Capital Market. In order to regain compliance with this requirement, the
bid price of our common stock must close at $1.00 per share or more for a
minimum of 10 consecutive business days. We cannot assure you that the bid price
of our common stock will close at $1.00 per share or more before April 7, 2008.
Effective
March 12, 2008, we implemented a 1-for-2.5 reverse stock split of our common
stock. We cannot assure you that, as a result of the reverse stock split, the
bid price of our common stock will close at $1.00 per share or more before April
7, 2008. Even if we are able to regain compliance with the minimum bid price
requirement before April 7, 2008, we cannot assure you that we will be able to
maintain compliance with the minimum bid price requirement. If we fail to regain
and maintain compliance with the minimum bid price requirement and are delisted,
our financial condition could be harmed and our stock price would likely
decline. The reverse stock split reduced the number if shares of our common
stock outstanding, which could adversely affect the liquidity of our common
stock, which could adversely affect the market price of our common stock.
Our ability to raise capital in the
future may be limited and our failure to raise capital when needed could prevent
us from growing.
We
believe that our existing cash resources and available debt financing will be
sufficient to meet our anticipated cash needs for at least the next 12 months.
However, the timing and amount of our working capital and capital expenditure
requirements may vary significantly depending on numerous factors, including:
-
the level and timing of license and service
revenues;
-
the costs and timing of expansion of product
development efforts and the success of these development
efforts;
-
the extent to which our existing and new products
gain market acceptance;
-
the costs and timing of expansion of sales and
marketing activities;
-
competing technological and marketing
developments;
-
the extent of international
operations;
-
the need to adapt to changing technologies and
technical requirements;
-
the costs involved in maintaining and enforcing
patent claims and other intellectual property rights;
-
the existence of opportunities for expansion and
for acquisitions of, investments in, complementary businesses,
technologies or product lines; and
-
access to and availability of sufficient
management, technical, marketing and financial personnel.
If our
capital resources are insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity securities or debt securities or obtain debt
financing. The sale of additional equity securities or debt securities would
result in additional dilution to our stockholders. Additional debt would result
in increased expenses and could result in covenants that would restrict our
operations. If adequate funds are not available or are not available on
acceptable terms, this would significantly limit our ability to hire, train or
retain employees, support our expansion, take advantage of unanticipated
opportunities such as acquisitions of businesses or technologies, develop or
enhance products, or respond to competitive pressures.